requiring personal automobile insurers to issue a policy to any eligible applicant who seeks one, known as the "take all comers" requirement,
The underwriting expense ratio is the percentage of underwriting expenses (including corporate expenses) incurred to net premiums written. Underwriting expenses are the aggregate of policy acquisition costs, including commissions, and the portion of administrative, general and other expenses attributable to underwriting operations. In addition, underwriting expenses are adjusted for any change in deferred acquisition costs.
Revenues declined $10,279, or 4.5%, over the prior year principally due to declining earned premium as written premium has declined in each of the last two years, as previously discussed. Increases in net investment income were offset by declines in realized investment gains.
Total unpaid losses and LAE, net of salvage and subrogation, by line of business at December 31, 2006 and 2005 follow (in millions):
During the second quarter of 2006, we entered into an agreement to fund a commercial loan participation of $10,000. As of December 31, 2006, $2,285 of this commitment has been funded and is included in other investments on the consolidated balance sheet. The remaining commitment will be funded through ordinary operating cash flows over the next two years.
All of our investments in fixed maturity and equity securities at December 31, 2006 and 2005 were classified as available-for-sale. Realized gains and losses on available-for-sale securities were determined by using the specific identification method. We have not invested more than 5% of fixed maturities in any one state or political subdivision.
We review all securities that have been at a continuous loss position for 36 months or more.
Gross unrealized losses on our fixed maturity and equity securities at December 31, 2006 by duration of unrealized loss and by credit quality (for fixed maturity securities) follow:
In September 2005, the AICPA issued a new accounting pronouncement, Statement of Position (SOP) 05-01, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts. This SOP provides guidance on accounting for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (SFAS) No. 97. Internal replacements are modifications in product benefits, features, rights, or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. The provisions of this SOP are effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We will adopt this SOP during the first quarter of 2007. Financial statement application of this SOP is prospective and initial application would generally occur as of the beginning of the fiscal year. We believe the adoption of this SOP will not have a material impact on our future financial statements.
The cost of computer software developed or obtained for internal use in excess of $150 is capitalized. Amounts below the $150 threshold are expensed in the period the costs are incurred. Capitalized costs are generally amortized on a straight-line basis primarily over a ten-year period, unless another rational basis is more representative of the software's use.
business. Various redundancies and deficiencies for the other lines of business and accident years combined for the remaining net redundancy of approximately $600.
Our loss and LAE reserves include our share of the aggregate loss from CAR which reflect our loss reserves and loss reserves determined by the other writers of automobile insurance in Massachusetts that participate in CAR (Servicing Carriers).
On June 9, 2006, we entered into a series of agreements with participating reinsurers that provide catastrophe reinsurance for our insurance subsidiaries' other than automobile property lines of business for the contract year effective July 1, 2006 through June 30, 2007 (the "Catastrophe Reinsurance Program"). This new Catastrophe Reinsurance Program replaces our terminated 75% quota share program, which had covered our other than automobile property and liability lines of business, except for umbrella and our expiring one-year catastrophe treaty, which covered six percent of our exposure to Massachusetts FAIR Plan losses in excess of $100 million up to a total Massachusetts FAIR Plan losses of $1 billion.
Prior to the catastrophe reinsurance program, we used a series of one-year quota share agreements. This program covered all non-automobile property and liability business, except umbrella policies. We utilized a 75% quota share agreement for the period July 1, 2005 to June 30, 2006; a 70% agreement for the period July 1, 2004 to June 30, 2005; and a 65% agreement for the period July 1, 2003 to June 30, 2004. Quota share reinsurance refers to a form of pro rata reinsurance arrangement where the reinsurer participates in a specified percentage of the premiums and losses on every risk within the scope of the reinsurance agreement.
During 2000, our directors approved a Directors' Retirement Compensation Plan (the Retirement Plan). The Retirement Plan becomes effective for each director upon terminating service from our Board of Directors (the Board) provided that such termination was not made under conditions adverse to our interest. Effective with the annual meeting wherein the director is not reappointed to the Board, and provided benefits are not paid until such time as the director has attained the age of 65, we will pay an annual retirement benefit equal to 50% of the average annual total compensation of the director for the highest three full years (the three year average compensation). The annual retirement benefit of 50% of the three year average compensation vests at the rate of 4.0% for each year of Board service up to a maximum of 100% vesting through termination of service. Payments continue for a maximum of ten years over the remaining life of the terminated director, or his or her then spouse, if the director pre-deceases the spouse. No payments are to be made after the death of the director and spouse. Expenses related to the Retirement Plan in 2006, 2005 and 2004 were $1,279, $887 and $273, respectively. We paid $78, $78 and $55 under the Retirement Plan in 2006, 2005 and 2004, respectively. The liability for the Retirement Plan, as calculated based on a discounted cash flow basis, was $5,181 and $3,980 at December 31, 2006 and 2005, respectively.
Direct premiums written and earned for the years ended 2006, 2005 and 2004 follow: