The Hartford 2008 Annual Report Download - page 179

Table of Contents
Prior accident year loss and loss adjustment expense ratio
The prior year loss and loss adjustment expense ratio represents the increase (decrease) in the estimated cost of settling
catastrophe and non-catastrophe claims incurred in prior accident years as recorded in the current calendar year divided by
earned premiums.
Expense ratio
The expense ratio is the ratio of underwriting expenses, excluding bad debt expense, to earned premiums. Underwriting
expenses include the amortization of deferred policy acquisition costs and insurance operating costs and expenses. Deferred
policy acquisition costs include commissions, taxes, licenses and fees and other underwriting expenses and are amortized
over the policy term.
Policyholder dividend ratio
The policyholder dividend ratio is the ratio of policyholder dividends to earned premium.
Combined ratio
The combined ratio is the sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend
ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every $100 of earned
premiums. A combined ratio below 100.0 demonstrates underwriting profit; a combined ratio above 100.0 demonstrates
underwriting losses.
Catastrophe ratio
The catastrophe ratio (a component of the loss and loss adjustment expense ratio) represents the ratio of catastrophe losses
(net of reinsurance) to earned premiums. By their nature, catastrophe losses vary dramatically from year to year. Based on
the mix and geographic dispersion of premium written and estimates derived from various catastrophe loss models, the
Company’s expected catastrophe ratio over the long-term is 3.0 to 3.5 points. See “Risk Management Strategy” below for a
discussion of the Company’s catastrophe risk management program that serves to mitigate the Company’s net exposure to
catastrophe losses. Catastrophe losses used to calculate the catastrophe ratio do not include the effect of reinstatement
premiums or assessments.
Combined ratio before catastrophes and prior accident year development
The combined ratio before catastrophes and prior accident year development represents the combined ratio for the current
accident year, excluding the impact of catastrophes. The Company believes this ratio is an important measure of the trend in
profitability since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year reserve
development.
Underwriting results
Underwriting results is a before-tax measure that represents earned premiums less incurred losses, loss adjustment expenses,
underwriting expenses and policyholder dividends. The Hartford believes that underwriting results provides investors with a
valuable measure of before-tax profitability derived from underwriting activities, which are managed separately from the
Company’s investing activities. Within Ongoing Operations, the underwriting segments of Personal Lines, Small
Commercial, Middle Market and Specialty Commercial are evaluated by management primarily based upon underwriting
results. Underwriting results is also presented for Ongoing Operations and Other Operations. A reconciliation of
underwriting results to net income for Ongoing Operations and Other Operations is set forth in their respective discussions
herein.
Investment yield
The investment yield, or return, on the Company’s invested assets primarily includes interest income on fixed maturity
investments. Based upon the fair value of Property & Casualty’s investments as of December 31, 2008 and 2007,
approximately 82% and 89%, respectively, of invested assets were held in fixed maturities. A number of factors affect the
yield on fixed maturity investments, including fluctuations in interest rates and the level of prepayments. The Company also
invests in equity securities, mortgage loans, limited partnership arrangements and other alternative investments.
Property & Casualty’s insurance business has been written by a number of writing companies that, under a pooling
arrangement, participate in the Hartford Fire Insurance Pool, the lead company of which is the Hartford Fire Insurance
Company (“Hartford Fire”).
Property & Casualty maintains one portfolio of invested assets for all business written by the Hartford Fire Insurance Pool
companies, including business reported in both the Ongoing Operations and Other Operations segments. Separate
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009