Travelers 2007 Annual Report Download - page 100

Net favorable prior year reserve development in 2006 and 2005 was $359 million and $360 million,
respectively. The 2006 total was driven by the factors described above. In 2005, in the Automobile line
of business, the improvement was partially driven by better than expected results from changes in claim
handling practices. These changes included practices which have allowed case reserves to be established
more accurately earlier in the claim settlement process, thereby changing historical loss development
patterns. In addition, industry and Company initiatives to fight fraud in several states led to a decrease
in the total number of claims in 2005 and a change in historical loss development patterns. In the
Homeowners and Other line of business, favorable prior year reserve development in 2005 was partially
driven by a significant decrease in the number of claims, attributable to changes in the marketplace,
including higher deductibles and fewer small-dollar claims. These changes also resulted in a change in
historical loss development patterns.
The amortization of deferred acquisition costs totaled $1.31 billion in 2007, $156 million, or 14%,
higher than the comparable 2006 total of $1.15 billion. The increase included $94 million from the
implementation of the new fixed agent compensation program in 2007 described in more detail in the
‘‘Consolidated Overview’’ section herein, as well as growth in business volume, partially offset by the
impact of the sale of Mendota. In 2006, the amortization of deferred acquisition costs totaled
$1.15 billion, $106 million, or 10%, higher than the comparable 2005 total of $1.05 billion, primarily
reflecting growth in business volume.
General and administrative expenses totaled $699 million in 2007, a decrease of $105 million, or
13%, from the 2006 total of $804 million. The decrease in expenses in 2007 primarily reflected a
decline in commission expenses resulting from the implementation of the new fixed agent compensation
program, as well as the impact of the sale of Mendota, which were partially offset by expenses related
to increased business volume, and continued investments to support business growth and product
development. The implementation of the new fixed agent compensation program in 2007 resulted in a
$165 million reduction in reported general and administrative expenses, compared to what would have
been reported under the prior contingent commission program.
General and administrative expenses of $804 million in 2006 were $139 million, or 21%, higher
than the 2005 total of $665 million. The increase reflected increased business volume, the segment’s
continued investments to support business growth and product development, legal expenses related to
investigations of various business practices by certain governmental agencies, and the segment’s share
of costs associated with the Company’s national advertising campaign. The 2005 total included
$25 million of catastrophe-related assessments.
GAAP Combined Ratio
The loss and loss adjustment expense ratio of 58.6% in 2007 was 3.8 points higher than the
comparable 2006 ratio of 54.8%, primarily reflecting the decline in net favorable prior year reserve
development. The ratio in 2007 included a 2.2 point benefit from net favorable prior year reserve
development, compared with a 5.5 point benefit in 2006. Catastrophe losses accounted for 2.4 points
and 1.6 points, respectively, of the loss and loss adjustment expense ratios in 2007 and 2006. Excluding
the impact of prior year development and catastrophes in both years, the adjusted 2007 loss and loss
adjustment expense ratio was 0.3 points lower than the adjusted 2006 ratio. The 2006 loss and loss
adjustment expense ratio of 54.8% was 7.4 points lower than the comparable 2005 ratio of 62.2%. The
2005 ratio included a 9.3 point impact of catastrophe losses and a 6.0 point benefit from net favorable
prior year reserve development. Excluding those factors from both years, the loss and loss adjustment
expense ratio in 2006 was slightly lower than the comparable 2005 ratio, reflecting continued favorable
trends in current accident year loss experience in 2006.
The underwriting expense ratio of 28.2% in 2007, which included a 1.0 point benefit from the
implementation of the new fixed agent compensation program, was 0.1 points lower than the 2006
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