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ALL » Topics » Combined ratio excluding the effect of catastrophes and prior year reserve re-estimatesThis excerpt taken from the ALL 8-K filed Dec 18, 2007. Combined ratio excluding the
effect of catastrophes and prior year reserve re-estimates is a non-GAAP ratio, which is computed as the difference
between three GAAP operating ratios: the combined ratio, the effect of
catastrophes on the combined ratio and the effect of prior year reserve
re-estimates on the combined ratio. The most directly comparable GAAP measure
is the combined ratio. We believe that this ratio is useful to investors and it
is used by management to reveal the trends in our Property-Liability business
that may be obscured by catastrophe losses and prior year reserve re-estimates.
These catastrophe losses cause our loss trends to vary significantly between
periods as a result of their incidence of occurrence and magnitude and can have
a significant impact on the combined ratio. Prior year reserve re-estimates are
caused by unexpected loss development on historical reserves. We believe it is
useful for investors to evaluate these components separately and in the
aggregate when reviewing our underwriting performance. We also provide it to
facilitate a comparison to our outlook on the 2007 combined ratio excluding the
effect of catastrophe losses and prior year reserve re-estimates. The combined
ratio excluding the effect of catastrophes and prior year reserve re-estimates
should not be considered a substitute for the combined ratio and does not
reflect the overall underwriting profitability of our business.
In this press release, we provide our outlook on the 2007 combined ratio excluding the effect of catastrophe losses and prior year reserve re-estimates. A reconciliation of this measure to the combined ratio is not possible on a forward-looking basis because it is not possible to provide a reliable forecast of catastrophes for December. Future prior year reserve re-estimates are expected to be zero because reserves are determined based on our best estimate of ultimate loss reserves as of the reporting date.
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