Our annuity sales and a reduction in withdrawals contributed to a net cash inflow related to our annuity business of $96.0 million in 2009 compared to net cash outflows of $73.0 million and $92.8 million in 2008 and 2007, respectively. The reduction in annuity withdrawals is indicative of the change in economic conditions and the inclination of consumers to choose products with less risk and guaranteed returns.
The following table shows our premiums written and earned for 2009, 2008 and 2007.
The deterioration in 2008 was primarily driven by catastrophe losses, which increased by nearly $50.6 million in 2008 over 2007. Net losses from Hurricanes Gustav and Ike contributed $3.6 million and $19.0 million, respectively, to the commercial lines property losses in 2008. We also had an increase in commercial fire losses, with incurred losses from these claims increasing from $20.3 million in 2007 to $27.3 million in 2008. The number of claims reported decreased slightly, but the severity of commercial fire losses increased.
In 2009, our premium writings were affected by continued competition and the weak economy, which contributed to the $3.3 million decrease in premiums earned as compared to 2008. In 2009, we experienced a slight decrease in our policy counts, which resulted in a decrease in premiums earned, compared to 2008, when an increase in policy counts resulted in an increase in premiums earned. Losses and loss settlement expenses increased in each of the past three years, rising from $63.5 million in 2007 to $72.4 million in 2008 and $75.1 million in 2009. We attribute the increase in 2009 to a slight increase in claims severity, while the increase in 2008 was attributable to the growth of the number of policies that we had written.
We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short- and long-term liquidity needs, projected tax status, general economic conditions, expected rates of inflation and regulatory requirements. We manage our portfolio based on investment guidelines approved by management, which comply with applicable statutory regulations.
The following table is a breakdown of our fixed maturity securities for our available-for-sale, held-to-maturity and trading security portfolios, by credit rating, at December 31, 2009 and 2008, respectively. Information contained in the table is based upon issue credit ratings provided by Moody’s unless the rating is unavailable, and then it is obtained from Standard & Poor’s:
In 2008, our net investment income declined $14.9 million to $107.6 million. This decrease is attributable to lower market interest rates in 2008 than in 2007; mostly on our short-term and fixed maturity securities, which dropped an average of 203 basis points in 2008. This decrease is also attributable to the net cash outflows from our annuity business, which decreased our invested assets by $73.0 million in 2008 and $92.8 million in 2007. Further contributing to this decline was a loss in investment income of $4.5 million due to the performance of our investments in certain limited liability partnership holdings.
Our short-tail lines of business include fire and allied lines, homeowners, commercial property, auto physical damage and inland marine. The amounts of the case-based reserves that we establish for claims in these lines depend upon various factors, such as individual claim facts (including type of coverage and severity of loss), company historical loss experience and trends in general economic conditions (including changes in replacement costs, medical costs and inflation).
Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe that using company historical premium and claims data to establish reserves for losses and loss settlement expenses results in adequate and reasonable reserves. Based upon this comparison, we believe that our total recorded loss reserves at December 31, 2009, are unlikely to vary by more than 10 percent of the recorded amounts, either positively or negatively. Historically, our reserves have had an average variance of less than 10 percent of recorded amounts, with our reserves booked as of December 31, 2008, generating a deficiency of 4.9 percent in 2009. Our reserves booked as of December 31, 2007, generated a reserve deficiency of 0.1 percent in 2008. These deficiencies are discussed in detail in the under the heading “Reserve Development” in the “Property and Casualty Insurance Segment” of the “Results of Operations” section in this item.
The accompanying Consolidated Financial Statements include United Fire & Casualty Company (“United Fire”) and its wholly owned subsidiaries: United Life Insurance Company, Lafayette Insurance Company, Addison Insurance Company, American Indemnity Financial Corporation, United Fire & Indemnity Company and Texas General Indemnity Company. United Fire Lloyds, an affiliate of United Fire & Indemnity Company, has also been included in consolidation. All intercompany balances have been eliminated in consolidation.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value, due to its short-term nature.
To determine the fair value of the majority of our investments, we utilize prices obtained from independent, nationally recognized pricing services. We obtain one price for each security. When the pricing services cannot provide a determination of fair value for a specific security, we obtain non-binding price quotes from broker-dealers that we have had several years’ experience with and who have demonstrated knowledge of the subject security. We request and utilize one broker quote per security.
Conditions and trends that have affected the reserve development for a given year may change. Therefore, such development cannot be used to extrapolate future reserve redundancies or deficiencies.