Our principal executive offices are located at 101 South Stratford Road, Winston-Salem, NC 27104. This five-story office building totals 79,254 square feet and we currently lease approximately 68,932 square feet under a lease that will expire in 2012. All staff functions are located within this office complex. We currently sublease space on two floors of this facility to Essent, totaling approximately 20,937 square feet under a sublease that will expire in 2012. We believe this property is suitable and adequate for its present circumstances.
As a result of the increase in our rescission and denial activity, we believe we face an increased risk of litigation. Any impediment to our ability to rescind coverage for underwriting violations would be detrimental to our success in run-off. See Item 1A, “Risk Factors,” for more information.
The decline in insurance in force in 2009 and 2008 reflects the lack of writing new business as well as the cancellation of insurance coverage resulting from claim settlement and rescission activity. Furthermore, during the fourth quarter of 2009, insurance coverage was terminated on four Modified Pool transactions when pre-determined aggregate stop loss limits in the contracts were met. A small portion of our Modified Pool contracts contain provisions that terminate coverage and the contract when cumulative settled losses reach the stop loss limit. No future premium is received following the termination of one of these Modified Pool contracts. We expect that several other Modified Pool transactions will also reach their respective stop loss limits during 2010 and terminate, which would result in an estimated decline in premiums of approximately $3.8 million from what was earned in 2009. The majority of our Modified Pool contracts do not terminate when settled losses reach the stop loss limit.
We believe that a policy with a high LTV, all else being equal, will have a greater risk of default than a policy with a low LTV, especially in periods with declining or depressed home prices. We have not been provided with the “mark-to-market” LTV of our insured portfolio. To the extent that an insured loan in our portfolio has experienced a significant decline in the underlying value, and we believe this to be the case for a large percentage of our insured portfolio, the “mark-to-market” LTV of the policy may be substantially higher than the LTV at origination.
The following table shows direct risk in force as of December 31, 2009 and December 31, 2008 by year of loan origination. Business originated in 2006 and 2007 continues to comprise the majority of our risk in force. This is due to the significant amounts of production during these two years as well as the large number of policies that have been cancelled from prior origination years. In general, policies originated during these years have significantly higher amounts of average risk per policy than policies originated prior to 2006. Furthermore, policies originated during these vintage years have also exhibited higher default and claim rates than preceding vintage years. For additional information regarding these vintage years, see “Losses and Expenses,” below.
Approximately 53% of our Primary flow insurance in force was subject to captive reinsurance arrangements at December 31, 2009 compared to 55% at December 31, 2008. Under captive reinsurance programs, reinsurance companies that are affiliates of the lenders assume a portion of the risk associated with the lender’s insured book of business in exchange for a percentage of the premium. The risk reinsured by the captive is supported by assets held in trust and we are the beneficiary. At December 31, 2009, we had approximately $257 million in captive reinsurance trust balances with $229 million of reserves ceded to those captives. The majority of the captive reinsurance arrangements have trust balances below the reserves ceded under the contracts. In those cases, the net reserve credit that we recognize in our financial statements is limited to the trust balances because we have no contractual right to require additional capital contributions. As a result, we expect limited benefit in future periods from these arrangements.
However, in addition to the above factors, the incidence of default in the current environment has been and continues to be adversely impacted by the significant decline in home prices throughout the United States. The more recent book years particularly have been impacted and, as the above table indicates, the 2005, 2006 and 2007 book years are exhibiting significantly adverse performance compared to the more developed earlier book years. We do not expect this adverse performance to subside and expect the gross cumulative incurred loss incidence rate of these book years to ultimately be significantly higher than our previous books of business.
While defaults from the distressed markets continue to comprise the majority of risk in default, risk in default from policies in the non-distressed markets increased by 59.6% during 2009 compared to an increase of 16.0% in the distressed markets. We believe the growing deterioration in the non-distressed markets is primarily a result of high unemployment and the slower, more gradual decline in home prices. Defaults in the distressed markets also comprised a large percentage of settled claims and rescinded policies, which mitigated the slowing growth rate in risk in default in these markets.
At the end of the first quarter of 2008, we established a premium deficiency reserve because the present value of our estimated future settled losses and expenses, net of the present value of our estimated future renewal premiums, exceeded our existing net reserves. Subsequent to the first quarter of 2008, the quarterly review of our outstanding book of business has not resulted in the need to establish any further premium deficiency. This is primarily due to the large increases in our recorded loss reserves.