Our consolidated financial statements are prepared in accordance with U.S. GAAP, which require management to make estimates and assumptions. We believe that the following accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
For quota share or proportional contracts, we are entitled to receive premium as the ceding client collects the premium under contractual reporting and payment terms, which are usually quarterly. Premiums are usually collected over a two year period on our quota share or proportional contracts. For excess of loss contracts, premium is generally paid in contractually stipulated installments with payment terms ranging from payment at the inception of the contract to four quarterly payments. As a result of recognizing the estimated gross premium written at the inception of the policy and collecting that premium over an extended period, we include a premium receivable asset on our balance sheet. We actively monitor our premium receivable asset to consider whether we need an allowance for doubtful accounts. As part of this process, we consider the credit quality of our cedants and monitor premium receipts versus expectations. We also seek to include a right of offset in the contract terms. Since commencing our operations, premiums receivable written off have not been material and, currently, no material premiums receivable are significantly beyond their due dates or in dispute.
the fund managers as at December 31, 2009 (2008-$2.0 million) to adjust the carrying value of the funds to our best estimate of fair value.
Net favorable loss development of prior year reserves in 2008 of $22.6 million compared to $8.8 million of net favorable development in 2007. The lines of business with the largest favorable development in 2008 were property ($18.3 million) and aviation ($2.0 million). In 2007 the lines of business with the largest favorable development were property ($5.7 million) and excess liability ($1.7 million);
The combined ratio for 2009 was 92.1% compared to 87.4% for the year ended December 31, 2008 and 83.9% for the year ended December 31, 2007. The 2009 combined ratio increased over 2008 principally due to increases in the loss ratio and the ratio of acquisition costs to net premiums earned. The 2008 combined ratio increased over 2007 principally due to an increased loss ratio partially offset by lower acquisition costs.
Gross premiums written for the year ended December 31, 2009 increased by 16.6% compared to the 2008 year. The increase in premiums is principally in our professional liability, workers compensation and general casualty lines of business. We increased our professional liability business to take advantage of favorable market pricing and reduced market capacity. The increase in workers compensation premiums is principally due to a significant quota share treaty written in 2009. We expect this treaty to be renewed in 2010 at a reduced premium level. Our general casualty premium volume is generally flat year-over-year; the comparative 2008 year includes negative premium adjustments which have not recurred in 2009. The market for property was favorable and our renewals benefited from an increase in rates. However, with the 41.6% growth in our Max Specialty property business in the United States, we have kept our reinsurance premium volumes stable year-over-year as part of our strategy to limit aggregate property exposures. The year ended December 31, 2009 included reductions in premium estimates on prior year contracts of $10.9 million compared to reductions of $46.0 million in 2008. The year ended December 31, 2008 also includes $10.8 million of reinstatement premiums principally triggered by property catastrophe losses incurred in 2008.
Gross premiums written for the year ended December 31, 2008 increased 21.5% compared to the 2007 year. This was principally due to a $79.5 million increase in agriculture business written, partially offset by decreases in general casualty and marine and energy lines of business. The year ended December 31, 2008 included reductions in premium estimates on prior year contracts of $46.0 million compared to reductions of $9.3 million in 2007.
Net investment income. Net investment income, which excludes realized and unrealized gains and losses on investments, decreased 6.6% to $169.7 million for the year ended December 31, 2009 as compared to $181.6 million in 2008. In 2008, net investment income decreased 3.5% from $188.2 million for the year ended December 31, 2007. Net investment income is a function of the investment yield on cash, fixed maturities and funds withheld by clients. The ratio of cash to invested assets and the investment yield on cash, fixed maturities and funds withheld by clients for the three years ended December 31, 2009, 2008 and 2007 were as follows:
market sources to determine a reasonable fair value. In addition, pricing services use valuation models, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities. The ability to obtain quoted market prices is reduced in periods of decreasing liquidity, which generally increases the use of matrix pricing methods and generally increases the uncertainty surrounding the fair value estimates.
Furthermore, life and annuity benefits and deposit liabilities recorded in the audited consolidated financial statements at December 31, 2009 are computed on a net present value basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect a discount of the amount payable.
ASU 2009-01-The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles
In April 2009, the FASB issued guidance regarding interim disclosures about fair value of financial instruments which requires the disclosure about fair value of financial instruments in interim and annual financial statements. This guidance was effective for interim reporting periods ending after June 15, 2009. We adopted the guidance on April 1, 2009 and reflected the relevant required disclosures in the interim consolidated financial statements.