Fixed maturities are subject to fluctuations in fair value due to changes in interest rates, changes in issuer specific circumstances such as credit rating and changes in industry specific circumstances such as movements in credit spreads based on the market’s perception of industry risks. As a result of these potential fluctuations, it is possible to have significant unrealized gains or losses on a security. Our strategy for our fixed maturities portfolio is to tailor the maturities of the portfolio to the timing of expected loss and benefit payments. At maturity, absent any credit loss, fixed maturities’ amortized cost will equal their fair value and no realized gain or loss will be recognized in income. If, due to an unforeseen change in loss payment patterns, we need to sell any available for sale investments before maturity, we could realize significant gains or losses in any period, which could result in a meaningful effect on reported net income for such period.
Our reinsurance premiums are recorded at the inception of each contract based upon contract terms and information received from ceding clients and brokers. For excess of loss contracts, the amount of minimum and/or deposit premium is usually contractually documented at inception, and variances between this premium and final premium are generally small. An adjustment is made to the minimum and/or deposit premium, when notified, if there are changes in underlying exposures insured. For quota share or proportional reinsurance contracts, gross premiums written are normally estimated at inception based on information provided by cedants and/or brokers. We generally account for such premiums using the client’s initial estimates, and then adjust them as more current information becomes available, with such adjustments recorded as premiums written in the period they are determined. We believe that the ceding clients’ estimate of the volume of business they expect to cede to us usually represents the best estimate of gross premium written at the beginning of the contract. As the contract progresses, we monitor actual premium received in conjunction with correspondence from the ceding client in order to refine our estimate. Variances from original premium estimates are normally greater for quota share contracts than excess of loss contracts. Premiums are earned on a pro rata basis over the coverage period. The net adjustments to gross premiums written as a result of changes in premium estimates for the years ended December 31, 2010, 2009 and 2008 were $24.8 million, $10.9 million and $46.0 million, respectively. Such adjustments are generally the result of changing market conditions experienced by our clients.
Invested assets relating to the insurance, reinsurance (other than those invested assets of the U.S. companies within the reinsurance segment) and life and annuity reinsurance segments are managed on an aggregated basis. Consequently, investment income on this consolidated portfolio and gains on other investments are not directly reflected in any one of these segments. However, because of the longer duration of liabilities on casualty insurance and reinsurance business (as compared to property), and life and annuity reinsurance business, investment returns are important in evaluating the profitability of these segments. Accordingly, we allocate investment returns from the consolidated portfolio to each of these three segments. The allocation is based on a notional allocation of invested assets from the consolidated portfolio using durations that are determined based on estimated cash flows for each segment. The balance of investment returns from this consolidated portfolio is allocated to the corporate function for the purposes of segment reporting.
The amount of net premiums earned is a function of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, net premiums earned generally lag quarterly increases and decreases in gross premiums written and reinsurance premiums ceded. As a result, net premiums earned tend to be less volatile than gross premiums written and reinsurance premiums ceded. The increase in net premiums earned for the year ended December 31, 2010 compared to the years ended December 31, 2009 and December 31, 2008 was principally due to the incremental earnings of the former Harbor Point portfolio of contracts written before the Amalgamation, which are included in the 2010 year but have no equivalent in the comparable 2009 and 2008 years. On a pro forma basis, net premiums earned in the year ended December 31, 2010 would have been consistent with net premiums earned for the year ended December 31, 2009.
Claims and policy benefits decreased for the year ended December 31, 2010 compared to both the year ended December 31, 2009 and the year ended December 31, 2008. This was due to the decline over the three-year period in the number of new life and annuity reinsurance contracts written. There were no new life and annuity reinsurance contracts written in the year ended December 31, 2010, and three and six contracts written in the years ended December 31, 2009 and 2008, respectively. In our life and annuity reinsurance segment, we have not recently seen many meaningful opportunities to write new life and annuity reinsurance contracts where we can earn an attractive investment spread. As a result, we have determined not to write any new life and annuity reinsurance contracts in the foreseeable future.
Net foreign exchange gains and losses. Net foreign exchange gains for the year ended December 31, 2010 were $0.1 million, compared to $5.8 million of gains for the year ended December 31, 2009 and $9.9 million of losses for the year ended December 31, 2008. Net foreign exchange gains in 2010 and 2009 principally arose on the timing of transactions in Euros and British pounds and the movement of the U.S. dollar relative to those currencies. The loss in 2008 arose in connection with the purchase of Alterra Capital UK. We purchased British pounds in advance of the acquisition of Alterra Capital UK and before the transaction closed the value of the British pound dropped significantly relative to the U.S. dollar.
Gross premiums written for the year ended December 31, 2009 increased by 16.6% compared to the year ended December 31, 2008. Significant factors affecting gross premiums written were:
Net losses and loss expenses. The loss ratio for the year ended December 31, 2010 would have increased by 7.5 percentage points compared to the year ended December 31, 2009. Significant items impacting the loss ratio were:
Our results for the year ended December 31, 2010 include net losses of $7.0 million for property catastrophe losses and significant per-risk losses. Large loss events in the year ended December 31, 2010 included flooding in Tennessee and storms in the Northeastern U.S. These losses were contained within our annual loss expectations for the property line of business. In the fourth quarter of 2010, we reduced our original estimate of net losses associated with these events by $2.0 million. During the year ended December 31, 2009, we did not incur any significant property catastrophe losses or significant per-risk losses.
All but one of the hedge fund strategies we employed experienced negative returns during the year ended December 31, 2008. The largest contributors by investment strategy to the loss in 2008 were the long/short equity and the event driven arbitrage strategies. As of December 31, 2008, 38.5% and 9.9% of our hedge fund portfolio was allocated to long/short equity and event-driven strategies, respectively.
We also hold an index-linked structured deposit. The deposit has a guaranteed minimum redemption value of $24.3 million and a scheduled redemption date of December 18, 2013. The interest earned on the deposit is a function of the performance of the reference indices over the term of the deposit.
Liabilities for property and casualty losses. Property and casualty losses totaled $3,906.1 million as of December 31, 2010 compared to $3,178.1 million as of December 31, 2009, an increase of 22.9%. The increase in property and casualty losses was principally attributable to the Amalgamation, which resulted in an $852.0 million increase in reserves. During the year ended December 31, 2010, we incurred gross losses of $818.9 million, we paid $925.6 million in property and casualty losses, including a $315.0 million settlement of a significant prior year contract, and recorded gross favorable development on prior year reserves of $146.9 million.
6.25% senior notes are fully and unconditionally guaranteed by Alterra on a senior unsecured basis. The guarantee ranks equally with all of Alterra’s existing and future unsecured and unsubordinated indebtedness and ranks senior to all of Alterra’s future subordinated indebtedness. The effective interest rate related to the 6.25% senior notes, based on the net proceeds received, was 6.37%. The proceeds, net of all issuance costs, from the sale of the 6.25% senior notes were $346.9 million and were used to repay a $200.0 million revolving bank loan outstanding under the Harbor Point Credit Facility, with the remainder to be used for general corporate purposes.
Capital resources. As of December 31, 2010, total shareholders’ equity was $2,918.3 million compared to $1,564.6 million as of December 31, 2009, an increase of 86.5% principally due to the Amalgamation. On May 21, 2010, we filed a shelf registration statement on Form S-3 (File No. 333-167035) with the SEC that permits us to periodically issue debt securities, common shares, preferred shares, depository shares, warrants, share-purchase contracts and share purchase units. In September 2010, Alterra Finance issued $350.0 million principal amount of 6.25% senior notes due September 30, 2020 with interest payable on March 30 and September 30 of each year pursuant to the shelf registration statement. The senior notes are guaranteed by Alterra. The net proceeds of the offering were used to repay a $200.0 million revolving bank loan outstanding under the Harbor Point Credit Facility, with the remainder to be used for general corporate purposes.
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.