$7 million of net adverse development on liability business, primarily related to the 2007 through 2009 accident years and reflecting earlier than expected loss emergence on Excess & Surplus (“E&S”) umbrella business for those years over the past twelve months.
$30 million of net favorable prior period reserve development on aviation business, primarily relating to the 2007 and 2005 accident years and resulting from better than expected loss emergence.
$11 million of net favorable prior period reserve development on our professional lines reinsurance business, driven by net favorable development of $25 million on the 2003 and 2004 accident years, partially offset by adverse development of $14 million on the 2007 and 2006 accident years.
2010 versus 2009: Premiums ceded in 2010 were $584 million, or 30% of gross premiums written, compared with $751 million, or 42%, in 2009. The reductions were primarily attributable to changes in our reinsurance purchasing, including higher attachment points on our property excess of loss program and reduced cession rates on our professional lines quota share reinsurance programs on renewal during the second quarter.
2009 versus 2008: The 17% increase in gross premiums written was driven by improved market conditions and the select expansion of our business. Gross premiums written for liability and professional lines of business primarily benefited from new and opportunistic business opportunities, together with an increase in our share on certain treaty renewals this year. The growth of these lines was also partially due to the impact of premium adjustments on prior year proportional contracts for professional lines and liability. In 2009, we recorded net favorable premium estimate adjustments of $12 million on prior year professional lines proportional contracts and net adverse adjustments of $4 million on liability business, compared to net adverse adjustments of $7 million and $9 million, respectively, in 2008.
The 12.2 percentage point increase in our current accident year loss ratio was largely the result of an increased level of natural catastrophe activity. We recognized estimated pre-tax net losses (net of related reinstatement premiums) of $136 million and $110 million for the 2010 New Zealand and Chilean earthquakes, respectively. In addition, we recognized net losses for a number of other notable 2010 weather-related events including the first quarter Australian and U.S. storms and European Windstorm Xynthia, as well as fourth quarter Australian and U.S. storms. In contrast, catastrophe losses were notably less significant in 2009.
Corporate Expenses: Our corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 2.5%, 2.7% and 2.7% for 2010, 2009 and 2008, respectively.
The level of OTTI losses on equities was much higher in 2009 than in 2010 and 2008 primarily as a result of the significant turmoil in the equity markets experienced in late 2008 and through the first quarter of 2009. The impairments were due to severity and duration of the unrealized loss positions, for which we concluded the forecasted recovery period was too uncertain. The recognition of such losses does not necessarily indicate that sales will occur or that sales are imminent or planned.
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net realized investment gains and losses and the change in unrealized gains and losses generated by our investment portfolio. The following table provides a breakdown of the total return on cash and investments for the period indicated:
During 2010, we entered into a three-year revolving $500 million credit facility (the “Syndicated Credit Facility”), which provides us with combined borrowing and letter of credit issuance capacity up to the aggregate amount of the facility. At our request, and subject to certain conditions, the aggregate commitment of this facility may be increased by up to $250 million. Interest on loans issued under this is payable based on underlying market rates at the time of loan issuance. While any loans are unsecured, we have the option to issue letters of credit on a secured basis in order to reduce associated fees. This facility is subject to certain covenants that we believe are customary for facilities of this type, including limitations on fundamental changes, the incurrence of additional indebtedness and liens, certain transactions with affiliates and investments, as defined in the facility documents. Compliance with certain financial covenants that we believe are customary for insurance and reinsurance companies in credit facilities of this type is also required. These covenants include:
At December 31, 2010, we had $315 million, nil and $41 million of letters of credit outstanding under the secured letter of LOC Facility, the Syndicated Credit facility and the Expired Facility, respectively. Thus, outstanding capacity under the Credit Facilities was $935 million, not taking into consideration the $250 million potential increase in the amount available under the Syndicated Credit Facility. We were in compliance with all covenants of the Credit Facilities at the same date.
The estimation of IBNR is necessary due to the time lags between when a loss event occurs and when it is actually reported to us, referred to as the reporting lag. Reporting lags may arise from a number of factors, including but not limited to the nature of the loss, the use of intermediaries and complexities in the claims adjusting process. By definition, we do not have specific information on IBNR so it must be estimated. IBNR is calculated by deducting incurred losses (i.e. paid losses and case reserves) from management’s best estimate of ultimate losses. In contrast to case reserves, which are established at the contract level, IBNR reserves are generally estimated at an aggregate level and cannot be identified as reserves for a particular loss event or contract. Refer to the ‘Reserving For Significant Catastrophic Events’ section for additional information on reserving for such events.
We review our reserve for losses and loss expenses on a quarterly basis. Case reserves are primarily established based on amounts reported from insureds and/or their brokers. Management estimates IBNR after reviewing detailed actuarial analyses and applying informed judgment to consider qualitative factors that may not be fully reflected in the actuarial estimates. A variety of actuarial methods are utilized in this process, including the Expected Loss Ratio, Bornhuetter-Ferguson and Chain Ladder methods. Our estimate is highly dependent on management’s judgment as to which method(s) are most appropriate for a particular accident year and class of business. Given our relatively limited operating history, our historical data is often supplemented with industry benchmarks when applying these methodologies.
Our reinsurance recoverable is presented net of a provision for uncollectible amounts, reflecting the amount we believe will ultimately not be recovered due to reinsurer insolvency, contractual disputes over contract language or coverage and/or some other reason. We apply case-specific provisions against certain recoveries that we deem unlikely to be collected in full. In addition, we use a default analysis to estimate our provision for uncollectible amounts on the remainder of the balance. The estimates of our reinsurance recoverable and the associated provision require management’s judgment and are reviewed in detail on a quarterly basis. Any adjustments to amounts recognized in prior periods are reported in our net losses and loss expenses in the Consolidated Statement of Operations for the period when the adjustments were identified. The charge-off of amounts previously reserved as uncollectible is also considered on a case-by-case basis as part of this quarterly process.
At December 31, 2010, 1,150 fixed maturities (2009: 832) were in an unrealized loss position of $114 million (2009: $134 million) of which $15 million (2009: $20 million) was related to securities below investment grade or not rated.
As disclosed in Note 2(a), on April 1, 2009, we adopted a new accounting standard which amended the previous OTTI recognition model for fixed maturities. Because the new accounting standard does not allow for retrospective application, the OTTI amounts reported in the above table for the year ended December 31, 2010, are not measured on the same basis as prior period amounts and accordingly these amounts are not comparable. The adoption of this new accounting standard on April 1, 2009, resulted in $38 million net after-tax increase to retained earnings with a corresponding decrease to AOCI, resulting in no change to our shareholders’ equity.
Equity securities include U.S. and foreign common stocks as well as a foreign bond mutual fund. For common stocks we classified these within Level 1 as their fair values are based on quoted market prices in active markets. Our investment in the foreign bond mutual fund has daily liquidity, with redemption based on the net asset value of the fund. Accordingly, we have classified this investment as Level 2.
The table below presents the financial instruments measured at fair value on a recurring basis.
We write business with loss experience generally characterized as low frequency and high severity in nature, which results in volatility in our financial results. Net loss and loss expenses incurred include net favorable prior period reserve development of $313 million, $423 million and $376 million for the years ended December 31, 2010, 2009 and 2008, respectively. Prior period reserve development arises from changes to loss estimates recognized in the current year that relate to losses incurred in previous calendar years.
At December 31, 2010, we had $41 million, $315 million and nil letters of credit outstanding under the Expired Facility, the LOC Facility and the Syndicated Credit Facility, respectively. There was no debt outstanding under the Syndicated Credit Facility. We were in compliance with all LOC Facility and Syndicated Credit Facility covenants at December 31, 2010.
We also manage the aggregation of credit risk by minimizing overlaps in underwriting, financing and investing activities.
Except as noted below, we are not a party to any material legal proceedings. From time to time, we are subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against us in the ordinary course of insurance or reinsurance operations. In our opinion, the eventual outcome of these legal proceedings is not expected to have a material adverse effect on our financial condition, results of operations or cash flows.
The following table provides a comparison of basic and diluted earnings per common share:
At December 31, 2010, and 2009, our authorized share capital was 800,000,000 common shares, par value of $0.0125 per share.
We have several defined contribution plans that are self directed. Generally, mutual funds are made available pursuant to which employees and we contribute a percentage of the employee’s gross salary into the plan each month. During 2010, our total contribution expenses were $15 million (2009: $13 million and 2008: $10 million).
1,521,500 restricted stocks/units with a grant date fair value of $36.56 to our employees;
100,000 restricted stocks with a grant date fair value of $35.88 to our Chairman in connection with an amendment to his employment agreement;
During 2010, we granted 1,496,550 restricted shares (2009: 1,281,500; 2008: 2,747,630) to our employees and non-management directors with a weighted average grant-date fair value per share of $28.91 (2009: $26.39; 2008: $37.23). The total 2008 granted restricted shares included 1,000,000 shares with a grant date fair value of $35.17 per share to our CEO in connection with an amendment to his employment agreement. The grant made to our CEO has the following vesting schedule: 500,000 shares on January 31, 2009; 166,666 shares on January 1, 2010; 166,667 shares on January 1, 2012; and 166,667 shares on January 1, 2013.
The unaudited statutory capital and surplus, for our principal operating subsidiaries at December 31, 2010 and 2009 was as follows: