2008 versus 2007: The reduction in net premiums earned in 2008 as compared with 2007 primarily emanated from the insurance segment, reflecting lower net premiums written, partially offset by the impact of growth in certain lines of business in prior years.
In 2009, we experienced $211 million of net favorable reserve development, the principal components of which were as follows:
Increased claims activity on the credit component of credit and political risk business, emanating from the effects of the global financial crisis. The current accident year loss ratio on credit and political risk business for 2009 was 133% compared to 38% for 2008. This contributed to an additional 14.6 points to the overall current accident year loss ratio for the insurance segment, relative to the prior year. The increase includes a reserving provision related to one peak credit insurance risk which has been stressed by the global economic downturn. No claim has been presented to date. However, we have been closely monitoring the status of the underlying project and identified an opportunity to work and negotiate with interested parties to settle our exposure. We have reserved for the amount that we believe will ultimately be payable to eliminate our exposure.
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in value of the hedged item. Further, the hedge relationship must be designated and formally documented at the inception, detailing the particular risk management objective and strategy for the hedge, including the item and risk that is being hedged, the derivative that is being used, and how effectiveness is being assessed. We formally measure the hedge effectiveness both at the inception and on an ongoing basis. We evaluate the effectiveness of our designated hedges on a retrospective and prospective basis using the period-to-period dollar offset method. Using this method, if the hedge correlation is within the range of 80% to 125%, we consider the hedge effective and apply hedge accounting.
In April 2009, we adopted revised guidance issued by FASB on the accounting for assets and liabilities assumed in a business combination that arise from contingencies, resulting in no impact to our results of operations or financial position. This guidance amends the previously issued standard on business combinations, by requiring that assets acquired or liabilities assumed in a business combination that arise from contingencies be recognized at fair value only if fair value can be reasonably estimated; otherwise the asset or liability should generally be recognized in accordance with guidance on accounting for contingencies, and removes the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date.
On January 7, 2009, we acquired Dexta Corporation Pty Ltd (“Dexta”), an underwriting agency in Australia. The total purchase consideration to acquire Dexta was not material to our consolidated financial position. This acquisition resulted in the recognition of $15 million and $20 million of goodwill and intangible assets with a finite life, respectively. These intangible assets with a finite life consist primarily of Dexta’s distribution network.
At December 31, 2009, we held insurance enhanced bonds (MBS, ABS and municipal securities), in the amount of approximately $217 million (2008: $215 million), which represented approximately 2.2% (2008: 2.8%) of our total fixed maturities and a weighted average credit rating of AA by S&P. If we exclude the insurance enhancement, the weighted average credit quality of our insured bond portfolio was AA- (2008: A+) by S&P. At December 31, 2009, our largest exposures to financial guarantors were Financial Security Assurance Inc. for $69 million (2008: $72 million), MBIA Insurance Corporation for $69 million (2008: $70 million) and Ambac Financial Group, Inc. for $57 million (2008: $60 million). We do not have any significant investments in companies which guarantee securities at December 31, 2009. Effective February, 2009, MBIA provides insurance indemnity through its wholly owned subsidiary, National Public Finance Guarantee Corporation.
In aggregate, 94% of our hedge fund allocation is redeemable within one year and 100% is redeemable within two years, subject to prior written redemption notice varying from 45 to 95 days. This includes recognition of certain funds we hold which restrict new investor redemptions during a lock-up period. A lock-up period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. Another common restriction is the suspension of redemptions (known as “gates”) which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund’s net assets or to prevent certain adverse regulatory, or any other reasons that may render the manager unable to promptly and accurately calculate the fund’s net asset value. During 2009 and 2008, no gates were imposed on our redemption requests. At December 31, 2009, outstanding redemptions receivable amounted to $34 million or 10% of hedge fund holdings, $25 million of which we anticipate collection within the next three months. Of the remainder, $3 million is subject to holdback until the completion of the fund’s annual audit and $6 million will remain invested in special purpose vehicles.
In 2009 we entered into a cancellation agreement for our insurance derivative contract with longevity risk exposure for a total cash consideration of $200 million; accordingly, there is no outstanding balance at December 31, 2009.
Subsequent to December 31, 2009, through February 5, 2010, we repurchased a further 4,399,414 common shares at an average price of $28.38 per share, for a total cost of $125 million. At February 5, we have approximately $417 million of remaining authorization for common share repurchases under the 2007 and 2009 plans, which will expire on December 31, 2011.
If either the CEO or Chairman dies, is disabled or a change of control of the Company occurs, the remaining benefits under their respective SERP are payable by the Company in a lump sum. At December 31, 2009, the total lump sum contingently payable to our CEO and Chairman was $22 million and $4 million, respectively. During 2009, pension expense was negligible (2008: $3 million and 2007: $2 million) for the two SERPs. At December 31, 2009, the accrued SERPs obligations were $17 million (2008: $16 million and 2007: $14 million). The weighted-average assumptions used to determine our net periodic pension cost and benefit obligations were as follows:
The collateral manager of four of our CLOs is Blackstone Debt Advisors L.P., who is entitled to management fees payable by the collateralized obligations in the ordinary course of business. We also have investments in three hedge funds and a credit fund that are managed by Blackstone Alternative Asset Management, LP, who is entitled to management fees in the ordinary course of business. During 2009, total management fees to the Blackstone Group were $1 million (2008: $2 million; 2007: $4 million).