Change in fair value of derivatives. In the twelve months ended December 31, 2010, we recorded a reduction in the fair value of derivatives of $0.2 million (2009 - $8.0 million; 2008 - $7.8 million). This includes a gain of $6.8 million in the value of our interest rates swaps which we entered into during 2010 and a reduction of $7.0 million (2009 - $8.0 million; 2008 - $7.8 million) in the estimated fair value of our credit insurance contract. On October 26, 2010, we gave notice of our intention to cancel our credit insurance contract with effect from November 28, 2010. The notice of cancellation has triggered a final payment of $1.9 million to the contract counter-parties.
In order to show the potential variability in the Company’s estimate of loss reserves, the internal actuaries use stochastic modeling techniques around their mean estimate. We believe that stochastic modeling provides a distribution against which selected reserves can be assessed for which we show the probability of various outcomes relative to the actuarial mean estimate. Stochastic modeling provides a range of potential outcomes as reserve movements will be caused by any number of factors, and as such it is unlikely that only one factor will change in a given period; stochastic modeling techniques will reflect the impact from many factors. The output from the stochastic modeling is more meaningful at a segmental level and is therefore not provided at a line of business level.
If the ultimate liabilities equate to the mean actuarial estimate, then the impact from the change in loss reserves would be to increase net income before tax by $316.2 million (being the difference above between the selected loss reserves of $3,820.5 million and the mean value of $3,504.3 million), although the impact of such a change is unlikely to be recognized in one calendar year due to the unwinding of experience against expectations taking many years.
The prior year adjustment in 2008 for our insurance segment was attributable mainly to reserve strengthening for our marine, energy and transportation business and reserve releases in our reinsurance segment were due to favorable development in casualty reinsurance. Losses from Hurricanes Ike and Gustav contributed 25.6 percentage points to the loss ratio in property reinsurance.
Reserves by segment. For the twelve months ended December 31, 2010, we had total net loss and loss adjustment expense reserves of $3,540.6 million (December 31, 2009 - $3,009.6 million). This amount represented our best estimate of the ultimate liability for payment of losses and loss adjustment expenses. Of the total gross reserves for unpaid losses of $3,820.5 million at the balance sheet date of December 31, 2010, a total of $2,074.8 million or 54.3% represented IBNR claims (December 31, 2009 - $1,946.3 million and 58.4%, respectively). The following tables analyze gross and net loss and loss adjustment expense reserves by segment as at December 31, 2010 and 2009:
The two tables above are not directly comparable as the year end 2010 position reflects an additional year’s business. The increase in reserves in 2010 over 2009 therefore reflects the reserves associated with the 2010 accident year less changes in reserve estimates and payments made on earlier
As of December 31, 2010, the Company had funds on deposit of $699.9 million and £30.0 million (December 31, 2009 - $667.1 million and £18.8 million) as collateral for the secured letters of credit.
Swiss trust fund. Aspen U.K. has established a Swiss trust fund with a Swiss bank to secure a Swiss insurance license. As at December 31, 2010, the balance held in trust was CHF3.1 million (2009 - CHFNil).
For a discussion of our commitments and contingencies, please see Note 18 to the consolidated financial statements for the twelve months ended December 31, 2010 included elsewhere in this report.