The losses for D&O business are generally very large and infrequent, and with some cases involving securities class actions. D&O claims report reasonably quickly, but take years to settle. Our loss estimates are based on expected losses, an assessment of the characteristics of reported losses at the claim level, evaluation of loss trends, industry data, and the legal, regulatory and current risk environment. Significant judgment is involved because anticipated loss experience in this area is less predictable due to the small number of claims and/or erratic claim severity patterns. As time passes for a given underwriting year, we place additional weight on assumptions relating to our actual experience and claims outstanding. The expected ultimate losses may be adjusted up or down as the underwriting years mature.
The following is a discussion and analysis of our consolidated and segment results of operations for the years ended December 31, 2012, 2011 and 2010. Our financial results are presented on the basis of U.S. GAAP. However, in presenting our financial results, we discuss our performance with reference to operating earnings, book value per share, underwriting profit or loss, and the combined ratio, all of which are non-GAAP financial measures of performance and/or underwriting profitability. Operating earnings is calculated as net income less after-tax net realized gains (losses) and net OTTI losses recognized in earnings. Book value per share is calculated by dividing stockholders’ equity by the number of outstanding shares at any period end. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater 100% indicates an underwriting loss. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations by highlighting the underlying profitability of our insurance business.
2011 accident year loss emergence of approximately $11.0 million related to our Professional Liability business, of which approximately $8.0 million was specific to our D&O liability insurance for both publicly and privately held corporations. The remaining $3.0 million of emergence was specific to our small lawyers and miscellaneous professional liability coverages.
The following is a discussion of relevant factors related to the $2.1 million net reserve deficiency for the year ended December 31, 2011:
• $1.7 million for New York construction liability due to unfavorable loss emergence.
• 2011 accident year energy losses with a net loss of $9.5 million, inclusive of $2.7 million in reinsurance reinstatement premiums, related to drilling operations in the North Sea, Gulf of Mexico and Russia, as well as an onshore industrial site.
The 2011 Lloyd’s Operations Property Casualty gross written premiums increased 21.5% compared to the same period in 2010. The increase is primarily due to greater Onshore Energy premiums as a result of steady production and renewal rate increases resulting from reduced competition that has occurred due to recent loss activity. Engineering & Construction has also increased production from prior year primarily due to rate increases prompted by a contraction in the market.