Loss and Loss Adjustment Expenses. Loss and loss adjustment expenses totaled $172.2 million in 2009 compared to $141.9 million in 2008, representing an increase of $30.3 million, or 21.3%. Our net loss ratio, which is calculated by dividing loss and loss adjustment expenses less claims service income by premiums earned, was 70.0% in 2009 compared to 56.7% in 2008. The higher loss ratio in 2009 was attributable primarily to unfavorable development of prior accident year loss reserves of $14.4 million in 2009 compared to favorable development of $19.7 million in 2008, an increase in the current accident year loss ratio from 57.5% at December 31, 2008 to 60.0% at December 31, 2009, an increase of approximately $6.4 million in the earned premium against which the current accident year ELR is applied and a reduction of approximately $1.6 million in contingent profit commissions related to the commutation of reinsurance treaties. Offsetting these increases were a decrease in assumed losses of $4.0 million, an increase of approximately $4.0 million in assumed losses ceded to reinsurers and a decrease of approximately $5.8 million relating primarily to ULAE reserves and loss based assessments. Our direct net loss reserves are net of reinsurance and exclude reserves associated with KEIC and the business that we involuntarily assume from the NCCI.
Income Tax Expense. The effective tax rate for the year ended December 31, 2008 was 30.5% compared to 31.7% for the same period in 2007. The effective rate for December 31, 2008 was lower than the statutory rate of 35.0% primarily as a result of tax exempt interest income, which accounted for approximately 7.5 percentage points of the reduction from the statutory rate. This decrease in the statutory rate was partially offset by $1.0 million, or 2.3 percentage points, due to a valuation allowance established against our deferred tax assets as of December 31, 2008. The valuation allowance was necessary primarily as a result of the OTTI charges we incurred in the second and third quarters of 2008 and, to a lesser degree, our capital loss carry forwards.
SB 228 required the DWC Administrative Director to establish, by December 1, 2004, an Official Medical Treatment Utilization Schedule meeting specific criteria. SB 228 also provided that beginning three months after the publication date of the updated American College of Occupational and Environmental Medical (“ACOEM”) Practice Guidelines and continuing until such time as the DWC Administrative Director establishes an Official Medical Treatment Utilization Schedule, the ACOEM standards will be presumed to be correct regarding the extent and scope of all medical treatment. The DWC Administrative Director has subsequently adopted the ACOEM Guidelines as the Official Medical Treatment Utilization Schedule.
We do not expect a material impact to our investment portfolio or financial position as a result of the problems currently facing monoline bond insurers.
Issuance costs of $591,000 incurred in connection with the Surplus Notes are being amortized over the life of the notes using the effective interest method. Amortization expense for the years ended December 31, 2009, 2008, and 2007 was $29,000, $43,000 and $56,000, respectively.