Loss development patterns are determined utilizing actuarial analysis, including management’s judgment, and are based on loss development patterns of paid losses and reporting of case reserves to us, as well as industry loss development patterns. Information that may cause future loss development patterns to differ from historical loss development patterns is considered and reflected in our selected loss development patterns as appropriate. For property and health coverages these patterns indicate that a substantial portion of the ultimate losses are reported within two to three years after the contract is effective. Casualty loss development patterns can vary from three years to over twenty years depending on the type of business.
As losses from catastrophes mature, our actuaries consider losses reported to us relative to loss development patterns from prior catastrophe events. Our estimate of ultimate liability for losses and LAE related to a catastrophe event will generally be based on these development patterns after approximately twelve months following the event. However, since loss development patterns may be inconsistent between events, for very large catastrophes, such as Hurricane Katrina in 2005, we will generally review information on a contract-by-contract basis for a longer period. Ultimate losses for a catastrophe event are typically reasonably well known within 12 to 24 months following the event, although ultimate losses from an earthquake may take longer to develop.
The increase in diluted earnings per common share in the year ended December 31, 2009 as compared with the year ended December 31, 2008 was primarily due to the increase in net income. Diluted earnings per common share also reflected the decrease in weighted average shares outstanding. The weighted average shares outstanding decreased primarily due to the weighted average effect of the repurchase of 7,852,498 of our common shares in 2009.
Net favorable development in the property excess-of-loss per risk class related primarily to the 2006 through 2008 underwriting years. Net favorable development in the catastrophe excess-of-loss (non-major events) class related primarily to the 2008 underwriting year. Net unfavorable development in major catastrophes related primarily to marine losses related to Hurricane Rita in the 2005 underwriting year. Net unfavorable development in the crop class related primarily to the North American business in the 2008 underwriting year. Net unfavorable development in the marine, aviation and satellite class related primarily to the marine business in the 2007 underwriting year. Net favorable development in the property proportional class related primarily to the 2005 through 2007 underwriting years.
Net acquisition expenses and related ratios were $125.9 million and 25.0% for the year ended December 31, 2008 and $146.0 million and 22.9% for the year ended December 31, 2007. The decrease in net acquisition expenses in 2008 as compared with 2007 was due to the decrease in net premiums earned. The increase in the net acquisition expense ratio in 2008 as compared with 2007 was due to differences in commissions relating to prior years and to deteriorating terms and conditions that generally resulted in higher commission and brokerage rates. Net acquisition expenses in 2008 included an increase in commissions relating to prior years of $4.8 million, representing 0.9% of net premiums earned as compared with a decrease of $4.9 million in 2007, representing 0.8% of net premiums earned. Net acquisition expense ratios were also impacted by changes in the mix of business.
Net losses, LAE and acquisition expenses decreased by $11.5 million for the year ended December 31, 2008 as compared with December 31, 2007 which was primarily due to the decrease in net premiums earned. The increase in the net loss, LAE and acquisition expense ratio was primarily due to the decrease in net favorable development in 2008 as compared with 2007. Net favorable development was $0.4 million and $6.7 million in 2008 and 2007, respectively. Net favorable development and related premium adjustments decreased the net loss and LAE ratios in 2008 and 2007 by 3.4 points and 20.5 points, respectively. Net favorable development in 2008 included $20.2 million in negative losses and LAE, which was substantially offset by increased acquisition expenses relating to prior years. Net favorable development in 2007 was primarily related to surety and accident and health business in the 2004 and 2005 underwriting years. Exclusive of net favorable development, the decrease in the net loss, LAE and acquisition expense ratio was the result of the expiration of a contract that experienced greater than expected loss activity in 2007 and premium adjustments relating to prior years for which there were no related losses.