· A reassessment of loss and LAE reserves in Montpelier Bermuda’s casualty class of business, primarily relating to medical malpractice policies, resulted in a decrease in estimated prior year losses and LAE of $6.6 million during 2009.
The increase in Montpelier Bermuda’s operating expenses incurred during 2009, as compared to 2008, was primarily attributable to two items. The first was the implementation of a new reinsurance accounting system. Operating expenses initially recognized during 2009 associated with this new system include the periodic amortization of capitalized costs, as well as maintenance and enhancement costs incurred subsequent to its implementation. The second was a $2.9 million increase in legal fees incurred during 2009, primarily in connection with Montpelier Bermuda’s reinsurance contract dispute with MPCL.
The increase in Montpelier Bermuda’s incentive compensation expenses recognized during 2009 versus 2008 reflects a significant increase in our consolidated underwriting income experienced from year to year.
During 2010 Montpelier Syndicate 5151 incurred $141.0 million of current year net loss and LAE, $29.6 million of which resulted from the February 2010 earthquake in Chile. Most of the remaining 2010 current year loss and LAE was recognized during the year in order to provide for claims and events that have been incurred but not yet reported to us.
· A $2.6 million reduction in the estimated ultimate losses and LAE associated with Hurricane Ike.
Our U.S. subsidiaries have not generated any U.S. Federal taxable income to-date. Our U.S. subsidiaries incurred zero, $0.1 million and $0.1 million in U.S. state income taxes during 2010, 2009 and 2008, respectively.
Our Bilateral Facility is subject to an annual commitment fee of 0.40%, which was increased effective April 1, 2010 from 0.20%. The commitment fee is charged on drawn balances only.
Our debt and interest and other financing obligations presented above assume that we do not exercise our option to redeem the Trust Preferred Securities at par in March 2011 and that, for all periods thereafter through March 2036, interest on the Trust Preferred Securities accrues at the applicable floating rate of 3-month LIBOR plus 380 basis points. Our letter of credit facilities, each of which is cancellable within one year, are assumed to be fully cancelled at December 31, 2011.
· we paid $1.8 million in net settlements of investment-related derivative contracts,
We also experienced a $0.9 million increase in the U.S. dollar value of our cash and cash equivalents due to foreign exchange rate fluctuations.
Estimating loss reserves for our modest book of longer-tail casualty reinsurance business, which can be either on an excess-of-loss or proportional basis, involves further uncertainties. In addition to the uncertainties inherent in the reserving process described above, casualty business can be subject to longer reporting lags than property business, and claims often take many years to settle. During this period, additional factors and trends will be revealed and as they become apparent we will adjust our reserves. There is also the potential for the emergence of new types of losses within our casualty book. Any factors that extend the time until claims are settled add uncertainty to the reserving process. At December 31, 2010 and 2009, we recorded gross loss and LAE reserves related to our casualty business of $210.7 million and $188.8 million, respectively.