* The US GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
Subsequent to December 31, 2001, A.M. Best (Best) downgraded the financial strength rating (FSR) of Terra Nova to "B++" (very good) from "A-" (excellent). In addition on March 22, 2002, Standard & Poor's (S&P) reduced Terra Nova's FSR to "BBB-" (good). Both actions were the result of the Company's underwriting losses.
The underwriting loss increased to $256.2 million in 2001 from $203.8 million in 2000. The 2001 underwriting loss was primarily due to $177.0 million of losses related to World Trade Center and other related events of September 11, 2001 (`WTC'), reserve strengthening and expense charges. In 2000, the underwriting loss was primarily due to inadequate pricing and poor underwriting controls on the discontinued lines and portions of the continued programs. In addition the underwriting loss for 2000 included a $58.6 million non-recurring charge relating to: 1) $36.5 million charge against deferred acquisition costs due to poor experience on property business and certain marine, casualty and auto lines; 2) $19.6 million of reserve strengthening required on marine, property, casualty and auto accounts; and 3) a $2.5 million charge to record liabilities under an operating lease.
The Company's net WTC exposure was $68.0 million. Approximately $5.5 million of estimated net losses were ceded to certain United States insurance subsidiaries of the Company's parent, Markel Corporation. Further details of this quota share arrangement are provided in note 12 of the notes to consolidated financial statements. Before these cessions, the estimated WTC losses were $73.5 million, net of approximately $248 million of reinsurance recoverables. In addition to reported claims, the Company has used many loss estimation techniques including detailed policy level reviews, the use of catastrophe modeling software, direct contact with insureds and brokers and sensitivity analysis to possible coverage scenarios in order to develop its estimated WTC exposure. New information concerning potential losses and coverage issues continues to emerge. While the Company believes that its WTC reserve is adequate, adverse development is possible.
Upon renewal in early January 2002, the cost of the marine and energy reinsurance program increased significantly. Based on these higher costs, the Company determined that unearned premiums at December 31, 2001 for the unexpired marine and energy risks in its Lloyd's Market segment were not adequate to cover future losses, increased reinsurance costs and related deferred policy acquisition costs. As a result the Company wrote off $20.0 million of deferred policy acquisition costs in 2001.
Also late in 2001, the Company completed a comprehensive study of asbestos exposures. The study included the use of London Market asbestos exposure experts and the Company's internal and external actuaries. The study was completed using a proprietary database, which contained exposure information about asbestos claims submitted since inception to the London Market. The Company's participation on these risks was then calculated. The Company believes that this "ground up" approach is superior to methods previously used and as a result increased the discontinued lines net asbestos reserves by $20.0 million. Environmental and asbestos exposures are subject to significant uncertainty due to potential severity and an uncertain legal climate. Environmental and asbestos reserves could be subject to increases in the future. The Company's environmental and asbestos reserves are not discounted to present value and are forecasted to pay out over the next 50 years.