rates for favorable loss experience. However, as these insureds experience losses their premiums are "stepped up" accordingly. Because of the use of claims-made policies, as the number of years of coverage provided increases, CNA's (and AIG's) exposure increases. This additional exposure results in an increase in premiums charged.
The composition of the investment portfolio at December 31, 2001 and 2000 is as follows:
Favorable development on prior years losses is attributable to various economic trends and factors. The strong economic environment of recent years has resulted in fewer professional liability claims as fewer companies are experiencing financial stress or failure that can often lead to such claims. However, AIG has noted that under the CNA program, loss frequency has increased in recent years while loss severity has remained constant. This increase in loss frequency can be attributed to CNA's implementation of a step plan (also see above discussion of premiums) in 1995 that was designed to attract a large number of new insureds, predominantly smaller firms, to the program. CNA expected loss severity to decrease and offset the effects of increases in loss frequency, but to date this decrease has not occurred. Accordingly, losses have trended upward in the most recent years.
AIG's gross premiums assumed in 2001 amounted to $6,738,231, an increase of $461,797 from 2000. Gross premium assumed in 2000 decreased by $429,312, or 7.3% from 1999. Assumed reinsurance premiums receivable represents current assumed premiums receivable less commissions payable to the fronting carriers. This balance was $1,145,874 at December 31, 2001 and $115,256 at December 31, 2000. This balance also fluctuates due to the timing of renewal premiums written. The increase in premiums has also resulted in a direct increase in policy acquisition costs, unearned premiums, fixed commissions paid to CNA as part of its quota share agreement, and loss reserves.
Reinsurance balances payable represent AIG's estimate of the premiums due to the Company's reinsurer under the retrocession agreements described above, and amounts currently due for losses and loss adjustment expenses payable. The estimate of reinsurance balances due for retrospective premiums decreased by $0, $0 and $182,959 during 2001, 2000 and 1999, respectively. Including loss and loss adjustment expenses currently due, reinsurance balances payable decreased from $306,529 at December 31, 2000 to $174,833 at December 31, 2001, a decrease of $131,696, or 43%.
Prepaid expenses and other assets amounted to $130,427 at December 31, 2001, a decrease of 18.4% from 2000.
During 2001, 2000 and 1999, the Board of Directors declared quarterly dividends of $0.65 per share totaling $821,556, $855,681 and $863,289, respectively. Continuation of quarterly dividend payments is subject to the Board of Directors' continuing evaluation of the Company's level of surplus vis a vis its capacity to accept more business. It is an objective of the Company to build surplus to retain flexibility for any future business expansion.
The result of this process is that twice a year, the actuary has made recommendations of a range of ultimate loss estimate to AIC's Board of Directors, which for each period has selected ultimate loss estimates that fall within that range. Based on the foregoing practice, the estimated loss ratio has been updated by AIG's Board of Directors at least once each year.
Market risk generally represents the risk of loss that may result from potential change in the value of a financial instrument due to a variety of market conditions. The Company's exposure to market risk is generally limited to potential losses arising from changes in the level of interest rates on market values of fixed term holdings and changes in the market values of equity securities. The Company does not hold or issue derivative financial instruments for either trading or hedging purposes.
Interest rate risk results from the Company's holdings in interest-rate- sensitive instruments. The Company is exposed to potential losses arising from changes in the level of interest rates on fixed rate instruments held. The Company is also exposed to credit spread risk resulting from possible changes in the issuer's credit rating. To manage its exposure to interest rate risk the Company attempts to select investments with characteristics that match the characteristics of the related insurance liabilities. Additionally, the Company generally only invests in higher-grade interest bearing instruments.
The Company only invests in U.S. dollar denominated financial instruments and does not have any exposure to foreign exchange risk.
On June 1, 2000, the Board of Directors of Investco, which holds almost all of the Company's investment portfolio, authorized Investco to spend up to $1 million to purchase outstanding Common Shares of the Company. On September 8, 2000, the Bermuda Monetary Authority authorized the purchase of up to 15,000 Common Shares pursuant to the June 1 Board authorization. Such purchases are effected through privately negotiated transactions and are in addition to Investco's practice of purchasing the
shares of individuals who have died or retired from the practice of public accounting. Under the June 1 Board authorization, Investco has purchased to date 11,460 Common Shares for a purchase price of $351,018. In addition, Investco has purchased to date 8,928 Common Shares of individuals who have died or retired for a purchase price of $386,219.