For natural peril exposed business we establish loss reserves based on loss payments and case reserves reported by our clients, when and if received. We then add to these case reserves our estimates for IBNR. To establish our IBNR loss estimates, in addition to the loss information and estimates communicated by ceding companies, we use industry information, knowledge of the business written and management’s judgment.
Loss and loss adjustment expense reserves as of December 31, 2008 and 2007 were comprised of the following:
Bornheutter-Ferguson Reported Loss Method. We estimate ultimate losses by modifying expected loss ratios to the extent reported losses experienced to date differ from what would have been expected to have been reported based upon the selected reported loss development pattern. This method avoids some of the distortions that could result from a large development factor being applied to a small base of reported losses to calculate ultimate losses. We use this method for lines of business and contracts where there are limited historical reported losses.
Our primary financial goal is to increase the long-term value in fully diluted book value per share. During the year ended December 31, 2008, fully diluted book value decreased by $3.18 per share or 19.2% to $13.39.
Increased acquisition costs for the year ended December 31, 2008 compared to the same period for 2007 are a direct result of the increases in premiums written as well as the accrual of higher profit commission on frequency contracts that have had favorable underwriting results. For the years ended December 31, 2008, 2007 and 2006 the acquisition cost ratios for frequency business were 46.8%, 46.3% and 40.8%, respectively. We expect that acquisition costs will be higher for frequency business than for severity business. The acquisition cost ratios for severity business were 10.8%, 21.8% and 36.8% for the years ended December 31, 2008, 2007 and 2006, respectively.
As of December 31, 2008 we have made total commitments of $29.6 million in private investments, of which we have invested $9.9 million, and our remaining commitments to these investments total $19.7 million. Given the nature of the private equity investments, we are unable to determine with any degree of accuracy on when the commitments will be called. As such, for the purposes of the above table, we have assumed that all commitments will be made within one year. Under our investment guidelines, in effect as of the date hereof, no more than 10% of the assets in the investment portfolio may be held in private equity securities without specific approval from the Board of Directors.
On January 1, 2008, we entered into an agreement wherein the Company and DME Advisors agreed to create a joint venture for the purposes of managing certain jointly held assets. The term of the advisory agreement is January 1, 2008 through December 31, 2010, with automatic three-year renewals unless either Greenlight Re or DME Advisors terminate the agreement by giving 90 days notice prior to the end of the three year term. Concurrent with the execution of the advisory agreement, we terminated the investment agreement with DME Advisors.