Investment income is an important element of our net income. Because the period of time between our receipt of premiums and the ultimate settlement of claims is often several years or longer, we are able to invest cash from premiums for significant periods of time. As a result, we are able to generate more investment income from our premiums as compared to insurance companies that operate in other lines of business that pay claims more quickly. From December 31, 2005 to December 31, 2009, our investment portfolio, including cash and cash equivalents, increased from $582.9 million to $800.5 million and produced net investment income of $28.0 million in 2009, $31.0 million in 2008 and $30.2 million in 2007.
Substantial judgment is required to determine the relevance of our historical experience and industry information under current facts and circumstances. The interpretation of this historical and industry data can be
Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $163.3 million for 2009, compared to $176.4 million for 2008, a decrease of $13.1 million, or 7.4%. Loss and LAE incurred was composed of current accident losses and prior loss year losses. The current accident year loss ratio was 73.8% for 2009 compared to 68.0% for 2008. The higher current accident year loss ratio was primarily the result of a significant number of severe claims in 2009. However the higher current accident year loss ratio amounted to a decrease in losses incurred due to lower earned premiums. Prior accident years developed favorably both in 2009 and 2008, and there was $21.9 million of favorable development in 2009 compared to $20.4 million in 2008. This is further discussed below in “Prior Year Development.” Our net loss ratio was 65.1% for 2009, compared to 60.9% for 2008.
For our securities classified as held-to-maturity, unrealized gains and losses are not recorded in the financial statements until realized or until a decline in fair value, below amortized cost, is deemed to be other-than-temporary.
The Company has the ability and positive intent to hold certain investments until maturity. Therefore, investments in held-to-maturity fixed maturity securities are recorded at amortized cost. Equity securities are recorded at fair value. Temporary changes in the fair value of the equity securities are reported in shareholders’ equity as a component of other comprehensive income, net of deferred income taxes.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no such uncertain positions as of December 31, 2009 and 2008.
The Company’s reserves for loss and loss adjustment expenses, net of amounts recoverable from reinsurers, at December 31, 2008 were decreased in 2009 by $21.9 million. Reserves at December 31, 2007 were decreased in 2008 by $20.4 million, and at December 31, 2006 reserves were decreased in 2007 by $9.5 million. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and then reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled.
The Company determined the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard defines fair value, describes three levels of inputs that may be used to measure fair value, and expands disclosures about fair value measurements.