We intend to continue monitoring market conditions to position ourselves to participate in future under-served or capacity-constrained markets as they arise and intend to offer products that we believe will generate favorable returns on equity over the long term. Accordingly, our underlying results and product line concentrations in any given period may not be indicative of our future results of operations.
professional indemnity contract and a commercial excess of loss contract, respectively, as underlying losses are no longer expected to reach a level that would impact these contracts.
For the year ended December 31, 2012, our net loss reserves on prior period contracts increased by $56.9 million which primarily related to the following:
Adverse loss development of $15.7 million based on data received from the client and our reserve analysis relating to prior year commercial motor liability contracts that are in run-off. We received additional loss data from the client during 2011 that indicated higher than expected paid and incurred losses. During 2011, based on a review of the client’s actual loss data and as part of our quarterly reserve analysis, we increased our loss reserves accordingly;
There were no other significant developments of prior period reserves during the year ended December 31, 2010.
For the year ended December 31, 2012, the increase in general and administrative expenses of $3.6 million, or 26.3%, was primarily due to personnel costs (including share based compensation) being higher by $2.2 million compared to 2011. This was mainly due to the 2011 personnel costs being unusually low as a result of the reversal of employee bonus accruals due to deteriorating underwriting results related to prior underwriting years and the reversal of share based compensation expense relating to the retirement of our former chief executive officer during 2011. To a lesser extent, the higher personnel costs during 2012 were due to our Cayman Islands and Dublin offices adding five new employees during 2012. Other than personnel costs, non-investment related foreign exchange losses accounted for $0.8 million of the increase in general and administrative expenses for the year ended December 31, 2012.
The loss ratio is calculated by dividing loss and loss adjustment expenses incurred by net premiums earned. We expect that the loss ratio will be volatile for our severity business and may exceed that of our frequency business in certain periods. Given that we opportunistically underwrite a concentrated portfolio across several lines of business that have varying expected loss ratios, we can expect there to be significant annual variations in the loss ratios reported from our frequency business. In addition, the loss ratios for both frequency and severity business can vary depending on the mix of the lines of business written.
At December 31, 2012, deferred acquisition costs (net of retrocession) decreased by $9.5 million, or 13.9%, compared to December 31, 2011. The decrease was primarily due to the corresponding decrease in unearned premium reserves which decreased $37.6 million, or 16.6% during the same period. The decrease in unearned premium reserves was principally due to the novation of Florida homeowners' contracts.The corresponding retroceded portions of these contracts were also novated which resulted in a decrease in the unearned premiums ceded as of December 31, 2012. We evaluate the recoverability of deferred acquisition costs by determining if the sum of future earned premiums and anticipated investment income is greater
The increase in frequency loss reserves is partially due to adverse loss development on prior year contracts mainly related to commercial motor liability, and partially a result of estimated losses incurred associated with the increase in premiums earned during the year ended December 31, 2012 (see "Note 7. Loss and Loss Adjustment Expense Reserves" for a summary of changes in outstanding loss and loss adjustment expense reserves). The increase in severity loss reserves is due to a full limit loss on catastrophe contract as a result of super-storm Sandy, and an increase in loss reserves related to the 2010 New Zealand earthquake. These increases were partially offset by loss payments made during 2012 on other severity contracts which had loss reserves as of December 31, 2011. For most of our contracts written as of December 31, 2012, our risk exposure is limited by the fact that the contracts have defined limits of liability. Once the loss limit for a contract has been reached, we have no further exposure to additional losses from that contract. However, certain contracts, particularly quota share contracts that relate to first dollar exposure, may not contain aggregate limits.
As of December 31, 2012, neither Greenlight Re nor GRIL was licensed or admitted as a reinsurer in any jurisdiction other than the Cayman Islands and the European Economic Area, respectively. Because many jurisdictions do not permit domestic insurance companies to take credit on their statutory financial statements for loss recoveries or ceded unearned premium, unless appropriate measures are in place from reinsurance obtained from unlicensed or non-admitted insurers, we anticipate that all of our U.S. clients and some of our non-U.S. clients will require us to provide collateral through funds withheld, trust arrangements, letters of credit or a combination thereof.
On January 1, 2008, we entered into an Advisory Agreement wherein the Company and DME Advisors agreed to create a joint venture for the purposes of managing certain jointly-held assets. The Advisory Agreement was amended effective August 31, 2010 to include GRIL as a participant to the agreement. The term of the Advisory Agreement is August 31, 2010 through December 31, 2013, with automatic three-year renewals unless 90 days prior to the end of the then current term, either DME Advisors terminates the agreement or any of the participants notifies DME Advisors of its desire to withdraw from the agreement. Pursuant to the Advisory Agreement, we pay a monthly management fee of 0.125% on our share of the assets managed by DME Advisors and performance allocation of 20% on the net investment income of the Company’s share of assets managed by DME Advisors subject to a loss carry forward provision. The loss carry forward provision allows DME Advisors to earn reduced performance allocation of 10% on net investment income in any year subsequent to the year in which the investment account incurs a loss, until all the losses are recouped and an additional amount equal to 150% of the aggregate loss is earned. DME Advisors is not entitled to earn performance allocation in a year in which the investment portfolio incurs a loss. For the year ended December 31, 2012, $18.8 million of performance allocation was calculated at the 20% rate and included in net investment income.