For the remaining fixed income investments in an unrealized loss position for which a decision to sell has not been made and it is more likely that the Company will not be required to sell, the Company performs additional reviews to determine whether the investment will recover its amortized cost. Analysis and reviews performed to determine if the amortized cost of the Company’s fixed income investments is likely to be recovered include the following actions, among others, depending on the type of security being reviewed or tested:
In making an assessment of the value of its goodwill, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits in addition to an analysis of the Company’s stock price relative to both its book value and its net income. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s financial performance were to deteriorate significantly, this could lead to an impairment of goodwill, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2009.
The $20.3 million of other-than-temporary impairment losses recognized by the Company in 2009 relating to specific credit events occurred primarily due to reductions in expected recovery values on mortgage and asset-backed securities during the period, along with certain credit related downgrades in corporate securities. For the years ended December 31, 2008 and 2007, the Company recorded $82.1 and $17.3 million of OTTI losses in earnings, respectively. These amounts included a portion related to credit losses and a portion related to non-credit factors. Non-credit related factors included market and sector related factors such as limited liquidity and credit spread widening.
Acquisition Expenses. The Company’s acquisition expense ratio in the Insurance segment decreased in 2009 as compared to 2008 and 2007 due to the reduction in worker’s compensation earned premiums which had a higher commission expense structure than the remaining lines of the Insurance segment.
General and Administrative Expenses. The general and administrative expense ratio experienced by the Reinsurance segment in 2009 as compared to 2008 and 2007 increased as a result of higher incentive compensation expenses and an increase in allocated corporate and service company expenses against lower net premiums earned.
The Company had outstanding as of December 31, 2009 and 2008 $605.3 million and $635.5 million, respectively, of letters of credit under the 2007 Credit Facility. The Company did not have any revolving loans outstanding under the 2007 Credit Facility as of December 31, 2009. The Company was in compliance with all covenants contained in the 2007 Credit Facility as of December 31, 2009.
Other Reinsurance. Favorable loss emergence in the other reinsurance reserve category was due to lower than expected loss activity within the agriculture, personal accident, self-insured and special accounts lines of business.
Ceded premiums written were $415.4 million for the year ended December 31, 2009, $462.1 million for the year ended December 31, 2008 and $206.1 million for the year ended December 31, 2007. The decrease in ceded premiums written was due to decline in business written and ceded by our U.S. insurance operations, specifically related to the agriculture line, as a result of decreases in gross premiums written compared to 2008. The Company’s U.S. insurance operating subsidiaries use proportional and excess reinsurance to protect larger limits on certain business written by this segment. Excess reinsurance coverage is often purchased in relation to the workers’ compensation line to protect against catastrophic events. ARMtech participates in a federally sponsored crop reinsurance program offered by the U.S. government.
The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the terms of the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24-month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period.
The following tables summarize the composition of the available for sale portfolio by investment ratings assigned by rating agencies at December 31, 2009 and 2008. In some cases, where bonds are unrated, the rating of the issuer has been applied.
Represents total OTTI recognized in accumulated other comprehensive income (loss). It does not include the change in fair value subsequent to the impairment measurement date. At December 31, 2009, the gross unrealized loss related to securities for which a non-credit OTTI was recognized in accumulated other comprehensive income (loss) was $22.0 million.
The following tables summarize, for all available for sale securities in an unrealized loss position at December 31, 2009 and 2008, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.
There were no material changes in the Company’s valuation techniques during 2009.
Reinsurance - This segment is comprised of five lines of business: catastrophe, casualty, property, aerospace and marine and surety and other specialty. Catastrophe coverages include reinsurance for catastrophic perils on a treaty basis. The casualty line of business is comprised of third party liability exposures and workers’ compensation coverages. The property line of business includes proportional and excess of loss reinsurance of personal and commercial exposures and proportional and non-proportional reinsurance of hull and cargo insurance business. The aerospace and marine line coverages includes the reinsurance of aviation and space business. Surety and other specialty coverages include proportional and excess of loss coverages of contract and commercial surety business, personal accident coverages and agriculture coverages for weather related perils as well as protection from yield and price risks.