Each technique has inherent benefits and shortcomings (i.e., biases), particularly when applied to company-specific characteristics and trends. For example, certain methods (e.g., the Bornhuetter-Ferguson and pure premium methods) are more relevant to immature accident years, and other methods (e.g., the loss development methods) provide more meaningful information for years with a greater level of maturity. Because each method has its own set of attributes, we do not rely exclusively upon a single method. Rather, we evaluate each of the methods for the different perspectives that they provide. Each method is applied in a consistent manner from period to period and the methods encompass a review of selected claims data, including, but not limited to, claim and incident counts, average indemnity payments and loss adjustment expenses.
Our open claim counts of 572 at December 31, 2009 decreased by 2.2% from 585 open claims at December 31, 2008. In 2009, our claims settled (with and without indemnity) of 407 outpaced the number of reported claims of 394. This continued the claims trend that we saw in 2008 in which our open claim counts decreased by 20.9% from 740 at December 31, 2007 to 585 at December 31, 2008, the result of a relatively low 381 claims being reported in 2008 combined with total claims closed (with and without indemnity) of 536 outpacing reported claims. The changes from December 31, 2007 to December 31, 2008, showed substantially the same trend with reported claims of 402 in 2007 versus 381 in 2008. Closed claims (with and without indemnity) were 471 and 536 for 2007 and 2008, respectively. From a historical perspective it is important to note that we had 1,372 open claims (the highest number of claims in the history of API) at December 31, 2003, the year in which tort reform legislation passed in Texas. Our open claim counts have declined dramatically since the end of 2003 as the number of reported claims has decreased and while leveling somewhat in 2009, we continue to settle or close claims at an accelerated pace.
Net case reserves were relatively flat in 2009 (up 1.2%) as compared to 2008; however, the average net case reserves continued to increase by 3.5% as the number of open cases continued to decrease. Net case reserves increased by 0.7% from December 31, 2007 to December 31, 2008 as the number of open claims continued to decrease over this period. During 2009 our IBNR reserve increased by 4.5% from $34,473,000 in 2008 to $36,024,000 in 2009. We increased our IBNR reserves based on the increase in our number of policyholders from 5,336 in 2008 to 6,363 in 2009 while reported claims stayed relatively flat with 394 and 381 reported in 2009 and 2008, respectively. During 2008 our IBNR reserve decreased by 9.4% from $38,039,000 in 2007 to $34,473,000 in 2008. While our number of policyholders continued to increase from 4,930 in 2007 to 5,336 in 2008, the number of reported claims dropped to 381 in 2008 from 402 in 2007, and the number of remaining open claims decreased to 585 at December 31, 2008 from 740 at December 31, 2007. We believe claim severity has stabilized and continues to emerge favorably for the post-tort reform years. The combination of declining reported claims and open claims resulted in a net decrease in IBNR the last three year period.
The following table reflects the activity in the liability for reserve for losses and loss adjustment expenses since January 1, 2007 through the year ended December 31, 2009 (in thousands):
Beginning in 2004, we have seen favorable decreases in the number of claims reported each year as compared to historical reported claim development patterns.
The effect of reinsurance on premiums written and earned for the years ended December 31, 2009 and 2008 is as follows (in thousands):
Cash and Cash Equivalents. Cash and cash equivalents include cash and highly liquid investments with a maturity date at purchase of 90 days or less. We deposit our cash and cash equivalents with high credit quality institutions. Periodically such balances may exceed applicable FDIC insurance limits. Management has assessed the financial condition of these institutions and believes the possibility of credit loss is minimal.
Deferred Policy Acquisition Costs. The costs of acquiring and renewing insurance business that vary with and are directly related to the production of such business are deferred and amortized ratably over the period the related unearned premiums are earned. Such costs include commissions, premium taxes and certain underwriting and policy issuance costs. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. If such costs are estimated to be unrecoverable, they are expensed in the period the determination is made.
On a pro forma basis, loss and loss adjustment expenses for the year ended December 31, 2008 decreased by $6,090,000 (25%) to $18,569,000 from $24,659,000 for the year ended December 31, 2007. The decrease of $6,090,000 on a pro forma basis is the result of a lower accident year loss and loss adjustment expense and higher favorable development on prior year losses in 2008 as compared to 2007. For the year ended December 31, 2008, current accident year loss and loss adjustment expenses totaled $39,134,000 based on 371 claims reported and prior year losses developed favorably $20,565,000 as a result of reductions in our estimates of claims severity, principally the 2003 through 2007 report years. For the year ended December 31, 2006, current accident year loss and loss adjustment expenses were $40,682,000 based on 402 claims reported and there was $16,023,000 of favorable development on prior years. The positive effects of 2003 tort reform in Texas on average claim severity has resulted in continued favorable development of reserves and improved claim development patterns. API has favorably settled a number of post-tort reform claims from the 2004 and 2005 report years at below the reserved amounts. However, even though reported claims have decreased by 31 claims year over year, we continue to accrue our current accident year losses conservatively based on increases in policyholder count from 4,930 as of December 31, 2007 to 5,330 as of December 31, 2008.
Other underwriting expenses and the net change in deferred acquisition costs increased $2,878,000 (35%) to 11,088,000 from $8,210,000 for the year ended December 31, 2008 compared to 2007 as a result of the acquisition of API on April 1, 2007.
If management does not intend to sell the fixed maturity security and it is not likely that it will be required to sell the fixed maturity security before recovery of its amortized cost basis, but the present value of the cash flows expected to be collected is less than the amortized cost basis of the fixed maturity security (referred to as the credit loss), an OTTI is also considered to have occurred. In this instance, FASB ASC 320-10 requires the separation of the total OTTI into the amount related to the credit loss, which is recognized in earnings, with the remaining amount of the total OTTI attributed to other factors (referred to as the noncredit portion) and recognized as a separate component in OCI. After the recognition of an OTTI, the fixed maturity security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. In addition, FASB ASC 320-10 expands and increases the frequency of existing disclosures about OTTIs for fixed maturity securities regarding expected cash flows, credit losses and aging of securities with unrealized losses. Upon adoption, the cumulative effect of this pronouncement is recognized as an adjustment to the opening balance of retained earnings with a corresponding adjustment to OCI for those securities that management does not have the intent to sell or it is not likely that it will be required to sell the fixed maturity security before recovery of its amortized cost basis. The adoption of this pronouncement did not have a material impact on our results of operations, financial position or cash flows.