We receive claims service income in return for providing claims administration services for other companies. The claims service income we receive for providing these services approximates our costs. For the years ended December 31, 2008, 2007, and 2006, approximately 46.3%, 52.6%, and 66.8%, respectively, of our claims service income was generated by contracts we have with LMC to provide claims handling services for the policies written by the Eagle Entities prior to the Acquisition. We expect income from these contracts to decrease substantially over the next several years as transactions related to the Eagle Entities diminish. The next largest claims administration services customer represented approximately 17.9%, 10.1%, and 19.1% of claims service income for the years ended December 31, 2008, 2007 and 2006, respectively.
Net premiums earned are also affected by premiums ceded under reinsurance agreements. Ceded premiums earned in 2008 totaled $14.5 million compared to $15.0 million in 2007, representing a decrease of $0.5 million, or 3.3%. A decrease in ceded premiums earned is an increase to our overall net premiums earned. Offsetting the increase in net premiums earned was a decrease in the amount of premiums we involuntarily assume on residual market business from the NCCI, which operates residual market programs on behalf of many states. Assumed premiums earned decreased $1.4 million from $8.6 million in 2007 to $7.2 million in 2008.
There is uncertainty about whether recent lower paid loss trends, which result primarily from California legislative reforms enacted in 2003 and 2004, will be sustained, particularly in light of current efforts to change or repeal portions of the reforms. We will not know the full impact of these reforms with a high degree of confidence for several years. We have established loss reserves at December 31, 2007 that are based upon our current best estimate of ultimate loss costs, taking into consideration the recent lower paid loss claim data, incurred loss trends and the uncertainty regarding the permanence of recent legislative reforms. See the discussion under the headings “Loss Reserves” in Part I, Item 1 and “Critical Accounting Policies, Estimates and Judgments - Unpaid Loss and Loss Adjustment Expenses” in this Item 7 for a further discussion of our loss reserving process.
Underwriting, Acquisition and Insurance Expenses. Underwriting expenses totaled $58.9 million in 2007 compared to $42.3 million in 2006, representing an increase of $16.6 million, or 39.2%. Our net underwriting expense ratio was 25.8% in 2007 compared to 22.7% in 2006. The increase in the expense ratio was driven by $7.7 million in increased staffing costs and other premium production related expenses related to our investments in the geographic expansion of our business. Increases of approximately $6.7 million in commission costs, driven in part by the increase in premiums written, and $1.5 million in equity compensation costs related to the grant of additional stock options and restricted stock also contributed to the increase in our underwriting expenses.
As of December 31, 2008, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
We regularly review our investment portfolio for declines in value. In general, we review all securities that are impaired by 5% or more at the end of the period. We focus our review of securities with no stated maturity date on securities that were impaired by 20% or more at the end of the period or have been impaired 10% or more continuously for six months or longer as of the end of the period. We also analyze the entire portfolio for other factors that might indicate a risk of impairment, including credit ratings and interest rates.
The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from activities or economic characteristics of the reinsurers to minimize its exposure to losses from reinsurer insolvencies. In the event a reinsurer is unable to meet its obligations, the Company would be liable for the losses under the agreement.
Provisions in the three lower layer treaties (covering losses from $0.5 million to $10.0 million) in the Company’s 2005-2006 reinsurance program allow the Company the ability, at its sole discretion, to commute the contracts within 24 months of expiration in return for a contingent profit commission calculated in accordance with terms specified in the contracts. In accordance with these provisions, the Company commuted these treaties in 2008 in return for a contingent profit commission of approximately $2.3 million. As of December 31, 2008, there were no ceded losses associated with these layers and it is not expected that developed losses that would otherwise be covered by reinsurance will exceed the contingent profit commission. The contingent profit commission was recorded as a reduction of loss and loss adjustment expenses.
As a result of changes in estimates of insured events in prior periods, the unpaid loss and loss adjustment expenses decreased by approximately $19.5 million in 2007 due to positive development on previously reported claims in accident year 2006 and $15.1 million due to positive development on previously reported claims in accident year 2005. For accident years 2004 and prior, unpaid loss and loss adjustment expenses increased $560,000 as a result of unfavorable development on previously reported claims due to the small base of claims and losses assumed from the NCCI pools. According to the terms of the adverse development cover, the Company is obligated to reimburse LMC for $248,000 of the positive development of KEIC reserves existing at the date of the Acquisition. In connection with the Acquisition, KEIC and LMC entered into an
Intangible assets, other than goodwill, consist of the following at December 31, 2008 and 2007 (dollar amounts in thousands):