Substantially all of our business is placed through agents and brokers. Since the vast majority of the Company’s gross written premium is primary or direct as opposed to assumed the delays in reporting assumed premium generally do not have a significant effect on the Company’s financial statements, since we record estimates for both unreported direct and assumed premium. We also record the ceded portion of the estimated gross written premium and related acquisition costs. The earned gross, ceded and net premiums are calculated based on our earning methodology which is generally pro-rata over the policy period. Losses are also recorded in relation to the earned premium. The estimate for losses incurred on the estimated premium is based on an actuarial calculation consistent with the methodology used to determine incurred but not reported loss reserves for reported premiums.
The 2008 results of operations were adversely impacted by hurricane activity and net realized capital losses. Hurricanes Gustav and Ike reduced 2008 net income by $19.1 million and earnings per share by $1.12. The combined loss and expense ratio was increased by an aggregate 4.3 ratio points for such losses and are inclusive of reinsurance recoveries and related costs for reinsurance reinstatement premiums. Excluding these effects, our financial performance compared to 2007 was stable due to a combination of growth in investment income offset by lower underwriting profits.
The professional liability premium increased 9.5% to $109.0 million in 2008 from $99.6 million in 2007 reflecting continued growth and the expansion of our professional liability business, and an emerging flight to quality that occurred in the latter part of the year. Average 2008 renewal premium rates for this business decreased approximately 3.9% in 2008. The professional liability premium increased 7.3% to $99.6 million in 2007 from $92.8 million in 2006 when it increased 6.7% from $86.9 million in 2005 reflecting growth and the expansion of our professional liability business. Average 2008 and 2007 renewal premium rates for this business decreased approximately 3.9% and 6.6%, respectively, after being relatively level in 2006. D&O average renewal premium rates decreased approximately 2.7% in 2008, 7.9% in 2007 and 2.0% in 2006.
The average renewal premium rate decreased approximately 6.2% in 2008 and 1.2% in 2007 and increased approximately 13.0% in 2006. The 2006 increase started in the 2005 fourth quarter in the offshore energy business resulting from losses caused by the 2005 Hurricanes.
Professional Liability Premium. The gross written premium for each of the years in the three-year period ended December 31, 2008 consisted of the following:
Restructuring of the 2008 marine quota share treaties for the Insurance Companies and the Lloyd’s Operations resulting in a large reduction in ceded premium.
Net Losses and Loss Adjustment Expenses Incurred. The ratios of net loss and loss adjustment expenses incurred to net earned premium (loss ratios) were 61.0%, 56.6% and 57.7% in 2008, 2007 and 2006, respectively. The 2008 loss ratio of 61.0% was favorably impacted by 7.9 loss ratio points resulting from the $50.7 million net redundancy of prior years’ loss reserves and adversely impacted by 3.7 loss ratio points related to the 2008 Hurricanes. The result of underwriting losses caused by Hurricanes Gustav and Ike of approximately $29.3 million, including $12.2 million of reinstatement costs, increased the 2008 combined ratio by 4.3 ratio points. The 2007 loss ratio of 56.6% was favorably impacted by 7.8 loss ratio points resulting from the $47.0 million net redundancy of prior year loss reserves. The 2007 loss ratio also included 0.9 loss ratio points for the U.K. flood losses in the Insurance Companies’ U.K. Branch’s property business and the Lloyd’s marine cargo business. The 2006 loss ratio of 57.7% was favorably impacted by 3.7 loss ratio points resulting from the $17.2 million net redundancy of prior year loss reserves.
Additional information regarding our incurred losses and loss reserves for the 2008 Hurricanes and the 2005 Hurricanes can be found in “Business- Loss Reserves,” included herein.
The 2008 and 2007 net realized capital losses include provisions of $36.7 million and $0.7 million, respectively, for declines in the market value of securities which were considered to be other than temporary. The after-tax effects of such provisions on the 2008 and 2007 net income were $23.9 million and $0.4 million, respectively.
Syndicate 1221’s stamp capacity was £123 million ($228 million) in 2008, £140 million ($280 million) in 2007 and £123 million ($226 million) in 2006. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write as determined by the Council of Lloyd’s. We provided 100% of Syndicate 1221’s total stamp capacity in 2008, 2007 and 2006. Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission.
The pre-tax yields on the Lloyd’s Operations’ investments, excluding net realized capital gains and losses, approximated 3.4%, 3.9% and 3.4% for 2008, 2007 and 2006, respectively. Such yields are net of interest credits to certain reinsurers for funds withheld by our Lloyd’s Operations. Generally, the Lloyd’s Operations’ investments have been invested with a relatively short average duration, which is reflected in the yield, in order to meet liquidity needs. The increase in the Lloyd’s Operations net investment income is reflective of the increased investment portfolio primarily due to positive cash flow. The average duration of the Lloyd’s Operations investment portfolio was 1.4 years at December 31, 2008 compared to 1.6 years at December 31, 2007.
For a discussion of our letter of credit facility, see “- Liquidity and Capital Resources”, included herein.
Cash flows from operations were $245.3 million, $284.6 million and $146.0 million for 2008, 2007, and 2006, respectively. Operating cash flow was used primarily to acquire additional investments of fixed income securities.