Our life insurance segment continued to provide a consistent source of profit. We discuss results for the segment in Life Insurance Results of Operations, Page 73. Investment income and realized investment gains from the life insurance investment portfolio are included in Investments segment results.
For property casualty policies, deferred acquisition costs are amortized over the terms of the policies. We assess recoverability of deferred acquisition costs at the segment level, consistent with the ways we acquire, service, manage and measure profitability. Our property casualty insurance operations consist of three segments, commercial lines, personal lines and excess and surplus lines. For life insurance policies, acquisition costs are amortized into income either over the premium-paying period of the policies or the life of the policy, depending on the policy type. We analyze our acquisition cost assumptions periodically to reflect actual experience; we evaluate our deferred acquisition cost for recoverability; and we regularly conduct reviews for potential premium deficiencies or loss recognition.
The 2010 calendar year total loss and loss expense ratio improved somewhat, largely due to a higher level, compared with 2009, of favorable development on prior accident year reserves. Factors contributing to the higher level of favorable prior accident year reserve development included a moderation in trend for future umbrella coverage payments and less volatility in the trend estimates for future commercial multiple peril payments.
The calendar year total loss and loss expense ratio improved during 2010 due to a higher amount of favorable development on prior accident year reserves. The ratio was at a profitable level for both 2009 and 2010.
Premiums - Earned premiums and net written premiums increased in 2010, due to higher renewal and new business premiums that reflected improved pricing, including rate changes effective late 2009 for most states and representing a net rate increase on average. During 2009, we adjusted pricing in an effort to return to consistent profitability in our personal lines segment. Net written premiums grew slightly, driven by new business growth that included expansion into new states where we previously offered only commercial lines policies. Industry average written premium growth was estimated at approximately 3 percent in 2010, up from negative 1 percent in both 2009 and 2008.
Earned premiums increased in 2010 largely because of growth in our term and universal life insurance business. Earned premiums from term insurance grew $10 million, or 12 percent, and earned premiums from universal life insurance grew $7 million, or 25 percent.
In 2010, we recorded $36 million in write-downs of 15 securities that we deemed had experienced an other-than-temporary decline in fair value compared with $131 million for 50 securities in 2009 and $510 million for 126 securities in 2008. The factors we consider when evaluating impairments are discussed in Critical Accounting Estimates, Asset Impairment, Page 44. The OTTI charges in 2010 were less than 1 percent of our investment portfolio at year-end compared with 1 percent for 2009 and 5 percent for 2008. OTTI charges also include unrealized losses of holdings that we intend to sell but have not yet completed a transaction.
We direct our associates and agencies to settle claims and pay losses as quickly as is practical and we made $1.865 billion of net claim payments during 2010. At year-end 2010, net property casualty reserves reflected $2.076 billion in unpaid amounts on reported claims (case reserves), $877 million in loss expense reserves and $858 million in estimates of claims that were incurred but had not yet been reported (IBNR). The specific amounts and timing of obligations related to case reserves and associated loss expenses are not set contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown. We discuss our methods of establishing loss and loss expense reserves and our belief that reserves are
We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance retention was $500,000 or below prior to 1987. We also predominantly were a personal lines company in the 1960s and 1970s when asbestos and pollution exclusions were not widely used. During the 1980s and early
Commercial auto loss emergence - Similar to commercial casualty, commercial auto liability contributed to favorable development because both paid and reported loss emergence during calendar year 2010 was substantially less than expected. As of December 31, 2009 we expected reported loss emergence in the next 12 calendar months to be approximately $26 million; actual emergence was $17 million. Paid loss emergence was approximately 15 percent lower than expected at the prior year-end.
Casualty per occurrence treaty - The casualty treaty provides capacity up to $25 million. Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first $6 million of each loss. Losses between $6 million and $25 million are reinsured at 100 percent. The ceded
We base the contingent commission accrual estimate on property casualty underwriting results. Contingent commissions are paid to agencies using a formula that takes into account agency profitability, premium volume and other factors, such as prompt monthly payment of amounts due to the company. The contingent commission accrual of $77 million in 2010 contributed 2.6 percentage points to the property casualty combined ratio. Contingent commission accruals for 2009 and 2008 were $81 million and $75 million, respectively.
We include the non credit portion of fixed maturities and all other unrealized gains and losses on investments, net of taxes, in shareholders’ equity as AOCI. Realized gains and losses on investments are recognized in net income based on the trade date accounting method.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events. ASU 2010-09 removes the requirement for U.S. Securities and Exchange Commission (SEC) filers to disclose the date through which subsequent events have been evaluated in both issued and revised financial statements. We have adopted ASU 2010-09, effective for the first reporting period after issuance. It did not have a material impact on our company’s financial position, cash flows or results of operations.
For the year ended December 31, 2010 and 2009, there were no credit losses on fixed-maturity securities for which a portion of OTTI has been recognized in other comprehensive income.
During 2008, we impaired 126 securities. At December 31, 2008, 142 fixed-maturity investments with a total unrealized loss of $78 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments were trading below 70 percent of book value. Six equity investments with a total unrealized loss of $41 million had been in an unrealized loss position for 12 months or more as of December 31, 2008, with two trading below 70 percent of book value.
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis for the years ended December 31, 2010 and 2009. We do not have any material liabilities carried at fair value. There were also no significant transfers between Level 1 and Level 2.
The change in AOCI includes changes in unrealized gains and losses on investments and pension obligations as follows:
Key assumptions used in developing the 2010 net pension expense were a 6.10 percent discount rate; an 8.00 percent expected return on plan assets and rates of compensation increases ranging from 4.00 percent to 6.00 percent. The 8.00 percent return on plan assets assumption is consistent with current expectations of inflation and based partially on the fact that our common stock holdings pay dividends. We believe this rate is representative of the expected long-term rate of return on these assets. These assumptions were consistent with the prior year, except that the discount rate was increased by 0.10 percentage points due to market interest rate conditions at the beginning of the year. We based the rates of compensation increase on the company’s historical data.
As of December 31, 2010, we had $11 million of unrecognized total compensation cost related to non-vested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period of 1.8 years.
We have market-based awards for which we recognize compensation costs in accordance with ASC 718. These awards vest according to the level of total shareholder return achieved compared to a peer group over a three-year period. These awards are valued using a Monte-Carlo valuation on the date of grant, which uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each peer and the correlations of each peer being modeled. Compensation cost is recognized regardless of whether the market-based performance objective has been satisfied, resulting in shares not being issued. We make assumptions to develop the Monte-Carlo model as follows: