We are an international insurance company focusing on specialty products within the overall property/casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance and in specialty liability insurance primarily consisting of contractors’ liability and commercial primary and excess casualty coverages.
Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes whereby deferred assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. Additional information regarding our deferred tax assets can be found in Note 1, Organization and Summary of Significant Accounting Policies, and Note 7, Income Taxes, to our consolidated financial statements, both included herein.
Our pre-tax underwriting profit declined by $24.4 million to a $4.9 million underwriting loss in 2010 compared to a $19.5 million underwriting profit in 2009. The decline in the pre-tax underwriting profit was primarily due to the recording of net reinstatement premiums of $19.0 million relating to the Deepwater Horizon incident. In addition, the continued soft market reduced rates across most lines and impacted overall profitability in 2010 compared to the prior year.
The 2009 property casualty gross written premiums decreased 13.0% to $352.3 million when compared to 2008 reflecting weak economic conditions that have significantly reduced demand for construction liability, particularly in the western United States, as well as primary excess and surplus insurance. The construction liability line has also seen significant increases in the level of competition from new entrants. Our offshore energy line declined as we wrote very little Gulf of Mexico wind business in 2009 as the terms and conditions were not sufficient and worldwide drilling activity slowed. Partially offsetting these declines was an increase in gross written premiums for our commercial umbrella line and our retail umbrella line which was introduced in 2009. Our NavTech and excess casualty lines saw average renewal rate increases of approximately 8% and 2%, respectively, whereas our contractors’ liability and NavPac lines saw average renewal rate decreases of approximately 2% and 4%, respectively.
The Insurance Companies recorded $14.9 million of net prior year savings for property casualty business in total. The favorable development included:
The Lloyd’s Operations recorded $8.3 million in favorable loss development for prior years during 2010. This included favorable development of $3.2 million in Marine, $4.8 million in NavTech, and $0.5 million in all other areas. The Marine favorable development was primarily from the 2007 and 2008 underwriting years and was driven by loss development on these underwriting years being more favorable than our expectations, particularly in marine liability, assumed reinsurance, and specie classes. NavTech’s favorable development was mostly from the 2006 through 2008 underwriting years driven by favorable claims trends in the offshore energy.
The 2010, 2009 and 2008 results included provisions of $0.5 million, $10.2 million and $36.4 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 2010, 2009 and 2008 net income were $0.4 million, $6.7 million and $23.7 million, respectively.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers which have a risk potential that is greater than prime but less than subprime. The subprime collateral consists of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A categories are as defined by S&P.
At December 31, 2010, the gross unrealized losses in the table directly above are related to fixed maturity securities that are rated investment grade, which is defined by us as a security having an NAIC rating of 1 or 2, an S&P rating of “BBB-” or higher, or a Moody’s rating of “Baa3” or higher. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired.
The increase in stockholders’ equity in 2010 was primarily due to 2010 net income of $69.6 million partially offset by share repurchases of $52.0 million. The increase in stockholders’ equity in 2009 was primarily due to 2009 net income of $63.2 million and $46.0 million of unrealized gains in 2009 within our investment portfolio.