We receive handling fees associated with certain large-deductible policies. These fees cover the cost of settling losses and offset expenses associated with the USL&H second injury fund and are recorded as other service income.
Premiums assumed from the NCCI residual markets in the twelve months ended December 31, 2009 totaled $4.0 million compared to $6.6 million for the same period in 2008, representing a decrease of $2.6 million, or 39.3%. The decrease was primarily attributable to actuarial revised estimates related to the year 2007 and 2008.
Premiums Earned. Net premiums earned totaled $244.4 million in 2009 compared to $248.6 million in 2008, representing a decrease of $4.2 million, or 1.7%. We record the entire annual policy premium as unearned premium at inception and earn the premium over the life of the policy, which is generally twelve months. Consequently, the amount of premiums earned in any given year depends on when the underlying policies were written. Our direct premiums earned increased $7.6 million, or 3.0%, to $263.5 million in 2009 from $255.9 million in 2008. Net premiums earned in 2009 were reduced by net adjustments of $3.8 million on retrospectively rated policies due to favorable loss results on those policies.
These bonds have been refunded by depositing highly rated government-issued securities into irrevocable trust funds established for payment of principal and interest.
Net cash provided by operating activities in 2009 totaled $68.3 million, an increase of $1.4 million, or 2.1%, from $66.9 million in 2008, which decreased $27.7 million, or 29.3%, from $94.6 million in 2007. The increase in 2009 was primarily attributable to an increase in premiums collected of approximately $5.5 million and a decrease in federal income taxes paid of approximately $14.8 million, offset by an increase in loss and loss adjustment expenses paid (net of reinsurance collected) of approximately $16.9 million. The decrease in 2008 is mainly attributable to increases in paid loss and loss adjustment expenses of approximately $25.8 million, paid federal and state taxes of $2.3 million and other expenses of $7.6 million. The increase in cash paid in 2008 was partially offset by an $8.0 million increase in premium collections.
claims. Development can be expected, meaning it is consistent with prior results; favorable (better than expected); or unfavorable (worse than expected). In all cases, we are comparing the actual development of the data in the current valuation with what was expected based on the historical patterns in the underlying data. Favorable development indicates a basis for reducing the estimated ultimate loss amounts while unfavorable development indicates a basis for increasing the estimated ultimate loss amounts. We reflect the favorable or unfavorable development in loss reserves in the results of operations in the period in which the ultimate loss estimates are changed.
For accident year 2008, there was unfavorable development in the gross losses for California State Act which resulted in an increase of our net ultimate loss estimates of $6.2 million. For non-California State Act, there was unfavorable development in the gross losses for accident year 2008 which resulted in an increase of our net ultimate loss estimates of $1.5 million. For USL&H, there was unfavorable development in the gross losses for accident year 2008 which resulted in an increase of our ultimate loss estimates of $1.1 million.
For accident year 2009, the ultimate losses were set by multiplying the selected ELR to the booking earned premium. For more information on the ELR method and selection see the related discussion under the heading “Actuarial Loss Reserve Estimation Methods” in Part II, Item 7 of this annual report.
For debt securities that are considered OTTI and that we do not intend to sell and more likely than not would not be required to sell prior to recovery of the amortized cost basis, we recognize OTTI losses in accordance with the provisions of the Codification. The amount of the OTTI loss is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other comprehensive income. For the year ended December 31, 2009, we recognized no OTTI losses related to debt securities.
The Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
GAAP. These adjustments to fair value usually result from write-downs of individual assets. None of these assets were measured to fair value during the year ended December 31, 2009.