We are a specialty insurance group with offices in the United States, the United Kingdom, Spain, Bermuda, Belgium and Ireland transacting business in more than 100 countries. Our group consists of insurance companies, underwriting agencies and brokers. Our shares are traded on the New York Stock Exchange, and we had a market capitalization of $3.1 billion at February 15, 2008. We earned $395.4 million or $3.38 per diluted share in 2007, compared to $342.3 million or $2.93 per diluted share in 2006. The increase in earnings in 2007 was due to increased earned premium, higher investment income and increased underwriting profit. We grew shareholders’ equity by 19% in 2007 to $2.4 billion at December 31, 2007, principally from net earnings.
During 2006 and 2005, we reached agreements with various reinsurers to commute two large reinsurance contracts related to certain run-off assumed accident and health reinsurance business included in our discontinued lines, for which we had reinsurance recoverables of $120.2 million in 2006 and $145.7 million in 2005 at the date of commutation. In consideration for discounting the recoverables and reassuming the associated loss reserves, we agreed to accept cash payments that were less than the related recoverables. We recorded pre-tax losses of $20.2 million in 2006 and $26.0 million in 2005 related to these commutations, which were included in loss and loss adjustment expense in our insurance company segment. We expect to recoup these losses over future years as we earn interest on the cash proceeds from the commutations prior to the related claims being paid.
Gross written premium, net written premium and net earned premium are detailed below. Premium increased in 2007 principally as a result of acquisitions. See the Insurance Company Segment section below for further discussion of the relationship and changes in our premium revenue.
Revenue from our agency segment decreased to $178.6 million in 2007 from $180.0 million in 2006 and $188.9 million in 2005, primarily due to the consolidation of one of our underwriting agencies into one of our insurance companies effective April 1, 2006, less business being produced in certain lines of business, and the overall effect of ceding less reinsurance. These effects were partially offset by 2006 acquisitions and growth in certain other lines of business. While the consolidation and increased retentions resulted in less fee and
Expansion of our diversified financial products line of business as a result of which we retain premium for a longer duration than had been the case prior to entering this business.
At December 31, 2007, we had cash and short-term investments of $822.8 million, of which $586.9 million was held by our insurance companies. We maintain cash and liquid short-term instruments in our insurance companies in order to be able to fund losses of our insureds. Cash and short-term investments were higher than normal at December 31, 2007 due to proceeds from the sale of fixed income securities that hedged certain foreign currency denominated liabilities and, at December 31, 2006, due to proceeds from the liquidation of our trading portfolio.
A portion of our revenue is related to healthcare insurance and reinsurance products that are subject to the effects of the underlying inflation of healthcare costs. Such inflation in the costs of healthcare tends to generate increases in premiums for medical stop-loss coverage, resulting in greater revenue but also higher claim payments. Inflation also may have a negative impact on insurance and reinsurance operations by causing higher claim settlements than may originally have been estimated, without an immediate increase in premiums to a level necessary to maintain profit margins. We do not specifically provide for inflation when setting underwriting terms and claim reserves, although we do consider trends. We continually review claim reserves to assess their adequacy and make necessary adjustments.
The percentage of net incurred but not reported reserves to net total reserves was 51% at both December 31, 2007 and 2006. The reasons, by line of business, for changes in net reserves and the percentage of incurred but not reported reserves to total net reserves, other than changes related to normal maturing of claims, follow: