The following table sets forth certain of our selected financial data as of and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005. Our data as of December 31, 2009 and 2008, and for the years ended December 31, 2009, 2008 and 2007 were derived from our consolidated financial statements beginning on page of this Form 10-K. Our data as of December 31, 2007, 2006 and 2005, and for the years ended December 31, 2006 and 2005 were derived from our audited consolidated financial statements not included in this Form 10-K. You should read the selected financial data in conjunction with our consolidated financial statements as of December 31, 2009 and 2008 and for each of the years in the three year period ended December 31, 2009 beginning on page of this Form 10-K, and the related “Management's Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 27 of this Form 10-K.
We had $2.3 billion in capital resources as of December 31, 2009 as compared with $2.1 billion as of December 31, 2008. Our net income was $383.3 million, $226.2 million and $357.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. Net income for the year ended December 31, 2009 reflects disciplined underwriting, lower than expected catastrophe activity, strong investment results and net favorable development. Our net premiums written for the years ended December 31, 2009, 2008 and 2007 were $897.8 million, $1.0 billion, and $1.1 billion, respectively. The decreases in net premiums written were primarily due to the non-renewal of business that fell below our minimum pricing standards.
In 2005 an unprecedented level of hurricane losses caused many reinsurers to report significant net losses after which rating agencies imposed higher capital requirements. Both reinsurers and their clients reassessed their catastrophe pricing parameters and procedures. The result was an increase in catastrophe pricing, particularly for wind exposures in the United States, in 2006 and the beginning of 2007. A number of new companies were formed to take advantage of the improved pricing. The combination of additional capacity and a lack of major catastrophe activity in 2006 and 2007 led to a decline in pricing for catastrophe exposed reinsurance in the second half of 2007. After initially stabilizing, non-catastrophe pricing weakened in late 2006 and continued to decline through the first half of 2008. During the second half of 2008, the financial markets experienced significant adverse credit events and a loss of liquidity and the 2008 hurricane season resulted in substantial losses to the insurance and reinsurance industry, which reduced the amount of capital in the insurance industry. Many reinsurance companies reported strong financial results for 2009 reflecting the absence of major catastrophes and the favorable performance of their investment portfolios during the year.
We anticipate that 2010 will be characterized by ample capacity for insurance risk and that risk adjusted pricing will come under downward pressure in all lines of business that have not recently experienced significant losses.
Despite this pressure, we generally expect that reinsurance rates for business in our Property and Marine segment will remain attractive for 2010. Assuming only modest rate declines, we expect to write a similar amount of property and marine business during 2010 compared with the amount we wrote in 2009. We expect that property and marine business will continue to represent a large proportion of our overall book of business, which could result in volatility in our results of operations.
For our Casualty segment, we believe that underlying primary insurance rate increases are generally lower than the trend in loss costs would indicate is appropriate and that capacity for casualty insurance and reinsurance will remain abundant during 2010. However, we believe that select casualty reinsurance treaties will offer adequate returns during 2010. Under these conditions, we expect the amount of business we write in our Casualty segment will remain stable or decrease during 2010 compared with the amount we wrote in 2009.
We expect a relatively low level of demand for products in our Finite Risk segment in 2010.
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make many estimates and assumptions that affect the reported amounts of assets, liabilities (including unpaid losses and LAE), revenues and expenses, and related disclosures of contingent liabilities. Certain of these estimates and assumptions result from judgments that are necessarily subjective. Actual results may differ materially from these estimates. Our critical accounting estimates include premiums written and earned, unpaid losses and LAE, valuation of investments and evaluation of risk transfer.
An allowance for uncollectible premiums is established for possible non-payment of premiums receivable, as deemed necessary. As of December 31, 2009, based on our historical experience, the general profile of our ceding companies and our ability in most cases to contractually offset premiums receivable against losses and LAE and commission amounts payable to the same parties, we did not establish an allowance for uncollectible premiums receivable.
Certain of our reinsurance contracts include provisions that adjust premiums based upon the loss experience under the contracts. We take these into account when determining our WBNR and EBNR. Reinstatement premiums are the premiums charged for the restoration of the reinsurance limit of a reinsurance contract to its full amount, generally coinciding with the payment by the reinsurer of losses. These premiums relate to and are earned over the future coverage obtained for the remainder of the contract term. Additional premiums are those premiums that are a function of losses and not related to reinstatement of limits. WBNR and EBNR include estimates of reinstatement premiums and additional premiums based on reinsurance contract provisions and loss experience and rely on the estimates of unpaid losses and LAE.
One of the most significant estimates made by management in the preparation of our consolidated financial statements is our liability for unpaid losses and LAE, also referred to as “loss reserves.” Unpaid losses and LAE are estimates of future amounts required to pay losses and LAE for claims under our assumed reinsurance contracts that have occurred at or before the balance sheet date. Unpaid losses and LAE include estimates of the cost of reported claims not yet paid, generally referred to as “case reserves.” Unpaid losses and LAE also include estimates of the cost of claims incurred but not yet reported, generally referred to as “IBNR.”
While we commenced operations in 2002, the business we write is sufficiently similar to the historical reinsurance business of Travelers such that we review the historical loss experience of this business when we estimate our own initial expected loss ratios and loss development patterns. This historical loss experience was made available to us in connection with our initial public offering. Loss development patterns can span more than a decade, therefore, the Travelers data is a valuable supplement to our own and industry data.
Generally, an event must cause more than $1 billion of property losses to the insurance industry or $10 million of property losses to the Company to be considered and tracked as a major catastrophe. Unpaid losses and LAE related to major catastrophes were $173.3 million, which represented 7% of our total unpaid losses and LAE as of December 31, 2009.
The loss development patterns are also key inputs to our loss estimation process. Loss development patterns reflect the time lag between the occurrence and settlement of a loss. The time lag in reporting can be several years in some cases and may be attributed to a number of reasons, including the time it takes to investigate a claim, delays associated with the litigation process, and the deterioration, in connection with health related claims, in a claimant’s physical condition many years after an accident occurs. As a predominantly broker market reinsurer for both excess-of-loss and proportional contracts, we are subject to potential additional time lags in the receipt of information as the primary insurer reports to the broker who in turn reports to us. As of December 31, 2009, we did not have any significant back-log related to our processing of assumed reinsurance information. All of the foregoing factors can impact the loss development patterns. A key assumption that our estimates are based on is that past loss development patterns are reasonably predictive of future loss development patterns. However, it may be difficult to identify differences in business reinsured from Underwriting Year to Underwriting Year and how such differences can affect loss development patterns. This difficulty adds to uncertainty in estimates that use these patterns.
The current estimate of unpaid losses and LAE is a central estimate that reflects many reasonable possible outcomes. The range of reasonable alternative estimates is necessarily smaller than a range of reasonably possible outcomes. In the following two sections, we discuss two types of uncertainty with respect to loss estimation. Under Variability of Outcomes, we discuss how estimates change over time as new information or loss data develops. Under Sensitivity of Estimates, we demonstrate that alternative reasonable estimates can be made with current information.
The liability for unpaid losses and LAE as of the balance sheet date represents management’s best estimate of the ultimate liabilities as of that date. The actuarial techniques used by our actuaries in estimating our liabilities produces a central estimate of ultimate losses and LAE for each class and underwriting year. These techniques do not produce a range of reasonably possible outcomes. For some classes, the ultimate value of the liability for unpaid losses and LAE will not be known for many decades. We expect that the ultimate value will differ from current estimates as losses are reported and paid and that difference could be material as reported losses reflect the actual emergence of factors that influence claim costs. We believe, however, that as a greater percentage of losses are reported, the likelihood of material changes to ultimate losses declines. Each quarter, we re-estimate ultimate losses and LAE and reflect updated information in those estimates.
During the years ended December 31, 2009, 2008 and 2007, we experienced net favorable loss development of $100.8 million, $167.2 million, and $81.2 million, respectively. This net favorable loss development was attributable primarily to a level of losses reported to us by our ceding companies that was lower than expected and that, in our judgment, resulted in sufficient credibility in the cumulative loss experience to adjust our previously selected ultimate loss ratios. During 2009, 2008 and 2007, approximately $94.9 million, $154.4 million, and $84.7 million, respectively, of the total net favorable development was attributable to lower reported loss experience than we expected. During the years ended December 31, 2009, 2008 and 2007, changes in the initial expected loss ratio and the loss development patterns resulted in net favorable loss development of $5.9 million and $12.8 million for 2009 and 2008, respectively, and net unfavorable loss development of $3.5 million in 2007. Conditions and trends that have affected development of reserves in the past may not necessarily occur in the future. The factors that may result in differences between our current estimates of loss liability and our ultimate loss liability are set forth above under “Uncertainty of Estimates” in this Form 10-K.
Initial expected loss ratios and loss development patterns are key inputs to our loss estimation process. We exercise judgment in establishing key inputs at the beginning of an underwriting year and also as we modify the key inputs, as appropriate, throughout the loss development period. We have selected the initial expected loss ratio and the loss development patterns for sensitivity analysis. Ultimate loss estimates for the North American casualty excess of loss classes of business, which generally have the longest loss development patterns, have a higher degree of uncertainty than other reserving classes. IBNR for these classes as of December 31, 2009 was $1.1 billion, which was 66% of the total IBNR at that date. The estimates of unpaid losses and LAE related to North American casualty excess of loss classes of business have a higher degree of uncertainty and, consequently, reasonable alternatives to our selected initial expected loss ratios and loss development patterns could vary significantly. For example, if we increased the initial expected loss ratio for these classes by 5% from 68% to 73%, we would increase the IBNR for these classes by $88.8 million , which represents approximately 6% of unpaid losses and LAE for these classes as of December 31, 2009, or if we increased the initial expected loss ratio for these classes by 10% from 68% to 78%, we would increase the IBNR for these classes by $141.6 million , which represents approximately 10% of unpaid losses and LAE for these classes as of December 31, 2009.
As another example of key assumption sensitivity, if we accelerated the estimated loss development patterns related to North American casualty excess of loss classes by 5%, we would decrease the IBNR for these classes by $36.8 million, which is less than 3% of unpaid losses and LAE for these classes as of December 31, 2009, or if we accelerated the loss development patterns by 10%, we would decrease the IBNR for these classes by $73.7 million, which is 5% of unpaid losses and LAE for these classes as of December 31, 2009.
In order to limit the effect on our financial condition of large and multiple losses, we may buy retrocessional reinsurance, which is reinsurance for our own account. Reinsurance recoverable, also referred to as “ceded loss reserves,” includes estimates of the recoveries from our retrocessional reinsurance that arise from claims from our reinsurance business. These assets are estimates of future amounts recoverable from retrocessionaires for claims that have occurred at or before the balance sheet date. Each quarter, after estimating the amount of gross loss reserves, our actuaries review all retrocessional contracts. Based on the structure of each retrocessional contract and the gross incurred loss, a recovery amount is estimated.
We periodically receive pricing documentation that describes the methodologies used by various pricing services. The prices we obtain from pricing providers are validated by conducting price comparisons against multiple pricing sources for certain securities as may be available, performing an in-depth review of specific securities when evaluating potential other-than-temporary impairments, periodic back-testing of sales to the previously reported fair value, and continuous monitoring of market data including specific data that relates to our investment portfolio.
We routinely review our available-for-sale investments to determine whether unrealized losses represent temporary changes in fair value or are the result of other than temporary impairment (“OTTI”). The process of determining whether a security is other-than-temporarily impaired requires judgment and involves analyzing many factors. These factors include the overall financial condition of the issuer, the length and magnitude of an unrealized loss, specific credit events, the collateral structure and the credit support that may be applicable. The amount of the credit loss is the difference between the present value of expected future cash flows from an impaired debt security and the amortized cost of the security. The portion of the impairment related to the credit loss and portion of OTTI related to all other factors is recognized in the consolidated statement of operations. The portion of OTTI related to all other factors is also recognized in accumulated other comprehensive income, net of deferred taxes, in the consolidated statement of shareholders’ equity. In evaluating the potential for OTTI, we also consider our intent to sell a security and the likelihood that we will be required to sell a security before the unrealized loss is recovered. Our intent to sell a security is based, in part, on adverse changes in the credit worthiness of a debt issuer, pricing and other market conditions, and our anticipated net cash flows. If we determine that we intend to sell a security that is in an unrealized loss position, then the unrealized loss related to such security, representing the difference between the security’s amortized cost and its fair value, is recognized as a realized loss in our consolidated statement of operations at the time we determine our intent to sell.
We conduct our worldwide reinsurance business through three operating segments: Property and Marine, Casualty and Finite Risk. In managing our operating segments, management uses measures such as net underwriting income and underwriting ratios to evaluate segment performance. We do not allocate assets or certain income and expenses such as investment income, interest expense and corporate expenses by segment. Segment net underwriting income is reconciled to the U.S. GAAP measure of income before income taxes in Note 13 to the Consolidated Financial Statements contained elsewhere in this Form 10-K. The measures we used in evaluating our operating segments should not be used as a substitute for measures determined under U.S. GAAP.
Net underwriting income was $218.2 million and $90.1 million for the years ended December 31, 2009 and 2008, respectively. The increase in net underwriting income in 2009 as compared with 2008 was primarily due to a decrease in net underwriting losses arising from major catastrophes, partially offset by a decrease in net favorable development. Net underwriting losses arising from major catastrophes were $35.5 million and $198.0 million in 2009 and 2008, respectively.
Net underwriting income increased by $100.9 million for the year ended December 31, 2009 as compared with the year ended December 31, 2008, which was primarily due to a decrease in net underwriting losses arising from major catastrophes. This increase was partially offset by a decrease in net favorable development and net premiums earned. We had $35.5 million of net underwriting losses arising from major catastrophes in 2009 as compared with $198.0 million in 2008. Net underwriting losses arising from major catastrophes in 2009 were primarily attributable to the Irish Floods, Hailstorm Wolfgang and Winterstorm Klaus. In 2008 losses arising from major catastrophes were primarily attributable to Hurricanes Gustav and Ike and Winterstorm Emma. Net favorable development was $25.1 million and $77.6 million in 2009 and 2008, respectively.
Net losses and LAE decreased by $146.6 million in the year ended December 31, 2009 as compared with the year ended December 31, 2008, which was primarily due to the decrease in losses arising from major catastrophes in 2009. Net losses arising from major catastrophes were $42.6 million in 2009 and $224.9 million in 2008. The decrease in losses from major catastrophes was partially offset by the decrease in net favorable loss development in 2009. Net losses arising from major catastrophes, with related premium adjustments, increased the net loss and LAE ratio by 7.5 points and 36.1 points in 2009 and 2008, respectively. Net favorable loss development and related premium adjustments decreased the net loss and LAE ratio by 3.2 and 13.4 points in 2009 and 2008, respectively. Net favorable loss development in both 2009 and 2008 was primarily attributable to a level of cumulative losses reported by our ceding companies that was lower than expected and that, in our judgment, resulted in sufficient credibility in the loss experience to change our previously selected loss ratios. The net loss and LAE ratios were also affected by changes in the mix of business.
Net losses and LAE decreased by $110.5 million in the year ended December 31, 2009 as compared with the year ended December 31, 2008, which was primarily due to a decrease in net premiums earned and the effects of the contracts discussed above. Net favorable loss development was $73.6 million and $73.2 million in 2009 and 2008, respectively. Net favorable loss development and related premium adjustments decreased the net loss and LAE ratios by 19.0 points and 14.7 points in the years ended December 31, 2009 and 2008, respectively. Net favorable loss development was primarily attributable to a level of cumulative losses reported by our ceding companies that was lower than expected and that, in our judgment, resulted in sufficient credibility in the loss experience to change our previously selected loss ratios. The net loss and LAE ratios were also affected by changes in the mix of business.
Net favorable development in the North American claims made class related primarily to the 2003 and 2005 underwriting years. Changes in loss development patterns and initial expected loss ratios contributed approximately $2.8 million to this net favorable development. The net favorable development was partially offset by net unfavorable development in the 2007 underwriting year arising from claims related to the utilities sector. Net favorable development in the North American clash class related primarily to a specific loss resulting from an explosion in 2005. Net favorable development in the North American excess-of-loss occurrence class related primarily to the 2003, 2005 and 2007 underwriting years partially offset by net unfavorable development in the 2002 and 2008 underwriting years. The net favorable development in the 2003 and 2007 underwriting years resulted from improved loss experience in the current year after adverse experience led us to increase the selected loss ratio from the initial expected loss ratio in prior years. Changes in loss development patterns and initial expected loss ratios contributed approximately $1.2 million to the net favorable development. Net favorable development in the North American umbrella class related primarily to the 2003 through 2005 underwriting years and included $0.6 million related to changes in the initial expected loss ratio for the 2008 underwriting year. The net unfavorable development in the accident and health class related primarily to the 2007 and 2008 underwriting years and was partially offset by net favorable development in the 2004 and 2005 underwriting years. In the financial lines class, net favorable development related primarily to the 2004 through 2007 underwriting years partially offset by net unfavorable development in the 2008 underwriting year. Net favorable development in the international casualty class related primarily to the 2006 and prior underwriting years, partially offset by net unfavorable development in the 2007 and 2008 underwriting years.
The following table sets forth the net favorable (unfavorable) development in the year ended December 31, 2008 by class of business ($ in thousands):
Net acquisition expenses and related net acquisition expense ratios were $88.8 million and 22.8% for the year ended December 31, 2009 and $125.9 million and 25.0%, for the year ended December 31, 2008. The decrease in net acquisition expenses in 2009 as compared with 2008 was due to the decrease in net premiums earned. The decrease in the acquisition expense ratio was due to a decrease in commissions related to prior years’ losses of $4.4 million, which, with related premium adjustments, represented 1.2% of net earned premiums in 2009 as compared with an increase of $4.8 million in commissions which, with related premium adjustments, represented 0.3% of net premiums earned in 2008. Net acquisition expense ratios were also impacted by changes in the mix of business.
During the years ended December 31, 2009 and 2008, the Finite Risk portfolio consisted of one finite risk contract in force and we expect little or no new activity in this segment in the foreseeable future due to the relatively low level of demand expected for finite risk products. Due to the decline in the premium volume in recent years, current year ratios may be significantly impacted by relatively insignificant adjustments of prior years’ business. The increases in net premiums written and net premiums earned in 2009 as compared with 2008 were attributable to an increase in our share of one contract.
Net losses, LAE and acquisition expenses increased by $11.8 million in the year ended December 31, 2009 as compared with the year ended December 31, 2008 which was primarily due to the increase in net premiums earned and the difference in net favorable development in 2009 as compared with 2008. Net unfavorable development was $2.3 million in 2009 as compared with net favorable development of $0.4 million in 2008. Net unfavorable development in 2009 resulted from commission adjustments that were affected by interest income on funds held by the ceding companies in the year. Interest income on funds held that affected commissions was $2.2 million and $1.5 million in 2009 and 2008, respectively. The net unfavorable development increased the net loss and LAE and acquisition expense ratio by 11.3 points in 2009 and the net favorable development decreased the net loss and LAE and acquisition expense ratio by 3.4 points in 2008. The net loss, LAE and acquisition expense ratio was also favorably impacted as a result of premiums recognized in 2008 for which there were no related losses.
Other underwriting expenses were $1.4 million and $1.3 million for the years ended December 31, 2009 and 2008, respectively. The increase in other underwriting expenses in 2009 as compared with 2008 was due to an increase in performance-based compensation accruals.
The net changes in the fair value of derivatives were $9.7 million and $14.1 million for the years ended December 31, 2009 and 2008, respectively. The decrease in expense in 2009 as compared with 2008 was due to the expiration of three derivative contracts that were in effect in 2008. In 2008, in addition to the derivative contract with Topiary, we had an additional contract that provided second event catastrophe protection along with two derivative contracts that were options to purchase industry loss warranty retrocessional protection. See “Financial Condition - Liquidity” below for additional discussion of Topiary.
Net foreign currency exchange gains for the year ended December 31, 2009 were $0.4 million compared to net foreign currency exchange losses of $6.8 million for the year ended December 31, 2008. We routinely transact business in currencies other than the U.S. dollar. The net foreign currency exchange losses in 2008 were the result of holding more non-U.S. dollar denominated assets than non-U.S. dollar denominated liabilities, primarily the Euro and the British pound sterling, as the U.S. dollar strengthened against those currencies. In 2009 we held non-U.S. dollar denominated assets and liabilities in approximately equivalent amounts.
Interest expense was $19.0 million for each of the years ended December 31, 2009 and 2008 and was related to our $250.0 million of Series B 7.5% Notes due June 1, 2017 (the "Series B Notes").
Income tax expense was $4.3 million and $13.0 million for the years ended December 31, 2009 and 2008, respectively. The decrease in income tax expense for the year ended December 31, 2009 was primarily due to the decrease in taxable income generated by our subsidiaries that operate in taxable jurisdictions, which resulted in an effective tax rate of 1.1% in 2009 as compared to 5.4% in 2008. The decrease in taxable income was partially attributable to an increase in in the proportion of assets in Platinum US that was invested in tax-advantaged municipal bonds. The effective tax rate in any given period is primarily driven by the composition of income before income tax expense from our subsidiaries. The decrease in the effective tax rate in 2009 as compared with 2008 was the result of a greater portion of income before income tax expense being generated by Platinum Holdings and Platinum Bermuda, which are not subject to corporate income tax. In 2009, the percentage of income before income tax expense derived from Platinum Holdings and Platinum Bermuda was 94.3% as compared with 84.4% in 2008.
Year Ended December 31, 2008 as Compared with the Year Ended December 31, 2007
Net income and diluted earnings per common share for the years ended December 31, 2008 and 2007 was as follows ($ in thousands, except earnings per share):
Net income decreased by $130.7 million for the year ended December 31, 2008 as compared with 2007. The decrease was primarily due to a decrease in net underwriting income of $132.9 million and a decrease in net investment income of $27.6 million. These decreases were offset by an increase in net realized gains on investments of $57.7 million. Net underwriting income consists of net premiums earned, less net losses and LAE, net acquisition expenses and operating costs related to underwriting operations.
The net favorable development was $77.6 million for the year ended December 31, 2008. See “Results of Operations - Year Ended December 31, 2009 as Compared with the Year Ended December 31, 2008 - Underwriting Results - Property and Marine” above for discussion of net favorable development by class of business for the year ended December 31, 2008.
The following table sets forth the net favorable (unfavorable) development for the year ended December 31, 2007 by class of business ($ in thousands):
Net favorable development in the property excess-of-loss per risk class was primarily related to the North American risk business in the 2004 through 2006 underwriting years. Net favorable development in the catastrophe excess-of-loss (non-major events) class was primarily related to the 2005 and 2006 underwriting years. Net favorable development in major catastrophes was primarily related to Hurricanes Katrina, Rita and Wilma. Net favorable development in the crop class was primarily related to the 2004 through 2006 underwriting years. Net unfavorable development in the marine, aviation and satellite class was primarily related to marine business in the 2003 and 2005 underwriting years, partially offset by favorable experience in 2004 underwriting year. Net favorable development in the property proportional class was primarily related to the 2005 and prior underwriting years.
Net acquisition expenses and related ratios were $90.8 million and 15.2% for the year ended December 31, 2008 and $68.4 million and 13.6% for the year ended December 31, 2007. The increase in net acquisition expenses in 2008 as compared with 2007 was primarily due to an increase in net premiums earned. The increase in the net acquisition expense ratio in 2008 as compared with 2007 was due in part to higher commission rates in the crop and marine classes in the 2008 underwriting year as compared with 2007. Net acquisition expenses and the related net acquisition expense ratio were also affected by commissions related to prior years. The increase in the acquisition expense ratio was due to an increase in commissions related to prior years were $5.1 million in 2008 which, with related premium adjustments, represented 0.6% of net premiums earned and net decrease of $1.7 million in 2007 which, with related premium adjustments, represented 0.3% of net premiums earned. Net acquisition expense ratios were also impacted by changes in the mix of business.
Net losses and LAE decreased by $107.7 million for the year ended December 31, 2008 as compared with December 31, 2007 which was primarily due to a decrease in net premiums earned and an increase in net favorable loss development. Net favorable loss development was $73.2 million in 2008 and $19.5 million in 2007. Net favorable loss development in 2008 included $58.4 million from certain long-tailed casualty classes. Net favorable loss development and related premium adjustments decreased the net loss and LAE ratios by 14.7 and 3.1 points in 2008 and 2007, respectively. Additionally, the net loss and LAE ratio increased by 5.8% in 2008 as compared with 2007 due to $35.8 million of losses in 2008 related to the RVI Contract. Exclusive of net favorable loss development and the RVI Contract, the net loss and LAE ratio increased in 2008 as compared with 2007 due to higher initial expected loss ratios in certain significant classes reflecting a decline in price adequacy. The net loss and LAE ratios were also affected by changes in the mix of business.
The net favorable development was $69.6 million for the year ended December 31, 2008. See “Results of Operations - Year Ended December 31, 2009 as Compared with the Year Ended December 31, 2008 - Underwriting Results - Casualty” above for discussion of net favorable development by class of business for the year ended December 31, 2008.
Net favorable development in the North American claims made class was primarily related to the 2003 underwriting year. Net unfavorable development in the North American clash class was primarily related to two large claims in the 2005 underwriting year. Net unfavorable development in North American excess-of-loss occurrence class was primarily related to construction related exposures in the 2003 through 2005 underwriting years. Changes to initial expected loss ratios in the construction related exposures amounted to $17.3 million of the net unfavorable development. Net favorable development in the North American umbrella class was related to changes in initial expected loss ratio on the 2003 through 2005 underwriting years. Net favorable development in the financial lines class was primarily related to the political risk and surety business in the 2004 and 2005 underwriting years. Net favorable development in the international casualty class was primarily related to 2002 through 2004 underwriting years. Changes in loss development patterns and initial expected loss ratios in the motor excess and excess claims made business contributed approximately $2.3 million to net favorable development.
The Finite Risk segment generated 1.4% and 2.7% of our net premiums written for the years ended December 31, 2008 and 2007, respectively. The following table summarizes underwriting activity and ratios for the Finite Risk segment for the years ended December 31, 2008 and 2007 ($ in thousands):
Net investment income was $186.6 million and $214.2 million for the years ended December 31, 2008 and 2007, respectively. Net investment income decreased in 2008 as compared with 2007 primarily due to a decrease in yields on invested assets and cash and cash equivalents. Net investment income included interest earned on funds held of $3.5 million and $5.3 million in 2008 and 2007, respectively.
Sales of investments for the year ended December 31, 2008 resulted in realized net gains of $52.0 million primarily from TIPS, U.S. Government securities, U.S. Government agencies, and RMBS, and realized net losses of $4.2 million for corporate bonds. The net gains from mark-to-market adjustments on trading securities in 2008 were comprised of $8.5 million related to non-U.S. dollar denominated securities and $1.2 million related to TIPS. The non-U.S. dollar denominated securities in our trading portfolio included primarily European government and U.K. government bonds where yields decreased resulting in an increase in fair value.
Net impairment losses on investments were $30.7 million and $0.8 million for the years ended December 31, 2008 and 2007, respectively. The net impairment losses in 2008 included $10.9 million related to non-agency residential mortgage-backed securities, $7.6 million related to corporate bonds, $6.5 million related to Alt-A residential mortgage-backed securities and sub-prime asset-backed securities, and $5.6 million related to perpetual preferred stocks. The net impairment losses of $0.8 million in 2007 related to corporate bonds.
The net changes in the fair value of derivatives were $14.1 million and $5.0 million for the years ended December 31, 2008 and 2007, respectively. The net changes in fair value of derivatives in 2008 were due to four derivative contracts in place during 2008 compared with two derivative contracts during 2007.
Operating expenses were $88.2 million and $103.6 million for the years ended December 31, 2008 and 2007, respectively. Operating expenses include $63.7 million and $74.3 million for 2008 and 2007, respectively, relating to other underwriting expenses. The remaining $24.5 million and $29.3 million in 2008 and 2007, respectively, related to costs such as compensation and other corporate expenses associated with operating as a publicly traded company. The decrease in 2008 as compared with 2007 was due, in part, to the RenRe Agreement, under which we incurred fees of $7.8 million in 2007. Additionally, performance-based compensation decreased in 2008 by $8.5 million as compared with 2007. Offsetting these decreases in 2008 were one-time fees and expenses of $4.3 million related to the derivative agreement with Topiary.
Interest expense was $19.0 million and $21.5 million for the years ended December 31, 2008 and 2007, respectively, and was primarily related to our $250.0 million of Series B Notes. The decrease in interest expense was the result of a reduction in our debt obligations outstanding in 2008 as compared with 2007. Interest expense for 2007 also included interest related to $42.8 million of Series B 6.371% Senior Guaranteed Notes due November 16, 2007, which were repaid when they came due in November 2007.
Our principal cash requirements are the payment of losses and LAE, commissions, brokerage, operating expenses, taxes and dividends to our common shareholders, the servicing of debt, and the purchase of retrocessional contracts. We expect that our liquidity needs for the next twelve months will be met by our cash and cash equivalents, short-term investments, cash flows from operations, investment income and proceeds from the sale, redemption or maturity of our investments.
Under the terms of the agreement, we pay to Topiary approximately $9.7 million during each of the three annual periods. The net derivative liability of $4.7 million was included in other liabilities on our consolidated balance sheet. The net change in fair value of $9.7 million was included in the change in fair value of derivatives in our consolidated statement of operations.
As of December 31, 2009, the fair value of our available-for-sale securities was $3.5 billion with a net unrealized loss of $74.0 million. The following table sets forth the fair values, net unrealized gains and losses and average credit quality of our fixed maturity securities as of December 31, 2009 ($ in thousands):
The net unrealized loss position of our portfolio of RMBS was $52.6 million as of December 31, 2009 as compared with $51.7 million as of December 31, 2008. Approximately 86% of the RMBS in our investment portfolio are issued or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation and are referred to as U.S. Government agency RMBS. The remaining 14% of our RMBS were issued by non-agency institutions and include securities with underlying Alt-A mortgages. The net unrealized loss position of our portfolio of sub-prime asset-backed securities was $25.7 million as of December 31, 2009 as compared with $25.9 million as of December 31, 2008. We analyze our RMBS and sub-prime asset-backed securities on a periodic basis using default loss models based on the performance of the underlying loans. Performance metrics include delinquencies, defaults, foreclosures, prepayment speeds and cumulative losses incurred. The expected losses for a mortgage pool are compared to the current level of subordination, which generally represents the point at which our security would experience losses. We evaluate projected cash flows as well as other factors in order to determine if a credit impairment has occurred.
Our derivative instruments, which are included in other liabilities in the consolidated balance sheets, are priced at fair value, primarily using unobservable inputs through the application of our own assumptions and internal valuation pricing models. Our debt obligations are priced at fair value from independent sources for those or similar securities.
The following table presents the carrying amounts and estimated fair values of our financial instruments as of December 31, 2009 ($ in thousands):
At December 31, 2009, our capital resources of $2.3 billion consisted of common shareholders’ equity of $2.1 billion and $250.0 million of the Series B Notes. At December 31, 2008, our capital resources of $2.1 billion consisted of common shareholders’ equity of $1.6 billion, $250.0 million of the Series B Notes, and $167.5 million of preferred share equity. The increase in capital during year ended December 31, 2009 was primarily attributable to net income from operations and an increase in the fair value of our investment portfolio, offset by share repurchase activity. On February 17, 2009, our 5,750,000 outstanding 6% Series A Mandatory Convertible Preferred Shares converted into 5,750,000 common shares at a ratio of one-to-one, based on the volume-weighted average price of $29.90 of our common shares from January 14, 2009 through February 11, 2009.
We do not have any material commitments for capital expenditures as of December 31, 2009.
We do not have any off-balance sheet arrangements, as defined for purposes of SEC rules, which are not accounted for or disclosed in the consolidated financial statements as of December 31, 2009.
Our contractual obligations as of December 31, 2009 by estimated maturity are presented below ($ in thousands):
There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the gross unpaid losses and LAE do not represent all of the obligations that will arise under the contracts, but rather only the estimated liability incurred through December 31, 2009. There are reinsurance contracts that have terms extending into 2010 under which additional obligations will be incurred.
Our consolidated financial statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009, together with the reports thereon by KPMG, our independent registered public accounting firm for the year ended December 31, 2009 and KPMG LLP, our independent registered public accounting firm for the years ended December 31, 2008 and 2007, are set forth on pages through hereto.