These measures are used to monitor our results and should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Reconciliations of such measures to the most comparable U.S. GAAP figures are included below or are included elsewhere within this Form 10-K in accordance with Regulation G.
Segment underwriting income or loss is reconciled to the U.S. GAAP measure of income or loss before income taxes in Note 10 to the "Consolidated Financial Statements" in this Form 10-K.
Fully converted book value per common share represents total shareholders' equity, adjusted for the assumed proceeds from the exercise of share options, divided by the number of common shares outstanding, adjusted for the assumed exercise or vesting of all outstanding share options and restricted share units.
Options with an exercise price below the market price per share at period end.
Return on equity represents net income available to common shareholders divided by the beginning shareholders' equity for the year, adjusted for material capital transactions during the year. Management uses return on equity as a financial performance measure in determining incentive compensation as set forth in Item 11, "Executive Compensation" in this Form 10-K.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto included in this Form 10-K. This Form 10-K contains forward-looking statements that involve risks and uncertainties. Please see the "Note on Forward-Looking Statements" on page 1 of this Form 10-K. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Management has included certain schedules containing financial measures that are not calculated under standards and rules that comprise U.S. GAAP. See Item 6, "Selected Financial Data" in this Form 10-K for additional information.
As of December 31, 2014 and 2013, our capital resources of $2.0 billion consisted of $1.7 billion of common shareholders' equity and $250.0 million of debt obligations. Investable assets, consisting of investments, cash and cash equivalents, accrued investment income and net balances due to and from brokers, were $3.3 billion and $3.5 billion as of December 31, 2014 and 2013, respectively. Our net premiums written were $492.1 million, $567.1 million and $565.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. Our net income was $164.8 million, $223.3 million and $327.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Return on equity was 10.2%, 12.9% and 20.2% for the years ended December 31, 2014, 2013 and 2012, respectively. Book value per share grew to $69.97 as of December 31, 2014, an increase of 12.7% from $62.07 as of December 31, 2013.
Historically, property and casualty reinsurers have experienced significant fluctuations in operating results. Demand for reinsurance is influenced significantly by underwriting results of primary insurers and prevailing general economic and market conditions, all of which affect ceding companies' decisions as to the amount or portion of risk that they retain for their own accounts and consequently reinsurance premium rates. The supply of reinsurance is related to prevailing prices, the levels of insured losses and levels of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the reinsurance industry and general economic and market conditions. As a result, the property and casualty reinsurance business historically has been cyclical, characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity have permitted favorable pricing.
In 2012, 2013 and 2014, the reinsurance industry financial results have reflected lower than average global natural and man-made catastrophes and continuing prior years' favorable development. In addition, losses and LAE on many lines of business continued to be lower than their long-term averages. These financial results have bolstered reinsurers' balance sheets. Additionally, new capital from non-traditional sources has grown significantly. Combining the additional supply with flat or reduced demand from buyers of reinsurance has resulted in substantial risk-adjusted rate reductions in some property catastrophe lines as at January 1, 2015 and smaller but still significant reductions in other property and marine and casualty lines of business.
Competition has increased in recent years from non-traditional entrants into our industry, such as hedge funds and private equity firms, the proliferation of third-party capital utilization by our competitors, the growth of markets for catastrophic and specialty risks, and the continuing competition to serve customers and capitalize on potential opportunities in the market. These developments have increasingly become part of the competitive landscape, particularly in the U.S. property catastrophe market. Over time, these initiatives could significantly affect supply, pricing and competition in our industry and partially displace our traditional reinsurance products.
Government-backed entities also represent competition for the coverages that we provide directly, or for the business of our customers, reducing the potential amount of third party private protection our clients might need or desire.
In the Property and Marine segment, we believe that property catastrophe exposed reinsurance rates for peak zones and perils will remain under pressure for the balance of the year. We currently anticipate that the portfolio of business we write in our Property and Marine segment during 2015 will be less than our current in-force book of business as a result of a softening reinsurance market environment and the effect of the pending Merger. Our Property and Marine segment will continue to represent a large proportion of our overall book of business, which could result in significant volatility in our results of operations.
In addition to estimating premiums written, we estimate the earned portion of premiums written. The amounts we recorded on the consolidated balance sheets as estimated premiums receivable and unearned premiums are based on estimated written and earned premiums, respectively, and are subject to judgment and uncertainty. Any adjustments to written and earned premiums, and the related losses and acquisition expenses, are accounted for as changes in estimates and are reflected in the results of operations in the period in which they are made. These adjustments could be material and could significantly impact earnings in the period they are recorded although the potential net impact of changes in premiums earned on our results of operations is reduced by the accrual of losses and acquisition expenses related to such premiums.
As of December 31, 2014, the selected estimates of premiums receivable were higher than the initial estimates made by our underwriters by $4.0 million or 3.2%, and unearned premiums were lower than the initial estimates made by our underwriters by $1.0 million or 0.9%. We believe that we reasonably could have made an increase of between $0 and $4.0 million for premiums receivable and a decrease of between $0 and $1.0 million for unearned premiums. As of December 31, 2013, the selected estimates of premiums receivable and unearned premiums were lower than the initial estimates made by our underwriters by $3.1 million or 2.2% and by $0.9 million or 0.7%, respectively. We believe that we reasonably could have made a decrease of between $0 and $3.1 million for premiums receivable and between $0 and $0.9 million for unearned premiums. Key factors that affect premium estimates of our underwriters and management include: (1) the competition in many classes of business that make it difficult for ceding companies to achieve their premium targets, and (2) the lack of a historical track record for some ceding companies writing new programs.
Unpaid losses and LAE represent management's best estimate at a given point in time and are subject to the effects of trends in loss severity and frequency. Provisions for economic inflation and changes in the social and legal environment are also considered in the loss estimation process. These estimates are reviewed regularly and adjusted as loss experience develops or new information becomes available, such as rate changes in the policies underlying our reinsurance contracts or in the mix of business by reserving class. Any adjustments are accounted for as changes in estimates and are reflected in the results of operations in the period in which they are made. It is possible that the ultimate liability may differ materially from such estimates.
As of December 31, 2014 and 2013, the liabilities recorded on our consolidated balance sheets for unpaid losses and LAE were $1.4 billion and $1.7 billion, respectively. These amounts exclude any amounts we may recover from our retrocessionaires under coverage we purchased for such losses. We record estimates of amounts we expect to recover from retrocessionaires as assets on the consolidated balance sheets. The following table sets forth our case reserves, additional case reserves and IBNR by segment as of December 31, 2014 and 2013 ($ in thousands):
Includes $118.5 million and $223.6 million of reserves related to major catastrophes as of December 31, 2014 and 2013, respectively.
Reserves, excluding major catastrophes, were $1.3 billion as of December 31, 2014, representing 92% of our unpaid losses and LAE. When estimating unpaid losses and LAE, we segregate the business into classes by reinsurance subsidiary, by type of coverage and by type of contract (resulting in approximately 60 classes). Within each class, the business is further segregated by Underwriting Year, starting with 2002, our first year of operations.
Our actuaries calculate multiple point estimates of our liability for losses and LAE using a variety of actuarial methods for many, but not all, of our classes for each Underwriting Year. We do not believe that these multiple point estimates are or should be considered a range. Our actuaries consider each class and determine the most appropriate point estimate for each Underwriting Year based on the characteristics of the particular class including: (1) loss development patterns derived from historical data, (2) the credibility of the selected loss development pattern, (3) the stability of the loss development patterns and (4) the observed loss development of other underwriting years for the same class. Our actuaries also consider other relevant factors, including: (1) historical ultimate loss ratios, (2) the presence of individual large losses and (3) known occurrences that have not yet resulted in reported losses.
Generally, estimates of ultimate losses that are not related to a specific event are initially determined based on the loss ratio method applied to each Underwriting Year and to each class of business. The selected ultimate losses are determined by multiplying the initial expected loss ratio by the earned premium. The initial expected loss ratios are key inputs that involve management judgment and are based on a variety of factors, including: (1) contract by contract expected loss ratios developed during our pricing process and (2) our historical loss ratios and combined ratios adjusted for rate change and trend. These judgments take into account management's view of past, current and future factors that may influence ultimate losses, including: (1) market conditions, (2) changes in the business underwritten, (3) changes in timing of the emergence of claims and (4) other factors that may influence ultimate loss ratios and losses.
The determination of when reported losses are sufficient and credible to warrant selection of an ultimate loss ratio different from initial expected loss ratio also requires judgment. We generally make adjustments for reported loss experience indicating unfavorable variances from initial expected loss ratios sooner than reported loss experience indicating favorable variances. This is because the reporting of losses in excess of expectations tends to have greater credibility than an absence or lower than expected level of reported losses. While we continue with this approach, in the fourth quarter of 2012 we began reflecting favorable variances in reported losses in our selection of ultimate loss ratios at an earlier point in the loss development pattern than we had in the past. For further discussion, see "Independent Actuarial Review" below.
Over time, as a greater number of claims are reported and the credibility of reported losses improves, actuarial estimates of IBNR are based on the Bornhuetter-Ferguson and the chain ladder techniques. The loss development pattern is a key input to these techniques. The Bornhuetter-Ferguson technique utilizes actual reported losses, a loss development pattern and the initial expected loss ratio to determine an estimate of ultimate losses. We believe this technique is most appropriate when there are few reported claims and a relatively less stable loss development pattern. The chain ladder technique utilizes actual reported losses and a loss development pattern to determine an estimate of ultimate losses that is independent of the initial expected ultimate loss ratio and earned premium. We believe this technique is most appropriate when there are a large number of reported losses with significant statistical credibility and a relatively stable loss development pattern.
While we commenced operations in 2002, the business we write is sufficiently similar to the historical reinsurance business of our predecessor, the former reinsurance segment of The St. Paul Companies, Inc., such that we review the historical loss experience of this business when we estimate our own loss development patterns. Loss development patterns can span more than a decade. Therefore, this data is a valuable supplement to our own and industry data.
Loss development patterns are determined utilizing actuarial analysis, including management's judgment, and are based on historical patterns of paid losses and reporting of case reserves to us, as well as industry loss development patterns. Information that may cause future loss development patterns to differ from historical loss development patterns is considered and reflected in our selected loss development patterns as appropriate. For property and health classes, these patterns indicate that a substantial portion of the ultimate losses are reported within two to three years after the contract is effective. Casualty loss development patterns can vary from three years to over twenty years depending on the type of business.
We analyze historical loss development patterns and may adjust them for observed anomalies. For example, we observed that loss development patterns were much slower in Underwriting Years that were characterized by especially intense competition, known as the "soft market", particularly in the North American excess-of-loss claims made class. We believe this is due to multiple year policies written by ceding companies and the deterioration in underwriting standards during these periods. In determining our loss development patterns for certain classes, we may exclude certain historical data from the soft market years. However, one of the risks of excluding some of the data from those years is that we could be obscuring trends in loss development patterns. Our actuaries consider this when determining the credibility of indications that use these patterns. For certain reinsurance contracts, historical loss development patterns may be developed from ceding company data or other sources.
Generally, an event causing more than $1 billion of insured property losses to the insurance industry, as estimated by Property Claims Services or other sophisticated independent loss estimate providers, or $10 million of property and/or marine losses to the Company is considered and tracked as a major catastrophe. Net losses from major catastrophes consist of gross losses and LAE, net of any retrocessional recoveries and reinstatement premiums earned. Unpaid losses and LAE related to major catastrophes were $118.5 million, which represented 8% of our total unpaid losses and LAE, as of December 31, 2014.
Our underwriters will typically prepare an initial estimate of our ultimate losses for a major catastrophe event on a contract-by-contract basis. This estimate is typically based on the Company's portfolio modeling, discussions with brokers and ceding companies, market share analysis and a review of the Company's in-force contracts, as well as claims information and analysis, if any, received from brokers and ceding companies. Our actuaries and underwriters will also consider a variety of factors, including: (1) the credibility of ceding company estimates, (2) whether the ceding company estimates include IBNR and (3) whether the ceding company information is current. After reviewing loss estimates and other information with our underwriters, our actuaries make an estimate of ultimate loss.
The frequency and severity of reported losses relative to anticipated frequency and severity of losses is one of the most influential factors and is largely dependent on the loss experience of our ceding companies. Reported loss experience is a key input to our loss estimation process and, if loss experience reported in periods subsequent to estimating the ultimate losses are materially greater or less than anticipated, we may adjust the ultimate loss ratio accordingly. Adjustments to increase or decrease a prior year's ultimate loss ratio are generally referred to as unfavorable or favorable loss development.
Changes in estimates of prior years' earned premiums can also affect prior years' ultimate losses. Our actuaries consider factors affecting all key inputs to actuarial techniques when determining the credibility of indications.
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 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, 2014, 2013 and 2012, we experienced net favorable loss development of $127.6 million, $183.3 million, and $235.5 million, respectively. The net favorable loss development was attributable primarily to a level of cumulative losses reported to us 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 and reduce estimated ultimate losses, as discussed further in Item 1, "Business - Unpaid Losses and Loss Adjustment Expenses", in this Form 10-K.
Initial expected loss ratios and loss development patterns are two 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. Changes in the initial expected loss ratio and the loss development patterns resulted in net favorable loss development of $1.4 million, $18.2 million and $26.0 million during the years ended December 31, 2014, 2013 and 2012, respectively.
For example, if we increased the initial expected loss ratio for these classes by 5 points from 69% to 74%, we would increase the IBNR for these classes by $38.8 million, which represents approximately 4% of unpaid losses and LAE for these classes as of December 31, 2014. If we increased the initial expected loss ratio for these classes by 10 points from 69% to 79%, we would increase the IBNR for these classes by $77.1 million, which represents approximately 9% of unpaid losses and LAE for these classes as of December 31, 2014.
As of December 31, 2014, our investments and cash and cash equivalents totaled $3.3 billion, consisting of $1.9 billion of fixed maturity securities and $1.4 billion of cash and cash equivalents. Investments we own that we may not have the positive intent to hold until maturity are classified as available-for-sale and reported at fair value, with related net unrealized gains or losses excluded from net income or loss, and included in shareholders' equity as a component of accumulated other comprehensive income, net of deferred taxes. Investments we own and have the intent to sell prior to maturity, or securities for which we have elected the fair value option, are classified as trading securities. Trading securities are reported at fair value, with fair value adjustments included in net realized gains on investments and the related deferred income tax included in income tax expense or benefit in the consolidated statements of operations.
The accounting guidance related to fair value measurements addresses the recognition and disclosure of fair value measurements where those measurements are either required or permitted by the guidance. The fair values of our financial assets and liabilities addressed by this guidance are determined primarily through the use of observable inputs. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from external independent sources. Unobservable inputs reflect management's assumptions about what market participants' assumptions would be in pricing the asset or liability based on the best information available. We classify our financial assets and liabilities in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. This classification requires judgment in assessing the market and pricing methodologies for a particular security. The fair value hierarchy is comprised of the following three levels:
Level 3: Valuations are based on unobservable inputs for assets and liabilities where there is little or no market activity. Unadjusted third party pricing sources or management's assumptions and internal valuation models may be used to determine the fair value of financial assets or liabilities
The number of prices we obtained per security varies based on the type of asset class and particular reporting period. Prices are generally obtained from multiple sources when a new security is purchased and a pricing source is assigned to the particular security. A hierarchy is maintained that prioritizes pricing sources based on availability and reliability of information, with preference generally given to prices provided by index providers and pricing vendors. Pricing sources may be assigned to a particular security based upon the provider's expertise. Generally, the initial pricing source selected is consistently used for each reporting period. We have not adjusted any prices that we have obtained from pricing sources. However, if we determine that a price appears unreasonable, we investigate and assess whether the price should be adjusted.
We receive pricing documentation that describes the methodologies used by various pricing sources. We validate the prices we obtain from third party pricing sources by performing price comparisons against multiple pricing sources, if available, periodically back-testing sales to the previously reported fair value, performing an in-depth review of specific securities when evaluating stale prices and large price movements, as well as performing other validation procedures. We also continuously monitor market data that relates to our investment portfolio and review pricing documentation that describes the methodologies used by various pricing sources.
The fair value measurements of our investments classified as Level 3 were approximately 0.2% of our total investments as of December 31, 2014. Specifically, the fair value measurements of our sub-prime asset-backed securities classified as Level 3 used significant unobservable inputs that include prepayment rates, probability of default and loss severity in the event of default. The prices we obtained to determine these measurements were based upon unadjusted third party pricing sources.
Reinsurance accounting is followed for assumed and ceded transactions when risk transfer requirements have been satisfied. Reinsurance contracts that do not transfer sufficient insurance risk are accounted for as deposits.
All of our assumed and ceded contracts are reviewed by our underwriters. Contracts that trigger certain criteria are subjected to a more detailed risk transfer analysis by management. Our risk transfer analysis evaluates significant assumptions related to the amount and timing of expected cash flows, as well as the interpretation of underlying contract terms, and involves management's judgment, experience, and interpretations. See Notes 1 and 3 to the "Consolidated Financial Statements" contained elsewhere in this Form 10-K for additional information regarding our reinsurance deposit assets and liabilities.
In discussing our Results of Operations, in addition to referring to certain non-GAAP financial measures as defined in Item 6, "Selected Financial Data", in this Form 10-K, we also refer to other financial measures such as net losses from major catastrophes and net favorable or unfavorable development.
2014 versus 2013: The decrease in net income for the year ended December 31, 2014 as compared with the year ended December 31, 2013 was primarily due to decreases in underwriting income and net realized gains on investments, partially offset by a decrease in income tax expense. The decrease in diluted earnings per common share was due to the decrease in net income, partially offset by a decrease in the diluted weighted average shares outstanding. The decrease in the diluted weighted average shares outstanding related to share repurchases during the last twelve months.
Net favorable development was $126.4 million and $173.2 million for the years ended December 31, 2014 and 2013, respectively.
Net losses from current year major catastrophes were $5.1 million and $26.1 million for the years ended December 31, 2014 and 2013, respectively.
Net premiums earned decreased by $10.4 million for the year ended December 31, 2014 as compared with 2013 primarily as a result of decreases in net premiums written in current and prior periods. Net premiums written and earned were also impacted by changes in the mix of business and the structure of the underlying reinsurance contracts.
2013 versus 2012: The Property and Marine segment gross premiums written decreased by $20.4 million, and by $12.0 million excluding reinstatement premiums written related to major catastrophes, for the year ended December 31, 2013 as compared with the year ended December 31, 2012. The decrease in gross premiums written was primarily due to decreases in the crop and catastrophe classes partially offset by one large new contract in the North American property proportional class for the year ended December 31, 2013 as compared with 2012. The decrease in gross premiums written resulted primarily from fewer opportunities that met our underwriting standards and a reduction in rates.
The pre-tax net losses from 2014 major catastrophes were $5.1 million, including reinstatement premiums of $0.8 million, and related to PCS Catastrophe 45 for the year ended December 31, 2014.
Any favorable or unfavorable development related to these major catastrophes subsequent to December 31, 2013 is included in prior years' loss development, as described below, for the major catastrophe class of business.
Any favorable or unfavorable development related to these major catastrophes subsequent to December 31, 2012 is included in prior years' loss development, as described below, for the major catastrophe class of business.
2014 versus 2013: The Property and Marine segment net favorable loss development was $27.4 million and $71.3 million for the years ended December 31, 2014 and 2013, respectively. Net favorable loss development and related premium adjustments decreased the net loss and LAE ratio by 12.8 points and 31.3 points for the years ended December 31, 2014 and 2013, respectively. Net favorable loss development for the years ended December 31, 2014 and 2013 was primarily attributable to a level of cumulative losses reported by our ceding companies that was lower than expected and that, in our judgment, resulted in sufficient credibility in the loss experience to change our previously selected loss ratios.
The following table sets forth the net favorable (unfavorable) development by class of business for the year ended December 31, 2014 ($ in thousands):
Net favorable development in the major catastrophes class arose primarily from the Tohoku earthquake, the New Zealand earthquakes in 2011 and Hurricane Sandy, partially offset by net unfavorable development from the September 2010 New Zealand earthquake. Net favorable development in the property per risk class arose primarily from the 2013 underwriting year. Net favorable development in the catastrophe excess-of-loss (non-major events) class arose primarily from the 2012 and 2013 underwriting years. Net favorable development in the crop class arose primarily from 2013 underwriting year. Net favorable development in the marine, aviation and satellite class arose from most prior underwriting years, partially offset by net unfavorable development from the Costa Concordia loss in the 2011 underwriting year. A change in loss development patterns in this class contributed $1.2 million to the net favorable development.
Net favorable development in the major catastrophes class arose primarily from Hurricane Sandy and the Tohoku earthquake, partially offset by net unfavorable development on a marine loss related to Hurricane Ike. Net favorable development in the property per risk class arose from most prior underwriting years, with the majority from the 2012 underwriting year. Net favorable development in the catastrophe excess-of-loss (non-major events) class arose primarily from the 2010 through 2012 underwriting years. Net favorable development in the marine, aviation and satellite class arose from most prior underwriting years. Net favorable development in the property proportional class arose primarily from the 2010 through 2012 underwriting years, partially offset by net unfavorable development from the 2007 and 2008 underwriting years. A change in the loss development patterns contributed $0.8 million to the net favorable development in this class. Net favorable development in the crop class arose primarily from the 2012 underwriting year.
2014 versus 2013: The Property and Marine segment calendar year losses, excluding current year major catastrophes and prior years' loss development, were $91.3 million and $78.0 million for the years ended December 31, 2014 and 2013, respectively. The calendar year loss ratios, excluding current year major catastrophes and prior years' loss development, were 43.2% and 34.8% for the years ended December 31, 2014 and 2013, respectively. The increase in calendar year losses and the calendar year loss ratio resulted primarily from an increase in losses from our North American catastrophe excess-of-loss (non-major events) class in 2014 of $12.7 million as compared with 2013 and an underwriting loss in our North American crop class in 2014 of $3.1 million as compared with underwriting income of $4.1 million in the same period in 2013. The calendar year losses and the related loss ratios, excluding current year major catastrophes, prior years' loss development, North American non-major catastrophe events and the underwriting result from our North American crop class, were 43.0% and 47.1% for the years ended December 31, 2014 and 2013, respectively. Calendar year losses and related loss ratios were also impacted by changes in the mix of business.
2014 versus 2013: The Property and Marine segment other underwriting expenses were $31.1 million and $30.9 million for the years ended December 31, 2014 and 2013, respectively.
2013 versus 2012: The Casualty segment underwriting income decreased by $71.2 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012, primarily due to a decrease in net favorable development. Net favorable development was $103.9 million and $184.1 million for the years ended December 31, 2013 and 2012, respectively.
2014 versus 2013: The Casualty segment net premiums written decreased by $35.9 million for the year ended December 31, 2014 as compared with the year ended December 31, 2013. Net premiums written reflected an increase in prior years' premium estimates of $3.4 million and $32.7 million for the years ended December 31, 2014 and 2013, respectively. Excluding the impact of increases to prior years' premium estimates, net premiums written decreased by $6.5 million.
Net premiums earned decreased by $30.7 million for the year ended December 31, 2014 as compared with the year ended December 31, 2013. Net premiums earned reflected a decrease in prior years' premium estimates of $0.8 million for the year ended December 31, 2014 and an increase in prior years' premium estimates of $20.2 million for the year ended December 31, 2013. Excluding the impact of changes to prior years' premium estimates, net premiums earned decreased by $9.6 million. Net premiums written and earned were also impacted by changes in the mix of business and the structure of the underlying reinsurance contracts.
2014 versus 2013: Net losses and LAE decreased by $20.8 million for the year ended December 31, 2014 as compared with the year ended December 31, 2013. In 2014, we had a similar calendar year loss ratio as 2013 but on lower premiums earned. We also had a decrease in net favorable loss development in 2014 as compared with the same period in 2013.
Net favorable development in the North American claims made class arose primarily from the 2004 through 2012 underwriting years, partially offset by net unfavorable development from the 2003 underwriting year. A change in loss development patterns and initial expected loss ratio assumptions contributed $6.1 million to the net favorable development. Net favorable development in the North American umbrella class arose from the 2003 through 2011 underwriting years, partially offset by net unfavorable development from the 2007 underwriting year. A change in initial expected loss ratio assumptions contributed $9.1 million to the net favorable development. Net favorable development in the international casualty class arose from most prior underwriting years, partially offset by net unfavorable development from the 2002 underwriting year. Net favorable development in the North American clash class arose primarily from the 2004 through 2009 underwriting years. Net favorable development in the accident and health class arose primarily from the 2008 through 2012 underwriting years. Net unfavorable development in the North American occurrence class arose primarily from construction claims in the 2002 through 2005 and 2007 underwriting years, partially offset by net favorable development from the 2008 through 2012 underwriting years.
2014 versus 2013: The Casualty segment calendar year losses, excluding prior years' loss development, were $192.9 million and $219.1 million for the years ended December 31, 2014 and 2013, respectively. The calendar year loss ratios, excluding prior years' loss development, were 72.8% and 73.5% for the years ended December 31, 2014 and 2013, respectively. Calendar year losses and related loss ratios, excluding prior years' loss development, were impacted by changes in the mix of business.
2014 versus 2013: The Casualty segment net acquisition expenses were $66.4 million and $71.6 million for the years ended December 31, 2014 and 2013, respectively. The net acquisition expense ratios were 24.8% and 24.1% for the years ended December 31, 2014 and 2013, respectively. The decrease in net acquisition expenses was due to a decrease in earned premiums. The increase in the net acquisition expense ratio was primarily the result of an increase in ceding commissions on proportional business. The net acquisition expense ratio was also impacted by changes in the mix of business and the structure of the underlying reinsurance contracts.
2014 versus 2013: The Casualty segment other underwriting expenses were $22.0 million and $23.1 million for the years ended December 31, 2014 and 2013, respectively.
2013 versus 2012: The Casualty segment other underwriting expenses were $23.1 million and $22.9 million for the years ended December 31, 2013 and 2012, respectively.
The following table sets forth underwriting results, ratios and the change year over year for the Finite Risk segment for the years ended December 31, 2014, 2013 and 2012 ($ in thousands):
During the years ended December 31, 2014, 2013 and 2012, the in-force Finite Risk portfolio consisted of one contract. Due to the inverse relationship between losses and commissions for this segment, we believe it is important to evaluate the overall combined ratio, rather than its component parts of net loss and LAE ratio and net acquisition expense ratio. Due to the decline in premium volume in recent years, current year ratios may be significantly impacted by relatively small adjustments of prior years' reserves.
The Finite Risk segment generated 5.0%, 7.4% and 3.9% of our net premiums written for the years ended December 31, 2014, 2013 and 2012, respectively.
2014 versus 2013: Net premiums written decreased by $17.6 million for the year ended December 31, 2014 as compared with the year ended December 31, 2013. Net premiums written reflected a decrease to prior years' premium estimates of $0.5 million for the year ended December 31, 2014 and an increase of $9.2 million for the year ended December 31, 2013. Excluding the impact of changes to prior years' premium estimates, net premiums written decreased by $7.9 million. The change in both current and prior years' premium estimates relate to the one in-force contract.
Net premiums earned decreased by $5.7 million for the year ended December 31, 2014 as compared with the year ended December 31, 2013. Net premiums earned reflected a decrease to prior years' premium estimates of $0.5 million for the year ended December 31, 2014 and an increase of $4.6 million for the year ended December 31, 2013. Excluding the impact to prior years' premium, net premiums earned decreased by $0.6 million.
2014 versus 2013: Net investment income was $69.4 million and $72.0 million for the years ended December 31, 2014 and 2013, respectively. Net investment income decreased due to a decrease in the average book value of our investments, primarily due to share repurchases. We retained a high proportion of cash in our portfolio in order to manage the overall duration and provide ample liquidity. The average book yield for the portfolio of total investments and cash and cash equivalents was 2.1% for the year ended December 31, 2014 as compared with 2.0% for the year ended December 31, 2013.
2014 versus 2013: Net realized gains on investments were $2.8 million and $23.9 million for the years ended December 31, 2014 and 2013, respectively. Sales of investments resulted in net realized gains of $5.4 million for the year ended December 31, 2014 and included $2.8 million from the sale of municipal bonds, $1.5 million from the sale of corporate bonds and $0.6 million from the sale of U.S. government agencies. Also included in net realized gains for the year ended December 31, 2014 was a net negative impact from fair value adjustments on trading securities of $2.6 million related to non-U.S government securities.
The following table sets forth other revenues and expenses for the years ended December 31, 2014, 2013 and 2012 ($ in thousands):
Operating expenses not allocated to underwriting segments were $28.9 million and $27.2 million for the years ended December 31, 2014 and 2013, respectively. While operating expenses were comparable year over year, an increase in expenses related to the Merger were offset by a decrease in our annual incentive plan compensation expense, which is based on our annual return on equity. Expenses related to the Merger were approximately $2.1 million for the year ended December 31, 2014.
2013 versus 2012: Other income (expense) related primarily to changes in the fair value on our reinsurance deposit assets resulting in income of $3.6 million and $0.7 million for the years ended December 31, 2013 and 2012, respectively.
Operating expenses not allocated to underwriting segments were $27.2 million and $25.3 million for the years ended December 31, 2013 and 2012, respectively. The increase was due to an increase in our executive incentive plan compensation expense, which is based on our average annual return on equity over three years, partially offset by a decrease in our annual incentive plan compensation expense, which is based on our annual return on equity.
The income tax expense or benefit is primarily driven by the taxable income or loss generated by our U.S.-based subsidiaries. Our effective tax rate is primarily driven by the portion of taxable income or loss generated by our U.S.-based subsidiaries relative to the income or loss generated by our Bermuda-based operations, which are not subject to corporate income tax. Premiums earned by our U.S. and Bermuda-based subsidiaries generally do not bear a proportionate relationship to their respective pre-tax income for a variety of reasons, including the significant impact on pre-tax income of the different mixes of business underwritten by the particular subsidiary, the presence or absence of underwriting income or loss attributable to such business, and the investment results experienced by the particular subsidiary.
Pre-tax income was $123.4 million and $58.9 million in our Bermuda and U.S. companies, respectively, for the year ended December 31, 2014. Pre-tax income was $151.3 million and $106.9 million in our Bermuda and U.S. companies, respectively, for the year ended December 31, 2013.
Pre-tax income was $272.2 million and $80.3 million in our Bermuda and U.S. companies, respectively, for the year ended December 31, 2012.
Platinum Bermuda is not licensed, approved or accredited as a reinsurer in the United States and, therefore, under the terms of its contracts with U.S. ceding companies, it is required to provide collateral to its ceding companies for unpaid losses and LAE and unearned premiums in a form acceptable to state insurance regulators. Platinum Bermuda and Platinum US also provide reinsurance coverage in many international jurisdictions, several of which require them to provide collateral directly with regulators or ceding companies.
On February 10, 2015, Platinum Holdings' board of directors declared, subject to certain conditions, a special dividend of $10.00 per common share in connection with its pending Merger by RenaissanceRe. The special dividend would be payable prior to the effective time of the Merger on the closing date of the Merger to shareholders of record at the close of business on the last business day prior to the closing date. The special dividend is conditioned on the Merger having been approved by the shareholders of the Company at a special meeting of its shareholders on February 27, 2015 (or any adjournment or postponement thereof). The Merger is expected to occur on or after March 2, 2015, subject to the approval of shareholders of Platinum and the satisfaction of customary closing conditions. There can be no assurance that all such closing conditions will be satisfied by March 2, 2015 or at any time thereafter and thus there is no assurance that the Merger will occur. Platinum Holdings expects to incur approximately $22.0 million of expenses in 2015 associated with the Merger.
Platinum Holdings and Platinum Finance's sources of liquidity include cash and cash equivalents, liquid investments, potential borrowings from our syndicated credit facility, the potential issuance of securities, and dividends and other distributions from subsidiaries. Our reinsurance subsidiaries' sources of liquidity consist primarily of cash and cash equivalents, inflows of premiums, investment income, proceeds from the sales, maturities and paydowns of investments, capital contributions or potential borrowings from Platinum Holdings and Platinum Finance and potential borrowings from our syndicated credit facility.
As of December 31, 2014, we had consolidated cash and cash equivalents of $1.4 billion, including $113.8 million at Platinum Holdings and $248.1 million at Platinum Finance. We expect that Platinum Holdings' and Platinum Finance's liquidity needs for the next twelve months will be met by our cash and cash equivalents and available dividend capacity from our subsidiaries. We expect that our reinsurance subsidiaries' liquidity needs for the next twelve months will be met by our cash and cash equivalents, inflows of premiums, investment income and proceeds from the sales, maturities and paydowns of investments. The foregoing two sentences do not give effect to the consummation of the Merger.
On January 14, 2015, Platinum Bermuda paid a dividend of $240.0 million to Platinum Holdings.
The following table summarizes the cash provided by or used in our operating, investing and financing activities and the effect of foreign currency exchange rate changes on cash and cash equivalents for the years ended December 31, 2014, 2013 and 2012 ($ in thousands):
Cash provided by and used in operating activities fluctuates primarily as a result of the payment of losses and LAE and changes in volume and timing of premium receipts. Our reinsurance subsidiaries generally have liquidity from underwriting activities as premiums are received in advance of the time losses are paid. The period of time from the occurrence of a claim through the settlement of the liability may extend many years into the future. However, due to the nature of our reinsurance operations, cash flows are affected by the amount and timing of actual claim payments that can vary based on many factors, including the severity of individual losses, changes in the legal environment, foreign exchange rates and general market conditions. As a result of a reduction in premium volume and expected payment of losses and LAE, including the payment of losses from major catastrophe activity in the last several years, our operating cash flows may be negative for the next twelve months.
Net cash used in financing activities primarily related to repurchases of common shares of $215.7 million, $303.3 million and $115.7 million in 2014, 2013 and 2012, respectively.
Our investable assets consist of investments, cash and cash equivalents, accrued investment income and net balances due to and from brokers. Our investable assets credit quality is primarily measured by Moody's. If a particular security did not have a Moody's rating then a rating, generally from S&P, was converted to a Moody's equivalent rating. The following table sets forth our investment portfolio information as of December 31, 2014 and 2013:
The following table summarizes the fair value and unrealized gains or losses of our investments and cash and cash equivalents as of December 31, 2014 and 2013 ($ in thousands):
See Note 3 to the "Consolidated Financial Statements" in this Form 10-K for discussion of the fair value measurements of our financial assets and liabilities.
The following table provides additional detail on the fair value and amortized cost of our portfolio of non-U.S. government fixed maturity available-for-sale securities, fixed maturity trading securities and short-term investments converted to U.S. dollars as of December 31, 2014 ($ in thousands):
In addition to the investments noted above, we held non-U.S. dollar denominated cash and cash equivalents of $92.1 million as of December 31, 2014. Non-U.S. dollar investments and cash and cash equivalents are generally held for the purpose of hedging our net non-U.S. dollar denominated reinsurance liabilities.
The net unrealized gain position of our municipal bond and corporate bond portfolios was $89.7 million and $5.9 million, respectively, as of December 31, 2014 as compared with $48.4 million and $3.1 million, respectively, as of December 31, 2013. The increase in the net unrealized gain position in our municipal bond portfolio was the result of a decrease in interest rates and a tightening of credit spreads. We analyze the creditworthiness of our municipal bond and corporate bond portfolios by reviewing various performance metrics of the issuer, including financial condition, credit ratings and other public information.
The net unrealized gain position of our CMBS portfolio was $3.1 million as of December 31, 2014 as compared with $4.9 million as of December 31, 2013. We analyze our CMBS on a periodic basis using default loss models based on the performance of the underlying loans. Performance metrics include delinquencies, defaults, foreclosures, debt-service-coverage ratios and cumulative losses incurred. The expected losses for a mortgage pool are compared with the current level of credit support, 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. As of December 31, 2014, our CMBS portfolio consists primarily of senior tranches of CMBS with high credit ratings and strong credit support.
We have an LOC facility with a financial institution in the aggregate amount of $100.0 million available for the issuance of LOC to support reinsurance obligations of our reinsurance subsidiaries. We also have the ability to request an uncommitted LOC facility of up to $150.0 million subject to agreement with the lender.
We had no revolving borrowings under the Syndicated Credit Facility during the years ended December 31, 2014 and 2013. The following table summarizes the outstanding LOC as of December 31, 2014 ($ in thousands):
The credit capacity of $675.0 million consists of $410.9 million of committed capacity and $264.1 million of uncommitted capacity. The Company also has the ability to increase the Syndicated Credit Facility and other LOC facilities by up to $175.0 million subject to agreement with the lenders. We are in compliance with all of the covenants under our credit facilities.
Platinum Holdings and its subsidiaries are subject to certain legal and regulatory restrictions in their respective jurisdictions of domicile. The legal restrictions generally include the requirement to maintain positive net assets and to be able to pay liabilities as they become due. For more details on these restrictions, see Item 1, "Business - Regulation", in this Form 10-K. Regulatory restrictions on dividends are described below.
Pursuant to the terms of the Merger Agreement, Platinum Holdings is prohibited from declaring or paying any dividend or making other distributions on its share capital, other than (i) dividends or distributions paid by a wholly owned subsidiary to it or its subsidiaries, (ii) quarterly cash dividends in the ordinary course of business on Platinum Holdings' common shares with record and payment dates consistent with past practice, in an amount not to exceed $0.08 per common share per quarter and (iii) the special dividend contemplated by the Merger Agreement.
In addition, on February 10, 2015, Platinum Holdings' board of directors declared, subject to certain conditions, a special dividend of $10.00 per common share in connection with its pending Merger by RenaissanceRe. The special dividend would be payable prior to the effective time of the Merger on the closing date of the Merger to shareholders of record at the close of business on the last business day prior to the closing date. The special dividend is conditioned on the Merger having been approved by the shareholders of the Company at a special meeting of its shareholders on February 27, 2015 (or any adjournment or postponement thereof). The Merger is expected to occur on or after March 2, 2015, subject to the approval of shareholders of Platinum and the satisfaction of customary closing conditions. There can be no assurance that all such closing conditions will be satisfied by March 2, 2015 or at any time thereafter and thus there is no assurance that the Merger will occur.
The laws and regulations of Bermuda and the United States include certain restrictions on the amount of statutory capital and surplus that are available for the payment of dividends by Platinum Bermuda and Platinum US to their respective parent companies, Platinum Holdings and Platinum Finance.
As of December 31, 2014 and 2013, our capital resources of $2.0 billion consisted of $1.7 billion of common shareholders' equity and $250.0 million of debt obligations. The decrease in capital of $8.7 million during the year ended December 31, 2014 was primarily attributable to repurchases of common shares of $215.7 million, offset by net income of $164.8 million and the increase in net unrealized gains, net of tax, of $44.6 million.
We do not have any material commitments for capital expenditures as of December 31, 2014.
The shares we repurchased were canceled. As of December 31, 2014, we had $110.1 million remaining under the share repurchase program. Pursuant to the terms of the Merger Agreement, the Company is prohibited from repurchasing its common shares without the prior written consent of RenaissanceRe.
Since 2007, we have repurchased 46,799,289 shares and purchased 8,500,000 share options for an aggregate amount of $1.9 billion and $146.4 million, respectively.
The timing and amount, if any, of repurchase transactions depend on a variety of factors, including prevailing market conditions, our liquidity requirements, contractual restrictions, corporate and regulatory considerations and other factors.
Pursuant to the terms of the Merger Agreement, the Company is also prohibited from repurchasing its Series B 7.5% Notes without the prior written consent of RenaissanceRe. See Item 5, "Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" in this Form 10-K.
See Note 13 to the "Consolidated Financial Statements" contained elsewhere in this Form 10-K.
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 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, 2014. There are reinsurance contracts that have terms extending into future years under which additional obligations will be incurred.
Our consolidated financial statements as of December 31, 2014 and 2013 and for each of the years in the three-year period ended December 31, 2014, together with the report thereon by KPMG Audit Limited, our independent registered public accounting firm, are set forth on pages through hereto.
The schedules relating to our consolidated financial statements as of December 31, 2014 and 2013 and for each of the years in the three-year period ended December 31, 2014, together with the independent registered public accounting firm report thereon, are set forth on pages S-1 through S-9 hereto. Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X or information required is provided elsewhere in the consolidated financial statements.