Platinum Holdings and Platinum Bermuda lease office space in Pembroke, Bermuda, where our principal executive office is located. Platinum US and Platinum Administrative Services, Inc. lease office space in New York, New York. In addition, Platinum US leases office space in Chicago, Illinois and Platinum Administrative Services, Inc. leases office space in Stamford, Connecticut. We renew and enter into new leases in the ordinary course of business and anticipate no difficulty in extending our leases or obtaining comparable office facilities in suitable locations. We consider our facilities to be adequate for our current needs.
The following table sets forth certain of our selected financial data as of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009. Our data as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 were derived from our consolidated financial statements beginning on page of this Form 10-K. Our data as of December 31, 2011, 2010 and 2009 and for the years ended December 31, 2010 and 2009 were derived from our audited consolidated financial statements not included in this Form 10-K. The selected financial data should be read in conjunction with our consolidated financial statements as of December 31, 2013 and 2012 and for each of the years in the three-year period ended December 31, 2013 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 39 of this Form 10-K.
In presenting the Company's results in the table above as well as in Item 1, “Business” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K, management has included financial measures that are not calculated under standards and rules that comprise U.S. GAAP. Such measures, including underwriting income or loss and related underwriting ratios, book value per common share and fully converted book value per common share, are referred to as non-GAAP measures. These non-GAAP measures may be defined or calculated differently by other companies. Management believes these measures allow for a more complete understanding of the underlying business. In addition, return on equity is used as a financial performance measure in determining compensation, as discussed in items incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2014 Annual General Meeting of Shareholders (our “Proxy Statement”). 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.
The Company believes that underwriting income or loss and ratios allow for a more complete understanding of the profitability of our reinsurance operations and operating segments. Underwriting income or loss consists of net premiums earned less net losses and LAE and net underwriting expenses. Net underwriting expenses include net acquisition expenses and operating costs related to underwriting. Underwriting income or loss excludes revenues and expenses related to net investment income, net realized gains or losses on investments, net impairment losses on investments, corporate expenses not allocated to underwriting operations, interest expense, net foreign currency exchange gains or losses, net changes in fair value of derivatives and other income and expense.
The following table sets forth the calculation of return on equity for the years ended December 31, 2013, 2012 and 2011, respectively ($ in thousands):
Return on equity was 12.9%, 20.2% and (12.1%) for the years ended December 31, 2013, 2012 and 2011, respectively. Book value per share grew to $62.07 as of December 31, 2013, an increase of 7.2% from $57.90 as of December 31, 2012.
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.
The cyclical trends in the industry and the industry’s profitability can also be affected significantly by volatile and unpredictable developments, including what management believes to be a trend of courts to grant increasingly larger awards for certain damages, natural disasters (such as catastrophic hurricanes, windstorms, tornadoes, earthquakes and floods), acts of terrorism, fluctuations in interest rates, changes in the investment environment that affect market prices of and income and returns on investments and inflationary pressures that may tend to affect the size of losses experienced by primary insurers. Unfavorable market conditions may affect our ability to write reinsurance at rates that we consider appropriate relative to the risk assumed. These factors influence the total supply of underwriting capacity in the market which tends to drive the cyclical nature of the business.
In 2012 and 2013, 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’ already strong 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, 2014 and smaller but still significant reductions in other property and marine and casualty lines of business.
Competition in recent years has increased as a result of 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.
As noted above, property and casualty reinsurance business is a cyclical business. Presently, we appear to be in a phase of the cycle characterized by excess underwriting capacity. Below average insured losses from major catastrophes and an influx of capacity during 2013 had a destabilizing effect on rates for reinsurance business written in the second half of 2013 and at January 1, 2014. Ample capacity exists for all lines of business, pressuring rates down and expanding terms and conditions. In many lines of business we are approaching the minimum level of premium we would expect in order for such business to provide appropriate returns. We may write less premium in 2014 than we currently anticipate if there is a pervasive decrease in pricing and continued expansion of terms and conditions.
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 2014 will be similar to our current in-force book of business. 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 the Finite Risk segment, we expect only minor activity for 2014, reflecting a continued lack of demand for finite risk covers, and we will continue focusing our efforts on our other lines of business.
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that are inherently subjective in nature that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. Actual results may differ materially from these estimates. The critical accounting estimates used in the preparation of our consolidated financial statements include premiums written and earned, unpaid losses and LAE, valuation of investments and income taxes. In addition, estimates are used in our risk transfer analysis for assumed and ceded reinsurance transactions.
When estimating premiums written and earned premiums, we segregate the business into classes by reinsurance subsidiary, by type of coverage and by type of contract (resulting in approximately 65 classes). Within each class, business is further segregated by the year in which the contract incepted (the “Underwriting Year”), starting with 2002, our first year of operations. Classes that are similar in both the nature of their business and estimation process may be grouped for purposes of estimating premiums. Estimates are made for each class or group of classes and Underwriting Year. Premiums are estimated based on ceding company estimates and our own judgment after considering factors such as: (1) the ceding company’s historical premium versus projected premium, (2) the ceding company’s history of providing accurate estimates, (3) anticipated changes in the marketplace and the ceding company’s competitive position therein, (4) reported premiums to date and (5) the anticipated impact of proposed underwriting changes. Estimates of ultimate premium are made by our underwriters for each contract and Underwriting Year. Management aggregates these estimates by class and Underwriting Year and reviews them with our underwriters and actuaries and selects an ultimate premium estimate. Estimates of premiums written and earned are based on the selected ultimate premium estimate, the terms and conditions of the reinsurance contracts and the remaining exposure from the underlying policies. We evaluate the appropriateness of these estimates in light of the actual premium reported by the ceding companies, information obtained during audits and other information received from ceding companies.
The following table sets forth our estimated and reported premiums receivable and unearned premiums as of December 31, 2013 and 2012, respectively ($ in thousands):
We may record an allowance for uncollectible premiums if we believe an allowance is appropriate in light of our historical experience, the general profile of our ceding companies and our ability to contractually offset premiums receivable against losses and LAE and commission amounts payable to the same parties.
We receive information from ceding companies regarding our liability for unpaid losses and LAE. This information varies but typically includes information regarding the ceding company’s paid losses and case reserves and may include a ceding company’s estimate of IBNR. We may increase or decrease case reserves based on receipt of additional information from the ceding companies. Adjustments that we make to reported case reserves are generally referred to as “additional case reserves.”
Includes $223.6 million and $403.3 million of reserves related to major catastrophes as of December 31, 2013 and 2012, respectively.
Since we rely on information regarding paid losses, case reserves and sometimes IBNR provided by ceding companies in estimating our ultimate liability for unpaid losses and LAE, we perform certain procedures in order to help determine the completeness and accuracy of such information. Periodically, management assesses the reporting activities of these ceding companies on the basis of qualitative and quantitative criteria. These procedures include conferring with ceding companies or brokers on claims matters. Our claims personnel, or consultants engaged by us, may also conduct periodic audits of our ceding companies to: (1) review and establish the validity of specific claims, (2) determine that case reserves established by the ceding company are reasonable, (3) determine there is consistency in claim reporting from period to period, and (4) assess the overall claims practices and procedures of the ceding company. We also monitor the claims handling and reserving practices of ceding companies in order to help establish the reinsurance premium for reinsurance contracts with such ceding companies.
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.
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 $223.6 million, which represented 13% of our total unpaid losses and LAE, as of December 31, 2013.
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.
For additional information on major catastrophe events for which we have established specific reserves in 2013, 2012 and 2011 see the “Results of Operations” set forth below in this Form 10-K.
The initial expected loss ratios are key inputs to our loss estimation process and are derived from historical data and involve a high degree of judgment. The selection of the initial expected loss ratios also takes into account management’s view of past, current and future factors that may influence expected ultimate losses. Because of the high degree of judgment required in establishing initial expected loss ratios, there is uncertainty in the resulting estimates.
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 claims to the broker who in turn reports to us. As of December 31, 2013, 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.
We regularly engage internationally recognized independent actuarial firms to review our unpaid losses and LAE. Actuarial reviews were performed in 2006, 2009 and 2012 by independent actuarial firms. Each of these reviews provided a low and a high estimate of the Company’s unpaid losses and LAE and indicated that the Company’s loss reserves at the time of the review were within the low and high estimates indicated by the review. In 2012, the Company engaged the independent actuarial firm that had performed the 2006 review to perform an actuarial review of all reserving classes and engaged the independent actuarial firm that had performed the 2009 review to perform a separate review of certain North American casualty classes.
In the 2012 actuarial review, the Company’s unpaid losses and LAE as of March 31, 2012 were at the high end of the range of reasonable estimates provided by the independent actuarial firm, mainly due to two factors: (1) the shorter loss development patterns used by the independent actuarial firm and (2) faster recognition of favorable reported loss experience by the independent actuarial firm in the selection of ultimate loss ratios. We incorporated these factors in developing alternative indications of ultimate losses, which, together with the favorable variance in reported losses, led to significant favorable development of our loss reserves for prior years.
We believe incorporating earlier recognition of favorable variances may result in more volatility in our reserve for unpaid losses and LAE than we have previously experienced.
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. During the years ended December 31, 2013, 2012 and 2011, changes in the initial expected loss ratio and the loss development patterns resulted in net favorable loss development of $18.2 million, $26.0 million and $5.6 million, respectively.
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, 2013 was $644.8 million, 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 69% to 74%, we would increase the IBNR for these classes by $41.4 million, which represents approximately 4% of unpaid losses and LAE for these classes as of December 31, 2013, or if we increased the initial expected loss ratio for these classes by 10% from 69% to 79%, we would increase the IBNR for these classes by $81.7 million, which represents approximately 9% of unpaid losses and LAE for these classes as of December 31, 2013.
As another example of key assumption sensitivity, if we shortened 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 $75.4 million, which represents approximately 8% of unpaid losses and LAE for these classes as of December 31, 2013, or if we shortened the loss development patterns by 10%, we would decrease the IBNR for these classes by $130.2 million, which is approximately 14% of unpaid losses and LAE for these classes as of December 31, 2013.
The valuation process for our financial assets and liabilities, comprised primarily of our investments, requires significant judgment and involves analyzing specific factors relating to each security. When determining the fair value of a security we generally obtain prices from several sources and establish a hierarchy based on the reliability of information. The determination of whether unrealized losses represent temporary changes in fair value or were the result of other than temporary impairments also involves judgment.
Valuations are based on prices obtained from index providers, independent pricing vendors or broker-dealers using observable inputs for financial assets and liabilities; and
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.
Generally, pricing sources determine prices by maximizing the use of observable inputs to determine the fair value measurement. The inputs used by index providers may include, but are not limited to, benchmark yields, transactional data, broker-dealer quotes, security cash flows and structures, credit ratings, prepayment speeds, loss severities, credit risks and default rates. The inputs used by pricing vendors may include, but are not limited to, benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids, offers and industry and economic events. The inputs used by broker-dealers may include, but are not limited to, trade data, bids or offers and other market data.
We believe that the estimated fair value of our investments is representative of the securities in our portfolio. However, our estimate of fair value of a particular security may differ materially from the amount that could be realized if the security was sold immediately. In addition, when financial markets experience a reduction in liquidity, we may obtain prices for a specific security that have a larger dispersion across price sources and our ability to conduct orderly investment transactions may be limited.
For further discussion on fair values of investments see “Financial Condition - Liquidity - Sources of Liquidity” in this Form 10-K.
We routinely review our available-for-sale investments to determine whether unrealized losses represent temporary changes in fair value or are the result of an 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 of time and magnitude of an unrealized loss, specific credit events, changes in credit ratings, the collateral structure, the credit support that may be applicable, discussions with our investment managers and other public information.
We also consider our intent to sell available-for-sale securities and the likelihood that we will be required to sell these securities before an unrealized loss is recovered. Our intent to sell a security is based, in part, on adverse changes in the creditworthiness 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 a security, representing the difference between the security’s amortized cost and its fair value, is recognized as a net impairment loss in the consolidated statements of operations at the time we determine our intent is to sell.
Net deferred tax assets were $25.1 million and $22.8 million for the years ended December 31, 2013 and 2012, respectively. At each balance sheet date, we evaluate the recoverability of the net deferred tax assets, considering the timing of the reversal of deferred income and expense items as well as the likelihood that we will generate sufficient taxable income to realize the future tax benefits. We believe that it is more likely than not we will generate sufficient taxable income and realize the future tax benefits in order to recover the deferred assets and accordingly, no valuation allowance was established as of December 31, 2013 and 2012. See Note 8 to the “Consolidated Financial Statements” contained elsewhere in this Form 10-K for additional information on income taxes.
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.
Generally, an event causing more than $1 billion of property losses to the insurance industry or $10 million of property losses to the Company is considered and tracked as a major catastrophe. Net losses from major catastrophes consist of gross losses and LAE, net of any retrocessional recoveries and reinstatement premiums earned.
Net favorable or unfavorable development is the development of prior years’ unpaid losses and LAE and the related impact of premiums and commissions. Net favorable or unfavorable loss development, the unpaid losses and LAE component of net favorable or unfavorable development, excludes the related impact of premiums and commissions.
Net income (loss) and diluted earnings (loss) per common share for the years ended December 31, 2013, 2012 and 2011 were as follows ($ and amounts in thousands, except diluted earnings (loss) per common share):
2012 versus 2011: The net income and diluted earnings per common share for the year ended December 31, 2012 as compared with the net loss and diluted loss per common share for the year ended December 31, 2011 was primarily due to an increase in the net underwriting result attributable to a significant decrease in net losses from current year major catastrophes and an increase in net favorable development. In addition, there was an increase in net realized gains on investments and a decrease in net impairment losses on investments, partially offset by a decrease in net investment income and higher income taxes. As the year ended December 31, 2011 resulted in a net loss, the basic weighted average common shares outstanding is used in the denominator of the diluted loss per common share computation.
2013 versus 2012: Net underwriting income was $206.7 million and $212.2 million for the years ended December 31, 2013 and 2012, respectively. The change in the net underwriting result reflected a decrease in net favorable development, offset by a decrease in net losses from current year major catastrophes and underwriting income on our 2013 North American crop business as compared with an underwriting loss on our 2012 North American crop business.
2012 versus 2011: Net underwriting income was $212.2 million for the year ended December 31, 2012, which compares with net underwriting loss of $296.7 million for the year ended December 31, 2011. The change in the net underwriting result was due primarily to a significant decrease in net losses from current year major catastrophes and an increase in net favorable development.
The following table sets forth underwriting results, ratios and the change year over year for the Property and Marine segment for the years ended December 31, 2013, 2012 and 2011 ($ in thousands):
2013 versus 2012: The Property and Marine segment underwriting result improved by $62.8 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012, primarily due to a decrease in net losses from current year major catastrophes, an increase in net favorable development and underwriting income on our 2013 North American crop business as compared with an underwriting loss on our 2012 North American crop business in 2012.
2012 versus 2011: The Property and Marine segment underwriting result improved by $403.6 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011, primarily due to a decrease in net losses from current year major catastrophes. Net losses from current year major catastrophes were $68.9 million and $510.0 million for the years ended December 31, 2012 and 2011, respectively. Net losses from 2011 major catastrophes for the year ended December 31, 2011 were primarily attributable to the February and June earthquakes in New Zealand, the Tohoku earthquake in Japan, U.S. tornadoes and the floods in Thailand.
The Property and Marine segment generated 40.5%, 45.3% and 52.9% of our net premiums written for the years ended December 31, 2013, 2012 and 2011, respectively.
2012 versus 2011: The Property and Marine segment gross premiums written decreased by $119.6 million, and by $99.0 million excluding reinstatement premiums written related to major catastrophes, for the year ended December 31, 2012 as compared with the year ended December 31, 2011. The decrease in gross premiums written was due to decreases across most classes of business, most significantly in the catastrophe and crop classes as compared with 2011, and resulted from fewer opportunities that met our underwriting standards and our desire to reduce our exposure to catastrophe events.
The Property and Marine segment net losses and LAE include current year major catastrophe losses, prior years’ loss development and calendar year losses, excluding current year major catastrophes and prior years’ loss development. The following table sets forth the components of net losses and LAE for the years ended December 31, 2013, 2012 and 2011 ($ in thousands):
2012 versus 2011: Net losses and LAE decreased by $495.5 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011. The improvement in net losses and LAE was primarily due to a decrease in net losses from current year major catastrophes of $461.7 million and a decrease in non-major catastrophe losses, partially offset by underwriting losses on our 2012 North American crop business as a result of the severe drought conditions in the United States.
Any favorable or unfavorable development related to these major catastrophes subsequent to December 31, 2011 is included in prior years’ loss development, as described below, for the major catastrophe class of business.
2012 versus 2011: The Property and Marine segment net favorable loss development was $45.7 million and $41.4 million for the years ended December 31, 2012 and 2011, respectively. Net favorable loss development and related premium adjustments decreased the net loss and LAE ratio by 19.2 points and 11.2 points for the years ended December 31, 2012 and 2011, respectively. Net favorable loss development for the years ended December 31, 2012 and 2011 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.
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. Net favorable development in the crop class arose primarily from the 2012 underwriting year.
Net favorable development in the major catastrophes class arose primarily from the February 2010 earthquake in Chile, the September 2010 earthquake in New Zealand and the December 2010 floods in Australia. Net favorable development in the property per risk class arose from the 2007 through 2010 underwriting years. Net favorable development in the property proportional class arose primarily from the 2008 and 2009 underwriting years, with a change in the initial expected loss ratios contributing $0.7 million of the net favorable development. Net favorable development in the crop class arose primarily from North American business in the 2010 underwriting year. Net favorable development in the marine, aviation and satellite class arose primarily from the 2007 and 2008 underwriting years. This was partially offset by unfavorable development in the 2009 underwriting year primarily from the loss related to the explosion on the Deepwater Horizon oil rig. Net unfavorable development in the catastrophe excess-of-loss (non-major events) class arose primarily from an increase in loss advices from ceding companies related to fourth quarter 2010 events in Europe and Australia, partially offset by an improvement in North American and international business prior to 2010.
2013 versus 2012: The Property and Marine segment net acquisition expenses and related net acquisition expense ratios were $38.3 million and 17.3%, respectively, for the year ended December 31, 2013 and $34.3 million and 13.5%, respectively, for the year ended December 31, 2012. The increase in net acquisition expenses and the net acquisition expense ratio for the year ended December 31, 2013 as compared with 2012 was primarily due to one new contract in the property proportional class that has a higher acquisition expense ratio than the remainder of the segment. Net acquisition expenses and related net acquisition expense ratios were also impacted by other changes in the mix of business.
2012 versus 2011: The Property and Marine segment net acquisition expenses and related net acquisition expense ratios were $34.3 million and 13.5%, respectively, for the year ended December 31, 2012 and $49.3 million and 13.8%, respectively, for the year ended December 31, 2011. The decrease in net acquisition expenses was primarily due to the decrease in net premiums earned as compared with the same period in 2011. Net acquisition expenses and related net acquisition expense ratios were also impacted by changes in the mix of business.
2013 versus 2012: The Casualty segment net premiums written increased by $8.6 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012. Net premiums written in the years ended December 31, 2013 and 2012 were impacted by increases to prior years’ premium estimates of $32.7 million and $34.8 million, respectively. Excluding the impact of increases to prior years’ premium estimates, net premiums written increased by $10.7 million, primarily due to more opportunities in the accident and health class, partially offset by a decrease in North American casualty excess-of-loss business due to fewer opportunities that met our underwriting standards.
Net premiums earned increased by $3.8 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012. Net premiums earned increased as a result of the increases in net premiums written in the current period. Net premiums written and earned were also impacted by changes in the mix of business and the structure of the underlying reinsurance contracts.
2012 versus 2011: The Casualty segment net premiums written decreased by $9.9 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011. Net premiums written in the years ended December 31, 2012 and 2011 were impacted by increases to prior years’ premium estimates of $34.8 million and $21.5 million, respectively. Excluding the impact of increases to prior years’ premium estimates, net premiums written decreased by $23.2 million primarily due to fewer opportunities that met our underwriting standards across most classes.
The Casualty segment net losses and LAE include prior years’ loss development and calendar year losses, excluding prior years’ loss development. The following table sets forth the components of net losses and LAE for the years ended December 31, 2013, 2012 and 2011 ($ in thousands):
Net favorable development in the North American claims made class arose primarily from the 2003 through 2007 underwriting years. Net favorable development in the North American umbrella class arose primarily from the 2003 through 2008 underwriting years. The net favorable development in the 2008 underwriting year 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. Net favorable development in the North American occurrence excess-of-loss class arose primarily from the 2002 through 2007 underwriting years, with a change in the loss development patterns contributing approximately $2.1 million of net favorable development. Net favorable development in the financial lines class arose primarily from North American surety business across most prior underwriting years, with a change in the loss development patterns resulting in approximately $1.5 million of net favorable development. Net unfavorable development in the accident and health class arose primarily from the 2004 through 2006 underwriting years, partially offset by favorable development on the 2008 underwriting year. Net unfavorable development in the international casualty class arose primarily from the 2008 and 2010 underwriting years arising from wildfires in Australia and energy related claims in the United States written under global covers. This was partially offset by favorable development from the 2005 and 2006 underwriting years. Changes in the loss development patterns in this class resulted in approximately $1.6 million of net favorable development.
2013 versus 2012: The Casualty segment calendar year losses, excluding prior years’ loss development, were $219.1 million and $225.8 million for the years ended December 31, 2013 and 2012, respectively. The calendar year loss ratios, excluding prior years’ loss development, were 73.5% and 77.4% for the years ended December 31, 2013 and 2012, respectively. The decrease in calendar year losses and the related loss ratios, excluding prior years’ loss development, was primarily due to lower initial expected loss ratio estimates in the current year for several North American casualty classes as we lowered our estimates as a result of better than expected historical loss experience. Also, there was a lower loss ratio in the financial lines class in 2013 as compared with 2012. Calendar year losses and related loss ratios, excluding prior years’ loss development, were also impacted by changes in the mix of business.
2012 versus 2011: The Casualty segment calendar year losses, excluding prior years’ loss development, were $225.8 million and $238.1 million for the years ended December 31, 2012 and 2011, respectively. The calendar year loss ratios, excluding prior years’ loss development, were 77.4% and 74.8% for the years ended December 31, 2012 and 2011, respectively. The increase in calendar year losses and the related loss ratios, excluding prior years’ loss development, was impacted by an increase in the financial lines loss ratio as compared with 2011. Calendar year losses and related loss ratios, excluding prior years’ loss development, were impacted by changes in the mix of business.
2013 versus 2012: The Casualty segment net acquisition expenses and related net acquisition expense ratios were $71.6 million and 24.1%, respectively, for the year ended December 31, 2013 and $69.0 million and 23.5%, respectively, for the year ended December 31, 2012. The increase in net acquisition expenses and the net acquisition expense ratio for the year ended December 31, 2013 as compared with 2012 was the result of changes in the mix of business.
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. While operating expenses were comparable year over year, a decrease in our annual incentive plan compensation expense, which is based on our current year return on equity, was offset by an increase in our executive incentive plan compensation expense, which is based on our average annual return on equity over three years.
2012 versus 2011: The Casualty segment other underwriting expenses were $22.9 million and $19.0 million for the years ended December 31, 2012 and 2011, respectively. The increase was primarily the result of an increase in performance-based compensation accruals in 2012 versus 2011.
The following table sets forth underwriting results, ratios and the change year over year for the Finite Risk segment for the years ended December 31, 2013, 2012 and 2011 ($ in thousands):
The Finite Risk segment generated 7.4%, 3.9% and 1.5% of our net premiums written for the years ended December 31, 2013, 2012 and 2011, respectively.
2012 versus 2011: Net premiums written increased by $11.9 million for the year ended December 31, 2012 as compared with the year ended December 31, 2011. Net premiums written in the year ended December 31, 2012 were impacted by increases to prior years’ premium estimates of $5.8 million compared to decreases to prior years’ premiums estimates of $0.6 million for the year ended December 31, 2011. Excluding the impact of increases to prior years’ premium estimates, net premiums written increased by $5.5 million. The changes in both current and prior years’ premium estimates relate to the one in-force contract.
2013 versus 2012: Net investment income was $72.0 million and $99.9 million for the years ended December 31, 2013 and 2012, respectively. Net investment income decreased during the year ended December 31, 2013 as compared with 2012 primarily from a decrease in the average book yield for the portfolio of total investments and cash and cash equivalents from 2.6% to 2.0%. The change in the average book yield reflects purchases, sales, maturities and paydowns. We retained a high proportion of cash in our portfolio in order to manage the overall duration and provide ample liquidity. Contributing to the decrease in investment income was a reduction of approximately $324.6 million in the average book value of our investments and cash and cash equivalents for the year ended December 31, 2013 as compared with 2012, primarily due to share repurchases, dividend payments and negative operating cash flows.
Sales of investments resulted in net realized gains of $90.1 million for the year ended December 31, 2012 and included $68.0 million from the sale of municipal bonds, $9.6 million from the sale of CMBS and $9.2 million from the sale of corporate bonds. Also included in net realized gains for the year ended December 31, 2012 was a net negative impact from fair value adjustments on trading securities of $1.3 million related to non-U.S government securities.
2012 versus 2011: Net realized gains on investments were $88.8 million and $3.9 million for the years ended December 31, 2012 and 2011, respectively. Sales of investments resulted in net realized gains of $1.4 million for the year ended December 31, 2011 primarily from U.S. Treasury Inflation-Protected Securities and corporate bonds partially offset by realized losses from U.S. Government securities. Also included in net realized gains for the year ended December 31, 2011 was a net positive impact from fair value adjustments on trading securities of $2.5 million related primarily to non-U.S government securities, partially offset by insurance-linked securities.
2013 versus 2012: Net impairment losses on investments were $2.0 million and $3.0 million for the years ended December 31, 2013 and 2012, respectively. The net impairment losses recorded for the year ended December 31, 2013 included $1.4 million related to non-agency residential mortgage-backed securities (“RMBS”) and $0.6 million related to sub-prime asset-backed securities (“ABS”). Substantially all net impairment losses recorded for the year ended December 31, 2012 related to non-agency RMBS.
2012 versus 2011: Net impairment losses on investments were $3.0 million and $22.4 million for the years ended December 31, 2012 and 2011, respectively. The net impairment losses recorded for the year ended December 31, 2011 reflected our revised assumptions regarding macroeconomic conditions in the United States, including the outlook for home prices, and included $19.0 million related to non-agency RMBS and $3.4 million related to sub-prime ABS.
Interest expense was $19.1 million for both the years ended December 31, 2013 and 2012 and related to our $250.0 million of debt obligations
Operating expenses not allocated to underwriting segments were $25.3 million and $15.6 million for the years ended December 31, 2012 and 2011, respectively. The increase was primarily due to higher performance-based compensation accruals in 2012 compared with 2011.
Letters of credit issued by financial institutions. See “Sources of Liquidity - Credit Facilities” below for additional information on our credit facilities, letters of credit issued and the collateral required by us under these facilities as at December 31, 2013;
Pledged assets or trust accounts. As of December 31, 2013, investments of $5.8 million were pledged to U.S. regulatory authorities and investments of $58.7 million and cash and cash equivalents of $12.6 million were pledged to collateralize obligations under various reinsurance contracts; and
Net cash used in operating activities in 2013, 2012 and 2011 was primarily due to the payment of losses and LAE and a reduction in premium volume in recent years. Our reinsurance subsidiaries generally have liquidity from underwriting activities as premiums are received in advance of the time losses are paid. The period of time from the occurrence of a claim through the settlement of the liability may extend many years into the future. However, due to the nature of our reinsurance operations, cash flows are affected by the amount and timing of actual claim payments that can vary based on many factors, including the severity of individual losses, changes in the legal environment, foreign exchange rates and general market conditions. As a result of a reduction in premium volume and expected payment of losses and LAE, including the payment of losses from major catastrophe activity in the last several years, we anticipate that our operating cash flows will be negative for at least the next twelve months.
Our investable assets consist of investments, cash and cash equivalents, accrued investment income and net balances due from brokers. Our investable assets credit quality is primarily measured by Moody’s. If a particular security did not have a Moody’s rating then a rating generally from S&P was converted to a Moody’s equivalent rating. The following table sets forth our investment portfolio information as of December 31, 2013 and 2012:
The following table summarizes the fair value and unrealized gains or losses of our investments and cash and cash equivalents as of December 31, 2013 and 2012 ($ in thousands):
In addition to the investments noted above, we held non-U.S. dollar denominated cash and cash equivalents of $101.5 million as of December 31, 2013. These investments and cash and cash equivalents are generally held for the purpose of hedging our net non-U.S. dollar denominated reinsurance liabilities.
As of December 31, 2013, there were approximately $10.7 million and $4.4 million of municipal bonds for which ratings of “Aa” and “A”, respectively, included the benefit of guarantees from third-party insurers that would otherwise be rated as “A” and “Baa”, respectively, without the existence of such guarantees.
The net unrealized gain position of our municipal bond and corporate bond portfolios was $48.4 million and $3.1 million, respectively, as of December 31, 2013 as compared with a net unrealized gain position of our municipal bond and corporate bond portfolios of $129.7 million and $20.9 million, respectively, as of December 31, 2012. The decreases in the net unrealized gain position in our municipal bond and corporate bond portfolios were the result of increases in treasury yields and realized gains from sales activities, partially offset by a tightening of credit spreads. We analyze the creditworthiness of our municipal bond and corporate bond portfolios by reviewing various performance metrics of the issuer, including financial condition, credit ratings and other public information.
The following table sets forth the amortized cost and fair value of our fixed maturity available-for-sale and trading securities by stated maturity as of December 31, 2013 ($ in thousands):
On June 24, 2011, we entered into an amended and restated three-year, $300.0 million credit facility with various financial institutions (the "Syndicated Credit Facility") that consists of a $100.0 million unsecured senior credit facility available for revolving borrowings and letters of credit (“LOC”) and a $200.0 million secured senior credit facility available for LOC. Borrowings and LOC under the Syndicated Credit Facility are available for the working capital, liquidity and general corporate requirements of Platinum Holdings, Platinum Finance and our reinsurance subsidiaries. Platinum Holdings and Platinum Finance have unconditionally guaranteed the obligations of our reinsurance subsidiaries under the Syndicated Credit Facility.
On July 2, 2013, Platinum Bermuda entered into an amended and restated uncommitted LOC facility that increased the maximum aggregate amount of the facility to $125.0 million. Under the terms of the facility, up to $125.0 million is available for the issuance of LOC to support reinsurance obligations of Platinum Bermuda. There was $11.6 million committed under this facility as of December 31, 2013. The facility contains customary representations, warranties and covenants.
As of December 31, 2013, we were 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.
Platinum US is required to notify its regulator, the Maryland Insurance Administration, 10 days prior to the payment of an ordinary dividend and 30 days prior to the payment of an extraordinary dividend. During 2013, Platinum US utilized its ordinary dividend capacity and paid an extraordinary dividend. In 2014, Platinum US will have an ordinary dividend capacity of $25.6 million.
There are no regulatory restrictions on retained earnings available for the payment of dividends by Platinum Finance to Platinum Regency or by Platinum Regency to Platinum Holdings. Irish law prohibits Platinum Regency from declaring a dividend to its shareholders unless it has “profits available for distribution”. The determination of whether a company has profits available for distribution is based on its accumulated profits, not previously distributed or capitalized, less its accumulated realized losses, not previously used as a reduction from capital.
To the extent that our existing capital is insufficient to fund our future operating requirements or maintain our financial strength or debt ratings, we may need to raise additional capital through financings, which may be in the form of debt securities, preferred shares, common equity, bank credit facilities providing loans and/or letters of credit, or any combination of these sources. Any equity or debt financing, if available at all, may be on terms that are unfavorable to us or our shareholders. In the case of equity financings, dilution to our shareholders could result, and such securities may have rights, preferences and privileges that are senior to those of our outstanding securities. If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected, which could include, among other things, the following possible outcomes: (1) potential downgrades in the financial strength ratings assigned by rating agencies to our reinsurance subsidiaries, which could place those reinsurance subsidiaries at a competitive disadvantage compared with higher-rated competitors, (2) reductions in the amount of business that our reinsurance subsidiaries are able to write in order to meet statutory capital requirements of ceding companies or an increase in the amount of collateral required, (3) reductions in the amount of business that our reinsurance subsidiaries are able to write in order to meet capital adequacy-based tests enforced by regulatory authorities and (4) increases in the cost of bank credit and letters of credit. We can provide no assurance that, if needed, we would be able to obtain additional funds through financing on satisfactory terms or at all.
We do not have any material commitments for capital expenditures as of December 31, 2013.
The shares we repurchased were canceled. As of December 31, 2013, we had $170.9 million remaining under the share repurchase program. For the period of January 1, 2014 through February 10, 2014, we repurchased 147,817 shares, at a weighted average cost per share of $56.66, for an aggregate amount of $8.4 million.
Since 2007, we have repurchased 43,240,599 shares and purchased 8,500,000 share options for an aggregate amount of $1.7 billion and $146.4 million, respectively.
Our contractual obligations as of December 31, 2013 by estimated maturity are presented below ($ in thousands):
See Note 7 to the “Consolidated Financial Statements” contained elsewhere in this Form 10-K.
See Note 14 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, 2013. There are reinsurance contracts that have terms extending into future years under which additional obligations will be incurred.
The schedules relating to our consolidated financial statements as of December 31, 2013 and 2012 and for each of the years in the three-year period ended December 31, 2013, 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.