Platinum Holdings and Platinum Bermuda lease offices located at The Belvedere Building, 69 Pitts Bay Road, Pembroke, Bermuda. The term of these leases ends on December 31, 2009 with various options for renewal up until December 31, 2011. The principal offices of Platinum US and all other U.S. based subsidiaries are located at Two World Financial Center, New York, New York. The term of this lease ends on September 29, 2013. Platinum US also leases office space located in Chicago at 1901 N. Roselle Rd., Schaumburg, Illinois. The term of the lease in Chicago ends on February 28, 2011. Platinum UK leases office space for its principal office at St. Clare House, 30/33 Minories, London. The term of this lease ends on October 22, 2011. We anticipate no difficulty in extending these leases or obtaining comparable office facilities in suitable locations and 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, 2007, 2006, 2005, 2004 and 2003. Our data as of and for the years ended December 31, 2007, 2006 and 2005 were derived from our consolidated financial statements beginning on page of this Form 10-K. Our data as of and for the years ended December 31, 2004 and 2003 were derived from our audited consolidated financial statements not included in this Form 10-K. You should read the selected financial data in conjunction with our consolidated financial statements as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007 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 33 of this Form 10-K.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included on pages
It is important to understand our accounting estimates in order to understand our financial position and results of operations. We consider certain of these estimates to be critical to the presentation of the financial results since they require management to make estimates and valuation assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Certain of the estimates and assumptions result from judgments that are necessarily subjective and consequently actual results may materially differ from these estimates. Our critical accounting estimates include premiums written and earned, unpaid losses and LAE, valuation of investments and evaluation of risk transfer.
Estimated and reported premiums receivable as of December 31, 2007, 2006 and 2005 are shown in the table below ($ in thousands):
Estimated premiums receivable at December 31, 2007 is lower than December 31, 2006 due to a reduction in business written in 2007 as compared with 2006. Likewise, estimated premiums receivable as of December 31, 2006 was lower than at December 31, 2005 due to the reduction in business written in 2006 as compared with 2005.
An allowance for uncollectible premiums is established for possible non-payment of premiums receivable, as deemed necessary. As of December 31, 2007, based on our historical experience, the general profile of our ceding companies and our ability in most cases to contractually offset premium receivables against losses and LAE or other amounts payable to the same parties, we did not establish an allowance for uncollectible premiums receivable.
Unpaid losses and LAE represent management’s best estimate, at a given point in time, of the ultimate settlement and administration costs of claims incurred, and it is possible that the ultimate liability may materially differ from such estimates. Estimates of unpaid losses and LAE are periodically reviewed and adjusted as new information becomes available. Any such adjustments are accounted for as changes in estimates and are reflected in results of operations in the period in which they are made.
The gross liabilities recorded on our consolidated balance sheets as of December 31, 2007 and 2006 for unpaid losses and LAE were $2,361,038,000 and $2,368,482,000, respectively. The following table sets forth a breakdown between gross case reserves and gross IBNR by segment as of December 31, 2007 and 2006 ($ in thousands):
Since we rely on information regarding paid losses, case reserves and sometimes IBNR provided by ceding companies in order to assist us in estimating our 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 companies on the basis of qualitative and quantitative criteria. These procedures include conferring with ceding companies or brokers on claims matters, conducting periodic audits of our ceding companies by our claims personnel at their offices to: (1) review and establish validity of specific claims, (2) determine that case reserves established by the ceding company are reasonable, (3) determine consistency in claim reporting from period to period, and (4) assess the overall claims practices and procedures of our ceding companies. Additionally, we monitor the claims handling and reserving practices of ceding companies in order to help establish the proper reinsurance premium for reinsurance agreements. Disputes with ceding companies have been rare and generally have been resolved through negotiation.
Non-catastrophe reserves total $2,179,234,000, which is 92% of our gross unpaid loss reserves as of December 31, 2007. When estimating unpaid losses and LAE, we segregate the business of each of our reinsurance subsidiaries into classes by type of coverage and type of contract (approximately 125 classes). Within each class the business is further segregated by Underwriting Year, starting with 2002. Multiple point estimates using a variety of actuarial techniques are calculated for many, but not all, of our classes of coverage 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) the expected percentage of reported losses derived from the loss development patterns, (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. Other relevant factors considered include: (1) historical ultimate loss ratios, (2) the presence of individual large losses and (3) known occurrences that have not yet resulted in reported losses. For some classes of business our actuaries believe that a review of individual contract information improves the loss reserve estimate. For example, individual contract review is particularly important for the Finite Risk segment and the accident and health class within the Casualty segment. Our actuaries make their determinations of the most appropriate point estimate of loss for each class based on an evaluation of all the relevant information and it is inappropriate to ascribe a particular portion of the estimate to a particular factor or consideration. This information is aggregated and reviewed and approved by management and is included in the liability for unpaid losses and LAE.
While we commenced operations in 2002, the business we write is sufficiently similar to the historical reinsurance business of St. Paul Re such that we review the historical loss experience of this business when we estimate our own initial expected ultimate losses and the expected patterns of reported losses. The historical loss experience of St. Paul Re is updated quarterly by St. Paul Re and is available to us. These patterns can span more than a decade and, given our own relatively limited history, the availability of the St. Paul Re data is a valuable supplement to our own and industry data. Patterns of reported losses 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 patterns. Information that may cause future patterns of reported losses to differ from historical patterns of reported losses is considered and reflected in expected patterns as appropriate. A key assumption is that past patterns of reported losses are reasonably predictive of future patterns of reported losses. It is often difficult to identify differences in business reinsured from Underwriting Year to Underwriting Year and how such differences can affect loss development patterns. This difficulty adds to uncertainty in estimates that use these patterns. For property and health coverages these patterns indicate that a substantial portion of the ultimate losses are reported within 2 to 3 years after the contract is effective. Casualty patterns can vary from 3 years to over 20 years depending on the type of business.
In property lines the expected patterns of reported losses are based on historical reported loss data. The only significant exception is the Florida pro rata business in 2004 and 2005. For the Florida pro rata business a separate pattern was derived from ceding company data. For all lines, historical data by effective date and business type is used to determine patterns that reflect each year’s reinsurance contract inception date distribution and the distribution of underlying business written on a losses occurring versus on a risk attaching basis. In marine lines the expected patterns of reported losses are primarily based on historical reported loss data. Reported loss patterns are analyzed for various groups of reinsurance classes and an overall pattern is determined by the mix of business within each Underwriting Year.
In order to limit the effect on our financial condition of large and multiple losses, we may buy retrocessional reinsurance, which is reinsurance for our own account. Reinsurance recoverable, also referred to as “ceded loss reserves”, include estimates of the recoveries from our retrocessional reinsurance that arise from claims from our reinsurance business. These assets are estimates of future amounts recoverable from retrocessionaires for claims that have occurred at or before the balance sheet date. Each quarter, after estimating the amount of gross loss reserves, our actuaries review all retrocessional contracts. Based on the structure of each retrocessional contract and the gross incurred loss, a recovery amount is estimated. Reinsurance recoverable on unpaid losses and LAE was $18,853,000 as of December 31, 2007, and represents 0.8% of gross unpaid losses and LAE.
Fixed maturities for which we may not have the positive intent to hold until maturity are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from net income and reported in other comprehensive income as a separate component of shareholders' equity, net of deferred taxes. Fixed maturities for which we have the intent to sell prior to maturity are classified as trading securities and reported at fair value, with unrealized gains and losses included in other income and the related deferred income tax included in income tax expense.
We routinely review our available-for-sale investments to determine whether unrealized losses represent temporary changes in fair value or were the result of “other-than-temporary impairments.” The process of determining whether a security is other than temporarily impaired is subjective and involves analyzing many factors. These factors include but are not limited to: the overall financial condition of the issuer, the length and magnitude of an unrealized loss, specific credit events, the collateral structure and credit support that may be applicable to asset and mortgage-backed securities. We also consider our ability and intent to hold a security for a sufficient period of time for the value to recover the unrealized loss, which is based, in part, on current and anticipated future positive net cash flows from operations that generate sufficient liquidity in order to meet our obligations. If we determine that an unrealized loss on a security is other than temporary, we write down the carrying value of the security and record a realized loss in the consolidated statement of operations in the period during which the write down occurred.
Reinsurance accounting is followed for assumed and ceded transactions when risk transfer requirements have been met. Risk transfer analysis evaluates significant assumptions relating to the amount and timing of expected cash flows, as well as the interpretation of underlying contract terms. Reinsurance contracts that do not transfer sufficient insurance risk are accounted for as reinsurance deposit liabilities with interest expense charged to other income and credited to the liability.
The reinsurance industry historically has been cyclical, characterized by periods of price competition due to excessive underwriting capacity as well as periods of favorable pricing due to shortages of underwriting capacity. Cyclical trends in the industry and the industry's profitability can also be significantly affected by volatile developments, including natural and other catastrophes, such as hurricanes, windstorms, earthquakes, floods, fires, explosions and terrorist attacks, the frequency and severity of which are inherently difficult to predict. Property and casualty reinsurance rates often rise in the aftermath of significant catastrophe losses. To the extent that actual claim liabilities are higher than anticipated, the industry's capacity to write new business diminishes. The industry is also affected by changes in the propensity of courts to expand insurance coverage and grant large liability awards, as well as fluctuations in interest rates, inflation and other changes in the economic environment that affect market prices of investments.
In an unprecedented level of hurricane losses caused many reinsurers to report significant net losses. Many reinsurers were able to raise additional capital in the third and fourth quarters of 2005 and a number of new reinsurers were formed. Nonetheless, the magnitude of the hurricane losses caused rating agencies to tighten capital requirements and both reinsurers and their insurance company clients to reassess their catastrophe pricing and aggregate loss monitoring parameters and procedures. The result was an increase in catastrophe pricing, particularly for wind exposures in the U.S. in 2006 and the beginning of 2007. However, the lack of major catastrophe activity in 2006 and 2007 has led to an increase in capacity and decline in pricing for catastrophe exposed reinsurance in the second half of 2007. The impact of the 2005 catastrophe losses on non-catastrophe pricing was to initially slow down the weakening of rates which then resumed in late 2006 and continued throughout 2007. We believe that current rates can provide adequate returns with prudent and selective underwriting.
Net income for the years ended December 31, 2007 and 2006 was as follows ($ in thousands):
Net investment income for the years ended December 31, 2007 and 2006 was $214,222,000 and $187,987,000, respectively. Net investment income increased in 2007 as compared with 2006 primarily due to increased invested assets as well as a slight increase in yields on invested assets. The increase in invested assets was attributable to positive net cash flows provided by operations excluding trading securities activities, which was $491,483,000 in 2007. Positive net cash flows provided by operations were partially offset by $240,672,000 of common share repurchases during 2007. Net investment income included interest earned on funds held of $5,279,000 and $7,998,000 in 2007 and 2006, respectively. Interest on funds held relates primarily to business in the Finite Risk segment which has declined over the past several years. Net realized gains (losses) on investments were ($2,615,000) and $1,090,000 in 2007 and 2006, respectively. Net realized gains and losses on investments primarily result from our efforts to manage credit quality, duration and sector allocation of our investment portfolio as well as to balance our foreign currency denominated invested assets with our foreign currency denominated liabilities. We recorded a charge of $809,000 in 2007 relating to other-than-temporary impairments which was included within net realized losses on investments in the consolidated statement of operations.
Other expense for the years ended December 31, 2007 and 2006 was $5,787,000 and $2,872,000, respectively. Other expense in 2007 included $1,393,000 of net unrealized gains relating to changes in fair value of fixed maturities classified as trading, $468,000 of net expense on reinsurance contracts accounted for as deposits, an expense of $900,000 relating to an option to purchase reinsurance which was not exercised and an expense of $4,107,000 for the fair value adjustment of a derivative contract. Other expense in 2006 included $2,221,000 of net unrealized losses relating to changes in fair value of fixed maturities classified as trading and $706,000 of net expense on reinsurance contracts accounted for as deposits.
Net losses and LAE and the resulting loss and LAE ratios for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):
Exclusive of the effects of the catastrophe losses, including additional premiums generated by such catastrophe losses, and net favorable loss development, the net loss and LAE ratio in 2007 decreased by approximately 2.0%, as compared with 2006. The decrease was due to a higher proportion of catastrophe excess business which, because of the low level of catastrophes, had a lower net loss and LAE ratio than the remainder of the business. The favorable effects of the property catastrophe excess business were partially offset by higher loss ratios in the Casualty segment due to declining rate adequacy. The net loss and LAE ratios were also affected by other changes in the mix of business.
Net foreign currency exchange gains for the years ended December 31, 2007 and 2006 were $2,775,000 and $738,000, respectively. We routinely transact business in various currencies other than the U.S. dollar. Foreign currency exchange gains and losses result from the re-valuation into U.S. dollars of assets and liabilities denominated in currencies other than the U.S. dollar as well as fluctuations in the amounts of assets and liabilities denominated in currencies other than the U.S. dollar and the exchange rates of the currencies. We periodically monitor our largest foreign currency exposures and may purchase or sell foreign currency denominated invested assets based on these exposures. The net foreign currency exchange gain in 2007 was the result of our holding more non-U.S. dollar denominated assets than non-U.S. dollar denominated liabilities, primarily Euros and the British pound sterling in the normal course of doing business in these currencies, while the U.S. dollar declined in value against these currencies.
The most significant factor in the comparison of net income in 2006 with the net loss in 2005 was the difference in underwriting income in 2006 as compared with 2005. Underwriting income was $218,880,000 in 2006 and was favorably impacted by a low level of major catastrophes. In 2005 we incurred an underwriting loss of $249,506,000 primarily resulting from losses arising out of the 2005 Hurricanes that caused severe damage in the Gulf Coast region of the United States, including the states of Louisiana, Mississippi, Texas and Florida as well as in Mexico and the Caribbean. As a result of losses from the 2005 Hurricanes, certain reinsurance contracts generated additional premiums and adjustments to accrued profit commissions. The aggregate net adverse impact on our net loss for the year ended December 31, 2005 from the 2005 Hurricanes is summarized as follows ($ in thousands):
Net favorable development also contributed to underwriting income. Net favorable development was $55,768,000 in 2006 as compared with $79,256,000 in 2005. The net favorable loss development related to prior years in 2007 and 2006 included favorable development of $17,226,000 and unfavorable development of ($4,160,000), respectively, relating to the 2005 Hurricanes. In addition to the increase in underwriting income, net income in 2006 as compared with the net loss in 2005 was also favorably impacted by an increase in investment income of $58,482,000 and unfavorably impacted by increases in operating expenses related to Platinum Holdings and operating expenses not allocated to segments of $10,036,000 and income tax expense of $55,134,000 in 2006.
The decrease in net premiums written and earned in 2006 as compared with 2005 was attributable to reductions in business written in all three of our segments. These reductions were partially offset by increases in estimates of net premiums written of approximately $68,937,000 in the North American excess casualty classes related to business written in prior periods. We also commenced ceding premiums under the 2006 Property Quota Share Agreement. The decrease in net premiums written and earned in 2006 as compared with 2005 is also partially due to additional net premiums written and earned in 2005 of approximately $49,451,000 and $46,666,000, respectively, related to losses arising from the 2005 Hurricanes. The reduction in net premiums earned was also affected by changes in the mix of business and the structure of the underlying reinsurance contracts.
The decreases in net losses and LAE and the resulting net loss and LAE ratio in 2006 as compared with 2005 were primarily due to the significant difference in major catastrophe losses. Major catastrophe losses were $5,536,000 in 2006, representing 0.4% of net premiums earned, as compared with $604,890,000 in 2005, representing 35.3% of net premiums earned. Included in the major catastrophe losses in 2005 were $580,290,000 from the 2005 Hurricanes representing 33.8% of net premiums earned. Net losses and LAE and the resulting net loss and LAE ratios were also impacted by net favorable loss development of $60,746,000 in 2006, representing 4.5% of net premiums earned, and $97,314,000 in 2005, representing 5.7% of net premiums earned. The net favorable loss development in 2006 included net unfavorable loss development on the 2005 Hurricanes of $3,596,000.
The decrease in net acquisition expenses was primarily due to the decrease in net premiums earned in 2006 as compared with 2005. The decrease in the acquisition expense ratio in 2006 as compared with 2005 was partially due to the decrease in assumed quota share contracts in the Property and Marine and Finite Risk segments that had higher ceding commissions than the remaining business. Net acquisition expenses also included increases in adjustable commissions of approximately $2,285,000 in 2006 relating to prior years’ loss development, representing 0.2% of net premiums earned, as compared with $15,790,000, representing 0.9% of net premiums earned in 2005. Also contributing to the decrease in the acquisition expense ratio in 2006 as compared with 2005 was a ceding commission and override on the 2006 Property Quota Share Agreement.
Operating expenses for the years ended December 31, 2006 and 2005 were $95,490,000 and $69,827,000, respectively. Operating expenses include costs such as salaries, rent and like items related to reinsurance operations as well as costs associated with Platinum Holdings. The increase in operating expenses was primarily due to increased incentive-based compensation accruals. Operating expenses included approximately $17,000,000 of accruals for incentive-based compensation in 2006 as compared with $1,000,000 in 2005. The increase in incentive-based compensation was the result of the significant increase in net income. The remainder of the increase in operating expenses was primarily due to the expansion of operations in Bermuda, including Platinum Bermuda which increased its underwriting activity and increased its staff accordingly. The increase was also partially attributable to costs related to equity grants under long term performance based incentive plans.
Net foreign currency exchange gains (losses) for the years ended December 31, 2006 and 2005 were $738,000 and ($2,111,000), respectively. We routinely transact business in various foreign currencies. Net foreign currency exchange gains and losses arise as a result of fluctuations in the amounts of assets and liabilities denominated in foreign currencies as well as fluctuations in the currency exchange rates.
Income taxes (benefit) and the effective tax rate for the years ended December 31, 2006 and 2005 were as follows ($ in thousands):
We conduct our worldwide reinsurance business through three operating segments: Property and Marine, Casualty and Finite Risk. In managing our operating segments, management uses measures such as underwriting income and underwriting ratios to evaluate segment performance. We do not allocate assets or certain income and expenses such as investment income, interest expense and certain corporate expenses by segment. Segment underwriting income is reconciled to income before income taxes. The measures we used in evaluating our operating segments should not be used as a substitute for measures determined under U.S. GAAP. The following table summarizes underwriting activity and ratios for the three operating segments for the years ended December 31, 2007, 2006 and 2005 ($ in thousands):
The Property and Marine operating segment includes principally property (including crop) and marine reinsurance coverages that are written in the United States and international markets. This business includes property catastrophe excess-of-loss contracts, property per-risk excess-of-loss contracts and property proportional contracts. This operating segment generated 45.1%, 36.1% and 33.5% of our net premiums written in 2007, 2006 and 2005, respectively.
The increase in gross premiums written in 2007 as compared with 2006 was primarily in the catastrophe excess classes and was partially offset by decreases in the proportional classes. The decline in ceded premiums written was attributable to the non-renewal in 2007 of the 2006 Property Quota Share Agreement. Net premiums earned in 2007 increased primarily as a result of the decrease in ceded premiums written and earned.
The increases in net losses and LAE and related ratios in 2007 as compared with were due to the increase in catastrophe losses as well as to less net favorable loss development. Net losses in 2007 included major catastrophe losses of $44,585,000 in 2007, representing 8.9% of net premiums earned, as compared with major catastrophe losses of $5,536,000 in 2006, representing 1.2% of net premiums earned. Major catastrophe losses in 2007 included $32,804,000 from European windstorm Kyrill and $8,881,000 from floods in the United Kingdom. Net favorable loss development was $48,508,000 in 2007, representing 9.7% of net premiums earned, and $54,317,000 in 2006, representing 12.1% of net premiums earned. Exclusive of the major catastrophe losses and net favorable loss development, the net loss and LAE ratio decreased by approximately 3.5% in 2007 as compared to 2006 due to the increase in the proportion of catastrophe excess business which, because of the low level of catastrophes, had a lower net loss and LAE ratio than the remainder of the segment. The net loss and LAE ratios were also affected by other changes in the mix of business.
Net premiums written decreased in 2006 in almost all classes within this segment, most notably North American property proportional, property risk excess, crop and aviation classes of business. Contributing to the decrease in net premiums written was our decision to reduce our exposure to North American hurricanes. The reduction in North American property proportional and property risk excess was due to our decision to favor North American catastrophe excess business over North American property proportional and property risk excess catastrophe exposed business. Net premiums written and net premiums earned in 2005 included additional premiums of $45,409,000 and $42,624,000, respectively, from reinsurance contracts that incurred losses arising from the 2005 Hurricanes. Excluding the additional premiums related to the 2005 Hurricanes, gross premiums written in the North American catastrophe excess class increased in 2006. Net premiums written and earned in 2006 as compared with 2005 also decreased as a result of the commencement of the 2006 Property Quota Share Agreement under which we ceded approximately $55,455,000 of premiums written in the catastrophe classes. The reductions in the crop and aviation classes were primarily due to the expiration of a significant proportional contract in each class. The decreases of net premiums written were partially offset by increased pricing in the catastrophe exposed classes, primarily in North America.
The decrease in net acquisition expenses in 2006 as compared with 2005 was primarily due to the decrease in net premiums earned. The decrease in the net acquisition expense ratio was due in part to the commencement of the 2006 Property Quota Share Agreement, which has an override and profit commission. Net acquisition expenses included increases in commissions of $3,067,000 in 2006, representing 0.7% of net premiums earned, related to favorable loss development from prior years as compared with $6,489,000 in 2005, representing 1.1% of net premiums earned. The net acquisition expense ratios were also impacted by changes in the mix of business.
Other underwriting expenses for the years ended December 31, 2006 and 2005 were $39,887,000 and $26,074,000, respectively. The increase in other underwriting expenses was due to an increase in property underwriting activity in Bermuda and a corresponding increase in staff. In 2006, both Platinum US and Platinum UK sold significant portions of their property catastrophe books of business to Platinum Bermuda. While other underwriting expense increases at Platinum Bermuda were partially offset by declines in operating expenses at Platinum US, the increased legal and other costs related to the cessation of underwriting activity of Platinum UK more than offset declines in its ongoing operating costs. Additionally, a greater percentage of common operating and administrative costs were allocated to the Property segment due to an increase in property underwriting in Bermuda and a decline in underwriting activity company-wide in the Finite Risk segment. Other underwriting expenses for the years ended December 31, 2006 and 2005 included fees of $7,829,000 and $6,538,000, respectively, relating to the RenRe Agreement. These fees increased in 2006 as gross written premiums in the property catastrophe classes increased. The RenRe Agreement expired on September 30, 2007.
The decrease in net losses and LAE in 2007 as compared with 2006 was primarily due to the decrease in net premiums earned, partially offset by an increase in the net loss and LAE ratio. The increase in the net loss and LAE ratio in 2007 as compared with 2006 was due to higher initial expected loss ratios in certain significant classes reflecting a decline in price adequacy. The net loss and LAE ratio in 2007 compared with 2006 was also affected by the changes in the mix of business within the segment toward contracts with higher loss and LAE ratios and lower acquisition expense ratios. Net losses and LAE included net favorable loss development of approximately $19,474,000 in 2007, representing 3.1% of net premiums earned, and $9,424,000 in 2006, representing 1.2% of net premiums earned. Net favorable loss development in 2007 included $15,474,000 from certain long-tailed casualty classes with the remaining net favorable loss development from casualty classes with short loss development periods. The net loss and LAE ratio was also affected by the changes in the mix of business within the segment.
Net acquisition expenses and resulting net acquisition expense ratios for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):
The decrease in net acquisition expenses in 2007 as compared with 2006 was due to the decrease in net premiums earned. The decrease in the net acquisition expense ratio in 2007 as compared with 2006 was due to decreases in the North American umbrella and first dollar general liability classes, both of which had higher acquisition expense ratios than the remainder of the segment. Net acquisition expenses included decreases in estimated commissions related to prior years of $4,912,000 in 2007, representing 0.8% of net premiums earned, as compared with decreases of $318,000 in 2006.
Other underwriting expenses for the years ended December 31, 2007 and 2006 were $29,194,000 and $27,022,000, respectively. The increase in other underwriting expenses in 2007 as compared with 2006 was primarily due to increased incentive-based compensation and costs associated with an employee retention plan.
The decrease in net premiums written in 2006 was primarily due to reductions of business written across most casualty classes in the 2006 Underwriting Year, most significantly in the accident and health and trade credit classes. The reduction in business written is primarily due to decreases in price adequacy which caused us to non-renew some contracts. The decrease in net premiums written in the 2006 Underwriting Year was partially offset by increases in estimates of net written premiums of $68,937,000 in the North American excess casualty classes related to business written in prior Underwriting Years as compared with similar increases of estimates of $55,500,000 in 2005. Net premiums written and earned were also affected by changes in the mix of business and the structure of the underlying reinsurance contracts.
The increase in net losses and LAE in 2006 as compared with 2005 was primarily due to an increase in the net loss and LAE ratio. The increase in the net loss and LAE ratio in 2006 as compared with 2005 was due to less net favorable loss development in 2006 than in 2005 and higher initial expected loss ratios in certain significant classes reflecting a decline in price adequacy. Net losses and LAE included net favorable loss development of approximately $9,424,000 in 2006, representing 1.2% of net premiums earned and approximately $15,913,000 of net favorable loss development in 2005, representing 2.0% of net premiums earned. The net favorable loss development was primarily in casualty classes with short loss development periods. The net loss and LAE ratio was also affected by the changes in the mix of business within the segment.
Gross, ceded and net premiums written and earned for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):
The decrease in net premiums written and earned in 2006 as compared with 2005 was primarily attributable to the termination of two significant finite casualty quota share contracts. One of the contracts was terminated effective January 1, 2006 on a cut-off basis, which resulted in the return of previously written but unearned premium. Net premiums written and earned in 2005 included approximately $4,042,000 of additional premiums resulting from losses arising from the 2005 Hurricanes. Additionally in 2005, net favorable development of losses in this segment related to the Hurricanes resulted in a reduction of net premiums written and earned of $4,953,000.
The decrease in net losses, LAE and acquisition expenses in 2006 as compared with 2005 was primarily due to the reduction in net premiums earned. The decrease in the loss, LAE and acquisition expense ratio in 2006 was due to an absence of major catastrophe losses in 2006 as compared with losses of $31,000,000 from the 2005 Hurricanes representing 8.7% of net premiums earned in 2005. This was partially offset by net unfavorable development in 2006 of $2,531,000, representing 2.1% of net premiums earned as compared with net favorable development of approximately $21,187,000, representing 6.0% of net premiums earned in 2005. The unfavorable development in 2006 included unfavorable development on the 2005 Hurricanes of $3,500,000. Also contributing to the decrease in the net loss, LAE and acquisition ratio in was the termination of two finite casualty quota share contracts that had higher combined ratios than the remainder of the Finite Risk portfolio. The loss, LAE and acquisition expense ratio was also affected by the changes in the mix of business within the segment.
We have $1,388,242,000 of mortgage-backed and asset-backed securities in our investment portfolio, representing approximately 43% of our available-for-sale investment portfolio. Following is a breakdown of our mortgage-backed and asset-backed securities as of December 31, 2007 ($ amounts in thousands):
We continually monitor market events impacting our portfolio, including our sub-prime securities, and review sub-prime securities along with the rest of our portfolio for potential other-than-temporary impairments. We did not consider any of the mortgage-backed and asset-backed securities we hold to be other-than-temporarily impaired as of December 31, 2007.
Premiums receivable as of December 31, 2007 of $244,360,000 included $195,890,000 that was based upon estimates. Premiums receivable as of December 31, 2006 of $377,183,000 included $315,243,000 that was based upon estimates. The decline in premiums receivable in 2007 as compared to 2006 is due to the decline in premiums written. An allowance for uncollectible premiums is established for possible non-payment of such amounts due, as deemed necessary. As of December 31, 2007 and 2006, no such allowance was made based on our historical experience, the general profile of our ceding companies and our ability in most cases to contractually offset premiums receivable with losses and LAE or other amounts payable to the same parties.
Gross unpaid losses and LAE were $2,361,038,000 and $2,368,482,000 as of December 31, 2007 and 2006, respectively. The unpaid losses remained comparable as increases in unpaid losses related to casualty business were offset by declines in unpaid losses related to property and marine and finite business. The decline in property and marine unpaid losses is due, in part, to loss payments related the 2005 Hurricanes and 2004 Hurricanes which were approximately $287,040,000 in 2007. As of December 31, 2007 gross unpaid losses related to the 2005 Hurricanes and the 2004 Hurricanes were $142,310,000, of which $46,652,000 was IBNR.
Commissions payable as of December 31, 2007 of $100,204,000 included $91,035,000 that was based upon estimates. Commissions payable as of December 31, 2006 of $140,835,000 included $124,906,000 that was based upon estimates. The decline in commissions payable in 2007 as compared to 2006 is due to the decline in premiums written.
On September 13, 2006, we amended and restated an existing credit agreement with a syndicate of lenders, increasing the term from three to five years and increasing the facility from $200,000,000 to $400,000,000 (the "Credit Facility"). The Credit Facility consists of a $150,000,000 senior unsecured credit facility available for revolving borrowings and letters of credit and a $250,000,000 senior secured credit facility available for letters of credit. The Credit Facility generally will be available for our working capital, liquidity and general corporate requirements and those of our subsidiaries. Platinum Holdings and Platinum Finance guarantee borrowings by our reinsurance subsidiaries under the Credit Facility. The interest rate on borrowings under the Credit Facility is based on our election of either: (1) LIBOR plus 50 basis points or (2) the higher of: (a) the prime interest rate of the lead bank providing the Credit Facility, or (b) the federal funds rate plus 50 basis points. The interest rate based on LIBOR rate would increase or decrease by up to 12.5 basis points should our senior unsecured debt credit rating increase or decrease. We had approximately $83,355,000 of letters of credit outstanding in favor of various cedants as of December 31, 2007. As of December 31, 2007, $150,000,000 was available for borrowing on an unsecured basis and $166,645,000 was available for borrowing on a secured basis under the Credit Facility.
Our principal consolidated cash requirements are the payment of losses and LAE, commissions, brokerage, operating expenses, dividends to our preferred and common shareholders, the servicing of debt, capital expenditures, purchase of retrocessional contracts, payment of taxes and capital management activities.
Investments with a carrying value of $147,596,000 and cash and cash equivalents of $22,593,000 as of December 31, 2007 were held in trust to collateralize obligations under the Quota Share Retrocession Agreements. Investments with a carrying value of $165,193,000 and cash and cash equivalents of $106,598,000 as of December 31, 2007 were held in trust and letters of credit of $83,355,000 were issued to collateralize obligations under various other reinsurance contracts. Investments with a carrying value of $35,730,000 and cash and cash equivalents of $65,582,000 as of December 31, 2007 were held to collateralize letters of credit issued under the Credit Facility.
The payment of dividends and other distributions from our regulated reinsurance subsidiaries is limited by applicable laws and statutory requirements of the jurisdictions in which the subsidiaries operate, including Bermuda, the United States and the United Kingdom. Based on the regulatory restrictions of the applicable jurisdictions, the maximum amount available for payment of dividends or other distributions by our reinsurance subsidiaries in 2008 without prior regulatory approval is estimated to be approximately $398,241,000.
On August 4, 2004 our Board of Directors approved a program to repurchase up to $50,000,000 of our common shares. On July 26, 2007 our Board of Directors approved an increase in the existing repurchase program to result in authority as of such date to repurchase up to a total of $250,000,000. On October 25, 2007 our Board of Directors approved an additional increase to the repurchase program to result in authority as of such date to repurchase up to a total of $250,000,000 and on February 21, 2008 our Board of Directors approved an additional increase in the repurchase program to result in authority as of such date to purchase a total of $250,000,000. During the year ended December 31, 2007 we purchased 6,934,655 of our common shares in the open market at an aggregate amount of $240,672,000 at a weighted average price of $34.71 per share. The shares we purchased were canceled. No repurchases of our common shares were made during 2006 or 2005.
We believe that the net cash flows generated by the operating activities of our subsidiaries in combination with cash and cash equivalents on hand will provide sufficient funds to meet our liquidity needs over the next twelve months. Beyond the next twelve months, cash flows available to us may be influenced by a variety of factors, including economic conditions in general and in the insurance and reinsurance markets, legal and regulatory changes as well as fluctuations from year to year in claims experience and the occurrence or absence of large catastrophic events. If our liquidity needs accelerate beyond our ability to fund such obligations from current operating cash flows, we may need to liquidate a portion of our investment portfolio, borrow under the credit facility described above or raise additional capital in the capital markets. Our ability to meet our liquidity needs by selling investments or raising additional capital is subject to the timing and pricing risks inherent in the capital markets.
The renewal season for contracts effective January 1, 2008 (the "January 1 Renewal Season") has recently been completed. The January 1 Renewal Season is generally considered the most significant underwriting period of the year for the reinsurance industry. Insurance and reinsurance terms and conditions deteriorated for almost all lines of business and we responded by reducing our participation on some contracts and retiring from some others. Where premium remained adequate for the risk assumed, we continued our involvement. Some new accounts were written. This resulted in a portfolio of business written in the January 1 Renewal Season that was approximately 18% less than that written in the January 1, 2007 renewal season.
The lack of significant catastrophe activity in 2007 contributed to excellent financial results and stronger balance sheets for many reinsurers and insurers. We believe this resulted in an increase in capacity of reinsurers and insurers and will cause downward pressure on catastrophe rates for the remainder of 2008. We believe that most other classes within the Property and Marine segment will also continue to experience rate deterioration for the remainder of 2008.
For the Casualty segment, although we believe that certain sectors offer acceptable returns, pricing has been softening. Ceding companies are willing to increase retentions and reinsurers are competing for participation on the best treaties. During the January 1 Renewal Season we experienced average rate decreases of approximately 4% in this segment, against a backdrop of upward trending loss costs. As a result, we believe the business underwritten in 2008 will have a lower level of expected profitability as compared with the business underwritten in 2007.
In order to maintain acceptable profitability in our portfolio of casualty business we have reduced participation on some renewal treaties and declined to participate on others. During the January 1 Renewal Season we wrote approximately 25% less casualty business than we had during the January 1, 2007 renewal season. We anticipate market conditions to continue at their current levels for the balance of the year. We believe that financial security remains a significant concern for buyers of long-tailed reinsurance protection who typically seek reinsurers with strong balance sheets, quality ratings, and a proven claims-paying record. We believe that our rating, capitalization and reputation as a lead casualty reinsurer position us well to write profitable business as opportunities arise.
Our consolidated financial statements as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007, together with the report thereon by KPMG LLP, our independent registered public accounting firm, are set forth on pages through hereto.