Platinum Holdings’ principal executive offices are located in approximately 3,837 square feet of office space subleased from Platinum Bermuda at The Belvedere Building, 69 Pitts Bay Road, Pembroke, Bermuda. Platinum Bermuda leases a total of 7,674 square feet of office space, using approximately 3,837 square feet for its principal offices. The term of this lease ends on December 31, 2006.
The underwriting results and the audited historical combined financial statements of St. Paul Re prior to the Initial Public Offering (the Predecessor Business) are not indicative of the actual results of the Company subsequent to the Initial Public Offering.
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the related notes included on pages through of this Form 10-K. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
It is important to understand the Company’s accounting policies in order to understand its financial position and results of operations. Management considers certain of these policies 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 differ from these estimates. The Company’s critical accounting policies involve written and unearned premium, unpaid losses and LAE, reinsurance, investments, income taxes and stock-based compensation.
Assumed reinsurance premiums are recognized as revenues when premiums become earned proportionately over the coverage period. Net premiums earned are recorded in the statement of operations, net of the cost of retrocession. Net premiums written not yet recognized as revenue are recorded on the balance sheet as unearned premiums, gross of any ceded unearned premiums.
Due to the nature of reinsurance, ceding companies routinely report and remit premiums subsequent to the contract coverage period. Consequently, reinsurance premiums written include amounts reported by the ceding companies, supplemented by estimates of premiums that are written but not reported (“WBNR”). The premium estimation process considers the terms and conditions of the reinsurance contracts and assumes that the contracts will remain in force until expiration. The estimation of written premiums could be affected by early cancellation, election of contract provisions for cut-off and return of unearned premiums or other contract disruptions. In addition to estimating WBNR, the Company estimates the portion of premiums
When estimating premiums written and earned, each of our reinsurance subsidiaries segregates business into classes by type of coverage and type of contract (approximately 80 classes). Within each class, business is further segregated by the year in which the contract incepted (the “Underwriting Year”), starting with 2002. Estimates of WBNR and EBNR are made for each class and Underwriting Year. Premiums are estimated based on ceding company estimates and our own judgment after considering factors such as the ceding company’s historical premium versus projected premium, the ceding company’s history of providing accurate estimates, anticipated changes in the marketplace and the ceding company’s competitive position therein, reported premiums to date and the anticipated impact of proposed underwriting changes. The net impact on the results of operations of changes in estimated earned premiums is reduced by the losses and acquisition expenses related to such earned premiums.
The appropriateness of premium estimates is evaluated in light of the actual premium reported by the ceding companies and any adjustments to these estimates that represent earned premiums are accounted for as changes in estimates and are reflected in results of operations in the period in which they are made. The initial estimates of premiums derived by our underwriting function in respect of 2005 year-end were evaluated. The cumulative impact of our evaluation in respect of premiums receivable as of December 31, 2005 was to reduce premium estimates by approximately $49.8 million or 8.8% of reinsurance premiums receivable. As an illustration, we had one contract that, at December 31, 2005, represented approximately $47.5 million of our total reinsurance premiums receivable. With respect to that contract, we reduced reinsurance premiums receivable by approximately $4.7 million because we did not expect the ceding company to meet its production estimates or to achieve its estimated rate increases. We believe that we reasonably could have made an adjustment of between $0 and $4.7 million with respect to that contract at December 31, 2005. Had we made a $0 adjustment, the reinsurance premiums receivable for that contract at December 31, 2005 would have been $52.2 million. We made the $4.7 million adjustment, resulting in reinsurance premiums receivable for that contract of $47.5 million. While an adjustment of greater than $4.7 million is possible with respect to that contract, we do not consider such circumstance to be reasonably likely. Reinsurance premiums receivable under a particular contract can vary significantly from estimates derived from our underwriting function depending upon our assessment of the production and rate changes likely to be achieved by the ceding company.
Certain of the Company’s reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the loss experience under the contracts. Reinstatement premiums and additional premiums are recognized in accordance with the provisions of assumed reinsurance contracts, based on loss experience under such contracts. Reinstatement premiums are the premiums charged for the restoration of the reinsurance limit of a reinsurance contract to its full amount, generally coinciding with the payment by the reinsurer of losses. These premiums relate to the future coverage obtained for the remainder of the initial policy term and are earned over the remaining policy term. Any unearned premium existing at the time a contract limit is exhausted or reinstated is immediately earned. Additional premiums are those premiums
Case reserves are usually based upon claim reports received from ceding companies. The information we receive varies by ceding company and may include paid losses, estimated case reserves, and an estimated provision for IBNR reserves. Case reserves may be increased or reduced by our claims personnel based on receipt of additional information, including information received from ceding companies. IBNR is based on actuarial methods including the loss ratio method, the Bornhuetter-Ferguson method and the chain ladder method. IBNR related to a specific event may be based on our estimated exposure to an industry loss and may include the use of catastrophe modeling software.
Multiple point estimates using a variety of actuarial techniques are calculated for many, but not all, of our 80 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 based on the characteristics of the particular class and other relevant factors such as historical ultimate loss ratios, the presence of individual large losses, and 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
The pattern of reported losses is determined utilizing actuarial analysis, including management’s judgment, and is based on historical patterns of paid losses and reporting of case reserves to the Company, as well as industry patterns. Information that may cause historical patterns to differ from future patterns is considered and reflected in expected patterns as appropriate. 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 classes, there can be additional uncertainty in loss estimation related to large catastrophe events. With wind events, such as hurricanes, the damage assessment process may take more than a year. The cost of rebuilding is subject to increase due to supply shortages for construction materials and labor. In the case of earthquakes, the damage assessment process may take several years as buildings are discovered to have structural weaknesses not initially detected. The uncertainty inherent in loss estimation is particularly pronounced for casualty coverages, such as umbrella liability, general and product liability, professional liability, directors and officers liability and automobile liability, where information, such as required medical treatment and costs for bodily injury claims, emerges over time. In the overall loss reserving process, provisions for economic inflation and changes in the social and legal environment are considered.
Loss reserve calculations for primary insurance business are not precise in that they deal with the inherent uncertainty of future developments. Primary insurers must estimate their own losses, often based on incomplete and changing information. Reserving for reinsurance business introduces further uncertainties compared with reserving for primary insurance business. The uncertainty in the reserving process for reinsurers is due, in part, to the time lags inherent in reporting from the original claimant to the primary insurer to the reinsurer. As a predominantly broker market reinsurer for both excess-of-loss and proportional contracts, the Company is subject to a potential additional time lag in the receipt of information as the primary insurer reports to the broker who in turn reports to the Company. As of December 31, 2005, we did not have any significant back-log related to our processing of assumed reinsurance information.
Platinum Holdings and Platinum Bermuda are domiciled in Bermuda. Under current Bermuda law, they are not taxed on any Bermuda income or capital gains and they have received an assurance from the Bermuda Minister of Finance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to Platinum Holdings or Platinum Bermuda or any of their respective operations, shares, debentures or other obligations until March 28, 2016. The Company also has subsidiaries in the United States, United Kingdom and Ireland that are subject to the tax laws thereof.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R “Share-Based Payment” (“SFAS 123R”). On April 14, 2005, the Securities and Exchange Commission (“SEC”) adopted a new rule that allows SEC registrants to implement SFAS 123R as of January 1, 2006. The SEC’s new rule does not change the accounting required by SFAS 123R; it delays the date for compliance with the standard. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires that, prospectively, compensation expense be recognized for the fair value of all share options over the vesting period. Compensation expense for outstanding awards for which the requisite service has not been rendered as of December 31, 2005 will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123 adjusted by an allowance for estimated future forfeitures of unvested awards. We expect to adopt the provisions of SFAS 123R using the modified prospective application in the first quarter of 2006. SFAS 123R, which provides certain changes to the method for valuing share-based compensation among other changes, will apply to new awards. SFAS 123R will not have a material impact upon adoption.
Following the large rate increases in 2002 and 2003, reinsurers experienced lower rate increases and/or rate reductions in certain property and casualty classes in 2004. Despite the Florida and Caribbean catastrophe claims in the third quarter of 2004, property rate reductions still occurred as most reinsurers continued to be profitable. In 2005 an unprecedented level of hurricane losses caused many reinsurers to report significant net losses. Many reinsurers were able to raise additional capital in the fourth quarter 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 has been an increase in catastrophe pricing, particularly for wind exposures in the U.S. The impact on non-catastrophe pricing has been to mitigate the trend towards rate weakening with many markets experiencing an environment of little or no rate change. We believe that current rates should provide adequate returns.
Losses and LAE and the resulting loss and LAE ratios for the years ended December 31, 2005 and 2004 were as follows ($ in thousands):
The increase in losses and LAE in 2005 as compared with 2004 is primarily the result of more significant losses arising from the 2005 Hurricanes than from the 2004 Hurricanes. Net losses and LAE from the 2005 Hurricanes were $349,815,000 more than the net losses and LAE from the 2004 Hurricanes. The increase in losses and LAE is also due to the growth in business in the Property and Marine and Casualty segments. The increase in the loss ratio in 2005 from 2004 is due primarily to losses from the 2005 Hurricanes that contributed 33.8% to the loss and LAE ratio in 2005 as compared with losses from the 2004 Hurricanes that contributed 15.9% to the loss and LAE ratio in 2004. The losses and LAE from the hurricanes in 2005 and 2004 were partially offset by net favorable loss development of $97,315,000, representing 5.7% of net premiums earned in 2005 and $57,151,000, representing 3.9% of net premiums earned in 2004. Catastrophe
losses other than from the 2005 Hurricanes were approximately $24,600,000 or 1.4% of net premiums earned. There were no significant catastrophe losses in 2004 other than from the 2004 Hurricanes.
The increase in acquisition expenses in 2005 as compared with 2004 is consistent with the growth in business in the Property and Marine and Casualty segments. Contributing to the increase in the acquisition expense ratio in 2005 as compared with 2004 are greater reductions of profit commissions under reinsurance contracts that incurred losses from the 2004 Hurricanes as compared with similar reductions of profit commissions in 2005 relating to the 2005 Hurricanes. Profit commission reductions relating to the 2005 Hurricanes were $3,654,000 representing 0.2% of net premiums earned as compared with profit commission reductions relating to the 2004 Hurricanes of $10,243,000 representing 0.7% of net premiums earned. Acquisition expenses also includes increases in adjustable commissions of approximately $15,790,000 in 2005 relating to prior years’ loss development, representing 0.9% of net premiums earned as compared with increases of $1,631,000 of adjustable commissions in 2004, representing 0.1% of net premiums earned. The acquisition expense ratios in 2005 and 2004 are also affected by changes in the mix of business.
Operating expenses for the years ended December 31, 2005 and 2004 were $69,827,000 and $66,333,000, 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 of $3,494,000 in operating expenses in 2005 as compared with 2004 was attributable to increased costs associated with increased compensation costs.
Interest expense for the years ended December 31, 2005 and 2004 was $20,006,000 and $9,268,000, respectively, and includes interest related to the ESU’s as well as interest on debt obligations. The increase in 2005 as compared with 2004 is primarily due to interest on debt obligations of $250,000,000 issued in May 2005. As a result of the repurchase of $94,660,000 of the Remarketed Senior Guaranteed Notes due in 2007, we incurred a loss on repurchase of debt of $2,486,000. This includes a premium paid to the debt holders of $1,644,000, and related unamortized debt issuance costs, dealer/manager fees, and professional fees and expenses of $842,000.
Bermuda. Additionally, we incurred approximately $6,500,000 of income tax expense in 2005 associated with the transfer from Platinum Finance to Platinum Holdings of the proceeds from the issuance of debt obligations in May 2005. This transaction is deemed to be a taxable distribution under U.S. tax law and subject to U.S. withholding tax.
Net foreign currency exchange gains (losses) for the years ended December 31, 2004 and 2003 were $725,000 and ($114,000), respectively. We routinely do business in various foreign currencies. The decrease in net foreign currency exchange losses is due to efforts to better manage exposures to foreign currency exchange
The increase in losses and LAE in 2004 as compared with 2003 is due primarily to losses of approximately $230,475,000 from the 2004 Hurricanes and the growth in business in all segments. The increase in the loss ratio in 2004 from 2003 is due primarily to losses from the 2004 Hurricanes that contributed 15.9% to the loss and LAE ratio in 2004. Net favorable loss development of $57,151,000 reduced the loss and LAE ratio by 3.9% in 2004 as compared with net favorable loss development of $50,866,000 that reduced the loss and LAE ratio by 4.8% in 2003.
Operating expenses for the years ended December 31, 2004 and 2003 were $66,333,000 and $92,595,000, 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 decline of $26,262,000 in operating expenses in 2004 as compared with 2003 was attributable to a reduction of $11,408,000 in incentive-based compensation in 2004 as compared with 2003 due to the decline in our net income, a charge of $9,289,000 in 2003 related to the separation and consulting agreement with a former chief executive officer of the Company, as well as various non-recurring start-up costs of approximately $9,239,000 incurred in 2003.
related to the severance payment to and share option expense of a former chief executive officer of the Company were incurred by Platinum Holdings without tax benefit.
Net premiums written and earned increased in 2005 as compared with 2004 due to growth primarily in the North American pro-rata and catastrophe classes. The most significant increase was in the property pro-rata class where we increased our net premiums written in catastrophe exposed business in Florida. Net premiums written and earned in 2005 also include additional premiums of approximately $45,409,000 and $42,624,000, respectively, from reinsurance contracts that incurred losses arising from the 2005 Hurricanes. Net premiums written and earned in 2004 include approximately $16,198,000 of additional premiums resulting from losses arising from the 2004 Hurricanes. Net premiums written and earned in 2005 also include $2,685,000 of increases in premiums relating to unfavorable loss development on the 2004 Hurricanes. There were no significant premium changes relating to loss development in 2004.
The increase in losses and LAE and the related losses and LAE ratio in 2005 as compared with 2004 is due to losses of $549,050,000 arising from the 2005 Hurricanes as compared with losses of $169,652,000 arising from the 2004 Hurricanes. Losses from the 2005 Hurricanes represent 96.5 points of the 2005 loss and LAE ratio as compared with losses from the 2004 Hurricanes that represent 35.0 points of the 2004 loss and LAE ratio. Also contributing to the increase in losses and LAE in 2005 as compared with 2004 is the growth in business. The losses and LAE from the 2005 Hurricanes and 2004 Hurricanes were partially offset by net favorable loss development of approximately $51,298,000 representing 9.0% of net premiums earned in 2005 and approximately $48,478,000 representing 10.0% of net premiums earned in 2004. During 2005 and 2004, actual reported losses were significantly less than expected for the short-tailed non-catastrophe property lines resulting in reductions in estimated ultimate losses for such lines. The losses and LAE ratio is also affected by the additional premiums arising from the 2005 Hurricanes and 2004 Hurricanes.
Other underwriting expenses for the years ended December 31, 2005 and 2004 were $26,074,000 and $27,827,000, respectively. The decrease in other underwriting expenses is due to cost reductions in the Property and Marine segment in 2005, partially offset by the allocation of a greater percentage of common operating and administrative costs to the Property segment due to a decline in underwriting activity in the Finite Risk segment. Other underwriting expenses for the years ended December 31, 2005 and 2004 include fees of $6,538,000 and $6,395,000, respectively, relating to the Services and Capacity Reservation Agreement effective October 1, 2002 with RenaissanceRe (the “RenRe Agreement”) that provides for a periodic review of aggregate property catastrophe exposures by RenaissanceRe.
Net premiums written and earned increased in 2004, as compared with 2003, due to growth across all property classes. The increase in net premiums written is also the result of a more efficient use of catastrophe capacity through enhanced modeling capabilities, an increase of property pro-rata business and a transfer of catastrophe capacity from the Finite Risk segment to the Property and Marine segment. Net premiums
The Casualty operating segment principally includes reinsurance treaties that cover umbrella liability, general and product liability, professional liability, workers’ compensation, casualty clash, automobile liability, surety and trade credit. This operating segment also includes accident and health treaties, which are predominantly reinsurance of health insurance products. This operating segment generated 47.1%, 41.2% and 40.4% of our net premiums written for the years ended December 31, 2005, 2004 and 2003, respectively.
Losses and LAE and the resulting loss ratios for the years ended December 31, 2005 and 2004 were as follows ($ in thousands):
Acquisition expenses and resulting acquisition expense ratios for the years ended December 31, 2005 and 2004 were as follows ($ in thousands):
The increase in acquisition expenses is due primarily to the increase in net premiums earned in 2005 as compared with 2004. The acquisition expense ratios are comparable for the years ended December 31, 2005 and 2004.
contract, as contrasted with retrospective coverage, which covers losses that are incurred prior to inception of the contract. The three main categories of finite risk contracts are finite quota share, multi-year excess-of-loss and whole account aggregate stop loss. This operating segment generated 19.4%, 28.2% and 29.5% of our net premiums written for the years ended December 31, 2005, 2004, and 2003, respectively. The ongoing investigations by legal and regulatory authorities have reduced demand for finite risk products in 2005.
The increase in net premiums written and net premiums earned is primarily attributable to several large capped quota share contracts that were written in 2004. Net premiums earned are related to current and prior periods’ net premiums written and are affected by changes in the mix of business and the structure of the underlying reinsurance contracts. Net premiums written and earned also include approximately $13,067,000 of additional premiums from reinsurance contracts that incurred losses arising from the 2004 Hurricanes.
The consolidated sources of funds of the Company consist primarily of premiums written, investment income, proceeds from sales and redemption of investments, losses recovered from retrocessionaires, issuances of securities and actual cash and cash equivalents held by the Company. Net cash flows provided by operations, excluding trading securities activities, for the years ended December 31, 2005, 2004 and 2003 were $618,909,000, $698,223,000 and $469,168,000, respectively, and were used primarily to acquire additional investments. The catastrophe losses of 2005 and, to a lesser extent, the catastrophe losses in 2004, will create
an unusually large amount of loss payments over the next year that will adversely affect net cash flows from operations.
Platinum Holdings is a holding company that conducts no reinsurance operations of its own. All of its reinsurance operations are conducted through its wholly owned operating subsidiaries Platinum Bermuda, Platinum US and Platinum UK. As a holding company, the cash flow of Platinum Holdings consists primarily of dividends, interest and other permissible payments from its subsidiaries and issuances of securities. Platinum Holdings depends on such payments for general corporate purposes and to meet its obligations, including the payment of any dividends to its preferred and common shareholders.
The Company filed an unallocated universal shelf registration statement with the SEC, which the SEC declared effective on November 8, 2005. Under this shelf registration statement the Company may issue and sell, in one or more offerings, up to $750,000,000 of debt, equity and other types of securities or a combination of the above, including debt securities of Platinum Finance, unconditionally guaranteed by Platinum Holdings. To affect any such sales from time to time, Platinum Holdings and/or Platinum Finance will file one or more supplements to the prospectus forming a part of such registration statement, which will provide details of any proposed offering. In December 2005, Platinum Holdings issued $132,909,000 of Common Shares and $173,363,000 of mandatory convertible preferred shares under this unallocated shelf registration statement. On February 15, 2009, the mandatory conversion date, each preferred share will automatically convert into a number of our Common Shares based on the volume-weighted average price per Common Share on the 20 consecutive trading days ending on the third trading day prior to February 15, 2009. The conversion rate will not be more than one to one and not less than 0.7874 common share, depending on the market value of our Common Shares. The conversion rate of our Preferred Shares to Common Shares is subject to anti-dilution adjustments under certain circumstances, including the payment of dividends on our Common Shares in Common Shares, the issuance to all holders of Common Share rights or warrants to acquire Common Shares at less than market price, and the payment of cash dividends per Common Share in excess of $0.08 per quarter, subject to adjustment whenever the conversion rate is adjusted. Unless all accrued, cumulated and unpaid dividends on our Preferred Shares for all past quarterly dividend periods have been paid in full we cannot declare or pay any dividend or make any distribution of assets on our Common Shares. If dividends on the Preferred Shares outstanding have not been paid in an amount equal to six full quarterly dividends, holders of the outstanding Preferred Shares will be entitled to elect two additional directors to our board of directors. These voting rights will continue until all accrued, cumulated and unpaid dividends on the Preferred Shares then outstanding are paid in full.
The Company filed an allocated universal shelf registration statement with the SEC, which the SEC declared effective on April 5, 2004. The securities registered under the shelf registration statement for sales included up to $750,000,000 of common shares, preferred shares and various types of debt securities. Common Shares held by St. Paul and RenaissanceRe and common shares issuable upon exercise of options owned by St. Paul and RenaissanceRe accounted for $586,381,900 of the $750,000,000 of securities registered under the registration statement. St. Paul’s sold 6,000,000 of the Company’s common shares in an underwritten public offering, which was effected pursuant to a prospectus supplement to the shelf registration statement dated June 28, 2004 and completed on June 30, 2004. The 6,000,000 common shares sold by St. Paul amounted to $177,330,000 of the $750,000,000 securities registered under the shelf registration statement. The Company did not sell any common shares in the offering and did not receive any proceeds from the sale of the common shares by St. Paul. On September 22, 2005, Platinum Holdings completed the offering of 5,839,286 common shares at a price to the public of $28.00 per share, less related expenses. The proceeds were $161,865,000, net of expenses. This common share offering utilized substantially all of the remaining capacity allocated to the Company under the allocated shelf registration statement. On December 6, 2005, Renaissance Re sold its 3,960,000 common shares in a public offering, which was effected pursuant to a prospectus supplement to the allocated universal shelf registration statement effective April 5, 2004. The 3,960,000 common shares sold by Renaissance Re amounted to $119,394,000.
On December 1, 2005, certain reform measures simplifying the process for conducting registered securities offerings under the Securities Act came into effect. The new rules provide that shelf registration statements of certain well-known seasoned issuers, such as Platinum Holdings, are eligible for effectiveness
automatically upon filing. Should Platinum Holdings seek to issue securities in the future, it may make use of such new rules.
Also in the fourth quarter of 2005, Platinum Holdings and Platinum Finance completed an exchange offer through which they exchanged the outstanding Remarketed Notes for Series B Remarketed Senior Guaranteed Notes (the “Series B Remarketed Notes”) having substantially the same terms and which have been registered under the Securities Act of 1933, as amended (the “Securities Act”) and a tender offer to repurchase all of the outstanding Remarketed Notes and Series B Remarketed Notes. As a result of these offers, all of the Remarketed Notes were tendered for exchange or repurchased and $42,840,000 of the Series B Remarketed Notes remain outstanding.
The principal consolidated cash requirements of the Company are the payment of losses and LAE, commissions, brokerage, operating expenses, dividends to its preferred and common shareholders, the servicing of debt, the acquisition of and investment in businesses, capital expenditures, purchase of retrocessional contracts and payment of taxes. The catastrophe losses of 2005 and, to a lesser extent, the catastrophe losses in 2004, will create an unusually large amount of loss payments over the next year that could adversely affect net cash flows from operations.
Investments with a carrying value of $217,628,000 and cash and cash equivalents of $33,885,000 at December 31, 2005 were held in trust to collateralize obligations under the Quota Share Retrocession Agreements. Investments with a carrying value of $130,126,000 and cash and cash equivalents of $15,795,000 at December 31, 2005 were held in trust and letters of credit of $98,122,000 were issued to collateralize obligations under various other reinsurance contracts. Cash and cash equivalents of $38,243,000 at December 31, 2005 were held in trust to collateralize letters of credit.
Platinum Holdings, Platinum Bermuda, Platinum US and Platinum UK do not have any material commitments for capital expenditures as of December 31, 2005.
Hurricanes Katrina, Rita and Wilma (the “2005 Hurricanes”) caused significant losses to insurers and reinsurers during the third and fourth quarters of 2005. Following these events, rating agencies strengthened the capital requirements for companies with catastrophe exposures. Many reinsurers added capital through equity and debt offerings, but some saw their financial strength ratings downgraded in any case. In contrast, our A.M. Best rating of “A” (Excellent) was affirmed, which we believe strengthened our relative position in the marketplace.
For the Property and Marine segment, underlying primary rates and reinsurance rates are expected to increase, particularly for risks exposed to Atlantic hurricanes. During the January 1 renewal season, we achieved average rate increases of over 50% on our U.S. property renewal business and nearly 10% on our non-U.S. property renewal business, as well as average rate increases of approximately 70% on our marine renewal business. Despite having increased our assumptions for the frequency and severity of U.S. windstorm catastrophe exposures, we believe these rate increases result in a portfolio of catastrophe exposed business with expected profitability that is higher than the expected profitability of last year’s portfolio.
For 2006, we have targeted our net probable maximum loss from catastrophe exposures at various occurrence levels to be approximately equal in dollar terms to the comparable levels in 2005, but relatively lower as a percentage of our expected total capital for the respective years. For example, we expect our net probable maximum loss from catastrophe exposures at the one in 250 year occurrence level to be approximately 20% of total capital for 2006 versus approximately 30% of total capital for 2005. We believe this lower level of net catastrophe exposure will reduce the expected volatility of our operating results.
Given the magnitude of recent hurricane losses for the insurance and reinsurance industry in general and expectations for an active Atlantic hurricane season in 2006, we believe there is a heightened perception of risk among ceding companies, reinsurers and rating agencies. Accordingly, demand for property catastrophe risk transfer may increase beyond current levels. We expect that, as revisions to catastrophe models are released and new rating agency capital requirements are better understood, there will be continued U.S. market hardening for property and marine business.
In the Finite Risk segment, we believe that the ongoing investigations by the SEC, the office of the Attorney General for the State of New York, the U.S. Attorney for the Southern District of New York and non-U.S. regulatory authorities such as the Bermuda Monetary Authority and the U.K. Financial Services
The consolidated financial statements of the Company as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005, together with the report thereon by KPMG LLP, the Company’s independent registered public accounting firm, are set forth on pages through hereto.