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 Item 11, "Executive Compensation" in this Form 10-K.
The Company believes that underwriting income or loss and related underwriting 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, net foreign currency exchange gains or losses, interest expense and other income and expense.
Underwriting ratios are calculated for net losses and LAE, net acquisition expense and net underwriting expense. The ratios are calculated by dividing the related expense by net premiums earned. The combined ratio is the sum of the net losses and LAE, net acquisition expense and other underwriting expense ratios.
Book value per common share represents total shareholders' equity divided by the number of common shares outstanding. Management uses growth in book value per common share as an indicator of the value provided to common shareholders and believes that, over time, book value per common share is a key driver of share price. The most significant influences on our book value per common share are net income or loss, other comprehensive income or loss and share repurchase activities.
The following summary sets forth the calculation of book value and fully converted book value per common share for the years ended December 31, 2014 and 2013 ($ and amounts in thousands, except per share amounts):
The following table sets forth the calculation of return on equity for the years ended December 31, 2014, 2013 and 2012, respectively ($ in thousands):
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. Over the last several years, we have also seen a significant increase in overall reinsurance industry capacity resulting from strong financial results and the influx of new competitors. These factors influence the total supply of underwriting capacity in the market which tends to drive the cyclical nature of the business.
Our property reinsurance business can be very volatile in periods when there are few catastrophic events or when catastrophes are frequent or severe and there are large losses. Our casualty reinsurance business is typically less volatile; however, there tends to be a greater time lag between the occurrence, reporting and payment of casualty reinsurance claims, requiring a longer-term perspective on the part of management for this aspect of our business.
The following discussion of our current outlook does not give effect to the consummation of the Merger.
As noted above, property and casualty reinsurance business is a cyclical business. Presently, we believe the business 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 and 2014 had the effect of decreasing rates and weakening terms and conditions for reinsurance business written in the second half of 2014 and at January 1, 2015. In many lines of business, rates are approaching the minimum level we would expect in order for the business to provide appropriate returns. We may write less premium in 2015 if there is a continued decrease in pricing and weakening of terms and conditions. We may also purchase additional retrocessional protection to maintain an appropriate risk adjusted level of exposure.
In the Casualty segment, we expect casualty insurance and reinsurance capacity to remain abundant for the rest of 2015. If this is the case, the potential for improvement in the risk adjusted total return we are able to achieve on this business will be limited. We believe the casualty market is presently such that reinsurance rate adequacy is expected to produce returns at or below our cost of capital. Under these conditions many treaties do not meet our pricing standards. Accordingly, we expect to write a smaller portfolio in our Casualty segment during 2015 as compared with our current in-force book of business.
Our investment portfolio continues to be supported by investment returns from fixed income assets of high credit quality and moderate interest rate risk. In light of the pending Merger, we do not anticipate investing in riskier assets.
Based on our current reserve position, our net in-force portfolio of reinsurance business, our asset portfolio, and our underwriting prospects for the near term, we believe that we are strongly capitalized with a comfortable capital cushion above the rating agency targets for a company with our ratings. If the business performs as we anticipate, our capital cushion would grow over time. Under those conditions we would have the financial flexibility to expand our underwriting, hold riskier assets, or buy back shares. Our decision-making will be guided by the pricing we observe in the various markets.
When estimating premiums written and earned, we segregate the business into classes by reinsurance subsidiary, by type of coverage and by type of contract (resulting in approximately 60 classes). Within each class, 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, 2014 and 2013, respectively ($ in thousands):
Certain of our reinsurance contracts include provisions that adjust premiums and/or reinstate reinsurance coverage limits based upon the loss experience under the contracts. We take these provisions into account when determining our estimates of premiums written and earned. 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 of losses by the reinsurer. These premiums relate to and are earned over the future coverage period and the remaining exposure from the underlying policies. Any unearned premiums existing at the time of the reinstatement are earned immediately in proportion to the contract loss limits utilized. Additional premiums are premiums that are triggered by losses and are earned immediately. Premiums written and earned include estimates of reinstatement premiums and additional premiums based on reinsurance contract provisions and loss experience and rely on the estimates of unpaid losses and LAE.
During the years ended December 31, 2014, 2013 and 2012, we recorded net premiums written of $492.1 million, $567.1 million and $565.0 million. In those years, we recorded increases in prior year net premiums written of $2.5 million, $47.1 million and $44.8 million, respectively. Substantially all of the change in prior year net premiums written relates to the two most recent underwriting years and was primarily the result of updated premiums reported by our ceding companies. During the year ended December 31, 2014, we recorded a decrease in prior year net premiums earned of $1.2 million and, during the years ended December 31, 2013 and 2012, we recorded increases in prior year net premiums earned of $30.6 million and $30.4 million, respectively. The effect on net income from changes in estimates of prior years' net premiums earned, after considering corresponding changes in losses and acquisition expenses attributable to those changes in premiums, was not significant. We do not believe that the changes in prior years' premium estimates in 2014, 2013 and 2012 are indicative of prospective net premium adjustments in future years because conditions and trends that affected prior years' premium estimates may not exist in the future.
Our actuaries prepare estimates of our ultimate liability for unpaid losses and LAE based on various actuarial methods including the loss ratio method, the Bornhuetter-Ferguson method and the chain ladder method, each of which is discussed below. We believe that the quantitative actuarial methods used to estimate our liabilities are enhanced by management's professional judgment. We review the actuarial estimates of our liability and determine our best estimate of the liabilities to record as unpaid losses and LAE in our consolidated financial statements. We use the same processes and procedures for estimating unpaid losses and LAE for annual and interim periods.
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."
We believe that a review of individual contract information improves the loss estimates for some classes of business. Our actuaries make their determinations of the most appropriate point estimate of loss for each class based on an evaluation of relevant information and do not ascribe any particular portion of the estimate to a particular factor or consideration. These estimates are aggregated for review by management and, after approval, are the basis for our liability for unpaid losses and LAE.
In property and marine classes, the loss development patterns are primarily based on our historical reported loss data. For all classes, historical data by effective date and business type is used to determine loss development patterns that reflect each year's reinsurance contract inception date distribution and the distribution of underlying business written on a losses occurring basis versus on a risk attaching basis. Loss development patterns are analyzed for various reinsurance sub-classes and an overall pattern for each Underwriting Year is determined by the mix of business within that Underwriting Year.
In casualty classes, the loss development patterns are primarily based on our historical reported loss data and that of our predecessor, and for the North American casualty classes they are supplemented by industry data from the Reinsurance Association of America ("RAA") and Insurance Services Offices, Inc. Due to the long loss development pattern in general liability, various sources are used to estimate the end of the loss development pattern referred to as the "tail". To estimate the tail, we supplement our historical data, and the data available from our predecessor, with industry data, generally from the RAA, and data received from external actuarial firms. Loss development patterns are analyzed for various reinsurance sub-classes and an overall pattern for each Underwriting Year is determined by the mix of business within that Underwriting Year.
As losses from major catastrophes mature, our actuaries generally consider losses reported to us relative to loss development patterns from prior major catastrophe events. Our estimate of ultimate liability for losses and LAE related to a major catastrophe event will generally be based on these development patterns after approximately twelve months following the event. However, since loss development patterns may be inconsistent between events, for very large major catastrophes, such as the 2010 and 2011 earthquakes in New Zealand, we will generally review information on a contract-by-contract basis for a longer period. Estimates of ultimate losses for a major catastrophe event are typically well established within 12 to 24 months following the event, although ultimate losses from an earthquake may take longer to emerge.
For additional information on major catastrophe events for which we have established specific reserves in 2014, 2013 and 2012 see the "Results of Operations" set forth below in this Form 10-K.
The ultimate liability for unpaid losses and LAE may vary materially from our current estimates for many reasons. Our estimates are inherently uncertain because they are affected by factors that are highly dependent on judgment. Significant factors that add uncertainty to our estimates of losses include: (1) our estimates are based on predictions of future developments and estimates of future trends in claim severity and frequency, (2) the reliance that we necessarily place on ceding companies for claims reporting, (3) the associated time lag in reporting losses, (4) the need to estimate an initial expected loss ratio before significant loss experience is reported, (5) the low frequency/high severity nature of some of our business and (6) the varying reserving practices among ceding companies.
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, 2014, 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.
As part of the 2006, 2009 and 2012 reviews, the independent actuarial firms also provided shorter and longer loss development patterns by reserving class. Generally, the loss development patterns provided by the independent actuarial firms from the 2012 review were shorter than the patterns produced in the 2006 and 2009 reviews, indicating that losses were expected to be reported faster than previously estimated by the firms. The shorter patterns generally resulted in lower indicated loss ratios. The Company's actuarial staff applied these shorter loss development patterns from the 2012 review for certain of our classes to develop alternative indications of ultimate losses. During 2014, both firms provided updates of these patterns. We considered these alternative indications, along with the indications developed using loss development patterns determined by the Company's own actuaries, in the selection of ultimate loss ratios.
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 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, 2014 was $549.8 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.
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical financial assets or liabilities;
Level 2: 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 fair value of our fixed maturity securities and short-term investments is based on prices primarily obtained from index providers, pricing vendors, or broker-dealers using observable inputs. Index providers utilize external sources and pricing models to value index-eligible securities across numerous sectors and asset classes. Pricing vendors collect, edit, maintain, evaluate and model data on a large number of securities utilizing primarily market data and observable inputs. Broker-dealers value securities through proprietary trading desks primarily based on observable inputs. As of December 31, 2014, approximately 51% of the fair value of our fixed maturity securities was valued using prices obtained from index providers and 49% using prices obtained from pricing vendors. As of December 31, 2014, there was one security valued using a price from a broker-dealer.
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.
We believe that the gross unrealized losses in our fixed maturity available-for-sale securities portfolio of $3.7 million represent temporary declines in fair value. We believe that the unrealized losses are not necessarily predictive of ultimate performance and that the provisions we have made for net impairment losses are adequate. However, economic conditions may deteriorate more than expected and may adversely affect the expected cash flows of our securities, which in turn may lead to impairment losses being recorded in future periods. Conversely, economic conditions may improve more than expected and favorably increase the expected cash flows of our impaired securities, which would be earned through net investment income over the remaining life of the security.
For additional information on our investment portfolio including the credit quality and the net unrealized gain and loss of our investments as of December 31, 2014, see "Financial Condition - Liquidity - Sources of Liquidity" in this Form 10-K.
Net deferred tax assets were $17.5 million and $25.1 million for the years ended December 31, 2014 and 2013, respectively. At each balance sheet date, we evaluate the recoverability of the net deferred tax assets, considering the timing of the reversal of deferred income and expense items as well as the likelihood that we will generate sufficient taxable income to realize the future tax benefits. We believe that it is more likely than not we will generate sufficient taxable income and realize the future tax benefits in order to recover the deferred assets and accordingly, no valuation allowance was established as of December 31, 2014 and 2013. See Note 7 to the "Consolidated Financial Statements" contained elsewhere in this Form 10-K for additional information on income taxes.
Net favorable or unfavorable development is the development of prior years' unpaid losses and LAE and the related impact of premiums and commissions. Net favorable or unfavorable loss development, the unpaid losses and LAE component of net favorable or unfavorable development, excludes the related impact of premiums and commissions.
Net income and diluted earnings per common share for the years ended December 31, 2014, 2013 and 2012 were as follows ($ and amounts in thousands, except diluted earnings per common share):
2013 versus 2012: The decrease in net income and diluted earnings per common share for the year ended December 31, 2013 as compared with the year ended December 31, 2012 was primarily due to decreases in net investment income and net realized gains on investments.
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 income reflected a decrease in net favorable development, offset by a decrease in net losses from current year major catastrophes and underwriting income in our North American crop class as compared with an underwriting loss in our North American crop class for the same period in 2012.
Net favorable development was $173.2 million and $234.0 million for the years ended December 31, 2013 and 2012, respectively.
Net losses from current year major catastrophes were $26.1 million and $68.9 million for the years ended December 31, 2013 and 2012, respectively.
The following discussion and analysis reviews our underwriting results by operating segment.
The following table sets forth underwriting results, ratios and the change year over year for the Property and Marine segment for the years ended December 31, 2014, 2013 and 2012 ($ in thousands):
Net favorable development was $26.2 million and $67.5 million for the years ended December 31, 2014 and 2013, respectively.
Net losses from current year major catastrophes were $5.1 million and $26.1 million for the years ended December 31, 2014 and 2013, respectively. Net losses from 2014 major catastrophes for the year ended December 31, 2014 were attributable to Property Claims Services ("PCS") Catastrophe 45, a tornado and hailstorm event, primarily in Nebraska. Net losses from 2013 major catastrophes for the year ended December 31, 2013 were attributable to German hailstorms, floods in central and eastern Europe, primarily in Germany, and PCS Catastrophe 14, tornadoes in the U.S. Midwest, primarily in Oklahoma.
2013 versus 2012: The Property and Marine segment underwriting income increased 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 in our North American crop class as compared with an underwriting loss in our North American crop class in the same period in 2012.
Net favorable development was $67.5 million and $50.1 million for the years ended December 31, 2013 and 2012, respectively.
The Property and Marine segment generated 42.2%, 40.5% and 45.3% of our net premiums written for the years ended December 31, 2014, 2013 and 2012, respectively.
2014 versus 2013: The Property and Marine segment gross premiums written decreased by $20.0 million, and by $19.2 million excluding reinstatement premiums written related to major catastrophes, for the year ended December 31, 2014 as compared with the year ended December 31, 2013. Gross premiums written also reflected a decrease in prior years' premium estimates of $0.4 million for the year ended December 31, 2014 and an increase to prior years' premium estimates of $5.2 million for the year ended December 31, 2013. Excluding the impact of changes to prior years' premium estimates and reinstatement premiums related to major catastrophes, gross premiums written decreased $13.6 million. The decrease in gross premiums written was primarily due to decreases in the property catastrophe and property per risk excess-of-loss classes, partially offset by an increase in the North American property proportional class. The decrease in gross premiums written resulted primarily from fewer opportunities that met our underwriting standards and a reduction in rates.
The following table sets forth the components of net losses and LAE for the years ended December 31, 2014, 2013 and 2012 ($ in thousands):
The Property and Marine segment net losses from current year major catastrophes, with related premium adjustments, increased the net loss and LAE ratio by 2.7 points, 12.5 points and 30.2 points for the years ended December 31, 2014, 2013 and 2012, respectively.
2013 versus 2012: The Property and Marine segment net favorable loss development was $71.3 million and $45.7 million for the years ended December 31, 2013 and 2012, respectively. Net favorable loss development and related premium adjustments decreased the net loss and LAE ratio by 31.3 points and 19.2 points for the years ended December 31, 2013 and 2012, respectively. Net favorable loss development for the years ended December 31, 2013 and 2012 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 catastrophe excess-of-loss (non-major events) class arose primarily from the 2010 and 2011 underwriting years. Net favorable development in the property per risk class arose primarily from the 2007 through 2011 underwriting years. Net favorable development in the major catastrophes class arose primarily from the Tohoku earthquake. Net favorable development in the property proportional class arose primarily from the 2009 through 2011 underwriting years. Changes to loss development patterns contributed $0.4 million to the net favorable development. Net favorable development in the marine, aviation and satellite class arose primarily from the 2006 through 2008 underwriting years with changes to loss development patterns contributed $1.1 million to the net favorable development.
Calendar Year Losses - Excluding Current Year Major Catastrophes and Prior Years' Loss Development
2013 versus 2012: The Property and Marine segment calendar year losses, excluding current year major catastrophes and prior years' loss development, were $78.0 million and $99.3 million for the years ended December 31, 2013 and 2012, respectively. The calendar year loss ratios, excluding current year major catastrophes and prior years' loss development, were 34.8% and 41.6% for the years ended December 31, 2013 and 2012, respectively. The decrease in calendar year losses and the related loss ratios, excluding current year major catastrophes and prior years' loss development, resulted primarily from underwriting income in our North American crop class in 2013 as compared with an underwriting loss for the same period in 2012. Underwriting income related to our 2013 North American crop class was $4.1 million for year ended December 31, 2013, and the underwriting loss in our 2012 North American crop class was $17.6 million for the year for the year ended December 31, 2012, as a result of the severe drought conditions in the United States. The calendar year losses and the related loss ratios, excluding current year major catastrophes, prior years' loss development and the underwriting result from our North American crop class, were 38.0% and 38.1% for the years ended December 31, 2013 and 2012, respectively. Calendar year losses and related loss ratios were also impacted by changes in the mix of business.
2014 versus 2013: The Property and Marine segment net acquisition expenses were $40.1 million and $38.3 million for the years ended December 31, 2014 and 2013, respectively. The net acquisition expense ratios were 18.9% and 17.3%, for the years ended December 31, 2014 and 2013, respectively. The increase in net acquisition expenses and the net acquisition expense ratio for the year ended December 31, 2014 as compared with 2013 was primarily due to an increase in North American proportional business, which has a higher acquisition expense ratio than the remainder of the segment, and a reduction in property catastrophe business, which has a lower 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.
2013 versus 2012: The Property and Marine segment net acquisition expenses were $38.3 million and $34.3 million, for the years ended December 31, 2013 and 2012, respectively. The net acquisition expense ratios were 17.3% and 13.5% for the years ended December 31, 2013 and 2012, respectively. 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.
2013 versus 2012: The Property and Marine segment other underwriting expenses were $30.9 million and $31.1 million for the years ended December 31, 2013 and 2012, respectively.
The following table sets forth underwriting results, ratios and the change year over year for the Casualty segment for the years ended December 31, 2014, 2013 and 2012 ($ in thousands):
2014 versus 2013: The Casualty segment underwriting income decreased by $3.5 million for the year ended December 31, 2014 as compared with the year ended December 31, 2013, primarily due to a decrease in net favorable development. Net favorable development was $99.6 million and $103.9 million for the years ended December 31, 2014 and 2013, respectively.
The Casualty segment generated 52.8%, 52.1% and 50.8% of our net premiums written for the years ended December 31, 2014, 2013 and 2012, respectively.
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 reflected 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.
2014 versus 2013: The Casualty segment net favorable loss development was $97.8 million and $103.2 million for the years ended December 31, 2014 and 2013, respectively. Net favorable loss development and related premium adjustments decreased the net loss and LAE ratios by 37.2 points and 34.6 points for the years ended December 31, 2014 and 2013, respectively. Net favorable loss development for the years ended December 31, 2014 and 2013 was primarily attributable to a level of cumulative losses reported by our ceding companies that was lower than expected and that, in our judgment, resulted in sufficient credibility in the loss experience to change our previously selected loss ratios. In addition, we regularly review and update our initial expected loss ratios and loss development patterns based on our loss experience. For the years ended December 31, 2014 and 2013, net favorable loss development of $2.2 million and $15.7 million, respectively, was attributable to these changes in loss development patterns and initial expected loss ratios.
2013 versus 2012: The Casualty segment net favorable loss development was $103.2 million and $182.0 million for the years ended December 31, 2013 and 2012, respectively. Net favorable loss development and related premium adjustments decreased the net loss and LAE ratios by 34.6 points and 62.5 points for the years ended December 31, 2013 and 2012, respectively. Net favorable loss development for the years ended December 31, 2013 and 2012 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. In the fourth quarter of 2012, we began reflecting favorable variances in reported losses in our selection of ultimate loss ratios at an earlier point in the loss development timeline than we had previously. This earlier recognition accounted for $56.0 million of the net favorable loss development for the year ended December 31, 2012. In addition, net favorable loss development of $24.4 million was attributable to changes in loss development patterns for several classes. The net loss and LAE ratios were also impacted by changes in the mix of business.
Net favorable development in the North American claims made class arose primarily from the 2003 through 2011 underwriting years, partially offset by net unfavorable development arising from the 2007 and 2012 underwriting years and net unfavorable development of $5.6 million arising from changes in initial expected loss ratios and loss development patterns. Net favorable development in the North American umbrella class arose from 2005 through 2011 underwriting years, including a reduction in construction related claims of $9.4 million. Changes in expected loss ratios and loss development patterns contributed $7.2 million of net favorable development in this class. Net favorable development in the international casualty class arose from 2005 and 2008 through 2012 underwriting years. A change in the loss development patterns contributed $1.1 million of net unfavorable development in this class. Net favorable development in the financial lines class arose primarily from political risk exposure in the 2005 through 2008 underwriting years and trade credit exposure from the 2006, 2007, 2012 and 2013 underwriting years. Net favorable development in the North American clash class arose primarily from the 2006 through 2012 underwriting years. Net favorable development in the accident and health class arose primarily from the 2011 through 2013 underwriting years.
Net favorable development in the North American claims made class arose primarily from the 2004 through 2009 underwriting years with changes in loss development patterns contributing $6.8 million. Net favorable development in the North American umbrella class arose primarily from the 2003 through 2009 underwriting years with changes in loss development patterns contributing $16.1 million to the net favorable development. Net favorable development in the North American occurrence class arose primarily from the 2002 through 2005 and 2007 through 2009 underwriting years, partially offset by net unfavorable development from the 2006, 2010 and 2011 underwriting years. Changes in loss development patterns contributed $5.8 million to the net unfavorable development. Net favorable development in the international casualty class arose primarily from the 2003 through 2007 and 2009 underwriting years. Changes in loss development patterns contributed $5.1 million to the net favorable development. This was partially offset by net unfavorable development in the 2008 underwriting year which was impacted by claims related to the credit crisis arising from the financial institutions business as well as liability arising from Australian wildfires. Net favorable development in the financial lines class arose primarily from the 2006 and 2011 underwriting years. Changes in loss development patterns contributed $1.4 million to the net favorable development. Net favorable development in the North American clash class arose primarily from the 2004 and 2008 underwriting years. Changes in loss development patterns contributed $0.6 million to the net favorable development. Net favorable development in the accident and health class arose from most prior underwriting years.
2013 versus 2012: The Casualty segment net acquisition expenses were $71.6 million and $69.0 million for the years ended December 31, 2013 and 2012, respectively. The net acquisition expense ratios were 24.1% and 23.5% for the years ended December 31, 2013 and 2012, respectively. The increase in net acquisition expenses and related net acquisition expense ratios for the year ended December 31, 2013 as compared with 2012 was the result of changes in the mix of business.
2013 versus 2012: Net premiums written increased by $20.2 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012. Net premiums written reflected increases to prior years' premium estimates of $9.2 million and $5.8 million for the years ended December 31, 2013 and 2012, respectively. Excluding the impact of increases to prior years' premium estimates, net premiums written increased by $16.9 million. The increases in both current and prior years' premium estimates relate to the one in-force contract.
2013 versus 2012: The Finite Risk segment net losses, LAE and acquisition expenses increased by $11.5 million for the year ended December 31, 2013 as compared with the year ended December 31, 2012 primarily due to an increase in net premiums earned. Net favorable development was $1.8 million for the year ended December 31, 2013 and net unfavorable development was $0.2 million for the year ended December 31, 2012. The net favorable development decreased the net loss and LAE and acquisition expense ratio by 5.3 points for the year ended December 31, 2013 and net unfavorable development increased the net loss and LAE and acquisition ratio by 1.3 points for the year ended December 31, 2012.
Sales of investments resulted in net realized gains of $27.2 million for the year ended December 31, 2013 and included $18.3 million from the sale of municipal bonds, $6.1 million from the sale of corporate bonds and $2.5 million from the sale of commercial mortgage-backed securities ("CMBS"). Also included in net realized gains for the year ended December 31, 2013 was a net negative impact from fair value adjustments on trading securities of $3.3 million related to non-U.S government securities.
2013 versus 2012: Net realized gains on investments were $23.9 million and $88.8 million for the years ended December 31, 2013 and 2012, respectively. 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 primarily to non-U.S government securities, partially offset by insurance-linked securities.
2014 versus 2013: Net impairment losses on investments were $0.8 million and $2.0 million for the years ended December 31, 2014 and 2013, respectively. The net impairment losses recorded for the year ended December 31, 2014 included $0.5 million related to corporate bonds and $0.4 million related to non-agency residential mortgage-backed securities ("RMBS"). The net impairment losses recorded for the year ended December 31, 2013 included $1.4 million related to non-agency RMBS and $0.6 million related to sub-prime asset-backed securities ("ABS").
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. Substantially all net impairment losses recorded for the year ended December 31, 2012 related to non-agency RMBS.
Interest expense was $19.2 million and $19.1 million for the years ended December 31, 2014 and 2013, respectively, and related to our $250.0 million of debt obligations.
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.
2014 versus 2013: Income tax expense was $17.2 million and $34.7 million for the years ended December 31, 2014 and 2013, respectively. Our effective tax rate was 9.5% and 13.5% for the years ended December 31, 2014 and 2013, respectively.
2013 versus 2012: Income tax expense was $34.7 million and $25.0 million for the years ended December 31, 2013 and 2012, respectively. Our effective tax rate was 13.5% and 7.1% for the years ended December 31, 2013 and 2012, respectively.
See Note 7 to the "Consolidated Financial Statements" contained elsewhere in this Form 10-K for further detail on our pre-tax income by jurisdiction as well as a reconciliation of expected income taxes to our actual income tax expense or benefit.
Platinum Holdings is a holding company, the assets of which consist primarily of shares of its subsidiaries. Platinum Holdings' liquidity requirements, and those of Platinum Finance, include the payment of operating expenses, debt service obligations and income taxes. Our reinsurance subsidiaries' principal liquidity requirements are the payment of losses and LAE, commissions, brokerage, operating expenses, income taxes and dividends to Platinum Holdings and Platinum Finance. We consider the impact of dividends and other distributions from our reinsurance subsidiaries on their respective capital levels, which may impact the financial strength ratings assigned to our subsidiaries by A.M. Best and S&P.
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 of December 31, 2014;
Pledged assets or trust accounts. As of December 31, 2014, investments of $5.7 million were pledged to U.S. regulatory authorities and investments of $55.9 million and cash and cash equivalents of $13.0 million were pledged to collateralize obligations under various reinsurance contracts; and
Platinum Holdings may also require cash to pay for share and debt repurchases. Under the terms of the Merger Agreement, the Company is prohibited from repurchasing its common shares and debt obligations without the prior written consent of RenaissanceRe. See "Capital Resources - Share and Debt Repurchases" below for additional discussion of share and debt repurchases.
As part of our investment strategy, we seek to establish a level of cash and liquid short-term and intermediate-term securities which, including expected cash outflows from our operating activities and cash flows from our investments, we believe to be adequate to meet our foreseeable payment obligations. The ultimate amount and timing of claim payments could differ materially from our estimates and create significant variations in cash flows from operations between periods, which may require us to make payments from other sources of liquidity, such as sales of investments, borrowings from our syndicated credit facility or proceeds from capital market transactions. If we need to sell investments to meet liquidity requirements, the sale of such investments may be at a material gain or loss. As of December 31, 2014, our investment portfolio consisted primarily of diversified, high quality, predominantly investment-grade fixed maturity securities.
The following table provides additional information on the fair values, net unrealized gains and losses and credit quality of our fixed maturity available-for-sale securities as of December 31, 2014 ($ in thousands):
As of December 31, 2014, there were approximately $13.2 million and $4.6 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 RMBS portfolio was $1.9 million and $0.3 million as of December 31, 2014 and 2013, respectively. The net unrealized gain position of our sub-prime ABS portfolio was $2.8 million and $1.4 million as of December 31, 2014 and 2013, respectively. We analyze our non-agency RMBS and sub-prime ABS on a periodic basis using default loss models based on the performance of the underlying loans. Performance metrics include, but are not limited to, delinquencies, defaults, foreclosures, prepayment speeds and cumulative losses incurred. The expected losses for a mortgage pool are compared with the current level of credit support, which generally represents the point at which our security would experience losses. We evaluate projected cash flows as well as other factors in order to determine if a credit impairment has occurred.
The following table sets forth the amortized cost and fair value of our fixed maturity available-for-sale and trading securities by stated maturity as of December 31, 2014 ($ in thousands):
The actual maturities of our fixed maturity available-for-sale and trading securities could differ from stated maturities due to call or prepayment provisions.
On April 9, 2014, we entered into an amended and restated credit facility with various financial institutions (the "Syndicated Credit Facility"). The Syndicated Credit Facility is a four-year, $300.0 million secured senior credit facility available for letters of credit ("LOC"), with a sublimit of $100.0 million for revolving borrowings. LOC and borrowings 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. The Syndicated Credit Facility contains customary representations, warranties and covenants. Platinum Holdings and Platinum Finance have unconditionally guaranteed the obligations of each Platinum entity under the Syndicated Credit Facility.
Platinum Bermuda has an uncommitted LOC facility of $125.0 million available for the issuance of LOC to support reinsurance obligations of Platinum Bermuda. There was $10.9 million committed under this facility as of December 31, 2014. Platinum Holdings has unconditionally guaranteed the obligations of Platinum Bermuda under this facility.
Cash and cash equivalents of $131.3 million were held to collateralize LOC issued as of December 31, 2014.
Platinum Holdings receives dividends and other distributions from its subsidiaries as a source of liquidity and to fund the payment of dividends to its shareholders. Distributions to Platinum Holdings from its subsidiaries may be restricted as described below. There are no significant restrictions on retained earnings available for the payment of dividends by Platinum Holdings to its shareholders.
On February 10, 2015, Platinum Holdings' board of directors declared, subject to certain conditions, a quarterly dividend of $0.08 per common share. The quarterly dividend would be payable on March 31, 2015 to shareholders of record on March 2, 2015 and is conditioned on the Merger not having been consummated on or prior to March 31, 2015.
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 2014, Platinum US utilized its ordinary dividend capacity and paid an extraordinary dividend. In 2015, Platinum US will have an ordinary dividend capacity of $27.2 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.
Our Board of Directors has authorized the repurchase of our common shares through a share repurchase program. Since the program was established, our Board of Directors has approved increases in the repurchase program from time to time, most recently on April 22, 2014, to result in authority as of such date to repurchase up to a total of $250.0 million of our common shares. The following table summarizes our repurchases of common shares for the years ended December 31, 2014, 2013 and 2012 ($ in thousands, except per share data):
We do not have any off-balance sheet arrangements, as defined for purposes of the SEC rules, which are not accounted for or disclosed in the consolidated financial statements as of December 31, 2014.
Our contractual obligations as of December 31, 2014 by estimated maturity are presented below ($ in thousands):
See Note 6 to the "Consolidated Financial Statements" contained elsewhere in this Form 10-K.