through of this Form 10-K and “Note on Forward-Looking Statements” on page 1 of this Form 10-K. Our consolidated financial statements have been prepared in accordance with U.S. GAAP.
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, we estimate the portion of premiums earned but not reported ("EBNR"). The net impact on the results of operations of changes in estimated premiums earned is reduced by the accrual of losses and acquisition expenses related to such estimated premiums earned. The time lag involved in the process of reporting premiums is shorter than the lag in reporting losses. Premiums are generally reported within two years.
Premiums receivable include premiums billed and in the course of collection as well as WBNR. WBNR is the component of premiums receivable that is subject to judgment and uncertainty. Premiums receivable as of December 31, 2007 of $244,360,000 included $195,890,000 of WBNR that is based upon estimates. The appropriateness of WBNR is evaluated in light of the actual premium reported by the ceding companies and any adjustments to WBNR and EBNR that represent premiums earned are accounted for as changes in estimates and are reflected in results of operations in the period in which they are made.
When estimating premiums written and earned, we segregate the business of each of our reinsurance subsidiaries into classes by type of coverage and type of contract (approximately 90 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: (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 reviews these estimates with our underwriters and actuaries and an ultimate premium estimate is selected. Estimates of written premium and earned premium are then based on the selected ultimate premium estimate and the structure of the reinsurance contracts. The WBNR and EBNR are determined by subtracting the written and earned premium reported by the ceding companies from the estimated written and earned premium. As of December 31, 2007 WBNR was $195,890,000 and EBNR was $139,105,000. The selected best estimates of WBNR and EBNR were lower than the estimates made by our underwriters by $32,128,000 or 16%, and $19,336,000 or 14%, respectively. We believe that we reasonably could have made an adjustment of between $0 and $32,128,000 for WBNR and between $0 and $19,336,000 for EBNR. Key factors that were considered by management in selecting premium estimates lower than the estimates provided by our underwriters include: (1) the increased competition and lower rate level in classes of business with little or no North American catastrophe exposure that make it difficult for ceding companies to achieve their premium targets, (2) a large ceding company has recently reduced premium estimates on prior underwriting years thereby reducing credibility in its current year estimates and (3) the lack of a historical track record for some ceding companies writing new programs. The actual premium ultimately recorded may differ materially from the estimates discussed above.
One of the most significant estimates made by management in the preparation of our financial statements is the estimation of unpaid losses and LAE, also referred to as “loss reserves.” Unpaid losses and LAE include estimates of the cost of claims that were reported but not yet paid, generally referred to as case reserves, and the cost of claims incurred but not yet reported ("IBNR"). These liabilities are estimates of future amounts required to pay losses and LAE for reinsured claims for which we are liable and that have occurred at or before the balance sheet date. Every quarter, our actuaries prepare estimates of the loss reserves based on established actuarial techniques. Our processes and procedures for estimating unpaid losses and LAE on an annual basis and an interim basis are the same. Because the ultimate amount of unpaid losses and LAE is uncertain, we believe that the quantitative techniques used to estimate these amounts are enhanced by management’s professional judgment. We review these estimates and determine our best estimate of the liabilities to record in our consolidated financial statements.
Case reserves are generally based upon claim reports received from ceding companies. Actual paid losses and case reserves, often referred to collectively as reported losses, are subtracted from expected ultimate losses to derive IBNR. The information we receive varies by ceding company and includes paid losses and case reserves and may include an estimate of IBNR. Case reserves may be increased or decreased by our claims personnel based on receipt of additional information, including information received from ceding companies. Our estimates of ultimate loss are based on various actuarial methods including the loss ratio method, the Bornhuetter-Ferguson method and the chain ladder method, which are discussed below. Estimated ultimate loss related to a catastrophic event may be based on our estimated exposure to an industry loss and may rely on the use of catastrophe modeling software.
Generally, estimates of expected ultimate losses that are not related to a specific event are initially determined based on the loss ratio method applied to each Underwriting Year and to each class of business. The expected ultimate losses are determined by multiplying the expected loss ratio times the earned premium. The selection of expected loss ratios involve management judgment and are based on: (1) contract by contract expected loss ratios developed during our pricing process, and (2) our historical loss ratios and combined ratios (loss plus acquisition cost ratios), and (3) the historical loss ratios of St. Paul Re, when available, updated and adjusted for rate changes and trends. These judgments take into account management’s view of past, current and future: (1) market conditions, (2) changes in the business underwritten, (3) changes in timing of the emergence of claims and (4) other factors that may influence expected ultimate losses.
Over time, as a greater number of claims are reported, actuarial estimates of IBNR are based on the Bornhuetter-Ferguson and the chain ladder techniques. The Bornhuetter-Ferguson technique utilizes actual reported losses and expected patterns of reported losses, taking the initial expected ultimate losses into account to determine an estimate of expected ultimate losses. This technique is most appropriate when there are few reported claims and a relatively less stable pattern of reported losses. The chain ladder technique utilizes actual reported losses and expected patterns of reported losses to determine an estimate of expected ultimate losses that is independent of the initial expected ultimate losses. This technique is most appropriate when there are a large number of reported losses with significant statistical credibility and a relatively stable pattern of reported losses. The determination of when reported losses are sufficient and credible to warrant deviating from initial expected loss ratios also requires judgment. Reported loss experience indicating unfavorable variances from initial expected loss ratios tend to be recognized faster than reported loss experience indicating favorable variances. This is because the reporting of losses in excess of expectations tends to have greater credibility than an absence or lower than expected level of reported claims.
In North American casualty excess of loss lines the expected patterns of reported losses are primarily based on our historical reported loss data and that of St. Paul Re, both of which are supplemented by industry data from the Reinsurance Association of America ("RAA"). Due to the long reporting pattern in general liability, various sources are used to estimate the end of the reporting pattern referred to as the “tail”. To estimate the tail we supplement our historical data and that of St. Paul Re available to us, with industry data, generally from the RAA.
We analyze historical patterns of reported losses and may adjust them for observed anomalies. For example, we observed that patterns of reported losses were much slower in Underwriting Years that were characterized by especially intense competition, known as the “soft market”, particularly in the North American excess-of-loss claims made class. We believe this is due to multiple year policies written by cedants and the deterioration in underwriting standards during these periods. In determining our patterns of reported losses for certain classes we may exclude certain historical data from the soft market years as none of our business was written in these soft market periods. One of the risks of excluding some of the years is that we could be obscuring trends in patterns of reported losses. Our actuaries consider this when determining the credibility of indications that use these patterns. For a small number of reinsurance contracts appropriate historical patterns of reported losses must be developed from ceding company data or other sources.
In finite casualty expected patterns of reported losses for the largest contracts are based on ceding company data. For other contracts when ceding company data is unavailable appropriate patterns from our data or the RAA are used.
Catastrophe reserves total $181,803,000 which represents 8%, of our gross unpaid loss reserves as of December 31, 2007. Specific reserves for catastrophe events are established on an event by event basis. Generally, an event must cause more than $1 billion of property losses to the insurance industry or $10 million of property losses to the Company to be considered and tracked as a catastrophe. Our underwriters make estimates of ultimate loss for catastrophes by event and contract. The estimated ultimate losses are initially based on industry loss estimates, ceding company estimates, ceding company estimated market share and, in certain cases, output from catastrophe models. Information is typically updated as it becomes available. Our actuaries review the loss estimates and other information with our underwriters and make an estimate of ultimate loss. Important considerations in this review include: (1) the credibility of ceding company estimates, (2) whether the ceding company estimates include IBNR, and (3) how current the latest update is from the ceding company. As the events mature, the reported losses as a percentage of ultimate losses are compared to a catastrophe loss development pattern based on prior catastrophe events. After approximately 12 months following an event, the ultimate loss estimate is generally based on the development patterns and individual reinsurance contract level information may or may not be maintained. Loss development patterns may be inconsistent between events. For the very large catastrophes, such as Hurricane Katrina in 2005, the contract level information will generally be maintained and reviewed for a longer period. Generally, the ultimate losses are reasonably well known within 12 to 24 months after a catastrophic event. Although earthquake events can have a longer reporting period, there have been no significant earthquake events during our history.
The process of estimating ultimate losses for primary insurance business is not precise due to the inherent uncertainty of future developments. Primary insurers must estimate their own losses, often based on incomplete and changing information. The estimation process for reinsurance business introduces further uncertainties compared with reserving for primary insurance business. There are numerous factors that add uncertainty to our estimates of losses, the more significant of which 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 low frequency/high severity nature of some of the business that we underwrite, and (5) the varying reserving practices among ceding companies. 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 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 a potential additional time lag in the receipt of information as the primary insurer reports to the broker who in turn reports to us. As of December 31, 2007, we did not have any significant back-log related to our processing of assumed reinsurance information. In the reserving process, we assume that time lags in reporting are predictable over time and therefore the lags are contemplated in the loss reporting patterns used in our actuarial methods. Ceding company reserving practices can vary and our actuaries consider this when determining the credibility of indications that use this information.
Because our estimates of ultimate losses are affected by these and other factors and are highly dependent on judgment, our estimates of ultimate loss are inherently uncertain. 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 to discover structural weaknesses not initially detected in buildings. The uncertainty inherent in loss estimation is particularly pronounced for casualty coverages, such as umbrella liability, general and product liability, professional 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.
Unpaid losses and LAE as of December 31, 2007 related to the 2005 Hurricanes was $118,234,000, of which $67,405,000 was related specifically to Hurricane Katrina. In the table below, the paid and reported losses are shown as a percentage of the current estimated ultimate loss for the 2005 Hurricanes and losses from hurricanes Charlie, Ivan, Francis and Jean in 2004 (the "2004 Hurricanes") at nearly similar points of their respective development:
Paid and reported losses for the 2005 Hurricanes are a lower percentage of estimated ultimate loss than for the 2004 Hurricanes at similar points of their respective development. They are also lower than the comparable statistics for Hurricane Andrew in 1992 at its similar point of development. For the 2005 Hurricanes, we are relying primarily on our underwriters’ and actuaries’ estimates by contract which rely heavily on ceding company estimates of ultimate loss. We believe the unprecedented size of the events and the claims adjusting issues will result in a longer loss development period than for past hurricanes.
The increase in net income in 2007 as compared to 2006 was primarily due to an increase in net investment income of $26,235,000, a decrease in income tax expense of $6,342,000 and an increase in underwriting income of $4,079,000. Underwriting income consists of net premiums earned, less net losses and LAE, net acquisition expenses and operating expenses related to the reinsurance company subsidiaries. Underwriting income in 2007 included the net adverse impact of $38,721,000 from several major catastrophes, the most significant being $27,368,000 from European windstorm Kyrill and $8,453,000 from floods in the United Kingdom. In 2006, the net adverse impact of major catastrophes was $5,155,000. Net favorable development, which included the development of prior years’ unpaid losses and LAE and the related impact on premiums and commissions, also contributed to underwriting income in both 2007 and 2006. Net favorable development was $77,806,000 and $55,768,000 in 2007 and 2006, respectively.
The decrease in gross premiums written in 2007 as compared with 2006 was primarily attributable to decreases in gross premiums written across most classes in the Casualty segment, reflecting fewer opportunities that met our underwriting standards. Partially offsetting the decrease in casualty gross written premiums was an increase in property catastrophe gross written premiums. Also affecting the comparison of gross premiums in 2007 to 2006 was a reduction of gross premiums written in 2006 of $56,589,000 relating to the termination of a finite risk contract. The decrease in ceded written premiums, which resulted in an increase in net premiums written, was attributable to the non-renewal in 2007 of the quota share retrocession agreement effective January 1, 2006 (the "2006 Property Quota Share Agreement") under which Platinum US and Platinum UK ceded 30% of their new and renewal property catastrophe business effective on or after January 1, 2006 to a non-affiliated reinsurer. The decrease in net premiums earned was due to decreases in current and prior year’s written premiums.
The decrease in net losses and LAE in 2007 as compared to 2006 was primarily due to the decrease in net premiums earned. Net losses in 2007 included major catastrophe losses of $44,585,000 which represented 3.8%, of net premiums earned in 2007, as compared with major catastrophe losses of $5,536,000 in 2006, representing 0.4% 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 losses and LAE also included net favorable loss development of $81,166,000 in 2007, representing 6.9% of net premiums earned, and $60,746,000 in 2006, representing 4.5% of net premiums earned.
The net favorable loss development related to prior years emerged from all segments and was related to both catastrophe and non-catastrophe losses. The most significant portion of net favorable development was in the Property and Marine segment and certain classes in the Casualty segment. Actual reported losses in these classes were significantly less than expected and gained sufficient credibility in the current period to reduce estimated ultimate losses. Net favorable loss development in 2007 included $17,164,000 related to prior years’ major catastrophes, primarily hurricane losses in the Property and Marine segment. Net favorable loss development in 2007 also included $15,474,000 from certain long-tailed casualty classes. We do not believe that the net favorable development in 2007 is indicative of prospective net development of unpaid losses and LAE as of December 31, 2007 because conditions and trends that affected the net favorable development of prior years’ unpaid losses and LAE may not necessarily exist in the future.
The decrease in net acquisition expenses in 2007 as compared with 2006 was primarily due to the decrease in net premiums earned. The decrease in the net acquisition expense ratio in 2007 as compared with 2006 was primarily due to the decrease in the Property and Marine segment of assumed proportional business with relatively higher acquisition expense ratios and an increase in catastrophe excess business with a relatively lower acquisition expense ratio. The decrease in the net acquisition expense ratio was also attributable to a decrease in umbrella premiums in the Casualty segment which had a higher net acquisition expense ratio relative to the remainder of the business.
Operating expenses for the years ended December 31, 2007 and 2006 were $103,593,000 and $95,490,000, respectively. Operating expenses include costs such as salaries, rent and like items related to reinsurance operations as well as costs associated with Platinum Holdings and its non-operating intermediate holding company subsidiaries. The increase in operating expenses was primarily due to increased incentive-based compensation and costs associated with an employee retention plan, which represented $5,433,000 of the $8,103,000 increase.
Interest expense for the years ended December 31, 2007 and 2006 was $21,470,000 and $21,805,000, respectively, and was primarily related to our $250,000,000 of Series B 7.5% Notes due June 1, 2017 (the "Series B Notes"). Interest expense also included interest related to $42,840,000 of Series B 6.371% Remarketed Senior Guaranteed Notes due November 16, 2007 (the "Remarketed Notes"). In November 2002, we issued Equity Security Units ("ESUs") each of which consisted of a contract to purchase our common shares in 2005 and an ownership interest in a Senior Guaranteed Note. On August 16, 2005, Platinum Finance successfully completed the remarketing of $137,500,000 aggregate principal amount of the Senior Guaranteed Notes due November 16, 2007, referred to as the Remarketed Notes. On November 16, 2005, Platinum settled the common share purchase contract component of the ESUs by issuing 5,008,850 common shares, which generated cash proceeds to us of $137,500,000, less related fees and expenses. As a result of the settlement of the purchase contract component, the ESUs ceased to exist. In December 2005, Platinum Finance completed a tender offer to repurchase all of the outstanding Remarketed Notes and repurchased $94,660,000 of the Remarketed Notes. Interest expense in 2007 was less than interest expense in 2006 as Platinum Finance repaid the remaining $42,840,000 of Remarketed Notes when they came due in November 2007.
The decrease in income tax expense was due to the decrease in the effective income tax rate in 2007 as compared with 2006. The effective tax rate in any given year is based on income before tax expense of our subsidiaries that operate in several jurisdictions with varying corporate income tax rates. Platinum Holdings and Platinum Bermuda are not subject to corporate income tax. The decrease in the effective income tax rate was the result of a greater portion of income before income tax expense in than in 2006 being generated by Platinum Holdings and Platinum Bermuda, which are not subject to corporate income tax. In 2007, the combined income before income taxes derived from Platinum Holdings and Platinum Bermuda was 79.8%, as compared to 73.1% in 2006.
Other expense for the years ended December 31, 2006 and 2005 was $2,872,000 and $586,000, respectively. 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. Other expense in 2005 included $102,000 of net unrealized losses relating to changes in fair value of fixed maturities classified as trading and $53,000 of net expense on reinsurance contracts accounted for as deposits.
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 2006 increased by approximately 1% as compared with 2005. The increase is attributable to higher loss ratios in the Casualty segment reflecting decreases in price adequacy. The decrease in net premiums earned also contributed to the decrease in losses and LAE in 2006. Some of the most significant decreases in net premiums earned have been in the finite casualty, crop, trade credit and accident and health classes, which have loss ratios higher than our overall book of business. The net loss and LAE ratios were also affected by changes in the mix of business.
Interest expense for the years ended December 31, 2006 and 2005 was $21,805,000 and $20,006,000, respectively. Interest expense in 2006 included interest on Series B Notes as well as interest on the remaining balance of $42,840,000 of the Remarketed Notes. Interest expense in 2005 included interest on the Series B Notes from issuance in May 2005 and interest on $137,500,000 of the Remarketed Notes at 5.25% per annum, until remarketed in August 2005 at 6.371% per annum. The Remarketed Notes were then partially repurchased in December 2005. As a result of a repurchase of $94,660,000 of the Remarketed Notes in December 2005, we incurred a loss on repurchase of debt of $2,486,000. This included 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. The increase in 2006 as compared with 2005 was due to the increase in average outstanding debt during the comparable periods.
The increase in income tax expense in 2006 as compared with the income tax benefit in 2005 was primarily due to net income in 2006 as compared with a net loss in 2005. The effective tax rate in any given year is based on income before tax expense of our subsidiaries that operate in several jurisdictions with varying corporate income tax rates. The decrease in the effective tax rate was due to several factors. A higher percentage of income before income taxes was generated in 2006 than in 2005 by Platinum Holdings and Platinum Bermuda, which are not subject to corporate income tax. In 2006, the combined income before income taxes derived from Platinum Holdings and Platinum Bermuda was approximately 73% of the total income before income tax expense as compared with approximately 45% of the loss before income tax benefit in 2005. Additionally, in 2005, $6,500,000 of income tax was incurred as a result of the transfer from Platinum Finance to Platinum Holdings of a portion of the proceeds from the issuance of debt obligations in May 2005. This transfer was considered to be a taxable distribution under U.S. tax law and, accordingly, subject to U.S. withholding tax.
Other underwriting expenses for the years ended December 31, 2007 and 2006 were $42,422,000 and $39,887,000, respectively. The increase in 2007 as compared with 2006 was due, in part, to increased property underwriting activity in Bermuda and a corresponding increase in its staff. The additions to staff in Bermuda were made during 2006. The increase in 2007 as compared with 2006 was due, in part, to increased incentive-based compensation and costs associated with an employee retention plan. Other underwriting expenses in 2007 and 2006 also included fees of $7,787,000 and $7,829,000, respectively, relating to a Services and Capacity Reservation Agreement with Renaissance Re Holdings Ltd. ("RenaissanceRe") effective October 1, 2002 (the "RenRe Agreement") pursuant to which RenaissanceRe provided consulting services to us in connection with our property catastrophe book of business. The RenRe Agreement expired on September 30, 2007 and was not renewed.
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 1.2% of net premiums earned as compared with $573,900,000 in 2005, representing 100.8% of net premiums earned. Included in the major catastrophe losses in 2005 were $549,050,000 from the 2005 Hurricanes, representing 96.5% of net premiums earned. Net losses and LAE and the resulting net loss and LAE ratios in 2006 and 2005 were also impacted by favorable net loss development of $54,317,000 in 2006, representing 12.1% of net premiums earned and $51,298,000 in 2005, representing 9.0% of net premiums earned. Exclusive of the favorable net loss development, effects of the major catastrophe losses and additional premiums generated by such major catastrophe losses, the net loss and LAE ratio in 2006 improved by approximately 1% as compared with 2005. The slight improvement was due to changes in the mix of business.
The decrease in net premiums written in 2007 as compared with 2006 was primarily due to decreases in business underwritten in 2006 and 2007 across most North American casualty classes, with the most significant decreases in the umbrella, occurrence based excess-of-loss and first dollar general liability classes. The decreases were the result of fewer opportunities that met our underwriting standards. The decrease in net premiums written in 2007 as compared with 2006 was also due to increases in estimates of net written premiums in 2006 of $68,937,000 in the North American excess casualty classes related to business written in prior underwriting years. Net premiums earned decreased in 2007 as compared with 2006 due to the declines in net premiums written in 2007 and 2006. Net premiums written and earned were also affected by changes in the mix of business and the structure of the underlying reinsurance contracts.
The Finite Risk portfolio consists of a small number of contracts that can be large in premium size and, consequently, overall premium volume may vary significantly from year to year. The increase in net premiums written in 2007 as compared with 2006 was primarily attributable to the termination of a significant finite casualty proportional contract effective January 1, 2006 on a cut-off basis, which resulted in the return of previously written but unearned premium, reducing net premiums written in 2006 by $56,589,000. The decrease in net premiums earned reflects the reduction in our finite business in 2007 and 2006.
Net losses and LAE, net acquisition expenses and the resulting ratios for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):
Gross, ceded and net premiums written and earned for the years ended December 31, 2006 and 2005 were as follows ($ in thousands):
Net losses and LAE, net acquisition expenses and the resulting ratios for the years ended December 31, 2006 and 2005 were as follows ($ in thousands):
Cash and cash equivalents and investments as of December 31, 2007 and 2006 were as follows ($ in thousands):
The increase in cash and cash equivalents represented 95% of the total increase in cash and cash equivalents and investments in 2007. The increase in cash and cash equivalents is primarily theresult of maturities and calls in our fixed maturity portfolio in the fourth quarter of 2007 where the proceeds were held in cash equivalents. We decided to reinvest a significant portion of our cash equivalents into longer duration fixed maturities during 2008. This decision was in response to a change in the yield curve in 2007 which improved the risk rates of return on longer duration securities in comparison to shorter duration securities.
Our available-for-sale and trading portfolios are primarily composed of diversified, high quality, predominantly publicly traded fixed maturities. The investment portfolio, excluding cash and cash equivalents, had a weighted average duration of 2.9 years as of December 31, 2007. We routinely monitor the composition of our investment portfolio and cash flows in order to maintain liquidity necessary to meet our obligations.
Approximately 45.6% of the mortgage-backed and asset-backed securities in our investment portfolio are issued or guaranteed by Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation and are referred to as U.S. Government Agency securities. Included in residential mortgage backed bonds are securities with an amortized cost of $22,881,000 and fair value of $22,669,000 where the underlying collateral consists primarily of “Alt-A” mortgages. These securities have a weighted average credit rating of Aa at December 31, 2007.
During 2007, the U.S. sub-prime residential mortgage market experienced significantly increased delinquencies which resulted in increased volatility and decreased liquidity in the financial markets and the structured security markets in particular. The securities with underlying sub-prime exposure are categorized as asset-backed securities and were investment grade at December 31, 2007. The fair value of these sub-prime securities was $35,397,000 as of December 31, 2007 and represented 0.8% of our total cash and cash equivalents and investments. The following table summarizes our nine asset-backed securities within our fixed income portfolio exposed to the sub-prime residential mortgage market as of December 31, 2007 ($ in thousands):
Our other invested asset at December 31, 2006 represented an investment in Inter-Ocean Holdings, Ltd., a non-public reinsurance company. During the first quarter of 2007 we sold this investment at its carrying value resulting in no gain or loss. We do not have any ceded or assumed reinsurance business with Inter-Ocean Holdings, Ltd.
We entered into two derivative contracts during 2007. The first was an option to purchase reinsurance which was not exercised. The second was a derivative contract under which we could have recovered up to $120,000,000 from the counterparty if modeled losses from both a first and second catastrophe event exceed a specified attachment point. The cost of this contract was $4,107,000 and the coverage period ended on December 31, 2007 with no triggering events. Both agreements were accounted for as derivatives and the cost of both were included in other expense for the year ended December 31, 2007.
We filed an unallocated universal shelf registration statement with the SEC, which the SEC declared effective on November 8, 2005. Under this shelf registration statement we 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 4,408,263 common shares for $132,909,000 and 5,750,000 mandatory convertible preferred shares for $173,363,000 under the unallocated shelf registration statement. 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 rules.
In May 2005, Platinum Finance issued $250,000,000 aggregate principal amount of Series A Notes due June 1, 2017, unconditionally guaranteed by Platinum Holdings which were subsequently exchanged for the Series B Notes. Interest at a rate of 7.5% per annum is payable on the Series B Notes on each June 1 and December 1. Platinum Finance may redeem the Series B Notes, at its option, at any time in whole, or from time to time in part, prior to maturity. The Series B Notes can be redeemed by us prior to maturity subject to a “make-whole” provision. We have no current expectations of calling the Series B Notes prior to maturity.
Dividends on the mandatory convertible preferred shares issued in December 2005 are $0.4525 per preferred share per quarter. 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 dividends or make any distributions to any of our common shareholders. Additionally, under the Companies Act, Platinum Holdings may declare or pay a dividend only if, among other things, it has reasonable grounds for believing that it is, or after the payment would be, able to pay its liabilities as they become due and if the realizable value of its assets would thereby not be less than the aggregate of its liabilities and issued share capital and share premium accounts. Accordingly, there is no assurance that dividends will be declared or paid in the future.
Platinum Bermuda is not licensed, approved or accredited as a reinsurer anywhere in the United States and, therefore, under the terms of most of its contracts with United States ceding companies, it is required to provide collateral to its ceding companies for unpaid ceded liabilities in a form acceptable to state insurance commissioners. Typically, this type of collateral takes the form of letters of credit issued by a bank, the establishment of a trust, or funds withheld. Platinum Bermuda provides letters of credit through the Credit Facility and may be required to provide the banks with a security interest in certain investments of Platinum Bermuda.
Platinum US is obligated to collateralize the liabilities assumed from St. Paul under the Quota Share Retrocession Agreements. Platinum Bermuda and Platinum US have reinsurance and other contracts that also require them to provide collateral to ceding companies should certain events occur, such as a decline in our rating by A.M. Best below specified levels or a decline in statutory equity below specified amounts, or when certain levels of liabilities assumed from ceding companies are attained. Some reinsurance contracts also have special termination provisions that permit early termination should certain events occur.
Periods of moderate economic recession or inflation tend not to have a significant direct effect on our underwriting operations. Significant unexpected inflationary or recessionary periods can, however, impact our underwriting operations and investment portfolio. Management considers the potential impact of economic trends in the estimation process for establishing unpaid losses and LAE.
We do not have any material commitments for capital expenditures as of December 31, 2007.
We do not have any off-balance sheet arrangements, as defined for purposes of SEC rules, which are not accounted for or disclosed in the consolidated financial statements as of December 31, 2007.
For the Property and Marine segment, underlying primary rates and reinsurance rates have deteriorated over the past several months in most classes of business. During the January 1 Renewal Season we experienced average rate decreases of approximately 14% on our U.S. property catastrophe excess renewal business while rates on our non-U.S. property catastrophe excess renewal business were down approximately 4%. Per risk excess property rates were down approximately 5% on renewal business. In addition, rates were down approximately 13% on our marine renewal business.
In we expanded the operations of Platinum Bermuda in order to make it our principal reinsurer of our global catastrophe and financial lines reinsurance portfolios. As part of this strategy, we renewed business previously written by Platinum UK in Platinum Bermuda. We also renewed certain property catastrophe contracts written by Platinum US in Platinum Bermuda. After successfully renewing substantially all of the reinsurance business written by Platinum UK in Platinum Bermuda, we ceased underwriting reinsurance in Platinum UK in 2007. We transitioned Platinum UK to a non-underwriting operation and returned substantially all of its capital to Platinum Holdings. In 2007, we implemented a 100% loss portfolio transfer of Platinum UK’s reinsurance business to Platinum Bermuda which effectively replaced the previous 55% quota share agreement. During 2008 we intend to seek novation of Platinum UK reinsurance contracts to Platinum Bermuda.
We believe that the investigations that were commenced in 2005 by the Securities and Exchange Commission (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 as well as various non-U.S. regulatory authorities continues to reduce demand for limited risk transfer products in the Finite Risk segment. We expect the relatively low level of demand will continue during 2008.