Platinum Holdings and Platinum Bermuda lease office space in Pembroke, Bermuda, where our principal executive office is located. Platinum US and all other U.S.-based subsidiaries are located in office space we lease in New York. Platinum US also leases office space in Chicago. Platinum UK Services Company Limited leases office space in London. We renew and enter into new leases in the ordinary course of business and anticipate no difficulty in extending our leases or obtaining comparable office facilities in suitable locations. We consider our facilities to be adequate for our current needs.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto included in this Form 10-K. This Form 10-K contains forward-looking statements that involve risks and uncertainties. Please see the “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.
Assumed reinsurance premiums are recognized as revenues, net of any related ceded retrocessional coverage purchased. Both assumed and ceded premiums are recognized as earned and included in revenues generally on a basis proportionate with the coverage period. Assumed premiums written not yet recognized as revenue are recorded on the consolidated balance sheet as reinsurance premiums receivable and unearned premiums; ceded premiums written not yet earned are recorded on the consolidated balance sheet as prepaid reinsurance premiums.
Due to the nature of reinsurance, ceding companies routinely report and remit premiums subsequent to the contract coverage period. Consequently, reinsurance premiums written include amounts reported by the ceding companies, supplemented by estimates of premiums that are written but not reported ("WBNR"). In addition to estimating WBNR, we estimate the portion of premiums earned but not reported ("EBNR"). 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. The potential 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 from the inception of the contract.
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 116 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 reviews these estimates with our underwriters and actuaries and selects an ultimate premium estimate. 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, 2009 WBNR was $221.1 million and EBNR was $186.4 million. The selected estimates of WBNR and EBNR were lower than the initial estimates made by our underwriters by $26.7 million or 12%, and $18.1 million or 10%, respectively. We believe that we reasonably could have made an adjustment of between $0 and $26.7 million for WBNR and between $0 and $18.1 million for EBNR. Key factors that were considered by management in selecting premium estimates lower than the estimates provided by our underwriters include: (1) the increased competition and lower rate level in classes of business with little or no North American catastrophe exposure that make it difficult for ceding companies to achieve their premium targets, and (2) the lack of a historical track record for some ceding companies writing new programs. The actual premium ultimately recorded may differ materially from the estimates discussed above.
The following table sets forth our estimated and reported premiums receivable as of December 31, 2009 and 2008 ($ in thousands):
Estimated premiums receivable at December 31, 2009 was lower than at December 31, 2008 due to a decrease in both the property and marine and casualty business written in 2009 as compared with 2008.
The liabilities recorded on our consolidated balance sheets as of December 31, 2009 and 2008 for unpaid losses and LAE were $2.3 billion and $2.5 billion, respectively. These amounts exclude any amounts we may recover from our retrocessionaires under coverage we purchased for such losses. We record estimates of amounts we expect to recover from retrocessionaires as assets on the consolidated balance sheet. The following table sets forth our case reserves, additional case reserves and IBNR by segment as of December 31, 2009 and 2008 ($ in thousands):
Non-catastrophe reserves were $2.2 billion as of December 31, 2009, representing 93% of our unpaid losses and LAE. When estimating unpaid losses and LAE, we segregate the business into classes by reinsurance subsidiary, by type of coverage and by type of contract (resulting in approximately 116 classes). Within each class, the business is further segregated by Underwriting Year, starting with 2002, our first year of operations.
Generally, estimates of ultimate losses that are not related to a specific event are initially determined based on the loss ratio method applied to each Underwriting Year and to each class of business. The selected ultimate losses are determined by multiplying the initial expected loss ratio by the earned premium. The initial expected loss ratios are key inputs that involve management judgment and are based on a variety of factors, including: (1) contract by contract expected loss ratios developed during our pricing process, (2) our historical loss ratios and combined ratios (loss plus acquisition cost ratios), and (3) when available, updated and appropriately adjusted, the historical loss ratios of The Travelers Companies, Inc., formerly The St. Paul Companies, Inc. (“Travelers”), for the reasons described below. These judgments take into account management’s view of past, current and future factors that may influence ultimate losses, including: (1) market conditions, (2) changes in the business underwritten, (3) changes in timing of the emergence of claims and (4) other factors that may influence ultimate loss ratios and losses.
In the North American casualty excess of loss classes, the loss development patterns are primarily based on our historical reported loss data and that of Travelers, both of which are supplemented by industry data from the Reinsurance Association of America (“RAA”) and Insurance Services Offices, Inc. (“ISO”). 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 available Travelers data, with industry data, generally from the RAA.
During 2009, we established specific reserves for major catastrophes that included floods in Ireland (“Irish Floods”), Hailstorm Wolfgang, Winterstorm Klaus and three U.S. catastrophe events referred to by Property Claim Services, a division of ISO, as Catastrophes 63, 68 and 78. In 2008, we established specific reserves for major catastrophes including Winterstorm Emma, Hurricane Gustav, Hurricane Ike and two U.S. catastrophe events referred to by Property Claim Services as Catastrophes 42 and 43. We also have established specific reserves for catastrophe events in prior years, which include Hurricane Katrina.
The ultimate liability for unpaid losses and LAE may vary materially from our current estimates for several reasons. Our estimates are inherently uncertain because they are affected by factors that are highly dependent on judgment. There are numerous other 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 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.
Our estimates are based on assumptions that historical loss development and trends are reasonably predictive of how losses will develop in the future when reported. New or updated information or loss data may impact our selection of ultimate loss ratios in subsequent periods. There are various elements of updated loss data and related information that may result in a materially different estimate of ultimate losses. The four most significant inputs to our loss estimation process are: (1) reported losses to date, (2) the initial expected loss ratio, (3) the loss development patterns and (4) earned premiums.
Fixed maturity securities for which we may not have the intent to hold until maturity are classified as available-for-sale and reported at fair value. Unrealized gains and losses are included in other comprehensive income in the consolidated statement of operations and in accumulated other comprehensive income in the consolidated statement of shareholders' equity, net of deferred taxes. Fixed maturity securities for which we have the intent to sell prior to maturity or for which we have elected the fair value measurement attributes of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 825, “Financial Instruments” (“ASC 825”) are classified as trading securities and reported at fair value, with mark-to-market adjustments included in net realized gains or losses on investments in the consolidated statement of operations and the related deferred income tax included in income tax expense.
We obtain prices for all of our fixed maturity securities, preferred stocks and short-term investments from pricing services, which include index providers, pricing vendors and broker-dealers. As of December 31, 2009, we valued approximately 58% of our investment securities using prices obtained from index providers, 34% using prices obtained from pricing vendors, and 8% using prices obtained from broker-dealers. The number of prices we obtain per instrument varies based on the type of asset class and particular reporting period. Prices are generally obtained from multiple sources when a new security is purchased and a pricing source is assigned to the particular security. A hierarchy is maintained that prioritizes pricing sources based on availability and reliability of information, with preference given to prices provided by independent pricing vendors and index providers. Pricing providers may be assigned to a particular security based upon the provider’s expertise. Generally, the initial pricing source selected is consistently used for each reporting period. We have not adjusted any prices that we have obtained from pricing services. However, if we determine that a price appears unreasonable, we investigate and assess whether the price should be adjusted.
Pricing services determine prices by maximizing the use of observable inputs and we do not believe there are any unobservable inputs significant to the fair value measurement. The inputs used in index pricing may include, but are not limited to, benchmark yields, transactional data, broker-dealer quotes, security cash flows and structures, credit ratings, prepayment speeds, loss severities, credit risks and default rates. The inputs used by pricing vendors may include, but are not limited to; benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids, offers and industry and economic events. Broker-dealers value securities through trading desks primarily based on observable inputs.
We use reinsurance accounting for assumed and ceded transactions when risk transfer requirements have been met. Risk transfer analysis evaluates significant assumptions relating to the amount and timing of expected cash flows, as well as the interpretation of underlying contract terms that may include loss limits or loss mitigation provisions. Reinsurance contracts that do not transfer sufficient insurance risk are accounted for as reinsurance deposit liabilities with interest expense charged to other income and credited to the liability.
Net income and diluted earnings per common share for the years ended December 31, 2009 and 2008 were as follows ($ in thousands, except earnings per share):
The increase in net income in 2009 as compared to 2008 was primarily due to an increase in net underwriting income of $128.1 million. Net underwriting income consists of net premiums earned, less net losses and LAE, net acquisition expenses and operating costs related to underwriting operations. The increase in net underwriting income was primarily due to the decrease in net underwriting losses arising from major catastrophes in 2009 as compared with 2008.
Net favorable or unfavorable development is the development of prior years’ unpaid losses and LAE and the related impact on premiums and commissions. Net favorable development was $101.0 million and $147.6 million in the years ended December 31, 2009 and 2008, respectively. The net favorable development in 2009 relating to prior years was in both the Property and Marine and Casualty segments. The decrease in net premiums earned in the Property and Marine segment in 2009 reduced net underwriting income. In addition net underwriting income was favorably impacted in 2009 by improved loss experience relating to a reinsurance contract in the Casualty segment covering leased private passenger automobile residual values (the “RVI Contract”).
The Property and Marine operating segment generated 57.6% and 57.1% of our net premiums written in 2009 and 2008, respectively. The following table summarizes underwriting activity and ratios for the Property and Marine segment for the years ended December 31, 2009 and 2008 ($ in thousands):
Gross premiums written decreased by $78.3 million in the year ended December 31, 2009 as compared with the year ended December 31, 2008 as we reduced our exposure to catastrophe events, most significantly in the renewal of contracts effective January 1, 2009. Additionally, reinstatement premiums in 2008 relating to major catastrophes contributed to the decrease in gross premiums written in 2009 as compared with 2008. Reinstatement premiums related to major catastrophes were $7.2 million and $28.3 million in 2009 and 2008, respectively. The decrease in net premiums earned in 2009 as compared with 2008 is consistent with the decrease in net premiums written and reflects changes in the mix of business.
The following table sets forth the net favorable (unfavorable) development for the year ended December 31, 2009 by class of business ($ in thousands):
The following table sets forth the net favorable (unfavorable) development for the year ended December 31, 2008 by class of business ($ in thousands):
Net favorable development in the property excess-of-loss per risk class related primarily to the 2006 and 2007 underwriting years. The net favorable development included improved experience in business with smaller regional cedants where loss ratios had been increased from initial expected loss ratios in prior years. A change in the loss development patterns in our North American business resulted in $1.9 million of the net favorable development. Net favorable development in the catastrophe excess-of-loss (non-major events) class related primarily to the 2007 underwriting year. Following a study of our historical experience and an updated exposure analysis, we decreased our initial expected loss ratio of our non-U.S. catastrophe excess-of-loss (non-major events) class resulting in $0.6 million of the net favorable development. Net favorable development in major catastrophes related primarily to events occurring in 2005 and 2007, with the most significant net favorable development related to Hurricanes Ivan and Katrina, Winterstorm Kyrill and the 2007 summer floods in the UK. Net favorable development in the crop class related primarily to the 2007 underwriting year. Net favorable development in the marine, aviation and satellite class related primarily to an increase in reinstatement premiums resulting from adverse loss experience of several years. The net favorable development was partially offset by net unfavorable development in the 2006 and 2007 underwriting years of $0.8 million related to changes in the loss development pattern and initial expected loss ratio assumptions. Net favorable development in the property proportional class related primarily to the 2002 through 2007 underwriting years, with a change to the loss development patterns resulting in approximately $1.8 million of net favorable development.
Net acquisition expenses and related net acquisition expense ratios were $67.0 million and 12.7% for the year ended December 31, 2009 and $90.8 million and 15.2% for the year ended December 31, 2008. The decrease in net acquisition expenses in 2009 as compared with 2008 was primarily due to a decrease in net premiums earned. The decrease in the acquisition expense ratio was due to a decrease in commissions related to prior years’ losses of $6.1 million, which, with related premium adjustments, represented 1.3% of net earned premiums in 2009 as compared with an increase in commissions related to prior years’ losses of $5.1 million in 2008 which, with related premium adjustments, represented 0.6% of net premiums earned. Net acquisition expense ratios were also impacted by changes in the mix of business.
Other underwriting expenses were $37.3 million and $38.5 million for the years ended December 31, 2009 and 2008, respectively. The decrease in 2009 as compared with 2008 was due to $4.3 million of one-time fees and expenses incurred in 2008 when we entered into a derivative contract with Topiary Capital Limited (“Topiary”) that provides us with annual second event catastrophe loss protection, see “Financial Condition - Liquidity” below for additional discussion of Topiary, partially offset by an increase in performance-based compensation accruals in 2009.
Net underwriting income increased by $31.6 million in the year ended December 31, 2009 as compared with the year ended December 31, 2008, which was primarily the result of improved loss experience relating to the RVI Contract. In 2008, we recorded net underwriting losses on the RVI Contract of $28.1 million, which exhausted the aggregate loss limit on the contract. In 2009, we decreased net underwriting losses related to the RVI Contract by $12.6 million as a result of the improved loss experience. Partially offsetting the difference in net underwriting losses related to the RVI Contract in 2009 as compared with 2008 were net underwriting losses in 2009 of $9.2 million on an accident and health contract and incurred losses of $8.9 million on an international casualty contract related to liability arising from Australian wildfires.
Net premiums written decreased by $73.6 million in the year ended December 31, 2009 as compared with the year ended December 31, 2008. The decrease was primarily due to decreases in business underwritten in 2008 and 2009 across most casualty classes and was the result of fewer opportunities that met our underwriting standards in 2009 than in 2008. The decrease in net premiums earned was the result of the decrease in net premiums written in current and prior years. Net premiums written and earned were also affected by changes in the mix of business and the structure of the underlying reinsurance contracts.
Net favorable development in the North American excess-of-loss claims made class related primarily to the 2003 through 2006 underwriting years. During the year an analysis of our medical malpractice business resulted in changes to the loss development pattern and initial expected loss ratios for the 2004 and later underwriting years which resulted in $9.2 million of the net favorable development. The 2007 underwriting year experienced net unfavorable development due to exposure to claims relating to the financial crisis. Net favorable development in the North American umbrella class related primarily to the 2004 and 2005 underwriting years. Net favorable development in the financial lines class related primarily to the 2004 through 2007 underwriting years’ credit and surety excess-of-loss classes. Net favorable development in the international casualty class related primarily to the 2002 through 2004 underwriting years’ motor excess of loss and claims made classes partially offset by net unfavorable development in the 2006 underwriting year.
Other underwriting expenses were $25.6 million and $24.0 million for the years ended December 31, 2009 and 2008, respectively. The increase in other underwriting expenses in 2009 as compared with 2008 was primarily due to an increase in performance-based compensation accruals.
The Finite Risk segment generated 2.7% and 1.4% of our net premiums written for the years ended December 31, 2009 and 2008, respectively. Due to the inverse relationship between losses and commissions for this segment, we believe it is important to evaluate the overall combined ratio, rather than its component parts of net loss and LAE ratio and net acquisition expense ratio. The following table summarizes underwriting activity and ratios for the Finite Risk segment for the years ended December 31, 2009 and 2008 ($ in thousands):
Sales of investments for the year ended December 31, 2009 resulted in realized net gains of $82.2 million primarily from TIPS, U.S. Government agency securities, corporate bonds, residential mortgage-backed securities (“RMBS”), asset-backed securities, and non-U.S. government securities and realized net losses of $1.0 million from commercial mortgage-backed securities (“CMBS”). The U.S. Government agency securities that we sold consisted of securities issued by financial institutions under the Temporary Liquidity Guarantee Program and that are guaranteed by the Federal Deposit Insurance Corporation. The net losses from mark-to-market adjustments on trading securities in 2009 were comprised of net losses of $2.1 million related to non-U.S. dollar denominated securities and $1.2 million related to TIPS, which were partially offset by net gains of $1.0 million related to insurance-linked securities. Sales of investments for the year ended December 31, 2008 resulted in realized net gains of $52.0 million primarily from TIPS, U.S. Government securities, U.S. Government agencies, and RMBS and realized net losses of $4.2 million from corporate bonds. The net gains from mark-to-market adjustments on trading securities in 2008 were comprised of $8.4 million related to non-U.S. dollar denominated securities and $1.2 million of changes in the fair value of TIPS.
Net impairment losses on investments were $17.6 million and $30.7 million for the years ended December 31, 2009 and 2008, respectively. The net impairment losses in 2009 reflect the portion of other-than-temporary impairments attributed to the credit losses for the impaired securities in accordance with FASB Accounting Standards Codification 320, “Investments - Debt and Equity Securities” (“ASC 320”), which we adopted as of the interim period ending March 31, 2009. The net impairment losses in 2008 reflect the entire difference between the amortized cost basis and fair value of the impaired securities at the balance sheet date. The net impairment losses in 2009 included $8.4 million related to non-agency RMBS, $5.3 million related to sub-prime asset-backed securities, $2.8 million related to CMBS, and $1.2 million related to perpetual preferred stocks. The net impairment losses in 2008 included $10.9 million related to non-agency residential mortgage-backed securities, $7.6 million related to corporate bonds, $6.5 million related to Alt-A residential mortgage-backed securities and sub-prime asset-backed securities, and $5.6 million related to perpetual preferred stocks.
Diluted earnings per common share decreased due primarily to the decrease in net income. Diluted earnings per common share was also favorably impacted by the decrease in weighted average shares outstanding. The weighted average shares outstanding decreased as a result of repurchasing 7,763,292 common shares during 2008.
Net underwriting income was $90.1 million and $223.0 million for the years ended December 31, 2008 and 2007, respectively. The decrease in net underwriting income was primarily due to an increase in net underwriting losses arising from major catastrophes in 2008 as compared with 2007. Net underwriting losses arising from major catastrophes were $198.0 million and $38.7 million in 2008 and 2007, respectively. Net premiums earned decreased in 2008 as compared with 2007 primarily due to decreases in net premiums earned across most classes in the Casualty segment, partially offset by an increase in net premiums earned in the Property and Marine segment. The decrease in net underwriting income was partially offset by an increase in net favorable development. Net favorable development was $147.6 million and $77.8 million in 2008 and 2007, respectively.
The net favorable loss development related to prior years emerged from all segments and was related to both catastrophe and non-catastrophe losses. The most significant portion of net favorable development was in the Property and Marine segment and certain classes in the Casualty segment. Actual reported losses in these classes were significantly less than expected and gained sufficient credibility in the current period to reduce estimated ultimate losses.
The Property and Marine operating segment generated 57.1% and 45.1% of our net premiums written in 2008 and 2007, respectively. The following table summarizes underwriting activity and ratios for the Property and Marine segment for the years ended December 31, 2008 and 2007 ($ in thousands):
Net underwriting income decreased by $123.5 million for the year ended December 31, 2008 as compared with December 31, 2007, which was primarily due to an increase in net underwriting losses arising from major catastrophes, partially offset by an increase in net favorable development. The net underwriting losses in 2008 arising from major catastrophes, including Hurricanes Gustav and Ike and Winterstorm Emma, were $198.0 million as compared with $38.7 million in 2007, which reflects losses from Winterstorm Kyrill and floods in the United Kingdom.
Gross premiums written increased by $95.0 million for the year ended December 31, 2008 as compared with December 31, 2007 primarily due to an increase in North American crop and excess catastrophe business. Net premiums written and net premiums earned in 2008 also included reinstatement premiums of $31.9 million and $28.3 million, respectively, relating to reinsurance contracts that incurred losses arising from the major catastrophes in 2008. Net premiums written and net premiums earned in 2007 included reinstatement premiums of $5.9 million for net written and earned premiums. The increase in ceded premiums written was attributable to the purchase of additional retrocession protection for our North American property catastrophe business.
Net losses and LAE increased by $201.8 million for the year ended December 31, 2008 as compared with December 31, 2007 due to an increase in losses arising from major catastrophes, partially offset by an increase in net favorable loss development. We had net losses arising from major catastrophes of $224.9 million in 2008 and $44.6 million in 2007. The net losses arising from major catastrophes, with related premium adjustments, increased the net loss and LAE ratio in 2008 and 2007 by 36.1 points and 8.5 points, respectively. Net losses and LAE and the resulting net loss and LAE ratios were also impacted by net favorable loss development of $71.2 million in 2008 as compared with $48.5 million in 2007. Net favorable loss development in 2008 included $21.2 million related to prior years’ major catastrophes, primarily hurricane losses. Net favorable loss development and premium adjustments related to prior years’ losses decreased the net loss and LAE ratios in 2008 and 2007 by 13.4 and 9.6 points, respectively. Exclusive of losses arising from major catastrophes, net favorable loss development and related premiums, the net loss and LAE ratio increased by approximately 3.4 points in 2008 as compared with 2007 primarily due to an increase in crop quota share business that had a higher expected loss ratio in 2008 than in 2007 as well as a higher loss ratio than the remainder of the segment. The net loss and LAE ratios were also affected by other changes in the mix of business.
Other underwriting expenses were $38.5 million and $42.4 million for the years ended December 31, 2008 and 2007, respectively. The decrease in 2008 as compared with 2007 was primarily due to a decrease in performance-based compensation accruals in 2008 and the expiration on September 30, 2007 of a five-year Services and Capacity Reservation Agreement with Renaissance Re pursuant to which Renaissance Re provided consulting services to us in connection with our property catastrophe book of business (the “RenRe Agreement”). In 2007, we incurred fees of $7.8 million pursuant to RenRe Agreement. Partially offsetting this decrease in 2008 was $4.3 million of fees and expenses related to a derivative contract we entered into with Topiary that provides us with catastrophe loss protection. See “Financial Condition - Liquidity” for additional discussion of Topiary.
Net premiums written decreased by $154.5 million for the year ended December 31, 2008 as compared with December 31, 2007. The decrease was primarily due to decreases in business underwritten in 2008 and 2007 across most North American casualty classes, with the most significant decreases in the umbrella, occurrence based excess-of-loss and accident and health classes. The decrease in business written was the result of fewer opportunities that met our underwriting standards. The decrease in net premiums earned was the result of the decrease in net premiums written in current and prior years. Net premiums written and earned were also affected by changes in the mix of business and the structure of the underlying reinsurance contracts.
The following table sets forth the net favorable (unfavorable) development in the year ended December 31, 2007 by class of business ($ in thousands):
Other underwriting expenses were $24.0 million and $29.2 million for the years ended December 31, 2008 and 2007, respectively. The decrease in other underwriting expenses in 2008 as compared with 2007 was primarily due to a decrease in performance-based compensation accruals.
The Finite Risk portfolio consists of one finite risk contract in force for 2008 and two contracts in force for 2007 and we expect little or no new activity in this segment in the foreseeable future due to the relatively low level of demand expected for finite risk products. The decreases in net premiums written and net premiums earned in 2008 as compared with 2007 reflect the continuing reduction in the demand for finite business.
Other underwriting expenses were $1.3 million and $2.7 million for the years ended December 31, 2008 and 2007, respectively. The decrease in other underwriting expenses in 2008 as compared with 2007 was due to a decline in underwriting activity in the segment and a lower percentage of underwriting expenses allocated to the segment.
Net realized gains on investments were $57.3 milllion for the year ended December 31, 2008 and net realized losses on investments were $0.4 million for the year ended December 31, 2007. The following table sets forth the components of our net realized gains and losses on investments for the years ended December 31, 2008 and 2007 ($ in thousands):
Net foreign currency exchange losses for the year ended December 31, 2008 were $6.8 million compared to net foreign currency exchange gains of $2.8 million for the year ended December 31, 2007. The net foreign currency exchange losses in 2008 were the result of holding more non-U.S. dollar denominated assets than non-U.S. dollar denominated liabilities, primarily the Euro and the British pound sterling, as the U.S. dollar strengthened against those currencies.
Income tax expense was $13.0 million and $23.8 million for the years ended December 31, 2008 and 2007, respectively. The decrease in taxable income in 2008 as compared with 2007 was due to the decrease in taxable income generated by our subsidiaries that operate in taxable jurisdictions, which resulted in an effective tax rate of 5.4% in 2008 as compared with 6.3% in 2007. The decrease in the effective tax rate was the result of a greater portion of income, in 2008 as compared with 2007, being generated by Platinum Holdings and Platinum Bermuda, which are not subject to corporate income tax. In 2008, the percentage of income before income tax expense derived from Platinum Holdings and Platinum Bermuda was 84.4% as compared with 79.8% in 2007.
Platinum Holdings has unconditionally guaranteed the outstanding $250.0 million aggregate principal amount of the Series B Notes due June 1, 2017, issued by Platinum Finance. Platinum Finance pays interest at a rate of 7.5% per annum on the Series B Notes on each June 1 and December 1.
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 U.S. 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 our credit facility and may be required to provide the banks with a security interest in certain investments of Platinum Bermuda.
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 ceded liabilities are attained. Some reinsurance contracts also have special termination provisions that permit early termination should certain events occur. As of December 31, 2009 and 2008, we held investments with a carrying value of $275.5 million and $155.4 million, respectively, and cash and cash equivalents of $26.8 million and $224.8 million, respectively, in trust to collateralize obligations under our reinsurance contracts. As of December 31, 2009 and 2008, we held investments with a carrying value of $206.5 million and $140.3 million, respectively, and cash and cash equivalents of $17.0 million and $83.4 million, respectively, to collateralize letters of credit issued under our credit facility. The letters of credit were issued primarily to collateralize obligations under various reinsurance contracts.
In August 2008, we entered into a derivative agreement with Topiary that provides us with the ability to recover up to $200.0 million should two catastrophic events involving U.S. wind, U.S. earthquake, European wind or Japanese earthquake occur that meet specified loss criteria during any of three annual periods commencing August 1, 2008. Both the initial activation event and the qualifying second event must occur in the same annual period. The maximum amount that we can recover over the three-year period is $200.0 million. Any recovery we make under this contract is based on insured property industry loss estimates for U.S. perils and European wind and a parametric index for Japanese earthquake events. Recovery is based on both a physical and financial variable and is not based on actual losses we may incur. Consequently, the transaction is accounted for as a derivative and the derivative is carried at the estimated net fair value.
Topiary’s limit of loss is collateralized with high quality investment grade securities in a secured collateral account. The performance of the securities in the collateral account is guaranteed under a total swap agreement with Goldman Sachs International whose obligations under the swap agreement are guaranteed by Goldman Sachs Group, Inc.
Our sources of funds consist primarily of cash from operations, proceeds from sales, redemption and maturity of investments, issuance of securities and cash and cash equivalents held by us. Net cash flows provided by operations excluding trading security activities for the year ended December 31, 2009 were $269.0 million as compared with $276.0 million for the year ended December 31, 2008. In addition, we have a $400.0 million credit facility with a syndicate of lenders that consists of a $150.0 million senior unsecured credit facility available for revolving borrowings and letters of credit and a $250.0 million senior secured credit facility available for letters of credit. As of December 31, 2009, $150.0 million was available for borrowing and letters of credit on an unsecured basis and $105.9 million was available for letters of credit on a secured basis under the credit facility. As of December 31, 2008, $150.0 million was available for borrowing on letters of credit on an unsecured basis and $68.7 million was available for letters of credit on a secured basis under the credit facility.
As part of our investment strategy, we seek to establish a level of cash and liquid short-term and intermediate-term securities which, combined with expected cash flow from our subsidiaries, we believe to be adequate to meet our foreseeable payment obligations. Our reinsurance subsidiaries have liquidity from premiums, which are generally received in advance of the time losses are paid. The period of time from the occurrence of a claim through the settlement of the liability may extend many years into the future. However, due to the nature of our reinsurance operations, cash flows are affected by claim payments that can fluctuate from year to year. The amount and timing of actual claim payments can vary based on many factors, including the severity of individual losses, changes in the legal environment, and general market conditions. The ultimate amount and timing of the claim payments could differ materially from our estimates and create significant variations in cash flows from operations between periods, which may cause us to make payments from other sources of liquidity, such as sales of investments, borrowings from credit facilities 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 loss.
The net unrealized loss position of our portfolio of CMBS was $28.2 million as of December 31, 2009 as compared with $105.5 million as of December 31, 2008. This decrease in unrealized loss was primarily attributable to a narrowing of interest rate spreads during 2009. We analyze our CMBS on a periodic basis using default loss models based on the performance of the underlying loans. Performance metrics include delinquencies, defaults, foreclosures, debt-service-coverage ratios and cumulative losses incurred. The expected losses for a mortgage pool are compared to the current level of subordination, 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. Our portfolio consists primarily of senior tranches of CMBS with high credit ratings, strong subordination and low loan-to-value ratios.
Overall, we believe that the gross unrealized loss in our available-for-sale portfolio represents temporary declines in fair value and is not necessarily predictive of ultimate performance. We also believe that the provisions we have made for other-than-temporary impairments 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 recorded in future periods.
To the extent that our existing capital is insufficient to fund our future operating requirements or maintain our financial strength or debt ratings, we may need to raise additional capital through financings, which may be in the form of debt securities, preferred shares, common equity, bank credit facilities providing loans and/or letters of credit, or any combination of these sources. Any equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and such securities may have rights, preferences and privileges that are senior to those of our outstanding securities. If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected, which could include, among other things, the following possible outcomes: (1) potential downgrades in the financial strength ratings assigned by ratings agencies to our reinsurance subsidiaries, which could place those reinsurance subsidiaries at a competitive disadvantage compared to higher-rated competitors, (2) reductions in the amount of business that our reinsurance subsidiaries are able to write in order to meet capital adequacy-based tests enforced by regulatory authorities, and (3) increases in the cost of bank credit and letters of credit. We can provide no assurance that, if needed, we would be able to obtain additional funds through financing on satisfactory terms or at all.
In accordance with the share repurchase program authorized by our board of directors, we purchased 7,852,498 of our common shares in the open market at an aggregate amount of $252.3 million at a weighted average cost including commissions of $32.13 per share during the year ended December 31, 2009. Our board of directors has authorized the repurchase of up to $250.0 million of our common shares through the share repurchase program. Since the program was established in 2004, our board has monitored the level of share repurchase activity and periodically restored the repurchase authority under the program to $250.0 million, most recently on February 22, 2010. Our board of directors has also authorized the repurchase of up to $250.0 million of our outstanding Series B Notes issued by Platinum Finance in open market purchases, privately negotiated transactions or otherwise. We did not repurchase any Series B Notes. The timing and amount of the repurchase transactions under these programs depends on a variety of factors, including market conditions, our liquidity requirements, contractual restrictions, corporate and regulatory considerations and other factors.