For the Property and Marine segment, catastrophe rate adequacy improved most in catastrophe exposed areas of the U.S. We seek to limit the estimated probable maximum loss to a specific level for severe catastrophic events. We currently expect to limit the probable maximum pre-tax loss for 2009 to no more than 22.5% of total capital for a severe catastrophic event in any geographic zone that could be expected to occur once in every 250 years, although we may change this threshold at any time. In January 2009, the estimated probable maximum loss for a catastrophic event in any geographic zone arising from a 1-in-250 year event was approximately $293 million as compared with $467 million in January 2008.
Unpaid losses and LAE represent management’s best estimate, at a given point in time, of the ultimate settlement and administration costs of claims incurred, and it is possible that our ultimate liability may differ materially from such estimates. We periodically review and adjust our unpaid losses and LAE as new information becomes available. Any adjustments of unpaid losses and LAE are accounted for as changes in estimates and are reflected in our results of operations in the period in which they are made.
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 a variety of factors, including: (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) when available, updated and appropriately adjusted, the historical loss ratios of St. Paul Re. These judgments take into account management’s view of past, current and future factors that may influence expected 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 expected ultimate losses.
The decrease in underwriting income was primarily due to an increase in catastrophe losses, partially offset by an increase in net favorable development. The estimated net adverse impact in 2008 from major catastrophes, including Hurricanes Gustav and Ike and European storm Emma, was approximately $197,982,000 before taxes. This compared with the estimated net adverse impact in 2007 of $38,721,000 from major catastrophes, including European storm Kyrill and floods in the United Kingdom. The increase in gross premiums written in 2008 as compared with 2007 was 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 $31,875,000 and $28,251,000, 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 $5,852,000 and $5,864,000, respectively. The increase in ceded premiums written was attributable to the purchase of additional retrocession protection for our North American property catastrophe business. Net premiums earned in 2008 increased primarily as a result of the increase in net premiums written.
The net unrealized loss position of our portfolio of residential mortgage-backed securities (“RMBS”) was $77,573,000 as of December 31, 2008. Approximately 80% of the RMBS in our investment portfolio are issued or guaranteed by the 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 residential mortgage-backed securities. The remaining 20% of our RMBS were issued by non-agency institutions and include securities with underlying sub-prime and Alt-A mortgages. The net unrealized loss position of these RMBS was $86,993,000 as of December 31, 2008, which we believe was primarily attributable to a widening of interest rate spreads since the securities were acquired and to the loss of liquidity in the financial markets. We analyze our RMBS 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 to the break-even loss, which represents the point at which our tranche begins to experience losses. We also perform a sensitivity analysis of the variables that may result in expected losses greater than the break-even loss. We evaluate projected cash flows as well as other factors in order to determine if our security is other-than-temporarily impaired. As a result of our analyses, we recorded $17,403,000 of other-than-temporary impairment charges related to RMBS.
Our consolidated financial statements as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008, together with the report thereon by KPMG LLP, our independent registered public accounting firm, are set forth on pages through hereto.