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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.

 

We do not establish liabilities until the occurrence of an event that may give rise to a loss.  When an event of sufficient magnitude occurs, we may establish IBNR specific to such an event.  Generally, this is done following a property catastrophe that affects many ceding companies.  When events occur that have not yet resulted in reported losses, our actuaries estimate the impact and consider such events, including potentially separate evaluation as an individually large or catastrophic loss.  This process often does not differ from the reserving process for reported losses.

 

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 the ultimate liability may materially differ from such estimates.  Estimates of unpaid losses and LAE are periodically reviewed and adjusted as new information becomes available.  Any such adjustments are accounted for as changes in estimates and are reflected in results of operations in the period in which they are made.

 

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.

 

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The gross liabilities recorded on our consolidated balance sheets as of December 31, 2007 and 2006 for unpaid losses and LAE were $2,361,038,000 and $2,368,482,000, respectively.  The following table sets forth a breakdown between gross case reserves and gross IBNR by segment as of December 31, 2007 and 2006 ($ in thousands):

 

	Property and Marine			Casualty			Finite Risk			Total
December 31, 2007
Gross case reserves	$	235,673			331,931			70,873		$	638,477
Additional case reserves		778			21,329			–			22,107
Gross IBNR		212,446			1,347,337			140,671			1,700,454
Total gross unpaid losses and LAE	$	448,897			1,700,597			211,544		$	2,361,038
December 31, 2006
Gross case reserves	$	336,260			250,871			113,897		$	701,028
Additional case reserves		243			18,576			–			18,819
Gross IBNR		235,932			1,198,432			214,271			1,648,635
Total gross unpaid losses and LAE	$	572,435			1,467,879			328,168		$	2,368,482

 

    Since we rely on information regarding paid losses, case reserves and sometimes IBNR provided by ceding companies in order to assist us in estimating our liability for unpaid losses and LAE, we perform certain procedures in order to help determine the completeness and accuracy of such information.  Periodically, management assesses the reporting activities of these companies on the basis of qualitative and quantitative criteria.  These procedures include conferring with ceding companies or brokers on claims matters, conducting periodic audits of our ceding companies by our claims personnel at their offices to:  (1) review and establish validity of specific claims, (2) determine that case reserves established by the ceding company are reasonable, (3) determine consistency in claim reporting from period to period, and (4) assess the overall claims practices and procedures of our ceding companies.  Additionally, we monitor the claims handling and reserving practices of ceding companies in order to help establish the proper reinsurance premium for reinsurance agreements.  Disputes with ceding companies have been rare and generally have been resolved through negotiation.

 

Non-Catastrophe Reserves

 

Non-catastrophe reserves total $2,179,234,000, which is 92% of our gross unpaid loss reserves as of December 31, 2007.  When estimating unpaid losses and LAE, we segregate the business of each of our reinsurance subsidiaries into classes by type of coverage and type of contract (approximately 125 classes).  Within each class the business is further segregated by Underwriting Year, starting with 2002.  Multiple point estimates using a variety of actuarial techniques are calculated for many, but not all, of our classes of coverage for each Underwriting Year.  We do not believe that these multiple point estimates are or should be considered a range.  Our actuaries consider each class and determine the most appropriate point estimate for each Underwriting Year based on the characteristics of the particular class including: (1) the expected percentage of reported losses derived from the loss development patterns, (2) the credibility of the selected loss development pattern, (3) the stability of the loss development patterns, and (4) the observed loss development of other underwriting years for the same class.  Other relevant factors considered include:  (1) historical ultimate loss ratios, (2) the presence of individual large losses and (3) known occurrences that have not yet resulted in reported losses.  For some classes of business our actuaries believe that a review of individual contract information improves the loss reserve estimate.  For example, individual contract review is particularly important for the Finite Risk segment and the accident and health class within the Casualty segment.  Our actuaries make their determinations of the most appropriate point estimate of loss for each class based on an evaluation of all the relevant information and it is inappropriate to ascribe a particular portion of the estimate to a particular factor or consideration.  This information is aggregated and reviewed and approved by management and is included in the liability for unpaid losses and LAE.

 

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.

 

Since 2005, rates and underwriting terms and conditions have deteriorated year over year in most casualty classes of business resulting in higher expected loss ratios and combined ratios for each subsequent year.  In property classes, rates increased in 2006 following the large catastrophe losses experienced in 2004 and 2005 resulting in lower expected loss ratios.  In addition, there was an increase in more catastrophe-exposed business with larger margins that had the effect of further decreasing the expected non-catastrophe loss ratios.  In 2007 there were price increases for business exposed to North American wind in the beginning of the year followed by decreases for the remainder of the year resulting in little change in expected loss ratio.  Rates for other property business declined resulting in higher loss ratios and combined ratios.  For finite contracts, loss reserves are determined on a contract-by-contract basis and expected loss ratios were based on the pricing analysis.

 

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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.

 

    While we commenced operations in 2002, the business we write is sufficiently similar to the historical reinsurance business of St. Paul Re such that we review the historical loss experience of this business when we estimate our own initial expected ultimate losses and the expected patterns of reported losses.  The historical loss experience of St. Paul Re is updated quarterly by St. Paul Re and is available to us.  These patterns can span more than a decade and, given our own relatively limited history, the availability of the St. Paul Re data is a valuable supplement to our own and industry data.  Patterns of reported losses are determined utilizing actuarial analysis, including management’s judgment, and are based on historical patterns of paid losses and reporting of case reserves to us, as well as industry patterns.  Information that may cause future patterns of reported losses to differ from historical patterns of reported losses is considered and reflected in expected patterns as appropriate.  A key assumption is that past patterns of reported losses are reasonably predictive of future patterns of reported losses.  It is often difficult to identify differences in business reinsured from Underwriting Year to Underwriting Year and how such differences can affect loss development patterns.  This difficulty adds to uncertainty in estimates that use these patterns.  For property and health coverages these patterns indicate that a substantial portion of the ultimate losses are reported within 2 to 3 years after the contract is effective.  Casualty patterns can vary from 3 years to over 20 years depending on the type of business.

 

In property lines the expected patterns of reported losses are based on historical reported loss data.  The only significant exception is the Florida pro rata business in 2004 and 2005.  For the Florida pro rata business a separate pattern was derived from ceding company data.  For all lines, historical data by effective date and business type is used to determine patterns that reflect each year’s reinsurance contract inception date distribution and the distribution of underlying business written on a losses occurring versus on a risk attaching basis.  In marine lines the expected patterns of reported losses are primarily based on historical reported loss data.  Reported loss patterns are analyzed for various groups of reinsurance classes and an overall pattern is determined by the mix of business within each Underwriting Year.

 

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.

 

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Catastrophe Reserves

 

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.

 

While catastrophe activity in 2007 was greater than in 2006, it was still relatively low.  We have established specific reserves for the following 2007 events: European Windstorm Kyrill, the June floods in the UK, the July floods in the UK and the October wildfires in California.

 

 

Reinsurance Recoverable

 

In order to limit the effect on our financial condition of large and multiple losses, we may buy retrocessional reinsurance, which is reinsurance for our own account.  Reinsurance recoverable, also referred to as “ceded loss reserves”, include estimates of the recoveries from our retrocessional reinsurance that arise from claims from our reinsurance business.  These assets are estimates of future amounts recoverable from retrocessionaires for claims that have occurred at or before the balance sheet date.  Each quarter, after estimating the amount of gross loss reserves, our actuaries review all retrocessional contracts.  Based on the structure of each retrocessional contract and the gross incurred loss, a recovery amount is estimated.  Reinsurance recoverable on unpaid losses and LAE was $18,853,000 as of December 31, 2007, and represents 0.8% of gross unpaid losses and LAE.

 

Uncertainty of Estimates

 

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.

 

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In addition to the inherent uncertainty of estimating unpaid losses and LAE, our estimates with respect to the losses arising from Hurricane Katrina in 2005 are subject to an unusually high level of uncertainty arising out of complex and unique causation and coverage issues associated with the attribution of losses to wind or flood damage or other perils such as fire, business interruption or riot and civil commotion.  For example, the underlying policies generally do not cover flood damage; however, water damage caused by wind may be covered.  Our actual losses from Hurricane Katrina may exceed our estimates as a result of, among other things, the attribution of losses to coverages that for the purpose of our estimates we assumed would not be exposed, which may be affected by class action lawsuits or state regulatory actions.  The loss development patterns for the losses arising from Hurricanes Katrina, Rita and Wilma in 2005 (the "2005 Hurricanes") are showing variances from the loss development patterns of recent and historical catastrophes.

 

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 %				Reported %
2004 Hurricanes as of December 31, 2006		86	%			97	%
2005 Hurricanes as of December 31, 2007		82	%			94	%

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.

 

 

Sensitivity of Estimates

 

Generally, North American casualty excess business has the longest pattern of reported losses and, therefore, loss estimates have a higher degree of uncertainty than other reserving classes.  IBNR for these classes as of December 31, 2007 was $1,069,549,000, which was 64% of the total IBNR at that date.  Because estimates of unpaid losses and LAE related to North American casualty excess business have a higher degree of uncertainty, we would not consider a variance of five percentage points from the initial expected loss ratio to be unusual.  As an example, an increase in the initial expected loss ratio of 5%, from 67% to 72%, would result in an increase of the IBNR for these classes by $88,175,000.  This equates to approximately 6.7% of the liability for total unpaid losses and LAE for these classes as of December 31, 2007.  As another example, if the estimated pattern of reported losses was accelerated by 5%, the IBNR for these classes would decrease by $2,651,000, which is less than 1%.  We have selected these two inputs as examples of sensitivity analyses because we believe that the two most important inputs to the reserve estimation methodologies described above are the initial expected loss ratio and the estimated pattern of reported losses.

 

        Valuation of Investments

 

Fixed maturities for which we may not have the positive intent to hold until maturity are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from net income and reported in other comprehensive income as a separate component of shareholders' equity, net of deferred taxes.  Fixed maturities for which we have the intent to sell prior to maturity are classified as trading securities and reported at fair value, with unrealized gains and losses included in other income and the related deferred income tax included in income tax expense.

 

We routinely review our available-for-sale investments to determine whether unrealized losses represent temporary changes in fair value or were the result of “other-than-temporary impairments.”  The process of determining whether a security is other than temporarily impaired is subjective and involves analyzing many factors.  These factors include but are not limited to:  the overall financial condition of the issuer, the length and magnitude of an unrealized loss, specific credit events, the collateral structure and credit support that may be applicable to asset and mortgage-backed securities.  We also consider our ability and intent to hold a security for a sufficient period of time for the value to recover the unrealized loss, which is based, in part, on current and anticipated future positive net cash flows from operations that generate sufficient liquidity in order to meet our obligations.  If we determine that an unrealized loss on a security is other than temporary, we write down the carrying value of the security and record a realized loss in the consolidated statement of operations in the period during which the write down occurred.

 

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Risk Transfer

 

Reinsurance accounting is followed 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.  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.

 

Reinsurance Industry Conditions and Trends

 

The reinsurance industry historically has been cyclical, characterized by periods of price competition due to excessive underwriting capacity as well as periods of favorable pricing due to shortages of underwriting capacity.  Cyclical trends in the industry and the industry's profitability can also be significantly affected by volatile developments, including natural and other catastrophes, such as hurricanes, windstorms, earthquakes, floods, fires, explosions and terrorist attacks, the frequency and severity of which are inherently difficult to predict.  Property and casualty reinsurance rates often rise in the aftermath of significant catastrophe losses.  To the extent that actual claim liabilities are higher than anticipated, the industry's capacity to write new business diminishes.  The industry is also affected by changes in the propensity of courts to expand insurance coverage and grant large liability awards, as well as fluctuations in interest rates, inflation and other changes in the economic environment that affect market prices of investments.

 

In 2005 an unprecedented level of hurricane losses caused many reinsurers to report significant net losses.  Many reinsurers were able to raise additional capital in the third and fourth quarters of 2005 and a number of new reinsurers were formed.  Nonetheless, the magnitude of the hurricane losses caused rating agencies to tighten capital requirements and both reinsurers and their insurance company clients to reassess their catastrophe pricing and aggregate loss monitoring parameters and procedures.  The result was an increase in catastrophe pricing, particularly for wind exposures in the U.S. in 2006 and the beginning of 2007.  However, the lack of major catastrophe activity in 2006 and 2007 has led to an increase in capacity and decline in pricing for catastrophe exposed reinsurance in the second half of 2007.  The impact of the 2005 catastrophe losses on non-catastrophe pricing was to initially slow down the weakening of rates which then resumed in late 2006 and continued throughout 2007.  We believe that current rates can provide adequate returns with prudent and selective underwriting.

 

Results of Operations

 

Year Ended December 31, 2007 as Compared with the Year Ended December 31, 2006

 

Net income for the years ended December 31, 2007 and 2006 was as follows ($ in thousands):

 

	2007			2006			Increase
Net income	$	356,978			329,657		$	27,321

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.

 

 Gross, ceded and net premiums written and earned for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):

 

	2007			2006			Decrease
Gross premiums written	$	1,140,303			1,275,200		$	134,897
Ceded premiums written		20,496			98,587			78,091
Net premiums written		1,119,807			1,176,613			56,806
Gross premiums earned		1,193,894			1,434,282			240,388
Ceded premiums earned		20,806			97,581			76,775
Net premiums earned	$	1,173,088			1,336,701		$	163,613

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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.

 

Net investment income for the years ended December 31, 2007 and 2006 was $214,222,000 and $187,987,000, respectively.  Net investment income increased in 2007 as compared with 2006 primarily due to increased invested assets as well as a slight increase in yields on invested assets.  The increase in invested assets was attributable to positive net cash flows provided by operations excluding trading securities activities, which was $491,483,000 in 2007.  Positive net cash flows provided by operations were partially offset by $240,672,000 of common share repurchases during 2007.  Net investment income included interest earned on funds held of $5,279,000 and $7,998,000 in 2007 and 2006, respectively.  Interest on funds held relates primarily to business in the Finite Risk segment which has declined over the past several years.  Net realized gains (losses) on investments were ($2,615,000) and $1,090,000 in 2007 and 2006, respectively.  Net realized gains and losses on investments primarily result from our efforts to manage credit quality, duration and sector allocation of our investment portfolio as well as to balance our foreign currency denominated invested assets with our foreign currency denominated liabilities.  We recorded a charge of $809,000 in 2007 relating to other-than-temporary impairments which was included within net realized losses on investments in the consolidated statement of operations.

 

Other expense for the years ended December 31, 2007 and 2006 was $5,787,000 and $2,872,000, respectively.  Other expense in 2007 included $1,393,000 of net unrealized gains relating to changes in fair value of fixed maturities classified as trading, $468,000 of net expense on reinsurance contracts accounted for as deposits, an expense of $900,000 relating to an option to purchase reinsurance which was not exercised and an expense of $4,107,000 for the fair value adjustment of a derivative contract.  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.

 

Net losses and LAE and the resulting loss and LAE ratios for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):

 

	2007			2006			Decrease
Net losses and LAE	$	655,487			760,602		$	105,115
Net loss and LAE ratios		55.9	%		56.9	%	1.0 points

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.

 

    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 2007 decreased by approximately 2.0%, as compared with 2006.  The decrease was due to a higher proportion of catastrophe excess business which, because of the low level of catastrophes, had a lower net loss and LAE ratio than the remainder of the business.  The favorable effects of the property catastrophe excess business were partially offset by higher loss ratios in the Casualty segment due to declining rate adequacy.  The net loss and LAE ratios were also affected by other changes in the mix of business.

 

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.

 

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Net acquisition expenses and resulting net acquisition expense ratios for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):

 

	2007				2006				Decrease
Net acquisition expenses	$	220,330				285,923			$	65,593
Net acquisition expense ratios		18.8	%			21.4	%		2.6 points

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.

 

Net foreign currency exchange gains for the years ended December 31, 2007 and 2006 were $2,775,000 and $738,000, respectively.  We routinely transact business in various currencies other than the U.S. dollar.  Foreign currency exchange gains and losses result from the re-valuation into U.S. dollars of assets and liabilities denominated in currencies other than the U.S. dollar as well as fluctuations in the amounts of assets and liabilities denominated in currencies other than the U.S. dollar and the exchange rates of the currencies.  We periodically monitor our largest foreign currency exposures and may purchase or sell foreign currency denominated invested assets based on these exposures.  The net foreign currency exchange gain in 2007 was the result of our holding more non-U.S. dollar denominated assets than non-U.S. dollar denominated liabilities, primarily Euros and the British pound sterling in the normal course of doing business in these currencies, while the U.S. dollar declined in value against these currencies.

 

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.

 

    Income taxes and the effective tax rate for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):

 

		2007				2006				Decrease
Income taxes		$	23,825				30,167			$	6,342
Effective tax rates			6.3	%			8.4	%		2.1 points

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 2007 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.

 

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Year Ended December 31, 2006 as Compared with the Year Ended December 31, 2005

 

Net income (loss) for the years ended December 31, 2006 and 2005 was as follows ($ in thousands):

 

		2006				2005				Increase
Net income (loss)		$	329,657				(137,487	)		$	467,144

The most significant factor in the comparison of net income in 2006 with the net loss in 2005 was the difference in underwriting income in 2006 as compared with 2005.  Underwriting income was $218,880,000 in 2006 and was favorably impacted by a low level of major catastrophes.  In 2005 we incurred an underwriting loss of $249,506,000 primarily resulting from losses arising out of the 2005 Hurricanes that caused severe damage in the Gulf Coast region of the United States, including the states of Louisiana, Mississippi, Texas and Florida as well as in Mexico and the Caribbean.  As a result of losses from the 2005 Hurricanes, certain reinsurance contracts generated additional premiums and adjustments to accrued profit commissions.  The aggregate net adverse impact on our net loss for the year ended December 31, 2005 from the 2005 Hurricanes is summarized as follows ($ in thousands):

 

Gross losses and LAE	$	654,090
Retrocessional reinsurance		(73,800	)
Net losses and LAE		580,290
Additional net premiums earned		(46,666	)
Profit commissions		(3,654	)
Net adverse impact on loss before income tax benefit	$	529,970

Net favorable development also contributed to underwriting income.  Net favorable development was $55,768,000 in 2006 as compared with $79,256,000 in 2005.  The net favorable loss development related to prior years in 2007 and 2006 included favorable development of $17,226,000 and unfavorable development of ($4,160,000), respectively, relating to the 2005 Hurricanes.  In addition to the increase in underwriting income, net income in 2006 as compared with the net loss in 2005 was also favorably impacted by an increase in investment income of $58,482,000 and unfavorably impacted by increases in operating expenses related to Platinum Holdings and operating expenses not allocated to segments of $10,036,000 and income tax expense of $55,134,000 in 2006.

 

Gross, ceded and net premiums written and earned for the years ended December 31, 2006 and 2005 were as follows ($ in thousands):

 

		2006			2005			Increase (decrease)
Gross premiums written		$	1,275,200			1,765,155		$	(489,955	)
Ceded premiums written			98,587			47,433			51,154
Net premiums written			1,176,613			1,717,722			(541,109	)
Gross premiums earned			1,434,282			1,757,138			(322,856	)
Ceded premiums earned			97,581			42,415			55,166
Net premiums earned		$	1,336,701			1,714,723		$	(378,022	)

The decrease in net premiums written and earned in 2006 as compared with 2005 was attributable to reductions in business written in all three of our segments.  These reductions were partially offset by increases in estimates of net premiums written of approximately $68,937,000 in the North American excess casualty classes related to business written in prior periods.  We also commenced ceding premiums under the 2006 Property Quota Share Agreement.  The decrease in net premiums written and earned in 2006 as compared with 2005 is also partially due to additional net premiums written and earned in 2005 of approximately $49,451,000 and $46,666,000, respectively, related to losses arising from the 2005 Hurricanes.  The reduction in net premiums earned was also affected by changes in the mix of business and the structure of the underlying reinsurance contracts.

 

Net investment income for the years ended December 31, 2006 and 2005 was $187,987,000 and $129,445,000, respectively.  Net investment income increased during 2006 primarily due to increased invested assets attributable to positive net cash flows provided by operations excluding trading securities activities, which was $525,025,000 in 2006 as well as proceeds from the issuance of common shares, preferred shares and debt obligations in 2005.  The book basis yields on fixed maturities were 4.6% and 4.4% as of December 31, 2006 and 2005, respectively.  Net investment income included $7,998,000 and $8,172,000 of interest earned on funds held for the years ended December 31, 2006 and 2005, respectively.  Net realized gains (losses) on investments were $1,090,000 and ($3,046,000) for the years ended December 31, 2006 and 2005, respectively.  Net realized losses in 2006 and 2005 included $255,000 and $1,769,000, respectively, relating to the write-down of our investment in Inter-Ocean Holdings, Ltd.  The remaining net realized gains and losses on investments in 2006 and 2005 primarily resulted from our efforts to manage credit quality, duration, foreign currency exposure, and investment sector allocation and to balance our investment risk and reinsurance risk.

 

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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.

 

Net losses and LAE and the resulting loss and LAE ratios for the years ended December 31, 2006 and 2005 were as follows ($ in thousands):

 

		2006				2005				Decrease
Net losses and LAE		$	760,602				1,505,425			$	744,823
Net loss and LAE ratios			56.9	%			87.8	%		30.9 points

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 0.4% of net premiums earned, as compared with $604,890,000 in 2005, representing 35.3% of net premiums earned.  Included in the major catastrophe losses in 2005 were $580,290,000 from the 2005 Hurricanes representing 33.8% of net premiums earned.  Net losses and LAE and the resulting net loss and LAE ratios were also impacted by net favorable loss development of $60,746,000 in 2006, representing 4.5% of net premiums earned, and $97,314,000 in 2005, representing 5.7% of net premiums earned.  The net favorable loss development in 2006 included net unfavorable loss development on the 2005 Hurricanes of $3,596,000.

 

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.

 

Net acquisition expenses and resulting net acquisition expense ratios for the years ended December 31, 2006 and 2005 were as follows ($ in thousands):

 

		2006				2005				Decrease
Net acquisition expenses		$	285,923				403,135			$	117,212
Net acquisition expense ratios			21.4	%			23.5	%		2.1 points

The decrease in net acquisition expenses was primarily due to the decrease in net premiums earned in 2006 as compared with 2005.  The decrease in the acquisition expense ratio in 2006 as compared with 2005 was partially due to the decrease in assumed quota share contracts in the Property and Marine and Finite Risk segments that had higher ceding commissions than the remaining business.  Net acquisition expenses also included increases in adjustable commissions of approximately $2,285,000 in 2006 relating to prior years’ loss development, representing 0.2% of net premiums earned, as compared with $15,790,000, representing 0.9% of net premiums earned in 2005.  Also contributing to the decrease in the acquisition expense ratio in 2006 as compared with 2005 was a ceding commission and override on the 2006 Property Quota Share Agreement.

 

Operating expenses for the years ended December 31, 2006 and 2005 were $95,490,000 and $69,827,000, respectively.  Operating expenses include costs such as salaries, rent and like items related to reinsurance operations as well as costs associated with Platinum Holdings.  The increase in operating expenses was primarily due to increased incentive-based compensation accruals.  Operating expenses included approximately $17,000,000 of accruals for incentive-based compensation in 2006 as compared with $1,000,000 in 2005.  The increase in incentive-based compensation was the result of the significant increase in net income.  The remainder of the increase in operating expenses was primarily due to the expansion of operations in Bermuda, including Platinum Bermuda which increased its underwriting activity and increased its staff accordingly.  The increase was also partially attributable to costs related to equity grants under long term performance based incentive plans.

 

Net foreign currency exchange gains (losses) for the years ended December 31, 2006 and 2005 were $738,000 and ($2,111,000), respectively.  We routinely transact business in various foreign currencies.  Net foreign currency exchange gains and losses arise as a result of fluctuations in the amounts of assets and liabilities denominated in foreign currencies as well as fluctuations in the currency exchange rates.

 

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.

 

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Income taxes (benefit) and the effective tax rate for the years ended December 31, 2006 and 2005 were as follows ($ in thousands):

 

	2006				2005				Increase (decrease)
Income taxes (benefit)	$	30,167				(24,967	)		$	55,134
Effective tax rates		8.4	%			15.4	%		(7.0) points

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.

 

Segment Information

 

We conduct our worldwide reinsurance business through three operating segments: Property and Marine, Casualty and Finite Risk.  In managing our operating segments, management uses measures such as underwriting income and underwriting ratios to evaluate segment performance.  We do not allocate assets or certain income and expenses such as investment income, interest expense and certain corporate expenses by segment.  Segment underwriting income is reconciled to income before income taxes.  The measures we used in evaluating our operating segments should not be used as a substitute for measures determined under U.S. GAAP.  The following table summarizes underwriting activity and ratios for the three operating segments for the years ended December 31, 2007, 2006 and 2005 ($ in thousands):

 

		Property and Marine				Casualty				Finite Risk				Total
Year ended December 31, 2007:
Net premiums written		$	505,010				584,605				30,192			$	1,119,807
Net premiums earned			502,291				637,856				32,941				1,173,088
Net losses and LAE			195,398				444,701				15,388				655,487
Net acquisition expenses			68,351				145,969				6,010				220,330
Other underwriting expenses			42,422				29,194				2,696				74,312
Segment underwriting income		$	196,120				17,992				8,847				222,959
Net investment income															214,222
Net realized losses on investments															(2,615	)
Net foreign currency exchange gains															2,775
Other expense															(5,787	)
Corporate expenses not allocated to segments															(29,281	)
Interest expense															(21,470	)
Income before income tax expense														$	380,803
Ratios:
Net loss and LAE			38.9	%			69.7	%			46.7	%			55.9	%
Net acquisition expense			13.6	%			22.9	%			18.2	%			18.8	%
Other underwriting expense			8.4	%			4.6	%			8.2	%			6.3	%
Combined			60.9	%			97.2	%			73.1	%			81.0	%

 

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			Property and Marine				Casualty				Finite Risk				Total
Year ended December 31, 2006:
Net premiums written		$	424,929				757,675				(5,991	)		$	1,176,613
Net premiums earned			448,959				764,341				123,401				1,336,701
Net losses and LAE			145,900				522,815				91,887				760,602
Net acquisition expenses			70,905				188,717				26,301				285,923
Other underwriting expenses			39,887				27,022				4,387				71,296
Segment underwriting income		$	192,267				25,787				826				218,880
Net investment income															187,987
Net realized gains on investments															1,090
Net foreign currency exchange gains															738
Other expense															(2,872	)
Corporate expenses not allocated to segments															(24,194	)
Interest expense															(21,805	)
Income before income tax expense														$	359,824
Ratios:
Net loss and LAE			32.5	%			68.4	%			74.5	%			56.9	%
Net acquisition expense			15.8	%			24.7	%			21.3	%			21.4	%
Other underwriting expense			8.9	%			3.5	%			3.6	%			5.3	%
Combined			57.2	%			96.6	%			99.4	%			83.6	%
Year ended December 31, 2005:
Net premiums written		$	575,055				809,031				333,636			$	1,717,722
Net premiums earned			569,173				789,629				355,921				1,714,723
Net losses and LAE			756,742				511,609				237,074				1,505,425
Net acquisition expenses			93,983				194,397				114,755				403,135
Other underwriting expenses			26,074				24,690				4,905				55,669
Segment underwriting income (loss)		$	(307,626	)			58,933				(813	)			(249,506	)
Net investment income															129,445
Net realized losses on investments															(3,046	)
Net foreign currency exchange losses															(2,111	)
Other expense															(586	)
Corporate expenses not allocated to segments															(14,158	)
Interest expense															(20,006	)
Loss on repurchase of debt															(2,486	)
Loss before income tax benefit														$	(162,454	)
Ratios:
Net loss and LAE			133.0	%			64.8	%			66.6	%			87.8	%
Net acquisition expense			16.5	%			24.6	%			32.2	%			23.5	%
Other underwriting expense			4.6	%			3.1	%			1.4	%			3.2	%
Combined			154.1	%			92.5	%			100.2	%			114.5	%

 

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     Property and Marine

 

The Property and Marine operating segment includes principally property (including crop) and marine reinsurance coverages that are written in the United States and international markets.  This business includes property catastrophe excess-of-loss contracts, property per-risk excess-of-loss contracts and property proportional contracts.  This operating segment generated 45.1%, 36.1% and 33.5% of our net premiums written in 2007, 2006 and 2005, respectively.

 

Year Ended December 31, 2007 as Compared with the Year Ended December 31, 2006

 

Gross, ceded and net premiums written and earned for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):

		2007				2006				Increase (decrease)
Gross premiums written		$	527,142				514,316			$	12,826
Ceded premiums written			22,132				89,387				(67,255	)
Net premiums written			505,010				424,929				80,081
Gross premiums earned			524,743				535,988				(11,245	)
Ceded premiums earned			22,452				87,029				(64,577	)
Net premiums earned		$	502,291				448,959			$	53,332

The increase in gross premiums written in 2007 as compared with 2006 was primarily in the catastrophe excess classes and was partially offset by decreases in the proportional classes.  The decline in ceded premiums written was attributable to the non-renewal in 2007 of the 2006 Property Quota Share Agreement.  Net premiums earned in 2007 increased primarily as a result of the decrease in ceded premiums written and earned.

 

Net losses and LAE and the resulting loss ratios for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):

 

		2007				2006				Increase
Net losses and LAE		$	195,398				145,900			$	49,498
Net loss and LAE ratios			38.9	%			32.5	%		6.4 points

The increases in net losses and LAE and related ratios in 2007 as compared with 2006 were due to the increase in catastrophe losses as well as to less net favorable loss development.  Net losses in 2007 included major catastrophe losses of $44,585,000 in 2007, representing 8.9% of net premiums earned, as compared with major catastrophe losses of $5,536,000 in 2006, representing 1.2% 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 favorable loss development was $48,508,000 in 2007, representing 9.7% of net premiums earned, and $54,317,000 in 2006, representing 12.1% of net premiums earned.  Exclusive of the major catastrophe losses and net favorable loss development, the net loss and LAE ratio decreased by approximately 3.5% in 2007 as compared to 2006 due to the increase in the proportion of catastrophe excess business which, because of the low level of catastrophes, had a lower net loss and LAE ratio than the remainder of the segment.  The net loss and LAE ratios were also affected by other changes in the mix of business.

 

Net acquisition expenses and resulting net acquisition expense ratios for the years ended December 31, 2007 and 2006 were as follows ($ in thousands):

 

		2007				2006				Decrease
Net acquisition expenses		$	68,351				70,905			$	2,554
Net acquisition expense ratios			13.6	%			15.8	%		2.2 points

The decreases in net acquisition expenses and the net acquisition expense ratio in 2007 as compared with 2006 were primarily due to the continued decrease in property proportional business and an increase in property catastrophe excess business, which had a lower net acquisition expense ratio than property proportional business.  Net acquisition expenses included increases in adjustable commissions of $1,677,000 in 2007, representing 0.3% of net premiums earned, related to favorable net loss development from prior years as compared with increases of $3,067,000 in 2006, representing 0.7% of net premiums earned.  The net acquisition expense ratios were also impacted by other changes in the mix of business.