**Exhibit 13.1****PORTIONS OF ANNUAL REPORT****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS***The following is a discussion of the results of operationsand financial position of IPC Holdings, Ltd. References to the“Company” mean IPC Holdings and references to“we”, “our” or “IPC” mean IPCHoldings together with its wholly-owned subsidiaries, IPCReLimited (“IPCRe”), and IPCRe Underwriting ServicesLimited (“IPCUSL”). This discussion should be read inconjunction with our Consolidated Financial Statements andrelated notes for the year ended December 31, 2004.***General Overview**     We commenced operations in June 1993. An overview of ourprincipal lines of business is provided under “Item 1Business — General Development of Business —Overview” as set forth in our report on Form 10-K forthe fiscal year ended December 31, 2004. Propertycatastrophe reinsurers tend to experience significantfluctuations in operating results primarily because of thefrequency of occurrence or severity of catastrophic events.Because of the volatile nature of property catastrophereinsurance, the financial data included in this discussion arenot necessarily indicative of our future financial condition orresults of operations.     In our discussion below, when we refer to written premiums, weinclude new and renewal business, reinstatement premiums andpremium adjustments on current and prior year contracts. Renewaldates for property catastrophe reinsurance policies areconcentrated in the first quarter of each calendar year. About60% (by volume) of the annual premiums we write each year arefor contracts which have effective dates in the first quarter,about 20% in the second quarter, and about 15% in the thirdquarter. Premiums are typically due in installments over thecontract term, with each installment generally received within30 days after the due date. Premiums are earned on a prorata basis over the contract period, which is usually twelvemonths.     Premiums (cash) received which are surplus to our shortterm funding requirements, are invested in accordance with ourinvestment guidelines. Our current investment strategy isdefined primarily by the need to safeguard our capital, since webelieve that the risks inherent in catastrophe reinsuranceshould not be augmented by a speculative investment policy. Forthis reason, our investment policy places a strong emphasis onthe quality and liquidity of investments.     Other factors which can affect operating results arecompetition, changes in levels of underwriting capacity, andgeneral economic conditions. Underwriting results of primaryproperty insurers and prevailing general economic conditionssignificantly influence demand for reinsurance. After sufferingfrom deteriorating financial results because of increasedseverity or frequency of claims, some primary insurers seek toprotect their balance sheets by purchasing more reinsurance. Thesupply of reinsurance is related to prevailing prices, thelevels of insured losses and the level of industry capitalwhich, in turn, may fluctuate in response to changes in rates ofreturns being earned by the reinsurance industry. As a result ofthese factors, the property catastrophe reinsurance business isa cyclical industry characterized by both periods of intenseprice competition due to excessive underwriting capacity andperiods when shortages of capacity permit favourable premiumlevels. Since underwriting capacity reflects the amount ofshareholders’ equity (also known as“policyholders’ surplus” in mutual companies),increases in the frequency or severity of losses suffered byinsurers can significantly affect these cycles. Conversely, theabsence of severe or frequent catastrophic events could resultin declining premium rates in the global market. We haveexperienced, and expect to continue to experience, the effectsof these cycles.     Events from 1996 to 2004 demonstrate the volatility ofcatastrophe reinsurance business. In 1996, 1997, 2000, 2002 and2003, few major catastrophic events occurred. Consequently, fewclaims were made on IPCRe. Conversely, many catastrophic eventsoccurred in 1998, 1999, 2001 and 2004 in many parts of theworld, including Hurricane Georges in 1998 (estimated industrylosses in excess of $4 billion); a hailstorm which struckSydney, Australia in April, 1999 (estimated industry losses of$1.6 billion); Hurricane Floyd

 
(estimated industry losses of $2.2 billion); and cyclonesAnatol, Lothar and Martin that struck several parts of Europe inDecember, 1999 (estimated industry losses in excess of$9 billion). In June 2001, Tropical Storm Allison affectedparts of Texas (estimated industry losses of $2.5 billion)and on September 11, 2001, terrorist attacks were carriedout in the U.S. (estimated industry property losses of$18.8 billion). During 2004, the combined insured propertylosses from all catastrophic events set a new annual record.Events in 2004 included the four hurricanes that made landfallin Florida and affected other parts of the south-eastern UnitedStates and the Caribbean in the third quarter, and a recordnumber of typhoons which made landfall in Japan, several ofwhich resulted in significant insured losses. Estimates of theaggregated industry losses from these third quarter, 2004 eventsrange from $30 billion to $35 billion. Estimatedindustry loss amounts have been derived from recognized sourcessuch as Swiss Re’s Sigma publication and reports fromProperty Claim Services (“PCS”), who track insuredcatastrophic events in the United States of America.     From 1996 to 1999, there was an increase in the supply ofreinsurance capacity, which caused downward pressure on pricing.For the January 1998 and 1999 renewal cycles, premium ratesdeclined by an average of 15% and 10%, respectively. For theJanuary 2000 renewal cycle, due to the increased levels of claimactivity, premium rates were at a similar level to 1999.Significant claims incurred by many reinsurers during 2000 as aresult of events in late 1999, followed by several catastrophicevents in 2001, resulted in a contraction of capacity.Consequently, renewals during the fourth quarter of 2000 andthroughout 2001 and 2002 saw premium rates increasing by between10% and 25%, on average, for contracts which had not sufferedlosses, with significantly higher increases for those contractswhich had suffered losses. During the fourth quarter of 2001, inresponse to the reduction in the capacity and anticipatedincreased demand, many companies, including ourselves, raisedadditional capital. There were also a number of new insuranceand reinsurance companies formed in Bermuda and elsewhere,hoping to satisfy demand and benefit from improved market termsand conditions. We believe that the additional capital flowinginto the market affected price increases in 2002 and 2003, asthey were not as large as previously anticipated. While pricescontinued to increase during 2003 and 2004, the rate of increasemoderated over time, such that pricing in the second half of2004 was generally leveling off. Despite the level ofcatastrophe activity in 2004, pricing of our business renewingin January 2005 was generally flat or with modest declines ofaround 5% for contracts that had not incurred any losses, whileloss-impacted contracts had increases of between 10% and 20%.Pricing in the remainder of 2005 and beyond will also beaffected by the frequency or severity of catastrophic events, orabsence thereof. In the absence of a frequency or severity ofcatastrophic events during 2005, it is possible that catastrophereinsurance pricing for contracts not impacted by losses in2004, will decline further. We believe that we have been able toincrease the amount of business allocated to us and our marketshare because of our reputation, capital base,Standard & Poor’s (“S & P”) andA.M. Best Company (“A.M. Best”) ratings andlong-standing client relationships. We have been able to offer,and continue to offer, additional underwriting capacity createdby our increased capital base, to our existing clients, and alsoto new clients. These factors were reflected in the significantincrease in our written premium volume from 2002 to 2004, incomparison to 2001.     With respect to terms and conditions other than pricing, forrenewals in the period 2002 to 2004 the coverage of claims thatare the result of “terrorist acts” was generallyexcluded from property catastrophe reinsurance contractscovering large commercial risks, but not excluded for personallines or other coverages except where caused by nuclear,biological or chemical means. Between 2002 and 2004, IPCRe hasparticipated in a number of underwriting pools which coverproperty losses arising from terrorist acts as a separate hazard.     On November 26, 2002, the Terrorism Risk Insurance Act of2002 (“TRIA”) was signed into law. TRIA, which doesnot apply to reinsurance companies such as IPCRe, established atemporary federal program which requires U.S. and other insurersto offer coverage in their commercial property and casualtypolicies for losses resulting from terrorists’ actscommitted by foreign persons or interests in the United Statesor with respect to specified U.S. air carriers, vessels ormissions abroad. The coverage offered may not differ materiallyfrom the terms, amounts and other coverage limitationsapplicable to other policy coverages. Generally, insurers willpay all losses resulting from a covered terrorist act topolicyholders, retaining a defined “deductible” and10% of losses above the deductible. The federal government willreimburse insurers for 90% of losses above the deductible and,under certain circumstances, the federal government will requireinsurers
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to levy surcharges on policyholders to recoup for the federalgovernment its reimbursements paid. As a result of TRIA, ourparticipation in coverage for terrorism within the United Statesdeclined during 2003 and 2004. We have continued to excludelosses resulting from terrorist acts, as defined in thislegislation, from U.S. property catastrophe contractscovering large commercial risks incepting January 1, 2005.TRIA is currently set to expire at the end of 2005, and it isuncertain as to whether it will be extended or renewed. If TRIAis not extended or renewed, there may be an increase in demandfor coverage for losses resulting from terrorism. Coverage maybe sought through separate contracts, or some cedants may seekto include the hazard of terrorism in catastrophe reinsurancecontracts, which many reinsurers, including IPCRe, currentlyexclude for commercial risks, as discussed above.**Critical Accounting Policies**     Our significant accounting policies are described in theNote 2 to our Consolidated Financial Statements. Thefollowing is a summary of the accounting policies for the threemain components of our balance sheet and statement of income:premiums, losses (claims), including reserves and investments/investment income.***Premiums***     Premiums are recorded as written at the beginning of eachpolicy, based upon information received from ceding companiesand their brokers, and are earned over the policy period. Forexcess of loss contracts, the amount of deposit premium iscontractually documented at inception, and no managementjudgement is necessary in accounting for this. Premiums areearned on a pro rata basis over the policy period. Forproportional treaties, the amount of premium is normallyestimated at inception by the ceding company. We account forsuch premium using initial estimates, which are reviewedregularly with respect to the actual premium reported by theceding company. At December 31, 2004 the amount of premiumaccrued resulting from management’s estimates wasapproximately 3% of total gross premiums written for the yearthen ended. We also accrue for reinstatement premiums (premiumspaid to reinstate reinsurance coverage following a claim). Suchaccruals are based upon actual contractual terms applied to theamount of loss reserves expected to be paid, and the onlyelement of management judgement involved is with respect to theamount of loss reserves and associated rates on line (i.e.price), as described below. The amount accrued atDecember 31, 2004 for estimated reinstatement premiums onReported But Not Enough losses (“RBNE”) and IncurredBut Not Reported (“IBNR”) loss reserves was$12.5 million.***Loss Reserves***     Under accounting principles generally accepted in the UnitedStates of America, we are not permitted to establish lossreserves until the occurrence of an event which may give rise toa claim. As a result, only loss reserves applicable to lossesincurred up to the reporting date may be established, with noallowance for the provision of a contingency reserve to accountfor expected future losses. Claims arising from futurecatastrophic events can be expected to require the establishmentof substantial reserves from time to time.     Estimating appropriate loss reserves for catastrophes is aninherently uncertain process. Loss reserves represent ourestimates, at a given point in time, of ultimate settlement andadministration costs of losses incurred (including IBNR and RBNElosses). We regularly review and update these estimates, usingthe most current information available to us. Consequently, theultimate liability for a catastrophic loss is likely to differfrom the original estimate. Whenever we determine that anyexisting loss reserves are inadequate, we are required toincrease the loss reserves with a corresponding reduction, whichcould be material, in our operating results in the period inwhich the deficiency is identified. The establishment of newreserves, or the adjustment of reserves for reported claims,could result in significant upward or downward changes to ourfinancial condition or results of operations in any particularperiod.     The reserve for losses and loss adjustment expenses is basedupon reports from industry sources, individual case estimatesreceived from ceding companies and/or their brokers, output fromcommercially available catastrophe loss models andmanagement’s estimates. When a catastrophic event occurs,we first determine which treaties may be affected using ourgeographic database of exposures. We then contact the
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respective brokers and ceding companies involved with thosetreaties, to determine their estimate of involvement and theextent to which the reinsurance program is affected. We may alsouse computer modeling to measure and estimate loss exposureunder the actual event scenario, if available. Since 1993, wehave contracted AIR Worldwide Corporation for the use of theirproprietary models — currentlyCATRADER® — as part of our modeling approach.These computer-based loss modeling systems utilize A.M.Best’s data and direct exposure information obtained fromour clients. Once an event occurs, we establish a specificreserve for that event, based upon estimates of total lossesincurred by the ceding insurers as a result of the event and aspecific estimate of the portion of such loss we have reinsured.Management’s estimates are used mostly for IBNR or RBNEloss amounts. For certain catastrophic events there isconsiderable uncertainty underlying the assumptions andassociated estimated reserves for losses and loss adjustmentexpenses. Reserves are reviewed regularly and, as experiencedevelops and additional information becomes known, the reservesare adjusted as necessary. However, complexity resulting fromproblems such as multiple events affecting one geographic areaand the resulting impact on claims adjusting (includingallocation of claims to event and the effect of demand surge onthe cost of building materials and labour) by, andcommunications from, ceding companies, can cause delays to thetiming with which we are notified of changes to loss estimates.Such adjustments, if necessary, are reflected in results ofoperations in the period in which they become known. For excessof loss business, which is generally over 90% of the premium wewrite, we are aided by the fact that each treaty has a definedlimit of liability arising from one event. Once that limit hasbeen reached, we have no further exposure to additional lossesfrom that treaty for the same event. For proportional treaties,we generally use an initial estimated loss and loss expenseratio (the ratio of losses and loss adjustment expenses incurredto premiums earned), based upon information provided by theceding company and/or their broker and our historical experienceof that treaty, if any. The estimate is adjusted as actualexperience becomes known.     At December 31, 2004 management’s estimates for IBNR/RBNE represented approximately 43% of total loss reserves. Themajority of the estimate relates to reserves for claims from thefour hurricanes which struck Florida and two of the typhoonswhich struck Japan, in August and September of this year. If ourestimate of IBNR/ RBNE at December 31, 2004 was inaccurateby a factor of 10%, our results of operations would be impactedby a positive or negative movement of approximately$11.8 million. If our total reserve for losses atDecember 31, 2004 was inaccurate by a factor of 10%, ourincurred losses would be impacted by approximately$27.4 million, which represents approximately 1.6% ofshareholders’ equity. In accordance with IPCRe’sregistration under the Bermuda Insurance Act 1978 and RelatedRegulations (the “Insurance Act”), the loss reservesare certified annually by an independent loss reserve specialist.***Investments***     In accordance with our investment guidelines, our investmentsconsist of certain equity securities and high-grade marketablefixed income securities. Investments are considered“Available for Sale” and are carried at fair value.Fixed maturity investments are stated at fair value asdetermined by the quoted market price of these securities asprovided by either independent pricing services, or when suchprices are not available, by reference to broker or underwriterbid indications. Equity securities and investments in mutualfunds are stated at fair value as determined by either the mostrecently traded price or the net asset value as advised by thefund. Unrealized gains and losses are included within“Accumulated other comprehensive income” as a separatecomponent of shareholders’ equity. Realized gains andlosses on sales of investments are determined on a first-in,first-out basis. Investment income is recorded when earned andincludes the amortization of premiums and discounts oninvestments.     We regularly monitor the difference between the cost and fairvalue of our investments, which involves uncertainty as towhether declines in value are temporary in nature. If we believea decline in value of a particular investment is temporary, werecord the decline as an unrealized loss as a separate componentof our shareholders’ equity. If we believe the decline isother-than-temporary, we write down the cost basis of theinvestment to the market price as of the reporting date andrecord a realized loss in our statement of income. Thedetermination that a security has incurred another-than-temporary decline in value requires the judgement ofIPC’s management, which includes the views of ourinvestment managers and a regular review of our investments. Ourassessment of a decline in value includes our current judgementas to the financial
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position and future prospects of the entity that issued thesecurity. If that judgement changes in the future we mayultimately record a realized loss, after having originallyconcluded that the decline in value was temporary.     Generally, we review all securities that are trading at asignificant discount to par, amortized cost (if lower) or costfor an extended period of time. We generally focus our attentionon all securities whose market value is less than 75% of theircost. The specific factors we consider in evaluating potentialimpairment include the following: •     The extent of decline in value  •     The length of time the security is below cost  •     The future prospects of the issuer, or in the case of mutual    funds, the future prospects of the fund  •     Whether the decline appears to be related to general market or    industry conditions, or is issuer-specific  •     Our intent and ability to hold the security  •     Other qualitative and quantitative factors     At December 31, 2004 our equity investments comprisedinvestments in the following: a U.S. equity fund, a globalequity fund, a fund of hedge funds and a fund with attributessimilar to those of the S & P 500 Index. None of thefunds have a significant concentration in any one businesssector; accordingly, the value of our equity funds isprincipally influenced by macro economic factors rather thanissuer-specific factors. Our equity investments are subject tothe same analyses as described above for the determination ofother-than-temporary declines in value. Since there is aportfolio of securities within each fund, the qualitative issuesare usually broader than those for individual securities andtherefore the assessment of impairment is inherently moredifficult and requires more management judgement.     At December 31, 2004 we did not hold any fixed maturitysecurities that are not investment grade or not rated.     At December 31, 2004 we determined that there was noother-than-temporary impairment of securities.     The following table summarizes the total unrealized gains andlosses included as a separate component of shareholders’equity:       **At**  **December 31,**  **2004**     **$000***Gross unrealized (losses):*        Fixed maturity investments  (9,263)    Equity investments  —        (9,263)    *Gross unrealized gains:*        Fixed maturity investments  7,512     Equity investments  92,901        100,413     *Total net unrealized gains (losses)*  91,150     
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     The following table summarizes the unrealized loss position atDecember 31, 2004 by length of time those securities havebeen continuously in an unrealized loss position:                   **Less than 12 months** **12 months or longer**       **Gross**   **Gross**    **unrealized**   **unrealized**  **2004 Unrealized Losses** **losses** **Fair Value** **losses** **Fair Value**             Length of time with unrealized loss:                    Fixed maturity investments $(7,164) $924,722  $(2,099) $164,297     Equity investments $—  $—  $—  $— **Results of Operations*****Years Ended December 31, 2004, 2003 and 2002***     Following a two and a half year period in which there was littlein the way of major catastrophe activity, the second half of2004 saw a significant number of catastrophic events, includingthe four hurricanes that made landfall in Florida, and a recordnumber of typhoons making landfall in Japan. As a result, ournet income in 2004 was $138.6 million, a 46.8% decreasecompared to net income of $260.6 million earned in 2003,and down 12.2% over the $157.9 million net income earned in2002. The impact of losses from catastrophic events in 2004 waspartly offset by our growth in premium volume resulting fromprice increases and additional business for existing clients,augmented by business from new clients, which more than offsetbusiness that we did not renew.     In the twelve months ended December 31, 2004, we wrotegross premiums of $378.4 million, compared to$322.8 million and $259.7 million written in the yearsended December 31, 2003 and 2002, respectively. Thesewritings included adjustment premiums, which are adjustmentsgenerally arising from differences between cedants’ actualpremium income and the original estimates thereof, andreinstatement premiums, which are premiums paid by cedingcompanies to reinstate reinsurance coverage following a claim.Adjustment premiums were $12.8 million, $21.1 millionand $5.8 million, for the years ended December 31,2004, 2003 and 2002, respectively. Adjustment premiums weresignificantly higher in 2003 because original estimates of 2002primary property insurance premiums advised by cedants did notanticipate the significant increases in their pricing thatoccurred. Reinstatement premiums were $32.5 million,$7.3 million and $1.4 million, for the years endedDecember 31, 2004, 2003 and 2002, respectively. Thesignificant increase in 2004 was mostly due to the volume ofclaims relating to the hurricanes and typhoons which occurred inthe third quarter. In both 2004 and 2003, we had increasedparticipation and additional business from existing clients andselectively wrote business for new clients. In 2002, we alsobenefitted from rate increases, generally in the range of 10% to20%, but as high as 25% in some cases. In 2003 and 2004, webenefitted from rate increases of 3% to 10% during the firsthalf of the period, but pricing generally flattened during thelatter half, principally due to the absence of significantcatastrophic events until the third quarter of 2004, as well asincreased competition. In addition, during both 2004 and 2003,we decided not to renew some contracts with unsatisfactory ratesor terms.     We purchase reinsurance to reduce our exposure to large losses.(See Note 5 to the Consolidated FinancialStatements — “Ceded Reinsurance”.) In theyears ended December 31, 2004, 2003 and 2002, premiumsceded to these facilities were $20.1 million,$14.5 million and $5.4 million, respectively, reducingnet premium writings for those years to $358.3 million,$308.3 million and $254.3 million, respectively. Theincrease in ceded premiums reflects increased transfers ofexposure to our Property Catastrophe Aggregate Excess of LossReinsurance facility, as well as the increase inretrocessionaires’ participation in our proportionalreinsurance facility, which has varied from 37.0% in 2002 to60.5% in 2003 and 74.5% for 2004.     We earned net premiums of $354.9 million,$298.9 million and $226.4 million in the years endedDecember 31, 2004, 2003 and 2002, respectively,representing increases of 18.7% and 32.0%, respectively. Earnedpremiums increased from 2002 to 2004 because of the increase inwritten premiums, as well as the substantial increases inadjustment and reinstatement premiums recorded in 2003 and 2004,respectively.
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Excluding adjustment and reinstatement premiums, net premiumsearned increased by 23.4% from $219.2 million in 2002 to$270.5 million in 2003, and then by a further 14.4% to$309.6 million in 2004.     We earned net investment income of $51.2 million in theyear ended December 31, 2004 compared to $47.1 millionearned in the year ended December 31, 2003, and$49.3 million in the year ended December 31, 2002. Theoverall yield of the fixed income portfolio declined in each ofthe three years in the period ended December 31, 2004, dueto lower interest rates and their adverse impact on thereinvestment of maturing and sales of fixed income securities.In 2004, this negative factor was more than offset by theincrease in the average balance of invested assets, which was17% higher than in 2003, because of positive operating cash flowin the period. In addition, we benefitted from $3.5 millionof dividends from our investment in a fund of hedge funds. Suchdividends will be declared periodically, provided theperformance of the fund is positive. Investment income is net ofinvestment expenses, which were primarily investment managementand custodial fees payable to subsidiaries of AmericanInternational Group, Inc. (“AIG”). (See Note 9 tothe Consolidated Financial Statements — “RelatedParty Transactions”.) These fees totaled $3.0 millionin 2004, $3.2 million in 2003 and $2.9 million in2002. We received refunds of management fees deducted from thenet assets of a global equity fund and a North American equityfund, in which we are an investor, because we already paymanagement fees on the portfolio as a whole. Both funds aremanaged by AIG/ Sun America. These refunds were$2.4 million, $1.9 million and $1.2 million, forthe years ended December 31, 2004, 2003 and 2002,respectively.     At December 31, 2004 the portfolio consisted of cash andcash equivalents, high quality fixed maturity investments, andequity investments in a U.S. equity fund, a global equityfund, a fund of hedge funds and a fund with attributes similarto those of the S & P 500 Index.     We recorded a net realized gain of $5.9 million on the saleof investments for the year ended December 31, 2004,compared to $13.7 million for the year endedDecember 31, 2003 and a net realized loss of$(44.9) million for the year ended December 31, 2002.The loss for 2002 included a write-down of $49.1 million inthe cost basis of certain stocks where management had determinedthere had been a decline in value which wasother-than-temporary. In accordance with Statement of FinancialAccounting Standards No. 115, “Accounting for CertainInvestments in Debt and Equity Securities”, such awrite-down is recognized as a realized loss in the incomestatement, even though there were no sales of the securities.Generally, net gains and losses fluctuate from period to period,depending on the securities sold. Net unrealized gains on ourinvestment portfolio (see Note 3 to the ConsolidatedFinancial Statements — “Investments”) were$91.2 million at December 31, 2004, compared to$91.1 million at December 31, 2003.     We incurred net losses and loss adjustment expenses of$215.6 million, $54.4 million and $38.8 millionin the years ended December 31, 2004, 2003 and 2002,respectively. The level of insured losses from catastrophicevents around the world was significantly lower in 2003 and 2002compared to the relatively high frequency and severity of eventsduring 2004. Although 2003 saw many catastrophe events in theUnited States, as determined by PCS, most of the insured lossesfrom those events were not large enough to breach the attachmentpoints of our catastrophe excess of loss reinsurance contracts.     In 2004, we incurred losses from Hurricanes Charley, Frances,Ivan and Jeanne, all of which made landfall in Florida andaffected other parts of the South-East United States and theCaribbean in the third quarter, totalling $168.6 million.We also incurred net losses from Typhoons Chaba and Songda whichmade landfall in Japan in the third quarter, totalling$47.7 million. We also incurred a loss of $4.8 millionfrom a fire at an oil refinery in Algeria, which occurred inJanuary, 2004. Offsetting the impact of these losses were netreductions in losses from a variety of events in prior accidentyears, totalling $13.5 million.     In 2003, we incurred losses from: bush fires in Canberra,Australia in January 2003 ($2.9 million); an explosion andfire which impacted an energy facility in Canada, in January2003 ($2.7 million); tornadoes and hailstorms whichaffected the mid-West United States in April and May of 2003($10.3 million); several brush fires in California inOctober 2003 ($8.0 million); pro rata treaties($7.9 million); various windstorms which took place aroundthe world, including Hurricanes Isabel and Fabian, in September2003 ($8.5 million); and the floods which affected southernFrance in December 2003 ($2.5 million). We also incurredlosses as a result of development of claims from prior years,including increases to claims resulting from
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Hurricane Lili and storms which affected Europe in October 2002,and $7.0 million in respect of an increase in the ultimateexpected losses for Tropical Storm Allison which took place inJune, 2001. This was the result of an unfavourable court rulingregarding an insurance policy coverage dispute between a cedantand the original insured under the policy.     In 2002, we incurred losses from the floods which affectedcentral and eastern Europe in August ($18.5 million);reserves established for 2002 pro rata treaties($6.5 million); fires in Canada ($2.0 million); otherEuropean weather-related losses ($2.2 million), as well assome development of losses from the attack on the World TradeCenter ($6.0 million).     Acquisition costs, which are typically a percentage of premiumswritten, consist primarily of commissions and brokerage feespaid to intermediaries for the production of premiums written,and excise taxes. Brokerage commissions on property catastropheexcess of loss contracts typically range from 5% to 10% ofwritten premiums. We incurred acquisition costs of$37.7 million, $30.9 million and $24.5 millionfor the years ended December 31, 2004, 2003 and 2002,respectively, after deferring those costs related to theunearned portion of premiums written. The increases from 2002 to2003, and from 2003 to 2004 are primarily due to the increase inearned premiums, but they have not increased proportionately,because we wrote more business in 2003 and 2004 where brokerageand commissions are not incurred by us.     General and administrative expenses were $23.2 million,$19.1 million and $13.9 million for the years endedDecember 31, 2004, 2003 and 2002, respectively. Thesefigures include fees paid to subsidiaries of AIG foradministrative services, which are based on a percentage ofgross premiums written, but deferred to the extent of theunearned portion of those premiums, and were $9.3 million,$7.8 million and $5.8 million for the years endedDecember 31, 2004, 2003 and 2002, respectively. Theseservices include the provision of certain office space,furnishings, computer systems, accounting, legal, payroll,information technology and human resource personnel, and otherancillary services. (See Note 9 to the ConsolidatedFinancial Statements — “Related PartyTransactions”.) In addition to this significant increase,other expense categories which saw increases included salariesand benefits, which include the impact of expensing stock grantsand stock options granted to certain officers, acceleratedpension/stock compensation expense due to the early retirementof one of our officers, and professional fees resulting fromcorporate governance requirements under the Sarbanes-Oxley Actof 2002. In 2004, these increases were offset in part by thenon-recurring set-up costs of our revolving credit facility,which were incurred in 2003.**Liquidity and Capital Resources**     IPC Holdings is a holding company that conducts no reinsuranceoperations of its own, and its cash flows are limited todistributions from IPCRe and IPCUSL by way of loans ordividends. The dividends that IPCRe may pay are limited by theInsurance Act. During 1998, IPCRe incorporated a subsidiary inIreland called IPCRe Europe Limited, which underwrites selectedreinsurance business primarily in Europe. In November 2001, IPCHoldings incorporated a subsidiary in Bermuda called IPCUSL,which currently acts as an underwriting agent for a company inwhich AIG has an ownership interest. (See Note 9 to theConsolidated Financial Statements — “RelatedParty Transactions”.)     Under the Insurance Act, IPCRe is required to maintain asolvency margin and a minimum liquidity ratio, and is prohibitedfrom declaring or paying dividends if to do so would cause IPCReto fail to meet its solvency margin and its minimum liquidityratio. Under the Insurance Act, IPCRe is prohibited from payingdividends of more than 25% of its total statutory capital andsurplus at the end of the previous fiscal year unless it filesan affidavit stating that the declaration of such dividends hasnot caused IPCRe to fail to meet its solvency margin and minimumliquidity ratio. The Insurance Act also prohibits IPCRe fromdeclaring or paying any dividend without the approval of theSupervisor of Insurance of Bermuda if IPCRe failed to meet itssolvency margin and minimum liquidity ratio on the last day ofthe previous fiscal year. The maximum dividend payable by IPCRein accordance with the foregoing restrictions as ofJanuary 1, 2005 was approximately $414.6 million. Inaddition, IPCRe is prohibited under the Insurance Act fromreducing its opening total statutory capital by more than 15%without the approval of the Authority.
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***Sources of Funds***     Our sources of funds consist of premiums written, lossesrecovered from retrocessionaires, underwriting agencycommissions, investment income and proceeds from sales andredemptions of investments.     In July 1998, to further enhance its liquidity, IPCRe enteredinto a revolving credit facility with a syndicate of lenders ledby Bank One N.A.. The amount of the original facility was$300 million, which was reduced to $150 million inJune, 2001. The facility was renewed in July 2003 for athree-year term, in the amount of $200 million. IPCRe ispermitted to declare and pay dividends to the Company providedthere are no defaults or unmatured defaults pending. One of thesignificant covenants of the facility requires IPCRe to maintaina minimum net worth (shareholders’ equity) of$900 million, plus 50% of any positive net income in anyquarter, plus 75% of the net proceeds of any equity issuance. Asof December 31, 2004 no amounts have been drawn under thisfacility, and IPCRe is in compliance with all the terms andcovenants required. The maximum amount of dividends that IPCRecould have paid in the fourth quarter of 2004 under the terms ofthe credit facility was $517.7 million.     On December 12, 2001, we completed a follow-on publicoffering in which 17,480,000 ordinary shares were sold(including the exercise of the over-allotment option of2,280,000 shares) at $26.00 per share. Concurrent withthe offering, we sold 2,847,000 shares in a privateplacement to AIG at a price equal to the public offering price.Furthermore, AIG exercised an option which had been granted atthe time of the Company’s formation, whereby they acquired2,775,000 shares at an exercise price of $12.7746 pershare. Total net proceeds raised from these transactions wereapproximately $546 million.***Uses of Funds***     Cash is used primarily for investing activities and to paylosses and loss adjustment expenses, brokerage commissions,excise taxes, premiums retroceded, general and administrativeexpenses and dividends. We generated cash flows from operationsof $279.2 million, $269.5 million and$180.9 million in the years ended December 31, 2004,2003 and 2002, respectively. These amounts represent thedifference between premiums collected and investment earningsrealized, and losses and loss adjustment expenses paid,underwriting and other expenses paid. Cash flows from operationsdiffer, and may continue to differ, substantially from netincome. To date, we have invested all cash flows not requiredfor operating purposes or payment of dividends. The potentialfor large catastrophes means that unpredictable and substantialpayments may need to be made within relatively short periods oftime. Hence, future cash flows cannot be predicted with anycertainty and may vary significantly between periods. Losspayments during the years ended December 31, 2004, 2003 and2002 were $73.4 million, $57.1 million and$84.1 million, respectively. During 2005, we expect to paythe bulk of the $188 million of loss reserves we haveaccrued at December 31, 2004 for the various windstormsthat occurred in the third quarter of 2004, as well as claimsfrom other events that may occur during the year.     With the exception of cash holdings, our funds are primarilyinvested in fixed maturity securities, the fair value of whichis subject to fluctuation depending on changes in prevailinginterest rates, and investments in mutual funds, which invest instocks of large capitalized companies in the U.S. and othermajor countries around the world. We do not hedge our investmentportfolio against interest rate risk. Accordingly, changes ininterest rates and equity prices may result in losses, bothrealized and unrealized, on our investments (see“Quantitative and Qualitative Disclosure about MarketRisk” below for further explanation). On January 2,2004, we invested $75.0 million in the AIG Select HedgeFund, a limited company incorporated in the Cayman Islandsmanaged by a subsidiary of AIG, which invests in a number ofhedge funds, typically 20 to 25, managed by unrelatedparties, with a variety of investment strategies. The purpose ofthis investment is to provide additional diversification of ourportfolio as a whole, and to potentially improve overall yield.A further $19.0 million was invested in this fund in May2004, and dividends received have also been reinvested.     At December 31, 2004, 80.9% of our fixed maturityinvestment portfolio consisted of cash, U.S. Treasuries orother government agency issues, and investments with a AAA or AArating, compared to 82.9% of the portfolio at December 31,2003. The primary rating source is Moody’s InvestorsServices Inc. (See Note 3 (f) to the ConsolidatedFinancial Statements — “Investments”.) AtDecember 31, 2004 the
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portfolio had an average maturity of 2.3 years and anaverage modified duration of 2.1 years (compared to2.8 years and 2.6 years, respectively, atDecember 31, 2003).     Net cash outflows used for investing activities in the yearsended December 31, 2004, 2003 and 2002 were$301.4 million, $159.6 million and$479.7 million, respectively. At December 31, 2004 ourcash and cash equivalents were $27.9 million, compared to$91.9 million at December 31, 2003, of which$75.0 million was invested on January 2, 2004 in theAIG Select Hedge Fund, discussed above.     Our functional currency is the U.S. dollar. However,premiums receivable and losses payable in respect of asignificant portion of our business are denominated incurrencies of other countries, principally industrial countries.Consequently, we may, from time to time, experience currencyexchange gains and losses that could affect our financialposition and results of operations. In the year endedDecember 31, 2004, we incurred a foreign exchange loss of$(1.3) million, compared to foreign exchange gains of$1.9 million and $1.6 million, respectively, in theyears ended December 31, 2003 and 2002. The loss in 2004was partly due to the impact of changing exchange rates onnon-U.S. dollar loss reserves, whereas the gains in 2002and 2003 were primarily the result of the strengthening of theEuro and British pound. We currently do not -and as a practicalmatter cannot - hedge our U.S. dollar currency exposurewith respect to potential claims until a loss payable in anon-U.S. dollar currency occurs, after which we may matchsuch liability with assets denominated in the same currency, aswe have done on three occasions, or enter forward purchasecontracts for specific currencies, which we did during 2000.This type of exposure could be substantial. We also have nothedged our non-U.S. dollar currency exposure with respectto premiums receivable, which generally are collected over therelevant contract term. (See “Quantitative and QualitativeDisclosure about Market Risk” below.) Our practice is toexchange non-U.S. dollar denominated premiums upon receipt.Foreign currency investments have been infrequently made,generally for the purpose of improving overall portfolio yield.At December 31, 2004, we had no forward contract hedgesoutstanding.     Our investment portfolio does not currently include options,warrants, swaps, collars or similar derivative instruments. Ourinvestment policy guidelines provide that financial futures andoptions and foreign exchange contracts may not be used in aspeculative manner, but may be used, subject to certainnumerical limits, only as part of a defensive strategy toprotect the fair value of the portfolio. Also, our portfoliodoes not contain any investments in real estate or mortgageloans.     IPCRe is not a licensed insurer in the United States of Americaand therefore, under the terms of most of its contracts withU.S.-based companies, must provide security to reinsureds tocover unpaid liabilities in a form acceptable to state insurancecommissioners. Typically, this type of security takes the formof a letter of credit issued by an acceptable bank, theestablishment of a trust, or a cash advance. Currently IPCReobtains letters of credit through one commercial bank pursuantto a $150.0 million facility. In turn, IPCRe provides thebank security by giving the bank a lien over certain ofIPCRe’s investments in an amount not to exceed 118% of theaggregate letters of credit outstanding. At December 31,2004 and 2003, there were outstanding letters of credit of$98.7 million and $52.0 million, respectively. Thesignificantly higher amount at the end of 2004 was due to theincreased requirements of our clients as a result of claimsarising from the four hurricanes which made landfall in Florida.If we were unable to obtain the necessary credit, IPCRe could belimited in its ability to write business for our clients in theUnited States.     We believe that our revolving credit facility, operating cashflow and the high quality of our investment portfolio, providessufficient liquidity to meet our cash demands.     Neither IPC Holdings nor IPCRe or their subsidiaries have anymaterial commitments for capital expenditures.
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**Aggregate Contractual Obligations**     The following table summarizes our contractual obligations:                       **Payments due by period**  **(expressed in millions of U.S. dollars)**       **More than****Contractual Obligations** **Total** **Less than 1 year** **1-3 years** **3-5 years** **5 years**               Purchase Obligations $0.4  $0.3  $0.1  $—  $—     Losses and Loss Adjustment Expenses  274.5   159.9   73.7   19.6   21.2   *Purchase Obligations*are made up of the followingcontractual obligations: 1.     Administrative Services Agreement: The Company and IPCRe are    parties to an agreement with American International Company,    Limited (“AICL”), an indirect wholly-owned subsidiary    of AIG, under which AICL provides administrative    services — as described above — for a fee of    2.5% of the first $500 million annual gross written    premiums (1.5% of the next $500 million and 1% thereafter).    This administrative services agreement terminates on    June 30, 2006 and is automatically renewed thereafter for    successive three year terms unless prior written notice to    terminate is delivered by or to AICL at least 180 days    prior to the end of such three year term. As the fee payable is    based on annual gross written premiums the actual annual amount    is unknown until the end of the year and therefore not included    in the table above. The amount incurred for 2004 was    $9.2 million.  2.     Credit Facility: As described above, we renewed a credit    facility in the amount of $200 million for a period of    three years, ending on June 30, 2006. Drawings on this    facility can be used for general corporate purposes. The level    of the facility fee payable is dependent upon the S & P    credit rating of IPCRe and therefore a change in this rating    would affect the amount paid. The applicable fee rate based upon    IPCRe’s present credit rating is 0.125% of the amount of    the facility. An annual administration fee of $45,000 is also    payable. A margin fee would be payable on amounts drawn under    this agreement with the fee payable also dependent upon the    S & P rating of IPCRe at that time. At    December 31, 2004 no amounts have been drawn under this    facility.***Losses and Loss adjustment expenses***     The reserve for losses and loss adjustment expenses representmanagement’s estimate of the ultimate cost of settlingreinsurance claims. As more fully discussed in our“Critical Accounting Policies — LossReserves” above, the estimation of losses and lossadjustment expense reserves is based on various complex andsubjective judgments. Actual losses and loss adjustment expensespaid may differ, perhaps substantially, from the reserveestimates reflected in our financial statements. Similarly, thetiming for payment of our estimated losses is not fixed and isnot determinable on an individual or aggregate basis. Complexityresulting from problems such as multiple events affecting onegeographic area and the resulting impact on claims adjusting(including allocation of claims to event and the effect ofdemand surge on the cost of building materials and labour) by,and communications from, ceding companies, can cause delays tothe timing with which we are notified of changes to lossestimates, or are asked to make payments. The assumptions usedin estimating the likely payments due by periods are based onthe Company’s historical claims payment experience, but dueto the inherent uncertainty in the process of estimating thetiming of such payments, there is a risk that the amounts paidin any such period can be significantly different than theamounts disclosed above. Part of the uncertainty stems from thevariability of payment pattern by type of catastrophic eventthat caused the losses. For example, earthquake and hailstormlosses typically take longer to be reported and paid compared tolosses from windstorms. In addition, there is no prior historyof payment patterns for events such as the attack on the WorldTrade Center.     Furthermore, the amounts in this table represent our grossestimated known liabilities as of December 31, 2004 and donot include any allowance for claims from future events withinthe time periods specified. As such, it is highly likely thatthe total amounts paid out in the time periods shown will begreater than that indicated in the table.
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**Off-Balance Sheet Arrangements**     Neither the Company nor any of its subsidiaries have any formsof off-balance sheet arrangements, or cash obligations andcommitments, as defined by Item 303 (a)(4) ofRegulation S-K.**Quantitative and Qualitative Disclosure about Market Risk**     The investment portfolio of IPCRe is exposed to market risk.Market risk is the risk of loss of fair value resulting fromadverse fluctuations in interest rates, foreign currencyexchange rates and equity prices.     Measuring potential losses in fair values has become the focusof risk management efforts by many companies. Such measurementsare performed through the application of various statisticaltechniques. One such technique is Value at Risk(“VaR”). VaR is a summary statistical measure thatuses historical interest and foreign currency exchange rates andequity prices and estimates of the volatility and correlation ofeach of these rates and prices to calculate the maximum lossthat could occur within a given statistical confidence level andtime horizon.     We believe that statistical models alone do not provide areliable method of monitoring and controlling market risk. WhileVaR models are relatively sophisticated, the quantitative marketrisk information is limited by the assumptions and parametersestablished in creating the related models, which relyprincipally on historic data. Because of this, such models maynot accurately predict future market behaviour. Therefore, suchmodels are tools and do not substitute for the experience orjudgement of senior management.     Our investment managers performed a VaR analysis, to estimatethe maximum potential loss of fair value for each segment ofmarket risk, as of December 31, 2004 and 2003. The analysiscalculated the VaR with respect to the net fair value of ourinvested assets (cash and cash equivalents, equity andhigh-grade fixed income securities) as of December 31, 2004and 2003 using historical simulation methodology. AtDecember 31, 2004 the VaR of IPCRe’s investmentportfolio was approximately $29.2 million, which representsa 95th percentile value change over a one-month time horizon.This result was obtained through historical simulation usingapproximately 750 days (3 years) of historicalinterest rate and equity market data.     The following table presents the VaR of each component of marketrisk of IPCRe’s invested assets at December 31, 2004and 2003, respectively, the quarterly points during 2004 and theaverage for the year ended December 31, 2004, calculatedusing the VaR at the beginning, ending and quarterly points(expressed in thousands of U.S. dollars):                                     **Average for**  **At** **At** **At** **At** **At** **year ended**  **December 31,** **September 30,** **June 30,** **March 31,** **December 31,** **Dec. 31,****Market Risk** **2004** **2004** **2004** **2004** **2003** **2004**                 Currency $2,660  $1,987  $2,075  $2,024  $3,021  $2,353     Interest Rate  23,067   21,990   23,586   18,238   17,685   20,913     Equity (incl. hedge fund)  25,323   25,343   27,471   29,386   29,666   27,438                        Sum of Risk  51,050   49,320   53,132   49,648   50,372   50,704     Diversification Benefit  (21,866)  (24,096)  (26,267)  (24,618)  (22,757)  (23,921)                   **Total Net Risk** $29,184  $25,224  $26,865  $25,030  $27,615  $26,783                         Increased market volatility, reflected by changes to(higher) bond yields in the second half of 2004, hasresulted in increases to interest rate VaR (the risk due to theimpact of changes in interest rates) and VaR overall. Ourinvestment in equities (equity mutual funds and fund of hedgefunds) increased from $319 million at the end of 2003 to$429 million at the end of 2004, primarily relating to ourinvestments in the fund of hedge funds in January and May of2004. Equity volatility has actually declined as reflected bythe fall in the Market Volatility Index to very low levels,implying optimism in investor sentiment.     IPCRe’s premiums receivable and liabilities for losses fromreinsurance contracts it has written, are also exposed to therisk of changes in value resulting from adverse fluctuations inforeign currency exchange rates. To an extent, the impact onloss reserves of a movement in an exchange rate, will be partlyoffset by the
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impact on assets (receivables and cash/investments) denominatedin the same currency, or vice versa. At December 31, 2004,an estimated $25 million of reinsurance premiumsreceivable, and an estimated $62 million of loss reserves,were denominated in currencies other than the U.S. dollar.At December 31, 2004 we held U.S.$1.9 millionequivalent in Australian dollar time deposits. Accordingly, froma risk perspective, we do not believe that the impact ofexchange rate movements in respect of receivables or lossreserves on our overall VaR at December 31, 2004 to bematerial.**Transactions with Non-Independent Parties**     All of our related party transactions have been disclosed inNote 9 to the Consolidated Financial Statements —“Related Party Transactions”. To our knowledge,neither the Company nor any of its subsidiaries have enteredinto any other transactions with other non-independent parties.**Effects of Inflation**     IPCRe estimates the effect of inflation on its business andreflects these estimates in the pricing of its reinsurancecontracts. Because of the relatively short claims settlementcycle associated with its reinsurance portfolio, IPCRe generallydoes not take into account the effects of inflation whenestimating reserves. The actual effects of inflation on theresults of IPCRe cannot be accurately known until claims areultimately settled. Levels of inflation also affect investmentreturns.
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****Consolidated Financial Statements**(With Independent Registered Public Accountants’ Reportthereon)Years Ended December 31, 2004 and 2003
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**INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS’ REPORT**To the Board of Directors and Shareholders ofIPC Holdings, Ltd.     We have audited the accompanying consolidated balance sheets ofIPC Holdings, Ltd. and subsidiaries as of December 31, 2004and 2003, and the related consolidated statements of income,comprehensive income, shareholders’ equity, and cash flowsfor each of the years in the three-year period endedDecember 31, 2004. These consolidated financial statementsare the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidatedfinancial statements based on our audits.     We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financialstatement presentation. We believe that our audits provide areasonable basis for our opinion.     In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the financialposition of IPC Holdings, Ltd. and subsidiaries as ofDecember 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the years in thethree-year period ended December 31, 2004, in conformitywith U.S. generally accepted accounting principles.     We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), theeffectiveness of IPC Holdings, Ltd.’s internal control overfinancial reporting as of December 31, 2004, based oncriteria established in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO), and our report datedFebruary 21, 2005 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of,internal control over financial reporting./s/ KPMGChartered AccountantsHamilton, BermudaFebruary 21, 2005
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****December 31, 2004 and 2003****(Expressed in thousands of United States Dollars, except forper share amounts)**           **2004** **2003**     **ASSETS**    Fixed maturity investments, available for sale, at fair value    (amortized cost 2004: $1,446,327; 2003: $1,240,188) $1,444,576  $1,260,467     Equity investments, available for sale, at fair value (cost    2004: $335,719; 2003: $248,179)  428,620   319,007     Cash and cash equivalents  27,898   91,949     Reinsurance premiums receivable  85,086   61,194     Deferred premiums ceded  4,558   1,317     Loss and loss adjustment expenses recoverable  5,006   1,810     Accrued investment income  20,695   19,821     Deferred acquisition costs  8,424   8,035     Prepaid expenses and other assets  3,427   5,858          $2,028,290  $1,769,458         **LIABILITIES**    Reserve for losses and loss adjustment expenses $274,463  $123,320     Unearned premiums  68,465   61,795     Reinsurance premiums payable  3,387   3,877     Deferred fees and commissions  1,475   834     Accounts payable and accrued liabilities  12,061   10,473           359,851   200,299        **SHAREHOLDERS’ EQUITY**            Share capital — 2004: 48,407,203 shares    outstanding, par value $0.01; 2003: 48,292,270 shares    outstanding, par value $0.01  484   483     Additional paid-in capital  854,797   850,133     Deferred stock grant compensation  (2,899)  (1,495)    Retained earnings  724,907   628,931     Accumulated other comprehensive income  91,150   91,107           1,668,439   1,569,159          $2,028,290  $1,769,458               SIGNED ON BEHALF OF THE BOARD        Director         Director   See accompanying notes to consolidated financial statements
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF INCOME****For each of the years in the three year period endedDecember 31, 2004****(Expressed in thousands of United States Dollars, except forper share amounts)**               **2004** **2003** **2002**       **REVENUE**                Gross premiums written $378,409  $322,762  $259,685     Change in unearned premiums  (6,670)  (9,893)  (27,462)              Premiums earned  371,739   312,869   232,223               Reinsurance premiums ceded  20,098   14,466   5,410     Change in deferred premiums ceded  (3,241)  (498)  409               Premiums ceded  16,857   13,968   5,819               Net premiums earned  354,882   298,901   226,404     Net investment income  51,220   47,089   49,320     Other income  4,296   3,348   2,684     Net realized gains (losses) on investments  5,946   13,733   (44,867)             416,344   363,071   233,541           **EXPENSES**                Net losses and loss adjustment expenses  215,608   54,382   38,775     Net acquisition costs  37,682   30,867   24,521     General and administrative expenses  23,151   19,103   13,893     Net foreign exchange loss (gain)  1,290   (1,910)  (1,554)             277,731   102,442   75,635           **NET INCOME** $138,613  $260,629  $157,906               Basic net income per common share $2.87  $5.41  $3.28     Diluted net income per common share $2.87  $5.40  $3.27     Weighted average number of common shares — basic  48,287,261   48,205,554   48,173,362     Weighted average number of common shares — diluted  48,376,865   48,302,579   48,266,444 See accompanying notes to consolidated financial statements
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME****For each of the years in the three year period endedDecember 31, 2004****(Expressed in thousands of United States Dollars, except forper share amounts)**               **2004** **2003** **2002**       **INCOME** $138,613  $260,629  $157,906 **OTHER COMPREHENSIVE INCOME**                Net holding gains (losses) on investments during year  5,989   64,581   (17,251)    Reclassification adjustment for (gains) losses included in    net income  (5,946)  (13,733)  44,867              43   50,848   27,616           **COMPREHENSIVE INCOME** $138,656  $311,477  $185,522           See accompanying notes to consolidated financial statements
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY****For each of the years in the three year period endedDecember 31, 2004****(Expressed in thousands of United States Dollars, except forper share amounts)**               **2004** **2003** **2002**       **COMMON SHARES PAR VALUE $0.01**                Balance, beginning of year $483  $482  $482     Additional shares issued  1   1   —               Balance, end of year $484  $483  $482           **ADDITIONAL PAID-IN CAPITAL**                Balance, beginning of year $850,133  $846,397  $846,101     Additional paid-in capital on shares issued  941   2,719   458     Reduction in paid-in capital on share repurchase  (142)  (1,321)  (162)    Stock options and grants  3,865   2,338   —               Balance, end of year $854,797  $850,133  $846,397           **DEFERRED STOCK GRANT COMPENSATION**                Balance, beginning of year $(1,495) $—  $—     Stock grants awarded  (2,928)  (2,011)  —     Amortization  1,524   516   —               Balance, end of year $(2,899) $(1,495) $—           **RETAINED EARNINGS**                Balance, beginning of year $628,931  $404,345  $246,568     Net income  138,613   260,629   157,906     Reduction on share repurchase  (155)  (1,334)  (129)    Dividends paid  (42,482)  (34,709)  —               Balance, end of year $724,907  $628,931  $404,345           **ACCUMULATED OTHER COMPREHENSIVE INCOME**                Balance, beginning of year $91,107  $40,259  $12,643     Other comprehensive income  43   50,848   27,616               Balance, end of year $91,150  $91,107  $40,259           **TOTAL SHAREHOLDERS’ EQUITY** $1,668,439  $1,569,159  $1,291,483           See accompanying notes to consolidated financial statements
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****For each of the years in the three year period endedDecember 31, 2004****(Expressed in thousands of United States Dollars, except forper share amounts)**                **2004** **2003** **2002**       **CASH FLOWS FROM OPERATING ACTIVITIES**                Net income $138,613  $260,629  $157,906     Adjustments to reconcile net income to cash provided by    operating activities:                 Amortization of fixed maturity premiums (discounts), net  13,661   15,194   8,994      Net realized (gains) losses on investments  (5,946)  (13,733)  44,867      Stock compensation  2,461   842   —     Changes in:                 Reinsurance premiums receivable  (23,892)  (10,866)  (7,972)     Deferred premiums ceded  (3,241)  (498)  409      Loss and loss adjustment expenses recoverable  (3,196)  (1,405)  276      Accrued investment income  (874)  4,342   (5,322)     Deferred acquisition costs  (389)  (1,940)  (3,262)     Prepaid expenses and other assets  2,431   (855)  (1,527)     Reserve for losses and loss adjustment expenses  151,143   3,965   (42,852)     Unearned premiums  6,670   9,893   27,462      Reinsurance premiums payable  (490)  2,322   (177)     Deferred fees and commissions  641   707   (91)     Accounts payable and accrued liabilities  1,588   920   2,228               Cash provided by operating activities  279,180   269,517   180,939           **CASH FLOWS FROM INVESTING ACTIVITIES**                Purchases of fixed maturity investments  (1,632,680)  (1,429,322)  (1,092,085)    Proceeds from sales of fixed maturity investments  1,398,678   1,212,858   694,988     Proceeds from maturities of fixed maturity investments  14,862   88,246   28,676     Purchases of equity investments  (102,254)  (31,364)  (167,196)    Proceeds from sales of equity investments  20,000   —   55,960               Cash used in investing activities  (301,394)  (159,582)  (479,657)          **CASH FLOWS FROM FINANCING ACTIVITIES**                Proceeds from share issuance, net of repurchases  645   67   167     Cash dividends paid to shareholders  (42,482)  (34,709)  —               Cash (used in) provided by financing activities  (41,837)  (34,642)  167               Net (decrease) increase in cash and cash equivalents  (64,051)  75,293   (298,551)          **CASH AND CASH EQUIVALENTS,**beginning of year  91,949   16,656   315,207           **CASH AND CASH EQUIVALENTS,**end of year $27,898  $91,949  $16,656           See accompanying notes to consolidated financial statements
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(Expressed in thousands of United States Dollars, except forper share amounts)****1.****General**     IPC Holdings, Ltd. (the “Company”) was incorporated inBermuda on May 20, 1993 through the sponsorship of AmericanInternational Group, Inc. (“AIG”). AIG purchased 24.4%of the initial share capital of the Company and an option toobtain up to an additional 10% of the share capital. In December2001, the Company completed a follow-on public offering and AIGexercised its option. Concurrent with that offering, the Companyalso sold shares in a private placement to AIG. Immediatelysubsequent to the offering AIG owned, and continues to own,24.3% of the share capital of the Company.     Through its wholly-owned subsidiary, IPCRe Limited(“IPCRe”), the Company provides reinsurance ofproperty catastrophe risks worldwide, substantially on an excessof loss basis. Property catastrophe reinsurance coversunpredictable events such as hurricanes, windstorms, hailstorms,earthquakes, volcanic eruptions, fires, freezes, industrialexplosions and other man-made or natural disasters. IPCRe’sloss experience will generally include infrequent events ofgreat severity. IPCRe’s clients include many of the leadinginsurance companies in the world. IPCRe also writes, to alimited extent, aviation, property per-risk excess and othershort-tail reinsurance in various parts of the world.Approximately 39% of total premiums written in 2004 related toU.S. risks (2003: 42%; 2002: 45%). The balance ofIPCRe’s covered risks are located principally in Europe,Japan, Australia and New Zealand.     On September 10, 1998, IPCRe incorporated a subsidiary inIreland, named IPCRe Europe Limited. This company underwritesselected reinsurance business primarily in Europe.     On November 7, 2001, the Company incorporated a subsidiaryin Bermuda named IPCRe Underwriting Services Limited.(“IPCUSL”), which currently acts as an UnderwritingAgent for Allied World Assurance Company, Ltd(“AWAC”), a Bermuda-based Class 4 insurer(Note 9).**2.****Significant Accounting Policies**     The consolidated financial statements have been prepared inaccordance with U.S. generally accepted accountingprinciples. The preparation of consolidated financial statementsin conformity with generally accepted accounting principlesrequires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results coulddiffer from those estimates. The significant accounting policiesare as follows:     a) Principles of consolidation     The consolidated financial statements include the accounts ofthe Company and its wholly-owned subsidiaries, IPCRe and IPCUSL.All significant intercompany transactions have been eliminatedin consolidation.     b) Premiums and acquisition costs     Premiums written are recorded at the policy inception date andare based on information received from ceding companies andtheir brokers. Subsequent premium adjustments, if any, arerecorded in the period in which they are determined. Premiumsare earned on a pro-rata basis over the period for whichreinsurance coverage is provided. Unearned premiums representthe portion of premiums written which is applicable to theunexpired terms of the policies in force. Ceded reinsurancepremiums are similarly pro-rated over the terms of the contractswith the unexpired portion deferred in the balance sheet.     Acquisition costs, consisting primarily of commissions andbrokerage expenses incurred at policy issuance, are deferred andamortized to income over the period in which the relatedpremiums are earned.
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**Deferred acquisition costs are limited to estimated realizablevalue based on related unearned premium, anticipated claims andexpenses and investment income.     c) Reserve for losses and loss adjustment expenses     The reserve for losses and loss adjustment expenses, whichincludes a provision for losses and loss adjustment expensesincurred but not reported and development on reported claims(reported but not enough), is based on reports from industrysources, individual case estimates received from cedingcompanies and brokers, output from commercially availablecatastrophe loss models and management’s estimates. Forcertain catastrophic events there is considerable uncertaintyunderlying the assumptions and associated estimated reserves forlosses and loss adjustment expenses. Reserves are reviewedregularly and, as experience develops and new informationbecomes known, the reserves are adjusted as necessary. It isreasonably possible that changes in the near term could requirea material change in the amount estimated. Such adjustments, ifany, are reflected in results of operations in the period inwhich they become known. Amounts recoverable from reinsurers areestimated in a manner consistent with the underlying liabilities.     d) Investments     Investments consist of fixed maturity investments, equitysecurities and investments in mutual funds. Fixed maturityinvestments are stated at fair value as determined by the quotedmarket price of these securities as provided by eitherindependent pricing services or, when such prices are notavailable, by reference to broker or underwriter bidindications. Equity securities and investments in mutual fundsare stated at fair value as determined by either the mostrecently traded price or the net asset value as advised by thefund. By policy, IPCRe invests in high-grade marketablesecurities. All investments are classified as available-for-salesecurities under the provisions of Statement of FinancialAccounting Standards No. (“SFAS”) 115,“Accounting for Certain Investments in Debt and EquitySecurities”. Investment transactions are recorded on atrade date basis. Realized gains and losses on sales ofinvestments are determined on the basis of first-in, first-out.Investment income is recognized on the accrual basis andincludes the amortization of premiums and accretion of discountson investments.     Unrealized gains and losses are included within“Accumulated other comprehensive income” as a separatecomponent of shareholders’ equity. Unrealized depreciationin the value of individual securities considered by managementto be other-than-temporary, is charged to income in the periodit is determined. IPCRe’s assessment of a decline in valueincludes judgement as to the financial position and futureprospects of the entity that issued the security. If thatjudgement changes in the future IPCRe may ultimately record arealized loss, after originally concluding that the decline invalue was temporary. Factors which management consider inevaluating other-than-temporary declines in value include theextent of decline, the length of time the security is belowcost, IPCRe’s intent and ability to hold the security, thefuture prospects of the issuer and other qualitative andquantitative factors.     e) Other income     Other income consists of agency commission earned by IPCUSL. Thecommission is based on the gross premiums written under anagency agreement and is earned pro-rata over the underlyingreinsurance contract coverage periods. Unearned commissionrepresents the portion of commission which is applicable to theunexpired terms of the underlying contracts. The unearnedcommission is included in “prepaid expenses and otherassets”.     f) Translation of foreign currencies     Transactions in foreign currencies are translated intoU.S. dollars at the rate of exchange prevailing in theaccounting period of each transaction. Monetary assets andliabilities denominated in foreign currencies are translatedinto U.S. dollars at the exchange rates in effect on thebalance sheet date. Foreign currency
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**revenues and expenses are translated at the average exchangerates prevailing during the period. Realized and unrealizedexchange gains and losses are included in the determination ofnet income.     g) Cash and cash equivalents     Cash and cash equivalents include amounts held in banks and timedeposits with maturities of less than three months from the dateof purchase.     h) Net income per common share     Net income per common share is calculated by dividing net incomeby the weighted average common shares outstanding during theyear. Diluted net income per common share is computed bydividing net income by the weighted average number of commonshares and common stock equivalents outstanding during the year.Stock options and unvested stock grants are considered commonstock equivalents for the purpose of calculating diluted netincome per common share, and were included in the weightedaverage number of shares outstanding using the Treasury Stockmethod. In a period where there is a net loss, the dilutiveeffect of options is not included in the weighted average numberof shares, as this would be anti-dilutive.     i) Stock incentive compensation plan     In December 2002, the Financial Accounting Standards Board(“FASB”) issued Statement No. 148,“Accounting for Stock-Based Compensation andDisclosure” (“SFAS 148”), which is effectivefor fiscal years ending after December 31, 2002.SFAS 148 amends FASB Statement No. 123,“Accounting for Stock-Based Compensation”(“SFAS 123”), to provide alternative methods oftransition for a voluntary change to the fair value method ofaccounting for stock-based employee compensation. In addition,SFAS 148 amends disclosure requirements of SFAS 123 torequire prominent disclosure about the method of accounting forstock based employee compensation and the effect of the methodused to report results. SFAS 148 permits two additionaltransition methods for entities that adopt the preferable fairvalue method of accounting for stock-based employeecompensation. Management has adopted the fair value method ofaccounting for stock-based employee compensation on aprospective basis for all awards granted, modified or settledafter January 1, 2003. Accordingly, compensation expense isrecorded on a straight-line basis over the vesting period basedon the fair value of the options issued at the date of grant.The amount of the charge recorded for the year endedDecember 31, 2004 was $937 (2003: $326).     On June 13, 2003, the shareholders approved a new stockincentive plan. The plan allows for the issuance of up to500,000 shares as grants of restricted stock to selectedemployees to compensate them for their contributions to thelong-term growth and profits of the Company. These grants areaccounted for in accordance with SFAS 123. Compensationexpense is recorded ratably over the vesting period based on thefair value of the grants at the date of grant. The grants arerecorded as outstanding upon issuance. The charge recorded forthe year ended December 31, 2004 was $1,524 (2003: $516).
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**     The following table illustrates the effect on net income andearnings per share if the fair value based method had beenapplied to all outstanding and unvested awards in each period inaccordance with SFAS 123.               **Year Ended December 31,**     **2004** **2003** **2002**           Net income, as reported $138,613  $260,629  $157,906     Add: Stock-based employee expense  2,461   842   —     Deduct: Total stock-based employee compensation expense    determined under fair value based method for all awards  (2,972)  (1,536)  (799)              Pro forma net income $138,102  $259,935   157,107               Earnings per share:                Basic — as reported $2.87  $5.41  $3.28     Basic — proforma $2.86  $5.40  $3.26     Diluted — as reported $2.87  $5.40  $3.27     Diluted — proforma $2.85  $5.40  $3.25      j) Accounting pronouncements     In December 2004, the FASB revised the previously SFAS 123,with SFAS 123 (Revised 2004) “Share-BasedPayment” (“SFAS 123R”). This also supercedesAccounting Principles Board Opinion No. 25 (APB 25),“Accounting for Stock Issued to Employees”.SFAS 123R requires entities to measure the cost of employeeservices received in exchange for an award of equity instrumentsbased on the grant-date fair value of the award. That cost willbe recognized over the period during which an employee isrequired to provide service in exchange for the award. TheCompany has been expensing compensation costs for stock optionssince 2003 on a prospective basis for all awards granted,modified or settled after January 1, 2003 in accordancewith SFAS 148. SFAS 123R will require the expensing ofthe portion of all outstanding awards for which the requisiteservice has not yet been rendered, i.e. those awards grantedprior to January 1, 2003 that have not yet had therequisite service rendered. SFAS 123R is effective forinterim periods beginning after June 15, 2005 but earlyadoption is encouraged. In this respect the Company will adoptSFAS 123R effective January 1, 2005. Management do notbelieve that the adoption of this new accounting pronouncementwill have a material impact on the Company’s financialposition or results of operations.**3.****Investments**     a) The cost or amortized cost, gross unrealized gains, grossunrealized losses and fair value of investments classified asavailable for sale by category as of December 31, 2004 and2003 are as follows:                    **Cost or** **Gross** **Gross**    **amortized** **unrealized** **unrealized**  **December 31, 2004** **cost** **gains** **losses** **Fair value**             Fixed maturity investments                     U.S. Government and government agencies $320,158  $—  $(2,802) $317,356      Other governments  157,314   230   (1,469)  156,075      Corporate  776,186   7,252   (4,552)  778,886      Supranational entities  192,669   30   (440)  192,259                $1,446,327  $7,512  $(9,263) $1,444,576                  Equity investments $335,719  $92,901  $—  $428,620              
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**                    **Cost or** **Gross** **Gross**    **amortized** **unrealized** **unrealized**  **December 31, 2003** **cost** **gains** **losses** **Fair value**             Fixed maturity investments                     U.S. Government and government agencies $310,147  $1,899  $(420) $311,626      Other governments  258,411   2,669   (361)  260,719      Corporate  596,186   16,997   (1,085)  612,098      Supranational entities  75,444   679   (99)  76,024                $1,240,188  $22,244  $(1,965) $1,260,467                  Equity investments $248,179  $70,852  $(24) $319,007                   The following table summarizes, for all securities in anunrealized loss position at December 31, 2004 and 2003, theunrealized loss and fair value by length of time the securityhas continuously been in an unrealized loss position.                    **Less than 12 months** **12 months or longer**       **Gross**   **Gross**    **unrealized**   **unrealized**  **December 31, 2004** **losses** **Fair value** **losses** **Fair value**             Fixed maturity investments                     U.S. Government and government agencies $(1,793) $239,990  $(1,009) $77,366      Other governments  (1,040)  86,097   (429)  37,688      Corporate  (3,891)  414,268   (661)  49,243      Supranational entities  (440)  184,367   —   —                $(7,164) $924,722  $(2,099) $164,297                  Equity investments $—  $—  $—  $–                                  **Less than 12 months** **12 months or longer**       **Gross**   **Gross**    **unrealized**   **unrealized**  **December 31, 2003** **losses** **Fair value** **losses** **Fair value**             Fixed maturity investments                     U.S. Government and government agencies $(420) $172,384  $—  $—      Other governments  (361)  75,953   —   —      Corporate  (898)  113,910   (187)  12,415      Supranational entities  (99)  60,548   —   —                $(1,778) $422,795  $(187) $12,415                  Equity investments $—  $—  $(24) $3,376              
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**     b) The contractual maturity dates of fixed maturity investmentsavailable for sale as of December 31, 2004 are as follows:           **Amortized**    **cost** **Fair value**         Due in one year or less $211,682  $211,795     Due after one year through five years  1,189,726   1,187,731     Due after five years through ten years  44,919   45,050          $1,446,327  $1,444,576             Actual maturities may differ from contractual maturities becauseborrowers may have the right to prepay obligations with orwithout prepayment penalties.     c) Pledged assets     In the normal course of business IPCRe provides security toreinsureds if requested. Such security takes the form of aletter of credit or a cash advance. Letters of credit are issuedby IPCRe’s bankers, in favour of the ceding company, at therequest of IPCRe. Under an agreement effectiveSeptember 20, 1994, amended in 1999, 2001 and 2004, IPCReprovides the bank security by giving the bank a lien overcertain of IPCRe’s investments in an amount not to exceed118% of the aggregate letters of credit outstanding. As ofDecember 31, 2004 and 2003 the bank had outstanding lettersof credit of $98,691 and $52,019, respectively.     d) Net investment income               **2004** **2003** **2002**           Interest on fixed maturity investments $60,253  $61,809  $57,693     Interest on cash and cash equivalents  2,839   346   1,494     Net amortization of (premiums) discounts on investments  (13,661)  (15,194)  (8,994)             49,431   46,961   50,193     Net income from equities  4,765   3,307   2,026     Less: investment expenses  (2,976)  (3,179)  (2,899)              Net investment income $51,220  $47,089  $49,320           
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**     e) Proceeds from sales of available for sale securities for theyears ended December 31, 2004, 2003 and 2002 were$1,418,678, $1,212,858 and $750,948, respectively. Components ofnet realized gains and losses on investments are summarized inthe following table:               **2004** **2003** **2002**           Fixed Maturity Investments                Gross realized gains $7,032  $16,404  $14,463     Gross realized losses  (6,372)  (2,671)  (1,083)              Net realized gains  660   13,733   13,380               Equity investments                Gross realized gains  5,286   —   5,708     Gross realized losses  —   —   (63,955)              Net realized gains (losses)  5,286   —   (58,247)              Total net realized gains (losses)  5,946   13,733   (44,867)              Change in net unrealized appreciation (depreciation) on    investments                Fixed maturity investments  (22,030)  (19,898)  22,687     Equity investments  22,073   70,746   4,929               Change in net unrealized appreciation on investments  43   50,848   27,616               Total net realized gains (losses) and change in net unrealized    appreciation on investments $5,989  $64,581  $(17,251)               Included in gross realized losses on equity investments for theyears ended December 31, 2004, 2003 and 2002 are amountstotaling $nil, $nil and $49,030 respectively, in respect ofdeclines in the value of individual securities considered to beother than temporary.     f) The following table summarizes the composition of thefair value of all cash and cash equivalents and fixed maturityinvestments by rating:           **2004** **2003**         Cash and cash equivalents  1.9%  6.8%    U.S. Government and government agencies  21.6%  23.1%    AAA  31.7%  26.6%    AA  25.7%  26.4%    A  18.5%  16.6%    BBB  0.6%  0.5%          100.0%  100.0%            The primary rating source is Moody’s Investors Service Inc.(“Moody’s”). When no Moody’s rating isavailable, Standard & Poor’s Corporation(“S & P”) ratings are used and wheresplit-ratings exist, the higher of Moody’s and S &P is used.
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**     g) IPCRe holds the following equity investments:           **2004** **2003**  **Fair value** **Fair value**         AIG Global Equity Fund $153,643  $156,872     AIG American Equity Trust Fund  89,333   87,884     AIG Select Hedge Fund  99,920   —     Vanguard Institutional Index Fund  81,855   74,251     Other equity funds  3,869   —          $428,620  $319,007             The AIG Global Equity Fund, AIG American Equity Trust Fund,and AIG Select Hedge Fund are all managed by AmericanInternational Group, Inc. (“AIG”)/ Sun America. TheAIG Global Equity Fund invests predominantly in largecapitalized companies operating in diverse sectors of globalequity markets, the AIG American Equity Trust Fund investspredominantly in large capitalized companies operating acrossdiverse sectors of North America and the AIG Select Hedge Fundinvests in approximately 30-40 third party hedge funds utilizinga broad range of alternative investment strategies. Managementhas determined that the AIG American Equity Trust and the AIGSelect Hedge Fund are Variable Interest Entities and (as definedby FASB Interpretation No. 46 (Revised December 2003),“Consolidation of Variable Interest Entities”) IPCRehas a significant variable interest. Net asset values of the AIGGlobal Equity Fund, the AIG American Equity Trust Fund andthe AIG Select Hedge Fund as at December 31, 2004 are$373,310, $279,480 and $903,650 respectively, as reported by ourinvestment managers. The Company’s maximum exposure to lossas a result of these investments is limited to the fair valuesof the Company’s investment in these funds.     The Vanguard Institutional Index Fund invests in largecapitalized companies across diverse sectors of North Americaand aims for returns similar to those of the S & P 500Index.**4.****Fair Value of Financial Instruments**     The carrying amount of cash and cash equivalents approximatesfair value because of the short maturity of those instruments.Fixed maturity investments are stated at fair value asdetermined by the quoted market price of these securities asprovided by either independent pricing services, or when suchprices are not available, by reference to broker or underwriterbid indications. Equity securities and investments in mutualfunds are stated at fair value as determined by either the mostrecently traded price or the net asset value as advised by thefund. The fair value of other assets and liabilities, consistingof reinsurance premiums receivable, accrued investment income,other assets, reinsurance premiums payable and accounts payableand accrued liabilities approximates their carrying value due totheir relative short term nature.     The estimates of fair value of assets and liabilities aresubjective in nature and are not necessarily indicative of theamounts that the Company would actually realize in a currentmarket exchange. However, any differences would not be expectedto be material. Certain instruments such as deferred premiumsceded, loss and loss adjustment expenses recoverable, deferredacquisition costs, prepaid expenses, reserve for loss and lossadjustment expenses, unearned premiums and deferred fees andcommissions are excluded from fair value disclosure. Thus, thetotal fair value amounts cannot be aggregated to determine theunderlying economic value of the Company.**5.****Ceded Reinsurance**     IPCRe utilizes reinsurance to reduce its exposure to largelosses. Effective January 1, 1999, IPCRe arranged aproportional reinsurance facility. This facility covers propertycatastrophe business written by
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**IPCRe, and provides coverage up to $50,000 (2003: $50,000; 2002:$50,000) in each of at least 5 named zones, plus potentiallyother zones of IPCRe’s choosing, provided that they do notaccumulate with the named zones. The United States and theCaribbean are excluded zones. The named zones are: the UnitedKingdom; Europe (excluding the U.K.); Australia/ New Zealand;Japan and Other. Business ceded to the facility is solely at thediscretion of IPCRe. Within these limitations, IPCRe maydesignate the treaties to be included in the facility, subjectto IPCRe retaining at least 50% of the risk. A subsidiary of AIGis a participating reinsurer, and committed a 10% participationon a direct basis (2003: 10%; 2002: 10%). Most reinsurersparticipating in the facility have ratings of A or above, andthe minimum rating is A- at the time of acceptance.     Effective January 1, 2002, IPCRe arranged a PropertyCatastrophe Excess of Loss Reinsurance facility in respect ofcertain property catastrophe business written by IPCRe. Thisfacility covers first losses only for the business ceded to thisfacility. All subsequent events are retained by IPCRe. Businessceded to this facility includes worldwide business excluding theUnited States and Canada. IPCRe can cede $50,000 (2003: $30,000;2002: $15,000) ultimate net loss in the aggregate per contractyear to the facility. IPCRe’s retention is $10 in theaggregate per contract. Business ceded to this facility issolely at IPCRe’s discretion. The reinsurer participatingin this facility has a rating of AA-.     Although reinsurance agreements contractually obligate thereinsurers to reimburse IPCRe for the agreed upon portion of itsgross paid losses, they do not discharge IPCRe’s primaryliability. Management believes that the risk of non-payment bythe reinsurers is minimal.**6.****Share Capital and Additional Paid-in Capital**     The share capital of the Company as of December 31, 2004and 2003 consisted of the following:                         **Additional**  **Authorised** **Shares issued** **Share** **paid-in**  **shares** **and fully paid** **capital** **capital**             December 31, 2004                    Voting common shares, par value U.S. $0.01 each  75,000,000   48,407,203  $484  $854,797     Preferred shares, par value U.S. $0.01 each  25,000,000   —  $—  $—     December 31, 2003                    Voting common shares, par value U.S. $0.01 each  75,000,000   48,292,270  $483  $850,133     Preferred shares, par value U.S. $0.01 each  25,000,000   —  $—  $—      There are various restrictions on the ability of AIG to disposeof their shares as they were acquired through private placementand are presently unregistered. In 2004, the Company paiddividends of $0.20 per share in each of March and June, and$0.24 per share in each of September and December, toholders of its common shares. In 2003, the Company paiddividends of $0.16 per share in each of March and June, and$0.20 per share in each of September and December, toholders of its common shares. The Company did not pay dividendsduring 2002.**7.****Share Purchase Options**     The Company adopted a Stock Option Plan (the “OptionPlan”), effective February 15, 1996. This Option Planwas amended and approved by the shareholders in 1999 and furtheramended and approved in 2003. Under the last amended OptionPlan, approved by shareholders in June 2003, at the discretionof the Compensation Committee of the Board of Directors (the“Committee”), the Company may grant to certain
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**employees up to 1,077,500 common shares, $0.01 par value.The exercise price of the options granted under the Option Planshall be as determined by the Committee in its sole discretion,including, but not limited to, the book value per share or thepublicly traded market price per share.     In June 2003, the shareholders also approved a Stock IncentivePlan (the “Stock Plan”). Under the Stock Plan, at thediscretion of the Committee, the Company may grant to certainemployees up to 500,000 common shares, $0.01 par value. TheStock Plan provides for awards in the form of restricted stockunits subject to the terms and conditions of the Stock Plan.During 2004, the Company awarded 79,250 restricted stock units(2003: 62,500) to officers and management employees. Such unitsvest at a rate of 25% annually, but are recorded as outstandingupon issuance (regardless of the vesting period).     On February 15, 1996 and July 25, 1996, the Companygranted options to acquire 85,249 common shares to officers andmanagement employees at an exercise price of $16.54 percommon share which equaled the book value per common share as ofDecember 31, 1995. Between January 2, 1997 andDecember 31, 2004, the Company granted options to acquirecommon shares to officers and management employees at exerciseprices ranging from $13.375 to $38.90 per common share,which equaled the opening market prices on the dates of grant.Such options vest at a rate of 25% annually and lapse on thetenth anniversary of issue.     The effect on net income and net income per common share ofrecording compensation expense under the fair value provisionsof SFAS 123, versus compensation expense under theprovisions of SFAS 148, is shown in Note 2 (i).     A summary of the status of the Company’s Option Plan as ofDecember 31, 2004, 2003 and 2002 and changes during theyears then ended is presented in the tables and narrative below:                           **2004** **2003** **2002**           **Weighted**   **Weighted**   **Weighted**    **average**   **average**   **average**  **Number of** **exercise** **Number of** **exercise** **Number of** **exercise**  **shares** **price** **shares** **price** **shares** **price**                 Outstanding, beginning of year  350,375  $29.38   362,944  $23.41   251,719  $20.80     Granted  168,000  $38.90   112,500  $31.54   127,500  $27.85     Exercised  43,750  $21.52   125,069  $21.76   16,275  $17.96     Outstanding, end of year  474,625  $31.43   350,375  $29.38   362,944  $23.41     Exercisable, end of year  140,750  $25.37   87,250  $23.72   141,475  $22.19     Weighted average fair value of options granted (per share)     $14.62      $11.52      $10.64      The fair value of options granted on January 2, 2004 wasestimated using the Black-Scholes option pricing model, usingassumed risk-free rates of interest of 3.79%; expected dividendyield of 2.073%; an expected life of 7 years; and anexpected volatility of 39.5%.     The fair value of options granted on January 2, 2003 wasestimated using the Black-Scholes option pricing model, usingassumed risk-free rates of interest of 3.63%; expected dividendyield of 2.2%; an expected life of 7 years; and an expectedvolatility of 39.2%.
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**     The fair value of options granted on January 2, 2002 wasestimated using the Black-Scholes option pricing model, usingassumed risk-free rates of interest of 4.80%; expected dividendyield of 2.2%; an expected life of 7 years; and an expectedvolatility of 38.6%.                         **Weighted**          **average** **Weighted**   **Weighted**  **Outstanding at** **contractual** **average** **Exercisable at** **average**  **December 31,** **period in** **exercise** **December 31,** **exercise****Range of exercise price** **2004** **years** **price** **2004** **price**               $13-19  24,500   4.79   15.45   24,500   15.45     $19-25  49,000   5.55   21.34   31,250   21.54     $25-31  110,625   7.00   27.85   46,875   27.85     $31-37  122,500   7.29   31.63   38,125   31.84     $37-43  168,000   9.00   38.90   —   —                     Total  474,625           140,750                     **8.****Net Income per Common Share**     The following table sets forth the computation of basic anddiluted net income per common share (“EPS”):                   **Amount**  **Net income** **Shares** **per share**           December 31, 2004                Basic EPS $138,613   48,287,261  $2.87     Diluted EPS $138,613   48,376,865  $2.87     December 31, 2003                Basic EPS $260,629   48,205,554  $5.41     Diluted EPS $260,629   48,302,579  $5.40     December 31, 2002                Basic EPS $157,906   48,173,362  $3.28     Diluted EPS $157,906   48,266,444  $3.27 **9.****Related Party Transactions**     In addition to the related party transactions discussedelsewhere in the notes to the financial statements, the Companyand its subsidiaries have entered into the followingtransactions and agreements with related parties:     a) Administrative services     The Company and IPCRe are parties to an agreement with AmericanInternational Company, Limited (“AICL”), an indirectwholly-owned subsidiary of AIG, under which AICL providesadministrative services for a fee of 2.5% of the first $500,000annual gross written premiums (1.5% of the next $500,000 and1.0% thereafter). These fees are included in general andadministrative expenses in the accompanying consolidatedstatements of income. This agreement provides for AICL to makeavailable to the Company and IPCRe certain office space,furnishings, computer systems, accounting, legal, payroll,information technology and human resource personnel and otherancillary services. This administrative services agreementterminates on June 30, 2006 and is automatically renewedthereafter for successive three year terms unless prior writtennotice to terminate is delivered by or to AICL at least180 days prior to the end of such three year term. In
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**addition, IPCRe Europe Limited is party to an agreement with AIGInsurance Management Services (Europe) Limited(“AIMS”), an indirect wholly-owned subsidiary of AIG,under which AIMS provides administrative services for an annualfee of approximately $46 per annum. This agreement may beterminated by either party subject to three months’ writtennotice.     b) Investment management services     IPCRe is party to an agreement with AIG Global Investment Corp.(Ireland) Limited (“AIGGIC”), an indirect wholly-ownedsubsidiary of AIG, under which AIGGIC provides investmentadvisory and management services. This agreement is subject totermination by either party on 30 days’ writtennotice. Up until the end of 2003, IPCRe paid an overall feebased on the month end market value of the total portfolio. In2004, a new arrangement was agreed whereby IPCRe pays differentlevels of fees based on the month end market values of theindividual portfolios (fixed maturity, equity funds and hedgefund).     Rebates are received on the management fees charged by AIG/ SunAmerica for two of the equity funds, the AIG Global Equity Fundand the AIG American Equity Trust Fund. These fees andrebates are included in net investment income in theaccompanying consolidated statements of income.     c) Investment custodian services     IPCRe is party to an agreement with AIG Trust ServicesLimited (“AIGTS”), an indirect wholly-owned subsidiaryof AIG, under which AIGTS provides investment custodianservices. IPCRe has agreed to pay fees of 0.04% per annumbased on the month end market value of investments held undercustody, plus reimbursement of fees and out-of-pocket expenses.These fees are included in net investment income in theaccompanying consolidated statements of income. This agreementmay be terminated by either party upon 90 days’written notice.     The following amounts were incurred (received) for servicesprovided by indirect wholly-owned subsidiaries of AIG:                     **Investment** **Equity** **Investment**  **Administrative** **management** **funds fee** **custodian**  **services** **services** **rebate** **services**             Year ended December 31, 2004 $9,292  $2,227  $(2,426) $749     Year ended December 31, 2003 $7,821  $2,506  $(1,939) $673     Year ended December 31, 2002 $5,806  $2,219  $(1,237) $680      The following amounts were payable as of the balance sheet dateto subsidiaries of AIG for these services:                     December 31, 2004 $4,625     December 31, 2003 $3,914      d) Underwriting services     IPCUSL is party to an agreement with AWAC, a Bermuda-basedmulti-line insurance and reinsurance company, which iswholly-owned by Allied World Assurance Holdings, Ltd, a companyin which AIG has a 23.4% ownership interest. Under thisagreement, IPCUSL provides underwriting services on propertycatastrophe treaty reinsurance written by AWAC. IPCUSL receivesan agency commission of 6.5% of gross premiums written underthis agreement, which is on a rolling three year basis.     Business written under this agreement during the year endedDecember 31, 2004 was $65,150 (2003: $61,246, 2002:$41,284). Agency commission earned was $4,296 (2003: $3,348,2002: $2,684). The amounts are recorded as other income in theaccompanying consolidated statements of income. The balance duefrom AWAC as at December 31, 2004 was $339 (2003: $54).
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**     e) Related party reinsurance business     IPCRe assumed premiums from companies who are majority-owned byshareholders of the Company. Premiums assumed were $34,767,$41,136 and $42,888, respectively, for the years endedDecember 31, 2004, 2003 and 2002. In addition, IPCReassumed premiums through brokers related to shareholders of theCompany totaling $nil, $3,186 and $3,614, respectively, for theyears ended December 31, 2004, 2003 and 2002. Brokeragefees and commissions incurred in respect of this business wereapproximately $nil, $319 and $361, respectively, for the yearsended December 31, 2004, 2003 and 2002. IPCRe cededpremiums to a company which is wholly-owned by a shareholder(Note 5). Premiums ceded were $1,348, $982 and $601,respectively, for the years ended December 31, 2004, 2003and 2002. All such transactions were undertaken on normalcommercial terms. Reinsurance premiums receivable due fromrelated parties as of December 31, 2004 andDecember 31, 2003 were $7,261 and $8,723, respectively.Reinsurance premiums payable to related parties as ofDecember 31, 2004 and 2003 were $188 and $156, respectively.     f) A director and executive officer of various AIGsubsidiaries and affiliates serves as the Chairman of the Boardof Directors of the Company and IPCRe. In addition, the managingdirector of AIMS serves as a director of IPCRe Europe Limited.**10.****Reserve for Losses and Loss Adjustment Expenses**     Movements in the reserve for losses and loss adjustment expensesis summarized as follows:                **2004** **2003** **2002**           Gross loss reserves, beginning of the year $123,320  $119,355  $162,207     Loss reserves recoverable, beginning of the year  (1,810)  (405)  (681)              Total net reserves, beginning of year  121,510   118,950   161,526               Net losses incurred related to:                Current year  229,112   40,334   34,266     Prior years  (13,504)  14,048   4,509                Total incurred  215,608   54,382   38,775               Net paid losses related to:                Current year  (33,967)  (8,007)  (4,473)    Prior years  (34,740)  (47,803)  (79,393)               Total paid  (68,707)  (55,810)  (83,866)              Effect of foreign exchange movements  1,046   3,988   2,515               Total net reserves, end of year  269,457   121,510   118,950     Loss reserves recoverable, end of year  5,006   1,810   405               Gross loss reserves, end of year $274,463  $123,320  $119,355                Losses incurred in the year ended December 31, 2004 arepredominantly due from the four hurricanes which struck Floridaand two of the typhoons which struck Japan in the third quarter.These events total $223,600. Losses incurred in the year endedDecember 31, 2004 in respect of prior years includefavourable development on 2003 losses for the Mayhailstorms/tornadoes, Hurricane Isabel and the California brushfires, and 2002 losses for the eastern European floods.
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**     Losses incurred in the year ended December 31, 2003included $10,250 for tornadoes and hailstorms which affected themid-west United States in April and May, $8,000 for the variousbrush fires in California in October, and $8,500 for variouswindstorms, including Hurricanes Isabel and Fabian, which tookplace around the world during the third quarter of 2003. Lossesincurred in the year ended December 31, 2003 in respect ofprior years include $7,000 development of losses for TropicalStorm Allison which took place in June 2001, primarily resultingfrom an unfavourable court ruling regarding an insurance policydispute between a cedant and the original insured under thepolicy in March 2003, and increases to claims resulting fromHurricane Lili and storms which affected Europe, in October 2002.     Losses incurred in the year ended December 31, 2002included $18,000 in respect of the floods which affected partsof central and eastern Europe in August 2002. Losses incurred inthe year ended December 31, 2002 in respect of prior yearsprimarily result from development of reserves relating to theattack on the World Trade Center.     Net losses and loss adjustment expenses in the consolidatedstatements of income are presented net of reinsurance recoveriesduring the years ended December 31, 2004, 2003 and 2002 of$6,065, $2,338 and $(74) respectively.**11.****Written Premium by Geographic Region**     Financial information relating to reinsurance premiums writtenby geographic region is as follows:                           **December 31, 2004** **December 31, 2003** **December 31, 2002**         **Premiums**   **Premiums**   **Premiums**    **Written** **%** **Written** **%** **Written** **%**                 Geographic Area(1)                            United States $147,986   39.1% $136,319   42.2% $117,904   45.4%    Worldwide(2)  63,029   16.7%  54,491   16.9%  36,804   14.2%    Worldwide (excluding the U.S.)(3)  6,523   1.7%  15,747   4.9%  16,312   6.3%    United Kingdom  51,846   13.7%  40,650   12.6%  31,917   12.3%    Europe (excluding the U.K.)  57,907   15.3%  46,944   14.6%  30,943   11.9%    Japan  28,124   7.4%  15,597   4.8%  15,432   5.9%    Australia/ New Zealand  20,422   5.4%  10,276   3.2%  6,103   2.4%    Other  2,572   0.7%  2,738   0.8%  4,270   1.6%                     $378,409   100.0% $322,762   100.0% $259,685   100.0%                    (1)     Except as otherwise noted, each of these categories includes    contracts that cover risks located primarily in the designated    geographic area. (2)     Includes contracts that cover risks primarily in two or more    geographic zones, including the United States. (3)     Includes contracts that cover risks primarily in two or more    geographic zones, excluding the United States.**12.****Concentration and Credit Risk**     Credit risk arises out of the failure of a counterparty toperform according to the terms of the contract. IPCRe does notrequire collateral or other security to support financialinstruments with credit risk. A single
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**broker group accounted for approximately 33%, 35% and 35%,respectively, of total premiums written for the years endedDecember 31, 2004, 2003 and 2002. Five broker groupsaccounted for approximately 89%, 91% and 86%, respectively, oftotal premiums written for the years ended December 31,2004, 2003 and 2002.**13.****Credit Facility**     In July 1998, IPCRe entered into a five year, revolving creditagreement with a syndicate of financial institutions in theamount of $300,000. In July 2001, the amount was reduced to$150,000. In July, 2003 a new three year facility was enteredinto in the amount of $200,000. Drawings on this facility can beused for general corporate purposes. This facility has certainfinancial covenants, including minimum net worth provisions, andcertain investment restrictions. At December 31, 2004 noamounts have been drawn and IPCRe was in compliance with allcovenants under this facility.**14.****Statutory Capital and Surplus**     IPCRe is registered under the Bermuda Insurance Act 1978 andRelated Regulations (the “Act”) and is obliged tocomply with various provisions of the Act regarding solvency andliquidity. Under the Act, as amended in May 1995, IPCRe isrequired to maintain minimum statutory capital and surplus equalto the greater of $100,000, 50% of net premiums written or 15%of the net reserve for losses and loss adjustment expenses.These provisions have been met as shown in the following table:           **2004** **2003**         Actual statutory capital and surplus $1,658,399  $1,556,695     Minimum statutory capital and surplus $179,114  $154,142      IPCRe’s statutory net income for the years endedDecember 31, 2004, 2003 and 2002, was $136,450, $256,738and $152,444, respectively.     The Act limits the maximum amount of annual dividends ordistributions paid by IPCRe to the Company without notificationto the Supervisor of Insurance (“Supervisor”) of suchpayment (and in certain cases the prior approval of theSupervisor). The maximum amount of dividends which could be paidby IPCRe to the Company at January 1, 2005 without suchnotification is approximately $414,600.     In accordance with IPCRe’s license under the Act, lossreserves are certified annually by an independent loss reservespecialist.**15.****Pension Plan**     Effective December 1, 1995, IPCRe adopted a definedcontribution plan for the majority of its officers andemployees. Pursuant to the plan, each participant can contribute5% or more of their salary and IPCRe will contribute an amountequal to 5% of each participant’s salary. In 2003, IPCReadopted an additional defined contribution plan, a SupplementaryExecutive Retirement Plan (“SERP”), which isapplicable to senior employees. Pursuant to the SERP, IPCRecontributes an amount equal to 10% of each participant’ssalary to a maximum of $20 per employee. IPCRecontributions in respect of these plans amounted toapproximately $264, $234 and $72 in 2004, 2003 and 2002respectively. In addition, IPCRe has entered into individualpension arrangements with specific employees that arenon-contributory defined benefit plans. Benefits are based upona percentage of average final compensation multiplied by yearsof credited service. During the year one of these employeesretired from the Company, an independent actuarial calculationwas obtained and his future benefit was settled in a lump sumpayment. Independent actuarial reviews of the ongoing benefitobligations were undertaken at December 31, 2004 and 2003.The Company has recorded a liability for accumulated benefitobligations at December 31, 2004 of $926 (2003: $919),pension costs
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)**recorded in respect of the defined benefit plan amounted to$531, $187 and $589 in 2004, 2003 and 2002 respectively. Theplan is currently unfunded. The projected benefit obligationswere $982 and $853 at December 31, 2004 and 2003,respectively. Actuarial assumptions used in estimatingobligations are a discount rate of 6.00% (2003: 6.75%) andaverage compensation increases of 3.75% (2003: 3.10%).**16.****Taxes**     At the present time, no income, profit, capital or capital gainstaxes are levied in Bermuda. In the event that such taxes arelevied, the Company, IPCRe and IPCUSL have received anundertaking from the Bermuda Government exempting them from allsuch taxes until March 28, 2016.     The Company, IPCRe and IPCUSL do not consider themselves to beengaged in a trade or business in the United States and,accordingly, do not expect to be subject to United States incometaxes.     IPCRe Europe Limited is a tax-paying entity subject to thejurisdiction of the Government of Ireland. The amount of taxesincurred for 2004, 2003 and 2002 is not material to theconsolidated financial statements.**17.****Unaudited Quarterly Financial Data**                   **Quarter** **Quarter** **Quarter** **Quarter**  **ended** **ended** **ended** **ended**  **March 31,** **June 30** **Sept. 30,** **Dec. 31,**  **2004** **2004** **2004** **2004**             Gross premiums written $210,157  $72,906  $60,688  $34,658     Net premiums earned  83,561   78,145   99,956   93,220     Net investment income  11,563   14,082   11,958   13,617     Net realized gains (losses) on investments  5,663   2,002   (404)  (1,315)    Net losses and loss adjustment expenses  13,548   4,860   115,993   81,207     Net income (loss)  73,628   74,148   (17,798)  8,635     Net income (loss) per common share — basic $1.53  $1.54  $(0.37) $0.18     Net income (loss) per common share — diluted $1.52  $1.53  $(0.37) $0.18                    **Quarter** **Quarter** **Quarter** **Quarter**  **ended** **ended** **ended** **ended**  **March 31,** **June 30** **Sept. 30,** **Dec. 31,**  **2003** **2003** **2003** **2003**             Gross premiums written $191,852  $64,598  $45,804  $20,508     Net premiums earned  74,300   72,283   77,774   74,544     Net investment income  11,525   11,723   11,725   12,116     Net realized gains on investments  3,726   2,414   292   7,301     Net losses and loss adjustment expenses  11,156   11,516   15,778   15,932     Net income  67,528   65,588   62,132   65,381     Net income per common share — basic $1.40  $1.36  $1.29  $1.36     Net income per common share — diluted $1.40  $1.36  $1.29  $1.35 
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**IPC HOLDINGS, LTD. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****(Expressed in thousands of United States Dollars, except forper share amounts)****18.****Summarized Subsidiary Financial Data**     Summarized consolidated financial data of IPCRe Limited andsubsidiary, is as follows:               **2004** **2003** **2002**           Gross premiums written $378,409  $322,762  $259,685               Net premiums earned  354,882   298,901   226,404     Net investment income  51,220   47,089   49,320     Net realized gain (losses) on investments  5,946   13,733   (44,867)    Net losses and loss adjustment expenses  (215,608)  (54,382)  (38,775)    Net acquisition costs  (37,682)  (30,867)  (24,521)    General & administration expenses  (20,981)  (17,532)  (12,633)    Net foreign exchange (loss) gain  (1,290)  1,910   1,554               Net income $136,487  $258,852  $156,482               Loss ratio(1)  60.8%  18.2%  17.1%    Expense ratio(2)  16.5%  16.2%  16.4%    Combined ratio(3)  77.3%  34.4%  33.5%    Cash & investments $1,900,984  $1,671,313         Reinsurance balances receivable  85,086   61,194         Other assets  41,633   36,495                   Total assets $2,027,703  $1,769,002                   Unearned premiums $68,465  $61,795         Reserves for losses  274,463   123,320         Other liabilities  15,824   16,766                   Total liabilities  358,752   201,881                   Common stock  250,000   250,000         Additional paid-in capital  595,409   595,409         Retained earnings  732,392   630,605         Accumulated other comprehensive income  91,150   91,107                   Total shareholder’s equity  1,668,951   1,567,121                   Total liabilities and shareholder’s equity $2,027,703  $1,769,002                (1)     The ratio of losses and loss adjustment expenses to net premiums    earned. (2)     The ratio of net acquisition costs and general &    administration expenses to net premiums earned. (3)     The sum of loss ratio and expense ratio.
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