##### 



Exhibit 13.1
 PORTIONS OF ANNUAL REPORT
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following is a discussion of the results of operations and financial position of IPC
Holdings, Ltd. References to the Company mean IPC Holdings and references to we, us, our
or IPC mean IPC Holdings together with its wholly-owned subsidiaries, IPCRe Limited (IPCRe),
and IPCRe Underwriting Services Limited (IPCUSL). This discussion should be read in conjunction
with our Consolidated Financial Statements and related notes for the year ended December 31, 2005.
 General Overview




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##### 








---



##### 



Critical Accounting Policies
  Premiums
  Loss Reserves
   ®




---



##### 



Investments
    
    
    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 31,2005$000Gross unrealized (losses):Fixed maturity investments
    
    
    (17,406
    )Equity investments
    
    
    (735
    )(18,141
    )Gross unrealized gains:Fixed maturity investments
    
    
    1,277Equity investments
    
    
    109,952111,229Total net unrealized gains
    
    
    93,088
  Less than 12 months
    
    12 months or longerGross
    
    
    
    
    
    Grossunrealized
    
    
    
    
    
    unrealized2005 Unrealized Losses
    
    losses
    
    Fair Value
    
    losses
    
    Fair ValueLength of time with unrealized loss:Fixed maturity investments
    
    $
    (12,115
    )
    
    $
    1,447,839
    
    
    $
    (5,291
    )
    
    $
    232,745Equity investments
    
    $
    (735
    )
    
    $
    156,183
    
    
    $
    
    
    
    $
    
 Results of Operations
 Years Ended December 31, 2005, 2004 and 2003




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##### 



$(000)
    
    2005
    
    2004
    
    2003Annual (deposit) premiums
    
    
    335,856
    
    
    
    333,106
    
    
    
    294,444Reinstatement premiums
    
    
    129,149
    
    
    
    32,507
    
    
    
    7,233Adjustment premiums
    
    
    7,382
    
    
    
    12,796
    
    
    
    21,085Total premiums
    
    
    472,387
    
    
    
    378,409
    
    
    
    322,762




---



##### 








---



##### 



Liquidity and Capital Resources
   Sources of Funds




---



##### 



Uses of Funds
       rd




---



##### 



th
    Aggregate Contractual Obligations
  Payments due by period(expressed in millions of U.S. dollars)Less than 1
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    year
    
    1 - 3 Years
    
    3 -5 years
    
    5 yearsPurchase Obligations
    
    $
    0.1
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    
    
    
    $
    Losses and Loss
Adjustment Expenses
    
    
    1,072.1
    
    
    
    571.1
    
    
    
    328.8
    
    
    
    107.4
    
    
    
    64.8
 Purchase 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 2005 was $11.9 million. At the time of filing, a new
administrative services agreement to be effective July 1, 2006, is being negotiated with
AICL.
 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. 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, 2005 no amounts have been drawn under this facility, and no drawings are
currently permitted under the facility, as IPCRe is in default of the facilitys net worth
covenant at the time of filing. At the time of filing, a new facility is being discussed
with a number of banks.
 3.
    
    Letters of credit: As noted above, we currently obtain letters of credit through three
commercial banks pursuant to three bilateral facilities in amounts of $350 million, $250
million and $200 million. The last two facilities are 364 day facilities. We pay fees to
the banks based on the amounts of letters of credit they issue on our behalf. Because these
amounts change during the course of the year, the total amount we will pay in aggregate is
not known until the end of the year, and therefore not included in the table above.
Effective December 31, 2005 the aggregate amount of letters of credit issued were $606.3
million, and if this amount remained unchanged throughout 2006, we would pay fees totaling
$1.4 million. If we were to utilize the full limits of the three facilities, we would pay
$1.9 million in 2006. With respect to one facility, we pay a commitment fee to the extent
it is unused. Effective December 31, 2005, the amount of the
facility unused was $43 million. The amount of the commitment fee that could be paid is not material.
 Losses and Loss adjustment expenses
   Off-Balance Sheet Arrangements
  Quantitative and Qualitative Disclosure about Market Risk




---



##### 



At
    
    At
    
    At
    
    At
    
    At
    
    Average for yearDecember 31,
    
    September 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    ended Dec. 31,Market Risk
    
    2005
    
    2005
    
    2005
    
    2005
    
    2004
    
    2005Currency
    
    $
    2,445
    
    
    $
    2,183
    
    
    $
    2,184
    
    
    $
    2,477
    
    
    $
    2,660
    
    
    $
    2,391Interest Rate
    
    
    36,626
    
    
    
    30,594
    
    
    
    28,605
    
    
    
    29,505
    
    
    
    23,067
    
    
    
    29,679Equity (incl. hedge
fund)
    
    
    19,821
    
    
    
    19,794
    
    
    
    21,433
    
    
    
    24,775
    
    
    
    25,323
    
    
    
    22,229Sum of Risk
    
    
    58,892
    
    
    
    52,571
    
    
    
    52,222
    
    
    
    56,757
    
    
    
    51,050
    
    
    
    54,299Diversification
Benefit
    
    
    (21,188
    )
    
    
    (20,360
    )
    
    
    (22,618
    )
    
    
    (21,437
    )
    
    
    (21,866
    )
    
    
    (21,494
    )Total Net Risk
    
    $
    37,704
    
    
    
    32,211
    
    
    $
    29,604
    
    
    $
    35,320
    
    
    $
    29,184
    
    
    $
    32,805
   Transactions with Non-Independent Parties
  Effects of Inflation




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
 Consolidated Financial Statements




---



##### 



INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS REPORT
 
     KPMG




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 2005
    
    
    2004AssetsFixed maturity investments, available for sale, at fair value
(amortized cost 2005: $2,014,735; 2004: $1,446,327)
    
    $
    1,998,606
    
    
    $
    1,444,576Equity investments, available for sale, at fair value
(cost 2005: $420,910; 2004: $335,719)
    
    
    530,127
    
    
    
    428,620Cash and cash equivalents
    
    
    31,113
    
    
    
    27,898Reinsurance premiums receivable
    
    
    180,798
    
    
    
    85,086Deferred premiums ceded
    
    
    4,120
    
    
    
    4,558Loss and loss adjustment expenses recoverable
    
    
    1,054
    
    
    
    5,006Accrued investment income
    
    
    19,885
    
    
    
    20,695Deferred acquisition costs
    
    
    7,843
    
    
    
    8,424Prepaid expenses and other assets
    
    
    4,735
    
    
    
    3,427Total assets
    
    $
    2,778,281
    
    
    $
    2,028,290LiabilitiesReserve for losses and loss adjustment expenses
    
    $
    1,072,056
    
    
    $
    274,463Unearned premiums
    
    
    66,311
    
    
    
    68,465Reinsurance premiums payable
    
    
    4,991
    
    
    
    3,387Deferred fees and commissions
    
    
    1,363
    
    
    
    1,475Accounts payable and accrued liabilities
    
    
    17,160
    
    
    
    12,061Total liabilities
    
    
    1,161,881
    
    
    
    359,851Shareholders equityCommon shares - 2005: 63,666,368 shares outstanding, par value $0.01;
2004: 48,407,203 shares outstanding, par value $0.01
    
    
    637
    
    
    
    484Preferred shares  Series A mandatory convertible preferred shares
2005: 9,000,000 shares outstanding, par value $0.01;
2004: nil shares outstanding, par value $0.01
    
    
    90
    
    
    
    Additional paid-in capital
    
    
    1,473,257
    
    
    
    854,797Deferred stock grant compensation
    
    
    (2,492
    )
    
    
    (2,899
    )Retained earnings
    
    
    52,126
    
    
    
    724,907Accumulated other comprehensive income
    
    
    92,782
    
    
    
    91,150Total shareholders equity
    
    
    1,616,400
    
    
    
    1,668,439Total liabilities and shareholders equity
    
    $
    2,778,281
    
    
    $
    2,028,290
 See accompanying notes to consolidated financial statements




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 2005
    
    
    2004
    
    
    2003RevenueGross premiums written
    
    $
    472,387
    
    
    $
    378,409
    
    
    $
    322,762Change in unearned premiums
    
    
    2,154
    
    
    
    (6,670
    )
    
    
    (9,893
    )Premiums earned
    
    
    474,541
    
    
    
    371,739
    
    
    
    312,869Reinsurance premiums ceded
    
    
    21,581
    
    
    
    20,098
    
    
    
    14,466Change in deferred premiums ceded
    
    
    438
    
    
    
    (3,241
    )
    
    
    (498
    )Premiums ceded
    
    
    22,019
    
    
    
    16,857
    
    
    
    13,968Net premiums earned
    
    
    452,522
    
    
    
    354,882
    
    
    
    298,901Net investment income
    
    
    71,757
    
    
    
    51,220
    
    
    
    47,089Other income
    
    
    5,234
    
    
    
    4,296
    
    
    
    3,348Net realized (losses) gains on investments
    
    
    (10,556
    )
    
    
    5,946
    
    
    
    13,733Total income
    
    
    518,957
    
    
    
    416,344
    
    
    
    363,071ExpensesNet losses and loss adjustment expenses
    
    
    1,072,662
    
    
    
    215,608
    
    
    
    54,382Net acquisition costs
    
    
    39,249
    
    
    
    37,682
    
    
    
    30,867General and administrative expenses
    
    
    27,466
    
    
    
    23,151
    
    
    
    19,103Net foreign exchange loss (gain)
    
    
    2,979
    
    
    
    1,290
    
    
    
    (1,910
    )Total expenses
    
    
    1,142,356
    
    
    
    277,731
    
    
    
    102,442Net (loss) income
    
    
    (623,399
    )
    
    
    138,613
    
    
    
    260,629Dividend on preferred shares
    
    
    2,664
    
    
    
    
    
    
    
    Net (loss) income available to common shareholders
    
    $
    (626,063
    )
    
    $
    138,613
    
    
    $
    260,629Basic net (loss) income per common share
    
    $
    (12.30
    )
    
    $
    2.87
    
    
    $
    5.41Diluted net (loss) income per common share
    
    $
    (12.30
    )
    
    $
    2.87
    
    
    $
    5.40Weighted average number of common shares  basic
    
    
    50,901,382
    
    
    
    48,287,261
    
    
    
    48,205,554Weighted average number of common shares  diluted
    
    
    50,901,282
    
    
    
    48,376,865
    
    
    
    48,302,579
 See accompanying notes to consolidated financial statements




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars)
 
 2005
    
    
    2004
    
    
    2003Net (loss) income
    
    $
    (623,399
    )
    
    $
    138,613
    
    
    $
    260,629Other comprehensive incomeAdditional accumulated benefit pension obligation
    
    
    (306
    )
    
    
    
    
    
    
    Net holding (losses) gains on investments during year
    
    
    (8,618
    )
    
    
    5,989
    
    
    
    64,581Reclassification adjustment for losses (gains) included
in net (loss) income
    
    
    10,556
    
    
    
    (5,946
    )
    
    
    (13,733
    )1,632
    
    
    
    43
    
    
    
    50,848Comprehensive (loss) income
    
    $
    (621,767
    )
    
    $
    138,656
    
    
    $
    311,477
 See accompanying notes to consolidated financial statements




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 2005
    
    
    2004
    
    
    2003Common shares par value $0.01Balance, beginning of year
    
    $
    484
    
    
    $
    483
    
    
    $
    482Additional shares issued
    
    
    153
    
    
    
    1
    
    
    
    1Balance, end of year
    
    $
    637
    
    
    $
    484
    
    
    $
    483Preferred shares par value $0.01Balance, beginning of year
    
    $
    
    
    
    $
    
    
    
    $
    Additional shares issued
    
    
    90
    
    
    
    
    
    
    
    Balance, end of year
    
    $
    90
    
    
    $
    
    
    
    $
    Additional paid-in capitalBalance, beginning of year
    
    $
    854,797
    
    
    $
    850,133
    
    
    $
    846,397Additional paid-in capital on shares issued
    
    
    617,561
    
    
    
    941
    
    
    
    2,719Reduction in paid-in capital on share repurchase
    
    
    (1,334
    )
    
    
    (142
    )
    
    
    (1,321
    )Stock options and grants
    
    
    2,233
    
    
    
    3,865
    
    
    
    2,338Balance, end of year
    
    $
    1,473,257
    
    
    $
    854,797
    
    
    $
    850,133Deferred stock grant compensationBalance, beginning of year
    
    $
    (2,899
    )
    
    $
    (1,495
    )
    
    $
    Stock grants awarded
    
    
    (1,316
    )
    
    
    (2,928
    )
    
    
    (2,011
    )Stock grants forfeited
    
    
    454
    
    
    
    
    
    
    
    Amortization
    
    
    1,269
    
    
    
    1,524
    
    
    
    516Balance, end of year
    
    $
    (2,492
    )
    
    $
    (2,899
    )
    
    $
    (1,495
    )Retained earningsBalance, beginning of year
    
    $
    724,907
    
    
    $
    628,931
    
    
    $
    404,345Net (loss) income
    
    
    (623,399
    )
    
    
    138,613
    
    
    
    260,629Reduction on share repurchase
    
    
    (1,738
    )
    
    
    (155
    )
    
    
    (1,334
    )Dividends paid and accrued
    
    
    (47,644
    )
    
    
    (42,482
    )
    
    
    (34,709
    )Balance, end of year
    
    $
    52,126
    
    
    $
    724,907
    
    
    $
    628,931Accumulated other comprehensive incomeBalance, beginning of year
    
    $
    91,150
    
    
    $
    91,107
    
    
    $
    40,259Other comprehensive income
    
    
    1,632
    
    
    
    43
    
    
    
    50,848Balance, end of year
    
    $
    92,782
    
    
    $
    91,150
    
    
    $
    91,107Total shareholders equity
    
    $
    1,616,400
    
    
    $
    1,668,439
    
    
    $
    1,569,159
 See accompanying notes to consolidated financial statements




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars)
 
 2005
    
    
    2004
    
    
    2003Cash flows from operating activitiesNet (loss) income
    
    $
    (623,399
    )
    
    $
    138,613
    
    
    $
    260,629Adjustments to reconcile net income to
cash provided by operating activities:Amortization of fixed maturity premiums (discounts), net
    
    
    8,128
    
    
    
    13,661
    
    
    
    15,194Net realized losses (gains) on investments
    
    
    10,556
    
    
    
    (5,946
    )
    
    
    (13,733
    )Stock compensation
    
    
    2,640
    
    
    
    2,461
    
    
    
    842Changes in:Reinsurance premiums receivable
    
    
    (95,712
    )
    
    
    (23,892
    )
    
    
    (10,866
    )Deferred premiums ceded
    
    
    438
    
    
    
    (3,241
    )
    
    
    (498
    )Loss and loss adjustment expenses recoverable
    
    
    3,952
    
    
    
    (3,196
    )
    
    
    (1,405
    )Accrued investment income
    
    
    810
    
    
    
    (874
    )
    
    
    4,342Deferred acquisition costs
    
    
    581
    
    
    
    (389
    )
    
    
    (1,940
    )Prepaid expenses and other assets
    
    
    (1,308
    )
    
    
    2,431
    
    
    
    (855
    )Reserve for losses and loss adjustment expenses
    
    
    797,593
    
    
    
    151,143
    
    
    
    3,965Unearned premiums
    
    
    (2,154
    )
    
    
    6,670
    
    
    
    9,893Reinsurance premiums payable
    
    
    1,604
    
    
    
    (490
    )
    
    
    2,322Deferred fees and commissions
    
    
    (112
    )
    
    
    641
    
    
    
    707Accounts payable and accrued liabilities
    
    
    2,129
    
    
    
    1,588
    
    
    
    920Cash provided by operating activities
    
    
    105,746
    
    
    
    279,180
    
    
    
    269,517Cash flows from investing activitiesPurchases of fixed maturity investments
    
    
    (2,410,649
    )
    
    
    (1,632,680
    )
    
    
    (1,429,322
    )Proceeds from sales of fixed maturity investments
    
    
    1,726,564
    
    
    
    1,398,678
    
    
    
    1,212,858Proceeds from maturities of fixed maturity investments
    
    
    91,740
    
    
    
    14,862
    
    
    
    88,246Purchases of equity investments
    
    
    (96,938
    )
    
    
    (102,254
    )
    
    
    (31,364
    )Proceeds from sales of equity investments
    
    
    17,000
    
    
    
    20,000
    
    
    
    Cash used in investing activities
    
    
    (672,283
    )
    
    
    (301,394
    )
    
    
    (159,582
    )Cash flows from financing activitiesProceeds from share issuance, net of repurchases
    
    
    614,732
    
    
    
    645
    
    
    
    67Cash dividends paid to shareholders
    
    
    (44,980
    )
    
    
    (42,482
    )
    
    
    (34,709
    )Cash provided by (used in) financing activities
    
    
    569,752
    
    
    
    (41,837
    )
    
    
    (34,642
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,215
    
    
    
    (64,051
    )
    
    
    75,293Cash and cash equivalents, beginning of year
    
    
    27,898
    
    
    
    91,949
    
    
    
    16,656Cash and cash equivalents, end of year
    
    $
    31,113
    
    
    $
    27,898
    
    
    $
    91,949
 See accompanying notes to consolidated financial statements




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 General
     Significant Accounting Policies
  a)
    
    Principles of consolidation




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
  Significant Accounting Policies
 b)
    
    Premiums and acquisition costs
   c)
    
    Reserve for losses and loss adjustment expenses




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Significant Accounting Policies
 d)
    
    InvestmentsInvestments consist of fixed maturity investments, equity securities and investments in
mutual funds. Fixed maturity investments are stated at fair value as determined by the
quoted market price of these securities as provided by either independent pricing services
or, when such prices are not available, by reference to broker or underwriter bid
indications. Equity securities and investments in mutual funds are stated at fair value
as determined by either the most recently traded price or the net asset value as advised
by the fund. By policy, IPCRe invests in high-grade marketable securities. All
investments are classified as available-for-sale securities under the provisions of
Statement of Financial Accounting Standards No. (SFAS) 115, Accounting for Certain
Investments in Debt and Equity Securities. Investment transactions are recorded on a
trade date basis. Realized gains and losses on sales of investments are determined on the
basis of first-in, first-out. Investment income is recognized on the accrual basis and
includes the amortization of premiums and accretion of discounts on investments.Unrealized gains and losses are included within Accumulated other comprehensive income
as a separate component of shareholders equity. Unrealized depreciation in the value of
individual securities considered by management to be other-than-temporary, is charged to
income in the period it is determined. IPCRes assessment of a decline in value includes
judgement as to the financial position and future prospects of the entity that issued the
security. If that judgement changes in the future, IPCRe may ultimately record a realized
loss after originally concluding that the decline in value was temporary. Factors which
management consider in evaluating other-than-temporary declines in value include the
extent of decline, the length of time the security is below cost, IPCRes intent and
ability to hold the security, the future prospects of the issuer and other qualitative and
quantitative factors.e)
    
    Other incomeOther income consists of agency commission earned by IPCUSL. The commission is based on
the gross premiums written under an agency agreement and is earned pro-rata over the
underlying reinsurance contract coverage periods. Unearned commission represents the
portion of commission which is applicable to the unexpired terms of the underlying
contracts. The unearned commission is included in prepaid expenses and other assets.f)
    
    Translation of foreign currenciesTransactions in foreign currencies are translated into U.S. dollars at the rate of
exchange prevailing in the accounting period of each transaction. Monetary assets and
liabilities denominated in foreign currencies are translated into U.S. dollars at the
exchange rates in effect on the balance sheet date. Realized and unrealized exchange
gains and losses are included in the determination of net income.g)
    
    Cash and cash equivalentsCash and cash equivalents include amounts held in banks and time deposits with maturities
of less than three months from the date of purchase.




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Significant Accounting Policies
 h)
    
    Net (loss) or income per common shareNet (loss) income per common share is calculated by dividing net (loss) or income
available to common shareholders by the weighted average common shares outstanding during
the year. Diluted net income per common share is computed by dividing net income by the
weighted average number of common shares and common stock equivalents outstanding during
the year. Convertible preferred shares, stock options and unvested stock grants are
considered common stock equivalents for the purpose of calculating diluted net income per
common share, and are included in the weighted average number of shares outstanding using
the Treasury Stock method. In a period where there is a net loss, the dilutive effect of
convertible preferred shares, stock options and unvested stock grants are not included in
the weighted average number of shares, as this would be anti-dilutive.i)
    
    Stock incentive compensation planIn December 2002, the Financial Accounting Standards Board (FASB) issued Statement No.
148, Accounting for Stock-Based Compensation and Disclosure (SFAS 148), which was
effective for 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 of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends disclosure requirements
of SFAS 123 to require prominent disclosure about the method of accounting for stock based
employee compensation and the effect of the method used to report results. SFAS 148
permits two additional transition methods for entities that adopt the preferable fair
value method of accounting for stock-based employee compensation. In accordance with SFAS
148, management adopted the fair value method of accounting for stock-based employee
compensation on a prospective basis for all awards granted, modified or settled after
January 1, 2003. Accordingly, compensation expense is recorded on a straight-line basis
over the vesting period based on the fair value of the options issued at the date of
grant. The amount of the charge recorded for the year ended December 31, 2005 was $1,371
(2004: $937; 2003: $326).On June 13, 2003, the shareholders approved a stock incentive plan. The plan allows for
the issuance of up to 500,000 shares as grants of restricted stock to selected employees
to compensate them for their contributions to the long-term growth and profits of the
Company. These grants are accounted for in accordance with SFAS 123. Compensation expense
is recorded ratably over the vesting period based on the fair value of the grants at the
date of grant. The grants are recorded as outstanding upon issuance. The charge recorded
for the year ended December 31, 2005 was $1,269 (2004: $1,524; 2003: $516).The following table illustrates the effect on net income and earnings per share if the
fair value based method had been applied to all outstanding and unvested awards in each
period in accordance with SFAS 123.
 Year ended December 31,2005
    
    
    2004
    
    
    2003Net (loss) income available to common
shareholders, as reported
    
    $
    (626,063
    )
    
    $
    138,613
    
    
    $
    260,629Add: Stock-based employee expense
    
    
    2,640
    
    
    
    2,461
    
    
    
    842Deduct:
Total stock-based employee compensation expense determined under
fair value based method for all awards
    
    
    (2,875
    )
    
    
    (2,972
    )
    
    
    (1,536
    )Pro forma net (loss) income
    
    $
    (626,298
    )
    
    $
    138,102
    
    
    $
    259,935




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Significant Accounting Policies
 i)
    
    Stock incentive compensation plan(continued)
 Year ended December 31,2005
    
    
    2004
    
    
    2003Earnings per share:Basic  as reported
    
    $
    (12.30
    )
    
    $
    2.87
    
    
    $
    5.41Basic  proforma
    
    $
    (12.30
    )
    
    $
    2.86
    
    
    $
    5.40Diluted  as reported
    
    $
    (12.30
    )
    
    $
    2.87
    
    
    $
    5.40Diluted  proforma
    
    $
    (12.30
    )
    
    $
    2.85
    
    
    $
    5.40
 j)
    
    Accounting pronouncementsIn December 2004, the FASB revised the previously issued SFAS 123, with SFAS 123 (Revised
2004) Share-Based Payment (SFAS 123R). This also supersedes Accounting Principles
Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. SFAS 123R
requires entities to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. That cost
will be recognized over the period during which an employee is required to provide service
in exchange for the award. The Company has been expensing compensation costs for stock
options since 2003 on a prospective basis for all awards granted, modified or settled
after January 1, 2003 in accordance with SFAS 148. SFAS 123R will require the expensing
of the portion of all outstanding awards for which the requisite service has not yet been
rendered, i.e. those awards granted prior to January 1, 2003 that have not yet had the
requisite service rendered. SFAS 123R will also require the estimation of forfeitures
when calculating the compensation cost expense of stock options. The Company will adopt
SFAS 123R effective January 1, 2006. Management do not believe that the adoption of this
new accounting pronouncement will have a material impact on the Companys financial
position or results of operations.In November 2005 the FASB released FASB Staff Position (FSP) FAS 115-1 entitled The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.
FSP FAS 115-1 proposed a three step process as guidance for application and involves
firstly assessing each investment to determine whether it is impaired by comparing cost
against fair value. Secondly, an evaluation is then undertaken to assess whether the
impairment is other-than-temporary utilising the extent of decline in value, length of
time below cost, whether cause is issuer specific or market/interest rate related, future
prospects of issuer and likelihood of payment at maturity, IPCRes intent and ability to
hold the investment and the timing of decisions to sell investments. The third step would
be the recognition of an impairment loss equal to the difference between the investments
cost and its fair value if it was determined that the impairment was other-than-temporary.
The Companys accounting policy for recognition of other-than-temporary impairment is
consistent with FSP 115-1.




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Investments
 a)
    
    The cost or amortized cost, gross unrealized gains, gross unrealized losses and fair
value of investments classified as available for sale by category as of December 31, 2005
and 2004 are as follows:
 Cost or
    
    
    Gross
    
    
    Grossamortized
    
    
    unrealized
    
    
    unrealized
    
    
    FairDecember 31, 2005
    
    cost
    
    
    gains
    
    
    losses
    
    
    valueFixed maturity investmentsU.S. Government and
government agencies
    
    $
    326,916
    
    
    $
    64
    
    
    $
    (2,805
    )
    
    $
    324,175Other governments
    
    
    296,823
    
    
    
    165
    
    
    
    (3,026
    )
    
    
    293,962Corporate
    
    
    1,188,004
    
    
    
    1,048
    
    
    
    (9,735
    )
    
    
    1,179,317Supranational entities
    
    
    202,992
    
    
    
    
    
    
    
    (1,840
    )
    
    
    201,152$
    2,014,735
    
    
    $
    1,277
    
    
    $
    (17,406
    )
    
    $
    1,998,606Equity investments
    
    $
    420,910
    
    
    $
    109,952
    
    
    $
    (735
    )
    
    $
    530,127
 Cost or
    
    
    Gross
    
    
    Grossamortized
    
    
    unrealized
    
    
    unrealized
    
    
    FairDecember 31, 2004
    
    cost
    
    
    gains
    
    
    losses
    
    
    valueFixed maturity investmentsU.S. Government and
government agencies
    
    $
    320,158
    
    
    $
    
    
    
    $
    (2,802
    )
    
    $
    317,356Other governments
    
    
    157,314
    
    
    
    230
    
    
    
    (1,469
    )
    
    
    156,075Corporate
    
    
    776,186
    
    
    
    7,252
    
    
    
    (4,552
    )
    
    
    778,886Supranational entities
    
    
    192,669
    
    
    
    30
    
    
    
    (440
    )
    
    
    192,259$
    1,446,327
    
    
    $
    7,512
    
    
    $
    (9,263
    )
    
    $
    1,444,576Equity investments
    
    $
    335,719
    
    
    $
    92,901
    
    
    $
    
    
    
    $
    428,620




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Investments
  Less than 12 months
    
    
    12 months or longerGross
    
    
    
    
    
    
    Grossunrealized
    
    
    
    
    
    
    unrealizedDecember 31, 2005
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair valueFixed maturity investmentsU.S. Government and
government agencies
    
    $
    (2,686
    )
    
    $
    272,899
    
    
    $
    (119
    )
    
    $
    5,849Other governments
    
    
    (1,152
    )
    
    
    119,225
    
    
    
    (1,874
    )
    
    
    89,167Corporate
    
    
    (6,525
    )
    
    
    876,583
    
    
    
    (3,210
    )
    
    
    115,708Supranational entities
    
    
    (1,752
    )
    
    
    179,132
    
    
    
    (88
    )
    
    
    22,020$
    (12,115
    )
    
    $
    1,447,839
    
    
    $
    (5,291
    )
    
    $
    232,744Equity investments
    
    $
    (735
    )
    
    $
    156,183
    
    
    $
    
    
    
    $
    
 Less than 12 months
    
    
    12 months or longerGross
    
    
    
    
    
    
    Grossunrealized
    
    
    
    
    
    
    unrealizedDecember 31, 2004
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair valueFixed maturity investmentsU.S. Government and
government agencies
    
    $
    (1,793
    )
    
    $
    239,990
    
    
    $
    (1,009
    )
    
    $
    77,366Other governments
    
    
    (1,040
    )
    
    
    86,097
    
    
    
    (429
    )
    
    
    37,688Corporate
    
    
    (3,891
    )
    
    
    414,268
    
    
    
    (661
    )
    
    
    49,243Supranational entities
    
    
    (440
    )
    
    
    184,367
    
    
    
    
    
    
    
    $
    (7,164
    )
    
    $
    924,722
    
    
    $
    (2,099
    )
    
    $
    164,297Equity investments
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Investments
 b)
    
    The contractual maturity dates of fixed maturity investments available for sale as of
December 31, 2005 are as follows:
 Amortized
    
    
    Faircost
    
    
    valueDue in one year or less
    
    $
    407,434
    
    
    $
    406,649Due after one year through five years
    
    
    1,307,252
    
    
    
    1,293,991Due after five years through ten years
    
    
    300,049
    
    
    
    297,966$
    2,014,735
    
    
    $
    1,998,606
 Actual maturities may differ from contractual maturities because borrowers may have the
right to prepay obligations with or without prepayment penalties.c)
    
    Pledged assetsIn the normal course of business IPCRe provides security to reinsureds if requested. Such
security takes the form of a letter of credit or a cash advance. Letters of credit are
issued by IPCRes bankers, in favour of the ceding company, at the request of IPCRe. At
December 31, 2005 IPCRe has three letter of credit facilities. Under an agreement
effective September 20, 1994 (amended in 1999, 2001, 2004 and 2005) IPCRe provides the
bank security by giving the bank a lien over certain of IPCRes investments in an amount
not to exceed 118% of the aggregate letters of credit outstanding. Under two agreements
effective December 30, 2005, IPCRe provides the banks security by giving the banks a lien
over certain of IPCRes investments in an amount not to exceed approximately 110% of the
aggregate letters of credit outstanding. The total amount of security required by the
banks under the three facilities at December 31, 2005 was approximately $689,971 (2004:
$116,455). Effective December 31, 2005 outstanding letters of credit were $606,329 (2004:
$98,691).d)
    
    Net investment income
 2005
    
    
    2004
    
    
    2003Interest on fixed maturity investments
    
    $
    69,125
    
    
    $
    60,253
    
    
    $
    61,809Interest on cash and cash equivalents
    
    
    4,038
    
    
    
    2,839
    
    
    
    346Net amortization of (premiums) discounts
on investments
    
    
    (8,128
    )
    
    
    (13,661
    )
    
    
    (15,194
    )65,035
    
    
    
    49,431
    
    
    
    46,961Net income from equities
    
    
    9,873
    
    
    
    4,765
    
    
    
    3,307Less: investment expenses
    
    
    (3,151
    )
    
    
    (2,976
    )
    
    
    (3,179
    )Net investment income
    
    $
    71,757
    
    
    $
    51,220
    
    
    $
    47,089




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Investments
 e)
    
    Proceeds from sales of available for sale securities for the year ended December 31,
2005, were $1,743,564, (2004: $1,418,678; 2003: $1,212,858). Components of net realized
gains and losses on investments are summarized in the following table:
 2005
    
    
    2004
    
    
    2003Fixed maturity investmentsGross realized gains
    
    $
    343
    
    
    $
    7,032
    
    
    $
    16,404Gross realized losses
    
    
    (16,153
    )
    
    
    (6,372
    )
    
    
    (2,671
    )Net realized (losses) gains
    
    
    (15,810
    )
    
    
    660
    
    
    
    13,733Equity investmentsGross realized gains
    
    
    5,254
    
    
    
    5,286
    
    
    
    Gross realized losses
    
    
    
    
    
    
    
    
    
    
    Net realized gains
    
    
    5,254
    
    
    
    5,286
    
    
    
    Total net realized (losses) gains
    
    
    (10,556
    )
    
    
    5,946
    
    
    
    13,733Change in net unrealized appreciation (depreciation)
on investmentsFixed maturity investments
    
    
    (14,378
    )
    
    
    (22,030
    )
    
    
    (19,898
    )Equity investments
    
    
    16,316
    
    
    
    22,073
    
    
    
    70,746Change in net unrealized appreciation on investments
    
    
    1,938
    
    
    
    43
    
    
    
    50,848Total net realized (losses) gains and change in net
unrealized appreciation on investments
    
    $
    (8,618
    )
    
    $
    5,989
    
    
    $
    64,581




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Investments
 f)
    
    The following table summarizes the composition of the fair value of all cash and cash
equivalents and fixed maturity investments by rating:
 2005
    
    
    2004Cash and cash equivalents
    
    
    1.5
    %
    
    
    1.9
    %U.S. Government and government agencies
    
    
    16.0
    %
    
    
    21.6
    %AAA
    
    
    32.3
    %
    
    
    31.7
    %AA
    
    
    29.5
    %
    
    
    25.7
    %A
    
    
    20.2
    %
    
    
    18.5
    %BBB
    
    
    0.5
    %
    
    
    0.6
    %100.0
    %
    
    
    100.0
    %
 The primary rating source is Moodys Investors Service Inc. (Moodys). When no Moodys
rating is available, Standard & Poors Corporation (S & P) ratings are used and where
split-ratings exist, the higher of Moodys and S & P is used.g)
    
    IPCRe holds the following equity investments:
 2005
    
    
    2004Fair value
    
    
    Fair valueAIG Global Equity Fund
    
    $
    176,737
    
    
    $
    153,643AIG American Equity Fund
    
    
    97,780
    
    
    
    89,333AIG Select Hedge Fund
    
    
    156,183
    
    
    
    99,920Vanguard Institutional Index Fund
    
    
    93,494
    
    
    
    81,855Other equity funds
    
    
    5,933
    
    
    
    3,869$
    530,127
    
    
    $
    428,620
 The AIG Global Equity Fund, AIG American Equity Fund, and AIG Select Hedge Fund are all
managed by AIG/Sun America. The AIG Global Equity Fund invests predominantly in large
capitalized companies operating in diverse sectors of global equity markets, the AIG
American Equity Fund invests predominantly in large capitalized companies operating across
diverse sectors of North America and the AIG Select Hedge Fund invests in approximately
30-40 third party hedge funds utilizing a broad range of alternative investment
strategies. Net asset values of the AIG Global Equity Fund, the AIG American Equity Fund
and the AIG Select Hedge Fund as at December 31, 2005 are $534,745, $340,415 and
$1,049,450 respectively, as reported by our investment managers. The Companys maximum
exposure to loss as a result of these investments is limited to the fair values of the
Companys investment in these funds.The Vanguard Institutional Index Fund invests in large capitalized companies across
diverse sectors of North America and aims for returns similar to those of the S & P 500
Index.




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Fair Value of Financial Instruments
   Ceded Reinsurance




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Share Capital and Additional Paid-in Capital
   AdditionalAuthorised
    
    
    Shares issued
    
    
    Share
    
    
    paid-inshares
    
    
    and fully paid
    
    
    capital
    
    
    capitalDecember 31, 2005Voting common shares, par value
U.S. $0.01 each
    
    
    75,000,000
    
    
    
    63,666,368
    
    
    $
    637
    
    
    $
    1,244,926Preferred shares, par value
U.S. $0.01 each
    
    
    25,000,000
    
    
    
    9,000,000
    
    
    $
    90
    
    
    $
    228,331December 31, 2004Voting common shares, par value
U.S. $0.01 each
    
    
    75,000,000
    
    
    
    48,407,203
    
    
    $
    484
    
    
    $
    854,797Preferred shares, par value
U.S. $0.01 each
    
    
    25,000,000
    
    
    
    
    
    
    $
    
    
    
    $
    




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Share Purchase Options
      2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageNumber of
    
    
    exercise
    
    
    Number of
    
    
    exercise
    
    
    Number of
    
    
    exerciseshares
    
    
    price
    
    
    shares
    
    
    price
    
    
    shares
    
    
    priceOutstanding, beginning
of year
    
    
    474,625
    
    
    $
    31.43
    
    
    
    350,375
    
    
    $
    29.38
    
    
    
    362,944
    
    
    $
    23.41Granted
    
    
    169,000
    
    
    $
    43.03
    
    
    
    168,000
    
    
    $
    38.90
    
    
    
    112,500
    
    
    $
    31.54Exercised
    
    
    123,625
    
    
    $
    25.70
    
    
    
    43,750
    
    
    $
    21.52
    
    
    
    125,069
    
    
    $
    21.76Forfeited
    
    
    67,875
    
    
    $
    37.19
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Outstanding, end of year
    
    
    452,125
    
    
    $
    36.47
    
    
    
    474,625
    
    
    $
    31.43
    
    
    
    350,375
    
    
    $
    29.38Exercisable, end of year
    
    
    127,750
    
    
    $
    30.19
    
    
    
    140,750
    
    
    $
    25.37
    
    
    
    87,250
    
    
    $
    23.72Weighted average fair value of
options granted (per share)
    
    
    
    
    
    $
    15.07
    
    
    
    
    
    
    $
    14.62
    
    
    
    
    
    
    $
    11.52




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Share Purchase Options
 The fair value of options granted on January 3, 2005 was estimated using the Black-Scholes
option pricing model, using assumed risk-free rates of interest of 3.93%; expected
dividend yield of 2.231%; an expected life of 7 years; and an expected volatility of
36.7%.The fair value of options granted on January 2, 2004 was estimated using the Black-Scholes
option pricing model, using assumed risk-free rates of interest of 3.79%; expected
dividend yield of 2.073%; an expected life of 7 years; and an expected volatility of
39.5%.The fair value of options granted on January 2, 2003 was estimated using the Black-Scholes
option pricing model, using assumed risk-free rates of interest of 3.63%; expected
dividend yield of 2.200%; an expected life of 7 years; and an expected volatility of
39.2%.
 Weightedaverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedOutstanding at
    
    
    contractual
    
    
    average
    
    
    Exercisable at
    
    
    averageRange of
    
    December 31,
    
    
    period in
    
    
    exercise
    
    
    December 31,
    
    
    exerciseexercise price
    
    2005
    
    
    years
    
    
    price
    
    
    2005
    
    
    price$13-19
    
    
    7,500
    
    
    
    3.30
    
    
    
    15.61
    
    
    
    7,500
    
    
    
    15.61$19-25
    
    
    11,500
    
    
    
    3.78
    
    
    
    21.83
    
    
    
    11,500
    
    
    
    21.83$25-31
    
    
    68,125
    
    
    
    6.00
    
    
    
    27.85
    
    
    
    41,250
    
    
    
    27.85$31-37
    
    
    83,750
    
    
    
    6.18
    
    
    
    31.65
    
    
    
    40,000
    
    
    
    31.76$37-43
    
    
    128,750
    
    
    
    8.00
    
    
    
    38.90
    
    
    
    27,500
    
    
    
    38.90$43-49
    
    
    152,500
    
    
    
    9.00
    
    
    
    43.03
    
    
    
    
    
    
    
    Total
    
    
    452,125
    
    
    
    
    
    
    
    
    
    
    
    127,750
 Related Party Transactions
 In addition to the related party transactions discussed elsewhere in the notes to the
financial statements, the Company and its subsidiaries have entered into the following
transactions and agreements with related parties:a)
    
    Administrative servicesThe 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 for a fee of 2.5% of the first $500,000 annual gross written
premiums (1.5% of the next $500,000 and 1.0% thereafter). These fees are included in
general and administrative expenses in the accompanying consolidated statements of (loss) income.
This agreement provides for AICL to make available to the Company and IPCRe certain
office space, furnishings, computer systems, accounting, legal, payroll, information
technology and human resource personnel and other ancillary services. 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. This agreement is
currently being renegotiated. In addition, IPCRe Europe Limited is party to an agreement
with AIG Insurance Management Services (Europe) Limited (AIMS), an indirect wholly-owned
subsidiary of AIG, under which AIMS provides administrative services for an annual fee of
approximately $50 per annum. This agreement may be terminated by either party subject to
three months written notice.




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Related Party Transactions
 b)
    
    Investment management servicesIPCRe is party to an agreement with AIG Global Investment Corp. (Ireland) Limited
(AIGGIC), an indirect wholly-owned subsidiary of AIG, under which AIGGIC provides
investment advisory and management services. This agreement is subject to termination by
either party on 30 days written notice. Up until the end of 2003, IPCRe paid an overall
fee based on the month end market value of the total portfolio. In 2004, a new
arrangement was agreed whereby IPCRe pays different levels of fees based on the month end
market values of the individual portfolios (fixed maturity, equity funds and hedge fund).Rebates are received on the management fees charged by AIG/Sun America for two of the
equity funds, the AIG Global Equity Fund and the AIG American Equity Fund. These fees and
rebates are included in net investment income in the accompanying consolidated statements
of (loss) income.c)
    
    Investment custodian servicesIPCRe is party to an agreement with AIG Trust Services Limited (AIGTS), an indirect
wholly-owned subsidiary of AIG, under which AIGTS provides investment custodian services.
IPCRe has agreed to pay fees of 0.04% per annum based on the month end market value of
investments held under custody, plus reimbursement of fees and out-of-pocket expenses.
These fees are included in net investment income in the accompanying consolidated
statements of (loss) income. This agreement may be terminated by either party upon 90 days
written notice.The following amounts were incurred (received) for services provided by indirect wholly-owned subsidiaries of AIG:
 Investment
    
    
    Equity
    
    
    InvestmentAdministrative
    
    
    management
    
    
    funds fee
    
    
    custodianservices
    
    
    services
    
    
    rebate
    
    
    servicesYear ended December 31, 2005
    
    $
    11,862
    
    
    $
    2,370
    
    
    $
    (2,325
    )
    
    $
    781Year ended December 31, 2004
    
    $
    9,292
    
    
    $
    2,227
    
    
    $
    (2,426
    )
    
    $
    749Year ended December 31, 2003
    
    $
    7,821
    
    
    $
    2,506
    
    
    $
    (1,939
    )
    
    $
    673
 The following amounts were payable as of the balance sheet date to subsidiaries of AIG for these services:
 December 31, 2005
    
    $
    4,835December 31, 2004
    
    $
    4,205




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Related Party Transactions
 d)
    
    Underwriting servicesIPCUSL is party to an agreement with AWAC, a Bermuda-based multi-line insurance and
reinsurance company, which is wholly-owned by Allied World Assurance Holdings, Ltd, a
company in which AIG has a 23.3% ownership interest. Under this agreement, IPCUSL
provides underwriting services on property catastrophe treaty reinsurance written by AWAC.
IPCUSL receives an agency commission of 6.5% of gross premiums written under this
agreement, which is on a rolling three year basis. IPCUSL has received notice of the
intent of AWAC to cancel the underwriting agreement effective November 30, 2007.Business written under this agreement during the year was $80,234 (2004: $65,150; 2003:
$61,246). Agency commission earned was $5,234 (2004: $4,296; 2003: $3,348). The amounts
are recorded as other income in the accompanying consolidated statements of (loss) income. The
balance due from AWAC as at December 31, 2005 was $1,017 (2004: $339) and deferred
commissions relating to the unearned premiums written under this agreement were $739
(2004: $759).e)
    
    Related party reinsurance businessIPCRe assumed premiums (including reinstatement premiums) from companies who are
majority-owned by shareholders of the Company. Premiums assumed during the year were
$44,283 (2004: $34,767; 2003: $41,136). IPCRe did not assume any premiums through brokers
related to shareholders of the Company during the year ended December 31, 2005 (2004:
$nil; 2003: $3,186) and therefore did not incur any brokerage fees and commissions in
respect of this business (2004: $nil; 2003: $319). IPCRe ceded premiums to a company
which is wholly-owned by a shareholder (Note 5). Premiums ceded during the year were
$1,524 (2004: $1,348; 2003: $982). All such transactions were undertaken on normal
commercial terms. Reinsurance premiums receivable due from related parties as of December
31, 2005 were $20,097 (2004: $7,261). Reinsurance premiums payable to related parties as
of December 31, 2005 were $469 (2004: $188).f)
    
    A director and executive officer of various AIG subsidiaries and affiliates served as
the Chairman of the Board of Directors of the Company and IPCRe until his retirement from
the Boards effective December 31, 2005. A new director appointed effective January 1, 2006
is also a director and executive officer of various AIG subsidiaries. In addition, the
managing director of AIMS serves as a director of IPCRe Europe Limited.




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 Reserve for Losses and Loss Adjustment Expenses
  2005
    
    
    2004
    
    
    2003Gross loss reserves, beginning of the year
    
    $
    274,463
    
    
    $
    123,320
    
    
    $
    119,355Loss reserves recoverable, beginning of the year
    
    
    (5,006
    )
    
    
    (1,810
    )
    
    
    (405
    )Total net reserves, beginning of year
    
    
    269,457
    
    
    
    121,510
    
    
    
    118,950Net losses incurred related to:Current year
    
    
    1,017,495
    
    
    
    229,112
    
    
    
    40,334Prior years
    
    
    55,167
    
    
    
    (13,504
    )
    
    
    14,048Total incurred
    
    
    1,072,662
    
    
    
    215,608
    
    
    
    54,382Net paid losses related to:Current year
    
    
    (96,705
    )
    
    
    (33,967
    )
    
    
    (8,007
    )Prior years
    
    
    (170,399
    )
    
    
    (34,740
    )
    
    
    (47,803
    )Total paid
    
    
    (267,104
    )
    
    
    (68,707
    )
    
    
    (55,810
    )Effect of foreign exchange movements
    
    
    (4,013
    )
    
    
    1,046
    
    
    
    3,988Total net reserves, end of year
    
    
    1,071,002
    
    
    
    269,457
    
    
    
    121,510Loss reserves recoverable, end of year
    
    
    1,054
    
    
    
    5,006
    
    
    
    1,810Gross loss reserves, end of year
    
    $
    1,072,056
    
    
    $
    274,463
    
    
    $
    123,320




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 9.
    
    Reserve for Losses and Loss Adjustment Expenses(continued)Losses incurred in the year ended December 31, 2004 are predominantly due to the four
hurricanes which struck Florida and two of the typhoons which struck Japan in the third
quarter of 2004. Amounts recorded for these events were $223,600. Losses incurred in the
year ended December 31, 2004 in respect of prior years include favourable development on
2003 losses for the May hailstorms/tornadoes, Hurricane Isabel and the California brush
fires, and 2002 losses for the eastern European floods.Losses incurred in the year ended December 31, 2003 included $10,250 for tornadoes and
hailstorms which affected the mid-west United States in April and May, $8,000 for the
various brush fires in California in October, and $8,500 for various windstorms, including
Hurricanes Isabel and Fabian, which took place around the world during the third quarter
of 2003. Losses incurred in the year ended December 31, 2003 in respect of prior years
include $7,000 development of losses for Tropical Storm Allison which occurred in June
2001, primarily resulting from an unfavourable court ruling regarding an insurance policy
dispute between a cedant and the original insured under the policy in March 2003, and
increases to claims resulting from Hurricane Lili and storms which affected Europe, in
October 2002.Net losses and loss adjustment expenses in the consolidated statements of (loss) income are
presented net of reinsurance recoveries during the year ended December 31, 2005 were
$3,872 (2004: $7,765; 2003: $2,338).
 10.
    
    Written Premium by Geographic RegionFinancial information relating to reinsurance premiums (excluding reinstatement premiums)
written by geographic region is as follows:
 December 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Premiums
    
    
    
    
    
    
    Premiums
    
    
    
    
    
    
    Premiumswritten
    
    
    %
    
    
    written
    
    
    %
    
    
    written
    
    
    %Geographic Area (1)United States
    
    $
    136,331
    
    
    
    39.7
    %
    
    $
    130,327
    
    
    
    37.7
    %
    
    $
    134,128
    
    
    
    42.5
    %Europe
    
    
    94,183
    
    
    
    27.4
    %
    
    
    108,377
    
    
    
    31.3
    %
    
    
    86,693
    
    
    
    27.5
    %Japan
    
    
    24,395
    
    
    
    7.1
    %
    
    
    20,439
    
    
    
    5.9
    %
    
    
    15,595
    
    
    
    4.9
    %Australia/New Zealand
    
    
    14,647
    
    
    
    4.3
    %
    
    
    20,418
    
    
    
    5.9
    %
    
    
    9,946
    
    
    
    3.2
    %Worldwide (2)
    
    
    66,260
    
    
    
    19.3
    %
    
    
    56,115
    
    
    
    16.2
    %
    
    
    50,550
    
    
    
    16.0
    %Worldwide
(excluding the U.S.) (3)
    
    
    5,419
    
    
    
    1.6
    %
    
    
    7,082
    
    
    
    2.1
    %
    
    
    15,416
    
    
    
    4.9
    %Other
    
    
    2,003
    
    
    
    0.6
    %
    
    
    3,144
    
    
    
    0.9
    %
    
    
    3,200
    
    
    
    1.0
    %343,238
    
    
    
    100.0
    %
    
    
    345,902
    
    
    
    100.0
    %
    
    
    315,528
    
    
    
    100.0
    %Reinstatement premiums
    
    
    129,149
    
    
    
    
    
    
    
    32,507
    
    
    
    
    
    
    
    7,234$
    472,387
    
    
    
    
    
    
    $
    378,409
    
    
    
    
    
    
    $
    322,762
 
 (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.




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 11.
    
    Concentration and Credit RiskCredit risk arises out of the failure of a counterparty to perform according to the terms
of the contract. IPCRe does not require collateral or other security to support financial
instruments with credit risk. A single broker group accounted for approximately 34%,
(2004: 33%; 2003: 35%), of premiums written, excluding reinstatement premiums, for the year
ended December 31, 2005. Five broker groups accounted for approximately 88% of premiums
written, excluding reinstatement premiums, in each of the years ended December 31, 2005,
2004 and 2003. In accordance with industry practice, IPCRe frequently pays amounts owed in
respect of claims under its policies to reinsurance brokers, for payment over to the ceding
insurers. In the event that a broker failed to make such a payment, depending on the
jurisdiction, IPCRe might remain liable to the client for the deficiency. Conversely, in
certain jurisdictions when premiums for such policies are paid to reinsurance brokers for
payment over to IPCRe, such premiums will be deemed to have been paid and the ceding
insurer will no longer be liable to IPCRe for those amounts whether or not actually
received by them. Consequently, IPCRe assumes a degree of credit risk associated with
brokers around the world during the payment process.12.
    
    Credit FacilityIn July, 2003 a three year facility was entered into in the amount of $200,000. Drawings
on this facility can be used for general corporate purposes. This facility has certain
financial covenants, including minimum net worth provisions, and certain investment
restrictions. At December 31, 2005 no amounts have been drawn and could not be drawn as
IPCRe was not in compliance with the net worth and other financial covenants under this
facility. The Company is presently in discussions with various banks concerning replacing
the facility.13.
    
    Statutory Capital and SurplusIPCRe is registered under the Bermuda Insurance Act 1978 and Related Regulations as amended
(the Act) and is obliged to comply with various provisions of the Act regarding solvency
and liquidity. Under the Act, IPCRe is required to maintain minimum statutory capital and
surplus equal to 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:
 2005
    
    2004Actual statutory capital and surplus
    
    $
    1,611,940
    
    
    $
    1,659,115Minimum statutory capital and surplus
    
    $
    225,342
    
    
    $
    179,114
 IPCRes statutory net (loss) income for the year ended December 31, 2005 was $(626,141)
(2004: $136,450; 2003: $256,738).The Act limits the maximum amount of annual dividends or distributions paid by IPCRe to the
Company without notification to the Supervisor of Insurance (Supervisor) of such payment
(and in certain cases the prior approval of the Supervisor). The maximum amount of
dividends which could be paid by IPCRe to the Company at January 1, 2006 without such
notification is approximately $277,142.In accordance with IPCRes license under the Act, loss reserves are certified annually by
an independent loss reserve specialist.




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 14.
    
    Pension PlanEffective December 1, 1995, IPCRe adopted a defined contribution plan for the majority of
its officers and employees. Pursuant to the plan, each participant can contribute 5%
or more of their salary and IPCRe will contribute an amount equal to 5% of each
participants salary. In 2003, IPCRe adopted an additional defined contribution plan,
a Supplementary Executive Retirement Plan (SERP), which is applicable to senior
employees. Pursuant to the SERP, IPCRe contributes an amount equal to 10% of each
participants salary to a maximum of $20 per employee. IPCRe contributions in respect
of these plans amounted to approximately $276 in 2005 (2004: $264; 2003: $234).IPCRe has also entered into individual pension arrangements with specific employees that
are non-contributory defined benefit plans. These defined benefit plans are currently
unfunded. Benefits are based upon a percentage of average final compensation multiplied by
years of credited service. During 2004 one of these employees retired from the Company and
an independent actuarial calculation was obtained. The projected future benefits were
settled through a lump sum payment. Independent actuarial reviews of the ongoing benefit
obligations were undertaken at December 31, 2005, 2004 and 2003. A summary of the status
of the deferred benefit plans is provided below:
 2005
    
    
    2004
    
    
    2003Change in benefit obligationBenefit obligation at beginning of the year
    
    $
    1,377
    
    
    $
    1,506
    
    
    $
    1,196Service cost
    
    
    180
    
    
    
    174
    
    
    
    126Interest cost
    
    
    91
    
    
    
    84
    
    
    
    58Settlement loss
    
    
    
    
    
    
    193
    
    
    
    Benefits paid
    
    
    
    
    
    
    (524
    )
    
    
    Actuarial loss (gain)
    
    
    256
    
    
    
    (56
    )
    
    
    126Total net reserves, beginning of year
    
    $
    1,904
    
    
    $
    1,377
    
    
    $
    1,506Reconciliation of funded statusFunded status
    
    $
    (1,904
    )
    
    $
    (1,377
    )
    
    $
    (1,142
    )Unrecognized actuarial loss
    
    
    581
    
    
    
    451
    
    
    
    224Net amount recognized as year-end
    
    $
    (1,323
    )
    
    $
    (926
    )
    
    $
    (918
    )Amounts recognized in the statement of financial positionAccrued benefit liability
    
    $
    (1,629
    )
    
    $
    (926
    )
    
    $
    (918
    )Accumulated other comprehensive income
    
    
    306
    
    
    
    
    
    
    
    Net amount recognized as year-end
    
    $
    (1,323
    )
    
    $
    (926
    )
    
    $
    (918
    )Component of net periodic benefit costService cost
    
    $
    180
    
    
    $
    174
    
    
    $
    126Interest cost
    
    
    91
    
    
    
    84
    
    
    
    58Recognized actuarial loss
    
    
    126
    
    
    
    80
    
    
    
    3Net periodic benefit cost
    
    
    397
    
    
    
    338
    
    
    
    187Additional loss due to settlement
    
    
    
    
    
    
    193
    
    
    
    Net amount recognized in year
    
    $
    397
    
    
    $
    531
    
    
    $
    187




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 14.
    
    Pension Plan(continued)In accordance with SFAS 87 Employers Accounting for Pensions, an additional amount of
$306 was recorded in 2005 in accumulated other comprehensive income in shareholders
equity in the accompanying consolidated financial statements as the unfunded accrued
benefit liability exceeded the accrued pension cost. Actuarial assumptions used in
estimating obligations are a discount rate of 5.50% (2004: 6.00%; 2003: 6.00%) and average
compensation increases of 3.75% (2004: 3.75%; 2003: 4.00%).15.
    
    TaxesAt the present time, no income, profit, capital or capital gains taxes are levied in
Bermuda. In the event that such taxes are levied, the Company, IPCRe and IPCUSL have
received an undertaking from the Bermuda Government exempting them from all such taxes
until March 28, 2016.The Company, IPCRe and IPCUSL do not consider themselves to be engaged in a trade or
business in the United States and, accordingly, do not expect to be subject to United
States income taxes.IPCRe Europe Limited is a tax-paying entity subject to the jurisdiction of the Government
of Ireland. The amount of taxes incurred for 2005, 2004 and 2003 is not material to the
consolidated financial statements.16
    
    Unaudited Quarterly Financial Data
 Quarter
    
    Quarter
    
    Quarter
    
    Quarterended
    
    ended
    
    ended
    
    endedMarch 31,
    
    June 30
    
    Sept. 30,
    
    Dec. 31,2005
    
    2005
    
    2005
    
    2005Gross premiums written
    
    $
    205,841
    
    
    $
    86,994
    
    
    $
    165,980
    
    
    $
    13,572Net premiums earned
    
    
    82,038
    
    
    
    87,129
    
    
    
    207,291
    
    
    
    76,064Net investment income
    
    
    17,515
    
    
    
    14,857
    
    
    
    15,731
    
    
    
    23,654Net realized (losses) gains on investments
    
    
    (3,210
    )
    
    
    1,032
    
    
    
    (2,002
    )
    
    
    (6,376
    )Net losses and loss adjustment expenses
    
    
    37,936
    
    
    
    24,434
    
    
    
    855,977
    
    
    
    154,315Net income (loss)
    
    
    43,955
    
    
    
    64,050
    
    
    
    (656,570
    )
    
    
    (74,835
    )Net income (loss) per common share  basic
    
    $
    0.91
    
    
    $
    1.32
    
    
    $
    (13.57
    )
    
    $
    (1.28
    )Net income (loss) per common share  diluted
    
    $
    0.91
    
    
    $
    1.32
    
    
    $
    (13.57
    )
    
    $
    (1.28
    )
 Quarter
    
    Quarter
    
    Quarter
    
    Quarterended
    
    ended
    
    ended
    
    endedMarch 31,
    
    June 30
    
    Sept. 30,
    
    Dec. 31,2004
    
    2004
    
    2004
    
    2004Gross premiums written
    
    $
    210,157
    
    
    $
    72,906
    
    
    $
    60,688
    
    
    $
    34,658Net premiums earned
    
    
    83,561
    
    
    
    78,145
    
    
    
    99,956
    
    
    
    93,220Net investment income
    
    
    11,563
    
    
    
    14,082
    
    
    
    11,958
    
    
    
    13,617Net realized gains (losses) on investments
    
    
    5,663
    
    
    
    2,002
    
    
    
    (404
    )
    
    
    (1,315
    )Net losses and loss adjustment expenses
    
    
    13,548
    
    
    
    4,860
    
    
    
    115,993
    
    
    
    81,207Net income (loss)
    
    
    73,628
    
    
    
    74,148
    
    
    
    (17,798
    )
    
    
    8,635Net income (loss) per common share  basic
    
    $
    1.53
    
    
    $
    1.54
    
    
    $
    (0.37
    )
    
    $
    0.18Net income (loss) per common share  diluted
    
    $
    1.52
    
    
    $
    1.53
    
    
    $
    (0.37
    )
    
    $
    0.18




---



##### 



IPC HOLDINGS, LTD. AND SUBSIDIARIES
  (Expressed in thousands of United States Dollars, except for per share amounts)
 
 17.
    
    Summarized Subsidiary Financial DataSummarized consolidated financial data of IPCRe Limited and subsidiary, is as follows:
 2005
    
    
    2004
    
    
    2003Gross premiums written
    
    $
    472,387
    
    
    $
    378,409
    
    
    $
    322,762Net premiums earned
    
    
    452,522
    
    
    
    354,882
    
    
    
    298,901Net investment income
    
    
    71,641
    
    
    
    51,220
    
    
    
    47,089Net realized (losses) gain on investments
    
    
    (10,556
    )
    
    
    5,946
    
    
    
    13,733Net losses and loss adjustment expenses
    
    
    (1,072,662
    )
    
    
    (215,608
    )
    
    
    (54,382
    )Net acquisition costs
    
    
    (39,249
    )
    
    
    (37,682
    )
    
    
    (30,867
    )General & administration expenses
    
    
    (25,407
    )
    
    
    (20,981
    )
    
    
    (17,532
    )Net foreign exchange (loss) gain
    
    
    (2,979
    )
    
    
    (1,290
    )
    
    
    1,910Net (loss) income
    
    $
    (626,690
    )
    
    $
    136,487
    
    
    $
    258,852Loss ratio (1)
    
    
    237.0
    %
    
    
    60.8
    %
    
    
    18.2
    %Expense ratio (2)
    
    
    14.3
    %
    
    
    16.5
    %
    
    
    16.2
    %Combined ratio (3)
    
    
    251.3
    %
    
    
    77.3
    %
    
    
    34.4
    %Cash & investments
    
    $
    2,559,736
    
    
    $
    1,900,984Balances receivable from reinsureds
    
    
    180,798
    
    
    
    85,086Other assets
    
    
    39,179
    
    
    
    41,633Total assets
    
    $
    2,779,713
    
    
    $
    2,027,703Unearned premiums
    
    $
    66,311
    
    
    $
    68,465Reserves for losses
    
    
    1,072,056
    
    
    
    274,463Other liabilities
    
    
    19,753
    
    
    
    15,824Total liabilities
    
    
    1,158,120
    
    
    
    358,752Common stock
    
    
    250,000
    
    
    
    250,000Additional paid-in capital
    
    
    1,211,609
    
    
    
    595,409Retained earnings
    
    
    67,202
    
    
    
    732,392Accumulated other comprehensive income
    
    
    92,782
    
    
    
    91,150Total shareholders equity
    
    
    1,621,593
    
    
    
    1,668,951Total liabilities and shareholders equity
    
    $
    2,779,713
    
    
    $
    2,027,703
 
 (1)
    
    The ratio of net 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.