See Note 2 to our audited consolidated financial statements included herein for our significant accounting policies.
We operate in the reinsurance and insurance business serving two segments: the property and casualty segment and the life and annuity segment. Within the property and casualty segment, we offer three products: traditional reinsurance, alternative risk transfer reinsurance and insurance and traditional insurance. We differentiate our property and casualty products in several ways, including the amount of aggregate loss cap and/or occurrence limits incorporated into the underlying contracts, with our alternative risk transfer products having
Gross premiums written. Gross premiums written for traditional reinsurance products for the year ended December 31, 2004 were $334.6 million compared to $318.6 million for the year ended December 31, 2003, an increase of 5.0%. This increase included $37.3 million of decreases in premium estimates relating to contracts written in prior periods. The premium estimate changes resulted principally from changes in two ceding clients’ operations due to a rating agency downgrade in one instance and the loss of key members of the client’s underwriting team in the second instance, with both items leading to lower premium production for the ceding clients. Gross premiums written for the traditional reinsurance products for the year ended December 31, 2003 were $318.6 million compared to $137.9 million for the year ended December 31, 2002, an increase of 131.0%. This increase includes $6.1 million of increases in premium estimates relating to contracts written in prior periods. Our first full year of offering traditional reinsurance products was 2003 and reflected our shift in product mix away from alternative risk transfer products. The level of business written in future periods will vary, perhaps materially, based upon market conditions and management’s assessment of the adequacy of premium rates relative to the underwriting risk being assumed.
Net premiums earned. Net premiums earned for traditional reinsurance products increased by 39.3% to $273.0 million for the year ended December 31, 2004. The increase is attributed to the expansion of our traditional reinsurance product line over the last two years and reflects the earning pattern of an increasingly mature book of property and casualty contracts. Net premiums earned for traditional reinsurance products for the year ended December 31, 2003 were $196.0 million, an increase of 403.9% over the same period in 2002. We commenced writing traditional reinsurance business in the latter half of 2002.
General and administrative expenses. General and administrative expenses were $5.0 million for the year ended December 31, 2004 compared to $3.2 million for the year ended December 31, 2003, an increase of 56.3%. The increase resulted principally from expenses associated with the continued expansion of our traditional reinsurance staff. The general and administrative expense to net premiums earned ratio was 1.8% for the year ended December 31, 2004 compared to 1.6% for the year ended December 31, 2003. General and administrative expenses were $1.4 million for the year ended December 31, 2002 resulting in a general and administrative expense to net premiums earned ratio of 3.6%, higher than 2003 and 2004 due principally to personnel costs.
Net investment income, excluding realized and unrealized gains and losses, for the year ended December 31, 2003 decreased $4.3 million to $60.1 compared to the year ended December 31, 2002. The decrease was principally attributable to a $13.4 million decline in the investment income earned from premiums and deposits withheld by clients during the year ended December 31, 2003. Funds withheld by clients declined significantly in the year principally due to the final settlement of certain contractual obligations through commutation. The average investment yield on the cash, fixed maturities investments and funds withheld by clients for the year ended December 31, 2003 was 3.8% compared to an average yield of 5.2% for the year ended December 31, 2002.