1) Property catastrophe reinsurance written for our own account and DaVinci, our traditional core business. Our subsidiary Renaissance Reinsurance is one of the world’s leading providers of this coverage. This coverage protects against large natural catastrophes, such as earthquakes, hurricanes and tsunamis, as well as claims arising from other natural and man-made catastrophes such as winter storms, freezes, floods, fires, tornadoes and explosions. We offer this coverage to insurance companies and other reinsurers primarily on an excess of loss basis. This means that we begin paying when our customers’ claims from a catastrophe exceed a certain retained amount.
As noted above, because of the numerous factors which can affect reserves for claims and claim expenses, but which cannot be determined with certainty in advance, we have a reserving philosophy which attempts to incorporate prudent assumptions and estimates. In recent years, we have experienced favorable reserve development on our reserves for older accident years. In comparison to our property catastrophe portfolio of reinsurance coverage which we have been writing for over ten years, we do not have the benefit of a significant amount of our own historical experience in our specialty reinsurance and Individual Risk lines.
The following table summarizes the underwriting results and ratios for our Individual Risk segment for the years ended December 31, 2005, 2004, and 2003:
For 2006, we currently expect growth in our Individual Risk gross premiums written, compared to 2005. (See ‘‘Current Outlook’’ for additional disclosure.)
Effective December 31, 2005, DaVinciRe raised $320.6 million of additional equity capital. The capital was funded by new and existing investors, including $50.0 million contributed by us. The Company’s economic ownership interest in DaVinciRe at December 31, 2005, was 19.69%, down from 25.25% prior to the capital raise. Subsequent to December 31, 2005, DaVinciRe raised an additional $53.9 million of equity capital and our economic ownership interest has been reduced to 18.04%.
We use the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees and expect to continue to use this option valuation model upon the required adoption of FASB Statement No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘FAS 123(R)’’) effective January 1, 2006. Because FAS 123(R) must be applied not only to new awards but also to previously granted awards that are not fully vested on the effective date, and because we adopted FAS 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation costs for some previously granted awards that were not recognized under FAS 123 will be recognized under FAS 123(R). We do not expect the additional compensation expense related to unvested grants that were issued prior to January 1, 2003 to have a material impact upon adoption of FAS 123(R). Had we adopted FAS 123(R) in prior periods, the impact of that standard would have approximated the impact of FAS 123 as described in the transitional disclosure provisions of FAS 148. In accordance with the transitional disclosure provisions of FAS 148, the following table sets out the effect on our net (loss) income and (loss) earnings per share for all reported periods had the compensation cost been calculated based upon the fair value method recommended in FAS 123:
This firm has based its estimate of future claim payments upon benchmark payment patterns constructed internally, drawing upon available relevant sources of loss and allocated loss adjustment expense development data. These benchmarks are revised periodically as new trends emerge. We believe that it is likely that this benchmark data will not be predictive of our future claim payments and that material fluctuations can occur due to the nature of the losses which we insure and the coverages which we provide.