The following is a discussion and analysis of our results of operations for the years ended December 31, 2005, 2004 and 2003 and financial condition as at December 31, 2005. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included in this filing.
Property Specialty - Contracts in this category include risk excess of loss, property pro-rata and direct insurance and facultative reinsurance business. Risk excess of loss reinsurance protects insurance companies on their primary insurance risks and facultative reinsurance transactions on a “single risk” basis. Coverage is usually triggered by a large loss sustained by an individual risk rather than by smaller losses which fall below the specified retention of the reinsurance contract.
To a lesser extent, we have also writen retrocessional coverage contracts, which provide reinsurance protection to other reinsurers, also called retrocedants. Coverage generally provided catastrophe protection for the property portfolios of other reinsurers. Retrocessional contracts typically carry a higher degree of volatility than reinsurance contracts as they protect against concentrations of exposures written by retrocedants, which in turn may experience an aggregation of losses from a single catastrophic event. Commencing in 2006 Blue Ocean is intended to be the vehicle in which property catastrophe retrocessional business is written. For additional discussion on gross premiums written see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Other Specialty - Reinsurance contracts of aviation liability, aviation war, marine, personal accident catastrophe, workers’ compensation, terrorism, other casualty and other reinsurance business are included in this category. Marine and aviation contracts are primarily written on a retrocessional excess of loss basis. We have agreements with the Overseas Private Investment Corporation (“OPIC”) to underwrite stand-alone terrorism insurance products, however, we have not yet written any business under these agreements. We aim to control our risk by writing predominantly short-tail lines of business. Aviation contracts are primarily written on a retrocessional excess of loss basis. As for terrorism, a limited number of direct risks, reinsurance
treaties and national pools are written as well. Commencing in 2006 we plan on exiting or significantly reducing our catastrophe-exposed offshore marine class of business.
Qualifying Quota Share (“QQS”) - This category represents whole account quota share reinsurance to three Lloyd’s syndicates. Previously, we provided whole account quota share reinsurance, or QQS reinsurance, to three Lloyd’s syndicates for the 2002 and 2003 underwriting years. We do not anticipate writing any additional QQS contracts at this time. We have commuted the 2002 underwriting year contracts and expect to commute the 2003 underwriting contracts during the first or second quarter of 2006.
Income from our investment portfolio is primarily comprised of interest on fixed maturity investments net of investment expenses, dividends received on our equity investments, and to a lesser extent from net realized gains on the sale of investments. A significant portion of our contracts provide short-tail reinsurance coverage for damages resulting mainly from natural and man-made catastrophes, which means that we could become liable for a significant amount of losses on short notice. Accordingly, we have structured our investment portfolio to preserve capital and provide us with a high level of liquidity, which means that the large majority of our investment portfolio contains shorter term fixed maturity investments with a modest portfolio of equity investments.
Since the classes of business we underwrite have large aggregate exposures to natural and man-made catastrophes, we expect that our claims experience will predominantly be the result of relatively few events of significant severity. The occurrence of claims from catastrophic events is likely to result in substantial volatility in, and could have a material adverse effect on, our financial condition and results of operations and our ability to write new business.
supplemental information or analysis and, in certain cases, ceding company audits conducted by our own staff or by third parties as appropriate. In our short history, disputes with ceding companies have been rare and those which have not been resolved in negotiation have been resolved through arbitration in accordance with contractual provisions. Following Hurricane Katrina, disputes with ceding companies over policy terms and claims are expected to increase.
Following a major catastrophic event, such as Hurricane Katrina, the possibility of future litigation or legislative change that may impact interpretation of policy terms further increases the degree of uncertainty in the reserving process.
Management has determined that the best estimate for gross loss and loss adjustment expense reserves at December 31, 2005 was $1,781.9 million. Of this estimate $55.3 million relates to our insurance business and $1,726.6 million relates to our reinsurance business. Management’s best estimate of a range of likely outcomes around this estimate is between $1,381.8 million and $2,182.0 million.
risks incept. The premium estimate is based on information provided by ceding companies. At the inception of the contract the ceding company estimates how much premium they expect to write during the year. As these are pro-rata contracts, our gross written premium related to these contracts is a function of the amount of premium they estimate they will write. When the actual premium is reported by the ceding company, which may be on a quarterly or six month lag, it may be significantly higher or lower than the estimate.
We regularly evaluate the appropriateness of these premium estimates based on the latest information available, which includes actual reported premium to date, the latest premium estimates as provided by cedants and brokers, historical experience, management’s professional judgment, information obtained during the underwriting renewal process, as well as a continuing assessment of relevant economic conditions. Any adjustments to premium estimates are recorded in the period in which they become known. Adjustments to original premium estimates could be material and may significantly impact earnings in the period they are determined. The net income impact in 2005 of premium adjustments with respect to premiums estimated to have been earned in 2004 was immaterial. We also expect the net income impact for 2006 of premium adjustments with respect to premiums estimated to have been earned in 2005 to be immaterial.
Where contract terms on excess of loss contracts require the reinstatement of coverage after a ceding company’s loss, the mandatory reinstatement premiums are recorded as written and earned premiums when the loss event occurs. We accrue reinstatement premiums based on case reserves reported by ceding companies and on management’s best estimate of IBNR reserves as described above under “Loss and Loss Adjustment Expense Reserves” when the IBNR reserves can be identified on an individual contract basis. Generally pro-rata contracts do not contain provisions for the reinstatement of coverage.
Reinsurance Recoverable. Reinsurance receivable and recoverable on paid and unpaid loss and loss adjustment expenses includes amounts due to us from reinsurance companies for paid and unpaid loss and loss adjustment expenses, based on contracts in force.
Incentive awards that may be granted under the LTIP consist of share appreciation rights (“SARs”), restricted share units (“RSUs”) and performance shares (“Performance Shares”). Each type of award gives a plan participant the right to receive a payment in cash, common shares or a combination thereof, including in the case of RSUs dividend equivalents at the discretion of the Committee. All incentive awards granted by the Committee under the LTIP for the 2005-2007 performance period were in the form of Performance Shares and no awards of SARs or RSUs were made to plan participants.
Performance Unit Plan (“PUP”). The PUP was formerly the Company’s primary executive long-term incentive scheme, until it was exhausted at December 31, 2004. Pursuant to the terms of the PUP, at the discretion of the Committee, performance units were granted to executive officers and certain other key employees. Performance units entitle the recipient to receive, without payment to the Company, all, double, or a part of the value of the units granted, depending on the achievement of specific financial or operating goals. Performance units vest at the end of a three-year performance cycle, and are payable in cash, common shares or a combination thereof at the discretion of the Committee.
For the 2002-2004 cycle, the actual harvest ratio as determined by the Compensating and Nominating Committee was 132.0%. On February 28, 2005, we paid out the 2002-2004 PUP accrual of $14.0 million.
The 2005 year turned out to be the most costly year ever for catastrophe losses to the insurance and reinsurance industry with aggregate loss estimates from Hurricanes Katrina, Rita, and Wilma, the European Floods and Hurricane Dennis estimated to be between $65 and $70 billion. The large loss events of 2004 and 2005 have had a significant impact on the market. For reinsurers, it highlighted the significant amount of modeling risk and non-modeled risk inherent in catastrophe-exposed property products. The modeling companies are responding by updating their models for increased frequency and severity of major events. The
rating agencies have different approaches, but some have reacted to the losses sustained by almost all reinsurers, which are above their expectations, by increasing capital adequacy requirements in respect of catastrophe exposures.
We expect that the updated vendor models due out in the spring of 2006 will drive up direct insurance companies’ modeled catastrophe PML’s, and consequently, their catastrophe excess of loss limit demands. At the same time, we expect that PML’s for reinsurers who have not taken action by upgrading their models will also increase substantially, which may cause them to cut back on exposures or purchase additional protections at higher prices. We believe these factors will lead to a capacity crunch for peak property business zones which will fuel the movement of prices upwards for coverage of those zones.
We believe in the merits of our specialist property focus and have adapted to this new environment accordingly by way of the following:
We are structuring our gross portfolio within tighter constraints on aggregate exposures in most peak zones relative to our capital base. We have done this in part by declining inadequately priced business in targeted segments, but also through changes in terms and conditions. As an example, we are attempting to channel catastrophe peril coverage previously included in non catastrophe excess of loss property classes into the catastrophe excess of loss market, where in our view the exposure is more appropriately priced;
We have adjusted our internal models for increased severity and frequency in advance of the changes in commercial models;
We sponsored the launch of Blue Ocean Re Holdings Ltd., to enable us to write property/catastrophe retrocessional business on an unrated but fully collateralized basis. This expands our policy of generating fee income through the provision of underwriting services to third party capital in one of the most capital intensive segments of the market.
The decrease in net income of $993.2 million for the year ended December 31, 2005 year compared to 2004 was principally driven by net losses incurred related to the 2005 U.S. hurricanes, the effects of which far
An increase in outwards reinstatement premiums as a result of the 2005 hurricanes; and
An increase in net investment income as a result of our higher portfolio balance; and
The following table summarizes our consolidated financial results for the years indicated ($ in millions):
The following table summarizes our book values per common share as at the periods indicated:
We ended 2005 with a fully converted book value per share (as defined above) of $11.86, a decrease of $14.89 from December 31, 2004. This decrease of 55.7% mainly resulted from the net effect of the factors described above as well as the payment of a special dividend of $5.50 per common share and warrant paid during the first quarter of 2005 and the payment of quarterly dividends of $0.36 per common share and warrant for each of the first three quarters of 2005 and $0.075 for the fourth quarter of 2005. This decrease was partially offset by the issuance of 25,850,926 common shares on September 21, 2005 at $24.00 per share. We experienced a total return on our investment portfolio including net unrealized gains (losses), foreign exchange gains (losses) on investments and the foreign exchange effect of insurance balances for the years ended December 31, 2005, 2004 and 2003 of approximately 2.1%, 3.4% and 4.7%, respectively.
The Company believes that fully converted book value per share and the change in fully converted book value per share adjusted for dividends are measurements which are important to investors and other interested parties who benefit from having a consistent basis for comparison with other companies within the industry. However, these measures may not be comparable to similarly titled measures used by companies either outside or inside of the insurance industry. These measures may be incorporated into the formulae applied by our Compensation and Nominating Committee when determining the harvest ratio under our Performance Unit Plan and our Long-Term Incentive Plan.
During the second quarter of 2005 we participated in the founding of a new reinsurance vehicle, Rockridge, which was established to invest its assets in a fixed income arbitrage strategy and assume high-layer, short-tail risks principally from Montpelier. This relationship provides us with the capacity to increase gross lines in specific programs where we see favorable underwriting opportunities. We then cede this incremental business to Rockridge and earn fees for the services we provide in underwriting the original business. During the year ended December 31, 2005, we wrote $6.6 million of incremental premium which was ceded to Rockridge.
For the year ended December 31, 2004, excluding the effects of reinstatement premiums, gross premiums written were higher in 2004 by $5.3 million, or less than 1.0% as compared to 2003. As expected, our mix of business changed in 2004. We did not renew the QQS programs in 2004 and increased the level of Other Specialty business, consisting mainly of increases in casualty business and other miscellaneous classes of business. Consistent with 2003, for the three syndicates we did reinsure in 2003 and 2002, we negotiated
substantial other reinsurance contracts for 2004 to partially replace the reduction in QQS premium in 2003 and the non-renewed QQS premium income in 2004.
The Other Specialty category strengthened in 2004 as compared to 2003, partly due to increased market penetration resulting mainly from our ability to capitalize on market opportunities and, we believe, due to the developing reputation of our underwriting and risk management skills. This category has also increased due to increases in the level of our casualty business. We wrote a larger amount of casualty reinsurance in 2004 as compared to 2003 due to improving terms and conditions of casualty reinsurance contracts. For the years ended December 31, 2004 and 2003, casualty accounted for approximately 8.5% and 5.4% of gross premiums written, respectively.
In light of the changes we have made to our risk profile as set forth above, we expect that our gross premiums written for 2006 will be lower as compared to 2005. In addition to these changes, there were some one-off factors which will also impact gross premiums written in 2006 as follows:
Our agreement with Aspen affiliates dating from 2003 whereby Aspen agreed to cede $60 million per year of gross premiums written to us for three years expired at the end of 2005; and
Net premiums earned increased for the year ended December 31, 2005 as compared to 2004, mainly due to net earned reinstatement premium related to the 2005 hurricanes of $61.9 million compared to net earned reinstatement premium of $0.9 million for the year ended December 31, 2004 related to the 2004 catastrophes. Net written and earned premiums are expected to decrease in 2006 due to a reduction in gross premiums written discussed above and an increased level of reinsurance premiums ceded. This includes, among others, the large purchases that took place in the fourth quarter of 2005 as described above.
Net premiums earned increased for the years ended December 31, 2004 and 2003 mainly due to the increase in gross premiums written for the majority of our lines of business in the current and prior year. Net premiums earned have also increased due to the acceleration of earned premiums related to certain policies affected by the catastrophes which occurred during the third quarter of 2004. We also earned a portion of the reinstatement premiums written and ceded related to the third quarter catastrophes. Offsetting these increases is a decrease in net earned premium as a result of the earning of the additional reinsurance purchased during the year. Net premiums earned increased by approximately $13.1 million as result of the effect of the third quarter 2004 catastrophes.
The nature of our business means that loss ratios can vary widely from period to period depending on the occurrence and severity of natural and man-made catastrophes. During the year ended December 31, 2005, we incurred estimated gross and net losses of $1,464.7 million and $1,202.8 million, respectively, from Hurricanes Katrina, Rita, Wilma and Dennis in the U.S and the European floods. The severity of the catastrophe losses contributed significantly more to the 2005 loss ratio than in previous years. The 2004 loss ratio was impacted by the four Florida hurricanes and two Japanese typhoons while 2003 was a very light year in terms of catastrophe losses.
Net loss and loss adjustment expenses were $1,510.7 million, $404.9 million and $164.1 million for the years ended December 31, 2005, 2004 and 2003, respectively. Reinsurance recoveries of $318.6 million, $88.5 million and $(8.4) million were netted against loss and loss adjustment expenses for the years ended December 31, 2005, 2004 and 2003, respectively. The majority of the reinsurance recoveries for 2005 and 2004 related to the U.S. hurricanes which occurred during those two years. Reinsurance recoveries for the years ended December 31, 2003 related to QQS only. Based on additional information received from the syndicates, we reduced our estimated recovery ratio on reinsurance purchased by the QQS syndicates which resulted in the negative reinsurance recovery amount for the year ended December 31, 2003. We paid net losses of $489.3 million, $192.0 million and $53.2 million for the years ended December 31, 2005, 2004 and 2003, respectively. The majority of the increase in paid losses during 2005 as compared to 2004 related to payments made for the hurricane losses as discussed above. In addition, excluding the catastrophes, net paid losses have increased each year as our book of business has matured and we make claim payments related to multiple underwriting years. We expect that our paid losses will be higher than average during the first six months of 2006 as we continue to pay claims related to the 2005 and 2004 catastrophes. At December 31, 2005, approximately 68% of our gross reserves related to the five 2005 catastrophes mentioned above.
The overall gross loss ratio for the year ended December 31, 2004 was 56.8%.
than the corresponding periods in 2004 due to the nature of the 2005 natural catastrophes compared with the 2004 storms. The extreme size of the industry loss for Katrina resulted in much more loss to our retrocessional book of business than from any of the 2004 storms. We also suffered losses to some of the higher layers in our Property Catastrophe book of business that were not affected by any of the 2004 hurricanes. In the same period in 2003, we incurred losses from Hurricanes Fabian and Isabel as well as the wildfires which occurred in California.
The following tables set forth a reconciliation of our gross and net loss and loss adjustment expense reserves by line of business for the year ended December 31, 2005 ($ in millions):
Property Catastrophe net loss and loss adjustment expense reserves as at December 31, 2004 increased by $20.5 million during the year ended December 31, 2005. The increase in ultimate losses for the year was due mostly to increases in the estimates for the 2004 hurricanes and Typhoon Songda. The increase in the gross loss reserves was offset somewhat by an increase in the ceded losses attributable to the 2004 hurricanes. Excluding the 2004 hurricanes and Songda, there was little movement in the Property Cat loss reserves for prior years.
Due to the potential variability in ultimate premiums and the limited availability of underlying loss information with the QQS business, our actuaries selected an expected loss ratio based on a review of the information supplied by cedants and applied it to projected premiums. For the year ended December 31, 2005, the projected ultimate losses have increased, due mostly to foreign currency fluctuations. Much of the negative impact from the currency fluctuations affected the 2002 contracts. As expected, we commuted all three of the 2002 QQS contracts during the second quarter of 2005. Taking into account the effect of reinsurance purchased by the QQS syndicates with respect to the contracts in which we participate, our net projected ultimate losses increased by $4.4 million for the year ended December 31, 2005. We expect to commute the 2003 QQS contracts during the first half of 2006.
Management has determined that the best estimate for net loss and loss adjustment expense reserves at December 31, 2005, 2004 and 2003 was $1,476.2 million, $454.8 million and $242.1 million, respectively.
The following are management’s best estimates of a range of likely outcomes around their best estimate of gross and net loss and loss adjustment expense reserves by line of business ($ in millions):
Gross Loss and Loss Adjustment Expense Reserves at December 31, 2005
Net Loss and Loss Adjustment Expense Reserves at December 31, 2005
Acquisition costs are generally driven by contract terms and are normally a set percentage of premiums. General and administrative expenses are comprised of fixed expenses, which include salaries and benefits, share options, office and risk management expenses, and variable expenses, which include costs related to our performance unit plan, long-term incentive plan and bonuses. The increase in acquisition costs during the year ended December 31, 2005 as compared to 2004 is consistent with the increase in gross premiums written as discussed above.
General and administrative expenses for the years indicated consisted of the following ($ in millions):
All outstanding share options were converted into restricted and unrestricted common voting shares during the first quarter of 2005 with unvested options expensed at the time of conversion which is the reason for the decline in this expense as compared to 2004.
Participating directors in the directors share plan received three quarterly allotments of share units for which we incurred an expense of $0.2 million during the year ended December 31, 2005.
The increase in general and administrative expenses in 2004 from 2003 was partially a result of an increase in fixed expenses for professional fees and employment costs, consistent with the increase in staff numbers in 2004. In addition, there was an increase in the accrual for current and deferred incentive compensation expense, but not as much as originally anticipated, as our net income decreased due to the catastrophes which occurred during the third quarter of 2004.
We anticipate that our general and administrative expense ratio will be higher in 2006 than in 2005 due to the expected increase in costs resulting from the move to our new premises during 2006, the upgrading of our IT infrastructure and an increase in current and deferred incentive compensation combined with the expected
The majority of investment management fees incurred related to White Mountains Advisors LLC, a wholly-owned indirect subsidiary of White Mountains Insurance Group, one of our major shareholders and were $2.9 million, $2.4 million and $3.2 million, respectively for the years ended December 31, 2005, 2004 and 2003. The investment management fees are higher for 2005 as compared to 2004 due to the greater proportion of equities under management, which have higher investment management fees and also due to the greater average volume of funds under management. The investment management and custodian fees are lower for 2004 as compared to 2003 even though the asset base increased because the investment management fee structure was revised during the first quarter of 2004, resulting in a lower expense for the portfolio mix. The fees will vary as our mix of investments changes. Management believes that the fees charged were consistent with those that would have been charged by an unrelated party.
Based on the weighted average monthly investments held, and including net unrealized gains (losses), and foreign exchange gains (losses) on investments and the foreign exchange effect of insurance balances for the years ended December 31, 2005, 2004 and 2003, respectively, the total investment returns were as follows:
We believe that the gross unrealized losses relating to our fixed maturity investments at December 31, 2005 and 2004 of $33.3 million and $11.1 million, respectively, resulted primarily from increases in market interest rates from the dates that certain investments within that portfolio were acquired as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in value are viewed as being temporary because we have the intent and ability to retain such investments for a period of time sufficient to allow for any anticipated recovery in market value. We also believe that the gross unrealized losses relating to our equity portfolio of $2.0 million and $0.1 million at December 31, 2005 and 2004, respectively, are temporary based on an analysis of various factors including the time period during which the individual investment has been in an unrealized loss position and the significance of the decline.
Because we provide short-tail insurance and reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, we could become liable to pay substantial claims on short notice. Accordingly, we have structured our investment portfolio to preserve capital and provide us with a high level of liquidity, which means that the large majority of our investment portfolio contains shorter term fixed maturity investments, such as U.S. government and agency bonds, U.S. government-sponsored enterprises, corporate debt securities and mortgage-backed and asset-backed securities.
Due to higher short term fixed income yields, our capital raise and an increased level of insurance float, we project a greater proportion of our returns will be generated from investment income in 2006. The increased insurance float is attributable to both (a) large catastrophe loss reserves which we will pay out over the next couple of years, and to a lesser extent (b) the build up of attritional loss reserves over the years.
We paid interest expense related to the Senior Notes during the years ended December 31, 2005 and 2004 of $15.3 million, $15.8 million, respectively. We expect to pay the same amount of interest in 2006 related to the Senior Notes as they bear a fixed interest rate of 6.125%. We paid interest expense during the year ended December 31, 2003 of $2.8 million which related to the term loan facility and revolving loan facility only. The term loan facility and revolving credit facility were repaid and terminated during 2003. For the year ended December 31, 2003 interest expensed relating to the term loan facility and revolving loan facility represented an average rate of 1.7%. Fees are payable quarterly, the first payment being due on April 7, 2006.
approximately $600.0 million from the issuance of common shares. Our contractual obligations and commitments are set out below as at December 31, 2005.
On March 4, 2005, the Compensation and Nominating Committee permitted certain founding executive officers of the Company to exercise their 1,822,500 remaining vested and unvested share options in exchange for 599,187 and 408,489 unrestricted and restricted shares, respectively, resulting in an increase in common shares by their par amount and a decrease in additional paid-in capital of an equivalent amount.
On December 30, 2005, Montpelier Re invested in Blue Ocean , the holding company that owns 100% of Blue Ocean Re. Blue Ocean Re is a Bermuda-licensed reinsurer formed to write property catastrophe retrocessional protection. MAL provides Blue Ocean Re with underwriting, risk management, claims management, ceded retrocession agreement management, actuarial and accounting services and receives fees for such services. As at December 31, 2005, Montpelier Re beneficially owned 1,065,990 shares, or 49% of Blue Ocean Re Holdings’ outstanding common shares and 34% of the preferred shares. Blue Ocean has been determined to be a “variable interest entity” (“VIE”) as defined by FIN 46, with the Company currently representing the primary beneficiary. For this reason, Blue Ocean’s results have been consolidated with those of the Company. However, future revisions to Blue Ocean’s capital structure and/or operating agreements may lead to different conclusions regarding consolidation in future periods.
As Montpelier Re is not an admitted insurer or reinsurer in the U.S., the terms of certain U.S. insurance and reinsurance contracts require Montpelier Re to provide letters of credit to clients. In addition, in order for Montpelier Re to write Lloyd’s Qualifying Quota Share business, it was required to provide a letter of credit in favor of The Society and Council of Lloyd’s (“Lloyd’s”) in accordance with Lloyd’s rules.
credit facility in favor of U.S. ceding companies. The agreement is a one year secured facility that allows Montpelier Re to request the issuance of up to $1.0 billion in letters of credit.
Montpelier Re is registered under The Insurance Act 1978 (Bermuda), Amendments Thereto and Related Regulations (the “Act”). Under the Act, Montpelier Re is required annually to prepare and file Statutory Financial Statements and a Statutory Financial Return. The Act also requires Montpelier Re to meet minimum solvency requirements. For the years ended December 31, 2005 and 2004, Montpelier Re satisfied these requirements.
On August 2, 2004, we invested an aggregate of $20.0 million as part of an investor group, which included one of our major shareholders, acquiring the life and investments business of Safeco Corporation (since renamed Symetra Financial Corporation), pursuant to a Stock Purchase Agreement. Symetra is an unquoted investment and is carried at estimated fair value at December 31, 2005 of $21.5 million based on reported net asset values and other information available to management, with the unrealized gain included in accumulated other comprehensive income.
In the year ended December 31, 2005, we incurred an operating net cash inflow of $71.9 million, primarily relating to premiums received by Montpelier Re net of acquisition costs. We paid net losses of $489.3 million and received a net amount of $0.6 million from investments during the year ended December 31, 2005. As at December 31, 2005 we had a cash balance of $450.1 million. Net cash provided by operating activities has resulted from premiums received and sales of certain of our fixed maturities and equity investments.
Cash is used primarily to pay loss and loss adjustment expenses, brokerage commissions, excise taxes, general and administrative expenses, to purchase new investments, to pay dividends, to pay for any premiums retroceded and future authorized share repurchases. In 2006 we expect to have a large cash outflow as a result of payment of loss and loss adjustment expenses related to the 2005 hurricanes and an increase in our purchase of outwards reinsurance, combined with the lower level of expected gross premiums written for 2006 as described above.
In addition to relying on premiums received and investment income from our investment portfolio, we intend to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of our expected liabilities. No assurance can be given, however, that we will successfully match the structure of our investments with our liabilities. If our calculations with respect to liabilities are incorrect, or if we improperly structure our investments, we could be forced to liquidate investments prior to maturity, potentially at a significant loss. As we recently raised $600.0 million in additional capital, even given the large catastrophes that occurred during 2005 which will result in large payments for loss and loss adjustment expenses, at this point we do not anticipate having to liquidate any investments prior to maturity.