The following is a discussion and analysis of the Company's results of operations for the year ended December 31, 2001 compared to the year ended December 31, 2000 and the period ended December 31, 1999, and also a discussion of the Company's financial condition as of December 31, 2001. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes that are included herein.
Years ended December 31, 2001 and 2000 and period from inception (July 8, 1999) to December 31, 1999
During 1999, the Company did not write any reinsurance business nor did it engage in any investment activities. Accordingly, the Company did not record any premium, investment income or any expenses in 1999, other than general and administrative expenses.
Gross premiums written. Gross premiums written for the year ended December 31, 2001 were $710.5 million compared to $409.7 million for the year ended December 31, 2000, an increase of 73.4%. Gross premiums written for property and casualty were $496.4 million for the year ended December 31, 2001 compared to $126.3 million for the year ended December 31, 2000. Gross premiums written for property and casualty increased principally due to the flexibility of the Company's alternative risk transfer products, which, in a firm price environment for traditional property and casualty reinsurance products, made them more appealing than traditional risk transfer reinsurance products. Gross premiums written for life and annuity were $214.1 million for the year ended December 31, 2001 compared to $283.4 million for the year ended December 31, 2000. The low interest rate environment adversely impacted the Company's life and annuity production.
Net premiums earned. Net premiums earned for the year ended December 31, 2001 were $500.9 million compared to $401.4 million for the year ended December 31, 2000. Property and casualty net premiums earned were $319.3 million, after the deduction of $66.6 million of earned premiums ceded, for the year ended December 31, 2001 compared to $118.1 million, after the deduction of $7.9 million of earned premiums ceded, for the year ended December 31, 2000. Life and annuity net premiums earned were $181.6 million, after the deduction of $32.4 million of earned premiums ceded, for the year ended December 31, 2001 compared to $283.3 million, after the deduction of $nil of earned premiums ceded, for the year ended December 31, 2000.
Net investment income. Net investment income was $43.9 million for the year ended December 31, 2001 compared to $38.9 million for the year ended December 31, 2000. The increase was primarily attributable to the increase in the fixed maturities portfolio resulting from cash received in collection of premiums written since December 31, 2000, as well as proceeds contributed from the Company's initial public offering. Declining interest rates contributed to a total return of 8.55% for the fixed maturities portfolio for the year ended December 31, 2001 compared to a total return of 9.61% for the year ended December 31, 2000.
Losses, benefits and experience refunds. Losses, benefits and experience refunds were $524.4 million for the year ended December 31, 2001 compared to $408.2 million for the year ended December 31, 2000. Property and casualty losses were $322.0 million for the year ended December 31, 2001 compared to $109.3 million for the year ended December 31, 2000. The increase in property and casualty losses was directly related to the increase in property and casualty premiums written and earned and loss reserve adjustments on premiums written in prior years. In the aggregate, the Company took a gross charge of $5.0 million for estimated claims related the September 11, 2001 terrorist attacks on the World Trade Center. After consideration of reinsurance recoveries and additional premiums on contracts incurring losses from these attacks, the Company's net provision was $3.0 million. Life and annuity benefits were $202.4 million for the year ended December 31, 2001 compared to $298.9 million for the year ended December 31, 2000. The decrease was attributable to the lower volume of life and annuity premiums written and earned in 2001 compared to 2000.
Capital resources. The Company's capital structure currently consists of equity and minority interest. At December 31, 2001, total capitalization after deducting loans to management and including retained earnings and accumulated other comprehensive income amounted to $699.7 million as compared with $514.6 million at December 31, 2000 and $296.6 million at December 31, 1999. Shareholders' equity increased from $400.4 million at December 31, 2000 to $584.1 million at December 31, 2001. The increase during the year ended December 31, 2001 was primarily the result of $179.5 million of net proceeds from the issuance of 12 million additional Common Shares in connection with the Company's
IPO in August 2001, $14.7 million from the issuance of Common Shares in connection with the formation of Grand Central Re in May 2001, $10.7 million in unrealized gains from fixed maturities and net income from operations of $2.5 million, offset by Common Share repurchases of $17.1 million and $3.3 million of unearned stock grant compensation provided to employees during 2001. The Company continuously reviews its capital adequacy and believes this level of capital is sufficient to support the Company's current reinsurance operations.
The Company has a $375 million letter of credit facility with a syndicate of commercial banks. At December 31, 2001 and 2000 letters of credit totaling $282.9 million and $189.7 million, respectively, issued in the ordinary course of the Company's business have been issued by the Company's bankers in favor of certain ceding insurance companies to meet regulatory requirements. All issued letters of credit were fully collateralized by the Company's investments. The Company was in compliance with all the covenants of its letter of credit facility at December 31, 2001.
On November 2, 2001 the Board of Directors declared a quarterly shareholder dividend of $0.02 per share ($0.08 annually) payable to shareholders of record on November 16, 2001. Prior to that time, the Company never declared or paid any dividends on its Common Shares. Any determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the results of operations and cash flows, the financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and other factors the Board of Directors deems relevant.
The Company had no material commitments for capital expenditures at December 31, 2001. At December 31, 2001, the Company had an unfunded alternative investment capital commitment of $31.5 million to a fund that focuses on distressed loan investment opportunities in Japan. This commitment will be funded by a reallocation of Max Re Diversified's assets or additional investments by the Company into Max Re Diversified. The Company had no other commitments except for leasehold commitments.
For the Company's significant accounting policies, see Note 2 to the audited consolidated financial statements included herein.
In June 2001, the Financial Accounting Standards Board issued FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets." FAS No. 141 requires the usage of the purchase method for all business combinations initiated after June 30, 2001, prohibits the usage of the pooling of interest method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. FAS No. 142 addresses the initial recognition and measurement of intangible assets subsequent to the acquisition. Under these new accounting standards, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but, instead, will be tested at least annually for impairment. Currently, these pronouncements will not have any impact on the financial position of the Company.