The following table sets forth our selected financial data and other financial information as at December 31, 2004, 2003, 2002 and 2001 and for the years ended December 31, 2004, 2003 and 2002 and for the period from November 14, 2001 to December 31, 2001. The historical financial information was prepared in accordance with U.S. GAAP. The statement of income data for the periods ended December 31, 2004, 2003, 2002 and 2001, and the balance sheet data at December 31, 2004, 2003, 2002 and 2001 were derived from our audited consolidated financial statements, which have been audited by PricewaterhouseCoopers, our independent registered public accounting firm. You should read the selected financial data in conjunction with our consolidated financial statements and related notes thereto contained in Item 8 - “Financial Statements and Supplementary Data” and
Our principal operating subsidiary, Montpelier Re, operates as a Bermuda-based provider of global property and casualty reinsurance and insurance products. We operate in markets where we believe our underwriting expertise and financial strength represent a relative advantage. Our profitability in any given period is based upon our premium and investment revenues less net loss and loss adjustment expenses.
Qualifying Quota Share (“QQS”) - This category represents whole account quota share reinsurance to three Lloyd’s syndicates. Under QQS contracts, we assume a specified portion of the risk on a specified coverage in exchange for an equal proportion of the premiums. Gross premiums written related to QQS arrangements have been recorded gross of original commissions to the syndicates. We did not write any QQS contracts in 2004.
General and administrative expenses are comprised of fixed expenses which include salaries and benefits, professional fees, office and risk management expenses, and variable expenses which include costs related to our performance unit plan, bonuses and stock option plan. Other than bonuses and performance units, expenses are primarily fixed in nature and do not vary with the amount of premiums written or losses incurred.
Loss and Loss Adjustment Expense Reserves. For most insurance and reinsurance companies, the most significant judgment made by management is the estimation of loss and loss adjustment expense reserves.
We maintain loss and loss adjustment expense reserves to cover our estimated liability for both reported and unreported claims. We utilize a reserving methodology that calculates a point estimate for our ultimate losses, and we then develop a range around our point estimate. The point estimate represents management’s best estimate of ultimate loss and loss adjustment expenses. Our internal actuaries review our reserving assumptions and our methodologies on a quarterly basis and our loss estimates are subject to an annual corroborative review by independent actuaries using generally accepted actuarial principles.
Reserving for reinsurance business introduces further uncertainties. As predominantly a broker market reinsurer for both excess of loss and proportional contracts, we must rely on loss information reported to brokers by primary insurers who must estimate their own losses at the policy level, often based on incomplete and changing information. The information we receive varies by cedant and may include paid losses, estimated case reserves, and an estimated provision for incurred but not reported losses (“IBNR reserves”). Additionally, reserving practices and the quality of data reporting may vary among ceding companies which adds further uncertainty to the estimation of our ultimate losses.
Estimating loss reserves for our small book of longer tail casualty reinsurance business, which can be either on an excess of loss or proportional basis, involves further uncertainties. In addition to the uncertainties inherent in the reserving process described above, casualty business can be subject to much longer reporting lags than property business, and claims often take many years to settle. During this period, additional factors and trends will be revealed and as these factors become apparent, reserves will be adjusted. There is also the potential for the emergence of new classes of losses or types of losses within the casualty book. Any factors that extend the time until claims are settled add uncertainty to the reserving process. At December 31, 2004, management has estimated gross loss and loss adjustment expense reserves related to our casualty business of $65.6 million.
Since we rely on estimates of paid losses, case reserves, and IBNR provided by ceding companies in order to assist us in estimating our own loss and loss adjustment expense reserves, we maintain certain procedures in order to mitigate the risk that such information is incomplete or inaccurate. At least monthly management assesses the reporting activities of these companies on the basis of qualitative and quantitative criteria. On a timely basis management takes appropriate follow-up action as required, which may include requests for 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 extremely rare and those which have not been resolved in negotiation have been resolved through arbitration in accordance with contractual provisions.
Our case reserve estimates are initially set on the basis of loss reports received from third parties. The majority of both our reinsurance and insurance business is sourced through brokers but a small proportion is sourced directly from the insured party or ceding company. The reinsurance and insurance business which is sourced through brokers is subject to a potential time lag in the receipt of information which we factor into our reserving process as discussed above.
The claim count on the types of insurance and reinsurance that we write, which are low frequency and high severity in nature, is generally low. The reporting delay for longer tail casualty business, which comprises a small proportion of our business, is traditionally longer than for our short tail lines. Because our casualty premiums written have been small relative to our property premiums written and because losses associated with such casualty premiums are substantially slower to develop than those associated with our property premiums, our volume of casualty claims has been significantly smaller than our volume of property claims to date.
Due to our relatively short operating history, our loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim will necessarily take many years to develop. In addition, due to the nature of the business, this information is not routinely provided by the cedants for every contract.
The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, may result in loss and loss adjustment expenses significantly greater or less than the reserves provided. Changes to our prior year loss reserves will impact our current underwriting results by improving our results if the prior year reserves prove to be redundant or reducing our results if the prior year reserves prove to be insufficient. We expect volatility in our results in periods that significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have occurred and are expected to give rise to a claim. As a result, we are not allowed to record contingency reserves to account for expected future losses. We anticipate that claims arising from future events will require the establishment of substantial reserves from time to time.
Management has determined that the best estimate for gross loss and loss adjustment expense reserves at December 31, 2004 was $549.5 million. Of this estimate $9.6 million relates to our insurance business and $539.9 million relates to our reinsurance business. Management’s best estimate of a range of likely outcomes around this estimate is between $425.6 million and $673.4 million. For additional information concerning our loss and loss adjustment expense reserves, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Premiums. Though we are principally a provider of reinsurance, we write both insurance and reinsurance contracts. Our insurance premium is all written on an excess of loss basis. Our assumed reinsurance premium is written on an excess of loss or on a pro-rata basis. Reinsurance contracts are generally written prior to the time the underlying direct policies are written by cedants and accordingly they must estimate such premiums when purchasing reinsurance coverage. For the majority of excess of loss contracts, including all insurance business, the deposit premium is defined in the contract wording. The deposit premium is based on the ceding companies estimated premium, and this is the amount we record as written premium in the period the underlying risks incept. In the majority of cases, these contracts are adjustable at the end of the contract period to reflect the changes in underlying risks during the contract period. Subsequent adjustments, based on reports by the ceding companies of actual premium, are recorded in the period they are determined, which are normally reported within six months to a one year subsequent to the expiration of the policy. To date these adjustments have not been significant.
On pro-rata contracts and certain excess of loss contracts where the deposit premium is not specified in the contract, an estimate of written premium is recorded in the period in which the underlying 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.
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 premiums when the loss event occurs, and are recognized as earned premium ratably over the remaining contract period. 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.
assessment, management believes that as at December 31, 2004 no provision for doubtful accounts is necessary.
For excess of loss contracts, other than risk attaching contracts or contracts where the deposit premium is not defined, premium income is generally earned ratably over the term of the reinsurance contract, usually 12 months. For all other contracts, including contracts written on a pro-rata or risks attaching basis, premiums are generally earned over a 24 month period which is the risk period of the underlying (12 month) policies. The portion of the premium related to the unexpired portion of the policy at the end of any reporting period is reflected on the balance sheet in unearned premium.
A total of 936,000 performance units were authorized under the PUP at December 31, 2004 and 2003 (or up to 1,872,000 common shares should the maximum harvest of 200% of units apply) covering the three performance periods, 2002-2004, 2003-2005 and 2004-2006.
For the 2003-2005 cycle, the performance target for a 100% harvest ratio is the achievement of a combined ratio of 72% over the period or the achievement of an annual total return to shareholders of 18% as measured over the period. To date we have experienced a combined ratio less than 72% for this three-year performance period. Taking into account our results to date as well as the estimated combined ratio for the remainder of this performance period, we have adjusted the estimated harvest ratio from 100.0% at December 31, 2003 to 116.4% at December 31, 2004. This resulted in an increase in the PUP liability and PUP expense during the year ended December 31, 2004.
As at December 31, 2004, the following table summarizes the impact of potential share price changes and potential adjustments to the harvest ratio used in the liability calculation on the amount of liability and expense recorded for the remaining three-year cycles ($ in thousands):
Based on the share price of $38.45 at December 31, 2004
An estimated 1% change in the estimated combined ratio is approximately equivalent to a 5% change in the harvest ratio for the respective performance period.
The Compensation and Nominating Committee of the Board of Directors has approved a new Long-Term Incentive Plan effective as of January 1, 2005. At the discretion of the Committee, performance shares or other types of awards will be granted to executive officers and certain other key employees. Performance shares entitle the recipient to receive, without payment to the Company, all, double, or a part of the value of the performance shares granted, depending on the achievement of specific financial or operating goals. Performance shares 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 2005-2007 cycle the Committee has adopted a return on allocated capital (“ROAC”) framework to assess management’s performance.
Generally speaking, pricing in property and other insurance and reinsurance markets has been cyclical in nature. Multi-year periods of intense price competition and insufficient pricing (“soft market”) have been followed by periods of higher, sufficient pricing (a “hard market”). Then, over a period of a few years, as lost capital is replenished, and new competitors enter the business, prices fall again.
In market loss terms, 2004 was the worst year ever for natural catastrophes. At December 31, 2004 we estimated industry insured losses of approximately $37 billion for the four U.S. hurricanes and two large Japanese typhoons that occurred during the third quarter of 2004. Such catastrophic events had a material adverse impact on our financial condition and results of operations. While such events might have been expected to improve pricing in the future, due to the financial strength of the industry, we continue to see competition eroding the adequacy of rate levels in many of the classes of business, with commercial property insurance worldwide and non-U.S. property treaty renewals particularly impacted.
We expect that casualty reinsurance rates will remain relatively stable overall. Rate levels in other classes of business are expected to vary from stable to some rate reductions.
Separately, we see the growth of a new class of competition in our markets. Hedge Funds and catastrophe bonds are elements we now see more regularly as competition to traditional reinsurance markets.
• An increase in acquisition costs due to the increased level of proportional business written;
• An increase in financing expense due to a full year’s interest expense on the Senior Notes; and
• Favorable development of net losses from prior years of approximately $97.6 million in 2004 compared to $58.2 million in 2003; and
• An increase in net investment income as a result of our higher investment portfolio balance.
We ended the 2004 year with a fully converted book value per share (as defined above) of $26.75, an increase of $1.83 from December 31, 2003. This increase of 7.3% mainly resulted from the net effect of the factors described above. In addition, we paid a regular quarterly dividend of $0.34 per quarter during the year. We experienced a return of approximately 3.3% on our investment portfolio including unrealized gains for the year ended December 31, 2004 as compared to a return of 4.0% for the year ended December 31, 2003.
Total return to shareholders, which is a non-GAAP measure, was $3.19 or 13.1% for the year ended December 31, 2004. It is the internal rate of return of the increase in fully converted book value per share from $24.92 at December 31, 2003 to $26.75 at December 31, 2004, including the accrued dividends of $0.34 for each of the four quarters of 2004. Management believes that this measure most accurately reflects the return made by its shareholders as it takes into account the effect of all dilutive securities and the effect of dividends.
Management believes that fully converted book value per share and total return to shareholders are measurements which are important to investors and other interested parties, and that these persons 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.
During 2003, we refined the classification of gross premiums written for certain pro-rata contracts between the Property Specialty line and the Property Catastrophe and Other Specialty lines. There was no effect on total gross premiums written.
For the year ended December 31, 2004, excluding the effects of $33.4 million in reinstatement premiums recorded as a result of the third quarter catastrophes, gross premiums written were at a similar level to 2003. However, disregarding the QQS business, gross premiums written increased during the year ended December 31, 2004 compared to 2003 by approximately 9.8 %.
Gross premiums written related to the Property Specialty category increased only marginally
The Other Specialty category strengthened as compared to the prior year, 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. Casualty business included professional indemnity casualty reinsurance, predominantly medical malpractice, specialized errors and omissions business, UK Employer’s Liability and catastrophe and/or clash layers for general liability and retrocessional accounts, on an excess of loss basis. As previously stated, 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. We estimate that casualty business will account for approximately 10% of our gross premiums written during 2005 but this level could be affected by premium rate levels. In addition, we have added a dedicated underwriter to focus on the sabotage and terrorism class and we have also entered into agreements with the Overseas Private Investment Corporation (“OPIC”) to form an insurance facility to underwrite stand-alone terrorism insurance products. We anticipate writing a modestly higher amount of this business in 2005 as compared to 2004.
The increase in gross premiums written in all classes of business, except QQS, from 2002 to 2003 resulted mainly from increased market penetration which allowed us to capitalize on market opportunities in virtually all lines of business. In 2003 we also experienced increases in our written line sizes and in our average signing percentages. Premium rate levels were stable in 2003 as compared to 2002 across the major classes of business in which we specialize in but we experienced improved signings on renewals as well as increased access to more original programs than in 2002. Our reputation, combined with our strong capital base and additional ratings also contributed to the increase in gross premiums written.
Reinsurance premiums ceded for 2004 increased from 2003 primarily because we purchased additional protection against our catastrophe book as compared to the prior year. In addition, in 2004 we also purchased protection for our casualty book and recorded reinstatement reinsurance premiums ceded of $19.4 million related
Reinsurance premiums ceded in 2002 solely related to the QQS syndicates with respect to the contracts in which we participate for the 2002 and 2003 underwriting years. The lower level of QQS inuring reinsurance premiums ceded in 2003 as compared to 2002 is directly related to the level of QQS gross premiums written as discussed above.
Catastrophe losses contributed significantly more to the 2004 loss ratio than in 2003 or 2002. For business less heavily impacted by catastrophes, the level of losses experienced has generally been lower than our long term expectations for the years ended December 31, 2004, 2003 and 2002. The variation in the loss ratios between the year ended December 31, 2003 and the prior year results from the fact that in 2002 we did not have the benefit of prior years’ loss history on which to base our loss reserve analysis and, accordingly, we relied more heavily on industry experience and professional judgment to estimate our loss and loss adjustment expense reserves. As our business developed in 2003, we supplemented industry information with our own specific experience in our actuarial analysis. This led to reduced projections of ultimate losses, particularly in the Property Specialty classes of business.
The Property Catastrophe and Property Specialty groups of business contained the lines most impacted by the aforementioned catastrophes. Excluding the seven major catastrophic events, the net loss ratios for the year ended December 31, 2004 for both the Property Catastrophe and Property Specialty groups of business were lower in 2004 than in 2003 primarily because there were relatively few other property loss events which impacted us during the year. In the same period in 2003, we incurred losses from Hurricanes Fabian and Isabel as well as the wildfires which occurred in California. The catastrophes which occurred during 2004 were of a much greater magnitude than those which occurred during 2003. The 2004 loss ratios for the Property Catastrophe and Property Specialty groups have also benefited from favorable prior year development. The Other Specialty class continues to experience very low levels of reported losses, but has also been impacted to some extent by the catastrophes which occurred during the third quarter of 2004, resulting in a higher net loss ratio for 2004 as compared to the same period in 2003. There is also a higher percentage of casualty business in the Other Specialty group in 2004 compared with 2003. These classes have been reserved at higher loss ratios due to the longer-tail nature of casualty business. The Qualifying Quota Share loss ratio for the year ended December 31, 2004 is lower than the same period in 2003. This is as a result of the QQS syndicates lowering their ultimate loss
The 2004 and 2003 years include approximately $97.6 million and $58.2 million, respectively, of favorable development of net losses from prior years. Favorable prior year development benefited the net loss ratio for the years ended December 31, 2004 and 2003 by approximately 12.4% and 7.2%, respectively.
• Property Catastrophe net loss and loss adjustment expense reserves as at December 31, 2003, included reserves for several major catastrophic events from 2002 and 2003. The largest of these were the European Floods of August 2002, Hurricane Isabel which occurred in September 2003, and the October
2003 wildfires in California. Claims from these three events have developed less than our initial projections indicated, leading to a reduction in net ultimate losses of $17.8 million during 2004.
Other than the matters described above, we did not make any significant changes in the assumptions or methodology used in our reserving process during the year ended December 31, 2004.
At December 31, 2004, we estimated our gross and net reserves for loss and loss adjustment expenses using the methodology as outlined in our Critical Accounting Policy earlier in this section.
Management has determined that the best estimate for net loss and loss adjustment expense reserves at December 31, 2004, 2003 and 2002 was $454.8 million, $242.1 million and $129.5 million, respectively.
Gross loss and loss adjustment expense reserves at December 31, 2004
Net foreign exchange gains result from the effect of the fluctuation in foreign currency exchange rates on the translation of foreign currency assets and liabilities combined with realized gains (losses) resulting from the receipt of premium installments and payment of claims in foreign currencies. The foreign exchange gain during the years ended December 31, 2004, 2003 and 2002 is primarily due to the weakening of the U.S. dollar resulting in gains on translation arising out of receipts of foreign currency premium installments. Our premiums receivable and liabilities for losses incurred in currencies other than the U.S. dollar are exposed to the risk of changes in value resulting from fluctuations in foreign exchange rates and may affect our financial results in the future.
Acquisition costs as a percentage of gross premiums earned, excluding reinsurance and profit commission, were 16.7%, 16.5% and 16.7% for the years ended December 31, 2004, 2003 and 2002, respectively. The 2004 ratio is broadly similar to the 2003 and 2002 ratios. We anticipate that the acquisition cost ratio, excluding profit commission, will remain at a similar level in 2005 as in 2004 although the amount may vary due to the mix of business written and estimated loss experience.
The increase in general and administrative expenses from 2003 to 2004 is partially as 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.
period, the expense increased in 2004 due to the increase in the harvest ratio from 100% at the end of 2003 to 116.4% at December 31, 2004, combined with the increase in our share price which includes an adjustment for any dividends paid out during the performance period, from 2003 to 2004. The 2004 year also includes an additional accrual for the 2004-2006 performance period. The overall effect was a net increase in the PUP expense as compared to 2003. On February 28, 2005 we paid out the 2002-2004 PUP accrual of approximately $14.0 million.
Net investment income was primarily composed of interest on coupon-paying bonds and bank interest, partially offset by accretion of premium on bonds and investment management and custodian fees of $2.6 million, $3.2 million and $2.1 million, respectively, for the years ended December 31, 2004, 2003 and 2002. The investment management fees were paid to White Mountains Advisors LLC, a wholly-owned indirect subsidiary of White Mountains Insurance Group, one of our major shareholders. Management believes that the fees charged were consistent with those that would have been charged by an unrelated party. The investment management and custodian fees are lower for 2004 as compared to 2003 even though the asset base has increased because the investment management fee structure was revised during the first quarter of 2004, resulting in a lower expense for our current portfolio mix. The fees increased from 2002 to 2003 due to the increase in our asset base. The fees will vary as our mix of investments changes.
unrealized losses of $11.1 million at December 31, 2004, investments with a market value of $8.3 million have been in a continuous unrealized loss position for more than 12 months. Of the gross unrealized losses of $1.5 million at December 31, 2003, no investment had continuously been in an unrealized loss position for more than 12 months.
We believe that the gross unrealized losses relating to our fixed maturity investments at December 31, 2004 of $11.1 million 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 $0.1 million at December 31, 2004 are temporary based on an analysis of various factors including the time period during which the individual investments has been in an unrealized loss position and the significance of the decline.
(1) Total return is calculated by dividing total net investment income on fixed maturity investments by the monthly average of the sum of such investments at amortized cost in 2004.
The combination of the Lehman Brothers Government/Credit 1-5 Year Index and the 1-3 month Treasury Bill rate is used for comparative purposes as it closely reflects our asset mix.
Fees for the letter of credit facilities relate to the Letters of Credit that we have in place as detailed in the Capital Resources section. These fees are higher than the same period in 2003 as more reinsureds have requested additional security as a result of the third quarter catastrophes.
For the years ended December 31, 2003 and 2002, interest expensed relating to the term loan facility and revolving loan facility represented an average rate of 1.7% and 2.2%, respectively.
We are a holding company that conducts no operations of its own. We rely primarily on cash dividends and management fees from Montpelier Re to pay our operating expenses, interest on our debt and to pay dividends to our shareholders and warrant holders. There are restrictions on the payment of dividends from Montpelier Re to the Company, which are described in more detail below. We currently have in place a regular dividend program of $0.34 per share per quarter. In addition, on February 25, 2005 we declared a special dividend in the amount of $5.50 per common voting share and warrant payable on March 31, 2005 to shareholders and warrant holders of record on March 15, 2005. We expect to continue the payment of dividends in the future but we cannot assure that such payments will continue. Any determination to pay any future cash dividends will be at the discretion of our Board of Directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends, and any other factors our Board of Directors deems relevant.
Our ability to underwrite business is dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In the normal course of business, we evaluate our capital needs to support the volume of business written in order to maintain our claims paying and financial strength ratings. We regularly provide financial information to rating agencies to both maintain and enhance existing ratings.
The table above includes the estimated timing of the payment of estimated future cash flows for gross loss and loss adjustment expenses based on our best estimate of obligations to pay policyholders at December 31, 2004. The amount and timing of the cash flows are uncertain and do not have contractual payout terms. Due to the short-tail nature of our business we expect that gross and net loss and loss adjustment expenses generally will be settled during the time period in which they are incurred. For a discussion of these uncertainties refer to the Loss and Loss Adjustment Expenses section in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included with this filing. These estimated obligations will be funded through existing cash and investments.
We may issue additional debt or equity as circumstances warrant. In this regard, on February 12, 2004 we filed a universal shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission for
On May 26, 2004 our Board of Directors approved a plan to repurchase up to $150.0 million of our common shares from time to time depending on market conditions during a period up to 24 months. On June 2, 2004, we repurchased 1,263,865 common shares at $34.50 per common share. The closing market price per common share on May 28, 2004 was $34.88. The purchase price totaled $43.6 million and was funded using existing cash on hand. On August 5, 2004, we repurchased a further 625,000 common shares at $35.00 per common share. The closing market price per common share on August 3, 2004 was $35.43. The purchase price totaled $21.9 million and was funded using existing cash on hand.
Our Chairman, President and Chief Executive Officer adopted a written plan in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934 for the purpose of the exercise of options and the sale of limited amounts of our shares owned by him. The plan covered the possible exercise of 600,000 options and share sales over a 12 month period commencing March 3, 2004, subject to market conditions and the terms of the plan. Pursuant to this plan, options for 500,000 common shares were exercised during the year ended December 31, 2004 at the exercise price of $16.67, resulting in an increase in common shares by their par amount and an increase in additional paid-in capital of $8.3 million. Subsequent to December 31, 2004, 10,000 options and 90,000 options with an exercise price of $16.67 and $17.50, respectively, were exercised for an additional 100,000 common shares, which has exhausted the plan.
In the normal course of business, we provide security to reinsureds as required under contract provisions. Such security takes the form of a letter of credit issued by a bank at our request. In order for us to write Lloyd’s Qualifying Quota Share business, we must provide a letter of credit in favor of The Society and Council of Lloyd’s (“Lloyd’s”) in accordance with Lloyd’s rules. Effective May 27, 2004 the Company entered into a three-year Amended and Restated Letter of Credit Reimbursement and Pledge Agreement with Banc of America Securities LLC and a syndicate of lending institutions for the provision of a letter of credit facility for the account of Montpelier Re in favor of Lloyd’s or certain U.S. ceding companies (“Tranche A”) in an amount of up to $250.0 million, and in favor of certain U.S. ceding companies only (Tranche “B”) in an amount of up to $200.0 million of which up to $50.0 million may be used by us as a revolving line of credit for general corporate purposes. This agreement replaced the Letter of Credit Reimbursement and Pledge Agreement with Fleet National Bank discussed below. Letters of credit issued under this facility at December 31, 2004 were $252.0 million and are secured by cash and investments of approximately $277.2 million. On October 28, 2004, we exercised an option to increase the aggregate amount of Tranche B by $50.0 million to $250.0 million as we anticipated that reinsureds would be requesting additional security as a result of the third quarter catastrophes.
the same as those under the above Letter of Credit Facility Agreement and are described below. There were no letters of credit issued under this facility at December 31, 2004.
On August 2, 2004, the Company invested an aggregate of $20.0 million as part of an investor group 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 based on reported net asset values and other information available to management, with any unrealized gain or loss included in accumulated other comprehensive income.
In the year ended December 31, 2004, we generated an operating net cash inflow of $519.7 million, primarily relating to premiums net of acquisition costs received by Montpelier Re. We paid net losses of $192.0 million during the year ended December 31, 2004. We invested a net amount of $396.3 million during the year ended December 31, 2004, and had a cash balance of $110.6 million at December 31, 2004. The increase in liquidity has resulted from premiums received that were higher than the level of paid claims during the year. Our liquidity depends on operating, investing and financing cash flows as described below.
Cash is used primarily to pay loss and loss adjustment expenses, brokerage commissions, general and administrative expenses, to purchase new investments, to pay dividends, to pay for any premiums retroceded and future authorized share repurchases. In 2004 we purchased retrocessional excess of loss protection against large risk losses on the direct insurance and facultative book and against small to medium-size catastrophes on our overall property writings. In addition, in 2004 we also purchased retrocessional stop-loss protection against losses on our casualty writings. For 2005 we expect to purchase a slightly higher amount of reinsurance protection as compared to 2004.
Our cash flows from operations represent the difference between premiums collected and investment earnings realized, and the loss and loss adjustment expenses, underwriting and other expenses paid and investment losses realized. Cash flows from operations may differ substantially, however, from net income. To date, we have invested the majority of our cash flows not required for operating purposes but have also paid out dividends to our shareholders and repurchased common shares during 2004 as discussed above.
We intend to manage these risks by structuring our investments in an effort to anticipate the payout patterns of our liabilities under insurance or reinsurance policies. No assurance can be given, however, that we will successfully match the structure of Montpelier Re’s investments with its liabilities under insurance or reinsurance contracts. If our calculations with respect to these reinsurance liabilities are incorrect, or if we improperly structure our investments to match such liabilities, we could be forced to liquidate investments prior to maturity,
The estimated fair value of fixed maturity, equity, other investments and our cash and cash equivalents balance was $2,598.7 million as of December 31, 2004, compared to $2,237.7 million at December 31, 2003. The primary cause of this increase was the receipt of $718.7 million in premiums net of acquisition costs, net investment income of $69.1 million and net realized gains on investments of $7.2 million for the year ended December 31, 2004, offset by paid claims, the payment of general and administrative expenses, the payment of dividends and the repurchase of some of our common shares.
Reference is made to Item 15 (a) of this Report for the Consolidated Financial Statements of Montpelier Re Holdings Ltd. and the Notes thereto, as well as the Schedules to the Consolidated Financial Statements.