We lease office space in Bermuda, where our executive offices are located. In addition, Stonington leases office space in Addison, Texas, and our other U.S. based subsidiaries lease office space in Richmond, Virginia and Raleigh, North Carolina. We also lease office space in Dublin, Ireland. As we anticipate additional growth in our businesses, it is likely that we will need to expand into additional facilities to accommodate this growth.
Company obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of RenaissanceRe
(1) Earnings per common share - diluted was calculated by dividing net income available to common shareholders by the number of weighted average common shares and common share equivalents outstanding. Common share equivalents are calculated on the basis of the treasury stock method.
(1) Excludes $18.8 million, $20.8 million and $22.2 million of premium assumed from the Individual Risk segment in the years ended December 31, 2004, 2003 and 2002, respectively.
(2) Income (loss) for the Reinsurance and Individual Risk segments represents net underwriting income. Net underwriting income consists of net premiums earned less claims and claim expenses, acquisition costs and operational expenses.
The following is a discussion and analysis of our results of operations for the year ended December 31, 2004 compared with the years ended December 31, 2003 and December 31, 2002. The following also includes a discussion of our financial condition at December 31, 2004. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes included in this filing. This filing contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the results described or implied by these forward-looking statements (see "Note on Forward-Looking Statements").
We have developed a proprietary, computer-based pricing and exposure management system, Renaissance Exposure Management System (REMS©). REMS© has analytic and modeling capabilities that help us to assess the risk and return of each incremental reinsurance contract in relation to our overall portfolio of reinsurance contracts. Before we bind any risk, exposure data is gathered from clients and this exposure data is input into REMS© modeling system. The REMS© modeling system enables us to measure each policy on a consistent basis and provides us with a measurement of an appropriate price to charge for each policy based upon the risk that is assumed. We combine the
analyses generated by REMS© with other information available to us, including our own knowledge of the client submitting the proposed program. While REMS© is most developed in analyzing catastrophe risks, it is also used for analyzing other classes of risk.
Certain of the restatement corrections are attributable to an Aggregate Excess of Loss Reinsurance contract and an Assignment Agreement, each entered into by Renaissance Reinsurance with Inter-Ocean in 2001. The Aggregate Excess of Loss Reinsurance contract initially provided for $45.0 million of maximum limit over a three-year period in exchange for annual premium of $7.3 million. This agreement was subsequently amended to provide for $30.0 million of maximum limit for the same annual premium. The Assignment Agreement provided for the sale by Renaissance Reinsurance to Inter-Ocean of $50.0 million face amount of reinsurance recoverables for $30.0 million. In prior financial statements, the Company accounted for the Aggregate Excess of Loss Reinsurance contract as traditional reinsurance and for the Assignment Agreement as a sale of reinsurance recoverables. In connection with the aforementioned review, the Company concluded that these contracts, based on the totality of the surrounding facts and circumstances, should have been treated as a single transaction and, when so treated, lacked the necessary risk transfer to be accounted for as transactions involving ceded reinsurance and a sale of reinsurance recoverables.
The aggregate net effect of the corrections is to increase 2003 net income by $1.3 million; to decrease 2002 net income by $21.9 million; and to increase 2001 net income by $20.6 million. The amounts reflect: (1) the timing of the recognition of Inter-Ocean reinsurance recoverables (with the impact of decreasing net income by $1.4 million in 2003; decreasing net income by $25.0 million in 2002; and increasing net income by $26.4 million in 2001), and (2) the timing of premium ceded on multi-year contracts (with the impact of increasing net income by $2.7 million in 2003; increasing net income by $3.1 million in 2002; and decreasing net income by $5.8 million in 2001). These restatements only affect the Reinsurance segment. See Note 2 to our Consolidated Financial Statements.
The independent members of the Board of Directors, in connection with the aforementioned review, have concluded that certain members of senior management (James N. Stanard, Chief Executive Officer; William I. Riker, President; John M. Lummis, Chief Operating Officer/Chief Financial Officer; Michael W. Cash, Senior Vice President; and Martin J. Merritt, Controller) made mistakes and in some instances lacked due care in connection with the original accounting for the Inter-Ocean transactions that led to the restatement. The independent members of the Board of Directors plan to discuss their findings directly with each of the aforementioned executives. The independent members of the Board of Directors also concluded that, since 2001, the Company has made significant improvements in its internal controls, including controls over financial reporting. These improvements include:
• hiring a general counsel and developing a legal department, including legal resources dedicated to the Company's reinsurance underwriting function;
• designing and implementing controls related to accounting for complex reinsurance contracts; and
• developing training programs regarding the contractual features contained within reinsurance contracts that may require an accounting review in accordance with the Company's policies and procedures.
our REMS© modeling system enables us to analyze each of our policies against such loss and compare our estimate of the loss with those reported by our policyholders. The REMS© modeling system also allows us to compare and analyze individual losses reported by policyholders affected by the same loss event. Although the REMS modeling system assists with the analysis of the underlying loss, and provides us with the information and ability to perform increased analysis, the estimation of claims resulting from catastrophic events is inherently difficult because of the variability and uncertainty associated with property catastrophe claims and the unique characteristics of each loss. During 2003, with the accumulation of 10 years of historical information on our claims and claim expenses, we adopted a new system to reassess our property catastrophe reserves on our older accident years.
During 2003 our Individual Risk segment began issuing insurance policies for certain commercial liability coverages, including general, automobile and professional liability risks. The claim reporting and claim development periods of these risks are generally expected to be longer than the reporting and development periods for our property risks, and accordingly there is normally greater uncertainty in the estimation of the reserves associated with these policies.
During the years ended December 31, 2004, 2003 and 2002, changes to prior year estimated claims reserves had the following impact: for 2004, prior year estimated claims reserves were reduced by $140.3 million; for 2003, prior year estimated claims reserves were reduced by $93.6 million; and for 2002, prior year estimated claims reserves were increased by $23.0 million; and in each year there was a corresponding increase or decrease to net income. Although we believe we are cautious in our assumptions, and in the application of our methodologies, we cannot be certain that our ultimate payments will not vary, perhaps materially, from the estimates we have made. (Also see - "Reserves for Claims and Claim Expenses.")
The estimate of losses recoverable can be more subjective than estimating the underlying claims and claim expense reserves as discussed under the heading "Claims and Claim Expense Reserves" above. In particular, losses recoverable may be affected by deemed inuring reinsurance, industry losses reported by various statistical reporting services, and other factors. In addition, the level of IBNR reserves has a significant impact on losses recoverable. These factors can impact the amount of the losses recoverable to be recorded as well as delay the recognition of losses recoverable to reporting periods that are different from the underlying loss.
We book premiums on non-proportional contracts in accordance with the contract terms. Premiums written on losses occurring contracts are typically earned over the contract period. Premiums on risks attaching contracts are generally earned as reported by the cedants, which may be over a period more than twice as long as the contract period. For multi-year policies, only the initial annual premium is included as written at policy inception. The remaining annual premiums are included as written at
each successive anniversary date within the multi-year term. Management is required to make estimates based on judgment and historical experience for periods during which information has not yet been received.
Since premiums for our Reinsurance segment are contractually driven and the reporting lag for such premiums is minimal, estimates for premiums written for this segment are usually not significant. The minimum and deposit premiums on excess policies are usually set forth in the language of the contract and are utilized to record premiums on these policies. Actual premiums are determined in subsequent periods based on actual exposures and any adjustments are recorded in the period in which they are identified.
During 2003 our consolidated property catastrophe premiums remained flat, primarily due to increased competition and due to some softening of prices in the market, where we accordingly chose not to renew certain policies.
During 2005, we are currently anticipating a decline in our property catastrophe premiums. (See "Current Outlook" for additional disclosure.)
Specialty reinsurance - During 2004 and 2003 our consolidated specialty reinsurance written premiums increased by $91.1 million and $44.8 million, respectively. These increases were primarily due to our continued focus on a few targeted areas of this market where we believe we can leverage our expertise, including surety, casualty, property and terrorism-specific classes of reinsurance. The areas representing the majority of the 2003 increase were catastrophe exposed workers' compensation and terrorism-specific reinsurance.
The following is a summary of our reinsurance premiums by geographic region:
$44.7 million. Because we do not include minority interest in our summary of underwriting income in the table above, the $549.7 million referred to above does not reflect the $137.8 million offset for the minority interest of the 74.75% shareholders of DaVinciRe, which, when considered, would result in the net $411.9 million total effect to the reinsurance segment.
Offsetting the effect of the hurricanes above was a reduction of prior years estimated ultimate net claims reserves of $113.8 million. The reduction in prior years' estimated ultimate net claims reserves was primarily due to a re-estimation of our ultimate losses associated with six large catastrophe events, which produced a reduction of approximately $31.3 million, a $23.0 million reduction in reserves from numerous smaller catastrophe events, and $46.8 million in reductions from our specialty book of business. The reductions in our reserves for the smaller catastrophe events and the reserves for the specialty book of business were driven by the application of our formulaic reserving methodology used for these books of business and were primarily due to the actual paid and reported loss activity being better than what we had anticipated when estimating the initial ultimate claims and claims expense ratios and the initial loss reporting patterns.
The increase in our 2003 net underwriting income from our Reinsurance segment, compared to 2002, was primarily the result of three factors: 1) the comparably low level of property catastrophe losses during 2003 which reduced our net claims and claim expenses by approximately $40.0 million; 2) favorable development on prior period reserves which contributed $68.7 million of a reduction in net claims and claim expenses; and 3) the increase in our net reinsurance premiums earned during 2003, as a result of our increase in gross written property catastrophe premiums in 2002 and the increase in our gross written specialty reinsurance premiums in 2002 and 2003.
Losses from our property catastrophe reinsurance and specialty reinsurance policies can be infrequent, but severe, as demonstrated in the variation of our results during 2004 as compared to 2003 and 2002. During periods with benign property catastrophe loss activity, such as 2003 and 2002, we have the potential to produce a low level of losses and a related increase in underwriting income.
Our underwriting expenses consist of acquisition expenses and operational expenses. Acquisition expenses consist of costs to acquire premiums and are principally comprised of broker commissions and excise taxes. Acquisition expenses are driven by contract terms and are normally a set percentage of premiums and, accordingly, these costs will normally fluctuate in line with the fluctuation in premiums. Operational expenses consist of salaries and other general and administrative expenses. Our reinsurance business operates with a limited number of employees and we have the ability to grow our written premiums without proportionally increasing our operating expenses. The decrease in our operational expenses in 2004 by $17.5 million was primarily due to a reduction of $20.1 million in executive compensation and bonus and incentive compensation due to changes in the compensation structure of certain executives and also due to the reduction in underwriting profit in 2004 (see - "Capital Resources" below). The increase in underwriting expenses during 2003 was primarily due to an increase in acquisition costs on our specialty reinsurance business, which is attributable to commission costs related to certain quota share premiums written in 2003 which typically carry higher acquisition costs than our excess of loss contracts.
We have entered into joint ventures and specialized quota share cessions of our book of business. In accordance with the joint venture and quota share agreements, we are entitled to certain fee income and profit commissions. We record these fees and profit commissions as a reduction in acquisition expenses or operating expenses and, accordingly, these fees have also contributed to the reduction in our expense ratio.
The following table summarizes the underwriting results and ratios for the Individual Risk segment for the years ended December 31, 2004, 2003, and 2002:
The increase in our premiums from our Individual Risk operations in 2003 was as a result of an improving market environment due primarily to: 1) the increase in demand for insurance and
During 2005, we expect that certain new programs will incept in the first half of the year. Assuming we are correct, and assuming our estimate for growth in other existing areas of the Individual Risk business is also correct, we expect gross written premium growth for this segment to grow significantly in 2005.
The 2004 underwriting results for the Individual Risk segment decreased to an underwriting loss of $105.8 million, compared to underwriting income of $32.0 million in 2003. The significant decline is primarily attributable to the $158.3 million of negative impact from the four large hurricanes that occurred during the third quarter. This impact is reflected in the following items: net losses of $143.7 million plus reinstatement premiums ceded of $14.6 million.
Our underwriting expenses consist of acquisition expenses and operational expenses. Acquisition expenses consist of costs to acquire premiums and are comprised of fees and expenses paid to: 1) program managers, who source primary insurance premiums for us through specialized programs; 2) primary insurers, with whom we write quota share reinsurance; and 3) broker commissions and excise taxes paid to brokers, who source insurance for us on a risk-by-risk basis. Acquisition expenses are driven by contract terms and are generally determined based on a set percentage of premiums. Operational expenses consist of compensation and other general and administrative expenses. Our Individual Risk business operates with a limited number of employees and, accordingly, we outsource much of the administration of our Individual Risk business to program managers and third party administrators.
During 2003, the majority of our equity in earnings of other ventures was generated from our 50% equity ownership in Top Layer Re. The increase in fee income during 2003 was primarily due to the $4.0 million annual fee we receive related to services provided to Platinum. The reduction in other items is primarily related to the derivative income we received in 2002 related to derivative instruments under which recoveries are triggered by an industry loss index or geological or physical variables, which did not repeat in 2003.
Our interest payments and preferred dividends increased during 2004, primarily as a result of the issuance of $250 million 6.08% Series C Preference Shares in March 2004. Our interest payments and preferred dividends increased during 2003, primarily as a result of the issuance of $100 million 5.875% Senior Notes and the issuance of $100 million 7.3% Series B Preference Shares. This capital was raised to support the growth in our insurance and reinsurance operations.
During 2004, our U.S. operations did not generate taxable income and, accordingly, we increased the valuation allowance on our deferred tax asset by $4.0 million so that our valuation allowance is now equal to our net deferred tax asset. During 2003 and 2002 we wrote a limited amount of business in our U.S. operations and therefore the related tax impact for 2003 and 2002 was minimal.
We currently plan to continue to increase the business written by our U.S. tax-paying insurance subsidiaries. If, as a result, our U.S. operations begin to generate taxable income, the appropriateness
The amount of the realized gains or realized losses that will be recorded in the future will be dependent upon the level of our investments, the changes in the interest rate environment and how quickly or slowly we choose to turn over our investment portfolio.
The payment of dividends by our Bermuda subsidiaries is, under certain circumstances, limited under U.S. statutory regulations and Bermuda insurance law, which require our Bermuda insurance subsidiaries to maintain certain measures of solvency and liquidity. At December 31, 2004, the statutory capital and surplus of our Bermuda insurance subsidiaries was $2.3 billion, and the amount of capital and surplus required to be maintained was $520.6 million. During 2004, Renaissance Reinsurance, DaVinci and Glencoe declared aggregate cash dividends of $234.4 million, $3.2 million and $55.0 million, respectively, compared with $322.3 million, $81.6 million and $18.0, respectively, in 2003.
Our U.S. insurance subsidiary Stonington is also required to maintain certain measures of solvency and liquidity. This is determined using risk based capital tests, which determines the threshold that constitutes the authorized control level. If Stonington's statutory capital and surplus falls below the authorized control level, the commissioner is authorized to take whatever regulatory actions are considered necessary to protect policyholders and creditors. At December 31, 2004, the statutory capital and surplus of Stonington was $57.5 million. Because of the accumulated deficit in earned surplus from prior operations, Stonington currently cannot pay an ordinary dividend.
Of the total case reserve amounts above, the amount reported by ceding insurers and insureds was $326.8 million at December 31, 2004 and $244.0 million at December 31, 2003. The remaining balance represents additional case reserve estimates established by management.
At December 31, 2004, our total gross reserves for claims and claim expenses was $1,459.4 million and our estimated IBNR reserves were $950.5 million. A 5% change in such IBNR reserves would equate to a $47.5 million adjustment to net claims and claim expenses incurred, which would represent 28.9% of our 2004 net income and 1.8% of shareholders' equity at December 31, 2004.
As discussed in the Summary of Critical Accounting Policies and Estimates, the most significant accounting judgment made by management is the estimation of the claims and claim expense reserves. Because of the variability and uncertainty associated with loss estimation, it is possible that our individual case reserves are incorrect, possibly materially.
For our Reinsurance and Individual Risk operations, our estimates of claims reserves include case reserves reported to us as well as our estimate of appropriate additional case reserves and IBNR. Our case reserves, additional case reserves, and our estimates for IBNR reserves are based on 1) claims reports from insureds and program managers, 2) our underwriters' experience in setting claims reserves; 3) the use of computer models where applicable; and 4) historical industry claims experience. For some classes of business we also use statistical and actuarial methods to estimate ultimate expected claims and claim expenses. We review our claims reserves on a regular basis. (Also see "Summary of Critical Accounting Policies and Estimates".)
During 2004, our capital resources increased primarily as a result of three items: 1) our net income available to common shareholders of $133.1 million; 2) the issuance of $250.0 million of Series C preference shares; and 3) an increase in our revolving credit facility by $100.0 million.
In March 2004, we raised $250 million through the issuance of 10 million Series C preference shares, in February 2003, we raised $100 million through the issuance of 4 million Series B preference shares, and in November 2001, we raised $150 million through the issuance of 6 million Series A preference shares. The Series C, Series B and Series A preference shares may be redeemed at $25 per share at our option on or after March 23, 2009, February 4, 2008 and November 19, 2006, respectively; however, we have no current intentions to redeem the shares. Dividends on the Series C, Series B and Series A preference shares are cumulative from the date of original issuance and are payable quarterly in arrears at 6.08%, 7.3% and 8.1%, respectively, when, if, and as declared by the Board of Directors. If RenaissanceRe submits a proposal to our shareholders concerning an amalgamation or submits any proposal that, as a result of any changes to Bermuda law, requires approval of the holders of RenaissanceRe preference shares to vote as a single class, RenaissanceRe may redeem the Series C, Series B and Series A preference shares prior to March 23, 2009, February 4, 2008 and November 19, 2006, respectively, at $26 per share. The preference shares have no stated maturity and are not convertible into any other of our securities.
Effective December 31, 2003, we adopted FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires consolidation of all Variable Interest Entities ("VIE") by the investor that will absorb a majority of the VIE's expected losses or residual returns. As further discussed in Note 8 to the Consolidated Financial Statements, the Capital Trust was determined to be a VIE under FIN 46 and the Company has been determined not to be the primary beneficiary of the Capital Trust. Accordingly, the Capital Trust has been deconsolidated effective December 31, 2003. As a result, the accounts of the Capital Trust, principally the Capital Securities previously classified as minority interest, are not included in our consolidated balance sheet at December 31, 2004 or 2003. Our $103.1 million subordinated obligation to the Capital Trust, previously eliminated in consolidation, is recorded on our consolidated balance sheet at December 31, 2004 and 2003 as a liability.
During May 2004, DaVinciRe amended and restated its credit agreement providing for a $100 million committed revolving credit facility and maintained as outstanding the full $100 million available under this facility. Neither RenaissanceRe nor Renaissance Reinsurance is a guarantor of this facility and the lenders have no recourse against us or our subsidiaries other than DaVinciRe and its subsidiary under the DaVinciRe facility. Pursuant to the terms of the $500 million facility maintained by RenaissanceRe, a default by DaVinciRe in its obligations will not result in a default under the RenaissanceRe facility. Interest rates on the facility are based on a spread above LIBOR, and averaged approximately 2.32% during 2004 (2003 - 2.09%). As amended, the credit agreement contains certain covenants requiring DaVinciRe to maintain a debt to capital ratio of not more than 30% and a minimum net worth of $250 million. At December 31, 2004 and 2003, DaVinciRe was in compliance with the covenants under this agreement. The amended and restated agreement extended the term of the facility to May 25, 2007.
Under the terms of certain reinsurance contracts, our insurance and reinsurance subsidiaries and joint ventures may be required to provide letters of credit to reinsureds in respect of reported claims and/or unearned premiums. Our principal letter of credit facility is a syndicated secured facility which accepts as collateral shares issued by our subsidiary RIHL. Our participating operating subsidiaries and our managed joint ventures have pledged (and must maintain) RIHL shares issued to them with a sufficient collateral value to support their respective obligations under the facility, including reimbursement obligations for outstanding letters of credit. The participating subsidiaries and joint ventures also have the option to post alternative forms of collateral. In addition, for liquidity purposes, in order to be permitted to pledge RIHL shares as collateral, each participating subsidiary and joint venture must maintain additional unpledged RIHL shares that have a net asset value at least equal to 15% of its facility usage, and RIHL shares having an aggregate net asset value equal to at least 15% of the net asset value of all outstanding RIHL shares must remain unencumbered. In the case of a default under the facility, or in other circumstances in which the rights of our lenders to
collect on their collateral may be impaired, the lenders may exercise certain remedies under the facility agreement, in accordance with and subject to its terms, including redemption of pledged shares and conversion of the collateral into cash or eligible marketable securities. The redemption of shares by the collateral agent takes priority over any pending redemption of unpledged shares by us or other holders. Between January 2004 and November 2004, this facility was increased to $1.0 billion from $385 million, and as of January 18, 2005, the facility was reduced to $850 million. In November 2004, the term of this facility was extended through April 30, 2005 and in March 2005, the reimbursement agreement was amended to conform certain default provisions of the agreement to comparable provisions in existing credit agreements of the Company and DaVinciRe. Subject to certain conditions, the size of the facility may be increased to $1.3 billion. At December 31, 2004, we had outstanding letters of credit under the facility aggregating $548.4 million.
In August 2004, the Company's shareholders approved the RenaissanceRe Holdings Ltd. 2004 Stock Option Incentive Plan (the "Premium Option Plan") under which 6,000,000 common shares were reserved for issuance upon the exercise of options granted under the Premium Option Plan. As described in the Company's Proxy Statement relating to the required shareholder vote, filed with the SEC in July 2004, the Premium Option Plan provides for, among other things, mandatory premium pricing such that options can generally only be issued thereunder with a strike price at a minimum of 150% of the fair market value on the date of grant, minimum 4-year cliff vesting, and no discretionary repricing. The Premium Option Plan includes a dividend protection feature that reduces the strike price for extraordinary dividends and a change in control feature that reduces the strike price based on a pre-established formula in the event of change in control. Grantees under the Premium Option Plan must satisfy performance criteria which is determined by the Company's Compensation Committee. As at December 31, 2004, 3,956,000 options were outstanding under the Premium Option Plan with an exercise price of $74.24 per share, and 1,250,000 options were outstanding with an exercise price of $98.98 per share.
The equity investments in reinsurance company relate to our November 1, 2002 purchase of 3,960,000 common shares of Platinum in a private placement transaction. In addition, we received a ten-year warrant to purchase up to 2.5 million additional common shares of Platinum for $27.00 per share. We purchased the common shares and warrant for an aggregate price of $84.2 million. At December 31, 2004, we owned (exclusive of the warrant) 9.2% of Platinum's outstanding common shares. We have recorded our investment in Platinum at fair value, and at December 31, 2004 the aggregate fair value was $150.5 million (2003 - $145.5 million). The fair value of the common shares is based on the market price of Platinum's shares as of the balance sheet date. The fair value of the warrant is estimated by the Company using the Black-Scholes option pricing model. The aggregate unrealized gain on the Platinum common shares of $38.9 million (2003 - $34.6 million) is included in accumulated other comprehensive income. During the fourth quarter of 2004, a lockup provision on the warrant expired and as a result the warrant met the definition of a derivative under FAS 133 and therefore changes in the fair value of the warrant were recorded prospectively in other income from November, 2004. At December 31, 2004, $27.4 million was recorded in other income representing the unrealized gain on the warrant. This includes a $23.8 million one-time reclassification from other comprehensive income to other income which occurred during the fourth quarter of 2004 with the $3.6 million remainder being the increase in fair value from November 2004. At December 31, 2003, the aggregate unrealized gain on the Platinum warrant was $26.7 million which was included in other comprehensive income.
The hedge funds are engaged in various investment strategies, including event driven, diversified arbitrage, distressed, US long/short, global long/short and sector long/short with original capital contributed by us, generally in the range of $5 million to $15 million per fund, although we have committed to invest up to $60 million in one hedge fund. The loan fund primarily invests in senior secured floating rate loans. The European high yield credit fund is denominated in Euros and primarily invests in unlisted and listed fixed and floating rate debt securities issued by entities that are domiciled in or have a substantial portion of their total assets or operations in a European country. The private equity partnerships are primarily engaged in U.S. private equity, real estate, distressed securities and secondary investment strategies with initial capital commitments ranging from $1.5 million to $15 million, although we have committed to invest up to $30 million in one partnership. The medium term note was issued by an investment company which invests predominantly in investment-grade European fixed income securities and passes through a variable U.S. dollar return on the note based on the performance of the underlying securities. The non-U.S. convertible fund is denominated in Euros and primarily invests in unlisted and listed non-U.S. convertible securities.
Included in miscellaneous other investments are catastrophe bonds, that generally include variable rate notes where the return is contingent upon climatical or geological events.
At December 31, 2004, we have not entered into any off-balance sheet arrangements, as defined by ITEM 303 (a)(4) of Regulation S-K.
On December 16, 2004, the FASB issued revised FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("FAS 123(R)"). FAS 123(R) replaces FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("FAS 123") and supersedes APB opinion No.25 "Accounting for Stock Issued to Employees". The statement requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees and is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. 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 estimate that the additional compensation expense related to unvested grants that were issued prior to January 1, 2003 will not be material 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 FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("FAS 148"). In accordance with the transitional disclosure provisions of FAS 148, the following table sets out the effect on the Company's net income and earnings per share for all reported periods had the compensation cost been calculated based upon the fair value method recommended in FAS 123:
Since 2001, there has been an increase in the number of traditional reinsurance companies dedicating capital to the property catastrophe reinsurance market. This increase, combined with more recent capital additions from newer, non-traditional market participants, has resulted in an excess of supply over demand in certain sectors of the market and, correspondingly, has caused deterioration in pricing and in terms and conditions. Therefore, we expect that a growing number of transactions will not meet our hurdle rates and we estimate that our property catastrophe reinsurance premium will decline during 2005. We also note that during 2004, we recorded $30.1 million of reinstatement premiums and $27.4 million of premiums on back-up covers related to the third quarter Florida hurricanes. If there is an absence of similar catastrophic events during 2005, we anticipate that such premiums will not recur and, therefore, the decline in property catastrophe reinsurance premiums in 2005 will be more pronounced.
We are currently seeing some softening in the specialty reinsurance market; however, due to the strength of our organization and our relationships with both our brokers and our customers, we believe there are still adequate opportunities for us to grow this line of business modestly during 2005. Our premiums from this line of business are attributable to a relatively small number of large deals and the amount of the premiums can fluctuate significantly between quarters and between years depending upon the number of, and nature of, the transactions that we complete.
During 2005, we expect to see continued softening in the commercial property markets. We also expect additional program manager relationships to come on line during 2005. Based upon this, we expect our premiums from our Individual Risk segment to grow significantly in 2005.
We believe that the current market environment may create more opportunities for the creation of joint ventures and strategic investments. We have established RenaissanceRe Ventures Ltd. to facilitate strategic investments. In evaluating joint ventures and strategic investments, we may consider opportunities in other areas of the insurance and reinsurance markets, or in other financial markets, either through organic growth, the formation of new joint ventures, or the acquisition of other companies or books of business of other companies. We are currently in the process of reviewing
(3) We caution the reader that the information provided above related to estimated future payment dates of our reserves for claims and claim expenses is not prepared or utilized for internal purposes and that we currently do not estimate the future payment dates of claims and claim expenses. Because of the nature of the coverages that we provide, the amount and timing of the cash flows associated with our policy liabilities will fluctuate, perhaps significantly, and therefore are highly uncertain. In order to estimate the payment dates of our contractual obligations for our reserve for claims and claim expense, we have utilized the work of an outside consulting actuarial firm.