Ocean marine gross premiums written grew by 11% during 2004 when compared to the prior year. The 2004 year premiums reflected an increase in cargo premium production as a result of our agreement with Southern Marine & Aviation, a leading provider of insurance for bulk petroleum cargo shipments, which commenced underwriting for the Company in the fourth quarter of 2003. Gross premiums in 2004 also reflected a leveling to slight decline in premium rates across all classes with the largest rate decreases occurring in the drill rig class. The leveling of premium rates followed a few years of rate increases. Net premiums written increased by 22% in 2004 when compared to 2003 reflecting increased gross premiums as well as higher net retentions per loss. The Company’s net loss retention increased to a maximum of $4 million for any one risk or any one occurrence effective on policies written during 2004 compared with $2 million for any one risk or any one occurrence effective on policies written during 2003. Partially offsetting the reduction in ceded written premiums in 2004 were $1.6 million in reinsurance reinstatement costs incurred as a result of the Hurricane Ivan catastrophe loss. There were no reinsurance reinstatement costs incurred on catastrophe losses in 2003. Net premiums earned grew by 4% in 2004 when compared to 2003 reflecting growth in premium production partially offset by reinsurance reinstatement costs.
Net losses and loss adjustment expenses incurred as a percentage of net premiums earned (the loss ratio) for the year ended December 31, 2004 was 57.2% compared to 57.8% for the year ended December 31, 2003. The Company recorded lower loss ratios in 2004 primarily due to a reduction in net loss reserves in the aircraft line of business of $8.3 million, or 7.1% of the loss ratio, relating to the events occurring on September 11, 2001. Offsetting this benefit were net catastrophe losses in the ocean marine line in 2004 arising from Hurricane Ivan that increased losses incurred by $2.8 million and reduced net premiums earned by $1.6 million due to reinsurance reinstatement costs. There were no catastrophe losses reported in 2003. A few large current accident year losses occurring in the ocean marine line of business also contributed to a higher loss ratio in the ocean marine line in 2004. The inland marine/fire loss ratios for 2004 were lower than 2003, reflecting a lower frequency of claims and favorable loss development. The other liability loss ratio also improved in 2004 when compared to the loss ratio in 2003 primarily due to the growth in professional liability writings and excess liability lines of business, which largely reflected the beneficial impact of firmer rates in those classes of business.
Policy acquisition costs as a percentage of net premiums earned (the acquisition cost ratio) for the year ended December 31, 2004 were 21.6% as compared with 20.2% for the year ended December 31, 2003. The acquisition cost ratio for 2004 reflected an increase in the ocean marine ratio as a result of higher acquisition costs associated with new sources of cargo premium production and an increase in the other liability class reflecting higher acquisition costs relating to increases in the professional liability class of business. In addition, premiums earned in 2003 reflected larger amounts of aircraft premiums, which generally have a lower acquisition cost ratio than other lines of business.
Interest expense was $5.4 million for the year ended December 31, 2004 compared to $26,000 for 2003 as a result of interest expense arising from the Company’s issuance of $100 million of 6.5% Senior Notes on March 11, 2004.
The consolidated financial statements required by this item and the report of the independent accountants therein required by Item 15(a) of this report commence on page. See accompanying Index to the Consolidated Financial Statements on page.