Applying these loss and loss expense ratios to our earned premium derives the estimated baseline ultimate costs of the losses from which we deduct paid losses and reported case reserves to generate our baseline IBNR. The actuarial methodologies used to derive our baseline estimate can not fully allow for all uncertainties within our business. To account for some of these uncertainties, our
Acquisition Costs. Acquisition costs for the year ended December 31, 2004 were $125.0 million compared to $99.5 million for the year ended December 31, 2003, an increase of $25.5 million. The acquisition cost ratio for the year ended December 31, 2004 was 15.7% compared with 13.0% for the year ended December 31, 2003. The increase in the acquisition cost ratio was partially caused by higher amortized reinsurance costs, which reduced the level of net premiums earned. As a percentage of gross premiums earned, the level of acquisition costs was 13.7% for the year ended December 31, 2004 compared to 12.0% for the year ended December 31, 2003. The increase of 1.7 percentage points in the level of the gross acquisition ratio was primarily due to additional commissions.
Other Insurance Related Income. Other insurance related income of $0.6 million related to the movement in the fair value of a reinsurance contract that met the definition of a derivative. We did not record any other insurance related income in the year ended December 31, 2002.
Premiums. In the year ended December 31, 2004, gross premiums written were $824.2 million compared to $625.9 million for the year ended December 31, 2003, an increase of $198.3 million. The table below shows gross premiums written by line of business:
Gross premiums are earned over the period of the insured risk. Consequently, the level of gross premiums earned increased as the level of gross premiums written increased. We expect the level of gross premiums earned to continue to increase in 2005.
The Company routinely assesses whether declines in fair value of its investments represent impairments that are other than temporary. There are several factors that are considered in the assessment of a security, which include (i) the time period during which there has been a significant decline below cost, (ii) the extent of the decline below cost, (iii) the Company's intent and ability to hold the security, (iv) the potential for the security to recover in value, (v) an analysis of the financial
The Company's global reinsurance segment principally consists of treaty reinsurance business sourced outside of the U.S. and underwritten in our Bermuda and Zurich offices. The Company's Bermuda office primarily sources business from clients based outside of continental Europe, whereas the Zurich office sources business from clients based in continental Europe. The Company's Bermuda based portfolio consists of short tail severity-driven products that principally cover property exposures. The Zurich based portfolio consists notably of short tail property exposures but also more medium tail exposures such as motor excess of loss and trade credit lines of business. As the majority of this segment's business is short tail in nature, it typically allows the Company to determine the ultimate loss experience within a relatively short period of time after a contract has expired.
The following table shows an analysis of the Company's gross premiums written by domicile of subsidiary for the years ended December 31, 2004, 2003 and 2002:
During the first half of 2002, the Company utilized other investment derivatives as was permitted by its guidelines in effect at that time. During the year ended December 31, 2002, the Company recorded $2.3 million of realized and unrealized gains on other investment derivatives.
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of investments and reinsurance recoverable balances. The investment portfolio is managed by external advisors in accordance with prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuers. The Company did not have an aggregate exposure in a single entity, other than in U.S. Government and U.S. Government agency securities, of more than 2% of shareholders' equity at December 31, 2004. Concentration of credit risk with respect to reinsurance recoverable balances is limited due to the number of reinsureds used on the Company's reinsurance programmes. As at December 31, 2004, five reinsurers accounted for 46.3% of reinsurance balances recoverable. Of this percentage, 19.4 percentage points are with reinsurers rated A+ by AM Best, 16.1 percentage points are with reinsurers rated A by AM Best and 0.3 percentage points are with reinsurers rated A- by AM Best.
AXIS Specialty entered into an agreement in November 2001 with The Putnam Advisory Company, L.L.C. ("Putnam") under which Putnam was appointed as an investment manager of part of the Company's investment portfolio. This agreement was entered into on an arms length basis on terms generally available in the market. During the year ended December 31, 2004, AXIS Specialty incurred $716 (2003: $704; 2002: $671) of fees pursuant to this agreement of which $248 (2003: $176) was included in accounts payable and accrued expenses.