At December 31, 2005, the IBNR component of total reserves increased over the prior year, primarily due to an expected shift in the portion of total claim costs attributable to LAE, such as legal defense and related costs. This change is mostly due to the stricter claims philosophy we adopted in 2001, which focuses on aggressively defending non-meritorious claims in order to lower overall claims costs. While we believe this approach has been beneficial to our results in total, it has increased our estimates for LAE costs as an individual component. Establishing case reserves for LAE is inherently difficult since the level of costs ultimately necessary to resolve a case tend to increase over time and can vary significantly based on things such as if and when a case is taken to trial. Therefore, a substantial portion of total LAE reserves is reflected in our estimates for case reserve development. Additionally, our stricter claims philosophy has resulted in a relatively lower number of cases with an indemnity case reserve. These two factors together are the primary reasons for the increase in IBNR as a component of total reserves during 2005.
These factors, in turn, can be affected by external events, including the judicial environment and tort-related trends over time. For example, the removal or significant weakening of one or more of the tort reforms passed in our largest market, Florida, could result in an unexpected increase in claim frequency and/or severity. In addition, these factors may also be impacted by internal events, such as changes in our business mix or claims handling philosophy. Determining whether such events are reasonably likely to occur and attempting to quantify the impact of an individual event are inherently difficult. We utilize our experience and judgment and consider these factors as well as historical experience and the results of applied actuarial techniques when evaluating the adequacy of carried loss and LAE reserves. All of the above-mentioned factors individually can and will generally vary from one period to the next over time but are estimated to approximate their ultimate values in setting reserve estimates.
Insurance net income increased 55% to $25.2 million for the year ended December 31, 2005 from $16.3 million for the year ended December 31, 2004. The increase in net income was primarily due to increases in underwriting and operating profits on higher net premiums earned and higher net investment income. The improvement in our net losses and LAE incurred relative to net premiums earned is primarily the result of rate increases and other improvement in our underwriting results. The increases in underwriting profit were partially offset by higher other underwriting expenses due mainly to a reduction in ceding commissions earned and to a lesser extent, lower fees, net of related expenses, under former fronting programs. The decrease in ceding commissions resulted primarily from the elimination of further cessions under the Hannover Re net account quota share reinsurance agreement effective June 30, 2004. Partially offsetting the increases in net income were net realized investment losses in the current year, compared with net realized investment gains for 2004, and higher interest expense on debt.
Other underwriting expenses increased 191% to $36.4 million for the year ended December 31, 2005 from $12.5 million for the year ended December 31, 2004. The increase in other underwriting expenses is primarily the result of a decrease in ceding commissions resulting from the termination of the Hannover Re net account quota share reinsurance agreement. In addition, the exit of our fronting programs has resulted in lower fronting fees, net of related expenses, resulting in a corresponding increase in other underwriting expenses. Other underwriting expenses include a reduction of $1.7 million, which represents the proceeds from the settlement of litigation.
Direct and assumed premiums written decreased 8% to $312.7 million for the year ended December 31, 2004 from $340.7 million for the year ended December 31, 2003. The decrease in direct and assumed premiums written is primarily attributable to our planned exits from fronting programs and non-core states. We began exiting our fronting programs in 2002 to free up capacity for our core MPL insurance business and all of our previous programs are now in run-off. Also contributing to the decrease was the non-renewal of the excess of loss reinsurance treaty under which First Professionals assumed reinsurance from PRI. Direct premiums written for the year ended December 31, 2004 excluding premiums under fronting programs increased 2% to $273.3 million for the year ended December 31, 2004 from $268.5 million for the year ended December 31, 2003. The increase in direct premiums written excluding premiums under fronting programs reflects a combination of factors including increased insurance rates offset by an overall shift in the mix of policies written and renewed, primarily by First Professionals, towards lower limits of coverage. The total number of MPL insurance policyholders increased 1% to 14,158 at December 31, 2004 from 14,014 at December 31, 2003. The 1% net increase in the number of policyholders was comprised of an increase in policyholders in Florida of 1,287, or 13%, offset by reductions in policyholders at Intermed and in non-core states totaling 1,143 during 2004.
We do not own the Reciprocals; rather, they are owned by and operated for the benefit of their policyholders. Pursuant to our management agreements with the Reciprocals, we receive fees and certain expense reimbursements, but we do not bear the associated insurance underwriting risks. Additional information about our management agreement and relationship with the Reciprocals can be found in Item 1. Business and Item 1A. Risk Factors.
Insurance management fees increased 47% to $39.1 million for the year ended December 31, 2004 from $26.6 million for the year ended December 31, 2003. The increase in claims administration and management fees is due to a corresponding increase in direct written premiums by PRI. Two new institutional clients have added approximately $56 million to PRI’s 2004 annual written premiums. The addition of these new accounts had the effect of increasing AFP’s management fee revenue by $7.3 million for the year ended December 31, 2004. Subsequent to entering into the agreement with PRI, certain physicians of one of the institutional clients decided to self insure. The effect of these cancellations is reflected in the fourth quarter of 2004. Also, PRM commenced operations effective July 1, 2004 and had management fee revenues of $0.9 million for the year ended December 31, 2004.
As of December 31, 2005, we had cash and investments of $773.8 million. Included within cash and investments were cash and cash equivalents of $102.7 million and short-term investments and fixed maturity securities, available for sale, with a fair value of approximately $46.6 million and $47.4 million, respectively, that have scheduled maturities during the next twelve months. We believe that our cash and investments as of December 31, 2005, combined with expected cash flows from operating activities and the scheduled maturities of investments, will be sufficient to meet our cash needs for operating purposes for at least the next twelve months.
Interest on long-term debt is calculated using interest rates in effect at December 31, 2005 for variable rate debt.