Reinsurance Recoverables. Reinsurance recoverables on paid and unpaid losses, net, are established for the portion of our loss and loss expense reserves that are ceded to reinsurers. Reinsurance recoverables are determined based in part on the terms and conditions of reinsurance contracts which could be subject to interpretations that differ from our own based on judicial theories of liability. In addition, we bear credit risk with respect to our reinsurers that can be significant considering that certain of the reserves remain outstanding for an extended period of time. We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. See “Business - Reinsurance” and Note 4 to our audited consolidated financial statements, both included in this report.
lines of business of $20.9 million or 17.0%. Our property lines of business increased slightly to $68.2 million in 2005 compared to $67.5 million in 2004. For casualty business, rates increased slightly during 2005.
Our reinsurance program significantly influences our net retained losses. In exchange for premiums ceded to reinsurers under quota share and excess of loss reinsurance agreements, our reinsurers assume a portion of the losses and loss expenses incurred. See “Business - Reinsurance.” We remain obligated for amounts ceded in the event that the reinsurers do not meet their obligations under the agreements (due to, for example, disputes with the reinsurer or the reinsurer’s insolvency).
We began writing commercial automobile/trucking coverage for commercial vehicles and trucks in 1997. In 2000, we exited the commercial automobile line of business due to unsatisfactory underwriting results. Our net loss and loss expense reserves for commercial automobile as of December 31, 2006 and 2005 were $147,000 and $936,000, respectively.
Year ended December 31, 2006 compared to Year ended December 31, 2005.
Consolidated net cash used by investing activities was $63.9 million for the year ended December 31, 2006, compared to $64.6 million for the year ended December 31, 2005. This decrease is a result of a larger amount of cash at the end of 2006 that had not yet been invested.
Line of Credit. During the third quarter of 2006, ProCentury amended its line of credit agreement. The amended agreement provides for a $10.0 million line of credit with a maturity date of September 30, 2009, and interest only payments due quarterly based on LIBOR plus 1.2% of the outstanding balance. All of the outstanding shares of Century are pledged as collateral. In both June and July 2006, we made a $500,000 draw on the line of credit for general corporate purposes. A payment of approximately $1.0 million was paid on the line of credit in August 2006, including $1.0 million of principal and approximately $6,000 of interest. At December 31, 2006 there is $4.0 million outstanding under the line of credit.
Amortization of deferred policy acquisition cost for the year ended December 31, 2004 includes a reduction of amortization expense of $2.5 million relating to the transfer of capitalized acquisition costs from Evergreen and Continental for the property and casualty segment, which was partially offset by $1.9 million of capitalized acquisition costs for the surety business that was transferred from Century to Evergreen and Continental. These transactions occurred in conjunction with the termination of the intercompany pooling agreement and the implementation of the loss portfolio agreements.
The income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% in 2006, 2005 and 2004 to income before income taxes as a result of the following:
In 2004, ProCentury paid approximately $484,000 in fees relating to various consulting agreements with certain shareholders of ProCentury that were all terminated on December 31, 2003, including the following significant agreements:
The Company does not expect such regulatory requirements to impair its ability to pay operating expenses and interest and principal during 2006.