insurance losses and loss adjustment expenses (which we sometimes refer to in this report as LAE) including estimates for losses incurred during the period and changes in estimates from prior periods related to direct and assumed non-standard personal automobile and term life insurance policies (which we refer to in this report as gross insurance losses and loss adjustment expenses), less the portion of those insurance losses and loss adjustment expenses that are ceded to other insurers (which we refer to in this report as ceded insurance losses and loss adjustment expenses) (we refer to the difference as net insurance losses and loss adjustment expenses); and
Alternative Distribution Channels. While we believe that the majority of our customers prefer to conduct business through our neighborhood sales offices, we also believe that a portion of the non-standard market has the ability and desire to conduct business over the phone or through the Internet. We commenced issuing policies over the telephone in Tennessee during the fourth quarter and we expect to have this distribution channel available in all of our states by the end of June 2006.
We have been testing sales over the Internet for the past two years in Florida through an independent agency, which produced $4.5 million in gross written premiums for us in 2005. We plan to make this channel available in the majority of our other states through both this independent agency’s website and our own website.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003. For the year ended December 31, 2004, insurance losses and loss adjustment expenses increased to $282.0 million from $168.2 million in 2003, an increase of $113.8 million, which is generally consistent with the overall premium growth and increase in net business we retained. Our net loss ratio was 75.7% in 2004 compared to 73.6% in 2003, an increase of 2.1 points. Approximately 1.7 points of the increase in the current year loss ratio was attributable to adverse development in the prior year’s loss reserve estimates. Additionally, catastrophic losses in 2004 increased our annual loss ratios by approximately 0.7 points, after taking into account a series of four hurricanes striking Florida and other southeastern states in August and September, as compared to an increase of 0.6 points in 2003.
All of the debt securities in our portfolio were rated investment grade by the NAIC and S&P as of December 31, 2005. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated or are rated non-investment grade. The quality distribution of our investment portfolio as of December 31, 2005 was as follows:
Capital Stock, the Company has historically and plans to continue to use stock options as a component of its overall compensation to employees. Accordingly, effective January 1, 2006, the Company will be required to expense the cost resulting from all share-based payment arrangements in its financial statements. The Company plans to adopt this statement using the modified prospective application, which is expected to result in annual reduction to net income of approximately $868,000 based on the number of options outstanding as of December 31, 2005.