These benefit types account for approximately 79% of our total losses and LAE reserves. The payment patterns are reviewed each year based on the observed recent and long-term patterns in our own historical data, recent and long-term patterns in industry data, and analyses of potential changes in patterns resulting from major legislative benefit changes. The changes in the payment patterns for Nevada are the result of these regular reviews of our historical data and updating of the actuarial judgments involved in selecting expected payment patterns. For 2004 and 2005 a range is shown for medical because multiple methods were used to select medical payment patterns in Nevada. The changes in the payment patterns used in states other than Nevada were significantly influenced by analysis of the anticipated effects of the 2003 California legislation relating to workers’ compensation benefits, as well as observations of our early experience as it emerged of claims experience subsequent to the enactment of that legislation. At each reserve evaluation, as more claims experience has emerged subsequent to that legislation, the post-legislative claims experience has been given increasing judgmental weight in the actuarial selection of expected future payment patterns. The actual payout pattern for the aggregate claims associated with an accident year will not be known until decades later, when all the claims are closed.
Realized Gains (Losses) on Investments. Realized gains (losses) on investments decreased $1.3 million, or 107.9%, to $(0.1) million in 2005 from $1.2 million in 2004. Our investment activity was driven by the continued long term effort to increase after-tax income and resulted in the sale of corporate and mortgage bonds as well as equity securities. The resulting transactions generated nominal net realized losses which were offset by the overall yield increase.
(a) Any adjustment to the estimated direct reserves ceded under the LPT Agreement is reflected in losses and LAE for the period during which the adjustment is determined, with a corresponding increase or decrease in net income in the period.
Net Investment Income. Net investment income increased $15.9 million, or 60.5%, to $42.2 million in 2004 from $26.3 million in 2003. This increase was primarily due to an increase in invested assets of $93.2 million in 2004 as compared to 2003 and an increase in yield on invested assets of approximately 1.40 percentage points, to 4.48%, in 2004 from 3.08% in 2003. Invested assets increased in the year ended December 31, 2004 principally as a result of favorable net cash flows and an increase in the fair market value of equity securities. For the years ended December 31, 2005, 2004 and 2003, the fair value of equity securities increased by $10.6, $23.9 and $52.8 million, respectively.
insurance companies are domiciled. As of December 31, 2006, our combined investment portfolio, excluding cash and cash equivalents, totaled $1.72 billion, an increase of 7.5% from December 31, 2005. As of December 31, 2006, our combined portfolio consisted principally of fixed maturity securities. Our fixed maturity securities portfolio is heavily weighted toward short-term to intermediate-term, investment grade securities rated ‘‘A’’ or better.
The composition of our investment portfolio, excluding cash and cash equivalents, as of December 31, 2006 is shown in the following table:
We regularly assess individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary declines in fair values. This process includes reviewing the amount and length of time of unrealized losses on investments, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives. For the twelve months ended December 31, 2006, we recognized an impairment of $0.6 million in the fair values of six of the equity holdings in our investment portfolio as a result of the severity and duration of the decline in market value of these securities. We believe that we have appropriately identified other-than-temporary declines in the fair values of our remaining unrealized losses at December 31, 2006. We have the ability and intent to hold fixed maturity securities with unrealized losses for a sufficient amount of time for them to recover their values or reach maturity.
Effective February 5, 2007, EMHC converted from a mutual holding company to a Nevada stock company and completed its initial public offering (IPO) of its common stock. All policyholder membership interests in EMHC were extinguished on that date and EMHC’s name changed to Employers Holdings, Inc. (see Note 13 -Subsequent Events for a description of the conversion and concurrent IPO).
Cash equivalents include investments in commercial paper of companies with high credit ratings, investments in money market securities and securities backed by the U.S. government. Investments are diversified throughout many industries and geographic regions. The Company limits the amount of credit exposure with any one financial institution and believes that no significant concentration of credit risk
The above table excludes the impact of the amortization of the deferred reinsurance gain-LPT Agreement and the reduction of the ceded reserves on the LPT Agreement (see Note 7), which are reflected in losses and LAE incurred in the consolidated statements of income.
Net income for the Company’s insurance subsidiaries prepared in accordance with SAP for the years ended December 31, 2006, 2005 and 2004 was $164.3 million, $96.9 million and $69.4 million, respectively.
In addition, effective February 5, 2007, the Company completed its IPO in which the Company issued 30,762,500 common shares at a price of $17.00 per share. The cash proceeds of the IPO after underwriting discount and commission of $34.0 million and estimated offering and conversion expenses of $16.6 million were $472.4 million, of which $9.4 million was retained by Employers Holdings, Inc. and may be used for working capital, payment of future dividends on common stock, repurchase shares of common stock and other general corporate purposes.
Estimated costs related to the IPO are $5.6 million of which $3.9 million have been capitalized as of December 31, 2006 and are included in other assets in the accompanying consolidated balance sheets. Estimated costs related to the conversion are $11.0 million of which $10.0 million have been incurred through December 31, 2006. Conversion expenses consisted primarily of printing and mailing costs and the aggregate cost of engaging independent accounting, actuarial, financial, investment banking, legal and other consultants to advise the Company on its conversion. These costs were expensed as incurred and are included in the underwriting and other operating expense in the accompanying statements of income.