Index to Financial Statements Total premiums and policy charges increased $76.3 million, or 14% in 2005 and $36.1 million, or 7%, in 2004. For 2005, AVIC contributed $20.8 million and Virginia Mutual contributed $21.8 million, for a combined amount of $42.6 million of the increase. The persistency ratio for life business was 91.2% at December 31, 2005 and 2004. Persistency, a non-GAAP financial measure, represents the ratio of the annualized premium of policies inforce at December 31, 2005 and 2004 as a percentage of the annualized premium paid at December 31, 2005 and 2004, respectively.
Index to Financial Statements Net income improved 10.4% on a per diluted share basis in 2005 compared to 2004 and increased 13.8% on a similar basis in 2004 compared to 2003.
Property Casualty Products: Acquisition costs for property casualty insurance are amortized over the period in which the related premiums are earned. Investment income is considered, if necessary, in the determination of the recoverability of deferred policy acquisition costs. During 2005, the property casualty insurance segment deferred $109,342,742 and recorded amortization expense of $100,652,027 related to acquisition costs, leaving a balance of $33,933,193 in the property casualty segment at December 31, 2005. Due to the elimination of intercompany profits, property casualty deferrals were reduced by $1,992,848 and amortization expense was reduced by $1,205,665 within the corporate and eliminations segment.
The Mutual Group is a direct writer primarily of personal lines property casualty insurance in Alabama. The Company’s subsidiaries similarly are direct writers in: Georgia, Mississippi, Missouri, Indiana, Ohio, Virginia, Tennessee, Arkansas, Kentucky, and Florida; and assume business from Texas. Specialty is a direct writer in Alabama, Georgia, Mississippi, and Virginia. Virginia Mutual is a direct writer in Virginia and North Carolina.
The Company’s property casualty subsidiaries have agreed to guarantee payment on debt owed by three real estate partnerships affiliated with Fire. These guarantees expire between 2006 and 2035 and, in the unlikely circumstance of a guarantee call, could negatively impact the Company by up to $2.2 million (refer to Note 9-Commitments and Contingencies).
securities for impairment each quarter and considers its intent and ability to hold any debt securities in a loss position until the fair value recovers. Information used in the assessment for impairment includes industry analyst reports, credit ratings, and the volatility of the security’s market price.
The Company’s collateral loan portfolio totaled approximately $124.7 million and $110.8 million at December 31, 2005 and 2004, respectively. These portfolios consisted of mortgage and consumer loans in the Company’s primary market area of Alabama, Georgia and Mississippi. Management evaluates the creditworthiness of customers on a case-by-case basis and obtains collateral as deemed necessary based on this evaluation. The Company had charged off loans totaling $422,288, $432,099 and $364,317 in 2005, 2004 and 2003, respectively. At December 31, 2005 and 2004, respectively, the Company maintained an allowance for losses of $1,406,871 and $1,244,280. The Company has estimated the fair value of the collateral loan portfolio to be approximately $130.3 million and $113.9 million at December 31, 2005 and 2004, respectively. The estimated fair value was determined by discounting the estimated future cash flows from the loan portfolio at 5.89% for 2005 and 5.74% for 2004, the current interest rates offered for similar loans, and after allowing for estimated loan losses. The Company had impaired loans of $633,532 and $35,079 subject to individual valuation at December 31, 2005 and 2004, respectively. Loans in nonaccrual status at December 31, 2005 and 2004 were $441,215 and $354,196 respectively. Repossessed assets, net of allowance for losses on disposal, included in other assets were $75,757 and $59,434 at December 31, 2005 and 2004, respectively.
The Company uses variable-rate debt to partially fund its consumer loan and commercial lease portfolios. In particular, it has issued variable-rate long-term debt and commercial paper. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases. Short-term debt was $234.7 million and $220.2 million at December 31, 2005 and 2004, respectively, and long-term debt was $70 million at both December 31, 2005 and 2004.
In addition, one purported class action lawsuit is pending against both Alfa Builders, Inc. and Fire. Additionally, three purported class action lawsuits are pending against the property casualty companies involving a number of issues and allegations which could affect the Company because of a pooling agreement between the companies. No class has been certified in any of these four purported class action cases. In the event a class is certified in any of these purported class actions, reserves may need to be adjusted.
Certain commercial commitments in the table above include items that may, in the future, require recognition within the financial statements of the Company. Events leading to the call of a guarantee, the failure of the policy administration system being developed for use by the life insurance operations to perform properly and achievement of specific metrics by Vision are examples of situations that would impact the financial position and results of the Company
Alfa Corporation paid $31,054,206 in dividends to stockholders in 2005. ABC paid dividends of $54,000 in 2005 on preferred stock. Their minority interest of $600,000 is classified as other liabilities in the consolidated balance sheet.
The amounts of statutory net income and stockholders’ equity for the Company’s life and property casualty insurance subsidiaries are as follows:
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; therefore, allowances are established if amounts are believed to be uncollectible. At December 31, 2005 and 2004, there were no amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurance to minimize exposure to significant losses from reinsurer insolvencies. At December 31, 2005, the Company does not believe there to be a significant concentration of credit risk related to its reinsurance program.
Nonvested restricted shares are measured at fair value on the date of grant. Compensation cost for restricted share awards with cliff vesting is recognized using the straight-line method over the three-year vesting period. Total compensation cost related to nonvested shares was $282,812 in 2005. Based on the Management and Operating Agreement (Refer to Note 3-Related Party Transactions), the Company’s share of compensation cost related to restricted shares was $181,275 in 2005.
The Company views this acquisition as an opportunity to expand its personal lines business in new markets through Vision’s independent agent force. An insurance subsidiary, AVIC, was formed through which Vision will write its nonstandard automobile business. Vision operates in Texas, Missouri, Indiana, Ohio, Virginia, Tennessee, Arkansas, Kentucky, and Florida.