The amount of capital that was raised by existing companies and new companies coupled with the increasing presence of hedge funds no doubt tempered the improvements in the global marketplace. At January 1, 2006, the only significant improvements in pricing, terms and conditions tended to be in United States peak zone catastrophe exposures. Furthermore, the penalties imposed by rating agencies on monoline companies may eventually lead to increased competition on casualty business as insurers and reinsurers look for greater portfolio diversification. The ultimate impact on the market of these events, however, remains uncertain.
In both 2005 and 2004, as compared to their respective immediately prior year, the impact of the strengthening of certain foreign currencies in which TRH does business compared to the U.S. dollar had the effect of increasing net premiums written. The following table summarizes the effect of foreign currency exchange rates on the percentage change in net premiums written in 2005 and 2004 compared to its respective immediately prior year.
The effective tax rates, which represent the sum of current and deferred income taxes (benefits) divided by (loss) income before income taxes, were 182.2% in 2005, 7.8% in 2004 and 21.5% in 2003. With respect to the effective tax rate in 2005 as compared to the prior years, the major adjustments reconciling the expected tax expense to actual tax expense in each of the three years under discussion (as detailed in Note 4 of Notes to Consolidated Financial Statements) are similar in terms of their nature and relative size, except that the adjustment for tax-exempt interest has increased as the size of the tax-exempt fixed maturity portfolio has grown in 2005 and 2004 over the respective immediately prior year. It is important to note that while the actual tax benefit derived from tax exempt interest income and the dividends received deduction in 2005 increased marginally over 2004, the percentage impact in the effective tax rate calculation from such items increased significantly. The greater impact is caused by the fact that (loss) income before income taxes (i.e., denominator in the effective tax rate calculation) is a lower absolute value in 2005 compared to 2004 and 2003, due largely to the greater amount of catastrophe costs in 2005 compared to 2004 and 2003.
Risk-based capital (RBC) standards, promulgated by the National Association of Insurance Commissioners (NAIC), relate an individual company's statutory policyholders' surplus to the risk inherent in its overall operations and set thresholds at which certain company and regulatory corrective actions are mandated. At December 31, 2005 the statutory surpluses of TRC and Putnam each significantly exceeded the level of surplus required under RBC requirements for regulatory attention.
method of accounting for share based payment transactions with employees. On January 1, 2003, TRH adopted the recognition provisions of SFAS No. 123. SFAS No. 123R requires share based payment transactions with employees to be accounted for using a fair-value based method and broadens the recognition provisions to include share based payments awarded to an employee by related parties or other holders of an economic interest in the reporting entity.
substantially the same terms and conditions as, the 1990 Plan. During 2004, all such options granted in 1994 were exercised, and none remain outstanding. The impact of these options on the financial statements is not material.
(b) Senior Notes Purchased by AIG Subsidiaries: In December 2005, certain subsidiaries of AIG purchased $450 million aggregate principal amount of the Senior Notes. Such amount comprised 60% of the total amount of the Senior Notes. (See Note 6.)
Net ceded reinstatement premiums (which represent additional net costs related to catastrophe losses) totaled $61.1 million (representing $56.2 million from Domestic operations, ($5.1) million from International-Europe and $10.0 million from International-Other) in 2005, which amounts served to reduce (increase) net premiums written and earned. Net ceded reinstatement premiums were not significant in 2004 and 2003.
Various regulators including the United States Department of Justice (DOJ), the SEC, the Office of the New York State Attorney General (NYAG) and the New York State Department of Insurance (DOI) have been conducting investigations relating to certain insurance and reinsurance business practices, non-traditional insurance products and assumed reinsurance transactions within the industry and at AIG. In connection with these investigations, AIG requested that TRH, as a subsidiary of AIG, review its documents and practices, and TRH has cooperated with AIG in all such requests.
(c) Leases: As of December 31, 2005, the future minimum lease payments (principally for leased office space) under various long-term operating leases were as follows: