From a profitability perspective, the 2005 All Lines GAAP combined ratio improved to 94.2% compared to 99.6% in 2004 as all component ratios saw improvements over last year resulting from our improved risk profile and disciplined underwriting. The Group experienced favorable prior year reserve development in 2005 and 2004. Catastrophe losses decreased in 2005 over prior year despite the significant hurricanes that devastated the gulf coast. From a premium perspective, both gross and net premiums declined from prior year as a result of declines in new business premium production due to increased price competition in the market while renewal rates increased only slightly over 2004. The Group has begun several initiatives to reverse the trend in the decline in premiums including leveraging the advantage of our P.A.R.I.S.(sm) technology, restructuring our marketing approach, and investing in new product opportunities.
major product line. The Group began capitalizing application development costs associated with the Personal Lines segment during 2003, which is expected to begin rollout in 2006. In December 2004, the Group began rollout for the Specialty Lines segment. The Specialty Lines segment rollout is expected to continue throughout the first half of 2007. During 2002, the Group substantially completed the rollout for the Commercial Lines operating segment. The cost associated with this application is amortized on a straight-line basis over the estimated useful life of ten years from the date placed into service with before-tax amortization expense of $3.4, $3.1 and $2.6 for 2005, 2004 and 2003, respectively being reflected in the consolidated statements of income for these respective periods. Capitalized internally developed software costs (including P.A.R.I.S.(sm) and other internally developed software) and accumulated amortization at December 31, 2005 and 2004 are summarized in the table below:
The 2005 All Lines combined ratio improved 5.4 points resulting from continued improvement in all three component ratios. The 2.3 point improvement in the loss and LAE ratios is the result of the Group's continued focus on disciplined underwriting quality, lower claim frequency, favorable prior year reserve development of $20.1 and lower catastrophe losses. The favorable prior year reserve development reduced the loss and LAE ratios by 1.4 points. The 3.1 point improvement in the underwriting expense ratio is primarily a result of the Group's continued focus on expense management and the result of expense savings from the CSE initiative announced in 2004.
2. Incurred loss development - case incurred patterns of prior claims are used to estimate future incurred patterns which are applied to current incurred losses to derive an estimate of ultimate losses.
Net cash generated from operations was $267.9 in 2005 compared with $270.6 and $168.7 in 2004 and 2003, respectively. Cash generated from operations was essentially flat compared to 2004 as a result of a continued decline in paid losses and LAE of $50.3 in 2005, a result of improved loss experience, and $4.9 received from the settlement of IRS examinations which contributed to the improved profitability of the Corporation. See below for additional information on this settlement. The impact of these items were offset by a decline in net premiums written in 2005 and a decrease in reinsurance treaty funds held of $44.6. The decrease in the reinsurance treaty funds held is related to withdrawals to pay claims qualified under this contract of reinsurance, which was terminated on December 31, 2004 and is in run-off. These withdrawals reduced the reinsurance treaty funds held obligation and reduced net cash flow from operating activities. In 2004 and 2003 the Group made deposits of premium into the reinsurance treaty fund in excess of withdrawals, therefore increasing this obligation and net cash flow from operating activities. The increase in net cash for the year 2004 compared to 2003 is due primarily to a reduction in paid losses and LAE of $98.0 in 2004, as a result of improved loss experience. The reinsurance recoverable asset at December 31, 2005 and 2004, increased $75.3 and $73.8 with $115.7 and $73.6 due to increases in loss and LAE reserves for future loss payments expected to be paid by reinsurers, offset by a decrease in ceded unearned premium of $31.6 in 2005 along with other components as shown in Item 15, Note 6, Reinsurance, in the Notes to Consolidated Financial Statements, on page 77 of this Annual Report on Form 10-K.
The NAIC has developed a "Risk-Based Capital" formula for property and casualty and life insurers. The formula is intended to measure the adequacy of an insurer's capital given the asset and liability structure and product mix of the company. As of December 31, 2005 and 2004, all insurance companies in the Group exceeded the necessary capital requirements.
The property catastrophe reinsurance program protects the Group against an accumulation of losses arising from a catastrophe. The 2005 program provides $100.0 of coverage in excess of the Group's $25.0 retention. Over the last 20 years, only two events triggered coverage under the catastrophe reinsurance program. Both of these losses exceeded the prior retention amount of $13.0, resulting in significant recoveries from reinsurers. Reinsurance limits are purchased to cover exposure to catastrophic events having the probability of occurring approximately every 250 years.
The investment portfolio also includes non-publicly traded securities such as private placements, non-exchange traded equities and limited partnerships which are carried at fair value. Fair values are based on valuations from pricing services, brokers and other methods as determined by management to provide the most accurate price. The carrying value of this portfolio at December 31, 2005, was $320.3 compared to $310.8 at December 31, 2004.