Net income decreased in 2005 compared to 2004. Although operating segment results increased between years, net litigation costs following class certification, early extinguishment of debt costs and a higher effective income tax rate offset the growth. Net income increased in 2004 compared to 2003 primarily as a result of higher operating segment income, reductions in income tax accruals and deferred income tax asset valuation allowances, and the gain on the sale of our residential financing subsidiary. The increase was partially offset by realized and unrealized losses on assets.
We generated cash flows from operating activities of $402.0 million, $930.4 million and $394.9 million for the years ended December 31, 2005, 2004, and 2003, respectively. Operating cash flows were primarily used to increase our investment portfolio.
Our covenants in the Declaration run in favor of persons that buy, hold or sell our indebtedness during the period that such indebtedness is “Covered Debt,” which is currently comprised of covered subordinated debt and covered senior debt. Our 5.95% Senior Notes due 2015 and our 8.85% Junior Subordinated Debentures, Series A, owned of record by AmerUs Capital I are the initial covered senior debt and the initial covered junior debt, respectively, and together comprise the initial Covered Debt. Other debt will replace each of our covered senior debt and our covered subordinated debt that then comprises the Covered Debt under the Declaration on the earlier to occur of (i) the date two years and thirty days prior to the maturity of such existing covered senior debt or covered subordinated debt or (ii) the date we give notice of a redemption of such existing covered senior debt or covered subordinated debt such that the date such existing covered senior debt or covered subordinated debt is repurchased in such an amount that the outstanding principal amount of such existing covered senior debt or covered subordinated debt is or will become less than $100 million or $50 million, respectively. If the covered subordinated debt outstanding at any time is greater than $100 million, only the covered subordinated debt will be deemed to be Covered Debt.
Interest rate, equity and credit derivatives are primarily used to reduce exposure to changes in interest rates or credit to manage duration mismatches. Call options are primarily used to hedge indexed products. Credit default swaps and swaptions are coupled with a bond to synthetically create an investment cheaper than the equivalent instrument traded in the cash market. Although we are subject to the risk that counterparties will fail to perform, credit standings of counterparties are monitored regularly. We only enter into transactions with counterparties rated at least “AA” or for which a collateral agreement is in place. We are also subject to the risk associated with changes in the value of contracts. However, such adverse changes in value generally are offset by changes in the value of the items being hedged.
As of December 31, 2005, mortgage loans in the investment portfolio were $976.1 million, or 4.9% of the aggregate carrying value of invested assets. As of December 31, 2005, the mortgage loans were comprised of commercial mortgage loans which are primarily fixed-rate loans. As of December 31, 2005, we held 818 individual commercial mortgage loans with an average balance of $1.2 million.
The following table lists material investment OTTIs exceeding $3 million in 2004 and 2003. There were no material OTTIs in 2005. The write-downs occurred due to creditor and/or issue specific circumstances.