limitations on rates arising from the competitive market place or regulation
Positive variations on investment income are subject to a number of factors, including
Harleysville Group has attempted to reduce the potential impact of future catastrophes by achieving greater geographic distribution of risks, reducing exposure in catastrophe-prone areas and through reinsurance, including an agreement with Mutual. Effective January 1, 1997, Harleysville Group entered into a reinsurance agreement with Mutual whereby Mutual, in return for a reinsurance premium, reinsured accumulated catastrophe losses up to $14.4 million in a quarter for 2005, 2004 and 2003. This reinsurance coverage was in excess of a retention of $3.6 million in a quarter for 2005, 2004 and 2003. The agreement excludes catastrophe losses resulting from earthquakes, terrorism or hurricanes, and supplements the existing external catastrophe reinsurance program. Under this agreement, Harleysville Group ceded to Mutual premiums earned of $8.8 million, $8.6 million and $8.4 million, and losses incurred of $(0.2) million, $0.7 million and $4.2 million for 2005, 2004 and 2003, respectively. The premiums for this reinsurance were established in consultation with an independent actuarial firm. The agreement was terminated December 31, 2005 and the coverage will not be replaced as it is no longer deemed necessary based on the current catastrophe risk profile.
Reinsurance receivables were $249.0 and $193.2 million at December 31, 2005 and 2004, respectively. Of these amounts, $183.9 million and $123.8 million, respectively or 74% and 64%, respectively, of the receivables were due from governmental bodies, regulatory agencies or quasi governmental pools and reinsurance facilities where, Harleysville Group believes, there is virtually no credit risk. The increase in the amounts due from these types of pools and facilities is primarily based on an increase of $64.8 million in the amount due from the National Flood Insurance Program primarily as a result of claims arising from Hurricane Katrina. The remainder of the reinsurance recoverables are principally due from reinsurers rated A- or higher by the A.M. Best Company.
We write property and casualty insurance business in the eastern and midwestern United States. Consequently, unusually severe storms or other natural or man-made disasters that destroy property in these states could adversely affect our operations. Our revenues and profitability also are subject to prevailing economic and regulatory conditions in the states in which we write insurance. We may be exposed to risks of adverse developments that are greater than if we conducted business nationwide.
expand our network of agencies to successfully market our products. If these agencies fail to market our products successfully, our business may be adversely impacted. Also, independent agents may decide to sell their businesses to banks, other insurance agencies or other businesses. Changes in ownership of agencies, or expansion of agencies through acquisition, could adversely affect an agency’s ability to control growth and profitability, thereby adversely affecting our business.
Harleysville Ltd. leases the home office to Mutual, which shares the facility with Harleysville Group. Rental income under the lease was $3,961,000, $3,697,000 and $3,606,000 for 2005, 2004, and 2003, respectively, and is included in other income after elimination of intercompany amounts of $2,424,000, $2,262,000 and $2,207,000 in 2005, 2004 and 2003, respectively.
At December 31, 2005, Harleysville Group held cash collateral of $150,938,000 related to securities on loan with a market value of $146,433,000. Harleysville Group’s policy is to require initial collateral of 102% of the market value of loaned securities plus accrued interest, which is required to be maintained daily by the borrower at no less than 100% of such market value plus accrued interest over the life of the loan. Acceptable collateral includes cash and money market instruments, government securities, “A” rated corporate obligations, “AAA” rated asset-backed securities or GICs and Funding Agreements from issuers rated “A” or better.
In the ordinary course of business, Harleysville Group cedes insurance to, and assumes insurance from, insurers to limit its maximum loss exposure through diversification of its risks. See Note 2(a) for discussion of reinsurance with Mutual. Reinsurance contracts do not relieve Harleysville Group of
Losses and loss settlement expenses are net of reinsurance recoveries of $141,449,000, $84,960,000 and $117,687,000 for 2005, 2004 and 2003, respectively.