Effective December 31, 2003, Vesta sold to us two insurance companies - Affirmative Insurance Company and Insura - and also transferred to us all future economic interest in Vesta’s non-standard personal automobile insurance business through a series of reinsurance transactions. We accounted for our acquisition of these insurance companies at their underlying carrying amounts in a manner similar to a pooling of interests in accordance with SFAS No. 141, and our historical consolidated financial statements have been presented to reflect our historical results of operations and the historical results of Affirmative Insurance Company and Insura on a
Deferred policy acquisition costs. Deferred policy acquisition costs represent the deferral of expenses that we incur acquiring new business or renewing existing business. Policy acquisition costs, primarily commissions and underwriting and agency expenses related to issuing a policy are deferred and charged against income ratably over the terms of the related policies. At December 31, 2005, we had $24.5 million of deferred policy acquisition costs. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. A premium deficiency and a corresponding charge to income is recognized if the sum of the expected losses and loss adjustment expenses, unamortized acquisition costs and maintenance costs exceeds related unearned premiums and anticipated investment income. At December 31, 2005, we determined that there was no premium deficiency.
As of December 31, 2005, we have recorded in our financial statements $61.0 million of goodwill, $14.7 million of indefinite life intangible assets and $4.9 million of finite life intangible assets having estimated lives of between two and 20 years.
We issue non-standard personal automobile insurance policies through Affirmative Insurance Company and Insura, our two Illinois-domiciled insurance company subsidiaries. Our insurance companies are licensed to write business in 34 states, although our business is concentrated in 13 states. Our insurance companies possess the certificates of authority and capital necessary to transact insurance business and issue policies, but they rely on both our underwriting agencies and unaffiliated underwriting agencies to design, distribute and service those policies.
As noted in more detail in the discussion of our insurance segment below, net realized losses for the year ended December 31, 2005, included $1.7 million related to the realignment of the investment portfolio. The Company’s investment portfolio has not been realigned in previous fiscal periods.
Net premiums earned for the year ended December 31, 2005 were $297.8 million, an increase of $103.5 million, or 53.2%, as compared to $194.3 million in the prior year. The increased capitalization mentioned above enabled us to increase retention amounts at July 2004 and again at January 2005. Partially offsetting this increase in retention is a decline in our overall total controlled premium primarily due to increased competition in our affiliated agencies as well as the run-off of programs in our non-affiliated distribution channel.
Commission income for the year ended December 31, 2005 was $477,000 compared to zero in the prior year. This increase is due to the accounting for the novation agreement we entered into which was effective August 1, 2005. We accounted for this contract under the deposit accounting rules according to FAS 113 (See Note 8 to our consolidated financial statements contained elsewhere in this report).
The previously issued consolidated balance sheets as of March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004 have also been restated to reflect the $7.2 million receivable from Vesta as “receivable from affiliates” and an offsetting liability in “amounts due reinsurers”. This also resulted in an adjustment to the consolidated statement of cash flows for the year ended December 31, 2003 that did not affect “net cash provided by operating activities” because it increased the cash flows from the change in “receivable from affiliates” while simultaneously reducing cash flows from the change in “net due to/from reinsurers”, both of which are components of the “net cash provided by operating activities”.
The effect of the restatement on line items of the previously reported unaudited consolidated statements of operations for the quarters and year to date periods ended March 31, 2005, June 30, 2005, and September 30, 2005 is presented below (dollars in thousands):
On January 30, 2003, we settled $13.2 million of our consideration due for acquisitions through the issuance of a $13.2 million note payable.
We provide various services for Vesta and its subsidiaries, including underwriting, premium processing, and claims processing. Accordingly, for the years ended December 31, the accompanying consolidated statements of operations reflect income from these services as follows (dollars in thousands):
On March 12, 2004, we issued 19,623 shares of our common stock to Thomas E. Mangold, our former Chief Executive Officer, at a purchase price of $9.76 per share, for aggregate consideration of $191,576 in cash. We believe that the fair value of our common stock issued to Mr. Mangold was higher than our historical carrying value we assigned to our shares of common stock for this transaction. In light of our proposed public offering, we used a projected public valuation model to determine the estimated fair value of the common shares issued to Mr. Mangold. Based on the projections, we recorded $44,000 of compensation expense in 2004.
In July 2005, we issued 40,000 shares of restricted common stock to Timothy A. Bienek, Executive Vice President and Chief Financial Officer, which vest over three years. This grant was cancelled upon termination in December 2005 and no compensation expense was recorded in 2005.
During the year ended December 31, 2005, we paid dividends to holders of our common stock in an aggregate amount of $1.3 million.
To increase the Internal Revenue Code Section 162(m) performance based compensation limit on the maximum number of shares that can be granted as awards to any individual in any calendar year to 250,000 shares.