Reinsurance recoverable increased $111.2 million, or 436.2%, to $136.7 million as of December 31, 2005, as compared to $25.5 million as of December 31, 2004. The increase is due to the timing of settlements with our reinsurers in connection with the adjustment of loss and LAE claims as they relate to costs recoverable under our reinsurance agreements. All amounts are considered current; the private reinsurance recoverable is collateralized by irrevocable letters of credit in favor of Federated National.
Other assets decreased $0.2 million, or 5.0%, to $4.6 million as of December 31, 2005, as compared to $4.8 million as of December 31, 2004. Other assets, as of December 31, 2005, includes $2.0 million related to Federated National’s statutory approval to recoup the Citizens assessment by adding a surcharge to homeowner insurance policies in an amount limited to the assessment. For further discussion see Footnote (12) Commitments and Contingencies. Major components of other assets are as follows:
Factors that affect unpaid losses and LAE include the estimates made on a claim-by-claim basis known as “case reserves” coupled with bulk estimates known as IBNR. Periodic estimates by management of the ultimate costs required to settle all claim files are based on the Company’s analysis of historical data and estimations of the impact of numerous factors such as (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of its analysis. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. For further discussion, see “Loss and LAE” below.
Salaries and wages increased $0.2 million, or 4.1%, to $6.4 million for the year ended December 31, 2005, as compared to $6.1 million for the year ended December 31, 2004. Management believes that the modest increase in salaries and wages was due in part to the increased labor costs in connection with additional claims loss adjusters added to our staff. Management further believes that salaries and wages are consistent with retaining quality management and increased premium production.
Net realized investment gains decreased by $1.5 million, or 69.1%, to $0.7 million for the year ended December 31, 2004 as compared $2.2 million for the year ended December 31, 2003. The table below reflects the gains and losses by investment category.
For the year ended December 31, 2005, net investing activities used $15.5 million, as compared to $36.3 million and $21.9 million for the years ended December 31, 2004 and 2003, respectively. Our available for sale investment portfolio is highly liquid as it consists entirely of readily marketable securities. For the year ended December 31, 2005, investing activities generated $122.5 million and used $139.5 million from the maturity several times over of our very short municipal portfolio. Other changes to cash flow from investing activities included $1.7 million generated in connection with our sale of discontinued operations, and $0.2 million used to purchase property and equipment.
For the year ended December 31, 2005, net financing activities used $4.7 million, as compared to the $11.7 million and $12.2 million provided for the years ended December 31, 2004 and 2003, respectively. For the year ended December 31, 2005, the source of cash in connection with financing activities was from the exercise of stock options and totaled $2.8 million. Uses of cash in connection with financing activities included the regularly scheduled retirement of our Notes totaling $5.0 million, dividends paid totaling $2.3 million and $2.0 million in connection with the reduction of our outstanding revolving credit.
During the years ended December 31, 2004 and 2003, we marketed our insurance products through a network of company-owned agencies, franchised agencies, independent agents and general agents. Because we sold our company-owned agencies and franchised agencies at the end of 2004, in 2005 and thereafter we expect to continue to market our products through our existing network of independent agents and general agents.
INTEREST RATE RISK--the risk that interest rates will change and cause a decrease in the value of an insurer's investments. To the extent that liabilities come due more quickly than assets mature, an insurer might have to sell assets prior to maturity and potentially recognize a gain or a loss.
Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida OIR if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10 percent of capital surplus (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10 percent of capital surplus with dividends payable constrained to unassigned funds minus 25 percent of unrealized capital gains or (iii) the lesser of (a) percent of capital surplus or (b) net investment income plus a three-year carryfoward with dividends payable constrained to unassigned funds minus 25 percent of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida OIR (i) if the dividend is equal to or less than the greater of (a) percent of the insurer's capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer's entire net operating profits and realized net capital gains derived during the immediate preceding calendar year, (ii) the insurer will have policyholder capital surplus equal to or exceeding 115 percent of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the Florida OIR at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115 percent of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida OIR or (ii) days after the Florida OIR has received notice of such dividend or distribution and has not disapproved it within such time. No dividends were declared or paid in 2005, 2004 or 2003. Under these laws, neither Federated National nor American Vehicle would be permitted to pay dividends to 21st Century in 2005.
The table below reflects the range and test results for both Federated National and American Vehicle for the years ended December 31 2005 and 2004, respectively.
GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. Federated National's statutory capital and surplus was $11.2 million and $7.6 million as of December 31, 2005 and 2004, respectively. Federated National's statutory net income (loss) was ($2.2) million, ($25.4) million and $2.9 million for the years ended December 31, 2005, 2004 and 2003, respectively. Federated National’s statutory non-admitted assets were approximately $10.5 million and $8.9 million as of December 31, 2005 and 2004, respectively.
In June 2000, a lawsuit was filed against us, our directors and our executive officers seeking compensatory damages in an undisclosed amount on the basis of allegations that our amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which we recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit was filed in the United States District Court for the Southern District of New York. The plaintiff class purportedly included purchasers of our common stock between November 5, 1998 and August 13, 1999. The Court granted the plaintiffs class status.