In December 2002, the Company entered into a retroactive adverse loss development reinsurance agreement (the “ADC”) with Inter-Ocean N.A. Reinsurance Company, Ltd. The ADC provided protection from adverse development on loss reserves existing as of the date of the agreement. Effective September 15, 2005, the Company commuted the ADC based on the most current actuarial data and the settlement of claims subject to the agreement subsequent to the ADC effective date. As a result of this commutation, the Company recognized a gain of $7.0 million, which was recorded as a reduction of losses and loss adjustment expenses during the third quarter of 2005.
Legal Settlement. On August 30, 1996, the Los Angeles County Metropolitan Transportation Authority (“MTA”) filed a civil action against Argonaut Insurance alleging breach of contract, breach of the covenant of good faith and fair dealing. Argonaut Insurance responded to the complaint and brought certain counterclaims against the MTA. The Company asserted that it was owed approximately $47.6 million relating to amounts funded below the deductible limit or in excess of policy limits and accordingly due under the terms of the insurance policy and such amount was included in premiums receivable.
The increase in gross written premiums in 2005 as compared to 2004 of 16.9% was primarily attributable to new business related to a renewal rights acquisition and the addition of Argonaut Specialty in the E & S segment. The increase in gross written premiums in 2004 as compared to 2003 was due primarily to new business from two renewal rights acquisitions, which were entered into at the end of 2003, by the Select Markets and Public Entity segments. Consolidated gross written premiums include $544.5 million from new business written in 2005, as compared to $402.2 million in 2004 and $391.4 million in 2003.
The increase in net investment income for the year ended December 31, 2005 as compared to 2004 and 2003 was primarily attributable to higher invested balances resulting from increased cash flows and higher yields. Invested assets were $356.8 million, $302.4 million and $246.3 million as of December 31, 2005, 2004 and 2003, respectively.
Argonaut Insurance is exposed to asbestos liability at the primary level through claims filed against its direct insureds, as well as through its position as a reinsurer of other primary carriers. Argonaut Insurance has direct liability arising primarily from policies issued from the mid 1970s to early 1980s which pre-dated policy contract wording that excluded asbestos exposure. During 2004 the Company settled its largest direct exposure for $29.8 million (see discussion below). The majority of the policies were issued on behalf of small contractors or construction companies. The Company believes that the frequency and severity of asbestos claims for such insureds is typically less than that experienced for large, industrial manufacturing and distribution concerns.
On March 12, 2003, the Company entered into a reinsurance consulting agreement with Rattner Mackenzie (Bermuda) Ltd., a wholly owned subsidiary of HCC, pursuant to which Rattner Mackenzie provides reinsurance consulting advice to the Company’s insurance subsidiaries for an annual fee of $250,000. Effective January 1, 2006, the annual fee was increased to $300,000. The agreement expires on March 31, 2007.
During 2005, HCC, through its investment in the preferred shares and the Company’s common stock, owned approximately 7.5% of the Company on a fully diluted basis. In January 2006, HCC converted 500,000 shares of the Preferred Shares into the Company’s common stock.