The Company recorded ($60.5) million, $97.6 million and $132.2 million of prior period loss development before corporate aggregate reinsurance for 2005, 2004 and 2003, respectively. After corporate aggregate reinsurance, the prior period loss development was ($68.6) million, $69.3 million and $118 million for 2005, 2004 and 2003, respectively. The net favorable development in 2005 before corporate aggregate reinsurance was comprised of three principal components: (1) adverse development of asbestos, environmental and other latent liabilities of $44.6 million, primarily due to an unexpected adverse court decision related to one asbestos policyholder and largely offset by favorable emergence of non-latent umbrella and other casualty reserves in accident years 1998 and prior, (2) $24.7 million of strengthening of prior year reserves for the surety line of business, a line the Company exited in 2005, and (3) net favorable development of the Company’s remaining property and casualty reserves of $97.5 million, arising from accident years 1999 through 2004. Of the $97.5 million cited in (3) above, approximately 60% emanated from property and commercial multi-peril business and the balance from casualty business. Most of the property and commercial multi-peril development related to accident year 2004. The casualty lines generally developed favorably across all accident years in the 1999 through 2004 period with the exception of accident years 2001 and 2003 for general liability and accident year 2002 for worker’s compensation. Of the $97.6 million development for calendar year 2004, $90.5 million was due to an increase in asbestos reserves, driven mainly by an increase in the average severity of claims for known policyholders. Of the $132.2 million for calendar year 2003, $149.8 million was due to development of asbestos reserves reflecting a significant increase in the number of new policyholders presenting claims, offset in part by reserve releases in non-latent general liability. For a more detailed description of the asbestos strengthening, see “Asbestos reserves” below.
Hazardous waste sites present another significant potential exposure. The federal “Superfund” law and comparable state statutes govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and restoration by PRPs. These laws establish the means to pay for cleanup of waste sites if PRPs fail to do so, and to assign liability to PRPs. Most PRPs named to date are parties who have been generators, transporters, past or present landowners or past or present site operators.
Based on the experience and underwriting expertise of management, the Company seeks to write new lines of business and expand existing classes of business based on market conditions and expected profitability. The Company offers insurance products designed to meet specific insurance needs of targeted policyholder groups and underwrites specific types of coverage for markets that are generally underserved by the industry.
The aggregate carrying value of the Company’s investment portfolio, including cash and cash equivalents, was approximately $3.2 billion at December 31, 2005, 2004 and 2003. For detailed information on the Company’s investment portfolio, see Note 3 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data”.
Investments in available-for-sale fixed income and equity securities are summarized as follows:
In connection with the SPDRs transactions described above, the Company has pledged cash and U. S. Treasury securities as collateral for the obligation to purchase the SPDRs. These assets are recorded in assets pledged for short-sale obligations on the consolidated balance sheets. At December 31, 2005 and 2004, the fair value of the assets pledged for the purchase of the SPDRs totaled $496,903 and $277,899, respectively, and consisted primarily of cash and U.S. Treasury securities.
In 2005, the Company recognized net favorable prior year loss development of $68,564, including $8,058 of amortization of deferred gains on corporate aggregate reinsurance. The net favorable development was comprised of three principal components: (1) adverse development of asbestos, environmental and other latent liabilities of $44,646, primarily due to an unexpected adverse court decision related to one asbestos policyholder and largely offset by favorable emergence of non-latent umbrella and other casualty reserves in accident years 1998 and prior, (2) $24,699 of strengthening of prior year reserves for the surety line of business, a line the Company exited in 2005, and (3) net favorable development of the Company’s remaining property and casualty reserves of approximately $99,700, arising from accident years 1999 through 2004. Of the approximately $99,700 cited in (3) above, approximately 60% emanated from property and commercial multi-peril business and the balance from casualty business. Most of the property and commercial multi-peril development related to accident year 2004. The casualty lines generally developed favorably across all accident years in the 1999 through 2004 period with the exception of accident years 2001 and 2003 for general liability and accident year 2002 for workers’ compensation.
Concurrent with the issuance of the Notes, the Company entered into a non-interest bearing standby credit agreement, subordinate to the Notes, whereby Fairfax agreed, under certain conditions, to lend up to $40,000 to Crum & Forster in order to meet certain corporate obligations. Borrowings under this agreement, if any, are due in June 2018. Through December 31, 2005, there have been no borrowings under this agreement.
Income tax expense shown on the consolidated statements of income excludes $9,258, $6,719 and $844 of deferred income taxes on equity in earnings of investees in 2005, 2004 and 2003, respectively. Total income tax expense in 2005, 2004 and 2003, inclusive of these amounts, was $74,578, $11,235 and $71,458, respectively, and the related effective tax rate was 32.4%, 31.7% and 34.5%, respectively.