This document may contain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”), that reflect our current views with respect to future events and financial performance. These forward-looking statements, which may apply to us specifically or the insurance industry in general, are made pursuant to the safe harbor provisions of the PSLRA and include estimates and assumptions related to economic, competitive, regulatory, judicial, legislative and other developments. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “anticipate,” “will,” “continued,” “potential,” “continued,” “seek,” “predict,” or the negative version of those words or similar statements of a future or forward-looking nature for purposes of the federal securities laws or otherwise. Although Republic Companies Group, Inc. believes that the expectations reflected in forward-looking statements have a reasonable basis, it can give no assurance that these expectations will prove to be correct. Forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. For a discussion of the most significant risks and uncertainties that could cause Republic Companies Group, Inc.’s actual results to differ materially from those projected, see Item 1A. Risk Factors in this Annual Report on Form 10-K. Except to the limited extent required by applicable law, Republic Companies Group, Inc. undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Net insurance premiums earned. Premiums are earned ratably over the term (generally one year) of the related policy. Net insurance premiums earned are the portion of our net written premiums ratably earned during a measured period. At the end of each accounting period, the portion of the premiums that are not yet earned are included in unearned premium liabilities and are realized as revenue in subsequent periods over the remaining term of the policy. As described in more detail in Note 2 to our audited consolidated and combined financial statements included in this annual report, our unearned premium liability was adjusted to fair value at the 2003 Acquisition date. The fair value adjustment of the unearned premium liability was amortized over a twelve month period following the 2003 Acquisition, since the related policies have one year terms or less. In addition, we track gross written premiums, which include all premiums billed under the policies underwritten by our insurance companies during a specified policy period and most closely reflect our sales efforts, and net written premiums, which are the portion of our gross written premiums that we retain after cessions to reinsurers. In prior years, policy fees received from various fronting programs in the Program Management and Insurance Services segments were included in gross and net written premiums and net insurance premiums earned. Such fees are generally returned to the respective producers in the form of additional commission and were not a part of our net income. Since these policy fees are charged and retained by the producing unaffiliated MGA or insurer, we elected in 2005 to net these fees and the related commission within Other Income and to reclassify the presentation in prior periods to be consistent with the 2005 presentation. The impact is to reduce written and earned premiums and to reduce commission or acquisition expenses, although there is no net income effect (See additional comments under-Reclassifications below).
Commissions. We pay base and contingent commissions to our independent agents and MGAs for producing and managing our insurance policies. Our independent agents may earn contingent profit sharing commissions based on their premium volume and the loss ratios on the business they produce. In addition to a base commission, the commissions paid to our unaffiliated MGAs vary using a sliding scale that ties commissions to the ultimate profitability of the insurance policies produced by the MGAs. These commissions are subsequently adjusted after a policy is written in order to compensate our MGAs based on the ultimate profitability of business produced. As noted above, we elected in 2005 to net the commission expense associated with policy fees reported by unaffiliated MGAs and insurers writing through our fronting programs with the related policy fees within Other Income. We reclassified the commission expense for all periods presented to provide a comparable presentation. The impact reduces commission expense by the amount of the policy fee commission; however, there is no impact on net income (see additional comments under-Reclassifications below).
While our catastrophe loss experience was higher in 2005 compared to 2004, we had considerable improvement in our ex-catastrophe loss results. In virtually all of our lines of business within our independent agency segments, we had noticeable improvement. The only exception is in our commercial liability line where continuing losses from prior year claims continued to develop into early 2005. This experience reflects the new underwriting philosophy instituted in 2003 in both the personal and commercial lines emphasizing targeted geographic areas and classes of business that we believed would produce more profitable long-term business opportunities.
Income (loss) from continuing operations before income taxes and income tax expense (benefit)
Net cash provided by financing activities was $17.0 million for the year ended December 31, 2005 compared to $1.2 million for the year ended December 31, 2004 and $4.1 million for the 2003 Stub Period and $11.8 million for the 2003 Cutoff period. The increase in cash provided by financing activities for 2005 was primarily related to the $20.0 million in proceeds from our new senior credit facility and to the increase in the cash overdraft account as of December 31, 2005. We believe this occurred due to the large volume of checks issued during the fourth quarter to settle hurricane claims; however, due to the complexities of arranging repairs and coordinating endorsements with lienholders, many policyholders simply had not cashed their claim checks as of December 31, 2005. Substantially all of the cash received from our IPO and from our new senior credit facility were used to pay accrued preferred dividends, to redeem preferred stock and pay expenses of the IPO. There were no major financing activities in 2004. In the 2003 Stub Period, we issued $30.0 million of trust preferred securities, primarily to redeem $22.0 million of temporary capital provided by our new ownership following the 2003 Acquisition. The balance of the trust preferred proceeds was used for general corporate purposes. Changes in our cash overdraft balance between 2004 and 2003 were due to the timing of routine claims and operating activities.
our change of control, defined as the replacement of the majority of our board or equivalent governing body during any 12 month period with individuals other than those members serving on our board at the beginning of such period or successors to those board members who are elected or nominated by a board, the majority of which is composed of those initial board members;
the length of time and extent to which the fair value of the security has been less than cost;
The estimated cost of loss and loss adjustment expenses attributable to insured events of prior years decreased by a net of $8.1 million during 2005. Favorable development occurred primarily in the homeowners and personal property lines, due to favorable development of mold losses from 2002 and 2003, and in the agency-based personal auto business, due to a decline in volume combined with favorable development. Additionally, notable improvement occurred in the workers compensation line of business. Offsetting the favorable development in these lines was an increase in our estimates of losses and loss adjustment expenses attributable to insured events of prior years (primarily from 2003) in commercial package and other commercial liability lines related primarily to losses experienced involving classes of business that we no longer write.
all accrued but unpaid dividends on each outstanding share of Series A Preferred Stock, each issued and outstanding share of Series A Preferred Stock that is not redeemed for cash following the IPO shall be converted into a number of shares of Converted Common Stock equal to (a) the liquidation value of the unredeemed Series A Preferred Stock divided by (b) the public offering price per share of the Converted Common Stock. All previously reported common share and per share amounts have been adjusted to give effect to the stock split.
The net amounts included in the consolidated balance sheets at December 31, 2005 and 2004 were: