Approximately two-thirds of AFG's consolidated assets are invested in marketable securities. AFG's investment portfolio at December 31, 2005, contained $14.3 billion in "Fixed maturities" classified as available for sale and $557 million in "Other stocks", all carried at fair value with unrealized gains and losses reported as a separate component of shareholders' equity on an after-tax basis. At December 31, 2005, AFG had pretax net unrealized gains of $54.3 million on fixed maturities and $55.2 million on other stocks.
The table below sets forth the scheduled maturities of AFG's available for sale fixed maturity securities at December 31, 2005, based on their fair values. Asset backed securities and other securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
This line of business consists of two or more coverages protecting the insured from various property and liability risk exposures. The commercial multi-peril line of business includes coverage similar to other liability - occurrence, so in general, variables affecting estimation of loss reserves for commercial multi-peril include those mentioned above for other liability - occurrence. In addition, this line also includes reserves for a run-off book of homebuilders business. Variables unique to estimating the liabilities for this coverage include:
In connection with the 2005 A&E study, AFG reviewed its reserves for other mass torts. This review resulted in a pretax charge of $10 million. Other mass tort reserves consisted of the following (in millions):
Gross written premiums increased about 17% during 2004 reflecting primarily volume increases in the crop, equine and transportation insurance businesses. Net written premiums increased 33% for 2004 reflecting an overall reduction in reinsurance ceded. The combined ratio for 2004 included 4.7 points for the effect of hurricane losses. Even with the hurricane losses, the combined ratio improved 7.1 points over 2003 reflecting exceptionally strong profitability in the crop business.
The adverse development in Specialty casualty in 2005 was mainly in the professional liability and runoff casualty businesses partially offset by favorable development in the excess and surplus and not-for-profit businesses. Professional liability, which mostly covers lawyers, has had higher than expected increases in claim severity. Adverse development in excess casualty runoff impacted all three years, reflecting higher frequency and severity of claims related to the 1999 through 2001 accident years. Adverse development in 2004 and 2003 included amounts related to executive liability and the commutation of reinsurance. Adverse executive liability development resulted primarily from increased severity on two claims (one in each year) under directors' and officers' liability policies, as both settlement and defense costs from shareholder lawsuits increased beyond estimates. Adverse development in 2003 included amounts related to other liability coverage, due primarily to an unexpected shift in the judicial climate in some previously conservative states.
Annuity and supplemental insurance acquisition expenses include amortization of annuity, supplemental insurance and run-off life business deferred policy acquisition costs ("DPAC") as well as a portion of commissions on sales of insurance products. Annuity and supplemental insurance acquisition expenses also include amortization of the present value of future profits of businesses acquired.
Other operating and general expenses for 2003 include a pretax charge of $35.5 million related to an agreement to settle a lawsuit alleging antitrust violations by a number of California workers' compensation insurers, including an AFG subsidiary. Excluding this item, and the above-mentioned litigation charge and goodwill write-off in 2004, other operating and general expenses increased $53.9 million (13%) for 2004 compared to 2003 due primarily to a $30.3 million increase in expenses of AFG's warranty business and a $9.5 million increase in expenses in certain other property and casualty insurance operations.
the initial effect of transferring the related securities from available for sale to trading. Beginning in the fourth quarter of 2003, the adjustment to fair value on the embedded derivatives offsets the investment income recorded on the adjustment to fair value of the related trading portfolios.
Earnings Per Share Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. The calculation of diluted earnings per share includes the following dilutive effect of common stock options: 2005 - 1,295,000 shares; 2004 - 1,194,000 shares; and 2003 - 335,000 shares.
At December 31, 2005, there were 11.6 million shares of AFG Common Stock reserved for issuance under AFG's stock incentive plans. Options are granted with an exercise price equal to the market price of AFG Common Stock at the date of grant. Options generally become exercisable at the rate of 20% per year commencing one year after grant; those granted to non-employee directors of AFG are fully exercisable upon grant. Options generally expire ten years after the date of grant. Data for stock options issued under AFG's stock incentive plans is presented below:
During 2003, AFG subsidiaries invested $20 million in preferred stock and warrants of an unrelated party who utilized the proceeds to repay loans from several banks, including $3.4 million in loans and fees to the Provident Bank. At the time of the transaction, AFG's Chairman and members of his immediate family owned approximately one-fourth of Provident's parent company; AFG owned 14% of the parent company.
(c) Grossed up for prepaid reinsurance premiums of $479 and $522 at December 31, 2005 and 2004, respectively.