Federal Income Taxes. Federal income tax expense was $1,876,571 in 2005 compared to federal income tax (benefit) of $(4,767,432) in 2004. The benefit in 2004 was primarily caused by tax losses arising from the discontinued bond program losses.
The short-term cash requirements of our property/casualty business primarily consist of paying losses and LAE, reinsurance premiums and day-to-day operating expenses. Historically, we have met those requirements through short-term investments and cash receipts from operations, which consist primarily of insurance premiums collected, reinsurance recoveries and investment income. Our investment portfolio is a source of additional liquidity through the sale of readily marketable fixed maturities, equity securities and short-term investments. After satisfying our cash requirements, excess cash flows from our underwriting and investment activities are used to build the investment portfolio and thereby increase future investment income.
We believe that both liquidity and interest rate risk can be minimized by such asset/liability management described above. With this strategy, management believes we can pay our policy liabilities as they become due without being required to use our credit facilities or liquidate intermediate-term and long-term investments; however, in the event that such action is required, it is not anticipated to have a material impact on our results of operations, financial condition and/or future liquidity.
Intangible assets represented databases acquired by ALPC and a non-compete agreement. The databases were comprised of municipal code data and related files, which were amortized on a straight-line basis over the estimated economic useful lives of twenty years. The non-compete agreement was amortized on a straight-line basis over the contractual life of five years, which ended August 31, 2006. On August 31, 2006, the Company sold its municipal code publishing segment as more fully described above in “Sale of Affiliate.”
Pursuant to the terms of certain surety bonds issued by the Company that guarantee the payment of reimbursable unemployment compensation benefits, certain monies are held by the Company in contract funds on deposit and are used for the payment of benefit charges. The Company has agreements with cost containment service firms designed to control the unemployment compensation costs of the employers enrolled in the program. Any remaining funds after the payment of all benefit charges are shared between the Company and the cost containment firms as management fees. Management fees are recognized when earned based on the development of benefit charges. Management fees of $830,329, $713,697 and $33,710 were recognized in 2006, 2005 and 2004, respectively, as a result of this arrangement.
The amortized cost and estimated fair value of fixed maturity investments in held to maturity and available for sale securities at December 31, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The weighted-average grant-date fair value of options granted during the years ended December 31, 2006, 2005 and 2004 was $2.48, $0 and $2.50, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $9,120, $0 and $172,857, respectively.
The components of other comprehensive income (loss) and the related federal income tax effects for the years ended December 31, are as follows:
Effective January 1, 2003, the Company entered into a producer-owned reinsurance arrangement with a new lender/dealer producer whereby 100% of that producer’s premiums (along with the associated risk) was ceded to its PORC. This reinsurance arrangement was cancelled effective December 31, 2003. For this reinsurance arrangement, the Company has obtained collateral in the form of a letter of credit from the reinsurer to secure its obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and the Company has immediate access to such collateral if necessary. Under this arrangement, the Company ceded premiums earned of $67,969, $115,790 and $4,435,659 for the years ended December 31, 2006, 2005 and 2004, respectively.