We lease our headquarters in Chicago, Illinois. Our headquarters have approximately 25,000 square feet and our lease expires in 2020. We believe that our facility will support our future business requirements or that we will be able to lease additional space, if needed, on reasonable terms.
Our Partner Agent, Risk Transfer Holdings, Inc., or RTH, specializes in providing workers’ compensation coverage to PEOs, which are organizations that provide small employers with human resource services, employee benefits, and workers’ compensation insurance. Currently we are writing business in California,
Florida, Georgia, Alabama, South Carolina and most recently Texas and Illinois. We are also targeting other states that offer favorable environments. RTH produced total written premiums of $50.2 million for the year ended December 31, 2005.
AEON Insurance Group, Inc., or AEON, the Company’s partner agent specializing in commercial auto, general liability, inland marine and property coverages for tow truck operators and vehicle repossessors, on a national basis, produced total written premiums of $11.0 million for the year ended December 31, 2005.
American Team Managers, or ATM, specializes in general liability coverage for artisan contractors (electricians, plumbers and other trades) and general contractors and workers’ compensation for small to midsize businesses all within California. Total written premiums for the year ended December 31, 2005 were $22.1 million.
Our premiums in 2005 were primarily concentrated in California and Florida. California approved a 15.3% decrease in advisory pure premium rate for workers’ compensation effective as of January 1, 2006. This decrease was in response to an improvement in loss experience caused by recent workers’ compensation reform. Given the recent reforms, we still believe that California is an attractive workers’ compensation market. However, future experience may lead us to conclude otherwise. Our gross written premiums by state were as follows:
retained by us. We have entered into new reinsurance arrangements for 2006 which we expect will produce ceded results more in line with our direct results.
Our direct and net loss and loss adjustment expense ratio was also negatively affected by the level of the unallocated loss adjustment expense ratio, which was 7.5% on a direct basis and 9.0% on a net basis. This high level of unallocated loss adjustment expense was due to lower than expected premium volume, while having to incur the costs necessary to build a claim infrastructure and management process.
For the year ended December 31, 2004 we reported a net loss of $8.1 million as a result of start-up costs while not recording any revenues. Revenue consisted solely of investment income of $0.3 million earned on capital from our initial funding date of November 23, 2004 through December 31, 2004. Total expenses consisted of service company fees of $4.6 million and other operating expenses of $3.8 million.
Potomac’s pre-tax income was $1.0 million for the period from January 1, 2004 through November 23, 2004 and $2.1 million for the year ended December 31, 2003. As of January 1, 2004, Potomac ceased its participation in the OneBeacon Amended and Restated Reinsurance (Pooling) Agreement, or the Pool. As a result, net written premiums, net earned premiums, losses and underwriting expenses for the period from January 1, 2004 through November 23, 2004 were zero and, therefore, are not comparable with 2003 results.
As a holding company, we will have continuing funding needs for general corporate expenses, the payment of principal and interest on future borrowings, if any, taxes and the payment of other obligations.
Our insurance operations commenced in early 2005 and as a result cash flows were negative for the majority of 2005 and first became positive in the fourth quarter of 2005. We expect that operating cash flows will continue to grow and remain positive.
In 2004, Potomac’s sources of cash consisted primarily of net investment income and proceeds from sales and maturities of investments. Potomac’s uses of cash were primarily investing expenses and the purchase of investments. Prior to January 1, 2004, the effective date of Potomac’s withdrawal from the Pool, its sources of cash also included premium collections and its uses included claim payments and operating expenses.
During 2004 Potomac declared and paid $18.6 million in cash dividends and capital distributions and distributed $13.3 million of net assets to OneBeacon.
Our investment portfolio consists of marketable fixed maturity and short-term investments. All fixed maturity investments are classified as available for sale and are reported at their estimated fair value based on quoted market prices. Realized gains and losses are credited or charged to income in the period in which they are realized. Changes in unrealized gains or losses are reported as a separate component of comprehensive income, and accumulated unrealized gains or losses are reported as a separate component of accumulated other comprehensive income in stockholders equity.
The following table of contractual obligations includes information with respect to our known contractual obligations as of December 31, 2005.
the transaction. This table does not include our accounts payable reflected in our audited consolidated balance sheet data that are included in our consolidated financial statements contained elsewhere in this report.
Prior to November 23, 2004, Potomac had a service contract with White Mountains Advisors LLC, or Advisors, a wholly-owned subsidiary of OneBeacon. Under this agreement, Advisors provided investment research and advice, including the execution of orders for the purchase and sale of securities. The amounts charged to Potomac by Advisors for such services were based on a fixed fee applied to the month-end market values of the investments being managed.
Management believes that the following critical accounting policies affect our more significant estimates used in the preparation of our financial statements.
We use quoted market prices in determining the fair value of fixed maturities and short-term investments in most cases. Where quoted market prices are unavailable, we expect to base the estimate on recent trading. Unrealized appreciation or depreciation of available-for-sale investments carried at fair value are excluded from net income and credited or charged directly to accumulated other comprehensive income, a separate component of stockholders’ equity. The change in unrealized appreciation or depreciation is reported as a component of other comprehensive income.
We monitor the difference between our cost basis and the fair value of our investments to determine, when the fair value is below cost, if this is other than a temporary impairment. Factors considered in evaluating whether a decline in value is other than temporary include: the length of time and the extent to which the fair value has been less than cost; the financial conditions and near-term prospects of the issuer; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery. Other than temporary impairment charges on investments are recorded based on the fair value of the investments at the balance sheet date, and are included in net realized gains and losses.
We recorded an indefinite-life intangible asset for the value of insurance licenses acquired in connection with the acquisition of Potomac. Indefinite-lived intangible assets are not subject to amortization. If the aggregate fair value of insurance licenses declines to an amount less than their book value, impairment will be recorded as a realized loss for the excess of book value over fair value.
To establish loss and loss adjustment expense reserves, we make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in our financial statements. Actual results could differ materially from those estimates. The effects of inflation could cause the severity of claims to increase in the future. Our estimates for losses and loss adjustment expenses will include assumptions, including those relating to inflation, about future payments for settlement of claims and claims handling expenses. To the extent inflation causes these costs to increase above our estimated reserves that will be established for these claims, we will be required to increase reserves for losses and loss adjustment expenses with a corresponding reduction in our earnings in the period in which the increase is identified. The actual effects of inflation on our results cannot be accurately determined until claims are ultimately settled.