The selected financial data presented below for the fiscal years ended December should be read in conjunction with our consolidated financial statements and the notes thereto, which are included in Item 8. Financial Statements and Supplementary Data, herein. For additional information with respect to our business see
We believe the critical accounting policies discussed in the remainder of this section of our MD&A affect our more significant judgments and estimates used in preparation of the consolidated financial statements. These may be further commented upon in applicable sections on Results of Operations and Liquidity and Capital Resources that follow. Information about the significant accounting policies we use in the preparation of our consolidated financial statements is included in Note 2, Significant Accounting Policies, to our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Form 10-K.
Our liability for losses and LAE (also referred to as our loss and LAE reserves) is our largest liability and represents the financial statement item most sensitive to estimation and judgment. MPL insurance, including business written directly and reinsurance assumed, is our primary line of business and accounted for $644.8 million and $610.6 million, or 97% and 96%, of our total consolidated liability for losses and LAE as of December 31, 2005 and 2004, respectively.
The following table summarizes, in thousands, our liability for losses and LAE by line of business:
Using internal actuarial staff, we analyze and develop projections of ultimate losses that are used to establish our carried reserves. In performing our review, we separate reserves by line of business, coverage type and layer of coverage, geography and accident year. By doing so, we are able to further evaluate the unique patterns of development and trends for each line of business. We then select a point estimate for each line of business with due regard for the age, characteristics and volatility of the portion of the business, the volume of data available for review and past experience with respect to the accuracy of estimates for business of a similar type. This series of selected point estimates, along with other relevant quantitative and qualitative information, is then evaluated to produce our best estimate and our range of projected ultimate losses based upon the various methods discussed above. We develop our range by selecting and applying a factor to our best estimate in order to produce the upper end of our range, which is reflective of the outcomes of higher projections. A similar method is used to arrive at the low end of our range. In general, the width of a range reflects the level of variability in the underlying projections, and a typical range of reasonable values for MPL business is considered to be as wide as 15%. Therefore, in addition to the performance of the business itself, our results of operations and financial position are very sensitive to our reserve estimates and judgments. The range developed for our loss and LAE reserves, net of reinsurance, at December 31, 2005 was $334.4 million to $384.8 million.
The primary factors affecting our estimates of how much we will pay and therefore our reserve for insurance claims, defense and other related costs are:
In considering the potential sensitivity of the factors and assumptions underlying management’s best estimate of loss and LAE reserves, it is also important to understand that the medical professional liability sector of the property casualty insurance industry is characterized by a relatively small number of claims with a large average cost per claim. For example, in 2005, which we ended with 14,055 professional liability policyholders, we paid a total of $60.8 million in loss (indemnity only) payments on 391 claims. Given the magnitude of our reserves and these characteristics, even a relatively small change in the number of claims we expect to pay (i.e., frequency) or a relatively small percentage change in the average cost per claim (i.e., severity) could have a significant impact on our reserves and, correspondingly, our financial position and results of operations. This is the case for other key assumptions as well, such as the frequency of reported claims and incidents that will ultimately close with an indemnity payment versus those that will close without an indemnity payment. In addition, due to the relatively small number of claims ultimately resulting in an indemnity payment and the average cost per claim, any change in the trends assumed in the ultimate values for these factors could result in a significant change in our reserve estimates. Because our aggregate loss and LAE reserves are so large, this also means that virtually any change in the level of our carried reserves will be material to results of operations and may be material to our financial position.
The following table rolls forward our consolidated liability for losses and LAE reserves, net of reinsurance, (in thousands) showing the changes for the period beginning January 1, 2003 and ending December 31, 2005.
During May 2005, First Professionals and APAC entered into agreements to commute their 25% quota share reinsurance ceded to American Professional Assurance, Ltd. (“APAL”). Under the terms of the agreements, the two companies assumed policy liabilities previously ceded under the contracts of approximately $10.2 million and received a comparable amount of assets in the form of cash and investments, resulting in no material gain or loss on the transaction.
Incurred losses and LAE for claims related to prior years represent the total net change in estimates charged or credited to earnings in the current year with respect to liabilities that originated and were established in prior years. Information regarding incurred losses and LAE is accumulated over time and the estimates of the liability are revised accordingly, resulting in gains or losses in the period revisions are made. As noted in the table above, our aggregate loss and LAE reserve estimates reported for years 2004 and prior have not increased or decreased significantly in 2005.
The following table sets forth on a calendar year basis, the development of our liability for losses and LAE, net of amounts recoverable under reinsurance arrangements, for the ten-year period preceding the year ended December 31, 2005, and the cumulative amounts paid with respect to such reserves. Development reflects the difference between the amount we previously established as loss reserves and the re-estimated liability as of the end of each succeeding year. Favorable development, or redundancy, means that we now believe we will have to pay less for related claims than we had previously set aside in reserves and have revised our reserve estimates accordingly. Unfavorable development, or deficiency, means that we now believe we will have to pay more for related claims and have increased our reserve estimates. The table also provides a reconciliation of our liability net of reinsurance to the gross liability before reinsurance, as it is shown on our consolidated statements of financial position.
As the table below indicates, our reserve estimates can vary over time based on actual results and our assessment of the impact of recent conditions and trends. For example, the cumulative net reserves carried at the end of calendar years 1995 through 1998 have been higher than subsequent payments and re-estimates and have developed redundantly. In contrast, net reserves at the end of calendar years 1999 through 2003 have increased from the amounts initially carried and have developed deficiently. Improvements in recent years have resulted in a slight redundancy in the cumulative net reserves carried at the end of 2004 as compared to our prior estimates.
A portion of the coverage that physicians purchase under claims−made policies is for an additional death, disability and retirement (“DD&R”) insurance benefit. This DD&R coverage provides coverage to the physician for any prior incidents occurring during the coverage period that are reported after his or her death, disability or retirement. The loss exposure associated with this product is known as extended reporting endorsement claims. The reserve for extended reporting period claims coverage is recorded during the term of the original claims−made policy, based on the present value of future estimated benefits, including assumptions for morbidity, mortality, retirement, interest and inflation, less the present value of expected future premiums associated with this DD&R coverage. The reserves for these claims fluctuate based on the number of physicians who are eligible for this coverage and their age. These liabilities, which possess elements of both loss reserves and pension liabilities, are carried within unearned premiums. Once an endorsement is issued because of a triggering event, a liability is established as part of the reserve for losses and LAE. Any changes in the DD&R reserves are reflected as an expense in the period in which we become aware that an adjustment is necessary. At December 31, 2005 and 2004, our carried DD&R reserves, which include assumed reserves from PRI pursuant to a reinsurance agreement established in the year 2000 with First Professionals, were $72.9 million and $62.3 million, respectively, which include a discount related to the present value calculation of approximately $29.4 million and $25.1 million, respectively. A 1% change in our discount rate related to our DD&R reserves as of December 31, 2005, would result in an approximate addition or reduction in our reserve of approximately $4.9 million. For additional information about our relationship with PRI, see Item 8. Financial Statements and Supplementary Schedules, Note 5. Related Party Transactions.
Because our investment portfolio is the largest component of consolidated assets and a multiple of shareholders’ equity, adverse changes in economic conditions subsequent to the statement of financial position date could result in other-than-temporary impairments that are material to our financial condition and operating results. Such economic changes could arise from overall changes in the financial markets or specific changes to industries, companies or municipalities in which we maintain relatively large investment holdings.
We operate in income tax paying jurisdictions and provide for income taxes in accordance with the provisions of Financial Accounting Standard (“FAS”) No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are estimated and recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We determine deferred tax assets and liabilities separately for each tax-paying component (an individual entity or group of entities that is consolidated for tax purposes) in each tax jurisdiction.
A valuation allowance against deferred tax assets is estimated and recorded if it is more likely than not that all or some portion of the benefits related to the deferred tax assets will not be realized. Valuation allowances are based on estimates of taxable income and the period over which deferred tax assets will be recoverable. In the event that actual results differ from our estimates or those estimates are adjusted in future periods, we may need to establish a valuation allowance, which would impact our financial position and results of operations. We have not established a valuation allowance because we believe it is more likely than not that our deferred tax assets will be fully realized. For additional information concerning our income taxes, see Item 8. Financial Statements and Supplementary Data, Note 10, Income Taxes.
Deferred policy acquisition costs consist primarily of commissions and premium taxes, which vary with and are directly related to the production of new and renewal insurance business. Acquisition costs are deferred and amortized over the period in which the related premium is earned. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. If such costs are estimated to be unrecoverable, they are expensed. Commissions and brokerage fee expenses incurred by our non-insurance businesses are expensed as incurred.
Deferred ceding commissions consist of the ceding commissions from the Hannover Re net account quota share agreement, which are deferred and earned over the period in which the related ceded premium is earned by the reinsuring company. The amount of the deferred ceding commission reported in the statement of financial position as of December 31, 2005 and 2004 was $0 and $1,246, respectively. The accretion of deferred ceding commissions, which is recorded as reduction to other underwriting expenses, for the years ended December 31, 2005, 2004 and 2003 was $826, $11,708 and $9,260, respectively.
We also regularly review our intangible assets for impairment. As of December 31, 2005, we recognized an impairment charge of $0.4 million related to one of our intangible assets, which we deemed to not have a remaining useful life. This impairment charge was incurred at our insurance segment and is reported in other expenses in the consolidated financial statements.
We account for our interest rate collars and swaps in accordance with FAS 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by FAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and FAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” We use derivative financial instruments as cash flow hedges to manage market risks related to the effects of changes in interest rates on our floating rate long-term debt. The cost of these contracts is being amortized over their respective maturities. In addition, the remaining balances are adjusted and carried at their estimated fair values, with the changes therein reported as unrealized gains or losses in other comprehensive (loss) income. The differential, if any, to be paid or received as interest rates change is accrued and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from the counterparties is included as adjustments to accrued interest. See Item 8. Financial Statements and Supplementary Data, Note 13, Derivative Financial Instruments, for additional information related to our interest rate collars.
Premium income, which is our main source of revenue, is generally recognized pro-rata over the respective period of each policy. Premium receivables are recorded net of an estimated allowance for uncollectible amounts. In the event it is determined that the unearned premium reserve for a book of business will not be sufficient to recover the future expected losses and LAE and acquisition and maintenance costs, including consideration of related investment income, recognition of a premium deficiency would be required through a write down of deferred acquisition costs and corresponding charge to income. In the event deferred acquisition costs are written off entirely, any remaining premium deficiency would be accounted for as a liability with a corresponding charge to income.
Insurance management revenues include management fees of our insurance management segment, which are determined by contract as a percentage of direct premiums written, with an allowance for expected return premiums, for the Reciprocals we manage. Such management fees are estimated, billed and earned monthly based upon the estimated or re-estimated direct premiums written for the calendar year.
For information concerning contingencies to which we are subject, see Item 8. Financial Statements and Supplementary Data, Note 18, Commitments and Contingencies.
As described in Item 8. Financial Statements and Supplementary Data, Note 2, Significant Accounting Policies under the heading “New Accounting Pronouncements,” there are accounting pronouncements that have recently been issued but have not yet been implemented by us. Note 2 describes the potential impact that these pronouncements are expected to have on our financial position, results of operations and cash flows.
Consolidated income from continuing operations for the year ended December 31, 2005 was $32.9 million, or $3.06 per diluted share, an increase of 23% and 19%, respectively, when compared with income from continuing operations of $26.8 million, or $2.57 per diluted share, for the year ended December 31, 2004. Consolidated income from continuing operations increased primarily as a result of increases in underwriting profits on higher net premiums earned and higher net investment income at the insurance segment. Consolidated income from continuing operations for the year ended December 31, 2005 also increased as a result of an increase in the gross margin on insurance management fees. Partially offsetting these increases were net realized investment losses in the current year as compared with net realized investment gains in the prior year and higher interest expense on debt. Commission income was also lower in the current year when compared with the prior year.
Consolidated revenues for the year ended December 31, 2005 increased $74.4 million, or 34%, to $294.8 million from $220.4 million for the year ended December 31, 2004. The increase in consolidated revenues is primarily due to higher net premiums earned at our insurance segment as a result of lower ceded premiums following the termination of the Hannover Re net account quota share reinsurance agreement as of June 30, 2004, higher net investment income as a result of growth in our invested assets and improved yields, and higher insurance management fees. The growth in consolidated revenues for the year ended December 31, 2005 was offset to some extent by net realized investment losses, compared with net realized investment gains for the year ended December 31, 2004, and a decline in commission income at our insurance management segment.
Consolidated net income for the year ended December 31, 2004 was $28.2 million, or $2.70 per diluted share, an increase of 70% and 58%, respectively, when compared with net income of $16.6 million, or $1.71 per diluted share, for the year ended December 31, 2003. Included in consolidated net income for the years ended December 31, 2004 and 2003 were discontinued operations of $1.4 million and $1.2 million, respectively. Other changes in net income are due to the factors discussed in the paragraph above with regard to consolidated income from continuing operations.
Our insurance segment is made up of our four insurance subsidiaries. Holding company operations are also included in the insurance segment due to the segment’s size and prominence and the substantial attention devoted to the segment.
During 2003, we completed the integration of APAC operations and transitioned the management of APAC and Intermed into First Professionals. During the fourth quarter 2003, we negotiated and completed the commutation of our reinsurance with Gerling. We also negotiated our primary excess of loss reinsurance program renewal for 2004 at a reduced cost for the first time in several years. Finally, we played an active part in tort reform on behalf of our policyholders, as well as the health care economy and the citizens of the State of Florida.
Financial data of our insurance segment for the three years ended December 31, 2005, and 2003 is summarized in the table below. Dollar amounts are in thousands.
Selected direct professional liability claim data as of December 31, 2005, 2004 and is summarized in the table below. Dollar amounts are in thousands.
Selected professional liability policyholder information as of December 31, 2005, 2004 and 2003 is summarized in the table below.
Professional liability policyholders (excluding fronting arrangements) includes policyholders whose individual insurance is 90% reinsured under facultative reinsurance agreements. For the periods ended December 31, 2004 and 2003, 111 and 95 such policyholders previously reported under fronting arrangements have been reclassified to professional liability policyholders (excluding fronting arrangements).
The results of our insurance segment include the effects of a significant net account quota share reinsurance agreement with the Hannover Re companies. Amounts ceded under the Hannover Re net account quota share reinsurance agreement for the three years ended December 31, 2005, 2004 and 2003 are summarized in the table below. Dollar amounts are in thousands.
Net premiums written increased 31% to $251.8 million for the year ended December 31, 2005 from $192.5 million for the year ended December 31, 2004. The increase for the year ended December 31, 2005 reflects the termination of cessions under the Hannover Re net account quota share reinsurance agreement, which resulted in a decrease in ceded written premiums of $51.0 million and a corresponding increase in net premiums written for the year ended December 31, 2005, when compared with the year ended December 31, 2004. As cessions under the Hannover Re net account quota share reinsurance agreement were terminated as of June 30, 2004, the agreement did not have a significant impact on net premiums written for the year ended December 31, 2005 and net premiums written during the second half of 2004 and will not have a significant impact in future quarters.
Our investment revenues, which are comprised of net investment income and net realized investment gains and losses, decreased 2% to $24.0 million for the year ended December 31, 2005 from $24.5 million for the year ended December 31, 2004. Net investment income increased primarily as a result of recent growth in our investment portfolio corresponding with increases in our insurance business and to a lesser extent an increase in our overall average yield. Offsetting the increase in net investment income for the year ended December 31, 2005 were net realized investment losses, compared with net realized investment gains for the year ended December 31, 2004. Included in net realized investment losses for the year ended December 31, was an other-than-temporary impairment charge of $0.7 million related to certain of our corporate fixed maturity securities. The net realized investment gains for the year ended December 31, 2004 were partially generated in the process of repositioning our portfolio to increase our mix of tax-exempt investments. Also included in net realized investment gains for the year ended December 31, 2004 was a gain of $2.1 million related to the sale of an investment in a limited partnership.
Net losses and LAE incurred increased 33% to $166.7 million for the year ended December 31, 2005 from $125.2 million for the year ended December 31, 2004. The growth in net losses and LAE incurred is associated with the growth in premiums. Our loss and LAE ratios (defined as the ratio of net losses and LAE incurred to net premiums earned) were 74% and 84% for the years ended December 31, 2005 and 2004, respectively. The lower increase in our net losses and LAE incurred relative to the net premiums earned and corresponding decrease in our loss ratio primarily reflect pricing and other improvements in our insurance business and the resulting improvement in our underwriting results. The improvement in our loss and LAE ratio for the year ended December 31, 2005 reflects the impact of pricing improvements and underwriting actions and favorable claims results, mainly lower numbers of newly reported claims and incidents and stable severity.
The lower closed claim measures reported for the year ended December 31, 2005, including net paid losses and LAE on professional liability claims, and claims and incidents closed are primarily due to our stricter claims philosophy and a decrease in frequency. Also contributing to the lower net paid losses and LAE on professional liability claims was the lower retention after reinsurance in prior years, which reflects the inherent time lag between when premiums are earned and related claims are paid and closed. The number of professional liability claims with indemnity payment was slightly higher; however this was primarily due to an increase in the number of claims that were processed and closed that were already in inventory, as opposed to adverse loss experience. Such fluctuations among periods are not unusual and although the current percentage of CWIP to all claims and incidents closed is slightly higher, it remains within a reasonable range of outcomes for the period relative to our carried reserves.
Interest expense on debt increased 36% to $3.5 million for the year ended December 31, 2005 from $2.6 million for the year ended December 31, 2004. The increase is due to increases in the three-month LIBOR, which is the base rate used to determine the interest on our long-term debt. The interest rates on our long-term debt ranged from 8.09% to 8.61% as of December 31, 2005. We have hedging instruments in place, with maturity dates in 2008, for the purpose of limiting the maximum floating rate interest cost on our long-term debt should the three-month LIBOR continue to increase.
Insurance net income increased 139% to $16.3 million for the year ended December 31, 2004 from $6.8 million for the year ended December 31, 2003. The increase in net income was primarily the result of increases in net premiums earned driven by rate increases implemented during 2003 and declines in the proportion of our premiums ceded to reinsurers as a result of the lower cost of our excess of loss reinsurance program, and lower interest costs related to debt and intersegment expenses. Partially offsetting these developments were a reduction in ceding commissions and an increase in other underwriting expenses. The decrease in ceding commissions resulted from the elimination of further cessions under the Hannover Re net account quota share reinsurance agreement as of June 30, 2004. The increase in other underwriting expenses was driven by the cancellation of fronting programs and an increase in corporate expenses associated with Sarbanes-Oxley compliance. Other expenses increased due to growth in finance charges associated with the Hannover Re net account quota share reinsurance agreement.
Our investment revenues increased 20% to $24.5 million for the year ended December 31, 2004 from $20.3 million for the year ended December 31, 2003. Net investment income increased primarily as a result of recent growth in our fixed income investment portfolio corresponding with increases in our insurance business. Net realized investment gains increased primarily as a result of lower other-than-temporary impairments in 2004 when compared with 2003. During 2003 we recognized losses of $5.3 million for other-than-temporary impairments of two private equity holdings, of which $4.5 million was related to our investment in APAL. In 2004 we recognized an additional other-than-temporary impairment of $0.8 million related to our investment in APAL. With the recognition of this impairment, we have written our investment in APAL down to $0. Net realized investment gains in 2004 also included a gain of $2.1 million related to the sale of an investment in a limited partnership.
Net paid losses and LAE on professional liability claims increased 6% to $119.3 million for the year ended December 31, 2004 from $112.4 million for the year ended December 31, 2003. The number of CWIP increased 24% to 350 for the year ended December 31, 2004 from 283 for the year ended December 31, 2003. The percentage of CWIP to all closed claims and incidents for year ended December 31, 2004 was 14% compared to 13% for the year ended December 31, 2003.
Other underwriting expenses increased 33% to $12.5 million for the year ended December 31, 2004 from $9.4 million for the year ended December 31, 2003. The increase in other underwriting expenses is primarily the result of recent growth in our insurance business and a decrease in ceding commissions resulting from the elimination of cessions under the Hannover Re net account quota share reinsurance agreement during the third quarter of 2004. Also contributing to the 2004 increase were direct costs associated with compliance with the Sarbanes-Oxley Act of 2002 of approximately $1.5 million and lower ceding commissions under reinsurance agreements.
Interest expense on debt decreased 56% to $2.6 million for the year ended December 31, 2004 from $5.9 million for the year ended December 31, 2003. The significant decrease in interest expense on debt for 2004 is primarily due to the retirement of our former bank debt during 2003, which carried higher total borrowing costs, through refinancing in the form of private issuances of long-term debt securities and by repayment using internally generated funds. Included in interest expense on debt for 2003 are charges of $2.5 million related to the unwinding of swap agreements associated with our former bank debt.
Financial and selected other data for the insurance management segment for the years ended December 31, 2005, 2004 and 2003 is summarized in the table below. Dollar amounts are in thousands.
Our TPA segment was comprised of our former wholly owned subsidiary EMI. Effective April 30, 2005, we sold our former third party administration segment’s employee benefits administration business to WebTPA, Inc. As consideration for the sale, we received $0.6 million, which was comprised of $0.4 million in cash and a $0.2 million interest bearing note receivable. A pre-tax gain of $0.4 million was recognized on the sale. Effective June 2, 2005, we sold EMI to a private investor. As consideration for the sale we received $3.5 million in cash. A pre-tax gain of $1.0 million was recognized on the sale. In connection with these sales, we became subject to certain usual and customary obligations related to the indemnification of each buyer for commitments and contingencies that existed as of the respective sale dates. In addition, the sale agreement calls for us to be contractually liable for a specific line of business meeting certain revenue targets and to pay an amount to the private investor should WebTPA, Inc. exercise specified rights under the May 2005 purchase agreement. No amounts have been included in our consolidated financial statements related to these contractual liabilities as the contingencies are not believed to be probable. See Item 8. Financial Statements and Supplementary Data, Note 19, Discontinued Operations, for additional information about the sale of our TPA segment. Financial data for the TPA segment for the years ended December 31, 2005, 2004 and 2003 is summarized in the table below. Dollar amounts are in thousands.
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. As a holding company, we possess assets that consist primarily of the stock of our subsidiaries, and of other investments. The sources of liquidity available to us for the payment of operating expenses, taxes and debt-related amounts include net earnings from and overhead allocations to our insurance management segment and management fees and dividends from our insurance segment. The net earnings of our insurance management segment are derived by providing management services to the Reciprocals and reinsurance brokerage services to these same companies and our insurance subsidiaries. Management fees from our insurance subsidiaries are based upon agreements in place with First Professionals and APAC, pursuant to which we provide substantially all management and administrative services. In accordance with limitations imposed by Florida and Missouri laws, our insurance subsidiaries are permitted, within insurance regulatory guidelines, to pay us dividends of approximately $19.7 million during 2006 without prior regulatory approval.
A number of factors could cause unexpected changes in our consolidated liquidity and capital resources, including but not limited to, the following:
Sources of liquidity include cash from operations, financing arrangements and routine sales of investments. As reported in the consolidated statement of cash flows, net cash provided by operating activities was $104.5 million for the year ended December 31, 2005 compared with $64.9 million and $89.9 million for the years ended December 31, 2004 and 2003, respectively. The majority of the increase in net cash provided by operating activities for the year ended December 31, 2005 is attributable to higher reinsurance recoveries and higher retention of our insurance business due to lower reinsurance ceded. The lower reinsurance for the year ended December 31, 2005 was due in large part to the termination of the Hannover Re net account quota share agreement as of June 30, 2004. Cash flows from operating activities also increased due to a decrease in net loss and LAE payments as a percentage of net premiums written. Cash flows from operating activities for the year ended December 31, 2005 also include the proceeds from the commutation of the former 25% quota share reinsurance agreement with APAL and collection of amounts, which did not occur in 2004. Amounts collected from PRI also increased for the year ended December 31, 2005.
Net cash flows used in investing activities was $132.1 million for the year ended December 31, 2005, which was net of $3.9 million received from the disposition of our former TPA segment. Net cash flows used in investing activities were $24.9 million and $91.1 million for the years ended December 31, 2004 and 2003, respectively. The changes in net cash flows used in investing activities are due primarily to net purchases of fixed maturity securities, including short-term investments, which are dependent on cash flows from operating activities and our current investment strategy. Net purchases of fixed maturity securities were $133.1 million in 2005, compared with $25.1 million and $89.2 million in 2004 and 2003, respectively.
Capital resources consist of funds deployed or available to be deployed to support our business operations. We believe our financial strength provides us with the flexibility and capacity to obtain funds externally through debt or equity financing on both a short-term and long-term basis. Our ability to access the capital markets is dependent on, among other things, market conditions. We have accessed the debt market from time to time. The following table summarizes the components of our capital resources at December 31, 2005 and 2004.
The securities are uncollateralized and bear floating interest rates equal to the three-month LIBOR plus spreads ranging from 3.85% to 4.20% (the interest rates ranged from 8.09% to 8.61% as of December 31, 2005). The floating interest rates are adjustable quarterly with changes in the three-month LIBOR, and in the case of two offerings, the maximum rate that may be charged under the securities within the first five years is 12.50%. We have also purchased interest rate collars designed to maintain the ultimate floating rate interest cost on all of these securities within a stated range for five years from closing. We have the option to call the trust preferred securities at par or its equivalent beginning five years from closing. The trust preferred securities also contain features that allow us the option, under certain conditions, to defer interest payments for up to 20 quarters and to redeem the securities before the first optional call date in five years. In the case of the potential earlier call date, the redemption or call price payable by us may be different than par. The securities have stated maturities of thirty years and are due in May and October 2033.
Reinsurance recoverable on paid losses decreased $4.5 million to $14.6 million as of December 31, 2005 from $19.1 million as of December 31, 2004. The decrease is primarily due to the receipt of amounts recoverable under our primary excess of loss reinsurance treaty and the commutation of the quota share agreement with APAL, whereby we received $2.6 million for paid losses recoverable.
We purchase reinsurance from a number of companies to mitigate concentrations of credit risk. Our reinsurance brokers assist us in the analysis of the credit quality of our reinsurers. We base our reinsurance buying decisions on an evaluation of the then current financial strength and stability of prospective reinsurers. However, the financial strength of our reinsurers, and their corresponding ability to pay us, may change in the future due to forces or events we cannot control or anticipate. At December 31, 2005 our receivable from reinsurers was approximately $332.5 million. We have not experienced any difficulties in collecting amounts due from reinsurers due to the financial condition of the reinsurer. Should future events lead us to believe that any reinsurer is unable to meet their obligations, adjustments to the amounts recoverable would be reflected in the results of current operations. The table below identifies our reinsurers from which our recoverables (net of amounts due to the reinsurer) are $5 million or more as of December 31, 2005. Dollar amounts are in thousands.
* We hold collateral in the form of letters of credit or trust accounts for amounts recoverable from these reinsurers, which are not designated as authorized reinsurers by the applicable departments of insurance of the states that have jurisdiction over the underlying business.
Other assets decreased $13.5 million to $25.8 million as of December 31, 2005 from $39.3 million as of December 31, 2004. The decrease is due in part to a reduction in the amount due from PRI of $5.4 million. In addition, other assets as of December 31, 2004 included an amount due from broker of $4.1 million related to investment sale transactions entered into prior to December 31, 2004 and settled during January 2005. Other assets at December 31, 2004 also included $2.1 million of assets held by our previously owned TPA segment.
As noted above, we use interest rate collars as a hedge to maintain the total borrowing costs of our long-term debt (interest expense on the debt instruments, plus or minus cash flows under the interest rate collar instruments) to within specified ranges. Our total borrowing costs on long-term debt combined with the corresponding cash flows under the related interest rate collars can fluctuate between $2.3 million to $3.8 million annually, until such time as the interest rate collars expire. The interest rate collars are set to expire on dates corresponding with the first dates under the respective long-term debt agreements at which they can be retired by us at our option, which is five years from the date of issue in each case.
We guarantee the floating rate interest and principal obligations under the trust preferred securities issued by three separately created, unconsolidated trusts. In addition, the indenture agreements relating to our junior subordinated debentures and trust preferred securities contain limitations, under certain circumstances, as to (i) the declaration or payment of dividends, or distributions thereon, or the redemption, purchase, acquisition or liquidation with respect to any capital stock of FPIC or its affiliates; (ii) the payment, in certain circumstances, of principal, premium or interest on, or the repayment, repurchase or redemption of, debt securities of FPIC or its affiliates that rank in equal standing with or are junior in interest to the debentures; or (iii) the payment, in certain circumstances, under any guarantees of FPIC or its affiliates that rank in equal standing with, or are junior in interest to, capital securities guarantees relating to the issuance of the debentures. Circumstances that would result in such limitations include a continuing event of default, as defined by the indenture agreements, a default with respect to payment of any obligations under capital securities guarantees, or a continuing interest deferral election by FPIC. See Item 8. Financial Statements and Supplementary Data, Note 12, Long-term debt, for additional disclosures about our trusts and junior subordinated debentures.
AFP has an exclusive ten year management agreement with PRI. During 2002, the management agreement between AFP and PRI was amended to remove the sharing by AFP of 10% of PRI’s statutory net income or loss. In connection with the amendment, AFP agreed to consider certain years open for a period of five years for re-determination based on possible adjustments, if any. There have been no adjustments to date. For additional information about the management agreement between AFP and PRI, see Item 1, Business and Item 1A, Risk Factors.
We provide pension benefits to eligible employees through various defined benefit plans that we sponsor. For additional information about our employee benefit plans, see Item 8. Financial Statements and Supplementary Data, Note 15, Employee Benefit Plans.
The following table illustrates, in thousands, the sensitivity to a change in the discount rate for our defined benefit plans as of December 31, 2005:
We have issued two irrevocable letters of credit in the amount of $500,000 each as collateral under operating leases for the buildings occupied by AFP in Manhasset and Lake Success, New York. We also issue irrevocable letters of credit or place assets in trust under our assumed reinsurance contracts with PRI. The assets in trust and letters of credit serve as collateral to corresponding insurance liabilities recorded on our balance sheet and are not considered to be off-balance sheet obligations. Finally, we are contractually committed to make certain minimum lease payments for the use of property under operating lease agreements.
The liability for losses and LAE represents our best estimate of the unpaid cost of settling claims, including claims that have been incurred but not yet reported. The estimated costs of settling claims are generally based upon past experience adjusted for current trends, and any other factors that would modify past experience. While management believes the liabilities for losses and LAE are adequate to cover the ultimate liability, the actual ultimate loss costs may vary from the amounts presently estimated and such differences could be material. The liability for losses and LAE are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable are reported separately in the consolidated statements of financial position. As of December 31, 2005, our reinsurance balances recoverable related to the liability for losses and LAE were $303.8 million in aggregate.