We are an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents and general agents, control substantially all aspects of the insurance underwriting, distribution and claims process. We are authorized to underwrite personal automobile insurance, commercial general liability insurance, homeowners’ property and casualty insurance and mobile home property and casualty insurance in various states with various lines of authority through our wholly owned subsidiaries, Federated National and American Vehicle. We internally process claims made by our own and third party insureds through our wholly owned claims adjusting company, Superior. We also offer premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium.
The most significant events affecting our results of operations and financial condition were the impacts of the 2006-2005 and 2004-2005 hurricane seasons. Federated National incurred significant losses relative to its homeowners’ insurance line of business. For further discussions relative to the hurricanes’ impact please see our section titled “REINSURANCE”
A summary of long-term contractual obligations as of December 31, 2005 follows. The amounts represent estimates of gross undiscounted amounts payable over time.
In November 2005, the FASB released FASB Staff Position Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which effectively replaces EITF Issue No. 03-1. FSP 115-1 contains a three-step model for evaluating impairments and carries forward the disclosure requirements in EITF Issue No. 03-1 pertaining to securities in an unrealized loss position is considered impaired; an evaluation is made to determine whether the impairment is other-than-temporary; and, if an impairment is considered other-than-temporary, a realized loss is recognized to write the security’s cost or amortized cost basis down to fair value. FSP 115-1 references existing other-than-temporary impairment guidance for determining when an impairment is other-than-temporary and clarifies that subsequent to the recognition of an other-than-temporary impairment loss for debt securities, an investor shall account for the security using the constant effective yield method. FSP 115-1 is effective for reporting periods beginning after December 15, 2005, with earlier application permitted. We do not expect that adoption of this FSP 115-1 will have a material impact on the Company’s net income in 2006.
We have determined that all of these securities do not qualify for other than temporary impairment or permanent impairment status. Our rational includes, but is not limited to, Standard and Poor’s rating of no less than BB++, no delinquent interest and dividend payments, near term maturity dates and our ability and intent to hold these securities for a period sufficient to allow for an anticipated recovery in market value. For a further discussion on our investments please refer to Footnote three, titled INVESTMENTS.
Prepaid reinsurance premiums increased $6.6 million, or 120.2%, to $12.1 million as of December 31, 2005, as compared to $5.5 million as of December 31, 2004. The increase is due to the overall rise in the cost of reinsurance premiums associated with our homeowners’ book of business premiums, our payment patterns, and the amortization of prepaid reinsurance premiums.
Deferred income taxes, net, decreased $1.0 million, or 26.0%, to $2.7 million as of December 31, 2005, as compared to $3.7 million as of December 31, 2004. The decline is primarily due to a $0.8 million increase in the deferred tax liability in connection with deferred acquisition costs, net.
The Company’s sale of homeowners’ policies increased $13.3 million, or 21%, to $75.7 million for the year ended December 31, 2005, as compared to $62.4 million in the same period of fiscal 2004. The increase in our homeowners’ gross premium written is primarily due to the Company’s rate increase of 22.4% that was affected December 1, 2004. The approximate average premium on the policies currently in force is approximately $1,849, as compared to $1,571 for 2004, and the typical deductible is $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims. The Company increased its rates again by an average 14.9% as of December 31, 2005.
The September 2004 Notes pay interest at the annual rate of 6%, mature on September 30, 2007, and rank pari passu in terms of payment and priority to the July Notes. Quarterly payments of principal and interest due on the September 2004 Notes, like the July 2003 Notes, may be made in cash or, at our option, in shares of our Common Stock. If paid in shares of Common Stock, the number of shares to be issued shall be determined by dividing the payment due by 95% of the weighted-average volume price for the Common Stock on NASDAQ as reported by Bloomberg for the 20 consecutive trading days preceding the payment date.
Goodwill is stated separately on the balance sheet and totaled $ -0- and $153,546 at December 31, 2005 and 2004, respectively, net of $-0- and $61,419 of accumulated amortization as of December 31, 2005 and 2004, respectively. Our remaining goodwill related to our Express Tax and EXPRESSTAX franchise subsidiaries which were sold on January 1, 2005. The impairment computation for 2004 indicated there was no impairment of goodwill.
In assessing the net realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2005 and 2004, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
Operating segments that are not individually reportable are included in the “All Other” category, which includes the operations of the parent holding company.