Our growth in premiums, underwriting results and investment income have been, and continue to be, influenced by market conditions, as well as the acquisition of Financial Pacific on October 1, 2005. The Group’s financial statements include Financial Pacific and its results of operations for the entire year of 2006 and for the period of October 1, 2005 through December 2005.
In 2005, net investment income increased $1.6 million, or 57.2%. Although our investment income benefited in 2005 from higher short-term interest rates, the majority of the increase, $1.4 million, or 50.8 percentage points of the increase, was attributable to the inclusion of the net investment income of Financial Pacific since its acquisition by the Group.
Net realized gains for 2005 were $1.3 million, as compared to $484,000 in 2004. As noted above, these gains were taken as part of the process of funding the acquisition of Financial Pacific Insurance Group. In 2005, net realized investment gains of $1.3 million included gains on securities sales of $2.4 million, offset by losses on securities sales of $1.1 million. The losses from securities sales were comprised of $357,000 from the sale of fixed income securities, $245,000 from the sale of equities, and $517,000 from the writedown of securities determined to be other-than-temporarily impaired. These securities were written down to our estimate of fair market value at the time of the write-down. For the quarter and year ended December 31, 2005, the Group’s net realized gain on the interest rate swap agreements was $122,000.
The estimated fair value and unrealized loss for securities in a temporary unrealized loss position as of December 31, 2005 are as follows :
The principal source of liquidity for the Holding Company (which has modest expenses and does not currently, or for the foreseeable future, need a significant regular source of cash flow to cover these expenses other than its debt service on its indebtedness to Mercer Insurance Company and its quarterly dividend to shareholders) is dividend payments and other fees received from the insurance subsidiaries, and payments it receives on the 10-year note it received from the ESOP (see below) when the ESOP purchased shares at the time of the Conversion.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Mercer Insurance Group, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2007, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
For the year ending December 31, 2006, there were no agents in the Group that individually produced greater than 5% of the Group’s direct written premiums. For the years ending December 31, 2005 and 2004, approximately 17% and 24% of the Group’s direct premiums written were produced by two agents, including one who is a related party (see Note 15 for information about related party transactions).
With $120.1 million of recorded reserves, net of reinsurance, at December 31, 2006, commercial multi-peril is the line of business that carries the largest net loss and loss adjustment expense reserves, representing 73% of the Group’s total carried net loss and loss adjustment expense reserves at December 31, 2006. As a result of changes in estimates of insured events in prior years, the liabilities for prior year losses and loss adjustment expenses for the commercial multi-peril line of business increased by $9.6 million in 2006.
During the third quarter of 2006, the Group commuted all reinsurance agreements with Alea North America Insurance Company (Alea). These reinsurance agreements included participation in the property quota share and casualty excess of loss treaties. As a result of the commutation, the Group received a cash payment of $4.5 million, and recorded a pre-tax net loss on commutation of $160,000.
The effect of reinsurance on the liability for losses and loss adjustment expenses, and on losses and loss adjustment expenses incurred is as follows:
Amortization expense for intangible assets subject to amortization was $ 54, $14, $0 in 2006, 2005 and 2004. Estimated amortization expense for 2007 and future years is as follows: