Index to Financial Statements Consolidated gross realized gains were $5.5 million for the year ended December 31, 2005, as compared to $7.3 million and $118.4 million in 2004 and 2003, respectively. Included in consolidated gross realized gains for the year ended December 31, 2003 were gains of approximately $57.6 million from the disposition of four real estate holdings. Additionally, during 2003, the Company reallocated its investment portfolio, resulting in realized gains of approximately $48.8 million. Consolidated gross realized losses were $2.2 million, $2.1 million and $4.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. Included in consolidated gross realized losses for the years ended December 31, 2005, 2004 and 2003 were write downs of approximately $1.0 million, $0.1 million and $4.0 million, respectively, from the recognition of other than temporary impairments on certain investment securities.
Net investment income increased 42.9% as a result of growth in the amount of invested assets from positive cash flows over the past year combined with a capital contribution of $20.0 million coupled with increased yields. Net invested assets increased to $818.5 million as of December 31, 2005 compared to $640.5 million and $473.0 million as of December 31, 2004 and 2003, respectively
Risk Management. Workers’ compensation was the primary line underwritten by the Risk Management segment, concentrating on casualty risk management solutions for accounts that generally produced annual premiums between $500,000 and $5.0 million. In addition, commercial automobile and other liability policies were sometimes written as accompanying lines to the workers’ compensation coverage for certain risk management insureds. These insurance products were designed to meet the needs of business customers that were willing and able to bear a substantial portion of the insurance risk through loss sensitive deductible and retrospectively rated policies.
Effective January 1, 2003, Argonaut Insurance entered into a quota share reinsurance program to assume directors and officers liability premiums and losses on policies underwritten by subsidiaries of HCC. Under the terms of the agreements, Argonaut Insurance assumed 3.33% of premiums and losses under HCC’s USA Directors and Officers Liability program and 5% of premiums and losses under HCC’s International Directors and Officers Liability program for 2003. The percentage assumed by the Company for both programs was reduced to 1.5% effective January 1, 2004, and was renewed in 2005. Gross written premiums assumed under these programs totaled $6.4 million, $9.1 million and $12.6 million, respectively, for the years ended December 31, 2005, 2004 and 2003. The Company committed to participate in each of the directors and officers programs in 2006 with 3.0% quota share participation effective January 1, 2006.
During 2003, the Company, through a series of statutory trusts, sold $27.0 million of Floating Rate Capital securities (the “Capital Securities) (liquidation amount $1,000 per Capital Security) in a series of private sales. In conjunction with the sales of the Capital Securities, the trusts sold $0.8 million of Floating Rate Common Securities to the Company. The trusts used the proceeds from these sales to purchase $27.8 million of Floating Rate Junior Subordinated Debentures (the “Debentures”) from the Company. The interest rates on the Debentures and the Capital Securities are equal to the 3-Month LIBOR plus a margin of 4.10%, reset quarterly. The interest rates are not to exceed 12.5% prior to the coupon cap date, which is approximately 5 years after the issuance date. The Debentures are unsecured and are subordinate in right of payment to all of the Company’s future senior indebtedness. The Debentures are due 30 years after issuance, but may be redeemed after the five-year anniversary at a price equal to 100% of the principal amount of the Debentures, plus accrued and unpaid interest on the date of redemption. The Debentures may be redeemed prior to the five-year anniversary date upon the occurrence of specific events at a price equal to 107.5% to 100.95% plus accrued and unpaid interest to the date of redemption.
(4) 7% annual dividend on convertible preferred stock. Obligation calculated assuming preferred stock will convert on 10 year anniversary date.
In addition to the previously described general uncertainties encountered in estimating reserves, there are significant additional uncertainties in estimating the amount of the Company’s potential losses from asbestos and environmental claims. Reserves for asbestos and environmental claims cannot be estimated with traditional loss reserving techniques that rely on historical accident year development factors due to the uncertainties surrounding these types of claims. Among the uncertainties impacting the estimation of such losses are: (1) potentially long waiting periods between exposure and emergence of any bodily injury or property damage; (2) difficulty in identifying sources of environmental or asbestos contamination; (3) difficulty in properly allocating responsibility and/or liability for environmental or asbestos damage; (4) changes in underlying laws and judicial interpretation of those laws; (5) potential for an environmental or asbestos claim to involve many insurance providers over many policy periods; (6) long reporting delays from insureds to insurance companies; (7) historical data concerning asbestos and environmental losses, which is more limited than historical information on other types of claims; (8) questions concerning interpretation and application of insurance coverage; and (9) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure. Case reserves and expense reserves for costs of related litigation have been established where sufficient information has been developed. Additionally, incurred but not reported reserves have been established to cover additional exposure on known and unknown claims.