Fixed income investment funds are generally invested in securities with intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions. At December 31, 2005, the average life of AFG's fixed maturities was about 6-1/2 years.
AFG realized aggregate losses of $10.4 million during 2005 on $480.9 million in sales of fixed maturity securities (seven issues/issuers) that had individual unrealized losses greater than $500,000 at December 31, 2004. One of the securities was a $319.8 million U.S. Treasury Note due in 2007 that declined in value by $4.3 million (1.3%) from year-end 2004 to the sale date. The remaining six securities were "AAA" rated mortgage-backed securities, two of which increased in fair value by an aggregate of $677,000 and four of which decreased in fair value by an aggregate of $832,000 from year-end 2004 to the sale date.
The judicial climate in some states has had some effect on certain claims in recent years with more liberal coverage decisions, expanded concepts of liability and higher jury awards. Significant case reserve strengthening has occurred in several books of business within this line. Management believes these stronger case reserves will cause future development on known claims to be less than recent historical patterns.
Other income increased $51.9 million (19%) for 2004 compared to 2003 due primarily to a $14.5 million increase in revenues earned by AFG's warranty business, a $10.6 million increase in fee income in certain other property and casualty insurance operations, and an $11.4 million increase in policy fees earned in the annuity and supplemental insurance operations.
Equity in earnings (losses) of investees includes losses of a manufacturing business that was formerly a subsidiary. Equity in net earnings (losses) of investees includes $1.2 million in 2005 compared to $3.2 million in 2004 and $3.1 million in 2003 in losses from this business. In addition, equity in net earnings (losses) of investees for 2005 includes a $3.9 million after-tax impairment writedown on this business.
(h) Includes holding company expenses and a third quarter 2004 charge of $52 million
No compensation cost has been recognized for stock option grants. For information about the SFAS No. 123 "fair value" of options granted, see Note A - "Accounting Policies - Stock-based Compensation." AFG realizes a tax benefit upon the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options ("ISOs") based on the difference between the market value of the common stock and the option exercise price (or sales price for ISOs) on the date the options are exercised (or sold for ISOs). Such benefits are credited to capital surplus and amounted to $3.9 million in 2005, $3.3 million in 2004 and $32,000 in 2003.
GAFRI recently completed an in-depth review of projected costs associated with its former manufacturing operations. Based upon information provided by environmental and other consultants, GAFRI recorded a pretax charge of $9.5 million in the third quarter of 2005. At December 31, 2005, GAFRI had a liability of approximately $15 million for environmental costs and certain other matters associated with the sales of these former operations.
Results for the third quarter of 2004 include a $214.3 million pretax gain on the sale of Provident Financial Group, partially offset by a $52 million charge based on American Premier's settlement of litigation related to environmental clean-up costs at a former railroad site and $35 million in hurricane losses.
Future minimum rentals, related principally to office space, required under operating leases having initial or remaining noncancelable lease terms in excess of one year at December 31, 2005, were as follows: 2006 - $30 million; 2007 - $27 million; 2008 - $24 million; 2009 - $19 million; 2010 - $15 million; and $26 million thereafter. In addition, AFG has 99-year land leases (approximately 91 years remaining) at one of its real estate properties. Minimum lease payments under these leases are expected to total approximately $300,000 in 2006 and are adjusted annually for inflation.