Policyholder benefits paid (claims) decreased 22.5%, ending 2012 at $34,105,000 compared to $44,025,000 for the same period last year. Claims as a percentage of net premiums earned totaled 65.8% for 2012 compared to 78.3% in 2011. The primary reason for the $9,920,000 decrease was lower claims activity in the P&C segment primarily related to less storm activity during 2012 compared to 2011 coupled with decreased claims in the automobile line of business in 2012 compared to 2011. However, while comparatively better, claims were still elevated in the current year due to losses and LAE reported from Hurricane Isaac.
Deferred policy acquisition cost amortization and commission expenses increased $99,000 for the year ended December 31, 2012 at $1,406,000 compared to $1,307,000 for the same period last year; an increase of 7.6%. The increase in expense was primarily due to a reduction in cost capitalized in the current year to a change in accounting rules related to limitations on capitalization of costs associated with unsuccessful sales in life and A&H insurance products.
Property and casualty operations constitute our largest segment composing 87.2% and 87.8% of our total premium revenue in 2012 and 2011, respectively. Premium revenues and operating income for the P&C segment for the year ended December 31, 2012 and 2011 are summarized below:
in automobile premium revenue in the current year compared to the prior year. No auto policies were in-force at December 31, 2012.
The P&C segment continued to be involved in litigation pertaining to claims from Hurricane Katrina which impacted our coverage areas in Louisiana and Mississippi in August 2005. The cumulative claims associated with Hurricane Katrina exceeded the $37,500,000 million upper limit of the reinsurance agreement in effect during 2005. For the year-ended December 31, 2012, claims exceeding the upper limits of our reinsurance related to Hurricane Katrina totaled $193,000. Nine claims remain open from Hurricane Katrina and based on presently available information, management believes reserves are adequate to cover the ultimate liability.
The P&C segment ended 2012 with pre-tax net income of $2,552,000 compared to a pre-tax net loss of $4,389,000 for the same period last year. The primary reason for the net income in the current year was the $10,025,000 decrease in claims in 2012 compared to 2011. However, partially offsetting the decrease in claims was $3,390,000 in reported losses and LAE related to Hurricane Isaac in 2012. In addition, decreases in deferred acquisition costs and commissions of $473,000 and $527,000, respectively, coupled with an increase of $417,000 in realized investment gains all contributed to the increase in net income in 2012 compared to 2011. The combination of declining revenue and increased claims led to the negative results in the prior year.
Litigation settlement and defense costs incurred by NSG for the year ended December 31, 2012 and 2011 totaled $13,328,000 and $1,626,000, respectively. The $11,826,000 increase is directly related to the settlement of the Mobile Attic litigation matter as discussed in detail in Note 15 to the consolidated financial statements with additional commentary included in Liquidity and Capital Resources. On June 20, 2012, the Company and The Bagley Family Revocable Trust (Bagley Trust) reached a settlement agreement to dispose of the Mobile Attic related action. Under terms of the settlement, the Company agreed to pay Bagley Trust $13,000,000. The Company paid $2,500,000 to the Bagley Trust on September 18, 2012, with the balance payable in nine equal annual installments beginning in November 2013 with a final payment in 2021. The settlement agreement contains an option for the Company to defer payments in years in which its P&C subsidiaries incur substantial catastrophe losses, providing some flexibility in regards to capital management. The settlement agreement also requires annual debt service payments to equal or exceed any payment of dividends to shareholders in the preceding twelve months.
As depicted in the table above, the Company's investment allocation shifted slightly to lower quality investment grade securities. This shift occurred primarily in the life insurance subsidiary and resulted from an increased allocation in corporate bonds. Most of the shift was composed of purchases of intermediate term corporate bonds. While credit quality dropped moderately, the corporate bonds provided increased yield and improved cash flow predictability, better matching duration and crediting rate of insurance liabilities in what continues to be a challenging interest rate environment. The Company closely monitors its investment holdings and believes the slight reduction in credit quality will be offset by higher yields versus lower risk alternatives. The Company reviews investment allocations throughout the year and makes adjustments within the portfolio as needed.
Except as discussed above and in Note 15 to these consolidated financial statements, the Company is unaware of any known trends, events, or uncertainties reasonably likely to have a material effect on its liquidity, capital resources, or operations. Additionally, the Company has not been made aware of any recommendations of regulatory authorities, which if implemented, would have such an effect.
At December 31, 2012 or 2011, the Company recorded $9,097,000 and $9,558,000, respectively, as an asset for DAC in the financial statements. We do not foresee any issues related to recoverability of these capitalized costs. For more information regarding deferred policy acquisition costs, see Note 1 to our financial statements.
Property and equipment is carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment. Significant costs incurred for internally developed software are capitalized and amortized over estimated useful lives of 3 years. Maintenance, repairs, and minor renovations are charged to expense as incurred. Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the respective account and the resulting gain or loss is included in the results of operations. The Company provides for depreciation of property and equipment using the straight-line method designed to amortize costs over estimated useful lives. Estimated useful lives range up to 40 years for buildings and from 3-10 years for electronic data processing equipment and furniture and fixtures. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
In December 2005, the Company formed National Security Capital Trust I, a statutory trust created under the Delaware Statutory Trust Act, for the sole purpose of issuing, in private placement transactions, $9,000,000 of trust preferred securities (TPS) and using the proceeds thereof, together with the equity proceeds received from the Company in the initial formation of the Trust, to purchase $9,279,000 of variable rate subordinated debentures issued by the Company. The Company owns all voting securities of the Trust and the subordinated debentures are the sole assets of the Trust. The Trust will meet the obligations of the TPS with the interest and principal paid on the subordinated debentures. The Company received net proceeds from the TPS transactions, after commissions and other costs of issuance, of $9,005,000. The Company also holds all the voting securities issued by the Trust and such trusts are considered to be VIE's. The Trust is not consolidated because the Company is not the primary beneficiary of the trust. The Subordinated Debentures, disclosed in Note 8, are reported in the accompanying Consolidated Balance Sheets as a component of long-term debt. The Company's equity investments in the Trust total $279,000 and are included in Other Assets in the accompanying consolidated balance sheets.
The Company’s interest rate swaps include provisions requiring the Company to post collateral when the derivative is in a net liability position. The Company has securities on deposit with fair market values of $1,557,000 (all of which is posted as collateral). At December 31, 2011, the Company had cash collateral on deposit of $310,000 in addition to securities on deposit with fair market values of $877,000, all of which is posted as collateral. See Note 5 for additional information about the interest rate swaps.
Under the catastrophe reinsurance program, the Company retains the first $4,000,000 in losses from each event. Reinsurance coverage is maintained in four layers as follows:
A subsidiary of the Company established an Employee Stock Ownership Plan (ESOP) in January 2010, to enable its eligible employees to acquire a proprietary interest in the Company's common stock and to provide retirement and other benefits to such employees. During 2012, $100,000 was contributed to the ESOP to fund the purchase of shares on the open market. There were no costs incurred during 2011.