Certain financial information for The National Security Group’s three segments (Life segment, property and casualty segment, and other (non-insurance)) is summarized as follows (amounts in thousands):
NSIC had a loss before income taxes in 2005 of $(271,000) compared to income before tax of $216,000 in 2004. Expenses related to ongoing litigation totaled over $375,000 and $250,000 in 2005 and 2004. The litigation expenses are primarily related to an ongoing class action lawsuit which is further discussed in Note 15 of the Consolidated Financial Statements and Form 8-K filed December 15, 2005 and incorporated herein by reference. Based on currently available information, we remain optimistic that this ongoing multi-year litigation will reach final settlement during 2006. This litigation is periodically reevaluated and estimates are adjusted to reflect total estimated cost. While we believe that, based on currently available information, our reserves are adequate to cover the total ultimate cost of this settlement, until a final settlement is approved; it is possible that our litigation reserve may have to be adjusted.
In 2005, Mobile Attic generated net income of $275,000 primarily due to franchise fees generated on the strength of sales of new franchise locations. As individual franchise locations begin to mature over the next five years, the Company expects a shift in revenue away from one time franchise fees to more stable continuing royalty fees which are based on a percentage of individual franchisee rental revenues.
In estimating the time interval for payment of property and casualty claim reserves, the Company utilized historical payment patterns. By the nature of the insurance contracts under which these liabilities exist, there can be no certainty that actual payments will fall in the periods indicated above. However, management feels that current liquidity and capital resources are sufficient to pay these obligations as they come due. Also, due to the relatively short-tail nature of the majority of the Company’s claim liabilities, management can conclude with a reasonable level of confidence that historical patterns indicate that approximately 70% of claim liabilities at the end of a given year are settled within the following two year period.
National Security Insurance Company (life insurer) has regulatory adjusted capital of $10.78 and $11.45 million at December 31, 2005 and 2004, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 13.3 and 14.0 at December 31, 2005 and 2004 respectively. Accordingly, National Security Insurance Company exceeds the minimum RBC requirements.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $27.2 million and $23.9 million at December 31, 2005 and 2004, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 4.4 and 3.6 at December 31, 2005 and 2004 respectively. Accordingly, National Security Fire & Casualty Company exceeds the minimum RBC requirements.
Omega One Insurance Company (property/casualty insurer), which began writing business in late 1995, has regulatory adjusted capital of $8.0 million and $7.6 million at December 31, 2005 and 2004, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 17.4 and 12.3 at December 31, 2005 and 2004 respectively. Accordingly, Omega One Insurance Company exceeds the minimum RBC requirements.
At December 31, 2005, the estimated reinsurance recoverable recorded was $10,193,000. The Company does not anticipate any issues with collection of the recorded amount.
A reduction in DAC is recognized if the sum of the expected loss and loss adjustment expenses, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums and projected investment income. Management reviews DAC calculations throughout the year to establish and assess their recoverability. Changes in management’s assumptions, estimates or judgment with respect to calculating DAC could materially impact our financial statements and financial condition. Changes in loss ratios, projected investment income, premium rates or overall expense levels could negatively impact the recoverability of DAC.
casualty lines, the most significant of which are homeowners and nonstandard automobile
outstanding during each year. The adjusted weighted average shares outstanding were 2,466,600 (2,466,600 in 2004 and 2003).
other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Amounts paid for prospective reinsurance contracts are reported as prepaid reinsurance premiums and amortized over the remaining contract period.
In December 2005, the Company formed National Security Capital Trust I (the Trust), a statutory trust created under the Delaware Statutory Trust Act, for the sole purpose of issuing, in private placement transactions, $9 million 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 $9.3 million 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 million. 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 Sheet as a component of long-term debt. The Company’s equity investments in the Trusts total $279,000 and are included in Other Assets.