The P&C segment ended 2008 with a year to date pre-tax net loss from underwriting of $8,872,000 compared to a pre-tax underwriting income of $4,421,000 for the same period last year. The unprecedented tornado and windstorm activity during the first half of 2008 combined with the losses incurred from Hurricanes Gustav and Ike during September led to the underwriting losses for the year. The P&C companies were slammed with nineteen storms in the first half of 2008 which increased losses by almost $5,000,000. None of the storms were individually significant enough to reach our layers of reinsurance protection but cumulatively, significantly adversely impacted our underwriting profitability. The reinsurance agreement for 2008 was structured with retention of $3,500,000 and the company retaining 5% of losses between $3,500,000 and $17,500,000. Two additional layers provide 100% coverage up to $57,500,000 with one reinstatement. Gross losses and loss adjustment expenses incurred from Hurricane Gustav totaled $14,140,000 ($4,032,000 after reinsurance recoveries) while gross losses and loss adjustment expenses incurred from Hurricane Ike totaled $4,271,000 ($3,539,000 after reinsurance recoveries). Net of reinsurance, total 2008 pre-tax income was reduced by $12,474,000 from catastrophe related losses and loss adjustment expenses. Net of tax, catastrophe related losses totaled $8,233,000 and reduced net income by $3.33 per share.
Discontinued operations consist of the operations of Mobile Attic Inc. On April 5, 2007, The National Security Group, Inc. entered into an agreement with a private investment group to sell ninety percent of its fifty percent equity interest in Mobile Attic, Inc. Total cash proceeds from the sale were $2,700,000 and the net gain on the disposal totaled $1,460,000. Under the terms of the agreement, NSG transferred assets of approximately $11,688,000 consisting primarily of portable storage leasing equipment. NSG was also released from debt obligations totaling $10,251,000 consisting primarily of short term debt used to finance portable storage leasing equipment.
As for the composition of the RMBS portfolio, agency mortgage backed securities compose 69% and 74% of the RMBS portfolio at December 31, 2008 and 2007, respectively. The remainder of the RMBS portfolio is composed of private label mortgage backed securities. These securities consist primarily of conventional 15 and 30 year loans with an average borrower FICO score of 740. We own no mortgage backed securities backed by subprime loans and less than 1% of the RMBS portfolio is composed of loans subject to rate resets. One security in the private label mortgage backed security portfolio is rated below investment grade and it composes less than 1% of the RMBS portfolio.
As disclosed in Note 13 to the consolidated financial statements, in 2008, the amount that The National Security Group’s insurance subsidiaries can transfer in the form of dividends to the parent company is limited to $820,000 in the life insurance subsidiary and $2,678,000 in the property/casualty insurance subsidiary. Due to a decline in capital position in the subsidiaries, the ability of the subsidiaries to pay dividends to the parent company has been reduced. However, the decreased capital levels pose no short term threat to our ability to fund the obligations of the parent company. Should capital levels continue to decline in 2009, the threat of further stockholder dividend reductions could materialize.
NSFC and Omega generally reinsure with third parties any liability in excess of $225,000 on any single policy. In addition, the property and casualty segment holds a catastrophe contract which covers losses related to a catastrophic event with multiple policyholders affected. In the event a catastrophe exceeds the $3.5 million retention stated in the contract, reinsurers will reimburse the company 95% (5% co-pay) of gross losses and loss adjustment expenses paid up to $ 17.5 million (layer one and layer two of the contract). If losses exceed $ 17.5 million, the contract allows for 100% reimbursement of losses and loss adjustment expenses up to $57.5 million. Any losses above the $57.5 million cap are the responsibility of our company. The contract in place during 2008 also allowed one reinstatement for coverage under the contract for a second catastrophic event if needed. The contract provided protection up to at least a 100 year “near term” event as depicted in catastrophe modeling results. The “near term” catastrophe modeling results reflect a predicted increase in storm activity given the current weather pattern and various factors projected to impact our weather patterns in the near term. We believe that maintaining protection to at least a 100 year near term event will be comparable with our past practice of maintaining catastrophe reinsurance protection up to a 250 year event under the previous models. During 2008, our company incurred losses from Hurricane Gustav which reached the first and second layer of the catastrophe contract. In addition, Hurricane Ike losses and loss adjustment expenses also exceeded $3.5 million forcing the company to use the reinstatement under the contract to cover losses for this storm as well.
The Company expenses advertising costs as incurred. Advertising costs charged to expense were $186,000 for the year ended December 31, 2008 ($193,000 for the year ended December 31, 2007). Advertising cost consists primarily of agent conventions expense and print media.
A summary of securities held-to-maturity with unrealized losses as of December 31, 2008 and 2007 along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:
Under pre-1984 life insurance company tax laws, a portion of NSIC's gain from operations was not subject to current income taxation, but was accumulated for tax purposes in a memorandum account designated "policyholders' surplus". The aggregate balance in this account, $3,720,000 at December 31, 2008, would be taxed at current rates only if distributed to shareholders or if the account exceeded a prescribed minimum. The Deficit Reduction Act of 1984 eliminated additions to policyholders' surplus for 1984 and thereafter. Deferred taxes have not been provided on amounts designated as policyholders' surplus. The deferred income tax liability not recognized is approximately $1,270,000 at December 31, 2008.