Consolidated income before income taxes increased 212% from $2,002,000 in 2005 to $6,254,000 in 2006. A significant improvement in our property-casualty segment operations due to the lack of hurricane activity was the primary factor contributing to the improved consolidated results. Life segment operations incurred a net loss before taxes in 2006 of $(658,000), significantly higher than the loss incurred in 2005 of $(297,000). Upward revisions in a litigation settlement adversely impacted life operations for both years. However, the longstanding litigation was settled in 2006.
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) :
While this event had no material impact on our earnings, we did incur an additional assessment from the Mississippi Windstorm Underwriting Association (MWUA) in 2006 totaling over $6,200,000. This assessment was in addition to assessments totaling over $3,000,000 paid in 2005. This assessment was for additional losses incurred by MWUA from Hurricane Katrina in 2005. MWUA is a form of residual market or pooling arrangement that provides coverage to those that are unable to find private insurers willing to insure them. All licensed property and casualty insurers writing applicable coverage are required to participate in these pooling entities. Should the pooling entity incur losses in excess of its ability to pay, the industry participants in the respective states are assessed for the excess losses. Due to the extensive growth and development in the coastal regions of the Gulf of Mexico over the last decade, many of the pools in the states in which we operate, particularly Alabama and Mississippi, have experienced extensive growth. Fortunately, in the case of the MWUA assessment we had adequate reinsurance protection in place and this assessment was covered 100% by our catastrophe reinsurance. We did incur an additional charge for pro-rata reinstatement premium due to the assessment. However, this charge was not material to our earnings.
The combined ratio for 2006 compared to 2005 improved 10.9 percentage points. No hurricane activity during 2006 led to the reduction in the combined ratio.
National Security Insurance Company (life insurer) has regulatory adjusted capital of $9.9 and $10.3 million at December 31, 2007 and 2006, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 11.8 and 11.7 at December 31, 2007 and 2006 respectively. Accordingly, National Security Insurance Company exceeds the minimum RBC requirements.
Property and casualty loss reserves are maintained to cover the estimated unpaid liability for losses and loss adjustment expenses with respect to reported and unreported incurred claims. Loss reserves are an estimation based on actuarial projection techniques common in the insurance industry. Reserves are management’s expectations of what the settlement and administration of claims will cost. Management estimated reserves are based on historical settlement patterns, estimated salvage and subrogation, and an appraisal of the related facts and circumstances. Management’s reserve estimates are reviewed by consulting actuaries to determine their adequacy and reasonableness.
For purposes of reporting cash flows, cash includes cash-on-hand, demand deposits with banks and overnight investments.