The reinsurance program for our life insurance subsidiary remained largely unchanged in 2006 from 2005. The retention on our standard individual life cases remained the same at $.2 million for insureds ages 65 or less and $.1 million for insureds ages 66 or older. For catastrophe excess claims we continue to retain $1.0 million of the ultimate net loss, and we are indemnified for the excess up to a maximum of $5.0 million. Refer to the Reinsurance section of Part I, Item 1 “Business” for a more detailed discussion of our life reinsurance program.
We conduct our operations through two distinct segments: property and casualty insurance and life insurance. We manage these segments separately because they generally do not share the same customer base and they each have different pricing and expense structures. We evaluate segment profit or loss based upon operating and investment results, which is reported on a pre-tax basis in the following sections of the Management’s Discussion and Analysis. Detailed segment information is presented in Part II, Item 8, Note 10 to the Consolidated Financial Statements.
Our net loss ratio in the workers’ compensation line of business was 74.1 percent in 2006, 62.9 percent in 2005 and 81.5 percent in 2004. The challenges facing workers’ compensation insurance providers include the state regulatory climates in some states that make it difficult to obtain appropriate rate increases and inflationary medical costs. We consider our workers’ compensation business to be a companion product; we do not write stand-alone workers’ compensation policies. Our workers’ compensation insurance covers primarily small- to mid-size accounts. The deterioration in this line during 2006 was primarily due to an increase in claim severity experienced in 2006 over 2005. The improvement in this line during 2005 resulted primarily from a reduction in loss frequency.
Our assumed reinsurance line of business improved in 2006, ending the year with a net loss ratio of 57.5 percent. The line deteriorated in 2005, ending the year with a net loss ratio of 137.8 percent, compared with 46.8 percent in 2004. Assumed losses increased by $11.4 million between 2004 and 2005. The deterioration in the 2005 net loss ratio compared to 2004 and the improvement in our net loss ratio from 2005 to 2006 was primarily due to the impact Hurricane Katrina and Hurricane Rita had on our assumed loss experience during 2005. In recent years, we have significantly reduced the level of our assumed reinsurance business. We continue to have exposure, primarily with respect to catastrophe coverage related to the runoff business, as well as to the small number of assumed reinsurance contracts that we have continued to underwrite.
We have significant cash flows from sales of investments and scheduled and unscheduled investment security maturities, redemptions and prepayments. These investing cash flows totaled $372.1 million in 2006 and $289.2 million in 2005, which together with cash flows from operations were sufficient for our cash flow needs in both years. If our operating and investing cash flows had not been sufficient to support our operations, we may also borrow up to $50.0 million on a bank line of credit. Under the terms of our credit agreement, interest on outstanding notes is payable at the lender’s prevailing prime rate, minus 1.0 percent. We did not borrow against our line of credit during 2006 or 2005.
Stockholders’ equity increased from $500.2 million at December 31, 2005, to $680.8 million at December 31, 2006, an increase of 36.1 percent, which resulted from net income of $88.1 million, net proceeds from our common stock
Upon acquisition, we classify investment securities as held-to-maturity, available-for-sale, or trading. We record investments in held-to-maturity fixed maturities at amortized cost. We record available-for-sale fixed maturities, trading securities, equity securities and other long-term investments at fair value. We record mortgage loans and short-term investments at cost and policy loans at the actual amount loaned to the policyholder.
We record a deferred asset for our life insurance segment’s policy acquisition costs. At December 31, 2006, we had $77.4 million in deferred policy acquisition costs related to our life insurance segment, compared to $65.6 million at December 31, 2005. Substantially the entire asset relates to our universal life and investment (i.e. annuity) contracts, hereafter referred to as non-traditional business.
•The historical patterns of claim frequency and severity utilized within our IBNR reserve calculation, without considering unusual events, are consistent and will continue to be consistent; and
•Assuming that we have liability for all claims, even though the issue of liability may in some cases be resolved in our favor.
Realized gains or losses on disposition of investments are included in the computation of net income. Cost of investments sold is determined by the specific identification method. Changes in unrealized appreciation and depreciation, with respect to available-for-sale fixed maturities and equity securities, are reported as a separate component of accumulated other comprehensive income, less applicable income taxes.
In addition, we are a defendant in legal actions arising from normal business activities. Management, after consultation with legal counsel, is of the opinion that any liability resulting from these actions will not have a material impact on our financial condition and operating results.
Pursuant to our adoption of SFAS No. 123(R), “Share-Based Payment” on January 1, 2006, we now recognize stock-based compensation expense on options granted under our stock option plans. This expense is based on the fair value of the respective stock award and is recognized ratably over the underlying vesting period. We utilized the modified-prospective method prescribed by SFAS No. 123(R) in transitioning to this new accounting treatment for stock-based compensation expense. This method requires that stock-based compensation expense be recorded for all stock options granted subsequent to January 1, 2006 and all unvested stock options that existed upon the adoption of SFAS No. 123(R) in 2006.
In July 2006, FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” was issued to clarify accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as the derecognition of a tax position previously recognized in the financial statements. FIN 48 also prescribes expanded disclosure requirements for unrecognized tax benefits recorded. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt this interpretation effective January 1, 2007 and do not expect the adoption of FIN 48 to have a material impact on our Consolidated Financial Statements.
(1) Note: Includes an adjustment to reflect the change in the market value of our limited partnership investments.
The unrecognized prior service cost and the unrecognized actuarial loss are being amortized on a straight-line basis over an average period of approximately 11 years. This period represents the average remaining employee service period until the date of full eligibility. We anticipate amortization of prior service costs and net losses for 2007 to be $107,000 and $855,000, respectively. The following table provides the components of net periodic benefit cost for the plans for 2006, 2005 and 2004.