obligation as of the date of termination and a prepaid benefit cost was recorded. As a result of the termination of the Plan, during 2001, the Insurance Company recognized a curtailment gain of approximately $1,109,000 resulting in a prepaid benefit cost of $1,454,694 as of December 31, 2001.
Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the years ended December 31, 2006 and 2005.
The commercial segment’s loss ratio increased as a result of increased claim severity in the commercial multi-peril product line in the 2005 and 2004 accident years in addition to reserve strengthening in the workers compensation product line on prior accident years. The loss ratio in 2004 was lower than what would normally be expected due to redundant development experienced during 2004 coupled with a decline in claim frequency during 2004. Although the farm segment experienced an increase in loss severity in 2005, primarily attributable to fire losses, the increase was more than offset by the increase in net premium earned which caused the decline in the segment’s loss ratio. The marine segment, the Company’s smallest and therefore most volatile segment in terms of its loss ratio, experienced an increase in its loss ratio despite the increase in its net premiums earned. The increased loss ratio was due to increased loss severity in 2005.
Federal Income Tax. During the year ended December 31, 2005 the Company recorded an income tax benefit of approximately $1,152,000 resulting in an effective tax rate of 14.5%. Federal income taxes do not bear the usual relationship to pre-tax income primarily as a result of the effects of the reduction of the deferred tax asset valuation allowance, non-taxable investment income and other provision to return variances. During the quarter ended September 30, 2005 the Company’s management reassessed the need for a full valuation allowance, and based on all available evidence, including the Company’s cumulative net income for recent fiscal years, estimates of current and future profitability and the overall prospects of our business, concluded that a full valuation allowance was no longer necessary. As a result, the valuation allowance was reduced by approximately $3,855,000 which is reflected in the 2005 income tax benefit. The Company’s federal income tax expense excluding the effect of the change in the valuation allowance was $2,704,000 resulting in an effective tax rate of 34.1% for the year ended December 31, 2005. See Note 5 to the consolidated financial statements, included elsewhere in this report, for further information regarding federal income taxes. Such information is incorporated herein by reference.
During the year ended December 31, 2005 other-than-temporary impairment losses on available-for-sale equity investments amounted to $98,774 which are included in net realized investment gains (losses) on investments in the consolidated statement of operations. There were no other-than-temporary impairment losses in 2006 or 2004.
The following tables show the estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at December 31, 2006 and 2005.
FIC’s statutory capital and surplus at December 31, 2006 and 2005 and statutory net income (loss) for the years ended December 31, 2006, 2005 and 2004 are as follows: