Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The National Security Group, Inc. (referred to in this document as "we", "our", "us", "Company" or "NSEC") and its subsidiaries. We are a “smaller reporting company” under Securities and Exchange Commission (SEC) regulations and therefore qualify for the scaled disclosure of smaller reporting companies. In general, the same information is required to be disclosed in the management discussion and analysis by smaller reporting companies except that the discussion need only cover the latest two year period and disclosures relating to contractual obligations are not required. In accordance with the scaled disclosure requirements, the following discussion generally covers the change in financial condition, results of operations and cash flows for the year ended December 31, 2019 compared to the year ended December 31, 2018 and should be read in conjunction with the Selected Financial Data and Consolidated Financial Statements and Notes which accompany this report. Please refer to our note regarding forward-looking statements on page 4 of this report.
The National Security Group, Inc. operates in ten states with 45.9% of total premium revenue generated in the states of Alabama and Mississippi. We operate in two business segments summarized as follows:
|
|
•
|
The Property and Casualty (P&C) segment is the most significant segment, accounting for 91.1% of gross earned premium in 2019. The P&C segment operates in the states of Alabama, Arkansas, Georgia, Louisiana, Mississippi, Oklahoma, South Carolina, and Tennessee.
|
|
|
•
|
The Life segment accounted for 8.9% of gross premium revenue in 2019. The Life segment is licensed to underwrite life and accident and health insurance in Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee and Texas.
|
The P&C segment is conducted through National Security Fire & Casualty Company (NSFC), a wholly owned subsidiary of the Company organized in 1959, and Omega One Insurance Company (Omega), a wholly owned subsidiary of NSFC organized in 1992. Omega produces no direct written premium and is authorized to underwrite lines of business similar to NSFC; therefore, all references to NSFC or P&C segment in the remainder of this discussion will include the insurance operations of both NSFC and Omega.
The Life segment business is conducted through National Security Insurance Company (NSIC), a wholly owned subsidiary of the Company organized in 1947. All references to NSIC or life segment in the remainder of this management discussion and analysis will refer to the combined life, accident and health insurance operations.
Our income is principally derived from net underwriting profits and investment income. Net underwriting profit is principally derived from earned premiums received less claims paid, sales commissions to agents, costs of underwriting and insurance taxes and fees. Investment income includes interest and dividend income and gains and losses on investment holdings.
All of the insurance subsidiaries are Alabama domiciled insurance companies; therefore, the Alabama Department of Insurance is the primary insurance regulator. However, each subsidiary is subject to regulation by the respective insurance regulators of each state in which it is licensed to transact business. Insurance rates charged by each of the insurance subsidiaries are typically subject to review and approval by the insurance department for the respective state in which the rates will apply.
All of our insurance companies have been assigned ratings by A.M. Best Co (Best). On April 11, 2019, A. M. Best affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb" of NSFC. In addition, A.M. Best affirmed the FSR of B+ (Good) and Long-Term ICR of "bbb-" of Omega. The A.M. Best outlook for the ratings is "stable" for NSFC and Omega. A.M. Best upgraded the FSR to B++ (Good) and the Long-Term ICR to "bbb" for NSIC. The outlook for the ratings of NSIC is "stable". A.M. Best also affirmed the Long-Term ICR of "bb" of the parent holding company, NSEC, with a "stable" outlook.
The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On September 30, 2019, Demotech affirmed a Financial Stability Rating of A (Exceptional) for both NSFC and Omega.
The earnings in the property and casualty segment have seasonal volatility due to severe storm activity resulting in incurred losses and loss adjustment expenses from hurricane, tornado, wind and hail related damage. These storm systems or other natural disasters are classified as catastrophes (referred to as "catastrophe" or "cat" events/losses
throughout the remainder of this document) by Property Claim Service (PCS) when an individual event causes $25 million or more in industry wide direct insured losses and affect a significant number of policyholders and insurers.
A primary process utilized by management to review financial performance is evaluating the operating performance of each segment before intercompany eliminations. By performing the evaluation in this manner, management can better assess the profitability of each segment on a standalone basis. To provide information similar to that utilized by management, industry segment information presented in this discussion is presented on a pretax basis by segment before eliminations. Note 15 to the consolidated financial statements in this Form 10-K contains a reconciliation of net income by segment to consolidated net income.
In order to present information as analyzed by Company management, the P&C segment combined ratio in this Management Discussion and Analysis is presented before certain intercompany eliminations. These intercompany eliminations, which are presented in Note 15 to the Consolidated Financial Statements, primarily include management and service fees paid by each subsidiary to NSEC, along with fees and expenses of the Company's employee claims adjusters. Claims adjusters are employees of NSIC but provide claim adjustment services to NSFC at rates comparable to those paid to independent (non-employee) adjusters utilized by NSFC. Management believes that the analysis of the P&C segment combined ratio prior to elimination of the intercompany transactions provides a more realistic view of performance and is consistent with our internal evaluation of operating performance.
In January of 2016, the FASB issued guidance that requires equity securities held for investment to be measured at fair value with changes in fair value recognized in net income through investment gains and losses. Under previous guidance, the change in fair value was reported as a component of Other Comprehensive Income with the change reflected in shareholders' equity and did not impact net income. For us, this new guidance became effective January 1, 2018 and is reported in the Statement of Operations on the line item "Investment gains (losses)" and as a subcomponent in the financial statement notes and this discussion as "change in value of equity securities". Due to the inherent volatility of equity securities, which can be impacted by both company specific and broad economic factors, including the change in fair value of equity securities as a component of net income is likely to produce significant fluctuations in net income from period to period.
Information in this discussion is presented in whole dollars rounded to the nearest thousand, except for per share information. Tabular amounts are presented in thousands.
Summary
For the year ended December 31, 2019, net income for the Company totaled $4,067,000, $1.61 income per share, compared to net income of $779,000, $0.31 income per share, for the year ended December 31, 2018; an increase of $3,288,000. Results in 2019 were improved primarily due to an increase in realized investment gains. Results for 2018 were negatively impacted by Hurricane Michael. On October 10, 2018, Hurricane Michael made landfall in the panhandle of Florida, as a Category 4 storm. Hurricane Michael primarily impacted our policyholders in Georgia; but also affected policyholders in Alabama and South Carolina. The losses incurred from Hurricane Michael reduced fourth quarter 2018 net income by $3,160,000.
Pretax income from operations in 2019 totaled $1,525,000 compared to a pretax income from operations of $1,617,000 in 2018. While pretax income is comparable between periods, weather related losses in the P&C segment were elevated in both years. Losses from Hurricane Michael adversely impacted operating income in 2018 while a higher frequency of non-catastrophe wind and hail losses reduced 2019 pretax operating income.
Financial results for the year ended December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
Consolidated Financial Summary
|
|
Year ended
December 31
|
($ in thousands, except per share)
|
|
2019
|
|
2018
|
Gross premiums written
|
|
$
|
67,529
|
|
|
$
|
67,174
|
|
Net premiums written
|
|
$
|
60,411
|
|
|
$
|
60,717
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
59,883
|
|
|
$
|
60,856
|
|
Net investment income
|
|
3,876
|
|
|
3,941
|
|
Net investment gains (losses)
|
|
3,055
|
|
|
(552
|
)
|
Other income
|
|
585
|
|
|
612
|
|
Total Revenues
|
|
67,399
|
|
|
64,857
|
|
Policyholder benefits and settlement expenses
|
|
38,598
|
|
|
40,409
|
|
Amortization of deferred policy acquisition costs
|
|
3,459
|
|
|
3,597
|
|
Commissions
|
|
7,429
|
|
|
7,555
|
|
General and administrative expenses
|
|
9,698
|
|
|
8,839
|
|
Taxes, licenses and fees
|
|
2,470
|
|
|
2,157
|
|
Interest expense
|
|
1,165
|
|
|
1,235
|
|
Total Benefits, Losses and Expenses
|
|
62,819
|
|
|
63,792
|
|
Income Before Income Taxes
|
|
4,580
|
|
|
1,065
|
|
Income tax expense
|
|
513
|
|
|
286
|
|
Net Income
|
|
$
|
4,067
|
|
|
$
|
779
|
|
Income Per Common Share
|
|
$
|
1.61
|
|
|
$
|
0.31
|
|
Reconciliation of Net Income to non-GAAP Measurement
|
|
|
|
|
Net income
|
|
$
|
4,067
|
|
|
$
|
779
|
|
Income tax expense
|
|
513
|
|
|
286
|
|
Investment (gains) losses, net
|
|
(3,055
|
)
|
|
552
|
|
Pretax Income From Operations
|
|
$
|
1,525
|
|
|
$
|
1,617
|
|
We provide a reconciliation of net income to the non-GAAP measurement "pretax income (loss) from operations". The purpose of this reconciliation is to provide investors with information routinely utilized by management in analyzing and comparing the performance of our insurance operations between periods. This information reflects the financial performance of our insurance operations without the impact of realized capital gains/losses on investments and unrealized capital gains on equity securities which are now required to be included as a component of net income under GAAP. We typically invest in equity securities with a long-term view. Short-term volatility due to changes in market value of equity securities can mask both the positive or negative performance of our insurance operations from period to period.
Premium Revenue
For the year ended December 31, 2019, net premiums earned were down $973,000 at $59,883,000 compared to $60,856,000 during the same period last year. The decrease in premium revenue was primarily driven by a decline in net earned premium in the P&C segment of $818,000. The decline in gross earned premium was primarily attributable to a decrease in our surplus lines business in coastal Louisiana. In addition, P&C segment ceded premium was up $665,000 or 10.4%, in 2019, compared to the same period last year, due to an increase in the cost of our catastrophe reinsurance.
Investment Gains (Losses)
Investment gains for the year ended December 31, 2019 were $3,055,000 compared to investment losses of $552,000 for the year ended December 31, 2018. One primary reason for the increase in 2019 investment gains, compared to the 2018 investment losses, was a gain on our company owned life insurance (COLI) investment of $1,792,000. In addition, in 2019, we had unrealized gains in our equity investments totaling $712,000 compared to unrealized losses
in equity investments of $203,000 in 2018. We also recognized $233,000 in realized gains on the sale of equity securities in 2019.
Net Income
For the year ended December 31, 2019, the Company had net income of $4,067,000, $1.61 income per share, compared to net income of $779,000, $0.31 income per share, for the same period last year. The primary reason for the increase in 2019 earnings compared to 2018 earnings was an increase in investment gains. Investments gains consisted of the gain on company owned life insurance along with gains on equity securities mentioned previously.
Pretax Income from Operations
For the year ended December 31, 2019, our pretax income from operations was $1,525,000 compared to a pretax income from operations of $1,617,000 for the year ended December 31, 2018; a decrease of $92,000. As mentioned previously, catastrophe losses from Hurricane Michael in 2018 were partially offset by increased non-catastrophe wind and hail losses in 2019.
P&C Segment Combined Ratio
For the year ended December 31, 2019, the P&C segment had a GAAP combined ratio of 100.1%. Reported claims from cat events totaling $6,623,000 combined with reported claims from non-catastrophe wind and hail totaling $9,133,000 increased the P&C segment combined ratio in 2019 by 28.9 percentage points. In comparison, for the year ended December 31, 2018, the P&C segment had a GAAP combined ratio of 101.3%. Reported claims from cat events totaling $9,138,000 (net of reinsurance recoveries) combined with reported claims from non-catastrophe wind and hail totaling $6,792,000 increased the P&C segment combined ratio in 2018 by 28.7 percentage points. Partially offsetting the increase in catastrophe losses and non-cat wind and hail losses in 2019 was a decrease in reported fire losses of $976,000 compared to the same period in the prior year.
Overview - Balance Sheet highlights at December 31, 2019 compared to December 31, 2018
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet Highlights
|
|
December 31, 2019
|
|
December 31, 2018
|
($ in thousands, except per share)
|
|
|
|
|
Invested Assets
|
|
$
|
118,969
|
|
|
$
|
112,690
|
|
Cash
|
|
$
|
11,809
|
|
|
$
|
5,676
|
|
Total Assets
|
|
$
|
153,934
|
|
|
$
|
144,231
|
|
Policy Liabilities
|
|
$
|
78,472
|
|
|
$
|
77,988
|
|
Total Debt
|
|
$
|
14,164
|
|
|
$
|
14,352
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
$
|
2,443
|
|
|
$
|
(1,570
|
)
|
Shareholders' Equity
|
|
$
|
53,461
|
|
|
$
|
45,866
|
|
Book Value Per Share
|
|
$
|
21.12
|
|
|
$
|
18.15
|
|
Invested Assets
Invested assets as of December 31, 2019 were $118,969,000 compared to $112,690,000 as of December 31, 2018; an increase of 5.6%. The increase in invested assets was primarily due to a $4,910,000 increase in market value of fixed income securities available for sale. Significant declines in market interest rates over the past twelve months was the primary driver of the increase in market value of fixed income securities.
Cash
The Company, primarily through its insurance subsidiaries, had $11,809,000 in cash and cash equivalents at December 31, 2019, compared to $5,676,000 at December 31, 2018. The primary reason for the increase in cash and cash equivalents compared to last year was timing in investment of positive cash flow from operations and investments.
Total Assets
Total assets as of December 31, 2019 were $153,934,000 compared to $144,231,000 at December 31, 2018. Positive cash flow from insurance operations contributed to an increase in purchases of fixed maturity securities and a $4,910,000 increase in market value of our portfolio of fixed maturity securities further contributed to the increase in total assets for 2019.
Policy Liabilities
Policy related liabilities were $78,472,000 at December 31, 2019, compared to $77,988,000 at December 31, 2018; an increase of $484,000 or 0.6%. Increases in life insurance reserves were partially offset by a decline in P&C reserves leading to a marginal increase in policy liabilities.
Debt Outstanding
Total debt at December 31, 2019 was $14,164,000 compared to $14,352,000 at December 31, 2018. Debt was reduced $188,000 during 2019 primarily from the reduction of long-term debt in our holding company.
Shareholders' Equity
Shareholders' equity as of December 31, 2019 was $53,461,000, up $7,595,000, compared to December 31, 2018 Shareholders' equity of $45,866,000. Book value per share was $21.12 at December 31, 2019, compared to $18.15 per share at December 31, 2018; an increase of 16.4% or $2.97 per share. The primary factors contributing to the increase in both book value per share and Shareholders' equity were net income of $4,067,000 and accumulated other comprehensive income of $4,013,000. The increase in accumulated comprehensive income was driven by increases in market value of our bond investments available for sale. Offsetting the increase in Shareholders' equity was shareholder dividends paid of $531,000.
Industry Segment Data:
Net premiums earned for our two operating segments are summarized as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
2019
|
|
%
|
|
2018
|
|
%
|
Life, accident and health insurance
|
$
|
5,864
|
|
|
9.8
|
%
|
|
$
|
6,019
|
|
|
9.9
|
%
|
Property and casualty insurance
|
54,019
|
|
|
90.2
|
%
|
|
54,837
|
|
|
90.1
|
%
|
Net premiums earned
|
$
|
59,883
|
|
|
100.0
|
%
|
|
$
|
60,856
|
|
|
100.0
|
%
|
The property and casualty segment composed 90.2% of consolidated net premiums earned in 2019 compared to 90.1% in 2018. Through the P&C segment, we offer primarily dwelling fire and homeowners insurance coverage to our customers. The life segment composed 9.8% of net premiums earned in 2019 compared to 9.9% in 2018 with revenue produced from life, accident and supplemental health insurance products. While reading this discussion regarding segment information, reference is made to Note 15 to the Consolidated Financial Statements which provides additional segment related information.
The following discussion outlines more specific information with regard to the individual operating segments of the Company along with non-insurance related information (primarily administration expenses and interest expense on debt) associated with the insurance holding company.
Life and Accident and Health Insurance Operations:
Premium revenues and operating income for the life segment for the year ended December 31, 2019 and 2018 are summarized below:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
2019
|
|
2018
|
REVENUE
|
|
|
|
Net premiums earned
|
$
|
5,864
|
|
|
$
|
6,019
|
|
Net investment income
|
2,677
|
|
|
2,722
|
|
Net investment gains (losses)
|
861
|
|
|
(78
|
)
|
Other income
|
853
|
|
|
1,078
|
|
Total Revenues
|
10,255
|
|
|
9,741
|
|
BENEFITS AND EXPENSES
|
|
|
|
Policyholder benefits paid or provided
|
5,027
|
|
|
5,242
|
|
Amortization of deferred policy acquisition costs
|
736
|
|
|
838
|
|
Commissions
|
281
|
|
|
288
|
|
General and administrative expenses
|
1,948
|
|
|
2,111
|
|
Insurance taxes, licenses and fees
|
285
|
|
|
220
|
|
Interest expense
|
43
|
|
|
48
|
|
Total Expenses
|
8,320
|
|
|
8,747
|
|
INCOME BEFORE INCOME TAXES
|
$
|
1,935
|
|
|
$
|
994
|
|
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Net premiums earned in the life segment was $5,864,000 at December 31, 2019 compared to $6,019,000 at December 31, 2018; a decrease of 2.6%. The $155,000 decrease in net earned premium revenue was primarily due to a decline in new business production in both the traditional life and supplemental accident and health insurance products offered in NSIC.
The table below provides the major categories of investment income, primarily dividend and interest income, for the year ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Year ended December 31,
|
|
2019
|
|
2018
|
Fixed maturities
|
$
|
2,075
|
|
|
$
|
2,108
|
|
Equity securities
|
13
|
|
|
37
|
|
Mortgage loans on real estate
|
8
|
|
|
8
|
|
Investment real estate
|
545
|
|
|
543
|
|
Policy loans
|
142
|
|
|
141
|
|
Other
|
2
|
|
|
1
|
|
|
2,785
|
|
|
2,838
|
|
Less: Investment expenses
|
108
|
|
|
116
|
|
Net investment income
|
$
|
2,677
|
|
|
$
|
2,722
|
|
While NSIC composes only 9.8% of premium revenue, the subsidiary holds 42.6% of consolidated assets. The majority of these assets consist of fixed maturity investments. Net investment income had a moderate, 1.7% decrease at $2,677,000 for the year ended December 31, 2019 compared to $2,722,000 for the same period last year. Lower reinvestment yields on fixed maturity investments due to the declining interest rate environment experienced in 2019 was the primary factor contributing to the moderate decline in interest income.
The table below provides investment gains and losses for the year ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Year ended December 31,
|
|
2019
|
|
2018
|
Realized gains on fixed maturities
|
$
|
37
|
|
|
$
|
96
|
|
Realized gains on equity securities
|
233
|
|
|
—
|
|
Change in fair value of equity securities
|
589
|
|
|
(71
|
)
|
Other gains (losses), principally real estate
|
2
|
|
|
(87
|
)
|
Other-than-temporary impairments
|
—
|
|
|
(16
|
)
|
Net investment gains (losses)
|
$
|
861
|
|
|
$
|
(78
|
)
|
NSIC net investment gains, for the year ended December 31, 2019, were $861,000 compared to net investment losses of $78,000 for the same period last year; an improvement of $939,000. Net investment gains and losses are highly dependent on numerous internal and external factors including but not limited to market conditions, tax position and liquidity needs of the Company and can vary significantly from period to period. A factor contributing to the increase, in 2019, was a $233,000 realized gain primarily from our minority stake in privately held Trinity Bancorp, which merged with privately held River Financial Corporation, in October of 2019, in a cash and stock transaction. A second factor contributing to the increase in net investment gains, in 2019, was an increase in the change in value of equity securities held for investment of $589,000 compared to a loss of $71,000 in the prior year. This increase in the value of equity securities held for investment, in 2019, was primarily driven by improved performance in the overall equity market compared to the prior year.
Other income was $853,000 in 2019 compared to $1,078,000 for the same period last year; a decrease of $225,000. Other income consists primarily of adjuster fees paid to NSIC from the P&C segment. As a percent of net earned premium, other income was 14.5% in 2019 and 17.9% in 2018.
Claims were $5,027,000 through December 31, 2019 compared to $5,242,000 through December 31, 2018; a decrease of $215,000 or 4.1%. The primary reason for the decrease was elevated claim payments in the prior year due to an increase in both ordinary life and industrial life related claims.
Deferred policy acquisition cost amortization and commission expenses decreased $109,000 for the year ended December 31, 2019 at $1,017,000 compared to $1,126,000 for the same period last year; a decline of 9.7%. As a percent of net premiums earned, policy acquisition cost amortization and commission expense was 17.3% in 2019 compared to 18.7% in 2018. A decline in the rate of new business production was the primary reason for the decline in commission expenses.
General and administrative expenses were $1,948,000 in 2019 compared to $2,111,000 in 2018. As a percent of earned premium, general and administrative expenses were 33.2% and 35.1% at December 31, 2019 and 2018, respectively. The $163,000 decrease in general and administrative expenses, in 2019 compared to 2018, was primarily due to a decline in adjuster expenses of $63,000 coupled with a $37,000 decrease in depreciation expenses and a $19,000 decrease in actuarial and consulting fees.
For the year ended December 31, 2019 and 2018, insurance taxes, licenses and fees were $285,000 and $220,000, respectively. As a percent of earned premium, insurance taxes, licenses and fees were 4.9% in 2019 and 3.7% in 2018. The primary reason for the increase in, 2019 compared to 2018, was the payment of expenses associated with our Alabama Department of Insurance examination.
Interest expense was $43,000 for the year ended December 31, 2019 compared to $48,000 for the year ended December 31, 2018. Interest expense in NSIC is associated with interest payments on insurance policies with a deposit fund. Deposit fund balances declined in 2019 leading to a reduction in interest expense.
For the year ended December 31, 2019, the life segment had pretax income of $1,935,000 compared to a pretax income of $994,000 for the same period last year. The $514,000 increase in life segment revenues, primarily driven by investment gains in equity securities, coupled with the $427,000 decrease in life segment expenses were the primary factors contributing to the $941,000 increase in pretax income.
Property & Casualty Operations:
Pretax income for the P&C segment for the year ended December 31, 2019 and 2018 is summarized below:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
2019
|
|
2018
|
REVENUE
|
|
|
|
Net premiums earned
|
$
|
54,019
|
|
|
$
|
54,837
|
|
Net investment income
|
1,683
|
|
|
1,704
|
|
Net investment gains (losses)
|
2,178
|
|
|
(474
|
)
|
Other income
|
575
|
|
|
609
|
|
Total Revenues
|
58,455
|
|
|
56,676
|
|
BENEFITS AND EXPENSES
|
|
|
|
Policyholder benefits paid or provided
|
33,979
|
|
|
35,735
|
|
Amortization of deferred policy acquisition costs
|
2,723
|
|
|
2,759
|
|
Commissions
|
7,148
|
|
|
7,267
|
|
General and administrative expenses
|
8,616
|
|
|
8,472
|
|
Insurance taxes, licenses and fees
|
2,185
|
|
|
1,937
|
|
Total Expenses
|
54,651
|
|
|
56,170
|
|
INCOME BEFORE INCOME TAXES
|
$
|
3,804
|
|
|
$
|
506
|
|
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Net premiums earned in the P&C segment is primarily driven by our dwelling fire and homeowner lines of business. The following table provides premiums earned by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
2019
|
|
2018
|
|
|
Line of Business
|
Premium Earned
|
|
%
of NPE
|
|
Premium Earned
|
|
%
of NPE
|
|
2019
Increase (Decrease) over 2018
|
Dwelling Fire/Allied Lines
|
$
|
40,302
|
|
|
74.6
|
%
|
|
$
|
39,412
|
|
|
71.9
|
%
|
|
2.3
|
%
|
Homeowners
|
20,758
|
|
|
38.4
|
%
|
|
21,801
|
|
|
39.7
|
%
|
|
(4.8
|
)%
|
Catastrophe Reinsurance Premium Ceded
|
(7,041
|
)
|
|
(13.0
|
)%
|
|
(6,376
|
)
|
|
(11.6
|
)%
|
|
10.4
|
%
|
Net Premiums Earned
|
$
|
54,019
|
|
|
100.0
|
%
|
|
$
|
54,837
|
|
|
100.0
|
%
|
|
(1.5
|
)%
|
Property and casualty segment net premiums earned for 2019 was $54,019,000 compared to $54,837,000 for the same period last year. The primary reason for the moderate decline, in 2019 compared to 2018, was a 4.8% decrease in gross premium revenue in our homeowners program primarily driven by a reduction in premium revenue in coastal Louisiana. An increase in catastrophe reinsurance cost (ceded premium) of 10.4% also contributed to our 1.5% decrease in net premium earned.
The primary source of premium revenue growth in the P&C segment was primarily the states of Georgia and Oklahoma. Premium revenue in Georgia increased 12.3% in 2019 with policy counts up 1.1% compared to December 31, 2018. Increased rates were implemented in Georgia, along with growth in policy count, which lead to the year over year increase in premium revenue in the state. In addition, Oklahoma premium revenue increased 6.3% in 2019, while policy counts decreased 0.4%. The implementation of increased rates was the primary reason for the increase in premium revenue in Oklahoma, in 2019, compared to the same period last year.
The Company maintains catastrophe reinsurance coverage to mitigate loss exposure from cat events. To summarize our catastrophe reinsurance structure, under the catastrophe reinsurance program in 2019, the Company retained the first $4,000,000 in losses from a first event and $2 million in losses from a second event.
Reinsurance coverage is maintained in three layers as follows:
|
|
|
Layer
|
Reinsurers' Limits of Liability
|
First Layer
|
100% of $13,500,000 in excess of $4,000,000 retention
|
Second Layer
|
100% of $25,000,000 in excess of $17,500,000
|
Third Layer
|
100% of $30,000,000 in excess of $42,500,000
|
Underlying 2nd Event
|
100% of $2,000,000 in excess of $2,000,000 retention
|
Additional details regarding the structure of our 2019 catastrophe reinsurance program can be found in Note 10 to the Consolidated Financial Statements.
In our reinsurance structure, management attempts to limit the impact on pretax earnings of a single modeled 100 year cat event to no more than $4 million and the primary models utilized indicate that the Company's upper limit of reinsurance is adequate to cover up to approximately a 250 year event (a single event with an estimated probability of exceedance of 0.4% in a given year). It is noted, however, that hurricane models are subject to significant risks and uncertainties and are continuously evolving. Catastrophe models are only a tool to estimate the impact of catastrophe events and actual results can differ materially from model estimates.
We use the results of the Risk Management Solutions (RMS) and AIR Worldwide (AIR) models in our review of exposure to hurricane risk. Each of these third party vendors provides two views of the modeled results as follows: (i) a long-term view that closely relates modeled event frequency to historical hurricane activity; and (ii) a shorter-term view that adjusts historical frequencies to reflect expectations of elevated hurricane activity in the near future. We believe that modeled estimates provide a range of potential outcomes and we review multiple estimates for purposes of understanding our catastrophic risk and variability. However, due to regulatory and competitive limitations, we generally utilize long-term model output in the development of our product pricing.
The following table provides severe thunderstorm and hurricane single event model estimates for a range of return periods based on a blended view of the RMS and AIR long-term models utilizing our actual inforce P&C segment policy data as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross Losses
|
Net Losses 1
|
Net Losses as
a Percent Equity 2
|
Loss Return Period
|
Yearly Probability of Exceeding
|
Severe Thunderstorm
|
Hurricane
|
Severe Thunderstorm
|
Hurricane
|
Severe Thunderstorm
|
Hurricane
|
20 Years
|
5
|
%
|
$
|
3,907
|
|
$
|
16,031
|
|
$
|
3,087
|
|
$
|
3,160
|
|
5.9
|
%
|
6.1
|
%
|
50 Years
|
2
|
%
|
$
|
6,096
|
|
$
|
28,854
|
|
$
|
3,160
|
|
$
|
3,160
|
|
6.1
|
%
|
6.1
|
%
|
100 Years
|
1
|
%
|
$
|
8,186
|
|
$
|
41,154
|
|
$
|
3,160
|
|
$
|
3,160
|
|
6.1
|
%
|
6.1
|
%
|
250 Years
|
0.4
|
%
|
$
|
11,297
|
|
$
|
60,527
|
|
$
|
3,160
|
|
$
|
3,160
|
|
6.1
|
%
|
6.1
|
%
|
500 Years
|
0.2
|
%
|
$
|
14,969
|
|
$
|
77,468
|
|
$
|
3,160
|
|
$
|
7,085
|
|
6.1
|
%
|
13.6
|
%
|
1 - Net losses are net of reinsurance and after a 21% Federal income tax benefit.
2 - Equity as of December 31, 2019
In 2019, the P&C segment did not have any catastrophe losses exceeding our $4 million catastrophe reinsurance retention. However, the P&C segment was impacted, in 2019, by 23 smaller catastrophe events that individually did not exceed our catastrophe reinsurance retention; but cumulatively generated incurred losses totaling $6,623,000. In 2018, the P&C segment was impacted by Hurricane Michael which exceeded our $4 million catastrophe reinsurance retention. The P&C segment was also impacted, in 2018, by 18 smaller catastrophe events that individually did not exceed our catastrophe reinsurance retention; but cumulatively increased incurred losses by $5,138,000.
Additional details regarding the structure of our 2019 catastrophe reinsurance program can be found in Note 10 to the Consolidated Financial Statements.
The table below provides the major categories of investment income, primarily dividend and interest income, for the year ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Year ended December 31,
|
|
2019
|
|
2018
|
Fixed maturities
|
$
|
1,664
|
|
|
$
|
1,663
|
|
Equity securities
|
50
|
|
|
47
|
|
Other
|
7
|
|
|
23
|
|
|
1,721
|
|
|
1,733
|
|
Less: Investment expenses
|
38
|
|
|
29
|
|
Net investment income
|
$
|
1,683
|
|
|
$
|
1,704
|
|
For the year ended December 31, 2019, net investment income was $1,683,000 compared to $1,704,000 for the same period in 2018; a slight decrease of $21,000 or 1.2%. Lower yields on new investments in 2019 was the primary factor contributing to this marginal decrease in net investment income.
The table below provides investment gains and losses for the year ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Year ended December 31,
|
|
2019
|
|
2018
|
Realized gains (losses) on fixed maturities
|
$
|
(31
|
)
|
|
$
|
32
|
|
Change in fair value of equity securities
|
122
|
|
|
(132
|
)
|
Change in surrender value of company owned life insurance
|
295
|
|
|
(374
|
)
|
Realized gain on company owned life insurance
|
1,792
|
|
|
—
|
|
Net investment gains (losses)
|
$
|
2,178
|
|
|
$
|
(474
|
)
|
Net investment gains, for the year ended December 31, 2019, were $2,178,000 compared to net investment losses of $474,000 for the same period in 2018; an increase of $2,652,000. A gain on our company owned life insurance (COLI) investment of $1,792,000 was a primary reason for the significant increase in net investment gains in 2019. Changes in cash surrender values driven by underlying investment funds in the COLI are included in income as an investment gain or loss in the current period. The change in surrender value included in earnings for the periods ended December 31, 2019 and 2018 were an increase of $295,000 and a decline of $374,000, respectively. In addition, for the year ended December 31, 2019, we had unrealized gains in our P&C segment equity investments available for sale totaling $122,000 compared to unrealized losses in equity investments of $132,000 in 2018.
Other income was comparable at $575,000 for the year ended December 31, 2019, compared to $609,000 in 2018; a decrease of $34,000. Other income consists primarily of fees related to the issuance of our property insurance policies as well as other miscellaneous income. As a percent of net earned premium, other income was 1.1% in both 2019 and 2018.
Policyholder claims in the property and casualty segment were $33,979,000 in 2019, compared to $35,735,000 for the same period last year; a decrease of $1,756,000 or 4.9%. Claims as a percentage of premium earned was 62.9% in 2019 compared to 65.2% in 2018. The primary reason for the decrease in claims was a $2,515,000 decline in P&C segment catastrophe weather claims coupled with a $976,000 decrease in fire claims. These decreases were offset by an increase in non-catastrophe weather claims totaling $2,341,000.
Weather related losses consistently create the most significant variability in our loss and loss adjustment expense payments from year to year in our P&C segment. The following table provides a recap of P&C segment gross reported losses and LAE by catastrophe event and non-catastrophe wind and hail losses and LAE for the year ended December, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
|
For the year ended December 31, 2018
|
($ in thousands)
Catastrophe event
|
|
Reported
Losses & LAE
|
|
Claim Count
|
|
Catastrophe event
|
|
Reported
Losses & LAE
|
|
Claim Count
|
Cat 1916 (Feb 23-26)
|
|
$
|
296
|
|
|
85
|
|
|
Cat 1814 (Feb 24-26)
|
|
$
|
160
|
|
|
52
|
|
Cat 1918 (Mar 3-4)
|
|
757
|
|
|
76
|
|
|
Cat 1817 (Mar 18-21)
|
|
1,151
|
|
|
215
|
|
Cat 1920 (Mar 23-25)
|
|
147
|
|
|
29
|
|
|
Cat 1821 (Apr 13-17)
|
|
631
|
|
|
147
|
|
Cat 1923 (Apr 12-15)
|
|
574
|
|
|
121
|
|
|
Cat 1824 (May 12-16)
|
|
149
|
|
|
36
|
|
Cat 1924 (Apr 17-20)
|
|
324
|
|
|
76
|
|
|
Cat 1827 (May 29-June 1)
|
|
255
|
|
|
50
|
|
Cat 1926 (Apr 30-May 2)
|
|
209
|
|
|
35
|
|
|
Cat 1835 (June 24-26)
|
|
290
|
|
|
48
|
|
Cat 1927 (May 7-10)
|
|
600
|
|
|
106
|
|
|
Cat 1836 (June 28)
|
|
419
|
|
|
69
|
|
Cat 1931 (May 20-22)
|
|
168
|
|
|
41
|
|
|
Cat 1840 (July 19-22)
|
|
338
|
|
|
64
|
|
Cat 1943 (July 10-18)
|
|
1,021
|
|
|
249
|
|
|
Cat 1852 (Sept 13-16)
|
|
1,292
|
|
|
371
|
|
Cat 1954 (Aug 28-Sept 6)
|
|
530
|
|
|
148
|
|
|
Cat 1857 (Oct 10-14)
|
|
13,378
|
|
|
2,312
|
|
Cat 1963 (Oct 25-26)
|
|
1,221
|
|
|
236
|
|
|
|
|
|
|
|
Cat 1969 (Dec 16-17)
|
|
367
|
|
|
46
|
|
|
|
|
|
|
|
Misc cats less than $100k
|
|
409
|
|
|
105
|
|
|
Misc cats less than $100k
|
|
453
|
|
|
144
|
|
Total Cat losses
|
|
$
|
6,623
|
|
|
1,353
|
|
|
Total Before Reinsurance
|
|
$
|
18,516
|
|
|
3,508
|
|
|
|
|
|
|
|
Less: Reinsurance (Cat 1857)
|
|
(9,378
|
)
|
|
|
|
|
|
|
|
|
Total Net Cat Losses
|
|
$
|
9,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cat wind & hail
|
|
$
|
9,133
|
|
|
2,197
|
|
|
Non-cat wind & hail
|
|
$
|
6,792
|
|
|
2,025
|
|
During 2019, the P&C segment was impacted by 23 catastrophe events producing 1,353 policyholder claims totaling $6,623,000. Net of tax, these losses reduced 2019 net income by $5,232,000. In comparison, in 2018, the P&C segment was impacted by 19 catastrophe events from 3,508 claims totaling $9,138,000 net of reinsurance recoveries. Net of tax, 2018 catastrophe losses reduced 2018 net income by $7,219,000.
During 2019, the P&C segment had reported losses from Cat 1943 (Hurricane Barry) totaling $1,021,000 from 249 claims as well as Cat 1963 (Tropical Storm Olga) totaling $1,221,000 from 236 claims. These two cat events accounted for 33.9% of total reported cat losses in 2019 and added 4.1 percentage points to the 2019 P&C segment combined ratio. Claims reported from all 2019 cat events contributed 12.1 percentage points to the 2019 P&C segment combined ratio. The primary contributor to 2018 reported cat losses was Hurricane Michael. Hurricane Michael contributed $13,378,000 in reported losses on a gross basis ($4,000,000 net of reinsurance recoveries). Net of tax, Hurricane Michael losses reduced net income by $3,160,000. Claims reported from all 2018 cat events contributed 16.5 percentage points to the 2018 P&C segment combined ratio.
Non-catastrophe wind and hail claims reported in 2019 were above historical averages and totaled $9,133,000 compared to non-catastrophe wind and hail claims reported in 2018 totaling $6,792,000; an increase of $2,341,000. During 2019, the P&C segment had 2,197 non-catastrophe wind and hail claims reported (an average of $4,200 per claim) compared to 2,025 non-catastrophe wind and hail claims reported during 2018 (an average of $3,400 per claim). Non-catastrophe wind and hail claims reported during 2019 accounted for 26.9% of total P&C segment incurred losses in the current year and added 16.7 percentage points to the 2019 P&C segment combined ratio. Non-catastrophe wind and hail claims reported during 2018 accounted for 19.0% of total P&C segment incurred losses in 2018 and added 12.2 percentage points to the 2018 P&C segment combined ratio.
Reported fire losses in 2019 were down $976,000 or 6.5% compared to fire losses reported during 2018. The P&C segment had 481 fire losses reported in 2019 totaling $13,992,000 compared to 479 fire losses reported in 2018 totaling $14,968,000. The average cost per claim was $29,100 for fire losses reported in 2019 compared to $31,200 for fire
losses reported in 2018. Fire losses reported during 2019 added 25.6 percentage points to the P&C segment combined ratio while fire losses reported during 2018 added 27.0 percentage points to the P&C segment combined ratio.
Deferred policy acquisition costs were $2,723,000 compared to $2,759,000 for the same period last year; a decrease of $36,000. Policy acquisition costs consist of amortization of previously capitalized distribution costs and current commission payments to agents. As a percentage of premium revenue, policy acquisition costs were comparable at 5.0% in 2019 and 2018.
Commission expense for 2019 was $7,148,000 (13.2% of premium revenue) compared to $7,267,000 (13.3% of premium revenue) for the same period in 2018. The primary reason for the $119,000 decrease in commission expense was a reduction in the bonus commissions to agents in 2019 compared to 2018.
General and administrative expenses in the property and casualty segment totaled $8,616,000 in 2019 compared to $8,472,000 in 2018; a 1.7% increase. The primary factors contributing to the $144,000 increase in general expenses, in 2019, compared to the same period last year, was an increase in litigation related costs of $300,000.
Insurance taxes, licenses and fees were $2,185,000 through December 31, 2019, compared to $1,937,000 for the same period last year. As a percentage of net premiums earned, insurance taxes, licenses and fees were 4.0% for the year ended December 31, 2019, compared to 3.5% for year ended December 31, 2018. The primary reason for the increase in taxes, licenses and fees, in 2019, compared to 2018, was due to a slight increase in Mississippi related taxes in addition to the utilization of premium tax credits the state of Mississippi in the prior year that were not applied in 2019.
For the year ended December 31, 2019, the Company had a pretax income of $3,804,000 compared to pretax income of $506,000 for the same period in 2018. The $3,298,000 increase in pretax income was primarily due to the $1,756,000 reduction claims, in 2019 compared to 2018, coupled with the $1,792,000 gain on company owned life insurance, partially offsetting these positive factors was a decline in net premiums earned and an increase in general and administrative expenses.
Property & Casualty Combined Ratio:
A measure used to analyze a property/casualty insurer's underwriting performance is the combined ratio based upon generally accepted accounting principles (GAAP). It is the sum of two ratios:
|
|
•
|
The loss and loss expense ratio, which measures losses and loss adjustment expenses incurred as a percentage of premium revenue.
|
|
|
•
|
The underwriting expense ratio, which measures underwriting expenses incurred (e.g., agents' commissions, premium taxes, and other administrative underwriting expenses) as a percentage of premium revenue.
|
The results of these ratios by significant component for the past two years were as follows:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Loss and LAE Ratio (Non-Cat)
|
50.11
|
%
|
|
47.97
|
%
|
Loss and LAE Ratio (Cat)
|
12.13
|
%
|
|
16.48
|
%
|
Underwriting Expense Ratio
|
37.86
|
%
|
|
36.86
|
%
|
Combined Ratio
|
100.10
|
%
|
|
101.31
|
%
|
Maintaining a combined ratio below 100%, which indicates that the company is making an underwriting profit, depends upon many factors including hurricane activity in the Gulf of Mexico and the southern Atlantic coast, strict underwriting of risks, catastrophe reinsurance costs, severe thunderstorm frequency and the ability to obtain adequate and timely premium rates. A major hurricane hitting the coast of Alabama, Georgia, South Carolina, Mississippi or Louisiana could cause the combined ratio to fluctuate materially from year to year. In addition, most of the states that we write business are prone to severe thunderstorm and tornado activity with significant variations in the level of activity from year to year. The property and casualty subsidiaries maintain catastrophe reinsurance to minimize the effect of a major catastrophe; however, the geography of our coverage area, frequency of smaller catastrophe events and prohibitive cost of maintaining lower catastrophe deductibles and/or catastrophe aggregate coverage prevents some limitations on our ability to further mitigate catastrophe risks.
During 2019, the P&C segment experienced an decrease of 1.21 percentage points in the combined ratio compared to 2018. Non-catastrophe losses increased the P&C segment combined ratio 4.48 percentage points in the current year compared to the same period last year. However, catastrophe losses decreased in 2019 compared to 2018, leading to a 4.35 percentage point decrease in the P&C segment combined ratio and was the primary reason for the overall decrease, in 2019 compared to the same period last year. As noted in the table above, catastrophe loss is the primary source of variability in our combined ratio and is generally the primary driver of variability in our earnings. While catastrophe events are unpredictable and often occur in cycles, management has sought to increase margins through efficiency measures and improved rate optimization. Management continues to improve rate adequacy, reduce significant exposure concentrations and implement other risk management strategies in order to further improve underwriting profitability, mitigate earnings volatility and reduce downside risk to our capital position.
Non-insurance Operations:
The non-insurance operations of the Company consist of our ultimate holding company parent, The National Security Group, Inc. (NSEC). NSEC, as a standalone entity, has no material sources of revenue and relies on dividends and management service fees from our insurance subsidiaries to pay expenses. Dividends from subsidiaries are subject to insurance department approval and are also subject to statutory restrictions. Subsidiary dividends and service fees are eliminated upon consolidation of the subsidiaries in the audited financial statements included herein. Revenues and expense (excluding intercompany dividends from subsidiaries) for non-insurance operations for the year ended December 31, 2019 and 2018 are summarized as follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
2019
|
|
2018
|
REVENUE
|
|
|
|
Net investment income
|
$
|
56
|
|
|
$
|
55
|
|
Net realized investment gains
|
16
|
|
|
—
|
|
Other income
|
1,019
|
|
|
1,006
|
|
Total Revenues
|
1,091
|
|
|
1,061
|
|
|
|
|
|
EXPENSES
|
|
|
|
General and administrative expenses
|
1,128
|
|
|
309
|
|
Interest expense
|
1,122
|
|
|
1,187
|
|
Total Expenses
|
2,250
|
|
|
1,496
|
|
LOSS BEFORE INCOME TAXES
|
$
|
(1,159
|
)
|
|
$
|
(435
|
)
|
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Revenue for non-insurance operations primarily consists of interest on investments and other income. Other income is composed of management service fees from subsidiaries which are eliminated upon consolidation. General and administrative expenses totaled $1,128,000 in 2019 compared to $309,000 for the same period last year. The expenses of NSG are primarily associated with the public listing of our stock, taxes and fees, and directors' fees. The most significant item impacting the increase in general expenses was an increase in the liability for unfunded non-qualified deferred compensation plans. Total interest expense associated with short-term and long-term borrowings of NSG was $1,122,000 for the year ended December 31, 2019 and $1,187,000 for the same period in 2018. The decline in interest expense is related to a reduction in debt outstanding.
Investments:
The insurance subsidiaries primarily invest in highly liquid investment grade fixed maturity securities and equity securities. The types of assets in which the Company can invest are influenced by various state insurance laws which prescribe qualified investment assets. While working within the parameters of these regulatory requirements and further considering liquidity and capital needs, the Company considers investment quality, investment return, asset/liability matching and composition of the investment portfolio when making investment decisions.
At December 31, 2019, the Company's holdings in fixed maturity securities amounted to 85.4% of total investments and 65.9% of total assets. The Company utilizes the ratings of various Nationally Recognized Statistical Rating Organizations when classifying fixed maturity investments by credit quality.
The following is a breakdown of the Company's fixed maturity investments by quality rating:
|
|
|
|
|
|
|
|
% of Total Bond Portfolio
|
S&P or Equivalent Ratings
|
|
2019
|
|
2018
|
AAA/AA+
|
|
46.5%
|
|
43.7%
|
AA
|
|
3.3%
|
|
4.0%
|
AA-
|
|
2.4%
|
|
3.4%
|
A+
|
|
1.5%
|
|
0.8%
|
A
|
|
4.2%
|
|
4.8%
|
A-
|
|
5.8%
|
|
5.8%
|
BBB+
|
|
5.2%
|
|
6.1%
|
BBB
|
|
20.5%
|
|
19.1%
|
BBB-
|
|
6.1%
|
|
7.6%
|
Below Investment Grade
|
|
4.5%
|
|
4.7%
|
There were no material changes in credit quality mix in 2019 as we continue to focus on investing in high quality investment grade securities. Also, tight credit spreads throughout 2019 limited the rewards of investing in lower quality issues.
Our holdings in below investment grade securities are primarily comprised of energy and natural resource sector investments and collateralized debt obligations (CDO's). We have evaluated our current below investment grade holdings for potential impairment, along with any other security with a market value substantially below our amortized cost. We currently have no investment below 80% of amortized cost and based on presently available information, we do not believe any below investment grade securities are other-than-temporarily impaired. We also currently have no fixed income investments in default.
The amortized cost and aggregate fair values of investments in investment securities at December 31, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
December 31, 2019
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
U.S. Government corporations and agencies
|
|
$
|
4,131
|
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
4,281
|
|
Agency mortgage backed securities
|
|
32,283
|
|
|
861
|
|
|
157
|
|
|
32,987
|
|
Asset backed securities
|
|
10,307
|
|
|
71
|
|
|
104
|
|
|
10,274
|
|
Private label mortgage backed securities
|
|
6,815
|
|
|
441
|
|
|
4
|
|
|
7,252
|
|
Corporate bonds
|
|
36,074
|
|
|
1,816
|
|
|
70
|
|
|
37,820
|
|
States, municipalities and political subdivisions
|
|
6,669
|
|
|
109
|
|
|
1
|
|
|
6,777
|
|
Foreign governments
|
|
823
|
|
|
46
|
|
|
—
|
|
|
869
|
|
Total fixed maturities
|
|
97,102
|
|
|
3,494
|
|
|
336
|
|
|
100,260
|
|
Equity securities
|
|
2,127
|
|
|
3,176
|
|
|
—
|
|
|
5,303
|
|
Total
|
|
$
|
99,229
|
|
|
$
|
6,670
|
|
|
$
|
336
|
|
|
$
|
105,563
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
Agency mortgage backed securities
|
|
$
|
1,290
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
1,345
|
|
Total
|
|
$
|
1,290
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
1,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
December 31, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
U.S. Government corporations and agencies
|
|
$
|
4,820
|
|
|
$
|
31
|
|
|
$
|
107
|
|
|
$
|
4,744
|
|
Agency mortgage backed securities
|
|
27,492
|
|
|
159
|
|
|
545
|
|
|
27,106
|
|
Asset backed securities
|
|
10,901
|
|
|
7
|
|
|
248
|
|
|
10,660
|
|
Private label mortgage backed securities
|
|
5,869
|
|
|
105
|
|
|
27
|
|
|
5,947
|
|
Corporate bonds
|
|
36,935
|
|
|
407
|
|
|
1,551
|
|
|
35,791
|
|
States, municipalities and political subdivisions
|
|
10,059
|
|
|
105
|
|
|
91
|
|
|
10,073
|
|
Foreign governments
|
|
801
|
|
|
3
|
|
|
—
|
|
|
804
|
|
Total fixed maturities
|
|
96,877
|
|
|
817
|
|
|
2,569
|
|
|
95,125
|
|
Equity securities
|
|
1,842
|
|
|
2,464
|
|
|
—
|
|
|
4,306
|
|
Total
|
|
$
|
98,719
|
|
|
$
|
3,281
|
|
|
$
|
2,569
|
|
|
$
|
99,431
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
Agency mortgage backed securities
|
|
$
|
1,449
|
|
|
$
|
16
|
|
|
$
|
22
|
|
|
$
|
1,443
|
|
Total
|
|
$
|
1,449
|
|
|
$
|
16
|
|
|
$
|
22
|
|
|
$
|
1,443
|
|
As shown in the tables above, the Company experienced a decrease in unrealized losses on fixed maturity investments, along with a significant increase in unrealized gains in 2019 compared to the portfolio composition at December 31, 2018. The overall increase in market value of our fixed maturity investments was driven by a decline in market interest rates during 2019.
A number of factors influence portfolio allocation within each of the insurance subsidiaries. Within the property and casualty subsidiaries, due to the relatively short-term nature of segment liabilities, fixed income investments tend to be of shorter duration, with average maturities of less than five years. Also, due to higher levels of potential volatility of policy liabilities (severe weather related losses), a greater emphasis is placed upon overall liquidity of investments. In contrast, within the life insurance subsidiary, policy liabilities tend to be more stable and of significantly longer duration. In order to match the longer duration of liabilities, investments in the life insurance portfolio tend to have longer maturities, and higher average book yields. Also, less emphasis is placed upon short-term liquidity in the life subsidiary due to more predictable cash needs.
A downside of investing in longer duration securities in the life segment is that the portfolio is exposed to more significant price volatility as market interest rates rise. This exposure to sudden interest rate changes can lead to declines in market value of fixed income securities in a rising interest rate environment. Management currently maintains the life insurance portfolio in the intermediate duration range of 6.0 to guard against the adverse impact of rising rates. However, due to the necessity of matching the longer duration of life policy liabilities as closely as possible in order to pass regulatory cash flow testing and avoid significant interest rate speculation in the asset liability matching process, some volatility in market value of the portfolio in a rising rate environment cannot be avoided.
At December 31, 2019, 4.5% of total investments in the fixed income portfolio were classified as below investment grade. In evaluating whether or not the equity loss positions were other-than-temporary impairments, management evaluated financial information on each company and, where available, reviewed analyst reports from independent sources. Based on a review of the available financial information, the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was determined that the securities in an accumulated loss position in the portfolio were temporary impairments. Management has evaluated each security in a significant unrealized loss position. For the year ended December 31, 2019, the Company realized no other-than-temporary impairments related to fixed maturities.
The amortized cost and aggregate fair value of debt securities at December 31, 2019, by contractual maturity, are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
Available-for-sale securities:
|
|
|
|
|
Due in one year or less
|
|
$
|
2,136
|
|
|
$
|
2,133
|
|
Due after one year through five years
|
|
17,397
|
|
|
17,945
|
|
Due after five years through ten years
|
|
25,683
|
|
|
26,516
|
|
Due after ten years
|
|
51,886
|
|
|
53,666
|
|
Total
|
|
$
|
97,102
|
|
|
$
|
100,260
|
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
Due after one year through five years
|
|
$
|
29
|
|
|
$
|
30
|
|
Due after five years through ten years
|
|
4
|
|
|
5
|
|
Due after ten years
|
|
1,257
|
|
|
1,310
|
|
Total
|
|
$
|
1,290
|
|
|
$
|
1,345
|
|
As discussed earlier, the majority of our longer duration securities are investments made to match longer duration liabilities in the life segment or are investments in mortgage backed securities, primarily government agency. Due to the amortizing nature and the ability to prepay mortgage backed securities, actual maturities tend to be significantly shorter than contractual maturities.
Investment portfolio income
Investment returns with respect to the investment portfolio for the years ended December 31, 2019 and 2018 follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Net investment income
|
$
|
3,876
|
|
|
$
|
3,941
|
|
Average current yield on investments
|
3.3
|
%
|
|
3.5
|
%
|
Total return on investments
|
10.2
|
%
|
|
0.3
|
%
|
Net gains (losses) on investments (before taxes)
|
$
|
3,055
|
|
|
$
|
(552
|
)
|
Change in accumulated net unrealized gains (losses) (before income taxes)
|
$
|
4,910
|
|
|
$
|
(3,042
|
)
|
Average current yield on investments in 2019 decreased 0.2% compared to 2018. The marginal decrease in average current yield was primarily due to a decline in market interest rates during 2019 which reduced the book yield on new fixed maturity investments.
The total return on investments in 2019 was 10.2% compared to 0.3% in 2018. A gain on our company owned life insurance investment coupled with interest rate driven increases in value of our fixed maturity investments available for sale were the primary factors driving the much higher total return in 2019 compared to the prior year.
Repurchase agreements
The Company's subsidiaries maintain repurchase agreements for cash held on deposit under which insurance regulations dictates that our policy requires 102% (100% minimum) of the fair value of the securities purchased to be maintained as collateral. The repurchase investments are overnight agreements and investments are limited to government securities that are highly liquid. Therefore, these investments are reflected on the balance sheet as a cash equivalents. Due to a combination of the 102% collateral requirement and low short-term interest rates, we realize limited interest income from repurchase agreements/short-term investments. However, repurchase agreements utilizing government agency securities do provide deposit protection for short-term cash held in excess of FDIC deposit limits. The Company does not lend securities to any counterparty under repurchase agreements.
Liquidity and capital resources:
Due to regulatory restrictions, the majority of the Company's cash is required to be invested in investment-grade securities to provide protection for policyholders. The liabilities of the property and casualty insurance subsidiaries are of various terms, and therefore, those subsidiaries invest in securities with various effective maturities spread over periods usually not exceeding 10 years with an average portfolio duration typically of less than 5 years. The liabilities
of the life insurance subsidiary are typically of a longer duration, and therefore, a higher percentage of securities in the life insurance subsidiary are invested for periods exceeding 10 years.
The liquidity requirements for the Company are primarily met by funds generated from operations of the life insurance and property/casualty insurance subsidiaries. All operations and virtually all investments are maintained by the insurance subsidiaries. Premium and investment income as well as maturities and sales of invested assets provide the primary sources of cash for both the life and property/casualty businesses, while applications of cash are applied by both businesses to the payment of policy benefits, the cost of acquiring new business (principally commissions), operating expenses, purchases of new investments, and in the case of life insurance, policy loans.
Virtually all invested assets of the Company are held in the insurance subsidiaries. As of December 31, 2019, the contractual maturity schedule for all bonds and notes held by the Company, stated at amortized cost, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Maturity
|
|
Available- for-Sale
|
|
Held-to-Maturity
|
|
Total
|
|
Percentage of Total
|
Maturity in less than 1 year
|
|
$
|
2,136
|
|
|
$
|
—
|
|
|
$
|
2,136
|
|
|
2.17
|
%
|
Maturity in 1-5 years
|
|
17,397
|
|
|
29
|
|
|
17,426
|
|
|
17.71
|
%
|
Maturity in 5-10 years
|
|
25,683
|
|
|
4
|
|
|
25,687
|
|
|
26.11
|
%
|
Maturity after 10 years
|
|
51,886
|
|
|
1,257
|
|
|
53,143
|
|
|
54.01
|
%
|
|
|
$
|
97,102
|
|
|
$
|
1,290
|
|
|
$
|
98,392
|
|
|
100.00
|
%
|
It should be noted that the above table represents maturities based on stated/contractual maturity. Due to call and prepayment features inherent in some fixed maturity securities, actual repayment, or effective maturities, will differ from stated maturities. The Company routinely evaluates the impact of changing interest rates on the projected maturities of bonds in the portfolio and actively manages the portfolio in order to minimize the impact of interest rate risk. However, due to other factors, both regulatory and those associated with good investment management practices associated with asset/liability matching, we do have exposure to changes in market values of securities due to changes in interest rates. Currently, a 100 basis point immediate increase in interest rates would generate approximately a $4,885,000, or 4.8%, decline in the market value of fixed maturity investments. Alternatively, a 100 basis point decrease in interest rates will generate approximately $4,888,000, or 4.8%, increase in market value of fixed income investments. Management has attempted, to the extent possible, to reduce risk in a rising rate environment. However, due to asset liability matching requirements, particularly in the life subsidiary portfolio, interest rate risk can not be eliminated and exposure to market volatility can cause some variability in our accumulated other comprehensive income, total return on investments, total shareholders' equity and book value per share.
At December 31, 2019, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $53,461,000, up $7,595,000 compared to $45,866,000 at December 31, 2018. During the year, shareholders' equity was increased by net income of $4,067,000, comprehensive income due to changes in value of fixed maturity securities of $3,879,000 and comprehensive income of $134,000 related to change in value of interest rate swaps. Equity was also increased by shares issued of $53,000. Equity was reduced $7,000 by the purchase of 436 common stock shares held as treasury stock and cash dividends paid totaling $531,000.
As discussed above, changing interest rates can have a significant impact on the market value of fixed maturity investments. Fixed maturity securities classified as available-for-sale increase the liquidity resources of the Company as they can be sold at any time to pay claims or meet other Company obligations. However, these securities are required to be carried at market value with net of tax change in accumulated unrealized gains and losses directly impacting shareholder's equity. While the increase in interest rates causes near term declines in the value of fixed income securities, we are able to reap the benefit of reinvesting at higher rates as current fixed income investments are called, amortized (mortgage backed securities) or reach contractual maturity. Over the next twelve months, based on cash flow projection modeling that considers such factors as anticipated principal payments on mortgage backed securities, likelihood of call provisions being enacted and regular contractual maturities, we expect approximately 9% of our current fixed income portfolio to be reinvested or otherwise available to meet Company obligations.
The Company, primarily through its insurance subsidiaries, had $11,809,000 in cash and cash equivalents at December 31, 2019, compared to $5,676,000 at December 31, 2018. Cash provided by operating activities increased cash by $5,373,000 during the year ended December 31, 2019. The increase in cash from operating activities was driven by refunds of federal income tax overpayment along with changes in other assets and reinsurance recoveries. Cash provided by operating activities increased cash by $3,177,000 for the year ended December 31, 2018. The
increase in cash provided by operating activities in 2018 was primarily driven by net income from operations. Net cash provided by investing activities totaled $1,656,000 for the year ended December 31, 2019, compared to cash used in investing activities of $2,149,000 in 2018. Net cash provided by investing activities in 2019 primarily consisted of maturities of investments and proceeds from company owned life insurance. Net cash used in financing activities totaled $896,000 for the year ended December 31, 2019, compared to $1,996,000 for the same period last year. During the year ended December 31, 2019, the Company paid $531,000 in dividends to shareholders. The Company maintains a $700,000 line of credit which matures in March of 2020. We had $700,000 available on our revolving line of credit at December 31, 2019.
The Company had a total of $13,664,000 of long-term debt outstanding as of December 31, 2019, compared to $12,152,000 at December 31, 2018, which includes $12,372,000 in trust preferred securities issued by the Company in addition to the installment note. Current year and prior year amounts were reduced by the unamortized portion of the placement fees associated with the issuance of the trust preferred securities, $208,000 and $220,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Payments due by period
|
Contractual Obligations
|
Total
|
|
Less than
1 year
|
|
Years
1 through 3
|
|
Years
4 through 5
|
|
More than
5 years
|
Notes payable
|
$
|
2,000
|
|
|
$
|
500
|
|
|
$
|
1,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt obligations1
|
$
|
12,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,152
|
|
Interest on debt obligations1
|
$
|
11,601
|
|
|
$
|
860
|
|
|
$
|
2,225
|
|
|
$
|
1,378
|
|
|
$
|
7,138
|
|
Property and casualty claim reserves2
|
$
|
7,199
|
|
|
$
|
6,364
|
|
|
$
|
770
|
|
|
$
|
50
|
|
|
$
|
15
|
|
Future life insurance obligations3
|
$
|
68,500
|
|
|
$
|
4,466
|
|
|
$
|
11,933
|
|
|
$
|
6,890
|
|
|
$
|
45,211
|
|
1 Long-term debt, consisting of two separate issues of trust preferred securities, a line of credit and the long-term portion of an installment note is assumed to be settled at contractual maturity. Interest on long-term debt is calculated using the interest rates in effect at December 31, 2019 for each issue. Interest on long-term debt is accrued and settled quarterly on the trust preferred securities, monthly on the line of credit and annually on the installment note. Therefore, the timing and amount of interest payments may vary from the calculated value included in the table above. These calculations do not take into account any potential prepayments. For additional information regarding long-term debt and interest on long-term debt, please see Note 8, Notes Payable and Long-term Debt, in the notes to Consolidated Financial Statements.
|
2 The anticipated payout of property and casualty claim reserves, which includes loss and loss adjustment expenses, are based upon historical payout patterns. Both the timing and amount of these payments may vary from the payment indicated. For additional details on payout patterns please see Note 9.
|
3 Future life insurance obligations consist primarily of estimated future contingent benefit payments and surrender benefits on policies in force at December 31, 2019. These estimated payments are computed using assumptions for future mortality, morbidity and persistency. In contrast to this table, the majority of NSIC’s obligations is recorded on the balance sheet at the current account values and do not incorporate an expectation of future market growth, interest crediting or future deposits. Therefore, the estimated future life insurance obligations presented in this table significantly exceed the liabilities recorded in the Company’s consolidated balance sheet. Due to the significance of the assumptions used, the actual amount and timing of such payments may differ significantly from the estimated amounts. Management believes that current assets, future premiums and investment income will be sufficient to fund all future life insurance obligations.
|
Contractual obligations reflected in the table above include the issuance of $9,129,000 in subordinated debentures completed on December 15, 2005. The subordinated debentures mature December 15, 2035. It is anticipated that principal payments will not be made before maturity. Also included in long-term debt is the issuance of $3,035,000 in subordinated debentures on June 21, 2007. This issue matures June 15, 2037 and may be prepaid at any time. Also reflected in the table above is a $2,000,000 unsecured loan renewed in December 2019. The unsecured loan matures in November 2023.
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 believes 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 property and casualty claim liabilities, management can conclude with a reasonable level of confidence that historical patterns indicate that approximately 97.6% of claim liabilities at the end of a given year are settled within the following two year period. See Note 9 for additional details on payout patterns.
The ability of the Company to meet its commitments for timely payment of claims and other expenses depends, in addition to current cash flow, on the liquidity of its investments. The Company has relatively little exposure to below investment grade fixed income investments, which might be especially subject to liquidity problems due to thinly traded markets.
The Company's liquidity requirements are primarily met by funds provided from operations of the insurance subsidiaries. The Company receives funds from its subsidiaries through payment of dividends, management fees, reimbursements for federal income taxes and reimbursement of expenses incurred at the corporate level for the subsidiaries. These
funds are used to pay stockholder dividends, principal and interest on debt, corporate administrative expenses, federal income taxes, and for funding investments in the subsidiaries. The Company maintains minimal liquidity in order to maximize liquidity within the insurance subsidiaries in order to support ongoing insurance operations. The Company has no separate source of revenue other than dividends and fees from the insurance subsidiaries. Also, dividends from the insurance subsidiaries are subject to regulatory restrictions and, therefore, are limited depending on capital levels and earnings of the subsidiaries.
Our P&C segment is the primary source of dividends to the holding company. Consideration of insurance subsidiary growth opportunities, regulatory capital adequacy, rating agency impact and holding company debt reduction, among other items, are factors that influence our subsidiary dividend requirements. While we have made significant progress in recent years, continued strengthening capital levels in the insurance subsidiaries and reduction of debt remains a top priority.
Dividends paid from the insurance subsidiaries are subject to regulatory restrictions and prior approval of the Alabama Department of Insurance. As disclosed in Note 12 to the audited consolidated financial statements included in our 2019 Annual Report on Form 10-K, the amount that The National Security Group's insurance subsidiaries can transfer in the form of dividends to the parent company during 2020 is statutorily limited to $1,624,000 in the life insurance subsidiary and $3,626,000 in the property/casualty insurance subsidiary. Dividends are limited to the greater of net income (operating income for life subsidiary) or 10% of statutory capital, and regulators consider dividends paid within the preceding twelve months when calculating the available dividend capacity. Therefore, all of the above referenced dividend capacity will not be available for consideration of payment until dividends paid in the preceding twelve months have been considered on a rolling basis. The Company also has to continuously evaluate other factors such as subsidiary operating performance, subsidiary capital requirements and potential impact by rating agencies in making decisions on how much capital can be released from insurance subsidiaries for payment of dividends to NSG. These factors are considered along with the goal of growing year over year statutory surplus in the subsidiaries, and these considerations along with potential adverse impacts on regulatory surplus, will likely lead to dividend payments to NSG substantially below the above referenced regulatory maximums. The Company received $2,750,000 dividends from its subsidiaries during the year ended December 31, 2019.
The Company’s subsidiaries require cash in order to fund policy acquisition costs, claims, other policy benefits, interest expense, general expenses, and dividends to the Company. Premium and investment income, as well as maturities, calls, and sales of invested assets, provide the primary sources of cash for both subsidiaries. A significant portion of the Company’s investment portfolio, which is held by the insurance subsidiaries, consists of readily marketable securities, which can be sold for cash.
The Company continues to monitor liquidity and subsidiary capital closely. Despite challenging weather patterns in the property and casualty subsidiaries over the past three years, the insurance subsidiaries are well capitalized. However, further strengthening of subsidiary capital continues to be a top priority for management.
Except as discussed above, the Company is unaware of any known trends, events, or uncertainties reasonably likely to have a material effect on its liquidity, capital resources, or operations. Additionally, the Company has not been made aware of any recommendations of regulatory authorities, which if implemented, would have such an effect.
Statutory Risk-Based Capital of Insurance Subsidiaries:
The NAIC has adopted Risk-Based Capital (RBC) requirements for life/health and property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching, benefit and loss reserve adequacy, and other business factors. State insurance regulators will use the RBC formula as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines minimum capital standards that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the Company's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within levels, each of which requires corrective action.
The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2.0
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
The ratios of Total Adjusted Capital to Authorized Control Level RBC for The National Security Group's life/health and property/casualty insurance subsidiaries are all in excess of 5 to 1 at December 31, 2019.
National Security Insurance Company (life insurer) has regulatory adjusted capital of $17,210,000 and $16,043,000 at December 31, 2019 and 2018, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 15.0 and 16.2 at December 31, 2019 and 2018, respectively. Accordingly, National Security Insurance Company exceeds the minimum RBC requirements.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $36,264,000 and $34,645,000 at December 31, 2019 and 2018, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 5.1 and 4.7 at December 31, 2019 and 2018, 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 $11,430,000 and $10,783,000 at December 31, 2019 and 2018, and a ratio of regulatory total adjusted capital to authorized control level RBC of 20.1 and 18.9 at December 31, 2019 and 2018, respectively. Accordingly, Omega One Insurance Company exceeds the minimum RBC requirements.
Application of Critical Accounting Policies:
Our Consolidated Financial Statements are based upon the development and application of accounting policies that require management to make significant estimates and assumptions. Accounting policies may be based on (including but not limited to) GAAP authoritative literature, statutory authoritative literature, regulations and industry standards. The Company's financial results would be directly impacted by changes in assumptions and judgments used to select and apply our accounting policies. It is management's opinion that the following are some of the more critical judgment areas in regards to the application of our accounting policies and their effect on our financial condition and results of operations:
|
|
•
|
Deferred Policy Acquisition Costs
|
|
|
•
|
Fair Values of Financial Instruments
|
Reinsurance
Risk management involves ceding risks to reinsurers for policies underwritten based on contractual agreements. The reinsurance purchased helps provide protection by individual loss or catastrophic event when claims exceed specified amounts. Although the reinsurance protects our Company in the event a loss exceeds retention limits specified in a particular reinsurance agreement; ultimate responsibility for claim settlement rests with our Company if any reinsurer defaults on payments due. We record an asset for reinsurance recoverable in the financial statements for amounts due from reinsurers and monitor the balances due by reinsurer to ensure the asset is ultimately going to be collectible. If we discover an amount due may not be received, we remove the balance and charge it to an allowance for doubtful accounts or charge it off to expense based on the information available at the time.
When a claim is made under a policy we have reinsured, we initially pay the full amount owed to the policyholder or claimant. Subsequently, we initiate the process to recover any amounts due from reinsurers in accordance with the terms of the applicable reinsurance contract.
Reinsurance is maintained by the life and accident and health segment for losses that exceed $50,000 for any one insured.
During 2019, the property and casualty segment maintained a catastrophe reinsurance contract, which covered losses exceeding a retention related to a single catastrophic event. In the event a catastrophe exceeded the $4 million company retention stated in the contract, reinsurers would reimburse the company 100% of gross losses up to the upper limits of the reinsurance agreement, which was $72.5 million in 2019 and 2018. Any losses above the $72.5 million upper limit are the responsibility of our Company. The contract in place during 2019 also allowed one reinstatement for coverage under the contract for a second catastrophic event with the same upper $72.5 million upper limit but with a reduced retention of $2 million.
The property and casualty subsidiaries utilize our actual in force policy data modeled utilizing two different industry accepted catastrophe models to structure catastrophe reinsurance and determine upper limits of catastrophe reinsurance agreements. Historically, reinsurance has been maintained to meet at least a 250 year modeled event level. While this estimate is subject to some uncertainty and model risk, through obtaining coverage that meets at least a 250 year modeled event level, the models indicate that we maintain catastrophe reinsurance upper limits to cover an event that has less than a 0.5% probability of occurring in a given year.
At December 31, 2019, the estimated reinsurance recoverable recorded was $276,000 compared to $1,772,000 for the same period last year. The Company does not anticipate any issues with collection of the recorded amount. In 2019, catastrophe reinsurance premiums ceded totaled $6,008,000 compared to $5,486,000 ceded in 2018. Catastrophe reinsurance premiums are based on a premium calculation applying the agreed upon rate to the total insured value of the covered lines of business. The reduction of our second event retention along with a moderate increase in total insured value, were the primary factors contributing to the increase in reinsurance cost in 2019. In addition to catastrophe reinsurance, the Company placed reinstatement premium protection (RPP) reinsurance during 2019 and 2018 totaling $1,033,000 and $833,000, respectively.
The reinsurance related amounts recorded have been estimated based upon management's interpretation of the related reinsurance treaty. Areas in which judgment has been used regarding said estimates include: assessing the financial viability and credit quality of each reinsurer as well as the ability of each reinsurer to pay amounts owed.
There is a possibility that the actual amounts recovered from reinsurers could be materially less than the estimates recorded. This possibility could result in a material adverse impact on our financial condition and results of operations. Reinsurers may dispute claims under reinsurance treaties, such as the calculated amount of reinsurance recoverable. Management does not anticipate any issues with recoverability of reinsurance balances based on current evaluations of collectability. For more information regarding reinsurance, see the Notes to our Consolidated Financial Statements.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) are those costs incurred in connection with acquiring new business or renewing existing business. DAC is primarily comprised of commissions, premium taxes, and underwriting costs associated with issuing new policies. In accordance with generally accepted accounting principles, these costs are not expensed in their entirety at policy inception; rather, they are recorded as an asset and amortized over the lives of the policies.
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.
At December 31, 2019 and 2018, the Company recorded $7,666,000 and $7,834,000, respectively, as an asset for DAC in the Consolidated Financial Statements. We do not foresee any issues related to recoverability of these capitalized costs. For more information regarding deferred policy acquisition costs, see Note 1 to our Consolidated Financial Statements.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of the Company's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or are settled. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period the new rate is enacted.
At December 31, 2019, there is no evidence to suggest to management that any deferred tax asset is unrealizable. For more information regarding deferred income taxes, see Note 7 to our Consolidated Financial Statements.
The Company evaluates all tax positions taken on its U.S. federal income tax return. No material uncertainties exist for any tax positions taken by the Company.
Fair Values of Financial Instruments
Investments are recorded at fair value based upon quoted prices when available. Quoted prices are available for most investment debt and equity securities included in the financial statements. Further discussion of fair value methodology is discussed in Note 5 to the Consolidated Financial Statements. Periodically, the carrying values of an individual investment may become temporarily impaired because of time value, volatility, credit quality and existing market conditions. Management evaluates investments to determine whether the impairment is other-than-temporary. Evaluation criteria include credit quality of security, severity of decrease between cost and market value, length of time of the impairment and likelihood that the impairment will reverse in the near future. This evaluation requires significant assumptions, estimates and judgments by management. If the impairment is determined to be other-than-temporary, the investment is written down to the current fair value and a realized loss is recorded on the income statement. We have very limited exposure to less liquid and difficult to value investments.
Claim Liabilities
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's estimate of 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. The reserve analysis performed by management is reviewed by the actuaries during the third quarter each year with a final comprehensive review performed at year-end.
At December 31, 2019 and 2018, the recorded liability for loss and loss adjustment expense was $7,199,000 and $8,208,000, respectively, a $1,009,000 decrease. The decline in claim and claim adjustment expense reserves is primarily due to claims arising from Hurricane Michael in the fourth quarter of 2018. We believe the estimate of unpaid losses and loss adjustment expenses to be sufficient based on currently available information and a review of our historical reserving practices. For more information regarding loss and loss adjustment expense, see Note 9 to our Consolidated Financial Statements.
Recognition of Revenue
Life insurance premiums are recognized as revenues when due. Property and casualty insurance premiums include direct writings plus reinsurance assumed less reinsurance ceded and are recognized on a pro-rata basis over the terms of the policies. Unearned premiums represent that portion of direct premiums written that are applicable to the unexpired terms of policy contracts in force and is reported as a liability. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers and are reported as an asset.
Contingencies
Liabilities for loss contingencies arising from, but not limited to, litigation, claims, assessments, fines and penalties are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Significant attorney fees are estimated and recorded when incurred. Additional details with respect to contingencies are disclosed in Note 16 to the accompanying Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Under smaller reporting company rules we are not required to disclose information required under Item 7A. However, in order to provide information to our investors, we have elected to provide information related to market risk.
The Company's primary objectives in managing its investment portfolio are to maximize investment income and total investment returns while minimizing overall credit risk. Investment strategies are developed based on many factors including changes in interest rates, overall market conditions, underwriting results, regulatory requirements and tax position. Investment decisions are made by management and reviewed by the Board of Directors. Market risk represents the potential for loss due to adverse changes in fair value of securities. The three potential risks related
to the Company's fixed maturity portfolio are interest rate risk, prepayment risk and default risk. The primary risk related to the Company's equity portfolio is equity price risk.
Since the Company's assets and liabilities are largely monetary in nature, the Company's financial position and earnings are subject to risks resulting from changes in interest rates at varying maturities, changes in spreads over U.S. Treasuries on new investment opportunities and changes in the yield curve and equity pricing risks.
The Company is exposed to equity price risk on its equity securities. The Company holds common stock with a fair value of $5,303,000. Our portfolio has historically been highly correlated to the S&P 500 with regard to market risk. Based on an evaluation of the historical risk measure of our portfolio relative to the S&P 500, if the market value of the S&P 500 Index decreased 10% from its December 31, 2019 value, the fair value of the Company's common stock investments would decrease by approximately $530,000.
Certain fixed interest rate market risk sensitive instruments may not give rise to incremental income or loss during the period illustrated but may be subject to changes in fair values. Note 5 in the consolidated financial statements present additional disclosures concerning fair values of Financial Assets and Financial Liabilities and are incorporated by reference herein.
The Company limits the extent of its market risk by purchasing securities that are backed by entities considered to be financially stable, the majority of the assets are issued by U.S. government sponsored entities or corporate entities with debt considered to be "investment grade".
The Company's investment approach in the equity markets is based primarily on a fundamental analysis of value. This approach requires the investment committee to invest in well managed, primarily dividend paying companies, which have a low debt to capital ratio, above average return on capital for a sustained period of time, and low volatility rating (beta) relative to the market. The dividends provide a steady cash flow to help pay current claim liabilities, and it has been the Company's experience that by following this investment strategy, long-term investment results have been superior to those offered by bonds, while keeping the risk of loss of capital to a minimum relative to the overall equity market.
As for shifts in investment allocations, the Company has used improved cash flows from insurance operations to increase allocations to fixed maturity securities in order to limit volatility of statutory capital of the insurance subsidiaries.
Item 8. Financial Statements and Supplementary Data
|
|
|
Index to Financial Statements
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Consolidated Balance Sheets – December 31, 2019 and 2018
|
|
|
|
Consolidated Statements of Operations – Years Ended December 31, 2019 and 2018
|
|
|
|
Consolidated Statements of Comprehensive Income (Loss) – Years Ended December 31, 2019 and
2018
|
|
|
|
Consolidated Statements of Changes in Shareholders’ Equity – Years Ended December 31, 2019 and
2018
|
|
|
|
Consolidated Statements of Cash Flows – Years Ended December 31, 2019 and 2018
|
|
|
|
|
|
|
|
Financial Statement Schedules:
|
|
|
|
and 2018
|
|
|
|
Schedule II. Condensed Financial Information of Registrant – December 31, 2019 and 2018
|
|
|
|
Schedule III. Supplementary Insurance Information – December 31, 2019 and 2018
|
|
|
|
Schedule IV. Reinsurance – Years Ended December 31, 2019 and 2018
|
|
|
|
Schedule V. Valuation and Qualifying Accounts – Years Ended December 31, 2019 and 2018
|
|
|
|
All other Schedules are not required under related instructions or are not applicable and therefore have been omitted.
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of The National Security Group, Inc.
Elba, Alabama
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The National Security Group, Inc. (the Company) as of December 31, 2019 and 2018 and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes and financial statement schedules I, II, III, IV and V (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
|
/s/ Warren Averett, LLC
|
We have served as The National Group, Inc.’s auditor since 2009.
|
Birmingham, Alabama
|
|
March 19, 2020
|
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Investments
|
|
|
|
|
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2019 -
$1,345; 2018 - $1,443)
|
|
$
|
1,290
|
|
|
$
|
1,449
|
|
Fixed maturities available-for-sale, at estimated fair value (cost: 2019 - $97,102;
2018 - $96,877)
|
|
100,260
|
|
|
95,125
|
|
Equity securities, at estimated fair value (cost: 2019 - $2,127; 2018 - $1,842)
|
|
5,303
|
|
|
4,306
|
|
Trading securities
|
|
149
|
|
|
107
|
|
Receivable for securities sold
|
|
56
|
|
|
—
|
|
Mortgage loans on real estate, at cost
|
|
147
|
|
|
156
|
|
Investment real estate, at book value
|
|
2,934
|
|
|
2,945
|
|
Policy loans
|
|
1,895
|
|
|
1,854
|
|
Company owned life insurance
|
|
4,655
|
|
|
4,600
|
|
Other invested assets
|
|
2,280
|
|
|
2,148
|
|
Total Investments
|
|
118,969
|
|
|
112,690
|
|
Cash and cash equivalents
|
|
11,809
|
|
|
5,676
|
|
Accrued investment income
|
|
706
|
|
|
774
|
|
Policy receivables and agents' balances, net
|
|
12,028
|
|
|
11,185
|
|
Reinsurance recoverable
|
|
276
|
|
|
1,772
|
|
Deferred policy acquisition costs
|
|
7,666
|
|
|
7,834
|
|
Property and equipment, net
|
|
1,630
|
|
|
1,649
|
|
Income tax recoverable
|
|
—
|
|
|
1,463
|
|
Deferred income tax asset, net
|
|
—
|
|
|
716
|
|
Other assets
|
|
850
|
|
|
472
|
|
Total Assets
|
|
$
|
153,934
|
|
|
$
|
144,231
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Property and casualty benefit and loss reserves
|
|
$
|
7,199
|
|
|
$
|
8,208
|
|
Accident and health benefit and loss reserves
|
|
4,046
|
|
|
3,803
|
|
Life and annuity benefit and loss reserves
|
|
34,269
|
|
|
33,671
|
|
Unearned premiums
|
|
30,555
|
|
|
29,999
|
|
Policy and contract claims
|
|
1,053
|
|
|
792
|
|
Other policyholder funds
|
|
1,350
|
|
|
1,515
|
|
Short-term notes payable and current portion of long-term debt
|
|
500
|
|
|
2,200
|
|
Long-term debt
|
|
13,664
|
|
|
12,152
|
|
Accrued income taxes
|
|
226
|
|
|
—
|
|
Deferred income tax liability
|
|
96
|
|
|
—
|
|
Other liabilities
|
|
7,515
|
|
|
6,025
|
|
Total Liabilities
|
|
100,473
|
|
|
98,365
|
|
Contingencies
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
|
Common stock
|
|
2,532
|
|
|
2,527
|
|
Additional paid-in capital
|
|
5,602
|
|
|
5,554
|
|
Accumulated other comprehensive income (loss)
|
|
2,443
|
|
|
(1,570
|
)
|
Retained earnings
|
|
42,891
|
|
|
39,355
|
|
Treasury stock, at cost, 436 shares
|
|
(7
|
)
|
|
—
|
|
Total Shareholders' Equity
|
|
53,461
|
|
|
45,866
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
153,934
|
|
|
$
|
144,231
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
($ in thousands, except per share)
|
|
Year ended
December 31,
|
|
|
2019
|
|
2018
|
REVENUES
|
|
|
|
|
Net premiums earned
|
|
$
|
59,883
|
|
|
$
|
60,856
|
|
Net investment income
|
|
3,876
|
|
|
3,941
|
|
Investment gains (losses)
|
|
3,055
|
|
|
(552
|
)
|
Other income
|
|
585
|
|
|
612
|
|
Total Revenues
|
|
67,399
|
|
|
64,857
|
|
BENEFITS, LOSSES AND EXPENSES
|
|
|
|
|
|
|
Policyholder benefits and settlement expenses
|
|
38,598
|
|
|
40,409
|
|
Amortization of deferred policy acquisition costs
|
|
3,459
|
|
|
3,597
|
|
Commissions
|
|
7,429
|
|
|
7,555
|
|
General and administrative expenses
|
|
9,698
|
|
|
8,839
|
|
Taxes, licenses and fees
|
|
2,470
|
|
|
2,157
|
|
Interest expense
|
|
1,165
|
|
|
1,235
|
|
Total Benefits, Losses and Expenses
|
|
62,819
|
|
|
63,792
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
4,580
|
|
|
1,065
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
|
|
|
|
Current
|
|
768
|
|
|
(1,045
|
)
|
Deferred
|
|
(255
|
)
|
|
1,331
|
|
|
|
513
|
|
|
286
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,067
|
|
|
$
|
779
|
|
|
|
|
|
|
INCOME PER COMMON SHARE BASIC AND DILUTED
|
|
$
|
1.61
|
|
|
$
|
0.31
|
|
|
|
|
|
|
DIVIDENDS DECLARED PER SHARE
|
|
$
|
0.21
|
|
|
$
|
0.20
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Year ended
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Net income
|
|
$
|
4,067
|
|
|
$
|
779
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
Changes in:
|
|
|
|
|
Unrealized gains (losses) on securities, net of reclassification adjustment of $14 and $100 for 2019 and 2018, respectively
|
|
3,879
|
|
|
(2,404
|
)
|
Unrealized gain on interest rate swap
|
|
134
|
|
|
295
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
4,013
|
|
|
(2,109
|
)
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
8,080
|
|
|
$
|
(1,330
|
)
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Total
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Treasury Stock
|
Balance at December 31, 2017
|
$
|
47,625
|
|
|
$
|
36,974
|
|
|
$
|
2,646
|
|
|
$
|
2,522
|
|
|
$
|
5,483
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle
|
—
|
|
|
2,107
|
|
|
(2,107
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for December 31, 2018
|
779
|
|
|
779
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss (net of tax)
|
(2,109
|
)
|
|
—
|
|
|
(2,109
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
76
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
71
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
(505
|
)
|
|
(505
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
45,866
|
|
|
$
|
39,355
|
|
|
$
|
(1,570
|
)
|
|
$
|
2,527
|
|
|
$
|
5,554
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock reacquired
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for December 31, 2019
|
4,067
|
|
|
4,067
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (net of tax)
|
4,013
|
|
|
—
|
|
|
4,013
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
53
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
48
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
(531
|
)
|
|
(531
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
53,461
|
|
|
$
|
42,891
|
|
|
$
|
2,443
|
|
|
$
|
2,532
|
|
|
$
|
5,602
|
|
|
$
|
(7
|
)
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Year ended
December 31,
|
|
2019
|
|
2018
|
Cash Flows from Operating Activities
|
|
|
|
Net income
|
$
|
4,067
|
|
|
$
|
779
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation expense and amortization/accretion, net
|
365
|
|
|
312
|
|
Net (gains) losses on investments
|
(3,055
|
)
|
|
552
|
|
Deferred income taxes
|
(255
|
)
|
|
1,331
|
|
Amortization of deferred policy acquisition costs
|
3,459
|
|
|
3,597
|
|
Changes in assets and liabilities:
|
|
|
|
Change in receivable for securities sold
|
(56
|
)
|
|
—
|
|
Change in accrued investment income
|
68
|
|
|
(6
|
)
|
Change in reinsurance recoverable
|
1,496
|
|
|
(1,406
|
)
|
Policy acquisition costs deferred
|
(3,291
|
)
|
|
(3,307
|
)
|
Change in accrued income taxes
|
1,689
|
|
|
(1,070
|
)
|
Change in net policy liabilities and claims
|
(199
|
)
|
|
1,969
|
|
Change in other assets/liabilities, net
|
1,086
|
|
|
420
|
|
Other, net
|
(1
|
)
|
|
6
|
|
Net cash provided by operating activities
|
5,373
|
|
|
3,177
|
|
Cash Flows from Investing Activities
|
|
|
|
|
Purchase of:
|
|
|
|
Available-for-sale securities
|
(18,359
|
)
|
|
(16,621
|
)
|
Trading securities and short-term investments
|
(37
|
)
|
|
—
|
|
Property and equipment
|
(105
|
)
|
|
(29
|
)
|
Proceeds from sale or maturities of:
|
|
|
|
Held-to-maturity securities
|
173
|
|
|
179
|
|
Available-for-sale securities
|
17,972
|
|
|
14,172
|
|
Real estate held for investment
|
11
|
|
|
188
|
|
Proceeds from company owned life insurance
|
2,031
|
|
|
—
|
|
Other invested assets, net
|
(30
|
)
|
|
(38
|
)
|
Net cash provided by (used in) investing activities
|
1,656
|
|
|
(2,149
|
)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Change in other policyholder funds
|
(165
|
)
|
|
(191
|
)
|
Change in short-term notes payable
|
(200
|
)
|
|
(1,300
|
)
|
Dividends paid
|
(531
|
)
|
|
(505
|
)
|
Net cash used in financing activities
|
(896
|
)
|
|
(1,996
|
)
|
Net change in cash and cash equivalents
|
6,133
|
|
|
(968
|
)
|
Cash and cash equivalents, beginning of year
|
5,676
|
|
|
6,644
|
|
Cash and cash equivalents, end of period
|
$
|
11,809
|
|
|
$
|
5,676
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of The National Security Group, Inc. (the Company) and its wholly-owned subsidiaries: National Security Insurance Company (NSIC), National Security Fire and Casualty Company (NSFC) and NATSCO, Inc. (NATSCO). NSFC includes a wholly-owned subsidiary, Omega One Insurance Company (Omega). The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements have been included. All significant intercompany transactions and accounts have been eliminated in the consolidated financial statements. The financial information presented herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which includes information and disclosures not presented herein.
Description of Business
NSIC is licensed in the states of Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee and Texas and was organized in 1947 to provide life and burial insurance policies to the home service market. Business is produced by both company and independent agents. Primary products include ordinary life, accident and health, supplemental hospital, and cancer insurance products.
NSFC is licensed in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Oklahoma, South Carolina, Tennessee and West Virginia. In addition, NSFC operates on a surplus lines basis in Louisiana. NSFC operates in various property and casualty lines, the most significant of which are: dwelling fire and extended coverage, homeowners and mobile homeowners.
Omega is licensed in the states of Alabama and Louisiana. Omega currently has no insurance policies inforce but is party to an intercompany reinsurance agreement with NSFC. Intercompany transactions are eliminated upon consolidation in the accompanying consolidated financial statements.
The Company is incorporated under the laws of the State of Delaware. Its common stock is traded on the NASDAQ Global Market under the ticker symbol NSEC. Pursuant to the regulations of the United States Securities and Exchange Commission (SEC), the Company is considered a “Smaller Reporting Company” as defined by SEC Rule 12b-2 of the Exchange Act. The Company has elected to comply with the scaled disclosure requirements of Regulation S-K and only two years of financial statements are included herein.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these consolidated financial statements are reserves for future life insurance policy benefits, liabilities for losses and loss adjustment expenses, reinsurance recoverable associated with loss and loss adjustment expense liabilities, deferred policy acquisition costs, deferred income tax assets and liabilities, assessments of other-than-temporary impairments on investments and accruals for contingencies. Actual results could differ from the estimates used in preparing these consolidated financial statements.
Concentration of Risk
The Company's property and casualty subsidiaries, composing 91.2% of consolidated direct written premium, produced business during 2019 in eight states. However, 51% of property and casualty segment direct written premium is generated in the states of Alabama, Mississippi and Louisiana, subjecting the Company to significant geographic concentration. Consequently, adverse weather conditions or changes in the legal, regulatory or economic environment could adversely impact the Company.
The Company's life, accident and health insurance subsidiary, composing approximately 8.8% of consolidated direct written premium, is licensed in seven states. However, over 78% of life segment direct premium is generated in the
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
states of Alabama and Georgia. Consequently, changes in the legal, regulatory or economic environment in these states could adversely impact the Company.
For the year ended December 31, 2019, one agency individually produced greater than 5% of the Company's direct written premium.
Investments
The Company's investment securities are classified as follows:
|
|
•
|
Held-to-maturity investments are fixed maturity securities for which the Company has the positive intent and ability to hold to maturity. These securities are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using methods which approximate level yields over the period to maturity.
|
|
|
•
|
Trading securities are securities acquired with the intent to sell in the near term and are carried at fair value with changes in fair value reported in earnings.
|
|
|
•
|
Securities available-for-sale are fixed maturity securities and equity securities not classified as either held-to-maturity or trading. These securities are reported at fair value. Substantially all of our fixed maturity and equity securities are classified as available-for-sale.
|
Changes in fair value of trading securities are reported in the statement of operations.
Changes in fair value of fixed maturity securities available-for-sale are reported as net unrealized gains or losses as a component of other comprehensive income.
Changes in fair value of equity securities available-for-sale are reported as investment gains/losses in the statement of operations.
Investment gains and losses on fixed maturity securities arise when the investments are sold. Investment gains and losses on the sale of fixed maturity investments available-for-sale are determined using the specific-identification method and include write downs for fixed maturity securities considered to be other-than-temporarily impaired.
When a fixed maturity security has a decline in value, where fair value is below amortized cost, an other-than-temporary impairment (OTTI) is triggered in circumstances where:
|
|
•
|
the Company has the intent to sell the security
|
|
|
•
|
it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis
|
|
|
•
|
the Company does not expect to recover the entire amortized cost basis of the security
|
If the Company intends to sell the security or if it is more-likely-than-not the Company will be required to sell the security before recovery, an OTTI is recognized as a realized loss in the statement of operations equal to the difference between the security's amortized cost and its fair value. If the Company does not intend to sell the security or it is not more-likely-than-not that the Company will be required to sell the security before recovery, the OTTI is separated into an amount representing the credit loss, which is recognized as an investment loss in the statement of operations, and the amount related to all other factors, which is recognized in other comprehensive income.
Interest on fixed income securities is credited to income as it accrues on the principal amounts outstanding adjusted for amortization of premiums and accretion of discounts computed utilizing the interest method. Premiums and discounts on mortgage backed securities amortize or accrete using anticipated prepayments with changes in anticipated prepayments accounted for prospectively. The model used to determine anticipated prepayment assumptions for mortgage backed securities uses separate home sale, refinancing, curtailment and pay-off assumptions derived from a variety of industry sources. Mortgage backed security valuations are subject to prospective adjustments in yield due to changes in prepayment assumptions. The utilization of the prospective method will result in a recalculated effective yield that will equate the carrying amount of the investment to the present value of the projected future cash flows. The recalculated yield is used to accrue income on investments for subsequent periods.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans and policy loans are stated at the unpaid principal balance of such loans, net of any related allowance for loan losses.
Investment real estate is reported at cost, less allowances for depreciation computed on the straight-line basis. Investment real estate consists primarily of undeveloped commercial real estate.
Other investments consist primarily of investments in notes and equity investments in limited liability companies. The Company has no influence or control over the operating or financial policies of the limited liability companies, and consequently, these investments are accounted for using the cost method.
The Company owns life insurance (COLI) contracts on certain management and supervisory employees each having a face amount of approximately $2,000,000 (including cash surrender value at the time of payment). The Company's original investment in currently inforce company owned life insurance is $4,082,000. The primary purpose of the program is to offset future employee benefit expenses through earnings on the cash value of the policies. The Company is the owner and principal beneficiary of these policies. The life insurance contracts are carried at their current cash surrender value. Cash surrender value at December 31, 2019 and December 31, 2018 was $4,655,000 and $4,600,000, respectively. Changes in cash surrender values are included in the statement of operations. The change in surrender value included in the statement of operations for the years ended December 31, 2019 and 2018 was an increase of $295,000 and an decrease of $374,000, respectively. Proceeds from the COLI contracts are recorded when the benefits become payable under the terms of the policy and proceeds in excess of cash surrender value are recognized as a gain on company owned life insurance.
Cash and cash equivalents consist of demand deposit and money market accounts and investments with maturities of three months or less when purchased. Cash and cash equivalents are carried at cost, which approximates fair value.
Investments with other-than-temporary impairment in value are written down to estimated realizable values and losses recognized as a component of investments gains and losses in the Consolidated Statements of Operations. The fair value of the investment becomes its new cost basis.
Fair Values of Financial Instruments
The Company uses the following methods and assumptions to estimate fair values:
Investments
|
|
•
|
Fixed income security fair values are based on quoted market prices when available. If not available, fair values are based on values obtained from investment brokers and independent pricing services.
|
|
|
•
|
Equity security fair values are based on quoted market prices.
|
|
|
•
|
Multiple observable inputs are not available for some of our investments, primarily private placements and limited partnerships. Management values these investments either using non-binding broker quotes or pricing models that utilize market based assumptions that have limited observable inputs. These investments compose less than 1% of total assets.
|
Receivables and reinsurance recoverable - The carrying amounts reported approximate fair value.
Interest rate swaps - The estimated fair value of the interest rate swaps is based on valuations received from financial institution counterparties.
Trust preferred securities obligations and line of credit obligations - The carrying amounts reported for these instruments are equal to the principal balance outstanding and approximate fair value.
Policy Receivables
Receivable balances are reported at unpaid balances, less a provision for credit losses.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable are reported at net realizable value. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent receivables, and once these receivables are determined to be uncollectible, they are written off through a charge against an existing allowance account or against earnings.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment. Significant costs incurred for internally developed software are capitalized and amortized over estimated useful lives of 3 years. Maintenance, repairs, and minor renovations are charged to expense as incurred. Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the respective account and the resulting gain or loss is included in the statement of operations. The Company provides for depreciation of property and equipment using the straight-line method designed to amortize costs over estimated useful lives. Estimated useful lives range up to 40 years for buildings and from 3-10 years for equipment, furniture and fixtures. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Leases
The Company leases automobiles and some office equipment. The Company accounts for leases existing prior to January 1, 2019 under their original classification and omits any new costs classified as initial direct costs. The Company classified all leases as operating leases and accounts for separate lease and nonlease components as a single lease component. Leases are not considered material and the Company recognizes a right of use (ROU) asset which is included in other assets and a corresponding lease liability in other liabilities. The ROU asset recognized by the Company at December 31, 2019 was $389,000 and the corresponding lease liability was $427,000.
Statement of Cash Flows
For purposes of reporting cash flows, cash includes cash-on-hand, demand deposits with banks and overnight investments consisting primarily of repurchase agreements.
Premium Revenue
Life insurance premiums are recognized as revenues when due. Property and casualty insurance premiums include direct writings plus reinsurance assumed less reinsurance ceded and are recognized on a pro-rata basis over the terms of the policies. Unearned premiums represent that portion of direct premiums written that are applicable to the unexpired terms of policy contracts in force and is reported as a liability. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers and are reported as an asset.
Deferred Policy Acquisition Costs
The costs of acquiring new insurance business are deferred and amortized over the lives of the policies. Deferred costs include commissions, premium taxes, other agency compensation and expenses, and other underwriting expenses directly related to the level of new business produced.
Acquisition costs relating to life contracts are amortized over the premium paying period of the contracts, or the first renewal period of term policies, if earlier. Assumptions utilized in amortization are consistent with those utilized in computing policy liabilities.
The method of computing the deferred policy acquisition costs for property and casualty policies limits the amount deferred to a percentage of related unearned premiums.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Policy Liabilities
The liability for future life insurance policy benefits is computed using a net level premium method including the following
assumptions:
|
|
|
|
Years of Issue
|
|
Interest Rate
|
1947 - 1968
|
|
4%
|
1969 - 1978
|
|
6% graded to 5%
|
1979 - 2003
|
|
7% graded to 6%
|
2004 - 2012
|
|
5.25%
|
2013 - 2014
|
|
4.25%
|
2015 - 2019
|
|
4%
|
Mortality assumptions include various percentages of the 1955-60 and 1965-70 Select and Ultimate Basic Male Mortality Table. Withdrawal assumptions are based on the Company's experience.
Policyholder Benefit and Claim Settlement Expenses
The liability for unpaid claims represents the estimated liability for unpaid loss and loss adjustment expenses incurred but not yet reported under insurance contracts for loss events that have occurred on or before the balance sheet date. The liability for claims and related adjustment expenses are determined using case-basis evaluations and statistical analysis and represent estimates of the ultimate net cost of all losses incurred through December 31 of each year. Liability estimates are continually reviewed and adjusted as necessary; such adjustments are included in the period in which they are determined. Liability estimates are based on reports of losses from policyholders, individual case loss estimates, and estimates of losses incurred but not yet reported. Policyholder benefit and settlement expenses in the consolidated statement of operations include paid claims, settlement cost and changes in claim liability estimates. Loss and adjustment expenses charged to earnings are net of amounts recovered and estimates of recoverable amounts under ceded reinsurance contracts.
Earnings Per Share
Earnings per share of common stock is based on the weighted average number of shares outstanding during each year. The adjusted weighted average shares outstanding were 2,529,652 at December 31, 2019 and 2,525,325 at December 31, 2018. The Company did not have any dilutive securities as of December 31, 2019 and 2018.
Reinsurance
The Company's insurance operations re-insure certain risks in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and effect business-sharing arrangements. See Note 10 for additional information regarding the Company's reinsurance practices.
Income Taxes
The Company files a consolidated United States federal income tax return that includes the holding company and its subsidiaries. The Company is currently subject to a statutory rate of 21%. Tax related interest and penalties are reported as components of income tax expense.
The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax basis of the Company's assets and liabilities and capital or operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more-likely-than-not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period the new rate is enacted. Changes in deferred tax assets and liabilities are included as a component of income tax expense, with the exception of changes impacting other comprehensive income. Changes in deferred tax assets and liabilities associated with components of other comprehensive income are charged or credited to other comprehensive income.
The Company evaluates all tax positions taken on its U.S. federal income tax return. No material uncertainties exist for any tax positions taken by the Company.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
Liabilities for loss contingencies arising from, but not limited to, litigation, claims, assessments, fines and penalties are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Significant attorney fees are estimated and recorded when incurred.
Reclassifications
Certain 2018 amounts have been reclassified from the prior year consolidated financial statements to conform to the 2019 presentation.
Advertising
The Company expenses advertising costs as incurred.
Concentration of Credit Risk
The Company maintains cash balances which are generally held in non-interest bearing demand deposit accounts subject to FDIC insured limits of $250,000 per entity. At December 31, 2019, the net amount exceeding FDIC insured limits was $6,766,000 at three financial institutions. The Company has not experienced any losses in such accounts. Management of the Company reviews financial information of financial institutions on a quarterly basis and believes the Company is not exposed to any significant credit risk on cash and cash equivalents.
Policy receivables are reported at unpaid balances. Policy receivables are generally offset by associated unearned premium liabilities and are not subject to significant credit risk. Receivables from agents, less provision for credit losses, are composed of balances due from independent agents. At December 31, 2019, the single largest balance due from one agent totaled $349,000.
Reinsurance contracts do not relieve the Company of its obligations to policyholders. A failure of a reinsurer to meet its obligation could result in losses to the insurance subsidiaries. Allowances for losses on reinsurance recoverables are established if amounts are believed to be uncollectible. At December 31, 2019 and December 31, 2018, no amounts were deemed uncollectible. The Company, at least annually, evaluates the financial condition of all reinsurers and evaluates any potential concentrations of credit risk. At December 31, 2019, management does not believe the Company is exposed to any significant credit risk related to its reinsurance program.
Treasury Shares
Treasury shares are reported at cost and are reflected on the Consolidated Balance Sheets as a reduction of total equity.
Accounting Changes Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance to simplify the accounting for income taxes. The guidance removes certain exceptions to general principles in the income tax guidance and amends existing guidance to improve consistent application. The guidance is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this new guidance. The Company does not expect the adoption to have a material impact on its financial position or results of operations.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued guidance to that removes, modifies and adds to the disclosure requirements related to fair value measurements. The guidance removes the requirements to disclose the amount and reasons for transfers between Level 1 and Level 2 assets, the policy for timing and transfers between levels and the valuation process for Level 3 fair value measurements. The guidance modifies disclosure requirements for investments in certain entities that calculate net asset value and clarifies the purpose of the measurement uncertainty disclosure. The guidance adds requirements to disclose changes in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurements and to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company does not expect the adoption to have a material impact on its financial position or results of operations.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued guidance to improve the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The guidance improves timeliness of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows. The guidance will simplify and improve accounting for certain market-based options or guarantees associated with deposit type contracts and simplify the amortization of deferred policy acquisition costs. The guidance also introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. The guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance. Due to the nature and extent of the changes required to the Company’s life insurance operations, the adoption of this standard is expected to have a material impact on the consolidated financial statements.
Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued guidance that clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company does not expect the adoption to have a material impact on its financial position or results of operations.
Financial Instruments - Credit Losses
In June 2016, the FASB issued guidance that replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The FASB released additional guidance in November 2018 that provides scope clarification. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. The Company does not expect the adoption to have a material impact on its financial position or results of operations.
Recently Adopted Accounting Standards
Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued guidance to simplify the accounting for nonemployee share-based payment awards. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company does not make any material share-based payments. The Company adopted this guidance on January 1, 2019. The adoption of this guidance did not have a material impact on its financial position or results of operations.
Derivatives and Hedging
In August 2017, the FASB issued guidance that amends and simplifies hedge accounting guidance in order to enable entities to better portray the economic results of their risk management activities. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. The Company adopted this guidance on January 1, 2019 and had two swaps designated as cash flow hedges. One expired March 15, 2019 and one expires March 15, 2020. The adoption of this guidance did not have a significant impact on our financial position, results of operations, cash flows or related disclosures.
Leases
In February 2016, the FASB issued guidance that requires lessees (for capital and operating leases) to recognize the lease liability and right-of-use (ROU) asset at the commencement date of the lease. Additional transition guidance was issued in 2018 and 2019. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years.
The Company adopted this guidance on January 1, 2019 and recorded a ROU asset of $299,000 and corresponding lease liability of $306,000. The ROU asset and operating lease liability are included in other assets and other liabilities, respectively, on our Consolidated Balance Sheets as of January 1, 2019. The Company elected the package of practical expedients permitted under the guidance, which allowed the Company to account for existing leases under their current classification, as well as omit any new costs classified as initial direct costs, under the new guidance. Based on this election, the Company kept existing agreements as operating leases. The Company also elected the practical expedient allowing an accounting policy election by class of underlying asset, to account for separate lease and nonlease
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
components as a single lease component. The Company leases automobiles and some office equipment. These leases are not considered material. Adoption of this guidance had no material impact on the Company's financial position, results of operations, cash flows or related disclosures.
NOTE 2 – VARIABLE INTEREST ENTITIES
The Company holds passive interests in limited partnerships that are considered to be Variable Interest Entities (VIE) under the provisions of ASC 810 Consolidation. The Company is not the primary beneficiary of the entities and is not required to consolidate under ASC 810. The entities are private placement investment funds formed for the purpose of investing in private equity investments. The Company owns less than 1% of the limited partnerships. The carrying value of the investments totals $317,000 and is included as a component of Other Invested Assets in the accompanying consolidated balance sheets.
In December 2005, the Company formed National Security Capital Trust I, a statutory trust created under the Delaware Statutory Trust Act, for the sole purpose of issuing, in private placement transactions, $9,000,000 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 $9,279,000 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 $9,005,000. 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 sheets as a component of long-term debt. The Company's equity investments in the Trust total $279,000 and are included in Other Assets in the accompanying consolidated balance sheets.
In June 2007, the Company formed National Security Capital Trust II for the sole purpose of issuing, in private placement transactions, $3,000,000 of trust preferred securities and using the proceeds thereof, together with the equity proceeds received from the Company in the initial formation of the Trust, to purchase $3,093,000 unsecured junior subordinated deferrable interest debentures. 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 $2,995,000. 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 sheets as a component of long-term debt. The Company's equity investments in the Trust total $93,000 and are included in Other Assets in the accompanying consolidated balance sheets.
NOTE 3 – STATUTORY ACCOUNTING PRACTICES
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) which vary in certain respects from reporting practices prescribed or permitted by insurance regulatory authorities. The significant differences for statutory reporting include: (a) acquisition costs of acquiring new business are charged to operations as incurred, (b) life policy liabilities are established utilizing interest and mortality factors specified by regulatory authorities, (c) the Asset Valuation Reserve (AVR) and the Interest Maintenance Reserve (IMR) are recorded as liabilities in the life subsidiary, and (d) non-admitted assets (primarily furniture and equipment, agents' debit balances and prepaid expenses) are charged directly to surplus.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statutory net income (loss) and capital and surplus, excluding intercompany transactions, are summarized as follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
2019
|
|
2018
|
NSIC - including realized capital gains of $272 and $71, respectively
|
$
|
1,378
|
|
|
$
|
1,558
|
|
NSFC - including realized capital gains (losses) of $(10) and $39, respectively
|
$
|
2,644
|
|
|
$
|
786
|
|
Omega - including realized capital gains (losses) of $(21) and $7, respectively
|
$
|
593
|
|
|
$
|
(64
|
)
|
Statutory risk-based adjusted capital:
|
|
|
|
NSIC - including AVR of $968 and $766, respectively
|
$
|
17,210
|
|
|
$
|
16,043
|
|
NSFC - including investment in Omega of $7,930 and $7,280, respectively
|
$
|
36,264
|
|
|
$
|
34,645
|
|
Omega
|
$
|
11,430
|
|
|
$
|
10,783
|
|
The above amounts exclude allocation of direct expenses of the Company. NSIC, NSFC and Omega are in compliance with statutory restrictions with regard to minimum amounts of surplus and capital.
NOTE 4 – INVESTMENTS
Our investment in available-for-sale securities, which are reported at fair value, includes fixed maturity securities and equity securities. Net unrealized gains or losses on fixed maturities are reported after-tax as a component of other comprehensive income. Changes in fair value of equity securities are reported in investment gains/losses as a component of net income.
The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Available-for-sale securities:
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. Government corporations and agencies
|
|
$
|
4,131
|
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
4,281
|
|
Agency mortgage backed securities
|
|
32,283
|
|
|
861
|
|
|
157
|
|
|
32,987
|
|
Asset backed securities
|
|
10,307
|
|
|
71
|
|
|
104
|
|
|
10,274
|
|
Private label mortgage backed securities
|
|
6,815
|
|
|
441
|
|
|
4
|
|
|
7,252
|
|
Corporate bonds
|
|
36,074
|
|
|
1,816
|
|
|
70
|
|
|
37,820
|
|
States, municipalities and political subdivisions
|
|
6,669
|
|
|
109
|
|
|
1
|
|
|
6,777
|
|
Foreign governments
|
|
823
|
|
|
46
|
|
|
—
|
|
|
869
|
|
Total Fixed Maturities
|
|
97,102
|
|
|
3,494
|
|
|
336
|
|
|
100,260
|
|
Equity securities
|
|
2,127
|
|
|
3,176
|
|
|
—
|
|
|
5,303
|
|
Total
|
|
$
|
99,229
|
|
|
$
|
6,670
|
|
|
$
|
336
|
|
|
$
|
105,563
|
|
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Held-to-maturity securities:
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Agency mortgage backed securities
|
|
$
|
1,290
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
1,345
|
|
Total
|
|
$
|
1,290
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
1,345
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Available-for-sale securities:
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. Government corporations and agencies
|
|
$
|
4,820
|
|
|
$
|
31
|
|
|
$
|
107
|
|
|
$
|
4,744
|
|
Agency mortgage backed securities
|
|
27,492
|
|
|
159
|
|
|
545
|
|
|
27,106
|
|
Asset backed securities
|
|
10,901
|
|
|
7
|
|
|
248
|
|
|
10,660
|
|
Private label mortgage backed securities
|
|
5,869
|
|
|
105
|
|
|
27
|
|
|
5,947
|
|
Corporate bonds
|
|
36,935
|
|
|
407
|
|
|
1,551
|
|
|
35,791
|
|
States, municipalities and political subdivisions
|
|
10,059
|
|
|
105
|
|
|
91
|
|
|
10,073
|
|
Foreign governments
|
|
801
|
|
|
3
|
|
|
—
|
|
|
804
|
|
Total Fixed Maturities
|
|
96,877
|
|
|
817
|
|
|
2,569
|
|
|
95,125
|
|
Equity securities
|
|
1,842
|
|
|
2,464
|
|
|
—
|
|
|
4,306
|
|
Total
|
|
$
|
98,719
|
|
|
$
|
3,281
|
|
|
$
|
2,569
|
|
|
$
|
99,431
|
|
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Held-to-maturity securities:
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Agency mortgage backed securities
|
|
$
|
1,449
|
|
|
$
|
16
|
|
|
$
|
22
|
|
|
$
|
1,443
|
|
Total
|
|
$
|
1,449
|
|
|
$
|
16
|
|
|
$
|
22
|
|
|
$
|
1,443
|
|
The amortized cost and aggregate fair value of debt securities at December 31, 2019, by contractual maturity, are presented in the following table. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
Available-for-sale securities:
|
|
|
|
|
Due in one year or less
|
|
$
|
2,136
|
|
|
$
|
2,133
|
|
Due after one year through five years
|
|
17,397
|
|
|
17,945
|
|
Due after five years through ten years
|
|
25,683
|
|
|
26,516
|
|
Due after ten years
|
|
51,886
|
|
|
53,666
|
|
Total
|
|
$
|
97,102
|
|
|
$
|
100,260
|
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
Due after one year through five years
|
|
$
|
29
|
|
|
$
|
30
|
|
Due after five years through ten years
|
|
4
|
|
|
5
|
|
Due after ten years
|
|
1,257
|
|
|
1,310
|
|
Total
|
|
$
|
1,290
|
|
|
$
|
1,345
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of securities available-for-sale with unrealized losses as of December 31, 2019, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
December 31, 2019
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Total
Securities in a Loss Position
|
Agency mortgage backed securities
|
|
$
|
5,663
|
|
|
$
|
104
|
|
|
$
|
1,751
|
|
|
$
|
53
|
|
|
$
|
7,414
|
|
|
$
|
157
|
|
|
18
|
Asset backed securities
|
|
4,241
|
|
|
33
|
|
|
1,579
|
|
|
71
|
|
|
5,820
|
|
|
104
|
|
|
9
|
Private label mortgage backed securities
|
|
1,060
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
1,060
|
|
|
4
|
|
|
1
|
Corporate bonds
|
|
6,363
|
|
|
54
|
|
|
1,484
|
|
|
16
|
|
|
7,847
|
|
|
70
|
|
|
14
|
States, municipalities and political subdivisions
|
|
512
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
512
|
|
|
1
|
|
|
1
|
|
|
$
|
17,839
|
|
|
$
|
196
|
|
|
$
|
4,814
|
|
|
$
|
140
|
|
|
$
|
22,653
|
|
|
$
|
336
|
|
|
43
|
There were no securities held-to-maturity with unrealized losses as of December 31, 2019.
A summary of securities available-for-sale with unrealized losses as of December 31, 2018, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
December 31, 2018
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Total
Securities in a Loss Position
|
U.S. Government corporations and agencies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,209
|
|
|
$
|
107
|
|
|
$
|
3,209
|
|
|
$
|
107
|
|
|
6
|
Agency mortgage backed securities
|
|
5,504
|
|
|
45
|
|
|
10,969
|
|
|
500
|
|
|
16,473
|
|
|
545
|
|
|
38
|
Asset backed securities
|
|
5,824
|
|
|
146
|
|
|
2,741
|
|
|
102
|
|
|
8,565
|
|
|
248
|
|
|
12
|
Private label mortgage backed securities
|
|
1,348
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
1,348
|
|
|
27
|
|
|
2
|
Corporate bonds
|
|
16,583
|
|
|
709
|
|
|
9,823
|
|
|
842
|
|
|
26,406
|
|
|
1,551
|
|
|
51
|
States, municipalities and political subdivisions
|
|
1,242
|
|
|
10
|
|
|
4,420
|
|
|
81
|
|
|
5,662
|
|
|
91
|
|
|
11
|
|
|
$
|
30,501
|
|
|
$
|
937
|
|
|
$
|
31,162
|
|
|
$
|
1,632
|
|
|
$
|
61,663
|
|
|
$
|
2,569
|
|
|
120
|
A summary of securities held-to-maturity with unrealized losses as of December 31, 2018 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
December 31, 2018
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Total
Securities in a Loss Position
|
Agency mortgage backed securities
|
|
$
|
1,026
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,026
|
|
|
$
|
22
|
|
|
2
|
|
|
$
|
1,026
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,026
|
|
|
$
|
22
|
|
|
2
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company conducts periodic reviews to identify and evaluate securities in an unrealized loss position in order to identify other-than-temporary impairments. For securities in an unrealized loss position, the Company assesses whether the Company has the intent to sell the security or more-likely-than-not will be required to sell the security before the anticipated recovery. If either of these conditions is met, the Company is required to recognize an other-than-temporary impairment with the entire unrealized loss reported in earnings. For securities in an unrealized loss position that do not meet these conditions, the Company assesses whether the impairment of a security is other-than-temporary. If the impairment is determined to be other-than-temporary, the Company is required to separate the other-than-temporary impairments into two components: the amount representing the credit loss and the amount related to all other factors. The credit loss is the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.
Management has evaluated each security in a significant unrealized loss position in the fixed maturity investment portfolio. The Company has no material exposure to sub-prime mortgage loans and approximately 5% of the fixed income investment portfolio is rated below investment grade. Based on a review of the available financial information, the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was determined that, other than the impairment described below, the securities in an accumulated loss position in the portfolio were temporary impairments.
For the year ended December 31, 2019, the Company realized no other-than-temporary impairments. For the year ended December 31, 2018, the Company realized $16,000 other-than-temporary impairments. At December 31, 2019, the three largest losses not realized as an impairment in the fixed maturity portfolio totaled $60,000, $23,000 and $20,000. Each of these losses were driven by changes in market interest rates. At December 31, 2018, the three largest losses not realized as an impairment was in the fixed maturity portfolio totaled $145,000, $99,000 and $94,000.
Major categories of investment income are summarized as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Year ended
December 31,
|
|
|
2019
|
|
2018
|
Fixed maturities
|
|
$
|
3,752
|
|
|
$
|
3,803
|
|
Equity securities
|
|
86
|
|
|
106
|
|
Mortgage loans on real estate
|
|
8
|
|
|
7
|
|
Investment real estate
|
|
4
|
|
|
3
|
|
Policy loans
|
|
142
|
|
|
142
|
|
Other
|
|
30
|
|
|
25
|
|
|
|
4,022
|
|
|
4,086
|
|
Less: Investment expenses
|
|
146
|
|
|
145
|
|
Net investment income
|
|
$
|
3,876
|
|
|
$
|
3,941
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major categories of investment gains and losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Year ended
December 31,
|
|
|
2019
|
|
2018
|
Realized gains on fixed maturities
|
|
$
|
18
|
|
|
$
|
128
|
|
Realized gains on equity securities
|
|
233
|
|
|
—
|
|
Gains on trading securities
|
|
5
|
|
|
—
|
|
Change in fair value of equity securities
|
|
712
|
|
|
(203
|
)
|
Change in surrender value of company owned life insurance
|
|
295
|
|
|
(374
|
)
|
Realized gain on company owned life insurance
|
|
1,792
|
|
|
—
|
|
Other gains (losses), principally real estate
|
|
—
|
|
|
(87
|
)
|
Other-than-temporary impairments
|
|
—
|
|
|
(16
|
)
|
Net investment gains (losses)
|
|
$
|
3,055
|
|
|
$
|
(552
|
)
|
An analysis of the net change in unrealized gains (losses) on available-for-sale securities follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
December 31,
2019
|
|
December 31, 2018
|
Fixed maturities
|
$
|
4,910
|
|
|
$
|
(3,042
|
)
|
Deferred income tax
|
(1,031
|
)
|
|
638
|
|
Change in net unrealized gains (losses) on available-for-sale securities
|
$
|
3,879
|
|
|
$
|
(2,404
|
)
|
NOTE 5 – FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Our available-for-sale securities consists of fixed maturity and equity securities which are recorded at fair value in the accompanying consolidated balance sheets.
We are permitted to elect to measure financial instruments and certain other items at fair value, with the change in fair value recorded in earnings. We elected not to measure any eligible items using the fair value option.
Accounting standards define fair value as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework to make the measurement of fair value more consistent and comparable. In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets. The Company categorizes assets and liabilities carried at their fair value based upon a fair value hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 assets and liabilities consist of money market fund deposits and certain of our marketable debt and equity instruments, including equity instruments offsetting deferred compensation, that are traded in an active market with sufficient volume and frequency of transactions.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include certain of our marketable debt and equity instruments with quoted market prices that are traded in less active markets or priced using a quoted market price for similar instruments. Level 2 assets also include marketable equity instruments with security-specific restrictions that would transfer to the buyer, marketable debt instruments priced using indicator prices which represent non-binding market consensus prices that can be corroborated by observable market quotes, as well as derivative contracts and debt instruments priced using inputs that are observable in the market or can be derived principally from or corroborated
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
by observable market data. Marketable debt instruments in this category generally include commercial paper, bank time deposits, repurchase agreements for fixed-income instruments, and a majority of floating-rate notes, corporate bonds, and municipal bonds.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. Level 3 assets and liabilities include marketable debt instruments, non-marketable equity investments, derivative contracts, and company issued debt with values are determined using inputs that are both unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable debt instruments that are priced using indicator prices that we were unable to corroborate with observable market quotes.
Marketable debt instruments in this category generally include asset-backed securities and certain floating-rate notes, corporate bonds, and municipal bonds.
Assets/Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 are summarized in the following table by the type of inputs applicable to the fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Fair Value Measurements at Reporting Date Using
|
Description
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale
|
|
|
|
|
|
|
|
|
U.S. Government corporations and agencies
|
|
$
|
4,281
|
|
|
$
|
4,281
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Agency mortgage backed securities
|
|
32,987
|
|
|
19,330
|
|
|
13,657
|
|
|
—
|
|
Asset backed securities
|
|
10,274
|
|
|
2,601
|
|
|
7,673
|
|
|
—
|
|
Corporate bonds
|
|
37,820
|
|
|
—
|
|
|
37,820
|
|
|
—
|
|
Private label asset backed securities
|
|
7,252
|
|
|
1,060
|
|
|
6,192
|
|
|
—
|
|
States, municipalities and political subdivisions
|
|
6,777
|
|
|
—
|
|
|
6,777
|
|
|
—
|
|
Foreign governments
|
|
869
|
|
|
869
|
|
|
—
|
|
|
—
|
|
Trading securities
|
|
149
|
|
|
149
|
|
|
—
|
|
|
—
|
|
Equity securities
|
|
5,303
|
|
|
3,988
|
|
|
—
|
|
|
1,315
|
|
Total Financial Assets
|
|
$
|
105,712
|
|
|
$
|
32,278
|
|
|
$
|
72,119
|
|
|
$
|
1,315
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
(65
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
Total Financial Liabilities
|
|
$
|
(65
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below.
Fixed maturities available-for-sale — The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Consistent with the fair value hierarchy described above, securities with quoted market prices in active markets for identical assets are reflected within Level 1 while securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs.
Trading securities — Trading securities consist primarily of mutual funds whose fair values are determined consistent with similar instruments described above under “Fixed Maturities” and below under “Equity Securities.”
Equity securities — Equity securities consist principally of investments in common and preferred stock of publicly traded companies and privately traded securities. The fair values of our publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately traded equity securities are classified within Level 3.
Interest rate swaps — Interest rate swaps are recorded at fair value either as assets, within other assets or as liabilities, within other liabilities. The fair values of our interest rate swaps are provided by a third-party broker and are classified within Level 3.
As of December 31, 2019, Level 3 fair value measurements of assets include $1,315,000 of equity securities in a local community bank whose value is based on an evaluation of the financial statements of the entity. The Company does not develop the unobservable inputs used in measuring fair value.
As of December 31, 2019, Level 3 fair value measurements of liabilities include $65,000 net fair value of various interest rate swap agreements whose value is based on analysis provided by a third party that utilizes financial modeling tools and assumptions on interest and other factors. The Company does not develop the unobservable inputs used in measuring fair value. Additional information regarding the interest rate swap agreements is provided in Note 8.
The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
For the year December 31, 2019
|
|
Equity Securities
|
|
Interest Rate Swap
|
Beginning balance
|
|
$
|
1,125
|
|
|
$
|
(234
|
)
|
Total gains or losses (realized and unrealized):
|
|
|
|
|
|
|
Included in earnings
|
|
645
|
|
|
—
|
|
Included in other comprehensive income
|
|
—
|
|
|
169
|
|
Purchases:
|
|
—
|
|
|
—
|
|
Sales:
|
|
(455
|
)
|
|
—
|
|
Issuances:
|
|
—
|
|
|
—
|
|
Settlements:
|
|
—
|
|
|
—
|
|
Transfers in/(out) of Level 3
|
|
—
|
|
|
—
|
|
Ending balance
|
|
$
|
1,315
|
|
|
$
|
(65
|
)
|
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of December 31, 2019:
|
|
$
|
—
|
|
|
$
|
—
|
|
For the year ended December 31, 2019, there were no assets or liabilities measured at fair values on a nonrecurring basis.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 are summarized in the following table by the type of inputs applicable to the fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Fair Value Measurements at Reporting Date Using
|
Description
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial Assets
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale
|
|
|
|
|
|
|
|
|
U.S. Government corporations and agencies
|
|
$
|
4,744
|
|
|
$
|
4,147
|
|
|
$
|
597
|
|
|
$
|
—
|
|
Agency mortgage backed securities
|
|
27,106
|
|
|
11,756
|
|
|
15,350
|
|
|
—
|
|
Asset backed securities
|
|
10,660
|
|
|
2,939
|
|
|
7,721
|
|
|
—
|
|
Corporate bonds
|
|
35,791
|
|
|
—
|
|
|
35,791
|
|
|
—
|
|
Private label asset backed securities
|
|
5,947
|
|
|
—
|
|
|
5,947
|
|
|
—
|
|
States, municipalities and political subdivisions
|
|
10,073
|
|
|
—
|
|
|
10,073
|
|
|
—
|
|
Foreign governments
|
|
804
|
|
|
804
|
|
|
—
|
|
|
—
|
|
Trading securities
|
|
107
|
|
|
107
|
|
|
—
|
|
|
—
|
|
Equity securities available-for-sale
|
|
4,306
|
|
|
3,181
|
|
|
—
|
|
|
1,125
|
|
Total Financial Assets
|
|
$
|
99,538
|
|
|
$
|
22,934
|
|
|
$
|
75,479
|
|
|
$
|
1,125
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
(234
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(234
|
)
|
Total Financial Liabilities
|
|
$
|
(234
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(234
|
)
|
The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
For the year ended December 31, 2018
|
|
Equity Securities Available-for-Sale
|
|
Interest Rate Swap
|
Beginning balance
|
|
$
|
1,073
|
|
|
$
|
(608
|
)
|
Total gains or losses (realized and unrealized):
|
|
|
|
|
|
|
Included in earnings
|
|
52
|
|
|
—
|
|
Included in other comprehensive income
|
|
—
|
|
|
374
|
|
Purchases:
|
|
—
|
|
|
—
|
|
Sales:
|
|
—
|
|
|
—
|
|
Issuances:
|
|
—
|
|
|
—
|
|
Settlements:
|
|
—
|
|
|
—
|
|
Transfers in/(out) of Level 3
|
|
—
|
|
|
—
|
|
Ending balance
|
|
$
|
1,125
|
|
|
$
|
(234
|
)
|
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of December 31, 2018:
|
|
$
|
—
|
|
|
$
|
—
|
|
For the year ended December 31, 2018, there were no assets or liabilities measured at fair values on a nonrecurring basis.
The Company is exposed to certain risks in the normal course of its business operations. The primary risk that is managed through the use of derivatives is interest rate risk on floating rate borrowings. This risk is managed through the use of interest rate swap agreements which are designated as cash flow hedges. For cash flow hedges, the effective portion of the gain or loss on the interest rate swap is included as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction is recognized in earnings. The Company does not hold or issue derivatives that are not designated as hedging instruments. See Note 8 for additional information about the interest rate swap agreements.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate fair value of each class of financial instrument for which it is practical to estimate that value:
Cash and cash equivalents — the carrying amount is a reasonable estimate of fair value.
Fixed maturities held-to-maturity — the carrying amount is amortized cost; the fair values of the Company’s public fixed maturity securities that are classified as held-to-maturity are generally based on prices obtained from independent pricing services.
Mortgage loans — the carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited marketability of the mortgage notes.
Policy loans — the carrying amount is a reasonable estimate of fair value.
Company owned life insurance — the carrying amount is a reasonable estimate of fair value.
Other invested assets — the carrying amount is a reasonable estimate of fair value.
Other policyholder funds — the carrying amount is a reasonable estimate of fair value.
Debt — the carrying amount is a reasonable estimate of fair value.
The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
Assets and related instruments
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Held-to-maturity securities
|
|
$
|
1,290
|
|
|
$
|
1,345
|
|
|
$
|
1,449
|
|
|
$
|
1,443
|
|
Mortgage loans
|
|
147
|
|
|
147
|
|
|
156
|
|
|
156
|
|
Policy loans
|
|
1,895
|
|
|
1,895
|
|
|
1,854
|
|
|
1,854
|
|
Company owned life insurance
|
|
4,655
|
|
|
4,655
|
|
|
4,600
|
|
|
4,600
|
|
Other invested assets
|
|
2,280
|
|
|
2,280
|
|
|
2,148
|
|
|
2,148
|
|
Liabilities and related instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds
|
|
1,350
|
|
|
1,350
|
|
|
1,515
|
|
|
1,515
|
|
Short-term notes payable and current portion of long-term debt
|
|
500
|
|
|
500
|
|
|
2,200
|
|
|
2,200
|
|
Long-term debt
|
|
13,664
|
|
|
13,664
|
|
|
12,152
|
|
|
12,152
|
|
NOTE 6 – PROPERTY AND EQUIPMENT
Major categories of property and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Building and improvements
|
$
|
3,472
|
|
|
$
|
3,378
|
|
Electronic data processing equipment
|
1,470
|
|
|
1,504
|
|
Furniture and fixtures
|
483
|
|
|
477
|
|
|
5,425
|
|
|
5,359
|
|
Less accumulated depreciation
|
3,795
|
|
|
3,710
|
|
Property and equipment, net
|
$
|
1,630
|
|
|
$
|
1,649
|
|
Depreciation expense for the year ended December 31, 2019 was $124,000 ($161,000 for the year ended December 31, 2018).
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – INCOME TAXES
The Company recognizes tax-related interest and penalties as a component of tax expense. The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is not subject to examinations by authorities related to its U.S. federal or state income tax filings for years prior to 2014. Tax returns have been filed through the year 2018.
Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. Management believes that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. The Company recognized a net deferred tax liability position of $96,000 at December 31, 2019 and a net deferred tax asset position of $716,000 at December 31, 2018.
At December 31, 2018, the Company recognized an AMT credit in income tax recoverable of $1,622,000. Of this amount, $1,074,000 was recovered with the 2018 return and Management anticipates the remaining $548,000 will be recovered by 2020 pursuant to allowable amounts under the Tax Cuts and Jobs Act enacted in 2017.
The tax effect of significant differences representing deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
As of December 31,
2019
|
|
As of December 31,
2018
|
General expenses
|
|
$
|
1,269
|
|
|
$
|
1,067
|
|
Unearned premiums
|
|
1,288
|
|
|
1,265
|
|
Claims liabilities
|
|
645
|
|
|
552
|
|
Impairment on real estate owned
|
|
119
|
|
|
119
|
|
Unrealized losses on securities available-for-sale
|
|
—
|
|
|
368
|
|
Unrealized loss on interest rate swaps
|
|
14
|
|
|
49
|
|
Deferred tax assets
|
|
3,335
|
|
|
3,420
|
|
|
|
|
|
|
Trading securities
|
|
(1
|
)
|
|
—
|
|
Depreciation
|
|
(93
|
)
|
|
(79
|
)
|
Deferred policy acquisition costs
|
|
(1,610
|
)
|
|
(1,645
|
)
|
Pre-1984 policyholder surplus account
|
|
(397
|
)
|
|
(463
|
)
|
Unrealized gains on securities available-for-sale
|
|
(667
|
)
|
|
—
|
|
Unrealized gains on equity securities
|
|
(663
|
)
|
|
(517
|
)
|
Deferred tax liabilities
|
|
(3,431
|
)
|
|
(2,704
|
)
|
Net deferred tax asset (liability)
|
|
$
|
(96
|
)
|
|
$
|
716
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The appropriate income tax effects of changes in temporary differences are as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Year ended
December 31,
|
|
|
2019
|
|
2018
|
Deferred policy acquisition costs
|
|
$
|
(35
|
)
|
|
$
|
(61
|
)
|
Other-than-temporary impairments
|
|
—
|
|
|
(3
|
)
|
Trading securities
|
|
1
|
|
|
—
|
|
Unearned premiums
|
|
(23
|
)
|
|
4
|
|
General expenses
|
|
(202
|
)
|
|
2
|
|
Depreciation
|
|
14
|
|
|
(9
|
)
|
Claims liabilities
|
|
(93
|
)
|
|
(68
|
)
|
AMT credit
|
|
—
|
|
|
1,575
|
|
Impact of repeal of special provision on pre-1984 policyholder surplus
|
|
(66
|
)
|
|
(66
|
)
|
Unrealized gains (losses) on equity securities
|
|
149
|
|
|
(43
|
)
|
Deferred income tax expense (benefit)
|
|
$
|
(255
|
)
|
|
$
|
1,331
|
|
Total income tax expense (benefit) varies from amounts computed by applying current federal income tax rates to income or loss before income taxes. The reasons for these differences and the approximate tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
2019
|
|
2018
|
Federal income tax rate applied to pre-tax income/loss
|
|
21.0
|
%
|
|
21.0
|
%
|
Dividends received deduction and tax-exempt interest
|
|
(0.3
|
)%
|
|
(2.4
|
)%
|
Company owned life insurance
|
|
(9.6
|
)%
|
|
7.4
|
%
|
Other, net
|
|
0.1
|
%
|
|
0.9
|
%
|
Effective federal income tax rate
|
|
11.2
|
%
|
|
26.9
|
%
|
NOTE 8 – NOTES PAYABLE AND LONG-TERM DEBT
Short-term debt and current portion of long-term debt consisted of the following as of December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Current portion of installment note payable due in November with variable interest rate equal to the WSJ prime rate plus 0.5%. Unsecured.
|
|
$
|
500
|
|
|
$
|
2,200
|
|
|
|
$
|
500
|
|
|
$
|
2,200
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consisted of the following as of December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Promissory note with variable interest rate equal to the WSJ prime rate plus 0.5%; maturity November 2023. Annual installment payments beginning November 2020. Unsecured.
|
|
$
|
1,500
|
|
|
$
|
—
|
|
|
|
|
|
|
Subordinated debentures issued on December 15, 2005 with floating rate interest equal to 3-Month LIBOR plus 375 basis points; net of $150,000 in debt issuance cost ($159,000 in 2018); maturity December 15, 2035. Interest payable quarterly. Redeemable prior to maturity. Unsecured.
|
|
9,129
|
|
|
9,120
|
|
|
|
|
|
|
Subordinated debentures issued on June 21, 2007 with floating rate interest equal to 3-Month LIBOR plus 340 basis points; net of $58,000 in debt issuance cost ($61,000 in 2018); maturity June 15, 2037. Interest payable quarterly. Redeemable prior to maturity. Unsecured.
|
|
3,035
|
|
|
3,032
|
|
|
|
$
|
13,664
|
|
|
$
|
12,152
|
|
Annual maturities of all outstanding debt for the next five years and beyond are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
12,164
|
|
The Company has entered into various swap agreements related to the trust preferred securities. On March 19, 2009, the Company entered into a forward swap effective September 17, 2012, with a notional amount of $3,000,000 and designated the swap as a hedge against changes in cash flows attributable to changes in the benchmark interest rate (LIBOR) associated with the subordinated debentures issued June 21, 2007. Quarterly, commencing September 17, 2012, under the terms of the forward swap, which expired on March 15, 2019, the Company paid interest at a fixed rate of 7.02% until March 15, 2019. On May 26, 2010, the Company entered into a forward swap with a notional amount of $9,000,000 effective December 15, 2015, which hedges against changes in cash flows following the termination of the fixed rate period. Quarterly, commencing March 16, 2016 under the terms of the forward swap, the Company pays interest at a fixed rate of 8.49% until March 15, 2020.
The swaps entered into in 2009 and 2010 have fair values of $0 and $65,000 (liability), respectively, for a total liability of $65,000 at December 31, 2019 ($234,000 at December 31, 2018). The swap liability is reported as a component of other liabilities on the consolidated balance sheets. A net valuation gain of $134,000 (net of tax) is included in accumulated other comprehensive income related to the swap agreements at December 31, 2019. A net valuation gain of $295,000 (net of tax) was included in accumulated other comprehensive income related to the swap at December 31, 2018.
We use dollar offset at the hedge's inception and for each reporting period thereafter to assess whether the derivative used in a hedging transaction is expected to be, and has been, effective in offsetting changes in the fair value of the hedged item. Since inception, no portion of the hedged item has been deemed ineffective. For all hedges, we discontinue hedge accounting if it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge.
The Company’s interest rate swaps include provisions requiring the Company to post collateral when the derivative is in a net liability position. At December 31, 2019, the Company has securities on deposit with fair market values of $294,000 (all of which is posted as collateral). At December 31, 2018, the Company had securities on deposit with fair market values of $932,000 (all of which is posted as collateral). See Note 5 for additional information about the interest rate swaps.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – POLICY AND CLAIM RESERVES
The Company regularly updates its reserve estimates as new information becomes available and events occur that may impact the resolution of unsettled claims. Reserve estimation can be an inherently uncertain process and reserve estimates can be revised up or down depending on changes in circumstances. Changes in prior years' reserve estimates are reflected in the results of operations in the year such changes are determined.
The following table is a reconciliation of beginning and ending property and casualty reserve balances for claims and claim adjustment expense:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Year ended
December 31,
|
|
|
2019
|
|
2018
|
Summary of claims and claim adjustment expense reserves
|
|
|
|
|
Balance, beginning of year
|
|
$
|
8,208
|
|
|
$
|
7,075
|
|
Less reinsurance recoverable on unpaid losses
|
|
1,384
|
|
|
327
|
|
Net balances at beginning of year
|
|
6,824
|
|
|
6,748
|
|
Net losses:
|
|
|
|
|
Provision for claims and claim adjustment expenses for claims arising in current year
|
|
35,312
|
|
|
36,457
|
|
Estimated claims and claim adjustment expenses for claims arising in prior years
|
|
(1,333
|
)
|
|
(722
|
)
|
Total increases
|
|
33,979
|
|
|
35,735
|
|
Claims and claim adjustment expense payments for claims arising in:
|
|
|
|
|
Current year
|
|
30,179
|
|
|
31,833
|
|
Prior years
|
|
3,674
|
|
|
3,826
|
|
Total payments
|
|
33,853
|
|
|
35,659
|
|
Net balance at end of period
|
|
6,950
|
|
|
6,824
|
|
Plus reinsurance recoverable on unpaid losses
|
|
249
|
|
|
1,384
|
|
Claims and claim adjustment expense reserves at end of period
|
|
$
|
7,199
|
|
|
$
|
8,208
|
|
Claim and claim adjustment expense reserves before reinsurance recoverable at December 31, 2019 was down compared to the same period last year. Reserves were higher at December 31, 2018 primarily due to losses associated with Hurricane Michael. Reinsurance recoverable on unpaid losses was also higher in 2018 due to amounts recoverable on unpaid losses associated with Hurricane Michael. The estimate for claims arising in prior years was reduced $1,332,000 in 2019 (reduced $722,000 in 2018) due to favorable loss development during the year on claims arising in prior years.
The Company has a geographic exposure to catastrophe losses in certain areas of the country. Catastrophes can be caused by various events including hurricanes, windstorms, earthquakes, hail, severe winter weather, explosions and fires, and the incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophe losses are restricted to small geographic areas; however, hurricanes and earthquakes may produce significant damage in large, heavily populated areas. The Company generally seeks to reduce its exposure to catastrophes through individual risk selection and the purchase of catastrophe reinsurance. At December 31, 2019, the Company's estimate of unpaid losses and adjustment expenses for claims incurred in prior years related to catastrophes that exceeded our retention totaled $24,000 before reinsurance ($18,000 in 2018).
The claim development table that follows presents incurred and cumulative paid claims and adjustment expense by accident year. Information presented is undiscounted and net of reinsurance.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Homeowners, Dwelling Fire and Other Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
20101
|
|
20111
|
|
20121
|
|
20131
|
|
20141
|
|
20151
|
|
20161
|
|
20171
|
|
20181
|
|
2019
|
|
|
|
|
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IBNR
Reserves
Dec. 31,
2019
|
|
Cumulative
Number of
Reported
Claims
|
2010
|
$
|
30,610
|
|
|
$
|
29,918
|
|
|
$
|
29,805
|
|
|
$
|
29,718
|
|
|
$
|
29,687
|
|
|
$
|
29,672
|
|
|
$
|
29,641
|
|
|
$
|
29,660
|
|
|
$
|
29,659
|
|
|
$
|
29,654
|
|
$
|
—
|
|
|
5,891
|
|
2011
|
—
|
|
|
35,203
|
|
|
33,957
|
|
|
34,233
|
|
|
34,711
|
|
|
34,806
|
|
|
34,650
|
|
|
34,658
|
|
|
34,663
|
|
|
34,751
|
|
50
|
|
|
8,132
|
|
2012
|
—
|
|
|
—
|
|
|
29,959
|
|
|
30,190
|
|
|
30,402
|
|
|
30,091
|
|
|
29,948
|
|
|
29,885
|
|
|
29,827
|
|
|
29,834
|
|
5
|
|
|
5,203
|
|
2013
|
—
|
|
|
—
|
|
|
—
|
|
|
27,436
|
|
|
27,147
|
|
|
27,076
|
|
|
27,023
|
|
|
27,191
|
|
|
27,236
|
|
|
27,022
|
|
7
|
|
|
5,213
|
|
2014
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,929
|
|
|
26,422
|
|
|
26,290
|
|
|
26,225
|
|
|
26,130
|
|
|
26,096
|
|
—
|
|
|
4,752
|
|
2015
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31,484
|
|
|
30,861
|
|
|
30,360
|
|
|
30,890
|
|
|
30,960
|
|
363
|
|
|
5,852
|
|
2016
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,287
|
|
|
35,343
|
|
|
35,399
|
|
|
35,144
|
|
—
|
|
|
5,189
|
|
2017
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40,210
|
|
|
38,958
|
|
|
38,642
|
|
99
|
|
|
5,328
|
|
2018
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,079
|
|
|
36,195
|
|
438
|
|
|
4,788
|
|
2019
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,929
|
|
2,827
|
|
|
4,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
324,227
|
|
|
|
|
1Required supplementary information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
|
|
Unaudited
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
|
20101
|
|
20111
|
|
20121
|
|
20131
|
|
20141
|
|
20151
|
|
20161
|
|
20171
|
|
20181
|
|
2019
|
2010
|
$
|
26,064
|
|
|
$
|
29,201
|
|
|
$
|
29,404
|
|
|
$
|
29,507
|
|
|
$
|
29,639
|
|
|
$
|
29,640
|
|
|
$
|
29,640
|
|
|
$
|
29,660
|
|
|
$
|
29,659
|
|
|
$
|
29,654
|
|
2011
|
—
|
|
|
31,488
|
|
|
33,080
|
|
|
33,484
|
|
|
34,167
|
|
|
34,622
|
|
|
34,621
|
|
|
34,641
|
|
|
34,647
|
|
|
34,650
|
|
2012
|
—
|
|
|
—
|
|
|
26,162
|
|
|
29,135
|
|
|
29,614
|
|
|
29,765
|
|
|
29,834
|
|
|
29,835
|
|
|
29,823
|
|
|
29,824
|
|
2013
|
—
|
|
|
—
|
|
|
—
|
|
|
24,157
|
|
|
26,114
|
|
|
26,487
|
|
|
26,661
|
|
|
26,788
|
|
|
26,976
|
|
|
27,011
|
|
2014
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,844
|
|
|
25,461
|
|
|
25,800
|
|
|
26,033
|
|
|
26,095
|
|
|
26,094
|
|
2015
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,923
|
|
|
30,066
|
|
|
30,190
|
|
|
30,296
|
|
|
30,366
|
|
2016
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31,893
|
|
|
34,722
|
|
|
35,029
|
|
|
35,139
|
|
2017
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,209
|
|
|
38,245
|
|
|
38,499
|
|
2018
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,456
|
|
|
35,543
|
|
2019
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
317,576
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
|
290
|
|
|
|
|
Liabilities for claims and claim adjustment expenses, net of reinsurance
|
|
|
$
|
6,941
|
|
1Required supplementary information (unaudited)
The cumulative number of reported claims presented above is reported on a per claimant basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Percentage Payout of Incurred Claims by Age (in Years), Net of Reinsurance
|
|
(Required Supplementary Information - Unaudited)
|
Years
|
1
|
|
2
|
|
3
|
|
4
|
|
5
|
|
6
|
|
7
|
|
8
|
|
9
|
|
10
|
|
88.4
|
%
|
|
9.2
|
%
|
|
0.9
|
%
|
|
0.6
|
%
|
|
0.3
|
%
|
|
0.4
|
%
|
|
0.1
|
%
|
|
—
|
%
|
|
—
|
%
|
|
0.1
|
%
|
The tables presented above represent homeowners, dwelling fire and other liability lines of business. The Company combined the data for these lines of business because the policy coverage and payout pattern for homeowners and dwelling fire are not materially different. Also, other liability is combined with dwelling fire because liability coverage is only sold as an additional coverage offered only with the dwelling fire policy. The Company offers no stand alone liability products.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management periodically estimates the liability for claims that have been reported but not paid and for claims incurred but not reported (IBNR). Management utilizes expected losses along with historical data analysis of paid and incurred loss development patterns over the past ten years to aide in establishing the claims liability. Management also separately evaluates any recent large events in establishing claim reserves. The Company also engages a consulting actuary to review managements' estimates of claim liabilities each year. There has been no material change in reserving methodology in 2019 compared to prior years.
As shown in the table above depicting average annual payout of incurred claims, 88.4% of claims are settled within twelve months of the date of loss and cumulatively, 97.6% of claims are settled within two years of the date of loss. While reserves for reported but unpaid and incurred but not reported claims can ultimately prove to be excessive or deficient, the short duration of the Company's claim liabilities serves to lesson the uncertainty compared to longer tail lines of insurance. The Company has no material exposure to difficult to estimate long tail liabilities such as toxic waste cleanup, asbestos related illness or other environmental remediation exposures.
|
|
|
|
|
|
|
|
|
Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for
Unpaid Claims and Claim Adjustment Expenses
|
($ in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Net outstanding liabilities
|
|
|
|
Homeowners' insurance
|
$
|
2,651
|
|
|
$
|
2,418
|
|
Dwelling fire insurance
|
2,623
|
|
|
2,602
|
|
Other Liability insurance
|
1,667
|
|
|
1,804
|
|
Other short-duration insurance lines
|
9
|
|
|
—
|
|
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance
|
6,950
|
|
|
6,824
|
|
|
|
|
|
Reinsurance recoverable on unpaid claims
|
|
|
|
Homeowners' insurance
|
203
|
|
|
537
|
|
Dwelling fire insurance
|
46
|
|
|
847
|
|
Other Liability insurance
|
—
|
|
|
—
|
|
Other short-duration insurance lines
|
—
|
|
|
—
|
|
Total reinsurance recoverable on unpaid claims
|
249
|
|
|
1,384
|
|
|
|
|
|
Insurance lines other than short-duration
|
—
|
|
|
—
|
|
Unallocated claims adjustment expenses
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total gross liability for unpaid claims and claim adjustment expense
|
$
|
7,199
|
|
|
$
|
8,208
|
|
Accident and Health Claim Reserves
The Company, through its life insurance subsidiary, underwrites a limited number of short duration accident and health contracts. These claims are typically settled in three years or less and the reserve for unpaid claims totaled $417,000 at December 31, 2019 ($358,000 at December 31, 2018). These claims are a component of policy and contract claims which totaled $1,053,000 at December 31, 2019 ($792,000 at December 31, 2018).
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cumulative incurred and paid claims over the last three years, along with annual percentage payouts related to accident and health claims, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
20171
|
|
20181
|
|
2019
|
|
|
|
|
|
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in thousands)
|
|
|
|
|
Years
|
|
|
|
|
|
|
IBNR Reserves
Dec. 31, 2019
|
|
Cumulative Number
of Reported Claims
|
2017
|
$
|
1,008
|
|
|
$
|
964
|
|
|
$
|
917
|
|
|
$
|
—
|
|
|
1,612
|
|
2018
|
|
|
1,037
|
|
|
1,120
|
|
|
—
|
|
|
1,469
|
|
2019
|
|
|
|
|
935
|
|
|
417
|
|
|
1,174
|
|
1Required supplementary information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in thousands)
|
Years
|
20171
|
|
20181
|
|
2019
|
2017
|
$
|
725
|
|
|
$
|
881
|
|
|
$
|
916
|
|
2018
|
|
|
747
|
|
|
991
|
|
2019
|
|
|
|
|
614
|
|
1Required supplementary information (unaudited)
|
|
|
|
|
|
|
|
Average Annual Percentage Payout of Incurred Claims by Age
|
|
Required supplementary information (unaudited)
|
Years
|
1
|
|
2
|
|
3
|
|
70.5%
|
|
21.8%
|
|
7.6%
|
NOTE 10 – REINSURANCE
The Company's insurance operations utilize reinsurance in the risk management process in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and effect business-sharing arrangements. Life reinsurance is placed through yearly renewable term coverage. Property and casualty reinsurance is placed on an excess of loss basis to cover losses from catastrophe events. Reinsurance contracts do not relieve the insurance subsidiaries of the obligation indemnify policyholders with respect to the underlying insurance contracts. Failure of re-insurers to honor their obligations could result in credit related losses to the insurance subsidiaries. The insurance subsidiaries evaluate the financial conditions of their reinsurance companies and monitor concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the companies to minimize their exposure to significant losses from reinsurance insolvencies.
In the normal course of business, NSFC seeks to reduce the loss that may arise from catastrophes or other individually significant large loss events that cause unfavorable underwriting results or have adverse impacts on regulatory capital levels by re-insuring certain levels of risk in various areas of exposure with reinsurance companies. NSFC maintains a catastrophe reinsurance agreement to cover losses from catastrophic events, primarily hurricanes and tropical storms.
Under the catastrophe reinsurance program, the Company retains the first $4,000,000 in losses from the first catastrophe event and $2,000,000 from a second catastrophe event.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Catastrophe reinsurance coverage is maintained in three layers as follows:
|
|
|
Layer
|
Reinsurers' Limits of Liability
|
First Layer
|
100% of $13,500,000 in excess of $4,000,000 retention
|
Second Layer
|
100% of $25,000,000 in excess of $17,500,000
|
Third Layer
|
100% of $30,000,000 in excess of $42,500,000
|
Underlying 2nd Event
|
100% of $2,000,000 in excess of $2,000,000 retention
|
Each reinsurance layer covers events occurring from January 1 through December 31 of the contract year. All significant reinsurance companies under the program carry A.M. Best ratings of A- (Excellent) or higher, or equivalent ratings.
The Company's catastrophe reinsurance contract allows for one reinstatement. The Company maintains reinstatement premium protection (RPP) to cover reinstatement premiums incurred. The RPP further reduces risk from a major catastrophe and serves to protect the Company's capital position by reducing the modeled 100 year event net cost.
Amounts recoverable from re-insurers are estimated in a manner consistent with the claim liability associated with the underlying insurance policies. Amounts paid for prospective reinsurance contracts are reported as prepaid reinsurance premiums and amortized over the remaining contract period.
In the normal course of business, NSIC seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to reinsurance companies under excess coverage contracts. NSIC retains a maximum of $50,000 of coverage per individual life. Cost is amortized over the reinsurance contract period.
At December 31, 2019, the largest reinsurance recoverable of a single reinsurer was $10,000 ($125,000 at December 31, 2018). Amounts reported as ceded incurred losses were related to development of losses from prior year catastrophes.
NOTE 11 – EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have an established retirement savings plan (401K Plan). All full-time employees are eligible to participate, and all employer contributions are fully vested for employees who have completed 1,000 hours of service in the year of contribution. Company matching contributions for the year ended December 31, 2019 and 2018 amounted to $181,000 and $182,000, respectively. The Company contributes dollar-for-dollar matching contributions up to 5% of compensation subject to government limits.
The Company established a non-qualified plan under which Company directors are allowed to defer all or a portion of directors' fees into various investment options. A supplemental executive retirement plan (SERP) covers named executive officers, with the Company contributing 15% of executive compensation to the plan. Contributions to the plan are fully vested upon the earlier of death, disability, change in control, or ten years of participation in the plan. Costs for amounts related to the non-qualified deferred compensation plans for the year ended December 31, 2019 and 2018 amounted to an approximate increase of $573,000 and decrease of $53,000 in employee benefit related expenses, respectively.
The Company and its subsidiaries established an Employee Stock Ownership Plan (ESOP) in January 2010, to enable eligible employees to acquire a proprietary interest in the Company's common stock and to provide retirement and other benefits to such employees. There were no contributions during the year ended December 31, 2019 and contributions of $232,000 during the year ended December 31, 2018. All contributions were made in cash for purchase of Company shares in the open market. The Company has not allocated newly issued shares directly to the plan and the plan has no debt.
NOTE 12 – REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company is dependent on dividends from its insurance subsidiaries to fund operations and for the payment of shareholder dividends. Dividend payments from the insurance subsidiaries are subject to regulatory review/approval and statutory limitations. The statutory limitations are outlined as follows:
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount of dividends paid from NSIC to the Company in any year may not exceed, without prior approval of regulatory authorities, the greater of 10% of statutory surplus as of the end of the preceding year, or the statutory net gain from operations for the preceding year. At December 31, 2019, NSIC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $1,624,000.
NSFC is similarly restricted in the amount of dividends payable to the Company; dividends may not exceed the greater of 10% of statutory surplus as of the end of the preceding year, or net income for the preceding year. At December 31, 2019, NSFC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $3,626,000.
The payment of any subsidiary dividend requires prior notice to the regulatory authorities who may disallow the dividend if, in their judgment, payment of the dividend would have an adverse effect on the surplus of the subsidiary. Additionally, there are other considerations that can limit the payment of dividends to amounts less than statutory limits. Some of these considerations include potential adverse impact on regulatory capital ratios and impact on ratings issued by rating agencies such as A.M. Best and Demotech.
At December 31, 2019, securities with market values of $3,188,000 ($3,031,000 at December 31, 2018) were pledged with various states pursuant to statutory requirements.
NOTE 13 – SHAREHOLDERS' EQUITY
During the year ended December 31, 2019 and year ended December 31, 2018, changes in shareholders' equity consisted of net income of $4,067,000 and net income of $779,000, respectively; dividends paid of $531,000 in 2019 and $505,000 in 2018; other comprehensive income of $4,013,000 in 2019 and other comprehensive loss of $2,109,000 in 2018; common stock issued of $53,000 in 2019 and $76,000 in 2018; and the purchase of treasury shares of $7,000 in 2019. Other comprehensive income/loss consisted of changes in accumulated unrealized gains/losses on securities available-for-sale and changes in accumulated unrealized losses on interest rate swaps.
Preferred Stock
Preferred Stock may be issued in one or more series as shall from time to time be determined and authorized by the Board of Directors. The directors may make specific provisions regarding (a) the voting rights, if any (b) whether such dividends are to be cumulative or noncumulative (c) the redemption provisions, if any (d) participating rights, if any (e) any sinking fund or other retirement provisions (f) dividend rates (g) the number of shares of such series and (h) liquidation preference. There is currently no Preferred Stock issued or outstanding.
Common Stock
The holders of the Class A Common Stock will have one-twentieth of one vote per share, and the holders of the common stock will have one vote per share. There is currently no Class A Common Stock issued or outstanding.
In the event of any liquidation, dissolution or distribution of the assets of the Company remaining after the payments to the holders of the Preferred Stock of the full preferential amounts to which they may be entitled as provided in the resolution or resolutions creating any series thereof, the remaining assets of the Company shall be divided and distributed among the holders of both classes of common stock, except as may otherwise be provided in any such resolution or resolutions.
The table below provides information regarding the Company's preferred and common stock as of December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
Preferred Stock, $1 par value
|
500,000
|
|
|
—
|
|
|
—
|
|
|
500,000
|
|
|
—
|
|
|
—
|
|
Class A Common Stock, $1 par value
|
2,000,000
|
|
|
—
|
|
|
—
|
|
|
2,000,000
|
|
|
—
|
|
|
—
|
|
Common Stock, $1 par value
|
3,000,000
|
|
|
2,531,552
|
|
|
2,531,116
|
|
|
3,000,000
|
|
|
2,527,136
|
|
|
2,527,136
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 17, 2019, 4,416 shares of common stock were issued to directors as compensation under the 2009 Equity Incentive Plan previously approved by shareholders.
Treasury Stock
Treasury stock may be purchased pursuant to the share repurchase plan authorized by the Board of Directors in November 2019. The Board authorized the repurchase of up to $1,000,000 of the Company's outstanding common stock. The plan expires in May 2020.
During 2019, 436 shares of common stock were repurchased and placed in treasury.
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) ("AOCI") includes certain items that are reported directly within a separate component of shareholders' equity. The following table presents changes in AOCI balances:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Year ended
December 31,
|
|
|
2019
|
|
2018
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(185
|
)
|
|
$
|
(480
|
)
|
Other comprehensive income for period:
|
|
|
|
|
Other comprehensive gain before reclassifications
|
|
134
|
|
|
295
|
|
Net current period other comprehensive income
|
|
134
|
|
|
295
|
|
Balance at end of period
|
|
$
|
(51
|
)
|
|
$
|
(185
|
)
|
|
|
|
|
|
Unrealized Gains (Losses) on Available-for-Sale Securities
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,385
|
)
|
|
$
|
3,126
|
|
Other comprehensive income (loss) for period:
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
3,865
|
|
|
(2,304
|
)
|
Reclassification adjustment - gains on equity securities
|
|
—
|
|
|
(2,107
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
14
|
|
|
(100
|
)
|
Net current period other comprehensive income (loss)
|
|
3,879
|
|
|
(4,511
|
)
|
Balance at end of period
|
|
$
|
2,494
|
|
|
$
|
(1,385
|
)
|
|
|
|
|
|
Total Accumulated Other Comprehensive Income (Loss) at end of period
|
|
$
|
2,443
|
|
|
$
|
(1,570
|
)
|
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
($ in thousands)
Details about Accumulated Other Comprehensive Income Components
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income
|
|
Affected Line Item in the Statement Where Net Income is Presented
|
Unrealized Gains and Losses on
Available-for-Sale Securities
|
|
$
|
18
|
|
|
Net investment gains
|
|
|
18
|
|
|
Total before tax
|
|
|
(4
|
)
|
|
Tax expense
|
|
|
$
|
14
|
|
|
Net of Tax
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
($ in thousands)
Details about Accumulated Other Comprehensive Income Components
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income
|
|
Affected Line Item in the Statement Where Net Income is Presented
|
Unrealized Gains and Losses on
Available-for-Sale Securities
|
|
$
|
127
|
|
|
Net investment gains
|
|
|
127
|
|
|
Total before tax
|
|
|
(27
|
)
|
|
Tax expense
|
|
|
$
|
100
|
|
|
Net of Tax
|
NOTE 15 – SEGMENTS
The Company’s property and casualty insurance operations comprise one business segment. The property and casualty insurance segment primarily underwrites home insurance coverage with primary lines of business consisting of dwelling fire and extended coverage, homeowners (including mobile homeowners) and other liability.
Management organizes the business utilizing a niche strategy focusing on lower valued dwellings and older homes that can be difficult to insure in the standard insurance market. Our chief decision makers (Chief Executive Officer, Chief Financial Officer and subsidiary President) review results and operating plans making decisions on resource allocations on a company-wide basis. The Company’s products are primarily produced through independent agents within the states in which we operate.
The Company’s life and accident and health operations comprise the second business segment. The life and accident and health insurance segment consists of two lines of business: traditional life insurance and supplemental accident and health insurance.
Total assets by industry segment at December 31, 2019 and December 31, 2018 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Assets by industry segment
|
|
Total
|
|
P&C Insurance Operations
|
|
Life Insurance Operations
|
|
Non-Insurance Operations
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
153,934
|
|
|
$
|
83,917
|
|
|
$
|
65,605
|
|
|
$
|
4,412
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
144,231
|
|
|
$
|
80,994
|
|
|
$
|
59,479
|
|
|
$
|
3,758
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income by business segment for the years ended December 31, 2019 and 2018 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Year ended December 31, 2019
|
P&C Insurance Operations
|
|
Life Insurance Operations
|
|
Non-Insurance Operations
|
|
Inter- company Eliminations
|
|
Total
|
REVENUE
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
$
|
54,019
|
|
|
$
|
5,864
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59,883
|
|
Net investment income
|
1,683
|
|
|
2,677
|
|
|
56
|
|
|
(540
|
)
|
|
3,876
|
|
Investment gains
|
2,178
|
|
|
861
|
|
|
16
|
|
|
—
|
|
|
3,055
|
|
Other income
|
575
|
|
|
853
|
|
|
1,019
|
|
|
(1,862
|
)
|
|
585
|
|
|
58,455
|
|
|
10,255
|
|
|
1,091
|
|
|
(2,402
|
)
|
|
67,399
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits paid
|
33,979
|
|
|
5,027
|
|
|
—
|
|
|
(408
|
)
|
|
38,598
|
|
Amortization of deferred policy acquisition costs
|
2,723
|
|
|
736
|
|
|
—
|
|
|
—
|
|
|
3,459
|
|
Commissions
|
7,148
|
|
|
281
|
|
|
—
|
|
|
—
|
|
|
7,429
|
|
General and administrative expenses
|
8,616
|
|
|
1,948
|
|
|
1,128
|
|
|
(1,994
|
)
|
|
9,698
|
|
Taxes, licenses and fees
|
2,185
|
|
|
285
|
|
|
—
|
|
|
—
|
|
|
2,470
|
|
Interest expense
|
—
|
|
|
43
|
|
|
1,122
|
|
|
—
|
|
|
1,165
|
|
|
54,651
|
|
|
8,320
|
|
|
2,250
|
|
|
(2,402
|
)
|
|
62,819
|
|
Income (Loss) Before Income Taxes
|
3,804
|
|
|
1,935
|
|
|
(1,159
|
)
|
|
—
|
|
|
4,580
|
|
INCOME TAX EXPENSE (BENEFIT)
|
359
|
|
|
397
|
|
|
(243
|
)
|
|
—
|
|
|
513
|
|
Net Income (Loss)
|
$
|
3,445
|
|
|
$
|
1,538
|
|
|
$
|
(916
|
)
|
|
$
|
—
|
|
|
$
|
4,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
Year ended December 31, 2018
|
|
P&C Insurance Operations
|
|
Life Insurance Operations
|
|
Non-Insurance Operations
|
|
Inter-company
Eliminations
|
|
Total
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
54,837
|
|
|
$
|
6,019
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,856
|
|
Net investment income
|
|
1,704
|
|
|
2,722
|
|
|
55
|
|
|
(540
|
)
|
|
3,941
|
|
Investment gains (losses)
|
|
(474
|
)
|
|
(78
|
)
|
|
—
|
|
|
—
|
|
|
(552
|
)
|
Other income
|
|
609
|
|
|
1,078
|
|
|
1,006
|
|
|
(2,081
|
)
|
|
612
|
|
|
|
56,676
|
|
|
9,741
|
|
|
1,061
|
|
|
(2,621
|
)
|
|
64,857
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits paid
|
|
35,735
|
|
|
5,242
|
|
|
—
|
|
|
(568
|
)
|
|
40,409
|
|
Amortization of deferred policy acquisition costs
|
|
2,759
|
|
|
838
|
|
|
—
|
|
|
—
|
|
|
3,597
|
|
Commissions
|
|
7,267
|
|
|
288
|
|
|
—
|
|
|
—
|
|
|
7,555
|
|
General and administrative expenses
|
|
8,472
|
|
|
2,111
|
|
|
309
|
|
|
(2,053
|
)
|
|
8,839
|
|
Taxes, licenses and fees
|
|
1,937
|
|
|
220
|
|
|
—
|
|
|
—
|
|
|
2,157
|
|
Interest expense
|
|
—
|
|
|
48
|
|
|
1,187
|
|
|
—
|
|
|
1,235
|
|
|
|
56,170
|
|
|
8,747
|
|
|
1,496
|
|
|
(2,621
|
)
|
|
63,792
|
|
Income (Loss) Before Income Taxes
|
|
506
|
|
|
994
|
|
|
(435
|
)
|
|
—
|
|
|
1,065
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
(97
|
)
|
|
232
|
|
|
151
|
|
|
—
|
|
|
286
|
|
Net Income (Loss)
|
|
$
|
603
|
|
|
$
|
762
|
|
|
$
|
(586
|
)
|
|
$
|
—
|
|
|
$
|
779
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s gross and net premiums written for the property and casualty segment and the life and accident and health segment for the years ended December 31, 2019 and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Years ended
December 31,
|
|
|
2019
|
|
2018
|
Life, accident and health operations premiums written:
|
|
|
|
|
|
Traditional life insurance
|
|
$
|
4,181
|
|
|
$
|
4,336
|
|
Accident and health insurance
|
|
1,770
|
|
|
1,831
|
|
Gross life, accident and health
|
|
5,951
|
|
|
6,167
|
|
Reinsurance premium ceded
|
|
(77
|
)
|
|
(81
|
)
|
Net life, accident and health premiums written
|
|
$
|
5,874
|
|
|
$
|
6,086
|
|
Property and Casualty operations premiums written:
|
|
|
|
|
|
Dwelling fire & extended coverage
|
|
$
|
38,847
|
|
|
$
|
37,598
|
|
Homeowners (Including mobile homeowners)
|
|
20,507
|
|
|
21,214
|
|
Other liability
|
|
2,224
|
|
|
2,195
|
|
Gross property and casualty
|
|
61,578
|
|
|
61,007
|
|
Reinsurance premium ceded
|
|
(7,041
|
)
|
|
(6,376
|
)
|
Net property and casualty written
|
|
$
|
54,537
|
|
|
$
|
54,631
|
|
Consolidated gross premiums written
|
|
$
|
67,529
|
|
|
$
|
67,174
|
|
Reinsurance premium ceded
|
|
(7,118
|
)
|
|
(6,457
|
)
|
Consolidated net premiums written
|
|
$
|
60,411
|
|
|
$
|
60,717
|
|
The following table presents the Company’s gross and net premiums earned for the property and casualty segment and the life and accident and health segment for the years ended December 31, 2019 and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Years ended
December 31,
|
|
|
2019
|
|
2018
|
Life, accident and health operations premiums earned:
|
|
|
|
Traditional life insurance
|
|
$
|
4,165
|
|
|
$
|
4,273
|
|
Accident and health insurance
|
|
1,776
|
|
|
1,827
|
|
Gross life, accident and health
|
|
5,941
|
|
|
6,100
|
|
Reinsurance premium ceded
|
|
(77
|
)
|
|
(81
|
)
|
Net life, accident and health premiums earned
|
|
$
|
5,864
|
|
|
$
|
6,019
|
|
Property and Casualty operations premiums earned:
|
|
|
|
|
|
Dwelling fire & extended coverage
|
|
$
|
38,090
|
|
|
$
|
37,232
|
|
Homeowners (Including mobile homeowners)
|
|
20,758
|
|
|
21,801
|
|
Other liability
|
|
2,212
|
|
|
2,180
|
|
Gross property and casualty
|
|
61,060
|
|
|
61,213
|
|
Reinsurance premium ceded
|
|
(7,041
|
)
|
|
(6,376
|
)
|
Net property and casualty earned
|
|
$
|
54,019
|
|
|
$
|
54,837
|
|
Consolidated gross premiums earned
|
|
$
|
67,001
|
|
|
$
|
67,313
|
|
Reinsurance premium ceded
|
|
(7,118
|
)
|
|
(6,457
|
)
|
Consolidated net premiums earned
|
|
$
|
59,883
|
|
|
$
|
60,856
|
|
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – CONTINGENCIES
In the ordinary course of business, the Company and its subsidiaries are routinely a defendant in or party to pending or threatened legal actions and proceedings related to the conduct of their insurance operations. These suits can involve alleged breaches of contracts, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of the Company's subsidiaries, and other miscellaneous causes of action. It is inherently difficult to predict the outcome of such matters, particularly when the claimant seeks very large or indeterminate damages or when the matters present novel legal theories or involve multiple parties. An accrued liability is established when loss contingencies are both probable and estimable. However, there is potential loss exposure in excess of any accrued amounts. The Company monitors pending matters for further development that could affect the amount of the accrued liability.
The Company's property & casualty subsidiaries had one action remaining in Texas filed in the aftermath of Hurricane Ike at December 31, 2018. This is an individual action with allegations of underpayment of a hurricane-related claim. The suit seeks a variety of remedies, including actual and/or punitive damages in unspecified amounts and/or declaratory relief. There are no other individual actions deemed material by management based upon evaluation of information presently available.
The Company maintains loss and loss adjustment expense reserves on litigated claims that occur in the routine course of business in the insurance operations of the subsidiaries. These reserves are included in the liability for benefit and loss reserves on the balance sheet.
NOTE 17 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the year ended December 31, 2019 was $1,185,000 ($1,231,000 in 2018). Cash received from income taxes during the year ended December 31, 2019 was $921,000. Cash paid for income taxes during the year ended December 31, 2018 was $25,000.
During the year ended December 31, 2019, non-cash changes in equity included $5,000 in common stock issued to Directors in lieu of cash compensation along with a corresponding $48,000 increase in additional paid-in capital.
NOTE 18 – SUBSEQUENT EVENTS
Management has evaluated subsequent events and their potential effects on these consolidated financial statements through the filing date of this Form 10-K.
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule I. Summary of Investments Other Than Investments in Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE NATIONAL SECURITY GROUP, INC.
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Fair Value
|
|
Amount per the Balance Sheet
|
|
Cost
|
|
Fair Value
|
|
Amount per the Balance Sheet
|
Securities Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage backed securities
|
$
|
1,290
|
|
|
$
|
1,345
|
|
|
$
|
1,290
|
|
|
$
|
1,449
|
|
|
$
|
1,443
|
|
|
$
|
1,449
|
|
Total Securities Held-to-Maturity
|
1,290
|
|
|
1,345
|
|
|
1,290
|
|
|
1,449
|
|
|
1,443
|
|
|
1,449
|
|
Securities Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Banks and insurance companies
|
843
|
|
|
2,335
|
|
|
2,335
|
|
|
1,064
|
|
|
2,044
|
|
|
2,044
|
|
Industrial and all other
|
1,284
|
|
|
2,968
|
|
|
2,968
|
|
|
778
|
|
|
2,262
|
|
|
2,262
|
|
Total equity securities
|
2,127
|
|
|
5,303
|
|
|
5,303
|
|
|
1,842
|
|
|
4,306
|
|
|
4,306
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government corporations and agencies
|
4,131
|
|
|
4,281
|
|
|
4,281
|
|
|
4,820
|
|
|
4,744
|
|
|
4,744
|
|
Agency mortgage backed securities
|
32,283
|
|
|
32,987
|
|
|
32,987
|
|
|
27,492
|
|
|
27,106
|
|
|
27,106
|
|
Asset backed securities
|
10,307
|
|
|
10,274
|
|
|
10,274
|
|
|
10,901
|
|
|
10,660
|
|
|
10,660
|
|
Private label asset backed securities
|
6,815
|
|
|
7,252
|
|
|
7,252
|
|
|
5,869
|
|
|
5,947
|
|
|
5,947
|
|
Corporate bonds
|
36,074
|
|
|
37,820
|
|
|
37,820
|
|
|
36,935
|
|
|
35,791
|
|
|
35,791
|
|
States, municipalities and political subdivisions
|
6,669
|
|
|
6,777
|
|
|
6,777
|
|
|
10,059
|
|
|
10,073
|
|
|
10,073
|
|
Foreign governments
|
823
|
|
|
869
|
|
|
869
|
|
|
801
|
|
|
804
|
|
|
804
|
|
Total Debt Securities
|
97,102
|
|
|
100,260
|
|
|
100,260
|
|
|
96,877
|
|
|
95,125
|
|
|
95,125
|
|
Total Available-for-Sale
|
99,229
|
|
|
105,563
|
|
|
105,563
|
|
|
98,719
|
|
|
99,431
|
|
|
99,431
|
|
Total Securities
|
100,519
|
|
|
106,908
|
|
|
106,853
|
|
|
100,168
|
|
|
100,874
|
|
|
100,880
|
|
Trading securities
|
149
|
|
|
149
|
|
|
149
|
|
|
107
|
|
|
107
|
|
|
107
|
|
Mortgage loans on real estate
|
147
|
|
|
147
|
|
|
147
|
|
|
156
|
|
|
156
|
|
|
156
|
|
Investment real estate
|
2,934
|
|
|
2,934
|
|
|
2,934
|
|
|
2,945
|
|
|
2,945
|
|
|
2,945
|
|
Policy loans
|
1,895
|
|
|
1,895
|
|
|
1,895
|
|
|
1,854
|
|
|
1,854
|
|
|
1,854
|
|
Company owned life insurance
|
4,082
|
|
|
4,655
|
|
|
4,655
|
|
|
4,315
|
|
|
4,600
|
|
|
4,600
|
|
Other invested assets
|
2,336
|
|
|
2,336
|
|
|
2,336
|
|
|
2,148
|
|
|
2,148
|
|
|
2,148
|
|
Total investments
|
$
|
112,062
|
|
|
$
|
119,024
|
|
|
$
|
118,969
|
|
|
$
|
111,693
|
|
|
$
|
112,684
|
|
|
$
|
112,690
|
|
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule II. Condensed Financial Information of Registrant
|
|
|
|
|
|
|
|
|
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
|
BALANCE SHEETS
|
($ in thousands)
|
December 31,
|
|
2019
|
|
2018
|
Assets
|
|
|
|
Fixed maturities available-for-sale, at estimated fair value
|
$
|
294
|
|
|
$
|
932
|
|
Investment real estate, at book value
|
356
|
|
|
356
|
|
Cash
|
3,393
|
|
|
523
|
|
Investment in subsidiaries (equity method) eliminated upon consolidation
|
65,329
|
|
|
59,229
|
|
Income tax recoverable
|
491
|
|
|
1,012
|
|
Deferred income tax asset
|
714
|
|
|
601
|
|
Other assets
|
525
|
|
|
490
|
|
Total Assets
|
$
|
71,102
|
|
|
$
|
63,143
|
|
Liabilities and Shareholders' Equity
|
|
|
|
Liabilities
|
|
|
|
Accrued general expenses
|
$
|
3,412
|
|
|
$
|
2,691
|
|
Interest rate swaps
|
65
|
|
|
234
|
|
Short-term notes payable
|
500
|
|
|
2,200
|
|
Long-term debt
|
13,664
|
|
|
12,152
|
|
Total Liabilities
|
17,641
|
|
|
17,277
|
|
Total Shareholders' Equity
|
53,461
|
|
|
45,866
|
|
Total Liabilities and Shareholders' Equity
|
$
|
71,102
|
|
|
$
|
63,143
|
|
|
|
|
|
|
|
|
|
|
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
|
STATEMENTS OF INCOME
|
($ in thousands)
|
Years Ended December 31,
|
|
2019
|
|
2018
|
Income
|
|
|
|
Dividends (eliminated upon consolidation)
|
$
|
2,750
|
|
|
$
|
750
|
|
Net realized investment gains
|
16
|
|
|
—
|
|
Holding company management service fees
|
1,019
|
|
|
1,006
|
|
Other income
|
56
|
|
|
55
|
|
|
3,841
|
|
|
1,811
|
|
Expenses
|
|
|
|
State taxes
|
51
|
|
|
43
|
|
Interest
|
1,122
|
|
|
1,187
|
|
Other expenses
|
1,077
|
|
|
266
|
|
|
2,250
|
|
|
1,496
|
|
Income before income taxes and equity in undistributed earnings of
subsidiaries
|
1,591
|
|
|
315
|
|
Income tax expense (benefit)
|
(243
|
)
|
|
151
|
|
Income before equity in undistributed earnings of subsidiaries
|
1,834
|
|
|
164
|
|
Equity in undistributed earnings of subsidiaries
|
2,233
|
|
|
615
|
|
Net income
|
$
|
4,067
|
|
|
$
|
779
|
|
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
|
|
|
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
|
STATEMENTS OF CASH FLOWS
|
($ in thousands)
|
|
Years Ended
|
|
December 31,
|
|
2019
|
|
2018
|
Cash Flows from Operating Activities:
|
|
|
|
Net income
|
$
|
4,067
|
|
|
$
|
779
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Equity in undistributed earnings of subsidiaries
|
(2,233
|
)
|
|
(615
|
)
|
Net realized investment gains
|
(16
|
)
|
|
—
|
|
Income taxes
|
370
|
|
|
58
|
|
Other, net
|
750
|
|
|
(137
|
)
|
Net cash provided by operating activities
|
2,938
|
|
|
85
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
Net sales of investments
|
663
|
|
|
490
|
|
Net cash provided by investing activities
|
663
|
|
|
490
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Net repayments of debt
|
(200
|
)
|
|
(1,300
|
)
|
Cash dividends
|
(531
|
)
|
|
(505
|
)
|
Net cash used in financing activities
|
(731
|
)
|
|
(1,805
|
)
|
Net change in cash and cash equivalents
|
2,870
|
|
|
(1,230
|
)
|
Cash and cash equivalents, at beginning of year
|
523
|
|
|
1,753
|
|
Cash and cash equivalents, at end of year
|
$
|
3,393
|
|
|
$
|
523
|
|
Notes to Condensed Financial Information of Registrant
Note 1 - Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange Commission, the Condensed Financial Information of the Registrant does not include all of the information and notes normally included with financial statements prepared in accordance with generally accepted accounting principles. It is, therefore, suggested that this Condensed Financial Information be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Registrant’s Annual Report as referenced in Form 10-K, Part II, Item 8, page 45.
Note 2 - Cash Dividends and Asset Transfers from Insurance Subsidiaries
In 2019, cash dividends of $2,750,000 were paid to the Registrant by its subsidiaries ($750,000 in 2018).
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule III. Supplementary Insurance Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE NATIONAL SECURITY GROUP, INC.
|
($ in thousands)
|
|
|
|
|
Deferred Acquisition Costs
|
|
Future Policy Benefits
|
|
Unearned Premiums
|
|
Unpaid
Losses
|
At December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Life and accident and health insurance
|
|
|
|
|
$
|
4,227
|
|
|
$
|
38,315
|
|
|
$
|
10
|
|
|
$
|
1,053
|
|
Property and casualty insurance
|
|
|
|
|
3,439
|
|
|
—
|
|
|
30,545
|
|
|
7,199
|
|
Total
|
|
|
|
|
$
|
7,666
|
|
|
$
|
38,315
|
|
|
$
|
30,555
|
|
|
$
|
8,252
|
|
At December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and accident and health insurance
|
|
|
|
|
$
|
4,416
|
|
|
$
|
37,474
|
|
|
$
|
10
|
|
|
$
|
792
|
|
Property and casualty insurance
|
|
|
|
|
3,418
|
|
|
—
|
|
|
29,989
|
|
|
7,075
|
|
Total
|
|
|
|
|
$
|
7,834
|
|
|
$
|
37,474
|
|
|
$
|
29,999
|
|
|
$
|
7,867
|
|
|
Premium Revenue
|
|
Net Investment Income
|
|
Other Income
|
|
Benefits, Claims, Losses and Settlement Expenses
|
|
Commissions, Amortization
of Policy Acquisition Costs
|
|
General Expenses,
Taxes, Licenses and Fees
|
For the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and accident and health insurance
|
$
|
5,864
|
|
|
$
|
2,677
|
|
|
$
|
853
|
|
|
$
|
5,027
|
|
|
$
|
1,017
|
|
|
$
|
2,233
|
|
Property and casualty insurance
|
54,019
|
|
|
1,683
|
|
|
575
|
|
|
33,979
|
|
|
9,871
|
|
|
10,801
|
|
Other
|
—
|
|
|
56
|
|
|
1,019
|
|
|
—
|
|
|
—
|
|
|
1,128
|
|
Total
|
$
|
59,883
|
|
|
$
|
4,416
|
|
|
$
|
2,447
|
|
|
$
|
39,006
|
|
|
$
|
10,888
|
|
|
$
|
14,162
|
|
For the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and accident and health insurance
|
$
|
6,019
|
|
|
$
|
2,722
|
|
|
$
|
1,078
|
|
|
$
|
5,242
|
|
|
$
|
1,126
|
|
|
$
|
2,331
|
|
Property and casualty insurance
|
54,837
|
|
|
1,704
|
|
|
609
|
|
|
35,735
|
|
|
10,026
|
|
|
10,409
|
|
Other
|
—
|
|
|
55
|
|
|
1,006
|
|
|
—
|
|
|
—
|
|
|
309
|
|
Total
|
$
|
60,856
|
|
|
$
|
4,481
|
|
|
$
|
2,693
|
|
|
$
|
40,977
|
|
|
$
|
11,152
|
|
|
$
|
13,049
|
|
Note: Investment income and other operating expenses are reported separately by segment and not allocated.
|
Schedule IV. Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE NATIONAL SECURITY GROUP, INC.
|
($ in thousands)
|
Gross Amount
|
|
Ceded to Other Companies
|
|
Assumed from Other Companies
|
|
Net Amount
|
|
Percentage of Amount Assumed to Net
|
For the year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
$
|
202,663
|
|
|
$
|
9,761
|
|
|
$
|
—
|
|
|
$
|
192,902
|
|
|
—
|
%
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance and accident and health insurance
|
$
|
5,941
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
5,864
|
|
|
—
|
%
|
Property and casualty insurance
|
61,060
|
|
|
7,041
|
|
|
—
|
|
|
54,019
|
|
|
—
|
%
|
Total premiums
|
$
|
67,001
|
|
|
$
|
7,118
|
|
|
$
|
—
|
|
|
$
|
59,883
|
|
|
—
|
%
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
$
|
203,209
|
|
|
$
|
9,730
|
|
|
$
|
—
|
|
|
$
|
193,479
|
|
|
—
|
%
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance and accident and health insurance
|
$
|
6,100
|
|
|
$
|
81
|
|
|
$
|
—
|
|
|
$
|
6,019
|
|
|
—
|
%
|
Property and casualty insurance
|
61,213
|
|
|
6,376
|
|
|
—
|
|
|
54,837
|
|
|
—
|
%
|
Total premiums
|
$
|
67,313
|
|
|
$
|
6,457
|
|
|
$
|
—
|
|
|
$
|
60,856
|
|
|
—
|
%
|
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule V. Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
The National Security Group, Inc.
|
Years ended December 31, 2019 and 2018
|
($ in thousands)
|
|
2019
|
|
2018
|
Balance, January 1 Allowance for Doubtful Accounts
|
|
$
|
4
|
|
|
$
|
4
|
|
Additions
|
|
4
|
|
|
8
|
|
Deletions
|
|
3
|
|
|
8
|
|
Balance, December 31 Allowance for Doubtful Accounts
|
|
$
|
5
|
|
|
$
|
4
|
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Company management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
Management's Report on Internal Control over Financial Reporting
Management of The National Security Group, Inc. is responsible for establishing and maintaining effective internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP).
The Company's internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO-2013) and the smaller reporting company guidance - COSO for Smaller Reporting Companies released in 2007. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2019.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
The National Security Group, Inc.
March 19, 2020
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers
JACK E. BRUNSON (63) has served as a director since 1999 and as President of NSFC since 1997. He also serves on the Boards of Directors of NSFC and Omega. He joined the Company in 1982. Mr. Brunson is a Chartered Property and Casualty Underwriter.
W. L. BRUNSON, JR. (61) has served as a director since 1999 and as President and Chief Executive Officer of the Company since 2000. He also holds the position of President of NSIC. He joined the Company in 1983. Mr. Brunson is also a director of NSFC, NATSCO, NSIC, and Omega. Mr. Brunson is a member of the Alabama State Bar.
BRIAN R. MCLEOD (51) currently serves as Vice President of Finance & Operations, CFO and Treasurer of the Company. From 1992-2002 he served as Controller. He joined the Company in 1992. Mr. McLeod is a Director of NSIC, NSFC, Omega and NATSCO. Mr. McLeod is also a member of the Board of Directors for Trinity Bank, a community bank in Dothan, Alabama. Mr. McLeod is a Certified Public Accountant.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to directors and executive officers of the Company as well as Corporate Governance, is incorporated herein by reference in response to this item.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to Audit Committee and Audit Committee financial expert, is incorporated herein by reference in response to this item.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to information on the beneficial ownership reporting for directors and executive officers, is incorporated herein by reference in response to this item.
Item 11. Executive Compensation
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation 14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation 14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020, with respect to security ownership of certain beneficial owners and management is incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation 14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item.
Item 14. Principal Accounting Fees and Services
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation 14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020, with respect to principal accountant fees and services, is incorporated herein by reference in response to this item.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
|
|
1.
|
Consolidated financial statements, notes thereto and related information of The National Security Group, Inc. (the “Company”) are included in Item 8 of Part II of this report:
|
|
|
•
|
Report of Independent Registered Public Accounting Firm
|
|
|
•
|
Consolidated Balance Sheets - December 31, 2019 and 2018
|
|
|
•
|
Consolidated Statements of Operations - Years ended December 31, 2019 and 2018
|
|
|
•
|
Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2019 and 2018
|
|
|
•
|
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2019 and 2018
|
|
|
•
|
Consolidated Statements of Cash Flows - Years ended December 31, 2019 and 2018
|
|
|
•
|
Notes to the Consolidated Financial Statements
|
|
|
2.
|
Additional financial statement schedules and report of independent registered accounting firm are furnished herewith pursuant to the requirements of Form 10-K:
|
|
|
|
The National Security Group, Inc.
|
Schedule I
|
Summary of Investments Other Than Investments in Related Parties
|
Schedule II
|
Condensed Financial Information of the Registrant
|
Schedule III
|
Supplementary Insurance Information
|
Schedule IV
|
Reinsurance
|
Schedule V
|
Valuation and Qualifying Accounts
|
|
|
3.
|
Exhibits filed as part of this Form 10-K:
|
|
|
|
11.
|
Computation of Earnings Per Share filed Herewith, See Note 1 to Consolidated Financial Statements.
|
14.
|
Code of Ethics, See Additional Information in Part 1, Item 1 of This Report
|
|
Subsidiaries of the Registrant
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
(b) During the last fiscal quarter of the period covered by this Report, the Company filed the following Current
Reports on Form 8-K:
|
|
|
|
|
|
Date of Report
|
|
Date Filed
|
|
Description
|
October 18, 2019
|
|
October 21, 2019
|
|
|
November 13, 2019
|
|
November 13, 2019
|
|
|
November 20, 2019
|
|
November 20, 2019
|
|
|
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE NATIONAL SECURITY GROUP, INC.
|
|
|
|
/s/ Brian R. McLeod
|
|
/s/ William L. Brunson, Jr.
|
Brian R. McLeod
|
|
William L. Brunson, Jr.
|
Chief Financial Officer and Treasurer
|
|
President, Chief Executive Officer and Director
|
Date: March 19, 2020
POWER OF ATTORNEY
Know all by these present, that the undersigned hereby constitutes and appoints Brian R. McLeod, with full power of substitution and/or revocation, the undersigned's true and lawful attorney-in-fact: to execute for and on behalf of the undersigned, in the undersigned's capacity as a director of National Security Group, inc. (the “Company”), any and all forms (including, without limitation Form 10-K) required or desired to be executed by or on behalf of the Company pursuant to section 13 or 15(D) of the Securities Exchange Act of 1934, as amended, after said form has been approved by the Company's audit committee; to do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form and timely file such Form with the appropriate governmental authority (including, without limitation, the United States Securities and Exchange Commission) and any stock exchange or similar authority; and take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required by, the undersigned, it being understood that the documents executed by any such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion.
The undersigned hereby grants to each such attorney-in-fact full power and authority to do and perform any and every act and thing whatsoever requisite, necessary, or proper to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, with full power of substitution or revocation, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted. The undersigned acknowledges that the foregoing attorneys-in-fact, and each of them, in serving in such capacity at the request of the undersigned, are not assuming, nor is the Company assuming, any of the undersigned's responsibilities to comply with section 13 or 15(D) of the Securities Exchange Act of 1934, as amended.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in their capacity as a Director of The National Security Group, Inc. on March 19, 2020:
SIGNATURE
|
|
|
/s/ Charles Arnold
|
/s/ Mickey L. Murdock
|
/s/ Fleming Brooks
|
/s/ Frank B. O'Neil
|
/s/ Jack E. Brunson
|
/s/ Donald Pittman
|
/s/ William L. Brunson, Jr.
|
/s/ Paul C. Wesch
|
/s/ Fred D. Clark, Jr.
|
/s/ L. Brunson White
|
/s/ Elizabeth Crawford
|
/s/ Walter P. Wilkerson
|
/s/ Brian R. McLeod
|
|