acres of undeveloped commercial real estate in Greenville, Alabama. We sell undeveloped lots from this development, and the development has no depreciable improvements.
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 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 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.
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.
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.
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.
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.
in equity investments of $203,000 in 2018. We also recognized $233,000 in realized gains on the sale of equity securities in 2019.
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.
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.
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.
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.
Premium revenues and operating income for the life segment for the year ended December 31, 2019 and 2018 are summarized below:
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.
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.
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 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 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.
Additional details regarding the structure of our 2019 catastrophe reinsurance program can be found in Note 10 to the Consolidated Financial Statements.
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:
The table below provides the major categories of investment income, primarily dividend and interest income, for the year ended December 31, 2019 and 2018:
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:
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.
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
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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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 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.
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.
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'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
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.
Changes in fair value of equity securities available-for-sale are reported as investment gains/losses in the statement of operations.
the Company does not expect to recover the entire amortized cost basis of the security
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.
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.
The liability for future life insurance policy benefits is computed using a net level premium method including the following
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.
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 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.
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.
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.
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.
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.
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.
Statutory net income (loss) and capital and surplus, excluding intercompany transactions, are summarized as follows:
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 held-to-maturity securities as of December 31, 2019 are as follows:
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2018 are as follows:
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:
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:
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 gains and losses are summarized as follows:
Marketable debt instruments in this category generally include asset-backed securities and certain floating-rate notes, corporate bonds, and municipal bonds.
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.
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:
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:
Cash and cash equivalents - the carrying amount is a reasonable estimate of fair value.
Company owned life insurance - 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:
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.
Long-term debt consisted of the following as of December 31, 2019 and December 31, 2018:
Annual maturities of all outstanding debt for the next five years and beyond are as follows:
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.
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'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.
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.
The table below provides information regarding the Company's preferred and common stock as of December 31, 2019 and December 31, 2018:
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.
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:
Net income by business segment for the years ended December 31, 2019 and 2018 is summarized below:
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:
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.
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.