Consolidated net income for The National Security Group (The Company) was $3.756 million in 1999 compared to $930,000 in 1998. On a per share basis earnings were $1.83 in 1999 compared to $0.42 in 1998. The increase in net income was due to improved operating results in The Company's property/casualty subsidiaries operations. Realized capital gains in 1999 were $1.95 million compared to $4.1 million in 1998. Consolidated revenues were $32.6 million in 1999 compared to $37.3 million in 1998. The operating results of the subsidiaries are discussed in further detail in the sections that follow.
Income before income taxes in 1999 was $2.6 million compared to $2.5 million in 1998. Operating results for 1999 were very similar to 1998, with slightly higher realized capital gains producing the modest increase in income before income tax.
Income before income taxes in 1998 were $2.5 million compared to $2.2 million in 1997. The increase in pretax income was primarily due to a decrease in agents commissions and litigation expenses. Premium income was $3.8 million in 1998 compared to $4.0 million in 1997. Premium income began stabilizing in 1998 after five consecutive years of rapid decline.
NSFC had much improved underwriting results in the dwelling property lines of insurance compared to 1998. In 1998 NSFC incurred over $1.0 million in tornado losses, while in 1999 tornado losses were minimal. NSFC also did not incur any significant hurricane losses in 1999. In 1998 NSFC incurred over $1.1 million in hurricane losses. The decrease in hurricane and tornado losses of over $2 million led to much improved underwriting results in 1999 compared to 1998.
Loss and LAE Ratio ....... 70.9% 87.0% 79.3% Underwriting Expense Ratio 35.8% 31.6% 31.0% Combined Ratio ........... 106.7% 118.6% 110.3%
The combined ratio for 1998 was substantially higher than 1997 due to catastrophe losses and very unfavorable underwriting results in private passenger and commercial automobile lines of business. Catastrophe losses from Hurricane Georges and tornadoes increased the combined ratio by over 9%. However, the most significant impact on the combined ratio was the poor underwriting results from the automobile lines of business, which had a combined ratio of over 150%. Losses, adjustment expenses, and underwriting expenses in excess of earned premium on the automobile programs increase the combined ratio for all lines of business by over 16.5 percentage points.
National Association of Insurance Commissioners (NAIC) Securities Valuation Office (SVO) rating standards, and the nationally recognized rating organization equivalents of Moody's and Standard and Poor's:
SVO Equivalents % of Total SVO Class Moody's Standard and Poor's Bond Portfolio
1 Aaa to A3 AAA to A- 94.2 2 Baa to Baa3 BBB+ to BBB- 5.4 3 Ba1 to Ba3 BB+ to BB- 0.0 4 B1 to B3 B+ to B- 0.4 5 Caa to Ca CCC+ to C 0.0 6 C CI to D 0.0
As of January 1, 1994, the Company adopted Financial Accounting Standards Board Statement 115 and reclassified a portion of its fixed maturity securities portfolio as "available-for-sale," with the remainder being classified as "held-to- maturity." With that reclassification, the fixed maturity securities classified as "available-for-sale" are carried at fair value and changes in fair values, net of related income taxes, are charged or credited to shareholders' equity (see Note 3 to the consolidated financial statements).
Market Risk Disclosures: 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, changes in the yield curve and equity pricing risks.
The Company has notes payable of $2.7 million at December 31, 1999. The notes payable are to repaid in quarterly installments over five years.
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. On December 31, 1999, the Company had no known impairments of assets or changes in operation which would have a material adverse effect upon liquidity. Approximately 87% of the Company's assets are invested in cash, investment grade fixed income securities, short-term investments and broadly traded equity securities which are highly liquid. The values of these investments are subject to the conditions of the markets in which they are traded. Past fluctuations in these markets have had little effect on the liquidity of the Company. The Company has relatively little exposure to lower grade fixed income investments which might be especially subject to liquidity problems due to thinly traded markets.
Except as discussed in Note 11 to the consolidated financial statements, the Company is aware of no 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.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $23.4 million and $25.0 million at December 31, 1999 and 1998, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 9.2 and 9.1 at December 31, 1999 and 1998 respectively. Accordingly, National Security Fire & Casualty Company meets the minimum RBC requirements.
Consolidated Statements of Income - Years Ended December 31, 1999, 1998, and 1997.......................... 20
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1999, 1998, and 1997.......................... 22
Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998, and 1997.......................... 23
Schedule I. Summary of Investments - December 31, 1999 and 1998......... 38
Schedule VI. Reinsurance - Years Ended December 31, 1999, 1998, and 1997. 44
NSIC is licensed in the states of Alabama, Georgia, Mississippi, Texas and Florida and was organized in 1947 to provide life and burial insurance policies to the home service market. Premiums sold and serviced by company agents primarily include industrial life, larger ordinary life, accident and health, limited hospital, cancer and low valued life insurance. NSFC operates in various property and casualty lines, the most significant of which are low valued dwelling property, home service fire, nonstandard automobile physical damage and liability, nonstandard commercial, ocean marine and inland marine. Omega operates in property and casualty lines, the most significant of which is commercial auto liability.
SFAS No. 107 defines fair value as the quoted market prices for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. The fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, such as estimates of timing and amount of expected future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.
The fair value of the mortgage loan portfolio was approximately equal to the carrying amount of $112,000 on December 31, 1999 and $135,000 on December 31, 1998.
As of December 31, 1999 and 1998, the fair value of policy loans approximated their carrying amount of $669,000 and $645,000, respectively.
The fair value of other policyholder funds on deposit is estimated to approximate carrying amount of $1,526,000 on December 31, 1999 and $1,635,000 on December 31, 1998.
The liability for unpaid claims represents the estimated liability for claims reported to the Company and its subsidiaries plus claims incurred but not yet reported and the related adjustment expenses. The liabilities for claims and related adjustment expenses are determined using case-basis evaluations and statistical analyses and represent estimates of the ultimate net cost of all losses incurred through December 31 of each year. Although considerable variability is inherent in such estimates, management believes that the liabilities for unpaid claims and related adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations.
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 was 2,055,811 in 1999, 2,228,940 in 1998 and 2,316,953 in 1997.
NOTE 4 - NET INVESTMENT INCOME: Major categories of investment income are summarized as follows: (Dollars in thousands) Year ended December 31, ------------------------------ ------------------------------ 1999 1998 1997
4,386 4,394 4,294 ------ ------ ------ Less: Investment expenses ..................... (32) (43) (90) ------ ------ ------ Net investment income ......................... $ 4,354 $ 4,351 $ 4,204 ====== ====== ======
Deferred policy acquisition costs .......... $ 41 $ (22) $ 70 Policy liabilities ......................... (25) 56 (3) Unearned premiums .......................... 113 2 (2) General insurance expenses ................. (1) 222 (349) Claim liabilities .......................... 21 (39) (202) Alternative minimum tax credit carryforward (314) -- -- ------ -------- ------- $(165) $ 219 $(486) ====== ======== =======
NSFC also reinsures certain portions of insurance risk which exceed various retention limits. Claim liabilities for NSFC are stated after a deduction for reinsurance ceded to other companies totaling $4,106,000 at December 31, 1999. Reinsurance recoveries for claims and claim settlement expense were $530,000 during 1999.
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, 1999, NSIC's retained earnings unrestricted for the payment of dividends in 2000 amounted to $1,553,247. 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. As a result, dividends from NSFC to the Company are limited to $2,344,286 in 2000.
Securities with market values of $3,060,389 and $3,296,573, at December 31, 1999 and 1998, respectively, were deposited with various states pursuant to statutory requirements.
The Company and its subsidiaries operate primarily in the insurance industry. Premium revenues and operating income by industry segment for the years ended December 31, 1999, 1998 and 1997 are summarized below:
(Dollars in thousands) Year ended December 31, 1999 1998 1997 ----- ------ ------ Premium Revenues: Individual life and accident and health insurance $ 4,251 $ 3,837 $ 3,991 Property and casualty insurance 21,685 24,614 27,165 ------ ------ ------ $25,936 $28,451 $31,156 ====== ====== ======
Amortization of deferred policy acquisition costs and depreciation expense: Individual life and accident and health insurance $ (252) $ 450 $ 319 Property and casualty Insurance 1,615 1,599 1,339 ------ ------ ------ $1,363 $2,049 $ 1,658 ====== ====== ======
National Security Fire & Casualty Company, a subsidiary of the Company, was named as a defendant in a purported class action filed in Lee County, Alabama. On January 4, 2000 the Circuit Court of Lee County preliminarily approved a consent settlement to this action and a settlement is expected to be finalized by mid-year of 2000. A provision for this settlement is reflected in the accompanying financial statements.
The company establishes and maintains reserves against contingent liabilities in accordance with anticipated losses. In many instances, however, it is not feasible to predict the ultimate outcome with any degree of accuracy. While a resolution of these matters may significantly impact consolidated earnings and the Company's consolidated financial position, it remains management's opinion, based on information presently available, that the ultimate resolution of these matters will not have a material impact on the Company's consolidated financial position.
At December 31, 1999 and 1998, notes payable totaling $2,672,419 and $3,004,402, respectively, consisted of unsecured notes payable, bearing interest rates from 7% to 8%, due 2000.
We have audited in accordance with generally accepted auditing standards, the financial statements of The National Security Group, Inc. as of December 31, 1999 and 1998 and for the years then ended included in this Form 10-K, and have issued our report thereon dated February 18, 2000. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the accompanying index are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules as of December 31, 1999 and 1998 and for the years then ended have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Liabilities and Shareholders' Equity Accrued general expenses .......................... $ 802 $ 871 Notes Payable ................................... 2,672 3,004 ------- -------
Dividends of $2.3 million in 1999, $2 million in 1998 and $1.85 million in 1997 were paid to the Registrant by its subsidiaries.