The Company and its subsidiaries own certain real estate investment properties. The Company owns approximately 211 acres of real estate in Coffee County in Alabama. We also own, through our subsidiary NSFC, approximately 85
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 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 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.
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 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.
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:
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.
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
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.
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.
Overview - Balance Sheet highlights at December 31, 2019 compared to December 31, 2018
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.
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.
Net premiums earned for our two operating segments are summarized as follows (amounts in thousands):
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.
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.
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.
Pretax income for the P&C segment for the year ended December 31, 2019 and 2018 is summarized below:
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:
1 - Net losses are net of reinsurance and after a 21% Federal income tax benefit.
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.
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.
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.
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.
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.
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:
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.
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.
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.
The amortized cost and aggregate fair values of investments in investment securities at December 31, 2019 and December 31, 2018 are as follows:
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.
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.
Investment returns with respect to the investment portfolio for the years ended December 31, 2019 and 2018 follows:
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.
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 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.
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 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.
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.
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.
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.
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.
For the year ended December 31, 2019, one agency individually produced greater than 5% of the Company's direct written premium.
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.
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.
it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis
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 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.
Certain 2018 amounts have been reclassified from the prior year consolidated financial statements to conform to the 2019 presentation.
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 are reported at cost and are reflected on the Consolidated Balance Sheets as a reduction of total equity.
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.
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.
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
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.
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.
The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31, 2018 are as follows:
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.
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
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
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.
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:
For the year ended December 31, 2018, there were no assets or liabilities measured at fair values on a nonrecurring basis.
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.
Short-term debt and current portion of long-term debt consisted of the following as of December 31, 2019 and December 31, 2018:
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 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 cumulative number of reported claims presented above is reported on a per claimant basis.
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.
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 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.
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.
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.
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.
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2018:
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.
Total assets by industry segment at December 31, 2019 and December 31, 2018 are summarized below:
In 2019, cash dividends of $2,750,000 were paid to the Registrant by its subsidiaries ($750,000 in 2018).