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, the Company or NSEC) and its subsidiaries for the three years ended December 31, 2004. This discussion and analysis of the consolidated results of operations and financial condition of the Company should be read in conjunction with the Selected Financial Data and Consolidated Financial Statements and related notes included elsewhere herein. Please refer to our note regarding forward-looking statements on page 3 of this report.
Premium revenue reached a record high (eclipsed in 2004) of $47,536,000 in 2003, an increase of 45.3% over 2002 premium revenue of $32,631,000, a previous Company record. Continued strong growth in the property and casualty insurance segment was the primary catalyst contributing to the increase in premium revenue. Property and casualty premium revenue totaled $41,737,000 in 2003 compared to $27,236,000 in 2002. Strong growth in dwelling property lines of business, particularly homeowners type products, were the major contributor to the increase in property and casualty premium revenue. The life, accident and health segment continued to increase premium revenue at a healthy pace with a 7.5% increase over 2002.
Consolidated net income for the Company was $4,090,000 in 2003 compared to $908,000 in 2002. On a per share basis earnings were $1.66 in 2003 compared to $.37 in 2002. Realized capital gains in 2003 were $1,420,000 compared to $1,170,000 in 2002. Pre-tax earnings were $5,600,000 in 2003 compared to $1,500,000 in 2002. A much improved property and casualty combined ratio in the property and casualty subsidiaries was the primary factor contributing to the significant increase in the segments pre-tax earnings. The improvement in the property and casualty combined ratio is discussed further in the segment information presented below. The life, accident and health insurance segment experienced a 50% decline in pre-tax earnings primarily due to litigation related cost, which is discussed further in Note 15 to the consolidated financial statements.
Certain financial information for The National Security Group’s three segments (Life segment, property and casualty segment, and other (non-insurance)) is summarized as follows (amounts in thousands): Premium revenues:
Income before income taxes in 2004 was $186,000 compared to $529,000 in 2003. A decline in realized capital gains of $680,000 in the Life segment was the primary factor contributing to the decline in income before income taxes. Also, litigation related expenses continued to be a drain on the bottom line. Litigation expenses exceeded $250,000 in 2004 compared to $565,000 in 2003. Litigation expenses for 2004 and 2003 are related to items discussed in Note 15 to the Consolidated Financial Statements.
Premium revenue increased to $6,173,000 in 2004 compared to $5,799,000 in 2003, an increase of 6.5%. Premium revenue produced by independent agents totaled $2,537,000 in 2004 compared to $2,186,000 in 2003, a 16% increase. While NSIC is continuing to focus on growth through the independent agent method of distribution, we will begin to shift to an increased focus on quality. For the past five years, NSIC has worked to establish a position in the independent agent market. In the process of establishing this position, NSIC has had very low thresholds for business production and persistency. NSIC had appointments with over 1,828 independent agents at the end of 2004 but only 33% of agents appointed actually produced any new business. Management will begin to place more stringent performance standards on agents beginning in 2005 including higher production standards and higher expectations of persistency of business. These changes will no doubt greatly reduce the number of total agency appointments when fully implemented, but should improve quality and profitability of business produced. Premium revenue produced by NSIC home service agency force increased slightly in 2004 to $2,996,000 from $2,970,000 in 2003. Due to changing market conditions, the home service market is not considered to be a growth market, but the Company intends to maintain a niche in this market to serve our current policyholders that prefer this method of service. At December 31, 2004 NSIC had 17 home service agents that serviced this book of business.
Commission expense, including field servicing cost from the home service method of distribution, as a percent of premium revenue declined 3.4 percentage points in 2004 compared to 2003. Commission expense totaled 37% of revenue in 2004 compared to over 40% in 2003. Life insurance commission rates for independent agents are typically front loaded meaning that higher commissions are paid in the early years of a policy and commission rates decline as the policy ages. Because the independent agent method of distribution is a relatively new method of distribution, overall commission rates are skewed higher because the majority of in force policies are still paying the higher commission rates of the early years. Management is continuing to focus on reducing commissions through improving the rate of retention of new and existing business.
The Company’s property and casualty insurance business 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 National Security Fire & Casualty Company organized in 1992.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003:
Claim adjustment expenses averaged 6.4% of earned premium in 2004 compared to 5.6% in 2003. The slight increase was primarily due to the increase in cost associated with settling claims from Hurricane Ivan. The Company employs claims adjusters, which work approximately 50% of reported dwelling claims in a typical year with independently contracted adjusters working remaining claims. In areas with large concentrations of business, it is typically less expensive to use employee adjusters compared to independent adjusters. Due to the large number of claims from Hurricane Ivan, the Company utilized more independent adjusters to handle the increased workload in order to expedite the payment of claims to our policyholders.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002:
Property and casualty premium revenues increased $14,905,000 for the year ended December 31, 2003 compared to the same period in 2002, an increase of over 45.7%. The acquisition of a book of business contributed nearly $3,000,000 to the total increase in premium revenue. Increased production in the homeowners line of business added nearly $5,000 000 in increased premium revenue. NSFC’s traditional dwelling fire line of business grew over 32% during the year and added nearly $5,000,000 in premium revenue.
Net income before income tax was $5,628,000 in 2003 compared to $1,470,000 in 2002. Pre-tax income increased significantly over 2002. Results for 2002 were negatively impacted by adverse claims experience from hurricane losses in the fourth quarter of 2002 and an increased severity of losses on new business issued. Results for 2003 were much improved due to decreases in both severity and frequency of losses. Average severity on dwelling property claims declined from nearly $4,000 per loss in 2002 to $3,600 per loss in 2003. Prior year growth also helped 2003 results as a larger book of renewal business helped significantly reduce NSFC loss ratios. Typically, insurance business issued within one year has a higher occurrence of losses than renewal business. Due to the rapid growth the P&C subsidiaries have experienced over the last three years, larger amounts of new business have led to higher loss ratios as was demonstrated in 2002. Typically, as renewal books of business grow and the rapid growth of new business moderates, loss ratios improve.
The Company’s leasing operations are conducted through its 50% owned subsidiary, Mobile Attic, Inc. Mobile Attic was incorporated in August of 2001 and is a joint venture with a manufacturing partner, Cash Brothers Leasing of Elba, Alabama. As detailed in Note 1 (a) of the consolidated financial statements on page 34, the Company consolidated its investment in the subsidiary Mobile Attic, Inc.
Mobile Attic is in the business of leasing portable storage containers to individual and commercial customers through franchises and an independent dealer network currently covering Alabama and expanding throughout the Southeastern United States. At December 31, 2004 there were 14 franchise locations throughout the Southeast and 13 dealerships. At December 31, 2004 Mobile Attic had available approximately 3,500 storage containers for lease through franchise and dealer locations. The portable storage containers are eight feet wide and eight feet tall and are available in lengths of 8, 16, 20, and 40 feet. Independent dealers market these portable storage containers primarily to household customers in need of a convenient alternative to fixed location mini-storage, commercial customers in need of secure storage facilities at job sites, and retail customers for storage of seasonal inventory.
Net income in 2002 was $136,000 and primarily driven by the addition of several dealers during the year, thus increasing dealer fee revenue. In 2001, the year in which operations began, gross rental revenues were $87,000. In 2004, gross revenues from leasing operations were $2,459,000. Mobile Attic expects to add over 50 franchise locations during 2005.
The life insurance and property/casualty subsidiaries primarily invest in highly liquid investment grade debt and equity securities. At December 31, 2004, the company’s holdings in debt securities amounted to 73.4% of total investments and 55.3% of total assets. The following is a breakdown of the bond portfolio quality according to 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:
The National Security Group’s and consolidated statement of cash flows indicate that operating activities provided cash of $886,000, $11,398,000, $5,189,000 in 2004, 2003, and 2002 respectively. The significant decline in cash flow from operating activities in 2004 compared to 2003 was primarily due to the significant increase in claims associated with Hurricane Ivan. Cash flow in 2003 compared to 2002 was significantly improved primarily due to the previously discussed improvement in the property and casualty subsidiaries combined ratio.
The Company has standby letters of credit of $25,000. These letters are used to guarantee obligations of the property/casualty subsidiary under assumed reinsurance contracts. Certain invested assets of the Company secure the letters of credit. The Company also routinely incurs a liability for declared but unpaid dividends. Long-term liquidity needs of the Company constitute only those items which are directly related to the principal business operations of the Company.
Off-Balance Sheet Arrangements: With the consolidation of 50% owned subsidiary, The Mobile Attic, Inc. triggered by preexisting debt guarantees and the adoption of Financial Accounting Standards Board Interpretation 46 (FIN 46R), the Company has no off balance sheet arrangements.
The ratios of Total Adjusted Capital to Authorized Control Level RBC for The National Security Group’s life/health and property/casualty insurance subsidiaries are all in excess of 3.6 to 1 at December 31, 2004.
National Security Insurance Company (life insurer) has regulatory adjusted capital of $11.45 million and $11.37 million at December 31, 2004 and 2003, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 14.0 and 16.0 at December 31, 2004 and 2003 respectively. Accordingly, National Security Insurance Company exceeds the minimum RBC requirements.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $23.7 million and $23.1 million at December 31, 2004 and 2003, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 3.6 and 4.0 at December 31, 2004 and 2003 respectively. Accordingly, National Security Fire & Casualty Company exceeds the minimum RBC requirements.
As part our risk management strategy we routinely cede risks associated with insurance policies we underwrite to reinsurers pursuant to contractual agreements. Reinsurance provides protection for individual loss occurrences, including catastrophes, to alleviate fluctuation in the results of our underwriting activities and to limit our net liability for individual risks. The estimated reinsurance recoverable on paid losses, including an estimate for losses incurred but not reported, and amounts paid to reinsurers applicable to unexpired terms of policies in force are reported as assets.
A reinsurance arrangement does not discharge the issuing company from primary liability to the insured, and the issuing company is required to discharge its liability to the insured even if the reinsurer is unable to meet its obligations under the reinsurance arrangements. Reinsurance, however, does make the reinsurer liable to the issuing company to the extent of any reinsurance in force at the time of the loss. Reinsurance arrangements also decrease premiums retained by the issuing company since that company pays the reinsuring company a portion of total premiums based upon the amount of liability reinsured.
At December 31, 2004, the estimated reinsurance recoverable recorded was $3,318,000. The Company does not anticipate any issues with collection of the recorded amount.
NSIC generally reinsures all risks in excess of $50,000 with respect to any one insured. NSFC and Omega generally reinsure with third parties any liability in excess of $150,000 on any single policy. In addition, the property-casualty subsidiaries have catastrophe excess reinsurance, which protects it in part with respect to aggregate property losses arising out of a single catastrophe, such as a hurricane. In 2004, the property-casualty subsidiaries had catastrophe protection up to a $35 million loss. Based on a evaluation using actual NSFC and Omega exposures and catastrophe modeling based on a 250 year loss, that is a loss that has a less than ½ of 1% chance of occurring in any given year, the property and casualty subsidiaries would pay $2.7 million in losses and reinsurers would pay $36.8 million.
Deferred policy acquisition costs (DAC) are those costs incurred in connection with acquiring new business or renewing existing business. DAC is primarily comprised of commissions and other costs related to issuing insurance policies, net of amounts ceded to reinsurers. In accordance with generally accepted accounting principles, these costs are not expensed in their entirety, rather they are recorded as an asset and amortized over the lives of the policies.
At December 31, 2004 there is no evidence to suggest to management that the deferred tax asset is unrealizable. For more information regarding deferred income taxes, please see Note 7 to our financial statements.
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 estimated 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 independent actuaries to determine their adequacy and reasonableness.
All other Schedules are not required under related instructions or are inapplicable and therefore have been omitted.
We have audited the accompanying consolidated balance sheets of The National Security Group, Inc. and subsidiaries as of December 31, 2004, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index at page 28. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also, includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The National Security Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules listed in the Index at page 28, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2004 - $19,967;
Equity securities available-for-sale, at estimated fair value (cost: 2004 - $8,995;
Receivable from agents, less allowance for credit losses (2004 - $110; 2003 - $140) 2,465
Class A common stock, $1 par value, 2,000,000 shares authorized, none issued or outstanding --
Net realized gains on investments (2,162 ) (1,416 ) (1,163 )
T he accompanying consolidated financial statements include the accounts of (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). All significant intercompany transactions and accounts have been eliminated.
A s disclosed in the notes to the audited consolidated financial statements for the year ended December 31, 2003, the Company adopted Financial Accounting Standards Board Interpretation 46 as revised December 2003 (FIN 46R), in the first quarter of 2004. As a result of the adoption of FIN 46R, triggered by previously existing and disclosed guarantees of Mobile Attic debt by the Company, the Company consolidated an investment in a subsidiary Mobile Attic, Inc. Further details of the debt guarantees are discussed in Note 2 to these consolidated financial statements.
M obile Attic was previously reported using the equity method of accounting. For comparative purposes, the Company made adjustments to the December 31, 2003 Balance Sheet shown in these audited financial statements and the Income Statement and Statement of Cash Flows for the periods ended December 31, 2003 and 2002. These adjustments increased December 31, 2003 assets by $15,109,000 and liabilities by $13,394,000. The adjustment had no effect on consolidated stockholders’ equity. Certain accounts in the Income Statement for the periods ended December 31, 2003 and 2002 were adjusted as a result of the consolidation of Mobile Attic, but because the results of Mobile Attic were previously reported under the equity method, the adjustments had no effect on the consolidated results of operations for the periods ended December 31, 2003 and 2002. Cash flow, for the years ended December 31, 2003 and 2002, from operating activities increased $79,000 and $327,000, respectively; from investing activities decreased $7,224,000 and $1,872,000, respectively; and from financing activities increased $7,862,000 and $362,000, respectively. Total cash increased $169,000 and $77,000, respectively.
R ealized gains and losses on the sale of securities available-for-sale are determined using the specific-identification method.
O ther invested assets consist principally of state sponsored investments with a portion of investment yield derived from insurance premium tax credits. These investments are reported at the unpaid principal balance.
T he table below presents the carrying value and fair value of the Company’s financial instruments, as defined in accordance with applicable requirements. Fair values of the Company’s financial instruments are estimated by reference to quoted prices from market sources and financial institutions, as well as other valuation techniques. 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.
T he fair values of cash, cash equivalents, short-term investments and balances due on accounts from agents, reinsurers and others approximate their carrying amounts as reflected in the consolidated balance sheet due to their short-term availability or maturity.
L ife insurance premiums are recognized as revenues when due. Property and casualty insurance premiums, less amounts ceded to reinsurers, are recognized on a pro rata basis over the terms of the policies. Reinsurance premiums assumed are recognized as reported by the ceding company.
T he costs of acquiring new insurance business are deferred and amortized over the lives of the policies. Deferred costs include commissions, other agency compensation and expenses, and other underwriting expenses directly related to the level of new business produced.
T he method of computing the deferred policy acquisition costs for property and casualty policies limits the amount deferred to a percentage of related unearned premiums.
M ortality assumptions include various percentages of the 1955-60 and 1965-70 Select and Ultimate Basic Male Mortality Table. Withdrawal assumptions are based on the Company’s experience.
E arnings 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 2,466,600 (2,466,600 in 2003 and 2002).
T he Company expenses advertising costs as incurred. Advertising costs were $142,000 for the year ended December 31, 2004 ($118,000 and $114,000 for the years ended December 31, 2003 and 2002, respectively).
T he Company maintains cash depository accounts which, at times, may exceed federally insured limits. These amounts represent actual account balances held by financial institutions at the end of the period, and unlike the balance reported in the financial statements, the account balances do not reflect timing delays inherent in reconciling items such as outstanding checks and deposits in transit. The Company has not experienced any losses in such accounts. At December 31, 2004, the Company’s uninsured cash balances totaled $313,000.
SFAS No. 153, Exchanges of Nonmonetary Assets-an amendment of APB Opinion No. 29, Eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The adoption of this statement is not expected to have a material impact on the Company’s financial position or results of operations.
SFAS No. 123 revised, Share-Based Payment, establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services. The adoption of this statement is not expected to have a material impact on the Company’s financial position or results of operations.
I n November 2004, the FASB issued SFAS No. 151, Inventory Costs--an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. The adoption of this statement is not expected to have a material impact on the Company’s financial position or results of operations.
T he accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) which vary in certain respects from reporting practices prescribed or permitted by insurance regulatory authorities. The significant differences for statutory reporting include: (a) acquisition costs of acquiring new business are charged to operations as incurred, (b) life policy liabilities are established utilizing interest and mortality factors specified by regulatory authorities, (c) the Asset Valuation Reserve (AVR) and the Interest Maintenance Reserve (IMR) are recorded as liabilities, and (d) non-admitted assets (furniture and equipment, agents’ debit balances and prepaid expenses) are charged directly to surplus.
S tatutory net gains from operations and capital and surplus, excluding intercompany transactions, are summarized as follows:
NSIC - excluding realized capital (losses) gains of $(56), $287 and $356,
NSFC - including realized capital gains of $1,847, $203 and $622,
T he above amounts exclude allocation of overhead from the Company. NSIC, NSFC and Omega are in compliance with statutory restrictions with regard to minimum amounts of surplus and capital.
The amortized cost and aggregate fair value of debt securities at December 31, 2004, 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.
During the first quarter of 2003 the Company transferred certain corporate bonds from the SFAS No. 115 classification of held-to-maturity to available-for -sale. This decision was made due to circumstances considered by the Company to be both unusual and nonrecurring, which could not have been reasonably anticipated. With interest rates at four decade lows and corporate bond spreads extremely tight relative to U.S Treasury securities, the Company intends to sell certain (primarily corporate) bonds which were previously held in the SFAS No. 115 classification of held-to-maturity. The proceeds of these bonds will be reinvested primarily in agency securities and in the process raise the overall credit quality of the portfolio. The net carrying amount of the securities transferred was $9,833,000 and unrealized gains (net of tax) on these securities totaled $467,000 at the transfer date.
The gross unrealized investment losses and related fair value for securities available-for-sale at December 31, 2004 were as follow:
Depreciation expense for the year ended December 31, 2004 was $805,000 ($686,000 for the year ended December 31, 2003 and $289,000 for the year ended December 31, 2002).
Dividends received deduction and tax-exempt interest (196 ) (176 ) (184 )
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.
points which was 4.5% at December 31, 2003; matured April 2004 $ --
(5.15% at December 31, 2004 and 3.87% at December 31, 2003)
Note payable to bank with an interest rate based on prime minus 25
The provision for claims and claim adjustment expenses for prior years (net of reinsurance recoveries) decreased in 2004 and 2003 because of lower-than-anticipated losses in homeowners and dwelling fire lines of business. As a result of changes in estimates of insured events in prior years, the provision for claims and claim adjustment expenses (net of reinsurance recoveries) decreased in 2002 because of lower-than-anticipated losses in commercial and private passenger automobile lines of business.
The Company’s insurance operations participate in reinsurance in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and effect business-sharing arrangements. Life reinsurance is accomplished through yearly renewable term. Property and casualty reinsurance is placed on both a quota-share and excess of loss basis. Reinsurance ceded arrangements do not discharge the insurance subsidiaries as the primary insurer, except for cases involving a novation. Failure of reinsurers to honor their obligations could result in losses to the insurance subsidiaries. The insurance subsidiaries evaluate the financial conditions of their reinsurers and monitor concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize their exposure to significant losses from reinsurance insolvencies. At December 31, 2004,
reinsurance receivables with a carrying value of $326,000 ($765,000 at December 31, 2003) and prepaid reinsurance premiums of $467,000 ($496,000 at December 31, 2003) were associated with a single reinsurer. The amounts of recoveries pertaining to reinsurance contracts that were deducted from losses incurred during 2004, 2003 and 2002 were approximately $11,284,000, $580,000, and $374,000, respectively. The significant increase in recoveries pertaining to reinsurance contracts in 2004 compared to prior years was due to reinsurance associated will losses incurred from hurricane Ivan. The effect of reinsurance on premiums written and earned was as follows:
In 1989, the Company and its subsidiaries established a retirement savings plan and transferred the assets from the defined contribution profit sharing plan into the new plan. All full-time employees who have completed one year of service at January 1 or July 1 are eligible to participate and all employee contributions are fully vested for employees who have completed 1,000 hours of service in the year of contribution. Contributions for 2004, 2003, and 2002 amounted to $189,000, $228,000, and $177,000, respectively. Contributions are at the Board of Directors’ discretion subject to governmental limitations.
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, 2004, NSIC’s retained earnings unrestricted for the payment of dividends in 2005 amounted to $1,029,000.
At December 31, 2004, securities with market values of $3,655,000 ($3,606,000 at December 31, 2003) were deposited with various states pursuant to statutory requirements.
The holders of the Class A Common Stock will have one-twentieth of one vote per share, and the holders of the common stock will have one vote per share.
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, 2004, 2003 and 2002 are summarized below:
In two separate actions, NSIC is named as a defendant in purported class actions relating to the past sale of industrial burial insurance. The actions address whether the premiums charged were “excessive” relative to the benefit provided and whether the premiums charged were in any manner discriminatory relative to the race of the person insured. In addition, several individual actions on behalf of specifically named persons have been filed with similar allegations. No class has been certified in either of the purported class actions although a Motion for Class Certification has been filed in one of the actions. While NSIC did at one time sell industrial burial insurance, no such plans have been sold for several decades.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the Condensed Financial Information of the Registrant does not include all of the information and notes normally included with financial statements prepared in accordance with generally accepted accounting principles. It is, therefore, suggested that this Condensed Financial Information be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Registrant’s Annual Report as referenced in Form 10-K, Part II, Item 8, page 28.