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. 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, this discussion covers the two year period ended December 31, 2016.
The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On November 22, 2016, Demotech affirmed a Financial Stability Rating of A (Exceptional) for both NSFC and Omega.
For the year ended December 31, 2016, net premiums earned were up $1,936,000 at $61,398,000 compared to $59,462,000 in 2015. The primary reasons for the increase were an 8.1% reduction in catastrophe reinsurance costs coupled with increases in gross earned premium. The increase in gross earned premium was due to growth in P&C segment premium revenue of 2.5% in 2016 compared to 2015.
in which we operate and thus has reduced our written and earned premium growth rate. However, these efforts to improve profitability has led to four consecutive years of P&C segment underwriting profitability and the posting of a P&C underwriting profit in 2016 despite an increase in incurred losses from Hurricane Matthew. We have also increased consolidated shareholders equity at an annualized rate of 12.3% over the last four years. With our improved capital position generated by improved underwriting margins, we are implementing plans to increase our rate of top line growth; however, implementation of these plans to increase written premium will be deliberate as we do not intend to sacrifice long term underwriting profitability.
For the year ended December 31, 2016, the Company had net income of $3,063,000, $1.22 per share, compared to net income of $4,697,000, $1.87 per share, for the same period in 2015, a decrease of $1,634,000. The primary reason for the decline in 2016 year to date earnings compared to 2015 was the adverse impact of losses incurred from Hurricane Matthew, which reduced full year earnings by $2,640,000.
Policy liabilities were $76,174,000 at December 31, 2016 compared to $77,043,000 at December 31, 2015; a decrease of $869,000 or 1.1%. The primary reason for the decrease in policy liabilities in 2016 compared to the same period last year was a $2,114,000 decline in property and casualty loss reserves. Property and casualty loss reserves were down 21.9% in 2016 compared to 2015 primarily due to a lower year end claims inventory. While the property and casualty subsidiary did incur more claims in the fourth quarter of 2016 due to Hurricane Matthew, over 95% of Matthew claims were settled by December 31, 2016.
Total debt at December 31, 2016 was $17,126,000 compared to $17,957,000 at December 31, 2015. Debt was reduced $831,000 during 2016 with the primary reason being the reduction of long term debt in our holding company. The improvement of balance sheet strength through reduction of debt continues to be a primary focus of management.
Shareholders' equity as of December 31, 2016 was $48,052,000 up $3,169,000 compared to December 31, 2015 Shareholders' equity of $44,883,000. Book value per share was $19.09 at December 31, 2016, compared to $17.87 per share at December 31, 2015, an increase of $1.22. Despite the adverse impact of Hurricane Matthew, the Company had a 6.8% increase in book value per share and a 7.1% increase in Shareholders' Equity in 2016 compared to 2015. The primary factor contributing to the increase in Shareholders' equity was net income of $3,063,000. In addition, new shares issued under our director compensation plan totaled $76,000 in 2016. Furthermore, accumulated other comprehensive income increased $482,000. The increase in accumulated other comprehensive income was driven by increases in market values of available-for-sale investment securities. Offsetting the increases in Shareholders' equity were dividends paid of $452,000.
Deferred policy acquisition cost amortization and commission expenses decreased $156,000 for the year ended December 31, 2016 at $1,033,000 compared to $1,189,000 for the same period in 2015; a decline of 13.1%. As a percent of net premiums earned, policy acquisition cost amortization and commission expense was 16.6% compared to 18.9% in 2015. A decline in the rate of new business production was the primary reason for the decline in policy acquisition costs.
General and administrative expenses were $1,509,000 in 2016 compared to $1,525,000 in 2015. Reduction of general and administrative expenses in NSIC has been a primary focus of management for the past three years. Historically, general and administrative expenses in our life segment have run higher than industry averages due to the small size of the subsidiary. This disadvantage, coupled with the persistent low interest rate environment, has eroded earnings in the life segment. In the second half of 2014, management began the process of implementing significant operational
changes that included the consolidation of P&C and life segment operations. The consolidation process is now complete and we have completed employee cross training leaving operational areas more streamlined and more efficient. While the incremental improvement was less in 2016 compared to last year, the marginal year over year decline in general and administration expenses in the life insurance subsidiary is a direct result of this effort.
The reduction in catastrophe reinsurance cost also contributed to the improvement in underwriting margins in our property and casualty segment. The Company maintains catastrophe reinsurance coverage to mitigate loss exposure from catastrophic events. Our catastrophe retention remained unchanged at $4 million in 2016 and we maintain catastrophe reinsurance coverage with an upper limit of $72.5 million. Our catastrophe reinsurance also covers the cost of a second event up to the same $72.5 million upper limit, again with a $4 million retention. In our reinsurance structure, management attempts to limit the impact on pretax earnings of a single modeled 100 year cat event to no more than $4 million and the primary models utilized indicate that the Company's upper limit of reinsurance is adequate to cover up to approximately a 250 year event (an event with an estimated probability of occurrence of 0.4% in a given year). It is noted, however, that hurricane models are subject to significant risks and uncertainties and are continuously evolving. Catastrophe models are only a tool to estimate the impact of catastrophe events. The Company also has risk associated with multiple smaller catastrophe events that individually may not exceed our $4 million retention.
Additional details regarding the structure of our 2016 catastrophe reinsurance program can be found in Note 10 to the Consolidated Financial Statements.
Net investment income totaled $1,706,000 in 2016 compared to $1,473,000 in 2015; an increase of $233,000. The primary reason for the increase in net investment income in 2016 compared to 2015 was the change in value of our company owned life insurance (COLI). The change in value of the COLI decreased investment income $34,000 in 2016 compared to a decrease to investment income of $219,000 for the same period last year.
Policyholder benefits and settlement expenses in the property and casualty segment were $33,562,000 in 2016 compared to $29,461,000 for the same period in 2015; an increase of $4,101,000 or 13.9%. The P&C segment ended 2016 with a loss ratio of 60.2% compared to 54.8% for the same period in 2015. The primary reason for the increase in claims and the loss ratio in 2016 compared to 2015 was reported losses and loss adjustment expenses (LAE) from Hurricane Matthew in 2016.
During 2016, the P&C segment was impacted by 20 catastrophe events totaling $14,128,000 ($9,742,000 net of reinsurance recoveries) from 3,405 claims compared to reported losses and LAE from 22 cat events totaling $5,373,000 from 1,789 claims in 2015. Claims reported from year to date 2016 cat events contributed 25.3 percentage points to the 2016 P&C segment loss ratio. In comparison, claims reported during 2015 from prior year cat events contributed 10.0 percentage points to the year to date 2015 P&C segment loss ratio.
In addition to the increase in reported losses and LAE from cat events, reported fire losses and LAE were also up in 2016 compared to the same period in 2015. Reported fire losses were up $841,000 or 5.8% compared to fire losses reported during 2015. The P&C segment had 510 fire losses reported for the period ended December 31, 2016, totaling $15,313,000 compared to 549 fire losses reported for the same period in 2015 totaling $14,472,000. The average cost per claim was $30,000 for fire losses reported in 2016 compared to $26,400 for fire losses reported in 2015.
Deferred policy acquisition costs totaled $2,783,000 in 2016 compared to $2,701,000 in 2015. Deferred policy acquisition costs were comparable at 5.0% of net earned premium revenue for 2016 and 5.1% of net earned premium revenue for 2015. Deferred policy acquisition costs consist of amortization of previously capitalized distribution costs, primarily commissions.
Commission expense for 2016 was $7,584,000 (13.7% of premium revenue) compared to $7,572,000 (14.2% of premium revenue) for the same period in 2015. The primary reason for the $12,000 increase in commission expense during 2016 compared to 2015 was a slight 1.1% increase in gross written premium.
General and administrative expenses in the property and casualty segment totaled $6,818,000 in 2016 compared to $6,735,000 in 2015; an increase of $83,000 or 1.2%. The primary reason for the increase was a moderate increase in fees paid to consulting actuaries.
Insurance taxes, licenses and fees were $2,005,000 through December 31, 2016 compared to $1,906,000 for the same period in 2015. Insurance taxes, licenses and fees were 3.6% of premium revenue in 2016 and 2015.
The P&C segment ended 2016 with pretax income of $5,446,000 compared to pretax income of $7,070,000 for the same period in 2015. The $1,624,000 decrease in pretax income was primarily due to the negative impact of claims incurred from Hurricane Matthew as discussed previously.
A measure used to analyze a property/casualty insurer's underwriting performance is the combined ratio based upon generally accepted accounting principles (GAAP). It is the sum of two ratios:
A downside of investing in longer duration securities in the life segment is that the portfolio is exposed to more significant price volatility as market interest rates change. This exposure to sudden interest rate changes can lead to declines in market value of fixed income securities in a rising interest rate environment. Management currently maintains the life insurance portfolio in the intermediate duration range of 6.0 to guard against the adverse impact of rising rates. However, due to the necessity of matching the duration of liabilities as closely as possible in order to pass regulatory cash flow testing, some volatility in market value of the portfolio in a rising rate environment cannot be avoided.
The amortized cost and aggregate fair value of debt securities at December 31, 2016, by contractual maturity, are as follows (dollars in thousands). 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, 2016 and 2015 follows:
The total return on investments in 2016 increased significantly compared to 2015. Prior year total return was negatively impacted by a combination of interest rate driven declines in fixed income investments and declines in market value of our energy sector bond holdings. During 2016, market values of our energy sector bonds recovered leading to an increase in net unrealized capital gains. Also, realized capital gains were higher due to sales of both fixed income and equity investments.
The Company's subsidiaries maintain repurchase agreements for cash held on deposit under which insurance regulations dictates that our policy requires 102% (100% minimum) of the fair value of the securities purchased to be maintained as collateral. The repurchase investments are limited to government securities that are highly liquid and therefore, the investment is reflected on the balance sheet as a cash equivalent. Due to a combination of the 102% collateral requirement and short term interest rates hovering near zero, we realize virtually no interest income from repurchase agreements/short term investments. However, repurchase agreements utilizing government agency securities do provide deposit protection for short term cash held in excess of FDIC deposit limits. The Company does not lend securities to any counterparty under repurchase agreements.
Due to regulatory restrictions, the majority of the Company's cash is required to be invested in investment-grade securities to provide protection for policyholders. The liabilities of the property and casualty insurance subsidiaries are of various terms, and therefore, those subsidiaries invest in securities with various effective maturities spread over periods usually not exceeding 10 years with an average portfolio duration of less than 5 years. The liabilities of the life insurance subsidiary are typically of a longer duration, and therefore, a higher percentage of securities in the life insurance subsidiary are invested for periods exceeding 10 years.
At December 31, 2016, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $48,052,000, up $3,169,000 compared to $44,883,000 at December 31, 2015. Components of the change in equity were net income of $3,063,000, increase in accumulated unrealized gains on investments of $226,000, a net unrealized gain of $256,000 related to interest rate swaps and cash dividends paid totaling $452,000.
The Company, primarily through its insurance subsidiaries, had $7,368,000 in cash and cash equivalents at December 31, 2016, compared to $6,763,000 at December 31, 2015. Cash provided by operating activities increased cash by $1,148,000 during the year ended December 31, 2016. The increase in cash provided by operations was primarily driven by net income from operations. For the year ended December 31, 2015, cash provided by operating activities totaled $6,880,000. Operating cash flow generated in the property and casualty segment was the primary contributor to cash provided by operating activities in the prior year.
Net cash provided by investing activities totaled $684,000 for the period ended December 31, 2016, compared to cash used of $4,835,000 for the same period last year. The investment of cash generated from operations and reinvestment of maturing fixed income securities was the primary cash related investment activities during the year ended December 31, 2016. For the period ended December 31, 2015, cash used in investing activities totaled $4,835,000 the reinvestment of maturities of fixed income securities and investment of cash from operations was the primary cash related investment activity during the period.
The Company had a total of $15,326,000 of long-term debt outstanding as of December 31, 2016, compared to $17,100,000 at December 31, 2015, 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, $246,000 and $258,000, respectively.
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 over the past three years, strengthening capital levels in the insurance subsidiaries and reduction of debt remains a top priority.
offered combined with enhancements to the Company's rate development process and improvements in the Company's catastrophe reinsurance structure have reduced the pressure on subsidiary capital levels. However, continuing to strengthen subsidiary capital continues to be a top priority for management.
National Security Insurance Company (life insurer) has regulatory adjusted capital of $15.1 million and $13.9 million at December 31, 2016 and 2015, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 15.2 and 17.9 at December 31, 2016 and 2015, respectively. Accordingly, National Security Insurance Company exceeds the minimum RBC requirements.
During 2016, the property and casualty segment maintained a catastrophe contract, which covered losses related to a catastrophic event with multiple policyholders affected. 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 2016 and 2015. Any losses above the $72.5 million upper limit are the responsibility of our Company. The contract in place during 2016 also allowed one reinstatement for coverage under the contract for a second catastrophic event if needed.
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. Based on modeling results utilized in 2016 and 2015, the Company was reinsured at approximately a 250 year event level. While this estimate is subject to some uncertainty and model risk, 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, 2016, the estimated reinsurance recoverable recorded was $1,780,000 compared to $1,660,000 for the same period last year. The Company does not anticipate any issues with collection of the recorded amount. In 2016, catastrophe reinsurance premiums ceded totaled $5,185,000 compared to $5,477,000 ceded in 2015. Catastrophe reinsurance premiums are based on a premium calculation applying the agreed upon rate to the earned premium of the covered lines of business. The decline in ceded premium in 2016 is attributable to a 5% decline in the rate applied. In addition to catastrophe reinsurance, the Company placed reinstatement premium protection (RPP) reinsurance during 2016 and 2015 totaling $734,000 and $789,000, respectively.
At December 31, 2016 and 2015, the Company recorded $8,351,000 and $8,485,000, 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.
Investments are recorded at fair value based upon quoted prices when available. Quoted prices are available for most investment debt and equity securities included in the financial statements. Further discussion of fair value methodology is discussed in Note 5 to the Consolidated Financial Statements. Periodically, the carrying values of an individual investment may become temporarily impaired because of time value, volatility, credit quality and existing market conditions. Management evaluates investments to determine whether the impairment is other-than-temporary. Evaluation criteria include credit quality of security, severity of decrease between cost and market value, length of time of the impairment and likelihood that the impairment will reverse in the near future. This evaluation requires significant assumptions, estimates and judgments by management. If the impairment is determined to be other-than-temporary, the investment is written down to the current fair value and a realized loss is recorded on the income statement. We have very limited exposure to less liquid and difficult to value investments.
Life insurance premiums are recognized as revenues when due. Property and casualty insurance premiums include direct writings plus reinsurance assumed less reinsurance ceded and are recognized on a pro-rata basis over the
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. as of December 31, 2016 and 2015, 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. Also, in our opinion, the financial statement schedules listed in the accompanying index appearing under Item 8, 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.
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 of America (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. 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, 2016, which includes information and disclosures not presented herein.
Omega is licensed in the states of Alabama and Louisiana. Omega currently has no insurance policies in-force.
The Company's life, accident and health insurance subsidiary, composing approximately 9% of consolidated direct written premium, is licensed in seven states. However, over 79% of life segment direct premium is generated in the states of Alabama and Georgia. Consequently, changes in the legal, regulatory or economic environment in these states could adversely impact the Company.
Unrealized gains and losses on investments, net of tax, on securities available-for-sale are reflected directly in shareholders' equity as a component of accumulated other comprehensive income (loss), and accordingly, have no effect on operating results until realized.
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 effective interest rate 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.
receivables, and once these receivables are determined to be uncollectible, they are written off through a charge against an existing allowance account or against earnings.
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 2,515,459 at December 31, 2016 and 2,510,504 at December 31, 2015. The Company did not have any dilutive securities as of December 31, 2016 and 2015.
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, 2016, the net amount exceeding FDIC insured limits was $11,169,000 at two financial institutions. The Company has not experienced any losses in such accounts. Management of the Company reviews financial information of financial institutions on a quarterly basis and believes the Company is not exposed to any significant credit risk on cash and cash equivalents.
Policy receivables are reported at unpaid balances. Policy receivables are generally offset by associated unearned premium liabilities and are not subject to significant credit risk. Receivables from agents, less provision for credit
Effective January 1, 2016, the Company elected to change its method of presentation relating to placement fees associated with the issuance of trust preferred securities in accordance with FASB ASU 2015-03. Prior to 2016, the Company’s policy was to present these fees in Other Assets on the balance sheet, net of accumulated amortization. Beginning in 2016, the Company has presented these fees as a direct reduction in the related note payable.
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on a comprehensive new revenue recognition standard. This standard will not impact accounting for insurance contracts, leases, financial instruments and guarantees. For those contracts that are impacted by the new guidance, the guidance will require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to, in exchange for those goods or services. The guidance requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued a deferral of the effective date by one year. This guidance is effective retrospectively for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption of this standard is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Although insurance contracts are specifically scoped out of this new guidance, the Company has minor services that may be subject to the new revenue recognition guidance and are still in the process of evaluating the impact, if any, the guidance may have on its consolidated financial statements.
In February 2015, the FASB issued additional guidance regarding the consolidation of certain legal entities. The guidance modifies the evaluation of whether or not limited partnerships and similar legal entities are variable interest entities (VIEs) and the consolidation analysis of entities involved with VIEs, particularly those that have fee arrangements and related party relationships. The Company adopted this standard on January 1, 2016. This guidance did not have a material effect on results of operations or financial position.
January 1, 2016. Required disclosures will be included in the notes to consolidated financial statements included in the Company's 2016 Annual Report on Form 10-K and in interim reports beginning in 2017.
In September 2015, the FASB issued guidance that requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The guidance requires an entity to present on the face of the income statement or to disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company adopted this standard on January 1, 2016. This guidance did not have a material effect on results of operations or financial position.
The Company holds a passive interest in a limited partnership that is considered to be a Variable Interest Entity (VIE) under the provisions of ASC 810 Consolidation. The Company is not the primary beneficiary of the entity and is not required to consolidate under ASC 810. The entity is a private placement investment fund formed for the purpose of investing in private equity investments. The Company owns less than 1% of the limited partnership. The carrying value of the investment totals $228,000 and is included as a component of Other Invested Assets in the accompanying consolidated balance sheets.
In December 2005, the Company formed National Security Capital Trust I, a statutory trust created under the Delaware Statutory Trust Act, for the sole purpose of issuing, in private placement transactions, $9,000,000 of trust preferred securities (TPS) and using the proceeds thereof, together with the equity proceeds received from the Company in the initial formation of the Trust, to purchase $9,279,000 of variable rate subordinated debentures issued by the Company. The Company owns all voting securities of the Trust and the subordinated debentures are the sole assets of the Trust. The Trust will meet the obligations of the TPS with the interest and principal paid on the subordinated debentures. The Company received net proceeds from the TPS transactions, after commissions and other costs of issuance, of $9,005,000. The Company also holds all the voting securities issued by the Trust and such trusts are considered to be VIE's. The Trust is not consolidated because the Company is not the primary beneficiary of the trust. The Subordinated Debentures, disclosed in Note 7, are reported in the accompanying consolidated balance sheets as a component of long-term debt. The Company's equity investments in the Trust total $279,000 and are included in Other Assets in the accompanying consolidated balance sheets.
In June 2007, the Company formed National Security Capital Trust II for the sole purpose of issuing, in private placement transactions, $3,000,000 of trust preferred securities (TPS) 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 7, 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.
A summary of securities available-for-sale with unrealized losses as of December 31, 2016, 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 (dollars in thousands):
before the anticipated recovery. If either of these conditions is met, the Company is required to recognize an other-than-temporary impairment with the entire unrealized loss reported in earnings. For securities in an unrealized loss position that do not meet these conditions, the Company assesses whether the impairment of a security is other-than-temporary. If the impairment is determined to be other-than-temporary, the Company is required to separate the other-than-temporary impairments into two components: the amount representing the credit loss and the amount related to all other factors. The credit loss is the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.
For the year ended December 31, 2016 and year ended December 31, 2015, the Company realized no other-than-temporary impairments. At December 31, 2016, the single largest loss not realized as an impairment was in the bond portfolio and totaled $340,000. The second largest loss position was in the bond portfolio and totaled $85,000. The third largest loss position was in the bond portfolio and totaled $66,000. At December 31, 2015, the single largest loss not realized as an impairment was in the bond portfolio and totaled $252,000. The second largest loss position was in the bond portfolio and totaled $211,000. The third largest loss position was in the bond portfolio and totaled $186,000.
Our available-for-sale securities consists of fixed maturity and equity securities which are recorded at fair value in the accompanying consolidated balance sheets. The change in the fair value of these investments, unless deemed to be other-than-temporarily impaired, is recorded as a component of other comprehensive income.
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):
Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately traded equity securities are classified within Level 3.
As of December 31, 2016, Level 3 fair value measurements of assets include $1,258,000 of equity securities in a local community bank whose value is based on an evaluation of the financial statements of the entity. The Company does not develop the unobservable inputs used in measuring fair value.
As of December 31, 2016, Level 3 fair value measurements of liabilities include $1,030,000 net fair value of various interest rate swap agreements whose value is based on analysis provided by a third party broker who utilizes financial modeling tools and assumptions on interest and other factors. The Company does not develop the unobservable
Other policyholder funds - the carrying amount is a reasonable estimate of fair value.
The aggregate balance in this account, $2,520,000 at December 31, 2016, would be taxed at current rates only if distributed to shareholders or if the account exceeded a prescribed minimum. The Deficit Reduction Act of 1984 eliminated additions to policyholders' surplus for 1984 and thereafter. Deferred taxes have not been provided on amounts designated as policyholders' surplus. The deferred income tax liability not recognized is approximately $857,000 at December 31, 2016.
Short-term debt and current portion of long-term debt consisted of the following as of December 31, 2016 and December 31, 2015 (dollars in thousands):
The decrease in claim and claim adjustment expense reserves is primarily due to a reduction in non-catastrophe reported claims in the fourth quarter of 2016 compared to last year. The Company did experience an overall increase in claims in 2016 versus 2015, primarily due to claims associated with Hurricane Matthew which occurred in October of 2016. However, over 95% of reported claims from Hurricane Matthew were paid at December 31, 2016. The estimate for claims arising in prior years was reduced $1,460,000 in 2016 (reduced $962,000 in 2015) due to favorable loss development during the year on claims arising in prior years.
The Company has a geographic exposure to catastrophe losses in certain areas of the country. Catastrophes can be caused by various events including hurricanes, windstorms, earthquakes, hail, severe winter weather, explosions and fires, and the incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophe losses are restricted to small geographic areas; however, hurricanes and earthquakes may produce significant damage in large, heavily populated areas. The Company generally seeks to reduce its exposure to catastrophes through individual risk selection and the purchase of catastrophe reinsurance. At December 31, 2016, the Company's estimate of unpaid losses and adjustment expenses for claims incurred in prior years related to catastrophes that exceeded our retention totaled $462,000 before reinsurance ($856,000 in 2015). Because the Company has exhausted its catastrophe coverage limits available for Hurricane Katrina any additional development will not be covered by reinsurance.
The tables presented above represent homeowners, dwelling fire and other liability lines of business. The Company combined the data for these lines of business because the policy coverage and payout pattern for homeowners and
As shown in the table above depicting average annual payout of incurred claims, 87.6% of claims are settled within twelve months of the date of loss and cumulatively, 97.3% of claims are settled within two years of the date of loss. While reserve 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.
for unpaid claims totaled $391,000 at December 31, 2016. These claims are a component of policy and contract claims which totaled $1,008,000 at December 31, 2016.
In the normal course of business, NSIC seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to reinsurance companies under excess coverage contracts. NSIC retains a maximum of $50,000 of coverage per individual life. The cost of reinsurance is amortized over the contract period of the reinsurance.
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, 2016, NSIC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $1,642,000.
During the years ended December 31, 2016 and year ended December 31, 2015, changes in shareholders' equity consisted of net income of $3,063,000 and $4,697,000, respectively; dividends paid of $452,000 in 2016 and $402,000 in 2015; increases in accumulated other comprehensive income, net of applicable taxes, of $482,000 in 2016 and decreases in accumulated other comprehensive income, net of applicable taxes, of $2,247,000 in 2015. Other comprehensive gains and loss consisted of accumulated unrealized gains and losses on securities available-for-sale and unrealized loss on interest rate swaps.
On May 20, 2016, 4,914 shares of common stock were issued to directors as compensation under the 2009 Equity
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 (dollars in thousands):
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2015 (dollars in thousands):
Management organizes the business utilizing a niche strategy focusing on lower valued dwellings. Our chief decision makers (Chief Executive Officer, Chief Financial Officer and 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, 2016 and at December 31, 2015 are summarized below (dollars in thousands):
Premium revenues and operating income by business segment for the years ended December 31, 2016 and 2015 are summarized below (dollars in thousands):
The following table presents the Company’s gross and net premiums earned for the property and casualty segment and the life and accident and health segment for the years ended December 31, 2016 and 2015, respectively:
The Company and its subsidiaries continue to be named individually as parties to litigation related to the conduct of their insurance operations. These suits involve alleged breaches of contracts, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of the Company's subsidiaries, and other miscellaneous causes of action.
The Company's property & casualty subsidiaries are defending a limited number of matters filed in the aftermath of Hurricane Ike in Texas. These actions include individual lawsuits with allegations of underpayment of hurricane-related claims.