Capitalized along with the Greenville property are site preparation costs, including clearing, filling and leveling of land. There are no material improvements such as paving, parking lots or fencing that would be recorded as land improvements and depreciated over the appropriate useful life.
The Life segment accounted for 9.1% of gross premium revenue in 2018. 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 segment can be impacted by severe storm activity resulting in incurred losses and loss adjustment expenses primarily from hurricane, tornado, wind and hail related damage. These storm systems or other natural disasters are classified as catastrophes (referred to as "cat events" or "catastrophe events" throughout the remainder of this document) by Property Claim Service (PCS) when these events cause $25 million or more in industry wide direct insured losses and affect a significant number of policyholders and insurers.
A primary process management utilizes to review financial information of the Company is evaluating the operating performance of each segment before intercompany eliminations. By performing the evaluation in this manner, management can assess the profitability of each segment on a standalone basis. We have altered the presentation of our Management Discussion and Analysis related to industry segment data to provide pretax income income by segment before eliminations. We have restated prior year to follow the same format. Note 15 to the consolidated financial statements in this Form 10-K contains a reconciliation of net income by segment before eliminations to consolidated net income.
In order to present information as analyzed by Company management, industry segment data in this Management Discussion and Analysis is presented before certain intercompany eliminations. These intercompany eliminations, which are presented in Note 15 to the Consolidated Financial Statements, primarily include management and service fees paid by each subsidiary to NSEC, along with fees and expenses of the Company's employee claims adjusters. Claims adjusters are employees of NSIC but provide claim adjustment services to NSFC at rates comparable to those paid to independent (non-employee) adjusters utilized by NSFC. Management believes that the analysis of segment information prior to elimination of the intercompany transactions provides a more realistic view of performance relative to subsidiary capital allocation and product pricing strategies. While segment data is presented prior to intercompany eliminations, all intercompany transactions are eliminated in all Consolidated Financial Statements and other consolidated financial information presented in accordance with accounting principles generally accepted in the United States (GAAP).
For the year ended December 31, 2018, net income for the Company totaled $779,000, $0.31 income per share, compared to a net loss of $1,203,000, $0.48 loss per share, for the year ended December 31, 2017; a year over year increase of $1,982,000. While the Company ended 2018 with net income from operations, results for 2018 were negatively impacted by Hurricane Michael. On October 10, 2018, Hurricane Michael made landfall in the panhandle of Florida, as a Category 4 storm. Hurricane Michael primarily impacted our policyholders in Georgia; but also affected policyholders in Alabama and South Carolina. The losses incurred from Hurricane Michael reduced fourth quarter net income by $3,160,000.
Financial results for the year ended December 31, 2018 and 2017 were as follows:
For the year ended December 31, 2018, net premiums earned were down $307,000 at $60,856,000 compared to $61,163,000 in 2017. The decrease in premium revenue was primarily driven by a decline in net earned premium in the P&C segment of $207,000. This decline was primarily attributable to a decrease in our surplus lines business in coastal Louisiana.
In 2018, due to a change in GAAP, unrealized gains and losses on equity investments are required to be reported as a component of investment gains/losses on the statement of operations. These amounts were previously reported as a component of Other Comprehensive Income. For the year ended December 31, 2018, investment losses include a $203,000 decrease in accumulated gains on equity securities held for investment. This decrease in accumulated gains was driven by an overall decline in stock market values experienced late in the fourth quarter of 2018.
For the year ended December 31, 2018, the Company had net income of $779,000, $0.31 income per share, compared to a net loss of $1,203,000, $0.48 loss per share, for the same period in 2017. The primary reason for the increase in 2018 year to date earnings compared to 2017 was the reduction in retained catastrophe losses over the twelve month period in 2018. Also, results in 2017 were adversely impacted by an increase in income tax expense due to revaluation of deferred tax assets under the Tax Cuts and Jobs Act (TCJA). Retained catastrophe losses were down $5,142,000 in 2018 compared to 2017. In addition, we had a fourth quarter 2017 charge to income tax expense of $803,000 from the net impact of recognition and revaluation of deferred tax assets and liabilities due to enactment of the TCJA.
For the year ended December 31, 2018, our pretax income from operations was $1,243,000 compared to a pretax loss from operations of $1,348,000 for the year ended December 31, 2017; an improvement of $2,591,000. The primary reason for the pretax income from operations in 2018 compared to the pretax loss from operations in the prior year was a decrease in the frequency and severity of catastrophe related claims in the P&C segment. While our P&C segment was impacted by Hurricane Michael in the fourth quarter of 2018 and Hurricane Irma in the third quarter of 2017, our property and casualty subsidiary was also impacted by numerous tornado and severe thunderstorm related catastrophe events in the first half of 2017. The reduction in non-hurricane cat events in 2018 compared to the prior year was the primary reason for the decrease in claims and improvement in pretax income from operations.
Total assets as of December 31, 2018 were $144,231,000 compared to $146,438,000 at December 31, 2017. Asset growth in 2018 was hindered by losses from Hurricane Michael along with a decrease in value of our bond portfolio investments due to increases in market interest rates.
Total debt at December 31, 2018 was $14,352,000 compared to $15,639,000 at December 31, 2017. Debt was reduced $1,287,000 during 2018 primarily from the reduction of long-term debt in our holding company. The improvement of
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017:
The table below provides the major categories of investment income for the year ended December 31, 2018 and 2017:
The table below provides investment gains and losses for the year ended December 31, 2018 and 2017:
NSIC ended 2018 with net investment losses of $78,000 compared to net investment gains of $71,000 for the same period in 2017. Investment gains and losses are highly dependent on several factors including market conditions, tax position and liquidity needs of the Company and can vary significantly from period to period. In 2018, due to a change in GAAP, increases and decreases in accumulated gains/losses on equity investments held for investment are required to be reported as a component of investment gains/losses on the income statement. These amounts were previously reported as a component of Other Comprehensive Income. For the year ended December 31, 2018, life segment investment losses include a $71,000 decrease in accumulated gains on equity securities held for investment. This decrease in accumulated gains was driven by an overall decline in stock market values experienced late in the fourth quarter of 2018. The net investment gains in 2017, were primarily from the disposition of available-for-sale investments.
Deferred policy acquisition cost amortization and commission expenses decreased $29,000 for the year ended December 31, 2018 at $1,126,000 compared to $1,155,000 for the same period in 2017; a decline of 2.5%. As a percent of net premiums earned, policy acquisition cost amortization and commission expense was 18.7% in 2018 compared to 18.9% in 2017. A decline in the rate of new business production was the primary reason for the decline in commission expenses.
General and administrative expenses were $2,111,000 in 2018 compared to $1,929,000 in 2017. As a percent of earned premium, general and administrative expenses were 35.1% and 31.5% at December 31, 2018 and 2017, respectively. The most significant factor contributing to the change in general and administrative was expenses was the reversal of a bonus accrual which reduced general and administrative expenses in 2017.
The following table provides severe thunderstorm and hurricane single event model estimates for a range of return periods based on a blended view of the RMS and AIR long-term models utilizing our actual in-force P&C segment policy data as of August 31, 2018:
Additional details regarding the structure of our 2018 catastrophe reinsurance program can be found in Note 10 to the Consolidated Financial Statements.
The P&C segment ended 2018 with capital losses of $100,000, compared to capital gains totaling $163,000 for the same period in 2017; a decrease of $263,000. Investment gains and losses are highly dependent on several factors including market conditions, tax position and liquidity needs of the Company and can vary significantly from period to period. In 2018, due to a change in GAAP, unrealized gains and losses on equity investments are required to be reported as a component of investment gains/losses on the income statement. These amounts were previously reported as a component of Other Comprehensive Income. For the year ended December 31, 2018, P&C segment investment losses include a $132,000 decrease in accumulated gains on equity securities held for investment. This decrease in accumulated gains was driven by an overall decline in stock market values experienced late in the fourth quarter of 2018. There were no net investment gains in 2017.
Weather related losses consistently create the most significant variability in our loss and loss adjustment expense payments from year to year in our P&C segment. The following table provides a recap of P&C segment gross reported losses and LAE by catastrophe event and non-catastrophe wind and hail losses and LAE for the year ended December, 2018 and 2017 (dollars in thousands):
During 2018, we were impacted by 19 catastrophe events producing 3,508 policyholder claims totaling $18,516,000 on a gross basis and, $9,138,000 net of reinsurance recoveries. The primary contributor to 2018 reported cat losses was Hurricane Michael. On October 10, 2018, Hurricane Michael made landfall along Florida's Panhandle near Mexico Beach. At landfall, Michael was a Category 4 hurricane with winds of approximately 155 mph. Based on data collected from the National Weather Service, Michael was the third most intense hurricane to make landfall in the continental United States with minimum pressure on the afternoon of landfall at 919 millibars. As Hurricane Michael moved inland into southeast Alabama and southwest Georgia, it remained a very strong Category 3 storm before finally weakening to a tropical storm as it moved through central Georgia and South Carolina. We had policyholders in Alabama, Georgia and South Carolina exposed to hurricane or tropical storm force winds from October 10th through October 11th. Hurricane Michael contributed $13,378,000 in reported losses on a gross basis ($4,000,000 net of reinsurance recoveries). Net of tax, Hurricane Michael losses reduced net income by $3,160,000 or $1.25 per share.
In 2017, the P&C segment was impacted by 26 catastrophe events generating 3,216 claims totaling $14,280,000. Because each of these events remained below our $4 million catastrophe reinsurance retention, none were covered by reinsurance. Our 2017 catastrophe losses were a Company record for retained catastrophe losses. Net of tax, 2017 catastrophe losses reduced net income by $9,425,000 or $3.74 per share. The single largest catastrophe event in 2017 was Hurricane Irma, which caused $3,622,000 in reported losses in 2017 from 992 claims. Hurricane Irma impacted our policyholders in Alabama, Georgia, South Carolina and Tennessee. Georgia was the primary state in our coverage area impacted by Hurricane Irma comprising approximately 85% of reported claims.
Non-catastrophe wind and hail claims reported in 2018 totaled $6,792,000 compared to non-catastrophe wind and hail claims reported in 2017 totaling $5,649,000; an increase of $1,143,000 or 20.2%. During 2018, the P&C segment had 2,025 non-cat wind and hail claims reported (an average of $3,400 per claim) compared to 1,596 claims reported during 2017 (an average of $3,500 per claim). Non-cat wind and hail claims reported during 2018 accounted for 19.0% of total P&C segment incurred losses and LAE in the current year. Non-cat wind and hail claims reported during 2017 accounted for 14.9% of total P&C segment incurred losses and LAE in the prior year.
Year to date policyholder benefit payments were down in the property and casualty segment due to a decrease in frequency of reported losses from catastrophe events; however, reported fire losses were up in 2018 compared to 2017. Reported fire losses were up $993,000 or 7.1% in 2018 compared to fire losses reported during 2017. The P&C segment had 479 fire losses reported for the year ended December 31, 2018, totaling $14,968,000 compared to 486 fire claims reported for the same period in 2017 totaling $13,975,000. The average cost per claim was $31,200 for fire losses reported in 2018 compared to $28,800 for fire losses reported in 2017. Reported fire losses in 2018 added 27.3 percentage points to the combined ratio compared to 25.4 percentage points to the 2017 combined ratio.
Commission expense for 2018 was $7,267,000 (13.3% of premium revenue) compared to $7,380,000 (13.4% of premium revenue) for the same period in 2017. The primary reason for the $113,000 decrease in commission expense was a reduction in bonus commissions to agents in 2018 compared to 2017.
Insurance taxes, licenses and fees were $1,937,000 through December 31, 2018 compared to $2,237,000 for the same period in 2017. Insurance taxes, licenses and fees were 3.5% of premium revenue in 2018 compared to 4.1% of premium in 2017. The primary reason for the decrease in taxes, licenses and fees in 2018 compared to 2017 was an increase in 2017 taxes due to a one time charge for state taxes in the P&C segment totaling $185,000.
Maintaining a combined ratio below 100%, which indicates that the company is making an underwriting profit, depends upon many factors including hurricane activity in the Gulf of Mexico and the southern Atlantic coast, strict underwriting of risks, catastrophe reinsurance costs, severe thunderstorm frequency and the ability to obtain adequate and timely
premium rates. A major hurricane hitting the coast of Alabama, Georgia, South Carolina, Mississippi or Louisiana could cause the combined ratio to fluctuate materially from year to year. In addition, most of the states that we write business are prone to severe thunderstorm and tornado activity with significant variations in the level of activity from year to year. The property and casualty subsidiaries maintain catastrophe reinsurance to minimize the effect of a major catastrophe; however, the geography of our coverage area, frequency of smaller catastrophe events and prohibitive cost of maintaining lower catastrophe deductibles and/or catastrophe aggregate coverage prevents us from further mitigating catastrophe risks.
During 2018, the P&C segment experienced an increase of 0.18 percentage points in the combined ratio compared to 2017. While catastrophe loss is the primary source of variability in our combined ratio, as noted in the table above, over the past two years, non-catastrophe losses and LAE were the primary source of the increase in our combined ratio in 2018 compared to 2017. Non-catastrophe losses increased the P&C segment combined ratio 6.18 percentage points in the current year compared to the same period in the prior year. Offsetting this increase was a 9.0 percentage point decrease in the catastrophe loss component of the P&C combined ratio, in 2018 compared to 2017. Management continues to improve rate adequacy, reduce significant exposure concentrations and implement other risk management strategies in order to further improve underwriting profitability, mitigate earnings volatility and reduce downside risk to our capital position.
The non-insurance operations of the Company consist of our parent company, The National Security Group, Inc. (NSG). The National Security Group 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, 2018 and 2017 are summarized as follows (amounts in thousands):
The insurance subsidiaries primarily invest in highly liquid investment grade fixed maturity securities and equity securities. The types of assets in which the Company can invest are influenced by various state insurance laws which prescribe qualified investment assets. While working within the parameters of these regulatory requirements and
At December 31, 2018, the Company's holdings in fixed maturity securities amounted to 85.7% of total investments and 66.9% of total assets. The Company utilizes the ratings of various Nationally Recognized Statistical Rating Organizations when classifying fixed maturity investments by credit quality.
Fixed maturity portfolio credit quality in the AAA/AA+ rating category increased over five percentage points in 2018 primarily primarily due to new investment in Government National Mortgage Association (GNMA) collateralized mortgage obligations (CMO's) and commercial mortgage backed securities (CMBS). Higher interest rates in 2018 allowed us to improve fixed maturity portfolio credit quality while maintaining portfolio yield.
The amortized cost and aggregate fair values of investments in investment securities at December 31, 2018 and December 31, 2017 are as follows (dollars in thousands):
As shown in the tables above, the Company experienced an increase in unrealized losses on fixed maturity investments in 2018 compared to the portfolio composition at December 31, 2017. The increase in unrealized losses was primarily driven by an overall increase in market interest rates.
A number of factors influence portfolio allocation within each of the insurance subsidiaries. Within the property and casualty subsidiaries, due to the relatively short-term nature of segment liabilities, fixed income investments tend to be of shorter duration, with average maturities of less than five years. Also, due to higher levels of potential volatility of policy liabilities (severe weather related losses), a greater emphasis is placed upon overall liquidity of investments. In contrast, within the life insurance subsidiary, policy liabilities tend to be more stable and of significantly longer duration. In order to match the longer duration of liabilities, investments in the life insurance portfolio tend to have longer maturities and higher average book yields. Also, less emphasis is placed upon short term liquidity in the life subsidiary due to more predictable cash needs.
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 overnight agreements and investments are limited to government securities that are highly liquid. Therefore, these investments are reflected on the balance sheet as a cash equivalents. Due to a combination of the 102% collateral requirement and low short term interest rates, 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.
It should be noted that the above table represents maturities based on stated/contractual maturity. Due to call and prepayment features inherent in some fixed maturity securities, actual repayment, or effective maturities, will differ from stated maturities. The Company routinely evaluates the impact of changing interest rates on the projected maturities of bonds in the portfolio and actively manages the portfolio in order to minimize the impact of interest rate risk. However, due to other factors, both regulatory and those associated with good investment management practices associated with asset/liability matching, we do have exposure to changes in market values of securities due to changes in interest rates. Currently, a 100 basis point immediate increase in interest rates would generate approximately a $4,688,000, or 4.9%, decline in the market value of fixed maturity investments. Alternatively, a 100 basis point decrease in interest rates will generate approximately $4,690,000, or 4.9%, increase in market value of fixed income investments. Management has attempted, to the extent possible, to reduce risk in a rising rate environment. However, due to asset liability matching requirements, particularly in the life subsidiary portfolio, interest rate risk can not be eliminated and exposure to market volatility can cause some variability in our accumulated other comprehensive income, total return on investments, total shareholders' equity and book value per share.
At December 31, 2018, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $45,866,000, down $1,759,000 compared to $47,625,000 at December 31, 2017. Components of the change in equity were net income of $779,000, comprehensive loss due to changes in value of fixed maturity securities of $2,404,000, comprehensive income of $295,000 related to change in value of interest rate swaps and cash dividends paid totaling $505,000.
As discussed above, changing interest rates can have a significant impact on the market value of fixed maturity investments. Fixed maturity securities classified as available-for-sale increase the liquidity resources of the Company as they can be sold at any time to pay claims or meet other Company obligations. However, these securities are required to be carried at market value with net of tax change in accumulated unrealized gains and losses directly impacting shareholder's equity. While the increase in interest rates causes near term declines in the value of fixed income securities, we are able to reap the benefit of reinvesting at higher rates as current fixed income investments are called, amortized (mortgage backed securities) or reach contractual maturity. Over the next twelve months, based on cash flow projection modeling that considers such factors as anticipated principal payments on mortgage backed securities, likelihood of call provisions being enacted and regular contractual maturities, we expect approximately 6% of our current fixed income portfolio to be reinvested or otherwise available to meet Company obligations.
The following table reflects the anticipated cash flows associated with our short- and long-term contractual obligations and commitments as of December 31, 2018 (dollars in thousands):
Contractual obligations reflected in the table above include the issuance of $9,111,000 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 $3,028,000 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 $2,200,000 unsecured loan obtained in December 2016. The unsecured loan matures in November 2019.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $34.6 million and $35.2 million at December 31, 2018 and 2017, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 4.7 at December 31, 2018 and 2017, respectively. Accordingly, National Security Fire & Casualty Company exceeds the minimum RBC requirements.
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 2018 and 2017, 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, 2018 and 2017, the Company recorded $7,834,000 and $8,124,000, 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.
At December 31, 2018 and 2017, the recorded liability for loss and loss adjustment expense was $8,208,000 and $7,075,000, respectively, a $1,133,000 increase. The increase in claim and claim adjustment expense reserves is primarily due to claims arising from Hurricane Michael in the fourth quarter of 2018. We believe the estimate of unpaid losses and loss adjustment expenses to be sufficient based on currently available information and a review of our historical reserving practices. For more information regarding loss and loss adjustment expense, see Note 9 to our Consolidated Financial Statements.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
NSIC is licensed in the states of Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee and Texas and was organized in 1947 to provide life and burial insurance policies to the home service market. Business is produced by both company and independent agents. Primary products include ordinary life, accident and health, supplemental hospital, and cancer insurance products.
NSFC is licensed in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Oklahoma, South Carolina, Tennessee and West Virginia. In addition, NSFC operates on a surplus lines basis in Louisiana. NSFC operates in various property and casualty lines, the most significant of which are: dwelling fire and extended coverage, homeowners and mobile homeowners.
Omega is licensed in the states of Alabama and Louisiana. Omega currently has no insurance policies in-force but is party to an intercompany reinsurance agreement with NSFC. Intercompany transactions are eliminated upon consolidation in the accompanying consolidated financial statements.
The Company's life, accident and health insurance subsidiary, composing approximately 10% of consolidated direct written premium, is licensed in seven states. However, over 79% of life segment direct premium is generated in the
For the year ended December 31, 2018, one agency individually produced greater than 5% of the Company's direct written premium.
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 a 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
Property and equipment is carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment. Significant costs incurred for internally developed software are capitalized and amortized over estimated useful lives of 3 years. Maintenance, repairs, and minor renovations are charged to expense as incurred. Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the respective account and the resulting gain or loss is included in the statement of operations. The Company provides for depreciation of property and equipment using the straight-line method designed to amortize costs over estimated useful lives. Estimated useful lives range up to 40 years for buildings and from 3-10 years for equipment, furniture and fixtures. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
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 2,525,325 at December 31, 2018 and 2,520,431 at December 31, 2017. The Company did not have any dilutive securities as of December 31, 2018 and 2017.
Certain 2017 amounts have been reclassified from the prior year consolidated financial statements to conform to the 2018 presentation.
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, 2018, the net amount exceeding FDIC insured limits was $3,897,000 at three financial institutions. The Company has not experienced any losses in such accounts. Management of the Company reviews financial information of financial institutions on a quarterly basis and believes the Company is not exposed to any significant credit risk on cash and cash equivalents.
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, 2018 and December 31, 2017, 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, 2018, management does not believe the Company is exposed to any significant credit risk related to its reinsurance program.
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, 2019,
In March 2017, the FASB issued guidance that shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. The guidance is effective for fiscal years beginning after December 15, 2018 and interim reporting periods within those fiscal years. The Company adopted this guidance on January 1, 2019. The adoption of this guidance did not have a significant impact on our financial position, results of operations or cash flows.
The Company does not have policy fees or any material services that may be subject to the new revenue recognition guidance. The Company adopted this guidance as of January 1, 2018. The adoption of this guidance did not have an impact on its consolidated financial statements.
In January 2016, the FASB issued guidance that requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. The guidance eliminates the requirement for public companies to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted this guidance as of January 1, 2018. The adoption of this guidance resulted in a $2,107,000 reclassification to retained earnings from accumulated other comprehensive income related to accumulated unrealized gains on equity securities as well as recognition of a $160,000 loss, net of tax, related to the change in value of equity securities.
In May 2017, the FASB issued guidance to provide clarity and reduce diversity in practice as well as cost and complexity when there is a change in the terms or conditions of a share-based payment award. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted this guidance as of January 1, 2018. The adoption of this guidance did not have a significant impact on our financial position, results of operations or cash flows.
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 $116,000 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 8, are reported in the accompanying consolidated balance sheets as a component of long-term debt. The Company's equity investments in the Trust total $279,000 and are included in Other Assets in the accompanying consolidated balance sheets.
subordinated deferrable interest debentures. The Company owns all voting securities of the Trust and the subordinated debentures are the sole assets of the Trust. The Trust will meet the obligations of the TPS with the interest and principal paid on the subordinated debentures. The Company received net proceeds from the TPS transactions, after commissions and other costs of issuance, of $2,995,000. The Company also holds all the voting securities issued by the Trust and such trusts are considered to be VIE's. The Trust is not consolidated because the Company is not the primary beneficiary of the Trust. The Subordinated Debentures, disclosed in Note 8, are reported in the accompanying consolidated balance sheets as a component of long-term debt. The Company's equity investments in the Trust total $93,000 and are included in Other Assets in the accompanying consolidated balance sheets.
The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31, 2018 are as follows (dollars in thousands):
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2018 are as follows (dollars in thousands):
There were no equity securities or securities held-to-maturity with unrealized losses as of December 31, 2017.
Management has evaluated each security in a significant unrealized loss position in the fixed maturity investment portfolio. The Company has no material exposure to sub-prime mortgage loans and approximately 4.69% of the fixed income investment portfolio is rated below investment grade. Based on a review of the available financial information, the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was determined that, other than the impairment described below, the securities in an accumulated loss position in the portfolio were temporary impairments.
For the year ended December 31, 2018, the Company realized a $16,000 other-than-temporary impairment representing a credit loss on a mortgage backed security. For the year ended December 31, 2017, the Company realized no other-than-temporary impairments. At December 31, 2018, the three largest losses not realized as an impairment in the fixed maturity portfolio totaled $145,000, $99,000 and $94,000. Each of these losses were driven by changes in market interest rates. At December 31, 2017, the single largest loss not realized as an impairment was in the fixed maturity portfolio totaled $75,000. The second largest loss position in the fixed maturity portfolio totaled $60,000. The third largest loss position in fixed maturity portfolio totaled $53,000.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. Level 3 assets and liabilities include marketable debt instruments, non-marketable equity investments, derivative contracts, and company issued debt with values are determined using inputs that are both unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable debt instruments that are priced using indicator prices that we were unable to corroborate with observable market quotes.
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):
For the year ended ended December 31, 2018, there were no assets or liabilities measured at fair values on a nonrecurring basis.
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, 2017 (in thousands):
For the year ended December 31, 2017, there were no assets or liabilities measured at fair values on a nonrecurring basis.
Policy loans - the carrying amount is a reasonable estimate of fair value.
Depreciation expense for the year ended ended December 31, 2018 was $161,000 ($121,000 for the year ended December 31, 2017).
The Company recognizes tax-related interest and penalties as a component of tax expense. The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is not subject to examinations by authorities related to its U.S. federal or state income tax filings for years prior to 2014. Tax returns have been filed through the year 2017.
Short-term debt and current portion of long-term debt consisted of the following as of December 31, 2018 and December 31, 2017 (dollars in thousands):
The swaps entered into in 2009 and 2010 have fair values of $6,000 (liability) and $228,000 (liability), respectively, for a total liability of $234,000 at December 31, 2018 ($608,000 at December 31, 2017). The swap liability is reported as a component of other liabilities on the consolidated balance sheets. A net valuation gain of $295,000 (net of tax) is included in accumulated other comprehensive income related to the swap agreements at December 31, 2018. A net valuation gain of $278,000 (net of tax) was included in accumulated other comprehensive income related to the swap at December 31, 2017.
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, 2018, the Company has securities on deposit with fair market values of $932,000 (all of which is posted as collateral). At December 31, 2017, the Company had securities on deposit with fair market values of $1,446,000 (all of which is posted as collateral). See Note 5 for additional information about the interest rate swaps.
The Company regularly updates its reserve estimates as new information becomes available and events occur that may impact the resolution of unsettled claims. Reserve estimation can be an inherently uncertain process and reserves estimates can be revised up or down depending on changes in circumstances. Changes in prior years' reserve estimates are reflected in the results of operations in the year such changes are determined.
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, 2018, the Company's estimate of unpaid losses and adjustment expenses for claims incurred in prior years related to catastrophes that exceeded our retention totaled $18,000 before reinsurance ($115,000 in 2017). 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 dwelling fire are not materially different. Also, other liability is combined with dwelling fire because liability coverage
is only sold as an additional coverage offered only with the dwelling fire policy. The Company offers no stand alone liability products.
At December 31, 2018, the largest reinsurance recoverable of a single reinsurer was $125,000 ($322,000 at December 31, 2017). Amounts reported as ceded incurred losses were related to development of losses from prior year catastrophes.
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 contributions of $232,000 during the year ended December 31, 2018 and contributions of $268,000 during the year ended December 31, 2017. 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, 2018, NSIC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $1,583,000.
NSFC is similarly restricted in the amount of dividends payable to the Company; dividends may not exceed the greater of 10% of statutory surplus as of the end of the preceding year, or net income for the preceding year. At December 31, 2018, NSFC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $3,464,000.
The table below provides information regarding the Company's preferred and common stock as of December 31, 2018 and December 31, 2017:
On May 18, 2018, 4,824 shares of common stock were issued to directors as compensation under the 2009 Equity
The following table presents the Company’s gross and net premiums written for the property and casualty segment and the life and accident and health segment for the years ended December 31, 2018 and 2017, respectively:
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, 2018 and 2017, respectively:
In the ordinary course of business, the Company and its subsidiaries are routinely a defendant in or party to pending or threatened legal actions and proceedings related to the conduct of their insurance operations. These suits can 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. It is inherently difficult to predict the outcome of such matters, particularly when the claimant seeks very large or indeterminate damages or when the matters present novel legal theories or involve multiple parties. An accrued liability is established when loss contingencies are both probable and estimable. However, there is potential loss exposure in excess of any accrued amounts. The Company monitors pending matters for further development that could affect the amount of the accrued liability.
The Company maintains loss and loss adjustment expense reserves on litigated claims that occur in the routine course of business in the insurance operations of the subsidiaries. These reserves are included in the liability for benefit and loss reserves on the balance sheet.
Cash paid for interest during the year ended December 31, 2018 was $1,231,000 ($1,285,000 in 2017). Cash paid for income taxes during the year ended December 31, 2018 was $25,000. There was no cash paid for income taxes during the year ended December 31, 2017.