The National Security Group, Inc. is made up of two segments: the Life segment and the P&C segment. The Company’s life, accident and health insurance business is conducted through National Security Insurance Company (NSIC), a wholly owned subsidiary of the Company organized in 1947. The Company’s property and casualty insurance business is conducted through National Security Fire & Casualty Company (NSFC), a wholly owned subsidiary of the Company organized in 1959, and Omega One Insurance Company (Omega), a wholly owned subsidiary of National Security Fire & Casualty Company organized in 1992.
For the year ended December 31, 2009 total revenues were $66,004,000 compared to $60,690,000 for the same period last year; an increase of 8.8%. Earned premium increases in the P&C segment and Life segment as well as the recovery of value in our overall investment portfolio were the primary contributing factors to the increase in total revenue for 2009 over 2008.
The Company ended 2009 with net income totaling $4,224,000 compared to a net loss of $5,204,000 in 2008. The Company ended 2009 with net income per share of $1.71 compared to a net loss per share of $2.11 in 2008. The significant decline in storm activity during 2009 in addition to the lack of any major catastrophes were primary reasons for improved operating results in the current year compared to the prior year. In addition, our investment portfolio made a noteworthy turnaround with market values of securities increasing and the reduction in other-than-temporary impairment losses recognized. Furthermore, as mentioned above, the Company also ended 2009 with increases in premiums earned in both the P&C segment and the Life segment compared to the same period last year.
The Company ended 2009 with premiums earned totaling $59,594,000 compared to $56,264,000 for the same period last year. Premium revenue is generated from our two operating segments: P&C segment and Life segment. The P&C segment accounts for approximately 88% of total premium revenue production while our Life segment contributes the remaining 12%. The P&C segment operates in personal lines insurance products primarily generating premium revenue from dwelling fire, allied lines and homeowners policies. Our Life segment produces premium revenue primarily from life, accident and critical illness insurance policies.
Net investment income totaled $5,289,000 in 2009 compared to $4,368,000 in 2008; an increase of $921,000. We currently hold $5,000,000 in company owned life insurance (COLI). The change in value related to this investment lead to investment income totaling $740,000 in 2009 compared to investment losses of $543,000 for the same period last year. The COLI income was the primary reason for the overall increase in investment income.
Net realized investment gains totaled $357,000 in 2009 compared to investment losses of $1,049,000 in 2008. The primary reason for the improved results was the significant change in losses recognized from other-than-temporary impairment write-downs. During 2009, the Company recognized losses from other-than-temporary impairments totaling $443,000 compared to $2,973,000 during 2008. Realized investment gains increased $369,000 from fixed maturities compared to 2008 while realized gains decreased by $1,079,000 for equity securities compared to 2008.
Other income was $764,000 as of December 31, 2009 compared to $1,107,000 for the same period last year; a $343,000 decrease. Other income consists primarily of billing, payment and policy fees related to the issuance of our property and automobile insurance policies as well as miscellaneous income.
Stockholders equity for the year ended December 31, 2009 was $41,168,000 compared to $34,648,000 at December 31, 2008, an increase of $6,520,000 or 18.8%. The change in stockholders equity is composed of dividends paid to shareholders of $1,480,000 and net income of $4,224,000 as well as accumulated other comprehensive income totaling $3,520,000 and unrealized gains on interest rate swap totaling $256,000. The increase in accumulated income was primarily the result of increases in the value of our investment portfolio. Stockholders equity for the year ended December 31, 2008 was significantly reduced by underwriting losses in the property and casualty insurance operations and declines in investment portfolio fair value. Year end book value per share, defined as stockholders equity divided by common shares outstanding of 2,466,600, was $16.69 at December 31, 2009 compared to $14.04 at December 31, 2008.
Certain financial information for The National Security Group’s two operating segments (Life segment, property and casualty segment) and holding company level expenses is summarized as follows (amounts in thousands):
Our life segment is the smaller of our insurance segments contributing 12.08% of total insurance premium revenue in 2009 and 12.36% in 2008. Premium revenues and operating income for the life segment for the years ended December 31, 2009 and 2008 are summarized below (amounts in thousands):
NSIC premium accounted for 12.08% of total consolidated premium revenue for 2009. As mentioned above, NSIC operates using two primary methods of distribution: home service employee agents and independent agents. While the company has used the traditional home service distribution method since its founding in 1947, the independent agent distribution method has become the largest source of renewal business and new business production over the past decade. For 2009, the home service and independent agent distribution methods accounted for 33.4% and 62%, respectively of NSIC premium revenue.
Significant products contributing to the increase in premium revenue were our new cancer product launched in the fourth quarter of 2008 and renewal premiums from our ordinary life line of business. Minimum standards regarding retention rates have helped to increase our persistency in the independent method of distribution.
Net investment income totaled $2,114,000 as of December 31, 2009 compared to $1,940,000 for the same period last year. Investment income in NSIC is generated from securities held in our investment portfolio as well as mortgage and policy loan interest. Investment income increased $174,000 in 2009 compared to 2008 primarily due to an overall increase in NSIC’s invested assets.
General and administrative expenses and deferred policy acquisition costs (DAC) increased a net $173,000 in 2009 compared to 2008. While deferred policy acquisition costs in the Life segment decreased $756,000 from 2008, general and administrative expenses increased $929,000 from 2008. The primary reason for the change in the allocation between general expenses and DAC was a downward adjustment in the estimate of expenses capitalized as a component of DAC.
Property and casualty operations constitute our largest segment composing 87.92% and 87.64% of our total premium revenue in 2009 and 2008, respectively. Premium revenues and operating income for the P&C segment for the years ended December 31, 2009 and 2008 are summarized below:
Property and casualty segment premium revenue for 2009 increased 6.3% compared to 2008. The stabilization of renewal rates, moderate rate increases in our largest states and a reduction in ceded reinsurance due to a lack of catastrophe reinstatement premium payments were the primary factors contributing to the 6.3% increase.
Improvement in operating results was a primary focus area during 2009. We took a critical look at our rating methodology in the dwelling line of business as well as the homeowners programs offered by the P&C companies. We made efforts to improve underwriting margins but continue to face regulatory hurdles to properly compensate for our risk, especially in coastal areas. In addition to our focus on improving property underwriting results, we expanded our tiered Medalist automobile program into Louisiana. The private passenger automobile program, though only 3% of total premium revenue in 2009, experienced a 62.5% increase in net premiums earned compared to the same period last year. Net premiums earned were down slightly in our dwelling fire program but the homeowners programs ended 2009 with net premium earned up 13% compared to 2008.
The P&C segment ended 2009 with realized capital gains totaling $120,000 compared to $372,000 for the same period last year. A reduction in the number of securities sold at a gain during 2009 compared to 2008 was the primary reason for the decline in realized capital gains. The P&C segment was less impacted by the write-down of other than temporary impairments in 2009 versus 2008. During 2009, other- than-temporary impairment losses totaled $151,000 compared to $1,615,000 in 2008. For information regarding management’s method of determining investment impairment, please see the other-than-temporary impairment and credit quality section under investments on page 30.
The most significant improvement in the P&C segment was the significant improvement in our loss ratio. Policyholder benefit payments declined to 59% of premiums earned in 2009, compared to 80.6% in 2008. Policyholder benefit expenses decreased to $30,908,000 in 2009 from $39,719,000 in 2008, a decline of 22%. During 2008 the company incurred loss and loss adjustment expenses totaling $14,140,000 ($4,032,000 after reinsurance recoveries) from Hurricane Gustav and $4,271,000 ($3,539,000 after reinsurance recoveries) from Hurricane Ike. In addition, in 2008 the P&C segment experienced unusually high loss frequency from tornado and storm related activity totaling $4,916,000. Fortunately, the storm activity affecting the Company during 2009 was substantially less amounting to $2,268,000 in loss and loss adjustment expenses for the current year. The Company experienced no hurricane losses in 2009.
Commission expense for 2009 totaled 13.97% of premium revenue compared to 15.76% of premium revenue in 2008. Commission expenses totaled $7,317,000 in 2009 compared to $7,772,000 in 2008; a 5.8% decrease. Implementation of a new profit sharing bonus calculation during 2009 was the driver of the reduction in overall commission expenses. The company increased the threshold to be attained by agents in order to qualify for the bonus and altered the calculation base of the bonus to utilize earned as opposed to written premium. We did however open the profit sharing bonus to premium generated related to the automobile line of business.
General expenses totaled $6,775,000, or 12.93% of premium revenue, in 2009 compared to $7,265,000, or 14.73% of premium revenue, in 2008. Cost saving initiatives related to reductions in postage cost and salary expenses were the primary contributors to the decrease in general expenses. During 2009 we increased the amount of information available to our agents on our website and reduced routine mailings of this information, resulting in a 30% reduction in postage costs. We also continue to leverage the benefits of new technology investments in order to achieve greater levels of efficiency in our home office operations, thus reducing salary costs.
The combined ratio for 2009 was 96% compared to 120% for the same period last year. Improved operating results, less storm activity and the lack of hurricanes impacting our coverage areas were primary factors leading to the decline in 2009 compared to 2008. The combined ratio for 2008 was adversely impacted by losses incurred from hurricanes Gustav and Ike and a very active spring storm season. The components of this ratio are broken out in the table below under the section Property and Casualty Combined Ratio.
A summary of debt and equity securities available for sale with unrealized losses as of December 31, 2009 along with related fair value, aggregated by length of time that the investments have been in a continuous unrealized loss position follows:
At December 31, 2009, just under 3.5% of total investments in the fixed income portfolio were classified as below investment grade. When a fixed maturity security has a decline in value (where fair value is below amortized cost) an other-than-temporary impairment (OTTI) is triggered in circumstances where the Company has the intent to sell the security, it is more likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis, and/or the Company does not expect to recover the entire amortized cost basis of the security. 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 income statement 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 realized loss in the income statement, and the amount related to all other factors, which is recognized in other comprehensive income. When an equity security has a decline in value, where fair value is below cost, that is deemed to be other than temporary, the Company reduces the book value of the security to its current fair value, recognizing the decline as a realized loss in the income statement. Any future increases in the market value of investments written down are reflected as changes in unrealized gains as part of accumulated other comprehensive income within stockholders’ equity.
The increase in the average current yield on investments in 2009 compared to 2008 was primarily due to opportunities created in early 2009 due to a significant increase in spreads and yields on corporate debt. We increased our allocation to corporate debt in early 2009, thus taking advantage of the improved yields in the market.
The most significant change in investment income in 2009 compared to 2008 was a decline in realized capital losses and an increase in net unrealized capital gains. The most significant component contributing to the realized capital losses in 2008 were other than temporary impairment charges totaling $2,973,000. Details of the individual issuers composing the other-than-temporary impairment charges in 2009 and 2008 are as follows:
Due to regulatory restrictions, the majority of the Company’s cash is required to be invested in investment-grade securities to provide ample 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 maturities spread over periods usually not exceeding 10 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.
The following table reflects the anticipated cash flows associated with our short- and long-term contractual obligations as of December 31, 2009:
Included in long-term debt held by the Company is the issuance of $9,279,000 in subordinated debentures completed on December 15, 2005. The proceeds from the debentures were used to make a $6,000,000 capital infusion in the P&C subsidiary National Security Fire and Casualty with the remainder to be held for general corporate purposes. The subordinated debentures mature December 15, 2035. It is anticipated that principal payments will not be made until the expiration of the fixed rate period on the debt in 2015. Also included in long-term debt is the issuance of $3,093,000 in subordinated debentures completed June 21, 2007. The proceeds from the debentures were used to fund general corporate expenses thereby reducing the amount of dividends to the Group paid by the P&C subsidiary National Security Fire & Casualty thereby continuing to restore capital in the P&C subsidiary National Security Fire and Casualty to pre-hurricane levels. The second issue matures June 15, 2037 and may be redeemed following the fifth anniversary of issuance.
As disclosed in Note 13 to the consolidated financial statements, in 2009, the amount that The National Security Group’s insurance subsidiaries can transfer in the form of dividends to the parent company is limited to $1,250,000 in the life insurance subsidiary and $4,179,000 in the property/casualty insurance subsidiary. Improved capital positions and operating results have increased the ability of the subsidiaries to pay dividends to the parent company.
The ratios of Total Adjusted Capital to Authorized Control Level RBC for The National Security Group’s life/health and property/casualty insurance subsidiaries are all in excess of 4.0 to 1 at December 31, 2009.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $28.7 million and $26.8 million at December 31, 2009 and 2008, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 4.6 and 4.0 at December 31, 2009 and 2008, respectively. Accordingly, National Security Fire & Casualty Company exceeds the minimum RBC requirements.
Omega One Insurance Company (property/casualty insurer), which began writing business in late 1995, has regulatory adjusted capital of $9.6 million and $9.1 million at December 31, 2009 and 2008, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 23.0 and 25.2 at December 31, 2009 and 2008, respectively. Accordingly, Omega One Insurance Company exceeds the minimum RBC requirements.
Risk management involves ceding risks to reinsurers for policies underwritten based on contractual agreements. The reinsurance purchased helps provide protection by individual loss or catastrophic event when claims exceed specified amounts. Although the reinsurance protects our company in the event a loss penetrates into a particular reinsurance agreement; ultimate responsibility for claim settlement rests with our company if any reinsurer defaults on payments due. We record an asset for reinsurance recoverable on the financials for amounts due from reinsurers and monitor the balances due by reinsurer to ensure the asset is ultimately going to be collectible. If we discover an amount due may not be received we remove the balance and charge it to an allowance for doubtful accounts or charge it off to expense based on the information available at the time.
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 6 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 such as collateralized debt obligations.
In April 2009, a new accounting standard was issued related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. Our adoption of this new accounting standard was effective April 1, 2009. The new accounting standard reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The new accounting standard also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. The implementation of the new guidance did not have a significant impact on our financial statements.
We have audited the accompanying consolidated balance sheet of The National Security Group, Inc. as of December 31, 2009, and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of The National Security Group, Inc. as of December 31, 2008, were audited by other auditors whose report dated March 20, 2009 expressed an unqualified opinion on those statements.
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, 2009, and the results of its operations and its cash flows for the year 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.
Omega is licensed in the states of Alabama and Louisiana. Omega operates in property and casualty lines, the most significant of which are homeowners and private passenger automobile physical damage and liability.
For the year ended December 31, 2009 and 2008, there was one agency in the property and casualty segment that individually produced greater than 5% of the Company’s direct written premium.
Securities Available-for-Sale. Bonds, notes, common stock and non-redeemable preferred stock not classified as either held-to-maturity, or trading are reported at fair value, and adjusted for other-than-temporary declines in fair value.
When an equity security has a decline in value, where fair value is below cost, that is deemed to be other than temporary, the Company reduces the book value of the security to its current fair value, recognizing the decline as a realized loss in the income statement. Any future increases in the market value of investments written down are reflected as changes in unrealized gains as part of accumulated other comprehensive income within stockholders’ equity.
Other investments consist primarily of investments in notes and equity investments in limited liability companies and company owned life insurance. The Company has no influence or control over the operating or financial policies of the investee limited liability companies and consequently, these investments are accounted for using the cost method.
The Company owns life insurance contracts on certain management employees. The life insurance contracts are carried at their current cash surrender value. Changes in cash surrender values are included in income in the current period. Death proceeds from the contracts are recorded when the proceeds become payable under the terms of the policy.
Investments with other than temporary impairment in value are written down to estimated realizable values and losses recognized in the determination of net income. The fair value of the investment becomes its new cost basis.
Investments - Fixed income security fair values are based on quoted market prices when available. If not available, fair values are based on values obtained from investment brokers and independent pricing services.
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 2,466,600 (2,466,600 in 2008).
In the normal course of business, NSFC seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. In 2009, NSFC maintained a catastrophe reinsurance agreement to cover losses from catastrophic events, primarily hurricanes.
The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of the Company’s assets and liabilities and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period the new rate is enacted.
Certain 2008 amounts have been reclassified from the prior year financial statements to conform to the 2009 presentation.
The Company expenses advertising costs as incurred. Advertising costs charged to expense were $109,000 for the year ended December 31, 2009 ($186,000 for the year ended December 31, 2008). Advertising cost consists primarily of agent convention expense and print media.
In April 2009, a new accounting standard was issued related to interim disclosures about fair value of financial instruments. The new accounting standard requires disclosing qualitative and quantitative information about the fair value of all financial instruments on a quarterly basis, including methods and significant assumptions used to estimate fair value during the period. These disclosures were previously only done annually. The disclosures required by the new accounting standard were effective for the quarter ending June 30, 2009. The implementation of the new guidance did not have a significant impact on our financial statements.
In June 2009, a new accounting standard was issued related to the accounting for transfers of financial assets, which updates accounting for securitizations and special-purpose entities. The new accounting standard is a revision of previously issued accounting standards related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, and will require additional information regarding financial asset transfers, including
Effective July 1, 2009, the Financial Accounting Standards Board (FASB) issued the Accounting Standards Codification (ASC), which combined and superseded all existing non-SEC accounting and reporting standards under GAAP and became the single official source for authoritative GAAP guidance combined with guidance issued by the U.S. Securities and Exchange Commission (SEC). The FASB no longer issues new standards in the previous formats. Instead, amendments to the Codification are made by issuing “Accounting Standards Updates” (ASU). The Codification did not change existing GAAP. Accordingly, the issuance of the codification did not impact the Company’s consolidated results of operations or financial condition.
The Company holds a passive interest in a limited partnership that is considered to be a Variable Interest Entity (VIE) under the provisions of FIN 46(R). The Company is not the primary beneficiary of the entity and is not required to consolidate under FIN 46(R). 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 $325,000 and is included as a component of Other Invested Assets.
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.
A summary of securities available-for-sale with unrealized losses as of December 31, 2009 and 2008 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:
A summary of securities held-to-maturity with unrealized losses as of December 31, 2009 and 2008 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:
According to the most recent accounting guidance, for securities in an unrealized loss position, the Company is required to assess whether the Company has the intent to sell the security or more likely than not will be required to sell the security 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.
Management has evaluated each security in a significant unrealized loss position. For the year ended December 31, 2009, the Company realized $443,000 in other than temporary impairments. The single largest accumulated loss was in the equity portfolio and totaled $337,000. The second largest loss position was in the bond portfolio and totaled $332,000. The third largest loss position was in the equity portfolio and totaled $163,000. Most unrealized losses in the fixed income portfolio are interest rate driven as opposed to credit quality driven and management believes no ultimate loss will be realized. The Company has no material exposure to sub-prime mortgage loans and less than 2% of the fixed income investment portfolio is rated below investment grade. In evaluating whether or not the equity loss positions were other-than-temporary impairments, Management evaluated financial information on each company and reviewed analyst reports from at least two independent sources. Based on a review of the available financial information, the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was determined that the remaining securities in an accumulated loss position in the portfolio were temporary impairments.
For the year ended December 31, 2009, there were no assets or liabilities measured at fair values on a nonrecurring
Cash and cash equivalents-the carrying amount is a reasonable estimate of fair value.
Mortgage receivables-the carrying amount is a reasonable estimate of fair value to the restrictive nature and limited marketability of the mortgage notes.
The carrying amount and estimate fair value of the Company’s financial instruments as of December 31, are as follows:
Depreciation expense for the year ended December 31, 2009 was $424,000 ($454,000 for the year ended December 31, 2008).
The Company recognizes tax-related interest and penalties as a component of tax expense. The Company incurred $-0- in interest and penalties as of both December 31, 2009 and December 31, 2008. 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 2006. The Internal Revenue Service completed an examination during 2008 of the Company’s 2005 Federal Income Tax Return. No material adjustments were made as a result of this examination. No income tax returns are currently under examination by the Internal Revenue Service or any state or local taxing authority. Tax returns have been filed through the year 2008.
Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. Management believes that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. The Company recognized a net deferred tax liability position of $61,000 in 2009 and net deferred tax asset position of $1,839,000 in 2008.
Long-term debt consisted of the following as of December 31, 2009 and December 31, 2008:
unconditional guarantee of amounts due the Trusts. The amount guaranteed is not expected to at any time exceed the obligations of the TPS, and no additional liability has been recorded related to the guarantee.
The swaps entered into in 2007 and 2009 have fair values of $245,000 (liability) and $185,000 (asset), respectively, for a net liability of $60,000 at December 31, 2009 ($316,000 at December 31, 2008) which is reported as a component of other liabilities on the consolidated balance sheets. A net valuation gain of $256,000 is included in accumulated other comprehensive income related to the swap agreements for the current period. A net valuation loss of $228,000 was included in accumulated other comprehensive income related to the swap in the prior year.
In December of 2009, the Company obtained an unsecured line of credit for $700,000, with an interest rate of 5%, to be made available for general corporate purposes. The line of credit matures December 25, 2010. No funds were drawn on this line at December 31, 2009.
The Company regularly updates its reserve estimates as new information becomes available and events occur that may impact the resolution of unsettled claims. Changes in prior years’ reserve estimates are reflected in the results of operations in the year such changes are determined. The following table is a reconciliation of beginning and ending property and casualty reserve balances for claims and claim adjustment expense for the years ended December 31:
The Company’s insurance operations participate in reinsurance in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and effect business-sharing arrangements. Life reinsurance is accomplished through yearly renewable term. Property and casualty reinsurance is placed on both a quota-share and excess of loss basis. Reinsurance ceded arrangements do not discharge the insurance subsidiaries as the primary insurer, except for cases involving a novation. Failure of reinsurers to honor their obligations could result in losses to the insurance subsidiaries. The insurance subsidiaries evaluate the financial conditions of their reinsurers and monitor concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize their exposure to significant losses from reinsurance insolvencies.
In 1987, the Company established a non-qualified deferred compensation plan for its Board of Directors. The Board members had an option of deferring their fees to a cash account or to a stock account and all share deferrals are recorded at the fair market value on the date of the award. The directors’ non-qualified deferred compensation plan was frozen on December 31, 2004, and deferrals are no longer allowed. A new non-qualified plan became effective January 1, 2006 under which directors are allowed to defer all or a portion of directors’ fees into various investment options. The supplemental executive retirement plan (SERP) became effective March 1, 2008 and covers named executive officers with the Company contributing 15% of executive compensation to the plan. Contributions to the plan are fully vested upon the earlier of death, disability, change in control, or ten years of participation in the plan. Costs for amounts credited of the non-qualified deferred compensation plans for 2009 and 2008 amounted to approximately 388,000 and ($349,000), respectively.
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, 2009, NSIC’s retained earnings unrestricted for the payment of dividends in 2010 amounted to $1,250,000.
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, 2009, NSFC’s retained earnings unrestricted for the payment of dividends in 2010 amounted to $4,179,000.
At December 31, 2009, securities with market values of $3,530,000 ($3,812,000 at December 31, 2008) were deposited with various states pursuant to statutory requirements.
Premium revenues and operating income by industry segment for the years ended December 31, 2009 and 2008 are summarized below:
In 2007, the Company sold substantially all of its interest in a consolidated subsidiary, Mobile Attic, Inc. On July 9, 2009, the Company moved to intervene in a complaint filed by the purchaser of Mobile Attic against the founder and former president/CEO of Mobile Attic and others, regarding the plaintiff’s purchase of shares of Mobile Attic. The Company filed a proposed complaint in intervention requesting the Court to find that the Company is not liable for indemnity under the Stock Purchase Agreement, or in the alternative, to award damages to the Company for any loss suffered as a result of the fraudulent actions of the former president/CEO of Mobile Attic and as a result of the negligence of Mobile Attic and its
The Company establishes and maintains reserves on contingent liabilities. In many instances, however, it is not feasible to predict the ultimate outcome with any degree of accuracy. While a resolution of these matters may significantly impact consolidated earnings and the Company’s consolidated financial position, it remains management’s opinion, based on information presently available, that the ultimate resolution of these matters will not have a material impact on the Company’s consolidated financial position.
Information of the Registrant does not include all of the information and notes normally included with financial
and Notes thereto included in the Registrant’s Annual Report as referenced in Form 10-K, Part II, Item 8, page 44.