The Company ended 2012 with net premiums earned totaling $51,815,000 compared to $56,243,000 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 87% of total premium revenue while our life segment contributes the remaining 13%. The P&C segment operates in personal lines insurance products primarily generating premium revenue from dwelling fire and homeowners coverages. Our life segment produces premium revenue primarily from whole life, accident and critical illness insurance policies.
can vary significantly from year to year. Other activities, such as tax planning strategies, may also lead to significant variation in realized capital gains from year to year.
General and administrative expenses were $2,009,000 in 2012 compared to $2,081,000 in 2011. As a percent of earned premium, general and administrative expenses were virtually unchanged ending December 31, 2012 and 2011 at 30.4% and 30.3%, respectively. Although general and administrative expenses decreased in 2012 compared to 2011, as a percent of premium revenue, they were slightly higher. Historically, general and administrative expenses in our life segment have run higher than industry averages due to the small size of the subsidiary. Management continues to review processes to find ways to maximize efficiency and reduce costs and is currently looking into employee cross-training opportunities between insurance segments of the Company to help achieve this goal. However, due to the size of our life insurance subsidiary, reduction of general expenses will continue to be a challenge.
For the year ended December 31, 2012, the life segment had year-to-date pretax net income of $1,295,000 compared to a pre-tax net loss of $98,000 for the same period last year. Although the results were better in the current year compared to the prior year, the primary reason for the improvement was the $1,592,000 increase in realized capital gains. As mentioned previously, we will continue to face challenges due to the small size of our life insurance subsidiary due to scale; however, reduction of expenses will remain a primary focus area with the goal of improved operational results from the life segment.
Deferred policy acquisition costs totaled $2,773,000 in 2012 compared to $3,246,000 in 2011. Deferred policy acquisition costs were comparable at 6.1% of premium revenue for 2012; down 0.5 percentage points compared to
The amortized cost and aggregate fair value of debt securities at December 31, 2012, 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.
The Company's liquidity requirements are primarily met by funds provided from operations of the insurance subsidiaries. The Company receives funds from its subsidiaries through payments for federal income taxes and reimbursement of expenses incurred at the corporate level for the subsidiaries. These funds are used to pay stockholder dividends, interest on debt, corporate administrative expenses, federal income taxes, and for funding investments in the subsidiaries. The Company maintains minimal liquidity in order to maximize liquidity within the insurance subsidiaries in order to support ongoing insurance operations. The Company has no separate source of revenue other than
We have incurred substantial losses from catastrophe events over the past seven years. These events have driven up catastrophe reinsurance cost and forced our catastrophe reinsurance deductible up from $2 million in 2005 to $4 million in our 2012 renewal. As our cat retention has increased, we have attempted to achieve higher margins in our insurance rate structure in order to compensate for the additional risk of the higher catastrophe reinsurance retention but with limited success due to regulatory constraints primarily because this additional retention was not a "hard dollar" cost in our rate structure. So, since we were limited in our ability to increase margins for this additional retained risk and due to the capital erosion incurred in 2011, in the second quarter of 2012, we placed additional reinsurance cover in the form of reinsurance premium protection (RPP). The RPP cover will serve to reduce our risk from a major catastrophe and strengthen our capital position. The effect of adding this additional RPP cover is to reduce our modeled 100 year event net cost (net of reinsurance recoveries) from approximately $9 million (pretax) to an estimated $4.5 million (pretax). A 100 year event is defined as an event that has approximately a 1% probability of occurring in a given year. This
At December 31, 2012, the estimated reinsurance recoverable recorded was $1,541,000 compared to $2,778,000 for the same period last year. The Company does not anticipate any issues with collection of the recorded amount. In 2012, catastrophe reinsurance premiums totaled $6,646,000 ceded compared to $5,629,000 in 2011. 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 increase in ceded premium in 2012 is attributable to a 19.3% increase in the rate applied. In addition to catastrophe reinsurance, the Company placed reinstatement premium protection (RPP) reinsurance during 2012. RPP premiums totaled $1,346,000.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these consolidated financial statements are reserves for future policy benefits, liabilities for losses and loss adjustment expenses, reinsurance recoverable asset on associated loss and loss adjustment expense liabilities, deferred policy acquisition costs, deferred income tax assets and liabilities, assessments of other-than-temporary impairments on investments and accruals for contingencies. Actual results could differ from those estimates.
Level 1 - Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
As of December 31, 2012, Level 3 fair value measurements of liabilities include $1,521,000 net fair value of various interest rate swap agreements whose value is based on analysis provided by a third party broker. The Company does not develop the unobservable inputs used in measuring fair value. Additional information regarding the interest rate swap agreements is provided in Note 8.
Mortgage loans - the carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited marketability of the mortgage notes.
Depreciation expense for the year ended December 31, 2012 was $433,000 ($382,000 for the year ended December 31, 2011).
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, 2012, NSIC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $1,034,000.
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, 2012, NSFC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $2,468,000.
The Company’s property and casualty insurance operations comprise one business segment. The property and casualty insurance segment consists of seven lines of business: dwelling fire and extended coverage, homeowners (including mobile homeowners), ocean marine, other liability, private passenger auto liability, commercial auto liability and auto physical damage. Management organizes the business utilizing a niche strategy focusing on lower valued dwellings. Our chief decision makers (President, Chief Financial Officer and Chief Executive Officer) review results and operating plans making decisions on resource allocations on a company-wide basis. The Company’s products are primarily produced through agents within the states in which we operate. The Company’s life and accident and health operations comprise the second business segment. The life and accident and health insurance segment consists of two lines of business: traditional life insurance and accident and health insurance.