-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DICl6ntMq6LKzr0U/OGcvZsDUIIawg8VfC10fO9HOEa3XYyDJVGbLuTUy8pe+EDv vAxudkMJ/lM9hXzY4Wl6pA== 0000865058-98-000005.txt : 19980518 0000865058-98-000005.hdr.sgml : 19980518 ACCESSION NUMBER: 0000865058-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SECURITY GROUP INC CENTRAL INDEX KEY: 0000865058 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 631020300 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18649 FILM NUMBER: 98623968 BUSINESS ADDRESS: STREET 1: 661 E DAVIS ST CITY: ELBA STATE: AL ZIP: 36323 BUSINESS PHONE: 2058972273 10-Q 1 NATIONAL SECURITY GROUP, INC. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-18649 THE NATIONAL SECURITY GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 63-1020300 661 East Davis Street, Elba, Alabama 36323 (State or other (I.R.S.Employer (Address of principal (Zip code) jurisdiction of Identification executive offices) Incorporation No.) or organization) Registrant's telephone number, including area code (334) 897-2273 Not Applicable (Former name, address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Number of Shares of Common Stock outstanding as of May 1, 1998: 2,262,178 Exhibit index is located on page 13. Page 1 of 13 pages 1 THE NATIONAL SECURITY GROUP, INC. INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURE 12 EXHIBIT INDEX 13 2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements THE NATIONAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Three Months Ended March 31 1998 1997 Revenues Net insurance premiums earned ............................. $ 7,501 $ 7,982 Net investment income ..................................... 1,165 1,102 Realized investment gains ................................. 480 63 Other income .............................................. 139 162 Total revenues .......................................... 9,284 9,309 Benefits and Expenses Policyholder benefits and settlement expenses ............. 5,881 5,346 Policy acquisition costs .................................. 1,671 1,402 General insurance expenses ................................ 1,290 1,166 Insurance taxes, licenses and fees ........................ 397 362 Total benefits and expenses ............................ 9,239 8,276 Income Before Income Taxes and Cumulative Effect Adjustment .......................... 45 1,033 Income Taxes (Current and deferred) ....................... (275) 411 Net Income ................................................ $ 320 $ 622 Earnings per share ........................................ $ 0.14 $ 0.27 Dividends Declared per Share .............................. $ 0.19 $ 0.17 The Notes to Financial Statements are an integral part of these statements. 3 THE NATIONAL SECURITY GROUP, INC. CONSOLIDATED BALANCE SHEET (In thousands, except per share amounts) As of As of March 31, December 31, Assets 1998 1997 Investments: Securities held-to-maturity at amortized cost (estimated fair value: 1998 - $32,155;1997 - 33,959). $ 31,379 $ 29,995 Securities available-for-sale, at estimated fair value (cost: 1998 - 34,780;1997 - 26,098) ...... 54,212 52,819 Receivable for securities ............................ 0 400 Mortgage loans ....................................... 311 320 Investment real estate, at cost ...................... 1,629 1,645 Policy loans ......................................... 648 660 Total investments .................................. 88,191 85,827 Cash and cash equivalents ............................... 1,989 3,888 Accrued investment income ............................... 897 833 Reinsurance recoverable ................................. 8,543 8,489 Deferred policy acquisition costs ....................... 4,158 4,216 Current income tax recoverable .......................... 0 0 Prepaid reinsurance premiums ............................ 224 341 Other assets ............................................ 2,977 3,364 Total assets ......................................... $ 106,979 $ 106,958 Liabilities Policy reserves ...................................... $ 18,736 $ 18,667 Claim reserves ....................................... 22,544 22,246 Unearned premiums .................................... 8,659 8,853 Other policyholder funds ............................. 1,684 1,729 Deferred income tax .................................. 4,373 4,078 Current Income tax payable ........................... 104 147 Other liabilities .................................... 4,295 4,886 Total liabilities ................................. $ 60,395 $ 60,606 Shareholders' Equity Common stock, $1 par value, 2,339,848 shares issued ..... 2,340 2,340 Additional paid in capital .............................. 17 17 Net unrealized appreciation on securities available-for-sale, net of deferred taxes ............ 13,743 12,497 Retained earnings ....................................... 31,767 31,888 Treasury stock, at cost (77,670 shares) ................. (1,283) (390) Total shareholders' equity ........................... 46,584 46,352 Total liabilities and shareholder's equity ........... $ 106,979 $ 106,958 Shareholders' Equity per Share .......................... 20.29 20.04 The Notes to Financial Statements are an integral part of these statements. 4 THE NATIONAL SECURITY GROUP. INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31 1998 1997 Cash Flows from Operating Activities Income from continuing operations ....................... $ 320 $ 622 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Accrued investment income ............................. (64) (122) Reinsurance receivables ............................... (54) 2,020 Deferred Policy acquisition costs ................ ... 58 (82) Income Taxes ......................................... 252 729 Depreciation expense ................................. 30 35 Policy liabilities and claims ......................... 173 (889) Other, net ............................................ (103) (53) Net cash provided by operating activities .......... 612 2,260 Cash Flows from Investing Activities Cost of investments acquired ......................... (3,786) (4,672) Sale and maturity of investments .................... 2,667 3,001 Purchase of property and equipment ................... (15) (25) Proceeds from disposal of property and equipment .... 0 0 Other, net .......................................... 0 0 Net cash used in investing activities .............. (1,134) (1,696) Cash Flows from Financing Activities Increase in other policyholder funds ................ (45) (19) Dividends paid ...................................... (439) (394) Purchase of treasury stock .......................... (893) 0 Net cash used in financing activities ............. (1,377) (413) Net increase (decrease) in cash and cash equivalents ..... (1,899) 151 Cash and cash equivalents, beginning of period ........... 3,888 4,722 Cash and cash equivalents, end of period ................. $ 1,989 $ 4,873 The Notes to the Financial Statements are an integral part of these statements. 5 THE NATIONAL SECURITY GROUP, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1-Basis of Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. The interim financial statements include all adjustments necessary, in the opinion of management, for fair statement of financial position, results of operations and cash flows for the periods reported. These adjustments are all normal recurring adjustments. Note 2-Reinsurance National Security Fire and Casualty Company ("NSFC") and National Security Insurance Company ("NSIC") wholly owned subsidiaries of the Company, reinsure certain portions of insurance risk which exceed various retention limits. NSFC and NSIC are liable for these amounts in the event assuming companies are unable to meet their obligations. Note 3-Calculation of Earnings Per Share Earnings per share were based on net income divided by the weighted average common shares outstanding. The weighted average number of shares outstanding for the period ending March 31, 1998 was 2,262, and for the period ending March 31, 1997 was 2,319. Note 4-Changes in Shareholder's Equity During the three months ended March 31, 1998 and 1997, there were no changes in shareholders' equity except for net income of $320 and $622 respectively; dividends paid of $439 and $394 respectively; unrealized investment gains, net of applicable taxes, of $1,245 and $715 respectively, and (purchases) of treasury stock of ($893) and 0 respectively. Note 5 - Deferred Taxes The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows: March 31, January 1, 1998 1998 Deferred policy acquisition costs ........................ (1,417) (1,434) Policy liabilities ....................................... 594 519 Unearned premiums ........................................ 484 442 Claims liabilities ....................................... 540 530 General insurance expenses ............................... 951 931 Unrealized gains on securities available-for-sale ........ (5,689) (5,066) Other .................................................... 164 0 Net deferred tax assets (liability) ...................... (4,373) (4,078) Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. 6 THE NATIONAL SECURITY GROUP, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Note 6-Contingencies The Company and its subsidiaries continue to be named as parties to litigation related to the conduct of their insurance operations. These suits involve alleged breaches of contracts, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of the Company's subsidiaries, and miscellaneous other causes of action. Most of these lawsuits include claims for punitive damages in addition to other specified relief. The frequency of these lawsuits has increased significantly over the past 36 months, particularly in Alabama where the Company conducts the majority of its business. Certain of these actions are filed in jurisdictions in Alabama where local juries have returned large punitive damage verdicts against insurance companies and financial institutions with, in many cases, the punitive damage award bearing little or no relation to the actual damages. It is not feasible to predict or determine the ultimate outcome of these matters. On October 4, 1996, a jury in the Circuit Court of Palm Beach County, Florida returned a verdict against National Security Fire & Casualty Company, a subsidiary of the Company, in the amount of $995,252. The plaintiff, Leon B. King, had alleged that the Company's subsidiary had acted in bad faith in, among other actions, failing to timely deliver a settlement check in connection with a 1986 automobile accident. This same case was previously tried in 1993 with the jury returning a verdict in favor of the Company's subsidiary on all counts alleged. This verdict was subsequently reversed on appeal which resulted in the subject trial. Various post-trial motions including a motion for a new trial were denied and this verdict is being appealed. The amount of this verdict is reflected in the accompanying financial statements. It should be noted, however, that in the event that this verdict is ultimately upheld, ther could be an award of additional amounts including interest and attorneys' fees. A resolution of these matters may significantly impact consolidated earnings and may significantly impact the Company's consolidated financial position, although it remains management's opinion, based upon information presently available, that the ultimate resolution of these matters will not have a material impact on the Company's consolidated financial position. It should be noted, however, that management is unable to assess with any degree of accuracy the potential liability to the Company arising from these matters. The civil tort system, particularly in Alabama, must be presently regarded as, for the most part, hostile to insurance companies. Note 7-Accounting for certain investments in debt and equity securities The Company's investment securities are classified in two categories and accounted for as follows: Securities Held-to-Maturity. Bonds, notes and redeemable preferred stock for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest using methods which approximate level yields over the period to maturity. 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, adjusted for other-than-temporary declines in fair value. The Company and its subsidiaries have no trading securities. Unrealized holding gains and losses, net of tax, on securities available-for-sale are determined using the specific-identification method. 7 THE NATIONAL SECURITY GROUP, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Note 7-Continued Mortgage loans and policy loans are stated at the unpaid principle balance of such loans. Investment real estate is reported at cost, less allowances for depreciation computed on the straight -line basis. Short-term investments are carried at cost, which approximate market value. Investments with other than temporary impairment in value are written down to estimated realizable values. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion addresses the financial condition of The National Security Group, Inc. as of March 31, 1998, compared with December 31, 1997 and its results of operations and cash flows for the quarter ending March 31, 1998, compared with the same period last year. The reader is assumed to have access to the Company's 1997 Annual Report. This discussion should be read in conjunction with the Annual Report and with consolidated financial statements on pages 3 through 6 of this form 10-Q. Information is presented in whole dollars. CONSOLIDATED RESULTS OF OPERATIONS Premium revenues: Earned premiums for the three month period ending March 31, 1998 were $7.5 million versus $7.9 million for the same period last year, a decrease of 6%. The slight decrease is primarily due to the property/casualty subsidiary's reduction in homeowner's insurance premiums. Net investment income: Net investment income is up slightly over last year due to an increase in invested assets. Realized capital gains and losses: Investment gains of $480,000 were realized in the first quarter of 1998. This is up significantly from the first quarter of 1997. The gains were primarily generated from the sale of securities in the subsidiaries available for sale portfolio. The Company's investment committee only sells selected securities as market conditions warrant. Other income: Other income is down $23,000 due to a decrease in policy fees generated by an automobile program which was discontinued in the first quarter of 1998. Policyholder benefits and settlement expenses: Policyholder benefits as a percent of net insurance premiums earned has increased significantly compared to the first quarter of last year, 78.4% versus 66.9%. The increase is primarily due to a rise in incurred loss in the property/casualty subsidiary's private passenger automobile programs. One of these programs in the State of Louisiana was canceled earlier this year due to adverse claims experience. Policy acquisition cost: Policy acquisition costs are up nearly $300,000 compared to last year. This increase is due to costs associated with the launch of a new homeowners program in the State of Louisiana. The program is being underwritten by a managing general agent in Louisiana. Because managing general agents actually collect from sub-agents and underwrite policies, acquisition costs are usually higher on these programs. These costs are offset by lower general and administrative expenses at the company level. 9 General insurance expenses: General insurance expenses are up 10% from last year due to slight increase among several expense categories. Insurance taxes, licenses, and fees: Insurance taxes, licenses and fees have increased slightly both in total and as a percent of premiums earned due to an increase in homeowners premiums written in the property/casualty subsidiaries. Income taxes: Income taxes are down compared to last year due to a decrease in income of nearly $1 million and an increase in deferred tax assets. These future deductible amounts reduce overall income tax expense. Summary: Net income decreased $300,000 primarily due to an increase in policyholder benefits associated with losses incurred in the property/casualty subsidiaries private passenger automobile programs. Investments: Investments increased $2.3 million during the first quarter of 1998. The increase in investments was due to an increase in unrealized capital gains and new investments made with increased cash flow from the property/casualty insurance subsidiaries. Capital resources: At March 31, 1998, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $46.5 million, up slightly from December 31, 1997. The increase reflects net income of $320,000, an increase in unrealized investment gains of $1.2 million, dividends paid of $439,000, and purchases of treasury stock of $893,000. The Company assumed long term debt of $750,000 to finance the purchase of treasury stock. This debt is to be repaid over five years at 7% interest. Liquidity: The liquidity requirements of the Company are primarily met by funds provided from operations of the life insurance and property/casualty subsidiaries. Premium and investment income, as well as maturities, calls, and sales of invested assets, provide the primary sources of cash for both subsidiaries. Cash is used by subsidiaries for payments of policy benefits, the acquisition of new business (principally commissions), operating expenses, and purchases of new investments. The Company had $2.0 million in cash and cash equivalents at March 31, 1998. Net cash provided by operating activities was $600,000 for the current period, compared to $2.2 million for the period ended March 31, 1997. Cash used in investing activities was $1.1 million for the quarter. This use of cash was used to increase bond and stock investments. Cash dividends paid to stockholders' of $439,000, and purchases of treasury stock of $893,000 are the primary use of cash used in financing activities. 10 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K See Exhibit Index 11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned duly authorized officer, on its behalf and in the capacity indicated. The National Security Group, Inc. By M.L. Murdock /s/ -------------------------- M.L. Murdock Senior Vice President and Chief Financial Officer Dated: May 14, 1998 12 EXHIBIT INDEX Exhibit Description Page (a) 11 Statement Regarding Computation of Per Share Earnings Filed Herewith; See Note 3 to Financial (b) Form 8-K None 13 EX-27 2 03/31/98 FINANCIAL DATA SCHEDULE
7 1000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 19,990 31,379 32,155 34,222 311 1,629 88,191 1,989 8,543 4,158 106,979 18,736 8,659 22,544 1,684 750 0 0 2,340 44,244 106,979 7,501 1,165 480 139 5,881 1,671 1,687 45 (275) 320 0 0 0 320 .14 .14 0 0 0 0 0 0 0
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