-----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, I0BqBTTPnlcjMtZi7B04WpT+GD5X/5kDdnu5+G+KqF5FgQRafMubXnP6yEgUaFge JiGJjDoMjAadSCVSAmAg1Q== 0000865058-00-000005.txt : 20000517 0000865058-00-000005.hdr.sgml : 20000517 ACCESSION NUMBER: 0000865058-00-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000516 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: 636858 BUSINESS ADDRESS: STREET 1: 661 E DAVIS ST CITY: ELBA STATE: AL ZIP: 36323 BUSINESS PHONE: 2058972273 10-Q 1 FORM 10Q 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, 2000 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 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 661 East Davis Street, Elba, Alabama 36323 (Address of principal executive offices) (Zip code) 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, 2000: 2,055,811 Exhibit index is located on page 15. Page 1 of 15 pages 1 THE NATIONAL SECURITY GROUP, INC. INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Consolidated Condensed Unaudited) Consolidated Statements of Income .................................... 3 Consolidated Balance Sheets ........................................... 4 Consolidated Statements of Shareholders' Equity ....................... 5 Consolidated Statements of Cash Flows ................................. 6 Notes to Financial Statements ......................................... 7 Independent Accountants' Report ....................................... 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................... 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ........................... 13 SIGNATURE ............................................................. 14 EXHIBIT INDEX ......................................................... 15 2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements THE NATIONAL SECURITY GROUP, INC. CONSOLIDATED UNAUDITED STATEMENTS OF INCOME (In thousands, except per share amounts) Three Months Ended March 31 2000 1999 ---- ---- Revenues Net insurance premiums earned ................................ $5,776 $6,871 Net investment income ........................................ 1,055 1,085 Realized investment gains .................................... 949 667 Other income ................................................. 88 121 ------ ------ Total revenues ............................................. 7,868 8,744 ------ ------ Benefits and Expenses Policyholder benefits and settlement expenses ................ 3,763 5,447 Policy acquisition costs ..................................... 1,138 1,458 General insurance expenses ................................... 1,356 968 Insurance taxes, licenses and fees ........................... 251 320 ------ ------ Total benefits and expenses ............................... 6,508 8,193 ------ ------ Income Before Income Taxes and Cumulative Effect Adjustment .. 1,360 551 Income Taxes (Current and deferred) .......................... 249 84 ------ ------ Net Income ................................................... $1,111 $ 467 ====== ====== Earnings per share ........................................... $ 0.54 $ 0.23 ====== ====== Dividends Declared per Share ................................. $ 0.21 $ 0.20 ====== ====== The Notes to Financial Statements are an integral part of these unaudited financial statements. 3 THE NATIONAL SECURITY GROUP, INC. CONSOLIDATED BALANCE SHEET (In thousands, except per share amounts)
As of As of March 31, December 31, 2000 1999 ---- ---- Assets (Unaudited) Investments: Debt Securities held-to-maturity at amortized cost (estimated fair value: 2000 - $30,480; 1999 - 30,774) . $ 30,668 $ 30,911 Debt Securities available-for-sale, at estimated fair value (cost: 2000 - 25,114; 1999 - 23,065) ................. 24,030 21,936 Equity Securities, at market (cost: 2000 - $13,953; 1999 - $12,683) ................ 25,876 27,676 Mortgage loans ............................................ 101 112 Investment real estate, at cost ........................... 1,566 1,557 Policy loans .............................................. 664 669 -------- -------- Total investments ....................................... 82,905 82,861 -------- -------- Cash and cash equivalents .................................... 774 3,512 Accrued investment income .................................... 810 830 Reinsurance recoverable ...................................... 4,808 4,687 Deferred policy acquisition costs ............................ 4,284 4,273 Prepaid reinsurance premiums ................................. 170 257 Other assets ................................................. 1,889 1,685 -------- -------- Total assets .............................................. $ 95,640 $ 98,105 ======== ======== Liabilities Policy reserves ........................................... $ 19,055 $ 18,987 Claim reserves ............................................ 18,448 18,864 Unearned premiums ......................................... 6,798 7,088 Other policyholder funds .................................. 1,502 1,526 Notes payable ............................................. 2,610 2,672 Accrued Income Taxes ...................................... 252 53 Deferred income tax ....................................... 2,566 3,014 Other liabilities ......................................... 2,510 4,013 -------- -------- Total liabilities ...................................... $ 53,741 $ 56,217 -------- -------- Shareholders' Equity Common stock, $1 par value, 2,339,848 shares issued .......... 2,340 2,340 Additional paid in capital ................................ 17 17 Accumulated comprehensive income: Net unrealized appreciation on investment securities .... 9,247 9,915 Retained earnings ............................................ 33,876 33,197 Treasury stock, at cost (284,037 shares) ..................... (3,581) (3,581) -------- -------- Total shareholders' equity ................................ 41,899 41,888 -------- -------- Total liabilities and shareholder's equity ................ $ 95,640 $ 98,105 ======== ======== Shareholders' Equity per Share ............................... 20.38 20.37 ======== ========
The Notes to Financial Statements are an integral part of these unaudited financial statements. 4 THE NATIONAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except per share amounts)
Accumulated Other Retained Comprehensive Common Paid-in Treasury Total Earnings Income Stock Capital Stock Balance at December 31, 1998 ............. $ 41,968 $ 31,106 $ 12,146 $ 2,340 $ 17 $ (3,641) Comprehensive Income Net Income for 1999 .................. 3,756 3,756 Other comprehensive income(net of tax) Unrealized loss on securities, net of reclassification adjustment ... (2,231) (2,231) -------- Total Comprehensive Income ............... 1,525 -------- Cash dividends ($.81 per share) .......... (1,665) (1,665) Treasury stock sold ...................... 60 60 -------- -------- -------- -------- -------- -------- Balance at December 31, 1999 ............. $ 41,888 $ 33,197 $ 9,915 $ 2,340 $ 17 $ (3,581) Comprehensive Income Net Income for quarter ended 3/31/2000 1,111 1,111 Other comprehensive income(net of tax) Unrealized loss on securities, net of reclassification adjustment ... (668) (668) -------- Total Comprehensive Income ............... 443 -------- Cash dividends ($.21 per share) .......... ( 432) ( 432) Balance at March 31, 2000 (Unaudited) .... $ 41,899 $ 33,876 $ 9,247 $ 2,340 $ 17 $ (3,581) ======== ======== ======== ======== ======== ========
The Notes to the Financial Statements are an integral part of these unaudited financial statements. 5 THE NATIONAL SECURITY GROUP. INC. CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31 2000 1999 ----- ---- Cash Flows from Operating Activities Income from continuing operations ...................... $ 1,111 $ 467 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Accrued investment income ............................ 18 (43) Reinsurance receivables .............................. (121) 382 Deferred Policy acquisition costs .................... (11) (39) Income Taxes ........................................... (249) (721) Depreciation expense ................................. 33 25 Policy liabilities and claims ........................ (638) (509) Other, net ........................................... (1,563) (1,678) ------- ------- Net cash (used) provided by operating activities ... (1,420) (2,116) ------- ------- Cash Flows from Investing Activities Cost of investments acquired ........................ (3,224) (4,858) Sale and maturity of investments .................... 2,512 5,302 Purchase of property and equipment .................. (88) (80) Proceeds from disposal of property and equipment .... 0 0 Other, net .......................................... 0 0 ------- ------- Net cash provided (used) in investing activities .. (800) 364 ------- ------- Cash Flows from Financing Activities Increase in other policyholder funds ................ (24) (29) Payments on notes payable ........................... (62) (32) Dividends paid ...................................... (432) (410) Treasury stock issued (purchased) ................... 0 60 ------- ------- Net cash used in financing activities ............. (518) (1,377) ------- ------- Net (decrease) in cash and cash equivalents ............. (2,738) (2,163) Cash and cash equivalents, beginning of period ........... 3,512 4,073 ------- ------- Cash and cash equivalents, end of period ................. $ 774 $ 1,910 ======= ======= The Notes to the Financial Statements are an integral part of these unaudited financial statements. 6 THE NATIONAL SECURITY GROUP, INC. NOTES TO UNAUDITED 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. The accompanying consolidated financial statements include the accounts of The National Security Group, Inc. (the Company) and its wholly owned subsidiaries: National Security Insurance Company (NSIC), National Security Fire and Casualty Company (NSFC) and Natsco, Inc. (Natsco). NSFC includes a wholly owned subsidiary, Omega One Insurance Company. Note 2-Reinsurance NSFC, and NSIC 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, 2000 was 2,056 and for the period ending March 31, 1999 was 2,052. Note 4-Changes in Shareholder's Equity During the three months ended March 31, 2000 and 1999, there were no changes in shareholders' equity except for net income of $1,111 and $467 respectively; dividends paid of $432 and $410 respectively; unrealized investment (losses) gains, net of applicable taxes, of ($668) and $(1,475) respectively, and issuance (purchases) of treasury stock of $0 and $61 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, 2000 2000 ------ ------- Deferred policy acquisition costs ...................... (1,456) (1,453) Policy liabilities ..................................... 470 488 Unearned premiums ...................................... 462 327 Claims liabilities ..................................... 548 548 General insurance expenses ............................. 713 711 Alternative minimum tax credit carryforward ............ 244 314 Unrealized gains on securities available-for-sale ...... (3,547) (3,950) Net deferred tax assets (liability) .................... (2,566) (3,015) ====== ====== 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. 7 THE NATIONAL SECURITY GROUP, INC. NOTES TO UNAUDITED 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. National Security Fire & Casualty Company, a subsidiary of the Company, was named as a defendant in a purported class action filed in Lee County, Alabama. On January 4, 2000 the Circuit Court of Lee County preliminarily approved a consent settlement to this action and a settlement is expected to be finalized by mid-year of 2000. A provision for this settlement was reflected in the 1999 results of operations of the Company. 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. 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. 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. Note 8-Comprehensive Income Effective January 1, 1998 the Company and its subsidiaries adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). Comprehensive Income is defined as net income and all other changes in Stockholders' equity from transactions and events arising from non-owner sources. The adoption of SFAS 130 had no impact on the Company's net income or Shareholders' equity. The primary additional component for The Company is unrealized investment gains and losses. Total comprehensive (loss) income, net of reclassification adjustment, was $443,000 and $(1,008,000) at March 31, 2000 and 1999, respectively. 8 Independent Accountant's Report We have reviewed the accompanying interim consolidated balance sheet of The National Security Group, Inc as of March 31, 2000 and the related interim consolidated statements of income and cash flows for the three month period then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial statements consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expressions of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. Dudley, Hopton-Jones, Sims & Freeman PLLP Birmingham, Alabama May 15, 2000 9 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, 2000, compared with December 31, 1999 and its results of operations and cash flows for the quarter ending March 31, 2000, compared with the same period last year. The reader is assumed to have access to the Company's 1999 Annual Report. This discussion should be read in conjunction with the Annual Report and with consolidated financial statements on pages 3 through 7 of this form 10-Q. Information is presented in whole dollars. CONSOLIDATED RESULTS OF OPERATIONS Premium revenues: Premium revenue in the life insurance subsidiary, National Security Insurance Company (NSIC), accounts for 19% of total premium income of the Company. Life insurance premium revenue was up 12% compared to the first quarter of 1999. NSIC's new method of insurance sales, through independent insurance agents, is beginning to show positive results and is the primary reason for the increase in premium revenues in NSIC. NSIC's traditional home service insurance sales, sold by NSIC employee agents, have began to stabilize after several years of rapid decline. Premium revenue in the property/casualty insurance subsidiaries, National Security Fire & Casualty Company (NSFC) and Omega One Insurance Company (Omega) are down significantly compared to last year. The primary reason for the decline in property/casualty premium revenue is the discontinuation of several insurance programs managed by managing general agents. NSFC has traditionally used independent agents as the primary method of distribution of insurance products. However, both NSFC and Omega have used managing general agents as an additional method of distribution for the past several years. The primary difference between these two methods lies in the amount of responsibility the Company takes in the day to day management of the programs. Independent agents are primarily "retail" agents that sell directly to the insured and the Company has primary responsibility for underwriting the policy and paying claims as well as marketing getting new agents to sell the companies products. Managing general agents are traditionally considered "wholesale" agents that market an insurance companies products to other retail agents. The managing general agent generally underwrites, pays claims and takes primary responsibility for marketing a particular companies products. The property/casualty subsidiaries have experienced unfavorable underwriting results from several different managing general agent programs over the last five years. Auto programs in Louisiana and Georgia operated by managing general agents have been discontinued due to unfavorable underwriting results. The discontinuation of these programs has caused the decline in premium revenue. In an effort to improve underwriting results, management is refocusing on independent agents as the primary method of distribution.. Net investment income: Net investment income is down slightly from last year as higher interest rate bonds matured or were called during 1999. 10 Realized capital gains and losses: Investment gains of $949,000 were realized in the first quarter of 2000. This is up over 40% from the first quarter of 1999. The gains were primarily generated from the sale of common stock investments in the subsidiaries available for sale portfolio. Other income: Other income is down $33,000 due to a decrease in fees generated by a discontinued managing general agent program. Policyholder benefits and settlement expenses: Policyholder benefits as a percent of net insurance premiums earned decreased 14 percentage points compared to the first quarter of last year, 65.1% versus 79.3%. The first quarter of 1999 had a higher than anticipated loss ratio. NSFC incurred several storm related losses on dwelling property programs in the first quarter of 1999. Policy acquisition cost: Policy acquisition costs are down over $320,000 compared to last year, but as a percent of premium earned is down only slightly compared to last year. The slight percentage decrease in policy acquisition cost is due to the discontinuation of the managing general agents programs. General insurance expenses: General insurance expenses are up over $388,000 compared to last year. General expenses in 1999 were slightly lower than normal due to a refund of an association assessment which had been expensed in a previous period. The remainder of the increase in 2000 general expenses was due to an increase in directors deferred compensation of about $80,000, increased general expenses in the Life insurance subsidiary of approximately $90,000, and increased general expenses in the property/casualty subsidiaries of $100,000. Most of the increased expenses in the insurance subsidiaries were associated with rate filings, and product development (actuarial and rate analysis), and association assesments. Insurance taxes, licenses, and fees: Insurance taxes, licenses and fees have decreased due to a decrease in property & casualty written premium. Income taxes: Income tax expense consists of current period taxes of $296,000 and a change in deferred income taxes of ($45,000). Summary: Net income increased $67,000 primarily due to an increase realized investment gains of $282,000, and an improvement in underwriting results in the property/casualty subsidiaries as the loss ratio dropped from over 79% to 65%. Investments: Investment Capital resources: At March 31, 1999, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $41.9 million, up slightly from December 31, 1999. The increase reflects net income of $1,111,000, a decrease in unrealized investment gains of $668,000, and dividends paid of $432,000. 11 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 $774,000 in cash and cash equivalents at March 31, 2000, down from $3,512,000 at December 31, 1999. 12 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K See Exhibit Index 13 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 /s/ ML Murdock --------------- M.L. Murdock Senior Vice President and Chief Financial Officer Dated: May 15, 2000 14 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 15 EX-27 2 FINANCIAL DATA SCHEDULE
7 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 24,030 30,668 30,480 25,876 101 1,566 82,905 774 4,808 4,284 95,640 19,055 6,798 18,448 1,502 2,610 0 0 2,340 39,559 95,640 5,776 1,055 949 88 3,763 1,138 1,607 1,360 249 1,111 0 0 0 1,111 .54 .54 0 0 0 0 0 0 0
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