-----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, VL7BlmVA2n/rk71jCOI2smBp58EjJDW1e7XfDEAvzG24mqpYuds+kMIAyT7Y6Bji spUPp8/kFfrRAe786NxSnw== 0000865058-97-000004.txt : 19970818 0000865058-97-000004.hdr.sgml : 19970818 ACCESSION NUMBER: 0000865058-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970815 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: 1934 Act SEC FILE NUMBER: 000-18649 FILM NUMBER: 97664811 BUSINESS ADDRESS: STREET 1: 661 E DAVIS ST CITY: ELBA STATE: AL ZIP: 36323 BUSINESS PHONE: 2058972273 10-Q 1 QUARTERLY REPORT FOR NATIONAL SECURITY GROUP, INC. 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 June 30, 1997 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 incorporation or organization) Identification No.) 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 August 6, 1997: 2,319,763 Exhibit index is located on page 12. Page 1 of 12 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 8 PART II.OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURE 11 EXHIBIT INDEX 12 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 Six Months Ended June 30 Ended June 30 1997 1996 1997 1996 ---- ---- ---- ---- Revenues Net insurance premiums earned ............................. $ 7,881 $ 6,203 $ 15,863 $ 12,328 Net investment income ..................................... 914 932 2,016 1,832 Realized investment gains ................................. 620 3 683 1,182 Other income .............................................. 171 133 333 231 -------- -------- -------- -------- Total revenues .......................................... 9,586 7,271 18,895 15,573 -------- -------- -------- -------- Benefits and Expenses Policyholder benefits and settlement expenses ............. 5,158 4,359 10,504 10,116 Policy acquisition costs .................................. 1,542 1,125 2,944 2,231 General insurance expenses ................................ 1,153 1,047 2,319 2,628 Insurance taxes, licenses and fees ........................ 415 549 777 885 -------- -------- -------- -------- Total benefits and expenses ............................. 8,268 7,080 16,544 15,860 -------- -------- -------- -------- Income Before Income Taxes and Cumulative Effect Adjustment 1,318 191 2,351 (287) Income Taxes (Current and deferred) ....................... 308 167 719 27 -------- -------- -------- -------- Net Income ................................................ $ 1,010 $ 24 $ 1,632 $ (314) ======== ======== ======== ======== Earnings per share ........................................ $ 0.43 $ 0.01 $ 0.70 ($ 0.14) ======== ======== ======== ======== Dividends Declared per Share .............................. $ 0.17 $ 0.16 $ 0.34 $ 0.32 ======== ======== ======== ========
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 June 30, December 31, Assets 1997 1996 --------- --------- Investments: Securities held-to-maturity at amortized cost (estimated fair value: 1997 - $35,847 1996 - 36,038) ................................................................. $ 35,357 $ 35,413 Securities available-for-sale, at estimated fair value (cost: 1997 - 26,098; 1996 - 21,419) ................................................................. 40,356 32,716 Mortgage loans .................................................................... 338 405 Investment real estate, at cost ................................................... 1,630 1,659 Policy loans ...................................................................... 622 637 --------- --------- Total investments ............................................................... 78,318 70,815 --------- --------- Cash and cash equivalents ............................................................ 3,205 4,722 Accrued investment income ............................................................ 840 803 Reinsurance recoverable .............................................................. 11,298 12,488 Deferred policy acquisition costs .................................................... 4,203 4,013 Current income tax recoverable ....................................................... 0 258 Prepaid reinsurance premiums ......................................................... 369 1,908 Other assets ......................................................................... 3,254 3,212 --------- --------- Total assets ...................................................................... $ 101,487 $ 98,219 ========= ========= Liabilities Policy reserves ................................................................... $ 18,671 $ 18,558 Claim reserves .................................................................... 21,201 19,447 Unearned premiums ................................................................. 9,579 10,398 Other policyholder funds .......................................................... 1,803 1,842 Deferred income tax ............................................................... 3,501 2,852 Current Income tax payable ........................................................ 443 0 Other liabilities ................................................................. 2,846 4,603 --------- --------- Total liabilities .............................................................. $ 58,044 $ 57,700 --------- --------- 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 .. 10,022 7,941 Retained earnings .................................................................... 31,356 30,513 Treasury stock, at cost (20,085 shares) .............................................. (292) (292) --------- --------- Total shareholders' equity ........................................................ 43,443 40,519 --------- --------- Total liabilities and shareholder's equity ........................................ $ 101,487 $ 98,219 ========= ========= Shareholders' Equity per Share ....................................................... 18.73 17.47 ========= =========
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) Six Months Ended June 30 1997 1996 ------- ------- Cash Flows from Operating Activities Income from continuing operations ...................... $ 1,632 ($ 314) Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Accrued investment income ............................. (37) 84 Reinsurance receivables ............................... 1,190 4,197 Deferred Policy acquisition costs ..................... (190) (142) Income Taxes .......................................... 1,350 51 Depreciation expense .................................. 59 60 Policy liabilities and claims ......................... 1,048 (2,685) Other, net ............................................ (243) (1,293) ------- ------- Net cash provided by operating activities ........... 4,809 (42) ------- ------- Cash Flows from Investing Activities Cost of investments acquired ......................... (8,425) (1,708) Sale and maturity of investments ..................... 3,002 4,714 Purchase of property and equipment ................... (76) (15) Proceeds from disposal of property and equipment ..... 0 0 Other, net ........................................... 0 0 ------- ------- Net cash used in investing activities .............. (5,499) 2,991 ------- ------- Cash Flows from Financing Activities Increase in other policyholder funds ................. (39) (169) Dividends paid ....................................... (788) (744) Purchase of treasury stock ........................... 0 (71) ------- ------- Net cash used in financing activities .............. (827) (984) ------- ------- Net increase (decrease) in cash and cash equivalents ...... (1,517) 1,965 Cash and cash equivalents, beginning of period ............ 4,722 2,817 ------- ------- Cash and cash equivalents, end of period .................. $ 3,205 $ 4,782 ======= ======= 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 June 30, 1997 was 2,320, and for the period ending June 30, 1996 was 2,340. Note 4-Changes in Shareholder's Equity During the six months ended June 30, 1997 and 1996, there were no changes in shareholders' equity except for net income (loss) of $1,632 and ($314) respectively; dividends paid of $789 and $743 respectively; unrealized investment gains, net of applicable taxes, of $2,081 and $205 respectively, and purchase of treasury stock of $0 and $70 respectively. Note 5 - Deferred Taxes The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows: June 30, January 1, 1996 1997 Deferred policy acquisition costs .................... (1,359) (1,364) Policy liabilities ................................... 511 516 Unearned premiums .................................... 435 440 Claims liabilities ................................... 324 329 General insurance expenses ........................... 587 582 Unrealized gains on securities available-for-sale .... (4,029) (3,355) Other ................................................ 30 0 ------ ------ Net deferred tax assets (liability) .................. (3,501) (2,852) ====== ====== 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. 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 Effective January 1, 1994 the Company and its subsidiaries adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). This statement, among other things, requires investment securities (bonds, notes, common stock and preferred stocks) to be divided into one of three categories: held to maturity, available-for-sale, and trading. The Company's 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 income 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. 7 THE NATIONAL SECURITY GROUP, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Note 7-Continued Unrealized holding gains and losses, net of tax, on securities available-for-sale are reported as a net amount in a separate component of shareholders' equity until realized. Realized gains and losses on the sale of securities available-for-sale are determined using the specific-identification method. Mortgage 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 is 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 June 30, 1997, compared with December 31, 1996 and its results of operations and cash flows for the quarter ending June 30, 1997, compared with the same period last year. The reader is assumed to have access to the Company's 1996 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 premium for the six month period ending June 30, 1997 was $15.8 million versus $12.3 million for the same period last year. This 28% increase is primarily due to growth in the property/casualty subsidiary's private passenger and commercial automobile programs in Louisiana and Georgia which began in early 1996. Earned premium from the new private passenger automobile programs are projected to reach $6 million by year end. Earned premium from the commercial automobile program is expected to reach $3 million for the year. The Company is also set to begin a new commercial auto program in Missouri during the third quarter. Net investment income: Net investment income is up $184,000, primarily due to an increase in cash available for investment the last 18 months, generated by new programs. Realized capital gains and losses: Investment gains of $683,000 were realized in the first half of 1997, with most of the sales taking place in the second quarter. The Company's investment committee elected to sale a portion of certain holdings to increase the diversity of the portfolio. Other income: Other income is up $102,000 due to an increase in policy fees. Policyholder benefits and settlement expenses: Policyholder benefits as a percent of net insurance premiums earned is down considerably from last year, 66.2% versus 82.1%. The decrease is primarily due to improvement in the property/casualty subsidiary's low value dwelling and homeowners insurance programs. So far this year, these programs have not suffered from severe weather losses which negatively impacted loss ratios the last two years. Last year's loss ratio was not only impacted by tornadoes which hit the Southeastern United States early in the year, but the programs also, incurred an unusually high number of fire losses due to the colder than normal winter. 9 Policy acquisition costs: Policy acquisition costs are down from last year due to the cancellation of some higher commission rate programs. General insurance expenses: General insurance expenses are down 11.7% from last year due to a decrease in litigation expenses and attorney fees in the insurance subsidiaries. Insurance taxes, licenses, and fees: Insurance taxes, licenses and fees decreased due to the discontinuation of a commercial multi-line general agent program. In this program the property/casualty subsidiary paid all premium taxes but ceded 80% of the business which, on a net basis, increased the Company's premium tax rate. Income taxes: The Company's effective tax rate on current year earnings is 30.5%, which is slightly higher than normal due to the partial taxation of unearned property and casualty premiums which have increased over the past six months. Summary: Net income is up over $1.9 million from last year due to increased premium revenue, and a 15.9 percentage point drop in the Company's benefit payments as a percent of premium revenues. A reduction in litigation expenses also helped reduce general expenses. Investments: Investments increased $7.5 million during the first half of 1997. Increased cash flow from operations, coupled with an increase in market value of nearly $3 million in the Company's available for sale securities portfolio fueled the increase in investments. Capital resources: At June 30, 1997, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $43.4 million, up $2.9 million from December 31, 1996. The increase reflects a net income of $1.6 million, an increase in unrealized investment gains of $2.1 million, and dividends paid of $789,000. The Company has no long term debt. 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 $3.2 million in cash and cash equivalents at June 30, 1997. Net cash provided by operating activities was $4.8 million for the current period, compared to net cash used of $42,000 for the period ended June 30, 1996. Cash used in investing activities was $5.5 million, which is due to acquisitions made with cash generated by operations. Cash dividends paid to stockholders' of $789,000 are the primary uses 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: August 14, 1997 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 06/30/97 FINANCIAL DATA SCHEDULE
7 1000 6-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 13,315 35,357 35,847 27,041 338 1,630 78,318 3,205 11,298 4,203 101,487 18,671 9,579 21,201 1,803 0 0 0 2,340 41,103 101,487 15,863 2,016 683 333 10,504 2,944 3,096 2,351 719 1,632 0 0 0 1,632 .70 .70 0 0 0 0 0 0 0
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