-----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, NGjRUWH3V4VZ6XIjtPxkS0IwrKHifrdS/bc3bcqQEI64/hjJuSyCJesUJs4fmDSj ZVMmGssPzUjlreCAeNV5Vw== 0000865058-98-000006.txt : 19980817 0000865058-98-000006.hdr.sgml : 19980817 ACCESSION NUMBER: 0000865058-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98689589 BUSINESS ADDRESS: STREET 1: 661 E DAVIS ST CITY: ELBA STATE: AL ZIP: 36323 BUSINESS PHONE: 2058972273 10-Q 1 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 June 30, 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 (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, 1998: 2,271,018 Exhibit index is located on page 14. Page 1 of 14 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 ....................... 12 SIGNATURE ............................................................. 13 EXHIBIT INDEX ......................................................... 14 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 1998 1997 1998 1997 ---- ---- ---- ---- Revenues Net insurance premiums earned ............................. $ 7,273 $ 7,881 $ 14,774 $ 15,863 Net investment income ..................................... 917 914 2,082 2,016 Realized investment gains ................................. 937 620 1,417 683 Other income .............................................. 126 171 264 333 -------- -------- -------- -------- Total revenues .......................................... 9,253 9,586 18,537 18,895 -------- -------- -------- -------- Benefits and Expenses Policyholder benefits and settlement expenses ............. 6,128 5,158 12,009 10,504 Policy acquisition costs .................................. 1,640 1,542 3,311 2,944 General insurance expenses ................................ 2,587 1,153 3,877 2,319 Insurance taxes, licenses and fees ........................ 301 415 698 777 -------- -------- -------- -------- Total benefits and expenses ............................. 10,656 8,268 19,895 16,544 -------- -------- -------- -------- Income Before Income Taxes and Cumulative Effect Adjustment (1,403) 1,318 (1,358) 2,351 Income Taxes (Current and deferred) ....................... 18 308 (257) 719 -------- -------- -------- -------- Net Income (Loss) ......................................... $ (1,421) $ 1,010 $ (1,101) $ 1,632 ======== ======== ======== ======== Earnings (loss) per share ................................. $ (0.62) $ 0.43 $ (0.48) $ 0.70 ======== ======== ======== ======== Dividends Declared per Share .............................. $ 0.19 $ 0.17 $ 0.38 $ 0.34 ======== ======== ======== ========
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 1998 1997 ---- ---- Investments: Securities held-to-maturity at amortized cost (estimated fair value: 1998 - $32,468 1997 - 30,807) . $ 31,712 $ 29,995 Securities available-for-sale, at estimated fair value (cost: 1998 - 33,567; 1997 - 35,257) ................. 52,902 52,819 Receivable for securities .............................. 0 400 Mortgage loans ......................................... 219 320 Investment real estate, at cost ........................ 1,615 1,645 Policy loans ........................................... 648 660 --------- --------- Total investments .................................... 87,108 85,827 --------- --------- Cash and cash equivalents ................................. 3,299 3,888 Accrued investment income ................................. 876 833 Reinsurance recoverable ................................... 7,969 8,489 Deferred policy acquisition costs ......................... 4,200 4,216 Current income tax recoverable ............................ 234 0 Prepaid reinsurance premiums .............................. 214 341 Other assets .............................................. 3,626 3,364 --------- -------- Total assets ........................................... $ 107,526 $ 106,958 ========= ========= Liabilities Policy reserves ........................................ $ 18,748 $ 18,667 Claim reserves ......................................... 23,301 22,246 Unearned premiums ...................................... 9,547 8,853 Other policyholder funds ............................... 1,588 1,729 Deferred income tax .................................... 4,653 4,078 Current Income tax payable ............................. 0 147 Other liabilities ...................................... 4,862 4,886 --------- --------- Total liabilities ................................... $ 62,699 $ 60,606 --------- --------- 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 . 13,670 12,497 Retained earnings ......................................... 29,913 31,888 Treasury stock, at cost (68,830 shares) ................... (1,113) (390) --------- -------- Total shareholders' equity ............................. 44,827 46,352 --------- -------- Total liabilities and shareholder's equity ............. $ 107,526 $ 106,958 ========= ======== Shareholders' Equity per Share ............................. 19.74 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) Six Months Ended June 30 1998 1997 ----- ---- Cash Flows from Operating Activities Income from continuing operations ...................... $(1,101) $ 1,632 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Accrued investment income ............................ (43) (37) Reinsurance receivables .............................. 520 1,190 Deferred Policy acquisition costs .................... (190) Income Taxes ......................................... (147) 1,350 Depreciation expense ................................. 61 59 Policy liabilities and claims ........................ 1,749 1,048 Other, net ........................................... 239 (243) ------- ------- Net cash provided by operating activities .......... 1,294 4,809 ------- ------- Cash Flows from Investing Activities Cost of investments acquired ........................ (4,907) (8,425) Sale and maturity of investments .................... 4,795 3,002 Purchase of property and equipment .................. (37) (76) Proceeds from disposal of property and equipment .... 0 0 Other, net .......................................... 0 0 ------- ------- Net cash used in investing activities ............. (149) (5,499) ------- ------- Cash Flows from Financing Activities Decrease in other policyholder funds ................ (141) (39) Dividends paid ...................................... (871) (788) Purchase of treasury stock .......................... (722) 0 ------- ------- Net cash used in financing activities ............. (1,734) (827) ------- ------- Net increase (decrease) in cash and cash equivalents ..... (589) (1,517) Cash and cash equivalents, beginning of period ........... 3,888 4,722 ------- ------- Cash and cash equivalents, end of period ................. $ 3,299 $ 3,205 ======= ======= 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, 1998 was 2,271,000 and for the period ending June 30, 1997 was 2,320,000. Note 4-Changes in Shareholder's Equity (in thousands) During the six months ended June 30, 1998 and 1997, there were no changes in shareholders' equity except for net (loss) income of $(1,101) and $1,632 respectively; dividends paid of $871 and $789 respectively; unrealized investment gains, net of applicable taxes, of $1,169 and $2,081 respectively, and purchase of treasury stock of $722 and $0 respectively. Note 5 - Deferred Taxes The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows: (in thousands) June 30, January 1, 1998 1998 Deferred policy acquisition costs ...................... (1,425) (1,434) Policy liabilities ..................................... 526 519 Unearned premiums ...................................... 559 442 Claims liabilities ..................................... 653 530 General insurance expenses ............................. 700 931 Unrealized gains on securities available-for-sale ...... (5,610) (5,066) Other .................................................. (56) 0 ------ ------ Net deferred tax liability ............................. (4,653) (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 the verdict was appealed. The Florida District Court of Appeal for the Fourth District subsequently affirmed the verdict and concurrently granted the motion for attorney's fees and costs filed by the attorneys for the plaintiff, remanding the case to the trial court for a determination of the amount. The Company's subsidiary subsequently reached a settlement of the attorney's fee issue and the judgment, including all related issues, was satisfied on July 8, 1998. This judgment and the settlement of the attorney's fee award will result in a combined charge to the Company's 1998 earnings of $2 million. This amount is reflected in the accompanying financial statements for the quarter ended June 30, 1998. The Company's subsidiary is now pursuing recovery of the amount it has expended in the resolution of this litigation from the independent adjusting firm whose actions it believes caused or contributed to the basis for the subject litigation. No provision has been established for any potential recovery. Note 7- 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 National Security Group, Inc. is unrealized investment gains and losses. Total comprehensive income was $72,000 and $3.7 million at June 30, 1998 and 1997, respectively. 7 THE NATIONAL SECURITY GROUP, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Note 8-Year 2000 Issue The Year 2000 issue relates to computer system programs which may not properly recognize the change in date years from 1999 to 2000. As a result of this time sensitivity of existing software, any business entity is at risk of possible system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send billings, or engage in similar normal business activities. The Company is currently modifying significant portions of its computer programs so that its computer systems will function properly with respect to the year 2000 date recognition. The Company presently believes that with modifications to existing software, the year 2000 issue will not pose a significant operational problem. However, if such modifications are not made, or not completed timely, the year 2000 issue could have a material impact on the operations of the Company. The Company is utilizing internal resources to reprogram and test software for year 2000 modifications. The Company anticipates completing the year 2000 project no later than June 30, 1999. The total cost of the year 2000 project is not expected to be material to the financial results of the Company. 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, 1998, compared with December 31, 1997 and its results of operations and cash flows for the quarter ending June 30, 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 premium for the six month period ending June 30, 1998 was $14.7 million versus $15.8 million for the same period last year. This reduction in premium is primarily due to a subsidiary eliminating a private passenger automobile program in Louisiana. To help replace premium lost from this program the property/casualty subsidiaries have begun new programs in Louisiana and Florida. The Louisiana program is a mobile homeowners program which began in late 1997. The Florida program is an automobile program which also began in late 1997. Net investment income: Net investment income is up slightly, primarily due to an increase in investments in debt securities over the last year. Realized capital gains and losses: Investment gains of $1.4 million were realized in the first half of 1998. In light of the record highs achieved by many of the equity investments held by the Company, the investment committee elected to sale a portion of certain holdings to increase the diversity of the portfolio. Other income: Other income is down slightly due to a decrease in policy fees from the Louisiana private passenger auto program which was discontinued in 1997. Policyholder benefits and settlement expenses: Policyholder benefits as a percent of net insurance premiums earned is up considerably from last year, 81.2% versus 66.1%. The increase in policy holder benefits is primarily due to losses incurred from the discontinuation of the previously mentioned Louisiana automobile program, and from second quarter tornado losses incurred in a property/casualty subsidiary's low value dwelling and homeowners programs. Tornado losses incurred in April from a single tornado which hit Jefferson County Alabama exceeded $500,000. 9 Policy acquisition costs: Policy acquisition costs as a percent of premiums earned are up due to increased cost associated with the startup of the new homeowners program in Louisiana and the new automobile program in Florida. Both programs are run by managing general agents which underwrite policies and pay claims. The Company, in order to compensate the agent for these added responsibilities, pays a higher commission rate to the agent. These increased commissions are partly offset by decreased general and administrative expenses on the program. General insurance expenses: General insurance expenses are up 67% from last year due to expenses associated with the settlement of the litigation discussed in Note 7 of the financial statements. Insurance taxes, licenses, and fees: Insurance taxes, licenses and fees are down due to a decrease in written premium. As previously discussed, the decrease in written premium is primarily due to the cancellation of a private passenger auto program in the State of Louisiana. Income taxes: The Company has an income tax benefit for the current year due to a net loss caused primarily by the settlement of previous years litigation expenses in 1998. Previous year's litigation accruals are deferred tax assets representing future deductible amounts until the litigation is actually settled. The settlement of previous year's litigation in 1998 will be current tax assets deductible on the Company's 1998 income tax. Summary: The Company has a year to date net loss of $1.1 million dollars versus net income of $1.6 million in 1997. The net loss in 1998 is primarily a result of the previously discussed litigation settlement reached in July of 1998 and accrued in the second quarter, and from tornado and windstorm losses incurred in low value dwelling and homeowners property insurance programs. Investments: Investments increased slightly during the first half of 1998 primarily due to increases in market value of available-for-sale equity securities. Proceeds from the sale of select available-for-sale securities were reinvested primarily in debt securities classified in the hold-to-maturity portfolio. Capital resources: At June 30, 1998, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $44.8 million, down $1.5 million from December 31, 1997. The decrease reflects a net loss of $(1.1 million), an increase in unrealized investment gains of $1.1 million, dividends paid of $871,000, and the purchase of treasury stock of $722,000. A subsidiary has a note from a local bank which management intends to repay in full within the next year. 10 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 $3.3 million in cash and cash equivalents at June 30, 1998. Net cash provided by operating activities was $1.2 million for the current period, compared to net cash provided of $4.8 million for the period ended June 30, 1997. Cash used in investing activities was $149,000. Cash dividends paid to stockholders' of $871,000 and treasury stock purchased of $722,000 are the primary uses of cash used in financing activities. 11 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K See Exhibit Index 12 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/ M.L. Murdock ------------------------------ M.L. Murdock Senior Vice President and Chief Financial Officer Dated: August 14, 1998 13 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 14 EX-27 2 06/30/98 FINANCIAL DATA SCHEDULE
7 1000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 19,708 31,712 32,468 33,194 219 1,615 87,108 3,299 7,969 4,200 107,526 18,748 9,547 23,301 1,588 750 0 0 2,340 42,487 107,526 14,774 2,082 1,417 264 12,009 3,311 4,575 (1,358) (257) (1,101) 0 0 0 (1,101) (.48) (.48) 0 0 0 0 0 0 0
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