-----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, EQH+2/kPaSFpGHIXqafs2ummWzc7sKBR2Yf33QTK9NfyKsfPJogtrRSP4++aui4H fEihELv38DabO6una29PeA== 0000865058-98-000008.txt : 19981116 0000865058-98-000008.hdr.sgml : 19981116 ACCESSION NUMBER: 0000865058-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98747598 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 September 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 November 6, 1998: 2,051,311 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 Nine Months Ended September 30 Ended September 30 1998 1997 1998 1997 ---- ---- ---- ---- Revenues Net insurance premiums earned ..... $ 6,942 $ 7,894 $ 21,716 $ 23,757 Net investment income ............. 1,135 1,173 3,217 3,189 Realized investment gains ......... 1,094 1,414 2,511 2,097 Other income ...................... 147 155 411 488 -------- -------- -------- -------- Total revenues .................. 9,318 10,636 27,855 29,531 -------- -------- -------- -------- Benefits and Expenses Policyholder benefits and settlement expenses ........... 6,273 6,365 18,282 16,869 Policy acquisition costs .......... 1,094 1,299 4,405 4,243 General insurance expenses ........ 887 1,536 4,764 3,855 Insurance taxes, licenses and fees 453 363 1,151 1,140 -------- -------- -------- -------- Total benefits and expenses ..... 8,707 9,563 28,602 26,107 -------- -------- -------- -------- Income Before Income Taxes and Cumulative Effect Adjustment .. 611 1,073 (747) 3,424 Income Taxes (Current and deferred) 219 440 (38) 1,159 -------- -------- -------- -------- Net Income (Loss) ................. $ 392 $ 633 $ ( 709) $ 2,265 ======== ======== ======== ======== Earnings (loss) per share ......... $ 0.17 $ 0.28 $ (0.31) $ 0.98 ======== ======== ======== ======== Dividends Declared per Share ...... $ 0.19 $ 0.17 $ 0.57 $ 0.51 ======== ======== ======== ======== 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 Sept 30, Dec 31, Assets 1998 1997 ---- ---- Investments: Debt Securities held-to-maturity at amortized cost (estimated fair value: 1998 - $31,779; 1997 - 30,807) ..... $30,494 $29,995 Debt Securities available-for-sale, at estimated fair value (cost: 1998 - 20,192; 1997 - 21,131) ..................... 20,295 21,104 Equity Securities, at market (cost: 1998 - $14,489; 1997 - $14,126) .................... 29,002 31,715 Receivable for securities .................................. 0 400 Mortgage loans .......................................... 154 320 Investment real estate, at cost ......................... 1,599 1,645 Policy loans ............................................ 652 648 ------- ------- Total investments ..................................... 82,196 85,827 ------- ------- Cash and cash equivalents ...................... 3,382 3,888 Accrued investment income ...................... 921 833 Reinsurance recoverable ........................ 7,504 8,489 Deferred policy acquisition costs .............. 4,355 4,216 Current income tax recoverable ................. 516 0 Prepaid reinsurance premiums ................... 329 341 Other assets ................................... 3,426 3,364 -------- -------- Total assets ................................ $102,629 $106,958 ======== ======== Liabilities Policy reserves ............................. $18,817 $18,667 Claim reserves .............................. 23,575 22,246 Unearned premiums ........................... 9,724 8,853 Other policyholder funds .................... 1,693 1,729 Deferred income tax ......................... 3,383 4,078 Current Income tax payable .................. 0 147 Other liabilities ........................... 4,006 4,886 ------- ------- Total liabilities ........................ $61,198 $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 10,314 12,497 Retained earnings .................................... 29,873 31,888 Treasury stock, at cost (68,830 shares) .............. (1,113) (390) --------- -------- Total shareholders' equity ........................ 41,431 46,352 --------- -------- Total liabilities and shareholder's equity ........ $ 102,629 $106,958 ========= ======== Shareholders' Equity per Share ....................... 18.25 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) Nine Months Ended September 30 1998 1997 ----- ---- Cash Flows from Operating Activities Income from continuing operations ................. $ (709) $ 2,265 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Accrued investment income ....................... (88) (178) Reinsurance receivables ......................... 985 (88) Deferred Policy acquisition costs ............... (139) (315) Income Taxes .................................... (842) 1,951 Depreciation expense ............................ 92 89 Policy liabilities and claims ................... 2,350 3,626 Other, net ...................................... (3,356) 491 -------- -------- Net cash (used in) provided by operating activities . (1,707) 7,841 -------- -------- Cash Flows from Investing Activities Cost of investments acquired ................... (6,786) (17,043) Sale and maturity of investments ............... 8,229 8,223 Purchase of property and equipment ............. (69) (95) Proceeds from disposal of property and equipment 0 0 Other, net ..................................... 0 0 -------- -------- Net cash provided by (used in) investing activities 1,374 (8,915) -------- -------- Cash Flows from Financing Activities Decrease in other policyholder funds ........... (36) 77 Loan proceeds .................................. 1,887 0 Dividends paid ................................. (1,302) (1,182) Purchase of treasury stock ..................... (722) (98) -------- -------- Net cash used in financing activities ............... (173) (1,203) -------- -------- Net decrease in cash and cash equivalents .......... (506) (2,277) Cash and cash equivalents, beginning of period ...... 3,888 4,722 -------- -------- Cash and cash equivalents, end of period ............ $ 3,382 $ 2,445 ======== ======== 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 Omega One Insurance Company ("Omega") are wholly owned property and casualty insurance subsidiaries of The National Security Group, Inc ("The Company"). National Security Insurance Company ("NSIC") is a wholly owned life insurance subsidiary of the Company. The insurance subsidiaries reinsure certain portions of insurance risk which exceed various retention limits. NSFC, Omega 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 September 30, 1998 was 2,279,000 and for the period ending September 30, 1997 was 2,313,000. Note 4-Changes in Shareholder's Equity (in thousands) During the nine months ended September 30, 1998 and 1997, there were no changes in shareholders' equity except for net (loss) income of $(709) and $2,265 respectively; dividends paid of $1,302 and $1,183 respectively; changes in unrealized investment gains, net of applicable taxes, of $(2,182) and $3,223 respectively, and purchase of treasury stock of $722 and $70 respectively. Note 5 - Deferred Taxes The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows: (in thousands) September 30, January 1, 1998 1998 ------- ------- Deferred policy acquisition costs ...................... (1,514) (1,434) Policy liabilities ..................................... 526 519 Unearned premiums ...................................... 549 442 Claims liabilities ..................................... 643 530 General insurance expenses ............................. 700 931 Unrealized gains on securities available-for-sale ...... (4,231) (5,066) Other .................................................. (56) 0 ------ ------ Net deferred tax liability ............................. (3,383) (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. 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 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 (loss) income was $(2.9 million) and $5.4 million at September 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. Note 9-Subsequent Events On October 7, 1998 the Company repurchased 219,707 shares of its common stock, representing 9.7% of the total shares outstanding. The shares were repurchased at the market price of $11.51 per share. The repurchase was partially funded by an unsecured short term 7.8% loan from a local bank in the amount of $2,350,000. Management intends to secure long term financing of this debt before maturity, and repay the loan from dividends of subsidiaries. 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 September 30, 1998, compared with December 31, 1997 and its results of operations and cash flows for the quarter ending September 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 nine month period ending September 30, 1998 was $21.7 million versus $23.8 million for the same period last year. This reduction in premium is primarily due to a property/casualty subsidiary eliminating a private passenger automobile program in Louisiana. The subsidiary has also reduced automobile premium writings in Georgia during 1998. To help replace premium lost from these programs 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 comparable to last year. Realized capital gains and losses: Investment gains of $2.5 million were realized in the first nine months of 1998. Investment gains of $2.1 million were realized in the first nine months of 1997. With many of the Company's equity investment holdings rapidly increasing in value over the last three years, 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. 9 Policyholder benefits and settlement expenses: Policyholder benefits as a percent of net insurance premiums earned are up considerably from last year, 85% versus 72%. There are several factors which have contributed to the large increase in policyholder benefits and settlement expenses during 1998. Late in the third quarter of 1998 Hurricane Georges made landfall on the coast of Mississippi causing widespread, mostly moderate, damage to property insured by the Company in south Mississippi and southwest Alabama. Current estimates of losses incurred from Hurricane Georges are $1.2 million. The second major factor contributing to the increase in policy holder benefits is losses incurred from the previously mentioned Louisiana private passenger automobile program. This program was canceled earlier this year due to the poor underwriting results and unfavorable legal and regulatory climate in Louisiana. The third major factor contributing to the poor underwriting results was 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. The unpredictability of hurricane and tornado losses is inherent in the dwelling property insurance business. The Company maintains catastrophe reinsurance coverage to prevent catastrophic natural disaster related losses from having a material impact on the Company's financial condition, but such losses will have a material impact on the Company's results of operations(current net income) in the period incurred. 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 24% 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 up slightly due to an increase in written premium in the State of Florida and an increase in guaranty fund assessments. Income taxes: The Company has an income tax benefit due to the current years net operating loss. Summary: The Company has a year to date net loss of $700,000 versus net income of $2.3 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, windstorm, and hurricane losses incurred in low value dwelling and homeowners property insurance programs. 10 Investments: Investments decreased during the third quarter of 1998. The Company's equity portfolio had a decrease in unrealized gains during the third quarter as the overall stock market suffered a decline. Also, several of the Company's bonds were called during the third quarter as interest rates continued to decline. The cash from these investments were used to pay the litigation settlement discussed in the notes to the financial statements. Capital resources: At September 30, 1998, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $41.4 million, down $4.9 million from December 31, 1997. The decrease reflects a net loss of $709,000, a decrease in unrealized investment gains of $2.1 million, dividends paid of $1.3 million, 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. 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 $3.4 million in cash and cash equivalents at September 30, 1998. Net cash used in operating activities was $1.7 million for the current period, compared to net cash provided of $7.8 million for the period ended September 30, 1997. Cash provided by investing activities was $1.4 million. Cash dividends paid to stockholders' of $1.3 million 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: November 13, 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 Incorporated by reference; dated October 12, 1998 14 EX-27 2 FINANCIAL DATA SCHEDULE
7 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 20,295 30,494 31,779 29,002 154 1,599 82,196 3,382 7,504 4,355 102,629 18,817 9,724 23,575 1,693 687 0 0 2,340 39,091 102,629 21,716 3,217 2,511 411 18,282 4,405 5,915 (747) (38) (709) 0 0 0 (709) (.31) (.31) 0 0 0 0 0 0 0
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