-----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, DXlLm4KtAVgGI+zpJ/HRinvnlb5mVKA4t15TM5BpDSG1v6uLJxDxWty0TJJtH3aT Og1leTUqP7YaMabjLY320A== 0000865058-99-000003.txt : 19990517 0000865058-99-000003.hdr.sgml : 19990517 ACCESSION NUMBER: 0000865058-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99622278 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 March 31, 1999 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 May 1, 1999: 2,055,811 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 Ended March 31 1999 1998 ---- ---- Revenues Net insurance premiums earned ............................. $ 6,871 $ 7,501 Net investment income ..................................... 1,085 1,165 Realized investment gains ................................. 667 480 Other income .............................................. 121 138 ------- ------- Total revenues .......................................... 8,744 9,284 ------- ------- Benefits and Expenses Policyholder benefits and settlement expenses ............. 5,447 5,881 Policy acquisition costs .................................. 1,458 1,671 General insurance expenses ................................ 968 1,290 Insurance taxes, licenses and fees ........................ 320 397 ------- ------- Total benefits and expenses ............................ 8,193 9,239 ------- ------- Income Before Income Taxes and Cumulative Effect Adjustment 551 45 Income Taxes (Current and deferred) ....................... 84 (275) ------- ------- Net Income ................................................ $ 467 $ 320 ======= ======= Earnings per share ........................................ $ 0.23 $ 0.14 ======= ======= Dividends Declared per Share .............................. $ 0.20 $ 0.19 ======= ======= The Notes to Financial Statements are an integral part of these statements. 3 THE NATIONAL SECURITY GROUP, INC. CONSOLIDATED BALANCE SHEET (In thousands, except per share amounts)
As of As of March 31, December 31, Assets 1999 1998 ---- ---- Investments: Debt Securities held-to-maturity at amortized cost (estimated fair value: 1999 - $33,867; 1998 - 31,835) . $ 33,110 $ 30,807 Debt Securities available-for-sale, at estimated fair value (cost: 1999 - 19,074; 1998 - 20,315) ................. 18,841 20,337 Equity Securities, at market (cost: 1999 - $13,497; 1998 - $13,860) ................ 28,489 30,898 Receivable for securities sold ............................... 0 315 Mortgage loans ............................................ 130 135 Investment real estate, at cost ........................... 1,625 1,629 Policy loans .............................................. 651 645 --------- --------- Total investments ....................................... 82,846 84,766 --------- --------- Cash and cash equivalents .................................... 1,910 4,073 Accrued investment income .................................... 807 764 Reinsurance recoverable ...................................... 6,451 6,833 Deferred policy acquisition costs ............................ 4,193 4,154 Current income tax recoverable ............................... 69 75 Prepaid reinsurance premiums ................................. 245 266 Other assets ................................................. 3,719 3,042 --------- --------- Total assets .............................................. $ 100,240 $ 103,973 ========= ========= Liabilities Policy reserves ........................................... $ 18,900 $ 18,833 Claim reserves ............................................ 21,393 21,875 Unearned premiums ......................................... 8,651 8,745 Other policyholder funds .................................. 1,606 1,635 Notes payable ............................................. 2,972 3,004 Deferred income tax ....................................... 3,418 4,145 Other liabilities ......................................... 2,691 3,768 --------- --------- Total liabilities ...................................... $ 59,631 $ 62,005 --------- --------- 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 .... 10,671 12,146 Retained earnings ............................................ 31,162 31,106 Treasury stock, at cost (68,830 shares) ...................... (3,581) (3,641) --------- --------- Total shareholders' equity ................................ 40,609 41,968 --------- --------- Total liabilities and shareholder's equity ................ $ 100,240 $ 103,973 ========= ========= Shareholders' Equity per Share ............................... $ 19.75 $ 20.46 ========= =========
The Notes to Financial Statements are an integral part of these statements. 4 THE NATIONAL SECURITY GROUP. INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended March 31 1999 1998 ----- ---- Cash Flows from Operating Activities Income from continuing operations ...................... $ 467 $ 320 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Accrued investment income ............................ (43) (64) Reinsurance receivables .............................. 382 (54) Deferred Policy acquisition costs .................... (39) 58 Income Taxes ......................................... (721) 252 Depreciation expense ................................. 25 30 Policy liabilities and claims ........................ (509) 173 Other, net ........................................... (1,678) (103) ------- ------- Net cash (used) provided by operating activities ... (2,116) 612 ------- ------- Cash Flows from Investing Activities Cost of investments acquired ........................ (4,858) (3,786) Sale and maturity of investments .................... 5,302 2,667 Purchase of property and equipment .................. (80) (15) Proceeds from disposal of property and equipment .... 0 0 Other, net .......................................... 0 0 ------- ------- Net cash provided (used) in investing activities .. 364 (1,134) ------- ------- Cash Flows from Financing Activities Increase in other policyholder funds ................ (29) (45) Payments on notes payable ........................... (32) 0 Dividends paid ...................................... (410) (439) Treasury stock issued (purchased) ................... 60 (893) ------- ------- Net cash used in financing activities ............. (411) (1,377) ------- ------- Net (decrease) in cash and cash equivalents ............. (2,163) (1,899) Cash and cash equivalents, beginning of period ........... 4,073 3,888 ------- ------- Cash and cash equivalents, end of period ................. $ 1,910 $ 1,989 ======= ======= 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. 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, 1999 was 2,052 and for the period ending March 31, 1998 was 2,262. Note 4-Changes in Shareholder's Equity During the three months ended March 31, 1999 and 1998, there were no changes in shareholders' equity except for net income of $467 and $320 respectively; dividends paid of $410 and $439 respectively; unrealized investment (losses) gains, net of applicable taxes, of ($1,475) and $1,245 respectively, and issuance (purchases) of treasury stock of $61 and ($893) 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, 1999 1999 ------ ------- Deferred policy acquisition costs ...................... (1,426) (1,412) Policy liabilities ..................................... 463 463 Unearned premiums ...................................... 451 440 Claims liabilities ..................................... 578 569 General insurance expenses ............................. 718 710 Unrealized gains on securities available-for-sale ...... (4,202) (4,915) ------- ------ Net deferred tax assets (liability) .................... (3,418) (4,145) ====== ====== 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. A resolution of these matters may significantly impact consolidated earnings and may significantly impact the Company's consolidated financial position, although it remains management's opinion, based upon information presently available, that the ultimate resolution of these matters will not have a material impact on the Company's consolidated financial position. It should be noted, however, that management is unable to assess with any degree of accuracy the potential liability to the Company arising from these matters. The civil tort system, particularly in Alabama, must be presently regarded as, for the most part, hostile to insurance companies. Note 7-Accounting for certain investments in debt and equity securities The Company's investment securities are classified in two categories and accounted for as follows: Securities Held-to-Maturity. Bonds, notes and redeemable preferred stock for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest using methods which approximate level yields over the period to maturity. Securities Available-for-Sale. Bonds, notes, common stock and non-redeemable preferred stock not classified as either held-to-maturity, or trading are reported at fair value, adjusted for other-than-temporary declines in fair value. The Company and its subsidiaries have no trading securities. Unrealized holding gains and losses, net of tax, on securities available-for-sale are determined using the specific-identification method. 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 $(1,008,000) and $1,566,000 at March 31, 1999 and 1998, respectively. 7 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, 1999, compared with December 31, 1998 and its results of operations and cash flows for the quarter ending March 31, 1999, compared with the same period last year. The reader is assumed to have access to the Company's 1998 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: Earned premiums for the three month period ending March 31, 1999 were $6.9 million versus $7.5 million for the same period last year, a decrease of 8%. The decrease in premium is due to a decrease in NSFC and Omega automobile insurance premium. Two automobile programs were discontinued in the first quarter due to poor underwriting results. A third automobile program in Louisiana was discontinued in the first quarter of 1998. NSIC experienced a slight increase in life, accident and health insurance premium compared to the first quarter of last year. Previously, NSIC had experienced several years of declining premiums. Net investment income: Net investment income is down 6% for the quarter compared to the same period last year. The decline in investment income is due to many higher yielding bonds being called or maturing, forcing the Company to reinvest these funds at lower interest rates. Realized capital gains and losses: Investment gains of $667,000 were realized in the first quarter of 1999. This is up nearly 40% from the first quarter of 1998. The gains were primarily generated from the sale of securities in the subsidiaries available for sale portfolio. The Company's subsidiaries have experienced large increases in unrealized capital gains over the last four years from common stock investments. These investments are evaluated individually, and some are sold as market conditions warrant. Other income: Other income is down $18,000 due to a decrease in policy fees generated by an automobile program which was discontinued in the first quarter of 1998. Policyholder benefits and settlement expenses: Policyholder benefits as a percent of net insurance premiums earned increased slightly compared to the first quarter of last year, 79.3% versus 78.4%. The first quarter of both 1999, and 1998 have higher than anticipated loss ratios. NSFC incurred several storm related losses on dwelling property programs in the first quarter of 1999. In the same period last year NSFC had poor underwriting results from automobile insurance programs. Policy acquisition cost: Policy acquisition costs are down over $200,000 compared to last year, but as a percent of premium earned is comparable to last year. The decrease in policy acquisition cost is primarily due to the previously mentioned programs which have been discontinued. 8 General insurance expenses: General insurance expenses are down over $300,000 due to a decrease in litigation expenses. Insurance taxes, licenses, and fees: Insurance taxes, licenses and fees have decreased due to a decrease in property & casualty written premium. Income taxes: Income taxes increased for the quarter due to an increase in income. Income taxes for 1998 were lower due to an increase in deferred tax assets. These future deductible amounts reduce overall income tax expense. Summary: Net income increased $147,000 primarily due to an increase realized investment gains and a decrease in general insurance expenses. Income before taxes increased over $500,000 compared to last year. Investments: Investments decreased $1.9 million during the first quarter of 1999. Written premium has decreased in NSFC and several discontinued auto programs are now in the run-off stage. Because these programs are no longer generating any premium, the remaining claims liabilities from these programs will have to be paid out of remaining premium income and current investments. NSFC and NSIC also had a reduction in unrealized capital gains during the quarter which also reduced investment values for securities classified as available for sale. Capital resources: At March 31, 1999, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $40.6 million, down $1.4 million from December 31, 1998. The decrease reflects net income of $467,000, a decrease in unrealized investment gains of $1.48 million, dividends paid of $410,000, and issuance of treasury stock of $61,000. 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 $1.9 million in cash and cash equivalents at March 31, 1999. Net cash used by operating activities was $2.1 million for the current period, compared to cash provided of $612,000 period ended March 31, 1998. Cash provided by investing activities was $364,000. Cash dividends paid to stockholders' of $410,000 was the primary use of cash used in financing activities. 9 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K See Exhibit Index 10 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: May 14, 1999 11 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 12 EX-27 2 FINANCIAL DATA SCHEDULE
7 1,000 3-mos DEC-31-1999 JAN-01-1999 MAR-31-1999 18,841 33,110 33,867 28,489 130 1,625 82,846 1,910 6,451 4,193 100,240 18,900 8,651 21,393 1,606 2,972 0 0 2,340 38,269 100,240 6,871 1,085 667 121 5,447 1,458 1,288 551 84 467 0 0 0 467 .23 .23 0 0 0 0 0 0 0
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