-----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, C+6XG7Pe4hAgu3/YEpbHvxOq4qIoZ2D5ywzlWkfAubwyAMYMxJXtanffaLazyyMb aKNwlYrSDTF4Dhwr0Mhetg== 0000865058-99-000004.txt : 19990816 0000865058-99-000004.hdr.sgml : 19990816 ACCESSION NUMBER: 0000865058-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688922 BUSINESS ADDRESS: STREET 1: 661 E DAVIS ST CITY: ELBA STATE: AL ZIP: 36323 BUSINESS PHONE: 2058972273 10-Q 1 FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 August 6, 1999: 2,055,811 Exhibit index is located on page 15. Page 1 of 15 pages 1 THE NATIONAL SECURITY GROUP, INC. INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income ............................... 3 Consolidated Balance Sheets ..................................... 4 Consolidated Statements of Shareholders' Equity ................ 5 Consolidated Statements of Cash Flows ........................... 6 Notes to Financial Statements ................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ............................... 13 SIGNATURE ............................................................... 14 EXHIBIT INDEX ........................................................... 15 2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements THE NATIONAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Three Months Six Months Ended June 30 Ended June 30 1999 1998 1999 1998 ---- ---- ---- ---- Revenues Net insurance premiums earned ........................................ $ 6,627 $ 7,273 $ 13,498 $ 14,774 Net investment income ................................................ 1,070 917 2,155 2,082 Realized investment gains ............................................ 831 937 1,498 1,417 Other income ......................................................... 85 126 206 264 -------- -------- -------- -------- Total revenues ..................................................... 8,613 9,253 17,357 18,537 -------- -------- -------- -------- Benefits and Expenses Policyholder benefits and settlement expenses ........................ 3,468 6,128 8,915 12,009 Policy acquisition costs ............................................. 1,301 1,640 2,759 3,311 General insurance expenses ........................................... 856 2,587 1,824 3,877 Insurance taxes, licenses and fees ................................... 265 301 585 698 -------- -------- -------- -------- Total benefits and expenses ........................................ 5,890 10,656 14,083 19,895 -------- -------- -------- -------- Income Before Income Taxes and Cumulative Effect Adjustment .......... 2,723 (1,403) 3,274 (1,358) Income Taxes (Current and deferred) .................................. 775 18 859 (257) -------- -------- -------- -------- Net Income (Loss) .................................................... $ 1,948 $ (1,421) $ 2,415 $ (1,101) ======== ======== ======== ======== Earnings (loss) per share ............................................ $ 0.95 $ (0.62) $ 1.18 $ (0.48) ======== ======== ======== ======== Dividends Declared per Share ......................................... $ 0.20 $ 0.19 $ 0.40 $ 0.38 ======== ======== ======== ======== 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 1999 1998 ---- ---- Investments: Debt Securities held-to-maturity at amortized cost (estimated fair value: 1999 - $34,432; 1998 - 31,835) ... $ 34,039 $ 30,807 Debt Securities available-for-sale, at estimated fair value (cost: 1999 - 19,827; 1998 - 20,315) ................... 19,257 20,337 Equity Securities, at market (cost: 1999 - $12,931; 1998 - $13,860) .................. 29,708 30,898 Receivable for securities sold ................................. 0 315 Mortgage loans .............................................. 124 135 Investment real estate, at cost ............................. 1,578 1,629 Policy loans ................................................ 638 645 --------- --------- Total investments ......................................... 85,344 84,766 --------- --------- Cash and cash equivalents ...................................... 2,544 4,073 Accrued investment income ...................................... 841 764 Reinsurance recoverable ........................................ 5,631 6,833 Deferred policy acquisition costs .............................. 4,131 4,154 Current income tax recoverable ................................. 0 75 Prepaid reinsurance premiums ................................... 261 266 Other assets ................................................... 2,996 3,042 --------- --------- Total assets ................................................ $ 101,748 $ 103,973 ========= ========= Liabilities Policy reserves ............................................. $ 18,857 $ 18,833 Claim reserves .............................................. 20,227 21,875 Unearned premiums ........................................... 8,430 8,745 Other policyholder funds .................................... 1,590 1,635 Notes payable ............................................... 2,938 3,004 Current income tax payable .................................. 310 0 Deferred income tax ......................................... 3,874 4,145 Other liabilities ........................................... 2,502 3,768 --------- --------- Total liabilities ........................................ $ 58,728 $ 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 ...... 11,545 12,146 Retained earnings .............................................. 32,699 31,106 Treasury stock, at cost (284,037 shares) ....................... (3,581) (3,641) --------- --------- Total shareholders' equity .................................. 43,020 41,968 --------- --------- Total liabilities and shareholder's equity ................... $ 101,748 $ 103,973 ========= ========= Shareholders' Equity per Share .................................. 20.92 20.46 ========= ========= The Notes to Financial Statements are an integral part of these statements.
4 THE NATIONAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except per share amounts)
Accumulated Other Retained Comprehensive Common Paid-in Treasury Total Earnings Income Stock Capital Stock Balance at December 31, 1997 ....................... $ 46,352 $ 31,888 $ 12,497 $ 2,340 $ 17 $ ( 390) Comprehensive Income Net Income for 1998 ............................ 930 930 Other comprehensive income(net of tax) Unrealized loss on securities, net of reclassification adjustment ............. (351) (351) -------- Total Comprehensive Income ......................... 579 Cash dividends ($.77 per share) .................... (1,712) (1,712) Treasury stock purchased ........................... (3,251) (3,251) -------- -------- -------- -------- -------- -------- Balance at December 31, 1998 ....................... $ 41,968 $ 31,106 $ 12,146 $ 2,340 $ 17 $ (3,641) Comprehensive Income Net Income six months ended 6/30/1999 ............ 2,415 2,415 Other comprehensive income(net of tax) Unrealized loss on securities, net of reclassification adjustment ............. (600) (600) -------- Total Comprehensive Income ......................... 1,815 Cash dividends ($.40 per share) .................... ( 821) ( 821) Treasury stock issued .............................. 58 58 -------- -------- -------- -------- -------- -------- Balance at June 30, 1999 ........................... $ 43,020 $ 32,700 $ 11,546 $ 2,340 $ 17 $ (3,583) ======== ======== ======== ======== ======== ========
The Notes to the Financial Statements are an integral part of these statements. 5 THE NATIONAL SECURITY GROUP. INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended June 30 1999 1998 ----- ---- Cash Flows from Operating Activities Income from continuing operations ...................... $ 2,415 $(1,101) Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Accrued investment income ............................ (77) (43) Reinsurance receivables .............................. 1,202 520 Deferred Policy acquisition costs .................... 23 16 Income Taxes ......................................... 114 (147) Depreciation expense ................................. 50 61 Policy liabilities and claims ........................ (1,939) 1,749 Other, net ........................................... (1,185) 239 ------- ------- Net cash provided by operating activities .......... 603 1,294 ------- ------- Cash Flows from Investing Activities Cost of investments acquired ........................ (9,903) (4,907) Sale and maturity of investments .................... 8,724 4,795 Purchase of property and equipment .................. (80) (37) Proceeds from disposal of property and equipment .... 0 0 Other, net .......................................... 0 0 ------- ------- Net cash used in investing activities ............. (1,259) (149) ------- ------- Cash Flows from Financing Activities Decrease in other policyholder funds ................ (45) (141) Payments on notes payable ........................... (66) 0 Dividends paid ...................................... (822) (871) Treasury stock issued (purchased) ................... 61 (722) ------- ------- Net cash used in financing activities ............. (872) (1,734) ------- ------- Net increase (decrease) in cash and cash equivalents ..... (1,529) (589) Cash and cash equivalents, beginning of period ........... 4,073 3,888 ------- ------- Cash and cash equivalents, end of period ................. $ 2,544 $ 3,299 ======= =======
The Notes to the Financial Statements are an integral part of these statements. 6 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. A summary of the more significant accounting policies are set forth in the notes to the audited consolidated financial statements for the year ended December 31, 1998. Note 2-Reinsurance National Security Fire and Casualty Company ("NSFC"), Omega One Insurance Company ("OMEGA"), and National Security Insurance Company ("NSIC") wholly owned subsidiaries of the Company, 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 June 30, 1999 was 2,054,000 and for the period ending June 30, 1998 was 2,271,000. Note 4-Changes in Shareholder's Equity (in thousands) During the six months ended June 30, 1999 and 1998, there were no changes in shareholders' equity except for net income (loss) of $2,415 and $(1,101) respectively; dividends paid of $821 and $871 respectively; unrealized investment (losses)gains, net of applicable taxes, of $(600) and $1,169 respectively, and issuance (purchase) of treasury stock of $61 and $(722) 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, 1999 1999 Deferred policy acquisition costs ...................... (1,404) (1,412) Policy liabilities ..................................... 463 463 Unearned premiums ...................................... 419 440 Claims liabilities ..................................... 552 569 General insurance expenses ............................. 758 710 Unrealized gains on securities available-for-sale ...... (4,662) (4,915) Other .................................................. 0 0 ------ ------ Net deferred tax liability ............................. (3,874) (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. 7 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- 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 $(600,000) and $72,000 at June 30, 1999 and 1998, respectively. Note 8- Accounting for the Costs of Computer Software Developed or Obtained for Internal Use In March 1998 the Accounting Standards Executive Committee issued Statement of Opinion (SOP) 98-1 "Accounting for the costs of computer software developed or obtained for internal use". This pronouncement is affective for periods beginning January 1, 1999. The adoption of this standard did not have a material impact on the Company's financial position, results of operations, or cash flows. Note 9-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 has completed modification of all mission critical computer programs. Tests of these programs were completed in early August of 1999, and at the conclusion of testing it was determined that all date fields had been changed to accommodate the rolling forward to year 2000. Remaining non mission critical programs will be year 2000 compliant by the end of the third quarter of 2000. 8 THE NATIONAL SECURITY GROUP, INC. NOTES TO FINANCIAL STATEMENTS (Continued) In the event of an unforeseen disruption due to the year 2000 issue, the Company is developing a contingency plan. The contingency plan, which is expected to be completed by September 30, 1999, includes obtaining commitments from outside contractors for additional computer programming and consulting personnel in the event of a disruption. These personnel will be available in the event that a problems arise to an extent that they can not be handled by in house programmers The contingency plan will also include plans for alternative methods of processing some functions. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion addresses the financial condition of The National Security Group, Inc. as of June 30, 1999, compared with December 31, 1998 and its results of operations and cash flows for the quarter ending June 30, 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 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, 1999 was $13.5 million versus $14.7 million for the same period last year. This reduction in premium is primarily due to a subsidiary eliminating a private passenger automobile program in Georgia. Property and casualty insurance premiums have declined over the past couple of years as the Company has eliminated several programs that were marketed by managing general agents. These programs were commercial and private passenger auto programs which did not produce favorable underwriting results for the Company. In an effort to improve underwriting profitability, the Company is now refocusing on core programs in the homeowners insurance and low value dwelling fire insurance lines of business. Premium revenue is expected to be down for the remainder of 1999, and is projected to be down around 12% for the year compared to 1998. However, underwriting results are expected to be much improved over last year. Net investment income: Net investment income is up slightly, primarily due to a $2,000,000 increase in investments in debt securities over the last year. Realized capital gains and losses: Investment gains of $1.5 million were realized in the first half of 1999. Most of these gains were realized due to balancing of the insurance subsidiaries investment portfolios during the year. The Company's investment committee will reduce positions in stocks which, due to increases in market value, become disproportionately large as a percent of the entire investment portfolio. 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 maintain the diversity of the portfolio. Other income: Other income is down due to a decrease in policy fees generated by an automobile program which was discontinued in the first quarter of 1998. 10 Policyholder benefits and settlement expenses: Policyholder benefits are down over $3,000,000 for the year to date compared to 1998, and are down for the quarter by over $2,600,000 compared to the same quarter last year. There are two major factors which contributed to the improvement in benefits and settlement expenses. The primary factor contributing to this improvement in underwriting results is the discontinuation of two of the private passenger auto programs and a commercial auto program in the property/casualty subsidiaries. These programs were discontinued over the last two years and remaining policies in force on the final program to be canceled are expected to expire by the end of 1999. Another factor contributing to the improved underwriting results is the lack of storm related losses in the homeowners and low value dwelling lines of business. In the first six months of 1998 the property/casualty subsidiaries incurred several tornado related losses the largest of which was over $500,000 in losses from a single tornado which hit Jefferson County Alabama. In the first six months of 1999, while much of the country has been hit with various natural disasters, the states in which the property/casualty subsidiaries operate have incurred only isolated and moderate damage. However, the areas which have the highest concentrations of property/casualty business are prone to hurricane damage, and the third quarter of each year is usually the peak of hurricane season. Policy acquisition costs: Policy acquisition costs as a percent of premiums earned are down about two percentage points for the quarter and year to date due to some of the managing general agent programs, which usually have higher commission costs, being canceled. General insurance expenses: General insurance expenses are down 66% and 53% for the quarter and year to date respectively. The primary reason for the large decrease in general expenses is a drop in litigation expenses. A Company subsidiary settled a large litigation claim in Florida in the first half of 1998, which significantly increased general expenses. Insurance taxes, licenses, and fees: Insurance taxes, licenses and fees are down due to a decrease in written premium. Income taxes: Income taxes are up over last year due to the improved results of operations. Income taxes are 26% of income before taxes. Summary: The Company has a year to date net income of $2.4 million versus a net loss of $1.1 million in 1998. The improved results in 1999 are primarily due to improved underwriting results in the property/casualty subsidiaries operations, and a decrease in litigation expenses compared to last year. The net loss in 1998 is primarily a result of a 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 1999 primarily due to increases in the market value of equity securities. Proceeds from the sale of a portion of the equity securities were reinvested in bonds which increased the value of the held to maturity debt securities portfolio. 11 Capital resources: At June 30, 1999, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $43 million, up over $1.0 million from December 31, 1998. The increase reflects net income of $2.4 million, a decrease in unrealized investment gains of $600,000, dividends paid of $821,000, and the issuance of treasury stock of $58,000. The Company has $2.9 million in notes from local banks which management intends to repay in full over the next five years. 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 $2.5 million in cash and cash equivalents at June 30, 1999. Net cash provided by operating activities was $603,000 for the current period, compared to net cash provided of $1.3 million for the period ended June 30, 1998. Cash used in investing activities was $1.2 million. Cash dividends paid to stockholders' of $822,000 and payments on notes payable of $66,000 were the primary uses of cash used in financing activities. 12 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K See Exhibit Index 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned duly authorized officer, on its behalf and in the capacity indicated. The National Security Group, Inc. By /s/ M.L. Murdock ---------------------------------- M.L. Murdock Senior Vice President and Chief Financial Officer Dated: August 13, 1999 14 EXHIBIT INDEX Exhibit Description Page (a) 11 Statement Regarding Computation of Per Share Earnings Filed Herewith; See Note 3 to Financial (b) Form 8-K None 15 EX-27 2 FINANCIAL DATA SCHEDULE
7 1000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 19,257 34,039 34,432 29,708 124 1,578 85,344 2,544 5,631 4,131 101,748 18,857 8,430 20,227 1,590 2,938 0 0 2,340 40,680 101,748 13,498 2,155 1,498 206 8,915 2,759 1,824 3,274 859 2,415 0 0 0 2,415 1.18 1.18 0 0 0 0 0 0 0
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