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, 1996
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, 1996: 2,319,763
Exhibit index is located on page 13.
Page 1 of 13 pages
1
<PAGE>
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
<PAGE>
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
1996 1995 1996 1995
---- ---- ---- ----
Revenues
Net insurance premiums earned .......$ 6,203 $ 6,438 $ 12,328 $ 12,430
Net investment income ................ 932 1,012 1,832 1,947
Realized investment gains ............ 3 413 1,182 450
Other income ......................... 133 139 231 312
------- -------- -------- --------
Total revenues ..................... 7,271 8,002 15,573 15,139
------- -------- -------- --------
Benefits and Expenses
Policyholder benefits and
settlement expenses ................ 4,359 3,456 10,116 7,267
Policy acquisition costs ............. 1,125 1,166 2,231 2,322
General insurance expenses ........... 1,047 1,744 2,628 3,093
Insurance taxes, licenses and fees ... 549 390 885 729
------- -------- -------- --------
Total benefits and expenses ........ 7,080 6,756 15,860 13,411
------- -------- -------- --------
Income Before Income Taxes ........... 191 1,246 (287) 1,728
Income Taxes (Current and deferred) .. 167 318 27 525
------- -------- -------- --------
Net Income ..........................$ 24 $ 928 $ (314) $ 1,203
======= ======== ======== ========
Earnings per share ..................$ 0.01 $ 0.40 ($ 0.14) $ 0.51
======= ======== ======== ========
Dividends Declared per Share ........$ 0.16 $ 0.15 $ 0.32 $ 0.30
======= ======== ======== ========
The Notes to Financial Statements are an integral part of these statements.
3
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
As of As of
June 30, December 31,
Assets 1996 1995
---- ----
Investments:
Securities held-to-maturity at amortized cost
(estimated fair value: 1996 - $36,173; 1995 - 39,679) ..$35,834 $ 38,427
Securities available-for-sale, at estimated
fair value (cost: 1996 - 17,061; 1995 - 17,421) ........ 27,253 27,451
Mortgage loans .......................................... 482 484
Investment real estate, at cost ......................... 1,858 1,880
Policy loans ............................................ 641 627
------- --------
Total investments ..................................... 66,068 68,869
------- --------
Cash and cash equivalents .................................. 4,782 2,817
Accrued investment income .................................. 796 880
Reinsurance recoverable .................................... 7,695 11,892
Deferred policy acquisition costs .......................... 3,542 3,400
Current income tax recoverable ............................. 894 829
Prepaid reinsurance premiums ............................... 5,052 5,253
Other assets ............................................... 2,452 3,326
------- --------
Total assets ............................................ 91,281 $ 97,266
======= ========
Liabilities
Policy reserves .........................................$18,457 $ 18,290
Claim reserves .......................................... 13,143 16,538
Unearned premiums ....................................... 13,010 12,467
Other policyholder funds ................................ 1,758 1,927
Deferred income tax ..................................... 2,752 2,636
Other liabilities ....................................... 3,311 5,634
------- --------
Total liabilities ....................................$54,431 $ 57,492
------- --------
Shareholders' Equity
Common stock, $1 par value, 2,339,848 shares issued ........ 2,340 2,340
Additional paid in capital ................................. 17 17
Net unrealized appreciation on securities
available-for-sale, net of deferred taxes ................. 7,178 6,973
Retained earnings .......................................... 29,607 30,666
Treasury stock, at cost (14,700 shares) .................... (292) (222)
------- --------
Total shareholders' equity .............................. 38,850 39,774
------- --------
Total liabilities and shareholder's equity ..............$91,281 $ 97,266
======= ========
Shareholders' Equity per Share ............................. 16.75 17.11
======= ========
The Notes to Financial Statements are an integral part of these statements.
4
<PAGE>
THE NATIONAL SECURITY GROUP. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Six Months
Ended June 30
1996 1995
----- ----
Cash Flows from Operating Activities
Income from continuing operations .................($ 314) $ 1,203
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income ....................... 84 (3)
Reinsurance receivables ......................... 4,197 1,086
Deferred Policy acquisition costs ............... (142) (204)
Income Taxes .................................... 51 (290)
Depreciation expense ............................ 60 61
Policy liabilities and claims ................... (2,685) (1,255)
Other, net ...................................... (1,293) (1,205)
------- -------
Net cash provided by operating activities ..... (42) (607)
------- -------
Cash Flows from Investing Activities
Cost of investments acquired ................... (1,708) (2,722)
Sale and maturity of investments ................ 4,714 3,771
Purchase of property and equipment .............. (15) (81)
Proceeds from disposal of property and equipment . 0 0
Other, net ...................................... 0 0
------- -------
Net cash used in investing activities ......... 2,991 968
------- -------
Cash Flows from Financing Activities
Increase in other policyholder funds ............ (169) (285)
Dividends paid .................................. (744) (702)
Purchase of treasury stock ...................... (71) 0
------- -------
Net cash used in financing activities ......... (984) (987)
------- -------
Net increase (decrease) in cash and cash equivalents . 1,965 (626)
Cash and cash equivalents, beginning of period ....... 2,817 5,314
------- -------
Cash and cash equivalents, end of period .............$4,782 $ 4,688
======= =======
The Notes to the Financial Statements are an integral part of these statements.
5
<PAGE>
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, 1996 was 2,320, and for the period ending June 30,
1995 was 2,340.
Note 4-Changes in Shareholder's Equity
During the six months ended June 30, 1996 and 1995, there were no changes in
shareholders' equity except for net income (loss) of ($314) and $1,203
respectively; dividends paid of $743 and $702 respectively; unrealized
investment gains (losses), net of applicable taxes, of $205 and $1,374
respectively, and purchase of treasury stock of $70 and $0 respectively.
Note 5 - Deferred Taxes
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
June 30, January 1,
1996 1996
Deferred policy acquisition costs .................(1,204) (1,138)
Policy liabilities ................................ 509 499
Unearned premiums ................................. 374 353
Claims liabilities ................................ 324 291
General insurance expenses ........................ 286 314
Unrealized gains on securities available-for-sale .(3,013) (2,983)
Other ............................................. (28) 28
------ ------
Net deferred tax assets (liability) ...............(2,752) (2,636)
====== ======
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
<PAGE>
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.
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
we are 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 unpredictable and as, for the most part,
hostile to insurance companies.
Note 7-Accounting for certain investments in debt and equity securities
Effective January 1, 1994 the Company and its subsidiaries adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). This statement, among other things,
requires investment securities (bonds, notes, common stock and preferred stocks)
to be divided into one of three categories: held to maturity,
available-for-sale, and trading.
The Company's securities are classified in two categories and accounted for as
follows:
* Securities Held-to-Maturity. Bonds, notes and redeemable preferred stock
for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using
methods which approximate level yields over the period to maturity.
*Securities Available-for-Sale. Bonds, notes, common stock and
non-redeemable preferred stock not classified as either held-to-maturity,
or trading are reported at fair value, adjusted for other-than-temporary
declines in fair value.
The Company and its subsidiaries have no trading securities.
Unrealized holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a separate component of
shareholders' equity until realized. Realized gains and losses on the sale of
securities available-for-sale are determined using the specific-identification
method.
Mortgage loans are stated at the unpaid principle balance of such loans.
Investment real estate is reported at cost, less allowances for depreciation
computed on the straight-line basis. Short-term Investments are carried at cost,
which is approximate market value. Investments with other than temporary
impairment in value are written down to estimated realizable values.
7
<PAGE>
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, 1996, compared with December 31, 1995 and
its results of operations and cash flows for the quarter ending June 30, 1996,
compared with the same period last year.
The reader is assumed to have access to the Company's 1995 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, 1996 was $12.3 million
versus $12.4 million for the same period last year. This slight decrease is
primarily due to the property/casualty subsidiary's general agency private
passenger automobile program in Louisiana which was discontinued in late 1995.
The premium lost from this program is expected to be offset by new commercial
and private passenger auto programs. The new commercial auto program is expected
to produce around $1.2 million in written premium during 1996. The
property/casualty subsidiaries' new private passenger automobile programs in
Georgia and Louisiana began in the first quarter of 1996, and are expected to
produce around $2 million in written premium by year end.
Net investment income:
Net investment income is down $115,000, a decrease of 5.9%, primarily due to a
decrease in bond investments.
Realized capital gains and losses:
Investment gains of nearly $1.2 million were realized in the first half of 1996,
with most of the sales taking place in the first quarter. The Company's
investment committee elected to sale select stocks from the insurance
subsidiaries' portfolios following 1995's stock market run-up.
Other income:
Other income is down $81,000 due to a decrease in policy fees generated by a
general agency whose contract has been terminated.
Policyholder benefits and settlement expenses:
Policyholder benefits as a percent of net insurance premiums earned were up
considerably from last year, 82.1% versus 58.4%. The increase is due to a
substantial increase in losses incurred by the property/casualty subsidiary's
low value dwelling and homeowners insurance programs. These programs not only
suffered losses from several tornadoes which hit the Southeastern United States
early in the year, but also, incurred an unusually high number of fire losses
due to the colder than normal winter. The low value dwelling program, which
accounts for nearly 40% of net insurance premiums earned, recovered somewhat in
May and June producing an underwriting profit for the first time since before
Hurricane Opal, which hit the Southeastern U.S. in October of 1995. The
property/casualty subsidiary will cease writing any new business in the
homeowners program early in the third quarter due to continued unprofitable
underwriting results, while a review of the program is performed.
8
<PAGE>
Policy acquisition cost:
Policy acquisition costs as a percent of net insurance premiums earned is
unchanged from last year.
General insurance expenses:
General insurance expenses are down 15% from last year due to a decrease in
litigation expenses and attorney fees in the insurance subsidiaries.
Insurance taxes, licenses, and fees:
Insurance taxes, licenses and fees increased because automobile insurance in the
State of Louisiana is written by an admitted property/casualty subsidiary, and
is therefore subject to premium taxes and guaranty fund assessments. Previously,
automobile insurance in Louisiana was written by a non-admitted surplus lines
property/casualty subsidiary, and premium taxes were paid by the policyholder.
The benefit of this arrangement is that the company can write directly through
independent agents rather than through surplus lines brokers, thus reducing
commission expenses.
Income taxes:
The Company has income tax expense, despite having a net loss before taxes, due
to the reduction of a deferred tax asset during the second quarter of 1996.
Summary:
Net income is down over $1.5 million from last year, even though revenues were
up over $400,000, primarily due to an increase in policyholder benefits of over
$2.8 million. The increase in policyholder benefits occurred as a result of
increased claims in the Company's property/casualty insurance subsidiary as
explained above.
Investments:
Investments decreased $2.8 million during the first half of 1996. The decrease
is partially offset by an increase in cash of $2.0 million received primarily
from stocks and bonds either sold or matured. Also, part of the proceeds from
investments were used to pay claims which increased considerably during the
first quarter of 1996.
Capital resources:
At June 30, 1996, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $38.8 million,
down nearly $1 million from December 31, 1995. The decrease reflects a net loss
of $314,000 an increase in unrealized investment gains of $205,000, dividends
paid of $743,000, and treasury stock purchased of $71,000. The Company has no
long term debt.
Liquidity:
The liquidity requirements of the Company are primarily met by funds provided
from operations of the life insurance and property/casualty subsidiaries.
Premium and investment income, as well as maturities, calls, and sales of
invested assets, provide the primary sources of cash for both subsidiaries. Cash
is used by subsidiaries for payments of policy benefits, the acquisition of new
business (principally commissions), operating expenses, and purchases of new
investments.
The Company had $4.8 million in cash and cash equivalents at June 30, 1996. Net
cash used in operating activities was $42,000 for the current period, compared
to net cash used of $607,000 for the period ended June 30, 1995. Cash provided
by investing activities was $2.9 million for the quarter, generated primarily by
the sale and maturity of investments. Cash dividends paid to stockholders' of
$744,000 are the primary use of cash used in financing activities.
9
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
See Exhibit Index
10
<PAGE>
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 9, 1996
11
<PAGE>
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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 7,503
<DEBT-CARRYING-VALUE> 35,834
<DEBT-MARKET-VALUE> 36,173
<EQUITIES> 19,750
<MORTGAGE> 482
<REAL-ESTATE> 1,858
<TOTAL-INVEST> 66,068
<CASH> 4,782
<RECOVER-REINSURE> 7,695
<DEFERRED-ACQUISITION> 3,542
<TOTAL-ASSETS> 91,281
<POLICY-LOSSES> 18,457
<UNEARNED-PREMIUMS> 13,010
<POLICY-OTHER> 13,143
<POLICY-HOLDER-FUNDS> 1,758
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,340
<OTHER-SE> 36,510
<TOTAL-LIABILITY-AND-EQUITY> 91,281
12,328
<INVESTMENT-INCOME> 1,832
<INVESTMENT-GAINS> 1,182
<OTHER-INCOME> 231
<BENEFITS> 10,116
<UNDERWRITING-AMORTIZATION> 2,231
<UNDERWRITING-OTHER> 3,513
<INCOME-PRETAX> (287)
<INCOME-TAX> 27
<INCOME-CONTINUING> (314)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (314)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
