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, 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,former 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, 1996: 2,325,148
Exhibit index is located on page 13.
Page 1 of 13 pages
1
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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 ......... 11
SIGNATURE ........................................... 12
EXHIBIT INDEX ....................................... 13
2
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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
1996 1995
---- ----
Revenues
Net insurance premiums earned ............................. $ 6,125 $ 5,992
Net investment income ..................................... 900 935
Realized investment gains ................................. 1,179 37
Other income .............................................. 98 173
------- -------
Total revenues .......................................... 8,302 7,137
------- -------
Benefits and Expenses
Policyholder benefits and settlement expenses ............. 5,757 3,811
Policy acquisition costs .................................. 1,106 1,156
General insurance expenses ................................ 1,581 1,349
Insurance taxes, licenses and fees ........................ 336 339
------- -------
Total benefits and expenses ............................ 8,780 6,655
------- -------
Income Before Income Taxes and Cumulative Effect Adjustment (478) 482
Income Taxes (Current and deferred) ....................... (140) 207
------- -------
Net Income ................................................ ($ 338) $ 275
======= =======
Earnings per share ........................................ ($ 0.15) $ 0.12
======= =======
Dividends Declared per Share .............................. $ 0.16 $ 0.15
======= =======
The Notes to Financial Statements are an integral part of these statements.
3
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THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
As of As of
March 31, December 31,
Assets 1996 1995
---- ----
Investments:
Securities held-to-maturity at amortized cost
(estimated fair value: 1996 - $38,047; 1995 - 39,679) $ 37,360 $ 38,427
Securities available-for-sale, at estimated
fair value (cost: 1995 - 17,421; 1996 - 17,067) .... 26,588 27,451
Mortgage loans ..................................... 490 484
Investment real estate, at cost .................... 1,865 1,880
Policy loans ....................................... 631 627
-------- --------
Total investments ................................ 66,934 68,869
-------- --------
Cash and cash equivalents ............................. 4,351 2,817
Accrued investment income ............................. 818 880
Reinsurance recoverable ............................... 8,951 11,892
Deferred policy acquisition costs ..................... 3,374 3,400
Current income tax recoverable ........................ 922 829
Prepaid reinsurance premiums .......................... 5,274 5,253
Other assets .......................................... 2,934 3,326
-------- --------
Total assets ....................................... $ 93,558 $ 97,266
======== ========
Liabilities
Policy reserves .................................... $ 18,306 $ 18,290
Claim reserves ..................................... 14,579 16,538
Unearned premiums .................................. 12,335 12,467
Other policyholder funds ........................... 1,866 1,927
Deferred income tax ................................ 2,416 2,636
Other liabilities .................................. 5,262 5,634
-------- --------
Total liabilities ............................... $ 54,764 $ 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 ............. 6,705 6,973
Retained earnings ..................................... 29,954 30,666
Treasury stock, at cost (14,700 shares) ............... (222) (222)
-------- --------
Total shareholders' equity ......................... 38,794 39,774
-------- --------
Total liabilities and shareholder's equity ......... $ 93,558 $ 97,266
======== ========
Shareholders' Equity per Share ........................ 16.69 17.11
======== ========
The Notes to Financial Statements are an integral part of these statements.
4
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THE NATIONAL SECURITY GROUP. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Three Months
Ended March 31
1996 1995
----- ----
Cash Flows from Operating Activities
Income from continuing operations ...................... ($ 338) $ 275
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income ............................ 62 37
Reinsurance receivables .............................. 2,941 226
Deferred Policy acquisition costs .................... 26 (81)
Income Taxes ......................................... (313) (115)
Depreciation expense ................................. 30 (53)
Policy liabilities and claims ........................ (2,075) (709)
Other, net ........................................... (27) (1,044)
------- -------
Net cash provided by operating activities .......... 306 (1,464)
------- -------
Cash Flows from Investing Activities
Cost of investments acquired ........................ (808) (1,410)
Sale and maturity of investments .................... 2,474 2,450
Purchase of property and equipment .................. (5) (49)
Proceeds from disposal of property and equipment .... 0 0
Other, net .......................................... 0 0
------- -------
Net cash used in investing activities ............. 1,661 991
------- -------
Cash Flows from Financing Activities
Increase in other policyholder funds ................ (61) (90)
Dividends paid ...................................... (372) (351)
------- -------
Net cash used in financing activities ............. (433) (441)
------- -------
Net increase (decrease) in cash and cash equivalents ..... 1,534 (914)
Cash and cash equivalents, beginning of period ........... 2,817 5,314
------- -------
Cash and cash equivalents, end of period ................. $ 4,351 $ 4,400
======= =======
The Notes to the Financial Statements are an integral part of these statements.
5
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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 March 31, 1996 was 2,325, and for the period ending March 31,
1995 was 2,340.
Note 4-Changes in Shareholder's Equity
During the Three months ended March 31, 1996 and 1995, there were no changes in
shareholders' equity except for net income (loss) of ($338) and $275
respectively; dividends paid of $372 and $351 respectively; unrealized
investment gains (losses), net of applicable taxes, of ($268) and $1,067
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,
1996 1996
Deferred policy acquisition costs ...................... (1,147) (1,138)
Policy liabilities ..................................... 504 499
Unearned premiums ...................................... 344 353
Claims liabilities ..................................... 350 291
General insurance expenses ............................. 315 314
Unrealized gains on securities available-for-sale ...... (2,815) (2,983)
Other .................................................. 34 28
------ ------
Net deferred tax assets (liability) .................... (2,416) (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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 6-Contingencies
The Company's life insurance subsidiary was named a defendant in eleven separate
actions in Covington County, Alabama, all alleging various instances of
fraudulent conduct on the part of a former agent. The Company and the fire and
casualty insurance subsidiary were also named as defendants in certain of these
actions. Compensatory and punitive damages in an unspecified amount were sought.
Nine of these actions have been settled under terms which required that the
amount be kept confidential. Provisions for these settlements have been
reflected in the financial statements for the period ending March 31, 1996. The
Company intends to vigorously defend the two actions that remain pending.
In April, 1995, a purported class action was filed against the Company's life
insurance subsidiary alleging breach of contract, suppression of the truth, and
bad faith in connection with the sale of school accident insurance in Alabama,
Mississippi, and Georgia. In December 1995, the Circuit Court denied class
certification and the case was subsequently settled. This settlement is
reflected in the financial statements for the period ending March 31, 1996.
The Company and its subsidiaries continue to be named as parties to other
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.
7
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 7-Continued
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.
8
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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, 1996, compared with December 31, 1995 and
its results of operations and cash flows for the quarter ending March 31, 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 three month period ending March 31, 1996 were $6.1
million versus $6.0 million for the same period last year, an increase of 2%.
This increase is primarily due to the property/casualty subsidiary's commercial
automobile program which began in late 1995. This new program is expected to
produce around $1.5 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. The projected premium
from these programs have not been determined at this time.
Net investment income:
Net investment income is down $35,000, a decrease of 3.7%, 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 quarter of
1996. 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 $75,000 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, 93.9% versus 63.6%. 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.
Policy acquisition cost:
Policy acquisition costs as a percent of net insurance premiums earned are down
due to a decrease in premiums in higher acquisition cost programs in the
property/casualty subsidiary, and a decrease in the life insurance subsidiaries
sales force.
9
<PAGE>
General insurance expenses:
General insurance expenses are up 17% from last year due to the continuing cost
of litigation expenses and attorney fees of the life insurance subsidiary.
Insurance taxes, licenses, and fees:
Insurance taxes, licenses and fees are unchanged compared to last year.
Income taxes:
A reduction in the deferred tax liability reduced income tax expense by $53,000.
The remaining $87,000 tax benefit is attributable to the loss in the current
quarter.
Summary:
Net income is down over $600,000 from last year, even though revenues were up
over $1.1 million, primarily due to an increase in policyholder benefits of
nearly $2 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 $1.9 million during the first quarter of 1996. The
decrease is partially offset by an increase in cash of $1.5 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 March 31, 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 $338, a decrease in unrealized investment gains of $712, and dividends paid
of $372. 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 $4.4 million in cash and cash equivalents at March 31, 1996. Net
cash provided by operating activities was $306,000 for the current period,
compared to net cash used of $1.4 million for the period ended March 31, 1995.
Recoveries from catastrophe reinsurers on claims incurred in Hurricane Opal
account for most of the increase in cash for the period. However,
property/casualty tornado and fire claims during the quarter partially offset
the recoveries reducing cash provided from operations. Cash provided by
investing activities was $1.6 million for the quarter, generated primarily by
the sale of common stocks. Cash dividends paid to stockholders' of $372,000 are
the primary use of cash used in financing activities.
10
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
See Exhibit Index
11
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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 10, 1996
12
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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
13
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 7,903
<DEBT-CARRYING-VALUE> 37,360
<DEBT-MARKET-VALUE> 38,047
<EQUITIES> 18,685
<MORTGAGE> 490
<REAL-ESTATE> 1,865
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<CASH> 4,351
<RECOVER-REINSURE> 8,951
<DEFERRED-ACQUISITION> 3,374
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<POLICY-LOSSES> 18,306
<UNEARNED-PREMIUMS> 12,335
<POLICY-OTHER> 14,579
<POLICY-HOLDER-FUNDS> 1,866
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<COMMON> 2,340
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6,125
<INVESTMENT-INCOME> 900
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