UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 7, 1996: 2,319,763
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 Nine Months
Ended September 30 Ended September 30
1996 1995 1996 1995
---- ---- ---- ----
Revenues
Net insurance premiums earned ..... $ 7,177 $ 5,983 $19,505 $18,413
Net investment income ............. 1,047 1,012 2,879 2,959
Realized investment gains ......... (148) 1,188 1,034 1,638
Other income ...................... 161 112 392 424
------- ------- ------- -------
Total revenues .................. 8,237 8,295 23,810 23,434
------- ------- ------- -------
Benefits and Expenses
Policyholder benefits and
settlement expenses ............. 4,504 4,040 14,620 11,307
Policy acquisition costs .......... 1,341 1,105 3,572 3,427
General insurance expenses ........ 1,215 1,550 3,843 4,643
Insurance taxes, licenses and fees 281 405 1,166 1,134
------- ------- ------- -------
Total benefits and expenses ..... 7,341 7,100 23,201 20,511
------- ------- ------- -------
Income Before Income Taxes ........ 896 1,195 609 2,923
Income Taxes (Current and deferred) 111 453 138 978
------- ------- ------- -------
Net Income ........................ $ 785 $ 742 $ 471 $ 1,945
======= ======= ======= =======
Earnings per share ................ $ 0.34 $ 0.32 $ 0.20 $ 0.83
======= ======= ======= =======
Dividends Declared per Share ...... $ 0.16 $ 0.15 $ 0.48 $ 0.45
======= ======= ======= =======
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
September 30, December 31,
Assets 1996 1995
----- ----
Investments:
Securities held-to-maturity at amortized cost
(estimated fair value: 1996 - $36,786; 1995 - 39,679).. $ 36,368 $ 38,427
Securities available-for-sale, at estimated
fair value (cost: 1996 - 18,008; 1995 - 17,421) ....... 28,080 27,451
Mortgage loans ......................................... 420 484
Investment real estate, at cost ........................ 1,661 1,880
Policy loans ........................................... 619 627
-------- --------
Total investments .................................... 67,148 68,869
-------- --------
Cash and cash equivalents ................................. 4,709 2,817
Accrued investment income ................................. 803 880
Reinsurance recoverable ................................... 6,185 11,892
Deferred policy acquisition costs ......................... 3,589 3,400
Current income tax recoverable ............................ 689 829
Prepaid reinsurance premiums .............................. 3,652 5,253
Other assets .............................................. 2,113 3,326
-------- --------
Total assets ........................................... $ 88,888 $ 97,266
======== ========
Liabilities
Policy reserves ...................................... $ 18,457 $ 18,290
Claim reserves ....................................... 13,367 16,538
Unearned premiums .................................... 11,867 12,467
Other policyholder funds ............................. 1,888 1,927
Deferred income tax .................................. 2,614 2,636
Other liabilities .................................... 1,498 5,634
-------- --------
Total liabilities ................................. $ 49,691 $ 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 ............. 7,112 6,973
Retained earnings ....................................... 30,020 30,666
Treasury stock, at cost (20,085 shares) ................. (292) (222)
-------- --------
Total shareholders' equity ........................... 39,197 39,774
-------- --------
Total liabilities and shareholder's equity ........... $ 88,888 $ 97,266
======== ========
Shareholders' Equity per Share .......................... 16.90 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) Nine Months
Ended September 30
1996 1995
----- ----
Cash Flows from Operating Activities
Income from continuing operations ................. $ 471 $ 1,945
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income ....................... 77 (23)
Reinsurance receivables ......................... 5,707 (901)
Deferred Policy acquisition costs ............... (189) (344)
Income Taxes .................................... 118 (120)
Depreciation expense ............................ 90 112
Policy liabilities and claims ................... (3,604) 1,564
Other, net ...................................... (1,397) (685)
------- -------
Net cash provided by operating activities ..... 1,273 1,548
------- -------
Cash Flows from Investing Activities
Cost of investments acquired ................... (5,247) (3,353)
Sale and maturity of investments ............... 7,106 4,994
Purchase of property and equipment ............. (15) (91)
Proceeds from disposal of property and equipment 0 0
Other, net ..................................... 0 0
------- -------
Net cash used in investing activities ........ 1,844 1,550
------- -------
Cash Flows from Financing Activities
Increase in other policyholder funds ........... (40) (142)
Dividends paid ................................. (1,114) (1,053)
Purchase of treasury stock ..................... (71) 0
------- -------
Net cash used in financing activities ........ (1,225) (1,195)
------- -------
Net increase (decrease) in cash and cash equivalents 1,892 1,903
Cash and cash equivalents, beginning of period ...... 2,817 5,314
------- -------
Cash and cash equivalents, end of period ............ $ 4,709 $ 7,217
======= =======
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 September 30, 1996 was 2,320, and for the period ending
September 30, 1995 was 2,340.
Note 4-Changes in Shareholder's Equity
During the nine months ended September 30, 1996 and 1995, there were no changes
in shareholders' equity except for net income of $471 and $1,945 respectively;
dividends paid of $1,114 and $1,053 respectively; unrealized investment gains
(losses), net of applicable taxes, of $138 and $1,945 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:
September 30, January 1,
1996 1996
Deferred policy acquisition costs ............... (1,220) (1,138)
Policy liabilities .............................. 513 499
Unearned premiums ............................... 422 353
Claims liabilities .............................. 351 291
General insurance expenses ...................... 313 314
Unrealized gains on securities available-for-sale (2,960) (2,983)
Other ........................................... (33) 28
------ ------
Net deferred tax assets (liability) ............. (2,614) (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
On October 4, 1996, a jury in the Circuit Court of Palm Beach County, Florida
returned a verdict against National Security Fire & Casualty Company, a
subsidiary of the Company, in the amount of $1,046,540.96. The plaintiff, Leon
B. King, had alleged that the Company's subsidiary had acted in bad faith in,
among other actions, failing to timely deliver a settlement check in connection
with a 1986 automobile accident. This same case was previously tried in 1993
with the jury returning a verdict in favor of the Company's subsidiary on all
counts alleged. This verdict was subsequently reversed on appeal which resulted
in the subject trial. There are various post-trial motions pending, including a
motion for a new trial. Barring relief being granted, it is anticipated that
this verdict will be appealed.
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.
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.
7
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 7-Accounting for certain investments in debt and equity securities
(continued)
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 September 30, 1996, compared with December 31, 1995
and its results of operations and cash flows for the periods included on the
accompanying consolidated condensed statements of income and cash flows. 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.
Results for the 1996 third quarter and first nine months are not necessarily
indicative of results which may be attained in the future.
Information is presented in whole dollars.
FINANCIAL CONDITION
Capital resources:
At September 30, 1996, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $39.2 million,
down $577,000 from December 31, 1995. The decrease reflects net income of
$471,000 an increase in unrealized investment gains of $138,000, dividends paid
of $1,114,000, 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 $4.7 million in cash and cash equivalents at September 30, 1996.
Net cash provided by operating activities was $1.2 million for the current
period, compared to net cash provided of $1.5 million for the period ended
September 30, 1995. Cash provided by investing activities was $1.8 million for
the current period, generated primarily by the sale and maturity of investments.
Cash dividends paid to stockholders of $1.1 million are the primary use of cash
used in financing activities.
Investments:
Investments decreased $1.7 million during the first nine months of 1996. The
decrease is offset by an increase in cash of $1.9 million received primarily
from stocks and bonds either sold or matured.
CONSOLIDATED RESULTS OF OPERATIONS
Premium revenues:
Earned premium for the nine month period ending September 30, 1996 was $19.5
million versus $18.4 million for the same period last year. The 6% increase in
earned premium year to date and 20% increase for the quarter, compared to last
year, is due to the property/casualty subsidiaries commercial auto program in
Louisiana and private passenger auto programs in Georgia and Louisiana. 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.
The life insurance subsidiary's premium income is down 10% compared to last
year.
9
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Net investment income:
Net investment income is down $80,000, a decrease of 5.9%, primarily due to
maturities and calls of higher yield bond investments. However, the decline in
investment income stabilized in the third quarter showing a slight increase
compared to last year.
Realized capital gains and losses:
Investment gains of over $1 million were realized in the first nine months 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 $32,000 due to a decrease in policy fees.
Policyholder benefits and settlement expenses:
Policyholder benefits as a percent of net insurance premiums earned year to date
were up considerably from last year, 74.9% versus 61.4%. 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 percent of policy holder benefits to
net insurance premiums earned improved considerably during the third quarter to
62.7% compared to 67.5% for the same period last year.
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 17% 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 are unchanged from last year at around 6% of
earned premium. Premium taxes are down for the quarter because taxes for the
increased premiums on new programs now being earned were booked in the first and
second quarters when the new policies were first beginning to be written.
Income taxes:
Income taxes are down compared to last year because last year had a large
decrease in a deferred tax asset which caused income taxes for the period to be
higher.
Summary:
Net income is down nearly $1.5 million from last year, even though revenues were
up over $470,000, primarily due to an increase in policyholder benefits of over
$3.3 million. The increase in policyholder benefits occurred as a result of
increased claims in the Company's property/casualty insurance subsidiary as
explained above. Net income for the quarter was better than the third quarter of
last year as claims dropped back down to a normal level. A decrease in general
expenses also helped produce a third quarter profit.
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: September 13, 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
<PAGE>
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<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 7,199
<DEBT-CARRYING-VALUE> 36,368
<DEBT-MARKET-VALUE> 36,786
<EQUITIES> 20,881
<MORTGAGE> 420
<REAL-ESTATE> 1,661
<TOTAL-INVEST> 67,148
<CASH> 4,709
<RECOVER-REINSURE> 6,185
<DEFERRED-ACQUISITION> 3,589
<TOTAL-ASSETS> 88,888
<POLICY-LOSSES> 18,457
<UNEARNED-PREMIUMS> 11,867
<POLICY-OTHER> 13,367
<POLICY-HOLDER-FUNDS> 1,888
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,340
<OTHER-SE> 36,857
<TOTAL-LIABILITY-AND-EQUITY> 88,888
19,505
<INVESTMENT-INCOME> 2,879
<INVESTMENT-GAINS> 1,034
<OTHER-INCOME> 392
<BENEFITS> 14,620
<UNDERWRITING-AMORTIZATION> 3,572
<UNDERWRITING-OTHER> 5,009
<INCOME-PRETAX> 609
<INCOME-TAX> 138
<INCOME-CONTINUING> 471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 471
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
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