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, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-18649
THE NATIONAL SECURITY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-1020300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
661 East Davis Street, Elba, Alabama 36323
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (334) 897-2273
--------------
Not Applicable
(Former name, address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Number of Shares of Common Stock outstanding as of May 1, 1997: 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
Ended March 31
1997 1996
---- ----
Revenues
Net insurance premiums earned .......................... $7,982 $6,125
Net investment income .................................. 1,102 900
Realized investment gains .............................. 63 1,179
Other income ........................................... 162 98
------ ------
Total revenues ....................................... 9,309 8,302
------ ------
Benefits and Expenses
Policyholder benefits and settlement expenses .......... 5,346 5,757
Policy acquisition costs ............................... 1,402 1,106
General insurance expenses ............................. 1,166 1,581
Insurance taxes, licenses and fees ..................... 362 336
------ ------
Total benefits and expenses ......................... 8,276 8,780
------ ------
Income Before Income Taxes and Cumulative Effect Adjustment . 1,033 (478)
Income Taxes (Current and deferred) ......................... 411 (140)
------ ------
Net Income .................................................. $ 622 ($ 338)
====== ======
Earnings per share .......................................... $ 0.27 ($0.15)
====== ======
Dividends Declared per Share ................................ $ 0.17 $ 0.16
====== ======
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 1997 1996
---- ----
Investments:
Securities held-to-maturity at amortized cost
(estimated fair value:1997 - $33,959 1996 - 36,038) $ 33,797 $ 35,413
Securities available-for-sale, at estimated
fair value (cost: 1997 - 26,098; 1996 - 21,419) ... 36,741 32,716
Mortgage loans ..................................... 394 405
Investment real estate, at cost .................... 1,644 1,659
Policy loans ....................................... 625 622
-------- --------
Total investments ................................ 73,201 70,815
-------- --------
Cash and cash equivalents .......................... 4,873 4,722
Accrued investment income .......................... 925 803
Reinsurance recoverable ............................ 10,468 12,488
Deferred policy acquisition costs .................. 4,095 4,013
Current income tax recoverable ..................... 0 258
Prepaid reinsurance premiums ....................... 685 1,908
Other assets ....................................... 2,514 3,212
-------- --------
Total assets .................................... $ 96,761 $ 98,219
======== ========
Liabilities
Policy reserves .................................... $ 18,602 $ 18,558
Claim reserves ..................................... 19,944 19,447
Unearned premiums .................................. 8,968 10,398
Other policyholder funds ........................... 1,823 1,842
Deferred income tax ................................ 3,018 2,852
Current Income tax payable ......................... 305
Other liabilities .................................. 2,640 4,603
-------- --------
Total liabilities ............................... $ 55,300 $ 57,700
-------- --------
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 ......... 8,656 7,941
Retained earnings .................................. 30,740 30,513
Treasury stock, at cost (20,085 shares) ............ (292) (292)
-------- --------
Total shareholders' equity ...................... 41,461 40,519
-------- --------
Total liabilities and shareholder's equity ...... $ 96,761 $ 98,219
======== ========
Shareholders' Equity per Share ..................... 17.87 17.47
======== ========
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
1997 1996
----- ----
Cash Flows from Operating Activities
Income from continuing operations ................... $ 622 ($ 338)
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income ......................... (122) 62
Reinsurance receivables ........................... 2,020 2,941
Deferred Policy acquisition costs ................. (82) 26
Income Taxes ...................................... 729 (313)
Depreciation expense .............................. 35 30
Policy liabilities and claims ..................... (889) (2,075)
Other, net ........................................ (53) (27)
------- -------
Net cash provided by operating activities ....... 2,260 306
------- -------
Cash Flows from Investing Activities
Cost of investments acquired ................... (4,672) (808)
Sale and maturity of investments ............... 3,001 2,474
Purchase of property and equipment ............. (25) (5)
Proceeds from disposal of property and equipment 0 0
Other, net ..................................... 0 0
------- -------
Net cash used in investing activities ........ (1,696) 1,661
------- -------
Cash Flows from Financing Activities
Increase in other policyholder funds ........... (19) (61)
Dividends paid ................................. (394) (372)
------- -------
Net cash used in financing activities ........ (413) (433)
------- -------
Net increase (decrease) in cash and cash equivalents 151 1,534
Cash and cash equivalents, beginning of period ...... 4,722 2,817
------- -------
Cash and cash equivalents, end of period ............ $ 4,873 $ 4,351
======= =======
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, 1997 was 2,325, and for the period ending March 31,
1996 was 2,325.
Note 4-Changes in Shareholder's Equity
During the three months ended March 31, 1997 and 1996, there were no changes in
shareholders' equity except for net income (loss) of $622 and ($338)
respectively; dividends paid of $394 and $372 respectively; unrealized
investment gains (losses), net of applicable taxes, of $715 and ($268)
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,
1997 1997
Deferred policy acquisition costs ............... (1,392) (1,364)
Policy liabilities .............................. 520 516
Unearned premiums ............................... 563 440
Claims liabilities .............................. 393 329
General insurance expenses ...................... 583 582
Unrealized gains on securities available-for-sale (3,521) (3,355)
Other ........................................... (164) 0
------ ------
Net deferred tax assets (liability) ............. (3,018) (2,852)
====== ======
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 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.
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 $995,252. 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. Various post-trial motions including a motion for a new trial
were denied and this verdict is being appealed.
A resolution of these matters may significantly impact consolidated earnings and
may significantly impact the Company's consolidated financial position, although
it remains management's opinion, based upon information presently available,
that the ultimate resolution of these matters will not have a material impact on
the Company's consolidated financial position. It should be noted, however, that
management is unable to assess with any degree of accuracy the potential
liability to the Company arising from these matters. The civil tort system,
particularly in Alabama, must be presently regarded as, for the most part,
hostile to insurance companies.
Note 7-Accounting for certain investments in debt and equity securities
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, 1997, compared with December 31, 1996 and
its results of operations and cash flows for the quarter ending March 31, 1997,
compared with the same period last year.
The reader is assumed to have access to the Company's 1996 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 premiums for the three month period ending March 31, 1997 were $7.9
million versus $6.1 million for the same period last year, an increase of 30%.
This increase is primarily due to the property/casualty subsidiary's commercial
and private passenger automobile programs which began in late 1995 and early
1996. These new programs are expected to produce over $5 million in earned
premium in 1997.
Net investment income:
Net investment income is up over $200,000 due to an increase in invested assets
of over 10% in the last 12 months.
Realized capital gains and losses:
Investment gains of only $63,000 were realized in the first quarter of 1997.
This is down significantly from the first quarter of 1996, when nearly $1.2
million in gains were realized. The Company's investment committee only sells
selected securities as market conditions warrant.
Other income:
Other income is up $64,000 due to an increase in policy fees generated by a new
automobile program which began in 1996.
Policyholder benefits and settlement expenses:
Policyholder benefits as a percent of net insurance premiums earned is much
improved over last year, 66.9% versus 93.9%. The increase last year was 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. Losses this year returned to more normal
levels in these two programs.
9
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Policy acquisition cost:
Policy acquisition costs are up nearly $300,000 compared to last year. This
increase in due to an increase in written premium in the property/casualty
insurance subsidiaries. Policy acquisition cost as a percent of earned premium
is about the same as last year.
General insurance expenses:
General insurance expenses are down 26% from last year primarily due to a
decrease in litigation expenses and attorney fees in the life insurance
subsidiary.
Insurance taxes, licenses, and fees:
Insurance taxes, licenses and fees are up slightly from last year due to an
increase in written premium.
Income taxes:
Income taxes as a percent of income before taxes is somewhat higher than normal
due to increased deferred taxes on unrealized capital gains.
Summary:
Net income increased over $1 million compared to last year primarily due to
increased revenues and a decrease in policyholder benefits and general expenses.
Income also increased despite a decrease of over $1 million in unrealized
capital gains.
Investments:
Investments increased $2.4 million during the first quarter of 1997. The
increase in investments was due to an increase in unrealized capital gains and
new investments made with increased cash flow from the property/casualty
insurance subsidiaries.
Capital resources:
At March 31, 1997, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $41.4 million,
up nearly $1 million from December 31, 1996. The increase reflects net income of
$622,000, an increase in unrealized investment gains of $715,000, and dividends
paid of $394,000. 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 $4.9 million in cash and cash equivalents at March 31, 1997. Net
cash provided by operating activities was $2.2 million for the current period,
compared to $306,000 for the period ended March 31, 1996. Recoveries from quota
share reinsurers and income tax recoveries from net operating loss carry backs,
along with net income, account for the increase in cash for the period. Cash
used in investing activities was $1.7 million for the quarter. This use of cash
was used to increase bond and stock investments. Cash dividends paid to
stockholders' of $394,000 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 14, 1997
12
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EXHIBIT INDEX
Exhibit Description Page
(a) 11 Statement Regarding Computation of Per Share EarningsFiled 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 11,641
<DEBT-CARRYING-VALUE> 33,797
<DEBT-MARKET-VALUE> 33,959
<EQUITIES> 25,100
<MORTGAGE> 394
<REAL-ESTATE> 1,644
<TOTAL-INVEST> 73,201
<CASH> 4,873
<RECOVER-REINSURE> 10,468
<DEFERRED-ACQUISITION> 4,095
<TOTAL-ASSETS> 96,761
<POLICY-LOSSES> 18,602
<UNEARNED-PREMIUMS> 8,968
<POLICY-OTHER> 19,944
<POLICY-HOLDER-FUNDS> 1,823
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,340
<OTHER-SE> 39,121
<TOTAL-LIABILITY-AND-EQUITY> 96,761
7,982
<INVESTMENT-INCOME> 1,102
<INVESTMENT-GAINS> 63
<OTHER-INCOME> 162
<BENEFITS> 5,346
<UNDERWRITING-AMORTIZATION> 1,402
<UNDERWRITING-OTHER> 1,528
<INCOME-PRETAX> 1,033
<INCOME-TAX> 411
<INCOME-CONTINUING> 622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 622
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
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