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 September 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 $1.00 par value common stock
outstanding as of November 12, 1999: 2,055,811
Exhibit index is located on page 14.
Page 1 of 14 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 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 .................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................. 12
SIGNATURE ................................................................. 13
EXHIBIT INDEX ............................................................. 14
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)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended Sept 30 Ended Sept 30
1999 1998 1999 1998
---- ---- ---- ----
Revenues
Net insurance premiums earned ............................. $ 6,292 $ 6,942 $ 19,790 $ 21,716
Net investment income ..................................... 1,114 1,135 3,269 3,217
Realized investment gains ................................. 178 1,094 1,676 2,511
Other income .............................................. 98 147 304 411
-------- -------- -------- --------
Total revenues .......................................... 7,682 9,318 25,039 27,855
-------- -------- -------- --------
Benefits and Expenses
Policyholder benefits and settlement expenses ............. 4,028 6,273 12,943 18,282
Policy acquisition costs .................................. 1,485 1,094 4,244 4,405
General insurance expenses ................................ 1,248 887 3,072 4,764
Insurance taxes, licenses and fees ........................ 275 453 860 1,151
-------- -------- -------- --------
Total benefits and expenses ............................. 7,036 8,707 21,119 28,602
-------- -------- -------- --------
Income Before Income Taxes and Cumulative Effect Adjustment 646 611 3,920 (747)
Income Taxes (Current and deferred) ....................... 189 219 1,048 (38)
-------- -------- -------- --------
Net Income (Loss) ......................................... $ 457 392 $ 2,872 $ (709)
======== ======== ======== ========
Earnings (loss) per share ................................. $ 0.22 $ 0.17 $ 1.40 $ (0.31)
======== ======== ======== ========
Dividends Declared per Share .............................. $ 0.20 $ 0.19 $ 0.60 $ 0.57
======== ======== ======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
<S> <C> <C>
As of As of
September 30, December 31,
Assets 1999 1998
---- ----
Investments:
Debt Securities held-to-maturity at amortized cost
(estimated fair value: 1999 - $37,849; 1998 - 31,779) . $ 37,719 $ 30,807
Debt Securities available-for-sale, at estimated fair value
(cost: 1999 - 16,159; 1998 - 20,192) ................. 15,568 20,337
Equity Securities, at market
(cost: 1999 - $12,883; 1998 - $14,489) ................ 27,211 30,898
Receivable for securities sold ............................... 0 315
Mortgage loans ............................................... 119 135
Investment real estate, at cost .............................. 1,563 1,629
Policy loans ................................................. 645 642
--------- ---------
Total investments ....................................... 82,822 84,766
--------- ---------
Cash and cash equivalents .................................... 1,495 4,073
Accrued investment income .................................... 941 764
Reinsurance recoverable ...................................... 6,059 6,833
Deferred policy acquisition costs ............................ 4,062 4,154
Current income tax recoverable ............................... 0 75
Prepaid reinsurance premiums ................................. 231 266
Other assets ................................................. 2,677 3,042
--------- ---------
Total assets .............................................. $ 98,287 $ 103,973
========= =========
Liabilities
Policy reserves ........................................... $ 18,922 $ 18,833
Claim reserves ............................................ 19,738 21,875
Unearned premiums ......................................... 7,963 8,745
Other policyholder funds .................................. 1,554 1,635
Notes payable ............................................. 2,876 3,004
Current income tax payable ................................ 169 0
Deferred income tax ....................................... 3,186 4,145
Other liabilities ......................................... 2,453 3,768
--------- ---------
Total liabilities ...................................... $ 56,861 $ 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 .... 9,905 12,146
Retained earnings ............................................ 32,745 31,106
Treasury stock, at cost (284,037 shares) ..................... (3,581) (3,641)
--------- ---------
Total shareholders' equity ................................ 41,426 41,968
--------- ---------
Total liabilities and shareholder's equity ................ $ 98,287 $ 103,973
========= =========
Shareholders' Equity per Share ............................... 20.16 20.46
========= =========
The Notes to Financial Statements are an integral part of these statements.
</TABLE>
4
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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 nine months ended 9/30/1999 .. 2,872 2,872
Other comprehensive income(net of tax)
Unrealized loss on securities, net
of reclassification adjustment ... (2,241) (2,241)
--------
Total Comprehensive Income ............... 631
--------
Cash dividends ($.60 per share) .......... (1,233) (1,233)
Treasury stock issued .................... 60 60
-------- -------- -------- -------- -------- --------
Balance at Sept 30, 1999 ................. $ 41,426 $ 32,745 $ 9,905 $ 2,340 $ 17 $ (3,581)
======== ======== ======== ======== ======== ========
The Notes to the Financial Statements are an integral part of these statements.
</TABLE>
5
<PAGE>
THE NATIONAL SECURITY GROUP. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months
Ended Sept 30
1999 1998
----- ----
Cash Flows from Operating Activities
Income from continuing operations .................... $ 2,872 $ (709)
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income .......................... (177) (88)
Reinsurance receivables ............................ 774 985
Deferred Policy acquisition costs .................. 92 (139)
Income Taxes ....................................... (715) (842)
Depreciation expense ............................... 75 92
Policy liabilities and claims ...................... (2,830) 2,350
Other, net ......................................... (900) (3,356)
-------- --------
Net cash provided by operating activities ........ (809) (1,707)
-------- --------
Cash Flows from Investing Activities
Cost of investments acquired ...................... (11,746) (6,786)
Sale and maturity of investments .................. 11,449 8,229
Purchase of property and equipment ................ (90) (69)
Proceeds from disposal of property and equipment .. 0 0
Other, net ........................................ 0 0
-------- --------
Net cash used in investing activities ........... (387) 1,374
-------- --------
Cash Flows from Financing Activities
Decrease in other policyholder funds .............. (81) (36)
Payments on notes payable ......................... (128) 1,887
Dividends paid .................................... (1,233) (1,302)
Treasury stock issued (purchased) ................. 60 (722)
-------- --------
Net cash used in financing activities ........... (1,382) (173)
-------- --------
Net increase (decrease) in cash and cash equivalents ... (2,578) (506)
Cash and cash equivalents, beginning of period ......... 4,073 3,888
-------- --------
Cash and cash equivalents, end of period ............... $ 1,495 $ 3,382
======== ========
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
6
<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. 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 September 30, 1999 was 2,055,000 and for the period ending
September 30, 1998 was 2,279,000.
Note 4-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. To the extent possible, the Company
has made accruals for estimated liabilities relating to these suits. The most
significant of the current suits is a purported class action filed in Lee County
Alabama. No class has been certified in this suit. 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 5- 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.
7
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 6-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 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.
In the event of an unforeseen disruption due to the year 2000 issue, the Company
has developed a contingency plan. The contingency plan, includes 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 also includes plans for alternative
methods of processing some functions.
8
<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 September 30, 1999, compared with December 31, 1998
and its results of operations and cash flows for the quarter and nine months
ending September 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 nine month period ending September 30, 1999 was $19.8
million versus $21.7 million for the same period last year. The decrease in
earned premium is due to the elimination of three unprofitable automobile
programs in the property/casualty subsidiaries. Premiums in the life insurance
subsidiary are up slightly over last year as a result of the introduction of new
methods of distribution.
Premiums in the property/casualty subsidiaries for the nine month period ending
September 30, 1999 were $16.7 million versus $18.7 million for the same period
last year. Three unprofitable programs were eliminated in 1998 and early 1999
which led to the decrease in property and casualty premium. These programs were
managed by managing general agents in Louisiana and Georgia. 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.
Premiums in the life insurance subsidiary for the nine month period ending
September 30, 1999 were $3.1 million versus $3.0 million for the same period
last year. The increase in life insurance premium, though only a modest
increase, is encouraging after several years of double digit percentage
decreases in premium. Over the past three years, the life subsidiary has made
changes in method of distribution, and premium collection in order to better
serve customers and give agents more time to focus on selling to new customers
rather than collecting premium from existing customers. In the process of making
these changes, several district sales offices were closed and the agency force
was reduced by over 50%. These changes reduced life insurance premium income by
over 30%. However, due to making the changes, the agency force is experiencing
less turnover, and customers are able to pay premiums by more convenient methods
(check, ach transfer, money order) directly to the home office as opposed to the
old method of waiting for an agent to come and collect premium at the insured's
home.
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 $1.7 million were realized in the first nine months 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.
9
<PAGE>
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.
Policyholder benefits and settlement expenses:
Policyholder benefits are down over $5,000,000 for the year to date compared to
1998, and are down for the quarter by over $2,000,000 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 nine 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. Also, in the third quarter of 1998, Hurricane Georges
hit the Alabama and Mississippi coast causing widespread moderate damage. In the
first nine 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. Also, the areas which
have the highest concentrations of property/casualty business, Georgia, Alabama,
Mississippi, Louisiana, and Texas, have not incurred a direct hit from a major
hurricane this year.
Policy acquisition costs:
Policy acquisition costs as a percent of premiums earned are up slightly due to
an increase in new life insurance business. First year sales commissions on a
life insurance policy are generally higher than commissions paid at first
renewal and later.
General insurance expenses:
General insurance expenses are down $1.7 million in the nine months ended
September 30, 1999, compared to last year. 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 $2.9 million versus a net loss of
$709,000 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, windstorm, and hurricane losses
incurred in low value dwelling and homeowners property insurance programs. These
programs have not suffered any significant catastrophe related losses through
September of 1999.
10
<PAGE>
Investments:
Investments decreased during the first nine months of 1999 primarily due to
decreases in the market value of equity securities available for sale.
Capital resources:
At September 30, 1999, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $41.4 million,
down over $500,000 from December 31, 1998. The decrease reflects net income of
$2.9 million, a decrease in unrealized investment gains of $2.2 million,
dividends paid of $1.23 million, and the issuance of treasury stock of $60,000.
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 $1.5 million in cash and cash equivalents at September 30, 1999.
Net cash used by operating activities was $809,000 for the current period,
compared to net cash used of $1.7 million for the period ended September 30,
1998. Cash used in investing activities was $387,000. Cash dividends paid to
stockholders' of $1.23 million, payments on notes payable of $128,000, and
decreases in policyholder funds of $81,000 were the primary uses of cash used in
financing activities.
Information About Forward-Looking Statements
Any statement contained in this report which is not a historical fact, or which
might otherwise be considered an opinion or projection concerning the Company or
its business, whether express, or implied, is meant and should be considered a
forward-looking statement as that term is defined in the Private Securities
Litigation and Reform Act of 1995. Forward-looking statements are based on
assumptions and opinions concerning a variety of known and unknown risks,
including but not limited to changes in market conditions, natural disasters and
catastrophic events, changes in government regulation, increased competition,
changes in and availability of reinsurance, and general economic conditions. If
any of these assumptions prove incorrect, any forward-looking statements made on
the basis of such assumptions or opinions may also prove materially incorrect in
one or more respects.
Item 3. Market Risk Disclosure
The Company's Annual Report filed on form 10-K with the Securities and Exchange
Commission includes quantitative and qualitative market risk disclosure
information. Since December 31, 1998, there have been no significant changes in
these disclosures. However, the Company has experienced an unrealized loss on
securities, primarily common stocks, available for sale.
11
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
See Exhibit Index
12
<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: September 12, 1999
13
<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
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 15,568
<DEBT-CARRYING-VALUE> 37,719
<DEBT-MARKET-VALUE> 37,849
<EQUITIES> 27,211
<MORTGAGE> 119
<REAL-ESTATE> 1,563
<TOTAL-INVEST> 82,822
<CASH> 1,495
<RECOVER-REINSURE> 6,059
<DEFERRED-ACQUISITION> 4,062
<TOTAL-ASSETS> 98,287
<POLICY-LOSSES> 18,922
<UNEARNED-PREMIUMS> 7,963
<POLICY-OTHER> 19,738
<POLICY-HOLDER-FUNDS> 1,554
<NOTES-PAYABLE> 2,876
0
0
<COMMON> 2,340
<OTHER-SE> 39,086
<TOTAL-LIABILITY-AND-EQUITY> 98,287
19,790
<INVESTMENT-INCOME> 3,269
<INVESTMENT-GAINS> 1,676
<OTHER-INCOME> 304
<BENEFITS> 12,943
<UNDERWRITING-AMORTIZATION> 4,244
<UNDERWRITING-OTHER> 3,932
<INCOME-PRETAX> 3,920
<INCOME-TAX> 1,048
<INCOME-CONTINUING> 2,872
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,872
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
