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, 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 Common Stock outstanding as of May 1, 1999: 2,055,811
Exhibit index is located on page 12.
Page 1 of 12 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 ............................................ 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................. 10
SIGNATURE ................................................................. 11
EXHIBIT INDEX ............................................................. 12
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
1999 1998
---- ----
Revenues
Net insurance premiums earned ............................. $ 6,871 $ 7,501
Net investment income ..................................... 1,085 1,165
Realized investment gains ................................. 667 480
Other income .............................................. 121 138
------- -------
Total revenues .......................................... 8,744 9,284
------- -------
Benefits and Expenses
Policyholder benefits and settlement expenses ............. 5,447 5,881
Policy acquisition costs .................................. 1,458 1,671
General insurance expenses ................................ 968 1,290
Insurance taxes, licenses and fees ........................ 320 397
------- -------
Total benefits and expenses ............................ 8,193 9,239
------- -------
Income Before Income Taxes and Cumulative Effect Adjustment 551 45
Income Taxes (Current and deferred) ....................... 84 (275)
------- -------
Net Income ................................................ $ 467 $ 320
======= =======
Earnings per share ........................................ $ 0.23 $ 0.14
======= =======
Dividends Declared per Share .............................. $ 0.20 $ 0.19
======= =======
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)
<TABLE>
<CAPTION>
<S> <C> <C>
As of As of
March 31, December 31,
Assets 1999 1998
---- ----
Investments:
Debt Securities held-to-maturity at amortized cost
(estimated fair value: 1999 - $33,867; 1998 - 31,835) . $ 33,110 $ 30,807
Debt Securities available-for-sale, at estimated fair value
(cost: 1999 - 19,074; 1998 - 20,315) ................. 18,841 20,337
Equity Securities, at market
(cost: 1999 - $13,497; 1998 - $13,860) ................ 28,489 30,898
Receivable for securities sold ............................... 0 315
Mortgage loans ............................................ 130 135
Investment real estate, at cost ........................... 1,625 1,629
Policy loans .............................................. 651 645
--------- ---------
Total investments ....................................... 82,846 84,766
--------- ---------
Cash and cash equivalents .................................... 1,910 4,073
Accrued investment income .................................... 807 764
Reinsurance recoverable ...................................... 6,451 6,833
Deferred policy acquisition costs ............................ 4,193 4,154
Current income tax recoverable ............................... 69 75
Prepaid reinsurance premiums ................................. 245 266
Other assets ................................................. 3,719 3,042
--------- ---------
Total assets .............................................. $ 100,240 $ 103,973
========= =========
Liabilities
Policy reserves ........................................... $ 18,900 $ 18,833
Claim reserves ............................................ 21,393 21,875
Unearned premiums ......................................... 8,651 8,745
Other policyholder funds .................................. 1,606 1,635
Notes payable ............................................. 2,972 3,004
Deferred income tax ....................................... 3,418 4,145
Other liabilities ......................................... 2,691 3,768
--------- ---------
Total liabilities ...................................... $ 59,631 $ 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 .... 10,671 12,146
Retained earnings ............................................ 31,162 31,106
Treasury stock, at cost (68,830 shares) ...................... (3,581) (3,641)
--------- ---------
Total shareholders' equity ................................ 40,609 41,968
--------- ---------
Total liabilities and shareholder's equity ................ $ 100,240 $ 103,973
========= =========
Shareholders' Equity per Share ............................... $ 19.75 $ 20.46
========= =========
</TABLE>
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
1999 1998
----- ----
Cash Flows from Operating Activities
Income from continuing operations ...................... $ 467 $ 320
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income ............................ (43) (64)
Reinsurance receivables .............................. 382 (54)
Deferred Policy acquisition costs .................... (39) 58
Income Taxes ......................................... (721) 252
Depreciation expense ................................. 25 30
Policy liabilities and claims ........................ (509) 173
Other, net ........................................... (1,678) (103)
------- -------
Net cash (used) provided by operating activities ... (2,116) 612
------- -------
Cash Flows from Investing Activities
Cost of investments acquired ........................ (4,858) (3,786)
Sale and maturity of investments .................... 5,302 2,667
Purchase of property and equipment .................. (80) (15)
Proceeds from disposal of property and equipment .... 0 0
Other, net .......................................... 0 0
------- -------
Net cash provided (used) in investing activities .. 364 (1,134)
------- -------
Cash Flows from Financing Activities
Increase in other policyholder funds ................ (29) (45)
Payments on notes payable ........................... (32) 0
Dividends paid ...................................... (410) (439)
Treasury stock issued (purchased) ................... 60 (893)
------- -------
Net cash used in financing activities ............. (411) (1,377)
------- -------
Net (decrease) in cash and cash equivalents ............. (2,163) (1,899)
Cash and cash equivalents, beginning of period ........... 4,073 3,888
------- -------
Cash and cash equivalents, end of period ................. $ 1,910 $ 1,989
======= =======
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.
The accompanying consolidated financial statements include the accounts of The
National Security Group, Inc. (the Company) and its wholly owned subsidiaries:
National Security Insurance Company (NSIC), National Security Fire and Casualty
Company (NSFC) and Natsco, Inc. (Natsco). NSFC includes a wholly owned
subsidiary, Omega One Insurance Company.
Note 2-Reinsurance
NSFC, and NSIC 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, 1999 was 2,052 and for the period ending March 31,
1998 was 2,262.
Note 4-Changes in Shareholder's Equity
During the three months ended March 31, 1999 and 1998, there were no changes in
shareholders' equity except for net income of $467 and $320 respectively;
dividends paid of $410 and $439 respectively; unrealized investment (losses)
gains, net of applicable taxes, of ($1,475) and $1,245 respectively, and
issuance (purchases) of treasury stock of $61 and ($893) 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,
1999 1999
------ -------
Deferred policy acquisition costs ...................... (1,426) (1,412)
Policy liabilities ..................................... 463 463
Unearned premiums ...................................... 451 440
Claims liabilities ..................................... 578 569
General insurance expenses ............................. 718 710
Unrealized gains on securities available-for-sale ...... (4,202) (4,915)
------- ------
Net deferred tax assets (liability) .................... (3,418) (4,145)
====== ======
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. 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
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
The Company's investment 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 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 determined using the specific-identification method.
Mortgage loans and policy 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 approximate market value. Investments with other than
temporary impairment in value are written down to estimated realizable values.
Note 8-Comprehensive Income
Effective January 1, 1998 the Company and its subsidiaries adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). Comprehensive Income is defined as net income and all other changes in
Stockholders' equity from transactions and events arising from non-owner
sources. The adoption of SFAS 130 had no impact on the Company's net income or
Shareholders' equity. The primary additional component for The Company is
unrealized investment gains and losses. Total comprehensive (loss) income, net
of reclassification adjustment, was $(1,008,000) and $1,566,000 at March 31,
1999 and 1998, respectively.
7
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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, 1999, compared with December 31, 1998 and
its results of operations and cash flows for the quarter ending March 31, 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 7 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, 1999 were $6.9
million versus $7.5 million for the same period last year, a decrease of 8%. The
decrease in premium is due to a decrease in NSFC and Omega automobile insurance
premium. Two automobile programs were discontinued in the first quarter due to
poor underwriting results. A third automobile program in Louisiana was
discontinued in the first quarter of 1998.
NSIC experienced a slight increase in life, accident and health insurance
premium compared to the first quarter of last year. Previously, NSIC had
experienced several years of declining premiums.
Net investment income:
Net investment income is down 6% for the quarter compared to the same period
last year. The decline in investment income is due to many higher yielding bonds
being called or maturing, forcing the Company to reinvest these funds at lower
interest rates.
Realized capital gains and losses:
Investment gains of $667,000 were realized in the first quarter of 1999. This is
up nearly 40% from the first quarter of 1998. The gains were primarily generated
from the sale of securities in the subsidiaries available for sale portfolio.
The Company's subsidiaries have experienced large increases in unrealized
capital gains over the last four years from common stock investments. These
investments are evaluated individually, and some are sold as market conditions
warrant.
Other income:
Other income is down $18,000 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 as a percent of net insurance premiums earned increased
slightly compared to the first quarter of last year, 79.3% versus 78.4%. The
first quarter of both 1999, and 1998 have higher than anticipated loss ratios.
NSFC incurred several storm related losses on dwelling property programs in the
first quarter of 1999. In the same period last year NSFC had poor underwriting
results from automobile insurance programs.
Policy acquisition cost:
Policy acquisition costs are down over $200,000 compared to last year, but as a
percent of premium earned is comparable to last year. The decrease in policy
acquisition cost is primarily due to the previously mentioned programs which
have been discontinued.
8
<PAGE>
General insurance expenses:
General insurance expenses are down over $300,000 due to a decrease in
litigation expenses.
Insurance taxes, licenses, and fees:
Insurance taxes, licenses and fees have decreased due to a decrease in property
& casualty written premium.
Income taxes:
Income taxes increased for the quarter due to an increase in income. Income
taxes for 1998 were lower due to an increase in deferred tax assets. These
future deductible amounts reduce overall income tax expense.
Summary:
Net income increased $147,000 primarily due to an increase realized investment
gains and a decrease in general insurance expenses. Income before taxes
increased over $500,000 compared to last year.
Investments:
Investments decreased $1.9 million during the first quarter of 1999. Written
premium has decreased in NSFC and several discontinued auto programs are now in
the run-off stage. Because these programs are no longer generating any premium,
the remaining claims liabilities from these programs will have to be paid out of
remaining premium income and current investments. NSFC and NSIC also had a
reduction in unrealized capital gains during the quarter which also reduced
investment values for securities classified as available for sale.
Capital resources:
At March 31, 1999, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $40.6 million,
down $1.4 million from December 31, 1998. The decrease reflects net income of
$467,000, a decrease in unrealized investment gains of $1.48 million, dividends
paid of $410,000, and issuance of treasury stock of $61,000.
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 $1.9 million in cash and cash equivalents at March 31, 1999. Net
cash used by operating activities was $2.1 million for the current period,
compared to cash provided of $612,000 period ended March 31, 1998. Cash provided
by investing activities was $364,000. Cash dividends paid to stockholders' of
$410,000 was the primary use of cash used in financing activities.
9
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
See Exhibit Index
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned duly
authorized officer, on its behalf and in the capacity indicated.
The National Security Group, Inc.
By /s/ M.L. Murdock
----------------------------
M.L. Murdock
Senior Vice President and
Chief Financial Officer
Dated: May 14, 1999
11
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
(a) 11 Statement Regarding Computation of Per Share Earnings Filed Herewith;
See Note 3 to
Financial
(b) Form 8-K None
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 18,841
<DEBT-CARRYING-VALUE> 33,110
<DEBT-MARKET-VALUE> 33,867
<EQUITIES> 28,489
<MORTGAGE> 130
<REAL-ESTATE> 1,625
<TOTAL-INVEST> 82,846
<CASH> 1,910
<RECOVER-REINSURE> 6,451
<DEFERRED-ACQUISITION> 4,193
<TOTAL-ASSETS> 100,240
<POLICY-LOSSES> 18,900
<UNEARNED-PREMIUMS> 8,651
<POLICY-OTHER> 21,393
<POLICY-HOLDER-FUNDS> 1,606
<NOTES-PAYABLE> 2,972
0
0
<COMMON> 2,340
<OTHER-SE> 38,269
<TOTAL-LIABILITY-AND-EQUITY> 100,240
6,871
<INVESTMENT-INCOME> 1,085
<INVESTMENT-GAINS> 667
<OTHER-INCOME> 121
<BENEFITS> 5,447
<UNDERWRITING-AMORTIZATION> 1,458
<UNDERWRITING-OTHER> 1,288
<INCOME-PRETAX> 551
<INCOME-TAX> 84
<INCOME-CONTINUING> 467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 467
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
