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, 2000
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 Identification No.)
incorporation or organization)
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, 2000: 2,055,811
Exhibit index is located on page 15.
Page 1 of 15 pages
1
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(Consolidated Condensed Unaudited)
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
Independent Accountants' Report ....................................... 9
Item 2
Management's Discussion and Analysis of Financial Condition and Results
of Operations .................................................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................... 13
SIGNATURE ............................................................. 14
EXHIBIT INDEX ......................................................... 15
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED UNAUDITED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months
Ended March 31
2000 1999
---- ----
Revenues
Net insurance premiums earned ................................ $5,776 $6,871
Net investment income ........................................ 1,055 1,085
Realized investment gains .................................... 949 667
Other income ................................................. 88 121
------ ------
Total revenues ............................................. 7,868 8,744
------ ------
Benefits and Expenses
Policyholder benefits and settlement expenses ................ 3,763 5,447
Policy acquisition costs ..................................... 1,138 1,458
General insurance expenses ................................... 1,356 968
Insurance taxes, licenses and fees ........................... 251 320
------ ------
Total benefits and expenses ............................... 6,508 8,193
------ ------
Income Before Income Taxes and Cumulative Effect Adjustment .. 1,360 551
Income Taxes (Current and deferred) .......................... 249 84
------ ------
Net Income ................................................... $1,111 $ 467
====== ======
Earnings per share ........................................... $ 0.54 $ 0.23
====== ======
Dividends Declared per Share ................................. $ 0.21 $ 0.20
====== ======
The Notes to Financial Statements are an integral part of these unaudited
financial 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,
2000 1999
---- ----
Assets (Unaudited)
Investments:
Debt Securities held-to-maturity at amortized cost
(estimated fair value: 2000 - $30,480; 1999 - 30,774) . $ 30,668 $ 30,911
Debt Securities available-for-sale, at estimated fair value
(cost: 2000 - 25,114; 1999 - 23,065) ................. 24,030 21,936
Equity Securities, at market
(cost: 2000 - $13,953; 1999 - $12,683) ................ 25,876 27,676
Mortgage loans ............................................ 101 112
Investment real estate, at cost ........................... 1,566 1,557
Policy loans .............................................. 664 669
-------- --------
Total investments ....................................... 82,905 82,861
-------- --------
Cash and cash equivalents .................................... 774 3,512
Accrued investment income .................................... 810 830
Reinsurance recoverable ...................................... 4,808 4,687
Deferred policy acquisition costs ............................ 4,284 4,273
Prepaid reinsurance premiums ................................. 170 257
Other assets ................................................. 1,889 1,685
-------- --------
Total assets .............................................. $ 95,640 $ 98,105
======== ========
Liabilities
Policy reserves ........................................... $ 19,055 $ 18,987
Claim reserves ............................................ 18,448 18,864
Unearned premiums ......................................... 6,798 7,088
Other policyholder funds .................................. 1,502 1,526
Notes payable ............................................. 2,610 2,672
Accrued Income Taxes ...................................... 252 53
Deferred income tax ....................................... 2,566 3,014
Other liabilities ......................................... 2,510 4,013
-------- --------
Total liabilities ...................................... $ 53,741 $ 56,217
-------- --------
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 .... 9,247 9,915
Retained earnings ............................................ 33,876 33,197
Treasury stock, at cost (284,037 shares) ..................... (3,581) (3,581)
-------- --------
Total shareholders' equity ................................ 41,899 41,888
-------- --------
Total liabilities and shareholder's equity ................ $ 95,640 $ 98,105
======== ========
Shareholders' Equity per Share ............................... 20.38 20.37
======== ========
</TABLE>
The Notes to Financial Statements are an integral part of these unaudited
financial statements.
4
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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, 1998 ............. $ 41,968 $ 31,106 $ 12,146 $ 2,340 $ 17 $ (3,641)
Comprehensive Income
Net Income for 1999 .................. 3,756 3,756
Other comprehensive income(net of tax)
Unrealized loss on securities, net
of reclassification adjustment ... (2,231) (2,231)
--------
Total Comprehensive Income ............... 1,525
--------
Cash dividends ($.81 per share) .......... (1,665) (1,665)
Treasury stock sold ...................... 60 60
-------- -------- -------- -------- -------- --------
Balance at December 31, 1999 ............. $ 41,888 $ 33,197 $ 9,915 $ 2,340 $ 17 $ (3,581)
Comprehensive Income
Net Income for quarter ended 3/31/2000 1,111 1,111
Other comprehensive income(net of tax)
Unrealized loss on securities, net
of reclassification adjustment ... (668) (668)
--------
Total Comprehensive Income ............... 443
--------
Cash dividends ($.21 per share) .......... ( 432) ( 432)
Balance at March 31, 2000 (Unaudited) .... $ 41,899 $ 33,876 $ 9,247 $ 2,340 $ 17 $ (3,581)
======== ======== ======== ======== ======== ========
</TABLE>
The Notes to the Financial Statements are an integral part of these unaudited
financial statements.
5
<PAGE>
THE NATIONAL SECURITY GROUP. INC.
CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands) Three Months
Ended March 31
2000 1999
----- ----
Cash Flows from Operating Activities
Income from continuing operations ...................... $ 1,111 $ 467
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income ............................ 18 (43)
Reinsurance receivables .............................. (121) 382
Deferred Policy acquisition costs .................... (11) (39)
Income Taxes ........................................... (249) (721)
Depreciation expense ................................. 33 25
Policy liabilities and claims ........................ (638) (509)
Other, net ........................................... (1,563) (1,678)
------- -------
Net cash (used) provided by operating activities ... (1,420) (2,116)
------- -------
Cash Flows from Investing Activities
Cost of investments acquired ........................ (3,224) (4,858)
Sale and maturity of investments .................... 2,512 5,302
Purchase of property and equipment .................. (88) (80)
Proceeds from disposal of property and equipment .... 0 0
Other, net .......................................... 0 0
------- -------
Net cash provided (used) in investing activities .. (800) 364
------- -------
Cash Flows from Financing Activities
Increase in other policyholder funds ................ (24) (29)
Payments on notes payable ........................... (62) (32)
Dividends paid ...................................... (432) (410)
Treasury stock issued (purchased) ................... 0 60
------- -------
Net cash used in financing activities ............. (518) (1,377)
------- -------
Net (decrease) in cash and cash equivalents ............. (2,738) (2,163)
Cash and cash equivalents, beginning of period ........... 3,512 4,073
------- -------
Cash and cash equivalents, end of period ................. $ 774 $ 1,910
======= =======
The Notes to the Financial Statements are an integral part of these unaudited
financial statements.
6
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO UNAUDITED 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, 2000 was 2,056 and for the period ending March 31,
1999 was 2,052.
Note 4-Changes in Shareholder's Equity
During the three months ended March 31, 2000 and 1999, there were no changes in
shareholders' equity except for net income of $1,111 and $467 respectively;
dividends paid of $432 and $410 respectively; unrealized investment (losses)
gains, net of applicable taxes, of ($668) and $(1,475) respectively, and
issuance (purchases) of treasury stock of $0 and $61 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,
2000 2000
------ -------
Deferred policy acquisition costs ...................... (1,456) (1,453)
Policy liabilities ..................................... 470 488
Unearned premiums ...................................... 462 327
Claims liabilities ..................................... 548 548
General insurance expenses ............................. 713 711
Alternative minimum tax credit carryforward ............ 244 314
Unrealized gains on securities available-for-sale ...... (3,547) (3,950)
Net deferred tax assets (liability) .................... (2,566) (3,015)
====== ======
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.
7
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO UNAUDITED 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.
National Security Fire & Casualty Company, a subsidiary of the Company, was
named as a defendant in a purported class action filed in Lee County, Alabama.
On January 4, 2000 the Circuit Court of Lee County preliminarily approved a
consent settlement to this action and a settlement is expected to be finalized
by mid-year of 2000. A provision for this settlement was reflected in the 1999
results of operations of the Company.
The Company establishes and maintains reserves on contingent liabilities. In
many instances, however, it is not feasible to predict the ultimate outcome with
any degree of accuracy. While a resolution of these matters may significantly
impact consolidated earnings and the Company's consolidated financial position,
it remains management's opinion, based on information presently available, that
the ultimate resolution of these matters will not have a material impact on the
Company's consolidated financial position.
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 $443,000 and $(1,008,000) at March 31, 2000
and 1999, respectively.
8
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Independent Accountant's Report
We have reviewed the accompanying interim consolidated balance sheet of The
National Security Group, Inc as of March 31, 2000 and the related interim
consolidated statements of income and cash flows for the three month period then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
statements consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expressions of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Dudley, Hopton-Jones, Sims & Freeman PLLP
Birmingham, Alabama
May 15, 2000
9
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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, 2000, compared with December 31, 1999 and
its results of operations and cash flows for the quarter ending March 31, 2000,
compared with the same period last year.
The reader is assumed to have access to the Company's 1999 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:
Premium revenue in the life insurance subsidiary, National Security Insurance
Company (NSIC), accounts for 19% of total premium income of the Company. Life
insurance premium revenue was up 12% compared to the first quarter of 1999.
NSIC's new method of insurance sales, through independent insurance agents, is
beginning to show positive results and is the primary reason for the increase in
premium revenues in NSIC. NSIC's traditional home service insurance sales, sold
by NSIC employee agents, have began to stabilize after several years of rapid
decline.
Premium revenue in the property/casualty insurance subsidiaries, National
Security Fire & Casualty Company (NSFC) and Omega One Insurance Company (Omega)
are down significantly compared to last year. The primary reason for the decline
in property/casualty premium revenue is the discontinuation of several insurance
programs managed by managing general agents. NSFC has traditionally used
independent agents as the primary method of distribution of insurance products.
However, both NSFC and Omega have used managing general agents as an additional
method of distribution for the past several years. The primary difference
between these two methods lies in the amount of responsibility the Company takes
in the day to day management of the programs. Independent agents are primarily
"retail" agents that sell directly to the insured and the Company has primary
responsibility for underwriting the policy and paying claims as well as
marketing getting new agents to sell the companies products. Managing general
agents are traditionally considered "wholesale" agents that market an insurance
companies products to other retail agents. The managing general agent generally
underwrites, pays claims and takes primary responsibility for marketing a
particular companies products.
The property/casualty subsidiaries have experienced unfavorable underwriting
results from several different managing general agent programs over the last
five years. Auto programs in Louisiana and Georgia operated by managing general
agents have been discontinued due to unfavorable underwriting results. The
discontinuation of these programs has caused the decline in premium revenue. In
an effort to improve underwriting results, management is refocusing on
independent agents as the primary method of distribution..
Net investment income:
Net investment income is down slightly from last year as higher interest rate
bonds matured or were called during 1999.
10
<PAGE>
Realized capital gains and losses:
Investment gains of $949,000 were realized in the first quarter of 2000. This is
up over 40% from the first quarter of 1999. The gains were primarily generated
from the sale of common stock investments in the subsidiaries available for sale
portfolio.
Other income:
Other income is down $33,000 due to a decrease in fees generated by a
discontinued managing general agent program.
Policyholder benefits and settlement expenses:
Policyholder benefits as a percent of net insurance premiums earned decreased 14
percentage points compared to the first quarter of last year, 65.1% versus
79.3%. The first quarter of 1999 had a higher than anticipated loss ratio. NSFC
incurred several storm related losses on dwelling property programs in the first
quarter of 1999.
Policy acquisition cost:
Policy acquisition costs are down over $320,000 compared to last year, but as a
percent of premium earned is down only slightly compared to last year. The
slight percentage decrease in policy acquisition cost is due to the
discontinuation of the managing general agents programs.
General insurance expenses:
General insurance expenses are up over $388,000 compared to last year. General
expenses in 1999 were slightly lower than normal due to a refund of an
association assessment which had been expensed in a previous period. The
remainder of the increase in 2000 general expenses was due to an increase in
directors deferred compensation of about $80,000, increased general expenses in
the Life insurance subsidiary of approximately $90,000, and increased general
expenses in the property/casualty subsidiaries of $100,000. Most of the
increased expenses in the insurance subsidiaries were associated with rate
filings, and product development (actuarial and rate analysis), and association
assesments.
Insurance taxes, licenses, and fees:
Insurance taxes, licenses and fees have decreased due to a decrease in property
& casualty written premium.
Income taxes:
Income tax expense consists of current period taxes of $296,000 and a change in
deferred income taxes of ($45,000).
Summary:
Net income increased $67,000 primarily due to an increase realized investment
gains of $282,000, and an improvement in underwriting results in the
property/casualty subsidiaries as the loss ratio dropped from over 79% to 65%.
Investments:
Investment
Capital resources:
At March 31, 1999, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $41.9 million,
up slightly from December 31, 1999. The increase reflects net income of
$1,111,000, a decrease in unrealized investment gains of $668,000, and dividends
paid of $432,000.
11
<PAGE>
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 $774,000 in cash and cash equivalents at March 31, 2000, down
from $3,512,000 at December 31, 1999.
12
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
See Exhibit Index
13
<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/ ML Murdock
---------------
M.L. Murdock
Senior Vice President and
Chief Financial Officer
Dated: May 15, 2000
14
<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
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 24,030
<DEBT-CARRYING-VALUE> 30,668
<DEBT-MARKET-VALUE> 30,480
<EQUITIES> 25,876
<MORTGAGE> 101
<REAL-ESTATE> 1,566
<TOTAL-INVEST> 82,905
<CASH> 774
<RECOVER-REINSURE> 4,808
<DEFERRED-ACQUISITION> 4,284
<TOTAL-ASSETS> 95,640
<POLICY-LOSSES> 19,055
<UNEARNED-PREMIUMS> 6,798
<POLICY-OTHER> 18,448
<POLICY-HOLDER-FUNDS> 1,502
<NOTES-PAYABLE> 2,610
0
0
<COMMON> 2,340
<OTHER-SE> 39,559
<TOTAL-LIABILITY-AND-EQUITY> 95,640
5,776
<INVESTMENT-INCOME> 1,055
<INVESTMENT-GAINS> 949
<OTHER-INCOME> 88
<BENEFITS> 3,763
<UNDERWRITING-AMORTIZATION> 1,138
<UNDERWRITING-OTHER> 1,607
<INCOME-PRETAX> 1,360
<INCOME-TAX> 249
<INCOME-CONTINUING> 1,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,111
<EPS-BASIC> .54
<EPS-DILUTED> .54
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
