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 June 30, 2000
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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
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Commission File Number: 0-18649
THE NATIONAL SECURITY GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 63-1020300
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
661 East Davis Street, Elba, Alabama 36323
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (334) 897-2273
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Not Applicable
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(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 August 8, 2000: 2,055,811
Exhibit index is located on page 16.
Page 1 of 16 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 Shareholders'Equity 5
Consolidated Statement of Cash Flow 6
Notes to Financial Statements 7
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
EXHIBIT INDEX 16
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)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Six Months
Ended June 30 Ended June 30
2000 1999 2000 1999
-------- -------- ------- --------
Revenues
Net insurance premiums earned ............... $ 5,453 $ 6,627 $11,229 $13,498
Net investment income ....................... 1,103 1,070 2,158 2,155
Realized investment gains ................... 117 831 1,066 1,498
Other income ................................ 89 85 177 206
------- ------- ------- -------
Total revenues ............................ 6,762 8,613 14,630 17,357
------- ------- ------- -------
Benefits and Expenses
Policyholder benefits and settlement expenses 3,593 3,468 7,356 8,915
Policy acquisition costs .................... 1,050 1,301 2,188 2,759
General insurance expenses .................. 886 856 2,242 1,824
Insurance taxes, licenses and fees .......... 212 265 463 585
------- ------- ------- -------
Total benefits and expense ................ 5,741 5,890 12,249 14,083
------- ------- ------- -------
Income Before Income Taxes .................. 1,021 2,723 2,381 3,274
Income Taxes (Current and deferred) ......... 219 775 468 859
------- ------- ------- -------
Net Income .................................. $ 802 $ 1,948 $ 1,913 $ 2,415
======= ======= ======= =======
Earnings per share .......................... $ 0.39 $ 0.95 $ 0.93 $ 1.18
======= ======= ======= =======
Dividends Declared per Share ................ $ 0.21 $ 0.20 $ 0.42 $ 0.40
======= ======= ======= =======
The Notes to Financial Statements are an integral part of these statements.
3
</TABLE>
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
As of As of
June 30, December 31,
2000 1999
(Unaudited)
---------- -----------
Assets
Investments:
Debt Securities held-to-maturity at amortized cost
(estimated fair value: 2000-$29,326; 1999-$30,774) $29,519 $30,911
Debt Securities available-for-sale, at estimated fair value
(cost: 2000-$25,475; 1999-$23,065) 24,326 21,936
Equity Securities, at market
(cost: 2000-$12,009; 1999-$12,683) 25,315 27,676
Receivable for securities sold 151 0
Mortgage loans 97 112
Investment real estate, at cost 1,562 1,557
Policy loans 672 669
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Total investments 81,642 82,861
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Cash and cash equivalents 804 3,512
Accrued investment income 873 830
Reinsurance recoverable 3,960 4,687
Deferred policy acquisition costs 4,333 4,273
Prepaid reinsurance premiums 207 257
Other assets 1,996 1,685
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Total assets $ 93,815 $98,105
======= =======
Liabilities
Policy reserves $19,211 $18,987
Claim reserves 17,264 18,864
Unearned premiums 6,751 7,088
Other policyholder funds 1,435 1,526
Notes payable 2,547 2,672
Current income tax payable 564 53
Deferred income tax 2,393 3,014
Other liabilities 2,041 4,013
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Total liabilities $52,206 $56,217
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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 8,586 9,915
Retained earnings 34,247 33,197
Treasury stock, at cost (284,037 shares) (3,581) (3,581)
------- -------
Total shareholders'equity 41,609 41,888
------- -------
Total liabilities and shareholder's equity 93,815 98,105
======= =======
Shareholders' Equity per Share 20.24 20.37
======= =======
The Notes to Financial Statements are an integral part of these statements
4
</TABLE>
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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)
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Total Comprehensive Income ............... 1,525
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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 6/30/2000 1,913 1,913
Other comprehensive income(net of tax)
Unrealized loss on securities, net
of reclassification adjustment ... (1,329) (1,329)
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Total Comprehensive Income ............... 583
--------
Cash dividends ($.42 per share) .......... ( 863) ( 863)
Balance at June, 30 2000 (Unaudited) .... $ 41,609 $ 34,247 $ 8,586 $ 2,340 $ 17 $ (3,581)
======== ======== ======== ======== ======== ========
</TABLE>
The Notes to the Financial Statements are an integral part of these unaudited
financial statements.
5
THE NATIONAL SECURITY GROUP. INC.
CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months
Ended June 30
2000 1999
------- --------
Cash Flows from Operating Activities
Income from continuing operations $ 1,913 $ 2,415
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income (43) (77)
Reinsurance receivables 727 1,202
Deferred Policy acquisition costs (60) 23
Income Taxes (110) 114
Depreciation expense 66 50
Policy liabilities and claims (1,713) (1,939)
Other, net (2,092) (1,185)
------- -------
Net cash provided by operating activities (1,312) 603
======= =======
Cash Flows from Investing Activities
Cost of investments acquired (3,516) (9,903)
Sale and maturity of investments 8,406 8,724
Purchase of property and equipment (207) (80)
Proceeds from disposal of property and equipment 0 0
Other, net 0 0
------- -------
Net cash used in investing activities (317) (1,259)
======= =======
Cash Flows from Financing Activities
Decrease in other policyholder funds (91) (45)
Payments on notes payable (125) (66)
Dividends paid (863) (822)
Treasury stock issued 0 61
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Net cash used in financing activities (1,079) (872)
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Net increase (decrease) in cash and cash equivalents (2,708) (1,529)
Cash and cash equivalents, beginning of period 3,512 4,073
------- -------
Cash and cash equivalents, end of period $ 804 $2,544
======= =======
The Notes to the Financial Statements are an integral part of these statements.
6
</TABLE>
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-Basis of Presentation
The consolidated unaudited 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,
1999.
The accompanying consolidated unaudited 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
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 June 30, 2000 was 2,056,000 and for the period ending June 30,
1999 was 2,054,000.
Note 4-Changes in Shareholder's Equity (in thousands)
During the six months ended June 30, 2000 and 1999, there were no changes in
shareholders' equity except for net income of $1,913 and $2,415 respectively;
dividends paid of $863 and $821 respectively; unrealized investment losses, net
of applicable taxes, of $(1,329) and ($600) respectively, and issuance
(purchase) 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:
(in thousands)
June 30, January 1,
2000 2000
-------- ---------
Deferred policy acquisition costs (1,473) (1,453)
Policy liabilities 454 488
Unearned premiums 434 327
Claims liabilities 536 548
General insurance expenses 707 711
Alternative minimum tax credit carry forward 244 314
Unrealized gains on securities available-for-sale (3,295) (3,950)
Other 0 0
------- -------
Net deferred tax liability (2,393) (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
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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.
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 the settlement was finalized in the second
quarter of 2000. A provision for this settlement was reflected in the 1999
results of operations of the Company.
During June and July of 2000 a subsidiary of the company, National Security
Insurance Company, received inquiries from the Alabama and Georgia Departments
of Insurance regarding the issuance of industrial life insurance policies with
race based premiums. NSIC is currently investigating the matter and intends to
fully cooperate with the inquiries of each Department.
Numerous insurance companies operating in states that NSIC operates have been
named in class action lawsuits involving the issuance of race based life
insurance policies. NSIC does not currently have any pending actions involving
race based life insurance policies, but due to extensive press coverage and
advertising by plaintiff law firms, the possibility exists that NSIC could be
named in future class action lawsuits involving this matter.
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. However, it should be noted that
instances of class action lawsuits against insurance companies appear to be
increasing in several states in which insurance subsidiaries of the company
operate. Also, in Alabama, where the Company's subsidiaries have substantial
business, the possibility of a judgment in any given suit, including a large
punitive damage award by a jury, bearing little or no relation to actual
damages, continues to exists, creating the potential for unpredictable material
adverse financial results.
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 amoritization 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.
8
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
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 impairments 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 primary additional component for The Company is unrealized
investment gains and losses. Total comprehensive income, net of reclassification
adjustment, was $583,000 and $1,815,000 at June 30, 2000 and 1999, respectively.
9
<PAGE>
(Letterhead of Barfield, Murphy, Shank & Smith PC)
Independent Accountants' Review Report
We have reviewed the accompanying interim consolidated balance sheet of The
National Security Group, Inc as of June 30, 2000 and the related interim
consolidated statements of income and cash flows for the six-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
expression 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.
Barfield, Murphy, Shank & Smith PC
Birmingham, AL
August 14, 2000
10
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Item 2.
MANAGEMENTS' 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 June 30, 2000, compared with December 31, 1999 and
its results of operations and cash flows for the quarter ending June 30, 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 6 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 20% of total premium income of the Company. Life
insurance premium revenue was up 13% compared to the first six months 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 begun 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 over 20% compared to last year. The primary reason for the decline in
property/casualty premium revenue is the discontinuation, during 1999 and 2000,
of several insurance programs managed by managing general agents. Due to
unfavorable underwriting results, and in an effort to refocus on core lines of
business, the management of NSFC and Omega eliminated the last significant
managing general agent program in the second quarter of 2000. This program, a
private passenger auto program in Florida, has incurred significant underwriting
losses in the last three years, and contributed significantly to a combined
ratio in the current period in excess of 100%.
In an effort to improve operating results and increase premium revenue,
management is now working on improving existing products that have performed
well in the past and focus marketing efforts on existing profitable lines of
business.
Net investment income:
Net investment income is virtually unchanged compared to last year.
Realized capital gains and losses:
Investment gains of $1.1 million were realized in the first half of 2000. 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.
11
<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 and settlement expenses as a percent of earned premium is
down slightly compared to last year, 65.5% versus 66.1%. However, results for
both periods were negatively skewed due to the impact of general agent auto
programs. As mentioned in previous paragraphs, the last of these programs was
cancelled in the second quarter of 2000. The remaining policies in force on this
program will expire during the last six months of 2000.
Policy acquisition costs:
Policy acquisition costs are down over $571,000 compared to last year, but as a
percent of earned premium is down only slightly. Again, the primary factor
contributing to the decrease in policy acquisition cost is the discontinuation
of several managing general agent programs over the last two years.
General insurance expenses:
General insurance expenses are up primarily due to an increase in directors
deferred compensation, and cost associated with upgrading various insurance
products including actuarial fees and marketing related expenses.
Insurance taxes, licenses, and fees:
Insurance taxes, licenses and fees are down due to a decrease in written
premium, but as a percent of premium revenue is about the same as last year.
Summary:
The Company has a year to date net income of $1.9 million versus net income of
$2.4 million in 1999. The primary reason for the decrease in earnings compared
to last year is a $432,000 decrease in realized capital gains.
Investments:
Investments at June 30, 2000 are down $1.2 million compared to December 31,
1999. The primary reason for the decrease in investments is a $600,000 or 2.7%
decrease in the company's equity portfolio in the first six months of 2000.
Also, cash from investments have been used to reduce liabilities.
Capital resources:
At June 30, 2000, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $41.6 million,
down $279,000 compared to December 31, 1999. The decrease reflects net income of
$1.9 million, a decrease in unrealized investment gains of $1,329,000, dividends
paid of $863,000.
The Company has $2.5 million in notes from local banks which management intends
to repay in full over the next four years.
<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 $804,000 in cash and cash equivalents at June 30, 2000. Net cash
provided by operating activities was $603,000 for the current period, compared
to net cash provided of $603,000 for the period ended June 30, 1999. Cash used
in investing activities was $1.2 million. Cash dividends paid to stockholders'
of $863,000 and payments on notes payable of $125,000 were the primary uses of
cash used in financing activities.
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
See Exhibit Index
<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: August 11, 2000
<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
Incorporated by reference to the Registrant's Current
Report on Form 8-K filed on July 27, 2000.
16
