UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-18649
The National Security Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 63-1020300 661 East Davis Street, Elba, Alabama 36323 (State or
other (IRS Employer (Address of principal executive offices)(Zip code)
jurisdiction of identification incorporation or number) organization)
Registrant's telephone number, including area code (334) 897-2273
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock par value $1.00 per share
Title of Each Class
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( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. (X)
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of February 29, 2000 (based upon the bid price of these shares on
NASDAQ on such date) - 11,379,758
Number of Shares of Common Stock outstanding as of February 29, 2000 - 2,055,811
Portions of the Annual Proxy Statement incorporated by reference into Part III.
Total Number of Sequentially Numbered Pages: 48
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THE NATIONAL SECURITY GROUP, INC.
INDEX TO THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
Part I Page
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 8. Consolidated Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants and
Financial Disclosure 45
Part III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 46
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K 47
Signature Page 48
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PART I
Item 1. Business
Summary Description of The National Security Group, Inc.
The National Security Group, Inc. (the Company), an insurance holding company,
was incorporated in Delaware on March 20, 1990. The Company, through its
property and casualty subsidiaries, writes primarily low value dwelling fire and
windstorm, homeowners, and personal non-standard automobile lines of insurance.
The Company's property and casualty subsidiaries also write commercial lines of
insurance for small businesses. The Company, through its life insurance
subsidiary, offers a basic line of life, and health and accident insurance
products. Property-casualty insurance is the most significant segment,
accounting for 83.6% of total premium revenues.
Industry Segment and Geographical Area Information
Property and Casualty Insurance Segment
The Company's property and casualty insurance business is conducted through
National Security Fire & Casualty Company (NSFC), a wholly owned subsidiary of
the Company organized in 1959, and Omega One Insurance Company (Omega), a wholly
owned subsidiary of National Security Fire & Casualty Company organized in 1993.
NSFC is licensed to write insurance in the states of Alabama, Arkansas, Florida,
Georgia, Mississippi, Oklahoma, South Carolina, and Tennessee, and operates on a
surplus lines basis in the states of Kentucky, Louisiana, Missouri, and Texas.
Omega is licensed to write insurance in Alabama and Louisiana. The following
table indicates those states which accounted for more than five percent of
direct written premium during 1999:
State Percent of direct written premium
Alabama ............................. 37.11%
Arkansas ............................ 9.28%
Florida ............................. 15.24%
Georgia ............................. 8.36%
Louisiana ........................... 12.07%
Mississippi ......................... 5.67%
In general, the property-casualty insurance business involves the transfer by
the insured, to an insurance company of all or a portion of certain risks for
the payment, by the insured, of a premium to the insurance company. A portion of
such risks is often retained by the insured in the form of deductibles which may
vary greatly from policy to policy.
The premiums or payments to be made by the insured for direct products of the
property-casualty subsidiaries are based upon expected cost of providing
benefits, writing, and administering the policies. In determining the premium to
be charged, the property-casualty subsidiaries utilize data from past claims
experience and anticipated claims estimates along with commissions and general
expenses. Historically, there has been more price competition among property-
casualty insurers than other types of insurers.
The operating results of the property-casualty insurance industry are subject to
significant fluctuations from quarter to quarter and from year to year due to
the effect of competition on pricing, the frequency and severity of losses
incurred in connection with weather-related and other catastrophic events,
general economic conditions, and other factors such as changes in tax laws and
the regulatory environment.
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The following table sets forth the premiums earned and income during the
periods reported:
Year Ended December 31
(Amounts in Thousands)
1999 1998 1997
Net premiums earned:
Fire, Allied lines, and Homeowners ..... $ 14,600 $ 15,817 $ 14,647
Automobile ............................. 6,086 7,715 11,082
Other .................................. 999 1,082 1,436
$ 21,685 $ 24,614 $ 27,165
Income before income taxes ................... $ 2,365 $ (1,000) $ 1,572
Life Insurance Segment
The Company's life insurance business is conducted by National Security
Insurance Company (NSIC), a wholly owned subsidiary organized in 1947. NSIC is
licensed to write insurance in five states. The following table indicates those
states which accounted for 4% or more of the total direct premiums collected by
the Life Company in 1999:
State Percentage of Total Direct Premiums
Alabama ................................................. 91
Mississippi ............................................. 4
Georgia ................................................. 5
NSIC primarily writes home service life insurance products, which means its
agents sell new products directly at the home or other premises of the insured.
The products primarily consist of term and whole life insurance and accident and
health insurance. NSIC does not sell annuities.
Term life insurance policies provide death benefits if the insured's death
occurs during the specific premium paying term of the policy and generally do
not include a savings or investment element in the policy premium. Whole-life
insurance policies demand a higher premium than term life, but provide death
benefits which are payable under effective policies regardless of the time of
the insured's death and have a savings and investment element which may result
in the accumulation of a cash surrender value.
Accident and health business is primarily home service products and accident
policies sold through schools. Accident and health insurance provides coverage
for losses sustained through sickness or accident and includes individual
hospitalization and accident policies, group supplementary health policies and
specialty products, such as cancer policies. These policies generally provide a
stated benefit and have not experienced the escalating health care costs which
many health and accident insurance policies have experienced in recent years.
The following table sets forth certain information respecting the development of
the Life Company's business:
Year Ended December 31
(Amounts in Thousands)
1999 1998 1997
Life insurance in force at end of period:
Ordinary-whole life .................. $ 80,200 $ 71,800 $ 70,000
term life ............. 35,100 33,500 33,900
Industrial .......................... 30,700 32,300 34,000
Other ............................... 0 100 100
146,000 137,700 138,000
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Year Ended December 31
(Amounts in Thousands)
1999 1998 1997
New life insurance issued:
Ordinary-whole life ............... $66,200 $41,300 $39,000
term life ............. 7,700 5,300 200
Industrial ........................ 0 0 0
Other ............................. 100 100 100
74,000 46,700 39,300
Net premiums earned:
Life insurance ...................... $3,396 $2,914 $2,979
Accident and health insurance ....... 855 923 1,012
4,251 3,837 3,991
Investments
The insurance subsidiaries are regulated as to the types of investments which
they may make and the amount of funds they may maintain in any one type of
investment. Through its investment policy, the Company seeks to conserve its
capital resources and assets, meet the investment requirements of its reserves
and provide a reasonable return on investments.
The following table sets forth certain information respecting the Company's
investments at the date shown:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31
1999 1998
Investment Securities held-to-maturity, at amortized cost
(estimated fair value: 1999 - $30,774, 1998 - $31,835) $30,911 $30,807
Investment Securities available-for-sale, at market
(cost: 1999 - $35,748, 1998 - $34,175) ............... 49,612 51,235
Receivable for securities sold ............................... 0 315
Mortgage loans on real estate, at cost ....................... 112 135
Investment real estate, at cost .............................. 1,557 1,629
Policy loans ................................................. 669 645
Short-term investments ....................................... 2,129 3,290
$84,990 $88,056
</TABLE>
The results with respect to the foregoing investments are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31
1999 1998 1997
Net investment income ................................. $ 4,354 $ 4,351 $ 4,204
Average yield on investments .......................... 5.1% 4.9% 5.1%
Economic yield on investments (includes realized and
unrealized investment gains) .......... 3.7% 9.0% 16.0%
Net realized gains on investments (before income taxes) 1,951 4,117 2,720
Changes in net unrealized gains on investments
(before income taxes) .................. (3,196) (503) 6,266
</TABLE>
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As of December 31, 1999, the maturity schedule for all bonds and notes held by
the Company, stated at amortized cost, was as follows:
Maturity Schedule (Amounts in thousands)
Available Held to Percentage
Maturity for sale Maturity Total of Total
Maturity in less than 1 year $ 400 $ 1,040 $ 1,440 2.7%
Maturity in 1-5 years ...... 4,468 9,461 13,929 25.8
Maturity in 5-10 years ..... 11,911 8,560 20,471 37.9
Maturity after 10 years .... 6,286 11,850 18,136 33.6
Totals ..................... $23,065 $30,911 $53,976 100.0%
Certain Information Regarding Insurance Activities
Marketing and Distribution
The NSIC's products are marketed through a field force of agents and service
representatives who are employees of the Life Company. NSIC began in 1997 to add
independent agents to its method of distribution. This method of distribution is
expected to be more cost effective and will become an important method of
distribution in the future. NSFC's products are marketed through a network of
independent agents and brokers, who are independent contractors and who
generally maintain relationships with one or more competing insurance companies.
Agents receive compensation for their sales efforts. In the case of life
insurance agents, compensation is paid in the form of sales commissions plus a
servicing commission. Commissions incurred by NSIC in 1999 averaged
approximately 27.7% of premiums. Commissions incurred by the NSFC in 1999
averaged approximately 17.6% of premiums and ranged from 12.5% to 27.5%
depending on the type and amount of insurance sold. During 1999, no one
independent agent accounted for more than 10% of total net earned premium of the
property-casualty insurance subsidiaries.
NSIC is continuing the process of implementing changes in collection of premium
payments, and the method of marketing. If the policyholder so elects, he or she
may begin making payments by mail to the home office rather than have a home
service agent come to their house every month and collect premiums. This change
is being implemented in response to the change in lifestyles of our
policyholders. It is increasingly difficult to reach policyholders at home until
early evening, and they are usually too busy to be bothered. Those who elect to
pay by mail will still be provided service by an area representative for help
with claims and policy related questions. With this method of payment there has
been reductions in the number of Life Company agents. Also, because it is
becoming increasingly difficult to employ people to contact our policy owners at
home, NSIC management is continuing to implement changes in the method of
marketing of life insurance products. This new method of marketing utilizes
independent agents to distribute products.
Reinsurance
Both insurance subsidiaries customarily reinsure with other insurers certain
portions of the insurance risk. The primary purpose of such reinsurance
arrangements is to enable the Company to limit its risk on individual policies,
and in the case of property insurance, limit its risk in the event of a
catastrophe in various geographic areas. A reinsurance arrangement does not
discharge the issuing company from primary liability to the insured, and the
issuing company is required to discharge its liability to the insured even if
the reinsurer is unable to meet its obligations under the reinsurance
arrangements. Reinsurance, however, does make the reinsurer liable to the
issuing company to the extent of any reinsurance in force at the time of the
loss. Reinsurance arrangements also decrease premiums retained by the issuing
company since that company pays the reinsuring company a portion of total
premiums based upon the amount of liability reinsured.
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NSIC generally reinsures all risks in excess of $50,000 with respect to any one
policy. NSFC and Omega generally reinsure with third parties any liability in
excess of $100,000 on any single policy. In addition, the property-casualty
subsidiaries have catastrophe excess reinsurance which protects it in part with
respect to aggregate property losses arising out of a single catastrophe, such
as a hurricane. In 1999, the property-casualty subsidiaries had catastrophe
protection up to a $21 million loss. On a 1 in 200 year loss, that is a loss
that has only a 1/2 of 1% chance of occuring in any given year, the property and
casualty subsidiaries would pay $2.7 million in losses and reinsurers would pay
$17.9 million.
In addition to catastrophe reinsurance, NSFC also had a 50% quota share
reinsurance agreement on ocean marine exposure with additional excess of loss
coverage.
Reserve liabilities
NSIC maintains life insurance reserves for future policy benefits to meet future
obligations under outstanding policies. These reserves are calculated to be
sufficient to meet policy and contract obligations as they arise. Liabilities
for future policy benefits are calculated using assumptions for interest,
mortality, morbidity, expense, and withdrawals determined at the time the
policies were issued. As of December 31, 1999, the total reserves of NSIC
(including the reserves for accident and health insurance) were approximately
$19 million. NSIC believes that such reserves for future policy benefits were
calculated in accordance with generally accepted actuarial methods and that such
reserves are adequate to provide for future policy benefits. Wakely &
Associates, consulting actuaries, provided actuarial services in calculating
reserves.
The property-casualty subsidiaries are also required to maintain loss reserves
(claim liabilities) for all lines of insurance. Such reserves are intended to
cover the probable ultimate cost of settling all claims, including those
incurred but not yet reported. The reserves of the property-casualty
subsidiaries reflect estimates of the liability with respect to incurred claims
and are determined by evaluating reported claims on an ongoing basis and by
estimating liabilities for incurred but not reported claims. Such reserves
include adjustment expenses to cover the cost of investigating losses and
defending lawsuits. The establishment of accurate reserves is complicated by the
fact that claims in some lines of insurance are settled many years after the
policies have been issued, thus raising the possibility that inflation may have
a significant effect on the amount of ultimate loss payment, especially when
compared to initial loss estimates. The subsidiaries, however, attempt to
restrict their writing to risks that settle within one to four years of issuance
of the policy. As of December 31, 1999, the property-casualty subsidiaries had
reserves for unpaid claims of approximately $19 million before subtracting
unpaid claims which will be due from reinsurers of $4.5 million leaving net
unpaid claims of $14.5 million. The reserves are not discounted for the time
value of money. No changes were made in the assumptions used in estimating the
reserves during the years ending December 31, 1999, 1998 or 1997. The Company
believes such reserves are adequate to provide for settlement of claims. The
Fire Company's loss reserves are calculated by employees of the Company.
Milliman & Robertson, an independent actuarial consulting firm, issues a
Statement of Actuarial Opinion regarding the adequacy of reserves.
Underwriting Activities
The insurance subsidiaries maintain underwriting departments which seek to
evaluate the risks associated with the issuance of an insurance policy. NSIC
accepts standard risks and, to an extent, substandard risks and engages medical
doctors who review certain applications for insurance.
In the case of the property-casualty subsidiaries, the underwriting staff
attempts to assess, in light of the type of insurance sought by an applicant,
the risks associated with a prospective insured or insurance situation.
Depending upon the type of insurance involved, the process by which the risks
are assessed will vary. In the case of automobile liability insurance, the
underwriting staff assesses the risks involved in insuring a particular driver,
and in the case of fire insurance, the underwriting staff assesses the risks
involved in insuring a particular dwelling. Where possible, the underwriting
staff of the property-casualty insurance subsidiary utilizes standard procedures
as guides that quantify the hazards associated with a particular business
activity. In general, the property-casualty subsidiaries specialize in writing
nonstandard risks.
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The nonstandard market in which the property-casualty subsidiaries operate
reacts to general economic conditions in much the same way as the standard
market. When insurers' profits and equity are strong, companies generally cut
rates or not seek increases. Also, underwriting rules are less restrictive. As
profit and/or capital fall, companies tighten underwriting rules, and seek rate
increases. Premiums in the nonstandard market are higher than the standard
market because of the increased risk of the insured, which generally comprises
more frequent claims. Drivers of autos who have prior traffic convictions are
one such increased risk which warrants higher premiums. Low valued dwellings and
mobile homes also warrant higher premiums because of the nature of the risk. The
costs of placing such nonstandard policies and making risk determinations are
similar to those of the standard market. The added costs due to more frequent
claims servicing is reflected in the higher premiums which are charged.
Regulation
The insurance subsidiaries are each subject to regulation by the insurance
departments of those states in which they are licensed to conduct business.
Although the extent of regulation varies from state to state, the insurance laws
of the various states generally establish supervisory departments having broad
administrative powers with respect to, among other matters, the granting and
revocation of licenses to transact business; the licensing of agents; the
establishment of standards of financial solvency, including reserves to be
maintained, the nature of investments and, in most cases premium rates; the
approval of forms and policies; and the form and content of financial
statements. These regulations have as their primary purpose the protection of
policyholders and do not necessarily confer a benefit upon stockholders.
Many states in which the insurance subsidiaries operate, including Alabama, have
laws which require that insurers become members of guaranty associations. These
associations guarantee that benefits due policyholders of insurance companies
will continue to be provided even if the insurance company which wrote the
business is financially unable to fulfill its obligations. To provide these
benefits, the associations assess the insurance companies licensed in a state
that write the line of insurance for which coverage is guaranteed. The amount of
an insurer's assessment is generally based on the relationship between that
company's premium volume in the state and the premium volume of all companies
writing the particular line of insurance in the state. The Company paid $0, $0,
and $77,000 in various guaranty association assessments in 1999, 1998, and 1997
respectively. These payments are principally related to association costs
incurred due to the insolvency of various insurance companies. Future
assessments depend on the number and magnitude of insurance company insolvencies
and such assessments are therefore difficult to predict.
Most states have enacted legislation or adopted administrative rules and
regulations covering such matters as the acquisition of control of insurance
companies, transactions between insurance companies and the persons controlling
them. The National Association of Insurance Commissioners has recommended model
legislation on these subjects and all states where the Company's subsidiaries
transact business have adopted, with some modifications, that model legislation.
Among the matters regulated by such statutes are the payments of dividends.
These regulations have a direct impact on the Company since its cash flow is
substantially derived from dividends from its subsidiaries. However, the Company
has not had nor does it foresee a problem obtaining the necessary funds to
operate because of the regulation.
Competition
The insurance subsidiaries are engaged in a highly competitive business and
compete with many insurance companies of substantially greater financial
resources, including stock and mutual insurance companies. Mutual insurance
companies return profits, if any, to policyholders rather than stockholders;
therefore, mutual insurance companies may be able to charge lower net premiums
than those charged by stock insurers. Accordingly, stock insurers must attempt
to achieve competitive premium rates through greater volume, efficiency of
operations and control of expenses.
NSIC primarily markets its life and health insurance products through the home
service system. Direct competition comes from other home service companies, of
which there are many. NSIC's life and health products also compete to a lesser
extent with products sold by ordinary life companies. NSIC writes policies
primarily in Alabama. The market share of the total life and health premiums
written is small because of the number of insurers in this highly competitive
field. The primary methods of competition in the field are service and price.
NSIC attempts to price its products with
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other home service companies. Because of the increased costs associated with a
home service company, premium rates are generally higher than ordinary products,
so competition from these ordinary insurers must be met through service.
The property-casualty subsidiaries market their products through independent
agents and brokers, concentrating on low value dwellings and nonstandard auto
coverage. NSFC, though one of the larger writers of low-value dwelling fire
insurance in Alabama, nevertheless faces a number of competitors in this niche.
Moreover, larger general line insurers also compete with NSFC. The market share
in states other than Alabama is small. Price is the primary method of
competition. Due to the method of marketing through independent agents,
commission rates and service to the agent are also important factors in whether
the independent agent agrees to offer the Fire Company's products over its
competitors.
Inflation
The Company shares the same risks from inflation as other companies. Inflation
causes operating expenses to increase and erodes the purchasing power of the
Company's assets. A large portion of the Company's assets are invested in fixed
maturity investments. The purchasing power of these investments will be less at
maturity because of inflation. This is generally offset by the reserves which
are a fixed liability and will be paid with cheaper dollars. Also, inflation
tends to increase investment yields, which may reduce the impact of the
increased operating expenses caused by inflation.
Item 2. Properties
The Company owns no property. The Life insurance subsidiary owns its principal
executive offices located at 661 East Davis Street, Elba, Alabama. The executive
offices are shared by the insurance subsidiaries. The building was constructed
in 1977 and consists of approximately 26,000 square feet. The Company believes
this space to be adequate for its foreseeable future needs. The Company's
subsidiaries own certain real estate properties, including approximately 2,700
acres of timberland in Alabama.
Item 3. Legal Proceedings
The Company and its subsidiaries are named as parties to litigation related to
the conduct of their insurance operations. Further information regarding details
of pending suits can be found in note 11 to the consolidated financial
statements.
Item 4. Submission of Matters to a vote of Security Holders
There were no matters submitted to a vote of security holders during the three
months ended December 31, 1999.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The capital stock of the Company is traded in the Over-the-Counter (OTC) market.
Quotations are furnished by the National Association of Security Dealers
Automated Quotations System (NASDAQ). The trade symbol is NSEC.
The number of shareholders of the Company's capital stock as of January 31,
1999, was approximately 1,100.
Stock Bid Prices Dividends
High Low Per Share
1999
First Quarter ................. $15 $12 3/16 $ .20
Second Quarter ................ 12 3/16 11 .20
Third Quarter ................. 13 1/4 9 1/4 .20
Fourth Quarter ................ 14 1/4 9 7/8 .21
1998
First Quarter ................. $21 1/4 $17 $ .19
Second Quarter ................ 21 18 .19
Third Quarter ................. 18 1/2 14 .19
Fourth Quarter ................ 14 10 1/2 .20
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Item 6. Selected Financial Data
(Amounts in thousands, except per share)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Operating results 1999 1998 1997 1996 1995
Net premiums earned ...... $ 25,936 $ 28,451 $ 31,156 $ 26,654 $ 24,372
Net investment income .... 4,354 4,351 4,204 3,935 4,311
Net realized investment
gains ............... 1,951 4,117 2,720 1,839 1,650
Other income ............. 385 385 695 582 505
Total revenues ................ $ 32,626 $ 37,304 $ 38,775 $ 33,010 $ 30,838
Net Income .................... $ 3,756 $ 930 $ 2,998 $ 1,356 $ 214
Net income per share .......... $ 1.83 $ 0.42 $ 1.28 $ 0.58 $ 0.09
Other Selected Financial Data
Total shareholders' equity .... $ 41,888 $ 41,968 $ 46,352 $ 40,519 $ 39,774
Book value per share .......... $ 20.37 $ 20.46 $ 20.04 $ 17.43 $ 17.11
Dividends per share ........... $ 0.81 $ 0.77 $ 0.70 $ 0.65 $ 0.61
Net change in unrealized
capital gains (net of tax) ($ 2,231) ($ 351) $ 4,556 $ 968 $ 2,726
Total assets .................. $ 98,105 $ 103,973 $ 106,958 $ 98,219 $ 97,266
</TABLE>
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Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Selected
Financial Data and Consolidated Financial Statements and related notes included
elsewhere herein.
Results of Operations
Consolidated Results of Operations:
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Consolidated net income for The National Security Group (The Company) was $3.756
million in 1999 compared to $930,000 in 1998. On a per share basis earnings were
$1.83 in 1999 compared to $0.42 in 1998. The increase in net income was due to
improved operating results in The Company's property/casualty subsidiaries
operations. Realized capital gains in 1999 were $1.95 million compared to $4.1
million in 1998. Consolidated revenues were $32.6 million in 1999 compared to
$37.3 million in 1998. The operating results of the subsidiaries are discussed
in further detail in the sections that follow.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997:
Consolidated net income for The National Security Group (The Company) was
$930,000 in 1998 compared to $2.998 million in 1997. On a per share basis
earnings were $0.42 in 1998 compared to $1.28 in 1997. The decrease in net
income was due to poor operating results in The Company's property/casualty
subsidiaries operations. The operating results of the subsidiaries are discussed
in further detail in the sections that follow. Realized capital gains in 1998
were $4.1 million compared to $2.7 million in 1997. Consolidated revenues were
$37.3 million in 1998 compared to 38.8 million in 1997. Revenues were down 4%
for the year due to a decrease in property and casualty insurance premiums.
Industry Segment Data
Certain financial information for The National Security Group's three segments
(life and accident and health insurance, property and casualty insurance, and
other) is summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Premium revenues: 1999 % 1998 % 1997 %
Life and accident and health insurance .. $ 4,251 16.4 $ 3,837 13.5 $ 3,991 12.8
Property and casualty insurance ......... $21,685 83.6 24,614 86.5 27,165 87.2
$25,936 100.0 $28,451 100.0 $31,156 100.0
</TABLE>
Income before taxes and cumulative effect adjustment:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 % 1998 % 1997 %
Life and accident and health insurance $ 2,556 56.6 $ 2,489 225.0 $ 2,171 64.6
Property and casualty insurance ...... $ 2,365 52.4 (1,000) (90.4) 1,572 46.8
Other ................................ (405) (9.0) (383) (34.6) (383) (11.4)
$ 4,516 100.0 $ 1,106 100.0 $ 3,360 100.0
</TABLE>
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Life and Accident and Health Insurance Operations:
The Company's life, accident and health insurance business is conducted through
National Security Insurance Company (NSIC), a wholly owned subsidiary of the
Company organized in 1947.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998:
Income before income taxes in 1999 was $2.6 million compared to $2.5 million in
1998. Operating results for 1999 were very similar to 1998, with slightly higher
realized capital gains producing the modest increase in income before income
tax.
NSIC experienced a 10% increase in premium income primarily due to increased
sales of life insurance through independent agents. The Company began offering
life and accident insurance products through independent agents in 1998. Prior
to 1998 NSIC used employee agents as its only method of distribution of life and
accident insurance products.
The increase in premium revenues also produced an increase in commission
expense. First year commissions are paid at a higher rate than commissions paid
in succeeding years. The increase in premium revenues was produced entirely by
sales of new insurance policies, and consequently increased commission expense.
As these policies renew in succeeding years, commissions on these policies will
decrease.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997:
Income before income taxes in 1998 were $2.5 million compared to $2.2 million in
1997. The increase in pretax income was primarily due to a decrease in agents
commissions and litigation expenses. Premium income was $3.8 million in 1998
compared to $4.0 million in 1997. Premium income began stabilizing in 1998 after
five consecutive years of rapid decline.
Property & Casualty Operations:
The Company's property and casualty insurance business is conducted through
National Security Fire & Casualty Company (NSFC), a wholly owned subsidiary of
the Company organized in 1959, and Omega One Insurance Company (Omega), a wholly
owned subsidiary of National Security Fire & Casualty Company organized in 1993.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998:
Net income before income tax was $2.4 million in 1999 compared to a pretax loss
of $1.0 million in 1998. An improvement in underwriting results and reduced
litigation expenses were the major factors contributing to the improvement in
pretax income.
NSFC had much improved underwriting results in the dwelling property lines of
insurance compared to 1998. In 1998 NSFC incurred over $1.0 million in tornado
losses, while in 1999 tornado losses were minimal. NSFC also did not incur any
significant hurricane losses in 1999. In 1998 NSFC incurred over $1.1 million in
hurricane losses. The decrease in hurricane and tornado losses of over $2
million led to much improved underwriting results in 1999 compared to 1998.
The automobile insurance programs had underwriting losses of over $1.5 million
in 1999. Several of these programs which were managed by independent managing
general agents have been discontinued over the last year and management believes
that future losses from the discontinued programs will be greatly reduced
compared to losses incurred in 1998 and 1999. One program managed by a managing
general agent is still in operation in Florida, but management has taken steps
to minimize additional losses from this program. Company management expects to
maintain a presence in the automobile insurance market, but future growth and
expansion will be through the traditional independent agents with claims and
underwriting functions managed and closely monitored by in-house personnel.
13
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997:
Pretax losses were $1.0 million in 1998 compared to pretax income of $1.6
million in 1997. Several catastrophe losses and a litigation settlement during
1998 had a major impact on the results of property and casualty insurance
operations.
One of the property and casualty subsidiaries, NSFC, was hit by natural disaster
losses in the first and last half of the year. During the first six months of
1998, NSFC incurred over $1.0 million in tornado losses. The most severe tornado
loss was in Jefferson County, Alabama in the Spring of 1998. This single
tornado, which was reported to be a category F5 tornado with winds of over 200
miles per hour, caused over $550,000 in damage to NSFC policyholders. In the
last half of 1998 NSFC was hit by Hurricane Georges which hit the Gulf Coast of
Alabama and Mississippi and caused over $1.1 million in incurred losses. In
total, hurricane losses accounted for 10% of all property and casualty losses.
However, even though catastrophe losses were substantial in 1998, NSFC's low
value dwelling line of business, which was hit with a majority of these
catastrophe losses, ended the year with a combined ratio of less than 100%. NSFC
had no significant catastrophic losses in 1997.
NSFC also settled a long standing lawsuit in 1998 which decreased pretax
earnings by over $2.0 million. This settlement is discussed in further detail in
Note 11 of the financial statements.
The most significant operating result in the property and casualty subsidiaries
was the continued poor performance of the subsidiaries private passenger and
commercial automobile programs. The combined ratio of these programs, which
produced over $7.7 million in earned premium, was over 150%. Pretax losses from
these automobile programs totaled over $4.1 million. Two of the programs, both
in Louisiana, have been discontinued. The remaining in-force policies from a
private passenger auto program expired in late 1998, and in early 1999, a
commercial taxi program in Louisiana was discontinued. The remaining in-force
policies from this program expired in mid-1999. Based on previous loss
experience, the taxi program is expected to incur losses in excess of earned
premium until the remaining policies expire. These two programs accounted for
1998 pretax losses of $2.7 million.
Property & Casualty Combined Ratio:
A measure used to analyze a property/casualty insurer's underwriting performance
is the statutory combined ratio. It is the sum of two ratios:
a. The loss and loss expense ratio, which measures losses and loss adjustment
expenses incurred as a percentage of premiums earned.
b. The underwriting expense ratio, which measures underwriting expenses
incurred (e.g., agents' commissions, premium taxes, and other
administrative underwriting expenses) as a percentage of premiums written
during the year.
The results of these ratios for the past three years were:
1999 1998 1997
Loss and LAE Ratio ....... 70.9% 87.0% 79.3%
Underwriting Expense Ratio 35.8% 31.6% 31.0%
Combined Ratio ........... 106.7% 118.6% 110.3%
Maintaining a combined ratio below 100%, which indicates that the company is
making an underwriting profit, depends upon many factors including hurricane
activity in the Gulf of Mexico and the southern Atlantic coast, strict
underwriting of risks, and adequate and timely premium rates. A major hurricane
hitting the coast of Alabama, Georgia, South Carolina, Mississippi, Louisiana,
or Texas could cause the combined ratio to fluctuate materially from prior
years. The property and casualty subsidiaries maintain catastrophe reinsurance
to minimize the effect of a major catastrophe.
14
<PAGE>
The combined ratio for 1998 was substantially higher than 1997 due to
catastrophe losses and very unfavorable underwriting results in private
passenger and commercial automobile lines of business. Catastrophe losses from
Hurricane Georges and tornadoes increased the combined ratio by over 9%.
However, the most significant impact on the combined ratio was the poor
underwriting results from the automobile lines of business, which had a combined
ratio of over 150%. Losses, adjustment expenses, and underwriting expenses in
excess of earned premium on the automobile programs increase the combined ratio
for all lines of business by over 16.5 percentage points.
Asset Portfolio Review: The life insurance and property/casualty subsidiaries
primarily invest in highly liquid investment grade debt and equity securities.
At December 31, 1999, the company's holdings in debt securities amounted to 62%
of total investments and 54% of total assets. The following is a breakdown of
the bond portfolio quality according to
National Association of Insurance Commissioners (NAIC) Securities Valuation
Office (SVO) rating standards, and the nationally recognized rating organization
equivalents of Moody's and Standard and Poor's:
SVO Equivalents % of Total
SVO Class Moody's Standard and Poor's Bond Portfolio
1 Aaa to A3 AAA to A- 94.2
2 Baa to Baa3 BBB+ to BBB- 5.4
3 Ba1 to Ba3 BB+ to BB- 0.0
4 B1 to B3 B+ to B- 0.4
5 Caa to Ca CCC+ to C 0.0
6 C CI to D 0.0
As of January 1, 1994, the Company adopted Financial Accounting Standards Board
Statement 115 and reclassified a portion of its fixed maturity securities
portfolio as "available-for-sale," with the remainder being classified as
"held-to- maturity." With that reclassification, the fixed maturity securities
classified as "available-for-sale" are carried at fair value and changes in fair
values, net of related income taxes, are charged or credited to shareholders'
equity (see Note 3 to the consolidated financial statements).
The insurance subsidiaries' fixed maturity securities include mortgage-backed
bonds, primarily collateralized mortgage obligations (CMO's), of $12.8 million
and $15.5 million at December 31, 1999 and 1998 respectively. The mortgage-
backed bonds are subject to risks associated with variable prepayments of the
underlying mortgage loans. Prepayments cause those securities to have different
actual maturities than that expected at the time of purchase. Securities that
are purchased at a premium to par value and prepay faster than expected will
incur a reduction in yield or loss. Securities that are purchased at a discount
to par value and prepay faster than expected will generate an increase in yield
or gain. The degree to which a security is susceptible to either gains or losses
is influenced by the difference between amortized cost and par value, the
relative sensitivity of the underlying mortgages backing the assets to
prepayments in a changing interest rate environment and the repayment priority
of the securities in the overall securitization structure.
Market Risk Disclosures: Since the Company's assets and liabilities are largely
monetary in nature, the Company's financial position and earnings are subject to
risks resulting from changes in interest rates at varying maturities, changes in
spreads over U.S. Treasuries on new investment opportunities, changes in the
yield curve and equity pricing risks.
The Company is exposed to equity price risk on its equity securities. The
Company holds common stock with a fair value of $27.6 million. If the market
value of the S & P 500 Index decreased 10% from its December 31, 1999 value, the
fair value of the Company's common stock would decrease by approximately $2.7
million.
Certain fixed interest rate market risk sensitive instruments may not give rise
to incremental income or loss during the period illustrated but may be subject
to changes in fair values. Note 1 presents additional disclosures concerning
fair values of Financial Assets and Financial Liabilities, and is incorporated
by reference herein.
15
<PAGE>
The Company limits the extent of its market risk by purchasing securities that
are backed by stable collateral, the majority of the assets are issued by U.S.
government sponsored entities. Also, the majority of all of the subsidiaries'
CMO's are Planned Amortization Class (PAC) bonds. PAC bonds are typically the
lowest risk CMO's, and provide greater cash flow predictability. Such securities
with reduced risk typically have a lower yield, but higher liquidity, than
higher-risk mortgage backed bonds. To reduce the risk of loss of principal
should prepayments exceed expectations, the Company does not purchase mortgage
backed securities at significant premiums over par value.
The Company's investment approach in the equity markets is based primarily on a
fundamental analysis of value. This approach requires the investment committee
to invest in well managed, primarily dividend paying companies, which have a low
debt to capital ratio, above average return on net worth for a sustained period
of time, and low price to book value or low volatility rating (beta) relative to
the market. The dividends provide a steady cash flow to help pay current claim
liabilities, and it has been the Company's experience that by following this
investment strategy, investment results have been superior to those offered by
bonds, while keeping the risk of loss of capital to a minimum.
Liquidity and Capital Resources: Due to regulatory restrictions, the majority of
the Company's cash is required to be invested in investment-grade securities to
provide ample protection for policyholders. The liabilities of the insurance
subsidiaries are of various terms and, therefore, those subsidiaries invest in
securities with various maturities spread over periods usually not exceeding 10
years.
The liquidity requirements for the Company are primarily met by funds generated
from operations of the life insurance and property/casualty insurance
subsidiaries. Premium and investment income as well as maturities and sales of
invested assets provide the primary sources of cash for both the life and
property/casualty businesses, while applications of cash are applied by both
businesses to the payment of policy benefits, the cost of acquiring new business
(principally commissions), operating expenses, purchases of new investment, and
in the case of life insurance, policy loans.
The National Security Group's consolidated statement of cash flows indicate that
operating activities provided (used) cash of $868,000, $(1.90 million), $7.48
million in 1999, 1998, and 1997 respectively. Those statements also classify the
other sources and uses of cash by investing activities, and financing activities
and disclose the amount of cash available at the end of the year to meet the
Company's obligations. An increase in net income and a decrease in reinsurance
balances recoverable were the primary sources of the increase in cash flow for
1999. An increase in claim payments was a primary use of cash in operating
activities for 1998. A large decrease in reinsurance recoveries of $4 million
are the major causes of a $6 million increase in cash provided from operations
in 1997.
The Company has standby letters of credit of less than $25,000. These letters
are used to guarantee obligations of the property/casualty subsidiary under
assumed reinsurance contracts. The letters of credit are secured by certain
invested assets of the Company. The Company also routinely incurs liability for
declared but unpaid dividends. Long term liquidity needs of the Company
constitute only those items which are directly related to the principal business
operations of the Company.
The Company has notes payable of $2.7 million at December 31, 1999. The notes
payable are to repaid in quarterly installments over five years.
The ability of the Company to meet its commitments for timely payment of claims
and other expenses depends, in addition to current cash flow, on the liquidity
of its investments. On December 31, 1999, the Company had no known impairments
of assets or changes in operation which would have a material adverse effect
upon liquidity. Approximately 87% of the Company's assets are invested in cash,
investment grade fixed income securities, short-term investments and broadly
traded equity securities which are highly liquid. The values of these
investments are subject to the conditions of the markets in which they are
traded. Past fluctuations in these markets have had little effect on the
liquidity of the Company. The Company has relatively little exposure to lower
grade fixed income investments which might be especially subject to liquidity
problems due to thinly traded markets.
16
<PAGE>
Except as discussed in Note 11 to the consolidated financial statements, the
Company is aware of no known trends, events, or uncertainties reasonably likely
to have a material effect on its liquidity, capital resources, or operations.
Additionally, the Company has not been made aware of any recommendations of
regulatory authorities, which if implemented, would have such an effect.
As disclosed in note 8 to the consolidated financial statements, in 2000, the
amount that The National Security Group's insurance subsidiaries can transfer in
the form of dividends to the parent company is limited to $1.5 million in the
life insurance subsidiary and $2.3 million in the property/casualty insurance
subsidiary. However, that condition poses no short-term or long-term liquidity
concerns for the parent company.
Statutory Risk-Based Capital of Insurance Subsidiaries: The NAIC has adopted
Risk-Based Capital (RBC) requirements for life/health and property/casualty
insurance companies to evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks such as asset quality, mortality and
morbidity, asset and liability matching, benefit and loss reserve adequacy, and
other business factors. The RBC formula will be used by state insurance
regulators as an early warning tool to identify, for the purpose of initiating
regulatory action, insurance companies that potentially are inadequately
capitalized. In addition, the formula defines new minimum capital standards that
will supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is determined by a
ratio of the company's regulatory total adjusted capital, as defined by the
NAIC, to its authorized control level RBC, as defined by the NAIC. Companies
below specific trigger points or ratios are classified within levels, each of
which requires corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
The ratios of Total Adjusted Capital to Authorized Control Level RBC for The
National Security Group's life/health and property/casualty insurance
subsidiaries are all in excess of four to one at December 31, 1999.
National Security Insurance Company (life insurer) has regulatory adjusted
capital of $15.2 million and $14.4 million at December 31, 1999 and 1998,
respectively, and a ratio of regulatory total adjusted capital to authorized
control level RBC of 10.9 and 9.5 at December 31, 1999 and 1998 respectively.
Accordingly, National Security Insurance Company meets the minimum RBC
requirements.
National Security Fire & Casualty Company (property/casualty insurer) has
regulatory adjusted capital of $23.4 million and $25.0 million at December 31,
1999 and 1998, respectively, and a ratio of regulatory total adjusted capital to
authorized control level RBC of 9.2 and 9.1 at December 31, 1999 and 1998
respectively. Accordingly, National Security Fire & Casualty Company meets the
minimum RBC requirements.
Omega One Insurance Company (property/casualty insurer), which began writing
business in late 1995, has regulatory adjusted capital of $3.2 million and $3.2
million at December 31, 1999 and 1998, respectively, and a ratio of regulatory
total adjusted capital to authorized control level RBC of 4.6 and 4.0 at
December 31, 1999 and 1998 respectively. Accordingly, Omega One Insurance
Company meets the minimum RBC requirements.
Year 2000 Issue
The Company completed all year 2000 date conversations prior to December 31,
1999, and has experienced no major problems or disruptions of business due to
the year 2000 issue.
17
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements
Consolidated Financial Statements:
Report of Independent Certified Public Accountants ...................... 19
Consolidated Statements of Income -
Years Ended December 31, 1999, 1998, and 1997.......................... 20
Consolidated Balance Sheets - December 31, 1999 and 1998................. 21
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1999, 1998, and 1997.......................... 22
Consolidated Statements of Cash Flows -
Years Ended December 31, 1999, 1998, and 1997.......................... 23
Notes to Consolidated Financial Statements - December 31, 1999........... 24
Financial Statement Schedules:
Report of Independent Certified Public Accountants
on Financial Statement Schedules....................................... 37
Schedule I. Summary of Investments - December 31, 1999 and 1998......... 38
Schedule III. Condensed Financial Information of Registrant -
December 31, 1999 and 1998................................. 39
Schedule V. Supplementary Insurance Information -
December 31, 1999, 1998, and 1997........................... 43
Schedule VI. Reinsurance - Years Ended December 31, 1999, 1998, and 1997. 44
All other Schedules are not required under related instructions or are
inapplicable and therefore have been omitted.
18
<PAGE>
The National Security Group, Inc.
Report of Independent Certified Public Accountants
To the Board of Directors
and Shareholders of
The National Security Group, Inc.
We have audited the accompanying consolidated balance sheets of The National
Security Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
National Security Group, Inc. and subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
Dudley, Hopton-Jones, Sims & Freeman
Birmingham, Alabama
February 18, 2000
19
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Dollars in thousands
except per share amounts)
Years Ended December 31,
1999 1998 1997
REVENUES
Net premiums earned ............................. $ 25,936 $ 28,451 $ 31,156
Net investment income ........................... 4,354 4,351 4,204
Net realized investment gains ................... 1,951 4,117 2,720
Other income ................................. 385 385 695
------ ------ ------
32,626 37,304 38,775
------ ------ ------
BENEFITS AND EXPENSES
Policyholder benefits paid or provided .......... 17,275 22,880 22,995
Amortization of deferred policy acquisition costs 1,202 1,856 1,488
Commissions ................................. 3,563 3,764 4,334
General insurance expenses ...................... 4,786 6,261 5,229
Insurance taxes, licenses and fees .............. 987 1,194 1,258
Interest expense ................................ 297 243 111
------ ------ ------
28,110 36,198 35,415
------ ------ ------
Income Before Income Taxes ...................... 4,516 1,106 3,360
------ ------ ------
INCOME TAX EXPENSE
Current ................................. 925 (43) 848
Deferred ................................. (165) 219 (486)
------ ------ ------
760 176 362
------ ------ ------
Net Income ................................. $3,756 $ 930 $ 2,998
====== ====== ======
EARNINGS PER COMMON SHARE
Net Income ................................. $ 1.83 $ 0.42 $ 1.28
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in thousands)
December 31,
ASSETS 1999 1998
Investments
Securities held-to-maturity at amortized cost (estimated fair value: 1999 - $30,774;
1998 - $31,835) ................................................................................. $30,911 $30,807
Securities available-for-sale, at estimated fair value (cost: 1999 - $35,748;
11998--$$34,175) ................................................................................. 49,612 51,235
Receivable for securities ............................................................................ 0 315
Mortgage loans on real estate, at cost ............................................................... 112 135
Investment real estate, at book value (accumulated depr.: 1999 - $37; 1998 - $36) .................... 1,557 1,629
Policy loans ......................................................................................... 669 645
Short-term investments ............................................................................... 2,129 3,290
------ ------
Total Investments 84,990 88,056
Cash ................................................................................................. 1,383 783
Accrued investment income ............................................................................ 830 764
Reinsurance recoverable .............................................................................. 4,687 6,833
Deferred policy acquisition costs .................................................................... 4,273 4,154
Prepaid reinsurance premiums ......................................................................... 257 266
Current income tax recoverable ....................................................................... 0 75
Other assets ......................................................................................... 1,685 3,042
------ -------
Total Assets 98,105 103,973
====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and claims
Policy liabilities ................................................................................ 18,987 18,833
Unearned premiums ................................................................................. 7,088 8,745
Claim liabilities ................................................................................. 18,864 21,875
------ ------
44,939 49,453
Checks outstanding in excess of bank balance ......................................................... 912 776
Other policyholder funds ............................................................................. 1,526 1,635
Notes payable ........................................................................................ 2,672 3,004
Accrued income taxes ................................................................................. 53 0
Other liabilities .................................................................................... 3,101 2,992
Deferred income tax .................................................................................. 3,014 4,145
------ ------
Total Liabilities 56,217 62,005
------ ------
Contingencies
Preferred stock, $1 par value, 500,000 shares authorized, none issued or outstanding ................. 0 0
Class A common stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding .......... 0 0
Common stock, $1 par value, 2,500,000 shares authorized and 2,339,848 shares issued .................. 2,340 2,340
Additional paid in capital ........................................................................... 17 17
Accumulated other comprehensive income ............................................................... 9,915 12,146
Retained earnings .................................................................................... 33,197 31,106
Treasury stock at cost (shares: 1999 - 284,037; 1998 - 288,537) ...................................... (3,581) (3,641)
------ -------
Total Shareholders' Equity 41,888 41,968
------ -------
Total Liabilities and Shareholders' Equity 98,105 103,973
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Retained Comprehensive Common Paid-in Treasury
Total Income Earnings Income Stock Capital Stock
-------- ------- --------- ------------ ---------- ------- ------
Balance at December 31, 1997 ................. $46,352 $ 0 $ 31,888 $ 12,497 $ 2,340 $ 17 $ (390)
Comprehensive Income
Net Income for 1998 ..................... 930 930 930
Other comprehensive income (net of tax)
Unrealized loss on securities, net
of reclassification adjustment ..... (351) (351) (351)
-----
Comprehensive Income ......................... $ 579
=====
Cash dividends ($.73 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 for 1999 ..................... 3,756 $ 3,756 3,756
Other comprehensive income (net of tax)
Unrealized loss on securities, net
of reclassification adjustment ...... (2,231) (2,231) (2,231)
------
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)
====== ====== ====== ===== ===== =======
</TABLE>
22
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31,
-----------------------------------
-----------------------------------
1999 1998 1997
Cash flows from operating activities:
Net income .................................................................................. $ 3,756 $ 930 $2,998
Adjustments to reconcile net income to net cash provided by
operating activities:
(Increase) decrease in accrued investment income ........................................ (66) 69 (30)
Decrease in reinsurance recoverable ..................................................... 2,146 1,656 3,999
Amortization of deferred policy acquisition costs ....................................... 1,201 1,856 1,488
Net realized gains on investments ....................................................... (2,024) (4,117) (2,720)
Policy acquisition costs deferred ....................................................... (1,320) (1,794) (1,691)
Decrease (increase) in current income taxes receivable .................................. 75 (75) 258
Decrease in prepaid reinsurance premiums ................................................ 9 75 1,567
Depreciation and amortization expense ................................................... 219 142 118
(Decrease) increase in policy liabilities and claims .................................... (4,514) (323) 1,373
Increase (decrease) in income tax payable ............................................... 53 (147) 147
(Decrease) increase in deferred income taxes ............................................ (166) 219 (484)
Increase (decrease) in other liabilities ................................................ 109 (694) 599
Other, net .............................................................................. 1,390 306 (144)
------ ------ ------
Net cash provided by (used for) operating activities ....... 868 (1,897) 7,478
------ ------ -----
Cash flows from investing activities:
Purchases of held-to-maturity securities ................................................. (3,759) (4,881) --
Purchases of available-for-sale securities ............................................... (10,189) (5,731) (17,239)
Proceeds from maturities of held-to-maturity securities .................................. 3,805 4,501 4,859
Proceeds from sales of available-for-sale securities ..................................... 10,747 10,549 6,333
Proceeds from real estate held for investment ............................................ 71 15 13
Proceeds from sales and maturities of short-term investments ............................. 1,161 234 1,051
Receipts from repayment of loans, net .................................................... (1) 188 59
Purchase of property and equipment ....................................................... (230) (110) (210)
Proceeds from sale of property and equipment ............................................. 36 18 33
------ ----- ------
Net cash provided by (used for) investing activities ....... 1,641 4,783 (5,101)
Cash flows from financing activities:
Proceeds from short-term notes payable ................................................... -- 3,100 --
Payments on short-term notes payable ..................................................... (332) (96) --
(Decrease) in other policyholder funds ................................................... (109) (94) (113)
Dividends paid ........................................................................... (1,664) (1,712) (1,623)
Purchase (sale) of treasury stock ........................................................ 60 (3,251) (98)
Increase (decrease) in checks outstanding in excess of bank balances ..................... 136 (414) (326)
------ ------ ------
Net cash used for financing activities ....... (1,909) (2,467) (2,160)
Net increase in cash ....... 600 419 217
Cash at beginning of year ................................................................... 783 364 147
------ ------ ------
Cash at end of year ......................................................................... $ 1,383 $ 783 $ 364
====== ====== ======
Cash paid during the year for:
Interest ................................................................................. $ 296 $ 91 $ 14
====== ====== ======
Income taxes ............................................................................. $ 630 $ 97 $ 440
====== ====== ======
</TABLE>
See accompanying notes to consolidate financial statements.
23
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
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 (OMEGA). All significant intercompany
transactions and accounts have been eliminated.
Description of Major Products
NSIC is licensed in the states of Alabama, Georgia, Mississippi, Texas and
Florida and was organized in 1947 to provide life and burial insurance policies
to the home service market. Premiums sold and serviced by company agents
primarily include industrial life, larger ordinary life, accident and health,
limited hospital, cancer and low valued life insurance. NSFC operates in various
property and casualty lines, the most significant of which are low valued
dwelling property, home service fire, nonstandard automobile physical damage and
liability, nonstandard commercial, ocean marine and inland marine. Omega
operates in property and casualty lines, the most significant of which is
commercial auto liability.
Basis of Presentation
The significant accounting policies followed by The National Security Group,
Inc. and subsidiaries that materially affect financial reporting are summarized
below. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which, as to the
subsidiary insurance companies, differ from statutory accounting practices
permitted by regulatory authorities.
Investments
The Company's securities are classified in two categories and accounted for as
follows:
o Securities Held-to-Maturity. Bonds, notes and redeemable preferred stock
for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using
methods which approximate level yields over the period to maturity.
o Securities Available-for-Sale. Bonds, notes, common stock and
non-redeemable preferred stock not classified as either held-to-maturity,
or trading are reported at fair value, adjusted for other-than-temporary
declines in fair value.
The Company and its subsidiaries have no trading securities.
Unrealized holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a separate component of
shareholders' equity until realized.
Realized gains and losses on the sale of securities available-for-sale are
determined using the specific-identification method.
Mortgage loans and policy loans are stated at the unpaid principal 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 approximates market value. Investments with other than
temporary impairment in value are written down to estimated realizable values.
24
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: - CONTINUED
Disclosures About Fair Value of Financial Instruments
SFAS No. 107 defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases where quoted
market prices are not available, fair values are estimated using present value
or other valuation techniques. The fair value estimates are made at a specific
point in time, based on available market information and judgments about the
financial instrument, such as estimates of timing and amount of expected future
cash flows. Such estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument, nor do they consider the tax impact of the
realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets, nor can
the disclosed value be realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments, particularly insurance
liabilities other than financial guarantees and investment contracts, from its
disclosure requirements. In evaluating the Company's management of interest rate
and liquidity risk, the fair values of all assets and liabilities should be
taken into consideration.
The fair values of cash, cash equivalents, short-term investments and balances
due on accounts from agents, reinsurers and others approximate their carrying
amounts as reflected in the consolidated balance sheets due to their short-term
availability or maturity.
The fair values of debt and equity securities have been determined using values
supplied by independent pricing services and are disclosed together with
carrying amounts in Note 3.
The fair value of the mortgage loan portfolio was approximately equal to the
carrying amount of $112,000 on December 31, 1999 and $135,000 on December 31,
1998.
As of December 31, 1999 and 1998, the fair value of policy loans approximated
their carrying amount of $669,000 and $645,000, respectively.
The fair value of other policyholder funds on deposit is estimated to
approximate carrying amount of $1,526,000 on December 31, 1999 and $1,635,000 on
December 31, 1998.
Statement of Cash Flows
For purposes of reporting cash flows, cash includes cash-on-hand and demand
deposits with banks.
Premium Revenues
Life insurance premiums are recognized as revenues when due. Property and
casualty insurance premiums, less amounts ceded to reinsurers, are recognized on
a pro rata basis over the terms of the policies. Reinsurance premiums assumed
are recognized as reported by the ceding company.
Deferred Policy Acquisition Costs
The costs of acquiring new insurance business are deferred and amortized over
the lives of the policies. Deferred costs include commissions, other agency
compensation and expenses, and other underwriting expenses directly related to
the level of new business produced.
25
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: - CONTINUED
Deferred Policy Acquisition Costs - Continued
Acquisition costs relating to life contracts are amortized over the premium
paying period of the contracts, or the first renewal period of term policies, if
earlier. Assumptions utilized in amortization are consistent with those utilized
in computing policy liabilities.
The method of computing the deferred policy acquisition costs for property and
casualty policies limits the amount deferred to a percentage of related unearned
premiums.
Policy Liabilities
The liability for future life insurance policy benefits is computed using a net
level premium method including the following assumptions:
Years of Issue Interest Rate
1947 - 1968 4%
1969 - 1978 6% graded to 5%
1979 - 1999 7% graded to 6%
Mortality assumptions include various percentages of the 1955-60 and 1965-70
Select and Ultimate Basic Male Mortality Table. Withdrawal assumptions are based
on the Company's experience.
Claim Liabilities
The liability for unpaid claims represents the estimated liability for claims
reported to the Company and its subsidiaries plus claims incurred but not yet
reported and the related adjustment expenses. The liabilities for claims and
related adjustment expenses are determined using case-basis evaluations and
statistical analyses and represent estimates of the ultimate net cost of all
losses incurred through December 31 of each year. Although considerable
variability is inherent in such estimates, management believes that the
liabilities for unpaid claims and related adjustment expenses are adequate. The
estimates are continually reviewed and adjusted as necessary; such adjustments
are included in current operations.
Earnings Per Share
Earnings per share of common stock is based on the weighted average number of
shares outstanding during each year. The adjusted weighted average shares
outstanding was 2,055,811 in 1999, 2,228,940 in 1998 and 2,316,953 in 1997.
Reinsurance
In the normal course of business, NSFC seeks to reduce the loss that may arise
from catastrophes or other events that cause unfavorable underwriting results by
reinsuring certain levels of risk in various areas of exposure with other
insurance enterprises or reinsurers. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy. Amounts paid for prospective reinsurance contracts are
reported as prepaid reinsurance premiums and amortized over the remaining
contract period.
In the normal course of business, NSIC seeks to limit its exposure to loss on
any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
contracts. NSIC retains a maximum of $30,000 of coverage per individual life.
The cost of reinsurance is amortized over the contract period of the
reinsurance.
26
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: - CONTINUED
Reclassifications
Certain reclassifications have been made in the previously reported financial
statements to make the prior year amounts comparable to those of the current
year. Such reclassifications had no effect on the previously reported net income
or shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently Issued Accounting Standards
Effective January 1, 1998 the Company and its subsidiaries adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, ("SFAS
No. 130"). SFAS No. 130 establishes reporting and presentation standards for
comprehensive income and its components in a set of general-purpose financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances arising from nonowner sources. SFAS No. 130 is effective for both
interim and annual financial statements issued for periods beginning after
December 15, 1997. Restatement of prior periods for comparative financial
statements is required. The adoption of SFAS No. 130 did not have a material
impact on the financial statements of the Company.
Effective January 1, 1998 the Company and its subsidiaries adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, ("SFAS No. 131"). SFAS No. 131 requires that
financial and descriptive information be disclosed for each reportable operating
segment based on the management approach. The management approach focuses on
financial information that a business enterprise's decision makers use to assess
performance and make decisions about resource allocations. The statement also
prescribes the enterprise-wide disclosures to be made about products, services,
geographic areas and major customers. SFAS No. 131 is effective for annual
financial statements issued for periods beginning after December 15, 1997, and
for interim financial statements in the second year of application. The adoption
of SFAS No. 131 did not have a material impact on the financial statements of
the Company.
Effective January 1, 1998 the Company and its subsidiaries adopted Statement of
Financial Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, ("SFAS No. 132"). SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits,
eliminates certain disclosures and requires additional information on changes in
benefit obligations and fair values of plan assets. SFAS No. 132 is effective
for annual financial statements for periods beginning after December 15, 1997.
Restatement of disclosures for previous periods is also required. The adoption
of SFAS No. 132 did not have a material impact on the financial statements of
the Company.
27
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - STATUTORY ACCOUNTING PRACTICES:
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) which vary in
certain respects from reporting practices prescribed or permitted by insurance
regulatory authorities. The significant differences for statutory reporting
include: (a) acquisition costs of acquiring new business are charged to
operations as incurred, (b) life policy liabilities are established utilizing
interest and mortality factors specified by regulatory authorities, (c) the
Asset Valuation Reserve (AVR) and the Interest Maintenance Reserve (IMR) are
recorded as liabilities, (d) deferred income taxes are not provided, and (e)
non-admitted assets (furniture and equipment, agents' debit balances and prepaid
expenses) are charged directly to surplus.
Statutory net gains from operations and capital and surplus, excluding
intercompany transactions, are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Dollars in thousands)
Year Ended December 31,
1999 1998 1997
Net gain from operations:
NSIC - including realized capital gains of $813, $658 and $651,
respectively $2,089 $2,103 $1,755
====== ====== ======
NSFC - including realized capital gains of $684, $3,163 and
$1,988 respectively $1,703 $ 657 $2,258
====== ====== ======
OMEGA - including realized capital gains of $480, $504, and
$471, respectively $ 231 $(1,420) $(1,529)
====== ====== ======
Statutory capital and surplus:
NSIC - including AVR of $2,639, $2,458 and $2,540,
respectively $15,202 $14,505 $10,526
====== ====== ======
NSFC $23,443 $25,072 $26,359
====== ====== ======
OMEGA $ 3,182 $ 3,210 $ 4,367
====== ====== ======
</TABLE>
The above amounts exclude allocation of overhead from the
Company. NSIC, NSFC and OMEGA are in compliance with statutory restrictions with
regard to minimum amounts of surplus and capital.
28
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - INVESTMENT SECURITIES:
The amortized cost and aggregate fair values of investments in securities
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Dollars in thousands)
December 31, 1999
-----------------------------------------------------------
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
Corporate debt securities ................................................ $ 8,735 $ 10 $ (751) $ 7,994
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .............................. 14,330 2 (390) 13,942
Equity securities ........................................................ 12,683 15,950 (957) 27,676
Total ........ $35,748 $15,962 $(2,098) $49,612
Held-to-maturity securities:
Corporate debt securities ................................................ $11,418 $ 20 $ (220) $11,218
Obligations of states and political subdivisions ......................... 4,297 246 (120) 4,423
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .............................. 15,196 8 (71) 15,133
Total ........ $30,911 $ 274 $ (411) $30,774
(Dollars in thousands)
December 31, 1998
-----------------------------------------------------------
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
Corporate debt securities ................................................ $ 5,288 $ 155 $ (316) $ 5,127
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .............................. 15,027 186 (3) 15,210
Equity securities ........................................................ 13,860 17,490 (452) 30,898
Total ........ $34,175 $17,831 $ (771) $51,235
Held-to-maturity securities:
Corporate debt securities ................................................ $13,213 $ 517 $ -- $13,730
Obligations of states and political subdivisions ......................... 3,583 463 -- 4,046
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .............................. 14,011 48 -- 14,059
Total ........ $30,807 $ 1,028 $ -- $1,835
</TABLE>
29
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - INVESTMENT SECURITIES: - CONTINUED
The amoritzed cost and aggregate fair value of debt securities at December 31,
1999, by contractual maturity, are as follows. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in Thousands)
-----------------------
-----------------------
Amortized Fair
Available-for-sale securities: Cost Value
Due in one year or less ........................................................... $ 400 $ 400
Due after one year through five years ............................................. 4,468 4,368
Due after five years through ten years ............................................ 11,911 11,529
Due after ten years ............................................................... 6,286 5,638
------- -------
Total $23,065 $21,935
Held-to-maturity securities:
Due in one year or less ........................................................... $ 1,040 $ 1,049
Due after one year through five years ............................................. 9,461 9,412
Due after five years through ten years ............................................ 8,560 8,534
Due after ten years ............................................................... 11,850 11,779
------- -------
Total $30,911 $30,774
</TABLE>
Gross gains of $2,041,304 and 4,009,429 and gross losses of $30,319 and $5,884
for 1999 and 1998, respectively, were realized on sales of available-for-sale
securities.
NOTE 4 - NET INVESTMENT INCOME:
Major categories of investment income are summarized as follows:
(Dollars in thousands)
Year ended December 31,
------------------------------
------------------------------
1999 1998 1997
Fixed maturities .............................. $ 3,567 $ 3,503 $ 3,334
Equity securities ............................. 630 682 654
Mortgage loans on real estate ................. 9 17 29
Investment real estate ........................ 18 18 18
Policy loans .................................. 33 38 37
Other, principally short-term investments ..... 129 136 222
4,386 4,394 4,294
------ ------ ------
Less: Investment expenses ..................... (32) (43) (90)
------ ------ ------
Net investment income ......................... $ 4,354 $ 4,351 $ 4,204
====== ====== ======
An analysis of investment gains follows:
Year ended December 31,
1999 1998 1997
Net realized investment gains (losses):
Fixed maturities ........................... $ (16) $ 53 $ 66
Other, principally equity securities ....... 1,967 4,064 2,654
------ ------ ------
$ 1,951 $ 4,117 $ 2,720
====== ====== ======
30
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - NET INVESTMENT INCOME: - CONTINUED
An analysis of the net increase (decrease) in unrealized appreciation on
available-for-sale securities follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31,
--------------------------------------
--------------------------------------
1999 1998 1997
Net increase (decrease) in unrealized appreciation on available-for-
sale securities before deferred tax ....................................... $(3,196) $(502) $ 6,266
Deferred income tax .......................................................... 965 151 (1,711)
------ ------ ------
Net increase (decrease) in unrealized appreciation on available-for-
sale securities ........................................................... $(2,231) $(351) $ 4,555
</TABLE>
NOTE 5 - INCOME TAXES:
Total income tax expense varies from amounts computed by applying current
federal income tax rates to income before income taxes. The reasons for these
differences and the approximate tax effects are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31,
--------------------------------------
--------------------------------------
1999 1998 1997
Federal income tax rate applied to pre-tax income ......................... $ 1,535 $ 376 $ 1,142
Dividends received deduction and tax-exempt interest ...................... (198) (174) (239)
Other, net ................................................................ (167) (54) (134)
Small life insurance company deduction .................................... (410) (440) (407)
Alternative minimum tax effect ............................................ -- 468 --
Federal income tax expense ................................................ $ 760 $ 176 $ 362
</TABLE>
Net deferred tax liabilties are determined based on the estimated future tax
effects of differences between the financial statements and tax bases of assets
and liabilities given the provisions of the enacted tax laws.
The tax effect of significant differences representing deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in Thousands)
----------------------------------
----------------------------------
December 31, December 31,
1999 1998
---------- ---------
---------- ---------
Deferred policy acquisition costs .................................................. $(1,453) $(1,412)
Policy liabilities ................................................................. 488 463
Unearned premiums .................................................................. 327 440
Claim liabilities .................................................................. 548 569
General insurance expenses ......................................................... 711 710
Unrealized gains on securities available-for-sale .................................. (3,950) (4,915)
Alternative minimum tax credit carryforward ........................................ 314 --
Net deferred tax liabilities ....................................................... $(3,015) $(4,145)
</TABLE>
31
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - INCOME TAXES: - CONTINUED
The approximate income tax effects of changes in temporary differences are as
follows:
Year ended December 31,
----------------------
----------------------
1999 1998 1997
Deferred policy acquisition costs .......... $ 41 $ (22) $ 70
Policy liabilities ......................... (25) 56 (3)
Unearned premiums .......................... 113 2 (2)
General insurance expenses ................. (1) 222 (349)
Claim liabilities .......................... 21 (39) (202)
Alternative minimum tax credit carryforward (314) -- --
------ -------- -------
$(165) $ 219 $(486)
====== ======== =======
Under pre-1984 life insurance company tax laws, a portion of NSIC's gain from
operations was not subject to current income taxation, but was accumulated for
tax purposes in a memorandum account designated "policyholders' surplus". The
aggregate balance in this account, $3,720,000 at December 31, 1999, would be
taxed at current rates only if distributed to shareholders or if the account
exceeded a prescribed minimum. The Deficit Reduction Act of 1984 eliminated
additions to policyholders' surplus for 1984 and thereafter. Deferred taxes have
not been provided on amounts designated as policyholders' surplus. The deferred
income tax liability not recognized is approximately $1,270,000 at December 31,
1999.
NOTE 6 - REINSURANCE:
NSFC and NSIC are involved in transactions in which another insurance company
assumes some of the risk originally undertaken by NSFC and NSIC. Reinsurance
contracts do not relieve NSIC and NSFC from their obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to NSIC
and NSFC. NSIC and NSFC evaluate the financial conditions of their reinsurers
and monitor concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurers to minimize
their exposure to significant losses from reinsurance insolvencies. At December
31, 1999, reinsurance receivables with a carrying value of $435,000 and prepaid
reinsurance premiums of $257,000 were associated with a single reinsurer.
The effect of reinsurance on premiums written and earned is as follows:
(Dollars in Thousands)
1999
----------------------------------------------------
----------------------------------------------------
NSIC NSFC
----------------------- ----------------------------
----------------------- ----------------------------
Written Earned Written Earned
Direct ........... $4,047 $ 4,300 $ 21,421 $ 23,078
Assumed .......... -- -- -- --
Ceded ............ (49) (49) (1,385) (1,393)
------ ------- -------- --------
Net .............. $3,998 $ 4,251 $ 20,036 $ 21,685
====== ====== ======== ========
32
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - REINSURANCE: - CONTINUED
(Dollars in Thousands)
1998
----------------------------------------------------
----------------------------------------------------
NSIC NSFC
----------------------- ----------------------------
----------------------- ----------------------------
Written Earned Written Earned
Direct ........... $3,886 $ 3,892 $ 26,085 $ 26,194
Assumed .......... -- -- -- --
Ceded ............ (55) (55) (1,503) (1,580)
------ ------- -------- --------
Net .............. $3,831 $ 3,837 $ 24,582 $ 24,614
====== ====== ======== ========
NSFC also reinsures certain portions of insurance risk which exceed various
retention limits. Claim liabilities for NSFC are stated after a deduction for
reinsurance ceded to other companies totaling $4,106,000 at December 31, 1999.
Reinsurance recoveries for claims and claim settlement expense were $530,000
during 1999.
NOTE 7 - EMPLOYEE BENEFIT PLAN:
In 1989, the Company and its subsidiaries established a retirement savings plan
and transferred the assets from the defined contribution profit sharing plan
into the new plan. All full-time employees who have completed one year of
service at January 1 or July 1 are eligible to participate and all employee
contributions are fully vested for employees who have completed 1,000 hours of
service in the year of contribution. Contributions for 1999, 1998, and 1997
amounted to $161,000, $61,000, and $170,000, respectively. Contributions are at
the Board of Directors' discretion subject to governmental limitations.
In 1987, the Company established a deferred compensation plan for its Board of
Directors. The Board members have an option of deferring their fees to a cash
account or to a stock account and all share deferrals are recorded at the fair
market value on the date of the award. Costs of the deferred compensation plan
for 1999, 1998, and 1997 amounted to approximately $48,490, $90,300, and
$228,525, respectively.
NOTE 8 - REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS:
The amount of dividends paid from NSIC to the Company in any year may not
exceed, without prior approval of regulatory authorities, the greater of 10% of
statutory surplus as of the end of the preceding year, or the statutory net gain
from operations for the preceding year. At December 31, 1999, NSIC's retained
earnings unrestricted for the payment of dividends in 2000 amounted to
$1,553,247. NSFC is similarly restricted in the amount of dividends payable to
the Company; dividends may not exceed the greater of 10% of statutory surplus as
of the end of the preceding year, or net income for the preceding year. As a
result, dividends from NSFC to the Company are limited to $2,344,286 in 2000.
Securities with market values of $3,060,389 and $3,296,573, at December 31, 1999
and 1998, respectively, were deposited with various states pursuant to statutory
requirements.
33
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8 - REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS: - CONTINUED
Under applicable Alabama insurance laws and regulations, NSFC is required to
maintain a minimum total surplus (to include both paid-in and contributed and
unassigned surplus) of $100,000.
Under applicable Alabama insurance laws and regulations, NSIC is required to
maintain a minimum total surplus (to include both paid-in and contributed and
unassigned surplus) of $200,000.
Under applicable Alabama insurance laws and regulations, Omega is required to
maintain a minimum total surplus (to include both paid-in and contributed and
unassigned surplus) of $600,000.
NOTE 9 - SHAREHOLDERS' EQUITY:
Preferred Stock
The Preferred Stock may be issued in one or more series as shall from time to
time be determined and authorized by the Board of Directors. The directors may
make specific provisions regarding (a) the voting rights, if any (b) whether
such dividends are to be cumulative or noncumulative (c) the redemption
provisions, if any (d) participating rights, if any (e) any sinking fund or
other retirement provisions (f) dividend rates (g) the number of shares of such
series and (h) liquidation preference.
Common Stock
The holders of the Class A Common Stock will have one-twentieth of one vote per
share, and the holders of the common stock will have one vote per share.
In the event of any liquidation, dissolution or distribution of the assets of
the Company remaining after the payments to the holders of the Preferred Stock
of the full preferential amounts to which they may be entitled as provided in
the resolution or resolutions creating any series thereof, the remaining assets
of the Company shall be divided and distributed among the holders of both
classes of common stock, except as may otherwise be provided in any such
resolution or resolutions.
NOTE 10 - INDUSTRY SEGMENTS:
The Company and its subsidiaries operate primarily in the insurance industry.
Premium revenues and operating income by industry segment for the years ended
December 31, 1999, 1998 and 1997 are summarized below:
34
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - INDUSTRY SEGMENTS: - CONTINUED
(Dollars in thousands)
Year ended December 31,
1999 1998 1997
----- ------ ------
Premium Revenues:
Individual life and accident and health insurance $ 4,251 $ 3,837 $ 3,991
Property and casualty insurance 21,685 24,614 27,165
------ ------ ------
$25,936 $28,451 $31,156
====== ====== ======
Income (loss) before income taxes:
Individual life and accident and health insurance $2,556 $2,489 $2,171
Property and casualty insurance 2,365 (1,000) 1,572
Other (110) (140) (272)
------ ------ ------
4,811 1,349 3,471
(295) (243) (111)
------ ------ ------
Interest expense $4,516 $1,106 $3,360
====== ====== ======
Assets
Individual life and accident and health insurance $41,323 $41,935 $39,569
Property and casualty insurance 56,714 61,842 67,286
Other 68 196 103
------ ------ ------
$98,105 $103,973 $106,958
====== ====== ======
Amortization of deferred policy acquisition costs and
depreciation expense:
Individual life and accident and health insurance $ (252) $ 450 $ 319
Property and casualty Insurance 1,615 1,599 1,339
------ ------ ------
$1,363 $2,049 $ 1,658
====== ====== ======
Capital expenditures are not material, and consequently, are not reported
NOTE 11 - CONTINGENCIES:
The Company and its subsidiaries are 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
wrongfull 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 is reflected in the
accompanying financial statements.
35
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - CONTINGENCIES: - CONTINUED
The company establishes and maintains reserves against contingent liabilities in
accordance with anticipated losses. 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.
On October 4, 1996, a jury in the Circuit Court of Palm Beach County, Florida
returned a verdict against National Security Fire & Casualty Company, a
subsidiary of the Company, in the amount of $995,252. The plaintiff, Leon B.
King, had alleged that the Company's subsidiary had acted in bad faith in, among
other actions, failing to timely deliver a settlement check in connection with a
1986 automobile accident. This same case was previously tried in 1993 with the
jury returning a verdict in favor of the Company's subsidiary on all counts
alleged. This verdict was subsequently reversed on appeal which resulted in the
subject trial. Various post-trial motions including a motion for a new trial
were denied and the verdict was appealed. The Florida District Court of Appeal
for the Fourth District subsequently affirmed the verdict and concurrently
granted the motion for attorney's fees and costs filed by the attorneys for the
plaintiff, remanding the case to the trial court for a determination of the
amount. The Company's subsidiary subsequently reached a settlement of the
attorney's fee issue and the judgement, including all related issues, was
satisfied on July 8, 1998.
This judgement and the settlement of the attorney's fee award resulted in a
combined charge to the Company's 1998 earnings of $2 million. The Company's
subsidiary is now pursuing recovery of the amount it has expended in the
resolution of this litigation from the independent adjusting firm whose actions
it believes caused or contributed to the basis for the subject litigation. No
provision has been established for any potential recovery.
NOTE 12 - CONCENTRATION OF CREDIT RISK:
The Company maintains its cash accounts primarily with banks located in Alabama.
The total cash balances are insured by the FDIC up to $100,000 per bank. The
Company had cash balances on deposit with Alabama banks at December 31, 1999
that exceeded the balance insured by the FDIC in the amount of $817,375.
NOTE 13 - NOTES PAYABLE:
At December 31, 1999 and 1998, notes payable totaling $2,672,419 and $3,004,402,
respectively, consisted of unsecured notes payable, bearing interest rates from
7% to 8%, due 2000.
36
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
and Shareholders of
The National Security Group, Inc.
We have audited in accordance with generally accepted auditing standards, the
financial statements of The National Security Group, Inc. as of December 31,
1999 and 1998 and for the years then ended included in this Form 10-K, and have
issued our report thereon dated February 18, 2000. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The
schedules listed in the accompanying index are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules as of December 31, 1999 and 1998 and for
the years then ended have been subjected to the auditing procedures applied in
the audits of the basic financial statements and, in our opinion, fairly state
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Birmingham, Alabama
February 18, 2000
Dudley, Hopton-Jones, Sims & Freeman PLLP
37
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
SCHEDULE I. SUMMARY OF INVESTMENTS (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 December 31, 1998
------------------------- -------------------------
Amount per Amount per
Original Fair Balance Original Fair Balance
Cost Value Sheet Cost Value Sheet
------ ------ ----- ----- ------ -------
Securities Held to Maturity:
United States government .................. 14,421 14,433 14,425 14,008 14,059 14,011
States, municipalities and
political subdivisions ................. 4,983 5,122 5,068 3,509 4,046 3,583
Public Utilities .......................... 1,721 1,637 1,731 2,457 2,520 2,484
Industrial and Miscellaneous .............. 9,572 9,580 9,687 10,617 11,210 10,729
------ ------ ------ ------ ------ ------
Total Securities Held to Maturity ......... 30,697 30,772 30,911 30,591 31,835 30,807
------ ------ ------ ------ ------ ------
Securities Available for Sale:
Equity Securities:
Public utilities .......................... 2,367 4,738 4,738 2,405 4,563 4,563
Banks and insurance companies ............. 1,952 5,104 5,104 1,742 5,580 5,580
Industrial and all other .................. 8,479 17,834 17,834 9,713 20,755 20,755
------ ------ ------ ------ ------ ------
Total equity securities ................... 12,798 27,676 27,676 13,860 30,898 30,898
------ ------ ------ ------ ------ ------
Debt Securities:
United States government .................. 12,904 12,610 12,610 13,827 13,983 13,983
States, municipalities and
political subdivisions ................. 1,425 1,331 1,331 1,200 1,227 1,227
Public Utilities .......................... 400 400 400 396 408 408
Industrial and Miscellaneous .............. 8,335 7,594 7,594 4,892 4,719 4,719
------ ------ ------ ------ ------ ------
Total Debt Securities ..................... 23,064 21,935 21,935 20,315 20,337 20,337
------ ------ ------ ------ ------ ------
Total Available for Sale .................. 35,862 49,611 49,611 34,175 51,235 51,235
------ ------ ------ ------ ------ ------
Total Securities .......................... 66,559 80,383 80,522 65,040 83,070 82,042
Mortgage loans on real estate ............. 112 112 320 320
Investment real estate .................... 1,557 1,557 1,645 1,645
Policy loans .............................. 669 669 648 648
Short term investments .................... 2,129 2,129 3,924 3,924
------ ------ ------ ------
Total investments ..... 71,026 84,989 71,577 88,579
====== ====== ====== ======
</TABLE>
38
<PAGE>
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
December 31,
------------------
1999 1998
----- ------
Assets
Cash .............................................. $ 68 $ 119
Investment in subsidiaries (equity method)
eliminated upon consolidation ................... 44,904 45,367
Other assets ...................................... 390 357
------- -------
Total Assets ................................... $45,362 $45,843
======= =======
Liabilities and Shareholders' Equity
Accrued general expenses .......................... $ 802 $ 871
Notes Payable ................................... 2,672 3,004
------- -------
Total Liabilities ................................. 3,474 3,875
------- -------
Total Shareholders' Equity ........................ $41,888 $41,968
------- -------
Total Liabilities and Shareholders' Equity ........ $45,362 $45,843
======= =======
The "Notes to Consolidated Financial Statements of The National Security Group,
Inc." are an integral part of this condensed financial information of the
registrants.
See accompanying "Notes to Condensed Financial Information of
Registrant"
39
<PAGE>
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
------- ------- -------
Income
From subsidiaries-eliminated upon consolidation
Dividends ........................................... $ 2,300 $ 2,000 $ 1,850
------- ------- -------
Expenses
State taxes ...................................... 26 26 26
Other expenses ...................................... 304 113 246
------- ------- -------
330 139 272
------- ------- -------
Income before income taxes and equity in
undistributed earnings of subsidiaries .............. 1,970 1,861 1,578
Income tax benefit ...................................... (17) (73) (109)
------- ------- -------
Income before equity in undistributed earnings
of subsidiaries ..................................... 1,987 1,934 1,687
Equity in undistributed (losses) earnings of subsidiaries 1,769 (1,004) 1,311
------- ------- -------
Net Income ...................................... $ 3,756 $ 930 $ 2,998
======= ======= =======
</TABLE>
The "Notes to Consolidated Financial Statements of The National Security Group,
Inc." are an integral part of this condensed financial information of the
registrants.
See accompanying "Notes to Condensed Financial Information of Registrant"
40
<PAGE>
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
------- ------- -------
Cash flows from operating activities:
Net income .............................................. $ 3,756 $ 930 $ 2,998
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed loss (income) of subsidiaries (1,769) 1,004 (1,311)
Decrease (Increase) in other assets ................. (33) 23 (62)
(Decrease) Increase in other liabilities ....... (69) (45) 107
------- ------- -------
Net cash provided by
operating activities ......... 1,885 1,912 1,732
------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable ............................. 0 3,100 0
Payments on notes payable ............................... (332) (96) 0
Purchase of treasury stock .............................. 60 (3,251) (98)
Cash dividends .......................................... (1,664) (1,713) (1,622)
------- ------- -------
Net cash used in
financing activities ......... (1,936) (1,960) (1,720)
------- ------- -------
Net increase in cash and cash equivalents ............... (51) (48) 12
Cash and due from banks at beginning of year ............ 119 167 155
------- ------- -------
Cash and due from banks at end of year .................. $ 68 $ 119 $ 167
======= ======= =======
</TABLE>
The "Notes to Consolidated Financial Statements of The National Security Group,
Inc." are an integral part of this condensed financial information of the
registrants.
See accompanying "Notes to Condensed Financial Information of Registrant"
41
<PAGE>
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
Notes to Condensed Financial Information of Registrant
Note 1-Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Condensed Financial Information of the Registrant does not
include all of the information and notes normally included with financial
statements prepared in accordance with generally accepted accounting
principles. It is, therefore, suggested that this Condensed Financial
Information be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Registrant's Annual Report as
referenced in Form 10-K, Part II, Item 8, page 18.
Note 2-Cash Dividends from Subsidiaries
Dividends of $2.3 million in 1999, $2 million in 1998 and $1.85 million in
1997 were paid to the Registrant by its subsidiaries.
42
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
SCHEDULE V. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
(Amounts in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Policy Claims
Deferred Future and Other
Acquisition Policy Unearned Benefits
Costs Benefits Premiums Payable
---------- -------- -------- --------
At December 31, 1999:
Life and accident and health insurance ................ $ 2,881 $18,987 $ 0 $ 394
Property and casualty insurance ....................... 1,392 0 7,088 18,471
------- ------- ------- -------
Total ................................................. $ 4,273 $18,987 $ 7,088 $18,865
======= ======= ======= =======
At December 31, 1998:
Life and accident and health insurance ................ $ 2,588 $18,833 $ 0 $ 347
Property and casualty insurance ....................... 1,566 0 8,745 21,528
------- ------- ------- -------
Total ................................................. $ 4,154 $18,833 $ 8,745 $21,875
======= ======= ======= =======
At December 31, 1997:
Life and accident and health insurance ................ $ 2,659 $18,667 $ 0 $ 386
Property and casualty insurance ....................... 1,557 0 8,853 21,860
------- ------- ------- -------
Total ................................................. $ 4,216 $18,667 $ 8,853 $22,246
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Commissions,
Benefits, Amortization General
Claims, of Deferred Expenses,
Net Losses and Policy Taxes,
Premium Investment Other Settlement Acquisition Licenses Premiums
Revenue Income Income Expenses Costs and Fees Written
-------- -------- ------- -------- ------- ------- --------
For the year ended December 31, 1999:
Life and accident and health insurance ...... $ 4,252 $ 2,124 $ 2 $ 2,404 $ 593 $ 1,895 $ 3,998
Property and casualty insurance ............. 21,685 2,230 383 14,871 4,172 3,845 20,036
Other ....................................... 0 0 0 0 0 330 0
------- ------- ------- ------- ------- ------- -------
Total ....................................... $25,937 $ 4,354 $ 385 $17,275 $ 4,765 $ 6,070 $24,034
======= ======= ======= ======= ======= ======= =======
For the year ended December 31, 1998:
Life and accident and health insurance ...... $ 3,837 $ 2,018 $ 4 $ 2,130 $ 1,104 $ 1,736 $ 3,831
Property and casualty insurance ............. 24,614 2,333 381 20,750 4,516 5,816 24,582
Other ....................................... 0 0 0 0 0 146 0
------- ------- ------- ------- ------- ------- -------
Total ....................................... $28,451 $ 4,351 $ 385 $22,880 $ 5,620 $ 7,698 $28,413
======= ======= ======= ======= ======= ======= =======
For the year ended December 31, 1997:
Life and accident and health insurance ...... $ 3,991 $ 2,048 $ 3 $ 2,106 $ 1,087 $ 2,089 $ 4,070
Property and casualty insurance ............. 27,165 2,156 692 20,889 4,735 4,290 27,185
Other ....................................... 0 0 0 0 0 219 0
------- ------- ------- ------- ------- ------- -------
Total ....................................... $31,156 $ 4,204 $ 695 $22,995 $ 5,822 $ 6,598 $31,255
======= ======= ======= ======= ======= ======= =======
</TABLE>
Note: Investment income and other operating expenses are reported separately by
segment and not allocated.
43
<PAGE>
THE NATIONAL SECURITY GROUP, INC.
SCHEDULE VI. REINSURANCE (CONSOLIDATED)
(Amounts in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
---------- ---------- --------- -------- ------
For the year ended December 31, 1999:
Life insurance in force .......................................... $146,096 $ 5,449 $ 0 $140,647 0.0%
======== ======== ======== ======== ===
Premiums:
Life insurance and accident and health insurance ........ $ 4,202 $ 49 $ 0 $ 4,153 0.0%
Property and casualty insurance ......................... 23,078 1,393 0 21,685 0.0%
-------- -------- -------- -------- ---
Total premiums .......................................... $ 27,280 $ 1,442 $ 0 $ 25,838 0.0%
======== ======== ======== ======== ===
For the year ended December 31, 1998:
Life insurance in force .......................................... $137,785 $ 5,782 $ 0 $132,003 0.0%
======== ======== ======== ======== ===
Premiums:
Life insurance and accident and health insurance ........ $ 3,892 $ 55 $ 0 $ 3,837 0.0%
Property and casualty insurance ......................... 26,194 1,580 0 24,614 0.0%
-------- -------- -------- -------- ---
Total premiums .......................................... $ 30,086 $ 1,635 $ 0 $ 28,451 0.0%
======== ======== ======== ======== ===
For the year ended December 31, 1997:
Life insurance in force .......................................... $138,059 $ 6,332 $ 0 $131,727 0.0%
======== ======== ======== ======== ===
Premiums:
Life insurance and accident and health insurance ........ $ 4,039 $ 48 $ 0 $ 3,991 0.0%
Property and casualty insurance ......................... 30,815 3,650 0 27,165 0.0%
-------- -------- -------- -------- ---
Total premiums .......................................... $ 34,854 $ 3,698 $ 0 $ 31,156 0.0%
======== ======== ======== ======== ===
</TABLE>
44
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
45
<PAGE>
PART III
Item 10. Directors and Officers of the Registrant
The information contained on pages 2-4 of The National Security Group's
Proxy Statement dated March 20, 2000, with respect to directors and
executive officers of the Company, is incorporated herein by reference
in response to this item.
Item 11. Executive Compensation
The information contained on pages 7 and 8 of The National Security
Group's Proxy Statement dated March 20, 2000, with respect to executive
compensation and transactions, is incorporated herein by reference in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained on page 9 of The National Security Group's
Proxy Statement dated March 20, 2000, with respect to security
ownership of certain beneficial owners and management, is incorporated
herein by reference to this item.
Item 13. Certain Relationships and Related Transactions
The information contained on pages 6 and 7 of The National Security
Group's Proxy Statement dated March 20, 2000, with respect to certain
relationships and related transactions, is incorporated herein by
reference in response to this item.
46
<PAGE>
PART IV
Item 14. Exhibits, financial statement schedules, and reports on Form 8-K
a. The following documents are filed as part of this report: Page #
Report of Independent Certified Public Accountants 19
Consolidated Statements of Income--
Years Ended December 31, 1999, 1998, and 1997 20
Consolidated Balance Sheets--December 31, 1999 and 1998 21
Consolidated Statements of Shareholders' Equity--
Years Ended December 31, 1999, 1998, and 1997 22
Consolidated Statements of Cash Flows--
Years Ended December 31, 1999, 1998, and 1997 23
Notes To Consolidated Financial Statements--December 31, 1999 24
Schedule I. Summary Of Investments--December 31, 1999 and 1998 38
Schedule III. Condensed Financial Information of Registrant--
December 31, 1999 and 1998 39
Schedule V. Supplementary Insurance Information--
December 31, 1999, 1998, and 1997 43
Schedule VI. Reinsurance--
Years Ended December 31, 1998, 1998, and 1997 44
All other Schedules are not required under the related instructions or are
inapplicable and therefore have been omitted.
b. Reports on Form 8-K
Incorporated by reference to the Registrant's Current Report on Form 8-K, filed
on December 3, 1999.
47
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE NATIONAL SECURITY GROUP, INC.
/s/ M.L. Murdock /s/ W.L. Brunson, Jr.
- ----------------------- --------------------------------
M.L. Murdock W.L. Brunson, Jr.
Senior Vice President,
Chief Financial Officer, President, Chief Executive
Treasurer and Director Officer and Director
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in their capacity as a Director of The National Security Group, Inc. On February
18, 2000.
SIGNATURE
/s/ Lewis Avinger /s/ D.M. English
/s/ Winfield Baird /s/ M.L. Murdock
/s/ Carolyn Brunson /s/ Craig S. Pittman
/s/ J.R. Brunson /s/ James B. Saxon
/s/ Walter P. Wilkerson /s/ Fred D. Clark Jr.
/s/ William L. Brunson, Jr. /s/ Jack E. Brunson
48
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 21,936
<DEBT-CARRYING-VALUE> 30,911
<DEBT-MARKET-VALUE> 30,774
<EQUITIES> 27,676
<MORTGAGE> 112
<REAL-ESTATE> 1,557
<TOTAL-INVEST> 84,990
<CASH> 1,383
<RECOVER-REINSURE> 4,687
<DEFERRED-ACQUISITION> 4,273
<TOTAL-ASSETS> 98,105
<POLICY-LOSSES> 18,987
<UNEARNED-PREMIUMS> 7,088
<POLICY-OTHER> 18,864
<POLICY-HOLDER-FUNDS> 1,526
<NOTES-PAYABLE> 2,672
0
0
<COMMON> 2,340
<OTHER-SE> 39,548
<TOTAL-LIABILITY-AND-EQUITY> 98,105
25,936
<INVESTMENT-INCOME> 4,354
<INVESTMENT-GAINS> 1,951
<OTHER-INCOME> 385
<BENEFITS> 17,275
<UNDERWRITING-AMORTIZATION> 4,765
<UNDERWRITING-OTHER> 5,773
<INCOME-PRETAX> 4,516
<INCOME-TAX> 760
<INCOME-CONTINUING> 3,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,756
<EPS-BASIC> 1.83
<EPS-DILUTED> 1.83
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
