UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 0-18649
THE NATIONAL SECURITY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-1020300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
661 East Davis Street, Elba, Alabama 36323
- -------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (334) 897-2273
--------------
Not Applicable
(Former name, address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Number of Shares of Common Stock outstanding as of August 8, 2001: 2,466,600
Exhibit index is located on page 15.
Page 1 of 15 pages
THE NATIONAL SECURITY GROUP, INC
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income .................................... 3
Consolidated Balance Sheets .......................................... 4
Consolidated Statements of Shareholders Equity ....................... 5
Consolidated Statements of Cash Flow ................................. 6
Notes to Financial Statements ........................................ 7
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations .............. 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................ 13
SIGNATURE ............................................................ 14
EXHIBIT INDEX ........................................................ 15
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED UNAUDITED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
2001 2000 2001 2000
----- ----- ----- ------
Revenues
Net insurance premiums earned .......... $ 6,142 $ 5,453 $12,304 $11,229
Net investment income .................. 1,114 1,103 2,162 2,158
Realized investment gains .............. 116 117 544 1,066
Other income ........................... 187 89 886 177
------- ------- ------- -------
Total revenues ....................... 7,559 6,762 15,896 14,630
------- ------- ------- -------
Benefits and Expenses
Policyholder benefits
and settlement expenses .............. 2,936 3,593 7,537 7,356
Policy acquisition costs ............... 1,280 1,050 2,526 2,188
General insurance expenses ............. 1,618 886 2,935 2,242
Insurance taxes, licenses and fees ..... 268 212 678 463
------- ------- ------- -------
Total benefits and expense ........... 6,102 5,741 13,676 12,249
------- ------- ------- -------
Income Before Income Taxes ............. 1,457 1,021 2,220 2,381
Income Taxes (Current and deferred) .... 463 219 675 468
------- ------- ------- -------
Net Income ............................. $ 994 $ 802 $ 1,545 $ 1,913
======= ======= ======= =======
Earnings per share ..................... $ 0.41 $ 0.33 $ 0.63 $ 0.78
======= ======= ======= =======
Dividends Declared per Share ........... $ .18 $ .17 $ 0.36 $ 0.34
======= ======= ======= =======
The Notes to Financial Statements are an integral part of these statements.
3
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
As of As of
June 30, December 31,
2001 2000
---- ----
(Unaudited)
Assets
Investments:
Debt Securities held-to-maturity at amortized cost
(estimated fair value: 2001 - $26,381; 2000 -$29,326) . $ 26,009 $ 28,875
Debt Securities available-for-sale, at estimated fair value
(cost: 2001 - $29,765; 2000 - $25,475) ............... 30,043 26,685
Equity Securities, at market
(cost: 2001 --$11,673; 2000 -- $12,009) ............... 24,856 24,963
Receivable for securities sold ............................... 0 143
Mortgage loans ............................................... 299 116
Investment real estate, at cost .............................. 1,545 1,569
Policy loans ................................................. 718 692
------ -----
Total investments ....................................... 83,470 83,043
Cash and cash equivalents .................................... 2,864 2,629
Accrued investment income .................................... 926 881
Reinsurance recoverable ...................................... 3,371 3,534
Deferred policy acquisition costs ............................ 4,761 4,469
Prepaid reinsurance premiums ................................. 220 293
Other assets ................................................. 2,997 2,714
------ -----
Total assets .............................................. $ 98,609 $ 97,563
====== ======
Liabilities
Policy reserves ........................................... $ 22,338 $ 19,787
Claim reserves ............................................ 14,503 15,767
Unearned premiums ......................................... 6,593 6,364
Other policyholder funds .................................. 1,435 1,488
Notes payable ............................................. 2,238 2,401
Current income tax payable ................................ 945 336
Deferred income tax ....................................... 3,332 3,419
Other liabilities ......................................... 2,627 4,221
------ ------
Total liabilities ...................................... $ 54,011 $ 53,783
------ ------
Shareholders' Equity
Common stock, $1 par value, 2,466,600 shares outstanding ..... 2,467 2,340
Additional paid in capital ................................ 4,951 17
Accumulated comprehensive income:
Net unrealized appreciation on investment securities .... 9,958 9,779
Retained earnings ............................................ 27,222 35,225
Treasury stock, at cost (6/30/01 0; 12/31/00 284,037.......... 0 (3,581)
-------- -------
Total shareholders' equity ................................ 44,598 43,780
-------- -------
Total liabilities and shareholder's equity ................ $ 98,609 $ 97,563
======== =======
Shareholders' Equity per Share
18.08 17.75
======== =======
The Notes to Financial Statements are an integral part of these statements
4
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
Accumulated
Other
Retained Comprehensive Common Paid-in Treasury
Total Earnings Income Stock Capital Stock
Balance at December 31, 1999 $ 41,888 $ 33,197 $ 9,915 $ 2,340 $ 17 $ (3,581)
Comprehensive Income
Net Income for 2000 3,776 3,776
Other comprehensive income (net of tax)
Unrealized loss on securities, net of
reclassification adjustment (136) (136)
--------
Total Comprehensive Income 3,640
--------
Cash dividends ($.85 per share) ( 1,748) ( 1,748)
------- ------- ------- ------ ----- ------
Balance at December 31, 2000 $ 43,780 $35,225 $ 9,779 $ 2,340 $ 17 $(3,581)
Comprehensive Income
Net Income three months ended 6/30/2001 1,545 1,545
Other comprehensive income (net of tax)
Unrealized loss on securities, net of
reclassification adjustment 179 179
------
Total Comprehensive Income 1,724
------
Retirement of Treasury Stock ( 3,297) (284) 3,581
Stock Dividend (20%) ( 5,345) 411 4,934
Cash dividends ($.36 per share) ( 906) ( 906)
------- ------- ------- ------ ------ ---------
Balance at March 31, 2001 (Unaudited) $ 44,598 $27,222 $ 9,958 $ 2,467 $4,951 $ 0
======== ======= ======== ======= ===== =========
The Notes to the Financial Statements are an integral part of these statements.
5
THE NATIONAL SECURITY GROUP. INC.
CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months
Ended June 30
2001 2000
----- ----
Cash Flows from Operating Activities
Income from continuing operations ...................... $1,545 $ 1,913
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Accrued investment income ............................ (45) (43)
Reinsurance receivables .............................. 163 727
Deferred Policy acquisition costs .................... (292) (60)
Income Taxes ......................................... 522 (110)
Depreciation expense ................................. (73) 66
Policy liabilities and claims ........................ 1,516 (1,713)
Other, net ...........................................(1,650) (2,092)
----- -----
Net cash provided by (used in)operating activities 1,686 (1,312)
----- -----
Cash Flows from Investing Activities
Cost of investments acquired ....................... (6,758) (3,516)
Sale and maturity of investments ................... 6,509 3,406
Purchase of property and equipment ................ (80) (207)
----- -----
Net cash used in investing activities .............. (329) (317)
----- -----
Cash Flows from Financing Activities
Change in other policyholder funds ................ (53) (91)
Change in notes payable ........................... (163) (125)
Dividends paid .................................... (906) (863)
----- -----
Net cash used in financing activities ........... (1,122) (1,079)
----- ------
Net decrease in cash and cash equivalents .............. 235 (2,708)
Cash and cash equivalents, beginning of period ........ 2,629 3,512
----- -----
Cash and cash equivalents, end of period .............. $ 2,864 $ 804
====== =====
The Notes to the Financial Statements are an integral part of these statements.
6
THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-Basis of Presentation The consolidated unaudited financial statements
have been prepared in conformity with generally accepted accounting principles.
The interim financial statements include all adjustments necessary, in the
opinion of management, for fair statement of financial position, results of
operations and cash flows for the periods reported. These adjustments are all
normal recurring adjustments. A summary of the more significant accounting
policies are set forth in the notes to the audited consolidated financial
statements for the year ended December 31, 2000.
The accompanying consolidated unaudited financial statements include the
accounts of The National Security Group, Inc. (the Company) and its wholly owned
subsidiaries: National Security Insurance Company (NSIC), National Security Fire
and Casualty Company (NSFC) and Natsco, Inc. (Natsco). NSFC includes a wholly
owned subsidiary, Omega One Insurance Company, and Liberty Southern Insurance
Company, which is wholly owned by Omega.
Note 2-Reinsurance
National Security Fire and Casualty Company (NSFC), Omega One Insurance Company
(OMEGA), and National Security Insurance Company (NSIC) wholly owned
subsidiaries of the Company, reinsure certain portions of insurance risk, which
exceed various retention limits. NSFC, OMEGA, and NSIC are liable for these
amounts in the event assuming companies are unable to meet their obligations.
Note 3-Calculation of Earnings Per Share
Earnings per share were based on net income divided by the weighted average
common shares outstanding. The weighted average number of shares outstanding for
the period ending June 30, 2001 was 2,466,600 and for the period ending June 30,
2000 was 2,466,600.
Note 4-Changes in Shareholder's Equity (in thousands)
During the three months ended June 30, 2001 and 2000, there were no changes in
shareholders' equity except for net income of $1,545 and $1,913 respectively;
dividends paid of $(906) and $863 respectively; and unrealized investment gains
(losses), net of applicable taxes, of $179 and $(1,329) respectively.
Note 5 - Deferred Taxes
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
(in thousands)
June 30, January 1,
2001 2001
Deferred policy acquisition costs ...................... (1,619) (1,519)
Policy liabilities ..................................... 384 419
Unearned premiums ...................................... 399 383
Claims liabilities ..................................... 396 432
General insurance expenses ............................. 706 694
Alternative minimum tax credit carry forward ........... 244 67
Unrealized gains on securities available-for-sale ...... (3,842) (3,895)
------- -------
Net deferred tax liability ............................. (3,332) (3,419)
======= =======
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
7
THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Note 6-Contingencies
The Company and its subsidiaries continue to be named as parties to litigation
related to the conduct of their insurance operations. These suits involve
alleged breaches of contracts, torts, including bad faith and fraud claims based
on alleged wrongful or fraudulent acts of agents of the Company's subsidiaries,
and miscellaneous other causes of action. Most of these lawsuits include claims
for punitive damages in addition to other specified relief.
In recently filed actions, NSIC is named as a defendant in purported class
actions relating to the past sale of industrial burial insurance. The actions
address whether the premiums charged were "excessive" relative to the benefit
provided and whether the premiums charged were in any manner discriminatory
relative to the race of the person insured. These actions are in the initial
phases and no discovery has been undertaken and no class has been certified. The
issues raised in these actions are similar to the issues pending in numerous
other actions currently pending nationwide against numerous insurers. While NSIC
did at one time sell industrial burial insurance, no such plans have been sold
for several decades.
The company establishes and maintains reserves on contingent liabilities. In
many instances, however, it is not feasible to predict the ultimate outcome with
any degree of accuracy. While a resolution of these matters may significantly
impact consolidated earnings and the Company's consolidated financial position,
it remains management's opinion, based on information presently available, that
the ultimate resolution of these matters will not have a material impact on the
Company's consolidated financial position. However, it should be noted that
instances of class action lawsuits against insurance companies appear to be
increasing in several states in which insurance subsidiaries of the company
operate.
The Company and its subsidiaries continue to be named as parties to litigation
related to the conduct of their insurance operations. These suits involve
alleged breaches of contracts, torts, including bad faith and fraud claims based
on alleged wrongful or fraudulent acts of agents of the Company's subsidiaries,
and miscellaneous other causes of action. Most of these lawsuits include claims
for punitive damages in addition to other specified relief.
Note 7-Accounting for certain investments in debt and equity securities
The Company's investment securities are classified in two categories and
accounted for as follows:
Securities Held-to-Maturity - Bonds, notes and redeemable preferred stock for
which the Company has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amoritization of premiums and accretion of
discounts which are recognized in interest using methods which approximate level
yields over the period to maturity.
Securities Available-for-Sale - Bonds, notes, common stock and non-redeemable
preferred stock not classified as either held-to-maturity, or trading are
reported at fair value, adjusted for other-than-temporary declines in fair
value.
The Company and its subsidiaries have no trading securities.
8
THE NATIONAL SECURITY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
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 principle balance of
such loans. Investment real estate is reported at cost, less allowances for
depreciation computed on the straight-line basis. Short-term investments are
carried at cost, which approximate market value. Investments with other than
temporary impairments in value are written down to estimated realizable values.
9
Item 2.
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion addresses the financial condition of The National
Security Group, Inc. as of June 30, 2001, compared with December 31, 2000 and
its results of operations and cash flows for the quarter ending June 30, 2001,
compared with the same period last year.
The reader is assumed to have access to the Company's 2000 Annual Report. This
discussion should be read in conjunction with the Annual Report and with
consolidated financial statements on pages 3 through 6 of this form 10-Q.
Information is presented in whole dollars.
CONSOLIDATED RESULTS OF OPERATIONS
Premium revenues:
Premium revenue in the life insurance subsidiary, National Security Insurance
Company (NSIC), accounts for 20% of total premium income of the Company. Life
insurance premium revenue was up 14% compared to the first six months of 2001.
Life insurance sales through independent agents are the primary area of
increased premium production for NSIC. Insurance sales in NSIC's traditional
home service market, which is sold through employee agents, are down about 3.5%
compared to last year.
Premium revenue in the property/casualty insurance subsidiaries, National
Security Fire & Casualty Company (NSFC) and Omega One Insurance Company (Omega),
is up 4.6% over last year. The homeowners and private passenger auto insurance
lines of business are the areas of growth in the property/casualty insurance
subsidiaries.
Total premium revenue is up 9.6% over the first six months of last year. Over
the past two years management has made improvements to existing insurance
products and increased marketing efforts. Early results of these efforts have
been encouraging.
Net investment income:
Net investment income is virtually unchanged compared to last year.
Realized capital gains and losses:
Realized capital gains are generated primarily by the sale of common stock
investments from the insurance subsidiaries investment portfolio. The Company's
investment committee will sell positions in the portfolio when market conditions
warrant, producing realized capital gains and/or losses. This periodic selling
of securities can produce significant fluctuations in realized capital gains
from period to period. Realized capital gains are down $522,000 from last year.
Other income:
Other income is up significantly for the quarter due to a one-time gain on a
recovery from a third party of $580,000 in connection with a previously settled
lawsuit in an insurance subsidiary. Policyholder benefits and settlement
expenses:
10
Policyholder benefits and settlement expenses as a percent of earned premium
improved dramatically in the second quarter of 2001. In the first quarter of
2001, the Company incurred numerous windstorm related losses. However, in the
second quarter, policyholder benefits and settlement expenses as a percent of
earned premium were only 47.8% of earned premium. The percentage in the first
quarter was 74.6% of earned premium.
Year to date results compared to last year are also improved. Policyholder
benefits and settlement expenses were 61.3% in the first six months of 2001,
compared to 65.5% in the same period last year.
Policy acquisition costs:
Policy acquisition costs are up $338,000 compared to last year, and increase of
9.5%. An increase in sales of both life and property/casualty insurance, which
produced an increase in agents commission expense, contributed to the increase.
Policy acquisition cost as a percent of earned premium is up one percentage
point over last year.
General insurance expenses:
General expenses are up 35% in the first six months of 2001 compared to the same
period last year. For the second quarter general expenses were up $832,000
compared to last year. Several factors contributed to this increase, the most
significant of which included a one-time charge of $200,000 for cost related to
the acquisition of a small book of life insurance business, actuarial fees
associated with various insurance product upgrades and enhancements, postage
expense associated with the mailing of privacy act notices to all policyholders
of insurance subsidiaries and litigation expenses. While general insurance
expenses will continue to be up compared to last year, the increase in expenses
incurred in the second quarter is not expected to continue in the remainder of
the year.
Insurance taxes, licenses, and fees:
Insurance taxes, licenses and fees are up due to an increase in written premium
and due to expenses paid to the Alabama Insurance Department for a routine
statutory examination, which is expected to continue through the third quarter
of 2001.
Summary:
The Company has a year to date net income of $1,545,000 versus net income of
$1,913,000 in 2000. The primary reason for the decrease in earnings compared to
last year is a $521,000 decrease in realized capital gains.
Investments:
Investments at June 30, 2001 are up $427,000 compared to December 31, 2000.
Capital resources:
At June 30, 2001, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $44.6 million,
up $818,000 compared to December 31, 2000. The increase reflects net income of
$1,545,000, an increase in accumulated unrealized investment gains of $179,000,
and dividends paid of $906,000.
The Company has $2.2 million in notes from local banks which management intends
to repay in full over the next three years.
11
Liquidity:
The liquidity requirements of the Company are primarily met by funds provided
from operations of the life insurance and property/casualty subsidiaries.
Premium and investment income, as well as maturities, calls, and sales of
invested assets, provide the primary sources of cash for both subsidiaries. Cash
is used by subsidiaries for payments of policy benefits, the acquisition of new
business (principally commissions), operating expenses, and purchases of new
investments.
The Company had $2,864,000 in cash and cash equivalents at June 30, 2001. Net
cash provided by operating activities was $1,686,000 for the current period,
compared to net cash used of $1,420,000 for the period ended June 30, 2000. Cash
used in investing activities was $329,000. Cash dividends paid to stockholders'
of $906,000 and payments on notes payable of $163,000 were the primary uses of
cash used in financing activities.
12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
See Exhibit Index
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned duly
authorized officer, on its behalf and in the capacity indicated.
The National Security Group, Inc.
By /s/ M.L. Murdock
M.L. Murdock
Senior Vice President and
Chief Financial Officer
Dated: August 14, 2001
EXHIBIT INDEX
Exhibit Description Page
(a) 11 Statement Regarding Computation of Per Share Earnings Filed Herewith;
See Note 3 to
Financial
(b) Form 8-K
Incorporated by reference to the Registrants Current Report on Form 8-K
filed on April 20, 2001.
Incorporated by reference to the Registrants Current Report on Form 8-K
filed on June 6, 2001.
15