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 September 30, 2001
------------------
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 November 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 Nine Months
Ended September 30 Ended September 30
2001 2000 2001 2000
---- ---- ---- ----
Revenues
Net insurance premiums earned ............... $ 6,309 $ 6,003 $18,613 $17,232
Net investment income ....................... 1,207 1,104 3,369 3,262
Realized investment gains ................... 484 846 1,028 1,912
Other income ................................ 201 228 1,087 405
------ ------ ------ ------
Total revenues ............................ 8,201 8,181 24,097 22,811
------ ------ ------ ------
Benefits and Expenses
Policyholder benefits and settlement expenses 3,387 2,996 10,924 10,352
Policy acquisition costs 1,708 1,503 4,234 3,691
General insurance expenses 1,418 1,570 4,353 3,812
Insurance taxes, licenses and fees .......... 307 204 985 667
------ ------ ------ ------
Total benefits and expense ................. 6,820 6,273 20,496 18,522
------ ------ ------ ------
Income Before Income Taxes .................. 1,381 1,908 3,601 4,289
Income Taxes (Current and deferred).......... 459 516 1,134 984
------ ------ ------ ------
Net Income .................................. $ 922 $ 1,392 $ 2,467 $ 3,305
====== ====== ====== ======
Earnings per share .......................... $ .37 $ 0.56 $ 1.00 $ 1.34
====== ====== ====== ======
Dividends Declared per Share ................ $ .20 $ 0.19 $ 0.56 $ 0.53
====== ====== ====== ======
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
September 30, December 31,
2001 2000
---- ----
(Unaudited)
Assets
Investments:
Debt Securities held-to-maturity at amortized cost
(estimated fair value: 2001 - $25,351; 2000 -$29,035) . $ 24,738 $ 28,875
Debt Securities available-for-sale, at estimated fair value
(cost: 2001 - $30,497; 2000 - $26,767) ............... 31,354 26,685
Equity Securities available-for-sale, at estimated fair value
(cost: 2001 --$11,300; 2000 -- $11,544) ............... 21,515 24,963
Receivable for securities sold ............................... 0 143
Mortgage loans ............................................... 295 116
Investment real estate, at cost .............................. 1,563 1,569
Policy loans ................................................. 734 692
------ -----
Total investments ....................................... 80,199 83,043
------ ------
Cash and cash equivalents .................................... 3,524 2,629
Accrued investment income .................................... 947 881
Reinsurance recoverable ...................................... 3,585 3,534
Deferred policy acquisition costs ............................ 4,782 4,469
Prepaid reinsurance premiums ................................. 326 293
Other assets ................................................. 3,448 2,714
------ -----
Total assets .............................................. $ 96,811 $ 97,563
====== ======
Liabilities
Policy reserves ........................................... $ 22,429 $ 19,787
Claim reserves ............................................ 14,061 15,767
Unearned premiums ......................................... 7,198 6,364
Other policyholder funds .................................. 1,510 1,488
Notes payable ............................................. 2,115 2,401
Current income tax payable ................................ 768 336
Deferred income tax ....................................... 2,833 3,419
Other liabilities ......................................... 2,572 4,221
------ ------
Total liabilities ...................................... $ 53,486 $ 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 .... 8,229 9,779
Retained earnings ............................................ 27,678 35,225
Treasury stock, at cost (9/30/01 0; 12/31/00 284,037.......... 0 (3,581)
-------- -------
Total shareholders' equity ................................ 43,325 43,780
-------- -------
Total liabilities and shareholder's equity ................ $ 96,811 $ 97,563
======== =======
Shareholders' Equity per Share ............................... $ 17.56 $ 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 $(3,581)
Comprehensive Income
Net Income three months ended 9/30/2001 2,467 2,467
Other comprehensive income (net of tax)
Unrealized loss on securities, net of
reclassification adjustment (1,550) (1,550)
------
Total Comprehensive Income 917
------
Retirement of Treasury Stock ( 3,297) (284) 3,581
Stock Dividend (20%) ( 5,345) 411 4,934
Cash dividends ($.56 per share) (1,372) ( 1,372)
------- ------- ------- ------ ------ ---------
Balance at September 30, 2001 (Unaudited) $ 43,325 $27,678 $ 8,229 $ 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)
Nine Months
Ended September 30
2001 2000
----- ----
Cash Flows from Operating Activities
Income from continuing operations ...................... $2,467 $ 3,305
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities:
Accrued investment income ............................ (66) (97)
Reinsurance receivables .............................. (51) 999
Deferred Policy acquisition costs .................... (313) (139)
Income Taxes ......................................... (154) 773
Depreciation expense ................................. (112) 99
Policy liabilities and claims ........................ 1,770 (2,021)
Other, net ...........................................(2,155) (2,743)
----- -----
Net cash provided by operating activities 1,386 176
----- -----
Cash Flows from Investing Activities
Cost of investments acquired ....................... (9,488) (6,329)
Sale and maturity of investments ................... 10,782 6,197
Purchase of property and equipment ................ (149) ( 46)
----- -----
Net cash provided by (used in)investing activities.. 1,145 (178)
----- -----
Cash Flows from Financing Activities
Change in other policyholder funds ................ 22 8
Change in notes payable ........................... (286) (207)
Dividends paid .................................... (1,372) (1,294)
----- -----
Net cash used in financing activities ........... (1,636) (1,493)
----- ------
Net change in cash and cash equivalents ............... 895 (1,495)
Cash and cash equivalents, beginning of period ........ 2,629 3,512
----- -----
Cash and cash equivalents, end of period .............. $ 3,524 $ 2,017
====== =====
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 September 30, 2001 was 2,466,600 and for the period ending
September 30, 2000 was 2,466,600.
Note 4-Changes in Shareholder's Equity (in thousands)
During the nine months ended September 30, 2001 and 2000, there were no changes
in shareholders' equity except for net income of $2,467 and $3,305 respectively;
dividends paid of $1,373 and $1,294 respectively; and unrealized investment
(losses), net of applicable taxes, of $(1,550) and $(672) respectively.
Note 5 - Deferred Taxes
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
(in thousands)
September 30, January 1,
2001 2001
------ -------
Deferred policy acquisition costs ...................... (1,626) (1,519)
Policy liabilities ..................................... 366 419
Unearned premiums ...................................... 467 383
Claims liabilities ..................................... 380 432
General insurance expenses ............................. 715 694
Alternative minimum tax credit carry forward ........... 45 67
Unrealized gains on securities available-for-sale ...... (3,180) (3,895)
------ ------
Net deferred tax liability ............................. (2,833) (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.
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 September 30, 2001, compared with December 31, 2000
and its results of operations and cash flows for the quarter ending September
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 21% of total premium income of the Company. Premium
revenue in NSIC consists of life insurance premium and accident and health
insurance premium. Life insurance premium revenue was $3.1 million in the first
nine months of 2001 compared to $2.8 million in the same period last year, an
increase of 12%. Accident and health insurance premium was $760,000 in the first
nine months of 2001 compared to $643,000 in the same period last year, an
increase of 18%.
Premium revenue in the property/casualty insurance subsidiaries, National
Security Fire & Casualty Company (NSFC) and Omega One Insurance Company (Omega),
was $14.7 million in the first nine months of 2001 compared to $13.8 million for
the same period last year, an increase of 6.8%. Direct written premium, which is
a leading indicator of continued earned premium growth, was up 15% in the first
nine months of 2001 compared to the same period last year. The homeowners and
private passenger auto insurance lines of business are the primary areas of
growth in the property/casualty insurance subsidiaries.
Total premium revenue was $18.6 million in the first nine months of 2001
compared to $17.2 million in the same period last year, an increase of 8.0%.
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 was up 3% in the first nine months of 2001 compared to the
same period last year. This increase is primarily the result of an increase in
investment in fixed income securities and an increase in investment yields on
securities purchased during the year 2000. However, given the dramatic decline
in interest rates over the past nine months, this trend is not expected to
continue as new investments in fixed income securities are at significantly
lower rates than in 2000.
10
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 $884,000 from last year.
Other income:
Other income is up significantly in the first nine months of 2001 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:
Policyholder benefits and settlement expenses as a percent of earned premium was
up 3.8 percentage points in the third quarter of 2001 compared to the third
quarter of last year. However, for the year to date, policyholder benefits and
settlement expenses as a percent of premium remain down slightly, 58.7% compared
to 60.1% last year.
Policy acquisition costs:
Policy acquisition costs are up $543,000 compared to last year. 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 premium earned is up only marginally at 22.8% compared to
21.4% last year.
General insurance expenses:
General expenses are up 14% in the first nine months of 2001 compared to the
same period 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, a $150,000
assessment from a state underwriting association in connection with losses
incurred from Hurricane Allison, 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.
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 be completed in November of 2001.
Summary:
The Company has a year to date net income of $2,467,000 versus net income of
$3,305,000 in 2000. The primary reason for the decrease in earnings compared to
last year is a $884,000 decrease in realized capital gains.
Investments:
The composition of the Company's investment portfolio at September 30, 2001
consisted of 70% fixed maturities, 27% equity securities, 2% investment real
estate, and 1% other investments. The majority of the Company's investment
portfolio consists of fixed maturity securities, which are diversified among
issuers and industries. Investments in fixed maturity and equity securities in
the insurance subsidiaries are limited to no more than 10% of each subsidiary's
shareholder's equity.
11
Capital resources:
At September 30, 2001, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $43.3 million, a
decrease of $455,000 compared to December 31, 2000. The decrease reflects net
income of $2,467,000, a decrease in accumulated unrealized investment gains of
$(1,550,000), and dividends paid of $1,373,000.
The Company has $2.1 million in notes from local banks which management intends
to repay in full over the next three years.
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 $3,524,000 in cash and cash equivalents at September 30, 2001.
Net cash provided by operating activities was $1,386,000 for the current period,
compared to net cash provided of $176,000 for the period ended September 30,
2000. Cash provided by investing activities was $1,145,000. Cash dividends paid
to stockholders' of $1,372,000 and payments on notes payable of $286,000 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: November 14, 2001
14
EXHIBIT INDEX
Exhibit Description Page
(a) 11 Statement Regarding Computation of Per Share Earnings Filed Herewith;
See Note 3 to
Financial
(b) Form 8-K
Incorporated by reference to the Registrant's Current Report on
Form 8-K filed on April 20, 2001.
Incorporated by reference to the Registrant's Current Report on
Form 8-K filed on June 6, 2001.
15