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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, 2001
-----------------
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 28, 2002 (based upon the bid price of these shares on
NASDAQ on such date) - $10,952,043.
Number of Shares of Common Stock outstanding as of February 28, 2002 - 2,466,600
Portions of the Annual Proxy Statement incorporated by reference into Part III.
Total Number of Sequentially Numbered Pages: 58
1
THE NATIONAL SECURITY GROUP, INC.
INDEX TO THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
Part I Page
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 8. Consolidated Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants and
Financial Disclosure 55
Part III
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners and Management 56
Item 13. Certain Relationships and Related Transactions 56
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K 57
Signature Page 58
2
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 dwelling fire and
windstorm, homeowners, mobile homeowners, and personal non-standard automobile
lines of insurance. 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 80%
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 2001:
State Percent of direct written premium
------ ---------------------------------
Alabama ...................................... 54.37%
Arkansas ..................................... 7.98%
Georgia ...................................... 6.78%
Louisiana .................................... 8.75%
Mississippi .................................. 8.26%
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.
3
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.
The following table sets forth the premiums earned and income (loss) during the
periods reported:
Year Ended December 31
(Amounts in Thousands)
2001 2000 1999
----- ----- -----
Net premiums earned:
Fire, Allied lines, and Homeowners ........ $14,037 $13,229 $14,600
Automobile ................................ 5,132 4,126 6,086
Other ..................................... 1,028 971 999
------- ------- -------
$20,197 $18,326 $21,685
======= ======= =======
Income (loss) before income taxes .......... $ 5,440 $ 3,917 $ 2,365
======= ======= =======
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 six states Alabama, Florida, Georgia,
Mississippi, South Carolina, and Texas. The following table indicates NSIC
direct premiums collected by state in 2001:
State Percentage of Total Direct Premiums
Alabama ................................. 80%
Georgia ................................. 11%
Mississippi ............................. 5%
Florida ................................. 4%
NSIC has two primary methods of distribution of insurance products, home service
agents and independent agents. Home service distribution life insurance products
account for 69% of total premium revenues in the life insurance segment. Home
service life products consist of products marketed directly at the home or other
premises of the insured by an employee agent of the Company. The independent
agent distribution method accounts for 22% of total premium revenue in the life
insurance segment. Since NSIC began marketing life, accident and health products
through independent agents in 1999 the distribution channel has become the
fastest growing method of distribution. The products offered by NSIC primarily
consist of term and whole life insurance and supplemental 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.
4
Accident and health business is primarily accident policies sold through
schools, though NSIC is beginning to experience an increase in accident sales
through its independent and captive agency force. 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)
2001 2000 1999
---- ---- ----
Life insurance in force at
end of period:
Ordinary-whole life ............ $104,700 $ 85,000 $ 80,200
Term Life ...................... 40,300 36,000 35,100
Industrial ..................... 33,000 30,000 30,700
Other .......................... 0 0 0
-------- -------- --------
178,000 151,000 146,000
======== ======== ========
Year Ended December 31
(Amounts in Thousands)
2001 2000 1999
---- ---- ----
New life insurance issued:
Ordinary-whole life ............... $82,700 $69,400 $66,200
Term Life ......................... 13,500 10,500 7,700
Industrial ........................ 0 0 0
Other ............................. 100 100 100
------- ------- -------
96,300 80,000 74,000
======= ======= =======
Net premiums earned:
Life insurance ...................... $4,139 $3,746 $3,396
Accident and health insurance ....... 1,022 848 855
------ ------ ------
5,161 4,594 4,251
====== ====== ======
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.
5
The following table sets forth certain information respecting the Company's
investments at the date shown:
Year Ended December 31
(Amounts in thousands)
2001 2000
---- ----
Investment Securities held-to-maturity, at amortized cost
(estimated fair value: 2001 - $23,922, 2000 - $29,035) $23,135 $28,875
Investment Securities available-for-sale, at market
(cost: 2001 - $45,975, 2000 - $38,311) ............... 57,648 51,648
Receivable for securities sold ............................... 50 143
Note Receivable from affiliate ............................... 250 0
Mortgage loans on real estate, at cost ....................... 275 116
Investment real estate, at cost .............................. 1,563 1,569
Policy loans ................................................. 726 692
Investment in affiliate ...................................... 53 0
Short-term investments ....................................... 1,796 1,675
------ ------
$85,496 $84,718
======= ======
The results with respect to the foregoing investments are as follows:
Year Ended December 31
2001 2000 1999
---- ---- ----
Net investment income ................. $ 4,506 $ 4,434 $ 4,354
Average yield on investments .......... 5.3% 5.3% 5.1%
Economic yield on investments
(includes realized and
unrealized investment gains) ......... 5.6% 6.7% 3.7%
Net realized gains on investments
(before income taxes) .................. 1,640 1,723 1,951
Changes in net unrealized gains on
investments (before income taxes) .... (1,366) (191) (3,196)
As of December 31, 2001, 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 ...... $ 1,795 $ 2,384 $ 4,179 7.2%
Maturity in 1-5 years ............. 6,243 5,783 12,026 20.8
Maturity in 5-10 years ............ 17,734 6,046 23,780 41.1
Maturity after 10 years ........... 8,929 8,922 17,851 30.9
------- ------- ------- -----
Totals ............................ $34,701 $23,135 $57,836 100.0%
======= ======= ======= =====
6
Investments in affiliate:
In the fourth quarter of 2001 The Company entered into a joint investment with a
local manufacturing firm, Cash Brothers Leasing, Inc and formed a new company,
The Mobile Attic, Inc. The Mobile Attic, Inc, through a network of dealers,
leases portable storage units. The primary customers of The Mobile Attic are
building contractors, retail establishments, and residential consumers.
At 12/31/2001 the Company held a 50% equity investment in The Mobile Attic. The
investment was accounted for in the financial statements on the equity basis and
contributed $52,000 to net income for the year. While the investment and impact
on earnings was not material in 2001, earnings from The Mobile Attic are
expected to become more significant in future periods. Early estimates indicate
that The Mobile Attic will add 10 to 15% to consolidated earnings in 2002.
Certain Information Regarding Insurance Activities
Marketing and Distribution
NSIC products are marketed through a field force of agents and service
representatives who are employees of the Life Company and through a network of
independent agents. The independent agent method of distribution is expected to
be more cost effective and has become the fastest growing method of
distribution. 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 2001 averaged
approximately 34.8% of premiums. Commissions incurred by the NSFC in 2001
averaged approximately 17.1% of premiums and ranged from 12.5% to 27.5%
depending on the type and amount of insurance sold. During 2001, no one
independent agent accounted for more than 10% of total net earned premium of the
property-casualty insurance subsidiaries.
NSIC has implemented 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 periodically to 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 have been reductions in the
number of NSIC employee 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.
7
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.
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 2001, 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 occurring 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, 2001, the total reserves of NSIC
(including the reserves for accident and health insurance) were approximately
$23 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, 2001, the property-casualty subsidiaries had
reserves for unpaid claims of approximately $13.9 million before subtracting
unpaid claims which will be due from reinsurers of $2.4 million leaving net
unpaid claims of $11.5 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, 2001, 2000 or 1999. The Company
believes such reserves are adequate to provide for settlement of claims.
Employees of the Company calculate NSFC and Omega loss reserves. Milliman &
Robertson, an independent actuarial consulting firm, issues a Statement of
Actuarial Opinion regarding the adequacy of reserves.
8
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.
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. Lower 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 generally 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 has paid no
material amounts to guaranty associations over the past three years. These
payments, when made, 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.
9
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 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 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 dwelling fire, homeowners and nonstandard
auto coverage. NSFC, though one of the larger writers of lower 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 NSFC products over its competitors.
10
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 N 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, 2001.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The capital stock of the Company is traded in the NASDAQ national 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,
2001, was approximately 1,100.
Stock Bid Prices Dividends
High Low Per Share
2001
First Quarter $15.63 $ 10.21 $ .183
Second Quarter 15.00 11.08 .183
Third Quarter 15.45 11.00 .19
Fourth Quarter 14.49 12.00 .20
2000
First Quarter $11.25 $ 9.17 $ .175
Second Quarter 10.21 9.17 .175
Third Quarter 14.27 10.42 .175
Fourth Quarter 16.04 11.04 .183
12
Item 6. Selected Financial Data
(Amounts in thousands, except per share)
Operating results 2001 2000 1999 1998 1997
- ----------------- ------ ---- ---- ----- ----
Net premiums earned ...... $ 25,357 $ 22,921 $ 25,936 $ 28,451 $ 31,156
Net investment income .... 4,506 4,434 4,354 4,351 4,204
Net realized investment
gains ............... 1,640 1,723 1,951 4,117 2,720
Other income ............. 1,280 597 385 385 695
--------- --------- --------- --------- ---------
Total revenues ................ $ 32,783 $ 29,675 $ 32,626 $ 37,304 $ 38,775
========= ========= ========= ========= =========
Net Income .................... $ 4,130 $ 3,776 $ 3,756 $ 930 $ 2,998
========= ========= ========= ========= =========
Net income per share .......... $ 1.67 $ 1.53 $ 1.52 $ 0.35 $ 1.07
========= ========= ========= ========= =========
Other Selected Financial Data
Total shareholders' equity .... $ 44,884 $ 43,780 $ 41,888 $ 41,968 $ 46,352
Book value per share .......... $ 18.18 $ 17.74 $ 16.98 $ 17.05 $ 16.70
Dividends per share ........... $ 0.76 $ 0.71 $ 0.68 $ 0.64 $ 0.58
Net change in unrealized
capital gains (net of tax) ($ 1,161) ($ 136) ($ 2,231) ($ 351) $ 4,556
Total assets .................. $ 99,484 $ 97,563 $ 98,105 $ 103,973 $ 106,958
13
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, 2001 Compared to Year Ended December 31, 2000
Consolidated net income for The National Security Group (The Company) was $4.130
million in 2001 compared to $3.776 million in 2000. On a per share basis
earnings were 1.67 in 2001 compared to 1.53 in 2000. A second consecutive year
of underwriting profits in the property/casualty insurance subsidiaries boosted
earnings to the highest levels in more than a decade. Realized capital gains in
2001 were 1.64 million and 1.72 million in 2000. Consolidated revenues were
$32.8 million in 2001 compared to $29.7 million in 2000. The operating results
of the subsidiaries are discussed in further detail in the sections that follow.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Consolidated net income for The National Security Group was $3.776 million in
2000 compared to $3.756 million in 1999. On a per share basis earnings were
$1.53 in 2000 compared to $1.52 in 1999. Operating results in The Company's
property/casualty subsidiaries were much improved due to the elimination of
several general agent auto programs, but a non-recurring charge incurred in the
life insurance subsidiary due to a management decision to strengthen reserves in
certain blocks of industrial life policies decreased earnings by approximately
$.29 per share. Realized capital gains in 2000 were $1.72 million compared to
$1.95 million in 1999. Consolidated revenues were $29.7 million in 2000 compared
to $32.6 million in 1999.
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 (amounts in thousands):
Premium revenues: 2001 % 2000 % 1999 %
---- - ----- -- ----- --
Life and accident and health insurance $ 5,161 20.4 $ 4,594 20.1 $ 4,251 16.4
Property and casualty insurance $20,196 79.6 18,326 79.9 21,685 83.6
------ ---- ------ ---- ------- ----
$25,357 100.0 $22,920 100.0 $25,936 100.0
14
Income before taxes and equity in income of affiliate:
2001 % 2000 % 1999 %
---- - ---- - ----- --
Life and accident and health insurance $ 586 10.7 $ 1,667 34.5 $ 2,556 56.6
Property and casualty insurance ...... $ 5,440 99.4 3,917 80.9 2,365 52.4
Other ................................ (313) (5.7) (473) (9.8) (110) (2.4)
Interest expense ..................... (243) (4.4) (267) (5.6) (295) (6.6)
------- ----- ------- ----- ------- -----
$ 5,470 100.0 $ 4,844 100.0 $ 4,516 100.0
======= ===== ======= ===== ======= =====
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, 2001 Compared to Year Ended December 31, 2000:
Income before income taxes in 2001 was $586,000 compared to $1,667,000 in 2000.
Increased field cost and general expenses and a decrease in realized capital
gains were the primary factors contributing to the decrease in income in the
life insurance subsidiary.
NSIC increased premium income 12.3% to $5,161,000 in 2001 compared to $4,594,000
in 2000. Life insurance premium income increased 10.5% in 2001, and accident and
health insurance also had an increase of 20.5% in 2001. The life insurance sales
through independent agents were the source of premium growth in NSIC in 2001.
Commission expenses increased due to the continued increase in new business
production. Life insurance commissions are front loaded, meaning that
significantly higher commission rates are paid in the early years of a policy
and decrease significantly particularly after the first two years of the policy.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999:
Income before income taxes in 2000 was $1,667,000 compared to $2,556,000 in
1999. A one time charge for reserve increases on certain blocks of old
industrial life insurance which NSIC no longer sells was the primary factor
contributing to the decrease in income before income taxes.
NSIC increased premium income 8% to $4,594,000 in 2000 compared to $4,251,000 in
1999. Life insurance premium income increased 10.3% in 2000, and accident and
health insurance decreased slightly compared to 1999. Life insurance sales
through independent agents were the source of premium growth in NSIC in 2000.
As experienced in 1999, life insurance commission expense increased again in
2000. Life insurance issued by NSIC pays a higher commission in early years of
the policy and the commission rate decreases in succeeding years. Since NSIC has
experienced a large increase in new business volume, commission expense has
increased.
15
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, 2001 Compared to Year Ended December 31, 2000:
Net income before income tax was $5,440,000 in 2001 compared to $3,917,000 in
2000. Improved underwriting results continued to be the primary factor
contributing to the improvement in income before taxes.
Earned premium for 2001 was $20,196,000 compared to $18,326,000 in 2000. The
property/casualty subsidiaries experienced premium growth in dwelling fire,
homeowners, and private passenger auto lines of business.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999:
Net income before income tax was $3,917,000 in 2000 compared to $2,365,000 in
1999. Improved underwriting results were the primary factor contributing to the
improvement in income before tax. The elimination of several unprofitable
private passenger and commercial auto insurance programs run by managing general
agents was the primary factor leading to the improvement in underwriting
results.
Management terminated the contract of the last remaining auto general agent
program in 2000. The program, which produced private passenger auto premium in
Florida, was terminated due to continued poor underwriting results. The final
policies in force on this program expired in mid 2001. With the elimination of
this program and other similar programs over the last two years management has
significantly improved underwriting results.
The elimination of the general agent programs combined with slight decreases in
other core lines of business led to a 16% decrease in earned premium in 2000
compared to 1999. However, in the last half of 2000 NSFC did begin to experience
a slight turnaround in premium production in core lines of business, which
management attributes to an increase focus on marketing to independent insurance
agents. Also, the elimination of the unprofitable managing general agent
programs greatly improved underwriting profitability.
In an effort to increase premium production in internally managed auto programs,
as opposed the managing general agent form of distribution, Omega acquired 100%
of the outstanding stock of Liberty Southern Insurance Company for a total cash
purchase price of approximately $700,000. The purchase was consummated in the
second quarter of 2000. With the purchase of Liberty Southern, Omega gained
entry into the monthly bill private passenger auto market. The program is
expected to produce $1,500,000 in direct written premium in 2001.
16
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:
2001 2000 1999
---- ---- ----
Loss and LAE Ratio ....... 54.3% 61.6% 70.9%
Underwriting Expense Ratio 36.1% 34.8% 35.8%
---- ---- -----
Combined Ratio ........... 90.4% 96.4% 106.7%
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.
The combined ratio for 2001 compared to 2000 decreased six percentage points.
This improvement was attributable to a lack of storm activity in the dwelling
property lines of business and the elimination of unprofitable general agent
auto programs from prior years.
Asset Portfolio Review: The life insurance and property/casualty subsidiaries
primarily invest in highly liquid investment grade debt and equity securities.
At December 31, 2001, the company's holdings in debt securities amounted to 68%
of total investments and 58% 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- 82.2
2 Baa to Baa3 BBB+ to BBB- 15.4
3 Ba1 to Ba3 BB+ to BB- 2.4
4 B1 to B3 B+ to B- 0.0
5 Caa to Ca CCC+ to C 0.0
6 C CI to D 0.0
17
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 D to the consolidated financial statements).
The insurance subsidiaries' fixed maturity securities include mortgage-backed
bonds, primarily collateralized mortgage obligations (CMO's), of $9.2 million
and $11.4 million at December 31, 2001 and 2000 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 $23 million. If the market value
of the S & P 500 Index decreased 10% from its December 31, 2001 value, the fair
value of the Company's common stock would decrease by approximately $2.3
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 A presents additional disclosures concerning
fair values of Financial Assets and Financial Liabilities, and is incorporated
by reference herein.
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, long term investment results have been superior to those
offered by bonds, while keeping the risk of loss of capital to a minimum.
18
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 $2,913,000, $(442,000), $868,000 in
2001, 2000, and 1999 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.
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 $2.1 million at December 31, 2001. The notes
payable are to be 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, 2001, the Company had no known impairments
of assets or changes in operation, which would have a material adverse effect
upon liquidity. Approximately 83% 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.
Except as discussed in Note N 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.
19
As disclosed in note K to the consolidated financial statements, in 2002, the
amount that The National Security Group's insurance subsidiaries can transfer in
the form of dividends to the parent company is limited to $1.1 million in the
life insurance subsidiary and $2.7 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. State insurance regulators will use the RBC formula 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 eight to one at December 31, 2001.
National Security Insurance Company (life insurer) has regulatory adjusted
capital of $13 million and $14.3 million at December 31, 2001 and 2000,
respectively, and a ratio of regulatory total adjusted capital to authorized
control level RBC of 15.7 and 12.9 at December 31, 2001 and 2000 respectively.
Accordingly, National Security Insurance Company meets the minimum RBC
requirements.
National Security Fire & Casualty Company (property/casualty insurer) has
regulatory adjusted capital of $23.6 million and $24.1 million at December 31,
2001 and 2000, respectively, and a ratio of regulatory total adjusted capital to
authorized control level RBC of 7.0 and 9.7 at December 31, 2001 and 2000
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 $5.0 million and $4.1
million at December 31, 2001 and 2000, respectively, and a ratio of regulatory
total adjusted capital to authorized control level RBC of 8.4 and 8.4 at
December 31, 2001 and 2000 respectively. Accordingly, Omega One Insurance
Company meets the minimum RBC requirements.
20
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Financial Statements
Consolidated Financial Statements:
Reports of Independent Certified Public Accountants 22
Consolidated Statements of Income -
Years Ended December 31, 2001, 2000, and 1999 24
Consolidated Balance Sheets -
December 31, 2001 and 2000 25
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 2001, 2000, and 1999 26
Consolidated Statements of Cash Flows -
Years Ended December 31, 2001, 2000, and 1999 27
Notes to Consolidated Financial Statements -
December 31, 2001 28
Financial Statement Schedules:
Reports of Independent Certified Public Accountants
on Financial Statement Schedules 47
Schedule I. Summary of Investments -
December 31, 2001 and 2000 48
Schedule II. Condensed Financial Information of Registrant -
December 31, 2001 and 2000 49
Schedule III. Supplementary Insurance Information -
December 31, 2001, 2000, and 1999 53
Schedule IV. Reinsurance -
Years Ended December 31, 2001, 2000, and 1999 54
All other Schedules are not required under related instructions or are
inapplicable and therefore have been omitted.
21
INDEPENDENT AUDITORS REPORT
To the Board of Directors
and Shareholders of
The National Security Group, Inc.
Elba, Alabama
We have audited the accompanying consolidated balance sheets of The National
Security Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, shareholders equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, 2001 and 2000,
and the results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Barfield, Murphy, Shank & Smith, P.C.
Birmingham, Alabama
February 22, 2002
22
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 statements of income and cash
flows of The National Security Group, Inc. and subsidiaries for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
statements of income and cash flows are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated statements of income and cash flows. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
consolidated statements of income and cash flows. We believe that our audit of
the statements of income and cash flows provides a reasonable basis for our
opinion.
In our opinion, the consolidated statements of income and cash flows referred to
above present fairly, in all material respects, the consolidated results of
operations and cash flows of The National Security Group, Inc. and subsidiaries
for the year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP
Birmingham, Alabama
February 18, 2000
23
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands
except per share amounts)
Years Ended December 31,
---------------------------
---------------------------
REVENUES 2001 2000 1999
Net premiums earned ........................................ $25,357 $22,921 $25,936
Net investment income ...................................... 4,506 4,434 4,354
Net realized investment gains .............................. 1,640 1,723 1,951
Other income ............................................... 1,280 597 385
------ ------ ------
32,783 29,675 32,626
BENEFITS AND EXPENSES
Policyholder benefits paid or provided ..................... 13,516 14,125 17,275
Amortization of deferred policy acquisition costs .......... 1,778 1,302 1,202
Commissions ................................................ 4,338 3,206 3,563
General insurance expenses ................................. 6,223 5,157 4,786
Insurance taxes, licenses and fees ......................... 1,215 774 987
Interest expense ........................................... 243 267 297
------ ------ ------
27,313 24,831 28,110
------ ------ ------
Income Before Income Taxes and Equity in Income of Affiliate 5,470 4,844 4,516
INCOME TAX EXPENSE
Current .................................................... 1,051 608 925
Deferred ................................................... 341 460 (165)
------ ------ ------
1,392 1,068 760
------ ------ ------
Income Before Equity in Income of Affiliate 4,078 3,776 3,756
Equity in Income of Affiliate 52 -- --
------ ------ ------
Net Income $ 4,130 $ 3,776 $ 3,756
====== ====== ======
EARNINGS PER COMMON SHARE
Net Income $ 1.67 $ 1.53 $ 1.52
====== ====== ======
See notes to consolidated financial statements.
24
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
-------------------------
-------------------------
ASSETS 2001 2000
Investments
Securities held-to-maturity, at amortized cost (estimated fair value: 2001 - $23,922
2000 - $29,035) .................................................................................. $ 23,135 $ 28,875
Securities available-for-sale, at estimated fair value (cost: 2001 - $45,975;
2000 - $38,311) ................................................................................. 57,648 51,648
Receivable for securities ......................................................................... 50 143
Note receivable from affiliate .................................................................... 250 --
Mortgage loans on real estate, at cost ............................................................ 275 116
Investment real estate, at book value (accumulated depr.: 2001 - $17; 2000 - $39) ................. 1,563 1,569
Policy loans ...................................................................................... 726 692
Investment in affiliate ........................................................................... 53 --
Short-term investments ............................................................................ 1,796 1,675
------ ------
Total Investments 85,496 84,718
------ ------
Cash ................................................................................................. 1,595 954
Accrued investment income ............................................................................ 938 881
Reinsurance recoverable .............................................................................. 3,524 3,534
Deferred policy acquisition costs .................................................................... 4,615 4,469
Prepaid reinsurance premiums ......................................................................... 291 293
Other assets ......................................................................................... 3,025 2,714
------ ------
Total Assets $ 99,484 $ 97,563
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy and claim reserves ............................................................................ $ 41,739 $ 41,918
Checks outstanding in excess of bank balance ......................................................... 1,905 1,107
Other policyholder funds ............................................................................. 1,503 1,488
Long-term debt ....................................................................................... 2,108 2,401
Accrued income taxes ................................................................................. 593 336
Other liabilities .................................................................................... 3,669 3,114
Deferred income tax .................................................................................. 3,083 3,419
------ ------
Total Liabilities 54,600 53,783
====== ======
Commitments and Contingencies ........................................................................ -- --
Shareholders' Equity
Preferred stock, $1 par value, 500,000 shares authorized, none issued or outstanding .............. -- --
Class A common stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding ....... -- --
Common stock, $1 par value, 2,500,000 shares authorized, 2,466,600 and 2,339,848
shares issued and 2,466,600 and 2,055,811 shares outstanding, respectively ....................... 2,467 2,340
Additional paid in capital ........................................................................ 4,951 17
Accumulated other comprehensive income ............................................................ 8,618 9,779
Retained earnings ................................................................................. 28,848 35,225
Treasury stock, at cost (0 and 284,037 shares, respectively) ...................................... -- (3,581)
------ ------
Total Shareholders' Equity 44,884 43,780
------ ------
Total Liabilities and Shareholders' Equity $ 99,484 $ 97,563
====== ======
See notes to consolidated financial statements
25
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Retained Comprehensive Common Paid-in Treasury
Total Income Earnings Income Stock Capital Stock
--------- --------- --------- ------- ------- -------- ---------
--------- --------- --------- ------- ------- -------- ---------
Balance at January 1, 2000 ................ $41,888 $33,197 $9,915 $2,340 $ 17 $(3,581)
Comprehensive income:
Net income for 2000 .................. 3,776 $3,776 3,776 -- -- -- --
Other comprehensive income, net of tax
Unrealized loss on securities, net
of reclassification adjustment .. (136) (136) -- (136) -- -- --
-----
Comprehensive income ...................... $3,640
Cash dividends ....................... (1,748) ===== (1,748) -- -- -- --
----- ----- ----- ----- ----- -----
Balance at December 31, 2000 .............. 43,780 35,225 9,779 2,340 17 (3,581)
Comprehensive income:
Net income for 2001 .................. 4,130 4,078 4,130 -- -- -- --
Other comprehensive income, net of tax
Unrealized loss on securities, net
of reclassification adjustment ... (1,161) (1,161) -- (1,161) -- -- --
-----
Comprehensive income ...................... $2,917
=====
Retirement of treasury stock ......... -- (3,297) (284) 3,581
Stock dividend (20%) ................. (5,345) 411 4,934
Cash dividends ....................... (1,865) (1,865) -- -- -- --
----- ------ ----- ------- ------ ------
Balance at December 31, 2001 .............. $44,884 $28,848 $8,618 $ 2,467 $4,951 $ --
====== ====== ====== ======= ====== ======
See notes to consolidated financial statements
26
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended December 31,
--------------------------------
--------------------------------
2001 2000 1999
Cash flows from operating activities:
Net income .......................................................... $ 4,130 $ 3,776 $ 3,756
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Change in accrued investment income ............................. (57) (51) (66)
Change in reinsurance recoverable ............................... 10 1,153 2,146
Amortization of deferred policy acquisition costs ............... 1,778 1,119 1,201
Change in receivable for securities ............................. 93 (143) --
Net realized gains on investments ............................... (1,593) (1,941) (2,024)
Gain on disposal of property and equipment ...................... (47) (32) --
Policy acquisition costs deferred ............................... (1,924) (1,315) (1,320)
Change in current income taxes receivable ....................... -- -- 75
Change in prepaid reinsurance premiums .......................... 2 (36) 9
Depreciation expense and amortization/accretion ................. (42) 115 219
Change in policy liabilities and claims ......................... (179) (3,021) (4,514)
Change in income tax payable .................................... 257 459 53
Change in deferred income taxes ................................. 169 284 (166)
Change in other liabilities ..................................... 555 13 109
Equity in earnings of investee .................................. (52) -- --
Other, net ...................................................... (187) (822) 1,390
------ ------ -------
Net cash (used in) provided by operating activities .......... 2,913 (442) 868
Cash flows from investing activities:
Purchases of held-to-maturity securities ......................... (982) (668) (3,759)
Purchases of available-for-sale securities ....................... (16,575) (7,139) (10,189)
Proceeds from maturities of held-to-maturity securities .......... 6,926 2,622 3,805
Proceeds from sales of available-for-sale securities ............. 10,508 6,973 10,747
(Purchases of) proceeds from real estate held for investment ..... 38 (13) 71
Net (purchases) proceeds from short-term investment .............. (121) 454 1,161
Receipts from repayment of loans, net ............................ (443) (27) (1)
Purchase of property and equipment ............................... (335) (378) (230)
Proceeds from sale of property and equipment ..................... 57 51 36
------ ------ ------
Net cash (used in) provided by investing activities .......... (927) 1,875 1,641
Cash flows from financing activities:
Payments on notes payable ........................................ (293) (271) (332)
Change in other policyholder funds ............................... 15 (38) (109)
Dividends paid ................................................... (1,865) (1,748) (1,664)
Change in treasury stock ......................................... -- -- 60
Change in checks outstanding in excess of bank balances .......... 798 195 136
------ ------ ------
Net cash used in financing activities ........................ (1,345) (1,862) (1,909)
------ ------ ------
Net (decrease) increase in cash .............................. 641 (429) 600
Cash at beginning of year ........................................... 954 1,383 783
------ ----- ------
Cash at end of year ................................................. $ 1,595 $ 954 $1,383
====== ===== ======
Cash paid during the year for:
Interest ......................................................... $ 241 $ 266 $ 296
====== ===== ======
Income taxes ..................................................... $ 800 $ 500 $ 630
====== ===== ======
27
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - 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). Omega included a wholly-owned
subsidiary - Liberty Southern Insurance Company (LSIC) through September 30,
2001. LSIC was liquidated on September 30, 2001. All significant intercompany
transactions and accounts have been eliminated.
Investment in Affiliate
The companys investment in affiliate consists of a 50% interest in Mobile
Attic, Inc., a portable storage leasing company. The company accounts for this
investment using the equity method (see note N commitment).
Description of Major Products
NSIC is licensed in the states of Alabama, Georgia, Mississippi, Texas, South
Carolina 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.
28
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Investments
The Companys 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.
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 Companys 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.
29
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Disclosures About Fair Value of Financial Instruments continued
SFAS No. 107 excludes certain financial instruments, particularly insurance
liabilities other than financial guarantees and investment contracts, from its
disclosure requirements. In evaluating the Companys 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 D.
The fair value of the mortgage loan portfolio was approximately equal to the
carrying amount of $275,000 on December 31, 2001 ($116,000 on December 31,
2000).
As of December 31, 2001, the fair value of policy loans approximated their
carrying amount of $726,000 ($692,000 as of December 31, 2000).
The fair value of other policyholder funds on deposit is estimated to
approximate their carrying amount of $1,503,000 on December 31, 2001 ($1,488,000
on December 31, 2000).
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.
30
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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.
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 - 2001 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 Companys 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.
31
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 were 2,466,600 (2,466,600 in 2000 and 1999).
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.
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
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133, as amended by SFAS Nos. 137 and 138, requires the
Company to record all derivative financial instruments at fair value on the
balance sheet. Changes in fair value of a derivative instrument are reported in
net income or other comprehensive income, depending on the designated use of the
derivative instrument. The adoption of SFAS No. 133 did not have a material
effect on the Companys financial position or results of operations.
Prospectively, the adoption of No. 133 may introduce volatility into the
Companys
32
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Recently Issued Accounting Standards continued
reported net income and other comprehensive income depending on future market
conditions and the Companys hedging activities.
In September 2000 the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of SFAS No. 125. SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets. This Statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001.
Recently Issued Accounting Standards- Continued
The adoption of this accounting standard did not have a material effect on the
Companys financial position or results of operations.
In June 2001, the FASB issued SFAS Nos. 141, Business Combinations, and 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires that business
combinations initiated after June 30, 2001, be accounted for using the purchase
method. SFAS No. 142 revises the standards for accounting for acquired goodwill
and other intangible assets. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001, and effective for any goodwill or intangible
asset acquired after June 30, 2001. The Company does not expect the adoption of
SFAS No. 142 to have a material effect on the Companys financial position or
results of operations.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that companies record the fair value of a
liability for an asset retirement obligation in the period in which the
liability is incurred. The Statement is effective for fiscal years beginning
after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to
have a material effect on the Companys financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 revises SFAS No. 121 by requiring
that one accounting model be used for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
The Company does not expect the adoption of SFAS No. 144 to have a material
effect on the Companys financial position or results of operations.
33
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - BUSINESS COMBINATION
During the second quarter of 2000, Omega acquired 100% of the outstanding stock
of Liberty Southern Insurance Company (LSIC) for a total cash purchase price of
approximately $700,000. Effective December 31, 2000, all insurance related
assets and liabilities of LSIC were transferred to Omega as the result of a
novation. This transaction was approved by the Alabama Department of Insurance
during a hearing relating to the acquisition of LSIC by Omega.
The purchase of LSIC was accounted for by the purchase method, whereby the
underlying assets acquired and liabilities assumed from the purchased
corporation are recorded by Omega at their fair value. The excess of the amount
paid over the fair value of LSICs identifiable net assets was approximately
$200,000, which has been recorded as a charge to earnings in year 2000. The
operating results of LSIC have been included in the Companys consolidated
financial statements since the date of acquisition. The purchase agreement
provides for additional consideration to be paid the former stockholders
contingent upon specified premium growth of the LSIC block of business.
Pro forma results of consolidated operations for 2000 and 1999, assuming the
LSIC acquisition was made at the beginning of each year, is as follows:
2000 1999
Net premiums earned .......................... $23,817 $26,787
Income before taxes .......................... $ 4,653 $ 4,450
Net income ................................... $ 3,585 $ 3,690
Earnings per common share .................... $ 1.45 $ 1.50
34
THE NATIONAL SECURITY GROUP, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - 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, and (d) 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:
(Dollars in thousands)
Year Ended December 31,
---------------------------
---------------------------
2001 2000 1999
NSIC - including realized capital gains of $652, $986 and $818,
respectively ................................................. $ 709 $ 1,016 $ 2,092
====== ====== ======
NSFC - including realized capital gains of $875, $709 and
$684, respectively ........................................... $ 2,720 $ 2,140 $ 1,703
====== ====== ======
Omega - including realized capital gains of $152, $257, and
$480, respectively ........................................... $ 1,047 $ 1,155 $ 231
====== ====== ======
LSIC (nine months ended September 30 for 2001) ................. $ 6 $ 8 $ --
====== ====== ======
Statutory capital and surplus:
NSIC - including AVR of $1,586, $1,780 and $2,639,
respectively ................................................. $11,416 $14,925 $15,202
====== ====== ======
NSFC ........................................................... $23,572 $24,170 $23,443
====== ====== ======
Omega .......................................................... $ 5,000 $ 4,079 $ 3,182
====== ====== ======
LSIC ........................................................... $ 0 $ 500 $ 0
====== ====== ======
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. LSIC was liquidated on September 30, 2001.
35
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - INVESTMENT SECURITIES
The amortized cost and aggregate fair values of investments in securities are as
follows:
(Dollars in thousands)
December 31, 2001
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
Corporate debt securities ............................ $19,564 $ 356 $ (441) $19,479
Obligations of states and political subdivisions ..... 2,895 99 (4) 2,990
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .......... 12,242 436 (2) 12,676
Equity securities .................................... 11,274 12,237 (1,008) 22,503
------- ------ ------- ------
Total $45,975 $13,128 $(1,455) $57,648
======= ====== ======= ======
Held-to-maturity securities:
Corporate debt securities ............................ $ 9,517 $ 324 $ (65) $ 9,776
Obligations of states and political subdivisions ..... 4,235 273 (12) 4,496
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .......... 9,383 281 (14) 9,650
------- ------ ------- ------
Total $23,135 $ 878 $ (91) $23,922
======= ====== ======= ======
(Dollars in thousands)
December 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
Corporate debt securities ............................ $10,870 $ 120 $ (418) $10,572
Obligations of states and political subdivisions ..... 2,447 40 (28) 2,459
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .......... 13,450 255 (51) 13,654
Equity securities .................................... 11,544 14,628 (1,209) 24,963
------- ------ ------- ------
Total $38,311 $15,043 $(1,706) $51,648
======= ====== ======= ======
36
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - INVESTMENT SECURITIES CONTINUED
(Dollars in thousands)
December 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-maturity securities: Cost Gains Losses Value
Corporate debt securities ............................ $10,683 $ 116 $ (108) $10,691
Obligations of states and political subdivisions ..... 4,338 245 (66) 4,517
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .......... 13,854 113 (140) 13,827
------- ------ ------- ------
Total $28,875 $ 474 $ (314) $29,035
======= ====== ======= ======
The amortized cost and aggregate fair value of debt securities at December 31,
2001, 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.
(Dollars in Thousands)
Amortized Fair
Available-for-sale securities: Cost Value
Due in one year or less ............................... $ 1,795 1,812
Due after one year through five years ................. 6,243 6,285
Due after five years through ten years ................ 17,734 18,142
Due after ten years ................................... 8,929 8,906
------- -------
Total $34,701 $35,145
======= =======
Held-to-maturity securities:
Due in one year or less ............................... $ 2,384 $2,454
Due after one year through five years ................. 5,783 6,049
Due after five years through ten years ................ 6,046 6,262
Due after ten years ................................... 8,922 9,157
------ ------
Total $23,135 $23,922
====== ======
For 2001, gross gains of $1,785,394 ($2,715,057 for 2000) and gross losses of
$323,829 ($774,196 for 2000) were realized on sales of
available-for-sale-securities.
37
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - NET INVESTMENT INCOME
Major categories of investment income are summarized as follows:
(Dollars in thousands)
Year ended December 31,
------------------------------
------------------------------
2001 2000 1999
Fixed maturities .............................. $ 3,819 $ 3,629 $ 3,567
Equity securities ............................. 544 642 630
Mortgage loans on real estate ................. 16 7 9
Investment real estate ........................ 138 142 18
Policy loans .................................. 35 43 33
Other, principally short-term investments ..... 88 121 129
------ ------ ------
4,640 4,584 4,386
Less: Investment expenses ..................... (134) (150) (32)
------ ------ ------
Net investment income ......................... $ 4,506 $ 4,434 $ 4,354
====== ====== ======
An analysis of investment gains follows:
Year ended December 31,
2001 2000 1999
Net realized investment gains (losses):
Fixed maturities ........................... $ 149 $ (419) $ (16)
Other, principally equity securities ....... 1,491 2,142 1,967
------ ------ ------
$ 1,640 $ 1,723 $ 1,951
====== ====== ======
An analysis of net decrease in unrealized appreciation on available-for-sale
securities follows:
Year ended December 31,
--------------------------------------
--------------------------------------
2001 2000 1999
Net Decrease in unrealized appreciation on available-for-
sale securities before deferred tax .................. $ (1,366) $(191) $(3,196)
Deferred income tax ..................................... 205 55 965
-------- ------- -------
Net Decrease in unrealized appreciation on available-for-
sale securities ...................................... $ (1,161) $(136) $ (2,231)
======== ======= =======
38
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES
Total income tax expense varies from amounts computed by applying current
federal income tax rates to income before income taxes. The reason for these
differences and the approximate tax effects are as follows:
(Dollars in thousands)
Year ended December 31,
-----------------------------
-----------------------------
2001 2000 1999
Federal income tax rate applied to pre-tax income .. $ 1,860 $ 1,647 $ 1,535
Dividends received deduction and tax-exempt interest (182) (213) (198)
Small life insurance company deduction ............. (122) (209) (410)
other, net ......................................... (164) (157) (167)
------- ------- -------
Federal income tax expense ......................... $ 1,392 $ 1,068 $ 760
======= ======= =======
Net deferred tax liabilities 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.
The tax effect of significant differences representing deferred assets and
liabilities are as follows:
(Dollars in Thousands)
---------------------------
---------------------------
Year ended December 31,
2001 2000
---------------------------
Deferred policy acquisition costs $ (1,569) $ (1,519)
Policy liabilities 349 419
Unearned premiums 464 383
Claim liabilities 310 432
General insurance expenses 757 694
Alternative minimum tax credit carryforward 0 67
Unrealized gains on securities available-for-sale (3,394) (3,895)
-------- --------
Net deferred tax liabilities $ (3,083) $ (3,419)
======== ========
39
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - CONTINUED
The appropriate income tax effects of changes in temporary differences are as
follows:
Year ended December 31,
----------------------
----------------------
2001 2000 1999
Deferred policy acquisition costs .......... $ 49 $ 66 $ 41
Policy liabilities ......................... 70 69 (25)
Unearned premiums .......................... (81) (56) 113
General insurance expenses ................. (62) 18 (1)
Alternative minimum tax credit carryforward 243 247 (314)
Claim liabilities .......................... 122 116 21
------ -------- -------
$ 341 $ 460 $(165)
====== ======== =======
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, 2001, 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,
2001.
NOTE G - LONG-TERM DEBT
Long-term debt consisted of the following as of December 31:
(Dollars in thousands)
----------------------
2001 2000
Note payable to bank with a 7% interest rate
dated October 9, 1998; matures May 28, 2004
Payments of $63,575 due quarterly. Unsecured ...... $2,108 $2,208
Note payable to bank with a 7.44% interest rate
dated February 25, 1998; matures February 26, 2003
Payments of $45,374 due quarterly. Unsecured ......
0 193
------ ------
2,108 $2,401
Aggregate maturities of long-term debt for each of the three years subsequent to
December 31, 2001 are as follows (dollars in thousands): 2002-$110; 2003-$118;
2004-$1,880.
40
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - POLICY AND CLAIM RESERVES
At December 31, policy and claim reserves consisted of the following:
(Dollars in thousands)
2001 2000
---- ----
Benefit and loss reserves
Property and casualty ...................... $11,489 $15,409
Accident and health ........................ 318 301
Life and annuity ........................... 22,416 19,486
Unearned premiums ............................ 7,115 6,364
Policy and contract claims ................... 401 358
------- -------
$41,739 $41,918
======= =======
The following table is a reconciliation of beginning and ending property and
casualty reserve balances for claims and claim adjustment expense for the years
ended December 31:
(Dollars in thousands)
--------------------------------
2001 2000 1999
Claims and claim adjustment expense
reserves at beginning of year $15,409 $18,471 $21,528
Less reinsurance recoverables on
unpaid losses 3,092 3,907 5,889
------ ------ ------
Net balances at beginning of year 12,317 14,564 15,639
Provision for claims and claim adjustment
expenses for claims arising in current year 14,045 14,465 15,859
Estimated claims and claims adjustment
expenses for claims arising in prior years (3,089) (5,411) (3,074)
------ ------ ------
Total increases 10,956 9,054 12,785
Claims and claim adjustment expense
payments for claims arising in:
Current year 9,891 8,792 9,934
Prior years 4,289 2,509 3,926
------ ------ ------
Total payments 14,180 11,301 13,860
------ ------ ------
Net balance at end of year 9,093 12,317 14,564
Plus reinsurance recoverables on
unpaid losses 2,396 3,092 3,907
------ ------ ------
Claims and claim adjustment expense
reserves at end of year $11,489 $15,409 $18,471
====== ====== ======
41
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - POLICY AND CLAIM RESERVES - CONTINUED
As a result of changes in estimates of insured events in prior years, the
provision of claims and claim adjustment expenses (net of reinsurance
recoveries) decreased in 2001, 2000 and 1999 because of lower-than-anticipated
losses in commercial and private passenger automobile lines of business.
The Company has a geographic exposure to catastrophe losses in certain areas of
the country. Catastrophes can be caused by various events including hurricanes,
windstorms, earthquakes, hail, severe winter weather, explosions and fires, and
the incidence and severity of catastrophes are inherently unpredictable. The
extent of losses from a catastrophe is a function of both the total amount of
insured exposure in the area affected by the event and the severity of the
event. Most catastrophe losses are restricted to small geographic areas;
however, hurricanes and earthquakes may produce significant damage in large,
heavily populated areas. The Company generally seeks to reduce its exposure to
catastrophes through individual risk selection and the purchase of catastrophe
reinsurance.
NOTE I - REINSURANCE
The Companys insurance operations participate in reinsurance in order to limit
losses, minimize exposure to large risks, provide additional capacity for future
growth and effect business-sharing arrangements. Life reinsurance is
accomplished through yearly renewable term. Property and casualty reinsurance is
placed on both a quota-share and excess of loss basis. Reinsurance ceded
arrangements do not discharge the insurance subsidiaries as the primary insurer,
except for cases involving a novation. Failure of reinsurers to honor their
obligations could result in losses to the insurance subsidiaries. The insurance
subsidiaries 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,
2001, reinsurance receivables with a carrying value of $618,000 ($912,000 at
December 31, 2000) and prepaid reinsurance premiums of $291,000 ($293,000 at
December 31, 2000) were associated with a single reinsurer. The amounts of
recoveries pertaining to reinsurance contracts that were deducted from losses
incurred during 2001, 2000 and 1999 were approximately $988,801, $605,000, and
$1,819,000, respectively
The effect of reinsurance on premiums written and earned was as follows:
(Dollars in Thousands)
2001
----------------------------------------------------
----------------------------------------------------
NSIC NSFC
----------------------- ----------------------------
----------------------- ----------------------------
Written Earned Written Earned
Direct ........... $5,047 $ 5,206 $ 22,528 $ 21,777
Assumed .......... -- -- -- --
Ceded ............ (45) (45) (1,579) (1,581)
------ ------- -------- --------
Net .............. $5,002 $ 5,161 $ 20,949 $ 20,196
====== ======= ======== ========
42
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - REINSURANCE - CONTINUED
(Dollars in Thousands)
2000
----------------------------------------------------
----------------------------------------------------
NSIC NSFC
----------------------- ----------------------------
----------------------- ----------------------------
Written Earned Written Earned
Direct ........... $4,456 $ 4,645 $ 18,951 $ 20,628
Assumed .......... -- -- -- --
Ceded ............ (51) (51) (1,460) (2,302)
------ ------- -------- --------
Net .............. $4,405 $ 4,594 $ 17,491 $ 18,326
====== ======= ======== ========
(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
====== ====== ======== ========
NOTE J - 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 2001, 2000, and 1999
amounted to $130,000, $127,000, and $161,000, 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 2001, 2000, and 1999 amounted to approximately $35,065, $54,755, and
$48,490, respectively.
NOTE K - 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, 2001, NSICs retained
earnings unrestricted for the payment of dividends in 2002 amounted to
$1,141,562.
43
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS - CONTINUED
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 $2,719,538 in 2002.
At December 31, 2001, securities with market values of $3,458,441 ($3,745,717 at
December 31, 2000) were deposited with various states pursuant to statutory
requirements.
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 L - 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.
44
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - 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, 2001, 2000 and 1999 are summarized below:
(Dollars in thousands)
Year ended December 31,
2001 2000 1999
---- ----- ------
Premium Revenues:
Individual life and accident and health insurance $ 5,161 $ 4,595 $ 4,251
Property and casualty insurance 20,196 18,326 21,685
------ ------ ------
$25,357 $22,921 $25,936
====== ====== ======
Income (loss) before income taxes:
Individual life and accident and health insurance $ 586 $1,667 $2,556
Property and casualty insurance 5,440 3,917 2,365
Other (313) (473) (110)
------ ------ ------
5,713 5,111 4,811
(243) (267) (295)
------ ------ ------
Interest expense $ 5,470 $4,844 $4,516
====== ====== ======
Assets
Individual life and accident and health insurance $44,513 $42,150 $41,323
Property and casualty insurance 54,962 55,256 56,714
Other 509 157 68
------ ------ ------
$99,984 $97,563 $ 98,105
====== ====== ======
Amortization of deferred policy acquisition costs and
depreciation expense:
Individual life and accident and health insurance $ 609 $ ( 61) $(252)
Property and casualty Insurance 1,279 1,406 1,615
------ ------ ------
$ 1,888 $1,345 $1,363
====== ====== ======
Capital expenditures are not material, and consequently not reported.
NOTE N - COMMITMENTS AND CONTINGENCIES
Commitments
The Company is obligated under a commitment to extend credit to Mobile Attic,
Inc., in the form of a $1,000,000 credit line. The credit line is secured by
inventory and matures on September 18, 2002. Interest is due on the unpaid
principal at the rate of 8% per annum. The Company may, at its option anytime on
or before the payment by Mobile Attic, Inc. of all outstanding principal and
interest, elect to convert the outstanding principal and accrued interest to a
proportionate share of common stock in Mobile Attic, Inc.
45
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - COMMITMENTS AND CONTINGENCIES - CONTINUED
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 Companys subsidiaries,
and miscellaneous other causes of action. Most of these lawsuits include claims
for punitive damages in addition to other specified relief.
NSFC, a subsidiary of the Company, was named as a defendant in a purported class
action filed in Lee County, Alabama. On January 4, 2000, the Circuit Court of
Lee County preliminarily approved a consent settlement to this action and the
settlement was finalized in the second quarter of 2000. A provision for this
settlement was reflected in the 1999 results of operations of the Company.
In two separate 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. In addition,
several individual actions on behalf of specifically named persons have been
filed with similar allegations. These actions are in the initial phases and
little discovery has been undertaken and no class has been certified. While the
cases entail separate and distinguishable facts, the legal issues 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 Companys consolidated financial position,
it remains managements opinion, based on information presently available, that
the ultimate resolution of these matters will not have a material impact on the
Companys 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 O - 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, 2001
that exceeded the balance insured by the FDIC in the amount of $617,888.
46
INDEPENDENT AUDITORS REPORT
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
and Shareholders of
The National Security Group, Inc.
Elba, Alabama
Under date of February 22, 2002, we reported on the balance sheets of The
National Security Group, Inc. as of December 31, 2001 and 2000, and the related
statements of income, shareholders equity and cash flows for the years then
ended, which are included in this Form 10-K. In connection with our audit of the
aforementioned financial statements, we also audited the related financial
statement schedules listed in the accompanying index. These financial statement
schedules are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Barfield, Murphy, Shank & Smith, P.C.
Birmingham, Alabama
February 22, 2002
47
THE NATIONAL SECURITY GROUP, INC.
SCHEDULE I. SUMMARY OF INVESTMENTS (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
December 31, 2001 December 31, 2000
---------------------------------- --------------------------------------
Amount Amount
per the per the
Original Fair Balance Original Fair Balance
Cost Value Sheet Cost Value Sheet
-------- -------- --------- --------- ----------- ----------
Securities Held to Maturity:
United States government $9,364 $9,650 $9,383 $14,080 $14,093 $14,104
States, municipalities
and political subdivisions 4,224 4,496 4,235 4,037 4,214 4,052
Public Utilities 974 989 969 1,597 1,570 1,595
Industrial and Miscellaneous 8,506 8,787 8,549 9,075 9,158 9,124
-------- -------- --------- --------- ----------- ----------
Total Securities Held to
Maturity . . . . . . . 23,068 23,922 23,136 28,789 29,035 28,875
-------- -------- --------- --------- ----------- ----------
Securities Available for Sale:
Equity Securities:
Public utilities 1,543 2,953 2,953 1,443 3,345 3,345
Banks and insurance
companies 1,758 4,886 4,886 1,952 5,500 5,500
Industrial and all other 7,973 14,664 14,664 8,150 16,118 16,118
-------- -------- --------- --------- ----------- ----------
Total equity securities 11,274 22,503 22,503 11,545 24,963 24,963
-------- -------- --------- --------- ----------- ----------
Debt Securities:
United States government 12,243 12,676 12,676 13,450 13,654 13,654
States, municipalities
and political subdivisions 2,895 2,990 2,990 2,447 2,459 2,459
Public Utilities 656 667 667 191 196 196
Industrial and Miscellaneous 18,907 18,811 18,811 10,680 10,376 10,376
-------- -------- --------- --------- ----------- ----------
Total Debt Securities 34,701 35,144 35,144 26,768 26,685 26,685
-------- -------- --------- --------- ----------- ----------
Total Available for Sale 45,975 57,647 57,647 38,313 51,648 51,648
-------- -------- --------- --------- ----------- ----------
Total Securities 69,043 81,569 80,783 67,102 80,683 80,523
Receivable for securities 50 50 143 143
Note receivable from affiliate 250 250 0 0
Mortgage loans on real estate 275 275 116 116
Investment real estate 1,563 1,563 1,569 1,569
Policy loans 726 726 692 692
Investment in affiliate 53 53 0 0
Short term investments 1,796 1,796 1,675 1,675
-------- --------- --------- ----------
Total investments $73,756 $85,496 $71,297 $84,718
======== ========= ========= ==========
48
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
December 31,
------------------------
2001 2000
------ ----
Assets
Cash $101 $66
Investment in subsidiaries (equity method)
eliminated upon consolidation 47,062 46,481
Other assets 722 458
----- ------
Total Assets $47,885 $47,005
====== ======
Liabilities and Shareholders Equity
Accrued general expenses $893 $824
Notes Payable 2,108 2,401
----- ------
Total Liabilities 3,001 3,225
----- ------
Total Shareholders' Equity $44,884 $43,780
------ ------
Total Liabilities and Shareholders' Equity $47,885 $47,005
======= ======
49
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
For the Years Ended December 31,
----------------------------
2001 2000 1999
------- ----- -----
Income
From subsidiaries-eliminated upon consolidation
Dividends ................................. $ 2,550 $ 2,400 $ 2,300
------- ------- -------
Expenses
State taxes ................................... 19 13 26
Other expenses ................................ 543 454 304
------- ------- -------
562 467 330
------- ------- -------
Income before income taxes and equity in
undistributed earnings of subsidiaries ........ 1,988 1,933 1,970
Income tax benefit ............................... (407) (129) (17)
------- ------- -------
Income before equity in undistributed earnings
of subsidiaries ............................... 2,395 2,062 1,987
Equity in undistributed earnings (losses) of
subsidiaries ..................................... 1,735 1,714 1,769
------- ------- -------
Net Income .................................... $ 4,130 $ 3,776 $ 3,756
======= ======= =======
50
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
For the Years Ended December 31,
--------------------------------
2001 2000 1999
------ ----- ----
Cash flows from operating activities:
Net income .......................................... $ 4,130 $ 3,776 $ 3,756
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (income) loss of
subsidiaries ..................................... (1,735) (1,714) (1,769)
Change in other assets ............................. (271) (68) (33)
Change in other liabilities ........................ 69 22 (69)
------- ------- -------
Net cash provided by operating activities .......... 2,193 2,016 1,885
------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable ......................... 0 0 0
Payments on notes payable ........................... (293) (271) (332)
Purchase of treasury stock .......................... 0 0 60
Cash dividends ...................................... (1,865) (1,747) (1,664)
------- ------- -------
Net cash used in financing activities .............. (2,158) (2,018) (1,936)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 35 (2) (51)
Cash and due from banks at beginning of year ........ 66 68 119
------- ------- -------
Cash and due from banks at end of year .............. $ 101 $ 66 $ 68
======= ======= =======
51
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 $2.5 million in 2001, $2.4
million in 2000 and $2.3 million in 1999 were paid to the Registrant by it
subsidiaries.
52
THE NATIONAL SECURITY GROUP, INC.
SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
(Amounts in thousands)
Policy
Claims
Deferred Future and Other
Acquisition Policy Unearned Benefits
Costs Benefits Premiums Payable
------- ------- ------- ------
At December 31, 2001:
Life and accident and health insurance $3,306 $22,734 $0 $401
Property and casualty insurance 1,309 0 7,115 11,489
----- ------- ----- -------
Total $4,615 $22,734 $7,115 $11,890
===== ======= ===== =======
At December 31, 2000:
Life and accident and health insurance $3,240 $19,787 $0 $358
Property and casualty insurance 1,229 0 6,364 15,409
------ ------- ----- -------
Total $4,469 $19,787 $6,364 $15,767
====== ======= ====== =======
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
====== ====== ===== ======
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, 2001:
Life and accident
and health
insurance .................... $ 5,161 $ 2,303 $ 4 $ 3,183 $ 1,753 $ 3,096 $ 5,002
Property and
casualty insurance ........... 20,196 2,203 1,276 10,333 4,363 4,017 20,949
Other ........................ 0 0 0 0 0 568 0
------- ------- ------- ------- ------- ------- -------
Total .................... $25,357 $ 4,506 $ 1,280 $13,516 $ 6,116 $ 7,681 $25,951
======= ======= ======= ======= ======= ======= =======
For the year ended December 31, 2000:
Life and accident
and health
insurance .................... $ 4,594 $ 2,160 $ 11 $ 3,263 $ 970 $ 2,430 $ 4,405
Property and
casualty insurance ........... 18,327 2,274 586 10,862 3,538 3,292 17,491
Other ........................ 0 0 0 0 0 476 0
------- ------- ------- ------- ------- ------- -------
Total .................... $22,921 $ 4,434 $ 597 $14,125 $ 4,508 $ 6,198 $21,896
======= ======= ======= ======= ======= ======= =======
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
======= ======= ======= ======= ======= ======= =======
Note: Investment income and other operating expenses are reported separately by
segment and not allocated.
53
THE NATIONAL SECURITY GROUP, INC.
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(Amounts in thousands)
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
-------- ------- ----- ------- ---
For the year ended December 31, 2001:
Life insurance in force ................... $184,128 $ 6,555 $ 0 $177,573 0.0%
======= ======= ==== ======= ===
Premiums:
Life insurance and accident and
health insurance .............. $ 5,206 $ 45 $ 0 $ 5,161 0.0%
Property and casualty insurance 21,777 1,581 0 20,196 0.0%
------- ------- ---- -------- ---
Total premiums ............ $ 26,983 $ 1,626 $ 0 $ 25,357 0.0%
======== ======== ===== ======== ===
For the year ended December 31, 2000:
Life insurance in force ................... $155,924 $ 5,320 $ 0 $150,604 0.0%
======== ======== ===== ======== ===
Premiums:
Life insurance and accident and
health insurance .............. $ 4,645 $ 51 $ 0 $ 4,594 0.0%
Property and casualty insurance 20,629 2,302 0 18,327 0.0%
-------- -------- ----- -------- ---
Total premiums ............ $ 25,274 $ 2,353 $ 0 $ 22,921 0.0%
======== ======== ===== ======== ===
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 .............. $ 4,300 $ 49 $ 0 $ 4,251 0.0%
Property and casualty insurance 23,078 1,393 0 21,685 0.0%
-------- -------- ----- -------- ---
Total premiums ............ $ 27,378 $ 1,442 $ 0 $ 25,936 0.0%
======== ======== ===== ======== ===
54
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
55
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained on pages 2-4 of The National Security Group's Proxy
Statement dated March 18, 2002, 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 18, 2002, 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 10 of The National Security Group's Proxy
Statement dated March 18, 2002, 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 18, 2002, with respect to certain relationships and
related transactions, is incorporated herein by reference in response to this
item.
56
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 #
Reports of Independent Certified Public Accountants 22
Consolidated Statements of Income--Years Ended
December 31, 2001, 2000, and 1999 24
Consolidated Balance Sheets--December 31, 2001 and 2000 25
Consolidated Statements of Shareholders' Equity--Years
Ended December 31, 2001, 2000, and 1999 26
Consolidated Statements of Cash Flows--Years Ended
December 31, 2001, 2000, and 1999 27
Notes To Consolidated Financial Statements--December 31, 2001 28
Schedule I. Summary Of Investments--December 31, 2001 and 2000 48
Schedule II. Condensed Financial Information of
Registrant--December 31, 2001 and 2000 49
Schedule III. Supplementary Insurance Information--
December 31, 2001, 2000, and 1999 53
Schedule IV. Reinsurance--Years Ended December 31, 2001,
2000, and 1999 54
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 April 20, 2001.
57
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.
Sr. Vice President, President, Chief Executive
Treasurer Officer and Director
Date: March 29, 2002
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 March
29, 2002.
SIGNATURE
/s/ D.M. English /s/ Fred D. Clark Jr.
/s/ Winfield Baird /s/ M.L. Murdock
/s/ Carolyn Brunson /s/ James B. Saxon
/s/ J.E. Brunson /s/ Walter P. Wilkerson
/s/ J.R. Brunson /s/ William L. Brunson,Jr.
58