Net investment income is virtually unchanged compared to last year. Due to the historically low interest rate environment, overall investment income has not increased. Currently most major economic indicators point to an increase in market interest rates over the next two years. The bond investment portfolio is being positioned to take advantage of the expected higher interest rate environment.
Realized capital gains were down significantly in the first quarter of 2005 compared to the same period last year. Realized gains are generated primarily from the sale of equity portfolio investments of the insurance subsidiaries. An investment committee composed of senior company management manages these investments. We will sell or decrease positions in certain investment holdings only as market conditions warrant which can lead to significant fluctuations in realized capital gains from quarter to quarter and year to year.
Other income increased $15,000 compared to last year. Other income is primarily composed of insurance related fees.
Policyholder benefits and settlement expenses increased $201,000. As a percentage of premium revenue, policyholder benefits and settlement expenses were 59.4% in the first quarter of 2005 compared to 57.35% in the first quarter of 2004.
Policy acquisition costs are down $264,000 compared to last year. Policy acquisition costs are directly related to the production of earned premium and as a percentage of premium earned, policy acquisition costs are down marginally from last year primarily due to a decrease in commission rates paid on an automobile program in the property and casualty subsidiaries.
General expenses as a percent of earned premium were 14.9% in the first quarter of 2005 compared to 16.5% in the first quarter of 2004. General expense ratios have improved significantly over the last four years, as the Company has been able to generate greater economies of scale with the growth in premium revenue. While the rate of premium revenue growth is beginning to decline, management will continue to evaluate and implement more efficient uses of company resources through automation and improvements in the use of information technology.
Taxes, licenses and fees are 4.01% of premium revenue in the first quarter of 2005 compared to 5.17% in the first quarter of last year. A decline in written premium in the first quarter of 2005 compared to the first quarter of 2004 is the primary factor contributing to the decline in taxes, licenses and fees.
The Company has a year to date net income of $1,292,000 versus net income of $1,053,000 in the first quarter of 2004. An underwriting margin of over 10% in the property and casualty insurance subsidiaries is the primary factor contributing to the increase in net income for the first quarter.
Investments:
Investments at March 31, 2005 were down $1,580,000 compared to December 31, 2004. The Company had experienced a decline in liquidity in late 2004 as a result of increased payments of claims due to Hurricane Ivan. The decline in invested assets in the first quarter of 2005 is primarily attributable to an effort by the company to restore liquidity levels drained by the increased claims activity from Hurricane Ivan and is offset by an increase in cash at March 31, 2005 compared to December 31, 2004.
The Company considers any fixed income investment with a Standard & Poor’s rating of BB+ or lower to be below investment grade (Commonly referred to as “Junk Bonds”). At March 31, 2005 less than 1% of the Company’s investment portfolio was invested in fixed income investments rated below investment grade. The Company currently has no bonds in the investment portfolio in default.
The Company monitors its level of investments in debt and equity securities held in issuers of below investment
grade debt securities. Management believes the level of such investments is not significant to the Company’s financial condition.
Income taxes:
The effective tax rate in the first three months of 2005 was 26.7% compared to 30.12% for the first three months of 2004. The life insurance subsidiary typically has a lower tax rate than the property/casualty subsidiaries. The first quarter of 2005 effective tax rate was lower primarily due to higher taxable earnings in the life insurance subsidiary compared to the first quarter of 2004. Generally the property/casualty subsidiaries pay a higher effective tax rate due to several factors, including, but not limited to, a tax on 20% of unearned premiums, the discounting of loss reserves for federal income tax purposes, and tax on a portion of income from otherwise “tax-free” bonds. A higher percentage of earnings from property/casualty operations compared to life insurance operations generally lead to a higher effective tax rate.
Liquidity and capital resources:
At March 31, 2005, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $46,940,000 up $264,000 compared to December 31, 2004. The increase reflects net income of $1,292,000, an increase in accumulated unrealized investment losses of $498,000, and dividends paid of $530,000.
The Company has $15.800,000 in notes from local banks which management intends to repay over the next five years.
The Company had $1,478,000 in cash and cash equivalents at March 31, 2005. Net cash provided by operating activities totaled $1,454,000 in the first quarter of 2005. The increase in cash from operations was primarily attributable to favorable underwriting results in the property and casualty subsidiaries and the collection of over $1,000,000 in reinsurance balances attributable to claims incurred from Hurricane Ivan.
The liquidity requirements of the Company are primarily met by funds provided from operations of the life insurance and property/casualty subsidiaries. The Company receives funds from its subsidiaries consisting of dividends, payments for federal income taxes, and reimbursement of expenses incurred at the corporate level for the subsidiaries. These funds are used to pay stockholder dividends, corporate interest, corporate administrative expenses, federal income taxes, and for funding investments in subsidiaries.
The Company’s subsidiaries require cash in order to fund policy acquisition costs, claims, other policy benefits, interest expense, general expenses, and dividends to the Company. Premium and investment income, as well as maturities, calls, and sales of invested assets, provide the primary sources of cash for both subsidiaries. A significant portion of the Company’s investment portfolio consists of readily marketable securities, which can be sold for cash.
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The Company’s business is concentrated primarily in the Southeastern United States. Accordingly, unusually severe storms or other disasters in the Southeastern United States might have a more significant effect on the Company than on a more geographically diversified insurance company. Unusually severe storms, other natural disasters and other events could have an adverse impact on the Company’s financial condition and operating results. However, the Company maintains a catastrophe reinsurance program to limit the effect of such catastrophic events on the Company’s financial condition.
Item 3. Market Risk Disclosures
The Company’s primary objectives in managing its investment portfolio are to maximize investment income and total investment returns while minimizing overall credit risk. Investment strategies are developed based on many factors including changes in interest rates, overall market conditions, underwriting results, regulatory requirements, and tax position. Investment decisions are made by management and reviewed by the Board of Directors. Market risk represents the potential for loss due to adverse changes in fair value of securities. The three potential risks related to the Company’s fixed maturity portfolio are interest rate risk, prepayment risk, and default risk. The primary risk related to the Company’s equity portfolio is equity price risk. There have been no material changes to the Company’s market risk for the three months ended March 31, 2005. For further information reference is made to the Company’s Form 10-K for the year ended December 31, 2004.
Item 4. Controls and Procedures
Company management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
Management is currently performing documentation procedures in preliminary assessment on internal controls over financial reporting in order to document and evaluate the current controls in place in order to form a basis for future testing required for compliance with Section 404 of the Sarbanes-Oxley Act. In the past, management has relied on existing controls although said controls may not have been in unabridged written form.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Please refer to Note 7 to the financial statements. |
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6.Exhibits and Reports on Form 8-K
a. Exhibits
11. Computation of Earnings Per Share Filed Herewith, See Note 3 to Consolidated Financial Statements
31.1 | Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
b. Reports on Form 8-K during the quarter ended March 31, 2005
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned duly authorized officer, on its behalf and in the capacity indicated.
The National Security Group, Inc.
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/S/ William L. Brunson, Jr.
William L. Brunson, Jr.
President and Chief Executive Officer | | /S/ Brian R. McLeod
Brian R. McLeod
Treasurer and Chief Financial Officer |
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| | |
Dated: May 12, 2005
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Exhibit 31.1
CERTIFICATION
I, William L. Brunson, Jr. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of The National Security Group, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 12, 2005
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/S/ William L. Brunson, Jr.
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William L. Brunson, Jr. Chief Executive Officer |
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Exhibit 31.2
CERTIFICATION
I, Brian R. McLeod, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of The National Security Group, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 12, 2005
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/S/ Brian R. McLeod
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Brian R. McLeod, CPA Chief Financial Officer |
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. § 1350, the undersigned officer of the National Security Group, Inc. (the “Company”), hereby certifies, to such officer’s knowledge, that the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15 (d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | | | |
| | |
Date: May 12, 2005 | | | | |
| | | | /S/ William L. Brunson, Jr.
|
| | | | Name: William L. Brunson, Jr. Title: Chief Executive Officer |
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EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, the undersigned officer of The National Security Group, Inc. (the “Company”), hereby certifies, to such officer’s knowledge, that the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15 (d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | | | |
| | |
Date: May 12. 2005 | | | | |
| | | | /S/ Brian R. McLeod, CPA
|
| | | | Name: Brian R. McLeod, CPA Title: Chief Financial Officer |
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