Policyholder benefits and settlement expenses increased $3,637,000 in the first six months of 2006 compared to the same period last year. As a percentage of premium revenue, policyholder benefits and settlement expenses were 69.2% for the six month period ended June 30, 2006 compared to 60.7% for the same period last year. As discussed in the overview at the opening of this management discussion and analysis, an increase in claims activity in the property and casualty subsidiaries was the primary factor contributing to this increase in benefits and settlement expenses.
Two primary factors contributed to the increase in policyholder benefits and settlement expenses:
Policy acquisition costs are directly related to the production of earned premium and as a percentage of premiums earned, policy acquisition costs are down primarily due to a reduction in commission rates on an automobile program operated by a general agent in Alabama and Mississippi.
General expenses as a percent of earned premium was up moderately for the quarter at 15.6% of earned premium compared to 15.3% of earned premium for the same period last year. There were no significant changes in the makeup of general expenses.
Taxes, licenses and fees are 3.0% of premium revenue in the first six months of 2006 compared to 4.4% in the first six months of last year, a decrease of $329,000. The most significant item contributing to this decrease was non-deductible fees incurred in the prior year associated with a periodic examination of insurance subsidiaries conducted by the Alabama Department of Insurance.
Interest expense increased $605,000 in the first six months of 2006 compared to last year due to increased interest cost associated with the issuance of $9.2 million in trust preferred securities. The issuance was completed in December of 2005. Mobile Attic also experienced an increase in interest cost due to rising interest rates of floating rate debt.
Summary:
The Company has net income for the first six months of 2006 of $829,000 compared to net income of $2,638,000 for the first six months of 2005. As discussed under the caption “Policyholder benefits and settlement expenses” earlier in this report, a significant increase in claims incurred in the property and casualty subsidiaries was the primary factor contributing to the decline in earnings.
Investments:
Investments at June 30, 2006 were up $346,000 compared to December 31, 2005. Reimbursements of amounts due to us under catastrophe reinsurance agreements produced additional funds for investment but were partially offset by increased claims payments during the first six months of 2006.
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 June 30, 2006 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:
Income taxes for the six month period ended June 30, 2006 was 26% of income before tax, down slightly compared to income taxes of 28% for the same period last year.
Liquidity and capital resources:
At June 30, 2006, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $42,177,000 down $1,379,000 compared to December 31, 2005. The decrease reflects a net income of $829,000, a decrease in accumulated unrealized investment gains of $1,123,000, and dividends paid of $1,085,000. The decline in unrealized capital gains is primarily due to market value related decline in debt securities available for sale. The rising short term interest rate environment over the last six months was the primary factor contributing to this decline.
The Company has $20.9 million in short and long term debt. The Company has $11.6 million in debt held by the holding company, National Security Group, Inc (NSG), with $2.3 million of this debt due in March of 2007. The Company intends to retire the $2.3 million in debt at maturity. The remaining $9.3 million in debt of NSG consists of trust preferred securities which were issued in December of 2005. These securities have a fixed interest rate of 8.83% until December of 2015 and a final maturity of December 15, 2035. The Company’s 50% owned subsidiary, Mobile Attic, Inc. holds debt of $9.4 million that is also set to mature in 2007. Mobile Attic intends to refinance this debt prior to maturity and management currently knows of no limitations in Mobile Attic’s ability to refinance this debt prior to maturity.
The Company had $139,000 in cash and cash equivalents at June 30, 2006. Net cash provided by operating activities totaled $2,169,000 in the first six months of 2006. Recoveries of amounts due under catastrophe reinsurance agreements of $3,857,000 was the primary factor contributing to the increase in cash provided by operating activities.
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.
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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.
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.
The Company experienced substantial losses during the 2005 hurricane season from hurricanes Dennis, Katrina and Rita. The Company maintained catastrophe reinsurance to cover such events. Management relies on hurricane models to establish coverage under catastrophe reinsurance agreements. Based on these models, the Company maintained coverage up to a $37.5 million loss from a single event during 2005. Models indicated that a loss of this magnitude had a 0.4% chance of occurrence in any given year. Losses to date from Katrina have used all but $1,353,000 of available reinsurance under the catastrophe reinsurance agreement with over $9,000,000 of covered losses coming in the form of Mississippi Windstorm Underwriting Association assessments. Management does not expect any significant additional rise in claims from Katrina but should losses exceed the remaining $1,353,000 in catastrophe coverage, we would incur additional losses to cover the losses in excess of $37.5 million.
The company has reinsurance to cover a catastrophe in 2006 up to $42.5 million subject to a $3 million deductible. This facility has not been utilized in the first six months of 2006.
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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 six months ended June 30, 2006. For further information reference is made to the Company’s Form 10-K for the year ended December 31, 2005.
Item 4. Controls and Procedures
Company management, including the Chief Executive Officer and Chief Financial Officer, has 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.
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Part II. OTHER INFORMATION |
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Item 1. Legal Proceedings |
Please refer to Note 7 to the financial statements. |
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Item 1A.Risk Factors |
There has been no material change in risk factors previously disclosed under Item 1A. of the |
Company’s annual report for 2005 on Form 10-K. |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
None |
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Item 3. Defaults Upon Senior Securities |
None |
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Item 4. Submission of Matters to a Vote of Security Holders |
None |
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Item 5. Other Information |
None |
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Item 6. Exhibits and Reports on Form 8-K |
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a. Exhibits |
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11. Computation of Earnings Per Share Filed Herewith, See Note 3 to Consolidated Financial Statements |
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31.1 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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b. Reports on Form 8-K during the quarter ended June 30, 2006 |
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Date of Report | | Date Filed | | Description | |
| | | | | | | | | |
April 20, 2006 | | April 20, 2006 | | Press release, dated April 20, 2006, issued by The National Security Group, Inc. |
| | | | | | | | | |
May 4, 2006 | | May 12, 2006 | | Notification of change in transfer agent effective May 4, 2006. |
| | | | | | | | | |
May 12, 2006 | | May 12, 2006 | | Press release, dated May 12, 2006, issued by The National Security Group, Inc. |
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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.
/s/ William L. Brunson, Jr. | | /s/ Brian R. McLeod |
William L. Brunson, Jr. | | Brian R. McLeod |
Treasurer and Chief Financial Officer | | Treasurer and Chief Financial Officer |
Dated: August 11, 2006
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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; |
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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; |
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| (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 |
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| (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 |
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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 |
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| (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: August 11, 2006
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/s/William L. Brunson, Jr. |
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; |
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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; |
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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; |
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| (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 |
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| (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 |
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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: August 11, 2006
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|
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/s/Brian R. McLeod, CPA |
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 June 30, 2006 (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: August 11, 2006 | | | | |
| | | | /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 June 30, 2006 (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: August 11. 2006 | | | | |
| | | | /s/ Brian R. McLeod, CPA |
| | | | Name:Brian R. McLeod, CPA Title: Chief Financial Officer |
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