Net investment income is up $156,000 or 4.9% for the year to date compared to last year. Increased short term interest rates along with a 4.1% increase in invested assets during the first nine months of 2006 are the primary factors contributing to the increase in net investment income.
Realized capital gains were $1,919,000 for the nine-month period ending September 30, 2006, down 624,000 from the same period in 2005. 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. The higher capital gains generated last year were primarily due to sales of equity investments in the wake of the unprecedented hurricane activity to increase liquidity in order to pay claims.
Other income decreased $32,000 compared to last year. Other income is primarily composed of insurance related fees tied to the non-standard auto line of business. The decrease in fees is primarily attributable to the decline in non-standard auto premium production.
Policyholder benefits and settlement expenses (claims) is significantly improved compared to the three month and nine month periods ended September 30 of last year. For the three month period ended September 30, 2006, claims were $9,026,000, or 59% of premium revenue, a significant turnaround compared to the same period last year when claims totaled 127% of premium revenue. For the nine month period ended September 30, 2006, claims totaled 29,272,000 or 65.7% of premium revenue, compared to $31,770,000 last year which totaled 80.8% of premium revenue. As discussed earlier, Hurricane Katrina and Hurricane Rita made a major adverse impact on the amount of incurred claims last year. In contrast, the third quarter of 2006 was free of any catastrophe related losses. For the year to date in 2006, the property and casualty subsidiaries have only incurred just over $1,000,000 in catastrophe losses due to March and April tornado activity primarily in Arkansas and Tennessee. The catastrophe losses incurred in 2006, while not insignificant, were only a small fraction of the over $40,000,000 in gross losses (prior to reinsurance) incurred during the 2005 hurricane season (based on development through the third quarter of 2006).
Policy acquisition costs were 19.13% of premium earned for the nine months ended September 30, 2006, down slightly for the 20.02% of earned premium in the first nine months of last year. The discontinuation of a higher commission rate general agent automobile program is the primary factor contributing to the decline in policy acquisition costs. For the quarter policy acquisition costs were 19.48% of earned premium compared to 19.29% for the same period last year. Last year’s third quarter hurricane losses reduced the accrual estimate for agent bonus commissions which the primary factor contributing to a decline in policy acquisition costs for the quarter. Policy acquisition costs consist primarily of commissions to agents for the sale of insurance products and typically increase or decrease in relation to the direction of premium revenue.
General expenses were 14.6% of premium revenue in the first nine months of 2006 compared to 13.4% for the same period last year. No one major item contributed to the increase but increased postage cost due to the increased production of new business and increased actuarial cost associated with preparing rate increases due to increased reinsurance rates are two of the more notable contributors to increased general insurance expenses.
Taxes, licenses, and fees:
Taxes, licenses and fees were 3.64% of premium revenue for the nine month period ended September 30, 2006 versus 4.72% for the same period in 2005. Increased cost associated with a periodic Alabama Department of Insurance examination was the primary factor contributing to the increase in taxes, licenses and fees in 2005.
Summary:
The Company has a year to date net income of $2,665,000 versus a net loss of $1,258,000 for the same period last year.
The non-existence of the adverse impact of hurricane losses in 2006 is the primary factor contributing to the increase in net income. The total cost, net of reinsurance recoveries, for all three hurricanes in 2005 totaled $6,099,000 net of tax and reduced earnings for the quarter and year to date by $2.47 per share. Hurricane Dennis did not exceed the catastrophe reinsurance deductible so the net loss from Dennis was $620,000 before tax and $409,000 net of tax. Hurricane Katrina losses net of reinsurance and including catastrophe reinstatement premiums totaled $6,411,000 before tax and $4,231,000 net of tax. Hurricane Rita losses net of reinsurance and including catastrophe reinstatement premiums totaled $2,211,000 before tax and $1,459,000 net of tax.
Investments:
Invested assets at September 30, 2006 increased $3,826,000 compared to December 31, 2005. Improved profitability along with increased cash available for investment due to collection of amounts due from reinsurance companies under last year’s catastrophe reinsurance contract are the primary factors contributing to the increase in invested assets.
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 September 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:
The effective tax rate in the nine months ending September 30, 2006 was 28.7%. The life insurance subsidiary typically has a lower tax rate than the property/casualty subsidiaries. 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 September 30, 2006, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $44,208,000 up $652,000 compared to December 31, 2005. The increase reflects current net income of $2,665,000, a decline in accumulated other comprehensive income (primarily unrealized investment gains) of $385,000, and dividends paid of $1,628,000.
The Company has $11.647 million in debt outstanding including notes from local banks of $9.3 million owed by a 50% owned subsidiary, Mobile Attic. Including the $9.3 million owed by Mobile Attic, management expects to refinance all current short term debt of $11.647 million before maturity in the first quarter of 2007.
The company occasionally undertakes short term borrowings through revolving lines of credit to provide more cash flow flexibility while paying claims associated with catastrophic events. NSFC has in place a $2 million revolving line of credit with a local bank. This line of credit will primarily be utilized to compensate for timing differences between our payment of claims to policyholders and the eventual reimbursement of the reinsured portions of claims under our catastrophe reinsurance agreement. The Company has no balance outstanding on this revolving line of credit.
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The Company had $3,563,000 in cash and short term investments at September 30, 2006. Net cash provided by operating activities totaled $6,395,000 for the nine months ended September 30, 2006.
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.
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. However, the Company maintains a catastrophe reinsurance program to limit the effect of such catastrophic events on the Company’s financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 nine months ended September 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.
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 7to the financial statements. |
|
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 Form 10-K. |
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
None |
|
Item 3. Defaults Upon Senior Securities |
None |
|
Item 4. Submission of Matters to a Vote of Security Holders |
None |
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Item 5. Other Information |
None |
|
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 |
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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 September 30, 2006 |
|
|
Date of Report | | Date Filed | | Description |
| | | | | | | | | |
July 25, 2006 | | July 25, 2006 | | Press release, dated July 25, 2006 issued by The National Security Group, Inc. |
August 11, 2006 | | August 11, 2006 | | Press release, dated August 11, 2006, issued by The National Security Group, Inc. |
August 31, 2006 | | September 1, 2006 | | Press release, dated August 31, 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 |
President and Chief Executive Officer | | Treasurer and Chief Financial Officer |
Dated: November 14, 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; |
| 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: November 14, 2006
|
|
/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; |
| 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: November 14, 2006
|
|
/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 September 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: November 14, 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 September 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: November 14, 2006 | | | | / s/ Brian R. McLeod, CPA |
| | | | |
| | | | Name: Brian R. McLeod, CPA Title: Chief Financial Officer |
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