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1、Weworld.yourinsureThe National Security Group,Inc.2006 Annual ReportOur world has changed in a myriad of ways since our humble boardinghouse beginnings in 1947.Generations of a family business philosophy built on individualized customer service and aggressive growth strategies have brought us throug
2、h 60 years of ups and downs in the community and in the insurance industry.Although our corporate image is updated,our methods more advanced and some of the faces are new,our keen attention to individual needs has remained the same.Families still need life insurance to continue their current standar
3、d of living after the death of a loved one.Homeowners still need to rebuild after a natural disaster,and drivers still need dependable coverage for the occasional fender bender.We are The National Security Group,an employee-driven team of insurance professionals,committed to protecting your family a
4、nd your future from financial disaster.We insure your world,and in this report a few of us will introduce ourselves,put a face on our company and hopefully become more than just a voice on the other end of the phone or name at the other end of an email.Dividends05969798990001020313.5014.4915.639.171
5、1.5615.1010.9416.2319.26(per share)Assets(at year end in millions)Market Price(at year end)Book Value(per share)0421.26 ContentsPerformance Highlights.1Stock and Dividend Data.1We Insure Your World.2Letter to Shareholders.6Financial Review.8Financial Statements.10Board of Directors.21Corporate Infor
6、mation.21059697989900010203.805.76.71.68.64.58.54.865.82504.84506.885059697989900010203101.699.497.698.1103.9106.998.2139.2127.204128.606134.90617.2505969798990001020317.0918.1817.7416.9817.0516.7014.5317.6618.60 0418.92 0618.39Willene PowellBrandon RichardsDebbie StockwellLucinda Carpenter(In thous
7、ands except per share data)PercentFor the Year 2006 2005 of ChangeEarnings Per Share.1.72.63 173.0%Earnings.4,250 1,558 172.8%Net Premium Income.58,874 53,563 9.9%Net Investment Income.4,463 3,964 12.6%Return on Average Equity.9.56%3.50%173.1%Average Shares Outstanding.2,467 2,467 At Year EndShareho
8、lders Equity Per Share.18.39 17.66 4.1%Shareholders Equity.45,379 43,556 4.2%Total Assets.134,911 139,226(3.1)%Shares Outstanding.2,467 2,467 Stock Bid Prices Dividends High Low Per Share2006First Quarter.18.25 15.70.220Second Quarter.18.11 15.77.220Third Quarter.17.90 15.40.220Fourth Quarter.17.47
9、15.64.2252005First Quarter.23.91 18.23.215Second Quarter.24.29 20.65.215Third Quarter.22.25 18.10.215Fourth Quarter.19.03 15.05.220HighlightsBrenda McDurmontPhilip ChristGlenda AdkinsonDana HowellNoralyn DawsonThe year began with a fresh face lift for the companys traditional symbol of protection,th
10、e shield logo.Our new image does not abandon that symbol,but enhances it to represent a more progressive organization.The new logo maintains our recognizable symbol of protection and strength,while updating the shield to a more contemporary look that better represents an organization committed to re
11、cruiting quality employees that can help us maintain our edge in delivering quality insurance products to the markets we serve.We began as an employee driven business committed to serving our customers and continue today with the philosophy that the best service we can provide our customers is perso
12、nalized service,whether it is a handshake in the field or a friendly voice on the other end of the phone.Our employees are also our customers and recognize that as time goes on,needs of families change.Once again,operating on the philosophy of delivering personalized service,we are committed to upda
13、ting our insurance products to meet the needs of those we serve throughout lifes changes.Youll find that our insurance products are designed to protect you at home,work,and play and even on the way.Our policyholders trust us to deliver insurance protection for life,home,auto and health.Our delivery
14、methods are focused on customer convenience made available through hometown independent agents,people you know and trust.Throughout our history our primary focus has remained on delivering quality insurance products to underserved markets.At no other time in our history has this become more apparent
15、 and challenging than in recent years with the catastrophic events that have unfolded in the Gulf Coast region of the Southeastern United States,our home for 60 years.In spite of these terrible and unprecedented events,we remain No company can be successful without the long term commitment of dedica
16、ted employees.Bette Ham(far left)and Pat Lindsey(near left)have taken their commitment to what some may describe as extreme.Both can boast that National Security is the only job theyve ever known.Bette has been with us since 1948.She retired from full time employment in 1994,but retains a part-time
17、position as secretary to the Board of Directors.As company matriarch,Bette simply sums up her astounding 50+year career as follows:“I got up each work day for many years looking forward to getting to work!Its been great to work for a company with a management staff that has always been possessed wit
18、h genuine ethics”.Pat often comments that she finished high school on Friday and started with National Security on the following Monday.Shes been with us ever since for 47 years holding many positions of increasing responsibility,most recently as Supervisor of the life claims department.Pat remarks
19、that the highlight of her career is“having the privilege to work for a growing company with a great group of people”.Pat,the privilege is ours.The National Security Group could not be where it is today without the dedication of employees like Bette and Pat.2committed to continuing to deliver viable
20、insurance products in our own backyard.In the world of insurance,we realize that we are a small player.However,we believe that our size offers distinct advantages and allows us to be more agile in reacting to changing market conditions and allows more flexibility in tailoring products to meet the ne
21、eds of our customers.We also realize that in order to maintain our long-term commitments to our customers and continue to attract the best employees to our organization,we must continue to grow.Since entering the new millennium our total assets have grown to exceed$100 million,currently standing jus
22、t under$135 million.Also,our premium revenues have grown to record levels in each of the last five years to nearly$59 million currently,a 17%compound rate of growth since 2000.We could not have accomplished these milestones without our employees commitment to delivering quality service to our policy
23、holders and building an organization dedicated to delivering quality service to our agents and policyholders.Celebrating the steady success of the new millennium and preparing for tomorrows challenges,our policyholders,agents and employees have weathered many storms.In order for us to continue to pr
24、ovide the service and protection our policyholders need,we will continue to prepare for the storms to come.We are not just a family of insurance companies,we are a family and we have a deep appreciation for those who have helped us not only survive,but prosper over the past 60 years.We realize that
25、our organization is only as good as our people;therefore we have developed a number of employee and agent incentive programs designed to encourage The National Security Group is committed to employee education and professional development.Through education reimbursement and internship programs,we ar
26、e able to develop the next generation of leaders in our organization.A few of the past and present participants in our education related programs are pictured(from left)Charlie Carter,Peggy Vaughan,Lisa Macon,Kelly Jackson and Justin Maddox.These employees have taken advantage of the education relat
27、ed opportunities to build and enhance careers,build self confidence,serve as role models to others and,in some cases,pursue delayed dreams of obtaining a college education.While the personal reasons for participation in our education related programs are varied,the benefit to our Company is immeasur
28、able as we continue to build upon the success brought to us by our most valuable asset,our employees.Since 2000,premium revenues have averaged a 17%compound rate of growth.3and reward superior service to our customers while also insuring that our success is perpetuated for many years to come.Among t
29、hose incentives we offer,we put great emphasis on employee education,both traditional and industry specific.We believe that an employee committed to a lifetime of self improvement will provide immeasurable benefits to our future success and also increase the satisfaction level of our employees.There
30、fore,we promote employee education throughout our organization.All of our employees participate in some form of self improvement each year,either through in-house industry specific training,pursuit of industry recognized professional designations or participation in our tuition reimbursement program
31、 made available to those that wish to pursue a traditional college education while maintaining full time employment.Our commitment to encouraging employee self improvement also allows us to reap the benefits of the knowledge gained.One of our most recent benefits to our commitment to education and i
32、nnovation is a new product delivery platform launched in our property and casualty operations.In 2006,we launched ARiS,our new interactive agent website which has received a warm welcome among our community of independent agents.The website will offer yet another customer service improvement by allo
33、wing agents to deliver insurance policies to our customers more rapidly and streamline the underwriting process allowing us to better manage our risk.This award winning technology was developed to meet four key requirements.It had to be Agile,Reliable,Intelligent and Scalable,hence the project code
34、name,ARiS.ARiS enables property and casualty agents to quickly and accurately perform their most common tasks.Accurate automated quotes can be delivered to policyholders in just minutes.Agents can also improve the service to their policyholders by delivering After two yearsof development,we launched
35、our interactiveagent website.William Stuart,shown at left with ARiS team member LaMargaret McArthur is the IT Manager for the property and casualty subsidiaries.Two years ago,they were members of a team charged with the responsibility of investigating,designing,and implementing a new policy administ
36、ration system that would become ARiS.William provided the overall architecture and design of the system and serves as the IT project manager.LaMargaret served as an IT/business user liaison on the project.The core team also included team members(opposite page from left)Lisa Armstead,Ashley Nelson,an
37、d Tim Wilson.The new administration system and website were launched in 2006 and debuted in Tennessee.Additional states are slated to come online throughout 2007.The best explanation of what exactly ARiS is and is capable of was summed up in the A.M.Best presentation at the 2006 E-fusion Award final
38、ist presentations.“National Security created an end-to-end enterprise policy administration system featuring complete web access for agents.Agents can obtain 4policies immediately and creating endorsements and processing customer payments in real time.This technology was designed to provide another
39、avenue to improve service to our customers,but of course we remain just a phone call away.Because of our new websites resourceful uses of technology as applied to business strategy in the insurance industry,ARiS was selected as a finalist for the 2006 E-Fusion Awards hosted by A.M.Best,the oldest in
40、surance rating organization in the country.ARiS is one of many examples of our commitment to making insurance easier to buy,easier to use,and easier to sell.Committed to our community and yours,The National Security Group strives to be a good corporate neighbor by participating in the development of
41、 the local economy.Our commitment to economic development spans from providing quality rewarding careers to our employees,to providing quality insurance products to our independent agents in eleven states,to direct investment in other businesses that provide jobs to the areas we serve.We began just
42、after World War II in a rural area of South Alabama,and our roots remain deep here.However,our core commitment continues to be insuring your world.Thanks,to over 1500 independent agents who have helped us continue to grow over our long history.Thanks to the staff at our corporate headquarters,who ha
43、ve always responded promptly when called upon in the best of times and worst of times.Thanks to our shareholders and their families,many of whom have been with us from our humble beginnings.And most importantly,thanks to our customers who have placed their confidence in us to provide protection in t
44、imes of needs.We look forward to celebrating,in 2007,60 years of personal service and community growth.We strive to be a good corporate neighbor by participating in the development of the local economy.5quotes,issue policies,endorse existing policies,valuate risks and even print out applications and
45、 declaration pages while the insured is still in the office!An automated expert underwriting system was created that immediately shows red flags,cautionary items,and items that require submission.The system also uses third party integration services that provide protection class lookup,accurate prop
46、erty valuations,instant credit reports and analysis and address verification.Additional features include online payments,agency sweep and online view of accounts,online photo uploads and much more.”The successful launch of this innovative system would not have been possible without the dedicated eff
47、orts of the team members shown here and the many others involved in this extensive project.ShareholdersPositive earnings,the 3rd best in Company history,continued premium growth,and resolution of a long standing legal matter were some of the highlights of 2006.The year was also a time for regrouping
48、 after back-to-back years with significant hurricane losses.Hurricanes Katrina in 2005 and Ivan in 2004 were,respectively,the largest and second largest catastrophic events the Company has experienced.Consolidated earnings in 2006 were$4.25 million or$1.72 per share versus$1.56 million or$0.63 per s
49、hare in 2005.While below our targeted level,earnings for the year 2006 constitute the highest reported earnings since 1987.A significant non-recurring item,which negatively impacted earnings,were charges associated with the settlement of a class action relating to our past sales of certain industria
50、l life insurance business,primarily in the 1950s and 1960s.This settlement negatively impacted 2006 earnings by$0.41 per share.Additionally,while we were(fortunately)not directly impacted by hurricanes in 2006,the year was not free of catastrophes,as we experienced significant tornado activity in th
51、e Spring.April tornado losses were in excess of$1.3 million,negatively impacting earnings by$0.41 per share.And while hurricanes did not have a direct impact on 2006 results,an indirect impact was clearly felt as we were faced with a significant increase in the cost of our catastrophe reinsurance co
52、verage.Stockholders equity modestly increased 4.2%from$43.6 million to$45.4 million,resulting in a book value per share of$18.39 as of December 31,2006.2006 represented the 31st consecutive year in which the Company paid cash dividends,which currently stand at an annual rate of$0.90 per share.Our ca
53、sh dividend has now been increased on an annual basis for 29 consecutive years.Core line premium growth remains of major importance.On a consolidated basis,premium revenues were increased$5.3 million or 10%.It remains our belief that growth must be generated in the lines which we know best and have
54、the most expertise and experience.Our focus remains on further developing our core lines,primarily traditional life insurance and personal lines property insurance,supplemented by automobile insurance and health and accident insurance.Since the year 2000,average annual premium growth has averaged 17
55、%.While growth remains an operating objective,our experience has shown that older,more seasoned books of business perform better,and we are satisfied with continuing with modest growth in our writings.We continued with a number of technology initiatives during the year,the major project being the in
56、troduction of a new web-based policy administration system in our property and casualty companies.The project,which we refer to as ARiS,was developed in-house and is an end-to-end policy administration system featuring complete web access for agents.Agents can retrieve quotes,create policies,endorse
57、 existing policies,valuate risks,and print applications and declarations while the customer is still in the office.An automated underwriting system immediately shows cautionary items or items that require submission.This project was introduced initially in Tennessee,and is being expanded into other
58、states over the coming months.We believe this system will greatly improve our operating efficiencies as well as enabling our agents to provide better service to policyholders.Our earnings are the third best in the Companys history.6We are not planning any material changes in our business strategy in
59、 the year ahead.We will continue to emphasize internally generated growth in our core insurance lines,maintaining discipline in our underwriting,and continuing to develop our workforce and operating procedures with an emphasis on service and ease of doing business.Emphasis in property and casualty o
60、perations will be placed on maintaining acceptable underwriting results in a growing book of business,and continuing to develop a more geographically diverse business to reduce the potential adverse affects of catastrophes.With life insurance production,emphasis will continue to be placed on develop
61、ing a network of independent agents and offering life and supplemental health products through established property and casualty producers.Focus will continue to be placed on work-site product offerings and offerings of specialty products through groups and associations.We are fortunate to be part o
62、f an organization with loyal dedicated employees(several of whom are featured in this Report)and with interested and supportive shareholders.We are committed to achieving our goals of superior growth and profitability in the years to come and to continue as a growing,profitable company that addresse
63、s our responsibilities to shareholders,policyholders,agents and employees.Thank you for your interest and support.We are fortunate to be a part of an organization with loyal dedicated employees.William L.Brunson,Jr.President and CEOThe Executive Management Team for The National Security Group,Inc.,i
64、s page left;William L.Brunson,President and Chief Executive Officer,The National Security Group,Inc.This page from left:Brian McLeod,Chief Financial Officer and Treasurer,The National Security Group,Inc.,Jack E.Brunson,President,National Security Fire and Casualty,and Mickey L.Murdock,Chief Operatin
65、g Officer and Senior Vice President,The National Security Group,Inc.7(Dollars in thousands-except per share figures)Per share figures for 2000 and prior years are restated for a 20%stock dividend issued in 2001.20062005200420032002200120001999199819971996Earnings Per Share.1.72 0.63 1.26 1.66 0.37 1
66、.67 1.53 1.52 0.35 1.07 0.48Book Value Per Share.18.39 17.66 18.92 18.60 17.09 18.18 17.74 16.98 17.05 16.70 14.53Total Shareholders Equity.45,379 43,556 46,676 45,872 42,159 44,884 43,780 41,888 41,968 46,352 40,519Assets.134,911 139,226 128,631 127,236 101,602 99,484 97,563 98,105 103,973 106,958
67、98,219 Earnings.4,250 1,558 3,113 4,090 908 4,130 3,776 3,756 930 2,998 1,356 Investment Income.4,463 3,964 4,230 4,023 4,235 4,506 4,434 4,354 4,351 4,204 3,935 Return on Average Equity(Percent).9.6 3.5 6.7 9.3 2.1 9.3 8.8 8.9 2.1 6.9 3.4 Premium Revenues.58,874 53,563 52,985 47,536 32,631 25,357 2
68、2,921 25,936 28,451 31,156 26,654 Shares Outstanding(Year-end).2,467 2,467 2,467 2,467 2,467 2,467 2,056 2,056 2,051 2,313 2,320CombinedRatio-Property&CasualtyCompanies Loss.63.46 74.41 68.24 60.0 75.5 54.3 61.7 70.9 87.0 79.3 79.8 Expense.32.21 32.21 31.36 30.8 31.9 36.1 34.8 35.8 40.3 31.0 30.9Com
69、bined.95.67 106.62 99.60 90.8 107.4 90.4 96.5 106.7 127.3 110.3 110.7Common Stock Data Dividends Paid Per Share.0.885 0.865.845.825 0.805 0.76 0.71 0.68 0.64 0.58 0.54 Price at Year End.17.25 16.23 21.26 19.26 13.5 14.49 15.63 9.17 11.56 15.10 10.94 Price Range.18.25-15.40 24.29-15.05 26.00-19.03 20
70、.50-11.95 16.00-13.00 15.63-10.21 16.04-9.17 12.50-7.71 17.71-8.75 20.00-10.63 11.88-9.69 P&C Co.Premiums/Surplus Ratio.1.5 1.4 1.5 1.5 1.2 0.7 0.6 0.8 0.9 0.9 0.8Life Co.Insurance in Force(Millions).217 203 178 179 176 176 151 141 132 132 138BESTs Rating P&C Company.B+B+B+B+B+B+B+B+B+A-A-Life Compa
71、ny.B B B B B B B B B B BDebt(Thousands).20,859 22,906 15,836 10,921 3,380 2,108 2,401 2,672 3,004 133 182Eleven Year Financial ReviewThe National Security Group,Inc.Sources of RevenueLeasing Revenues.$1,887,000.2.7%Net Realized Investment Gains.$2,615,000.3.8%Investment and Other Income.$5,674,000.8
72、.2%Life Company Premium.$6,550,000.9.5%Property&Casualty Company Premium.$52,324,000.75.8%8(Dollars in thousands-except per share figures)Per share figures for 2000 and prior years are restated for a 20%stock dividend issued in 2001.20062005200420032002200120001999199819971996Earnings Per Share.1.72
73、 0.63 1.26 1.66 0.37 1.67 1.53 1.52 0.35 1.07 0.48Book Value Per Share.18.39 17.66 18.92 18.60 17.09 18.18 17.74 16.98 17.05 16.70 14.53Total Shareholders Equity.45,379 43,556 46,676 45,872 42,159 44,884 43,780 41,888 41,968 46,352 40,519Assets.134,911 139,226 128,631 127,236 101,602 99,484 97,563 9
74、8,105 103,973 106,958 98,219 Earnings.4,250 1,558 3,113 4,090 908 4,130 3,776 3,756 930 2,998 1,356 Investment Income.4,463 3,964 4,230 4,023 4,235 4,506 4,434 4,354 4,351 4,204 3,935 Return on Average Equity(Percent).9.6 3.5 6.7 9.3 2.1 9.3 8.8 8.9 2.1 6.9 3.4 Premium Revenues.58,874 53,563 52,985
75、47,536 32,631 25,357 22,921 25,936 28,451 31,156 26,654 Shares Outstanding(Year-end).2,467 2,467 2,467 2,467 2,467 2,467 2,056 2,056 2,051 2,313 2,320CombinedRatio-Property&CasualtyCompanies Loss.63.46 74.41 68.24 60.0 75.5 54.3 61.7 70.9 87.0 79.3 79.8 Expense.32.21 32.21 31.36 30.8 31.9 36.1 34.8
76、35.8 40.3 31.0 30.9Combined.95.67 106.62 99.60 90.8 107.4 90.4 96.5 106.7 127.3 110.3 110.7Common Stock Data Dividends Paid Per Share.0.885 0.865.845.825 0.805 0.76 0.71 0.68 0.64 0.58 0.54 Price at Year End.17.25 16.23 21.26 19.26 13.5 14.49 15.63 9.17 11.56 15.10 10.94 Price Range.18.25-15.40 24.2
77、9-15.05 26.00-19.03 20.50-11.95 16.00-13.00 15.63-10.21 16.04-9.17 12.50-7.71 17.71-8.75 20.00-10.63 11.88-9.69 P&C Co.Premiums/Surplus Ratio.1.5 1.4 1.5 1.5 1.2 0.7 0.6 0.8 0.9 0.9 0.8Life Co.Insurance in Force(Millions).217 203 178 179 176 176 151 141 132 132 138BESTs Rating P&C Company.B+B+B+B+B+
78、B+B+B+B+A-A-Life Company.B B B B B B B B B B BDebt(Thousands).20,859 22,906 15,836 10,921 3,380 2,108 2,401 2,672 3,004 133 182(In thousands except per share figures)Investment Realized Net Net(Loss)Premium Leasing&Other Investment (Loss)Income Revenues Revenues Income Gains Benefits Income Per Shar
79、e20061st QTR$14,491$453$1,492$609$10,680$(141)$(0.06)2nd QTR 14,755 472 1,347 540 9,566 970 0.393rd QTR 15,297 406 1,452 770 9,026 1,836 0.744th QTR 14,331 556 1,383 696 8,724 1,585 0.65Total$58,874$1,887$5,674$2,615$37,996$4,250$1.7220051st QTR$13,664$602$1,451$198$8,113$1,292$0.522nd QTR 13,696 98
80、8 1,560 683 8,496 1,346 0.553rd QTR 11,969 700 1,273 1,394 15,161(3,896)(1.58)4th QTR 14,234 1,070 1,096 1,452 6,471 2,816 1.14Total$53,563$3,360$5,380$3,727$38,241$1,558$0.63Financial Results on a Quarterly BasisAndy Davis9Beverly McDanielGladys HatawayJudy MedleyDeloris Marsh10Dollars in thousands
81、 except per share amounts Year ended December 31,2006 2005 2004Revenues Net premiums earned.$58,874$53,563$52,985 Net investment income.4,463 3,964 4,230 Net realized investment gains.2,615 3,727 2,162 Net revenues from leasing operations.1,887 3,360 2,459 Other income.1,211 1,416 1,312 69,050 66,03
82、0 63,148BenefitsandExpenses Policyholder benefits paid or provided.37,996 38,241 35,067 Amortization of deferred policy acquisition costs.1,978 2,704 2,221 Commissions.8,921 8,987 8,646 General insurance expenses.9,141 7,911 8,608 Expenses from leasing operations.1,829 2,404 2,008 Insurance taxes,li
83、censes and fees.1,729 2,243 2,018 Interest expense.1,837 1,140 727 63,431 63,630 59,295IncomeBeforeIncomeTaxesandMinorityInterest 5,619 2,400 3,853IncomeTaxExpense(Benefit)Current.1,907 531 482 Deferred.(349)174 364 1,558 705 846IncomeBeforeMinorityInterest 4,061 1,695 3,007 Loss(Income)ofMinorityIn
84、terest 189(137)106 NetIncome$4,250$1,558$3,113EarningsperCommonShare NetIncome$1.72$0.63$1.26 See accompanying notes to consolidated financial statements.Consolidated Statements of IncomeThe National Security Group,Inc.11Dollars in thousands December 31,2006 2005AssetsInvestments Fixed maturities he
85、ld-to-maturity,at amortized cost(estimated fair value:2006-$18,172;2005-$18,204).$18,764$18,831 Fixed maturities available-for-sale,at estimated fair value(cost:2006-$62,980;2005-$56,704).61,935 56,124 Equity securities available-for-sale,at estimated fair value(cost:2006-$7,224;2005-$6,374).16,119
86、15,169 Receivable for securities.677 Mortgage loans on real estate,at cost.504 387 Investment real estate,at book value(accumulated depreciation:2006-$18;2005-$18).4,154 3,842 Policy loans.845 793 Other invested assets.2,346 2,605 Short-term investments.508 699 TotalInvestments$105,175 99,127 Cash.1
87、,106 2,350 Accrued investment income.786 701 Receivable from agents,less allowance for credit losses(2006-$110;2005-$110).3,098 2,663 Accounts receivable,less allowance for credit losses(2006-$10;2005-$48).2,047 2,848 Inventory.447 1,238 Reinsurance recoverable.2,242 10,193 Deferred policy acquisiti
88、on costs.7,922 6,567 Property and equipment,net.11,242 12,393Other assets.846 1,146 TotalAssets$134,911$139,226 LiabilitiesandShareholdersEquityProperty and casualty benefit and loss reserves.$12,498$19,511Accident and health benefit and loss reserves.824 575Life and annuity benefit and loss reserve
89、s.26,265 24,552Unearned Premiums.17,818 15,791Policy and contract claims.412 351Other policyholder funds.1,275 1,309 Short term debt.11,580 Long-term debt.9,279 22,906 Accrued income taxes.1,205 99 Other liabilities.5,645 7,185 Deferred income tax.2,031 2,502 TotalLiabilities$88,832 94,781 Contingen
90、cies.Minority interest.700 889 Shareholders equity Preferred stock,$1 par value,500,000 shares authorized,none issued or outstanding.Class A common stock,$1 par value,2,000,000 shares authorized,none issued or outstanding.Common stock,$1 par value,10,000,000 shares authorized 2,466,600 shares issued
91、 and outstanding.2,467 2,467 Additional paid-in capital.4,951 4,951 Accumulated other comprehensive income.5,616 5,860 Retained earnings.32,345 30,278 TotalShareholdersEquity 45,379 43,556 TotalLiabilitiesandShareholdersEquity$134,911$139,226See accompanying notes to consolidated financial statement
92、s.Consolidated Balance SheetsThe National Security Group,Inc.Dollars in thousands Accumulated Other Comprehensive Retained Comprehensive Common Paid-in Total Income(Loss)Earnings Income Stock Capital Balance at December 31,2003.45,872 29,825 8,629 2,467 4,951 Comprehensive income:Net income for 2004
93、.3,113 3,113 3,113 Other comprehensive loss,net of tax Unrealized loss on securities,net of reclassification adjustment of$1,483.(225)(225)(225)Comprehensive income.2,888 Cash dividends($0.845 per share).(2,084)(2,084)Balance at December 31,2004.$46,676$30,854$8,404$2,467$4,951 Comprehensive loss:Ne
94、t income for 2005 .1,558 1,558 1,558 Other comprehensive loss,net of tax Unrealized loss on securities,net of reclassification adjustment of$2,504.(2,544)(2,544)(2,544)Comprehensive loss.(986)Cash dividends($0.865 per share).(2,134)(2,134)Balance at December 31,2005.$43,556$30,278$5,860$2,467$4,951
95、Comprehensive income:Net income for 2006 .4,250 4,250 4,250 Other comprehensive loss,net of tax Unrealized loss on securities,net of reclassification adjustment of$1,845.(244)(244)(244)Comprehensive income.4,006 Cash dividends($0.885 per share).(2,183)(2,183)Balance at December 31,2006.$45,379$32,34
96、5$5,616$2,467$4,951 See accompanying notes to consolidated financial statements.12Consolidated Statements of Shareholders EquityThe National Security Group,Inc.Dollars in thousands Year ended December 31,2006 2005 2004Cash flows from operating activities:Net income.$4,250$1,558$3,113 Adjustments to
97、reconcile net income to net cash provided by(used in)operating activities:Change in accrued investment income.(85)43 186 Change in reinsurance recoverable.7,951(6,875)(1,519)Amortization of deferred policy acquisition costs.1,978 2,704 2,221 Change in receivable for securities.677(677)Net realized g
98、ains on investments.(2,615)(3,727)(2,162)Change in accounts receivable.801(2,103)(265)Change in inventory.791(1,016)(178)Policy acquisition costs deferred.(3,333)(3,054)(2,621)Change in prepaid reinsurance premiums.196 271 29 Depreciation expense and amortization/accretion.793 944 700 Change in poli
99、cy liabilities and claims.(5,051)8,073 3,396 Change in income tax payable.1,106 99(1,486)Change in deferred income taxes.349 174 362 Change in other liabilities.(1,540)(691)(1,246)Loss(gain)of minority interest.189(137)106 Other,net.1,345(1,035)250 Netcashprovidedby(usedin)operatingactivities 7,802(
100、5,449)886 Cash flows from investing activities:Purchases of held-to-maturity securities.(1,484)(1,193)(19,379)Purchases of available-for-sale securities.(24,396)(23,037)(4,933)Proceeds from maturities of held-to-maturity securities.909 2,770 3,176 Proceeds from sales of available-for-sale securities
101、.19,569 22,576 25,687 Proceeds from sales of real estate held for investment.838 189 124 Purchases of real estate held for investment.(821)(2,451)Purchase of other invested assets.(3,358)Proceeds from sales of other invested assets.259 368 385 Net proceeds(purchases)from sale of short-term investmen
102、ts.191(449)50 Advances on policy loans,net.(52)(22)(41)Purchase of property and equipment.(331)(457)(1,327)Proceeds from sale of property and equipment.770 Capitalized software development costs.(234)4,211 69 Netcash(usedin)providedbyinvestingactivities(4,782)2,505 453Cash flows from financing activ
103、ities:Proceeds from debt.9,279 243 Payments on debt.(2,047)(2,209)(328)Change in other policyholder funds.(34)(2)(105)Dividends paid.(2,183)(2,134)(2,084)Netcash(usedin)providedbyfinancingactivities(4,264)4,934(2,274)Net(decrease)increaseincash(1,244)1,990(935)Cash at beginning of year.2,350 360 1,2
104、95 Cash at end of year.$1,106$2,350$360See accompanying notes to consolidated financial statements.13Consolidated Statements of Cash FlowsThe National Security Group,Inc.NOTE1-SIGNIFICANTACCOUNTINGPOLICIES(a)PrinciplesofConsolidationThe accompanying consolidated financial statements include the acco
105、unts 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).All significant interco
106、mpany transactions and accounts have been eliminated.The accompanying consolidated financial statements also include an investment in affili-ate,which consists of a fifty percent interest in The Mobile Attic,Inc and its wholly owned subsidiary established in January of 2004,Mobile Attic Franchising
107、Company(MAFCO).The Mobile Attic,Inc.is a portable storage leasing company that began operations in 2001.MAFCO was established in the first quarter of 2004 to conduct the business of selling Mobile Attic portable storage leasing franchises.Effective in the first quarter of 2004 the Company consolidat
108、ed the accounts of Mobile Attic,Inc.and subsidiary MAFCO according to guidance in Financial Accounting Standards Board Interpretation 46 as revised December 2003(FIN 46R).(b)DescriptionofMajorProductsNSIC is licensed in the states of Alabama,Florida,Georgia,Mississippi,South Carolina and Texas and w
109、as organized in 1947 to provide life and burial insurance policies to the homeservice market.Business is now produced by both company and independent agents.Primary products include ordinary life,accident and health,supplemental hospital,and cancer insurance products.NSFC is licensed in Alabama,Arka
110、nsas,Florida,Georgia,Kentucky,Mississippi,Oklahoma,South Carolina,Tennessee and West Virginia.In addition NSFC operates on a surplus lines basis in Louisiana,Missouri,and Texas.NSFC operates in various property and casualty lines,the most significant of which are dwelling property fire and extended
111、coverage,hom-eowners,mobile homeowners,ocean marine,nonstandard automobile physical damage and liability and nonstandard commercial auto liability.Omega is licensed in the states of Alabama and Louisiana.Omega operates in property and casualty lines,the most significant of which are homeowners and n
112、onstandard automobile physical damage and liability.(c)BasisofPresentationThe significant accounting policies followed by the Company and subsidiaries that materi-ally affect financial reporting are summarized below.The accompanying consolidated financial statements have been prepared in accordance
113、with generally accepted accounting principles(GAAP)which,as to the subsidiary insurance companies,differ from statutory accounting practices permitted by regulatory authorities.(d)UseofEstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requir
114、es 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 dur-ing the reporting period.Among the more signifi
115、cant estimates included in these financial statements are reserves for future policy benefits,losses and loss adjustment expenses and deferred policy acquisition costs.Actual results could differ from those estimates.(e)InvestmentsThe Companys securities are classified in two categories and accounte
116、d for as follows:Securities Held-to-Maturity.Bonds,notes and redeemable preferred stock for which the Company has the positive intent and ability to hold to maturity are reported at cost,adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using me
117、thods which approximate level yields over the period to maturity.Securities Available-for-Sale.Bonds,notes,common stock and non-redeemable preferred stock not classified as either held-to-maturity,or trading are report-ed at fair value,adjusted for other-than-temporary declines in fair value.The Com
118、pany 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 d
119、etermined using the specific-identification method.Generally,realized gains and losses on sales of investments are recognized in net income using the specific identification method.Mortgage loans and policy loans are stated at the unpaid principal balance of such loans.Investment real estate is repo
120、rted 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 and losses recognized in the determin
121、ation of net income.Other invested assets consist principally of state sponsored investments with a portion of the investment yield derived from insurance premium tax credits.These investments are reported at the unpaid principal balance.(f)ReceivablefromAgentsAgent balances are reported at unpaid b
122、alances,less a provision for credit losses.(g)AccountsReceivableAccounts receivable are reported at net realizable value.Management determines the allow-ance for doubtful accounts based on historical losses and current economic conditions.On a continuing basis,management analyzes delinquent receivab
123、les and,once these receivables are determined to be uncollectible,they are written off through a charge against an existing allowance account or against earnings.(h)InventoryInventory consists of finished goods inventory and is carried at the lower of cost(first-in,first-out method)or market.(i)Prop
124、ertyandEquipmentProperty and equipment is carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment.Significant cost incurred for internally developed software are capitalized and amortized over NOTE1-SIGNI
125、FICANTACCOUNTINGPOLICIESCONTINUED estimated useful lives of 3 years.Maintenance,repairs,and minor renovations are charged to expense as incurred.Upon sale or retirement of property and equipment,the cost and related accumulated depreciation are eliminated from the respective account and the resultin
126、g gain or loss is included in the results of operations.The Company provides for depreciation of property and equipment using the straight-line method designed to amortize costs over estimated useful lives.Estimated useful lives range up to 40 years for buildings and from 3-8 years for electronic da
127、ta processing equipment and furniture and fixtures.(j)FairValueofFinancialInstrumentsThe table below presents the carrying value and fair value of the Companys financial instru-ments,as defined in accordance with applicable requirements.Fair values of the Companys financial instruments are estimated
128、 by reference to quoted prices from market sources and financial institutions,as well as other valuation techniques.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
129、in time,based on available market information and judgments about the financial instrument,such as estimates of tim-ing 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
130、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
131、.Certain financial instruments,particularly insurance liabilities other than financial guar-antees and investment contracts are excluded from the disclosures.In evaluating the Companys management of interest rate and liquidity risk,the fair values of all assets and liabilities should be taken into c
132、onsideration.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 sheet due to their short-term availability or maturity.Dollars in thousands December
133、 31,2006 2005 Carrying Estimated Carrying Estimated Value Fair Value Value Fair ValueAssets and related Instruments Debt and equity securities.$95,136$94,545$90,124$89,497 Mortgage loans.504 504 387 387 Policy loans.845 845 793 793 Other invested assets.2,346 2,346 2,605 2,605Liabilities and related
134、 Instruments Other policyholder funds.1,275 1,275 1,309 1,309(k)StatementofCashFlowsFor purposes of reporting cash flows,cash includes cash-on-hand,demand deposits with banks and overnight investments.(l)RevenueRecognitionLife insurance premiums are recognized as revenues when due.Property and casua
135、lty insur-ance 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.Mobile Attic,Inc.recognizes leasing revenues from royalties,storage unit rentals and sales on a mon
136、thly basis.Revenues from delivery charges are recognized when these services are billed.Mobile Attic executes franchise agreements that set the terms of its arrangement with each franchisee.The franchisee agreement requires the franchisee to pay an initial,non-refundable fee ranging from$35,000 to$5
137、5,000 and continuing fees based on percentage of rents.The initial term of the franchise is 20 years and,subject to Mobile Attics approval and payment of a renewal fee,a franchise may generally renew its agreement upon its expiration for an additional 10 years.When an individual franchise is sold,Mo
138、bile Attic agrees to provide certain services to the Franchisee,including training on the operations of the business as well as training on the loading and unloading of the storage containers.Mobile Attic recognizes initial fees as revenue when substantially all initial services required by the fran
139、chise agreement are performed,which is generally upon opening of a franchise location.Mobile Attic sold 5 individual franchise licenses during 2006 and 15 during 2005.Initial fees included in revenues for the years ended December 31,2006 and 2005 were$300,000 and$625,000,respectively.Deferred revenu
140、e at December 31,2006 and 2005 was$70,000 and$175,000,respectively,and represents that portion of total revenues from franchises not yet open.There were two company-owned locations in operation during the years ended December 31,2006 and 2005.As territory is assigned to each franchise sold,Mobile At
141、tic may reach the point where exist-ing markets become saturated and initial franchising revenue declines.Unless new markets are entered,franchise revenues after market saturation will come primarily from renewal fees for existing franchises.(m)DeferredPolicyAcquisitionCostsThe costs of acquiring ne
142、w 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 o
143、ver 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 polic
144、ies limits the amount deferred to a percentage of related unearned premiums.(n)PolicyLiabilitiesThe liability for future life insurance policy benefits is computed using a net level premium 14Notes to Consolidated Financial StatementsThe National Security Group,Inc.NOTE1-SIGNIFICANTACCOUNTINGPOLICIE
145、SCONTINUEDmethod including the following assumptions:Years of Issue Interest rate 1947-1968 4%1969-1978 6%graded to 5%1979-2006 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 o
146、n the Companys experience.(o)ClaimLiabilitiesThe 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 expe
147、nses are deter-mined 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 consid-erable variability is inherent in such estimates,management believes that the liabilities for unpaid cla
148、ims and related adjustment expenses are adequate.The estimates are continually reviewed and adjusted as necessary;such adjustments are included in current operations.(p)EarningsPerShareEarnings per share of common stock is based on the weighted average number of shares outstanding during each year.T
149、he adjusted weighted average shares outstanding were 2,466,600(2,466,600 in 2005 and 2004).(q)ReinsuranceIn the normal course of business,NSFC seeks to reduce the loss that may arise from catastro-phes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk i
150、n various areas of exposure with other insurance enterprises or reinsurers.In 2006,NSFC maintained catastrophe reinsurance protection for losses from a single catastrophic event with an upper limit of$42.5 million with a$3 million deductible and 5%coinsurance on reinsured losses up to$17.5 million.A
151、mounts 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
152、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$50,000 of coverage per individual life.The cost of reinsur
153、ance is amortized over the contract period of the reinsurance.(r)ReclassificationsCertain 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 rep
154、orted net income or shareholders equity.(s)AdvertisingThe Company expenses advertising costs as incurred except for nondirect-response advertising costs,which are expensed the first time the advertising takes place.Advertising costs charged to expense were$446,000 for the year ended December 31,2006
155、($250,000 and$142,000 for the years ended December 31,2005 and 2004,respectively).Advertising costs capitalized at December 31,2005 were$192,000.(t)ConcentrationofCreditRiskThe Company maintains cash depository accounts which,at times,may exceed federally insured limits.These amounts represent actua
156、l account balances held by financial institutions at the end of the period,and unlike the balance reported in the financial statements,the account balances do not reflect timing delays inherent in reconciling items such as outstand-ing checks and deposits in transit.The Company has not experienced a
157、ny losses in such accounts.The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.Reinsurance contracts do not relieve the Company of its obligations to policyholders.A failure of a reinsurer to meet their obligation could result in losses to the insurance
158、 subsidiaries.Allowances for losses are established if amounts are believed to be uncollectible.At December 31,2006 and 2005,no amounts were deemed uncollectible.The Company,at least annually,evaluates the financial condition of all reinsurers and evaluates any potential concentrations of credit ris
159、k.At December 31,2006,management does not believe the Company is exposed to any significant credit risk related to its reinsurance program.(u)RecentlyIssuedAccountingStandardsDuring 2006,the Financial Accounting Standards Board(FASB)issued the following pro-nouncements:SFAS No.155,Accounting for Cer
160、tain Hybrid Financial Instruments eliminates the exception from applying SFAS No.133,Accounting for Derivative Instruments and Hedging Activities,to interests on securitized financial assets so similar instruments are accounted for similarly regardless of form.SFAS No.155 is effective for all financ
161、ial instruments acquired or issued in an entitys first fiscal year beginning after September 15,2006.The adoption of this statement is not expected to have a material impact on the Companys financial position or results of operations.SFAS No.156,Accounting for Servicing of Financial Assets will requ
162、ire entities to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations.It also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fa
163、ir value and allows a choice of either the amortization or fair value measurement method for subsequent measurement.The statement is effective for annual periods beginning after September 15,2006.The adoption of this statement is not expected to have a material impact on the Companys financial posit
164、ion or results of operations.FASB Interpretation No.(FIN)48,Accounting for Uncertainty in Income Taxes prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return.It also provides guidance on derecognition of income tax assets and lia
165、bilities,classification of current and deferred income tax assets and liabilities,accounting for interest and penalties,accounting for income taxes in interim periods,financial disclo-sures,and transition.This interpretation is effective for fiscal years beginning after December 15,2006.The Company
166、is currently evaluating the impact this interpretation may have on NOTE1-SIGNIFICANTACCOUNTINGPOLICIESCONTINUEDits financial position or results of operations at the time it is adopted.SFAS No.157,Fair Value Measurements,changes the requirements for accounting and reporting of a change in accounting
167、 principle.The statement defines fair value,establishes a framework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.The statement is effective for fiscal years begin-ning after November 15,2007.The Company is currently evalua
168、ting the potential impact of this statement at the time it is adopted.SFAS No.158,Employers Accounting for Defined Benefit Pension and Other Postretirement Plans will require a company to recognize on a prospective basis an asset for a plans overfunded status or a liability for a plans underfunded s
169、tatus in its statement of financial position,to measure a plans assets and its obligations that determine its funded status as of the end of the employers fiscal year,and to recognize changes in the funded status of a defined postretirement plan in the year in which the changes occur as a component
170、of other comprehensive income.The requirement to recognize the funded status of a benefit plan and the disclosure requirements of the statement are effective for fiscal years ending after December 15,2006.The requirement to measure the plan assets and benefit obligations as of the date of the employ
171、ers fiscal year-end statement of financial position is effective for fiscal years ending after December 15,2008.The Company does not have a defined benefit pension plan or other postretirement plans and as a result the adoption of this statement is not expected to have a material impact on the Compa
172、nys financial position or results of operations.SFAS No.159,The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No.115 permits entities to choose to measure many financial instruments and certain other items at fair value.The objective is to i
173、mprove financial reporting by providing entities with the opportunity to mitigate volatility in reported earn-ings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.This Statement is effective as of the beginning of an entitys
174、first fiscal year that begins after November 15,2007.The adoption of this statement is not expected to have a material impact on the Companys financial position or results of operations.NOTE2VARIABLEINTERESTENTITIESIn December 2003,the FASB issued Revised FIN 46(FIN 46R)to clarify certain aspects of
175、 FIN 46 including the determination of who is the primary beneficiary of a variable inter-est entity(VIE).FIN 46R postponed the effective date as to when companies are required to apply the provisions prospectively for all variable interest entities in existence prior to January 31,2003 until the fi
176、rst financial reporting period that ends after March 15,2004.However,for entities that are considered to be special purpose entities,the effective date of FIN 46R is financial reporting periods after December 15,2003.The Company does not have an interest in any special purpose entities.The Company c
177、onsolidated its affiliate,Mobile Attic,Inc.,upon adoption of FIN 46R in the first quarter 2004 due to the Companys guarantee of Mobile Attics line of credit.The consolidation of Mobile Attic increased total assets by approximately$15 million and total liabilities by approximately$13 million.There wa
178、s no effect on total shareholders equity.The consolidation of Mobile Attic did not have a material impact on the results of operations as the Company previously accounted for the investment under the equity method.See Note 17 for additional information related to the VIE.In December 2005,the Company
179、 formed National Security Capital Trust I(the Trust),a statutory trust created under the Delaware Statutory Trust Act,for the sole purpose of issu-ing,in private placement transactions,$9 million of trust preferred securities(TPS)and using the proceeds thereof,together with the equity proceeds recei
180、ved from the Company in the initial formation of the Trust,to purchase$9.3 million of variable rate subordinated debentures issued by the Company.The Company owns all voting securities of the Trust and the subordinated debentures are the sole assets of the Trust.The Trust will meet the obligations o
181、f the TPS with the interest and principal paid on the subordinated debentures.The Company received net proceeds from the TPS transactions,after commissions and other costs of issuance,of$9.005 million.The Company also holds all the voting securities issued by the Trust and such trusts are considered
182、 to be VIEs.The Trust is not consolidated because the Company is not the primary beneficiary of the trust.The Subordinated Debentures,disclosed in Note 8 are reported in the accompanying Consolidated Balance Sheet as a com-ponent of long-term debt.The Companys equity investments in the Trust total$2
183、79,000 and are included in Other Assets.NOTE3-STATUTORYACCOUNTINGPRACTICESThe 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 insuranc
184、e 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 Ass
185、et 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 intercompan
186、y transactions,are summarized as follows:Dollars in thousands Year ended December 31,2006 2005 2004 NSIC-including realized capital(losses)gains of$561,$129,and$(56),respectively.$(1,580)$(101)$291 NSFC-including realized capital gains of$1,803,$3,098,$1,847,respectively.$4,222$729$2,164 OMEGA-inclu
187、ding realized capital gains of$180,$180,$35,respectively.$621$645$66715Notes to Consolidated Financial StatementsThe National Security Group,Inc.NOTE3-STATUTORYACCOUNTINGPRACTICESCONTINUEDDollars in thousands Year ended December 31,2006 2005 2004Statutory Risk-Based Adjusted Capital:NSIC-including A
188、VR of$955,$845,and$1,153,respectively.$10,298$10,776$11,451 NSFC.$32,583$27,209$23,766 OMEGA.$9,038$8,016$7,573The 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.NOT
189、E4-INVESTMENTSECURITIESThe amortized cost and aggregate fair values of investments in securities are as follows:Dollars in thousands December 31,2006 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses ValueAvailable-for-sale securities:Corporate debt securities.$11,521$39$133$11,427
190、Obligations of states and political subdivisions.5,650 23 92 5,581 U.S.Treasury securities and obligations of U.S.Government corporations and agencies.45,809 60 942 44,927 Total fixed maturities.62,980 122 1,167 61,935Equity securities.7,224 9,261 366 16,119 Total$70,204$9,383$1,533$78,054Held-to-ma
191、turity securities:Corporate debt securities.$244$6$250 Obligations of states and political subdivisions.2,787 22 54 2,755 U.S.Treasury securities and obligations of U.S.government corporations and agencies.15,733 11 577 15,167 Total$18,764$39$631$18,172Dollars in thousands December 31,2005 Gross Gro
192、ss Amortized Unrealized Unrealized Fair Cost Gains Losses ValueAvailable-for-sale securities:Corporate debt securities.$8,958$148$121$8,985 Obligations of states and political subdivisions.6,519 134 101 6,552 U.S.Treasury securities and obligations of U.S.Government corporations and agencies.41,227
193、114 754 40,587 Total fixed maturities.56,704 396 976 56,124 Equity securities.6,374 9,192 397 15,169 Total$63,078$9,588$1,373$71,293Held-to-maturity securities:Corporate debt securities.$244$47$197 Obligations of states and political subdivisions.2,280 7 66 2,221 U.S.Treasury securities and obligati
194、ons of U.S.government corporations and agencies.16,307 9 530 15,786 Total$18,831$16$643$18,204The amortized cost and aggregate fair value of debt securities at December 31,2006,by contractual maturity,are as follows.Expected maturities will differ from contractual maturi-ties because borrowers may h
195、ave the right to call or prepay obligations with or without call or prepayment penalties.NOTE4-INVESTMENTSECURITIESCONTINUEDDollars in thousands Amortized Fair Cost ValueAvailable-for-sale securities:Due in one year or less.$1,691$1,682 Due after one year through five years.15,366 15,228 Due after f
196、ive years through ten years.19,583 19,248 Due after ten years.26,340 25,777 Total$62,980$61,935Held-to-maturity securities:Due in one year or less.$Due after one year through five years.2,709 2,647 Due after five years through ten years.7,503 7,249 Due after ten years.8,552 8,276 Total$18,764$18,172
197、For 2006,gross gains of$2,637,000($3,793,000 for 2005 and$2,219,000 for 2004)and gross losses of$86,000($66,000 for 2005 and$130,000 for 2004)were realized on sales of available-for-sale-securities.A summary of securities available-for-sale with unrealized losses as of December 31,2006 and 2005 alon
198、g with the related fair value,aggregated by the length of time that investments have been in a continuous unrealized loss position,is as follows:Dollars in thousands December 31,2006 Less than 12 months 12 months or longer Total Gross Gross Gross Total Fair Unrealized Fair Unrealized Fair Unrealized
199、 Securities in a Value Losses Value Losses Value Losses Loss PositionFixed maturities Corporate.$7,780$133$7,780$133 22 Obligations of state and political subdivisions.4,817 92 4,817 92 19 U.S.Treasury securities and obligations of U.S.Goverment corporations and agencies.40,056 942 40,056 942 97Equi
200、ty securities.1,571 366 1,571 366 9$54,224$1,533$54,224$1,533 147Dollars in thousands December 31,2005 Less than 12 months 12 months or longer Total Gross Gross Gross Total Fair Unrealized Fair Unrealized Fair Unrealized Securities in a Value Losses Value Losses Value Losses Loss PositionFixed matur
201、ities Corporate.$3,562$121$3,562$121 16 Obligations of state and political subdivisions.3,424 101 3,424 101 17 U.S.Treasury securities and obligations of U.S.Goverment corporations and agencies.33,426 754 33,426 754 78Equity securities.998 397 998 397 7$41,410$1,373$41,410$1,373 118A summary of secu
202、rities held-to-maturity with unrealized losses as of December 31,2006 and 2005 along with the related fair value,aggregated by the length of time that investments have been in a continuous unrealized loss position,is as follows:Dollars in thousands December 31,2006 Less than 12 months 12 months or l
203、onger Total Gross Gross Gross Total Fair Unrealized Fair Unrealized Fair Unrealized Securities in a Value Losses Value Losses Value Losses Loss PositionFixed maturities Corporate.$Obligations of state and political subdivisions.2,222 54 2,222 54 8 U.S.Treasury securities and obligations of U.S.Gover
204、nment corporations and agencies.14,490 577 14,490 577 43$16,712$631$16,712$631 5116Notes to Consolidated Financial StatementsThe National Security Group,Inc.NOTE4-INVESTMENTSECURITIESCONTINUEDDollars in thousands December 31,2005 Less than 12 months 12 months or longer Total Gross Gross Gross Total
205、Fair Unrealized Fair Unrealized Fair Unrealized Securities in a Value Losses Value Losses Value Losses Loss PositionFixed maturities Corporate.$244$47$244$47 1 Obligations of state and political subdivisions.2,078 66 2,078 66 8 U.S.Treasury securities and obligations of U.S.Government corporations a
206、nd agencies.15,203 530 15,203 530 43$17,525$643$17,525$643 52All unrealized losses are reviewed to determine whether the losses are other than temporary.Factors considered include whether the securities are backed by the U.S.Government or its agencies and concerns surrounding the recovery of full pr
207、incipal.Management believes the unrealized losses are market driven and no ultimate loss will occur.NOTE5-NETINVESTMENTINCOMEMajor categories of investment income are summarized as follows:Dollars in thousands Year ended December 31,2006 2005 2004Fixed maturities.$3,706$3,505$3,704Equity securities.
208、333 408 503Mortgage loans on real estate.28 22 18Investment real estate.60 23 15Policy loans.58 56 2Other,principally short-term investments.399 95 223 4,584 4,109 4,465Less:Investment expenses.121 145 235Net investment income.$4,463$3,964$4,230An analysis of investment gains follows:Dollars in thou
209、sands Year ended December 31,2006 2005 2004Net realized investment gains:Fixed maturities.$99$132$431 Other,principally equity securities.2,516 3,595 1,731$2,615$3,727$2,162An analysis of the net decrease in unrealized appreciation on available-for-sale securities follows:Dollars in thousands Year e
210、nded December 31,2006 2005 2004Net decrease in unrealized appreciation on available-for-sale securities before deferred income tax.$(366)$(3,689)$(339)Deferred income tax.122 1,145 114Net decrease in unrealized appreciation on available-for-sale securities.$(255)$(2,544)$(225)NOTE6-PROPERTYANDEQUIPM
211、ENTAt December 31,property and equipment consisted of the following:Dollars in thousands 2006 2005Building and improvements.$1,957$1,945Electronic data processing equipment.2,093 2,027Leasing equipment.9,932 10,955Furniture and fixtures.1,021 1,098 15,003 16,025Less accumulated depreciation.3,761 3,
212、632$11,242$12,393Depreciation expense for the year ended December 31,2006 was$743,000($905,000 for the year ended December 31,2005 and$805,000 for the year ended December 31,2004).NOTE7-INCOMETAXESTotal income tax expense varies from amounts computed by applying current federal income tax rates to i
213、ncome before income taxes.The reason for these differences and the approxi-mate tax effects are as follows:Dollars in thousands Year ended December 31,2006 2005 2004Federal income tax rate applied to pre-tax income.$1,910$816$1,310Dividends received deduction and tax-exempt interest.(149)(183)(196)O
214、ther,net.(203)72(268)Federal income tax expense.$1,558$705$846Net deferred tax liabilities are determined based on the estimated future tax effects of dif-ferences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws.The tax effect of s
215、ignificant differences representing deferred assets and liabilities are as follows:Dollars in thousands December 31,2006 2005General insurance expenses.$707$1,233Unearned premiums.1,212 1,061Claim liabilities.243 255Policy liabilities.70 Deferred tax assets.2,162 2,619Depreciation.(216)(534)Deferred
216、 policy acquisition costs.(1,745)(2,233)Unrealized gains on securities available-for-sale.(2,232)(2,354)Deferred tax liabilities.(4,193)(5,121)Net deferred tax liability.$(2,031)$(2,502)The appropriate income tax effects of changes in temporary differences are as follows:Dollars in thousands Year en
217、ded December 31,2006 2005 2004Deferred policy acquisition costs.$(488)$117$138Policy liabilities.70 70 69Unearned premiums.(151)(88)(65)General insurance expenses.526(55)(71)Depreciation.(318)86 313Claim liabilities.12 44(20)$(349)$174$364Under pre-1984 life insurance company tax laws,a portion of N
218、SICs 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 31,2006,would be taxed at current rates only if distributed to shareholders
219、 or if the account exceeded a prescribed minimum.The Deficit Reduction Act of 1984 eliminated addi-tions 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 approxima
220、tely$1,270,000 at December 31,2006.NOTE8-NOTESPAYABLEANDLONG-TERMDEBTShort-term debt consisted of the following as of December 31,2006 and December 31,2005:Dollars in thousands 2006 2005Note payable to bank with an interest rate based on LIBOR(8.10%at December 31,2006 and 7.12%at December 31,2005)da
221、ted March,2002;maturity March,2007.Payments of$112,953due quarterly with balloon payment at maturity.Unsecured.$2,171$Note payable to bank with an interest rate based on prime minus 25basis points(8.00%at December 31,2006 and 7.00%at December 31,2005)dated June,2004;maturity June,2007.Interest payme
222、nts due quarterly.Secured by$9,005 of leasing equipment.9,409$11,580$17Notes to Consolidated Financial StatementsThe National Security Group,Inc.18NOTE8-NOTESPAYABLEANDLONG-TERMDEBTCONTINUEDLong-term debt consisted of the following as of December 31,2006 and December 31,2005:Dollars in thousands 200
223、6 2005Subordinated debentures issued on December 15,2005 with fixed interest rate of8.83%each distribution period thereafter until December 15,2015 when thecoupon rate shall equal the 3-month LIBOR plus 3.75%applied to the outstandingprincipal;maturity December,2035.Interest payments due quarterly.U
224、nsecured.$9,279$9,279Note payable to bank with an interest rate based on LIBOR(7.12%at December 31,2005)dated March,2002;maturity March,2007.Payments of$112,953 due quarterly with balloon payment at maturity.Unsecured.2,439Note payable to bank with an interest rate based on prime minus 25 basispoint
225、s(7.00%at December 31,2005)dated June,2004;maturity June,2007.Interest payments due quarterly.Secured by Mobile Attic leasing equipment.11,188$9,279$22,906Aggregate maturities of long-term debt for each of the five years subsequent to December 31,2006 are as follows(dollars in thousands):2007-$11,58
226、0;2008-$0;2009-$0;2010-$0 and 2011-$0.The remaining$9,279 is due in 2035.The subordinated debentures(debentures)have the same maturities and other applicable terms and features as the associated trust preferred securities(TPS).The debentures bear a fixed inter-est rate until December 15,2015.Payment
227、 of interest may be deferred for up to 20 consecutive quarters;however,stockholder dividends cannot be paid during any extended interest payment period or any time the debentures are in default.All have stated maturities of thirty years but may be redeemed at any time following the tenth anniversary
228、 of issuance.None of the securities require the Company to maintain minimum financial covenants.The Company has guaranteed that amounts paid to the Trust(discussed in Note 2)will be remitted to the holders of the associ-ated TPS.This guarantee,when taken together with the obligations of the Company
229、under the debentures,the Indentures pursuant to which the debentures were issued,and the related trust agreement(including obligations to pay related trust fees,expenses,debt and other obligations with respect to the TPS),provides a full and unconditional guarantee of amounts due the Trust.The amoun
230、t guaranteed is not expected to at any time exceed the obligations of the TPS,and no additional liability has been recorded related to the guarantee.NOTE9-POLICYANDCLAIMRESERVESThe following table is a reconciliation of beginning and ending property and casualty reserve bal-ances for claims and clai
231、m adjustment expense for the years ended December 31:Dollars in thousands 2006 2005 2004Claims and claim adjustment expense reserves at beginning of year.$19,511$13,094$11,343Less reinsurance recoverables on unpaid losses.8,560 2,611 1,232Net balances at beginning of year.10,951 10,483 10,111Provisi
232、ons for claims and claim adjustment expenses for claims arising in current year.32,311 36,660 32,702Estimated claims and claim adjustment expenses for claims arising in prior years.1,092(1,599)(1,091)Total increases.33,403 35,061 31,611Claims and claim adjustment expense payments for claims arising
233、in:Current year.26,056 29,168 25,837 Prior years.7,583 5,425 5,402Total payments.33,639 34,593 31,239Net balance at end of year.10,715 10,951 10,483Plus reinsurance recoverables on unpaid losses.1,783 8,560 2,611Claims and claim adjustment expense reserves at end of year.$12,498$19,511$13,094The pro
234、vision for claims and claim adjustment expenses for prior years(net of reinsurance recoveries)increased in 2006 primarily due to adverse development related to significant storm related losses in a concentrated coverage area in December of 2005 with the ultimate settlement of these claims exceeding
235、preliminary estimates and due to adverse development of a single commercial auto policy with a loss occurring in 2004 and increases in reserves on this claim were made in late 2006.The provision for claims and claim adjustment expenses for prior years(net of reinsurance recoveries)decreased in 2005
236、and 2004 because of lower-than-anticipated losses primarily in homeowners and dwelling fire lines of business.As a result of changes in estimates of insured events in prior years,the provision for claims and claim adjustment expenses(net of reinsurance recoveries)decreased in 2005 by an additional$5
237、00,000.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 un
238、predictable.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 d
239、amage 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.At December 31,2006,the Companys estimate of unpaid NOTE9-POLICYANDCLAIMRESERVESCONTINUEDlosses and adjustment expen
240、ses for hurricane related claims incurred in prior years totaled$1 million.Because all remaining outstanding claims are covered by the companies reinsurance contract,net outstanding losses to the Company total less than$10,000 including an allowance for estimated incurred but not reported losses.NOT
241、E10REINSURANCEThe Companys insurance operations participate in reinsurance in order to limit losses,mini-mize 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 cas
242、ualty 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
243、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 i
244、nsolvencies.At December 31,2006,reinsurance receivables with a carrying value of$175,000($233,000 at December 31,2005)and prepaid reinsurance premiums of$16,000($196,000 at December 31,2005)were associated with a single rein-surer.The amounts of recoveries pertaining to reinsurance contracts that we
245、re deducted from losses incurred during 2006,2005 and 2004 were approximately$7,525,000,$32,613,000,and$11,284,000,respectively.The Company did not incur any losses from an event occurring in 2006.Amounts reported as ceded incurred losses in 2006 were due to development of losses from prior year cat
246、astrophic losses primarily associated with assessments from the Mississippi Windstorm Underwriting Association stemming from losses associated from Hurricane Katrina in 2005.This assessment,while increasing gross losses,was covered by the Companys catastro-phe reinsurance contract and no net losses
247、were incurred due to this adverse development.The significant increase in recoveries pertaining to reinsurance contracts in 2005 compared to prior years was due to reinsurance associated with losses incurred from Hurricanes Katrina and Rita.The effect of reinsurance on premiums written and earned wa
248、s as follows:Dollars in thousands 2006 Life Property&Casualty Written Earned Written EarnedDirect.$6,476$6,592$58,712$56,669 Assumed.Ceded.(42)(42)(4,165)(4,345)Net.$6,434$6,550$54,547$52,324 Dollars in thousands 2005 Life Property&Casualty Written Earned Written EarnedDirect.$6,148$6,280$54,692$53,
249、718 Assumed.Ceded.(46)(46)(6,117)(6,389)Net.$6,102$6,234$48,575$47,329 Dollars in thousands 2004 Life Property&Casualty Written Earned Written EarnedDirect.$6,176$6,200$47,870$51,618 Assumed.Ceded.(27)(27)(4,835)(4,806)Net.$6,149$6,173$43,035$46,812 NOTE11-EMPLOYEEBENEFITPLANIn 1989,the Company and
250、its subsidiaries established a retirement savings plan(401K Plan)and transferred the assets from the defined contribution profit sharing plan into the new plan.All full-time employees who have completed six months of service at January 1 or July 1 are eligible to participate and all employee contrib
251、utions are fully vested for employees who have completed 1,000 hours of service in the year of contribution.Company matching contributions for 2006,2005,and 2004 amounted to$314,000,$217,000,and$189,000,respectively.The Company contributes matching contributions up to 5%of compensation subject to go
252、vernment limitations.In 1987,the Company established a non-qualified deferred compensation plan for its Board of Directors.The Board members had 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
253、award.Costs of the deferred compensation plan for 2006,2005,and 2004 amounted to approximately$198,000,($259,000),and$208,000,respectively.The directors non-qualified deferred compensation plan was frozen on December 31,2004 and deferrals are no longer allowed.No deferrals of directors fees were all
254、owed in 2005 prior to adoption of a new non-qualified plan.A new non-qualified plan became effective January 1,2006 under which directors are allowed to defer all or a portion of directors fees into various investment options.NOTE12-REGULATORYREQUIREMENTSANDDIVIDENDRESTRICTIONSThe amount of dividend
255、s 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 31,2006,NSICs retained earnings unrestri
256、cted for the payment of dividends in 2007 amounted to$934,000.Notes to Consolidated Financial StatementsThe National Security Group,Inc.19NOTE12-REGULATORYREQUIREMENTSANDDIVIDENDRESTRICTIONSCONTINUEDNSFC is similarly restricted in the amount of dividends payable to the Company;dividends may not exce
257、ed the greater of 10%of statutory surplus as of the end of the preceding year,or net income for the preceding year.At December 31,2006,NSFCs retained earnings unrestricted for the payment of dividends in 2007 amounted to$4,222,000.At December 31,2006,securities with market values of$3,827,000($3,780
258、,000 at December 31,2005)were deposited with various states pursuant to statutory requirements.Under applicable Alabama insurance laws and regulations,NSFC is required to maintain a mini-mum total surplus(to include both paid-in and contributed and unassigned surplus)of$100,000.Under applicable Alab
259、ama insurance laws and regulations,NSIC is required to maintain a mini-mum 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 mini-mum total surplus(to include both paid-in an
260、d contributed and unassigned surplus)of$600,000.NOTE13-SHAREHOLDERSEQUITYPreferredStockThe 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
261、 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.CommonStockThe holders of the Cla
262、ss 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 pre
263、ferential 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 o
264、r resolutions.NOTE14-INDUSTRYSEGMENTSThe Company and its subsidiaries operate primarily in the insurance industry.Premium revenues and operating income by industry segment for the years ended December 31,2006,2005 and 2004 are summarized below:Dollars in thousands Life Non-P&C Insurance Insurance To
265、tal Operations Operations OperationsYear ended December 31,2006Revenues Net premiums earned.$58,874$52,324$6,550$Net investment income.4,463 2,591 1,785 87 Net realized investment gains.2,615 1,983 582 50 Net revenues from leasing operations.1,887 1,887 Other income.1,211 1,208 2 1$69,050$58,106$8,9
266、19$2,025Income(loss)before income taxes.$7,456$9,282$(1,741)$(85)Interest expense.1,837 83 1,754$5,619$9,282$(1,824)$(1,839)Assets.$134,911$75,893$45,247$13,771Amortization of deferred policy acquisition costs.$2,315$2,478$(163)$Depreciation expense.$743$245$136$362Capital expenditures.$938$643$268$
267、27Year ended December 31,2005Revenues Net premiums earned.$53,563$47,329$6,234$Net investment income.3,964 2,323 1,619 22 Net realized investment gains.3,727 3,278 215 234 Net revenues from leasing operations.3,360 3,360 Other income.1,416 1,364 52$66,030$54,294$8,120$3,616Income(loss)before income
268、taxes.$3,540$2,698$(271)$1,113Interest expense.1,140 15 114 1,011$2,400$2,683$(385)$102Assets.$139,226$74,967$45,565$18,694Amortization of deferred policy acquisition costs.$2,704$2,256$448$Depreciation expense.$905$100$347$458Capital expenditures.$457$18$321$118NOTE14-INDUSTRYSEGMENTSDollars in tho
269、usands Life Non-P&C Insurance Insurance Total Operations Operations OperationsYear ended December 31,2004Revenues Net premiums earned.$52,985$46,812$6,173$Net investment income(loss).4,230 2,315 2,013$(98)Net realized investment gains.2,162 1,881 276 5 Net revenues from leasing operations.2,459 2,45
270、9 Other income(loss).1,312 1,325 9(22)$63,148$52,333$8,471$2,344Income(loss)before income taxes.$4,580$4,224$216$140Interest expense.727 30 697$3,853$4,224$186$(557)Assets.$128,631$65,462$45,947$17,222Amortization of deferred policy acquisition costs.$2,221$2,115$106$Depreciation expense.$805$188$17
271、3$444Capital expenditures.$1,327$130$663$534NOTE15-CONTINGENCIESLitigationThe 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 b
272、ased 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.On December 12,2005,the United States District court for the Middle District of
273、 Alabama(the“Court”)entered an order preliminarily approving a proposed settlement of a case pending against a subsidiary of the Company styled Mary W.Williams,et al v.National Security Insurance Company(“Williams Litigation”)and preliminarily certifying such case as a class action.The Williams Liti
274、gation related primarily to claims that a subsidiary of the Company sold industrial burial insurance policies to racial minorities on which it charged higher premiums or provided inferior benefits than premiums charged to or policy benefits provided to similarly situated non-minority policyholders.T
275、he Companys subsidiary has not sold industrial burial insurance for more than 20 years.Following a fairness hearing held on August 22,2006,the Court,in an order dated August 30,2006,granted final approval to the proposed settlement.The effective date of the settlement was September 30,2006,with an i
276、mplementation date of December 29,2006.The settlement provided for the Companys subsidiary to,among other matters,provide additional policyholder benefits,including pre-miums adjustments and benefits enhancements on existing policies and additional benefits on matured policies and pay attorneys fees
277、.The Company had previously established litiga-tion reserves with respect to this matter and had taken a policy reserve charge with respect to adjustments to the subject policies that were voluntarily made in 2000.The remaining costs associated with this settlement,including costs associated with pr
278、ospective enhancements,are fully reflected in the attached financial statements for the period ending December 31,2006.The class,as certified,did not permit any class members to opt out of the settlement and enjoined all similar litigation against the Companys subsidiary.In the settlement,the Compan
279、ys subsidiary denied all claims and allegations made in the lawsuit.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
280、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.NOTE16-SUPPLEMENTALCASHF
281、LOWINFORMATIONCash paid for interest during 2006 was$1,846,000($1,139,000 in 2005 and,$645,000 in 2004).Cash paid for income taxes in 2006 was$300,000($400,000 in 2005 and$2,000,000 in 2004).Noncash investing activities in 2006 and 2005 included converting$551,000 and$276,000,respec-tively,of storag
282、e units from furniture and equipment into inventory.Noncash investing activities in 2006 also included converting$746,000 of storage units from inventory into furniture and equipment.NOTE17-RELATEDPARTYTRANSACTIONSDuring the years ended December 31,2006,2005 and 2004 the Companys affiliate Mobile At
283、tic acquired$2,861,000;$2,632,000;and$1,389,000,respectively,of equipment from Cash Brothers Leasing,Inc.(Cash Brothers).The principal owners of Cash Brothers are also stockholders in Mobile Attic.Cash Brothers is also a distributor of the mobile storage units.During 2006,2005 and 2004 Mobile Attic
284、paid$36,000;$103,000;and$100,000,respectively,in commissions to Cash Brothers.At December 31,2006 and 2005,Mobile Attic had accrued expenses due Cash Brothers of$10,000 and$16,000,respectively.Mobile Attic also acquired$4,213,000 and$4,977,000 of equipment from Bridgeville Trailers dur-ing the years
285、 ended December 31,2006 and 2005,respectively.Two of the majority shareholders of Bridgeville Trailers each own 25%of Mobile Attic.NOTE18-SUBSEQUENTEVENTThe Company has entered into discussions with a party regarding the sale of its interest in Mobile Attic,Inc.The terms of the agreement have yet to
286、 be finalized but the consummation of an agree-ment would be contingent upon a provision to release the Company from any existing debt guar-antees of Mobile Attic and consequently an elimination of the requirement to consolidate Mobile Attic under the provisions of FIN 46R.Notes to Consolidated Fina
287、ncial StatementsThe National Security Group,Inc.To the Board of Directors and ShareholdersThe National Security Group,Inc.Elba,AlabamaWe have audited the accompanying consolidated balance sheets of The National Security Group,Inc.and subsidiaries as of December 31,2006 and 2005 and the related conso
288、lidated statements of income,share-holders equity,and cash flows for each of the years in the three-year period ended December 31,2006.These consolidated financial statements are the responsibility of the companys management.Our responsibility is to express an opinion on these consolidated financial
289、 statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board(United States).Those standards require that we plan and perform the audit to obtain reasonable assur-ance about whether the consolidated financial statements are
290、free of material misstatement.The company is not required to have,nor were we engaged to perform,an audit of its internal control over financial reporting.Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in t
291、he circumstances,but not for the purpose of expressing an opinion on the effectiveness of the companys internal control over financial reporting.Accordingly,we express no such opinion.An audit also includes examining,on a test basis,evidence supporting the amounts and disclosures in the consolidated
292、 financial statements,assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.In our opinion,the consolidated financial statements re
293、ferred to above present fairly,in all material respects,the financial position of The National Security Group,Inc.and subsidiaries as of December 31,2006 and 2005,and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,2006 in conform
294、ity with accounting principles generally accepted in the United States of America.Birmingham,AlabamaMarch 13,200720Report of Independent Registered Public Accounting FirmThe National Security Group,Inc.WinfieldBairdChairman of the BoardThe National Security Group,Inc.Chartered Financial AnalystBaird
295、 Financial ManagementBirmingham,AlabamaWilliamL.Brunson,Jr.President&Chief Executive OfficerThe National Security Group,Inc.Elba,AlabamaJackE.BrunsonPresidentNational Security Fire andCasualty CompanyElba,AlabamaMickeyMurdock,CPAChief Operating Officer andSenior Vice PresidentThe National Security G
296、roup,Inc.Elba,AlabamaCarolynE.BrunsonManaging PartnerBrunson PropertiesElba,AlabamaWalterP.Wilkerson,CPAPartnerBrunson,Wilkerson&Bowden CPAsEnterprise,AlabamaFredClark,Jr.Chief Operating OfficerAlabama Municipal Electric AuthorityMontgomery,AlabamaPaulC.WeschExecutive Vice President&General CounselT
297、he Mitchell CompanyMobile,AlabamaL.BrunsonWhiteVice President&Chief Information OfficerEnergen CorporationBirmingham,AlabamaDonaldS.PittmanAttorney at LawEnterprise,AlabamaFlemingBrooksPresidentBrooks Peanut Company,Inc.Samson,AlabamaFrankB.ONeilSenior Vice PresidentCorp.Communications and Investor
298、Relations and Asst.Corp.Secretary Pro AssuranceBirmingham,AlabamaJamesB.SaxonDirector EmeritusRetired ExecutiveAnderson ProductsSquare D CompanyBirmingham,AlabamaForCopyofAnnualReport,Proxyor10K,orForMoreInformationContact:Brian McLeodChief Financial OfficerThe National Security Group,Inc.661 East D
299、avis StreetElba,Alabama 36323334-897-2273AnnualShareholdersMeeting:May 4,2007Executive OfficesElba,AlabamaAuditors:Barfield,Murphy,Shank&Smith,PC1121 Riverchase Office RoadBirmingham,Alabama 35244Actuaries:Life Company-Wakely Actuarial Services,Inc.34125 US Highway 19 NorthSuite 310Palm Harbor,Flori
300、da 34684Fire Company-Milliman,Inc.650 California Street,17th FloorSan Francisco,California 94108The Common Stock of the Company trades on the NASDAQ Global Market under the symbol NSEC.Quotations are furnished by the National Association of Security Dealers Automated Quotations System(NASDAQ)and app
301、ear in the Wall Street Journal and other financial publications.Trade Symbol:NSECTransfer Agent:Registrar and Transfer Company 10 Commerce Drive Cranford,New Jersey 07016Corporate InformationBoard of DirectorsThe National Security Group,Inc.661 East Davis StreetElba,Alabama 661 East Davis StreetElba,Alabama
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