Market Overview

The National Security Group, Inc. Releases Financial Results

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The National Security Group, Inc. (NASDAQ:NSEC) today reported net
income for the three months ended December 31, 2017 of $669,000 and a
net loss for the year ended December 31, 2017 of $1,203,000. Unaudited
consolidated financial results based on US Generally Accepted Accounting
Principles (GAAP) for the three month and twelve month periods are
summarized as follows:

   
Unaudited Consolidated Financial Summary

Three months ended
December 31,

Year ended
December 31,

2017   2016 2017   2016
Gross premiums written $ 14,784,000   $ 14,801,000   $ 67,737,000   $ 67,424,000  
Net premiums written $ 13,034,000   $ 13,175,000   $ 61,388,000   $ 61,525,000  
 
Net premiums earned $ 15,325,000 $ 15,331,000 $ 61,163,000 $ 61,398,000
Net investment income 852,000 867,000 3,647,000 3,892,000
Net realized investment gains (losses) (78,000 ) 462,000 234,000 998,000
Other income 149,000   149,000   596,000   605,000  
Total Revenues 16,248,000   16,809,000   65,640,000   66,893,000  
Policyholder benefits and settlement expenses 7,958,000 10,856,000 42,869,000 38,847,000
Amortization of deferred policy acquisition costs 1,119,000 1,055,000 3,589,000 3,506,000
Commissions 1,776,000 1,581,000 7,723,000 7,894,000
General and administrative expenses 2,411,000 2,683,000 8,821,000 8,996,000
Taxes, licenses and fees 530,000 501,000 2,445,000 2,204,000
Interest expense 338,000   335,000   1,307,000   1,352,000  
Total Benefits, Losses and Expenses 14,132,000   17,011,000   66,754,000   62,799,000  
Income (Loss) Before Income Taxes 2,116,000   (202,000 ) (1,114,000 ) 4,094,000  
Income tax expense (benefit) 1,447,000   (98,000 ) 89,000   1,031,000  
Net Income (Loss) $ 669,000   $ (104,000 ) $ (1,203,000 ) $ 3,063,000  
Income (Loss) Per Common Share $ 0.26   $ (0.04 ) $ (0.48 ) $ 1.22  
 
Reconciliation of Net Income (Loss) to Non-GAAP Measurement
Net income (loss) $ 669,000 $ (104,000 ) $ (1,203,000 ) $ 3,063,000
Income tax expense (benefit) 1,447,000 (98,000 ) 89,000 1,031,000
Realized investment (gains) losses, net 78,000   (462,000 ) (234,000 ) (998,000 )
Pretax Income (Loss) From Operations $ 2,194,000   $ (664,000 ) $ (1,348,000 ) $ 3,096,000  
 

Management Commentary on Results of Operations

Three months ended December 31, 2017
compared to three months ended December 31, 2016:

Premium Revenue:

For the three months ended December 31, 2017, net premiums earned were
down $6,000 at $15,325,000 compared to $15,331,000 for the same period
in 2016. The moderate decrease in premium revenue is primarily
attributable to a 5.5% increase in catastrophe reinsurance cost.

Net Income (Loss):

For the three months ended December 31, 2017, the Company had net income
of $669,000, $0.26 income per share, compared to a net loss of $104,000,
$0.04 loss per share, for the same period in 2016, an increase of
$773,000. Adversely impacting our fourth quarter 2017 earnings was an
increase in income tax expense of $803,000 from the recognition and
revaluation of our deferred tax assets and liabilities due to enactment
of the Tax Cuts and Jobs Act (TCJA). However, a significant decline in
catastrophe losses in the fourth quarter of 2017 compared to the same
period of 2016 contributed to the improvement in net income for the
quarter. Net of tax, fourth quarter 2017 reported losses and loss
adjustment expenses (LAE) from catastrophe losses totaled $290,000,
compared to $2,995,000 (net of reinsurance) in the fourth quarter of
2016. Hurricane Matthew, which struck the Atlantic Coast impacting our
policyholders in Georgia and South Carolina, was the primary contributor
to our elevated level of catastrophe losses in 2016.

Federal Income Taxes:

On December 22, 2017, the President signed the TCJA, a comprehensive tax
legislation which, among other things, will reduce the Company's
statutory federal income tax rate from 34% to 21% effective January 1,
2018. In addition to the reduction in tax rates, the TCJA makes broad
and complex changes to the Internal Revenue Code that will introduce
changes to many tax related exclusions, deductions and credits. While
most provisions of the TCJA do not take effect until 2018, the Company
has recognized the tax effects of the enacted legislation on deferred
income tax assets and liabilities in the fourth quarter of 2017. The
recognition of the impact of the TCJA on deferred tax assets and
liabilities resulted in an increase in income tax expense in the fourth
quarter of 2017 of $803,000.

Pretax Income (Loss) from Operations:

A primary non-GAAP financial measure utilized by management is pretax
income (loss) from operations. This measure consists of net income
(loss) before income taxes adjusted for realized investment gains and
losses. This measure provides a means of comparing the results of our
core operations without the impact of items that are more unpredictable
and less consistent from year to year. A reconciliation of pretax income
(loss) from operations is presented in the table above.

For the three months ended December 31, 2017, the Company had pretax
income from operations of $2,194,000 compared to a pretax loss from
operations of $664,000 for the three months ended December 31, 2016, an
increase of $2,858,000. The primary reason for improvement in pretax
income from operations in the fourth quarter of 2017 compared to the
fourth quarter of 2016 was a significant decline in weather related
losses in our property and casualty subsidiary. As mentioned previously,
in the fourth quarter of 2016, the P&C segment had an increase in
catastrophe related claims from Hurricane Matthew which decreased pretax
income by $4,000,000, net of reinsurance.

P&C Segment Combined Ratio:

A measure used to analyze our P&C subsidiaries underwriting performance
is the GAAP based combined ratio. Maintaining a combined ratio below
100% indicates the Company is making an underwriting profit. For the
three months ended December 31, 2017, the P&C segment had a combined
ratio of 83.7%. The fourth quarter of 2017 had a reduced severity level
of catastrophe losses compared to 2016 with two catastrophe events
adding 10.5 percentage points to the P&C segment combined ratio. In
comparison, the P&C segment ended the fourth quarter of 2016 with a
combined ratio of 104.1% with catastrophe losses from two cat events
contributing 32.9 percentage points to the combined ratio. Hurricane
Matthew was the primary factor leading to the elevated fourth quarter
2016 combined ratio.

Year ended December 31, 2017 compared to
year ended December 31, 2016:

Premium Revenue:

For the year ended December 31, 2017, net premiums earned were down
$235,000 at $61,163,000 compared to $61,398,000 in 2016. The decrease in
premium revenue is primarily attributable to a 5.5% increase in
catastrophe reinsurance cost.

Net Income (Loss):

For the year ended December 31, 2017, the Company had a net loss of
$1,203,000, $0.48 loss per share, compared to net income of $3,063,000,
$1.22 income per share, for the same period in 2016, a decrease of
$4,266,000. The primary reason for the decline in 2017 year to date
earnings compared to 2016 was the adverse impact of losses incurred from
Hurricane Irma coupled with an increase in frequency and severity of
catastrophe losses in early 2017 from a very active spring storm season.
Net of tax, our reported losses and LAE from 26 catastrophe events in
2017 totaled $9,425,000 compared to 20 cat events in 2016 totaling
$6,430,000 after reinsurance recoveries. Also adversely impacting 2017
year to date earnings was a fourth quarter charge to income tax expense
of $803,000 from the net impact of recognition and revaluation of
deferred tax assets and liabilities due to enactment of the TCJA.

Pretax Income (Loss) from Operations:

For the year ended December 31, 2017, our pretax loss from operations
was $1,348,000 compared to pretax income from operations of $3,096,000
for the year ended December 31, 2016, a decrease of $4,444,000. The
primary reason for the pretax loss from operations in 2017 compared to
the prior year was an increase in the frequency and severity of
catastrophe related claims in the P&C segment. In addition to Hurricane
Irma, which occurred in September of 2017, our property and casualty
subsidiary was impacted by numerous tornado and severe thunderstorm
related catastrophe events in the first half of 2017.

P&C Segment Combined Ratio:

For the year ended December 31, 2017, the P&C segment had a GAAP
combined ratio of 102.3%. Reported claims from Hurricane Irma coupled
with 25 additional severe weather events in 2017 totaled $14,280,000 and
increased the P&C segment combined ratio by 25.7 percentage points. In
comparison, for the year ended December 31, 2016, the P&C segment had a
GAAP combined ratio of 94.6%. Hurricane Matthew reported claims, net of
reinsurance, along with non-hurricane cat event claims totaled
$9,742,000 and increased the P&C segment combined ratio 17.5 percentage
points. The P&C segment ended 2016 with reported claims from 20
catastrophe events.

Management Commentary on Financial Position

   
Selected Balance Sheet Highlights

December 31,
2017

December 31,
2016

(UNAUDITED)
Invested Assets $ 114,731,000 $ 113,156,000
Cash $ 6,644,000 $ 7,368,000
Total Assets $ 146,438,000 $ 148,579,000
Policy Liabilities $ 76,674,000 $ 76,174,000
Total Debt $ 15,639,000 $ 17,126,000
Accumulated Other Comprehensive Income $ 2,646,000 $ 1,007,000
Shareholders' Equity $ 47,625,000 $ 48,052,000
Book Value Per Share $ 18.88 $ 19.09
 

Invested Assets:

Invested assets as of December 31, 2017 were $114,731,000 up $1,575,000,
or 1.4%, compared to $113,156,000 as of December 31, 2016. Although
invested assets increased in 2017 compared to 2016, growth of invested
assets was adversely impacted by reduced cash flow from operations
primarily attributable to the increase in weather related claims in the
P&C segment.

Cash:

The Company, primarily through its insurance subsidiaries, had
$6,644,000 in cash and cash equivalents at December 31, 2017, not
materially different compared to $7,368,000 at December 31, 2016.

Total Assets:

Total assets as of December 31, 2017 were $146,438,000 compared to
$148,579,000 at December 31, 2016. Asset growth was hampered in 2017 by
increased catastrophe losses in the P&C segment.

Policy Liabilities:

Policy liabilities were $76,674,000 at December 31, 2017 compared to
$76,174,000 at December 31, 2016; an increase of $500,000 or 0.7%. The
primary reason for the increase in policy liabilities in 2017 compared
to the same period last year was a $839,000 increase in life segment
accident and health and life loss reserves. Life segment loss reserves
were up 2.3% in 2017 compared to 2016. While the property and casualty
subsidiary had a significant increase in reported claims early in the
fourth quarter of 2017 due to Hurricane Irma, over 95% of Hurricane Irma
claims were settled by December 31, 2017.

Debt Outstanding:

Total debt at December 31, 2017 was $15,639,000 compared to $17,126,000
at December 31, 2016. Debt was reduced $1,487,000 during 2017. The
improvement of balance sheet strength through both capital growth and
reduction of debt continues to be a primary focus of management.

Shareholders' Equity:

Shareholders' equity as of December 31, 2017 was $47,625,000, down
$427,000 compared to December 31, 2016 Shareholders' equity of
$48,052,000. Book value per share was $18.88 at December 31, 2017,
compared to $19.09 per share at December 31, 2016, a decrease of $0.21.
Despite the adverse impact of Hurricane Irma along with a record amount
of retained catastrophe losses reported in our P&C segment during the
current year, the Company had only a 1.1% decrease in book value per
share and a minimal 0.9% decrease in Shareholders' Equity at December
31, 2017 compared to December 31, 2016. The primary factors contributing
to the decrease in Shareholders' equity was a net loss of $1,203,000,
shareholder dividends of $504,000 and new shares issued under our
director compensation plan which totaled $76,000. Partially offsetting
these factors was an increase in accumulated other comprehensive income
of $1,204,000. The increase in accumulated other comprehensive income
was primarily driven by increases in market values of available-for-sale
investment securities.

The National Security Group, Inc. (NASDAQ Symbol: NSEC), through its
property & casualty (P&C) and life insurance subsidiaries, offers
property, casualty, life, accident and health insurance in ten states.
The Company writes primarily personal lines property coverage including
dwelling fire and windstorm, homeowners, and mobile homeowners lines of
insurance. The Company also offers life, accident and health,
supplemental hospital and cancer insurance products. The Company was
founded in 1947 and is based in Elba, Alabama. Additional information
about the Company, including additional details of recent financial
results, can be found on our website: www.nationalsecuritygroup.com.

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