Market Overview

The National Security Group, Inc. Releases Financial Results

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The National Security Group, Inc. (NASDAQ:NSEC) results for the three
months ended March 31, 2018 and 2017, based on accounting principles
generally accepted in the United States of America, were reported today
as follows:

   
Unaudited Consolidated Financial Summary Three months ended

March 31,

2018     2017
Gross premiums written $ 16,965,000   $ 17,169,000  
Net premiums written $ 15,780,000   $ 16,038,000  
 
Net premiums earned $ 15,059,000 $ 15,040,000
Net investment income 781,000 926,000
Net realized investment (losses) gains (125,000 ) 160,000
Other income 161,000   152,000  
Total Revenues 15,876,000   16,278,000  
Policyholder benefits and settlement expenses 9,427,000 11,146,000
Amortization of deferred policy acquisition costs 803,000 945,000
Commissions 2,060,000 2,093,000
General and administrative expenses 2,003,000 1,797,000
Taxes, licenses and fees 649,000 689,000
Interest expense 302,000   323,000  
Total Benefits, Losses and Expenses 15,244,000   16,993,000  
Income (Loss) Before Income Taxes 632,000   (715,000 )
Income tax expense (benefit) 161,000   (399,000 )
Net Income (Loss) $ 471,000   $ (316,000 )
Income (Loss) Per Common Share $ 0.19   $ (0.13 )
Reconciliation of Net Income (Loss) to non-GAAP Measurement
Net income (loss) $ 471,000 $ (316,000 )
Income tax expense (benefit) 161,000 (399,000 )
Realized investment losses (gains), net 125,000   (160,000 )
Pretax Income (Loss) From Operations $ 757,000   $ (875,000 )
 

Management Commentary on Results of Operations

Summary:

For the three months ended March 31, 2018, the Company had net income of
$471,000, $0.19 income per share, compared to a net loss of $316,000,
$0.13 loss per share, for the three months ended March 31, 2017. The
pretax income from operations in the first quarter of 2018 totaled
$757,000 compared to pretax loss from operations of $875,000 in the
first quarter of 2017. During the first quarter of 2018, claim activity
related to catastrophe events was significantly less compared to the
same period last year. For the three months ended March 31, 2018, the
P&C segment had $758,000 in reported losses and loss adjustment expenses
(LAE) from cat events. Results for the first quarter of 2017 were
negatively impacted by an increased frequency of severe thunderstorm
activity which generated widespread wind, hail and tornado damage to
insured property across the southeastern United States. This increased
frequency of severe thunderstorm activity led to $3,521,000 in reported
losses and LAE from cat events during the first quarter of 2017.

Premium Revenue:

For the three month period ended March 31, 2018, net premiums earned
were up $19,000 at $15,059,000 compared to $15,040,000 during the same
period in 2017. The increase in premium revenue was primarily
attributable to a slight 0.3% increase in net premiums earned in the P&C
segment.

Net Income (Loss):

For the quarter ended March 31, 2018, the Company had net income of
$471,000, $0.19 income per share, compared to a net loss of $316,000,
$0.13 loss per share, for the same period in 2017, an increase of
$787,000. As discussed above, a decrease in storm losses was the primary
factor contributing to the increase in net income in the current year
compared to the same period last year.

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 March 31, 2018, our pretax income from
operations was $757,000 compared to a pretax loss from operations of
$875,000 for the three months ended March 31, 2017, an increase of
$1,632,000. A decrease in severe thunderstorm activity during the first
quarter of 2018 compared to the same period last year was the primary
factor contributing to the improvement in pretax income from operations.
The first quarter of 2017 was plagued with an unusually high frequency
of severe thunderstorm activity due to much warmer temperatures in the
early part of the year.

P&C Segment Combined Ratio:

The P&C segment ended the first three months of 2018 with a GAAP basis
combined ratio of 92.7%. Reported catastrophe losses totaled $758,000
for the quarter and added 5.5 percentage points to the combined ratio.
In comparison, the P&C segment ended the first quarter of 2017 with a
GAAP basis combined ratio of 106.3% with catastrophe losses increasing
the combined ratio by 25.8 percentage points. Partially offsetting the
reduction in catastrophe losses in the first quarter; fire losses were
up $1,210,000 in 2018 compared to last year. This increase in fire
losses added 8.8 percentage points to the 2018 combined ratio. While the
colder temperatures in January and February of 2018 reduced outbreaks of
severe weather compared to last year, the colder temperatures tend to
increase the frequency of fire losses in the nonstandard markets in
which we operate due to increased use of supplemental home heating
sources such as space heaters and wood burning stoves.

       
Selected Balance Sheet Highlights

March 31,
2018

December 31,
2017

(dollars in thousands)
Invested Assets $ 114,318,000 $ 114,731,000
Cash $ 5,586,000 $ 6,644,000
Total Assets $ 146,074,000 $ 146,438,000
Policy Liabilities $ 77,250,000 $ 76,674,000
Total Debt $ 15,142,000 $ 15,639,000
Accumulated Other Comprehensive Income (Loss) $ (705,000 ) $ 2,646,000
Shareholders' Equity $ 46,726,000 $ 47,625,000
Book Value Per Share $ 18.53 $ 18.88
 

Management Commentary on Financial Position

Invested Assets:

Invested assets as of March 31, 2018 were $114,318,000 down $413,000, or
0.4%, compared to $114,731,000 as of December 31, 2017. Positive cash
flow from operations lead to an increase in investment purchases during
the first quarter of 2018, but this increase in new investment was
offset by an increase in market interest rates which reduced the market
value of our bond investment portfolio.

Cash:

The Company, primarily through its insurance subsidiaries, had
$5,586,000 in cash and cash equivalents at March 31, 2018, not
materially different compared to $6,644,000 at December 31, 2017. The
decrease in cash was primarily due to an increase in investments in
fixed income securities and debt reduction.

Total Assets:

The Company had no material change in total assets as of March 31, 2018
compared to December 31, 2017. Total assets as of March 31, 2018 were
$146,074,000 compared to $146,438,000 at December 31, 2017.

Policy Liabilities:

Policy liabilities were $77,250,000 at March 31, 2018 compared to
$76,674,000 at December 31, 2017; an increase of $576,000 or 0.8%. The
primary reason for the increase in policy liabilities in the first
quarter of 2018 compared to 2017 was an increase in unearned premium.
This increase in unearned premium is seasonal as we typically issue and
renew a larger number of annual insurance contracts during the first and
second quarters of each year compared to the remainder of the year.

Debt Outstanding:

Total debt at March 31, 2018 was $15,142,000 compared to $15,639,000 at
December 31, 2017. The pay down of a bank credit line was the primary
reason for the $497,000 or 3.2% decrease in total debt.

Shareholders' Equity:

Shareholders' equity as of March 31, 2018 was $46,726,000, down $899,000
compared to December 31, 2017 Shareholders' equity of $47,625,000. Book
value per share was $18.53 at March 31, 2018, compared to $18.88 per
share at December 31, 2017, a decrease of $0.35. The primary reason for
the decrease in Shareholders' Equity was the decrease in market value of
fixed income securities as well as the decrease in market value of
equity securities. Partially offsetting these factors was net income of
$471,000.

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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