<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: March 31, 1996
Commission file number: 0-16332
NATIONAL INSURANCE GROUP
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3031790
(State of Incorporation) (IRS Employer Identification No.)
395 OYSTER POINT BOULEVARD, SUITE 500 94080 SOUTH SAN FRANCISCO, CA
(Address of principal executive office) (Zip Code)
(415) 872-6772
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 4,679,697 shares as
of March 31, 1996.
<PAGE> 2
NATIONAL INSURANCE GROUP
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 - Financial Statements:
Consolidated Balance Sheets-March 31, 1996 and
December 31, 1995 1
Consolidated Statements of Earnings for the three-
month period ended March 31, 1996
and 1995 2
Consolidated Statements of Shareholders' Equity
for three months ended March 31, 1996 and 1995 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995. 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial Condition and Operating
Results 6-9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings None
Item 2 - Changes in Securities None
Item 3 - Defaults Upon Senior Securities None
Item 4 - Submission of Matters to a Vote of Security Holders None
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K:
Reports on Form 8-K None
Exhibit 11 - Computation of Weighted
Average Shares Outstanding and Earnings
Per Share 11
</TABLE>
<PAGE> 3
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
For the periods ended March 31, 1996 and 1995
(in thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS:
Fixed maturities $20,437 $21,130
Equity securities 2,225 2,271
Short-term investments 12,321 13,801
------- -------
Total investments 34,983 37,202
------- -------
Cash 827 133
Net Premiums and
accounts receivable 5,350 5,219
Property and equipment, net 3,685 4,068
Deferred acquisition costs 2,156 2,624
Deferred federal income taxes 1,696 1,994
Other assets 1,407 856
------- -------
Total assets $50,104 $52,096
======= =======
LIABILITIES:
Reserve for losses and LAE $ 2,968 $ 3,055
Unearned premiums 4,687 5,703
Accrued expenses and other
liabilities 4,726 4,286
Drafts payable 494 421
Reserve for return premiums 1,183 1,216
Reserve for Proposition 103 3,048 4,534
------- -------
Total liabilities $17,106 $ 19,215
======= =========
SHAREHOLDERS' EQUITY:
Common Stock, no par value;
authorized, 15,000,000 shares;
issued and outstanding 4,679,697
in 1996 and in 1995 23,071 23,071
Retained earnings 9,927 9,810
------- -------
Total shareholders' equity $32,998 $ 32,881
------- -------
Total liabilities and
shareholders' equity $50,104 $ 52,096
======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the periods ended March 31, 1996 and 1995
(in thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
First Quarter
-------------
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Net premiums written $ 2,770 $ 3,651
Change in unearned premiums 1,016 817
----------- -----------
Net premiums earned 3,786 4,468
Flood inquiry fees 4,431 1,719
Tracking fees 1,217 997
Net commission income 477 198
Net investment income 512 510
----------- -----------
TOTAL REVENUES 10,423 7,892
----------- -----------
Loss and LAE incurred 1,107 1,873
Commissions paid to
non-affiliates 692 680
Personnel expenses 5,142 3,330
All other expenses 3,248 2,346
----------- -----------
TOTAL EXPENSES 10,189 8,229
----------- -----------
Income(loss) before provision
for income taxes 234 (337)
Provision (benefit) for income taxes 85 (108)
----------- -----------
NET INCOME (LOSS) $ 149 $ (229)
=========== ===========
Weighted average common and
common equivalent shares
outstanding 4,702,934 4,678,729
=========== ===========
Per share results:
Net income (loss) per share $ .03 $ (.05)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
For the three months ended March 31, 1996 and 1995
(in thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
Total
Share-
Common Stock Retained Holders'
------------
Shares Amount Earnings Equity
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
Dec. 31, 1994 4,678,729 $ 23,066 $ 14,224 $ 37,290
Net Loss -- -- (229) (229)
Unrealized gain, net
of deferred tax -- -- 42 42
--------- --------- --------- ---------
Balance at
March 31, 1995 4,678,729 $ 23,066 $ 14,037 $ 37,103
========= ========= ========= =========
Balance at
Dec. 31, 1995 4,679,697 $ 23,071 $ 9,810 $ 32,881
Options Exercised: -- -- -- --
Net income -- -- 148 148
Unrealized loss,
net of deferred tax -- -- (31) (31)
--------- --------- --------- ---------
Balance at
March 31, 1996 4,679,697 $ 23,071 $ 9,927 $ 32,998
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ending March 31, 1996 and 1995
(in thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
(unaudited)
- -------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in cash
Net cash used in
operating activities $(1,289) $ (182)
Net cash provided by
investing activities 1,983 644
Net cash provided by
financing activities -- --
------- -------
Increase in cash 694 462
Cash, beginning of period 133 155
------- -------
Cash, end of period $ 827 $ 617
======= =======
</TABLE>
There was $82,000 of State income taxes paid during the three-months ended March
31, 1996.
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Information
In the opinion of management, the financial information reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary to a fair presentation of financial position and results of
operations for the interim periods. The results for the three month
periods ended March 31, 1996 and March 31 1995, are not necessarily
indicative of the results to be expected for the entire year.
These quarterly interim financial statements are unaudited.
5
<PAGE> 8
NATIONAL INSURANCE GROUP
Management's Discussion and Analysis of
Financial Condition and Operating Results
Item 2
Results of Operations
FIRST QUARTER OF 1996 COMPARED WITH FIRST QUARTER OF 1995:
REVENUE
Total revenue for the first quarter increased from $7.9 million in 1995 to $10.4
million in 1996, an increase of $2.5 million or 31.6%.
Net premiums written for the first quarter decreased from $3.7 million in 1995
to $2.8 million in 1996, a decrease of $900,000 thousand or 24.3%. An increase
in reserves for premium cancellations accounted for $810,000 of the revenue
decrease.
Net premiums earned for the first quarter decreased from $4.5 million in 1995 to
$3.8 million in 1996, a decrease of $700,000 or 15.5% due primarily to the same
factor which caused the decline in net premiums written during the period.
Flood inquiry fees for the first quarter increased from $1.7 million in 1995 to
$4.4 million in 1996, an increase of $2.7 million or 158.8%. $1.1 million of the
increase is due to the addition of five major new customers since the 1st
quarter of 1995. Interest rates have remained favorable and loan origination
volumes in general have increased. Interest rates on 30 year fixed mortgages
during the first quarter of 1995 averaged 8.79% compared to an average of 7.39%
during the first quarter of 1996. In addition, the Company has converted many of
its existing customers to the higher priced life-of-loan product as the industry
complies with federal regulations.
Tracking fees for the first quarter increased from $1.0 million in 1995 to $1.2
million in 1996, an increase of $200,000 or 20.0%. The increase was due
primarily to the addition of new customers.
Net investment income for the first quarter remained relatively unchanged at
$510,000 in 1995 and $512,000 in 1996.
EXPENSES
Loss and loss expenses incurred for the first quarter decreased from $1.9
million (42.2% of net premiums earned) in 1995 to $1.1 million (28.9% of net
premiums earned) in 1996, a decrease of $800,000 or 42.1%. Losses incurred
decreased $600,000 with loss adjustment expenses decreasing $200,000. The number
of losses decreased from 309 in 1995 to 233 in 1996.
Commissions paid to non-affiliates in the first quarter increased from $680,000
(15.2% of premiums earned) in 1995 to $690,000 (18.3% of premiums earned) in
1996, an increase of $12,000 or 1.8%. The percentage of commissions paid to
premiums earned varies depending upon customer mix. The historical average is
approximately 20% of earned premiums.
6
<PAGE> 9
Personnel expenses in the first quarter increased from $3.3 million in 1995 to
$5.1 million in 1996, an increase of $1.8 million or 54.5%. Staff additions and
increased outside labor, in response to the volume increases in the Flood
Inquiry and Tracking fee based business, accounted for $1.5 million of the
increase. The remaining $300,000 is due to increases in overhead labor and
related costs.
All other expenses in the first quarter increased from $2.3 million in 1995 to
$3.2 million in 1996, an increase of $900,000 or 39.1%. An adjustment to reserve
for errors and omissions accounted for $200,000 of the increase, and an increase
in professional services and consulting fees accounted for another $270,000 of
the increase.
As a result of the above factors, operating income before provision for income
taxes for the first quarter of 1996 increased from a loss of ($337,000) in 1995
to a gain of $234,000 in 1996, an increase of $571,000 or 169.5%. The net loss
for the first quarter of 1995 was ($229,000) or $(.05) per share compared with a
net gain of $149,000 or $.03 in 1996. The weighted average number of shares
outstanding for the first quarter of 1995 and 1996 were 4,678,729 and 4,702,934,
respectively.
FACTORS AFFECTING FUTURE OPERATION RESULTS
Earnings Volatility
The Company's financial results can be significantly affected by a number of
factors, including the volume of force-placed insurance and the rate of
cancellation of insurance policies, the addition or loss of significant
customers, significant changes in the number of loans or leases being tracked
for major customers and catastrophic loss events. For example, in 1992 the
Company incurred net losses relating to the Los Angeles riots and Hurricane
Andrew of $612,000 and $527,000, respectively. In November 1993, the Company
received claims of approximately $650,000 from policyholders for losses arising
out of the October and November 1993 series of fires in Southern California. The
Company also received an assessment of $725,000 from the California Fair Plan
Association, a mandatory insurance pool for certain California real estate,
relating to losses from those fires. In addition, revenues from the Company's
Flood Zone Determination Services are directly related to the volume of mortgage
loan originations, both new and refinanced, and any change in the level of such
activity could have a material impact on the Company's performance.
The Insurance Industry
The Company derives a significant amount of its revenues from insurance premiums
and investment income. In the event that, for whatever reason, the Company
experiences abnormally high losses, purchases reinsurance from reinsurers who
will not or cannot pay losses submitted, or other adverse developments occur,
then any such event or combination of events could have a material adverse
impact on the Company. In addition, insurance companies and others have often
been sued under certain legal theories, such as bad faith handling or settlement
of claims, which could subject the Company to liability in excess of policy
limits. An adverse outcome of any such lawsuit could have a material negative
impact on the Company.
Reserve Adequacy
The Company is required to maintain reserves to cover its estimated ultimate
liability for loss and loss adjustment expenses with respect to reported losses
and incurred but not reported claims. These reserves
7
<PAGE> 10
are estimates of what the company expects the ultimate settlement and
administration of claims will cost, and are based on known facts and
circumstances, predictions of future events, estimates of future trends in
claims severity and other variable, subjective factors. No assurances can be
given that such estimates will be adequate to cover actual losses incurred by
the Company. Any significant changes in the Company's estimate of ultimate
losses on reported claims may materially adversely affect the results of the
Company's operations in the period reported. The Company has in the past
experienced adverse developments in its loss reserves. The Company's loss and
loss adjustment expense reserves are reviewed on an annual basis by unaffiliated
actuaries. The company's most recent actuarial review of such reserves as of
December 31, 1995 concluded that the reserves (i) met the requirements of the
insurance laws of California; (ii) were computed in accordance with accepted
loss reserving standards and principles and (iii) make a reasonable provision
for all unpaid loss and loss expense obligations of the Company under the terms
of its policies and agreements.
The Company also maintains a reserve for return premiums which is based upon the
company's historical experience. As is prevalent in the force-placed insurance
industry, a substantial amount of the Company's net premiums written are
refunded to policyholders. The amount of such refunds can be affected by, among
other things, inaccurate or untimely data submitted by customers, which the
Company uses as a basis for recording written premiums or the loss of a
significant customer. No assurance can be given that the reserve for return
premiums will be adequate to cover actual refunded premiums paid by the Company
in the future.
Underwriting Risks
Traditional insurance companies underwrite risks individually or by class,
following an in-depth analysis of such risks. Although the Company applies
underwriting techniques to a small portion of insured risks, the immediate
coverage required by purchasers of force-placed insurance generally requires the
Company to write specialized insurance within predesignated limits and
geographic area, at a flat rate, without the application of traditional
underwriting criteria to individual risks. Accordingly, the Company may be
insuring individual risks that it might not have insured had it applied
traditional analysis to such risks and may not have adequate spread of risk in a
particular geographic area.
Reinsurance Considerations
The Company's business is partially dependent upon its ability to cede risks
insured by the Company to reinsurers. The amount, availability and cost of
reinsurance are subject to prevailing market conditions, beyond the control of
the company, which can affect the Company's level of business and profitability.
The Company is ultimately liable for the reinsured risk if for any reason the
reinsurers do not cover or will not pay the Company for the losses of the
insureds. As a result of the increased cost and more limited availability of
reinsurance, in the future, the Company may elect to retain a higher portion of
the risk historically ceded to reinsurers. If the Company were to retain a
higher proportion of insured risks, it would increase its exposure to
significant losses relating to properties insured by the Company. This increased
exposure could have a material adverse effect on the Company's results of
operation.
Flood zone Determinations
The Company derives a substantial portion of its total revenues from fees for
Flood Zone Determination Services. These services are primarily provided to
assist lenders in complying with federal laws which in many instances require
lenders to determine whether property being financed is located in a
federally-designated flood zone and require borrowers to obtain flood insurance.
Any significant change in federal
8
<PAGE> 11
legislation or secondary market requirements limiting these requirements on
lenders or borrowers, or the development by competitors of significantly
enhanced service or delivery systems could have a material adverse effect on the
Company's business or operation results.
The Company also indemnifies its customers from losses resulting from erroneous
flood inquiry determinations, where a borrower was not properly advised whether
the collateral was located in or out of a federally-designated flood zone. While
to date the Company has experienced no significant losses in this regard and
maintains reserves equal to its estimate of incurred but unreported
indemnification losses, there can be no assurance such reserves will prove
adequate in the future. The Company does not maintain errors and omissions
insurance coverage against such losses.
Rapid Technological Change and New Products; Product Delays
The markets for the company's information services are highly competitive and
characterized by rapidly changing technology. The Company believes that its
future success will depend, in part, on its ability to identify, develop,
install and support new services in a timely fashion, and on market acceptance
of such services. No assurance can be given that the introduction of new
technologies will enable the Company to gain market share, realize cost savings
or increase revenues.
9
<PAGE> 12
NATIONAL INSURANCE GROUP
ITEM 5 OTHER INFORMATION
RATE INCREASE:
LENDERS REAL PROPERTY PROTECTIVE & REAL ESTATE OWNED PROGRAMS
Effective December 22, 1995, the California Department of Insurance
approved Great Pacific Insurance Company's Rates, Rules & Forms Revision Filing
for the Lenders Real Property Protective Annual, Interim & Real Estate Owned
Programs. The Revision Filing includes an overall rate increase of +11% for all
three programs; a three tier optional rate/deductible schedule for the Annual
Program; and the addition of a separate "commercial" rate for the Real Estate
Owned Program. The selected effective date for implementing these program
enhancements, for all new & renewal business, was March 1, 1996, with the
exception of the renewal business of manual accounts which became effective May
1, 1996.
10
<PAGE> 13
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF WEIGHTED AVERAGE SHARES
OUTSTANDING AND EARNINGS PER SHARE
(in thousands of dollars except share amounts)
For the first quarter of 1996, there are no differences between primary and
fully diluted earnings per share. For the first quarter of 1995, the Company had
a loss per share.
<TABLE>
<CAPTION>
First Quarter
-------------
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Actual common shares
outstanding 4,679,697 4,678,729
Common shares issuable
under outstanding stock
options 23,237 --
Weighted average common
shares issued upon exercise
of stock options -- --
Total weighted average
shares outstanding 4,702,934 4,678,729
=========== ===========
Net income (loss) $ 148 $ (229)
=========== ===========
Net income (loss) per share $ .03 $ (.05)
=========== ===========
</TABLE>
11
<PAGE> 14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
NATIONAL INSURANCE GROUP
------------------------
(REGISTRANT)
/S/ JOHN R. GAULDING
--------------------
DATE: MAY 10, 1996 (SIGNATURE)
John R. Gaulding, Chairman
of the Board and Chief
Executive Officer, and,
President
/S/ KEVIN C. EICHLER
--------------------
DATE: MAY 10, 1996 (SIGNATURE)
Kevin C. Eichler,
Executive Vice President
and Chief Financial
Officer (Co-Executive Officer
and Principal Financial and
Accounting Officer)
/S/ PAULETTE J. TAYLOR
----------------------
DATE: MAY 10, 1996 (SIGNATURE)
Paulette J. Taylor,
Senior Vice President
and General Counsel
(Co-Executive Officer)
12
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 16,545
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,225
<MORTGAGE> 36
<REAL-ESTATE> 0
<TOTAL-INVEST> 34,983
<CASH> 827
<RECOVER-REINSURE> 11
<DEFERRED-ACQUISITION> 2,156
<TOTAL-ASSETS> 50,104
<POLICY-LOSSES> 2,968
<UNEARNED-PREMIUMS> 4,687
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 23,071
<OTHER-SE> 9,927
<TOTAL-LIABILITY-AND-EQUITY> 50,104
3,786
<INVESTMENT-INCOME> 512
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 6,125
<BENEFITS> 1,107
<UNDERWRITING-AMORTIZATION> 1,921
<UNDERWRITING-OTHER> 7,161
<INCOME-PRETAX> 234
<INCOME-TAX> 85
<INCOME-CONTINUING> 149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<RESERVE-OPEN> 3,055
<PROVISION-CURRENT> 1,390
<PROVISION-PRIOR> (283)
<PAYMENTS-CURRENT> 191
<PAYMENTS-PRIOR> 1,003
<RESERVE-CLOSE> 2,968
<CUMULATIVE-DEFICIENCY> (283)
</TABLE>
