A Year of Growth.2019 Annual Report661 East Davis StreetElba, Alabama 36323nationalsecuritygroup.com Dividends
Dividends
(per share)
(per share)
Selected Financial Data
(In thousands except per share data)
Selected Financial Data
(In thousands except per share data)
Board of Directors
Board of Directors
Corporate Profile
Corporate Profile
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
09
09
.21
.21
.20
.20
.20
.20
.18
.18
.16
.16
.12
.12
.10
.10
.325
.325
.55
.55
.60
.60
.60
.60
For the Year
Earnings Per Share ...........................................
Earnings ..............................................................
Net Premiums Earned .....................................
Net Investment Income .................................
Return on Average Equity .............................
Weighted Average Shares Outstanding .......
For the Year
Earnings Per Share ...........................................
Earnings ..............................................................
Net Premiums Earned .....................................
Net Investment Income .................................
Return on Average Equity .............................
Weighted Average Shares Outstanding .......
2019
1.61
4,067
59,883
3,876
2019
1.61
4,067
59,883
3,876
8.19%
8.19%
2,530
2,530
Percent
Percent
2018 of Change
2018 of Change
419.4%
0.31
419.4%
422.1%
422.1%
779
-1.6%
-1.6%
60,856
-1.6%
-1.6%
3,941
390.4%
390.4%
0.2%
0.2%
0.31
779
60,856
3,941
1.67%
1.67%
2,525
2,525
At Year End
Shareholders’ Equity Per Share ....................
Shareholders’ Equity .......................................
Total Assets .......................................................
Shares Outstanding .........................................
At Year End
Shareholders’ Equity Per Share ....................
Shareholders’ Equity .......................................
Total Assets .......................................................
Shares Outstanding .........................................
21.12
53,461
153,934
2,531
21.12
53,461
153,934
2,531
18.15
45,866
144,231
2,527
18.15
45,866
144,231
2,527
16.4%
16.6%
6.7%
0.2%
16.4%
16.6%
6.7%
0.2%
2019
First Quarter .......................................................
Second Quarter ................................................
Third Quarter .....................................................
Fourth Quarter...................................................
2019
First Quarter .......................................................
Second Quarter ................................................
Third Quarter .....................................................
Fourth Quarter...................................................
Stock Closing Prices
High
13.01
14.29
12.00
15.60
Stock Closing Prices
Low
11.22
11.00
10.70
10.01
High
13.01
14.29
12.00
15.60
Low
11.22
11.00
10.70
10.01
Dividends
Per Share
0.05
0.05
0.05
0.06
Dividends
Per Share
0.05
0.05
0.05
0.06
2018
First Quarter .......................................................
Second Quarter ................................................
Third Quarter .....................................................
Fourth Quarter...................................................
2018
First Quarter .......................................................
Second Quarter ................................................
Third Quarter .....................................................
Fourth Quarter...................................................
17.17
16.75
17.24
14.75
17.17
16.75
17.24
14.75
15.20
15.45
13.52
12.00
15.20
15.45
13.52
12.00
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Sources Of Revenue
(in thousands)
Sources Of Revenue
(in thousands)
Net Investment Gains
Net Investment Gains
$3,055 4.5%
$3,055 4.5%
Investment & Other
Investment & Other
$4,461 6.6%
$4,461 6.6%
Life Company Premium
$5,864 8.7%
Life Company Premium
$5,864 8.7%
153.9
153.9
144.2
144.2
146.4
146.4
148.6
148.6
147.8
147.8
144.9
144.9
133.9
133.9
135.7
135.7
132.9
132.9
136.9
136.9
131.4
131.4
15.30
15.30
13.01
13.01
16.35
16.35
17.75
17.75
15.25
15.25
13.45
13.45
Assets
Assets
(at year end in millions)
(at year end in millions)
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
09
09
Market Price
Market Price
(at year end)
(at year end)
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
09
09
9.95
9.95
8.55
8.55
8.75
8.75
12.25
12.25
11.10
11.10
Book Value
Book Value
(per share)
(per share)
Property & Casualty
Company Premium
$54,019 80.1%
Property & Casualty
Company Premium
$54,019 80.1%
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
09
09
21.12
21.12
18.15
18.15
18.88
18.88
19.09
19.09
17.87
17.87
17.05
17.05
13.42
13.42
12.25
12.25
15.41
15.41
17.72
17.72
16.69
16.69
Walter P. Wilkerson, CPA
Walter P. Wilkerson, CPA
Chairman of the Board
Chairman of the Board
Mickey Murdock
Mickey Murdock
Retired Senior Vice President
Retired Senior Vice President
The National Security Group, Inc.
The National Security Group, Inc.
The National Security Group, Inc.
The National Security Group, Inc.
Consultant
Consultant
Brunson, Wilkerson, Bowden
Brunson, Wilkerson, Bowden
Mayor, City of Elba
Mayor, City of Elba
Elba, Alabama
Elba, Alabama
& Associates, P.C.
& Associates, P.C.
Enterprise, Alabama
Enterprise, Alabama
Charles B. Arnold
Charles B. Arnold
Assistant Controller
Assistant Controller
Church's Chicken
Church's Chicken
Buford, Georgia
Buford, Georgia
Fleming Brooks
Fleming Brooks
Chairman of the Board
Chairman of the Board
Brooks Agrico LLC
Brooks Agrico LLC
Samson, Alabama
Samson, Alabama
Jack E. Brunson
Jack E. Brunson
President
President
National Security Fire &
National Security Fire &
Casualty Company
Casualty Company
Elba, Alabama
Elba, Alabama
William L. Brunson, Jr.
William L. Brunson, Jr.
President & Chief Executive Officer
President & Chief Executive Officer
The National Security Group, Inc.
The National Security Group, Inc.
Elba, Alabama
Elba, Alabama
Fred Clark, Jr.
Fred Clark, Jr.
President & Chief Executive Officer
President & Chief Executive Officer
Alabama Municipal Electric Authority
Alabama Municipal Electric Authority
Montgomery, Alabama
Montgomery, Alabama
Elizabeth B. Crawford
Elizabeth B. Crawford
Attorney at Law
Attorney at Law
Birmingham, Alabama
Birmingham, Alabama
Brian R. McLeod
Brian R. McLeod
Chief Financial Officer
Chief Financial Officer
The National Security Group, Inc.
The National Security Group, Inc.
Elba, Alabama
Elba, Alabama
Frank B. O’Neil
Frank B. O’Neil
Pro Assurance
Pro Assurance
Birmingham, Alabama
Birmingham, Alabama
Donald S. Pittman
Donald S. Pittman
Attorney at Law
Attorney at Law
Enterprise, Alabama
Enterprise, Alabama
Paul C. Wesch
Paul C. Wesch
Finance Director
Finance Director
City of Mobile
City of Mobile
Mobile, Alabama
Mobile, Alabama
L. Brunson White
L. Brunson White
Principal
Principal
Brunson White Advisors, LLC
Brunson White Advisors, LLC
Vestavia Hills, Alabama
Vestavia Hills, Alabama
Directors Emeritus
Directors Emeritus
Winfield Baird
Winfield Baird
Director Emeritus
Director Emeritus
Chartered Financial Analyst
Chartered Financial Analyst
Retired Financial Advisor,
Retired Financial Advisor,
Baird Financial Management
Baird Financial Management
Birmingham, Alabama
Birmingham, Alabama
James B. Saxon
James B. Saxon
Director Emeritus
Director Emeritus
Retired Executive
Retired Executive
Anderson Products
Anderson Products
Square D Company
Square D Company
Birmingham, Alabama
Birmingham, Alabama
Corporate Information
Corporate Information
For Copy of Annual Report, Proxy or
For Copy of Annual Report, Proxy or
Auditors:
Auditors:
10K, or For More Information Contact:
10K, or For More Information Contact:
Brian R. McLeod
Brian R. McLeod
Chief Financial Officer
Chief Financial Officer
The National Security Group, Inc.
The National Security Group, Inc.
661 East Davis Street
661 East Davis Street
Elba, Alabama 36323
Elba, Alabama 36323
334-897-2273
334-897-2273
Annual Shareholders Meeting:
Annual Shareholders Meeting:
May 22, 2020
May 22, 2020
Executive Offices
Executive Offices
Elba, Alabama
Elba, Alabama
Warren Averett, LLC
Warren Averett, LLC
2500 Acton Road
2500 Acton Road
Birmingham, Alabama 35243
Birmingham, Alabama 35243
Life Company Actuaries:
Life Company Actuaries:
W A Consulting, LLC
W A Consulting, LLC
33920 US Highway 19 North
33920 US Highway 19 North
Suite 151
Suite 151
Palm Harbor, Florida 34684
Palm Harbor, Florida 34684
The Common Stock of the Company trades on the NASDAQ Global Market under
The Common Stock of the Company trades on the NASDAQ Global Market under
the symbol NSEC. Quotations are furnished by the National Association of Security
the symbol NSEC. Quotations are furnished by the National Association of Security
Dealers Automated Quotations System (NASDAQ) and appear in the Wall Street
Dealers Automated Quotations System (NASDAQ) and appear in the Wall Street
Journal and other financial publications.
Journal and other financial publications.
Trade Symbol: NSEC
Trade Symbol: NSEC
Transfer Agent: Computershare
Transfer Agent: Computershare
P.O. Box 505000
P.O. Box 505000
Louisville, KY 40233
Louisville, KY 40233
1-800-368-5948
1-800-368-5948
www.computershare.com/investor
www.computershare.com/investor
Founded in 1947, The National
Founded in 1947, The National
Security Group, Inc. (NSG) is
Security Group, Inc. (NSG) is
dedicated to helping people in
dedicated to helping people in
times of need by providing vital,
times of need by providing vital,
easily understood insurance
easily understood insurance
products and prompt professional
products and prompt professional
service. At National Security we
service. At National Security we
realize that your world is unique.
realize that your world is unique.
That’s why we’re committed to
That’s why we’re committed to
insuring your world – whatever it
insuring your world – whatever it
may be. The Company is composed
may be. The Company is composed
of three insurance companies:
of three insurance companies:
National Security Insurance
National Security Insurance
Company (NSIC), National Security
Company (NSIC), National Security
Fire and Casualty Company
Fire and Casualty Company
(NSFC) and Omega One Insurance
(NSFC) and Omega One Insurance
Company (Omega), a wholly
Company (Omega), a wholly
owned subsidiary of NSFC. These
owned subsidiary of NSFC. These
companies provide a diversified
companies provide a diversified
line of insurance coverage in
line of insurance coverage in
communities primarily in the South.
communities primarily in the South.
Natsco, Inc., is a wholly owned
Natsco, Inc., is a wholly owned
subsidiary formed in 1984. The
subsidiary formed in 1984. The
insurance lines currently offered
insurance lines currently offered
include: dwelling fire and extended
include: dwelling fire and extended
coverage, homeowners (including
coverage, homeowners (including
mobile homeowners), and other
mobile homeowners), and other
liability, as well as traditional life,
liability, as well as traditional life,
accident, and health insurance. The
accident, and health insurance. The
policies provided by The National
policies provided by The National
Security Group, Inc. are marketed
Security Group, Inc. are marketed
through independent insurance
through independent insurance
agents throughout the Southeastern
agents throughout the Southeastern
United States.
United States.
Letter To Shareholders
As this letter is written, we are only in
the first quarter of 2020. Yet, with the
COVID-19 pandemic capturing our full
attention right now, the year 2019 seems
like an eternity ago. In just weeks, the
U.S. economy has gone from full speed
ahead to a virtual standstill as a result of
this global pandemic. These are trying
times for all of us. With so much changing
over the past few weeks, it seems like
“old news” to discuss 2019. However,
we believe our success in overcoming
the challenges of the past decade will
prepare us for the challenges already
presented to us in this new decade.
increases in assets and equity. With the
decline in interest rates experienced
throughout 2019, our bond portfolio
increased in value by $3,879,000. This
unrealized appreciation, along with net
income, contributed to a year-over-year
increase in shareholders’ equity of 16.6%
and contributed to a 6.7% year-over-
year increase in assets. While unrealized
gains and losses will fluctuate based on
market conditions, we have maintained
a generally conservative
investment
philosophy during
this period of
improving our balance sheet strength.
We were well positioned to reap the
Despite a tough environment over the past four years
benefits of the market conditions that unfolded in 2019.
due to elevated storm losses in our P&C operations,
Obviously, with the global pandemic stealing the
we managed to end 2019 with both assets and equity
headlines in early 2020, we are starting this new decade
at record levels. Our year-end Shareholders’ Equity
with some challenges. However, we believe we are
reached $53,461,000 while year-end assets topped
positioned to weather this storm and continue to make
$153,934,000. Shareholders’ Equity translates to a book
incremental improvements in our insurance operations
value per share of $21.12.
to restore underwriting profitability.
We will be
Investment returns were the major driver of earnings
prepared to provide a more detailed first quarter 2020
this year. Net income of $4,067,000 was respectable
update at our Annual Meeting in May. Further details on
with pre-tax investments gains of $3,055,000 being the
any changes in meeting arrangements will be provided
most significant contributor. In 2019, unlike the past
in our proxy material and on our website under the
three years, catastrophe related losses were in-line
investor section. Please check in regularly as we are all
with expectations. However, an elevated frequency of
reacting to daily changes during this challenging time in
smaller non-catastrophe related wind/hail claims put a
our history. As always, thank you for your support!
drag on earnings from our P&C insurance operations. At
100.1%, our combined ratio exceeded the 100% break-
even level for a third consecutive year. We continue to
adjust rates to adapt to this current pattern of persistent
severe weather.
Along with earnings, an increase in the value of our
bond investment portfolio was the major driver of
William L. Brunson, Jr.
President and CEO
Table of Contents
(Mark One)
1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2019
or
For the transition period from to .
Commission File Number 0-18649
The National Security Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
661 East Davis Street
Elba, Alabama
(Address of principal executive offices)
63-1020300
(IRS Employer
Identification No.)
36323
(Zip-Code)
Registrant’s Telephone Number including Area Code (334) 897-2273
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock,
par value $1.00 per share
Trading Symbol(s)
Name of each exchange on which
registered
NSEC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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
No
1
Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
Commission File Number 0-18649
The National Security Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
661 East Davis Street
Elba, Alabama
(Address of principal executive offices)
63-1020300
(IRS Employer
Identification No.)
36323
(Zip-Code)
Registrant’s Telephone Number including Area Code (334) 897-2273
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock,
par value $1.00 per share
Trading Symbol(s)
Name of each exchange on which
registered
NSEC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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
No
1
1
Table of Contents
Table of Contents
No
Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging
growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of the last business day of the registrant's most
recently completed second fiscal quarter, based upon the bid price of these shares on NASDAQ on such date, was $13,632,216.
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the close of the period covered by this report.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Class
Outstanding March 19, 2020
Common Stock $1.00 par value
2,530,678 shares
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
2
2
3
THE NATIONAL SECURITY GROUP, INC.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Equity Securities
Item 6. Selected Financial Data
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
Signature Page
Certifications
DOCUMENTS INCORPORATED BY REFERENCE
1. Definitive proxy statement for the 2020 Annual Meeting of Stockholders to be held May 22, 2020 is
incorporated by reference into Part III of this report. The proxy statement will be filed no later than 120
days from December 31, 2019.
2. Current Report on Form 8-K for event occurring on February 28, 2020 is incorporated into Part IV of this
report.
Page
No.
4
12
18
18
19
19
19
20
22
43
45
87
87
88
88
88
88
88
88
89
90
Table of Contents
Table of Contents
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging
growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of the last business day of the registrant's most
recently completed second fiscal quarter, based upon the bid price of these shares on NASDAQ on such date, was $13,632,216.
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the close of the period covered by this report.
Class
Outstanding March 19, 2020
Common Stock $1.00 par value
2,530,678 shares
THE NATIONAL SECURITY GROUP, INC.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signature Page
Certifications
Page
No.
4
12
18
18
19
19
19
20
22
43
45
87
87
88
88
88
88
88
88
89
90
DOCUMENTS INCORPORATED BY REFERENCE
1. Definitive proxy statement for the 2020 Annual Meeting of Stockholders to be held May 22, 2020 is
incorporated by reference into Part III of this report. The proxy statement will be filed no later than 120
days from December 31, 2019.
2. Current Report on Form 8-K for event occurring on February 28, 2020 is incorporated into Part IV of this
report.
2
3
3
Table of Contents
PART I
Item 1. Business
Summary Description of The National Security Group, Inc.
The National Security Group, Inc. (the Company, NSEC, we, us, our), an insurance holding company, was incorporated
in Delaware on March 20, 1990. Our common stock is traded on the NASDAQ Global Market under the symbol: NSEC.
Pursuant to regulations of the United States Securities and Exchange Commission (SEC), we are considered a “Smaller
Reporting Company” as defined by SEC rules. We have elected to utilize an “a la carte” scaled disclosure which
permits smaller reporting companies to elect to comply with scaled financial and non-financial disclosure requirements
on an item by item basis. The most significant reporting difference permitted under the scaled disclosures, which we
have utilized, is to include two years of audited financial statements.
The Company, through its three wholly owned subsidiaries, operates in two industry segments: property and casualty
(P&C) insurance and life insurance.
The property and casualty subsidiaries of the Company, National Security Fire and Casualty (NSFC), and Omega One
Insurance Company (Omega), primarily write personal lines dwelling coverage including dwelling fire and windstorm,
homeowners and mobile homeowners lines of insurance in ten states. Property and casualty insurance is the most
significant industry segment, accounting for 91.1% of gross earned premium.
The Company's life insurance subsidiary, National Security Insurance Company (NSIC), offers a basic line of life and
health and accident insurance products in seven states.
The majority of our assets and investments are held in the insurance company subsidiaries.
The Company's website address is: www.nationalsecuritygroup.com. The “Investors” section of our website (http://
investors.nationalsecuritygroup.com/) provides numerous resources for investors seeking additional information about
us. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K are
made available on our website soon after filing with the SEC. Additionally, stock trades by insiders as filed on Forms
3, 4, and 5 are posted to the website after filing with the SEC. The website also provides information regarding corporate
governance, stock quotes and press releases. Investors are encouraged to visit our website for additional information
about the Company.
Cautionary Statement Regarding Forward-Looking Statements
Any statement contained in this report which is not a historical fact, or which might otherwise be considered an opinion
or projection concerning the Company or its business, whether expressed or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1995.
The following report contains forward-looking statements that are not strictly historical and that involve risks and
uncertainties. Such statements include any statements containing the words “expect,” “plan,” “estimate,” “anticipate”
or other words of a similar nature. Management cautions investors about forward-looking statements. Forward-looking
statements involve certain evaluation criteria, such as risks, uncertainties, estimates, and/or assumptions made by
individuals informed of the Company and industries in which we operate. Any variation in the preceding evaluation
criteria could cause actual results to differ materially from those expressed or implied by such forward-looking
statements. These risks and uncertainties include, without limitation, the following:
The insurance industry is highly competitive and the Company encounters significant competition in all lines
of business from other insurance companies. Many of the competing companies have more abundant financial
resources than the Company.
Insurance is a highly regulated industry. It is possible that legislation may be enacted which would have an
adverse effect on the Company's business.
The Company is subject to regulation by state governments for each of the states in which it conducts business.
The Company cannot predict the subject of any future regulatory initiative(s) or its (their) impact on the
Company's business. Company insurance rates are also subject to approval by state insurance departments
in each of these states. We are often limited in the level of rate increases we can obtain.
Table of Contents
The Company is rated by various insurance rating agencies. If a rating is downgraded from its current level
by one of these agencies, sales of the Company's products and stock price could be adversely impacted.
The Company's financial results are adversely affected by increases in policy claims received by the Company.
While a manageable risk, this fluctuation is often unpredictable.
The Company's investments are subject to a variety of risks. Investments are subject to defaults and changes
in market value. Market value can be affected by changes in interest rates, market performance and the
The Company mitigates risk associated with life policies through implementing effective underwriting and
reinsurance strategies. These factors mitigate, not eliminate, risk related to mortality and morbidity exposure.
The Company has established reserves for claims and future policy benefits based on amounts determined
by independent actuaries. There is no assurance that these estimated reserves will prove to be sufficient or
that the Company will not incur claims exceeding reserves, which could result in operating losses and loss of
economy.
capital.
The Company mitigates risk associated with property and casualty policies through implementing effective
underwriting and reinsurance strategies. The Company obtains reinsurance which increases underwriting
capacity and limits the risk associated with policy claims. The Company is subject to credit risk with regard
to reinsurers as reinsurance does not alleviate the Company's liability to its insured's for the ceded risks. The
Company utilizes a third-party to develop a reinsurance treaty with reinsurers who are reliable and financially
stable. However, there is no guarantee that booked reinsurance recoverable will actually be recovered. A
reinsurer's insolvency or inability to make payments due could have a material adverse impact on the financial
condition of the Company.
The Company's ability to continue to pay dividends to shareholders is contingent upon profitability and capital
adequacy of the insurance subsidiaries. The insurance subsidiaries operate under regulatory restrictions that
could limit the ability to fund future dividend payments of the Company. An adverse event or series of events
could materially impact the ability of the insurance subsidiaries to fund future dividends, and consequently,
the Board of Directors would have to suspend the declaration of dividends to shareholders.
The Company is subject to the risk of adverse settlements or judgments resulting from litigation of contested
claims. It is difficult to predict or quantify the expected results of litigation because the outcome depends on
decisions of the court and jury that are based on facts and legal arguments presented at the trial.
Industry Segment and Geographical Area Information
Property and Casualty Insurance Segment
The Company's property and casualty insurance business is conducted through National Security Fire & Casualty
Company (NSFC), a wholly owned subsidiary of the Company organized in 1959, and Omega One Insurance Company
(Omega), a wholly owned subsidiary of National Security Fire & Casualty Company organized in 1992. This segment
will be referred to throughout this report as NSFC, property-casualty segment or P&C segment. NSFC is licensed to
write property and casualty insurance in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Oklahoma, South
Carolina, Tennessee and West Virginia, and operates on a surplus lines basis in the state of Louisiana. Omega is
licensed to write insurance in Alabama and Louisiana.
4
4
5
Table of Contents
PART I
Item 1. Business
Summary Description of The National Security Group, Inc.
The National Security Group, Inc. (the Company, NSEC, we, us, our), an insurance holding company, was incorporated
in Delaware on March 20, 1990. Our common stock is traded on the NASDAQ Global Market under the symbol: NSEC.
Pursuant to regulations of the United States Securities and Exchange Commission (SEC), we are considered a “Smaller
Reporting Company” as defined by SEC rules. We have elected to utilize an “a la carte” scaled disclosure which
permits smaller reporting companies to elect to comply with scaled financial and non-financial disclosure requirements
on an item by item basis. The most significant reporting difference permitted under the scaled disclosures, which we
have utilized, is to include two years of audited financial statements.
The Company, through its three wholly owned subsidiaries, operates in two industry segments: property and casualty
(P&C) insurance and life insurance.
The property and casualty subsidiaries of the Company, National Security Fire and Casualty (NSFC), and Omega One
Insurance Company (Omega), primarily write personal lines dwelling coverage including dwelling fire and windstorm,
homeowners and mobile homeowners lines of insurance in ten states. Property and casualty insurance is the most
significant industry segment, accounting for 91.1% of gross earned premium.
The Company's life insurance subsidiary, National Security Insurance Company (NSIC), offers a basic line of life and
health and accident insurance products in seven states.
The majority of our assets and investments are held in the insurance company subsidiaries.
The Company's website address is: www.nationalsecuritygroup.com. The “Investors” section of our website (http://
investors.nationalsecuritygroup.com/) provides numerous resources for investors seeking additional information about
us. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K are
made available on our website soon after filing with the SEC. Additionally, stock trades by insiders as filed on Forms
3, 4, and 5 are posted to the website after filing with the SEC. The website also provides information regarding corporate
governance, stock quotes and press releases. Investors are encouraged to visit our website for additional information
about the Company.
Cautionary Statement Regarding Forward-Looking Statements
Any statement contained in this report which is not a historical fact, or which might otherwise be considered an opinion
or projection concerning the Company or its business, whether expressed or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1995.
The following report contains forward-looking statements that are not strictly historical and that involve risks and
uncertainties. Such statements include any statements containing the words “expect,” “plan,” “estimate,” “anticipate”
or other words of a similar nature. Management cautions investors about forward-looking statements. Forward-looking
statements involve certain evaluation criteria, such as risks, uncertainties, estimates, and/or assumptions made by
individuals informed of the Company and industries in which we operate. Any variation in the preceding evaluation
criteria could cause actual results to differ materially from those expressed or implied by such forward-looking
statements. These risks and uncertainties include, without limitation, the following:
The insurance industry is highly competitive and the Company encounters significant competition in all lines
of business from other insurance companies. Many of the competing companies have more abundant financial
resources than the Company.
Insurance is a highly regulated industry. It is possible that legislation may be enacted which would have an
adverse effect on the Company's business.
The Company is subject to regulation by state governments for each of the states in which it conducts business.
The Company cannot predict the subject of any future regulatory initiative(s) or its (their) impact on the
Company's business. Company insurance rates are also subject to approval by state insurance departments
in each of these states. We are often limited in the level of rate increases we can obtain.
Table of Contents
The Company is rated by various insurance rating agencies. If a rating is downgraded from its current level
by one of these agencies, sales of the Company's products and stock price could be adversely impacted.
The Company's financial results are adversely affected by increases in policy claims received by the Company.
While a manageable risk, this fluctuation is often unpredictable.
The Company's investments are subject to a variety of risks. Investments are subject to defaults and changes
in market value. Market value can be affected by changes in interest rates, market performance and the
economy.
The Company mitigates risk associated with life policies through implementing effective underwriting and
reinsurance strategies. These factors mitigate, not eliminate, risk related to mortality and morbidity exposure.
The Company has established reserves for claims and future policy benefits based on amounts determined
by independent actuaries. There is no assurance that these estimated reserves will prove to be sufficient or
that the Company will not incur claims exceeding reserves, which could result in operating losses and loss of
capital.
The Company mitigates risk associated with property and casualty policies through implementing effective
underwriting and reinsurance strategies. The Company obtains reinsurance which increases underwriting
capacity and limits the risk associated with policy claims. The Company is subject to credit risk with regard
to reinsurers as reinsurance does not alleviate the Company's liability to its insured's for the ceded risks. The
Company utilizes a third-party to develop a reinsurance treaty with reinsurers who are reliable and financially
stable. However, there is no guarantee that booked reinsurance recoverable will actually be recovered. A
reinsurer's insolvency or inability to make payments due could have a material adverse impact on the financial
condition of the Company.
The Company's ability to continue to pay dividends to shareholders is contingent upon profitability and capital
adequacy of the insurance subsidiaries. The insurance subsidiaries operate under regulatory restrictions that
could limit the ability to fund future dividend payments of the Company. An adverse event or series of events
could materially impact the ability of the insurance subsidiaries to fund future dividends, and consequently,
the Board of Directors would have to suspend the declaration of dividends to shareholders.
The Company is subject to the risk of adverse settlements or judgments resulting from litigation of contested
claims. It is difficult to predict or quantify the expected results of litigation because the outcome depends on
decisions of the court and jury that are based on facts and legal arguments presented at the trial.
Industry Segment and Geographical Area Information
Property and Casualty Insurance Segment
The Company's property and casualty insurance business is conducted through National Security Fire & Casualty
Company (NSFC), a wholly owned subsidiary of the Company organized in 1959, and Omega One Insurance Company
(Omega), a wholly owned subsidiary of National Security Fire & Casualty Company organized in 1992. This segment
will be referred to throughout this report as NSFC, property-casualty segment or P&C segment. NSFC is licensed to
write property and casualty insurance in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Oklahoma, South
Carolina, Tennessee and West Virginia, and operates on a surplus lines basis in the state of Louisiana. Omega is
licensed to write insurance in Alabama and Louisiana.
4
5
5
Table of Contents
Table of Contents
The following table indicates allocation of direct premium written by state for the years ended December 31, 2019 and
2018:
($ in thousands)
State
Alabama
Arkansas
Georgia
Louisiana
Mississippi
Oklahoma
South Carolina
Tennessee
$
$
Percent of Direct Written Premium
2019
2018
16,159
1,699
10,913
4,430
10,889
7,177
7,004
3,307
61,578
26.2% $
2.7%
17.7%
7.2%
17.7%
11.7%
11.4%
5.4%
100.0% $
16,261
1,941
9,786
5,178
10,816
6,828
6,793
3,404
61,007
26.7%
3.2%
16.0%
8.5%
17.7%
11.2%
11.1%
5.6%
100.0%
In general, the property-casualty insurance business involves the transfer by the insured, to an insurance company
of all or a portion of certain risks for the payment, by the insured, of a premium to the insurance company. A portion
of such risks is often retained by the insured in the form of deductibles, which vary from policy to policy, but are typically
in the range of $500 to $1,000 on dwelling property and homeowners lines of business.
The premiums or payments to be made by the insured for insurance policies of the property and casualty subsidiaries
are based upon expected costs of providing benefits, underwriting and administering the policies. In determining the
premium to be charged, the property and casualty subsidiaries utilize data from past claims experience, modeled
catastrophe losses and anticipated claims estimates along with catastrophe reinsurance cost, commissions, taxes and
general expenses.
The operating results of the property-casualty insurance industry are subject to significant fluctuations from quarter-
to-quarter and from year-to-year. These fluctuations are often due to the effect of competition on pricing, unpredictable
losses incurred in connection with weather-related and other catastrophic events, general economic conditions and
other factors, such as changes in tax laws and the regulatory environment.
The following table sets forth the premiums earned (net of reinsurance) during the periods reported for the property
and casualty insurance segment:
3 years later
7,841
6,764
4 years later
($ in thousands)
Net premiums earned:
Fire, allied lines and homeowners
Other
Total net earned premium
Property and Casualty Loss Reserves
Year Ended December 31,
2019
2018
$
$
54,019 $
—
54,019 $
54,837
—
54,837
Net Liability re-
estimated:
Our property and casualty insurance subsidiaries are required to maintain reserves to cover their ultimate liability for
losses and adjustment expenses. Our staff periodically conducts reviews throughout the year of projected loss
development information in order to adjust estimates. The liability for loss and adjustment expense reserves consists
of an estimated liability for the ultimate settlement of claims that have been reported as well as an estimate of loss
and adjustment expenses for incurred claims that have not yet been reported (IBNR). IBNR estimates are based
primarily on historical development patterns using quantitative data generated from statistical information and qualitative
analysis of legal developments, economic conditions and development caused by events deemed to be infrequent in
occurrence. The reserves are based on an estimate made by management. Management estimates are based on
an analysis of historical paid and incurred loss development patterns for the ten prior loss years. Prior year period-
to-period loss development factors are applied to the latest reported loss reserve estimates in order to estimate the
ultimate incurred losses for each given loss year. The amount of loss reserves estimated in excess of current reported
case losses are recorded as IBNR reserves.
6
6
In addition to loss and loss adjustment expense reserves for specific claims, both reported and unreported, we establish
reserves for loss adjustment expenses that are not attributable to specific claims. These reserves consist of estimates
for Defense and Cost Containment (DCC) and Adjusting and Other Expenses (AO). These reserves are established
for the estimated expenses of internal claims staff and the cost of outside experts, such as attorneys representing our
interest, in the final settlement of incurred claims that are still in process of settlement. We conduct annual and interim
reviews over the course of each year in order to insure that no significant changes have occurred in our loss development
that might adversely impact our loss reserving methodology.
The following loss reserve re-estimates table illustrates the change over time of the net reserves established for
property-liability insurance claims and claims expense at the end of the last 10 calendar years. The first section shows
the reserves as originally reported at the end of the stated year. The second section, reading down, shows retroactive
re-estimates of the original recorded reserve as of the end of each successive year. These re-estimates are the result
of the Company's expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The
third section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to that
year's reserve liability. The last section compares the latest re-estimated reserve to the reserve originally established
and indicates whether the original reserve was adequate to cover the estimated costs of unsettled claims. The Loss
Reserve Re-estimates table is cumulative, and therefore, ending balances should not be added since the amount at
the end of each calendar year includes activity for both the current and prior years.
While the information in the table below provides a historical perspective on the adequacy of unpaid losses and loss
adjustment expenses established in previous years, it should not be assumed to be predictive of redundancies or
deficiencies on current year unpaid losses in future periods. Company management believes that the reserves
established at the end of 2019 are adequate. However, due to inherent uncertainties in the loss reserve estimation
process, management cannot guarantee that current year reserve balances will prove to be adequate. Due to the
relatively short tail nature of the property and casualty subsidiaries' claim liabilities, the Company does not discount
loss reserves for the time value of money.
Gross unpaid losses per
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Consolidated Balance Sheet
$12,646
$13,184
$14,386
$11,214
$ 8,734
$ 8,321
$ 9,645
$ 7,530
$ 7,075
$ 8,208
$ 7,199
Ceded reserves
(549)
(1,329)
(2,381)
(1,229)
(782)
(839)
(1,381)
(1,184)
(327)
(1,384)
(249)
Net unpaid losses
($ in thousands)
$12,097
$11,855
$12,005
$ 9,985
$ 7,952
$ 7,482
$ 8,264
$ 6,346
$ 6,748
$ 6,824
$ 6,950
Cumulative net
payments:
1 year later
$ 5,349
$ 5,738
$ 4,035
$ 4,827
$ 2,900
$ 2,990
$ 4,482
$ 2,950
$ 3,069
$ 3,320
2 years later
6,305
7,239
3,411
3,364
3,543
4,839
5,007
5,076
3,503
3,863
4,113
4,147
4,839
5,060
4,278
4,495
4,642
4,267
6,333
5,756
5,916
5,795
5,597
4,559
4,605
4,428
4,272
5,346
6,483
7,001
7,001
7,060
7,108
7,115
9,606
8,439
8,500
7,661
7,091
7,157
7,124
7,217
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
1 year later
2 years later
3 years later
4 years later
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
8,382
8,419
8,433
8,453
8,452
8,447
11,443
11,064
9,725
9,178
8,854
8,453
8,457
8,452
8,447
7,244
7,701
7,725
7,743
7,746
7,746
7,746
8,621
8,869
9,033
8,418
8,064
8,092
7,762
7,750
7,746
7,746
3,539
3,782
3,910
4,085
4,121
6,698
5,185
4,348
4,460
4,365
4,244
6,670
7,426
7,496
7,536
7,572
7,585
9,354
9,360
8,483
7,700
7,683
7,592
7,697
7
Net cumulative redundancy (deficiency)
$ 4,351
$ 3,408
$ 4,788
$ 2,288
$ 3,708
$ 3,210
$ 2,469
$ 2,079
$ 2,470
$ 1,985
Table of Contents
2018:
($ in thousands)
State
Alabama
Arkansas
Georgia
Louisiana
Mississippi
Oklahoma
South Carolina
Tennessee
The following table indicates allocation of direct premium written by state for the years ended December 31, 2019 and
Percent of Direct Written Premium
2019
2018
$
$
16,159
1,699
10,913
4,430
10,889
7,177
7,004
3,307
61,578
26.2% $
2.7%
17.7%
7.2%
17.7%
11.7%
11.4%
5.4%
100.0% $
16,261
1,941
9,786
5,178
10,816
6,828
6,793
3,404
61,007
26.7%
3.2%
16.0%
8.5%
17.7%
11.2%
11.1%
5.6%
100.0%
In general, the property-casualty insurance business involves the transfer by the insured, to an insurance company
of all or a portion of certain risks for the payment, by the insured, of a premium to the insurance company. A portion
of such risks is often retained by the insured in the form of deductibles, which vary from policy to policy, but are typically
in the range of $500 to $1,000 on dwelling property and homeowners lines of business.
The premiums or payments to be made by the insured for insurance policies of the property and casualty subsidiaries
are based upon expected costs of providing benefits, underwriting and administering the policies. In determining the
premium to be charged, the property and casualty subsidiaries utilize data from past claims experience, modeled
catastrophe losses and anticipated claims estimates along with catastrophe reinsurance cost, commissions, taxes and
general expenses.
The operating results of the property-casualty insurance industry are subject to significant fluctuations from quarter-
to-quarter and from year-to-year. These fluctuations are often due to the effect of competition on pricing, unpredictable
losses incurred in connection with weather-related and other catastrophic events, general economic conditions and
other factors, such as changes in tax laws and the regulatory environment.
The following table sets forth the premiums earned (net of reinsurance) during the periods reported for the property
Our property and casualty insurance subsidiaries are required to maintain reserves to cover their ultimate liability for
losses and adjustment expenses. Our staff periodically conducts reviews throughout the year of projected loss
development information in order to adjust estimates. The liability for loss and adjustment expense reserves consists
of an estimated liability for the ultimate settlement of claims that have been reported as well as an estimate of loss
and adjustment expenses for incurred claims that have not yet been reported (IBNR). IBNR estimates are based
primarily on historical development patterns using quantitative data generated from statistical information and qualitative
analysis of legal developments, economic conditions and development caused by events deemed to be infrequent in
occurrence. The reserves are based on an estimate made by management. Management estimates are based on
an analysis of historical paid and incurred loss development patterns for the ten prior loss years. Prior year period-
to-period loss development factors are applied to the latest reported loss reserve estimates in order to estimate the
ultimate incurred losses for each given loss year. The amount of loss reserves estimated in excess of current reported
case losses are recorded as IBNR reserves.
Table of Contents
In addition to loss and loss adjustment expense reserves for specific claims, both reported and unreported, we establish
reserves for loss adjustment expenses that are not attributable to specific claims. These reserves consist of estimates
for Defense and Cost Containment (DCC) and Adjusting and Other Expenses (AO). These reserves are established
for the estimated expenses of internal claims staff and the cost of outside experts, such as attorneys representing our
interest, in the final settlement of incurred claims that are still in process of settlement. We conduct annual and interim
reviews over the course of each year in order to insure that no significant changes have occurred in our loss development
that might adversely impact our loss reserving methodology.
The following loss reserve re-estimates table illustrates the change over time of the net reserves established for
property-liability insurance claims and claims expense at the end of the last 10 calendar years. The first section shows
the reserves as originally reported at the end of the stated year. The second section, reading down, shows retroactive
re-estimates of the original recorded reserve as of the end of each successive year. These re-estimates are the result
of the Company's expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The
third section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to that
year's reserve liability. The last section compares the latest re-estimated reserve to the reserve originally established
and indicates whether the original reserve was adequate to cover the estimated costs of unsettled claims. The Loss
Reserve Re-estimates table is cumulative, and therefore, ending balances should not be added since the amount at
the end of each calendar year includes activity for both the current and prior years.
While the information in the table below provides a historical perspective on the adequacy of unpaid losses and loss
adjustment expenses established in previous years, it should not be assumed to be predictive of redundancies or
deficiencies on current year unpaid losses in future periods. Company management believes that the reserves
established at the end of 2019 are adequate. However, due to inherent uncertainties in the loss reserve estimation
process, management cannot guarantee that current year reserve balances will prove to be adequate. Due to the
relatively short tail nature of the property and casualty subsidiaries' claim liabilities, the Company does not discount
loss reserves for the time value of money.
Gross unpaid losses per
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Consolidated Balance Sheet
$12,646
$13,184
$14,386
$11,214
$ 8,734
$ 8,321
$ 9,645
$ 7,530
$ 7,075
$ 8,208
$ 7,199
Ceded reserves
(549)
(1,329)
(2,381)
(1,229)
(782)
(839)
(1,381)
(1,184)
(327)
(1,384)
(249)
Net unpaid losses
($ in thousands)
$12,097
$11,855
$12,005
$ 9,985
$ 7,952
$ 7,482
$ 8,264
$ 6,346
$ 6,748
$ 6,824
$ 6,950
Cumulative net
payments:
1 year later
$ 5,349
$ 5,738
$ 4,035
$ 4,827
$ 2,900
$ 2,990
$ 4,482
$ 2,950
$ 3,069
$ 3,320
2 years later
3 years later
6,305
6,764
7,239
7,841
5,346
6,483
and casualty insurance segment:
7,244
8,382
7,001
4 years later
($ in thousands)
Net premiums earned:
Fire, allied lines and homeowners
Other
Total net earned premium
Property and Casualty Loss Reserves
Year Ended December 31,
2019
2018
$
$
54,019 $
—
54,019 $
54,837
—
54,837
Net Liability re-
estimated:
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
1 year later
2 years later
3 years later
4 years later
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
7,001
7,060
7,108
7,115
9,606
8,439
8,500
7,661
7,091
7,157
7,124
7,217
8,419
8,433
8,453
8,452
8,447
11,443
11,064
9,725
9,178
8,854
8,453
8,457
8,452
8,447
7,701
7,725
7,743
7,746
7,746
7,746
8,621
8,869
9,033
8,418
8,064
8,092
7,762
7,750
7,746
7,746
3,411
3,364
3,543
4,839
5,007
5,076
3,503
3,863
4,113
4,147
4,839
5,060
4,278
4,495
4,642
4,267
6,333
5,756
5,916
5,795
5,597
4,559
4,605
4,428
4,272
3,539
3,782
3,910
4,085
4,121
6,698
5,185
4,348
4,460
4,365
4,244
6,670
7,426
7,496
7,536
7,572
7,585
9,354
9,360
8,483
7,700
7,683
7,592
7,697
Net cumulative redundancy (deficiency)
$ 4,351
$ 3,408
$ 4,788
$ 2,288
$ 3,708
$ 3,210
$ 2,469
$ 2,079
$ 2,470
$ 1,985
6
7
7
Table of Contents
Table of Contents
Our reported results, financial position and liquidity could be affected by changes in key assumptions that determine
our loss reserves. The table below illustrates the change to equity that would occur as a result of a change in loss
reserves and reserves for loss adjustment expense:
($ in thousands)
For The Years Ended December 31,
2019
2018
Change in Loss and LAE
Reserves
Adjusted Loss and
LAE Reserves
% Change in
Equity
Adjusted Loss and
LAE Reserves
% Change in
Equity
*Loss and LAE reserves are in thousands
$
(10.0)%
(7.5)%
(5.0)%
(2.5)%
Reported
2.5%
5.0%
7.5%
10.0%
$
6,479
6,659
6,839
7,019
7,199
7,379
7,559
7,739
7,919
1.4%
1.0%
0.7%
0.3%
—%
(0.3)%
(0.7)%
(1.0)%
(1.4)%
7,387
7,592
7,798
8,003
8,208
8,413
8,618
8,824
9,029
1.8%
1.3%
0.9%
0.5%
—%
(0.5)%
(0.9)%
(1.3)%
(1.8)%
While our reserve estimates have had more significant variability in the past, we believe that the scenarios presented
above are most reasonable as our methodology has become more seasoned, and we have maintained continuity of
staff involved in the reserving process.
Life Insurance Segment
National Security Insurance Company (NSIC), a wholly owned subsidiary organized in 1947, conducts the Company's
life insurance business. This segment will be referred to throughout this report as NSIC, Life Company, or Life segment.
NSIC is licensed to write insurance in seven states: Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee
and Texas.
The following table indicates NSIC's percentage of direct premiums collected by state for the two years ended December
31, 2019 and 2018:
($ in thousands)
State
Alabama
Florida
Georgia
Mississippi
South Carolina
Tennessee
Texas
Percentage of Total Direct Premiums
2019
2018
$
$
3,307
56
1,324
543
469
60
192
5,951
55.6% $
1.0%
22.2%
9.1%
7.9%
1.0%
3.2%
100.0% $
3,538
62
1,316
590
419
50
192
6,167
57.4%
1.0%
21.3%
9.6%
6.8%
0.8%
3.1%
100.0%
NSIC has two primary methods of distribution of insurance products: independent agents and home service (career)
agents. The independent agent distribution method accounts for 67.1% of total premium revenue in the life insurance
segment. Approximately 200 of the Company's independent agents produced new business during 2019. The home
service distribution method of life insurance products accounts for 25.9% of total premium revenue in the life insurance
segment. Home service life products consist of products marketed directly at the home or other premises of the insured
by an employee agent. The Company employed two career agents and one regional manager as of December 31,
2019. The remaining 7.0% of premium revenue consists of the following: a book of business acquired from a state
guaranty association in 2000 (0.1%), premium generated through direct sales of school accident insurance (3.8%),
and other miscellaneous business serviced directly through the home office (3.1%).
NSIC's primary products are life insurance, primarily whole life, and health and accident insurance. NSIC does not
sell annuities, interest sensitive whole life or universal life insurance products. Term life insurance policies provide
8
8
death benefits if the insured's death occurs during the specific premium paying term of the policy. The policies generally
do not provide a savings or investment element included as part of the policy premium. Whole-life insurance policies
demand a higher premium than term life, but provide death benefits which are payable under effective policies regardless
of the time of the insured's death and have a savings and investment element which may result in the accumulation
of a cash surrender value. Our accident and health insurance policies provide coverage for losses sustained through
sickness or accident and include individual hospitalization and accident policies, group supplementary health policies,
and specialty products, such as cancer policies. Our line of health and accident products feature specified fixed
benefits, so rapidly rising health care costs do not have as great an impact on our health and accident line as they do
on comparable products offered by other companies.
The following table displays a schedule of 2019 life segment premium produced by product and distribution method:
($ in thousands)
Line of Business
Industrial
Ordinary
Group Life
A&H Group
A&H Other
Total Premium by Distribution Method
The following table sets forth certain information with respect to the development of Life segment business:
Home Service
Agent
Independent Agent
Other
41
$
— $
34
7
64
125
29
259
1,297
—
—
197
1,535
$
2,637
8
97
1,328
4,070
$
Year ended December 31,
2019
2018
175,248
$
12,118
15,297
202,663
$
$
$
$
$
18,622
18,622
4,088
1,776
5,864
164,231
23,243
15,735
203,209
16,742
16,742
4,193
1,826
6,019
Life insurance in force at end of period:
($ in thousands)
Ordinary-whole life
Term life
Industrial life
Life insurance issued:
Ordinary-whole life
Net premiums earned:
Life insurance
Accident and health insurance
Life Insurance Segment Reserves
We engage a consulting actuary to calculate our reserves for traditional life insurance products. The methodology
used requires that the present value of future benefits to be paid under life insurance policies less the present value
of future net premiums be calculated. The calculation uses assumptions including estimates of any adverse deviation,
investment yields and changes in investment yields, mortality, maintenance expenses and any non-forfeiture options
or termination benefits. The assumptions determine the level and sufficiency of reserves which are calculated and
reviewed by our consulting actuary at the end of each quarter. The independent consulting actuary also reviews our
estimates for other insurance products including claims reserves under accident and health contracts. Management
believes that the reserve amounts reflected in the accompanying Consolidated Financial Statements are adequate.
Investments
A significant percentage of the total income for the Company is tied to the performance of our investments. Assets
that will eventually be used to pay reserve liabilities and other policyholder obligations, along with our capital, are
invested to generate investment income while held by the Company. Our investment income is comprised primarily
of interest and dividend income on fixed maturity securities and equity securities along with capital gains/losses
generated by these investment securities. At December 31, 2019, cash and investments comprise 85% of total assets,
$
$
$
$
$
$
$
$
9
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Table of Contents
Our reported results, financial position and liquidity could be affected by changes in key assumptions that determine
our loss reserves. The table below illustrates the change to equity that would occur as a result of a change in loss
reserves and reserves for loss adjustment expense:
($ in thousands)
For The Years Ended December 31,
2019
2018
Change in Loss and LAE
Adjusted Loss and
% Change in
Reserves
LAE Reserves
Equity
Adjusted Loss and
LAE Reserves
% Change in
Equity
*Loss and LAE reserves are in thousands
$
$
(10.0)%
(7.5)%
(5.0)%
(2.5)%
Reported
2.5%
5.0%
7.5%
10.0%
6,479
6,659
6,839
7,019
7,199
7,379
7,559
7,739
7,919
1.4%
1.0%
0.7%
0.3%
—%
(0.3)%
(0.7)%
(1.0)%
(1.4)%
7,387
7,592
7,798
8,003
8,208
8,413
8,618
8,824
9,029
1.8%
1.3%
0.9%
0.5%
—%
(0.5)%
(0.9)%
(1.3)%
(1.8)%
While our reserve estimates have had more significant variability in the past, we believe that the scenarios presented
above are most reasonable as our methodology has become more seasoned, and we have maintained continuity of
staff involved in the reserving process.
Life Insurance Segment
National Security Insurance Company (NSIC), a wholly owned subsidiary organized in 1947, conducts the Company's
life insurance business. This segment will be referred to throughout this report as NSIC, Life Company, or Life segment.
NSIC is licensed to write insurance in seven states: Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee
The following table indicates NSIC's percentage of direct premiums collected by state for the two years ended December
Percentage of Total Direct Premiums
2019
2018
$
$
3,307
56
1,324
543
469
60
192
5,951
55.6% $
1.0%
22.2%
9.1%
7.9%
1.0%
3.2%
100.0% $
3,538
62
1,316
590
419
50
192
6,167
57.4%
1.0%
21.3%
9.6%
6.8%
0.8%
3.1%
100.0%
NSIC has two primary methods of distribution of insurance products: independent agents and home service (career)
agents. The independent agent distribution method accounts for 67.1% of total premium revenue in the life insurance
segment. Approximately 200 of the Company's independent agents produced new business during 2019. The home
service distribution method of life insurance products accounts for 25.9% of total premium revenue in the life insurance
segment. Home service life products consist of products marketed directly at the home or other premises of the insured
by an employee agent. The Company employed two career agents and one regional manager as of December 31,
2019. The remaining 7.0% of premium revenue consists of the following: a book of business acquired from a state
guaranty association in 2000 (0.1%), premium generated through direct sales of school accident insurance (3.8%),
and other miscellaneous business serviced directly through the home office (3.1%).
NSIC's primary products are life insurance, primarily whole life, and health and accident insurance. NSIC does not
sell annuities, interest sensitive whole life or universal life insurance products. Term life insurance policies provide
and Texas.
31, 2019 and 2018:
($ in thousands)
State
Alabama
Florida
Georgia
Mississippi
South Carolina
Tennessee
Texas
death benefits if the insured's death occurs during the specific premium paying term of the policy. The policies generally
do not provide a savings or investment element included as part of the policy premium. Whole-life insurance policies
demand a higher premium than term life, but provide death benefits which are payable under effective policies regardless
of the time of the insured's death and have a savings and investment element which may result in the accumulation
of a cash surrender value. Our accident and health insurance policies provide coverage for losses sustained through
sickness or accident and include individual hospitalization and accident policies, group supplementary health policies,
and specialty products, such as cancer policies. Our line of health and accident products feature specified fixed
benefits, so rapidly rising health care costs do not have as great an impact on our health and accident line as they do
on comparable products offered by other companies.
The following table displays a schedule of 2019 life segment premium produced by product and distribution method:
($ in thousands)
Line of Business
Industrial
Ordinary
Group Life
A&H Group
A&H Other
Total Premium by Distribution Method
Home Service
Agent
Independent Agent
Other
$
$
41
1,297
—
—
197
1,535
$
$
— $
2,637
8
97
1,328
4,070
$
34
7
64
125
29
259
The following table sets forth certain information with respect to the development of Life segment business:
($ in thousands)
Life insurance in force at end of period:
Year ended December 31,
2019
2018
Ordinary-whole life
Term life
Industrial life
Life insurance issued:
Ordinary-whole life
Net premiums earned:
Life insurance
Accident and health insurance
$
$
$
$
$
$
175,248
12,118
15,297
202,663
18,622
18,622
4,088
1,776
5,864
$
$
$
$
$
$
164,231
23,243
15,735
203,209
16,742
16,742
4,193
1,826
6,019
Life Insurance Segment Reserves
We engage a consulting actuary to calculate our reserves for traditional life insurance products. The methodology
used requires that the present value of future benefits to be paid under life insurance policies less the present value
of future net premiums be calculated. The calculation uses assumptions including estimates of any adverse deviation,
investment yields and changes in investment yields, mortality, maintenance expenses and any non-forfeiture options
or termination benefits. The assumptions determine the level and sufficiency of reserves which are calculated and
reviewed by our consulting actuary at the end of each quarter. The independent consulting actuary also reviews our
estimates for other insurance products including claims reserves under accident and health contracts. Management
believes that the reserve amounts reflected in the accompanying Consolidated Financial Statements are adequate.
Investments
A significant percentage of the total income for the Company is tied to the performance of our investments. Assets
that will eventually be used to pay reserve liabilities and other policyholder obligations, along with our capital, are
invested to generate investment income while held by the Company. Our investment income is comprised primarily
of interest and dividend income on fixed maturity securities and equity securities along with capital gains/losses
generated by these investment securities. At December 31, 2019, cash and investments comprise 85% of total assets,
8
9
9
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and investment income (including realized gains) comprises 10.3% of total revenue evidencing the significant impact
investments can have on financial results. Because our insurance subsidiaries are regulated as to the types of
investments they may make and the amount of funds they may maintain in any one type of investment, the Company
has developed a conservative value oriented investment philosophy, in order to meet regulatory requirements. The
Company's investment goals are to conserve capital resources and assets, obtain the necessary investment income
threshold to meet reserves, and provide a reasonable return. Current yield from invested assets and capital appreciation
of investments create this return.
Marketing and Distribution
As mentioned earlier in this report, NSIC products are marketed through a field force of agents who are employees of
the Life Company and through a network of independent agents. The Company's use of independent agents is
expected to be more cost effective in the long term and has become our primary method of distribution. In an effort
to boost productivity and better educate agents on the products and services of NSIC, we have field marketing
representatives that travel throughout our service areas holding training sessions for agents.
P&C products are marketed through a network of independent agents and brokers, who are independent contractors
and generally maintain relationships with one or more competing insurance companies. NSFC employs field marketing
representatives who visit in the offices of our independent agents regularly to give the agents opportunities for feedback.
Our NSFC marketing representatives also host training seminars throughout our service areas. The goal of these
seminars is to educate the independent agent sales force about our products and services.
Agents receive compensation for their sales efforts. In the case of life insurance agents, compensation is paid in the
form of sales commissions plus a servicing commission. Commissions paid by the Life segment in 2019 averaged
approximately 10.7% of premiums and are generally higher for new business production and decline each year at
subsequent renewals. Commission rates paid by the P&C segment in 2019 averaged approximately 15% of premiums
on both new and renewal business. During 2019, no independent agent, accounted for more than 10% of total net
earned premium of the property-casualty insurance subsidiaries. The net earned premium from the largest general
agent totaled $3,966,000 or 7.2% of total P&C segment net earned premium. NSFC also offers a “profit sharing bonus
plan” to independent agents in order to promote better field underwriting and encourage retention of profitable business.
This plan not only rewards our agents but also enhances profitability by giving the agent a vested interest in our success
and also aids in maintaining price stability for all our customers as agents have a financial incentive to use good field
underwriting practices when completing an application for insurance.
At December 31, 2019, NSIC employed two career agents and one regional manager. NSIC also had approximately
200 independent agents actively producing new business in seven states. At December 31, 2019, NSFC had contracts
with approximately 1,700 independent agencies in eight states.
Competition
In both of our insurance segments, we operate in a very competitive environment. There are numerous insurance
companies competing in the various states in which we offer our products. Many of the companies with which we
compete are much larger, have significantly larger volumes of business, offer much broader ranges of products and
have more significant financial resources than we do. We compete directly with many of these companies, not only
in the sale of products to consumers, but also in the recruitment and retention of qualified agents. We believe the
main areas in which a smaller company, like us, can compete is in the areas of providing niche products in under-
served areas of the insurance market at competitive prices while providing excellent service to our agents and
policyholders during the entire insurance product life cycle from policy issuance to final payment of a claim. We pride
ourselves on being accessible to our independent agent force and maintain a presence through the efforts of a field
marketing staff and easy access to home office staff. We believe we have made significant advancements in developing
a competitive advantage for our niche products. We also have longstanding relationships with many of our agents.
We believe we compete effectively within the markets we serve and continue to evolve our processes and procedures
in order to garner further competitive advantages.
NSFC's primary insurance products are dwelling fire and homeowners, including mobile homeowners. Dwelling fire
and homeowners are collectively referred to as the dwelling property line of business. We focus on providing niche
insurance products within the markets we serve. We are in the top twenty-five dwelling property insurance carriers in
our two largest states, Alabama and Mississippi. However, due to the large concentration of business among the top
five carriers, our total market share in the dwelling fire line of business is approximately 3.1% in Alabama and 2.7%
in Mississippi. In the homeowners line of business, our market share in both Alabama and Mississippi is less than
10
10
1%. The homeowners markets are even more concentrated with the top three homeowners carriers in both Alabama
and Mississippi controlling nearly 50% of the market.
We have actively sought competitive advantages over the last decade in the area of technological advancement. The
property and casualty administration system is an internally developed end-to-end system that we believe enhances
our ability to compete with larger carriers in the markets we serve. The system features a web based portal that allows
our independent agents to rate, quote and issue policies directly in their office. The system streamlines the underwriting
process with automation of many previous manual processes and enhances our agents' ability to provide excellent
service to their clients. The system also enhances the efficiency of our underwriting process allowing for a more
thorough evaluation of risks.
Our property and casualty claims administration system automates processes and workflows throughout the claims
process and provides a single view of the activity that has occurred on a claim. The system also has an adjuster web
portal, which allows adjusters to view policy limits, see reserve history and policy information, and view prior claims
and loss history. Communications between adjusters and examiners are centralized on the web portal allowing for
any messages to be viewed securely as part of the claims history. Computerized issuance of field checks by staff
adjusters was also implemented enforcing reserve and policy limits while reducing the error rates of the previously
used hand written checks issued in the field.
Regulation
Our insurance subsidiaries are directly regulated by the insurance department in our state of domicile, Alabama. We
are subject to the Alabama Insurance Holding Company System Regulatory Act and report to the Alabama Department
of Insurance. Consequently, we are subject to periodic examination and regulation under Alabama Insurance Laws.
We underwent our latest periodic regulatory examination which concluded in 2019 with no material issues noted and
no financial adjustments made as a result of the examination.
Our insurance subsidiaries are also subject to licensing and supervision by the various governmental agencies in the
jurisdictions in which we do business. The nature and extent of such regulation varies, but generally has its source
in state statutes which bestow regulatory, supervisory and administrative authority to State Insurance Commissioners
and their respective insurance departments. The regulations may require the Company to meet and maintain standards
of solvency, comply with licensing requirements, periodically examine market conditions and financial activities and
report on the condition of operations and finances. In addition, most of our insurance rates are subject to regulation
and approval by regulatory authorities within the respective states in which we offer our products.
Our insurance subsidiaries are subject to various statutory restrictions and limitations relating to the payment of
dividends or distributions to stockholders. The restrictions are generally based on certain levels of surplus, net income
or operating income as determined by statutory accounting practices. Alabama law permits dividends in any year
which, together with other dividends made within the preceding 12 months, do not exceed the greater of (1) 10% of
statutory surplus as of the end of the preceding year or (2) for property and casualty insurers, statutory net income for
the preceding year or for life companies, statutory net gain from operations for the preceding year. Dividends in excess
of the restricted amounts are payable only after obtaining expressed regulatory approval. Future dividends from the
insurance subsidiaries may be limited by business or regulatory considerations. The Company relies on insurance
subsidiary dividends to fund stockholder dividends and for payment of most operating expenses of the holding company,
including interest and principal payments on debt. Further discussion of dividend payment capacity of subsidiaries
can be found in Note 12 of the Consolidated Financial Statements included herein.
Our insurance subsidiaries are subject to risk based capital requirements adopted by the National Association of
Insurance Commissioners (NAIC). These requirements direct our insurance companies to calculate and report
information according to a risk based formula which attempts to measure statutory capital and surplus needs based
on the risk in our product mix and investment portfolio. The formula is designed to allow state insurance regulators
to identify companies that are potentially inadequately capitalized. Under the formula, the Company calculates Risk
Based Capital (RBC) by taking into account certain risks inherent in an insurer's assets, including investments and an
insurer's liabilities. Risk based capital rules provide for different levels of action depending on the ratio of a company's
total adjusted capital to its “authorized control level” RBC. Based on calculations made by each of our insurance
subsidiaries at December 31, 2019, each subsidiary exceeds any levels that would require regulatory actions.
A.M. Best Rating
A.M. Best Company is a leading provider of insurance company financial strength ratings and insurance company
issuer credit ratings. Best's financial strength ratings and issuer credit ratings provide an independent opinion based
11
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Table of Contents
and investment income (including realized gains) comprises 10.3% of total revenue evidencing the significant impact
investments can have on financial results. Because our insurance subsidiaries are regulated as to the types of
investments they may make and the amount of funds they may maintain in any one type of investment, the Company
has developed a conservative value oriented investment philosophy, in order to meet regulatory requirements. The
Company's investment goals are to conserve capital resources and assets, obtain the necessary investment income
threshold to meet reserves, and provide a reasonable return. Current yield from invested assets and capital appreciation
of investments create this return.
Marketing and Distribution
As mentioned earlier in this report, NSIC products are marketed through a field force of agents who are employees of
the Life Company and through a network of independent agents. The Company's use of independent agents is
expected to be more cost effective in the long term and has become our primary method of distribution. In an effort
to boost productivity and better educate agents on the products and services of NSIC, we have field marketing
representatives that travel throughout our service areas holding training sessions for agents.
P&C products are marketed through a network of independent agents and brokers, who are independent contractors
and generally maintain relationships with one or more competing insurance companies. NSFC employs field marketing
representatives who visit in the offices of our independent agents regularly to give the agents opportunities for feedback.
Our NSFC marketing representatives also host training seminars throughout our service areas. The goal of these
seminars is to educate the independent agent sales force about our products and services.
Agents receive compensation for their sales efforts. In the case of life insurance agents, compensation is paid in the
form of sales commissions plus a servicing commission. Commissions paid by the Life segment in 2019 averaged
approximately 10.7% of premiums and are generally higher for new business production and decline each year at
subsequent renewals. Commission rates paid by the P&C segment in 2019 averaged approximately 15% of premiums
on both new and renewal business. During 2019, no independent agent, accounted for more than 10% of total net
earned premium of the property-casualty insurance subsidiaries. The net earned premium from the largest general
agent totaled $3,966,000 or 7.2% of total P&C segment net earned premium. NSFC also offers a “profit sharing bonus
plan” to independent agents in order to promote better field underwriting and encourage retention of profitable business.
This plan not only rewards our agents but also enhances profitability by giving the agent a vested interest in our success
and also aids in maintaining price stability for all our customers as agents have a financial incentive to use good field
underwriting practices when completing an application for insurance.
At December 31, 2019, NSIC employed two career agents and one regional manager. NSIC also had approximately
200 independent agents actively producing new business in seven states. At December 31, 2019, NSFC had contracts
with approximately 1,700 independent agencies in eight states.
Competition
In both of our insurance segments, we operate in a very competitive environment. There are numerous insurance
companies competing in the various states in which we offer our products. Many of the companies with which we
compete are much larger, have significantly larger volumes of business, offer much broader ranges of products and
have more significant financial resources than we do. We compete directly with many of these companies, not only
in the sale of products to consumers, but also in the recruitment and retention of qualified agents. We believe the
main areas in which a smaller company, like us, can compete is in the areas of providing niche products in under-
served areas of the insurance market at competitive prices while providing excellent service to our agents and
policyholders during the entire insurance product life cycle from policy issuance to final payment of a claim. We pride
ourselves on being accessible to our independent agent force and maintain a presence through the efforts of a field
marketing staff and easy access to home office staff. We believe we have made significant advancements in developing
a competitive advantage for our niche products. We also have longstanding relationships with many of our agents.
We believe we compete effectively within the markets we serve and continue to evolve our processes and procedures
in order to garner further competitive advantages.
NSFC's primary insurance products are dwelling fire and homeowners, including mobile homeowners. Dwelling fire
and homeowners are collectively referred to as the dwelling property line of business. We focus on providing niche
insurance products within the markets we serve. We are in the top twenty-five dwelling property insurance carriers in
our two largest states, Alabama and Mississippi. However, due to the large concentration of business among the top
five carriers, our total market share in the dwelling fire line of business is approximately 3.1% in Alabama and 2.7%
in Mississippi. In the homeowners line of business, our market share in both Alabama and Mississippi is less than
10
1%. The homeowners markets are even more concentrated with the top three homeowners carriers in both Alabama
and Mississippi controlling nearly 50% of the market.
We have actively sought competitive advantages over the last decade in the area of technological advancement. The
property and casualty administration system is an internally developed end-to-end system that we believe enhances
our ability to compete with larger carriers in the markets we serve. The system features a web based portal that allows
our independent agents to rate, quote and issue policies directly in their office. The system streamlines the underwriting
process with automation of many previous manual processes and enhances our agents' ability to provide excellent
service to their clients. The system also enhances the efficiency of our underwriting process allowing for a more
thorough evaluation of risks.
Our property and casualty claims administration system automates processes and workflows throughout the claims
process and provides a single view of the activity that has occurred on a claim. The system also has an adjuster web
portal, which allows adjusters to view policy limits, see reserve history and policy information, and view prior claims
and loss history. Communications between adjusters and examiners are centralized on the web portal allowing for
any messages to be viewed securely as part of the claims history. Computerized issuance of field checks by staff
adjusters was also implemented enforcing reserve and policy limits while reducing the error rates of the previously
used hand written checks issued in the field.
Regulation
Our insurance subsidiaries are directly regulated by the insurance department in our state of domicile, Alabama. We
are subject to the Alabama Insurance Holding Company System Regulatory Act and report to the Alabama Department
of Insurance. Consequently, we are subject to periodic examination and regulation under Alabama Insurance Laws.
We underwent our latest periodic regulatory examination which concluded in 2019 with no material issues noted and
no financial adjustments made as a result of the examination.
Our insurance subsidiaries are also subject to licensing and supervision by the various governmental agencies in the
jurisdictions in which we do business. The nature and extent of such regulation varies, but generally has its source
in state statutes which bestow regulatory, supervisory and administrative authority to State Insurance Commissioners
and their respective insurance departments. The regulations may require the Company to meet and maintain standards
of solvency, comply with licensing requirements, periodically examine market conditions and financial activities and
report on the condition of operations and finances. In addition, most of our insurance rates are subject to regulation
and approval by regulatory authorities within the respective states in which we offer our products.
Our insurance subsidiaries are subject to various statutory restrictions and limitations relating to the payment of
dividends or distributions to stockholders. The restrictions are generally based on certain levels of surplus, net income
or operating income as determined by statutory accounting practices. Alabama law permits dividends in any year
which, together with other dividends made within the preceding 12 months, do not exceed the greater of (1) 10% of
statutory surplus as of the end of the preceding year or (2) for property and casualty insurers, statutory net income for
the preceding year or for life companies, statutory net gain from operations for the preceding year. Dividends in excess
of the restricted amounts are payable only after obtaining expressed regulatory approval. Future dividends from the
insurance subsidiaries may be limited by business or regulatory considerations. The Company relies on insurance
subsidiary dividends to fund stockholder dividends and for payment of most operating expenses of the holding company,
including interest and principal payments on debt. Further discussion of dividend payment capacity of subsidiaries
can be found in Note 12 of the Consolidated Financial Statements included herein.
Our insurance subsidiaries are subject to risk based capital requirements adopted by the National Association of
Insurance Commissioners (NAIC). These requirements direct our insurance companies to calculate and report
information according to a risk based formula which attempts to measure statutory capital and surplus needs based
on the risk in our product mix and investment portfolio. The formula is designed to allow state insurance regulators
to identify companies that are potentially inadequately capitalized. Under the formula, the Company calculates Risk
Based Capital (RBC) by taking into account certain risks inherent in an insurer's assets, including investments and an
insurer's liabilities. Risk based capital rules provide for different levels of action depending on the ratio of a company's
total adjusted capital to its “authorized control level” RBC. Based on calculations made by each of our insurance
subsidiaries at December 31, 2019, each subsidiary exceeds any levels that would require regulatory actions.
A.M. Best Rating
A.M. Best Company is a leading provider of insurance company financial strength ratings and insurance company
issuer credit ratings. Best's financial strength ratings and issuer credit ratings provide an independent opinion based
11
11
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on comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating
performance and business profile. All of our insurance companies have been assigned ratings by A.M. Best Company
(Best). On April 11, 2019, A. M. Best affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term
Issuer Credit Rating (Long-Term ICR) of "bbb" of NSFC. In addition, A.M. Best affirmed the FSR of B+ (Good) and
Long-Term ICR of "bbb-" of Omega. The A.M. Best outlook for the ratings is "stable" for NSFC and Omega. A.M. Best
upgraded the FSR to B++ (Good) and the Long-Term ICR to "bbb" for NSIC. The outlook for the ratings of NSIC is
"stable". A.M. Best also affirmed the Long-Term ICR of "bb" of the parent holding company, NSEC, with a "stable"
outlook. For the latest ratings, you can access www.ambest.com.
The nonstandard market in which the property and casualty subsidiaries operate reacts to general economic conditions
in much the same way as the standard market. When insurers' profits and equity are strong, companies sometimes
cut rates or do not seek increases. Also, underwriting rules are less restrictive. As profit and/or capital fall, companies
may tighten underwriting rules and seek rate increases. Premiums in the nonstandard market are higher than the
standard market because of the increased risk, which generally comprises more frequent claims. Lower valued
dwellings and mobile homes often warrant higher premiums because of the nature of the risk. The costs of placing
such nonstandard policies and making risk determinations are similar to those of the standard market. The added
costs due to more frequent claims servicing are reflected in the generally higher premiums that are charged.
Demotech Rating
The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On September 30, 2019,
Demotech affirmed a Financial Stability Rating of A (Exceptional) for both NSFC and Omega.
Our ability to maintain profitability is contingent upon our ability to actively manage our rates and our underwriting
procedures. Premium rate inadequacy may not become apparent quickly, and we will incur lag-time to correct. If our
rates or underwriting processes become inadequate, our results of operations and financial condition could be adversely
Employees
The Company itself has no management or operational employees. Instead, all human resource activities are within
the subsidiary National Security Insurance Company. NSIC employed 78 staff members as of December 31, 2019,
none of which were represented by a labor union. The Company and its property and casualty subsidiary have a
Management Service Agreement (“Agreement”) with National Security Insurance Company whereby the property and
casualty subsidiaries reimburse NSIC for salaries and expenses of employees provided under the Agreement. Involved
are employees in the areas of Underwriting, Customer Service, Policy Services, Accounting, Marketing, Administration,
Document Management, Data Processing, Programming, Personnel, Claims, and Management.
Certain information relating to retirement benefits we provide our employees is included in Note 11 to our Consolidated
Financial Statements. In addition to retirement related benefits, we offer a range of other benefits to our employees.
These benefits include bonuses based on Company performance, paid holidays, paid time off, extended illness leave
(including maternity), various options for individual and family health insurance, dental insurance, college scholarship
program for dependents, employee tuition assistance plan and company paid life insurance. We consider our employee
relations to be good.
Additional information with respect to The National Security Group's Business
We maintain a website (www.nationalsecuritygroup.com). The National Security Group, Inc.'s annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports that we file
or furnish pursuant to Section 13(a) of the Securities Exchange Act of 1934 are available through our website, free of
charge, as soon as reasonably practical upon having been electronically filed or furnished to the Securities and
Exchange Commission. Our code of ethical conduct is also available on our website and in print to any stockholder
who requests copies by contacting The National Security Group, Attn: Investor Relations, P. O. Box 703, Elba, AL
36323. Our periodic reports filed with the SEC, which include Forms 3, 4 and 5, Form 10-K, Form 10-Q, Form 8-K
and any amendments thereto may also be accessed free of charge from the SEC's website at www.sec.gov.
Item 1A. Risk Factors
As a “Smaller Reporting Company,” we are not required to provide any disclosure under Item 1A. In providing these
risk factors, we do not represent, and no inference should be drawn, that the disclosures so provided comply with all
requirements of Item 1A if we were subject to them. Risk factors are events and uncertainties over which the Company
has limited or no control and which can have a material adverse impact on our financial condition or results of operations.
We are subject to a variety of risk factors. The following information sets forth our evaluation of the risk factors we
deem to be most material. We work to actively manage these risks, but the reader should be cautioned that we are
only able to mitigate the impact of most risk factors, not eliminate the risk. Also, there may be other risks which we
do not presently deem material that may become material in the future.
Underwriting and Product Pricing
The insurance subsidiaries maintain underwriting departments that seek to evaluate the risks associated with the
issuance of an insurance policy. NSIC accepts standard risks and, to an extent, substandard risks. In the case of the
property and casualty subsidiaries, the underwriting staff attempts to assess, in light of the type of insurance sought
by an applicant, the risks associated with a prospective insured or insurance situation. The underwriting assessment
may involve various components in the risk evaluation process including, but not limited to, potential liability or fire
hazards, age of dwelling, loss history, credit history of insured, employment status, location of fire department, home
value, home heat source, and general maintenance of the property. In general, the property and casualty subsidiaries
specialize in writing nonstandard risks.
12
12
impacted.
Approval of Rates
Most lines of business written by our property and casualty insurers are subject to prior approval of premium rates in
the majority of the states in which we operate. The process of obtaining regulatory approval can be expensive and
time consuming and can impair our ability to make necessary rate adjustments due to changes in loss experience,
cost of reinsurance or other factors. If our requests to regulatory bodies for rate increases are not approved in an
adequate or timely manner, our results of operations and financial condition may be adversely impacted.
Maintenance of Profit Margins and Potential for Margin Compression
Our maximum long-term average pretax profit margin on most of our insurance products is approximately five to six
percent. In most states, we have limited ability to increase our margins beyond this level for higher risk, and we can
incur significant delays in our ability to pass along higher cost that we may incur. Examples of this risk include:
• Our catastrophe reinsurance cost is negotiated annually and effective January 1 of each year. The reinsurance
market in which we operate is unregulated, and our reinsurance cost is based on negotiated rates that adjust
annually. Due to increased frequency of storms over the past fifteen years and cycles of limited reinsurance
market capacity, we often experience rate increases in which we have limited ability to negotiate and often
cannot include these increases in our rates until the new reinsurance agreement is negotiated. Due to increased
cat loads in more storm prone areas, significant year over year increases in cat cost can often temporarily
eliminate our profit margins in some areas and significantly compress our overall profit margins priced into
our insurance coverages.
• We have a geographic concentration in the Southeastern U.S. which is exposed to significant hurricane risk.
We believe that we are often not adequately compensated for certain heavily exposed risk through a
combination of limits on allowable margin and regulatory delays in obtaining rate increases. We often have
to manage these exposures using alternatives to pricing, such as limits on new business production, to help
us manage exposure concentrations and protect our capital position.
• Due to increasing catastrophe reinsurance cost, we have incurred increases in our reinsurance retentions/
deductibles. Again, due to limits to profit margins, we are often not adequately compensated for the increased
risk associated with these higher reinsurance retentions due to overall limits on underwriting margins in some
of the states in which we operate.
Reinsurance, Risk of Loss from Catastrophic Event and Geographic Concentration
Both insurance subsidiaries customarily reinsure with other insurers certain portions of the insurance risk. The primary
purpose of such reinsurance arrangements is to enable the Company to limit its risk on individual policies, and in the
case of property insurance, limit its risk in the event of a catastrophe in various geographic areas. A reinsurance
arrangement does not discharge the issuing company from primary liability to the insured, and the issuing company
is required to discharge its liability to the insured even if the reinsurer is unable to meet its obligations under the
reinsurance arrangements. Reinsurance, however, does make the reinsurer liable to the issuing company to the extent
of any reinsurance in force at the time of the loss. Reinsurance arrangements also decrease premiums retained by
the issuing company since that company pays the reinsuring company a portion of total premiums based upon the
amount of liability reinsured. NSIC generally reinsures all risks in excess of $50,000 with respect to any one insured.
The property and casualty subsidiaries have catastrophe excess reinsurance, which provide protection in part with
respect to aggregate property losses arising out of a single catastrophe, such as a hurricane.
During 2019, the property and casualty segment maintained a catastrophe contract, which covered losses related to
a catastrophic event with multiple policyholders affected. In the event a catastrophe exceeded the $4 million company
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on comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating
performance and business profile. All of our insurance companies have been assigned ratings by A.M. Best Company
(Best). On April 11, 2019, A. M. Best affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term
Issuer Credit Rating (Long-Term ICR) of "bbb" of NSFC. In addition, A.M. Best affirmed the FSR of B+ (Good) and
Long-Term ICR of "bbb-" of Omega. The A.M. Best outlook for the ratings is "stable" for NSFC and Omega. A.M. Best
upgraded the FSR to B++ (Good) and the Long-Term ICR to "bbb" for NSIC. The outlook for the ratings of NSIC is
"stable". A.M. Best also affirmed the Long-Term ICR of "bb" of the parent holding company, NSEC, with a "stable"
outlook. For the latest ratings, you can access www.ambest.com.
The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On September 30, 2019,
Demotech affirmed a Financial Stability Rating of A (Exceptional) for both NSFC and Omega.
Demotech Rating
Employees
The Company itself has no management or operational employees. Instead, all human resource activities are within
the subsidiary National Security Insurance Company. NSIC employed 78 staff members as of December 31, 2019,
none of which were represented by a labor union. The Company and its property and casualty subsidiary have a
Management Service Agreement (“Agreement”) with National Security Insurance Company whereby the property and
casualty subsidiaries reimburse NSIC for salaries and expenses of employees provided under the Agreement. Involved
are employees in the areas of Underwriting, Customer Service, Policy Services, Accounting, Marketing, Administration,
Document Management, Data Processing, Programming, Personnel, Claims, and Management.
Certain information relating to retirement benefits we provide our employees is included in Note 11 to our Consolidated
Financial Statements. In addition to retirement related benefits, we offer a range of other benefits to our employees.
These benefits include bonuses based on Company performance, paid holidays, paid time off, extended illness leave
(including maternity), various options for individual and family health insurance, dental insurance, college scholarship
program for dependents, employee tuition assistance plan and company paid life insurance. We consider our employee
relations to be good.
Additional information with respect to The National Security Group's Business
We maintain a website (www.nationalsecuritygroup.com). The National Security Group, Inc.'s annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports that we file
or furnish pursuant to Section 13(a) of the Securities Exchange Act of 1934 are available through our website, free of
charge, as soon as reasonably practical upon having been electronically filed or furnished to the Securities and
Exchange Commission. Our code of ethical conduct is also available on our website and in print to any stockholder
who requests copies by contacting The National Security Group, Attn: Investor Relations, P. O. Box 703, Elba, AL
36323. Our periodic reports filed with the SEC, which include Forms 3, 4 and 5, Form 10-K, Form 10-Q, Form 8-K
and any amendments thereto may also be accessed free of charge from the SEC's website at www.sec.gov.
Item 1A. Risk Factors
As a “Smaller Reporting Company,” we are not required to provide any disclosure under Item 1A. In providing these
risk factors, we do not represent, and no inference should be drawn, that the disclosures so provided comply with all
requirements of Item 1A if we were subject to them. Risk factors are events and uncertainties over which the Company
has limited or no control and which can have a material adverse impact on our financial condition or results of operations.
We are subject to a variety of risk factors. The following information sets forth our evaluation of the risk factors we
deem to be most material. We work to actively manage these risks, but the reader should be cautioned that we are
only able to mitigate the impact of most risk factors, not eliminate the risk. Also, there may be other risks which we
do not presently deem material that may become material in the future.
Underwriting and Product Pricing
The insurance subsidiaries maintain underwriting departments that seek to evaluate the risks associated with the
issuance of an insurance policy. NSIC accepts standard risks and, to an extent, substandard risks. In the case of the
property and casualty subsidiaries, the underwriting staff attempts to assess, in light of the type of insurance sought
by an applicant, the risks associated with a prospective insured or insurance situation. The underwriting assessment
may involve various components in the risk evaluation process including, but not limited to, potential liability or fire
hazards, age of dwelling, loss history, credit history of insured, employment status, location of fire department, home
value, home heat source, and general maintenance of the property. In general, the property and casualty subsidiaries
specialize in writing nonstandard risks.
12
The nonstandard market in which the property and casualty subsidiaries operate reacts to general economic conditions
in much the same way as the standard market. When insurers' profits and equity are strong, companies sometimes
cut rates or do not seek increases. Also, underwriting rules are less restrictive. As profit and/or capital fall, companies
may tighten underwriting rules and seek rate increases. Premiums in the nonstandard market are higher than the
standard market because of the increased risk, which generally comprises more frequent claims. Lower valued
dwellings and mobile homes often warrant higher premiums because of the nature of the risk. The costs of placing
such nonstandard policies and making risk determinations are similar to those of the standard market. The added
costs due to more frequent claims servicing are reflected in the generally higher premiums that are charged.
Our ability to maintain profitability is contingent upon our ability to actively manage our rates and our underwriting
procedures. Premium rate inadequacy may not become apparent quickly, and we will incur lag-time to correct. If our
rates or underwriting processes become inadequate, our results of operations and financial condition could be adversely
impacted.
Approval of Rates
Most lines of business written by our property and casualty insurers are subject to prior approval of premium rates in
the majority of the states in which we operate. The process of obtaining regulatory approval can be expensive and
time consuming and can impair our ability to make necessary rate adjustments due to changes in loss experience,
cost of reinsurance or other factors. If our requests to regulatory bodies for rate increases are not approved in an
adequate or timely manner, our results of operations and financial condition may be adversely impacted.
Maintenance of Profit Margins and Potential for Margin Compression
Our maximum long-term average pretax profit margin on most of our insurance products is approximately five to six
percent. In most states, we have limited ability to increase our margins beyond this level for higher risk, and we can
incur significant delays in our ability to pass along higher cost that we may incur. Examples of this risk include:
• Our catastrophe reinsurance cost is negotiated annually and effective January 1 of each year. The reinsurance
market in which we operate is unregulated, and our reinsurance cost is based on negotiated rates that adjust
annually. Due to increased frequency of storms over the past fifteen years and cycles of limited reinsurance
market capacity, we often experience rate increases in which we have limited ability to negotiate and often
cannot include these increases in our rates until the new reinsurance agreement is negotiated. Due to increased
cat loads in more storm prone areas, significant year over year increases in cat cost can often temporarily
eliminate our profit margins in some areas and significantly compress our overall profit margins priced into
our insurance coverages.
• We have a geographic concentration in the Southeastern U.S. which is exposed to significant hurricane risk.
We believe that we are often not adequately compensated for certain heavily exposed risk through a
combination of limits on allowable margin and regulatory delays in obtaining rate increases. We often have
to manage these exposures using alternatives to pricing, such as limits on new business production, to help
us manage exposure concentrations and protect our capital position.
• Due to increasing catastrophe reinsurance cost, we have incurred increases in our reinsurance retentions/
deductibles. Again, due to limits to profit margins, we are often not adequately compensated for the increased
risk associated with these higher reinsurance retentions due to overall limits on underwriting margins in some
of the states in which we operate.
Reinsurance, Risk of Loss from Catastrophic Event and Geographic Concentration
Both insurance subsidiaries customarily reinsure with other insurers certain portions of the insurance risk. The primary
purpose of such reinsurance arrangements is to enable the Company to limit its risk on individual policies, and in the
case of property insurance, limit its risk in the event of a catastrophe in various geographic areas. A reinsurance
arrangement does not discharge the issuing company from primary liability to the insured, and the issuing company
is required to discharge its liability to the insured even if the reinsurer is unable to meet its obligations under the
reinsurance arrangements. Reinsurance, however, does make the reinsurer liable to the issuing company to the extent
of any reinsurance in force at the time of the loss. Reinsurance arrangements also decrease premiums retained by
the issuing company since that company pays the reinsuring company a portion of total premiums based upon the
amount of liability reinsured. NSIC generally reinsures all risks in excess of $50,000 with respect to any one insured.
The property and casualty subsidiaries have catastrophe excess reinsurance, which provide protection in part with
respect to aggregate property losses arising out of a single catastrophe, such as a hurricane.
During 2019, the property and casualty segment maintained a catastrophe contract, which covered losses related to
a catastrophic event with multiple policyholders affected. In the event a catastrophe exceeded the $4 million company
13
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retention stated in the contract, reinsurers would reimburse the company 100% of gross losses up to the upper limits
of the reinsurance agreement, which was $72.5 million in 2019 and 2018. Any losses above the $72.5 million upper
limit are the responsibility of our Company. The contract in place during 2019 also allowed one reinstatement for
coverage under the contract for a second catastrophic event.
The property and casualty subsidiaries utilize our actual in force policy data modeled applying two different industry
accepted catastrophe models to structure catastrophe reinsurance and determine upper limits of catastrophe
reinsurance agreements. Historically, reinsurance has been maintained to meet at least a 250 year modeled event
level. While this estimate is subject to some uncertainty and model risk, through obtaining coverage that meets at
least a 250 year modeled event level, the models indicate that we maintain catastrophe reinsurance upper limits to
cover an event that has less than a 0.5% probability of occurring in a given year.
Our inability to procure reinsurance, primarily catastrophe reinsurance, could adversely impact our ability to maintain
our level of premium revenue. The increased frequency of catastrophic events also increases our cost of reinsurance
pressuring the profit margins of our insurance products. It is generally cost prohibitive to maintain deductibles below
levels currently in place. Our current $4 million catastrophe deductible will adversely impact underwriting results in
years in which we incur losses from a major hurricane or tornado outbreak.
As described above, we maintain catastrophe reinsurance in amounts that provides protection to the Company's
financial condition in all but the most remote likelihood of occurrences. Our most critical catastrophe risk is from
hurricanes due to our proximity to the Atlantic Ocean and the Gulf of Mexico. Our results of operations are very likely
to be materially impacted in the event of the landfall of a hurricane or tropical storm striking the Northern Gulf Coast
or Southern Atlantic Coast in Georgia or South Carolina where we maintain significant concentrations of business.
We are also exposed to the risk of significant tornado activity in many of the states in which we operate. Our most
significant catastrophic event risk is the risk of a loss in excess of the Company's upper catastrophe limit which could
adversely impact the Company's financial condition if such an event occurs. We are also subject to assessments from
windstorm underwriting pools in various states. These risks are often difficult to measure and in the event of a major
catastrophe, could exceed the upper limits of our available reinsurance protection. We also face risk from a high
frequency of catastrophe events. While these events may not exceed the upper limits of our catastrophe reinsurance
retention, a large number of smaller events within our retention can materially impact our results of operations.
Catastrophe modeling results play a major role in our decision making process regarding the upper limits of our
catastrophe reinsurance protection. While the level of sophistication has increased significantly in recent years in the
design of computer generated catastrophe modeling, there are risks inherent in the modeling process, and the process
continues to evolve. We believe the chance of a catastrophe event exceeding the upper limits of our reinsurance
protection is remote; however, with the unpredictability of natural disasters, we are unable to eliminate all risk of
exceeding the upper limits of our reinsurance protection. Hurricane Katrina exceeded the upper limits of our coverage
in 2005. We have since increased the upper limits of our coverage and catastrophe models have improved significantly,
but should a future event exceed the upper limits of our reinsurance coverage by a material amount, our financial
condition could be adversely impacted.
Climate Change
Some scientific evidence supports that there have been and continue to be significant changes in climate including
temperature, precipitation and wind resulting from various natural factors, processes, and human activities. Rising
temperatures and changes in weather patterns could impact storm frequency and severity in our coverage areas.
Increases in storm frequency and severity could negatively impact reinsurance costs impacting product pricing and
the areas in which we offer our products. With respect to our property and casualty segment, climate change may
impact the types of storms in our coverage areas as well as the frequency and severity of storms, thereby adversely
impacting underwriting results, reinsurance placement and rates. With respect to our life insurance segment, climate
change may impact life expectancies, thereby influencing mortality assumptions used in pricing assumptions and
reserve calculations. Climate change could impact future product offerings, exclusions and/or policy limitations.
The Company may be impacted by domestic legislation and regulation related to climate change. Governmental
mandates could impede our ability to make a profit with our current product offerings, limit the products we can offer
and/or impact the geographic locations in which we offer our products. The impact of climate change cannot be
quantified at this time.
14
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Reserve Liabilities
NSIC maintains life insurance reserves for future policy benefits to meet future obligations under outstanding policies.
These reserves are calculated to be sufficient to meet policy and contract obligations as they arise. Liabilities for future
policy benefits are calculated using assumptions for interest, mortality, morbidity, expense and withdrawals determined
at the time the policies were issued. As of December 31, 2019, the total reserves of NSIC (consisting of reserves for
accident and health insurance) were approximately $38,315,000. We believe, based on current available information,
reserves for future policy benefits are adequate. However, we are currently in a period of persistent and historically
low interest rates. Should this period of low rates be sustained over the long term, it can impair our ability to make
sufficient returns to cover future policy liabilities. Also, should actual mortality, morbidity, expense or withdrawal
assumption differ materially from assumptions, our operating results could be negatively impacted.
The property and casualty subsidiaries are also required to maintain loss reserves (claim liabilities) for all lines of
insurance. Such reserves are intended to cover the probable ultimate cost of settling all claims, including those incurred
but not yet reported. The reserves of the property and casualty subsidiaries reflect estimates of the liability with respect
to incurred claims and are determined by evaluating reported claims on an ongoing basis and by estimating liabilities
for incurred but not reported claims. Such reserves include adjustment expenses to cover the cost of investigating
losses and defending lawsuits. The establishment of accurate reserves is complicated by the fact that claims in some
lines of insurance are settled many years after the policies have been issued, thus raising the possibility that inflation
may have a significant effect on the amount of ultimate loss payment, especially when compared to initial loss estimates.
The subsidiaries, however, attempt to restrict their writing to risks that settle within one to four years of issuance of the
policy. As of December 31, 2019, the property and casualty subsidiaries had reserves for unpaid claims of approximately
$7,199,000, before subtracting unpaid claims due from reinsurers of $249,000, leaving net unpaid claims of $6,950,000.
The reserves are not discounted for the time value of money. No changes were made in the assumptions used in
estimating the reserves during the years ending December 31, 2019 or 2018. The Company believes, based on current
available information, such reserves are adequate to provide for settlement of claims.
We incur the risk that we may experience excessive losses due to unanticipated claims frequency, severity or both
that may not be factored into our loss reserve liabilities. Unexpected frequency and severity can be adversely impacted
by outcomes of claims litigation; adverse jury verdicts related to claims settlements and adverse interpretations of
insurance policy provisions which result in increased liabilities. We are also subject to the risk of unanticipated
assessments from state underwriting associations or windstorm pools related to losses in excess of the associations
or pool's ability to pay. Such costs are often allocated to companies operating in the jurisdiction of the association or
windstorm pool, and the likelihood and amount of such assessments are difficult to predict. These events could
adversely impact our historical loss reserving methodology and cause financial adjustments that could materially impact
our financial condition and results of operations.
The insurance subsidiaries are rated by the independent insurance rating agencies A.M. Best and Demotech. A
downgrade in our ratings from either of these rating agencies could adversely impact our ability to maintain existing
business or generate new business. See page 11 of this Form 10-K for additional information on our current financial
Financial Ratings
ratings.
Regulation
The insurance subsidiaries are each subject to regulation by the insurance departments of those states in which they
are licensed to conduct business. Although the extent of regulation varies from state to state, the insurance laws of
the various states generally establish supervisory departments having broad administrative powers with respect to,
among other matters: the granting and revocation of licenses to transact business, the licensing of agents, the
establishment of standards of financial solvency (including reserves to be maintained), the nature of investments and
in most cases premium rates, the approval of forms and policies, and the form and content of financial statements.
The primary purpose of these regulations is the protection of policyholders. Compliance with regulations does not
necessarily confer a benefit upon shareholders.
Many states in which the insurance subsidiaries operate, including Alabama, have laws requiring that insurers become
members of guaranty associations. These associations guarantee that benefits due policyholders of insurance
companies will continue to be provided even if the insurance company which wrote the business is financially unable
to fulfill its obligations. To provide these benefits, the associations assess the insurance companies licensed in a state
that write the line of insurance for which coverage is guaranteed. The amount of an insurer's assessment is generally
based on the relationship between that company's premium volume in the state and the premium volume of all
companies writing the particular line of insurance in the state. The Company has paid no material amounts to guaranty
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retention stated in the contract, reinsurers would reimburse the company 100% of gross losses up to the upper limits
of the reinsurance agreement, which was $72.5 million in 2019 and 2018. Any losses above the $72.5 million upper
limit are the responsibility of our Company. The contract in place during 2019 also allowed one reinstatement for
coverage under the contract for a second catastrophic event.
The property and casualty subsidiaries utilize our actual in force policy data modeled applying two different industry
accepted catastrophe models to structure catastrophe reinsurance and determine upper limits of catastrophe
reinsurance agreements. Historically, reinsurance has been maintained to meet at least a 250 year modeled event
level. While this estimate is subject to some uncertainty and model risk, through obtaining coverage that meets at
least a 250 year modeled event level, the models indicate that we maintain catastrophe reinsurance upper limits to
cover an event that has less than a 0.5% probability of occurring in a given year.
Our inability to procure reinsurance, primarily catastrophe reinsurance, could adversely impact our ability to maintain
our level of premium revenue. The increased frequency of catastrophic events also increases our cost of reinsurance
pressuring the profit margins of our insurance products. It is generally cost prohibitive to maintain deductibles below
levels currently in place. Our current $4 million catastrophe deductible will adversely impact underwriting results in
years in which we incur losses from a major hurricane or tornado outbreak.
As described above, we maintain catastrophe reinsurance in amounts that provides protection to the Company's
financial condition in all but the most remote likelihood of occurrences. Our most critical catastrophe risk is from
hurricanes due to our proximity to the Atlantic Ocean and the Gulf of Mexico. Our results of operations are very likely
to be materially impacted in the event of the landfall of a hurricane or tropical storm striking the Northern Gulf Coast
or Southern Atlantic Coast in Georgia or South Carolina where we maintain significant concentrations of business.
We are also exposed to the risk of significant tornado activity in many of the states in which we operate. Our most
significant catastrophic event risk is the risk of a loss in excess of the Company's upper catastrophe limit which could
adversely impact the Company's financial condition if such an event occurs. We are also subject to assessments from
windstorm underwriting pools in various states. These risks are often difficult to measure and in the event of a major
catastrophe, could exceed the upper limits of our available reinsurance protection. We also face risk from a high
frequency of catastrophe events. While these events may not exceed the upper limits of our catastrophe reinsurance
retention, a large number of smaller events within our retention can materially impact our results of operations.
Catastrophe modeling results play a major role in our decision making process regarding the upper limits of our
catastrophe reinsurance protection. While the level of sophistication has increased significantly in recent years in the
design of computer generated catastrophe modeling, there are risks inherent in the modeling process, and the process
continues to evolve. We believe the chance of a catastrophe event exceeding the upper limits of our reinsurance
protection is remote; however, with the unpredictability of natural disasters, we are unable to eliminate all risk of
exceeding the upper limits of our reinsurance protection. Hurricane Katrina exceeded the upper limits of our coverage
in 2005. We have since increased the upper limits of our coverage and catastrophe models have improved significantly,
but should a future event exceed the upper limits of our reinsurance coverage by a material amount, our financial
condition could be adversely impacted.
Climate Change
Some scientific evidence supports that there have been and continue to be significant changes in climate including
temperature, precipitation and wind resulting from various natural factors, processes, and human activities. Rising
temperatures and changes in weather patterns could impact storm frequency and severity in our coverage areas.
Increases in storm frequency and severity could negatively impact reinsurance costs impacting product pricing and
the areas in which we offer our products. With respect to our property and casualty segment, climate change may
impact the types of storms in our coverage areas as well as the frequency and severity of storms, thereby adversely
impacting underwriting results, reinsurance placement and rates. With respect to our life insurance segment, climate
change may impact life expectancies, thereby influencing mortality assumptions used in pricing assumptions and
reserve calculations. Climate change could impact future product offerings, exclusions and/or policy limitations.
The Company may be impacted by domestic legislation and regulation related to climate change. Governmental
mandates could impede our ability to make a profit with our current product offerings, limit the products we can offer
and/or impact the geographic locations in which we offer our products. The impact of climate change cannot be
quantified at this time.
14
Reserve Liabilities
NSIC maintains life insurance reserves for future policy benefits to meet future obligations under outstanding policies.
These reserves are calculated to be sufficient to meet policy and contract obligations as they arise. Liabilities for future
policy benefits are calculated using assumptions for interest, mortality, morbidity, expense and withdrawals determined
at the time the policies were issued. As of December 31, 2019, the total reserves of NSIC (consisting of reserves for
accident and health insurance) were approximately $38,315,000. We believe, based on current available information,
reserves for future policy benefits are adequate. However, we are currently in a period of persistent and historically
low interest rates. Should this period of low rates be sustained over the long term, it can impair our ability to make
sufficient returns to cover future policy liabilities. Also, should actual mortality, morbidity, expense or withdrawal
assumption differ materially from assumptions, our operating results could be negatively impacted.
The property and casualty subsidiaries are also required to maintain loss reserves (claim liabilities) for all lines of
insurance. Such reserves are intended to cover the probable ultimate cost of settling all claims, including those incurred
but not yet reported. The reserves of the property and casualty subsidiaries reflect estimates of the liability with respect
to incurred claims and are determined by evaluating reported claims on an ongoing basis and by estimating liabilities
for incurred but not reported claims. Such reserves include adjustment expenses to cover the cost of investigating
losses and defending lawsuits. The establishment of accurate reserves is complicated by the fact that claims in some
lines of insurance are settled many years after the policies have been issued, thus raising the possibility that inflation
may have a significant effect on the amount of ultimate loss payment, especially when compared to initial loss estimates.
The subsidiaries, however, attempt to restrict their writing to risks that settle within one to four years of issuance of the
policy. As of December 31, 2019, the property and casualty subsidiaries had reserves for unpaid claims of approximately
$7,199,000, before subtracting unpaid claims due from reinsurers of $249,000, leaving net unpaid claims of $6,950,000.
The reserves are not discounted for the time value of money. No changes were made in the assumptions used in
estimating the reserves during the years ending December 31, 2019 or 2018. The Company believes, based on current
available information, such reserves are adequate to provide for settlement of claims.
We incur the risk that we may experience excessive losses due to unanticipated claims frequency, severity or both
that may not be factored into our loss reserve liabilities. Unexpected frequency and severity can be adversely impacted
by outcomes of claims litigation; adverse jury verdicts related to claims settlements and adverse interpretations of
insurance policy provisions which result in increased liabilities. We are also subject to the risk of unanticipated
assessments from state underwriting associations or windstorm pools related to losses in excess of the associations
or pool's ability to pay. Such costs are often allocated to companies operating in the jurisdiction of the association or
windstorm pool, and the likelihood and amount of such assessments are difficult to predict. These events could
adversely impact our historical loss reserving methodology and cause financial adjustments that could materially impact
our financial condition and results of operations.
Financial Ratings
The insurance subsidiaries are rated by the independent insurance rating agencies A.M. Best and Demotech. A
downgrade in our ratings from either of these rating agencies could adversely impact our ability to maintain existing
business or generate new business. See page 11 of this Form 10-K for additional information on our current financial
ratings.
Regulation
The insurance subsidiaries are each subject to regulation by the insurance departments of those states in which they
are licensed to conduct business. Although the extent of regulation varies from state to state, the insurance laws of
the various states generally establish supervisory departments having broad administrative powers with respect to,
among other matters: the granting and revocation of licenses to transact business, the licensing of agents, the
establishment of standards of financial solvency (including reserves to be maintained), the nature of investments and
in most cases premium rates, the approval of forms and policies, and the form and content of financial statements.
The primary purpose of these regulations is the protection of policyholders. Compliance with regulations does not
necessarily confer a benefit upon shareholders.
Many states in which the insurance subsidiaries operate, including Alabama, have laws requiring that insurers become
members of guaranty associations. These associations guarantee that benefits due policyholders of insurance
companies will continue to be provided even if the insurance company which wrote the business is financially unable
to fulfill its obligations. To provide these benefits, the associations assess the insurance companies licensed in a state
that write the line of insurance for which coverage is guaranteed. The amount of an insurer's assessment is generally
based on the relationship between that company's premium volume in the state and the premium volume of all
companies writing the particular line of insurance in the state. The Company has paid no material amounts to guaranty
15
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associations over the past two years. These payments, when made, are principally related to association costs incurred
due to the insolvency of various insurance companies. Future assessments depend on the number and magnitude
of insurance company insolvencies, and such assessments are therefore difficult to predict.
Most states have enacted legislation or adopted administrative rules and regulations covering such matters as the
acquisition of control of insurance companies, transactions between insurance companies and the persons controlling
them. The National Association of Insurance Commissioners has recommended model legislation on these subjects,
and all states where the Company's subsidiaries transact business have adopted, with some modifications, that model
legislation. Among the matters regulated by such statutes are the payments of dividends. These regulations have a
direct impact on the Company since its cash flow is substantially derived from dividends from its subsidiaries, and
adverse operating results in the insurance subsidiaries or the development of significant additional obligations in the
holding company could adversely impact liquidity at the holding company level. Statutory limitations of dividend
payments by subsidiaries are disclosed in Note 12 of the accompanying Consolidated Financial Statements.
While most regulation is at the state level, the federal government has increasingly expressed an interest in regulating
aspects of the insurance industry. All of these regulations at various levels of government increase the cost of conducting
business through increased compliance expenses. Also, existing regulations are constantly evolving through
administrative and court interpretations, and new regulations are often adopted. It is difficult to predict what impact
changes in regulation may have on the Company in the future. Changes in regulations could occur that might adversely
impact our ability to achieve acceptable levels of profitability and limit our growth.
Competition
The insurance subsidiaries are engaged in a highly competitive business and compete with many insurance companies
of substantially greater financial resources, including stock and mutual insurance companies. Mutual insurance
companies return profits, if any, to policyholders rather than shareholders; therefore, mutual insurance companies may
be able to charge lower net premiums than those charged by stock insurers. Accordingly, stock insurers must attempt
to achieve competitive premium rates through greater volume, efficiency of operations and control of expenses.
NSIC primarily markets its life and health insurance products through the home service system and independent
producers. Direct competition comes from home service companies and other insurance companies that utilize
independent producers to sell insurance products, of which there are many. NSIC's life and health products also
compete with products sold by ordinary life companies. NSIC writes policies primarily in Alabama, Georgia and
Mississippi. The market share of the total life and health premiums written is small because of the number of insurers
in this highly competitive field. The primary methods of competition in the field are service and price.
Because of the increased costs associated with a home service company, premium rates are generally higher than
ordinary products; as a result, competition from these ordinary insurers must be met through service. Initial costs of
distribution through independent agents are generally more than through home service distribution methods, but lower
commissions are paid in years subsequent to the first year of the policy so costs decline rapidly as policies renew after
the first year. The primary factor in controlling cost under the independent agent distribution method is maintaining a
high persistency rate. The persistency rate is the rate at which new business is maintained in renewal periods
subsequent to the first year. If a high persistency rate can be maintained, the overall costs of distribution are lowered
due to lower commission rate payments on policies in force subsequent to the first year.
The property and casualty subsidiaries market their products through independent agents and brokers, concentrating
primarily on dwelling fire and homeowners coverage. NSFC, though one of the larger writers of lower value dwelling
fire insurance in Alabama, nevertheless faces a number of competitors in this niche market. Moreover, larger general
line insurers also compete with NSFC. The market share in states other than Alabama is small. Price is the primary
method of competition. Because the Company utilizes independent agents, commission rates and service to the agent
are also important factors in whether the independent agent agrees to offer NSFC products over those of its competitors.
The Company primarily relies on an established independent agency force to market our insurance products. The
loss of independent agents could adversely impact both the retention of existing business and production of new
business.
Significant changes in the competitive environment in which we operate could materially impact our financial condition
or results of operations.
Technology and Cybersecurity
16
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Inflation
inflation.
Investment Risk and Liquidity
The Company shares the same risks from inflation as other companies. Inflation causes operating expenses to increase
and erodes the purchasing power of the Company's assets. A large portion of the Company's assets is invested in
fixed maturity investments. The purchasing power of these investments will be less at maturity because of inflation.
This is generally offset by the reserves that are a fixed liability and will be paid with cheaper dollars. Also, inflation
tends to increase investment yields, which may reduce the impact of the increased operating expenses caused by
Our invested assets are managed by company personnel. The majority of these investments consist of fixed maturity
securities. These securities are subject to price fluctuations due to changes in interest rates, and unfavorable changes
could materially reduce the market value of the Company's investment portfolio and adversely impact our financial
condition and results of operations. Fixed maturity investments are managed in light of anticipated liquidity needs and
duration of liabilities. Should we experience a significant change in liquidity needs for any reason, we may be forced
to sell fixed maturity securities at a loss to cover these liquidity needs. Changes in general economic conditions, the
stock market and various other external factors could also adversely impact the value of our investments and
consequently our results of operations and financial condition.
Impact of Economic and Credit Market Conditions on Our Investments
Our investment portfolio is exposed to economic and financial market risks, including changes in interest rates, credit
markets and prices of marketable equity and fixed-income securities. Events that unfolded in the latest recession had
a material impact on the valuations of our investments. Economic and credit market conditions during the recession
adversely affected the ability of some issuers of investment securities to repay their obligations and may further affect
the values of investment securities. If the carrying value of our investments exceeds the fair value, and the decline in
fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which
could adversely impact our results of operations and financial condition.
Litigation
and financial position.
We are routinely involved in litigation related to our insurance products. Litigation can involve claims for damages in
excess of stated policy limits and include damages for bad faith. Defense of these claims can often be expensive
adding to our loss adjustment expenses, and adverse jury verdicts could materially impact our results of operations
Dependence of the Company on Dividends from Insurance Subsidiaries
The Company is an insurance holding company with no significant operations and limited outside sources of income.
The primary asset of the Company is its stock in the insurance subsidiaries. The Company relies on dividends from
the insurance subsidiaries in order to pay operating expenses, to service debt obligations and to provide liquidity for
the payment of dividends to shareholders. The ability of the insurance subsidiaries to pay dividends is subject to
regulatory restrictions discussed in detail in Note 12 of the Consolidated Financial Statements included herein. Should
the insurance subsidiaries become subject to restrictions imposed by insurance regulations regarding the payment of
dividends, the ability of the Company to pay expenses, meet debt service requirements and pay cash dividends to
shareholders could be adversely impacted. Additionally, should business conditions deteriorate, we could be forced
to further limit or suspend dividend payments in order to protect our capital position.
Low Common Stock Trading Volume and Liquidity Limitations
We are a small public company with a large percentage of common stock outstanding owned by founding family
members, employees, officers and directors. Consequently, our average daily trading volume is very low with no
shares traded on some days and only a few thousand shares trading in a typical day. This low trading volume can
lead to significant volatility in our share price and limit a shareholders ability to dispose of large quantities of stock in
a short period of time.
Debt Covenants
Should we become unable to remain current on interest payments on our long-term debt, under our debt covenants,
we would be forced to suspend the payment of dividends to stockholders until interest payments are current.
Our insurance subsidiaries are dependent on computer technology and internet based platforms in the delivery of
insurance products. Our ability to innovate and manage technological change is key to remaining competitive in the
insurance industry. A breakdown of major systems, critical infrastructure or failure to maintain up-to-date technology
17
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associations over the past two years. These payments, when made, are principally related to association costs incurred
due to the insolvency of various insurance companies. Future assessments depend on the number and magnitude
of insurance company insolvencies, and such assessments are therefore difficult to predict.
Most states have enacted legislation or adopted administrative rules and regulations covering such matters as the
acquisition of control of insurance companies, transactions between insurance companies and the persons controlling
them. The National Association of Insurance Commissioners has recommended model legislation on these subjects,
and all states where the Company's subsidiaries transact business have adopted, with some modifications, that model
legislation. Among the matters regulated by such statutes are the payments of dividends. These regulations have a
direct impact on the Company since its cash flow is substantially derived from dividends from its subsidiaries, and
adverse operating results in the insurance subsidiaries or the development of significant additional obligations in the
holding company could adversely impact liquidity at the holding company level. Statutory limitations of dividend
payments by subsidiaries are disclosed in Note 12 of the accompanying Consolidated Financial Statements.
While most regulation is at the state level, the federal government has increasingly expressed an interest in regulating
aspects of the insurance industry. All of these regulations at various levels of government increase the cost of conducting
business through increased compliance expenses. Also, existing regulations are constantly evolving through
administrative and court interpretations, and new regulations are often adopted. It is difficult to predict what impact
changes in regulation may have on the Company in the future. Changes in regulations could occur that might adversely
impact our ability to achieve acceptable levels of profitability and limit our growth.
Competition
The insurance subsidiaries are engaged in a highly competitive business and compete with many insurance companies
of substantially greater financial resources, including stock and mutual insurance companies. Mutual insurance
companies return profits, if any, to policyholders rather than shareholders; therefore, mutual insurance companies may
be able to charge lower net premiums than those charged by stock insurers. Accordingly, stock insurers must attempt
to achieve competitive premium rates through greater volume, efficiency of operations and control of expenses.
NSIC primarily markets its life and health insurance products through the home service system and independent
producers. Direct competition comes from home service companies and other insurance companies that utilize
independent producers to sell insurance products, of which there are many. NSIC's life and health products also
compete with products sold by ordinary life companies. NSIC writes policies primarily in Alabama, Georgia and
Mississippi. The market share of the total life and health premiums written is small because of the number of insurers
in this highly competitive field. The primary methods of competition in the field are service and price.
Because of the increased costs associated with a home service company, premium rates are generally higher than
ordinary products; as a result, competition from these ordinary insurers must be met through service. Initial costs of
distribution through independent agents are generally more than through home service distribution methods, but lower
commissions are paid in years subsequent to the first year of the policy so costs decline rapidly as policies renew after
the first year. The primary factor in controlling cost under the independent agent distribution method is maintaining a
high persistency rate. The persistency rate is the rate at which new business is maintained in renewal periods
subsequent to the first year. If a high persistency rate can be maintained, the overall costs of distribution are lowered
due to lower commission rate payments on policies in force subsequent to the first year.
The property and casualty subsidiaries market their products through independent agents and brokers, concentrating
primarily on dwelling fire and homeowners coverage. NSFC, though one of the larger writers of lower value dwelling
fire insurance in Alabama, nevertheless faces a number of competitors in this niche market. Moreover, larger general
line insurers also compete with NSFC. The market share in states other than Alabama is small. Price is the primary
method of competition. Because the Company utilizes independent agents, commission rates and service to the agent
are also important factors in whether the independent agent agrees to offer NSFC products over those of its competitors.
The Company primarily relies on an established independent agency force to market our insurance products. The
loss of independent agents could adversely impact both the retention of existing business and production of new
Significant changes in the competitive environment in which we operate could materially impact our financial condition
business.
or results of operations.
Inflation
The Company shares the same risks from inflation as other companies. Inflation causes operating expenses to increase
and erodes the purchasing power of the Company's assets. A large portion of the Company's assets is invested in
fixed maturity investments. The purchasing power of these investments will be less at maturity because of inflation.
This is generally offset by the reserves that are a fixed liability and will be paid with cheaper dollars. Also, inflation
tends to increase investment yields, which may reduce the impact of the increased operating expenses caused by
inflation.
Investment Risk and Liquidity
Our invested assets are managed by company personnel. The majority of these investments consist of fixed maturity
securities. These securities are subject to price fluctuations due to changes in interest rates, and unfavorable changes
could materially reduce the market value of the Company's investment portfolio and adversely impact our financial
condition and results of operations. Fixed maturity investments are managed in light of anticipated liquidity needs and
duration of liabilities. Should we experience a significant change in liquidity needs for any reason, we may be forced
to sell fixed maturity securities at a loss to cover these liquidity needs. Changes in general economic conditions, the
stock market and various other external factors could also adversely impact the value of our investments and
consequently our results of operations and financial condition.
Impact of Economic and Credit Market Conditions on Our Investments
Our investment portfolio is exposed to economic and financial market risks, including changes in interest rates, credit
markets and prices of marketable equity and fixed-income securities. Events that unfolded in the latest recession had
a material impact on the valuations of our investments. Economic and credit market conditions during the recession
adversely affected the ability of some issuers of investment securities to repay their obligations and may further affect
the values of investment securities. If the carrying value of our investments exceeds the fair value, and the decline in
fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which
could adversely impact our results of operations and financial condition.
Litigation
We are routinely involved in litigation related to our insurance products. Litigation can involve claims for damages in
excess of stated policy limits and include damages for bad faith. Defense of these claims can often be expensive
adding to our loss adjustment expenses, and adverse jury verdicts could materially impact our results of operations
and financial position.
Dependence of the Company on Dividends from Insurance Subsidiaries
The Company is an insurance holding company with no significant operations and limited outside sources of income.
The primary asset of the Company is its stock in the insurance subsidiaries. The Company relies on dividends from
the insurance subsidiaries in order to pay operating expenses, to service debt obligations and to provide liquidity for
the payment of dividends to shareholders. The ability of the insurance subsidiaries to pay dividends is subject to
regulatory restrictions discussed in detail in Note 12 of the Consolidated Financial Statements included herein. Should
the insurance subsidiaries become subject to restrictions imposed by insurance regulations regarding the payment of
dividends, the ability of the Company to pay expenses, meet debt service requirements and pay cash dividends to
shareholders could be adversely impacted. Additionally, should business conditions deteriorate, we could be forced
to further limit or suspend dividend payments in order to protect our capital position.
Low Common Stock Trading Volume and Liquidity Limitations
We are a small public company with a large percentage of common stock outstanding owned by founding family
members, employees, officers and directors. Consequently, our average daily trading volume is very low with no
shares traded on some days and only a few thousand shares trading in a typical day. This low trading volume can
lead to significant volatility in our share price and limit a shareholders ability to dispose of large quantities of stock in
a short period of time.
Debt Covenants
Should we become unable to remain current on interest payments on our long-term debt, under our debt covenants,
we would be forced to suspend the payment of dividends to stockholders until interest payments are current.
Technology and Cybersecurity
Our insurance subsidiaries are dependent on computer technology and internet based platforms in the delivery of
insurance products. Our ability to innovate and manage technological change is key to remaining competitive in the
insurance industry. A breakdown of major systems, critical infrastructure or failure to maintain up-to-date technology
16
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could impact our ability to write new business and service existing policyholders, which would adversely impact our
results of operations and financial condition. Due to the nature of our business, we maintain confidential customer
information. The occurrence of computer viruses, information security breaches or unanticipated events could affect
the data processing systems of the Company, our service providers or information maintained on our customers. The
occurrence of any of these events could impact the Company's business and adversely affect our financial condition
and results of operations.
acres of undeveloped commercial real estate in Greenville, Alabama. We sell undeveloped lots from this development,
and the development has no depreciable improvements.
Capitalized along with the Greenville property are site preparation costs, including clearing, filling and leveling of land.
There are no material improvements such as paving, parking lots or fencing that would be recorded as land
improvements and depreciated over the appropriate useful life.
Access to Capital
We rely on debt and equity capital to operate. Adverse operating results, general market and economic conditions
could impair our ability to raise new capital needed to support our operations.
Item 3. Legal Proceedings
The Company and its subsidiaries are named parties to litigation related to the conduct of their insurance operations.
Further information regarding details of pending suits can be found in Note 16 to the Consolidated Financial Statements.
Key Personnel
As a small company within the insurance industry, we could be adversely impacted by the loss of key personnel. Our
ability to remain competitive is contingent upon our ability to attract and retain qualified personnel in all aspects of our
operations.
Accounting Standards
Our financial statements are prepared based upon generally accepted accounting standards issued by the Financial
Accounting Standards Board along with standards set by other regulatory organizations. We are required to adopt
newly issued or revised accounting standards that are issued periodically. Future changes could impact accounting
treatment applied to financial statements and could have a material adverse impact on the Company's results of
operations and financial conditions. Potential changes in accounting standards that are currently expected to impact
the Company are disclosed in the Consolidated Notes to Financial Statements included herein.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a pandemic.
Management recognizes that insurance is an essential source of financial protection and we must be able to respond
to our policyholder and agent needs while taking steps to protect our employees. While measures are in place to allow
employees to work remotely in order to limit any disruption to our policyholders and agents, it is currently unknown
how the COVID-19 Pandemic will ultimately impact our business. We do not anticipate disruptions to our home office
services, however we could face temporary and sporadic staffing shortages depending on the duration and severity
of the pandemic in our area. The ability of insureds to obtain documentation required to complete both the application
and claim processes could be impacted. Independent agents may close their offices in response to the COVID-19
Pandemic or also face staffing shortages. While some of our insureds may experience temporary closures of their
local independent agencies, payments can also be made via telephone, through our website or mailed to the Home
Office. We offer comprehensive online access to our agents that includes information on the agencies' policyholders
and the ability to issue policies through our online portal. We also maintain customer service staff to support our
independent agents and policyholders.
Management expects the most significant impact to be from the effects of the COVID-10 Pandemic on the economy.
As disclosed above, our investment portfolio is exposed to economic and financial market risks. Events that unfold
as part of the COVID-19 Pandemic may have a material impact on the valuations of our investments. Economic and
credit market conditions during the COVID-19 Pandemic may adversely affect the ability of some issuers of investment
securities to repay their obligations and may further affect the values of investment securities. Declines in fair value
will need to be evaluated and may be deemed to be other-than-temporary which will require write downs in value of
our investments. Investment write downs could adversely impact our results of operations and financial condition.
Item 1B. Unresolved Staff Comments
As a smaller reporting company, the Company is not required to furnish the information required in Item 1B.
Item 2. Properties
Our principal executive offices, owned by NSIC, are located at 661 East Davis Street, Elba, Alabama. The executive
offices are shared by the insurance subsidiaries. The building was constructed in 1977 with an addition added in 2008.
The executive offices total approximately 30,700 square feet. The Company believes this space to be adequate for
our immediate needs.
The Company and its subsidiaries own certain real estate investment properties. The Company owns approximately
211 acres of real estate in Coffee County in Alabama. We also own, through our subsidiary NSFC, approximately 85
18
18
Item 4. Mine Safety Disclosures
This section is not applicable.
Part II
Securities
indicated:
Shareholders
Dividends
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
The capital stock of the Company is traded in the NASDAQ Global Market. Quotations are furnished by the National
Association of Security Dealers Automated Quotations System (NASDAQ). The trade symbol is NSEC.
The following table sets forth the high and low sales prices per share, as reported by NASDAQ, during the period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
Stock Closing Prices
High
Low
High
Low
2019
13.01 $
14.29 $
12.00 $
15.60 $
11.22 $
11.00 $
10.70 $
10.01 $
2018
17.17 $
16.75 $
17.24 $
14.75 $
15.20
15.45
13.52
12.00
The number of shareholders of the Company's common stock was approximately 1,200 and the Company had
2,530,678 shares of common stock outstanding on March 19, 2020.
The following table sets forth quarterly dividend payment information for the Company for the periods indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends Per Share
2019
2018
$
$
$
$
0.05 $
0.05 $
0.05 $
0.06 $
0.05
0.05
0.05
0.05
Discussion regarding dividend restrictions may be found on page 40 of the Managements' Discussion and Analysis
as well as in Note 12 of the Consolidated Financial Statements.
The payment of shareholder dividends is subject to the discretion of our Board of Directors and is dependent upon
many factors including our operating results, financial condition, capital requirements and general economic conditions.
Total shareholder dividends paid in 2019 totaled $531,000.
Future dividends are dependent on future earnings, the Company's financial condition and other factors evaluated
periodically by management and the Board of Directors. The Company is an insurance holding company and depends
upon the dividends from the insurance subsidiaries to pay operating expenses and to provide liquidity for the payment
of shareholder dividends. The payment of shareholder dividends is subject to the profitability of the insurance
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could impact our ability to write new business and service existing policyholders, which would adversely impact our
results of operations and financial condition. Due to the nature of our business, we maintain confidential customer
information. The occurrence of computer viruses, information security breaches or unanticipated events could affect
the data processing systems of the Company, our service providers or information maintained on our customers. The
occurrence of any of these events could impact the Company's business and adversely affect our financial condition
We rely on debt and equity capital to operate. Adverse operating results, general market and economic conditions
could impair our ability to raise new capital needed to support our operations.
As a small company within the insurance industry, we could be adversely impacted by the loss of key personnel. Our
ability to remain competitive is contingent upon our ability to attract and retain qualified personnel in all aspects of our
and results of operations.
Access to Capital
Key Personnel
operations.
Accounting Standards
Our financial statements are prepared based upon generally accepted accounting standards issued by the Financial
Accounting Standards Board along with standards set by other regulatory organizations. We are required to adopt
newly issued or revised accounting standards that are issued periodically. Future changes could impact accounting
treatment applied to financial statements and could have a material adverse impact on the Company's results of
operations and financial conditions. Potential changes in accounting standards that are currently expected to impact
the Company are disclosed in the Consolidated Notes to Financial Statements included herein.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a pandemic.
Management recognizes that insurance is an essential source of financial protection and we must be able to respond
to our policyholder and agent needs while taking steps to protect our employees. While measures are in place to allow
employees to work remotely in order to limit any disruption to our policyholders and agents, it is currently unknown
how the COVID-19 Pandemic will ultimately impact our business. We do not anticipate disruptions to our home office
services, however we could face temporary and sporadic staffing shortages depending on the duration and severity
of the pandemic in our area. The ability of insureds to obtain documentation required to complete both the application
and claim processes could be impacted. Independent agents may close their offices in response to the COVID-19
Pandemic or also face staffing shortages. While some of our insureds may experience temporary closures of their
local independent agencies, payments can also be made via telephone, through our website or mailed to the Home
Office. We offer comprehensive online access to our agents that includes information on the agencies' policyholders
and the ability to issue policies through our online portal. We also maintain customer service staff to support our
independent agents and policyholders.
Management expects the most significant impact to be from the effects of the COVID-10 Pandemic on the economy.
As disclosed above, our investment portfolio is exposed to economic and financial market risks. Events that unfold
as part of the COVID-19 Pandemic may have a material impact on the valuations of our investments. Economic and
credit market conditions during the COVID-19 Pandemic may adversely affect the ability of some issuers of investment
securities to repay their obligations and may further affect the values of investment securities. Declines in fair value
will need to be evaluated and may be deemed to be other-than-temporary which will require write downs in value of
our investments. Investment write downs could adversely impact our results of operations and financial condition.
Item 1B. Unresolved Staff Comments
As a smaller reporting company, the Company is not required to furnish the information required in Item 1B.
acres of undeveloped commercial real estate in Greenville, Alabama. We sell undeveloped lots from this development,
and the development has no depreciable improvements.
Capitalized along with the Greenville property are site preparation costs, including clearing, filling and leveling of land.
There are no material improvements such as paving, parking lots or fencing that would be recorded as land
improvements and depreciated over the appropriate useful life.
Item 3. Legal Proceedings
The Company and its subsidiaries are named parties to litigation related to the conduct of their insurance operations.
Further information regarding details of pending suits can be found in Note 16 to the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
This section is not applicable.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The capital stock of the Company is traded in the NASDAQ Global Market. Quotations are furnished by the National
Association of Security Dealers Automated Quotations System (NASDAQ). The trade symbol is NSEC.
The following table sets forth the high and low sales prices per share, as reported by NASDAQ, during the period
indicated:
Stock Closing Prices
2019
2018
High
Low
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
13.01 $
14.29 $
12.00 $
15.60 $
11.22 $
11.00 $
10.70 $
10.01 $
17.17 $
16.75 $
17.24 $
14.75 $
15.20
15.45
13.52
12.00
Shareholders
The number of shareholders of the Company's common stock was approximately 1,200 and the Company had
2,530,678 shares of common stock outstanding on March 19, 2020.
Dividends
The following table sets forth quarterly dividend payment information for the Company for the periods indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends Per Share
2018
2019
$
$
$
$
0.05 $
0.05 $
0.05 $
0.06 $
0.05
0.05
0.05
0.05
Item 2. Properties
our immediate needs.
Our principal executive offices, owned by NSIC, are located at 661 East Davis Street, Elba, Alabama. The executive
offices are shared by the insurance subsidiaries. The building was constructed in 1977 with an addition added in 2008.
The executive offices total approximately 30,700 square feet. The Company believes this space to be adequate for
The payment of shareholder dividends is subject to the discretion of our Board of Directors and is dependent upon
many factors including our operating results, financial condition, capital requirements and general economic conditions.
Total shareholder dividends paid in 2019 totaled $531,000.
The Company and its subsidiaries own certain real estate investment properties. The Company owns approximately
211 acres of real estate in Coffee County in Alabama. We also own, through our subsidiary NSFC, approximately 85
Future dividends are dependent on future earnings, the Company's financial condition and other factors evaluated
periodically by management and the Board of Directors. The Company is an insurance holding company and depends
upon the dividends from the insurance subsidiaries to pay operating expenses and to provide liquidity for the payment
of shareholder dividends. The payment of shareholder dividends is subject to the profitability of the insurance
18
19
19
Discussion regarding dividend restrictions may be found on page 40 of the Managements' Discussion and Analysis
as well as in Note 12 of the Consolidated Financial Statements.
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subsidiaries and the ability of the insurance subsidiaries to pay dividends to the holding company. Dividends from the
insurance subsidiaries are subject to approval of the regulator in the state of domicile, the Alabama Department of
Insurance.
Five-Year Financial Information
($ in thousands)
Securities authorized for issuance under equity compensation plans
The Company's 2009 Equity Incentive Plan (the "2009 Plan") expired during 2019. Upon expiration, the Company
adopted a new equity based compensation plan on substantially the same terms as the 2009 Plan. The new 2019
Equity Incentive Plan was adopted by our shareholders at the 2019 Annual Shareholders Meeting. The following table
sets forth securities authorized for issuance under the Company's equity compensations plan:
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average exercise
price of outstanding
options, warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
—
—
—
—
—
—
200,000
—
200,000
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Share Repurchases in the Fourth Quarter of 2019
The following table sets forth information regarding the repurchase of shares of our common stock during the quarter
ended December 31, 2019:
Period
Dec. 1 - Dec. 31, 2019
Total
Total Number of
Shares Purchased
Average Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs (a)
Approximate Dollar
Value of Shares that
May Yet be
Purchased Under
the Program (a)
436 $
436
15.18
436 $
436
993,384
(a) On November 20, 2019, our Board of Directors authorized the repurchase of up to $1,000,000 of common stock.
Under the repurchase program, the Company is authorized to repurchase shares in open market purchases as well
as in privately negotiated transactions from time to time through May 31, 2020. Stock purchased under this program
will be held as treasury stock and will be available for general corporate purposes. The repurchase program’s terms
will comply with applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of
1934, as amended. The program is also subject to market conditions, applicable legal requirements, alternative cash
needs that may arise and other factors, as determined by Company management. The repurchase program does not
obligate the Company to acquire a specific number of shares and may be suspended or terminated at any time.
Repurchases of the Company’s common stock will be financed primarily through free cash flow.
Item 6. Selected Financial Data
Under smaller reporting company rules we are not required to disclose information required under Item 6. However,
in order to provide information to our investors, we have elected to provide certain selected financial data.
20
20
2019
2018
2017
2016
2015
$ 60,411
$ 60,717
$ 61,388
$ 61,525
$ 60,389
$ 59,883
$ 60,856
$ 61,163
$ 61,398
$ 59,462
3,876
3,055
585
3,941
(552)
612
3,647
234
596
3,892
998
605
3,462
503
623
$ 67,399
$ 64,857
$ 65,640
$ 66,893
$ 64,050
$
$
4,067
8,080
$
$
779
$ (1,203)
(1,330)
$
1
$
$
3,063
3,545
$
$
4,697
2,450
$ 153,934
$ 144,231
$ 146,438
$ 148,579
$ 147,841
$ 14,164
$ 14,352
$ 15,639
$ 17,126
$ 17,957
$ 53,461
$ 45,866
$ 47,625
$ 48,052
$ 44,883
Selected Financial Data:
Net premiums written
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
Total revenues
Net income (loss)
Comprehensive income (loss)
Total assets
Total debt outstanding
Total shareholders' equity
($ in thousands, except per share)
Key measures:
Return on average equity
Yield on investments, before tax
Debt to equity
Per share data:
Book value
Net income (loss)
Dividends paid
($ in thousands)
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Shares outstanding (at year end)
2,531
2,527
2,522
2,517
2,512
8.19%
3.35%
26.49%
100.10%
1.67%
3.47%
31.29%
(2.51)%
3.20 %
32.84 %
6.59%
3.45%
35.64%
94.59%
10.72%
3.12%
40.01%
91.00%
US GAAP combined ratio (P&C Segment)
101.31%
102.25 %
P&C Catastrophe losses, net
$
6,623
$ 14,516
$ 14,280
$
9,742
$
5,373
Catastrophe loss impact on combined ratio
(percentage points)
12.13
16.48
25.67
17.47
10.11
$
$
$
21.12
1.61
0.21
$
$
$
18.15
0.31
0.20
$
$
$
18.88
(0.48)
0.20
$
$
$
19.09
1.22
0.18
$
$
$
17.87
1.87
0.16
Quarterly Information:
Premiums
Investment
Investment
Claims and
& Other
Income
Gains
(Losses)
Benefit
Payments
Net Income
(Loss)
Net Income
(Loss) Per
Share
$
14,718 $
1,108 $
2,120 $
9,023 $
2,443 $
117
(117)
935
10,900
9,750
8,925
(587)
430
1,781
59,883 $
4,461 $
3,055 $
38,598 $
4,067 $
15,059 $
1,081 $
(264) $
9,427 $
471 $
(200)
456
(544)
9,772
9,825
11,385
457
907
(1,056)
$
60,856 $
4,553 $
(552) $
40,409 $
779 $
$
$
14,990
15,209
14,966
15,260
15,445
15,092
0.97
(0.23)
0.17
0.70
1.61
0.19
0.18
0.36
(0.42)
0.31
1,103
1,137
1,113
1,143
1,165
1,164
21
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subsidiaries and the ability of the insurance subsidiaries to pay dividends to the holding company. Dividends from the
Five-Year Financial Information
Insurance.
($ in thousands)
Selected Financial Data:
Net premiums written
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
Total revenues
Net income (loss)
Comprehensive income (loss)
Total assets
Total debt outstanding
Total shareholders' equity
Shares outstanding (at year end)
($ in thousands, except per share)
Key measures:
Return on average equity
Yield on investments, before tax
Debt to equity
US GAAP combined ratio (P&C Segment)
P&C Catastrophe losses, net
Catastrophe loss impact on combined ratio
(percentage points)
2019
$ 60,411
$ 59,883
3,876
3,055
585
$ 67,399
4,067
$
8,080
$
$ 153,934
$ 14,164
$ 53,461
2,531
2018
$ 60,717
$ 60,856
3,941
(552)
612
$ 64,857
2017
$ 61,388
$ 61,163
3,647
234
596
$ 65,640
779
$
$
(1,330)
$ 144,231
$ 14,352
$ 45,866
$ (1,203)
$
1
$ 146,438
$ 15,639
$ 47,625
2016
$ 61,525
$ 61,398
3,892
998
605
$ 66,893
3,063
$
$
3,545
$ 148,579
$ 17,126
$ 48,052
2015
$ 60,389
$ 59,462
3,462
503
623
$ 64,050
4,697
$
$
2,450
$ 147,841
$ 17,957
$ 44,883
2,527
2,522
2,517
2,512
8.19%
3.35%
26.49%
100.10%
6,623
1.67%
3.47%
31.29%
101.31%
(2.51)%
3.20 %
32.84 %
102.25 %
$ 14,516
$ 14,280
$
6.59%
3.45%
35.64%
94.59%
9,742
12.13
16.48
25.67
17.47
21.12
1.61
0.21
$
$
$
18.15
0.31
0.20
$
$
$
18.88
(0.48)
0.20
$
$
$
19.09
1.22
0.18
10.72%
3.12%
40.01%
91.00%
5,373
10.11
17.87
1.87
0.16
$
$
$
$
$
$
$
$
Premiums
Investment
& Other
Income
Investment
Gains
(Losses)
Claims and
Benefit
Payments
Net Income
(Loss)
Net Income
(Loss) Per
Share
$
$
$
$
14,718 $
14,990
15,209
14,966
59,883 $
15,059 $
15,260
15,445
15,092
60,856 $
1,108 $
1,103
1,137
1,113
4,461 $
1,081 $
1,143
1,165
1,164
4,553 $
21
21
2,120 $
117
(117)
935
3,055 $
9,023 $
10,900
9,750
8,925
38,598 $
2,443 $
(587)
430
1,781
4,067 $
(264) $
(200)
456
(544)
(552) $
9,427 $
9,772
9,825
11,385
40,409 $
471 $
457
907
(1,056)
779 $
0.97
(0.23)
0.17
0.70
1.61
0.19
0.18
0.36
(0.42)
0.31
Per share data:
Book value
Net income (loss)
Dividends paid
($ in thousands)
Quarterly Information:
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
insurance subsidiaries are subject to approval of the regulator in the state of domicile, the Alabama Department of
Securities authorized for issuance under equity compensation plans
The Company's 2009 Equity Incentive Plan (the "2009 Plan") expired during 2019. Upon expiration, the Company
adopted a new equity based compensation plan on substantially the same terms as the 2009 Plan. The new 2019
Equity Incentive Plan was adopted by our shareholders at the 2019 Annual Shareholders Meeting. The following table
sets forth securities authorized for issuance under the Company's equity compensations plan:
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average exercise
equity compensation plans
price of outstanding
options, warrants and rights
(excluding securities
reflected in column (a))
(b)
(c)
Number of securities
remaining available for
future issuance under
—
—
—
—
—
—
200,000
—
200,000
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Share Repurchases in the Fourth Quarter of 2019
The following table sets forth information regarding the repurchase of shares of our common stock during the quarter
ended December 31, 2019:
Total Number of
Shares Purchased
Average Price Paid
Announced Plans or
per Share
Programs (a)
Total Number of
Shares Purchased
as Part of Publicly
Approximate Dollar
Value of Shares that
May Yet be
Purchased Under
the Program (a)
Period
Total
Dec. 1 - Dec. 31, 2019
15.18
993,384
436 $
436
436 $
436
(a) On November 20, 2019, our Board of Directors authorized the repurchase of up to $1,000,000 of common stock.
Under the repurchase program, the Company is authorized to repurchase shares in open market purchases as well
as in privately negotiated transactions from time to time through May 31, 2020. Stock purchased under this program
will be held as treasury stock and will be available for general corporate purposes. The repurchase program’s terms
will comply with applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of
1934, as amended. The program is also subject to market conditions, applicable legal requirements, alternative cash
needs that may arise and other factors, as determined by Company management. The repurchase program does not
obligate the Company to acquire a specific number of shares and may be suspended or terminated at any time.
Repurchases of the Company’s common stock will be financed primarily through free cash flow.
Item 6. Selected Financial Data
Under smaller reporting company rules we are not required to disclose information required under Item 6. However,
in order to provide information to our investors, we have elected to provide certain selected financial data.
20
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights significant factors influencing the consolidated financial position and results of
operations of The National Security Group, Inc. (referred to in this document as "we", "our", "us", "Company" or "NSEC")
and its subsidiaries. We are a “smaller reporting company” under Securities and Exchange Commission (SEC)
regulations and therefore qualify for the scaled disclosure of smaller reporting companies. In general, the same
information is required to be disclosed in the management discussion and analysis by smaller reporting companies
except that the discussion need only cover the latest two year period and disclosures relating to contractual obligations
are not required. In accordance with the scaled disclosure requirements, the following discussion generally covers
the change in financial condition, results of operations and cash flows for the year ended December 31, 2019 compared
to the year ended December 31, 2018 and should be read in conjunction with the Selected Financial Data and
Consolidated Financial Statements and Notes which accompany this report. Please refer to our note regarding forward-
looking statements on page 4 of this report.
The National Security Group, Inc. operates in ten states with 45.9% of total premium revenue generated in the states
of Alabama and Mississippi. We operate in two business segments summarized as follows:
• The Property and Casualty (P&C) segment is the most significant segment, accounting for 91.1% of gross
earned premium in 2019. The P&C segment operates in the states of Alabama, Arkansas, Georgia, Louisiana,
Mississippi, Oklahoma, South Carolina, and Tennessee.
• The Life segment accounted for 8.9% of gross premium revenue in 2019. The Life segment is licensed to
underwrite life and accident and health insurance in Alabama, Florida, Georgia, Mississippi, South Carolina,
Tennessee and Texas.
The P&C segment is conducted through National Security Fire & Casualty Company (NSFC), a wholly owned subsidiary
of the Company organized in 1959, and Omega One Insurance Company (Omega), a wholly owned subsidiary of
NSFC organized in 1992. Omega produces no direct written premium and is authorized to underwrite lines of business
similar to NSFC; therefore, all references to NSFC or P&C segment in the remainder of this discussion will include the
insurance operations of both NSFC and Omega.
The Life segment business is conducted through National Security Insurance Company (NSIC), a wholly owned
subsidiary of the Company organized in 1947. All references to NSIC or life segment in the remainder of this
management discussion and analysis will refer to the combined life, accident and health insurance operations.
Summary
Our income is principally derived from net underwriting profits and investment income. Net underwriting profit is
principally derived from earned premiums received less claims paid, sales commissions to agents, costs of underwriting
and insurance taxes and fees. Investment income includes interest and dividend income and gains and losses on
investment holdings.
All of the insurance subsidiaries are Alabama domiciled insurance companies; therefore, the Alabama Department of
Insurance is the primary insurance regulator. However, each subsidiary is subject to regulation by the respective
insurance regulators of each state in which it is licensed to transact business. Insurance rates charged by each of the
insurance subsidiaries are typically subject to review and approval by the insurance department for the respective
state in which the rates will apply.
All of our insurance companies have been assigned ratings by A.M. Best Co (Best). On April 11, 2019, A. M. Best
affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR)
of "bbb" of NSFC. In addition, A.M. Best affirmed the FSR of B+ (Good) and Long-Term ICR of "bbb-" of Omega. The
A.M. Best outlook for the ratings is "stable" for NSFC and Omega. A.M. Best upgraded the FSR to B++ (Good) and
the Long-Term ICR to "bbb" for NSIC. The outlook for the ratings of NSIC is "stable". A.M. Best also affirmed the
Long-Term ICR of "bb" of the parent holding company, NSEC, with a "stable" outlook.
The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On September 30, 2019,
Demotech affirmed a Financial Stability Rating of A (Exceptional) for both NSFC and Omega.
The earnings in the property and casualty segment have seasonal volatility due to severe storm activity resulting in
incurred losses and loss adjustment expenses from hurricane, tornado, wind and hail related damage. These storm
systems or other natural disasters are classified as catastrophes (referred to as "catastrophe" or "cat" events/losses
throughout the remainder of this document) by Property Claim Service (PCS) when an individual event causes $25
million or more in industry wide direct insured losses and affect a significant number of policyholders and insurers.
A primary process utilized by management to review financial performance is evaluating the operating performance
of each segment before intercompany eliminations. By performing the evaluation in this manner, management can
better assess the profitability of each segment on a standalone basis. To provide information similar to that utilized by
management, industry segment information presented in this discussion is presented on a pretax basis by segment
before eliminations. Note 15 to the consolidated financial statements in this Form 10-K contains a reconciliation of net
income by segment to consolidated net income.
In order to present information as analyzed by Company management, the P&C segment combined ratio in this
Management Discussion and Analysis is presented before certain intercompany eliminations. These intercompany
eliminations, which are presented in Note 15 to the Consolidated Financial Statements, primarily include management
and service fees paid by each subsidiary to NSEC, along with fees and expenses of the Company's employee claims
adjusters. Claims adjusters are employees of NSIC but provide claim adjustment services to NSFC at rates comparable
to those paid to independent (non-employee) adjusters utilized by NSFC. Management believes that the analysis of
the P&C segment combined ratio prior to elimination of the intercompany transactions provides a more realistic view
of performance and is consistent with our internal evaluation of operating performance.
In January of 2016, the FASB issued guidance that requires equity securities held for investment to be measured at
fair value with changes in fair value recognized in net income through investment gains and losses. Under previous
guidance, the change in fair value was reported as a component of Other Comprehensive Income with the change
reflected in shareholders' equity and did not impact net income. For us, this new guidance became effective January
1, 2018 and is reported in the Statement of Operations on the line item "Investment gains (losses)" and as a
subcomponent in the financial statement notes and this discussion as "change in value of equity securities". Due to
the inherent volatility of equity securities, which can be impacted by both company specific and broad economic factors,
including the change in fair value of equity securities as a component of net income is likely to produce significant
fluctuations in net income from period to period.
Information in this discussion is presented in whole dollars rounded to the nearest thousand, except for per share
information. Tabular amounts are presented in thousands.
For the year ended December 31, 2019, net income for the Company totaled $4,067,000, $1.61 income per share,
compared to net income of $779,000, $0.31 income per share, for the year ended December 31, 2018; an increase
of $3,288,000. Results in 2019 were improved primarily due to an increase in realized investment gains. Results for
2018 were negatively impacted by Hurricane Michael. On October 10, 2018, Hurricane Michael made landfall in the
panhandle of Florida, as a Category 4 storm. Hurricane Michael primarily impacted our policyholders in Georgia; but
also affected policyholders in Alabama and South Carolina. The losses incurred from Hurricane Michael reduced fourth
quarter 2018 net income by $3,160,000.
Pretax income from operations in 2019 totaled $1,525,000 compared to a pretax income from operations of $1,617,000
in 2018. While pretax income is comparable between periods, weather related losses in the P&C segment were
elevated in both years. Losses from Hurricane Michael adversely impacted operating income in 2018 while a higher
frequency of non-catastrophe wind and hail losses reduced 2019 pretax operating income.
22
22
23
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights significant factors influencing the consolidated financial position and results of
operations of The National Security Group, Inc. (referred to in this document as "we", "our", "us", "Company" or "NSEC")
and its subsidiaries. We are a “smaller reporting company” under Securities and Exchange Commission (SEC)
regulations and therefore qualify for the scaled disclosure of smaller reporting companies. In general, the same
information is required to be disclosed in the management discussion and analysis by smaller reporting companies
except that the discussion need only cover the latest two year period and disclosures relating to contractual obligations
are not required. In accordance with the scaled disclosure requirements, the following discussion generally covers
the change in financial condition, results of operations and cash flows for the year ended December 31, 2019 compared
to the year ended December 31, 2018 and should be read in conjunction with the Selected Financial Data and
Consolidated Financial Statements and Notes which accompany this report. Please refer to our note regarding forward-
looking statements on page 4 of this report.
The National Security Group, Inc. operates in ten states with 45.9% of total premium revenue generated in the states
of Alabama and Mississippi. We operate in two business segments summarized as follows:
• The Property and Casualty (P&C) segment is the most significant segment, accounting for 91.1% of gross
earned premium in 2019. The P&C segment operates in the states of Alabama, Arkansas, Georgia, Louisiana,
Mississippi, Oklahoma, South Carolina, and Tennessee.
• The Life segment accounted for 8.9% of gross premium revenue in 2019. The Life segment is licensed to
underwrite life and accident and health insurance in Alabama, Florida, Georgia, Mississippi, South Carolina,
Tennessee and Texas.
The P&C segment is conducted through National Security Fire & Casualty Company (NSFC), a wholly owned subsidiary
of the Company organized in 1959, and Omega One Insurance Company (Omega), a wholly owned subsidiary of
NSFC organized in 1992. Omega produces no direct written premium and is authorized to underwrite lines of business
similar to NSFC; therefore, all references to NSFC or P&C segment in the remainder of this discussion will include the
insurance operations of both NSFC and Omega.
The Life segment business is conducted through National Security Insurance Company (NSIC), a wholly owned
subsidiary of the Company organized in 1947. All references to NSIC or life segment in the remainder of this
management discussion and analysis will refer to the combined life, accident and health insurance operations.
Our income is principally derived from net underwriting profits and investment income. Net underwriting profit is
principally derived from earned premiums received less claims paid, sales commissions to agents, costs of underwriting
and insurance taxes and fees. Investment income includes interest and dividend income and gains and losses on
investment holdings.
All of the insurance subsidiaries are Alabama domiciled insurance companies; therefore, the Alabama Department of
Insurance is the primary insurance regulator. However, each subsidiary is subject to regulation by the respective
insurance regulators of each state in which it is licensed to transact business. Insurance rates charged by each of the
insurance subsidiaries are typically subject to review and approval by the insurance department for the respective
state in which the rates will apply.
All of our insurance companies have been assigned ratings by A.M. Best Co (Best). On April 11, 2019, A. M. Best
affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR)
of "bbb" of NSFC. In addition, A.M. Best affirmed the FSR of B+ (Good) and Long-Term ICR of "bbb-" of Omega. The
A.M. Best outlook for the ratings is "stable" for NSFC and Omega. A.M. Best upgraded the FSR to B++ (Good) and
the Long-Term ICR to "bbb" for NSIC. The outlook for the ratings of NSIC is "stable". A.M. Best also affirmed the
Long-Term ICR of "bb" of the parent holding company, NSEC, with a "stable" outlook.
The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On September 30, 2019,
Demotech affirmed a Financial Stability Rating of A (Exceptional) for both NSFC and Omega.
The earnings in the property and casualty segment have seasonal volatility due to severe storm activity resulting in
incurred losses and loss adjustment expenses from hurricane, tornado, wind and hail related damage. These storm
systems or other natural disasters are classified as catastrophes (referred to as "catastrophe" or "cat" events/losses
throughout the remainder of this document) by Property Claim Service (PCS) when an individual event causes $25
million or more in industry wide direct insured losses and affect a significant number of policyholders and insurers.
A primary process utilized by management to review financial performance is evaluating the operating performance
of each segment before intercompany eliminations. By performing the evaluation in this manner, management can
better assess the profitability of each segment on a standalone basis. To provide information similar to that utilized by
management, industry segment information presented in this discussion is presented on a pretax basis by segment
before eliminations. Note 15 to the consolidated financial statements in this Form 10-K contains a reconciliation of net
income by segment to consolidated net income.
In order to present information as analyzed by Company management, the P&C segment combined ratio in this
Management Discussion and Analysis is presented before certain intercompany eliminations. These intercompany
eliminations, which are presented in Note 15 to the Consolidated Financial Statements, primarily include management
and service fees paid by each subsidiary to NSEC, along with fees and expenses of the Company's employee claims
adjusters. Claims adjusters are employees of NSIC but provide claim adjustment services to NSFC at rates comparable
to those paid to independent (non-employee) adjusters utilized by NSFC. Management believes that the analysis of
the P&C segment combined ratio prior to elimination of the intercompany transactions provides a more realistic view
of performance and is consistent with our internal evaluation of operating performance.
In January of 2016, the FASB issued guidance that requires equity securities held for investment to be measured at
fair value with changes in fair value recognized in net income through investment gains and losses. Under previous
guidance, the change in fair value was reported as a component of Other Comprehensive Income with the change
reflected in shareholders' equity and did not impact net income. For us, this new guidance became effective January
1, 2018 and is reported in the Statement of Operations on the line item "Investment gains (losses)" and as a
subcomponent in the financial statement notes and this discussion as "change in value of equity securities". Due to
the inherent volatility of equity securities, which can be impacted by both company specific and broad economic factors,
including the change in fair value of equity securities as a component of net income is likely to produce significant
fluctuations in net income from period to period.
Information in this discussion is presented in whole dollars rounded to the nearest thousand, except for per share
information. Tabular amounts are presented in thousands.
Summary
For the year ended December 31, 2019, net income for the Company totaled $4,067,000, $1.61 income per share,
compared to net income of $779,000, $0.31 income per share, for the year ended December 31, 2018; an increase
of $3,288,000. Results in 2019 were improved primarily due to an increase in realized investment gains. Results for
2018 were negatively impacted by Hurricane Michael. On October 10, 2018, Hurricane Michael made landfall in the
panhandle of Florida, as a Category 4 storm. Hurricane Michael primarily impacted our policyholders in Georgia; but
also affected policyholders in Alabama and South Carolina. The losses incurred from Hurricane Michael reduced fourth
quarter 2018 net income by $3,160,000.
Pretax income from operations in 2019 totaled $1,525,000 compared to a pretax income from operations of $1,617,000
in 2018. While pretax income is comparable between periods, weather related losses in the P&C segment were
elevated in both years. Losses from Hurricane Michael adversely impacted operating income in 2018 while a higher
frequency of non-catastrophe wind and hail losses reduced 2019 pretax operating income.
22
23
23
Table of Contents
Financial results for the year ended December 31, 2019 and 2018 were as follows:
in equity investments of $203,000 in 2018. We also recognized $233,000 in realized gains on the sale of equity
Consolidated Financial Summary
($ in thousands, except per share)
Gross premiums written
Net premiums written
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
Policyholder benefits and settlement expenses
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Total Revenues
Taxes, licenses and fees
Interest expense
Income Before Income Taxes
Income tax expense
Net Income
Income Per Common Share
Total Benefits, Losses and Expenses
Reconciliation of Net Income to non-GAAP Measurement
Net income
Income tax expense
Investment (gains) losses, net
Pretax Income From Operations
Year ended
December 31
2019
2018
$
$
$
$
$
$
$
67,529 $
60,411 $
59,883 $
3,876
3,055
585
67,399
38,598
3,459
7,429
9,698
2,470
1,165
62,819
4,580
513
4,067 $
1.61 $
4,067 $
513
(3,055)
1,525 $
67,174
60,717
60,856
3,941
(552)
612
64,857
40,409
3,597
7,555
8,839
2,157
1,235
63,792
1,065
286
779
0.31
779
286
552
1,617
We provide a reconciliation of net income to the non-GAAP measurement "pretax income (loss) from operations". The
purpose of this reconciliation is to provide investors with information routinely utilized by management in analyzing
and comparing the performance of our insurance operations between periods. This information reflects the financial
performance of our insurance operations without the impact of realized capital gains/losses on investments and
unrealized capital gains on equity securities which are now required to be included as a component of net income
under GAAP. We typically invest in equity securities with a long-term view. Short-term volatility due to changes in
market value of equity securities can mask both the positive or negative performance of our insurance operations from
period to period.
Premium Revenue
For the year ended December 31, 2019, net premiums earned were down $973,000 at $59,883,000 compared to
$60,856,000 during the same period last year. The decrease in premium revenue was primarily driven by a decline
in net earned premium in the P&C segment of $818,000. The decline in gross earned premium was primarily attributable
to a decrease in our surplus lines business in coastal Louisiana. In addition, P&C segment ceded premium was up
$665,000 or 10.4%, in 2019, compared to the same period last year, due to an increase in the cost of our catastrophe
reinsurance.
Investment Gains (Losses)
Investment gains for the year ended December 31, 2019 were $3,055,000 compared to investment losses of $552,000
for the year ended December 31, 2018. One primary reason for the increase in 2019 investment gains, compared to
the 2018 investment losses, was a gain on our company owned life insurance (COLI) investment of $1,792,000. In
addition, in 2019, we had unrealized gains in our equity investments totaling $712,000 compared to unrealized losses
24
24
25
Table of Contents
securities in 2019.
Net Income
For the year ended December 31, 2019, the Company had net income of $4,067,000, $1.61 income per share, compared
to net income of $779,000, $0.31 income per share, for the same period last year. The primary reason for the increase
in 2019 earnings compared to 2018 earnings was an increase in investment gains. Investments gains consisted of
the gain on company owned life insurance along with gains on equity securities mentioned previously.
Pretax Income from Operations
For the year ended December 31, 2019, our pretax income from operations was $1,525,000 compared to a pretax
income from operations of $1,617,000 for the year ended December 31, 2018; a decrease of $92,000. As mentioned
previously, catastrophe losses from Hurricane Michael in 2018 were partially offset by increased non-catastrophe wind
and hail losses in 2019.
P&C Segment Combined Ratio
For the year ended December 31, 2019, the P&C segment had a GAAP combined ratio of 100.1%. Reported claims
from cat events totaling $6,623,000 combined with reported claims from non-catastrophe wind and hail totaling
$9,133,000 increased the P&C segment combined ratio in 2019 by 28.9 percentage points. In comparison, for the
year ended December 31, 2018, the P&C segment had a GAAP combined ratio of 101.3%. Reported claims from cat
events totaling $9,138,000 (net of reinsurance recoveries) combined with reported claims from non-catastrophe wind
and hail totaling $6,792,000 increased the P&C segment combined ratio in 2018 by 28.7 percentage points. Partially
offsetting the increase in catastrophe losses and non-cat wind and hail losses in 2019 was a decrease in reported fire
losses of $976,000 compared to the same period in the prior year.
Overview - Balance Sheet highlights at December 31, 2019 compared to December 31, 2018
Selected Balance Sheet Highlights
($ in thousands, except per share)
Invested Assets
Cash
Total Assets
Policy Liabilities
Total Debt
Shareholders' Equity
Book Value Per Share
Accumulated Other Comprehensive Income (Loss)
December 31,
December 31,
2019
2018
$
$
$
$
$
$
$
$
118,969 $
112,690
11,809 $
5,676
153,934 $
144,231
78,472 $
14,164 $
2,443 $
53,461 $
21.12 $
77,988
14,352
(1,570)
45,866
18.15
Invested Assets
Invested assets as of December 31, 2019 were $118,969,000 compared to $112,690,000 as of December 31, 2018;
an increase of 5.6%. The increase in invested assets was primarily due to a $4,910,000 increase in market value of
fixed income securities available for sale. Significant declines in market interest rates over the past twelve months
was the primary driver of the increase in market value of fixed income securities.
The Company, primarily through its insurance subsidiaries, had $11,809,000 in cash and cash equivalents at December
31, 2019, compared to $5,676,000 at December 31, 2018. The primary reason for the increase in cash and cash
equivalents compared to last year was timing in investment of positive cash flow from operations and investments.
Total assets as of December 31, 2019 were $153,934,000 compared to $144,231,000 at December 31, 2018. Positive
cash flow from insurance operations contributed to an increase in purchases of fixed maturity securities and a $4,910,000
increase in market value of our portfolio of fixed maturity securities further contributed to the increase in total assets
Cash
Total Assets
for 2019.
Table of Contents
Table of Contents
Financial results for the year ended December 31, 2019 and 2018 were as follows:
Consolidated Financial Summary
($ in thousands, except per share)
Gross premiums written
Net premiums written
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
Taxes, licenses and fees
Interest expense
Income Before Income Taxes
Income tax expense
Net Income
Income Per Common Share
Net income
Income tax expense
Investment (gains) losses, net
Pretax Income From Operations
Policyholder benefits and settlement expenses
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Total Revenues
Total Benefits, Losses and Expenses
Reconciliation of Net Income to non-GAAP Measurement
Year ended
December 31
2019
2018
$
$
$
$
$
$
$
67,529 $
60,411 $
59,883 $
3,876
3,055
585
67,399
38,598
3,459
7,429
9,698
2,470
1,165
62,819
4,580
513
4,067 $
1.61 $
4,067 $
513
(3,055)
1,525 $
67,174
60,717
60,856
3,941
(552)
612
64,857
40,409
3,597
7,555
8,839
2,157
1,235
63,792
1,065
286
779
0.31
779
286
552
1,617
We provide a reconciliation of net income to the non-GAAP measurement "pretax income (loss) from operations". The
purpose of this reconciliation is to provide investors with information routinely utilized by management in analyzing
and comparing the performance of our insurance operations between periods. This information reflects the financial
performance of our insurance operations without the impact of realized capital gains/losses on investments and
unrealized capital gains on equity securities which are now required to be included as a component of net income
under GAAP. We typically invest in equity securities with a long-term view. Short-term volatility due to changes in
market value of equity securities can mask both the positive or negative performance of our insurance operations from
period to period.
Premium Revenue
reinsurance.
Investment Gains (Losses)
For the year ended December 31, 2019, net premiums earned were down $973,000 at $59,883,000 compared to
$60,856,000 during the same period last year. The decrease in premium revenue was primarily driven by a decline
in net earned premium in the P&C segment of $818,000. The decline in gross earned premium was primarily attributable
to a decrease in our surplus lines business in coastal Louisiana. In addition, P&C segment ceded premium was up
$665,000 or 10.4%, in 2019, compared to the same period last year, due to an increase in the cost of our catastrophe
Investment gains for the year ended December 31, 2019 were $3,055,000 compared to investment losses of $552,000
for the year ended December 31, 2018. One primary reason for the increase in 2019 investment gains, compared to
the 2018 investment losses, was a gain on our company owned life insurance (COLI) investment of $1,792,000. In
addition, in 2019, we had unrealized gains in our equity investments totaling $712,000 compared to unrealized losses
in equity investments of $203,000 in 2018. We also recognized $233,000 in realized gains on the sale of equity
securities in 2019.
Net Income
For the year ended December 31, 2019, the Company had net income of $4,067,000, $1.61 income per share, compared
to net income of $779,000, $0.31 income per share, for the same period last year. The primary reason for the increase
in 2019 earnings compared to 2018 earnings was an increase in investment gains. Investments gains consisted of
the gain on company owned life insurance along with gains on equity securities mentioned previously.
Pretax Income from Operations
For the year ended December 31, 2019, our pretax income from operations was $1,525,000 compared to a pretax
income from operations of $1,617,000 for the year ended December 31, 2018; a decrease of $92,000. As mentioned
previously, catastrophe losses from Hurricane Michael in 2018 were partially offset by increased non-catastrophe wind
and hail losses in 2019.
P&C Segment Combined Ratio
For the year ended December 31, 2019, the P&C segment had a GAAP combined ratio of 100.1%. Reported claims
from cat events totaling $6,623,000 combined with reported claims from non-catastrophe wind and hail totaling
$9,133,000 increased the P&C segment combined ratio in 2019 by 28.9 percentage points. In comparison, for the
year ended December 31, 2018, the P&C segment had a GAAP combined ratio of 101.3%. Reported claims from cat
events totaling $9,138,000 (net of reinsurance recoveries) combined with reported claims from non-catastrophe wind
and hail totaling $6,792,000 increased the P&C segment combined ratio in 2018 by 28.7 percentage points. Partially
offsetting the increase in catastrophe losses and non-cat wind and hail losses in 2019 was a decrease in reported fire
losses of $976,000 compared to the same period in the prior year.
Overview - Balance Sheet highlights at December 31, 2019 compared to December 31, 2018
Selected Balance Sheet Highlights
($ in thousands, except per share)
Invested Assets
Cash
Total Assets
Policy Liabilities
Total Debt
Accumulated Other Comprehensive Income (Loss)
Shareholders' Equity
Book Value Per Share
December 31,
2019
December 31,
2018
$
$
$
$
$
$
$
$
118,969 $
11,809 $
153,934 $
78,472 $
14,164 $
2,443 $
53,461 $
21.12 $
112,690
5,676
144,231
77,988
14,352
(1,570)
45,866
18.15
Invested Assets
Invested assets as of December 31, 2019 were $118,969,000 compared to $112,690,000 as of December 31, 2018;
an increase of 5.6%. The increase in invested assets was primarily due to a $4,910,000 increase in market value of
fixed income securities available for sale. Significant declines in market interest rates over the past twelve months
was the primary driver of the increase in market value of fixed income securities.
Cash
The Company, primarily through its insurance subsidiaries, had $11,809,000 in cash and cash equivalents at December
31, 2019, compared to $5,676,000 at December 31, 2018. The primary reason for the increase in cash and cash
equivalents compared to last year was timing in investment of positive cash flow from operations and investments.
Total Assets
Total assets as of December 31, 2019 were $153,934,000 compared to $144,231,000 at December 31, 2018. Positive
cash flow from insurance operations contributed to an increase in purchases of fixed maturity securities and a $4,910,000
increase in market value of our portfolio of fixed maturity securities further contributed to the increase in total assets
for 2019.
24
25
25
Table of Contents
Policy Liabilities
Policy related liabilities were $78,472,000 at December 31, 2019, compared to $77,988,000 at December 31, 2018;
an increase of $484,000 or 0.6%. Increases in life insurance reserves were partially offset by a decline in P&C reserves
leading to a marginal increase in policy liabilities.
Debt Outstanding
Total debt at December 31, 2019 was $14,164,000 compared to $14,352,000 at December 31, 2018. Debt was reduced
$188,000 during 2019 primarily from the reduction of long-term debt in our holding company.
Shareholders' Equity
Shareholders' equity as of December 31, 2019 was $53,461,000, up $7,595,000, compared to December 31, 2018
Shareholders' equity of $45,866,000. Book value per share was $21.12 at December 31, 2019, compared to $18.15
per share at December 31, 2018; an increase of 16.4% or $2.97 per share. The primary factors contributing to the
increase in both book value per share and Shareholders' equity were net income of $4,067,000 and accumulated other
comprehensive income of $4,013,000. The increase in accumulated comprehensive income was driven by increases
in market value of our bond investments available for sale. Offsetting the increase in Shareholders' equity was
shareholder dividends paid of $531,000.
Industry Segment Data:
Net premiums earned for our two operating segments are summarized as follows (amounts in thousands):
($ in thousands)
Life, accident and health insurance
Property and casualty insurance
Net premiums earned
2019
%
2018
$
$
5,864
54,019
59,883
9.8% $
90.2%
100.0% $
6,019
54,837
60,856
%
9.9%
90.1%
100.0%
The property and casualty segment composed 90.2% of consolidated net premiums earned in 2019 compared to
90.1% in 2018. Through the P&C segment, we offer primarily dwelling fire and homeowners insurance coverage to
our customers. The life segment composed 9.8% of net premiums earned in 2019 compared to 9.9% in 2018 with
revenue produced from life, accident and supplemental health insurance products. While reading this discussion
regarding segment information, reference is made to Note 15 to the Consolidated Financial Statements which provides
additional segment related information.
The following discussion outlines more specific information with regard to the individual operating segments of the
Company along with non-insurance related information (primarily administration expenses and interest expense on
debt) associated with the insurance holding company.
Table of Contents
summarized below:
Life and Accident and Health Insurance Operations:
Premium revenues and operating income for the life segment for the year ended December 31, 2019 and 2018 are
($ in thousands)
REVENUE
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
Total Revenues
10,255
BENEFITS AND EXPENSES
Policyholder benefits paid or provided
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Insurance taxes, licenses and fees
Interest expense
Total Expenses
2019
2018
$
5,864 $
2,677
861
853
5,027
736
281
1,948
285
43
8,320
6,019
2,722
(78)
1,078
9,741
5,242
2,111
838
288
220
48
8,747
994
INCOME BEFORE INCOME TAXES
$
1,935 $
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Net premiums earned in the life segment was $5,864,000 at December 31, 2019 compared to $6,019,000 at
December 31, 2018; a decrease of 2.6%. The $155,000 decrease in net earned premium revenue was primarily due
to a decline in new business production in both the traditional life and supplemental accident and health insurance
products offered in NSIC.
The table below provides the major categories of investment income, primarily dividend and interest income, for the
year ended December 31, 2019 and 2018:
($ in thousands)
Fixed maturities
Equity securities
Mortgage loans on real estate
Investment real estate
Policy loans
Other
Less: Investment expenses
Net investment income
Year ended December 31,
2019
2018
$
2,075 $
2,108
13
8
545
142
2
2,785
108
$
2,677 $
37
8
543
141
1
2,838
116
2,722
While NSIC composes only 9.8% of premium revenue, the subsidiary holds 42.6% of consolidated assets. The majority
of these assets consist of fixed maturity investments. Net investment income had a moderate, 1.7% decrease at
$2,677,000 for the year ended December 31, 2019 compared to $2,722,000 for the same period last year. Lower
reinvestment yields on fixed maturity investments due to the declining interest rate environment experienced in 2019
was the primary factor contributing to the moderate decline in interest income.
26
26
27
Table of Contents
Policy Liabilities
Debt Outstanding
Shareholders' Equity
Policy related liabilities were $78,472,000 at December 31, 2019, compared to $77,988,000 at December 31, 2018;
an increase of $484,000 or 0.6%. Increases in life insurance reserves were partially offset by a decline in P&C reserves
leading to a marginal increase in policy liabilities.
Total debt at December 31, 2019 was $14,164,000 compared to $14,352,000 at December 31, 2018. Debt was reduced
$188,000 during 2019 primarily from the reduction of long-term debt in our holding company.
Shareholders' equity as of December 31, 2019 was $53,461,000, up $7,595,000, compared to December 31, 2018
Shareholders' equity of $45,866,000. Book value per share was $21.12 at December 31, 2019, compared to $18.15
per share at December 31, 2018; an increase of 16.4% or $2.97 per share. The primary factors contributing to the
increase in both book value per share and Shareholders' equity were net income of $4,067,000 and accumulated other
comprehensive income of $4,013,000. The increase in accumulated comprehensive income was driven by increases
in market value of our bond investments available for sale. Offsetting the increase in Shareholders' equity was
shareholder dividends paid of $531,000.
Industry Segment Data:
Net premiums earned for our two operating segments are summarized as follows (amounts in thousands):
($ in thousands)
Life, accident and health insurance
Property and casualty insurance
Net premiums earned
2019
%
2018
$
$
5,864
54,019
59,883
9.8% $
90.2%
100.0% $
6,019
54,837
60,856
%
9.9%
90.1%
100.0%
The property and casualty segment composed 90.2% of consolidated net premiums earned in 2019 compared to
90.1% in 2018. Through the P&C segment, we offer primarily dwelling fire and homeowners insurance coverage to
our customers. The life segment composed 9.8% of net premiums earned in 2019 compared to 9.9% in 2018 with
revenue produced from life, accident and supplemental health insurance products. While reading this discussion
regarding segment information, reference is made to Note 15 to the Consolidated Financial Statements which provides
additional segment related information.
The following discussion outlines more specific information with regard to the individual operating segments of the
Company along with non-insurance related information (primarily administration expenses and interest expense on
debt) associated with the insurance holding company.
Table of Contents
Life and Accident and Health Insurance Operations:
Premium revenues and operating income for the life segment for the year ended December 31, 2019 and 2018 are
summarized below:
($ in thousands)
REVENUE
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
Total Revenues
BENEFITS AND EXPENSES
Policyholder benefits paid or provided
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Insurance taxes, licenses and fees
Interest expense
INCOME BEFORE INCOME TAXES
$
Total Expenses
2019
2018
$
5,864 $
2,677
6,019
2,722
(78)
1,078
9,741
5,242
838
288
2,111
220
48
8,747
994
861
853
10,255
5,027
736
281
1,948
285
43
8,320
1,935 $
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Net premiums earned in the life segment was $5,864,000 at December 31, 2019 compared to $6,019,000 at
December 31, 2018; a decrease of 2.6%. The $155,000 decrease in net earned premium revenue was primarily due
to a decline in new business production in both the traditional life and supplemental accident and health insurance
products offered in NSIC.
The table below provides the major categories of investment income, primarily dividend and interest income, for the
year ended December 31, 2019 and 2018:
($ in thousands)
Fixed maturities
Equity securities
Mortgage loans on real estate
Investment real estate
Policy loans
Other
Less: Investment expenses
Net investment income
Year ended December 31,
2019
2018
$
2,075 $
2,108
13
8
545
142
2
2,785
108
$
2,677 $
37
8
543
141
1
2,838
116
2,722
While NSIC composes only 9.8% of premium revenue, the subsidiary holds 42.6% of consolidated assets. The majority
of these assets consist of fixed maturity investments. Net investment income had a moderate, 1.7% decrease at
$2,677,000 for the year ended December 31, 2019 compared to $2,722,000 for the same period last year. Lower
reinvestment yields on fixed maturity investments due to the declining interest rate environment experienced in 2019
was the primary factor contributing to the moderate decline in interest income.
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27
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Table of Contents
Table of Contents
The table below provides investment gains and losses for the year ended December 31, 2019 and 2018:
Property & Casualty Operations:
($ in thousands)
Realized gains on fixed maturities
Realized gains on equity securities
Change in fair value of equity securities
Other gains (losses), principally real estate
Other-than-temporary impairments
Net investment gains (losses)
Year ended December 31,
2019
2018
$
$
37 $
233
589
2
—
861 $
96
—
(71)
(87)
(16)
(78)
NSIC net investment gains, for the year ended December 31, 2019, were $861,000 compared to net investment losses
of $78,000 for the same period last year; an improvement of $939,000. Net investment gains and losses are highly
dependent on numerous internal and external factors including but not limited to market conditions, tax position and
liquidity needs of the Company and can vary significantly from period to period. A factor contributing to the increase,
in 2019, was a $233,000 realized gain primarily from our minority stake in privately held Trinity Bancorp, which merged
with privately held River Financial Corporation, in October of 2019, in a cash and stock transaction. A second factor
contributing to the increase in net investment gains, in 2019, was an increase in the change in value of equity securities
held for investment of $589,000 compared to a loss of $71,000 in the prior year. This increase in the value of equity
securities held for investment, in 2019, was primarily driven by improved performance in the overall equity market
compared to the prior year.
Other income was $853,000 in 2019 compared to $1,078,000 for the same period last year; a decrease of $225,000.
Other income consists primarily of adjuster fees paid to NSIC from the P&C segment. As a percent of net earned
premium, other income was 14.5% in 2019 and 17.9% in 2018.
Claims were $5,027,000 through December 31, 2019 compared to $5,242,000 through December 31, 2018; a decrease
of $215,000 or 4.1%. The primary reason for the decrease was elevated claim payments in the prior year due to an
increase in both ordinary life and industrial life related claims.
Deferred policy acquisition cost amortization and commission expenses decreased $109,000 for the year ended
December 31, 2019 at $1,017,000 compared to $1,126,000 for the same period last year; a decline of 9.7%. As a
percent of net premiums earned, policy acquisition cost amortization and commission expense was 17.3% in 2019
compared to 18.7% in 2018. A decline in the rate of new business production was the primary reason for the decline
in commission expenses.
General and administrative expenses were $1,948,000 in 2019 compared to $2,111,000 in 2018. As a percent of
earned premium, general and administrative expenses were 33.2% and 35.1% at December 31, 2019 and 2018,
respectively. The $163,000 decrease in general and administrative expenses, in 2019 compared to 2018, was primarily
due to a decline in adjuster expenses of $63,000 coupled with a $37,000 decrease in depreciation expenses and a
$19,000 decrease in actuarial and consulting fees.
For the year ended December 31, 2019 and 2018, insurance taxes, licenses and fees were $285,000 and $220,000,
respectively. As a percent of earned premium, insurance taxes, licenses and fees were 4.9% in 2019 and 3.7% in
2018. The primary reason for the increase in, 2019 compared to 2018, was the payment of expenses associated with
our Alabama Department of Insurance examination.
Interest expense was $43,000 for the year ended December 31, 2019 compared to $48,000 for the year ended
December 31, 2018. Interest expense in NSIC is associated with interest payments on insurance policies with a deposit
fund. Deposit fund balances declined in 2019 leading to a reduction in interest expense.
For the year ended December 31, 2019, the life segment had pretax income of $1,935,000 compared to a pretax
income of $994,000 for the same period last year. The $514,000 increase in life segment revenues, primarily driven
by investment gains in equity securities, coupled with the $427,000 decrease in life segment expenses were the primary
factors contributing to the $941,000 increase in pretax income.
Pretax income for the P&C segment for the year ended December 31, 2019 and 2018 is summarized below:
($ in thousands)
REVENUE
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
BENEFITS AND EXPENSES
Total Revenues
2019
2018
$
54,019 $
1,683
2,178
575
58,455
2,723
7,148
8,616
2,185
54,651
54,837
1,704
(474)
609
56,676
2,759
7,267
8,472
1,937
56,170
506
Policyholder benefits paid or provided
33,979
35,735
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Insurance taxes, licenses and fees
Total Expenses
INCOME BEFORE INCOME TAXES
$
3,804 $
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Net premiums earned in the P&C segment is primarily driven by our dwelling fire and homeowner lines of business.
The following table provides premiums earned by line of business:
($ in thousands)
2019
2018
Line of Business
Dwelling Fire/Allied Lines
Homeowners
Premium
Earned
%
of NPE
Premium
Earned
%
of NPE
40,302
20,758
74.6 % $
38.4 %
39,412
21,801
71.9 %
39.7 %
Catastrophe Reinsurance Premium Ceded
(7,041)
(13.0)%
(6,376)
(11.6)%
Net Premiums Earned
54,019
100.0 % $
54,837
100.0 %
$
$
2019
Increase
(Decrease)
over 2018
2.3 %
(4.8)%
10.4 %
(1.5)%
Property and casualty segment net premiums earned for 2019 was $54,019,000 compared to $54,837,000 for the
same period last year. The primary reason for the moderate decline, in 2019 compared to 2018, was a 4.8% decrease
in gross premium revenue in our homeowners program primarily driven by a reduction in premium revenue in coastal
Louisiana. An increase in catastrophe reinsurance cost (ceded premium) of 10.4% also contributed to our 1.5%
decrease in net premium earned.
The primary source of premium revenue growth in the P&C segment was primarily the states of Georgia and Oklahoma.
Premium revenue in Georgia increased 12.3% in 2019 with policy counts up 1.1% compared to December 31, 2018.
Increased rates were implemented in Georgia, along with growth in policy count, which lead to the year over year
increase in premium revenue in the state. In addition, Oklahoma premium revenue increased 6.3% in 2019, while
policy counts decreased 0.4%. The implementation of increased rates was the primary reason for the increase in
premium revenue in Oklahoma, in 2019, compared to the same period last year.
The Company maintains catastrophe reinsurance coverage to mitigate loss exposure from cat events. To summarize
our catastrophe reinsurance structure, under the catastrophe reinsurance program in 2019, the Company retained the
first $4,000,000 in losses from a first event and $2 million in losses from a second event.
28
28
29
Table of Contents
($ in thousands)
Realized gains on fixed maturities
Realized gains on equity securities
Change in fair value of equity securities
Other gains (losses), principally real estate
Other-than-temporary impairments
Net investment gains (losses)
Year ended December 31,
2019
2018
$
$
37 $
233
589
2
—
861 $
96
—
(71)
(87)
(16)
(78)
NSIC net investment gains, for the year ended December 31, 2019, were $861,000 compared to net investment losses
of $78,000 for the same period last year; an improvement of $939,000. Net investment gains and losses are highly
dependent on numerous internal and external factors including but not limited to market conditions, tax position and
liquidity needs of the Company and can vary significantly from period to period. A factor contributing to the increase,
in 2019, was a $233,000 realized gain primarily from our minority stake in privately held Trinity Bancorp, which merged
with privately held River Financial Corporation, in October of 2019, in a cash and stock transaction. A second factor
contributing to the increase in net investment gains, in 2019, was an increase in the change in value of equity securities
held for investment of $589,000 compared to a loss of $71,000 in the prior year. This increase in the value of equity
securities held for investment, in 2019, was primarily driven by improved performance in the overall equity market
compared to the prior year.
Other income was $853,000 in 2019 compared to $1,078,000 for the same period last year; a decrease of $225,000.
Other income consists primarily of adjuster fees paid to NSIC from the P&C segment. As a percent of net earned
premium, other income was 14.5% in 2019 and 17.9% in 2018.
Claims were $5,027,000 through December 31, 2019 compared to $5,242,000 through December 31, 2018; a decrease
of $215,000 or 4.1%. The primary reason for the decrease was elevated claim payments in the prior year due to an
increase in both ordinary life and industrial life related claims.
Deferred policy acquisition cost amortization and commission expenses decreased $109,000 for the year ended
December 31, 2019 at $1,017,000 compared to $1,126,000 for the same period last year; a decline of 9.7%. As a
percent of net premiums earned, policy acquisition cost amortization and commission expense was 17.3% in 2019
compared to 18.7% in 2018. A decline in the rate of new business production was the primary reason for the decline
in commission expenses.
General and administrative expenses were $1,948,000 in 2019 compared to $2,111,000 in 2018. As a percent of
earned premium, general and administrative expenses were 33.2% and 35.1% at December 31, 2019 and 2018,
respectively. The $163,000 decrease in general and administrative expenses, in 2019 compared to 2018, was primarily
due to a decline in adjuster expenses of $63,000 coupled with a $37,000 decrease in depreciation expenses and a
$19,000 decrease in actuarial and consulting fees.
For the year ended December 31, 2019 and 2018, insurance taxes, licenses and fees were $285,000 and $220,000,
respectively. As a percent of earned premium, insurance taxes, licenses and fees were 4.9% in 2019 and 3.7% in
2018. The primary reason for the increase in, 2019 compared to 2018, was the payment of expenses associated with
our Alabama Department of Insurance examination.
Interest expense was $43,000 for the year ended December 31, 2019 compared to $48,000 for the year ended
December 31, 2018. Interest expense in NSIC is associated with interest payments on insurance policies with a deposit
fund. Deposit fund balances declined in 2019 leading to a reduction in interest expense.
For the year ended December 31, 2019, the life segment had pretax income of $1,935,000 compared to a pretax
income of $994,000 for the same period last year. The $514,000 increase in life segment revenues, primarily driven
by investment gains in equity securities, coupled with the $427,000 decrease in life segment expenses were the primary
factors contributing to the $941,000 increase in pretax income.
The table below provides investment gains and losses for the year ended December 31, 2019 and 2018:
Property & Casualty Operations:
Pretax income for the P&C segment for the year ended December 31, 2019 and 2018 is summarized below:
Table of Contents
($ in thousands)
REVENUE
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
Total Revenues
BENEFITS AND EXPENSES
Policyholder benefits paid or provided
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Insurance taxes, licenses and fees
Total Expenses
2019
2018
$
54,019 $
1,683
2,178
575
58,455
54,837
1,704
(474)
609
56,676
33,979
35,735
2,723
7,148
8,616
2,185
54,651
2,759
7,267
8,472
1,937
56,170
506
INCOME BEFORE INCOME TAXES
$
3,804 $
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Net premiums earned in the P&C segment is primarily driven by our dwelling fire and homeowner lines of business.
The following table provides premiums earned by line of business:
($ in thousands)
2019
2018
Line of Business
Dwelling Fire/Allied Lines
Homeowners
Catastrophe Reinsurance Premium Ceded
Net Premiums Earned
Premium
Earned
%
of NPE
Premium
Earned
%
of NPE
$
$
40,302
20,758
(7,041)
54,019
74.6 % $
38.4 %
(13.0)%
39,412
21,801
71.9 %
39.7 %
(6,376)
(11.6)%
100.0 % $
54,837
100.0 %
2019
Increase
(Decrease)
over 2018
2.3 %
(4.8)%
10.4 %
(1.5)%
Property and casualty segment net premiums earned for 2019 was $54,019,000 compared to $54,837,000 for the
same period last year. The primary reason for the moderate decline, in 2019 compared to 2018, was a 4.8% decrease
in gross premium revenue in our homeowners program primarily driven by a reduction in premium revenue in coastal
Louisiana. An increase in catastrophe reinsurance cost (ceded premium) of 10.4% also contributed to our 1.5%
decrease in net premium earned.
The primary source of premium revenue growth in the P&C segment was primarily the states of Georgia and Oklahoma.
Premium revenue in Georgia increased 12.3% in 2019 with policy counts up 1.1% compared to December 31, 2018.
Increased rates were implemented in Georgia, along with growth in policy count, which lead to the year over year
increase in premium revenue in the state. In addition, Oklahoma premium revenue increased 6.3% in 2019, while
policy counts decreased 0.4%. The implementation of increased rates was the primary reason for the increase in
premium revenue in Oklahoma, in 2019, compared to the same period last year.
The Company maintains catastrophe reinsurance coverage to mitigate loss exposure from cat events. To summarize
our catastrophe reinsurance structure, under the catastrophe reinsurance program in 2019, the Company retained the
first $4,000,000 in losses from a first event and $2 million in losses from a second event.
28
29
29
Table of Contents
Reinsurance coverage is maintained in three layers as follows:
The table below provides the major categories of investment income, primarily dividend and interest income, for the
Layer
First Layer
Second Layer
Third Layer
Reinsurers' Limits of Liability
100% of $13,500,000 in excess of $4,000,000 retention
100% of $25,000,000 in excess of $17,500,000
100% of $30,000,000 in excess of $42,500,000
Underlying 2nd Event
100% of $2,000,000 in excess of $2,000,000 retention
Additional details regarding the structure of our 2019 catastrophe reinsurance program can be found in Note 10 to the
Consolidated Financial Statements.
In our reinsurance structure, management attempts to limit the impact on pretax earnings of a single modeled 100
year cat event to no more than $4 million and the primary models utilized indicate that the Company's upper limit of
reinsurance is adequate to cover up to approximately a 250 year event (a single event with an estimated probability
of exceedance of 0.4% in a given year). It is noted, however, that hurricane models are subject to significant risks and
uncertainties and are continuously evolving. Catastrophe models are only a tool to estimate the impact of catastrophe
events and actual results can differ materially from model estimates.
We use the results of the Risk Management Solutions (RMS) and AIR Worldwide (AIR) models in our review of exposure
to hurricane risk. Each of these third party vendors provides two views of the modeled results as follows: (i) a long-
term view that closely relates modeled event frequency to historical hurricane activity; and (ii) a shorter-term view that
adjusts historical frequencies to reflect expectations of elevated hurricane activity in the near future. We believe that
modeled estimates provide a range of potential outcomes and we review multiple estimates for purposes of
understanding our catastrophic risk and variability. However, due to regulatory and competitive limitations, we generally
utilize long-term model output in the development of our product pricing.
The following table provides severe thunderstorm and hurricane single event model estimates for a range of return
periods based on a blended view of the RMS and AIR long-term models utilizing our actual inforce P&C segment policy
data as of December 31, 2019:
year ended December 31, 2019 and 2018:
Table of Contents
($ in thousands)
Fixed maturities
Equity securities
Other
Less: Investment expenses
Net investment income
Year ended December 31,
2019
2018
1,664 $
1,663
50
7
38
1,721
47
23
29
1,733
1,683 $
1,704
$
$
$
$
For the year ended December 31, 2019, net investment income was $1,683,000 compared to $1,704,000 for the same
period in 2018; a slight decrease of $21,000 or 1.2%. Lower yields on new investments in 2019 was the primary factor
contributing to this marginal decrease in net investment income.
The table below provides investment gains and losses for the year ended December 31, 2019 and 2018:
($ in thousands)
Realized gains (losses) on fixed maturities
Change in fair value of equity securities
Change in surrender value of company owned life insurance
Realized gain on company owned life insurance
Net investment gains (losses)
Year ended December 31,
2019
2018
(31) $
122
295
1,792
2,178 $
32
(132)
(374)
—
(474)
Net investment gains, for the year ended December 31, 2019, were $2,178,000 compared to net investment losses
of $474,000 for the same period in 2018; an increase of $2,652,000. A gain on our company owned life insurance
(COLI) investment of $1,792,000 was a primary reason for the significant increase in net investment gains in 2019.
Changes in cash surrender values driven by underlying investment funds in the COLI are included in income as an
investment gain or loss in the current period. The change in surrender value included in earnings for the periods ended
December 31, 2019 and 2018 were an increase of $295,000 and a decline of $374,000, respectively. In addition, for
the year ended December 31, 2019, we had unrealized gains in our P&C segment equity investments available for
sale totaling $122,000 compared to unrealized losses in equity investments of $132,000 in 2018.
Other income was comparable at $575,000 for the year ended December 31, 2019, compared to $609,000 in 2018;
a decrease of $34,000. Other income consists primarily of fees related to the issuance of our property insurance
policies as well as other miscellaneous income. As a percent of net earned premium, other income was 1.1% in both
2019 and 2018.
Policyholder claims in the property and casualty segment were $33,979,000 in 2019, compared to $35,735,000 for the
same period last year; a decrease of $1,756,000 or 4.9%. Claims as a percentage of premium earned was 62.9% in
2019 compared to 65.2% in 2018. The primary reason for the decrease in claims was a $2,515,000 decline in P&C
segment catastrophe weather claims coupled with a $976,000 decrease in fire claims. These decreases were offset
by an increase in non-catastrophe weather claims totaling $2,341,000.
Severe
Thunderstorm Hurricane
5.9%
6.1%
6.1%
6.1%
6.1%
6.1%
6.1%
6.1%
6.1%
13.6%
Thunderstorm Hurricane
3,087 $
3,160 $
3,160 $
3,160 $
3,160 $
500 Years
1 - Net losses are net of reinsurance and after a 21% Federal income tax benefit.
2 - Equity as of December 31, 2019
Yearly
Probability
of
Exceeding
Severe
Thunderstorm Hurricane
Gross Losses
Net Losses 1
Net Losses as
a Percent Equity 2
($ in
thousands)
Loss
Return
Period
20 Years
50 Years
100 Years
250 Years
16,031 $
28,854 $
41,154 $
60,527 $
77,468 $
3,907 $
6,096 $
8,186 $
11,297 $
1% $
0.4% $
0.2% $
5% $
2% $
14,969 $
Severe
3,160
3,160
3,160
7,085
3,160
In 2019, the P&C segment did not have any catastrophe losses exceeding our $4 million catastrophe reinsurance
retention. However, the P&C segment was impacted, in 2019, by 23 smaller catastrophe events that individually did
not exceed our catastrophe reinsurance retention; but cumulatively generated incurred losses totaling $6,623,000. In
2018, the P&C segment was impacted by Hurricane Michael which exceeded our $4 million catastrophe reinsurance
retention. The P&C segment was also impacted, in 2018, by 18 smaller catastrophe events that individually did not
exceed our catastrophe reinsurance retention; but cumulatively increased incurred losses by $5,138,000.
Additional details regarding the structure of our 2019 catastrophe reinsurance program can be found in Note 10 to the
Consolidated Financial Statements.
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30
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Table of Contents
Reinsurance coverage is maintained in three layers as follows:
Layer
First Layer
Second Layer
Third Layer
Reinsurers' Limits of Liability
100% of $13,500,000 in excess of $4,000,000 retention
100% of $25,000,000 in excess of $17,500,000
100% of $30,000,000 in excess of $42,500,000
Underlying 2nd Event
100% of $2,000,000 in excess of $2,000,000 retention
Additional details regarding the structure of our 2019 catastrophe reinsurance program can be found in Note 10 to the
Consolidated Financial Statements.
In our reinsurance structure, management attempts to limit the impact on pretax earnings of a single modeled 100
year cat event to no more than $4 million and the primary models utilized indicate that the Company's upper limit of
reinsurance is adequate to cover up to approximately a 250 year event (a single event with an estimated probability
of exceedance of 0.4% in a given year). It is noted, however, that hurricane models are subject to significant risks and
uncertainties and are continuously evolving. Catastrophe models are only a tool to estimate the impact of catastrophe
events and actual results can differ materially from model estimates.
The table below provides the major categories of investment income, primarily dividend and interest income, for the
year ended December 31, 2019 and 2018:
($ in thousands)
Fixed maturities
Equity securities
Other
Less: Investment expenses
Net investment income
Year ended December 31,
2019
2018
1,664 $
1,663
50
7
1,721
38
1,683 $
47
23
1,733
29
1,704
$
$
For the year ended December 31, 2019, net investment income was $1,683,000 compared to $1,704,000 for the same
period in 2018; a slight decrease of $21,000 or 1.2%. Lower yields on new investments in 2019 was the primary factor
contributing to this marginal decrease in net investment income.
The table below provides investment gains and losses for the year ended December 31, 2019 and 2018:
We use the results of the Risk Management Solutions (RMS) and AIR Worldwide (AIR) models in our review of exposure
to hurricane risk. Each of these third party vendors provides two views of the modeled results as follows: (i) a long-
term view that closely relates modeled event frequency to historical hurricane activity; and (ii) a shorter-term view that
($ in thousands)
adjusts historical frequencies to reflect expectations of elevated hurricane activity in the near future. We believe that
Realized gains (losses) on fixed maturities
modeled estimates provide a range of potential outcomes and we review multiple estimates for purposes of
understanding our catastrophic risk and variability. However, due to regulatory and competitive limitations, we generally
utilize long-term model output in the development of our product pricing.
Change in fair value of equity securities
Change in surrender value of company owned life insurance
Realized gain on company owned life insurance
The following table provides severe thunderstorm and hurricane single event model estimates for a range of return
Net investment gains (losses)
periods based on a blended view of the RMS and AIR long-term models utilizing our actual inforce P&C segment policy
Year ended December 31,
2019
2018
$
$
(31) $
122
295
1,792
2,178 $
32
(132)
(374)
—
(474)
Gross Losses
Net Losses 1
Net Losses as
a Percent Equity 2
data as of December 31, 2019:
Yearly
Probability
of
($ in
thousands)
Loss
Return
Period
20 Years
50 Years
100 Years
250 Years
500 Years
Exceeding
Thunderstorm Hurricane
Thunderstorm Hurricane
Thunderstorm Hurricane
Severe
Severe
Severe
5% $
2% $
1% $
0.4% $
0.2% $
3,907 $
16,031 $
6,096 $
28,854 $
8,186 $
41,154 $
11,297 $
60,527 $
14,969 $
77,468 $
3,087 $
3,160 $
3,160 $
3,160 $
3,160 $
3,160
3,160
3,160
3,160
7,085
5.9%
6.1%
6.1%
6.1%
6.1%
6.1%
6.1%
6.1%
6.1%
13.6%
1 - Net losses are net of reinsurance and after a 21% Federal income tax benefit.
2 - Equity as of December 31, 2019
In 2019, the P&C segment did not have any catastrophe losses exceeding our $4 million catastrophe reinsurance
retention. However, the P&C segment was impacted, in 2019, by 23 smaller catastrophe events that individually did
not exceed our catastrophe reinsurance retention; but cumulatively generated incurred losses totaling $6,623,000. In
2018, the P&C segment was impacted by Hurricane Michael which exceeded our $4 million catastrophe reinsurance
retention. The P&C segment was also impacted, in 2018, by 18 smaller catastrophe events that individually did not
exceed our catastrophe reinsurance retention; but cumulatively increased incurred losses by $5,138,000.
Additional details regarding the structure of our 2019 catastrophe reinsurance program can be found in Note 10 to the
Consolidated Financial Statements.
Net investment gains, for the year ended December 31, 2019, were $2,178,000 compared to net investment losses
of $474,000 for the same period in 2018; an increase of $2,652,000. A gain on our company owned life insurance
(COLI) investment of $1,792,000 was a primary reason for the significant increase in net investment gains in 2019.
Changes in cash surrender values driven by underlying investment funds in the COLI are included in income as an
investment gain or loss in the current period. The change in surrender value included in earnings for the periods ended
December 31, 2019 and 2018 were an increase of $295,000 and a decline of $374,000, respectively. In addition, for
the year ended December 31, 2019, we had unrealized gains in our P&C segment equity investments available for
sale totaling $122,000 compared to unrealized losses in equity investments of $132,000 in 2018.
Other income was comparable at $575,000 for the year ended December 31, 2019, compared to $609,000 in 2018;
a decrease of $34,000. Other income consists primarily of fees related to the issuance of our property insurance
policies as well as other miscellaneous income. As a percent of net earned premium, other income was 1.1% in both
2019 and 2018.
Policyholder claims in the property and casualty segment were $33,979,000 in 2019, compared to $35,735,000 for the
same period last year; a decrease of $1,756,000 or 4.9%. Claims as a percentage of premium earned was 62.9% in
2019 compared to 65.2% in 2018. The primary reason for the decrease in claims was a $2,515,000 decline in P&C
segment catastrophe weather claims coupled with a $976,000 decrease in fire claims. These decreases were offset
by an increase in non-catastrophe weather claims totaling $2,341,000.
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Weather related losses consistently create the most significant variability in our loss and loss adjustment expense
payments from year to year in our P&C segment. The following table provides a recap of P&C segment gross reported
losses and LAE by catastrophe event and non-catastrophe wind and hail losses and LAE for the year ended December,
2019 and 2018:
For the year ended December 31, 2019
For the year ended December 31, 2018
($ in thousands)
Catastrophe event
Reported
Losses &
LAE
Cat 1916 (Feb 23-26)
$
Cat 1918 (Mar 3-4)
Cat 1920 (Mar 23-25)
Cat 1923 (Apr 12-15)
Cat 1924 (Apr 17-20)
Cat 1926 (Apr 30-May 2)
Cat 1927 (May 7-10)
Cat 1931 (May 20-22)
Cat 1943 (July 10-18)
Cat 1954 (Aug 28-Sept 6)
Cat 1963 (Oct 25-26)
Cat 1969 (Dec 16-17)
Misc cats less than $100k
Total Cat losses
$
296
757
147
574
324
209
600
168
1,021
530
1,221
367
409
6,623
Claim
Count
Catastrophe event
85 Cat 1814 (Feb 24-26)
76 Cat 1817 (Mar 18-21)
29 Cat 1821 (Apr 13-17)
121 Cat 1824 (May 12-16)
76 Cat 1827 (May 29-June 1)
35 Cat 1835 (June 24-26)
106 Cat 1836 (June 28)
41 Cat 1840 (July 19-22)
249 Cat 1852 (Sept 13-16)
148 Cat 1857 (Oct 10-14)
236
46
105 Misc cats less than $100k
1,353 Total Before Reinsurance
Less: Reinsurance (Cat 1857)
Total Net Cat Losses
Non-cat wind & hail
$
9,133
2,197 Non-cat wind & hail
Reported
Losses &
LAE
$
160
1,151
631
149
255
290
419
338
Claim
Count
52
215
147
36
50
48
69
64
1,292
13,378
371
2,312
144
3,508
453
18,516
(9,378)
9,138
6,792
2,025
$
$
$
During 2019, the P&C segment was impacted by 23 catastrophe events producing 1,353 policyholder claims totaling
$6,623,000. Net of tax, these losses reduced 2019 net income by $5,232,000. In comparison, in 2018, the P&C
segment was impacted by 19 catastrophe events from 3,508 claims totaling $9,138,000 net of reinsurance recoveries.
Net of tax, 2018 catastrophe losses reduced 2018 net income by $7,219,000.
During 2019, the P&C segment had reported losses from Cat 1943 (Hurricane Barry) totaling $1,021,000 from 249
claims as well as Cat 1963 (Tropical Storm Olga) totaling $1,221,000 from 236 claims. These two cat events accounted
for 33.9% of total reported cat losses in 2019 and added 4.1 percentage points to the 2019 P&C segment combined
ratio. Claims reported from all 2019 cat events contributed 12.1 percentage points to the 2019 P&C segment combined
ratio. The primary contributor to 2018 reported cat losses was Hurricane Michael. Hurricane Michael contributed
$13,378,000 in reported losses on a gross basis ($4,000,000 net of reinsurance recoveries). Net of tax, Hurricane
Michael losses reduced net income by $3,160,000. Claims reported from all 2018 cat events contributed 16.5
percentage points to the 2018 P&C segment combined ratio.
Non-catastrophe wind and hail claims reported in 2019 were above historical averages and totaled $9,133,000
compared to non-catastrophe wind and hail claims reported in 2018 totaling $6,792,000; an increase of $2,341,000.
During 2019, the P&C segment had 2,197 non-catastrophe wind and hail claims reported (an average of $4,200 per
claim) compared to 2,025 non-catastrophe wind and hail claims reported during 2018 (an average of $3,400 per claim).
Non-catastrophe wind and hail claims reported during 2019 accounted for 26.9% of total P&C segment incurred losses
in the current year and added 16.7 percentage points to the 2019 P&C segment combined ratio. Non-catastrophe
wind and hail claims reported during 2018 accounted for 19.0% of total P&C segment incurred losses in 2018 and
added 12.2 percentage points to the 2018 P&C segment combined ratio.
Reported fire losses in 2019 were down $976,000 or 6.5% compared to fire losses reported during 2018. The P&C
segment had 481 fire losses reported in 2019 totaling $13,992,000 compared to 479 fire losses reported in 2018 totaling
$14,968,000. The average cost per claim was $29,100 for fire losses reported in 2019 compared to $31,200 for fire
losses reported in 2018. Fire losses reported during 2019 added 25.6 percentage points to the P&C segment combined
ratio while fire losses reported during 2018 added 27.0 percentage points to the P&C segment combined ratio.
Deferred policy acquisition costs were $2,723,000 compared to $2,759,000 for the same period last year; a decrease
of $36,000. Policy acquisition costs consist of amortization of previously capitalized distribution costs and current
commission payments to agents. As a percentage of premium revenue, policy acquisition costs were comparable at
5.0% in 2019 and 2018.
Commission expense for 2019 was $7,148,000 (13.2% of premium revenue) compared to $7,267,000 (13.3% of
premium revenue) for the same period in 2018. The primary reason for the $119,000 decrease in commission expense
was a reduction in the bonus commissions to agents in 2019 compared to 2018.
General and administrative expenses in the property and casualty segment totaled $8,616,000 in 2019 compared to
$8,472,000 in 2018; a 1.7% increase. The primary factors contributing to the $144,000 increase in general expenses,
in 2019, compared to the same period last year, was an increase in litigation related costs of $300,000.
Insurance taxes, licenses and fees were $2,185,000 through December 31, 2019, compared to $1,937,000 for the
same period last year. As a percentage of net premiums earned, insurance taxes, licenses and fees were 4.0% for
the year ended December 31, 2019, compared to 3.5% for year ended December 31, 2018. The primary reason for
the increase in taxes, licenses and fees, in 2019, compared to 2018, was due to a slight increase in Mississippi related
taxes in addition to the utilization of premium tax credits the state of Mississippi in the prior year that were not applied
in 2019.
For the year ended December 31, 2019, the Company had a pretax income of $3,804,000 compared to pretax income
of $506,000 for the same period in 2018. The $3,298,000 increase in pretax income was primarily due to the $1,756,000
reduction claims, in 2019 compared to 2018, coupled with the $1,792,000 gain on company owned life insurance,
partially offsetting these positive factors was a decline in net premiums earned and an increase in general and
administrative expenses.
Property & Casualty Combined Ratio:
A measure used to analyze a property/casualty insurer's underwriting performance is the combined ratio based upon
generally accepted accounting principles (GAAP). It is the sum of two ratios:
• The loss and loss expense ratio, which measures losses and loss adjustment expenses incurred as a
percentage of premium revenue.
• The underwriting expense ratio, which measures underwriting expenses incurred (e.g., agents' commissions,
premium taxes, and other administrative underwriting expenses) as a percentage of premium revenue.
The results of these ratios by significant component for the past two years were as follows:
Loss and LAE Ratio (Non-Cat)
Loss and LAE Ratio (Cat)
Underwriting Expense Ratio
Combined Ratio
2019
2018
50.11%
12.13%
37.86%
47.97%
16.48%
36.86%
100.10%
101.31%
Maintaining a combined ratio below 100%, which indicates that the company is making an underwriting profit, depends
upon many factors including hurricane activity in the Gulf of Mexico and the southern Atlantic coast, strict underwriting
of risks, catastrophe reinsurance costs, severe thunderstorm frequency and the ability to obtain adequate and timely
premium rates. A major hurricane hitting the coast of Alabama, Georgia, South Carolina, Mississippi or Louisiana could
cause the combined ratio to fluctuate materially from year to year. In addition, most of the states that we write business
are prone to severe thunderstorm and tornado activity with significant variations in the level of activity from year to
year. The property and casualty subsidiaries maintain catastrophe reinsurance to minimize the effect of a major
catastrophe; however, the geography of our coverage area, frequency of smaller catastrophe events and prohibitive
cost of maintaining lower catastrophe deductibles and/or catastrophe aggregate coverage prevents some limitations
on our ability to further mitigate catastrophe risks.
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2019 and 2018:
Cat 1918 (Mar 3-4)
Cat 1920 (Mar 23-25)
Cat 1923 (Apr 12-15)
Cat 1924 (Apr 17-20)
Cat 1926 (Apr 30-May 2)
Cat 1927 (May 7-10)
Cat 1931 (May 20-22)
Cat 1943 (July 10-18)
Cat 1954 (Aug 28-Sept 6)
Cat 1963 (Oct 25-26)
Cat 1969 (Dec 16-17)
Misc cats less than $100k
Weather related losses consistently create the most significant variability in our loss and loss adjustment expense
payments from year to year in our P&C segment. The following table provides a recap of P&C segment gross reported
losses and LAE by catastrophe event and non-catastrophe wind and hail losses and LAE for the year ended December,
For the year ended December 31, 2019
For the year ended December 31, 2018
($ in thousands)
Catastrophe event
Reported
Losses &
LAE
Claim
Count
Catastrophe event
Reported
Losses &
LAE
Claim
Count
Cat 1916 (Feb 23-26)
$
85 Cat 1814 (Feb 24-26)
$
296
757
147
574
324
209
600
168
1,021
530
1,221
367
409
76 Cat 1817 (Mar 18-21)
29 Cat 1821 (Apr 13-17)
121 Cat 1824 (May 12-16)
76 Cat 1827 (May 29-June 1)
35 Cat 1835 (June 24-26)
106 Cat 1836 (June 28)
41 Cat 1840 (July 19-22)
249 Cat 1852 (Sept 13-16)
148 Cat 1857 (Oct 10-14)
236
46
105 Misc cats less than $100k
Less: Reinsurance (Cat 1857)
Total Net Cat Losses
$
$
$
160
1,151
631
149
255
290
419
338
52
215
147
36
50
48
69
64
1,292
13,378
371
2,312
144
3,508
453
18,516
(9,378)
9,138
Total Cat losses
$
6,623
1,353 Total Before Reinsurance
Non-cat wind & hail
$
9,133
2,197 Non-cat wind & hail
6,792
2,025
During 2019, the P&C segment was impacted by 23 catastrophe events producing 1,353 policyholder claims totaling
Net of tax, 2018 catastrophe losses reduced 2018 net income by $7,219,000.
During 2019, the P&C segment had reported losses from Cat 1943 (Hurricane Barry) totaling $1,021,000 from 249
claims as well as Cat 1963 (Tropical Storm Olga) totaling $1,221,000 from 236 claims. These two cat events accounted
ratio. Claims reported from all 2019 cat events contributed 12.1 percentage points to the 2019 P&C segment combined
ratio. The primary contributor to 2018 reported cat losses was Hurricane Michael. Hurricane Michael contributed
$13,378,000 in reported losses on a gross basis ($4,000,000 net of reinsurance recoveries). Net of tax, Hurricane
Michael losses reduced net income by $3,160,000. Claims reported from all 2018 cat events contributed 16.5
percentage points to the 2018 P&C segment combined ratio.
Non-catastrophe wind and hail claims reported in 2019 were above historical averages and totaled $9,133,000
compared to non-catastrophe wind and hail claims reported in 2018 totaling $6,792,000; an increase of $2,341,000.
During 2019, the P&C segment had 2,197 non-catastrophe wind and hail claims reported (an average of $4,200 per
claim) compared to 2,025 non-catastrophe wind and hail claims reported during 2018 (an average of $3,400 per claim).
Non-catastrophe wind and hail claims reported during 2019 accounted for 26.9% of total P&C segment incurred losses
in the current year and added 16.7 percentage points to the 2019 P&C segment combined ratio. Non-catastrophe
wind and hail claims reported during 2018 accounted for 19.0% of total P&C segment incurred losses in 2018 and
added 12.2 percentage points to the 2018 P&C segment combined ratio.
Reported fire losses in 2019 were down $976,000 or 6.5% compared to fire losses reported during 2018. The P&C
segment had 481 fire losses reported in 2019 totaling $13,992,000 compared to 479 fire losses reported in 2018 totaling
$14,968,000. The average cost per claim was $29,100 for fire losses reported in 2019 compared to $31,200 for fire
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losses reported in 2018. Fire losses reported during 2019 added 25.6 percentage points to the P&C segment combined
ratio while fire losses reported during 2018 added 27.0 percentage points to the P&C segment combined ratio.
Deferred policy acquisition costs were $2,723,000 compared to $2,759,000 for the same period last year; a decrease
of $36,000. Policy acquisition costs consist of amortization of previously capitalized distribution costs and current
commission payments to agents. As a percentage of premium revenue, policy acquisition costs were comparable at
5.0% in 2019 and 2018.
Commission expense for 2019 was $7,148,000 (13.2% of premium revenue) compared to $7,267,000 (13.3% of
premium revenue) for the same period in 2018. The primary reason for the $119,000 decrease in commission expense
was a reduction in the bonus commissions to agents in 2019 compared to 2018.
General and administrative expenses in the property and casualty segment totaled $8,616,000 in 2019 compared to
$8,472,000 in 2018; a 1.7% increase. The primary factors contributing to the $144,000 increase in general expenses,
in 2019, compared to the same period last year, was an increase in litigation related costs of $300,000.
Insurance taxes, licenses and fees were $2,185,000 through December 31, 2019, compared to $1,937,000 for the
same period last year. As a percentage of net premiums earned, insurance taxes, licenses and fees were 4.0% for
the year ended December 31, 2019, compared to 3.5% for year ended December 31, 2018. The primary reason for
the increase in taxes, licenses and fees, in 2019, compared to 2018, was due to a slight increase in Mississippi related
taxes in addition to the utilization of premium tax credits the state of Mississippi in the prior year that were not applied
in 2019.
For the year ended December 31, 2019, the Company had a pretax income of $3,804,000 compared to pretax income
of $506,000 for the same period in 2018. The $3,298,000 increase in pretax income was primarily due to the $1,756,000
reduction claims, in 2019 compared to 2018, coupled with the $1,792,000 gain on company owned life insurance,
partially offsetting these positive factors was a decline in net premiums earned and an increase in general and
administrative expenses.
Property & Casualty Combined Ratio:
A measure used to analyze a property/casualty insurer's underwriting performance is the combined ratio based upon
generally accepted accounting principles (GAAP). It is the sum of two ratios:
$6,623,000. Net of tax, these losses reduced 2019 net income by $5,232,000. In comparison, in 2018, the P&C
• The loss and loss expense ratio, which measures losses and loss adjustment expenses incurred as a
segment was impacted by 19 catastrophe events from 3,508 claims totaling $9,138,000 net of reinsurance recoveries.
percentage of premium revenue.
• The underwriting expense ratio, which measures underwriting expenses incurred (e.g., agents' commissions,
premium taxes, and other administrative underwriting expenses) as a percentage of premium revenue.
for 33.9% of total reported cat losses in 2019 and added 4.1 percentage points to the 2019 P&C segment combined
The results of these ratios by significant component for the past two years were as follows:
Loss and LAE Ratio (Non-Cat)
Loss and LAE Ratio (Cat)
Underwriting Expense Ratio
Combined Ratio
2019
2018
50.11%
12.13%
37.86%
100.10%
47.97%
16.48%
36.86%
101.31%
Maintaining a combined ratio below 100%, which indicates that the company is making an underwriting profit, depends
upon many factors including hurricane activity in the Gulf of Mexico and the southern Atlantic coast, strict underwriting
of risks, catastrophe reinsurance costs, severe thunderstorm frequency and the ability to obtain adequate and timely
premium rates. A major hurricane hitting the coast of Alabama, Georgia, South Carolina, Mississippi or Louisiana could
cause the combined ratio to fluctuate materially from year to year. In addition, most of the states that we write business
are prone to severe thunderstorm and tornado activity with significant variations in the level of activity from year to
year. The property and casualty subsidiaries maintain catastrophe reinsurance to minimize the effect of a major
catastrophe; however, the geography of our coverage area, frequency of smaller catastrophe events and prohibitive
cost of maintaining lower catastrophe deductibles and/or catastrophe aggregate coverage prevents some limitations
on our ability to further mitigate catastrophe risks.
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33
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During 2019, the P&C segment experienced an decrease of 1.21 percentage points in the combined ratio compared
to 2018. Non-catastrophe losses increased the P&C segment combined ratio 4.48 percentage points in the current
year compared to the same period last year. However, catastrophe losses decreased in 2019 compared to 2018,
leading to a 4.35 percentage point decrease in the P&C segment combined ratio and was the primary reason for the
overall decrease, in 2019 compared to the same period last year. As noted in the table above, catastrophe loss is the
primary source of variability in our combined ratio and is generally the primary driver of variability in our earnings.
While catastrophe events are unpredictable and often occur in cycles, management has sought to increase margins
through efficiency measures and improved rate optimization. Management continues to improve rate adequacy, reduce
significant exposure concentrations and implement other risk management strategies in order to further improve
underwriting profitability, mitigate earnings volatility and reduce downside risk to our capital position.
Non-insurance Operations:
The non-insurance operations of the Company consist of our ultimate holding company parent, The National Security
Group, Inc. (NSEC). NSEC, as a standalone entity, has no material sources of revenue and relies on dividends and
management service fees from our insurance subsidiaries to pay expenses. Dividends from subsidiaries are subject
to insurance department approval and are also subject to statutory restrictions. Subsidiary dividends and service fees
are eliminated upon consolidation of the subsidiaries in the audited financial statements included herein. Revenues
and expense (excluding intercompany dividends from subsidiaries) for non-insurance operations for the year ended
December 31, 2019 and 2018 are summarized as follows:
($ in thousands)
REVENUE
Net investment income
Net realized investment gains
Other income
Total Revenues
EXPENSES
General and administrative expenses
Interest expense
Total Expenses
2019
2018
issues.
$
56 $
16
1,019
1,091
1,128
1,122
2,250
55
—
1,006
1,061
309
1,187
1,496
LOSS BEFORE INCOME TAXES
$
(1,159) $
(435)
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Revenue for non-insurance operations primarily consists of interest on investments and other income. Other income
is composed of management service fees from subsidiaries which are eliminated upon consolidation. General and
administrative expenses totaled $1,128,000 in 2019 compared to $309,000 for the same period last year. The expenses
of NSG are primarily associated with the public listing of our stock, taxes and fees, and directors' fees. The most
significant item impacting the increase in general expenses was an increase in the liability for unfunded non-qualified
deferred compensation plans. Total interest expense associated with short-term and long-term borrowings of NSG
was $1,122,000 for the year ended December 31, 2019 and $1,187,000 for the same period in 2018. The decline in
interest expense is related to a reduction in debt outstanding.
Investments:
The insurance subsidiaries primarily invest in highly liquid investment grade fixed maturity securities and equity
securities. The types of assets in which the Company can invest are influenced by various state insurance laws which
prescribe qualified investment assets. While working within the parameters of these regulatory requirements and
further considering liquidity and capital needs, the Company considers investment quality, investment return, asset/
liability matching and composition of the investment portfolio when making investment decisions.
At December 31, 2019, the Company's holdings in fixed maturity securities amounted to 85.4% of total investments
and 65.9% of total assets. The Company utilizes the ratings of various Nationally Recognized Statistical Rating
Organizations when classifying fixed maturity investments by credit quality.
The following is a breakdown of the Company's fixed maturity investments by quality rating:
S&P or Equivalent Ratings
AAA/AA+
% of Total Bond Portfolio
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
Below Investment Grade
2019
46.5%
3.3%
2.4%
1.5%
4.2%
5.8%
5.2%
20.5%
6.1%
4.5%
2018
43.7%
4.0%
3.4%
0.8%
4.8%
5.8%
6.1%
19.1%
7.6%
4.7%
There were no material changes in credit quality mix in 2019 as we continue to focus on investing in high quality
investment grade securities. Also, tight credit spreads throughout 2019 limited the rewards of investing in lower quality
Our holdings in below investment grade securities are primarily comprised of energy and natural resource sector
investments and collateralized debt obligations (CDO's). We have evaluated our current below investment grade
holdings for potential impairment, along with any other security with a market value substantially below our amortized
cost. We currently have no investment below 80% of amortized cost and based on presently available information,
we do not believe any below investment grade securities are other-than-temporarily impaired. We also currently have
no fixed income investments in default.
The amortized cost and aggregate fair values of investments in investment securities at December 31, 2019 and
U.S. Government corporations and agencies
$
4,131 $
150 $
— $
December 31, 2018 are as follows:
($ in thousands)
December 31, 2019
Available-for-sale securities:
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
States, municipalities and political subdivisions
Foreign governments
Total fixed maturities
Equity securities
Held-to-maturity securities:
Agency mortgage backed securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
32,283
10,307
6,815
36,074
6,669
823
97,102
2,127
861
71
441
1,816
109
46
3,494
3,176
157
104
4
70
1
—
336
—
4,281
32,987
10,274
7,252
37,820
6,777
869
100,260
5,303
Total $
99,229 $
6,670 $
336 $
105,563
$
Total $
1,290 $
1,290 $
55 $
55 $
— $
— $
1,345
1,345
34
34
35
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During 2019, the P&C segment experienced an decrease of 1.21 percentage points in the combined ratio compared
to 2018. Non-catastrophe losses increased the P&C segment combined ratio 4.48 percentage points in the current
year compared to the same period last year. However, catastrophe losses decreased in 2019 compared to 2018,
leading to a 4.35 percentage point decrease in the P&C segment combined ratio and was the primary reason for the
overall decrease, in 2019 compared to the same period last year. As noted in the table above, catastrophe loss is the
primary source of variability in our combined ratio and is generally the primary driver of variability in our earnings.
While catastrophe events are unpredictable and often occur in cycles, management has sought to increase margins
through efficiency measures and improved rate optimization. Management continues to improve rate adequacy, reduce
significant exposure concentrations and implement other risk management strategies in order to further improve
underwriting profitability, mitigate earnings volatility and reduce downside risk to our capital position.
Non-insurance Operations:
The non-insurance operations of the Company consist of our ultimate holding company parent, The National Security
Group, Inc. (NSEC). NSEC, as a standalone entity, has no material sources of revenue and relies on dividends and
management service fees from our insurance subsidiaries to pay expenses. Dividends from subsidiaries are subject
to insurance department approval and are also subject to statutory restrictions. Subsidiary dividends and service fees
are eliminated upon consolidation of the subsidiaries in the audited financial statements included herein. Revenues
and expense (excluding intercompany dividends from subsidiaries) for non-insurance operations for the year ended
December 31, 2019 and 2018 are summarized as follows:
($ in thousands)
REVENUE
Net investment income
Net realized investment gains
Other income
Total Revenues
EXPENSES
General and administrative expenses
Interest expense
2019
2018
$
56 $
16
1,019
1,091
1,128
1,122
2,250
55
—
1,006
1,061
309
1,187
1,496
LOSS BEFORE INCOME TAXES
$
(1,159) $
(435)
Total Expenses
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018:
Revenue for non-insurance operations primarily consists of interest on investments and other income. Other income
is composed of management service fees from subsidiaries which are eliminated upon consolidation. General and
administrative expenses totaled $1,128,000 in 2019 compared to $309,000 for the same period last year. The expenses
of NSG are primarily associated with the public listing of our stock, taxes and fees, and directors' fees. The most
significant item impacting the increase in general expenses was an increase in the liability for unfunded non-qualified
deferred compensation plans. Total interest expense associated with short-term and long-term borrowings of NSG
was $1,122,000 for the year ended December 31, 2019 and $1,187,000 for the same period in 2018. The decline in
interest expense is related to a reduction in debt outstanding.
Investments:
The insurance subsidiaries primarily invest in highly liquid investment grade fixed maturity securities and equity
securities. The types of assets in which the Company can invest are influenced by various state insurance laws which
prescribe qualified investment assets. While working within the parameters of these regulatory requirements and
further considering liquidity and capital needs, the Company considers investment quality, investment return, asset/
liability matching and composition of the investment portfolio when making investment decisions.
At December 31, 2019, the Company's holdings in fixed maturity securities amounted to 85.4% of total investments
and 65.9% of total assets. The Company utilizes the ratings of various Nationally Recognized Statistical Rating
Organizations when classifying fixed maturity investments by credit quality.
The following is a breakdown of the Company's fixed maturity investments by quality rating:
% of Total Bond Portfolio
S&P or Equivalent Ratings
AAA/AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
Below Investment Grade
2019
46.5%
3.3%
2.4%
1.5%
4.2%
5.8%
5.2%
20.5%
6.1%
4.5%
2018
43.7%
4.0%
3.4%
0.8%
4.8%
5.8%
6.1%
19.1%
7.6%
4.7%
There were no material changes in credit quality mix in 2019 as we continue to focus on investing in high quality
investment grade securities. Also, tight credit spreads throughout 2019 limited the rewards of investing in lower quality
issues.
Our holdings in below investment grade securities are primarily comprised of energy and natural resource sector
investments and collateralized debt obligations (CDO's). We have evaluated our current below investment grade
holdings for potential impairment, along with any other security with a market value substantially below our amortized
cost. We currently have no investment below 80% of amortized cost and based on presently available information,
we do not believe any below investment grade securities are other-than-temporarily impaired. We also currently have
no fixed income investments in default.
The amortized cost and aggregate fair values of investments in investment securities at December 31, 2019 and
December 31, 2018 are as follows:
($ in thousands)
December 31, 2019
Available-for-sale securities:
U.S. Government corporations and agencies
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
States, municipalities and political subdivisions
Foreign governments
Total fixed maturities
Equity securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
4,131 $
32,283
10,307
6,815
36,074
6,669
823
97,102
2,127
150 $
861
71
441
1,816
109
46
3,494
3,176
— $
157
104
4
70
1
—
336
—
4,281
32,987
10,274
7,252
37,820
6,777
869
100,260
5,303
Total $
99,229 $
6,670 $
336 $
105,563
Held-to-maturity securities:
Agency mortgage backed securities
$
Total $
1,290 $
1,290 $
55 $
55 $
— $
— $
1,345
1,345
34
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35
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($ in thousands)
Available-for-sale securities:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Held-to-maturity securities:
Due after one year through five years
Due after five years through ten years
Due after ten years
shorter than contractual maturities.
Investment portfolio income
($ in thousands)
Net investment income
Average current yield on investments
Total return on investments
Amortized
Cost
Fair
Value
$
2,136 $
17,397
25,683
51,886
Total $
97,102 $
100,260
$
29 $
4
1,257
Total $
1,290 $
2,133
17,945
26,516
53,666
30
5
1,310
1,345
Year Ended December 31,
2019
2018
3,876
$
3,941
3.3%
10.2%
3,055
4,910
$
$
3.5%
0.3%
(552)
(3,042)
$
$
Table of Contents
($ in thousands)
December 31, 2018
Available-for-sale securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. Government corporations and agencies
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
States, municipalities and political subdivisions
Foreign governments
Total fixed maturities
Equity securities
$
4,820 $
31 $
27,492
10,901
5,869
36,935
10,059
801
96,877
1,842
159
7
105
407
105
3
817
2,464
107 $
545
248
27
1,551
91
—
2,569
—
Total $
98,719 $
3,281 $
2,569 $
4,744
27,106
10,660
5,947
35,791
10,073
804
95,125
4,306
99,431
Held-to-maturity securities:
Agency mortgage backed securities
$
Total $
1,449 $
1,449 $
16 $
16 $
22 $
22 $
1,443
1,443
As discussed earlier, the majority of our longer duration securities are investments made to match longer duration
liabilities in the life segment or are investments in mortgage backed securities, primarily government agency. Due to
the amortizing nature and the ability to prepay mortgage backed securities, actual maturities tend to be significantly
As shown in the tables above, the Company experienced a decrease in unrealized losses on fixed maturity investments,
along with a significant increase in unrealized gains in 2019 compared to the portfolio composition at December 31,
2018. The overall increase in market value of our fixed maturity investments was driven by a decline in market interest
rates during 2019.
A number of factors influence portfolio allocation within each of the insurance subsidiaries. Within the property and
casualty subsidiaries, due to the relatively short-term nature of segment liabilities, fixed income investments tend to
be of shorter duration, with average maturities of less than five years. Also, due to higher levels of potential volatility
of policy liabilities (severe weather related losses), a greater emphasis is placed upon overall liquidity of investments.
In contrast, within the life insurance subsidiary, policy liabilities tend to be more stable and of significantly longer
duration. In order to match the longer duration of liabilities, investments in the life insurance portfolio tend to have
longer maturities, and higher average book yields. Also, less emphasis is placed upon short-term liquidity in the life
subsidiary due to more predictable cash needs.
A downside of investing in longer duration securities in the life segment is that the portfolio is exposed to more significant
price volatility as market interest rates rise. This exposure to sudden interest rate changes can lead to declines in
market value of fixed income securities in a rising interest rate environment. Management currently maintains the life
insurance portfolio in the intermediate duration range of 6.0 to guard against the adverse impact of rising rates. However,
due to the necessity of matching the longer duration of life policy liabilities as closely as possible in order to pass
regulatory cash flow testing and avoid significant interest rate speculation in the asset liability matching process, some
volatility in market value of the portfolio in a rising rate environment cannot be avoided.
At December 31, 2019, 4.5% of total investments in the fixed income portfolio were classified as below investment
grade. In evaluating whether or not the equity loss positions were other-than-temporary impairments, management
evaluated financial information on each company and, where available, reviewed analyst reports from independent
sources. Based on a review of the available financial information, the prospect for future earnings of each company
and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was
determined that the securities in an accumulated loss position in the portfolio were temporary impairments.
Management has evaluated each security in a significant unrealized loss position. For the year ended December 31,
2019, the Company realized no other-than-temporary impairments related to fixed maturities.
The amortized cost and aggregate fair value of debt securities at December 31, 2019, by contractual maturity, are as
follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Investment returns with respect to the investment portfolio for the years ended December 31, 2019 and 2018 follows:
Net gains (losses) on investments (before taxes)
Change in accumulated net unrealized gains (losses) (before income taxes) $
Average current yield on investments in 2019 decreased 0.2% compared to 2018. The marginal decrease in average
current yield was primarily due to a decline in market interest rates during 2019 which reduced the book yield on new
fixed maturity investments.
The total return on investments in 2019 was 10.2% compared to 0.3% in 2018. A gain on our company owned life
insurance investment coupled with interest rate driven increases in value of our fixed maturity investments available
for sale were the primary factors driving the much higher total return in 2019 compared to the prior year.
Repurchase agreements
The Company's subsidiaries maintain repurchase agreements for cash held on deposit under which insurance
regulations dictates that our policy requires 102% (100% minimum) of the fair value of the securities purchased to be
maintained as collateral. The repurchase investments are overnight agreements and investments are limited to
government securities that are highly liquid. Therefore, these investments are reflected on the balance sheet as a
cash equivalents. Due to a combination of the 102% collateral requirement and low short-term interest rates, we
realize limited interest income from repurchase agreements/short-term investments. However, repurchase agreements
utilizing government agency securities do provide deposit protection for short-term cash held in excess of FDIC deposit
limits. The Company does not lend securities to any counterparty under repurchase agreements.
Liquidity and capital resources:
Due to regulatory restrictions, the majority of the Company's cash is required to be invested in investment-grade
securities to provide protection for policyholders. The liabilities of the property and casualty insurance subsidiaries
are of various terms, and therefore, those subsidiaries invest in securities with various effective maturities spread over
periods usually not exceeding 10 years with an average portfolio duration typically of less than 5 years. The liabilities
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36
37
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($ in thousands)
December 31, 2018
Available-for-sale securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. Government corporations and agencies
$
4,820 $
31 $
107 $
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
States, municipalities and political subdivisions
Foreign governments
Total fixed maturities
Equity securities
Held-to-maturity securities:
Agency mortgage backed securities
27,492
10,901
5,869
36,935
10,059
801
96,877
1,842
159
7
105
407
105
3
817
2,464
545
248
27
1,551
91
—
—
2,569
4,744
27,106
10,660
5,947
35,791
10,073
804
95,125
4,306
99,431
Total $
98,719 $
3,281 $
2,569 $
$
Total $
1,449 $
1,449 $
16 $
16 $
22 $
22 $
1,443
1,443
As shown in the tables above, the Company experienced a decrease in unrealized losses on fixed maturity investments,
along with a significant increase in unrealized gains in 2019 compared to the portfolio composition at December 31,
2018. The overall increase in market value of our fixed maturity investments was driven by a decline in market interest
rates during 2019.
A number of factors influence portfolio allocation within each of the insurance subsidiaries. Within the property and
casualty subsidiaries, due to the relatively short-term nature of segment liabilities, fixed income investments tend to
be of shorter duration, with average maturities of less than five years. Also, due to higher levels of potential volatility
of policy liabilities (severe weather related losses), a greater emphasis is placed upon overall liquidity of investments.
In contrast, within the life insurance subsidiary, policy liabilities tend to be more stable and of significantly longer
duration. In order to match the longer duration of liabilities, investments in the life insurance portfolio tend to have
longer maturities, and higher average book yields. Also, less emphasis is placed upon short-term liquidity in the life
subsidiary due to more predictable cash needs.
A downside of investing in longer duration securities in the life segment is that the portfolio is exposed to more significant
price volatility as market interest rates rise. This exposure to sudden interest rate changes can lead to declines in
market value of fixed income securities in a rising interest rate environment. Management currently maintains the life
insurance portfolio in the intermediate duration range of 6.0 to guard against the adverse impact of rising rates. However,
due to the necessity of matching the longer duration of life policy liabilities as closely as possible in order to pass
regulatory cash flow testing and avoid significant interest rate speculation in the asset liability matching process, some
volatility in market value of the portfolio in a rising rate environment cannot be avoided.
At December 31, 2019, 4.5% of total investments in the fixed income portfolio were classified as below investment
grade. In evaluating whether or not the equity loss positions were other-than-temporary impairments, management
evaluated financial information on each company and, where available, reviewed analyst reports from independent
sources. Based on a review of the available financial information, the prospect for future earnings of each company
and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was
determined that the securities in an accumulated loss position in the portfolio were temporary impairments.
Management has evaluated each security in a significant unrealized loss position. For the year ended December 31,
2019, the Company realized no other-than-temporary impairments related to fixed maturities.
The amortized cost and aggregate fair value of debt securities at December 31, 2019, by contractual maturity, are as
follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Table of Contents
($ in thousands)
Available-for-sale securities:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Held-to-maturity securities:
Due after one year through five years
Due after five years through ten years
Due after ten years
Amortized
Cost
Fair
Value
$
2,136 $
17,397
25,683
51,886
2,133
17,945
26,516
53,666
Total $
97,102 $
100,260
$
29 $
4
1,257
Total $
1,290 $
30
5
1,310
1,345
As discussed earlier, the majority of our longer duration securities are investments made to match longer duration
liabilities in the life segment or are investments in mortgage backed securities, primarily government agency. Due to
the amortizing nature and the ability to prepay mortgage backed securities, actual maturities tend to be significantly
shorter than contractual maturities.
Investment portfolio income
Investment returns with respect to the investment portfolio for the years ended December 31, 2019 and 2018 follows:
($ in thousands)
Net investment income
Average current yield on investments
Total return on investments
Net gains (losses) on investments (before taxes)
$
$
Change in accumulated net unrealized gains (losses) (before income taxes) $
Year Ended December 31,
2019
2018
3,876
$
3,941
3.3%
10.2%
3,055
4,910
$
$
3.5%
0.3%
(552)
(3,042)
Average current yield on investments in 2019 decreased 0.2% compared to 2018. The marginal decrease in average
current yield was primarily due to a decline in market interest rates during 2019 which reduced the book yield on new
fixed maturity investments.
The total return on investments in 2019 was 10.2% compared to 0.3% in 2018. A gain on our company owned life
insurance investment coupled with interest rate driven increases in value of our fixed maturity investments available
for sale were the primary factors driving the much higher total return in 2019 compared to the prior year.
Repurchase agreements
The Company's subsidiaries maintain repurchase agreements for cash held on deposit under which insurance
regulations dictates that our policy requires 102% (100% minimum) of the fair value of the securities purchased to be
maintained as collateral. The repurchase investments are overnight agreements and investments are limited to
government securities that are highly liquid. Therefore, these investments are reflected on the balance sheet as a
cash equivalents. Due to a combination of the 102% collateral requirement and low short-term interest rates, we
realize limited interest income from repurchase agreements/short-term investments. However, repurchase agreements
utilizing government agency securities do provide deposit protection for short-term cash held in excess of FDIC deposit
limits. The Company does not lend securities to any counterparty under repurchase agreements.
Liquidity and capital resources:
Due to regulatory restrictions, the majority of the Company's cash is required to be invested in investment-grade
securities to provide protection for policyholders. The liabilities of the property and casualty insurance subsidiaries
are of various terms, and therefore, those subsidiaries invest in securities with various effective maturities spread over
periods usually not exceeding 10 years with an average portfolio duration typically of less than 5 years. The liabilities
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of the life insurance subsidiary are typically of a longer duration, and therefore, a higher percentage of securities in
the life insurance subsidiary are invested for periods exceeding 10 years.
The liquidity requirements for the Company are primarily met by funds generated from operations of the life insurance
and property/casualty insurance subsidiaries. All operations and virtually all investments are maintained by the
insurance subsidiaries. Premium and investment income as well as maturities and sales of invested assets provide
the primary sources of cash for both the life and property/casualty businesses, while applications of cash are applied
by both businesses to the payment of policy benefits, the cost of acquiring new business (principally commissions),
operating expenses, purchases of new investments, and in the case of life insurance, policy loans.
Virtually all invested assets of the Company are held in the insurance subsidiaries. As of December 31, 2019, the
contractual maturity schedule for all bonds and notes held by the Company, stated at amortized cost, was as follows:
($ in thousands)
Maturity
Maturity in less than 1 year
Maturity in 1-5 years
Maturity in 5-10 years
Maturity after 10 years
Available-
for-Sale
Held-to-
Maturity
$
$
2,136
17,397
25,683
51,886
97,102
$
$
— $
29
4
1,257
1,290
$
Total
2,136
17,426
25,687
53,143
98,392
Percentage
of Total
2.17%
17.71%
26.11%
54.01%
100.00%
It should be noted that the above table represents maturities based on stated/contractual maturity. Due to call and
prepayment features inherent in some fixed maturity securities, actual repayment, or effective maturities, will differ
from stated maturities. The Company routinely evaluates the impact of changing interest rates on the projected
maturities of bonds in the portfolio and actively manages the portfolio in order to minimize the impact of interest rate
risk. However, due to other factors, both regulatory and those associated with good investment management practices
associated with asset/liability matching, we do have exposure to changes in market values of securities due to changes
in interest rates. Currently, a 100 basis point immediate increase in interest rates would generate approximately a
$4,885,000, or 4.8%, decline in the market value of fixed maturity investments. Alternatively, a 100 basis point decrease
in interest rates will generate approximately $4,888,000, or 4.8%, increase in market value of fixed income investments.
Management has attempted, to the extent possible, to reduce risk in a rising rate environment. However, due to asset
liability matching requirements, particularly in the life subsidiary portfolio, interest rate risk can not be eliminated and
exposure to market volatility can cause some variability in our accumulated other comprehensive income, total return
on investments, total shareholders' equity and book value per share.
At December 31, 2019, the Company had aggregate equity capital, unrealized investment gains (net of income taxes)
and retained earnings of $53,461,000, up $7,595,000 compared to $45,866,000 at December 31, 2018. During the
year, shareholders' equity was increased by net income of $4,067,000, comprehensive income due to changes in
value of fixed maturity securities of $3,879,000 and comprehensive income of $134,000 related to change in value of
interest rate swaps. Equity was also increased by shares issued of $53,000. Equity was reduced $7,000 by the
purchase of 436 common stock shares held as treasury stock and cash dividends paid totaling $531,000.
As discussed above, changing interest rates can have a significant impact on the market value of fixed maturity
investments. Fixed maturity securities classified as available-for-sale increase the liquidity resources of the Company
as they can be sold at any time to pay claims or meet other Company obligations. However, these securities are
required to be carried at market value with net of tax change in accumulated unrealized gains and losses directly
impacting shareholder's equity. While the increase in interest rates causes near term declines in the value of fixed
income securities, we are able to reap the benefit of reinvesting at higher rates as current fixed income investments
are called, amortized (mortgage backed securities) or reach contractual maturity. Over the next twelve months, based
on cash flow projection modeling that considers such factors as anticipated principal payments on mortgage backed
securities, likelihood of call provisions being enacted and regular contractual maturities, we expect approximately 9%
of our current fixed income portfolio to be reinvested or otherwise available to meet Company obligations.
The Company, primarily through its insurance subsidiaries, had $11,809,000 in cash and cash equivalents at
December 31, 2019, compared to $5,676,000 at December 31, 2018. Cash provided by operating activities increased
cash by $5,373,000 during the year ended December 31, 2019. The increase in cash from operating activities was
driven by refunds of federal income tax overpayment along with changes in other assets and reinsurance recoveries.
Cash provided by operating activities increased cash by $3,177,000 for the year ended December 31, 2018. The
increase in cash provided by operating activities in 2018 was primarily driven by net income from operations. Net cash
provided by investing activities totaled $1,656,000 for the year ended December 31, 2019, compared to cash used in
investing activities of $2,149,000 in 2018. Net cash provided by investing activities in 2019 primarily consisted of
maturities of investments and proceeds from company owned life insurance. Net cash used in financing activities
totaled $896,000 for the year ended December 31, 2019, compared to $1,996,000 for the same period last year. During
the year ended December 31, 2019, the Company paid $531,000 in dividends to shareholders. The Company maintains
a $700,000 line of credit which matures in March of 2020. We had $700,000 available on our revolving line of credit
at December 31, 2019.
The Company had a total of $13,664,000 of long-term debt outstanding as of December 31, 2019, compared to
$12,152,000 at December 31, 2018, which includes $12,372,000 in trust preferred securities issued by the Company
in addition to the installment note. Current year and prior year amounts were reduced by the unamortized portion of
the placement fees associated with the issuance of the trust preferred securities, $208,000 and $220,000, respectively.
Contractual Obligations
Total
Less than
1 year
Years
1 through 3
Years
4 through 5
More than
5 years
Payments due by period
$
$
$
$
$
2,000
12,152
11,601
7,199
68,500
$
$
$
$
$
500
$
— $
860
6,364
4,466
$
$
$
1,500
$
— $
2,225
770
11,933
$
$
$
— $
— $
1,378
50
6,890
$
$
$
—
12,152
7,138
15
45,211
($ in thousands)
Notes payable
Debt obligations1
Interest on debt obligations1
Property and casualty claim reserves2
Future life insurance obligations3
1 Long-term debt, consisting of two separate issues of trust preferred securities, a line of credit and the long-term portion of an installment note
is assumed to be settled at contractual maturity. Interest on long-term debt is calculated using the interest rates in effect at December 31, 2019
for each issue. Interest on long-term debt is accrued and settled quarterly on the trust preferred securities, monthly on the line of credit and
annually on the installment note. Therefore, the timing and amount of interest payments may vary from the calculated value included in the table
above. These calculations do not take into account any potential prepayments. For additional information regarding long-term debt and interest
on long-term debt, please see Note 8, Notes Payable and Long-term Debt, in the notes to Consolidated Financial Statements.
2 The anticipated payout of property and casualty claim reserves, which includes loss and loss adjustment expenses, are based upon historical
payout patterns. Both the timing and amount of these payments may vary from the payment indicated. For additional details on payout patterns
please see Note 9.
3 Future life insurance obligations consist primarily of estimated future contingent benefit payments and surrender benefits on policies in force at
December 31, 2019. These estimated payments are computed using assumptions for future mortality, morbidity and persistency. In contrast to
this table, the majority of NSIC’s obligations is recorded on the balance sheet at the current account values and do not incorporate an expectation
of future market growth, interest crediting or future deposits. Therefore, the estimated future life insurance obligations presented in this table
significantly exceed the liabilities recorded in the Company’s consolidated balance sheet. Due to the significance of the assumptions used, the
actual amount and timing of such payments may differ significantly from the estimated amounts. Management believes that current assets, future
premiums and investment income will be sufficient to fund all future life insurance obligations.
Contractual obligations reflected in the table above include the issuance of $9,129,000 in subordinated debentures
completed on December 15, 2005. The subordinated debentures mature December 15, 2035. It is anticipated that
principal payments will not be made before maturity. Also included in long-term debt is the issuance of $3,035,000 in
subordinated debentures on June 21, 2007. This issue matures June 15, 2037 and may be prepaid at any time. Also
reflected in the table above is a $2,000,000 unsecured loan renewed in December 2019. The unsecured loan matures
in November 2023.
In estimating the time interval for payment of property and casualty claim reserves, the Company utilized historical
payment patterns. By the nature of the insurance contracts under which these liabilities exist, there can be no certainty
that actual payments will fall in the periods indicated above. However, management believes that current liquidity and
capital resources are sufficient to pay these obligations as they come due. Also, due to the relatively short-tail nature
of the majority of the Company's property and casualty claim liabilities, management can conclude with a reasonable
level of confidence that historical patterns indicate that approximately 97.6% of claim liabilities at the end of a given
year are settled within the following two year period. See Note 9 for additional details on payout patterns.
The ability of the Company to meet its commitments for timely payment of claims and other expenses depends, in
addition to current cash flow, on the liquidity of its investments. The Company has relatively little exposure to below
investment grade fixed income investments, which might be especially subject to liquidity problems due to thinly traded
markets.
The Company's liquidity requirements are primarily met by funds provided from operations of the insurance subsidiaries.
The Company receives funds from its subsidiaries through payment of dividends, management fees, reimbursements
for federal income taxes and reimbursement of expenses incurred at the corporate level for the subsidiaries. These
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of the life insurance subsidiary are typically of a longer duration, and therefore, a higher percentage of securities in
the life insurance subsidiary are invested for periods exceeding 10 years.
The liquidity requirements for the Company are primarily met by funds generated from operations of the life insurance
and property/casualty insurance subsidiaries. All operations and virtually all investments are maintained by the
insurance subsidiaries. Premium and investment income as well as maturities and sales of invested assets provide
the primary sources of cash for both the life and property/casualty businesses, while applications of cash are applied
by both businesses to the payment of policy benefits, the cost of acquiring new business (principally commissions),
operating expenses, purchases of new investments, and in the case of life insurance, policy loans.
Virtually all invested assets of the Company are held in the insurance subsidiaries. As of December 31, 2019, the
contractual maturity schedule for all bonds and notes held by the Company, stated at amortized cost, was as follows:
Maturity in less than 1 year
$
2,136
$
— $
($ in thousands)
Maturity
Maturity in 1-5 years
Maturity in 5-10 years
Maturity after 10 years
Available-
for-Sale
Held-to-
Maturity
17,397
25,683
51,886
97,102
$
$
29
4
1,257
1,290
$
Total
2,136
17,426
25,687
53,143
98,392
Percentage
of Total
2.17%
17.71%
26.11%
54.01%
100.00%
It should be noted that the above table represents maturities based on stated/contractual maturity. Due to call and
prepayment features inherent in some fixed maturity securities, actual repayment, or effective maturities, will differ
from stated maturities. The Company routinely evaluates the impact of changing interest rates on the projected
maturities of bonds in the portfolio and actively manages the portfolio in order to minimize the impact of interest rate
risk. However, due to other factors, both regulatory and those associated with good investment management practices
associated with asset/liability matching, we do have exposure to changes in market values of securities due to changes
in interest rates. Currently, a 100 basis point immediate increase in interest rates would generate approximately a
$4,885,000, or 4.8%, decline in the market value of fixed maturity investments. Alternatively, a 100 basis point decrease
in interest rates will generate approximately $4,888,000, or 4.8%, increase in market value of fixed income investments.
Management has attempted, to the extent possible, to reduce risk in a rising rate environment. However, due to asset
liability matching requirements, particularly in the life subsidiary portfolio, interest rate risk can not be eliminated and
exposure to market volatility can cause some variability in our accumulated other comprehensive income, total return
on investments, total shareholders' equity and book value per share.
At December 31, 2019, the Company had aggregate equity capital, unrealized investment gains (net of income taxes)
and retained earnings of $53,461,000, up $7,595,000 compared to $45,866,000 at December 31, 2018. During the
year, shareholders' equity was increased by net income of $4,067,000, comprehensive income due to changes in
value of fixed maturity securities of $3,879,000 and comprehensive income of $134,000 related to change in value of
interest rate swaps. Equity was also increased by shares issued of $53,000. Equity was reduced $7,000 by the
purchase of 436 common stock shares held as treasury stock and cash dividends paid totaling $531,000.
As discussed above, changing interest rates can have a significant impact on the market value of fixed maturity
investments. Fixed maturity securities classified as available-for-sale increase the liquidity resources of the Company
as they can be sold at any time to pay claims or meet other Company obligations. However, these securities are
required to be carried at market value with net of tax change in accumulated unrealized gains and losses directly
impacting shareholder's equity. While the increase in interest rates causes near term declines in the value of fixed
income securities, we are able to reap the benefit of reinvesting at higher rates as current fixed income investments
are called, amortized (mortgage backed securities) or reach contractual maturity. Over the next twelve months, based
on cash flow projection modeling that considers such factors as anticipated principal payments on mortgage backed
securities, likelihood of call provisions being enacted and regular contractual maturities, we expect approximately 9%
of our current fixed income portfolio to be reinvested or otherwise available to meet Company obligations.
The Company, primarily through its insurance subsidiaries, had $11,809,000 in cash and cash equivalents at
December 31, 2019, compared to $5,676,000 at December 31, 2018. Cash provided by operating activities increased
cash by $5,373,000 during the year ended December 31, 2019. The increase in cash from operating activities was
driven by refunds of federal income tax overpayment along with changes in other assets and reinsurance recoveries.
Cash provided by operating activities increased cash by $3,177,000 for the year ended December 31, 2018. The
38
increase in cash provided by operating activities in 2018 was primarily driven by net income from operations. Net cash
provided by investing activities totaled $1,656,000 for the year ended December 31, 2019, compared to cash used in
investing activities of $2,149,000 in 2018. Net cash provided by investing activities in 2019 primarily consisted of
maturities of investments and proceeds from company owned life insurance. Net cash used in financing activities
totaled $896,000 for the year ended December 31, 2019, compared to $1,996,000 for the same period last year. During
the year ended December 31, 2019, the Company paid $531,000 in dividends to shareholders. The Company maintains
a $700,000 line of credit which matures in March of 2020. We had $700,000 available on our revolving line of credit
at December 31, 2019.
The Company had a total of $13,664,000 of long-term debt outstanding as of December 31, 2019, compared to
$12,152,000 at December 31, 2018, which includes $12,372,000 in trust preferred securities issued by the Company
in addition to the installment note. Current year and prior year amounts were reduced by the unamortized portion of
the placement fees associated with the issuance of the trust preferred securities, $208,000 and $220,000, respectively.
($ in thousands)
Payments due by period
Contractual Obligations
Total
Less than
1 year
Years
1 through 3
Years
4 through 5
More than
5 years
Notes payable
Debt obligations1
Interest on debt obligations1
Property and casualty claim reserves2
Future life insurance obligations3
$
$
$
$
$
2,000
12,152
11,601
7,199
68,500
$
$
$
$
$
500
$
— $
860
6,364
4,466
$
$
$
1,500
$
— $
2,225
770
11,933
$
$
$
— $
— $
1,378
50
6,890
$
$
$
—
12,152
7,138
15
45,211
1 Long-term debt, consisting of two separate issues of trust preferred securities, a line of credit and the long-term portion of an installment note
is assumed to be settled at contractual maturity. Interest on long-term debt is calculated using the interest rates in effect at December 31, 2019
for each issue. Interest on long-term debt is accrued and settled quarterly on the trust preferred securities, monthly on the line of credit and
annually on the installment note. Therefore, the timing and amount of interest payments may vary from the calculated value included in the table
above. These calculations do not take into account any potential prepayments. For additional information regarding long-term debt and interest
on long-term debt, please see Note 8, Notes Payable and Long-term Debt, in the notes to Consolidated Financial Statements.
2 The anticipated payout of property and casualty claim reserves, which includes loss and loss adjustment expenses, are based upon historical
payout patterns. Both the timing and amount of these payments may vary from the payment indicated. For additional details on payout patterns
please see Note 9.
3 Future life insurance obligations consist primarily of estimated future contingent benefit payments and surrender benefits on policies in force at
December 31, 2019. These estimated payments are computed using assumptions for future mortality, morbidity and persistency. In contrast to
this table, the majority of NSIC’s obligations is recorded on the balance sheet at the current account values and do not incorporate an expectation
of future market growth, interest crediting or future deposits. Therefore, the estimated future life insurance obligations presented in this table
significantly exceed the liabilities recorded in the Company’s consolidated balance sheet. Due to the significance of the assumptions used, the
actual amount and timing of such payments may differ significantly from the estimated amounts. Management believes that current assets, future
premiums and investment income will be sufficient to fund all future life insurance obligations.
Contractual obligations reflected in the table above include the issuance of $9,129,000 in subordinated debentures
completed on December 15, 2005. The subordinated debentures mature December 15, 2035. It is anticipated that
principal payments will not be made before maturity. Also included in long-term debt is the issuance of $3,035,000 in
subordinated debentures on June 21, 2007. This issue matures June 15, 2037 and may be prepaid at any time. Also
reflected in the table above is a $2,000,000 unsecured loan renewed in December 2019. The unsecured loan matures
in November 2023.
In estimating the time interval for payment of property and casualty claim reserves, the Company utilized historical
payment patterns. By the nature of the insurance contracts under which these liabilities exist, there can be no certainty
that actual payments will fall in the periods indicated above. However, management believes that current liquidity and
capital resources are sufficient to pay these obligations as they come due. Also, due to the relatively short-tail nature
of the majority of the Company's property and casualty claim liabilities, management can conclude with a reasonable
level of confidence that historical patterns indicate that approximately 97.6% of claim liabilities at the end of a given
year are settled within the following two year period. See Note 9 for additional details on payout patterns.
The ability of the Company to meet its commitments for timely payment of claims and other expenses depends, in
addition to current cash flow, on the liquidity of its investments. The Company has relatively little exposure to below
investment grade fixed income investments, which might be especially subject to liquidity problems due to thinly traded
markets.
The Company's liquidity requirements are primarily met by funds provided from operations of the insurance subsidiaries.
The Company receives funds from its subsidiaries through payment of dividends, management fees, reimbursements
for federal income taxes and reimbursement of expenses incurred at the corporate level for the subsidiaries. These
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funds are used to pay stockholder dividends, principal and interest on debt, corporate administrative expenses, federal
income taxes, and for funding investments in the subsidiaries. The Company maintains minimal liquidity in order to
maximize liquidity within the insurance subsidiaries in order to support ongoing insurance operations. The Company
has no separate source of revenue other than dividends and fees from the insurance subsidiaries. Also, dividends
from the insurance subsidiaries are subject to regulatory restrictions and, therefore, are limited depending on capital
levels and earnings of the subsidiaries.
Our P&C segment is the primary source of dividends to the holding company. Consideration of insurance subsidiary
growth opportunities, regulatory capital adequacy, rating agency impact and holding company debt reduction, among
other items, are factors that influence our subsidiary dividend requirements. While we have made significant progress
in recent years, continued strengthening capital levels in the insurance subsidiaries and reduction of debt remains a
top priority.
Dividends paid from the insurance subsidiaries are subject to regulatory restrictions and prior approval of the Alabama
Department of Insurance. As disclosed in Note 12 to the audited consolidated financial statements included in our
2019 Annual Report on Form 10-K, the amount that The National Security Group's insurance subsidiaries can transfer
in the form of dividends to the parent company during 2020 is statutorily limited to $1,624,000 in the life insurance
subsidiary and $3,626,000 in the property/casualty insurance subsidiary. Dividends are limited to the greater of net
income (operating income for life subsidiary) or 10% of statutory capital, and regulators consider dividends paid within
the preceding twelve months when calculating the available dividend capacity. Therefore, all of the above referenced
dividend capacity will not be available for consideration of payment until dividends paid in the preceding twelve months
have been considered on a rolling basis. The Company also has to continuously evaluate other factors such as
subsidiary operating performance, subsidiary capital requirements and potential impact by rating agencies in making
decisions on how much capital can be released from insurance subsidiaries for payment of dividends to NSG. These
factors are considered along with the goal of growing year over year statutory surplus in the subsidiaries, and these
considerations along with potential adverse impacts on regulatory surplus, will likely lead to dividend payments to NSG
substantially below the above referenced regulatory maximums. The Company received $2,750,000 dividends from
its subsidiaries during the year ended December 31, 2019.
The Company’s subsidiaries require cash in order to fund policy acquisition costs, claims, other policy benefits, interest
expense, general expenses, and dividends to the Company. Premium and investment income, as well as maturities,
calls, and sales of invested assets, provide the primary sources of cash for both subsidiaries. A significant portion of
the Company’s investment portfolio, which is held by the insurance subsidiaries, consists of readily marketable
securities, which can be sold for cash.
The Company continues to monitor liquidity and subsidiary capital closely. Despite challenging weather patterns in
the property and casualty subsidiaries over the past three years, the insurance subsidiaries are well capitalized.
However, further strengthening of subsidiary capital continues to be a top priority for management.
operations:
Except as discussed above, the Company is unaware of any known trends, events, or uncertainties reasonably likely
to have a material effect on its liquidity, capital resources, or operations. Additionally, the Company has not been made
aware of any recommendations of regulatory authorities, which if implemented, would have such an effect.
Statutory Risk-Based Capital of Insurance Subsidiaries:
The NAIC has adopted Risk-Based Capital (RBC) requirements for life/health and property/casualty insurance
companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such
as asset quality, mortality and morbidity, asset and liability matching, benefit and loss reserve adequacy, and other
business factors. State insurance regulators will use the RBC formula as an early warning tool to identify, for the
purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition,
the formula defines minimum capital standards that will supplement the current system of low fixed minimum capital
and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the Company's
regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within levels, each of which requires corrective action.
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The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level
Regulatory action level
Authorized control level
Mandatory control level
2.0
1.5
1.0
0.7
The ratios of Total Adjusted Capital to Authorized Control Level RBC for The National Security Group's life/health and
property/casualty insurance subsidiaries are all in excess of 5 to 1 at December 31, 2019.
National Security Insurance Company (life insurer) has regulatory adjusted capital of $17,210,000 and $16,043,000
at December 31, 2019 and 2018, respectively, and a ratio of regulatory total adjusted capital to authorized control level
RBC of 15.0 and 16.2 at December 31, 2019 and 2018, respectively. Accordingly, National Security Insurance Company
exceeds the minimum RBC requirements.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $36,264,000
and $34,645,000 at December 31, 2019 and 2018, respectively, and a ratio of regulatory total adjusted capital to
authorized control level RBC of 5.1 and 4.7 at December 31, 2019 and 2018, respectively. Accordingly, National
Security Fire & Casualty Company exceeds the minimum RBC requirements.
Omega One Insurance Company (property/casualty insurer), which began writing business in late 1995, has regulatory
adjusted capital of $11,430,000 and $10,783,000 at December 31, 2019 and 2018, and a ratio of regulatory total
adjusted capital to authorized control level RBC of 20.1 and 18.9 at December 31, 2019 and 2018, respectively.
Accordingly, Omega One Insurance Company exceeds the minimum RBC requirements.
Application of Critical Accounting Policies:
Our Consolidated Financial Statements are based upon the development and application of accounting policies that
require management to make significant estimates and assumptions. Accounting policies may be based on (including
but not limited to) GAAP authoritative literature, statutory authoritative literature, regulations and industry standards.
The Company's financial results would be directly impacted by changes in assumptions and judgments used to select
and apply our accounting policies. It is management's opinion that the following are some of the more critical judgment
areas in regards to the application of our accounting policies and their effect on our financial condition and results of
• Reinsurance
•
Income Taxes
• Deferred Policy Acquisition Costs
• Fair Values of Financial Instruments
• Claim Liabilities
• Recognition of Revenue
• Contingencies
Reinsurance
Risk management involves ceding risks to reinsurers for policies underwritten based on contractual agreements. The
reinsurance purchased helps provide protection by individual loss or catastrophic event when claims exceed specified
amounts. Although the reinsurance protects our Company in the event a loss exceeds retention limits specified in a
particular reinsurance agreement; ultimate responsibility for claim settlement rests with our Company if any reinsurer
defaults on payments due. We record an asset for reinsurance recoverable in the financial statements for amounts
due from reinsurers and monitor the balances due by reinsurer to ensure the asset is ultimately going to be collectible.
If we discover an amount due may not be received, we remove the balance and charge it to an allowance for doubtful
accounts or charge it off to expense based on the information available at the time.
When a claim is made under a policy we have reinsured, we initially pay the full amount owed to the policyholder or
claimant. Subsequently, we initiate the process to recover any amounts due from reinsurers in accordance with the
terms of the applicable reinsurance contract.
Reinsurance is maintained by the life and accident and health segment for losses that exceed $50,000 for any one
insured.
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funds are used to pay stockholder dividends, principal and interest on debt, corporate administrative expenses, federal
The levels and ratios are as follows:
income taxes, and for funding investments in the subsidiaries. The Company maintains minimal liquidity in order to
maximize liquidity within the insurance subsidiaries in order to support ongoing insurance operations. The Company
has no separate source of revenue other than dividends and fees from the insurance subsidiaries. Also, dividends
from the insurance subsidiaries are subject to regulatory restrictions and, therefore, are limited depending on capital
levels and earnings of the subsidiaries.
Our P&C segment is the primary source of dividends to the holding company. Consideration of insurance subsidiary
growth opportunities, regulatory capital adequacy, rating agency impact and holding company debt reduction, among
other items, are factors that influence our subsidiary dividend requirements. While we have made significant progress
in recent years, continued strengthening capital levels in the insurance subsidiaries and reduction of debt remains a
top priority.
Dividends paid from the insurance subsidiaries are subject to regulatory restrictions and prior approval of the Alabama
Department of Insurance. As disclosed in Note 12 to the audited consolidated financial statements included in our
2019 Annual Report on Form 10-K, the amount that The National Security Group's insurance subsidiaries can transfer
in the form of dividends to the parent company during 2020 is statutorily limited to $1,624,000 in the life insurance
subsidiary and $3,626,000 in the property/casualty insurance subsidiary. Dividends are limited to the greater of net
income (operating income for life subsidiary) or 10% of statutory capital, and regulators consider dividends paid within
the preceding twelve months when calculating the available dividend capacity. Therefore, all of the above referenced
dividend capacity will not be available for consideration of payment until dividends paid in the preceding twelve months
have been considered on a rolling basis. The Company also has to continuously evaluate other factors such as
subsidiary operating performance, subsidiary capital requirements and potential impact by rating agencies in making
decisions on how much capital can be released from insurance subsidiaries for payment of dividends to NSG. These
factors are considered along with the goal of growing year over year statutory surplus in the subsidiaries, and these
considerations along with potential adverse impacts on regulatory surplus, will likely lead to dividend payments to NSG
substantially below the above referenced regulatory maximums. The Company received $2,750,000 dividends from
its subsidiaries during the year ended December 31, 2019.
The Company’s subsidiaries require cash in order to fund policy acquisition costs, claims, other policy benefits, interest
expense, general expenses, and dividends to the Company. Premium and investment income, as well as maturities,
calls, and sales of invested assets, provide the primary sources of cash for both subsidiaries. A significant portion of
the Company’s investment portfolio, which is held by the insurance subsidiaries, consists of readily marketable
securities, which can be sold for cash.
The Company continues to monitor liquidity and subsidiary capital closely. Despite challenging weather patterns in
the property and casualty subsidiaries over the past three years, the insurance subsidiaries are well capitalized.
However, further strengthening of subsidiary capital continues to be a top priority for management.
Except as discussed above, the Company is unaware of any known trends, events, or uncertainties reasonably likely
to have a material effect on its liquidity, capital resources, or operations. Additionally, the Company has not been made
aware of any recommendations of regulatory authorities, which if implemented, would have such an effect.
Statutory Risk-Based Capital of Insurance Subsidiaries:
The NAIC has adopted Risk-Based Capital (RBC) requirements for life/health and property/casualty insurance
companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such
as asset quality, mortality and morbidity, asset and liability matching, benefit and loss reserve adequacy, and other
business factors. State insurance regulators will use the RBC formula as an early warning tool to identify, for the
purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition,
the formula defines minimum capital standards that will supplement the current system of low fixed minimum capital
and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the Company's
regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within levels, each of which requires corrective action.
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level
Regulatory action level
Authorized control level
Mandatory control level
2.0
1.5
1.0
0.7
The ratios of Total Adjusted Capital to Authorized Control Level RBC for The National Security Group's life/health and
property/casualty insurance subsidiaries are all in excess of 5 to 1 at December 31, 2019.
National Security Insurance Company (life insurer) has regulatory adjusted capital of $17,210,000 and $16,043,000
at December 31, 2019 and 2018, respectively, and a ratio of regulatory total adjusted capital to authorized control level
RBC of 15.0 and 16.2 at December 31, 2019 and 2018, respectively. Accordingly, National Security Insurance Company
exceeds the minimum RBC requirements.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $36,264,000
and $34,645,000 at December 31, 2019 and 2018, respectively, and a ratio of regulatory total adjusted capital to
authorized control level RBC of 5.1 and 4.7 at December 31, 2019 and 2018, respectively. Accordingly, National
Security Fire & Casualty Company exceeds the minimum RBC requirements.
Omega One Insurance Company (property/casualty insurer), which began writing business in late 1995, has regulatory
adjusted capital of $11,430,000 and $10,783,000 at December 31, 2019 and 2018, and a ratio of regulatory total
adjusted capital to authorized control level RBC of 20.1 and 18.9 at December 31, 2019 and 2018, respectively.
Accordingly, Omega One Insurance Company exceeds the minimum RBC requirements.
Application of Critical Accounting Policies:
Our Consolidated Financial Statements are based upon the development and application of accounting policies that
require management to make significant estimates and assumptions. Accounting policies may be based on (including
but not limited to) GAAP authoritative literature, statutory authoritative literature, regulations and industry standards.
The Company's financial results would be directly impacted by changes in assumptions and judgments used to select
and apply our accounting policies. It is management's opinion that the following are some of the more critical judgment
areas in regards to the application of our accounting policies and their effect on our financial condition and results of
operations:
Income Taxes
• Reinsurance
• Deferred Policy Acquisition Costs
•
• Fair Values of Financial Instruments
• Claim Liabilities
• Recognition of Revenue
• Contingencies
Reinsurance
Risk management involves ceding risks to reinsurers for policies underwritten based on contractual agreements. The
reinsurance purchased helps provide protection by individual loss or catastrophic event when claims exceed specified
amounts. Although the reinsurance protects our Company in the event a loss exceeds retention limits specified in a
particular reinsurance agreement; ultimate responsibility for claim settlement rests with our Company if any reinsurer
defaults on payments due. We record an asset for reinsurance recoverable in the financial statements for amounts
due from reinsurers and monitor the balances due by reinsurer to ensure the asset is ultimately going to be collectible.
If we discover an amount due may not be received, we remove the balance and charge it to an allowance for doubtful
accounts or charge it off to expense based on the information available at the time.
When a claim is made under a policy we have reinsured, we initially pay the full amount owed to the policyholder or
claimant. Subsequently, we initiate the process to recover any amounts due from reinsurers in accordance with the
terms of the applicable reinsurance contract.
Reinsurance is maintained by the life and accident and health segment for losses that exceed $50,000 for any one
insured.
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During 2019, the property and casualty segment maintained a catastrophe reinsurance contract, which covered losses
exceeding a retention related to a single catastrophic event. In the event a catastrophe exceeded the $4 million
company retention stated in the contract, reinsurers would reimburse the company 100% of gross losses up to the
upper limits of the reinsurance agreement, which was $72.5 million in 2019 and 2018. Any losses above the $72.5
million upper limit are the responsibility of our Company. The contract in place during 2019 also allowed one
reinstatement for coverage under the contract for a second catastrophic event with the same upper $72.5 million upper
limit but with a reduced retention of $2 million.
The property and casualty subsidiaries utilize our actual in force policy data modeled utilizing two different industry
accepted catastrophe models to structure catastrophe reinsurance and determine upper limits of catastrophe
reinsurance agreements. Historically, reinsurance has been maintained to meet at least a 250 year modeled event
level. While this estimate is subject to some uncertainty and model risk, through obtaining coverage that meets at
least a 250 year modeled event level, the models indicate that we maintain catastrophe reinsurance upper limits to
cover an event that has less than a 0.5% probability of occurring in a given year.
At December 31, 2019, the estimated reinsurance recoverable recorded was $276,000 compared to $1,772,000 for
the same period last year. The Company does not anticipate any issues with collection of the recorded amount. In
2019, catastrophe reinsurance premiums ceded totaled $6,008,000 compared to $5,486,000 ceded in 2018.
Catastrophe reinsurance premiums are based on a premium calculation applying the agreed upon rate to the total
insured value of the covered lines of business. The reduction of our second event retention along with a moderate
increase in total insured value, were the primary factors contributing to the increase in reinsurance cost in 2019. In
addition to catastrophe reinsurance, the Company placed reinstatement premium protection (RPP) reinsurance during
2019 and 2018 totaling $1,033,000 and $833,000, respectively.
The reinsurance related amounts recorded have been estimated based upon management's interpretation of the
related reinsurance treaty. Areas in which judgment has been used regarding said estimates include: assessing the
financial viability and credit quality of each reinsurer as well as the ability of each reinsurer to pay amounts owed.
At December 31, 2019, there is no evidence to suggest to management that any deferred tax asset is unrealizable.
For more information regarding deferred income taxes, see Note 7 to our Consolidated Financial Statements.
The Company evaluates all tax positions taken on its U.S. federal income tax return. No material uncertainties exist
for any tax positions taken by the Company.
Fair Values of Financial Instruments
Investments are recorded at fair value based upon quoted prices when available. Quoted prices are available for most
investment debt and equity securities included in the financial statements. Further discussion of fair value methodology
is discussed in Note 5 to the Consolidated Financial Statements. Periodically, the carrying values of an individual
investment may become temporarily impaired because of time value, volatility, credit quality and existing market
conditions. Management evaluates investments to determine whether the impairment is other-than-temporary.
Evaluation criteria include credit quality of security, severity of decrease between cost and market value, length of time
of the impairment and likelihood that the impairment will reverse in the near future. This evaluation requires significant
assumptions, estimates and judgments by management. If the impairment is determined to be other-than-temporary,
the investment is written down to the current fair value and a realized loss is recorded on the income statement. We
have very limited exposure to less liquid and difficult to value investments.
Claim Liabilities
Property and casualty loss reserves are maintained to cover the estimated unpaid liability for losses and loss adjustment
expenses with respect to reported and unreported incurred claims. Loss reserves are an estimation based on actuarial
projection techniques common in the insurance industry. Reserves are management's expectations of what the
settlement and administration of claims will cost. Management's estimate of reserves are based on historical settlement
patterns, estimated salvage and subrogation, and an appraisal of the related facts and circumstances. Management's
reserve estimates are reviewed by consulting actuaries to determine their adequacy and reasonableness. The reserve
analysis performed by management is reviewed by the actuaries during the third quarter each year with a final
comprehensive review performed at year-end.
There is a possibility that the actual amounts recovered from reinsurers could be materially less than the estimates
recorded. This possibility could result in a material adverse impact on our financial condition and results of operations.
Reinsurers may dispute claims under reinsurance treaties, such as the calculated amount of reinsurance recoverable.
Management does not anticipate any issues with recoverability of reinsurance balances based on current evaluations
of collectability. For more information regarding reinsurance, see the Notes to our Consolidated Financial Statements.
At December 31, 2019 and 2018, the recorded liability for loss and loss adjustment expense was $7,199,000 and
$8,208,000, respectively, a $1,009,000 decrease. The decline in claim and claim adjustment expense reserves is
primarily due to claims arising from Hurricane Michael in the fourth quarter of 2018. We believe the estimate of unpaid
losses and loss adjustment expenses to be sufficient based on currently available information and a review of our
historical reserving practices. For more information regarding loss and loss adjustment expense, see Note 9 to our
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) are those costs incurred in connection with acquiring new business or renewing
existing business. DAC is primarily comprised of commissions, premium taxes, and underwriting costs associated
with issuing new policies. In accordance with generally accepted accounting principles, these costs are not expensed
in their entirety at policy inception; rather, they are recorded as an asset and amortized over the lives of the policies.
A reduction in DAC is recognized if the sum of the expected loss and loss adjustment expenses, unamortized acquisition
costs, and maintenance costs exceeds related unearned premiums and projected investment income. Management
reviews DAC calculations throughout the year to establish and assess their recoverability. Changes in management's
assumptions, estimates or judgment with respect to calculating DAC could materially impact our financial statements
and financial condition. Changes in loss ratios, projected investment income, premium rates or overall expense levels
could negatively impact the recoverability of DAC.
At December 31, 2019 and 2018, the Company recorded $7,666,000 and $7,834,000, respectively, as an asset for
DAC in the Consolidated Financial Statements. We do not foresee any issues related to recoverability of these
capitalized costs. For more information regarding deferred policy acquisition costs, see Note 1 to our Consolidated
Financial Statements.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes arise from
the recognition of temporary differences between financial statement carrying amounts and the tax bases of the
Company's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or are
settled. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset
will not be realized. The effect of a change in tax rates is recognized in the period the new rate is enacted.
Consolidated Financial Statements.
Recognition of Revenue
Life insurance premiums are recognized as revenues when due. Property and casualty insurance premiums include
direct writings plus reinsurance assumed less reinsurance ceded and are recognized on a pro-rata basis over the
terms of the policies. Unearned premiums represent that portion of direct premiums written that are applicable to the
unexpired terms of policy contracts in force and is reported as a liability. Prepaid reinsurance premiums represent the
unexpired portion of premiums ceded to reinsurers and are reported as an asset.
Contingencies
Liabilities for loss contingencies arising from, but not limited to, litigation, claims, assessments, fines and penalties are
recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation
can be reasonably estimated. Significant attorney fees are estimated and recorded when incurred. Additional details
with respect to contingencies are disclosed in Note 16 to the accompanying Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Under smaller reporting company rules we are not required to disclose information required under Item 7A. However,
in order to provide information to our investors, we have elected to provide information related to market risk.
The Company's primary objectives in managing its investment portfolio are to maximize investment income and total
investment returns while minimizing overall credit risk. Investment strategies are developed based on many factors
including changes in interest rates, overall market conditions, underwriting results, regulatory requirements and tax
position. Investment decisions are made by management and reviewed by the Board of Directors. Market risk
represents the potential for loss due to adverse changes in fair value of securities. The three potential risks related
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During 2019, the property and casualty segment maintained a catastrophe reinsurance contract, which covered losses
exceeding a retention related to a single catastrophic event. In the event a catastrophe exceeded the $4 million
company retention stated in the contract, reinsurers would reimburse the company 100% of gross losses up to the
upper limits of the reinsurance agreement, which was $72.5 million in 2019 and 2018. Any losses above the $72.5
million upper limit are the responsibility of our Company. The contract in place during 2019 also allowed one
reinstatement for coverage under the contract for a second catastrophic event with the same upper $72.5 million upper
limit but with a reduced retention of $2 million.
The property and casualty subsidiaries utilize our actual in force policy data modeled utilizing two different industry
accepted catastrophe models to structure catastrophe reinsurance and determine upper limits of catastrophe
reinsurance agreements. Historically, reinsurance has been maintained to meet at least a 250 year modeled event
level. While this estimate is subject to some uncertainty and model risk, through obtaining coverage that meets at
least a 250 year modeled event level, the models indicate that we maintain catastrophe reinsurance upper limits to
cover an event that has less than a 0.5% probability of occurring in a given year.
At December 31, 2019, the estimated reinsurance recoverable recorded was $276,000 compared to $1,772,000 for
the same period last year. The Company does not anticipate any issues with collection of the recorded amount. In
2019, catastrophe reinsurance premiums ceded totaled $6,008,000 compared to $5,486,000 ceded in 2018.
Catastrophe reinsurance premiums are based on a premium calculation applying the agreed upon rate to the total
insured value of the covered lines of business. The reduction of our second event retention along with a moderate
increase in total insured value, were the primary factors contributing to the increase in reinsurance cost in 2019. In
addition to catastrophe reinsurance, the Company placed reinstatement premium protection (RPP) reinsurance during
2019 and 2018 totaling $1,033,000 and $833,000, respectively.
The reinsurance related amounts recorded have been estimated based upon management's interpretation of the
related reinsurance treaty. Areas in which judgment has been used regarding said estimates include: assessing the
financial viability and credit quality of each reinsurer as well as the ability of each reinsurer to pay amounts owed.
There is a possibility that the actual amounts recovered from reinsurers could be materially less than the estimates
recorded. This possibility could result in a material adverse impact on our financial condition and results of operations.
Reinsurers may dispute claims under reinsurance treaties, such as the calculated amount of reinsurance recoverable.
Management does not anticipate any issues with recoverability of reinsurance balances based on current evaluations
of collectability. For more information regarding reinsurance, see the Notes to our Consolidated Financial Statements.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) are those costs incurred in connection with acquiring new business or renewing
existing business. DAC is primarily comprised of commissions, premium taxes, and underwriting costs associated
with issuing new policies. In accordance with generally accepted accounting principles, these costs are not expensed
in their entirety at policy inception; rather, they are recorded as an asset and amortized over the lives of the policies.
A reduction in DAC is recognized if the sum of the expected loss and loss adjustment expenses, unamortized acquisition
costs, and maintenance costs exceeds related unearned premiums and projected investment income. Management
reviews DAC calculations throughout the year to establish and assess their recoverability. Changes in management's
assumptions, estimates or judgment with respect to calculating DAC could materially impact our financial statements
and financial condition. Changes in loss ratios, projected investment income, premium rates or overall expense levels
could negatively impact the recoverability of DAC.
At December 31, 2019 and 2018, the Company recorded $7,666,000 and $7,834,000, respectively, as an asset for
DAC in the Consolidated Financial Statements. We do not foresee any issues related to recoverability of these
capitalized costs. For more information regarding deferred policy acquisition costs, see Note 1 to our Consolidated
Financial Statements.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes arise from
the recognition of temporary differences between financial statement carrying amounts and the tax bases of the
Company's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or are
settled. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset
will not be realized. The effect of a change in tax rates is recognized in the period the new rate is enacted.
42
At December 31, 2019, there is no evidence to suggest to management that any deferred tax asset is unrealizable.
For more information regarding deferred income taxes, see Note 7 to our Consolidated Financial Statements.
The Company evaluates all tax positions taken on its U.S. federal income tax return. No material uncertainties exist
for any tax positions taken by the Company.
Fair Values of Financial Instruments
Investments are recorded at fair value based upon quoted prices when available. Quoted prices are available for most
investment debt and equity securities included in the financial statements. Further discussion of fair value methodology
is discussed in Note 5 to the Consolidated Financial Statements. Periodically, the carrying values of an individual
investment may become temporarily impaired because of time value, volatility, credit quality and existing market
conditions. Management evaluates investments to determine whether the impairment is other-than-temporary.
Evaluation criteria include credit quality of security, severity of decrease between cost and market value, length of time
of the impairment and likelihood that the impairment will reverse in the near future. This evaluation requires significant
assumptions, estimates and judgments by management. If the impairment is determined to be other-than-temporary,
the investment is written down to the current fair value and a realized loss is recorded on the income statement. We
have very limited exposure to less liquid and difficult to value investments.
Claim Liabilities
Property and casualty loss reserves are maintained to cover the estimated unpaid liability for losses and loss adjustment
expenses with respect to reported and unreported incurred claims. Loss reserves are an estimation based on actuarial
projection techniques common in the insurance industry. Reserves are management's expectations of what the
settlement and administration of claims will cost. Management's estimate of reserves are based on historical settlement
patterns, estimated salvage and subrogation, and an appraisal of the related facts and circumstances. Management's
reserve estimates are reviewed by consulting actuaries to determine their adequacy and reasonableness. The reserve
analysis performed by management is reviewed by the actuaries during the third quarter each year with a final
comprehensive review performed at year-end.
At December 31, 2019 and 2018, the recorded liability for loss and loss adjustment expense was $7,199,000 and
$8,208,000, respectively, a $1,009,000 decrease. The decline in claim and claim adjustment expense reserves is
primarily due to claims arising from Hurricane Michael in the fourth quarter of 2018. We believe the estimate of unpaid
losses and loss adjustment expenses to be sufficient based on currently available information and a review of our
historical reserving practices. For more information regarding loss and loss adjustment expense, see Note 9 to our
Consolidated Financial Statements.
Recognition of Revenue
Life insurance premiums are recognized as revenues when due. Property and casualty insurance premiums include
direct writings plus reinsurance assumed less reinsurance ceded and are recognized on a pro-rata basis over the
terms of the policies. Unearned premiums represent that portion of direct premiums written that are applicable to the
unexpired terms of policy contracts in force and is reported as a liability. Prepaid reinsurance premiums represent the
unexpired portion of premiums ceded to reinsurers and are reported as an asset.
Contingencies
Liabilities for loss contingencies arising from, but not limited to, litigation, claims, assessments, fines and penalties are
recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation
can be reasonably estimated. Significant attorney fees are estimated and recorded when incurred. Additional details
with respect to contingencies are disclosed in Note 16 to the accompanying Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Under smaller reporting company rules we are not required to disclose information required under Item 7A. However,
in order to provide information to our investors, we have elected to provide information related to market risk.
The Company's primary objectives in managing its investment portfolio are to maximize investment income and total
investment returns while minimizing overall credit risk. Investment strategies are developed based on many factors
including changes in interest rates, overall market conditions, underwriting results, regulatory requirements and tax
position. Investment decisions are made by management and reviewed by the Board of Directors. Market risk
represents the potential for loss due to adverse changes in fair value of securities. The three potential risks related
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to the Company's fixed maturity portfolio are interest rate risk, prepayment risk and default risk. The primary risk
related to the Company's equity portfolio is equity price risk.
Since the Company's assets and liabilities are largely monetary in nature, the Company's financial position and earnings
are subject to risks resulting from changes in interest rates at varying maturities, changes in spreads over U.S. Treasuries
on new investment opportunities and changes in the yield curve and equity pricing risks.
The Company is exposed to equity price risk on its equity securities. The Company holds common stock with a fair
value of $5,303,000. Our portfolio has historically been highly correlated to the S&P 500 with regard to market risk.
Based on an evaluation of the historical risk measure of our portfolio relative to the S&P 500, if the market value of
the S&P 500 Index decreased 10% from its December 31, 2019 value, the fair value of the Company's common stock
investments would decrease by approximately $530,000.
Certain fixed interest rate market risk sensitive instruments may not give rise to incremental income or loss during the
period illustrated but may be subject to changes in fair values. Note 5 in the consolidated financial statements present
additional disclosures concerning fair values of Financial Assets and Financial Liabilities and are incorporated by
reference herein.
The Company limits the extent of its market risk by purchasing securities that are backed by entities considered to be
financially stable, the majority of the assets are issued by U.S. government sponsored entities or corporate entities
with debt considered to be "investment grade".
The Company's investment approach in the equity markets is based primarily on a fundamental analysis of value. This
approach requires the investment committee to invest in well managed, primarily dividend paying companies, which
have a low debt to capital ratio, above average return on capital for a sustained period of time, and low volatility rating
(beta) relative to the market. The dividends provide a steady cash flow to help pay current claim liabilities, and it has
been the Company's experience that by following this investment strategy, long-term investment results have been
superior to those offered by bonds, while keeping the risk of loss of capital to a minimum relative to the overall equity
market.
As for shifts in investment allocations, the Company has used improved cash flows from insurance operations to
increase allocations to fixed maturity securities in order to limit volatility of statutory capital of the insurance subsidiaries.
Schedule III. Supplementary Insurance Information – December 31, 2019 and 2018
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2019 and 2018
Consolidated Statements of Operations – Years Ended December 31, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) – Years Ended December 31, 2019 and
2018
2018
Consolidated Statements of Changes in Shareholders’ Equity – Years Ended December 31, 2019 and
Consolidated Statements of Cash Flows – Years Ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements – December 31, 2019
Financial Statement Schedules:
Schedule I. Summary of Investments Other Than Investments in Related Parties – December 31, 2019
and 2018
Schedule II. Condensed Financial Information of Registrant – December 31, 2019 and 2018
Schedule IV. Reinsurance – Years Ended December 31, 2019 and 2018
Schedule V. Valuation and Qualifying Accounts – Years Ended December 31, 2019 and 2018
All other Schedules are not required under related instructions or are not applicable and therefore have been
omitted.
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to the Company's fixed maturity portfolio are interest rate risk, prepayment risk and default risk. The primary risk
related to the Company's equity portfolio is equity price risk.
Since the Company's assets and liabilities are largely monetary in nature, the Company's financial position and earnings
are subject to risks resulting from changes in interest rates at varying maturities, changes in spreads over U.S. Treasuries
on new investment opportunities and changes in the yield curve and equity pricing risks.
The Company is exposed to equity price risk on its equity securities. The Company holds common stock with a fair
value of $5,303,000. Our portfolio has historically been highly correlated to the S&P 500 with regard to market risk.
Based on an evaluation of the historical risk measure of our portfolio relative to the S&P 500, if the market value of
the S&P 500 Index decreased 10% from its December 31, 2019 value, the fair value of the Company's common stock
investments would decrease by approximately $530,000.
Certain fixed interest rate market risk sensitive instruments may not give rise to incremental income or loss during the
period illustrated but may be subject to changes in fair values. Note 5 in the consolidated financial statements present
additional disclosures concerning fair values of Financial Assets and Financial Liabilities and are incorporated by
reference herein.
The Company limits the extent of its market risk by purchasing securities that are backed by entities considered to be
financially stable, the majority of the assets are issued by U.S. government sponsored entities or corporate entities
with debt considered to be "investment grade".
The Company's investment approach in the equity markets is based primarily on a fundamental analysis of value. This
approach requires the investment committee to invest in well managed, primarily dividend paying companies, which
have a low debt to capital ratio, above average return on capital for a sustained period of time, and low volatility rating
(beta) relative to the market. The dividends provide a steady cash flow to help pay current claim liabilities, and it has
been the Company's experience that by following this investment strategy, long-term investment results have been
superior to those offered by bonds, while keeping the risk of loss of capital to a minimum relative to the overall equity
market.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2019 and 2018
Consolidated Statements of Operations – Years Ended December 31, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) – Years Ended December 31, 2019 and
2018
Consolidated Statements of Changes in Shareholders’ Equity – Years Ended December 31, 2019 and
2018
Consolidated Statements of Cash Flows – Years Ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements – December 31, 2019
Financial Statement Schedules:
Schedule I. Summary of Investments Other Than Investments in Related Parties – December 31, 2019
and 2018
Schedule II. Condensed Financial Information of Registrant – December 31, 2019 and 2018
As for shifts in investment allocations, the Company has used improved cash flows from insurance operations to
increase allocations to fixed maturity securities in order to limit volatility of statutory capital of the insurance subsidiaries.
Schedule III. Supplementary Insurance Information – December 31, 2019 and 2018
Schedule IV. Reinsurance – Years Ended December 31, 2019 and 2018
Schedule V. Valuation and Qualifying Accounts – Years Ended December 31, 2019 and 2018
All other Schedules are not required under related instructions or are not applicable and therefore have been
omitted.
46
47
48
49
50
51
52
83
84
86
86
87
44
45
45
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of The National Security Group, Inc.
Elba, Alabama
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The National Security Group, Inc. (the Company)
as of December 31, 2019 and 2018 and the related consolidated statements of operations, comprehensive income
(loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes and financial
statement schedules I, II, III, IV and V (collectively referred to as the consolidated financial statements). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as
of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company. in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
/s/ Warren Averett, LLC
We have served as The National Group, Inc.’s auditor since 2009.
Birmingham, Alabama
March 19, 2020
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2019 -
$
1,290 $
1,449
Fixed maturities available-for-sale, at estimated fair value (cost: 2019 - $97,102;
Equity securities, at estimated fair value (cost: 2019 - $2,127; 2018 - $1,842)
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
ASSETS
Investments
$1,345; 2018 - $1,443)
2018 - $96,877)
Trading securities
Receivable for securities sold
Mortgage loans on real estate, at cost
Investment real estate, at book value
Policy loans
Company owned life insurance
Other invested assets
Cash and cash equivalents
Accrued investment income
Policy receivables and agents' balances, net
Reinsurance recoverable
Deferred policy acquisition costs
Property and equipment, net
Income tax recoverable
Deferred income tax asset, net
Other assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Property and casualty benefit and loss reserves
Accident and health benefit and loss reserves
Life and annuity benefit and loss reserves
Unearned premiums
Policy and contract claims
Other policyholder funds
Long-term debt
Accrued income taxes
Deferred income tax liability
Other liabilities
Contingencies
Shareholders' equity
Common stock
Additional paid-in capital
Total Investments
Total Assets $
153,934 $
144,231
$
7,199 $
December 31,
December 31,
2019
2018
100,260
5,303
149
56
147
2,934
1,895
4,655
2,280
118,969
11,809
706
12,028
276
7,666
1,630
—
—
850
4,046
34,269
30,555
1,053
1,350
500
13,664
226
96
7,515
100,473
2,532
5,602
2,443
42,891
(7)
53,461
95,125
4,306
107
—
156
2,945
1,854
4,600
2,148
112,690
5,676
774
11,185
1,772
7,834
1,649
1,463
716
472
8,208
3,803
33,671
29,999
792
1,515
2,200
12,152
—
—
6,025
98,365
2,527
5,554
(1,570)
39,355
—
45,866
144,231
Short-term notes payable and current portion of long-term debt
Total Liabilities
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost, 436 shares
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity $
153,934 $
46
46
The Notes to Consolidated Financial Statements are an integral part of these statements.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Table of Contents
To the Board of Directors and Shareholders
of The National Security Group, Inc.
Elba, Alabama
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The National Security Group, Inc. (the Company)
as of December 31, 2019 and 2018 and the related consolidated statements of operations, comprehensive income
(loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes and financial
statement schedules I, II, III, IV and V (collectively referred to as the consolidated financial statements). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as
of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company. in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
We have served as The National Group, Inc.’s auditor since 2009.
/s/ Warren Averett, LLC
Birmingham, Alabama
March 19, 2020
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
December 31,
2019
December 31,
2018
ASSETS
Investments
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2019 -
$1,345; 2018 - $1,443)
$
1,290 $
1,449
Fixed maturities available-for-sale, at estimated fair value (cost: 2019 - $97,102;
2018 - $96,877)
Equity securities, at estimated fair value (cost: 2019 - $2,127; 2018 - $1,842)
Trading securities
Receivable for securities sold
Mortgage loans on real estate, at cost
Investment real estate, at book value
Policy loans
Company owned life insurance
Other invested assets
Total Investments
Cash and cash equivalents
Accrued investment income
Policy receivables and agents' balances, net
Reinsurance recoverable
Deferred policy acquisition costs
Property and equipment, net
Income tax recoverable
Deferred income tax asset, net
Other assets
Total Assets $
$
Total Liabilities
LIABILITIES AND SHAREHOLDERS' EQUITY
Property and casualty benefit and loss reserves
Accident and health benefit and loss reserves
Life and annuity benefit and loss reserves
Unearned premiums
Policy and contract claims
Other policyholder funds
Short-term notes payable and current portion of long-term debt
Long-term debt
Accrued income taxes
Deferred income tax liability
Other liabilities
Contingencies
Shareholders' equity
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost, 436 shares
Total Shareholders' Equity
100,260
5,303
149
56
147
2,934
1,895
4,655
2,280
118,969
11,809
706
12,028
276
7,666
1,630
—
—
850
153,934 $
7,199 $
4,046
34,269
30,555
1,053
1,350
500
13,664
226
96
7,515
100,473
2,532
5,602
2,443
42,891
(7)
53,461
Total Liabilities and Shareholders' Equity $
153,934 $
95,125
4,306
107
—
156
2,945
1,854
4,600
2,148
112,690
5,676
774
11,185
1,772
7,834
1,649
1,463
716
472
144,231
8,208
3,803
33,671
29,999
792
1,515
2,200
12,152
—
—
6,025
98,365
2,527
5,554
(1,570)
39,355
—
45,866
144,231
46
The Notes to Consolidated Financial Statements are an integral part of these statements.
47
47
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in thousands)
Net income
Changes in:
Other comprehensive income (loss), net of tax
Year ended
December 31,
2019
2018
$
4,067 $
779
Unrealized gains (losses) on securities, net of reclassification
adjustment of $14 and $100 for 2019 and 2018, respectively
Unrealized gain on interest rate swap
Other comprehensive income (loss), net of tax
3,879
134
4,013
(2,404)
295
(2,109)
Comprehensive income (loss)
$
8,080 $
(1,330)
The Notes to Consolidated Financial Statements are an integral part of these statements.
($ in thousands, except per share)
REVENUES
Net premiums earned
Net investment income
Investment gains (losses)
Other income
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits and settlement expenses
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Taxes, licenses and fees
Interest expense
Total Revenues
Total Benefits, Losses and Expenses
Income Before Income Taxes
INCOME TAX EXPENSE (BENEFIT)
Current
Deferred
Net Income
INCOME PER COMMON SHARE BASIC AND DILUTED
DIVIDENDS DECLARED PER SHARE
Year ended
December 31,
2019
2018
$
59,883 $
3,876
3,055
585
67,399
38,598
3,459
7,429
9,698
2,470
1,165
62,819
4,580
768
(255)
513
60,856
3,941
(552)
612
64,857
40,409
3,597
7,555
8,839
2,157
1,235
63,792
1,065
(1,045)
1,331
286
$
$
$
4,067 $
779
1.61 $
0.21 $
0.31
0.20
The Notes to Consolidated Financial Statements are an integral part of these statements.
48
48
49
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year ended
December 31,
2019
2018
($ in thousands)
Year ended
December 31,
2019
2018
$
59,883 $
Net income
$
4,067 $
779
Other comprehensive income (loss), net of tax
Changes in:
Unrealized gains (losses) on securities, net of reclassification
adjustment of $14 and $100 for 2019 and 2018, respectively
Unrealized gain on interest rate swap
Other comprehensive income (loss), net of tax
3,879
134
4,013
(2,404)
295
(2,109)
Comprehensive income (loss)
$
8,080 $
(1,330)
Total Benefits, Losses and Expenses
The Notes to Consolidated Financial Statements are an integral part of these statements.
Total Revenues
($ in thousands, except per share)
REVENUES
Net premiums earned
Net investment income
Investment gains (losses)
Other income
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits and settlement expenses
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Taxes, licenses and fees
Interest expense
Income Before Income Taxes
INCOME TAX EXPENSE (BENEFIT)
Current
Deferred
Net Income
3,876
3,055
585
67,399
38,598
3,459
7,429
9,698
2,470
1,165
62,819
4,580
768
(255)
513
60,856
3,941
(552)
612
64,857
40,409
3,597
7,555
8,839
2,157
1,235
63,792
1,065
(1,045)
1,331
286
INCOME PER COMMON SHARE BASIC AND DILUTED
DIVIDENDS DECLARED PER SHARE
The Notes to Consolidated Financial Statements are an integral part of these statements.
$
$
$
4,067 $
779
1.61 $
0.21 $
0.31
0.20
48
49
49
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Total
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Balance at December 31, 2017
$ 47,625
$ 36,974
$
2,646
$
2,522
$
5,483
$
—
Cash Flows from Operating Activities
($ in thousands)
Net income
Cumulative effect of change in accounting
principle
—
2,107
(2,107)
—
—
—
Adjustments to reconcile net income to net cash provided by operating activities:
Comprehensive income:
Net income for December 31, 2018
779
779
—
Other comprehensive loss (net of tax)
(2,109)
Common stock issued
76
—
—
Cash dividends
(505)
(505)
(2,109)
—
—
—
—
5
—
—
—
71
—
Balance at December 31, 2018
$ 45,866
$ 39,355
$
(1,570) $
2,527
$
5,554
$
—
—
—
—
—
Common stock reacquired
(7)
—
—
—
—
(7)
Net cash provided by operating activities
5,373
3,177
Comprehensive income:
Net income for December 31, 2019
4,067
4,067
Other comprehensive income (net of tax)
4,013
Common stock issued
53
—
—
Cash dividends
(531)
(531)
—
4,013
—
—
—
—
5
—
—
—
48
—
—
—
—
—
Balance at December 31, 2019
$ 53,461
$ 42,891
$
2,443
$
2,532
$
5,602
$
(7)
The Notes to Consolidated Financial Statements are an integral part of these statements.
The Notes to Consolidated Financial Statements are an integral part of these statements.
$
11,809 $
50
50
51
Depreciation expense and amortization/accretion, net
Net (gains) losses on investments
Deferred income taxes
Amortization of deferred policy acquisition costs
Changes in assets and liabilities:
Change in receivable for securities sold
Change in accrued investment income
Change in reinsurance recoverable
Policy acquisition costs deferred
Change in accrued income taxes
Change in net policy liabilities and claims
Change in other assets/liabilities, net
Other, net
Cash Flows from Investing Activities
Purchase of:
Available-for-sale securities
Trading securities and short-term investments
Property and equipment
Proceeds from sale or maturities of:
Held-to-maturity securities
Available-for-sale securities
Real estate held for investment
Proceeds from company owned life insurance
Other invested assets, net
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities
Change in other policyholder funds
Change in short-term notes payable
Dividends paid
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of period
Year ended
December 31,
2019
2018
$
4,067 $
779
365
(3,055)
(255)
3,459
(56)
68
1,496
(3,291)
1,689
(199)
1,086
(1)
11
2,031
(30)
1,656
(165)
(200)
(531)
(896)
6,133
5,676
312
552
1,331
3,597
—
(6)
(1,406)
(3,307)
(1,070)
1,969
420
6
188
—
(38)
(2,149)
(191)
(1,300)
(505)
(1,996)
(968)
6,644
5,676
(18,359)
(16,621)
(37)
(105)
—
(29)
173
179
17,972
14,172
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Total
Retained
Earnings
Comprehensive
Income (Loss)
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
($ in thousands)
Balance at December 31, 2017
$ 47,625
$ 36,974
$
2,646
$
2,522
$
5,483
$
—
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense and amortization/accretion, net
Net (gains) losses on investments
Deferred income taxes
Amortization of deferred policy acquisition costs
Changes in assets and liabilities:
Change in receivable for securities sold
Change in accrued investment income
Change in reinsurance recoverable
Policy acquisition costs deferred
Change in accrued income taxes
Change in net policy liabilities and claims
Change in other assets/liabilities, net
Other, net
Year ended
December 31,
2019
2018
$
4,067 $
779
365
(3,055)
(255)
3,459
(56)
68
1,496
(3,291)
1,689
(199)
1,086
(1)
312
552
1,331
3,597
—
(6)
(1,406)
(3,307)
(1,070)
1,969
420
6
Net cash provided by operating activities
5,373
3,177
Cash Flows from Investing Activities
Purchase of:
Available-for-sale securities
Trading securities and short-term investments
Property and equipment
Proceeds from sale or maturities of:
Held-to-maturity securities
Available-for-sale securities
Real estate held for investment
Proceeds from company owned life insurance
Other invested assets, net
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities
Change in other policyholder funds
Change in short-term notes payable
Dividends paid
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of period
(18,359)
(16,621)
(37)
(105)
—
(29)
173
179
17,972
14,172
11
2,031
(30)
1,656
(165)
(200)
(531)
(896)
6,133
5,676
$
11,809 $
188
—
(38)
(2,149)
(191)
(1,300)
(505)
(1,996)
(968)
6,644
5,676
The Notes to Consolidated Financial Statements are an integral part of these statements.
51
51
Cumulative effect of change in accounting
principle
—
2,107
(2,107)
—
—
—
Balance at December 31, 2018
$ 45,866
$ 39,355
$
(1,570) $
2,527
$
5,554
$
Common stock reacquired
(7)
—
—
—
—
(7)
Comprehensive income:
Net income for December 31, 2018
779
779
Other comprehensive loss (net of tax)
(2,109)
(2,109)
Common stock issued
76
Cash dividends
(505)
(505)
Comprehensive income:
Net income for December 31, 2019
4,067
4,067
Other comprehensive income (net of tax)
4,013
4,013
Common stock issued
53
Cash dividends
(531)
(531)
—
—
—
—
—
—
—
—
5
—
—
—
5
—
—
—
71
—
—
—
48
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2019
$ 53,461
$ 42,891
$
2,443
$
2,532
$
5,602
$
(7)
The Notes to Consolidated Financial Statements are an integral part of these statements.
—
—
—
—
50
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts 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). The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP). In the opinion of management,
all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial
statements have been included. All significant intercompany transactions and accounts have been eliminated in the
consolidated financial statements. The financial information presented herein should be read in conjunction with the
Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which includes information and
disclosures not presented herein.
Description of Business
NSIC is licensed in the states of Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee and Texas and
was organized in 1947 to provide life and burial insurance policies to the home service market. Business is 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, Arkansas, Florida, Georgia, Kentucky, Mississippi, Oklahoma, South Carolina, Tennessee
and West Virginia. In addition, NSFC operates on a surplus lines basis in Louisiana. NSFC operates in various property
and casualty lines, the most significant of which are: dwelling fire and extended coverage, homeowners and mobile
homeowners.
Omega is licensed in the states of Alabama and Louisiana. Omega currently has no insurance policies inforce but is
party to an intercompany reinsurance agreement with NSFC. Intercompany transactions are eliminated upon
consolidation in the accompanying consolidated financial statements.
The Company is incorporated under the laws of the State of Delaware. Its common stock is traded on the NASDAQ
Global Market under the ticker symbol NSEC. Pursuant to the regulations of the United States Securities and Exchange
Commission (SEC), the Company is considered a “Smaller Reporting Company” as defined by SEC Rule 12b-2 of the
Exchange Act. The Company has elected to comply with the scaled disclosure requirements of Regulation S-K and
only two years of financial statements are included herein.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires 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 consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Among the more significant estimates included in these consolidated financial statements are reserves
for future life insurance policy benefits, liabilities for losses and loss adjustment expenses, reinsurance recoverable
associated with loss and loss adjustment expense liabilities, deferred policy acquisition costs, deferred income tax
assets and liabilities, assessments of other-than-temporary impairments on investments and accruals for
contingencies. Actual results could differ from the estimates used in preparing these consolidated financial statements.
Concentration of Risk
The Company's property and casualty subsidiaries, composing 91.2% of consolidated direct written premium, produced
business during 2019 in eight states. However, 51% of property and casualty segment direct written premium is
generated in the states of Alabama, Mississippi and Louisiana, subjecting the Company to significant geographic
concentration. Consequently, adverse weather conditions or changes in the legal, regulatory or economic environment
could adversely impact the Company.
The Company's life, accident and health insurance subsidiary, composing approximately 8.8% of consolidated direct
written premium, is licensed in seven states. However, over 78% of life segment direct premium is generated in the
states of Alabama and Georgia. Consequently, changes in the legal, regulatory or economic environment in these
states could adversely impact the Company.
For the year ended December 31, 2019, one agency individually produced greater than 5% of the Company's direct
written premium.
Investments
The Company's investment securities are classified as follows:
• Held-to-maturity investments are fixed maturity securities for which the Company has the positive intent and
ability to hold to maturity. These securities are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using methods which approximate level yields
over the period to maturity.
• Trading securities are securities acquired with the intent to sell in the near term and are carried at fair value
with changes in fair value reported in earnings.
• Securities available-for-sale are fixed maturity securities and equity securities not classified as either held-to-
maturity or trading. These securities are reported at fair value. Substantially all of our fixed maturity and equity
securities are classified as available-for-sale.
Changes in fair value of trading securities are reported in the statement of operations.
Changes in fair value of fixed maturity securities available-for-sale are reported as net unrealized gains or losses as
a component of other comprehensive income.
Changes in fair value of equity securities available-for-sale are reported as investment gains/losses in the statement
of operations.
Investment gains and losses on fixed maturity securities arise when the investments are sold. Investment gains and
losses on the sale of fixed maturity investments available-for-sale are determined using the specific-identification
method and include write downs for fixed maturity securities considered to be other-than-temporarily impaired.
When a fixed maturity security has a decline in value, where fair value is below amortized cost, an other-than-temporary
impairment (OTTI) is triggered in circumstances where:
•
•
•
cost basis
the Company has the intent to sell the security
it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized
the Company does not expect to recover the entire amortized cost basis of the security
If the Company intends to sell the security or if it is more-likely-than-not the Company will be required to sell the security
before recovery, an OTTI is recognized as a realized loss in the statement of operations equal to the difference between
the security's amortized cost and its fair value. If the Company does not intend to sell the security or it is not more-
likely-than-not that the Company will be required to sell the security before recovery, the OTTI is separated into an
amount representing the credit loss, which is recognized as an investment loss in the statement of operations, and the
amount related to all other factors, which is recognized in other comprehensive income.
Interest on fixed income securities is credited to income as it accrues on the principal amounts outstanding adjusted
for amortization of premiums and accretion of discounts computed utilizing the interest method. Premiums and discounts
on mortgage backed securities amortize or accrete using anticipated prepayments with changes in anticipated
prepayments accounted for prospectively. The model used to determine anticipated prepayment assumptions for
mortgage backed securities uses separate home sale, refinancing, curtailment and pay-off assumptions derived from
a variety of industry sources. Mortgage backed security valuations are subject to prospective adjustments in yield due
to changes in prepayment assumptions. The utilization of the prospective method will result in a recalculated effective
yield that will equate the carrying amount of the investment to the present value of the projected future cash flows.
The recalculated yield is used to accrue income on investments for subsequent periods.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts 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). The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP). In the opinion of management,
all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial
statements have been included. All significant intercompany transactions and accounts have been eliminated in the
consolidated financial statements. The financial information presented herein should be read in conjunction with the
Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which includes information and
disclosures not presented herein.
Description of Business
NSIC is licensed in the states of Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee and Texas and
was organized in 1947 to provide life and burial insurance policies to the home service market. Business is 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, Arkansas, Florida, Georgia, Kentucky, Mississippi, Oklahoma, South Carolina, Tennessee
and West Virginia. In addition, NSFC operates on a surplus lines basis in Louisiana. NSFC operates in various property
and casualty lines, the most significant of which are: dwelling fire and extended coverage, homeowners and mobile
homeowners.
Omega is licensed in the states of Alabama and Louisiana. Omega currently has no insurance policies inforce but is
party to an intercompany reinsurance agreement with NSFC. Intercompany transactions are eliminated upon
consolidation in the accompanying consolidated financial statements.
The Company is incorporated under the laws of the State of Delaware. Its common stock is traded on the NASDAQ
Global Market under the ticker symbol NSEC. Pursuant to the regulations of the United States Securities and Exchange
Commission (SEC), the Company is considered a “Smaller Reporting Company” as defined by SEC Rule 12b-2 of the
Exchange Act. The Company has elected to comply with the scaled disclosure requirements of Regulation S-K and
only two years of financial statements are included herein.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires 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 consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Among the more significant estimates included in these consolidated financial statements are reserves
for future life insurance policy benefits, liabilities for losses and loss adjustment expenses, reinsurance recoverable
associated with loss and loss adjustment expense liabilities, deferred policy acquisition costs, deferred income tax
assets and liabilities, assessments of other-than-temporary impairments on investments and accruals for
contingencies. Actual results could differ from the estimates used in preparing these consolidated financial statements.
Concentration of Risk
The Company's property and casualty subsidiaries, composing 91.2% of consolidated direct written premium, produced
business during 2019 in eight states. However, 51% of property and casualty segment direct written premium is
generated in the states of Alabama, Mississippi and Louisiana, subjecting the Company to significant geographic
concentration. Consequently, adverse weather conditions or changes in the legal, regulatory or economic environment
could adversely impact the Company.
The Company's life, accident and health insurance subsidiary, composing approximately 8.8% of consolidated direct
written premium, is licensed in seven states. However, over 78% of life segment direct premium is generated in the
states of Alabama and Georgia. Consequently, changes in the legal, regulatory or economic environment in these
states could adversely impact the Company.
For the year ended December 31, 2019, one agency individually produced greater than 5% of the Company's direct
written premium.
Investments
The Company's investment securities are classified as follows:
• Held-to-maturity investments are fixed maturity securities for which the Company has the positive intent and
ability to hold to maturity. These securities are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using methods which approximate level yields
over the period to maturity.
• Trading securities are securities acquired with the intent to sell in the near term and are carried at fair value
with changes in fair value reported in earnings.
• Securities available-for-sale are fixed maturity securities and equity securities not classified as either held-to-
maturity or trading. These securities are reported at fair value. Substantially all of our fixed maturity and equity
securities are classified as available-for-sale.
Changes in fair value of trading securities are reported in the statement of operations.
Changes in fair value of fixed maturity securities available-for-sale are reported as net unrealized gains or losses as
a component of other comprehensive income.
Changes in fair value of equity securities available-for-sale are reported as investment gains/losses in the statement
of operations.
Investment gains and losses on fixed maturity securities arise when the investments are sold. Investment gains and
losses on the sale of fixed maturity investments available-for-sale are determined using the specific-identification
method and include write downs for fixed maturity securities considered to be other-than-temporarily impaired.
When a fixed maturity security has a decline in value, where fair value is below amortized cost, an other-than-temporary
impairment (OTTI) is triggered in circumstances where:
•
•
•
the Company has the intent to sell the security
it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized
cost basis
the Company does not expect to recover the entire amortized cost basis of the security
If the Company intends to sell the security or if it is more-likely-than-not the Company will be required to sell the security
before recovery, an OTTI is recognized as a realized loss in the statement of operations equal to the difference between
the security's amortized cost and its fair value. If the Company does not intend to sell the security or it is not more-
likely-than-not that the Company will be required to sell the security before recovery, the OTTI is separated into an
amount representing the credit loss, which is recognized as an investment loss in the statement of operations, and the
amount related to all other factors, which is recognized in other comprehensive income.
Interest on fixed income securities is credited to income as it accrues on the principal amounts outstanding adjusted
for amortization of premiums and accretion of discounts computed utilizing the interest method. Premiums and discounts
on mortgage backed securities amortize or accrete using anticipated prepayments with changes in anticipated
prepayments accounted for prospectively. The model used to determine anticipated prepayment assumptions for
mortgage backed securities uses separate home sale, refinancing, curtailment and pay-off assumptions derived from
a variety of industry sources. Mortgage backed security valuations are subject to prospective adjustments in yield due
to changes in prepayment assumptions. The utilization of the prospective method will result in a recalculated effective
yield that will equate the carrying amount of the investment to the present value of the projected future cash flows.
The recalculated yield is used to accrue income on investments for subsequent periods.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans and policy loans are stated at the unpaid principal balance of such loans, net of any related allowance
for loan losses.
Accounts Receivable
Investment real estate is reported at cost, less allowances for depreciation computed on the straight-line basis.
Investment real estate consists primarily of undeveloped commercial real estate.
Other investments consist primarily of investments in notes and equity investments in limited liability companies. The
Company has no influence or control over the operating or financial policies of the limited liability companies, and
consequently, these investments are accounted for using the cost method.
The Company owns life insurance (COLI) contracts on certain management and supervisory employees each having
a face amount of approximately $2,000,000 (including cash surrender value at the time of payment). The Company's
original investment in currently inforce company owned life insurance is $4,082,000. The primary purpose of the
program is to offset future employee benefit expenses through earnings on the cash value of the policies. The Company
is the owner and principal beneficiary of these policies. The life insurance contracts are carried at their current cash
surrender value. Cash surrender value at December 31, 2019 and December 31, 2018 was $4,655,000 and $4,600,000,
respectively. Changes in cash surrender values are included in the statement of operations. The change in surrender
value included in the statement of operations for the years ended December 31, 2019 and 2018 was an increase of
$295,000 and an decrease of $374,000, respectively. Proceeds from the COLI contracts are recorded when the
benefits become payable under the terms of the policy and proceeds in excess of cash surrender value are recognized
as a gain on company owned life insurance.
Cash and cash equivalents consist of demand deposit and money market accounts and investments with maturities
of three months or less when purchased. Cash and cash equivalents are carried at cost, which approximates fair
value.
Investments with other-than-temporary impairment in value are written down to estimated realizable values and losses
recognized as a component of investments gains and losses in the Consolidated Statements of Operations. The fair
value of the investment becomes its new cost basis.
Fair Values of Financial Instruments
The Company uses the following methods and assumptions to estimate fair values:
Investments
• Fixed income security fair values are based on quoted market prices when available. If not available, fair
unexpired portion of premiums ceded to reinsurers and are reported as an asset.
values are based on values obtained from investment brokers and independent pricing services.
• Equity security fair values are based on quoted market prices.
• Multiple observable inputs are not available for some of our investments, primarily private placements and
limited partnerships. Management values these investments either using non-binding broker quotes or pricing
models that utilize market based assumptions that have limited observable inputs. These investments compose
less than 1% of total assets.
Receivables and reinsurance recoverable - The carrying amounts reported approximate fair value.
Interest rate swaps - The estimated fair value of the interest rate swaps is based on valuations received from financial
institution counterparties.
Trust preferred securities obligations and line of credit obligations - The carrying amounts reported for these instruments
are equal to the principal balance outstanding and approximate fair value.
Policy Receivables
Receivable balances are reported at unpaid balances, less a provision for credit losses.
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Accounts receivable are reported at net realizable value. Management determines the allowance for doubtful accounts
based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent
receivables, and once these receivables are determined to be uncollectible, they are written off through a charge
against an existing allowance account or against earnings.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and includes expenditures that substantially
increase the useful lives of existing property and equipment. Significant costs incurred for internally developed software
are capitalized and amortized over 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 costs and related accumulated
depreciation are eliminated from the respective account and the resulting gain or loss is included in the statement 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 3-10
years for equipment, furniture and fixtures. Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable.
Leases
The Company leases automobiles and some office equipment. The Company accounts for leases existing prior to
January 1, 2019 under their original classification and omits any new costs classified as initial direct costs. The Company
classified all leases as operating leases and accounts for separate lease and nonlease components as a single lease
component. Leases are not considered material and the Company recognizes a right of use (ROU) asset which is
included in other assets and a corresponding lease liability in other liabilities. The ROU asset recognized by the
Company at December 31, 2019 was $389,000 and the corresponding lease liability was $427,000.
Statement of Cash Flows
For purposes of reporting cash flows, cash includes cash-on-hand, demand deposits with banks and overnight
investments consisting primarily of repurchase agreements.
Premium Revenue
Life insurance premiums are recognized as revenues when due. Property and casualty insurance premiums include
direct writings plus reinsurance assumed less reinsurance ceded and are recognized on a pro-rata basis over the
terms of the policies. Unearned premiums represent that portion of direct premiums written that are applicable to the
unexpired terms of policy contracts in force and is reported as a liability. Prepaid reinsurance premiums represent the
Deferred Policy Acquisition Costs
The costs of acquiring new insurance business are deferred and amortized over the lives of the policies. Deferred
costs include commissions, premium taxes, 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 over 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 policies limits the amount
deferred to a percentage of related unearned premiums.
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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for loan losses.
Mortgage loans and policy loans are stated at the unpaid principal balance of such loans, net of any related allowance
Investment real estate is reported at cost, less allowances for depreciation computed on the straight-line basis.
Investment real estate consists primarily of undeveloped commercial real estate.
Other investments consist primarily of investments in notes and equity investments in limited liability companies. The
Company has no influence or control over the operating or financial policies of the limited liability companies, and
consequently, these investments are accounted for using the cost method.
The Company owns life insurance (COLI) contracts on certain management and supervisory employees each having
a face amount of approximately $2,000,000 (including cash surrender value at the time of payment). The Company's
original investment in currently inforce company owned life insurance is $4,082,000. The primary purpose of the
program is to offset future employee benefit expenses through earnings on the cash value of the policies. The Company
is the owner and principal beneficiary of these policies. The life insurance contracts are carried at their current cash
surrender value. Cash surrender value at December 31, 2019 and December 31, 2018 was $4,655,000 and $4,600,000,
respectively. Changes in cash surrender values are included in the statement of operations. The change in surrender
value included in the statement of operations for the years ended December 31, 2019 and 2018 was an increase of
$295,000 and an decrease of $374,000, respectively. Proceeds from the COLI contracts are recorded when the
benefits become payable under the terms of the policy and proceeds in excess of cash surrender value are recognized
as a gain on company owned life insurance.
Cash and cash equivalents consist of demand deposit and money market accounts and investments with maturities
of three months or less when purchased. Cash and cash equivalents are carried at cost, which approximates fair
value.
Investments
Investments with other-than-temporary impairment in value are written down to estimated realizable values and losses
recognized as a component of investments gains and losses in the Consolidated Statements of Operations. The fair
value of the investment becomes its new cost basis.
Fair Values of Financial Instruments
The Company uses the following methods and assumptions to estimate fair values:
• Fixed income security fair values are based on quoted market prices when available. If not available, fair
values are based on values obtained from investment brokers and independent pricing services.
• Equity security fair values are based on quoted market prices.
• Multiple observable inputs are not available for some of our investments, primarily private placements and
limited partnerships. Management values these investments either using non-binding broker quotes or pricing
models that utilize market based assumptions that have limited observable inputs. These investments compose
less than 1% of total assets.
Receivables and reinsurance recoverable - The carrying amounts reported approximate fair value.
Interest rate swaps - The estimated fair value of the interest rate swaps is based on valuations received from financial
institution counterparties.
Trust preferred securities obligations and line of credit obligations - The carrying amounts reported for these instruments
are equal to the principal balance outstanding and approximate fair value.
Policy Receivables
Receivable balances are reported at unpaid balances, less a provision for credit losses.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable are reported at net realizable value. Management determines the allowance for doubtful accounts
based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent
receivables, and once these receivables are determined to be uncollectible, they are written off through a charge
against an existing allowance account or against earnings.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and includes expenditures that substantially
increase the useful lives of existing property and equipment. Significant costs incurred for internally developed software
are capitalized and amortized over 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 costs and related accumulated
depreciation are eliminated from the respective account and the resulting gain or loss is included in the statement 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 3-10
years for equipment, furniture and fixtures. Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable.
Leases
The Company leases automobiles and some office equipment. The Company accounts for leases existing prior to
January 1, 2019 under their original classification and omits any new costs classified as initial direct costs. The Company
classified all leases as operating leases and accounts for separate lease and nonlease components as a single lease
component. Leases are not considered material and the Company recognizes a right of use (ROU) asset which is
included in other assets and a corresponding lease liability in other liabilities. The ROU asset recognized by the
Company at December 31, 2019 was $389,000 and the corresponding lease liability was $427,000.
Statement of Cash Flows
For purposes of reporting cash flows, cash includes cash-on-hand, demand deposits with banks and overnight
investments consisting primarily of repurchase agreements.
Premium Revenue
Life insurance premiums are recognized as revenues when due. Property and casualty insurance premiums include
direct writings plus reinsurance assumed less reinsurance ceded and are recognized on a pro-rata basis over the
terms of the policies. Unearned premiums represent that portion of direct premiums written that are applicable to the
unexpired terms of policy contracts in force and is reported as a liability. Prepaid reinsurance premiums represent the
unexpired portion of premiums ceded to reinsurers and are reported as an asset.
Deferred Policy Acquisition Costs
The costs of acquiring new insurance business are deferred and amortized over the lives of the policies. Deferred
costs include commissions, premium taxes, 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 over 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 policies limits the amount
deferred to a percentage of related unearned premiums.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Policy Liabilities
The liability for future life insurance policy benefits is computed using a net level premium method including the following
assumptions:
Years of Issue
Interest Rate
1947 - 1968
1969 - 1978
1979 - 2003
2004 - 2012
2013 - 2014
2015 - 2019
4%
6% graded to 5%
7% graded to 6%
5.25%
4.25%
4%
Mortality assumptions include various percentages of the 1955-60 and 1965-70 Select and Ultimate Basic Male Mortality
Table. Withdrawal assumptions are based on the Company's experience.
Concentration of Credit Risk
Policyholder Benefit and Claim Settlement Expenses
The liability for unpaid claims represents the estimated liability for unpaid loss and loss adjustment expenses incurred
but not yet reported under insurance contracts for loss events that have occurred on or before the balance sheet date.
The liability for claims and related adjustment expenses are determined using case-basis evaluations and statistical
analysis and represent estimates of the ultimate net cost of all losses incurred through December 31 of each year.
Liability estimates are continually reviewed and adjusted as necessary; such adjustments are included in the period
in which they are determined. Liability estimates are based on reports of losses from policyholders, individual case
loss estimates, and estimates of losses incurred but not yet reported. Policyholder benefit and settlement expenses
in the consolidated statement of operations include paid claims, settlement cost and changes in claim liability estimates.
Loss and adjustment expenses charged to earnings are net of amounts recovered and estimates of recoverable
amounts under ceded reinsurance contracts.
Earnings Per Share
Earnings per share of common stock is based on the weighted average number of shares outstanding during each
year. The adjusted weighted average shares outstanding were 2,529,652 at December 31, 2019 and 2,525,325 at
December 31, 2018. The Company did not have any dilutive securities as of December 31, 2019 and 2018.
Reinsurance
The Company's insurance operations re-insure certain risks in order to limit losses, minimize exposure to large risks,
provide additional capacity for future growth and effect business-sharing arrangements. See Note 10 for additional
information regarding the Company's reinsurance practices.
Income Taxes
The Company files a consolidated United States federal income tax return that includes the holding company and its
subsidiaries. The Company is currently subject to a statutory rate of 21%. Tax related interest and penalties are
reported as components of income tax expense.
The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes arise from
the recognition of temporary differences between financial statement carrying amounts and the tax basis of the
Company's assets and liabilities and capital or operating loss carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. A valuation allowance is provided when it is more-likely-than-not that some
portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period
the new rate is enacted. Changes in deferred tax assets and liabilities are included as a component of income tax
expense, with the exception of changes impacting other comprehensive income. Changes in deferred tax assets and
liabilities associated with components of other comprehensive income are charged or credited to other comprehensive
income.
The Company evaluates all tax positions taken on its U.S. federal income tax return. No material uncertainties exist
for any tax positions taken by the Company.
Liabilities for loss contingencies arising from, but not limited to, litigation, claims, assessments, fines and penalties are
recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation
can be reasonably estimated. Significant attorney fees are estimated and recorded when incurred.
Certain 2018 amounts have been reclassified from the prior year consolidated financial statements to conform to the
Contingencies
Reclassifications
2019 presentation.
Advertising
The Company expenses advertising costs as incurred.
The Company maintains cash balances which are generally held in non-interest bearing demand deposit accounts
subject to FDIC insured limits of $250,000 per entity. At December 31, 2019, the net amount exceeding FDIC insured
limits was $6,766,000 at three financial institutions. The Company has not experienced any losses in such accounts.
Management of the Company reviews financial information of financial institutions on a quarterly basis and believes
the Company is not exposed to any significant credit risk on cash and cash equivalents.
Policy receivables are reported at unpaid balances. Policy receivables are generally offset by associated unearned
premium liabilities and are not subject to significant credit risk. Receivables from agents, less provision for credit
losses, are composed of balances due from independent agents. At December 31, 2019, the single largest balance
due from one agent totaled $349,000.
Reinsurance contracts do not relieve the Company of its obligations to policyholders. A failure of a reinsurer to meet
its obligation could result in losses to the insurance subsidiaries. Allowances for losses on reinsurance recoverables
are established if amounts are believed to be uncollectible. At December 31, 2019 and December 31, 2018, no amounts
were deemed uncollectible. The Company, at least annually, evaluates the financial condition of all reinsurers and
evaluates any potential concentrations of credit risk. At December 31, 2019, management does not believe the
Company is exposed to any significant credit risk related to its reinsurance program.
Treasury shares are reported at cost and are reflected on the Consolidated Balance Sheets as a reduction of total
Treasury Shares
equity.
Accounting Changes Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance to simplify the accounting for income taxes. The guidance removes
certain exceptions to general principles in the income tax guidance and amends existing guidance to improve consistent
application. The guidance is effective for fiscal years beginning after December 15, 2020. The Company is currently
evaluating the impact of this new guidance. The Company does not expect the adoption to have a material impact on
its financial position or results of operations.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued guidance to that removes, modifies and adds to the disclosure requirements related
to fair value measurements. The guidance removes the requirements to disclose the amount and reasons for transfers
between Level 1 and Level 2 assets, the policy for timing and transfers between levels and the valuation process for
Level 3 fair value measurements. The guidance modifies disclosure requirements for investments in certain entities
that calculate net asset value and clarifies the purpose of the measurement uncertainty disclosure. The guidance adds
requirements to disclose changes in unrealized gains or losses included in other comprehensive income for recurring
Level 3 fair value measurements and to disclose the range and weighted average used to develop significant
unobservable inputs for Level 3 fair value measurements. The guidance is effective for fiscal years beginning after
December 15, 2019 and interim periods within those fiscal years. The Company does not expect the adoption to have
a material impact on its financial position or results of operations.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Policy Liabilities
assumptions:
The liability for future life insurance policy benefits is computed using a net level premium method including the following
Years of Issue
Interest Rate
1947 - 1968
1969 - 1978
1979 - 2003
2004 - 2012
2013 - 2014
2015 - 2019
4%
6% graded to 5%
7% graded to 6%
5.25%
4.25%
4%
Mortality assumptions include various percentages of the 1955-60 and 1965-70 Select and Ultimate Basic Male Mortality
Table. Withdrawal assumptions are based on the Company's experience.
Policyholder Benefit and Claim Settlement Expenses
The liability for unpaid claims represents the estimated liability for unpaid loss and loss adjustment expenses incurred
but not yet reported under insurance contracts for loss events that have occurred on or before the balance sheet date.
The liability for claims and related adjustment expenses are determined using case-basis evaluations and statistical
analysis and represent estimates of the ultimate net cost of all losses incurred through December 31 of each year.
Liability estimates are continually reviewed and adjusted as necessary; such adjustments are included in the period
in which they are determined. Liability estimates are based on reports of losses from policyholders, individual case
loss estimates, and estimates of losses incurred but not yet reported. Policyholder benefit and settlement expenses
in the consolidated statement of operations include paid claims, settlement cost and changes in claim liability estimates.
Loss and adjustment expenses charged to earnings are net of amounts recovered and estimates of recoverable
amounts under ceded reinsurance contracts.
Earnings Per Share
Earnings per share of common stock is based on the weighted average number of shares outstanding during each
year. The adjusted weighted average shares outstanding were 2,529,652 at December 31, 2019 and 2,525,325 at
December 31, 2018. The Company did not have any dilutive securities as of December 31, 2019 and 2018.
Reinsurance
Income Taxes
The Company's insurance operations re-insure certain risks in order to limit losses, minimize exposure to large risks,
provide additional capacity for future growth and effect business-sharing arrangements. See Note 10 for additional
information regarding the Company's reinsurance practices.
The Company files a consolidated United States federal income tax return that includes the holding company and its
subsidiaries. The Company is currently subject to a statutory rate of 21%. Tax related interest and penalties are
reported as components of income tax expense.
The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes arise from
the recognition of temporary differences between financial statement carrying amounts and the tax basis of the
Company's assets and liabilities and capital or operating loss carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. A valuation allowance is provided when it is more-likely-than-not that some
portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period
the new rate is enacted. Changes in deferred tax assets and liabilities are included as a component of income tax
expense, with the exception of changes impacting other comprehensive income. Changes in deferred tax assets and
liabilities associated with components of other comprehensive income are charged or credited to other comprehensive
income.
The Company evaluates all tax positions taken on its U.S. federal income tax return. No material uncertainties exist
for any tax positions taken by the Company.
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
Liabilities for loss contingencies arising from, but not limited to, litigation, claims, assessments, fines and penalties are
recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation
can be reasonably estimated. Significant attorney fees are estimated and recorded when incurred.
Reclassifications
Certain 2018 amounts have been reclassified from the prior year consolidated financial statements to conform to the
2019 presentation.
Advertising
The Company expenses advertising costs as incurred.
Concentration of Credit Risk
The Company maintains cash balances which are generally held in non-interest bearing demand deposit accounts
subject to FDIC insured limits of $250,000 per entity. At December 31, 2019, the net amount exceeding FDIC insured
limits was $6,766,000 at three financial institutions. The Company has not experienced any losses in such accounts.
Management of the Company reviews financial information of financial institutions on a quarterly basis and believes
the Company is not exposed to any significant credit risk on cash and cash equivalents.
Policy receivables are reported at unpaid balances. Policy receivables are generally offset by associated unearned
premium liabilities and are not subject to significant credit risk. Receivables from agents, less provision for credit
losses, are composed of balances due from independent agents. At December 31, 2019, the single largest balance
due from one agent totaled $349,000.
Reinsurance contracts do not relieve the Company of its obligations to policyholders. A failure of a reinsurer to meet
its obligation could result in losses to the insurance subsidiaries. Allowances for losses on reinsurance recoverables
are established if amounts are believed to be uncollectible. At December 31, 2019 and December 31, 2018, no amounts
were deemed uncollectible. The Company, at least annually, evaluates the financial condition of all reinsurers and
evaluates any potential concentrations of credit risk. At December 31, 2019, management does not believe the
Company is exposed to any significant credit risk related to its reinsurance program.
Treasury Shares
Treasury shares are reported at cost and are reflected on the Consolidated Balance Sheets as a reduction of total
equity.
Accounting Changes Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance to simplify the accounting for income taxes. The guidance removes
certain exceptions to general principles in the income tax guidance and amends existing guidance to improve consistent
application. The guidance is effective for fiscal years beginning after December 15, 2020. The Company is currently
evaluating the impact of this new guidance. The Company does not expect the adoption to have a material impact on
its financial position or results of operations.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued guidance to that removes, modifies and adds to the disclosure requirements related
to fair value measurements. The guidance removes the requirements to disclose the amount and reasons for transfers
between Level 1 and Level 2 assets, the policy for timing and transfers between levels and the valuation process for
Level 3 fair value measurements. The guidance modifies disclosure requirements for investments in certain entities
that calculate net asset value and clarifies the purpose of the measurement uncertainty disclosure. The guidance adds
requirements to disclose changes in unrealized gains or losses included in other comprehensive income for recurring
Level 3 fair value measurements and to disclose the range and weighted average used to develop significant
unobservable inputs for Level 3 fair value measurements. The guidance is effective for fiscal years beginning after
December 15, 2019 and interim periods within those fiscal years. The Company does not expect the adoption to have
a material impact on its financial position or results of operations.
56
57
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Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued guidance to improve the existing recognition, measurement, presentation and
disclosure requirements for long-duration contracts issued by an insurance entity. The guidance improves timeliness
of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows.
The guidance will simplify and improve accounting for certain market-based options or guarantees associated with
deposit type contracts and simplify the amortization of deferred policy acquisition costs. The guidance also introduces
certain financial statement presentation requirements, as well as significant additional quantitative and qualitative
disclosures. The guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within
those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
Due to the nature and extent of the changes required to the Company’s life insurance operations, the adoption of this
standard is expected to have a material impact on the consolidated financial statements.
Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued guidance that clarifies the requirements for assessing whether contingent call (put)
options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt
hosts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within
those years. The Company does not expect the adoption to have a material impact on its financial position or results
of operations.
Financial Instruments - Credit Losses
In June 2016, the FASB issued guidance that replaces the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable
and supportable information to inform credit loss estimates. The FASB released additional guidance in November
2018 that provides scope clarification. This guidance is effective for fiscal years beginning after December 15, 2022,
including interim periods within those years. The Company does not expect the adoption to have a material impact
on its financial position or results of operations.
Recently Adopted Accounting Standards
Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued guidance to simplify the accounting for nonemployee share-based payment awards.
The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal
year. The Company does not make any material share-based payments. The Company adopted this guidance on
January 1, 2019. The adoption of this guidance did not have a material impact on its financial position or results of
operations.
Derivatives and Hedging
In August 2017, the FASB issued guidance that amends and simplifies hedge accounting guidance in order to enable
entities to better portray the economic results of their risk management activities. The guidance is effective for fiscal
years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted.
The Company adopted this guidance on January 1, 2019 and had two swaps designated as cash flow hedges. One
expired March 15, 2019 and one expires March 15, 2020. The adoption of this guidance did not have a significant
impact on our financial position, results of operations, cash flows or related disclosures.
Leases
In February 2016, the FASB issued guidance that requires lessees (for capital and operating leases) to recognize the
lease liability and right-of-use (ROU) asset at the commencement date of the lease. Additional transition guidance
was issued in 2018 and 2019. This guidance is effective for fiscal years beginning after December 15, 2018, including
interim periods within those years.
The Company adopted this guidance on January 1, 2019 and recorded a ROU asset of $299,000 and corresponding
lease liability of $306,000. The ROU asset and operating lease liability are included in other assets and other liabilities,
respectively, on our Consolidated Balance Sheets as of January 1, 2019. The Company elected the package of practical
expedients permitted under the guidance, which allowed the Company to account for existing leases under their current
classification, as well as omit any new costs classified as initial direct costs, under the new guidance. Based on this
election, the Company kept existing agreements as operating leases. The Company also elected the practical expedient
allowing an accounting policy election by class of underlying asset, to account for separate lease and nonlease
components as a single lease component. The Company leases automobiles and some office equipment. These
leases are not considered material. Adoption of this guidance had no material impact on the Company's financial
position, results of operations, cash flows or related disclosures.
NOTE 2 – VARIABLE INTEREST ENTITIES
The Company holds passive interests in limited partnerships that are considered to be Variable Interest Entities (VIE)
under the provisions of ASC 810 Consolidation. The Company is not the primary beneficiary of the entities and is not
required to consolidate under ASC 810. The entities are private placement investment funds formed for the purpose
of investing in private equity investments. The Company owns less than 1% of the limited partnerships. The carrying
value of the investments totals $317,000 and is included as a component of Other Invested Assets in the accompanying
consolidated balance sheets.
In December 2005, the Company formed National Security Capital Trust I, a statutory trust created under the Delaware
Statutory Trust Act, for the sole purpose of issuing, in private placement transactions, $9,000,000 of trust preferred
securities (TPS) and using the proceeds thereof, together with the equity proceeds received from the Company in the
initial formation of the Trust, to purchase $9,279,000 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 of 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
$9,005,000. The Company also holds all the voting securities issued by the Trust and such trusts are considered to
be VIE's. 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 sheets as a
component of long-term debt. The Company's equity investments in the Trust total $279,000 and are included in Other
Assets in the accompanying consolidated balance sheets.
In June 2007, the Company formed National Security Capital Trust II for the sole purpose of issuing, in private placement
transactions, $3,000,000 of trust preferred securities and using the proceeds thereof, together with the equity proceeds
received from the Company in the initial formation of the Trust, to purchase $3,093,000 unsecured junior subordinated
deferrable interest debentures. 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 of 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 $2,995,000. The Company also holds all the voting securities issued by the Trust and
such trusts are considered to be VIE's. 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 sheets as a component of long-term debt. The Company's equity investments in the Trust total $93,000 and
are included in Other Assets in the accompanying consolidated balance sheets.
NOTE 3 – STATUTORY ACCOUNTING PRACTICES
The 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
insurance 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 Asset Valuation Reserve (AVR) and the Interest
Maintenance Reserve (IMR) are recorded as liabilities in the life subsidiary, and (d) non-admitted assets (primarily
furniture and equipment, agents' debit balances and prepaid expenses) are charged directly to surplus.
58
58
59
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Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued guidance to improve the existing recognition, measurement, presentation and
disclosure requirements for long-duration contracts issued by an insurance entity. The guidance improves timeliness
of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows.
The guidance will simplify and improve accounting for certain market-based options or guarantees associated with
deposit type contracts and simplify the amortization of deferred policy acquisition costs. The guidance also introduces
certain financial statement presentation requirements, as well as significant additional quantitative and qualitative
disclosures. The guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within
those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
Due to the nature and extent of the changes required to the Company’s life insurance operations, the adoption of this
standard is expected to have a material impact on the consolidated financial statements.
Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued guidance that clarifies the requirements for assessing whether contingent call (put)
options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt
hosts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within
those years. The Company does not expect the adoption to have a material impact on its financial position or results
of operations.
Financial Instruments - Credit Losses
In June 2016, the FASB issued guidance that replaces the incurred loss impairment methodology in current GAAP
with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable
and supportable information to inform credit loss estimates. The FASB released additional guidance in November
2018 that provides scope clarification. This guidance is effective for fiscal years beginning after December 15, 2022,
including interim periods within those years. The Company does not expect the adoption to have a material impact
on its financial position or results of operations.
Recently Adopted Accounting Standards
Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued guidance to simplify the accounting for nonemployee share-based payment awards.
The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal
year. The Company does not make any material share-based payments. The Company adopted this guidance on
January 1, 2019. The adoption of this guidance did not have a material impact on its financial position or results of
operations.
Derivatives and Hedging
In August 2017, the FASB issued guidance that amends and simplifies hedge accounting guidance in order to enable
entities to better portray the economic results of their risk management activities. The guidance is effective for fiscal
years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted.
The Company adopted this guidance on January 1, 2019 and had two swaps designated as cash flow hedges. One
expired March 15, 2019 and one expires March 15, 2020. The adoption of this guidance did not have a significant
impact on our financial position, results of operations, cash flows or related disclosures.
Leases
In February 2016, the FASB issued guidance that requires lessees (for capital and operating leases) to recognize the
lease liability and right-of-use (ROU) asset at the commencement date of the lease. Additional transition guidance
was issued in 2018 and 2019. This guidance is effective for fiscal years beginning after December 15, 2018, including
interim periods within those years.
The Company adopted this guidance on January 1, 2019 and recorded a ROU asset of $299,000 and corresponding
lease liability of $306,000. The ROU asset and operating lease liability are included in other assets and other liabilities,
respectively, on our Consolidated Balance Sheets as of January 1, 2019. The Company elected the package of practical
expedients permitted under the guidance, which allowed the Company to account for existing leases under their current
classification, as well as omit any new costs classified as initial direct costs, under the new guidance. Based on this
election, the Company kept existing agreements as operating leases. The Company also elected the practical expedient
allowing an accounting policy election by class of underlying asset, to account for separate lease and nonlease
58
components as a single lease component. The Company leases automobiles and some office equipment. These
leases are not considered material. Adoption of this guidance had no material impact on the Company's financial
position, results of operations, cash flows or related disclosures.
NOTE 2 – VARIABLE INTEREST ENTITIES
The Company holds passive interests in limited partnerships that are considered to be Variable Interest Entities (VIE)
under the provisions of ASC 810 Consolidation. The Company is not the primary beneficiary of the entities and is not
required to consolidate under ASC 810. The entities are private placement investment funds formed for the purpose
of investing in private equity investments. The Company owns less than 1% of the limited partnerships. The carrying
value of the investments totals $317,000 and is included as a component of Other Invested Assets in the accompanying
consolidated balance sheets.
In December 2005, the Company formed National Security Capital Trust I, a statutory trust created under the Delaware
Statutory Trust Act, for the sole purpose of issuing, in private placement transactions, $9,000,000 of trust preferred
securities (TPS) and using the proceeds thereof, together with the equity proceeds received from the Company in the
initial formation of the Trust, to purchase $9,279,000 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 of 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
$9,005,000. The Company also holds all the voting securities issued by the Trust and such trusts are considered to
be VIE's. 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 sheets as a
component of long-term debt. The Company's equity investments in the Trust total $279,000 and are included in Other
Assets in the accompanying consolidated balance sheets.
In June 2007, the Company formed National Security Capital Trust II for the sole purpose of issuing, in private placement
transactions, $3,000,000 of trust preferred securities and using the proceeds thereof, together with the equity proceeds
received from the Company in the initial formation of the Trust, to purchase $3,093,000 unsecured junior subordinated
deferrable interest debentures. 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 of 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 $2,995,000. The Company also holds all the voting securities issued by the Trust and
such trusts are considered to be VIE's. 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 sheets as a component of long-term debt. The Company's equity investments in the Trust total $93,000 and
are included in Other Assets in the accompanying consolidated balance sheets.
NOTE 3 – STATUTORY ACCOUNTING PRACTICES
The accompanying consolidated financial statements have been prepared in conformity with generally accepted
accounting principles (GAAP) which vary in certain respects from reporting practices prescribed or permitted by
insurance regulatory authorities. The significant differences for statutory reporting include: (a) acquisition costs of
acquiring new business are charged to operations as incurred, (b) life policy liabilities are established utilizing interest
and mortality factors specified by regulatory authorities, (c) the Asset Valuation Reserve (AVR) and the Interest
Maintenance Reserve (IMR) are recorded as liabilities in the life subsidiary, and (d) non-admitted assets (primarily
furniture and equipment, agents' debit balances and prepaid expenses) are charged directly to surplus.
59
59
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statutory net income (loss) and capital and surplus, excluding intercompany transactions, are summarized as follows:
The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31,
($ in thousands)
NSIC - including realized capital gains of $272 and $71, respectively
NSFC - including realized capital gains (losses) of $(10) and $39, respectively
Omega - including realized capital gains (losses) of $(21) and $7, respectively
Statutory risk-based adjusted capital:
NSIC - including AVR of $968 and $766, respectively
NSFC - including investment in Omega of $7,930 and $7,280, respectively
Omega
2019
2018
1,378
2,644
593
17,210
36,264
11,430
$
$
$
$
$
$
1,558
786
(64)
16,043
34,645
10,783
$
$
$
$
$
$
The above amounts exclude allocation of direct expenses of the Company. NSIC, NSFC and Omega are in compliance
with statutory restrictions with regard to minimum amounts of surplus and capital.
NOTE 4 – INVESTMENTS
Our investment in available-for-sale securities, which are reported at fair value, includes fixed maturity securities and
equity securities. Net unrealized gains or losses on fixed maturities are reported after-tax as a component of other
comprehensive income. Changes in fair value of equity securities are reported in investment gains/losses as a
component of net income.
The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31,
2019 are as follows:
($ in thousands)
Available-for-sale securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
U.S. Government corporations and agencies
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
States, municipalities and political subdivisions
Foreign governments
Total Fixed Maturities
Equity securities
$
4,131 $
32,283
10,307
6,815
36,074
6,669
823
97,102
2,127
150 $
861
71
441
1,816
109
46
3,494
3,176
— $
157
104
4
70
1
—
336
—
Fair
Value
4,281
32,987
10,274
7,252
37,820
6,777
869
100,260
5,303
Total $
99,229 $
6,670 $
336 $
105,563
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2019
are as follows:
($ in thousands)
Held-to-maturity securities:
Agency mortgage backed securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
Total $
1,290 $
1,290 $
55 $
55 $
— $
— $
1,345
1,345
2018 are as follows:
($ in thousands)
Available-for-sale securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. Government corporations and agencies
$
4,820 $
31 $
107 $
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
States, municipalities and political subdivisions
Foreign governments
Total Fixed Maturities
Equity securities
27,492
10,901
5,869
36,935
10,059
801
96,877
1,842
159
7
105
407
105
3
817
2,464
545
248
27
1,551
91
—
—
2,569
4,744
27,106
10,660
5,947
35,791
10,073
804
95,125
4,306
Total $
98,719 $
3,281 $
2,569 $
99,431
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2018
are as follows:
($ in thousands)
Held-to-maturity securities:
Agency mortgage backed securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
Total $
1,449 $
1,449 $
16 $
16 $
22 $
22 $
1,443
1,443
The amortized cost and aggregate fair value of debt securities at December 31, 2019, by contractual maturity, are
presented in the following table. Expected maturities will differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)
Available-for-sale securities:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Held-to-maturity securities:
Due after one year through five years
Due after five years through ten years
Due after ten years
Amortized
Cost
Fair
Value
$
2,136 $
17,397
25,683
51,886
Total $
97,102 $
100,260
$
29 $
4
1,257
Total $
1,290 $
2,133
17,945
26,516
53,666
30
5
1,310
1,345
60
60
61
Statutory net income (loss) and capital and surplus, excluding intercompany transactions, are summarized as follows:
($ in thousands)
NSIC - including realized capital gains of $272 and $71, respectively
NSFC - including realized capital gains (losses) of $(10) and $39, respectively
Omega - including realized capital gains (losses) of $(21) and $7, respectively
Statutory risk-based adjusted capital:
NSIC - including AVR of $968 and $766, respectively
NSFC - including investment in Omega of $7,930 and $7,280, respectively
Omega
2019
2018
1,378
2,644
593
17,210
36,264
11,430
$
$
$
$
$
$
1,558
786
(64)
16,043
34,645
10,783
$
$
$
$
$
$
with statutory restrictions with regard to minimum amounts of surplus and capital.
NOTE 4 – INVESTMENTS
component of net income.
2019 are as follows:
($ in thousands)
Available-for-sale securities:
Our investment in available-for-sale securities, which are reported at fair value, includes fixed maturity securities and
equity securities. Net unrealized gains or losses on fixed maturities are reported after-tax as a component of other
comprehensive income. Changes in fair value of equity securities are reported in investment gains/losses as a
The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31,
U.S. Government corporations and agencies
$
4,131 $
150 $
— $
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
States, municipalities and political subdivisions
Foreign governments
Total Fixed Maturities
Equity securities
32,283
10,307
6,815
36,074
6,669
823
97,102
2,127
861
71
441
1,816
109
46
3,494
3,176
Fair
Value
4,281
32,987
10,274
7,252
37,820
6,777
869
100,260
5,303
157
104
4
70
1
—
336
—
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2019
Total $
99,229 $
6,670 $
336 $
105,563
are as follows:
($ in thousands)
Held-to-maturity securities:
Agency mortgage backed securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
Total $
1,290 $
1,290 $
55 $
55 $
— $
— $
1,345
1,345
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31,
2018 are as follows:
The above amounts exclude allocation of direct expenses of the Company. NSIC, NSFC and Omega are in compliance
States, municipalities and political subdivisions
Foreign governments
Total Fixed Maturities
Equity securities
($ in thousands)
Available-for-sale securities:
U.S. Government corporations and agencies
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
4,820 $
31 $
27,492
10,901
5,869
36,935
10,059
801
96,877
1,842
159
7
105
407
105
3
817
2,464
107 $
545
248
27
1,551
91
—
2,569
—
4,744
27,106
10,660
5,947
35,791
10,073
804
95,125
4,306
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2018
are as follows:
Total $
98,719 $
3,281 $
2,569 $
99,431
($ in thousands)
Held-to-maturity securities:
Agency mortgage backed securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
Total $
1,449 $
1,449 $
16 $
16 $
22 $
22 $
1,443
1,443
The amortized cost and aggregate fair value of debt securities at December 31, 2019, by contractual maturity, are
presented in the following table. Expected maturities will differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)
Available-for-sale securities:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Held-to-maturity securities:
Due after one year through five years
Due after five years through ten years
Due after ten years
Amortized
Cost
Fair
Value
$
2,136 $
17,397
25,683
51,886
2,133
17,945
26,516
53,666
Total $
97,102 $
100,260
$
29 $
4
1,257
Total $
1,290 $
30
5
1,310
1,345
60
61
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of securities available-for-sale with unrealized losses as of December 31, 2019, 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:
($ in thousands)
Less than 12 months
12 months or longer
Total
December 31, 2019
Agency mortgage backed
securities
Asset backed securities
Private label mortgage
backed securities
Corporate bonds
States, municipalities and
political subdivisions
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Total
Securities
in a Loss
Position
$ 5,663 $
4,241
1,060
6,363
512
104 $ 1,751 $
53 $ 7,414 $
33
4
54
1
1,579
—
1,484
—
71
—
16
—
5,820
1,060
7,847
512
$ 17,839 $
196 $ 4,814 $
140 $22,653 $
157
104
4
70
1
336
18
9
1
14
1
43
There were no securities held-to-maturity with unrealized losses as of December 31, 2019.
A summary of securities available-for-sale with unrealized losses as of December 31, 2018, 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:
($ in thousands)
Less than 12 months
12 months or longer
Total
December 31, 2018
U.S. Government
corporations and agencies
Agency mortgage backed
securities
Asset backed securities
Private label mortgage
backed securities
Corporate bonds
States, municipalities and
political subdivisions
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Total
Securities
in a Loss
Position
$
— $
— $ 3,209 $
107 $ 3,209 $
5,504
5,824
1,348
16,583
45
146
27
709
10,969
2,741
—
9,823
500
102
—
842
16,473
8,565
1,348
26,406
107
545
248
27
1,551
1,242
10
4,420
81
5,662
91
$ 30,501 $
937 $31,162 $
1,632 $ 61,663 $
2,569
6
38
12
2
51
11
120
A summary of securities held-to-maturity with unrealized losses as of December 31, 2018 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:
($ in thousands)
Less than 12 months
12 months or longer
Total
December 31, 2018
Agency mortgage backed
securities
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Total
Securities
in a Loss
Position
$ 1,026 $
$ 1,026 $
22 $
22 $
— $
— $
— $ 1,026 $
— $ 1,026 $
22
22
2
2
The Company conducts periodic reviews to identify and evaluate securities in an unrealized loss position in order to
identify other-than-temporary impairments. For securities in an unrealized loss position, the Company assesses
whether the Company has the intent to sell the security or more-likely-than-not will be required to sell the security
before the anticipated recovery. If either of these conditions is met, the Company is required to recognize an other-
than-temporary impairment with the entire unrealized loss reported in earnings. For securities in an unrealized loss
position that do not meet these conditions, the Company assesses whether the impairment of a security is other-than-
temporary. If the impairment is determined to be other-than-temporary, the Company is required to separate the other-
than-temporary impairments into two components: the amount representing the credit loss and the amount related to
all other factors. The credit loss is the portion of the amortized book value in excess of the net present value of the
projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The
credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to
factors other than credit losses are recorded in other comprehensive income, net of taxes.
Management has evaluated each security in a significant unrealized loss position in the fixed maturity investment
portfolio. The Company has no material exposure to sub-prime mortgage loans and approximately 5% of the fixed
income investment portfolio is rated below investment grade. Based on a review of the available financial information,
the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the
securities until market values recovered, it was determined that, other than the impairment described below, the
securities in an accumulated loss position in the portfolio were temporary impairments.
For the year ended December 31, 2019, the Company realized no other-than-temporary impairments. For the year
ended December 31, 2018, the Company realized $16,000 other-than-temporary impairments. At December 31, 2019,
the three largest losses not realized as an impairment in the fixed maturity portfolio totaled $60,000, $23,000 and
$20,000. Each of these losses were driven by changes in market interest rates. At December 31, 2018, the three
largest losses not realized as an impairment was in the fixed maturity portfolio totaled $145,000, $99,000 and $94,000.
Major categories of investment income are summarized as follows:
($ in thousands)
Fixed maturities
Equity securities
Mortgage loans on real estate
Investment real estate
Policy loans
Other
Less: Investment expenses
Net investment income
Year ended
December 31,
2019
2018
$
3,752 $
86
8
4
142
30
4,022
146
$
3,876 $
3,803
106
7
3
142
25
4,086
145
3,941
62
62
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of securities available-for-sale with unrealized losses as of December 31, 2019, 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:
($ in thousands)
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Total
Securities
in a Loss
Position
December 31, 2019
Agency mortgage backed
securities
Asset backed securities
Private label mortgage
backed securities
Corporate bonds
States, municipalities and
political subdivisions
$ 5,663 $
104 $ 1,751 $
53 $ 7,414 $
4,241
1,060
6,363
512
33
4
54
1
1,579
—
1,484
—
71
—
16
—
5,820
1,060
7,847
512
$ 17,839 $
196 $ 4,814 $
140 $22,653 $
157
104
4
70
1
336
The Company conducts periodic reviews to identify and evaluate securities in an unrealized loss position in order to
identify other-than-temporary impairments. For securities in an unrealized loss position, the Company assesses
whether the Company has the intent to sell the security or more-likely-than-not will be required to sell the security
before the anticipated recovery. If either of these conditions is met, the Company is required to recognize an other-
than-temporary impairment with the entire unrealized loss reported in earnings. For securities in an unrealized loss
position that do not meet these conditions, the Company assesses whether the impairment of a security is other-than-
temporary. If the impairment is determined to be other-than-temporary, the Company is required to separate the other-
than-temporary impairments into two components: the amount representing the credit loss and the amount related to
all other factors. The credit loss is the portion of the amortized book value in excess of the net present value of the
projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The
credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to
factors other than credit losses are recorded in other comprehensive income, net of taxes.
Management has evaluated each security in a significant unrealized loss position in the fixed maturity investment
portfolio. The Company has no material exposure to sub-prime mortgage loans and approximately 5% of the fixed
income investment portfolio is rated below investment grade. Based on a review of the available financial information,
the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the
securities until market values recovered, it was determined that, other than the impairment described below, the
securities in an accumulated loss position in the portfolio were temporary impairments.
There were no securities held-to-maturity with unrealized losses as of December 31, 2019.
A summary of securities available-for-sale with unrealized losses as of December 31, 2018, 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:
For the year ended December 31, 2019, the Company realized no other-than-temporary impairments. For the year
ended December 31, 2018, the Company realized $16,000 other-than-temporary impairments. At December 31, 2019,
the three largest losses not realized as an impairment in the fixed maturity portfolio totaled $60,000, $23,000 and
$20,000. Each of these losses were driven by changes in market interest rates. At December 31, 2018, the three
largest losses not realized as an impairment was in the fixed maturity portfolio totaled $145,000, $99,000 and $94,000.
($ in thousands)
Less than 12 months
12 months or longer
Total
Major categories of investment income are summarized as follows:
($ in thousands)
Fixed maturities
Equity securities
Mortgage loans on real estate
Investment real estate
Policy loans
Other
Less: Investment expenses
Net investment income
Year ended
December 31,
2019
2018
$
3,752 $
86
8
4
142
30
4,022
146
$
3,876 $
3,803
106
7
3
142
25
4,086
145
3,941
18
9
1
14
1
43
6
38
12
2
51
11
120
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Total
Securities
in a Loss
Position
corporations and agencies
$
— $
— $ 3,209 $
107 $ 3,209 $
December 31, 2018
U.S. Government
Agency mortgage backed
securities
Asset backed securities
Private label mortgage
backed securities
Corporate bonds
States, municipalities and
political subdivisions
5,504
5,824
1,348
16,583
45
146
27
709
10,969
2,741
—
9,823
500
102
—
842
16,473
8,565
1,348
26,406
1,242
10
4,420
81
5,662
91
$ 30,501 $
937 $31,162 $
1,632 $ 61,663 $
2,569
107
545
248
27
1,551
A summary of securities held-to-maturity with unrealized losses as of December 31, 2018 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:
($ in thousands)
Less than 12 months
12 months or longer
Total
December 31, 2018
Agency mortgage backed
securities
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Total
Securities
in a Loss
Position
$ 1,026 $
$ 1,026 $
22 $
22 $
— $
— $
— $ 1,026 $
— $ 1,026 $
22
22
2
2
62
63
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major categories of investment gains and losses are summarized as follows:
($ in thousands)
Year ended
December 31,
2019
2018
Realized gains on fixed maturities
$
18 $
128
Realized gains on equity securities
Gains on trading securities
Change in fair value of equity securities
Change in surrender value of company owned life
insurance
Realized gain on company owned life insurance
Other gains (losses), principally real estate
Other-than-temporary impairments
Net investment gains (losses)
233
5
712
295
1,792
—
—
—
—
(203)
(374)
—
(87)
(16)
$
3,055 $
(552)
An analysis of the net change in unrealized gains (losses) on available-for-sale securities follows:
($ in thousands)
Fixed maturities
Deferred income tax
Change in net unrealized gains (losses) on available-for-sale securities
December 31,
2019
December 31,
2018
$
$
4,910 $
(1,031)
3,879 $
(3,042)
638
(2,404)
NOTE 5 – FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Our available-for-sale securities consists of fixed maturity and equity securities which are recorded at fair value in the
accompanying consolidated balance sheets.
We are permitted to elect to measure financial instruments and certain other items at fair value, with the change in fair
value recorded in earnings. We elected not to measure any eligible items using the fair value option.
Accounting standards define fair value as the price that would be received to sell an asset or would be paid to transfer
a liability in an orderly transaction between market participants at the measurement date, and establishes a framework
to make the measurement of fair value more consistent and comparable. In determining fair value, we primarily use
prices and other relevant information generated by market transactions involving identical or comparable assets. The
Company categorizes assets and liabilities carried at their fair value based upon a fair value hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
at the measurement date. Level 1 assets and liabilities consist of money market fund deposits and certain of our
marketable debt and equity instruments, including equity instruments offsetting deferred compensation, that are traded
in an active market with sufficient volume and frequency of transactions.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations
in which all significant inputs are observable or can be derived principally from or corroborated by observable market
data for substantially the full term of the assets or liabilities. Level 2 assets include certain of our marketable debt and
equity instruments with quoted market prices that are traded in less active markets or priced using a quoted market
price for similar instruments. Level 2 assets also include marketable equity instruments with security-specific restrictions
that would transfer to the buyer, marketable debt instruments priced using indicator prices which represent non-binding
market consensus prices that can be corroborated by observable market quotes, as well as derivative contracts and
debt instruments priced using inputs that are observable in the market or can be derived principally from or corroborated
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
by observable market data. Marketable debt instruments in this category generally include commercial paper, bank
time deposits, repurchase agreements for fixed-income instruments, and a majority of floating-rate notes, corporate
bonds, and municipal bonds.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of
assets or liabilities. Level 3 assets and liabilities include marketable debt instruments, non-marketable equity
investments, derivative contracts, and company issued debt with values are determined using inputs that are both
unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable
debt instruments that are priced using indicator prices that we were unable to corroborate with observable market
quotes.
Marketable debt instruments in this category generally include asset-backed securities and certain floating-rate notes,
corporate bonds, and municipal bonds.
Assets/Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 are summarized
in the following table by the type of inputs applicable to the fair value measurements:
U.S. Government corporations and agencies
$
4,281 $
4,281 $
— $
($ in thousands)
Description
Financial Assets
Fixed maturities available-for-sale
Agency mortgage backed securities
Asset backed securities
Corporate bonds
Private label asset backed securities
States, municipalities and political subdivisions
Foreign governments
Trading securities
Equity securities
Total Financial Assets
Financial Liabilities
Interest rate swap
Total Financial Liabilities
Fair Value Measurements at Reporting Date Using
Total
Level 1
Level 2
Level 3
32,987
10,274
37,820
7,252
6,777
869
149
5,303
19,330
2,601
—
1,060
—
869
149
3,988
13,657
7,673
37,820
6,192
6,777
—
—
—
$ 105,712 $
32,278 $
72,119 $
—
—
—
—
—
—
—
—
1,315
1,315
$
$
(65) $
(65) $
— $
— $
— $
— $
(65)
(65)
The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair
value on a recurring basis are summarized below.
Fixed maturities available-for-sale — The fair values of the Company’s public fixed maturity securities are generally
based on prices obtained from independent pricing services. Consistent with the fair value hierarchy described above,
securities with quoted market prices in active markets for identical assets are reflected within Level 1 while securities
with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on
observable pricing for similar assets and/or other market observable inputs.
Trading securities — Trading securities consist primarily of mutual funds whose fair values are determined consistent
with similar instruments described above under “Fixed Maturities” and below under “Equity Securities.”
Equity securities — Equity securities consist principally of investments in common and preferred stock of publicly traded
companies and privately traded securities. The fair values of our publicly traded equity securities are based on quoted
market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
by observable market data. Marketable debt instruments in this category generally include commercial paper, bank
time deposits, repurchase agreements for fixed-income instruments, and a majority of floating-rate notes, corporate
bonds, and municipal bonds.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of
assets or liabilities. Level 3 assets and liabilities include marketable debt instruments, non-marketable equity
investments, derivative contracts, and company issued debt with values are determined using inputs that are both
unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable
debt instruments that are priced using indicator prices that we were unable to corroborate with observable market
quotes.
Marketable debt instruments in this category generally include asset-backed securities and certain floating-rate notes,
corporate bonds, and municipal bonds.
Assets/Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 are summarized
in the following table by the type of inputs applicable to the fair value measurements:
($ in thousands)
Description
Financial Assets
Fixed maturities available-for-sale
Fair Value Measurements at Reporting Date Using
Total
Level 1
Level 2
Level 3
U.S. Government corporations and agencies
$
4,281 $
4,281 $
— $
Our available-for-sale securities consists of fixed maturity and equity securities which are recorded at fair value in the
Foreign governments
Agency mortgage backed securities
Asset backed securities
Corporate bonds
Private label asset backed securities
States, municipalities and political subdivisions
Trading securities
Equity securities
Total Financial Assets
Financial Liabilities
Interest rate swap
Total Financial Liabilities
32,987
10,274
37,820
7,252
6,777
869
149
5,303
19,330
2,601
—
1,060
—
869
149
3,988
13,657
7,673
37,820
6,192
6,777
—
—
—
$ 105,712 $
32,278 $
72,119 $
—
—
—
—
—
—
—
—
1,315
1,315
$
$
(65) $
(65) $
— $
— $
— $
— $
(65)
(65)
The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair
value on a recurring basis are summarized below.
Fixed maturities available-for-sale — The fair values of the Company’s public fixed maturity securities are generally
based on prices obtained from independent pricing services. Consistent with the fair value hierarchy described above,
securities with quoted market prices in active markets for identical assets are reflected within Level 1 while securities
with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on
observable pricing for similar assets and/or other market observable inputs.
Trading securities — Trading securities consist primarily of mutual funds whose fair values are determined consistent
with similar instruments described above under “Fixed Maturities” and below under “Equity Securities.”
Equity securities — Equity securities consist principally of investments in common and preferred stock of publicly traded
companies and privately traded securities. The fair values of our publicly traded equity securities are based on quoted
market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy.
65
65
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major categories of investment gains and losses are summarized as follows:
($ in thousands)
Realized gains on fixed maturities
$
18 $
128
Realized gains on equity securities
Gains on trading securities
Change in fair value of equity securities
Change in surrender value of company owned life
insurance
Realized gain on company owned life insurance
Other gains (losses), principally real estate
Other-than-temporary impairments
Net investment gains (losses)
Year ended
December 31,
2019
2018
233
5
712
295
1,792
—
—
—
—
(203)
(374)
—
(87)
(16)
$
3,055 $
(552)
An analysis of the net change in unrealized gains (losses) on available-for-sale securities follows:
($ in thousands)
Fixed maturities
Deferred income tax
Change in net unrealized gains (losses) on available-for-sale securities
NOTE 5 – FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
December 31,
December 31,
2019
2018
$
$
4,910 $
(1,031)
3,879 $
(3,042)
638
(2,404)
accompanying consolidated balance sheets.
We are permitted to elect to measure financial instruments and certain other items at fair value, with the change in fair
value recorded in earnings. We elected not to measure any eligible items using the fair value option.
Accounting standards define fair value as the price that would be received to sell an asset or would be paid to transfer
a liability in an orderly transaction between market participants at the measurement date, and establishes a framework
to make the measurement of fair value more consistent and comparable. In determining fair value, we primarily use
prices and other relevant information generated by market transactions involving identical or comparable assets. The
Company categorizes assets and liabilities carried at their fair value based upon a fair value hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
at the measurement date. Level 1 assets and liabilities consist of money market fund deposits and certain of our
marketable debt and equity instruments, including equity instruments offsetting deferred compensation, that are traded
in an active market with sufficient volume and frequency of transactions.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations
in which all significant inputs are observable or can be derived principally from or corroborated by observable market
data for substantially the full term of the assets or liabilities. Level 2 assets include certain of our marketable debt and
equity instruments with quoted market prices that are traded in less active markets or priced using a quoted market
price for similar instruments. Level 2 assets also include marketable equity instruments with security-specific restrictions
that would transfer to the buyer, marketable debt instruments priced using indicator prices which represent non-binding
market consensus prices that can be corroborated by observable market quotes, as well as derivative contracts and
debt instruments priced using inputs that are observable in the market or can be derived principally from or corroborated
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately traded
equity securities are classified within Level 3.
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 are summarized
in the following table by the type of inputs applicable to the fair value measurements:
Interest rate swaps — Interest rate swaps are recorded at fair value either as assets, within other assets or as liabilities,
within other liabilities. The fair values of our interest rate swaps are provided by a third-party broker and are classified
within Level 3.
As of December 31, 2019, Level 3 fair value measurements of assets include $1,315,000 of equity securities in a local
community bank whose value is based on an evaluation of the financial statements of the entity. The Company does
not develop the unobservable inputs used in measuring fair value.
As of December 31, 2019, Level 3 fair value measurements of liabilities include $65,000 net fair value of various interest
rate swap agreements whose value is based on analysis provided by a third party that utilizes financial modeling tools
and assumptions on interest and other factors. The Company does not develop the unobservable inputs used in
measuring fair value. Additional information regarding the interest rate swap agreements is provided in Note 8.
The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the year ended December 31, 2019:
($ in thousands)
For the year December 31, 2019
Beginning balance
Total gains or losses (realized and unrealized):
Included in earnings
Included in other comprehensive income
Purchases:
Sales:
Issuances:
Settlements:
Transfers in/(out) of Level 3
Ending balance
The amount of total gains or losses for the period included in
earnings attributable to the change in unrealized gains or losses
relating to assets and liabilities still held as of December 31, 2019:
Equity Securities
Interest Rate Swap
$
1,125 $
(234)
645
—
—
(455)
—
—
—
1,315 $
— $
$
$
—
169
—
—
—
—
—
(65)
—
For the year ended December 31, 2019, there were no assets or liabilities measured at fair values on a nonrecurring
basis.
U.S. Government corporations and agencies
$
4,744 $
4,147 $
597 $
The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the year ended December 31, 2018:
($ in thousands)
Description
Financial Assets
Fixed maturities available-for-sale
Agency mortgage backed securities
Asset backed securities
Corporate bonds
Private label asset backed securities
States, municipalities and political subdivisions
Foreign governments
Trading securities
Equity securities available-for-sale
Total Financial Assets
Financial Liabilities
Interest rate swap
Total Financial Liabilities
($ in thousands)
For the year ended December 31, 2018
Beginning balance
Total gains or losses (realized and unrealized):
Included in earnings
Included in other comprehensive income
Purchases:
Sales:
Issuances:
Settlements:
Transfers in/(out) of Level 3
Ending balance
Fair Value Measurements at Reporting Date Using
Total
Level 1
Level 2
Level 3
27,106
10,660
35,791
5,947
10,073
804
107
4,306
11,756
2,939
—
—
—
804
107
3,181
15,350
7,721
35,791
5,947
10,073
—
—
—
99,538 $
22,934 $
75,479 $
$
$
$
(234) $
(234) $
— $
— $
— $
— $
(234)
(234)
Equity Securities
Available-for-Sale
$
1,073 $
Interest Rate Swap
—
—
—
—
—
—
—
—
1,125
1,125
(608)
—
374
—
—
—
—
—
—
52
—
—
—
—
—
—
— $
The amount of total gains or losses for the period included in
earnings attributable to the change in unrealized gains or losses
relating to assets and liabilities still held as of December 31, 2018:
$
$
1,125 $
(234)
For the year ended December 31, 2018, there were no assets or liabilities measured at fair values on a nonrecurring
basis.
The Company is exposed to certain risks in the normal course of its business operations. The primary risk that is
managed through the use of derivatives is interest rate risk on floating rate borrowings. This risk is managed through
the use of interest rate swap agreements which are designated as cash flow hedges. For cash flow hedges, the
effective portion of the gain or loss on the interest rate swap is included as a component of other comprehensive income
and reclassified into earnings in the same period during which the hedged transaction is recognized in earnings. The
Company does not hold or issue derivatives that are not designated as hedging instruments. See Note 8 for additional
information about the interest rate swap agreements.
66
66
67
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Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately traded
equity securities are classified within Level 3.
Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 are summarized
in the following table by the type of inputs applicable to the fair value measurements:
Interest rate swaps — Interest rate swaps are recorded at fair value either as assets, within other assets or as liabilities,
within other liabilities. The fair values of our interest rate swaps are provided by a third-party broker and are classified
within Level 3.
As of December 31, 2019, Level 3 fair value measurements of assets include $1,315,000 of equity securities in a local
($ in thousands)
Description
Financial Assets
Fixed maturities available-for-sale
Fair Value Measurements at Reporting Date Using
Total
Level 1
Level 2
Level 3
community bank whose value is based on an evaluation of the financial statements of the entity. The Company does
U.S. Government corporations and agencies
$
4,744 $
4,147 $
597 $
not develop the unobservable inputs used in measuring fair value.
As of December 31, 2019, Level 3 fair value measurements of liabilities include $65,000 net fair value of various interest
rate swap agreements whose value is based on analysis provided by a third party that utilizes financial modeling tools
Agency mortgage backed securities
Asset backed securities
Corporate bonds
and assumptions on interest and other factors. The Company does not develop the unobservable inputs used in
Private label asset backed securities
measuring fair value. Additional information regarding the interest rate swap agreements is provided in Note 8.
States, municipalities and political subdivisions
Foreign governments
Trading securities
Equity securities available-for-sale
Total Financial Assets
Financial Liabilities
Interest rate swap
Total Financial Liabilities
$
$
$
27,106
10,660
35,791
5,947
10,073
804
107
4,306
11,756
2,939
—
—
—
804
107
3,181
15,350
7,721
35,791
5,947
10,073
—
—
—
99,538 $
22,934 $
75,479 $
—
—
—
—
—
—
—
—
1,125
1,125
(234) $
(234) $
— $
— $
— $
— $
(234)
(234)
The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the year ended December 31, 2018:
($ in thousands)
For the year ended December 31, 2018
Beginning balance
Total gains or losses (realized and unrealized):
Included in earnings
Included in other comprehensive income
Purchases:
Sales:
Issuances:
Settlements:
Transfers in/(out) of Level 3
Ending balance
The amount of total gains or losses for the period included in
earnings attributable to the change in unrealized gains or losses
relating to assets and liabilities still held as of December 31, 2018:
Equity Securities
Available-for-Sale
Interest Rate Swap
$
1,073 $
(608)
52
—
—
—
—
—
—
—
374
—
—
—
—
—
$
$
1,125 $
(234)
— $
—
For the year ended December 31, 2018, there were no assets or liabilities measured at fair values on a nonrecurring
basis.
The Company is exposed to certain risks in the normal course of its business operations. The primary risk that is
managed through the use of derivatives is interest rate risk on floating rate borrowings. This risk is managed through
the use of interest rate swap agreements which are designated as cash flow hedges. For cash flow hedges, the
effective portion of the gain or loss on the interest rate swap is included as a component of other comprehensive income
and reclassified into earnings in the same period during which the hedged transaction is recognized in earnings. The
Company does not hold or issue derivatives that are not designated as hedging instruments. See Note 8 for additional
information about the interest rate swap agreements.
66
67
67
The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the year ended December 31, 2019:
($ in thousands)
For the year December 31, 2019
Beginning balance
Total gains or losses (realized and unrealized):
Included in earnings
Included in other comprehensive income
Purchases:
Sales:
Issuances:
Settlements:
Transfers in/(out) of Level 3
Ending balance
Equity Securities
Interest Rate Swap
$
1,125 $
(455)
645
—
—
—
—
—
— $
(234)
—
169
—
—
—
—
—
—
The amount of total gains or losses for the period included in
earnings attributable to the change in unrealized gains or losses
relating to assets and liabilities still held as of December 31, 2019:
$
$
1,315 $
(65)
For the year ended December 31, 2019, there were no assets or liabilities measured at fair values on a nonrecurring
basis.
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate fair value of each class of financial instrument for which
it is practical to estimate that value:
NOTE 7 – INCOME TAXES
Cash and cash equivalents — the carrying amount is a reasonable estimate of fair value.
Fixed maturities held-to-maturity — the carrying amount is amortized cost; the fair values of the Company’s public
fixed maturity securities that are classified as held-to-maturity are generally based on prices obtained from independent
pricing services.
Mortgage loans — the carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited
marketability of the mortgage notes.
Policy loans — the carrying amount is a reasonable estimate of fair value.
Company owned life insurance — the carrying amount is a reasonable estimate of fair value.
Other invested assets — the carrying amount is a reasonable estimate of fair value.
Other policyholder funds — the carrying amount is a reasonable estimate of fair value.
Debt — the carrying amount is a reasonable estimate of fair value.
The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2019 and
December 31, 2018 are as follows:
($ in thousands)
Assets and related instruments
Held-to-maturity securities
Mortgage loans
Policy loans
Company owned life insurance
Other invested assets
Liabilities and related instruments
Other policyholder funds
Short-term notes payable and current portion of long-term debt
December 31, 2019
December 31, 2018
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$
1,290 $
1,345 $
1,449 $
1,443
147
1,895
4,655
2,280
1,350
500
147
1,895
4,655
2,280
1,350
500
156
1,854
4,600
2,148
1,515
2,200
156
1,854
4,600
2,148
1,515
2,200
Long-term debt
13,664
13,664
12,152
12,152
NOTE 6 – PROPERTY AND EQUIPMENT
Major categories of property and equipment are summarized as follows:
($ in thousands)
Building and improvements
Electronic data processing equipment
Furniture and fixtures
Less accumulated depreciation
Property and equipment, net
December 31, 2019
December 31, 2018
$
$
3,472
$
1,470
483
5,425
3,795
1,630
$
3,378
1,504
477
5,359
3,710
1,649
Depreciation expense for the year ended December 31, 2019 was $124,000 ($161,000 for the year ended December
31, 2018).
The Company recognizes tax-related interest and penalties as a component of tax expense. The Company files income
tax returns in the U.S. federal jurisdiction and various states. The Company is not subject to examinations by authorities
related to its U.S. federal or state income tax filings for years prior to 2014. Tax returns have been filed through the
year 2018.
Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. Management believes
that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to
realize its deferred tax assets. The Company recognized a net deferred tax liability position of $96,000 at December 31,
2019 and a net deferred tax asset position of $716,000 at December 31, 2018.
At December 31, 2018, the Company recognized an AMT credit in income tax recoverable of $1,622,000. Of this
amount, $1,074,000 was recovered with the 2018 return and Management anticipates the remaining $548,000 will be
recovered by 2020 pursuant to allowable amounts under the Tax Cuts and Jobs Act enacted in 2017.
The tax effect of significant differences representing deferred tax assets and liabilities are as follows:
As of December 31,
As of December 31,
2019
2018
($ in thousands)
General expenses
Unearned premiums
Claims liabilities
Deferred tax assets
Trading securities
Depreciation
Impairment on real estate owned
Unrealized losses on securities available-for-sale
Unrealized loss on interest rate swaps
Deferred policy acquisition costs
Pre-1984 policyholder surplus account
Unrealized gains on securities available-for-sale
Unrealized gains on equity securities
Deferred tax liabilities
Net deferred tax asset (liability)
$
$
1,269 $
1,288
645
119
—
14
3,335
(1)
(93)
(1,610)
(397)
(667)
(663)
(3,431)
(96) $
1,067
1,265
552
119
368
49
3,420
—
(79)
(1,645)
(463)
—
(517)
(2,704)
716
68
68
69
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Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate fair value of each class of financial instrument for which
NOTE 7 – INCOME TAXES
it is practical to estimate that value:
Cash and cash equivalents — the carrying amount is a reasonable estimate of fair value.
Fixed maturities held-to-maturity — the carrying amount is amortized cost; the fair values of the Company’s public
fixed maturity securities that are classified as held-to-maturity are generally based on prices obtained from independent
pricing services.
Mortgage loans — the carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited
marketability of the mortgage notes.
Policy loans — the carrying amount is a reasonable estimate of fair value.
Company owned life insurance — the carrying amount is a reasonable estimate of fair value.
Other invested assets — the carrying amount is a reasonable estimate of fair value.
Other policyholder funds — the carrying amount is a reasonable estimate of fair value.
Debt — the carrying amount is a reasonable estimate of fair value.
The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2019 and
December 31, 2018 are as follows:
($ in thousands)
Assets and related instruments
Held-to-maturity securities
Mortgage loans
Policy loans
Company owned life insurance
Other invested assets
Liabilities and related instruments
Other policyholder funds
December 31, 2019
December 31, 2018
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$
1,290 $
1,345 $
1,449 $
1,443
147
1,895
4,655
2,280
1,350
500
147
1,895
4,655
2,280
1,350
500
156
1,854
4,600
2,148
1,515
2,200
156
1,854
4,600
2,148
1,515
2,200
Short-term notes payable and current portion of long-term debt
Long-term debt
13,664
13,664
12,152
12,152
NOTE 6 – PROPERTY AND EQUIPMENT
Major categories of property and equipment are summarized as follows:
($ in thousands)
Building and improvements
Electronic data processing equipment
Furniture and fixtures
Less accumulated depreciation
Property and equipment, net
December 31, 2019
December 31, 2018
$
$
3,472
$
1,470
483
5,425
3,795
1,630
$
3,378
1,504
477
5,359
3,710
1,649
Depreciation expense for the year ended December 31, 2019 was $124,000 ($161,000 for the year ended December
31, 2018).
The Company recognizes tax-related interest and penalties as a component of tax expense. The Company files income
tax returns in the U.S. federal jurisdiction and various states. The Company is not subject to examinations by authorities
related to its U.S. federal or state income tax filings for years prior to 2014. Tax returns have been filed through the
year 2018.
Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. Management believes
that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to
realize its deferred tax assets. The Company recognized a net deferred tax liability position of $96,000 at December 31,
2019 and a net deferred tax asset position of $716,000 at December 31, 2018.
At December 31, 2018, the Company recognized an AMT credit in income tax recoverable of $1,622,000. Of this
amount, $1,074,000 was recovered with the 2018 return and Management anticipates the remaining $548,000 will be
recovered by 2020 pursuant to allowable amounts under the Tax Cuts and Jobs Act enacted in 2017.
The tax effect of significant differences representing deferred tax assets and liabilities are as follows:
($ in thousands)
General expenses
Unearned premiums
Claims liabilities
Impairment on real estate owned
Unrealized losses on securities available-for-sale
Unrealized loss on interest rate swaps
Deferred tax assets
Trading securities
Depreciation
Deferred policy acquisition costs
Pre-1984 policyholder surplus account
Unrealized gains on securities available-for-sale
Unrealized gains on equity securities
Deferred tax liabilities
Net deferred tax asset (liability)
As of December 31,
2019
As of December 31,
2018
$
$
1,269 $
1,288
645
119
—
14
3,335
(1)
(93)
(1,610)
(397)
(667)
(663)
(3,431)
(96) $
1,067
1,265
552
119
368
49
3,420
—
(79)
(1,645)
(463)
—
(517)
(2,704)
716
68
69
69
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The appropriate income tax effects of changes in temporary differences are as follows:
Long-term debt consisted of the following as of December 31, 2019 and December 31, 2018:
($ in thousands)
Deferred policy acquisition costs
Other-than-temporary impairments
Trading securities
Unearned premiums
General expenses
Depreciation
Claims liabilities
AMT credit
Impact of repeal of special provision on pre-1984 policyholder surplus
Unrealized gains (losses) on equity securities
Deferred income tax expense (benefit)
Year ended
December 31,
2019
2018
($ in thousands)
$
(35) $
—
1
(23)
(202)
14
(93)
—
(66)
149
(61)
(3)
—
4
2
(9)
(68)
1,575
(66)
(43)
December 31,
December 31,
2019
2018
Promissory note with variable interest rate equal to the WSJ prime rate plus
0.5%; maturity November 2023. Annual installment payments beginning
November 2020. Unsecured.
$
1,500 $
—
Subordinated debentures issued on December 15, 2005 with floating rate
interest equal to 3-Month LIBOR plus 375 basis points; net of $150,000 in
debt issuance cost ($159,000 in 2018); maturity December 15, 2035. Interest
payable quarterly. Redeemable prior to maturity. Unsecured.
Subordinated debentures issued on June 21, 2007 with floating rate interest
equal to 3-Month LIBOR plus 340 basis points; net of $58,000 in debt
issuance cost ($61,000 in 2018); maturity June 15, 2037. Interest payable
quarterly. Redeemable prior to maturity. Unsecured.
9,129
9,120
3,035
$
13,664 $
3,032
12,152
$
(255) $
1,331
Annual maturities of all outstanding debt for the next five years and beyond are as follows:
Total income tax expense (benefit) varies from amounts computed by applying current federal income tax rates to
income or loss before income taxes. The reasons for these differences and the approximate tax effects are as follows:
Federal income tax rate applied to pre-tax income/loss
Dividends received deduction and tax-exempt interest
Company owned life insurance
Other, net
Effective federal income tax rate
NOTE 8 – NOTES PAYABLE AND LONG-TERM DEBT
Year ended
December 31,
2019
2018
21.0 %
(0.3)%
(9.6)%
0.1 %
11.2 %
21.0 %
(2.4)%
7.4 %
0.9 %
26.9 %
Short-term debt and current portion of long-term debt consisted of the following as of December 31, 2019 and
December 31, 2018:
($ in thousands)
Current portion of installment note payable due in November with variable
interest rate equal to the WSJ prime rate plus 0.5%. Unsecured.
December 31,
2019
December 31,
2018
$
$
500 $
500 $
2,200
2,200
($ in thousands)
2020
$
500 $
500 $
500 $
500 $
— $
12,164
2021
2022
2023
2024
Thereafter
The Company has entered into various swap agreements related to the trust preferred securities. On March 19, 2009,
the Company entered into a forward swap effective September 17, 2012, with a notional amount of $3,000,000 and
designated the swap as a hedge against changes in cash flows attributable to changes in the benchmark interest rate
(LIBOR) associated with the subordinated debentures issued June 21, 2007. Quarterly, commencing September 17,
2012, under the terms of the forward swap, which expired on March 15, 2019, the Company paid interest at a fixed
rate of 7.02% until March 15, 2019. On May 26, 2010, the Company entered into a forward swap with a notional
amount of $9,000,000 effective December 15, 2015, which hedges against changes in cash flows following the
termination of the fixed rate period. Quarterly, commencing March 16, 2016 under the terms of the forward swap, the
Company pays interest at a fixed rate of 8.49% until March 15, 2020.
The swaps entered into in 2009 and 2010 have fair values of $0 and $65,000 (liability), respectively, for a total liability
of $65,000 at December 31, 2019 ($234,000 at December 31, 2018). The swap liability is reported as a component
of other liabilities on the consolidated balance sheets. A net valuation gain of $134,000 (net of tax) is included in
accumulated other comprehensive income related to the swap agreements at December 31, 2019. A net valuation
gain of $295,000 (net of tax) was included in accumulated other comprehensive income related to the swap at
December 31, 2018.
We use dollar offset at the hedge's inception and for each reporting period thereafter to assess whether the derivative
used in a hedging transaction is expected to be, and has been, effective in offsetting changes in the fair value of the
hedged item. Since inception, no portion of the hedged item has been deemed ineffective. For all hedges, we
discontinue hedge accounting if it is determined that a derivative is not expected to be, or has ceased to be, effective
as a hedge.
The Company’s interest rate swaps include provisions requiring the Company to post collateral when the derivative is
in a net liability position. At December 31, 2019, the Company has securities on deposit with fair market values of
$294,000 (all of which is posted as collateral). At December 31, 2018, the Company had securities on deposit with
fair market values of $932,000 (all of which is posted as collateral). See Note 5 for additional information about the
interest rate swaps.
70
70
71
($ in thousands)
Deferred policy acquisition costs
Other-than-temporary impairments
Trading securities
Unearned premiums
General expenses
Depreciation
Claims liabilities
AMT credit
Year ended
December 31,
2019
2018
$
(35) $
—
1
(23)
(202)
14
(93)
—
(66)
149
(61)
(3)
—
4
2
(9)
(68)
(66)
(43)
1,575
Year ended
December 31,
2019
2018
21.0 %
(0.3)%
(9.6)%
0.1 %
11.2 %
21.0 %
(2.4)%
7.4 %
0.9 %
26.9 %
December 31,
December 31,
2019
2018
$
$
500 $
500 $
2,200
2,200
Impact of repeal of special provision on pre-1984 policyholder surplus
Unrealized gains (losses) on equity securities
Deferred income tax expense (benefit)
Total income tax expense (benefit) varies from amounts computed by applying current federal income tax rates to
income or loss before income taxes. The reasons for these differences and the approximate tax effects are as follows:
Federal income tax rate applied to pre-tax income/loss
Dividends received deduction and tax-exempt interest
Company owned life insurance
Other, net
Effective federal income tax rate
NOTE 8 – NOTES PAYABLE AND LONG-TERM DEBT
December 31, 2018:
($ in thousands)
Current portion of installment note payable due in November with variable
interest rate equal to the WSJ prime rate plus 0.5%. Unsecured.
Short-term debt and current portion of long-term debt consisted of the following as of December 31, 2019 and
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The appropriate income tax effects of changes in temporary differences are as follows:
Long-term debt consisted of the following as of December 31, 2019 and December 31, 2018:
($ in thousands)
December 31,
December 31,
2019
2018
Promissory note with variable interest rate equal to the WSJ prime rate plus
0.5%; maturity November 2023. Annual installment payments beginning
November 2020. Unsecured.
$
1,500 $
—
Subordinated debentures issued on December 15, 2005 with floating rate
interest equal to 3-Month LIBOR plus 375 basis points; net of $150,000 in
debt issuance cost ($159,000 in 2018); maturity December 15, 2035. Interest
payable quarterly. Redeemable prior to maturity. Unsecured.
Subordinated debentures issued on June 21, 2007 with floating rate interest
equal to 3-Month LIBOR plus 340 basis points; net of $58,000 in debt
issuance cost ($61,000 in 2018); maturity June 15, 2037. Interest payable
quarterly. Redeemable prior to maturity. Unsecured.
9,129
9,120
3,035
$
13,664 $
3,032
12,152
$
(255) $
1,331
Annual maturities of all outstanding debt for the next five years and beyond are as follows:
($ in thousands)
2020
2021
2022
2023
2024
Thereafter
$
500 $
500 $
500 $
500 $
— $
12,164
The Company has entered into various swap agreements related to the trust preferred securities. On March 19, 2009,
the Company entered into a forward swap effective September 17, 2012, with a notional amount of $3,000,000 and
designated the swap as a hedge against changes in cash flows attributable to changes in the benchmark interest rate
(LIBOR) associated with the subordinated debentures issued June 21, 2007. Quarterly, commencing September 17,
2012, under the terms of the forward swap, which expired on March 15, 2019, the Company paid interest at a fixed
rate of 7.02% until March 15, 2019. On May 26, 2010, the Company entered into a forward swap with a notional
amount of $9,000,000 effective December 15, 2015, which hedges against changes in cash flows following the
termination of the fixed rate period. Quarterly, commencing March 16, 2016 under the terms of the forward swap, the
Company pays interest at a fixed rate of 8.49% until March 15, 2020.
The swaps entered into in 2009 and 2010 have fair values of $0 and $65,000 (liability), respectively, for a total liability
of $65,000 at December 31, 2019 ($234,000 at December 31, 2018). The swap liability is reported as a component
of other liabilities on the consolidated balance sheets. A net valuation gain of $134,000 (net of tax) is included in
accumulated other comprehensive income related to the swap agreements at December 31, 2019. A net valuation
gain of $295,000 (net of tax) was included in accumulated other comprehensive income related to the swap at
December 31, 2018.
We use dollar offset at the hedge's inception and for each reporting period thereafter to assess whether the derivative
used in a hedging transaction is expected to be, and has been, effective in offsetting changes in the fair value of the
hedged item. Since inception, no portion of the hedged item has been deemed ineffective. For all hedges, we
discontinue hedge accounting if it is determined that a derivative is not expected to be, or has ceased to be, effective
as a hedge.
The Company’s interest rate swaps include provisions requiring the Company to post collateral when the derivative is
in a net liability position. At December 31, 2019, the Company has securities on deposit with fair market values of
$294,000 (all of which is posted as collateral). At December 31, 2018, the Company had securities on deposit with
fair market values of $932,000 (all of which is posted as collateral). See Note 5 for additional information about the
interest rate swaps.
70
71
71
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – POLICY AND CLAIM RESERVES
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Homeowners, Dwelling Fire and Other Liability
The Company regularly updates its reserve estimates as new information becomes available and events occur that
may impact the resolution of unsettled claims. Reserve estimation can be an inherently uncertain process and reserve
estimates can be revised up or down depending on changes in circumstances. Changes in prior years' reserve
estimates are reflected in the results of operations in the year such changes are determined.
The following table is a reconciliation of beginning and ending property and casualty reserve balances for claims and
claim adjustment expense:
($ in thousands)
Summary of claims and claim adjustment expense reserves
Balance, beginning of year
Less reinsurance recoverable on unpaid losses
Net balances at beginning of year
Net losses:
Provision for claims and claim adjustment expenses for claims arising in current year
Estimated claims and claim adjustment expenses for claims arising in prior years
Total increases
Claims and claim adjustment expense payments for claims arising in:
Current year
Prior years
Total payments
Net balance at end of period
Plus reinsurance recoverable on unpaid losses
Year ended
December 31,
2019
2018
$
8,208 $
1,384
6,824
35,312
(1,333)
33,979
30,179
3,674
33,853
6,950
249
7,075
327
6,748
36,457
(722)
35,735
31,833
3,826
35,659
6,824
1,384
8,208
Claims and claim adjustment expense reserves at end of period
$
7,199 $
Claim and claim adjustment expense reserves before reinsurance recoverable at December 31, 2019 was down
compared to the same period last year. Reserves were higher at December 31, 2018 primarily due to losses associated
with Hurricane Michael. Reinsurance recoverable on unpaid losses was also higher in 2018 due to amounts recoverable
on unpaid losses associated with Hurricane Michael. The estimate for claims arising in prior years was reduced
$1,332,000 in 2019 (reduced $722,000 in 2018) due to favorable loss development during the year on claims arising
in prior years.
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 unpredictable. 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 damage 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, 2019,
the Company's estimate of unpaid losses and adjustment expenses for claims incurred in prior years related to
catastrophes that exceeded our retention totaled $24,000 before reinsurance ($18,000 in 2018).
The claim development table that follows presents incurred and cumulative paid claims and adjustment expense by
accident year. Information presented is undiscounted and net of reinsurance.
72
72
73
IBNR
Reserves
Dec. 31,
2019
Cumulative
Number of
Reported
Claims
—
50
5
7
—
363
—
99
438
2,827
5,891
8,132
5,203
5,213
4,752
5,852
5,189
5,328
4,788
4,616
20101
20111
20121
20131
20141
20151
20161
20171
20181
2019
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
($ in thousands)
— 36,287
35,343
35,399
—
—
—
— 40,210
38,958
—
—
— 37,079
—
—
Total
$ 324,227
Years
2011
2012
2013
2014
2015
2016
2017
2018
2019
2011
2012
2013
2014
2015
2016
2017
2018
2019
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2010 $30,610
$29,918
$29,805
$29,718
$29,687
$29,672
$29,641
$29,660
$29,659
$ 29,654 $
— 35,203
33,957
34,233
34,711
34,650
34,658
34,663
— 29,959
30,190
30,402
29,948
29,885
29,827
— 27,436
27,147
27,023
27,191
27,236
34,806
30,091
27,076
— 25,929
26,422
26,290
26,225
26,130
— 31,484
30,861
30,360
30,890
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
Required supplementary information (unaudited)
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
($ in thousands)
Unaudited
Years
20101
20111
20121
20131
20141
20151
20161
20171
20181
2019
2010 $26,064
$29,201
$29,404
$29,507
$29,639
$29,640
$29,640
$29,660
$29,659
$ 29,654
— 31,488
33,080
33,484
34,167
34,621
34,641
34,647
— 26,162
29,135
29,614
29,834
29,835
29,823
— 24,157
26,114
26,661
26,788
26,976
34,622
29,765
26,487
— 22,844
25,461
25,800
26,033
26,095
— 25,923
30,066
30,190
30,296
— 31,893
34,722
35,029
—
—
—
— 35,209
38,245
—
—
— 32,456
—
—
34,751
29,834
27,022
26,096
30,960
35,144
38,642
36,195
35,929
34,650
29,824
27,011
26,094
30,366
35,139
38,499
35,543
30,796
All outstanding liabilities before 2008, net of reinsurance
290
Liabilities for claims and claim adjustment expenses, net of reinsurance
$
6,941
Total
$ 317,576
1
Required supplementary information (unaudited)
The cumulative number of reported claims presented above is reported on a per claimant basis.
Average Annual Percentage Payout of Incurred Claims by Age (in Years), Net of Reinsurance
(Required Supplementary Information - Unaudited)
Years
1
2
3
4
5
6
7
8
9
10
88.4%
9.2%
0.9%
0.6%
0.3%
0.4%
0.1%
—%
—%
0.1%
The tables presented above represent homeowners, dwelling fire and other liability lines of business. The Company
combined the data for these lines of business because the policy coverage and payout pattern for homeowners and
dwelling fire are not materially different. Also, other liability is combined with dwelling fire because liability coverage
is only sold as an additional coverage offered only with the dwelling fire policy. The Company offers no stand alone
liability products.
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – POLICY AND CLAIM RESERVES
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Homeowners, Dwelling Fire and Other Liability
The Company regularly updates its reserve estimates as new information becomes available and events occur that
may impact the resolution of unsettled claims. Reserve estimation can be an inherently uncertain process and reserve
estimates can be revised up or down depending on changes in circumstances. Changes in prior years' reserve
estimates are reflected in the results of operations in the year such changes are determined.
The following table is a reconciliation of beginning and ending property and casualty reserve balances for claims and
20101
20111
20121
20131
20141
20151
20161
20171
20181
2019
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
($ in thousands)
Years
IBNR
Reserves
Dec. 31,
2019
Cumulative
Number of
Reported
Claims
—
50
5
7
—
363
—
99
438
2,827
5,891
8,132
5,203
5,213
4,752
5,852
5,189
5,328
4,788
4,616
2010 $30,610
$29,918
$29,805
$29,718
$29,687
$29,672
$29,641
$29,660
$29,659
$ 29,654 $
— 35,203
33,957
34,233
34,711
— 29,959
30,190
30,402
— 27,436
27,147
34,806
30,091
27,076
34,650
34,658
34,663
29,948
29,885
29,827
27,023
27,191
27,236
2011
2012
2013
2014
2015
2016
2017
2018
2019
2011
2012
2013
2014
2015
2016
2017
2018
2019
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 25,929
26,422
26,290
26,225
26,130
—
—
—
—
—
— 31,484
30,861
30,360
30,890
—
—
—
—
— 36,287
35,343
35,399
—
—
—
— 40,210
38,958
—
—
— 37,079
—
—
1
Required supplementary information (unaudited)
Total
$ 324,227
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
Unaudited
($ in thousands)
20101
20111
Years
20121
20131
20141
2010 $26,064
$29,201
$29,404
$29,507
$29,639
— 31,488
33,080
33,484
34,167
— 26,162
29,135
29,614
— 24,157
26,114
20151
$29,640
34,622
29,765
26,487
20161
20171
20181
2019
$29,640
$29,660
$29,659
$ 29,654
34,621
34,641
34,647
29,834
29,835
29,823
26,661
26,788
26,976
—
—
—
—
—
—
— 22,844
25,461
25,800
26,033
26,095
—
—
—
—
—
— 25,923
30,066
30,190
30,296
—
—
—
—
— 31,893
34,722
35,029
—
—
—
— 35,209
38,245
—
—
— 32,456
—
—
34,751
29,834
27,022
26,096
30,960
35,144
38,642
36,195
35,929
34,650
29,824
27,011
26,094
30,366
35,139
38,499
35,543
30,796
All outstanding liabilities before 2008, net of reinsurance
290
Liabilities for claims and claim adjustment expenses, net of reinsurance
$
6,941
Total
$ 317,576
1
Required supplementary information (unaudited)
The cumulative number of reported claims presented above is reported on a per claimant basis.
Average Annual Percentage Payout of Incurred Claims by Age (in Years), Net of Reinsurance
(Required Supplementary Information - Unaudited)
Years
1
2
3
4
5
6
7
8
9
10
88.4%
9.2%
0.9%
0.6%
0.3%
0.4%
0.1%
—%
—%
0.1%
The tables presented above represent homeowners, dwelling fire and other liability lines of business. The Company
combined the data for these lines of business because the policy coverage and payout pattern for homeowners and
dwelling fire are not materially different. Also, other liability is combined with dwelling fire because liability coverage
is only sold as an additional coverage offered only with the dwelling fire policy. The Company offers no stand alone
liability products.
72
73
73
claim adjustment expense:
($ in thousands)
Summary of claims and claim adjustment expense reserves
Balance, beginning of year
Less reinsurance recoverable on unpaid losses
Net balances at beginning of year
Provision for claims and claim adjustment expenses for claims arising in current year
Estimated claims and claim adjustment expenses for claims arising in prior years
Claims and claim adjustment expense payments for claims arising in:
Net losses:
Total increases
Current year
Prior years
Total payments
Year ended
December 31,
2019
2018
$
8,208 $
1,384
6,824
35,312
(1,333)
33,979
30,179
3,674
33,853
6,950
249
7,075
327
6,748
36,457
(722)
35,735
31,833
3,826
35,659
6,824
1,384
8,208
Net balance at end of period
Plus reinsurance recoverable on unpaid losses
Claims and claim adjustment expense reserves at end of period
$
7,199 $
Claim and claim adjustment expense reserves before reinsurance recoverable at December 31, 2019 was down
compared to the same period last year. Reserves were higher at December 31, 2018 primarily due to losses associated
with Hurricane Michael. Reinsurance recoverable on unpaid losses was also higher in 2018 due to amounts recoverable
on unpaid losses associated with Hurricane Michael. The estimate for claims arising in prior years was reduced
$1,332,000 in 2019 (reduced $722,000 in 2018) due to favorable loss development during the year on claims arising
in prior years.
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 unpredictable. 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 damage 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, 2019,
the Company's estimate of unpaid losses and adjustment expenses for claims incurred in prior years related to
catastrophes that exceeded our retention totaled $24,000 before reinsurance ($18,000 in 2018).
The claim development table that follows presents incurred and cumulative paid claims and adjustment expense by
accident year. Information presented is undiscounted and net of reinsurance.
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management periodically estimates the liability for claims that have been reported but not paid and for claims incurred
but not reported (IBNR). Management utilizes expected losses along with historical data analysis of paid and incurred
loss development patterns over the past ten years to aide in establishing the claims liability. Management also separately
evaluates any recent large events in establishing claim reserves. The Company also engages a consulting actuary
to review managements' estimates of claim liabilities each year. There has been no material change in reserving
methodology in 2019 compared to prior years.
As shown in the table above depicting average annual payout of incurred claims, 88.4% of claims are settled within
twelve months of the date of loss and cumulatively, 97.6% of claims are settled within two years of the date of loss.
While reserves for reported but unpaid and incurred but not reported claims can ultimately prove to be excessive or
deficient, the short duration of the Company's claim liabilities serves to lesson the uncertainty compared to longer tail
lines of insurance. The Company has no material exposure to difficult to estimate long tail liabilities such as toxic waste
cleanup, asbestos related illness or other environmental remediation exposures.
Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for
Unpaid Claims and Claim Adjustment Expenses
($ in thousands)
Net outstanding liabilities
Homeowners' insurance
Dwelling fire insurance
Other Liability insurance
Other short-duration insurance lines
Liabilities for unpaid claims and claim adjustment expenses, net of
reinsurance
Reinsurance recoverable on unpaid claims
Homeowners' insurance
Dwelling fire insurance
Other Liability insurance
Other short-duration insurance lines
Total reinsurance recoverable on unpaid claims
Insurance lines other than short-duration
Unallocated claims adjustment expenses
Other
December 31,
2019
December 31,
2018
$
2,651 $
2,623
1,667
9
6,950
203
46
—
—
249
—
—
—
—
2,418
2,602
1,804
—
6,824
537
847
—
—
1,384
—
—
—
—
Total gross liability for unpaid claims and claim adjustment expense
$
7,199 $
8,208
Accident and Health Claim Reserves
The Company, through its life insurance subsidiary, underwrites a limited number of short duration accident and health
contracts. These claims are typically settled in three years or less and the reserve for unpaid claims totaled $417,000
at December 31, 2019 ($358,000 at December 31, 2018). These claims are a component of policy and contract claims
which totaled $1,053,000 at December 31, 2019 ($792,000 at December 31, 2018).
Cumulative incurred and paid claims over the last three years, along with annual percentage payouts related to accident
and health claims, is as follows:
$
1,008 $
IBNR Reserves
Dec. 31, 2019
Cumulative Number
of Reported Claims
964 $
1,037
917 $
1,120
935
—
—
417
1,612
1,469
1,174
For the Years Ended December 31,
20171
20181
2019
Incurred Claims and Allocated Claims Adjustment
Expenses, Net of Reinsurance ($ in thousands)
Years
2017
2018
2019
Years
2017
2018
2019
1
1
Required supplementary information (unaudited)
Cumulative Paid Claims and Allocated Claims Adjustment
Expenses, Net of Reinsurance ($ in thousands)
20171
20181
2019
$
725
$
$
881
747
916
991
614
Required supplementary information (unaudited)
Average Annual Percentage Payout of Incurred Claims by
Required supplementary information (unaudited)
Age
2
21.8%
3
7.6%
Years
1
70.5%
NOTE 10 – REINSURANCE
The Company's insurance operations utilize reinsurance in the risk management process in order to limit losses,
minimize exposure to large risks, provide additional capacity for future growth and effect business-sharing
arrangements. Life reinsurance is placed through yearly renewable term coverage. Property and casualty reinsurance
is placed on an excess of loss basis to cover losses from catastrophe events. Reinsurance contracts do not relieve
the insurance subsidiaries of the obligation indemnify policyholders with respect to the underlying insurance contracts.
Failure of re-insurers to honor their obligations could result in credit related losses to the insurance subsidiaries. The
insurance subsidiaries evaluate the financial conditions of their reinsurance companies and monitor concentrations of
credit risk arising from similar geographic regions, activities, or economic characteristics of the companies to minimize
their exposure to significant losses from reinsurance insolvencies.
In the normal course of business, NSFC seeks to reduce the loss that may arise from catastrophes or other individually
significant large loss events that cause unfavorable underwriting results or have adverse impacts on regulatory capital
levels by re-insuring certain levels of risk in various areas of exposure with reinsurance companies. NSFC maintains
a catastrophe reinsurance agreement to cover losses from catastrophic events, primarily hurricanes and tropical storms.
Under the catastrophe reinsurance program, the Company retains the first $4,000,000 in losses from the first
catastrophe event and $2,000,000 from a second catastrophe event.
74
74
75
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management periodically estimates the liability for claims that have been reported but not paid and for claims incurred
but not reported (IBNR). Management utilizes expected losses along with historical data analysis of paid and incurred
loss development patterns over the past ten years to aide in establishing the claims liability. Management also separately
evaluates any recent large events in establishing claim reserves. The Company also engages a consulting actuary
to review managements' estimates of claim liabilities each year. There has been no material change in reserving
methodology in 2019 compared to prior years.
Cumulative incurred and paid claims over the last three years, along with annual percentage payouts related to accident
and health claims, is as follows:
For the Years Ended December 31,
20181
20171
Incurred Claims and Allocated Claims Adjustment
Expenses, Net of Reinsurance ($ in thousands)
2019
As shown in the table above depicting average annual payout of incurred claims, 88.4% of claims are settled within
twelve months of the date of loss and cumulatively, 97.6% of claims are settled within two years of the date of loss.
While reserves for reported but unpaid and incurred but not reported claims can ultimately prove to be excessive or
deficient, the short duration of the Company's claim liabilities serves to lesson the uncertainty compared to longer tail
lines of insurance. The Company has no material exposure to difficult to estimate long tail liabilities such as toxic waste
cleanup, asbestos related illness or other environmental remediation exposures.
$
1,008 $
Years
2017
2018
2019
1
Required supplementary information (unaudited)
IBNR Reserves
Dec. 31, 2019
Cumulative Number
of Reported Claims
964 $
1,037
917 $
1,120
935
—
—
417
1,612
1,469
1,174
Cumulative Paid Claims and Allocated Claims Adjustment
Expenses, Net of Reinsurance ($ in thousands)
20181
20171
2019
Years
2017
2018
2019
$
725
$
$
881
747
916
991
614
Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for
Unpaid Claims and Claim Adjustment Expenses
($ in thousands)
Net outstanding liabilities
Homeowners' insurance
Dwelling fire insurance
Other Liability insurance
Other short-duration insurance lines
Liabilities for unpaid claims and claim adjustment expenses, net of
reinsurance
Reinsurance recoverable on unpaid claims
Homeowners' insurance
Dwelling fire insurance
Other Liability insurance
Other short-duration insurance lines
Total reinsurance recoverable on unpaid claims
Insurance lines other than short-duration
Unallocated claims adjustment expenses
Other
December 31,
December 31,
2019
2018
$
2,651 $
2,623
1,667
9
6,950
203
46
—
—
249
—
—
—
—
2,418
2,602
1,804
—
6,824
537
847
—
—
1,384
—
—
—
—
Total gross liability for unpaid claims and claim adjustment expense
$
7,199 $
8,208
Accident and Health Claim Reserves
The Company, through its life insurance subsidiary, underwrites a limited number of short duration accident and health
contracts. These claims are typically settled in three years or less and the reserve for unpaid claims totaled $417,000
at December 31, 2019 ($358,000 at December 31, 2018). These claims are a component of policy and contract claims
which totaled $1,053,000 at December 31, 2019 ($792,000 at December 31, 2018).
1
Required supplementary information (unaudited)
Average Annual Percentage Payout of Incurred Claims by
Age
Required supplementary information (unaudited)
Years
1
70.5%
2
21.8%
3
7.6%
NOTE 10 – REINSURANCE
The Company's insurance operations utilize reinsurance in the risk management process in order to limit losses,
minimize exposure to large risks, provide additional capacity for future growth and effect business-sharing
arrangements. Life reinsurance is placed through yearly renewable term coverage. Property and casualty reinsurance
is placed on an excess of loss basis to cover losses from catastrophe events. Reinsurance contracts do not relieve
the insurance subsidiaries of the obligation indemnify policyholders with respect to the underlying insurance contracts.
Failure of re-insurers to honor their obligations could result in credit related losses to the insurance subsidiaries. The
insurance subsidiaries evaluate the financial conditions of their reinsurance companies and monitor concentrations of
credit risk arising from similar geographic regions, activities, or economic characteristics of the companies to minimize
their exposure to significant losses from reinsurance insolvencies.
In the normal course of business, NSFC seeks to reduce the loss that may arise from catastrophes or other individually
significant large loss events that cause unfavorable underwriting results or have adverse impacts on regulatory capital
levels by re-insuring certain levels of risk in various areas of exposure with reinsurance companies. NSFC maintains
a catastrophe reinsurance agreement to cover losses from catastrophic events, primarily hurricanes and tropical storms.
Under the catastrophe reinsurance program, the Company retains the first $4,000,000 in losses from the first
catastrophe event and $2,000,000 from a second catastrophe event.
74
75
75
Table of Contents
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Catastrophe reinsurance coverage is maintained in three layers as follows:
Layer
First Layer
Second Layer
Third Layer
Reinsurers' Limits of Liability
100% of $13,500,000 in excess of $4,000,000 retention
100% of $25,000,000 in excess of $17,500,000
100% of $30,000,000 in excess of $42,500,000
Underlying 2nd Event
100% of $2,000,000 in excess of $2,000,000 retention
Each reinsurance layer covers events occurring from January 1 through December 31 of the contract year. All significant
reinsurance companies under the program carry A.M. Best ratings of A- (Excellent) or higher, or equivalent ratings.
$3,626,000.
The Company's catastrophe reinsurance contract allows for one reinstatement. The Company maintains reinstatement
premium protection (RPP) to cover reinstatement premiums incurred. The RPP further reduces risk from a major
catastrophe and serves to protect the Company's capital position by reducing the modeled 100 year event net cost.
Amounts recoverable from re-insurers are estimated in a manner consistent with the claim liability associated with the
underlying insurance policies. Amounts paid for prospective reinsurance contracts are reported as prepaid reinsurance
premiums and amortized over the remaining contract period.
In the normal course 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 reinsurance companies under excess coverage contracts. NSIC retains a
maximum of $50,000 of coverage per individual life. Cost is amortized over the reinsurance contract period.
At December 31, 2019, the largest reinsurance recoverable of a single reinsurer was $10,000 ($125,000 at December
31, 2018). Amounts reported as ceded incurred losses were related to development of losses from prior year
catastrophes.
NOTE 11 – EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have an established retirement savings plan (401K Plan). All full-time employees
are eligible to participate, and all employer contributions are fully vested for employees who have completed 1,000
hours of service in the year of contribution. Company matching contributions for the year ended December 31, 2019
and 2018 amounted to $181,000 and $182,000, respectively. The Company contributes dollar-for-dollar matching
contributions up to 5% of compensation subject to government limits.
The Company established a non-qualified plan under which Company directors are allowed to defer all or a portion of
directors' fees into various investment options. A supplemental executive retirement plan (SERP) covers named
executive officers, with the Company contributing 15% of executive compensation to the plan. Contributions to the
plan are fully vested upon the earlier of death, disability, change in control, or ten years of participation in the plan.
Costs for amounts related to the non-qualified deferred compensation plans for the year ended December 31, 2019
and 2018 amounted to an approximate increase of $573,000 and decrease of $53,000 in employee benefit related
expenses, respectively.
The Company and its subsidiaries established an Employee Stock Ownership Plan (ESOP) in January 2010, to enable
eligible employees to acquire a proprietary interest in the Company's common stock and to provide retirement and
other benefits to such employees. There were no contributions during the year ended December 31, 2019 and
contributions of $232,000 during the year ended December 31, 2018. All contributions were made in cash for purchase
of Company shares in the open market. The Company has not allocated newly issued shares directly to the plan and
the plan has no debt.
NOTE 12 – REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company is dependent on dividends from its insurance subsidiaries to fund operations and for the payment of
shareholder dividends. Dividend payments from the insurance subsidiaries are subject to regulatory review/approval
and statutory limitations. The statutory limitations are outlined as follows:
76
76
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount of dividends 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, 2019, NSIC's retained earnings unrestricted for the
payment of dividends in the next twelve months amounted to $1,624,000.
NSFC is similarly restricted in the amount of dividends payable to the Company; dividends may not exceed 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,
2019, NSFC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to
The payment of any subsidiary dividend requires prior notice to the regulatory authorities who may disallow the dividend
if, in their judgment, payment of the dividend would have an adverse effect on the surplus of the subsidiary. Additionally,
there are other considerations that can limit the payment of dividends to amounts less than statutory limits. Some of
these considerations include potential adverse impact on regulatory capital ratios and impact on ratings issued by
rating agencies such as A.M. Best and Demotech.
At December 31, 2019, securities with market values of $3,188,000 ($3,031,000 at December 31, 2018) were pledged
with various states pursuant to statutory requirements.
NOTE 13 – SHAREHOLDERS' EQUITY
During the year ended December 31, 2019 and year ended December 31, 2018, changes in shareholders' equity
consisted of net income of $4,067,000 and net income of $779,000, respectively; dividends paid of $531,000 in 2019
and $505,000 in 2018; other comprehensive income of $4,013,000 in 2019 and other comprehensive loss of $2,109,000
in 2018; common stock issued of $53,000 in 2019 and $76,000 in 2018; and the purchase of treasury shares of $7,000
in 2019. Other comprehensive income/loss consisted of changes in accumulated unrealized gains/losses on securities
available-for-sale and changes in accumulated unrealized losses on interest rate swaps.
Preferred Stock
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 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. There is currently no Preferred Stock issued or outstanding.
Common Stock
The holders of the Class 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. There is currently no Class A Common Stock issued or outstanding.
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 preferential 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 or resolutions.
and December 31, 2018:
The table below provides information regarding the Company's preferred and common stock as of December 31, 2019
December 31, 2019
December 31, 2018
Authorized
Issued
Outstanding
Authorized
Issued
Outstanding
Preferred Stock, $1 par value
500,000
Class A Common Stock, $1
par value
2,000,000
—
500,000
— 2,000,000
—
—
—
—
Common Stock, $1 par value
3,000,000
2,531,552
2,531,116
3,000,000
2,527,136
2,527,136
—
—
77
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Catastrophe reinsurance coverage is maintained in three layers as follows:
Layer
First Layer
Second Layer
Third Layer
Reinsurers' Limits of Liability
100% of $13,500,000 in excess of $4,000,000 retention
100% of $25,000,000 in excess of $17,500,000
100% of $30,000,000 in excess of $42,500,000
Underlying 2nd Event
100% of $2,000,000 in excess of $2,000,000 retention
Each reinsurance layer covers events occurring from January 1 through December 31 of the contract year. All significant
reinsurance companies under the program carry A.M. Best ratings of A- (Excellent) or higher, or equivalent ratings.
The Company's catastrophe reinsurance contract allows for one reinstatement. The Company maintains reinstatement
premium protection (RPP) to cover reinstatement premiums incurred. The RPP further reduces risk from a major
catastrophe and serves to protect the Company's capital position by reducing the modeled 100 year event net cost.
Amounts recoverable from re-insurers are estimated in a manner consistent with the claim liability associated with the
underlying insurance policies. Amounts paid for prospective reinsurance contracts are reported as prepaid reinsurance
premiums and amortized over the remaining contract period.
In the normal course 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 reinsurance companies under excess coverage contracts. NSIC retains a
maximum of $50,000 of coverage per individual life. Cost is amortized over the reinsurance contract period.
At December 31, 2019, the largest reinsurance recoverable of a single reinsurer was $10,000 ($125,000 at December
31, 2018). Amounts reported as ceded incurred losses were related to development of losses from prior year
catastrophes.
NOTE 11 – EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have an established retirement savings plan (401K Plan). All full-time employees
are eligible to participate, and all employer contributions are fully vested for employees who have completed 1,000
hours of service in the year of contribution. Company matching contributions for the year ended December 31, 2019
and 2018 amounted to $181,000 and $182,000, respectively. The Company contributes dollar-for-dollar matching
contributions up to 5% of compensation subject to government limits.
The Company established a non-qualified plan under which Company directors are allowed to defer all or a portion of
directors' fees into various investment options. A supplemental executive retirement plan (SERP) covers named
executive officers, with the Company contributing 15% of executive compensation to the plan. Contributions to the
plan are fully vested upon the earlier of death, disability, change in control, or ten years of participation in the plan.
Costs for amounts related to the non-qualified deferred compensation plans for the year ended December 31, 2019
and 2018 amounted to an approximate increase of $573,000 and decrease of $53,000 in employee benefit related
expenses, respectively.
The Company and its subsidiaries established an Employee Stock Ownership Plan (ESOP) in January 2010, to enable
eligible employees to acquire a proprietary interest in the Company's common stock and to provide retirement and
other benefits to such employees. There were no contributions during the year ended December 31, 2019 and
contributions of $232,000 during the year ended December 31, 2018. All contributions were made in cash for purchase
of Company shares in the open market. The Company has not allocated newly issued shares directly to the plan and
the plan has no debt.
NOTE 12 – REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company is dependent on dividends from its insurance subsidiaries to fund operations and for the payment of
shareholder dividends. Dividend payments from the insurance subsidiaries are subject to regulatory review/approval
and statutory limitations. The statutory limitations are outlined as follows:
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount of dividends 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, 2019, NSIC's retained earnings unrestricted for the
payment of dividends in the next twelve months amounted to $1,624,000.
NSFC is similarly restricted in the amount of dividends payable to the Company; dividends may not exceed 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,
2019, NSFC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to
$3,626,000.
The payment of any subsidiary dividend requires prior notice to the regulatory authorities who may disallow the dividend
if, in their judgment, payment of the dividend would have an adverse effect on the surplus of the subsidiary. Additionally,
there are other considerations that can limit the payment of dividends to amounts less than statutory limits. Some of
these considerations include potential adverse impact on regulatory capital ratios and impact on ratings issued by
rating agencies such as A.M. Best and Demotech.
At December 31, 2019, securities with market values of $3,188,000 ($3,031,000 at December 31, 2018) were pledged
with various states pursuant to statutory requirements.
NOTE 13 – SHAREHOLDERS' EQUITY
During the year ended December 31, 2019 and year ended December 31, 2018, changes in shareholders' equity
consisted of net income of $4,067,000 and net income of $779,000, respectively; dividends paid of $531,000 in 2019
and $505,000 in 2018; other comprehensive income of $4,013,000 in 2019 and other comprehensive loss of $2,109,000
in 2018; common stock issued of $53,000 in 2019 and $76,000 in 2018; and the purchase of treasury shares of $7,000
in 2019. Other comprehensive income/loss consisted of changes in accumulated unrealized gains/losses on securities
available-for-sale and changes in accumulated unrealized losses on interest rate swaps.
Preferred Stock
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 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. There is currently no Preferred Stock issued or outstanding.
Common Stock
The holders of the Class 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. There is currently no Class A Common Stock issued or outstanding.
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 preferential 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 or resolutions.
The table below provides information regarding the Company's preferred and common stock as of December 31, 2019
and December 31, 2018:
December 31, 2019
December 31, 2018
Preferred Stock, $1 par value
Class A Common Stock, $1
par value
Authorized
500,000
2,000,000
Issued
Outstanding
Authorized
Issued
Outstanding
—
—
—
500,000
— 2,000,000
—
—
—
—
Common Stock, $1 par value
3,000,000
2,531,552
2,531,116
3,000,000
2,527,136
2,527,136
76
77
77
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 17, 2019, 4,416 shares of common stock were issued to directors as compensation under the 2009 Equity
Incentive Plan previously approved by shareholders.
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2018:
Treasury Stock
Treasury stock may be purchased pursuant to the share repurchase plan authorized by the Board of Directors in
November 2019. The Board authorized the repurchase of up to $1,000,000 of the Company's outstanding common
stock. The plan expires in May 2020.
During 2019, 436 shares of common stock were repurchased and placed in treasury.
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
($ in thousands)
Details about Accumulated Other
Comprehensive Income Components
Unrealized Gains and Losses on
Available-for-Sale Securities
Amounts Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income is
Presented
$
$
127 Net investment gains
127 Total before tax
(27) Tax expense
100 Net of Tax
Accumulated other comprehensive income (loss) ("AOCI") includes certain items that are reported directly within a
separate component of shareholders' equity. The following table presents changes in AOCI balances:
NOTE 15 – SEGMENTS
($ in thousands)
Unrealized Gains (Losses) on Cash Flow Hedges
Balance at beginning of period
Other comprehensive income for period:
Other comprehensive gain before reclassifications
Net current period other comprehensive income
Balance at end of period
Unrealized Gains (Losses) on Available-for-Sale Securities
Balance at beginning of period
Other comprehensive income (loss) for period:
Other comprehensive income (loss) before reclassifications
Reclassification adjustment - gains on equity securities
Amounts reclassified from accumulated other comprehensive income (loss)
Net current period other comprehensive income (loss)
Balance at end of period
Total Accumulated Other Comprehensive Income (Loss) at end of period
$
$
$
$
$
Year ended
December 31,
2019
2018
(185) $
(480)
134
134
(51) $
295
295
(185)
(1,385) $
3,126
3,865
—
14
3,879
2,494 $
(2,304)
(2,107)
(100)
(4,511)
(1,385)
The Company’s property and casualty insurance operations comprise one business segment. The property and
casualty insurance segment primarily underwrites home insurance coverage with primary lines of business consisting
of dwelling fire and extended coverage, homeowners (including mobile homeowners) and other liability.
Management organizes the business utilizing a niche strategy focusing on lower valued dwellings and older homes
that can be difficult to insure in the standard insurance market. Our chief decision makers (Chief Executive Officer,
Chief Financial Officer and subsidiary President) review results and operating plans making decisions on resource
allocations on a company-wide basis. The Company’s products are primarily produced through independent agents
within the states in which we operate.
The Company’s life and accident and health operations comprise the second business segment. The life and accident
and health insurance segment consists of two lines of business: traditional life insurance and supplemental accident
and health insurance.
Total assets by industry segment at December 31, 2019 and December 31, 2018 are summarized below:
($ in thousands)
Assets by industry segment
Total
P&C
Insurance
Operations
Life
Insurance
Operations
Non-
Insurance
Operations
December 31, 2019
153,934 $
83,917 $
65,605 $
4,412
2,443 $
(1,570)
December 31, 2018
144,231 $
80,994 $
59,479 $
3,758
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2019:
($ in thousands)
Details about Accumulated Other
Comprehensive Income Components
Unrealized Gains and Losses on
Available-for-Sale Securities
Amounts Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income is
Presented
$
$
18 Net investment gains
18 Total before tax
(4) Tax expense
14 Net of Tax
78
78
$
$
79
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 17, 2019, 4,416 shares of common stock were issued to directors as compensation under the 2009 Equity
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2018:
Incentive Plan previously approved by shareholders.
Treasury Stock
Treasury stock may be purchased pursuant to the share repurchase plan authorized by the Board of Directors in
November 2019. The Board authorized the repurchase of up to $1,000,000 of the Company's outstanding common
stock. The plan expires in May 2020.
($ in thousands)
Details about Accumulated Other
Comprehensive Income Components
Unrealized Gains and Losses on
Available-for-Sale Securities
During 2019, 436 shares of common stock were repurchased and placed in treasury.
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Amounts Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income is
Presented
$
$
127 Net investment gains
127 Total before tax
(27) Tax expense
100 Net of Tax
Accumulated other comprehensive income (loss) ("AOCI") includes certain items that are reported directly within a
separate component of shareholders' equity. The following table presents changes in AOCI balances:
NOTE 15 – SEGMENTS
The Company’s property and casualty insurance operations comprise one business segment. The property and
casualty insurance segment primarily underwrites home insurance coverage with primary lines of business consisting
of dwelling fire and extended coverage, homeowners (including mobile homeowners) and other liability.
Management organizes the business utilizing a niche strategy focusing on lower valued dwellings and older homes
that can be difficult to insure in the standard insurance market. Our chief decision makers (Chief Executive Officer,
Chief Financial Officer and subsidiary President) review results and operating plans making decisions on resource
allocations on a company-wide basis. The Company’s products are primarily produced through independent agents
within the states in which we operate.
The Company’s life and accident and health operations comprise the second business segment. The life and accident
and health insurance segment consists of two lines of business: traditional life insurance and supplemental accident
and health insurance.
Total assets by industry segment at December 31, 2019 and December 31, 2018 are summarized below:
Amounts reclassified from accumulated other comprehensive income (loss)
Assets by industry segment
Total
($ in thousands)
P&C
Insurance
Operations
Life
Insurance
Operations
Non-
Insurance
Operations
December 31, 2019
December 31, 2018
$
$
153,934 $
83,917 $
65,605 $
4,412
144,231 $
80,994 $
59,479 $
3,758
($ in thousands)
Unrealized Gains (Losses) on Cash Flow Hedges
Balance at beginning of period
Other comprehensive income for period:
Other comprehensive gain before reclassifications
Net current period other comprehensive income
Balance at end of period
Unrealized Gains (Losses) on Available-for-Sale Securities
Balance at beginning of period
Other comprehensive income (loss) for period:
Other comprehensive income (loss) before reclassifications
Reclassification adjustment - gains on equity securities
Net current period other comprehensive income (loss)
Balance at end of period
Year ended
December 31,
2019
2018
(185) $
(480)
134
134
(51) $
295
295
(185)
(1,385) $
3,126
3,865
—
14
3,879
2,494 $
(2,304)
(2,107)
(100)
(4,511)
(1,385)
$
$
$
$
$
Total Accumulated Other Comprehensive Income (Loss) at end of period
2,443 $
(1,570)
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2019:
($ in thousands)
Details about Accumulated Other
Comprehensive Income Components
Unrealized Gains and Losses on
Available-for-Sale Securities
Amounts Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income is
Presented
$
$
18 Net investment gains
18 Total before tax
(4) Tax expense
14 Net of Tax
78
79
79
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income by business segment for the years ended December 31, 2019 and 2018 is summarized below:
The following table presents the Company’s gross and net premiums written for the property and casualty segment
($ in thousands)
Year ended December 31, 2019
P&C
Insurance
Operations
Life
Insurance
Operations
Non-
Insurance
Operations
Inter-
company
Eliminations
Total
REVENUE
Net premiums earned
Net investment income
Investment gains
Other income
BENEFITS AND EXPENSES
Policyholder benefits paid
Amortization of deferred policy acquisition
costs
Commissions
General and administrative expenses
Taxes, licenses and fees
Interest expense
Income (Loss) Before Income Taxes
INCOME TAX EXPENSE (BENEFIT)
Net Income (Loss)
$
54,019 $
5,864 $
— $
— $ 59,883
1,683
2,178
575
58,455
33,979
2,723
7,148
8,616
2,185
—
54,651
3,804
359
3,445 $
$
2,677
861
853
10,255
5,027
736
281
1,948
285
43
8,320
1,935
397
56
16
1,019
1,091
—
—
—
1,128
—
1,122
2,250
(1,159)
(243)
(540)
—
(1,862)
(2,402)
3,876
3,055
585
67,399
(408)
38,598
—
—
(1,994)
—
—
3,459
7,429
9,698
2,470
1,165
(2,402)
62,819
—
—
4,580
513
1,538 $
(916) $
— $ 4,067
($ in thousands)
Year ended December 31, 2018
P&C
Insurance
Operations
Life
Insurance
Operations
Non-
Insurance
Operations
Inter-
company
Eliminations
Total
and the life and accident and health segment for the years ended December 31, 2019 and 2018, respectively:
Years ended
December 31,
2019
2018
Life, accident and health operations premiums written:
($ in thousands)
Traditional life insurance
Accident and health insurance
Gross life, accident and health
Reinsurance premium ceded
Net life, accident and health premiums written
Property and Casualty operations premiums written:
Dwelling fire & extended coverage
Homeowners (Including mobile homeowners)
Other liability
Gross property and casualty
Reinsurance premium ceded
Net property and casualty written
Consolidated gross premiums written
Reinsurance premium ceded
Consolidated net premiums written
Life, accident and health operations premiums earned:
($ in thousands)
Traditional life insurance
Accident and health insurance
Gross life, accident and health
Reinsurance premium ceded
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage
Homeowners (Including mobile homeowners)
Other liability
Gross property and casualty
Reinsurance premium ceded
Net property and casualty earned
Consolidated gross premiums earned
Reinsurance premium ceded
Consolidated net premiums earned
$
$
$
$
$
$
$
$
$
$
$
$
4,181 $
1,770
5,951
(77)
5,874 $
38,847 $
20,507
2,224
61,578
(7,041)
54,537 $
67,529 $
(7,118)
60,411 $
4,165 $
1,776
5,941
(77)
5,864 $
38,090 $
20,758
2,212
61,060
(7,041)
54,019 $
67,001 $
(7,118)
59,883 $
4,336
1,831
6,167
(81)
6,086
37,598
21,214
2,195
61,007
(6,376)
54,631
67,174
(6,457)
60,717
4,273
1,827
6,100
(81)
6,019
37,232
21,801
2,180
61,213
(6,376)
54,837
67,313
(6,457)
60,856
The following table presents the Company’s gross and net premiums earned for the property and casualty segment
and the life and accident and health segment for the years ended December 31, 2019 and 2018, respectively:
Years ended
December 31,
2019
2018
— $ 60,856
(540)
3,941
—
(2,081)
(552)
612
(2,621)
64,857
(568)
40,409
Net life, accident and health premiums earned
—
—
(2,053)
—
—
3,597
7,555
8,839
2,157
1,235
(2,621)
63,792
REVENUE
Net premiums earned
Net investment income
Investment gains (losses)
Other income
BENEFITS AND EXPENSES
Policyholder benefits paid
Amortization of deferred policy acquisition
costs
Commissions
General and administrative expenses
Taxes, licenses and fees
Interest expense
Income (Loss) Before Income Taxes
INCOME TAX EXPENSE (BENEFIT)
Net Income (Loss)
$
54,837 $
6,019 $
— $
1,704
(474)
609
56,676
35,735
2,759
7,267
8,472
1,937
—
56,170
506
(97)
2,722
(78)
1,078
9,741
5,242
838
288
2,111
220
48
8,747
994
232
55
—
1,006
1,061
—
—
—
309
—
1,187
1,496
(435)
151
$
603 $
762 $
(586) $
— $
1,065
286
779
—
—
80
80
81
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income by business segment for the years ended December 31, 2019 and 2018 is summarized below:
($ in thousands)
Year ended December 31, 2019
P&C
Life
Non-
Inter-
Insurance
Operations
Insurance
Operations
Insurance
Operations
company
Eliminations
Total
REVENUE
Net premiums earned
Net investment income
Investment gains
Other income
BENEFITS AND EXPENSES
Policyholder benefits paid
Amortization of deferred policy acquisition
costs
Commissions
General and administrative expenses
Taxes, licenses and fees
Interest expense
Income (Loss) Before Income Taxes
INCOME TAX EXPENSE (BENEFIT)
58,455
10,255
2,677
861
853
5,027
1,948
736
281
285
43
8,320
1,935
397
56
16
1,019
1,091
—
—
—
—
1,122
2,250
(1,159)
(243)
Net Income (Loss)
$
3,445 $
1,538 $
(916) $
— $ 4,067
($ in thousands)
Year ended December 31, 2018
P&C
Life
Non-
Inter-
Insurance
Operations
Insurance
Operations
Insurance
Operations
company
Eliminations
Total
$
54,837 $
6,019 $
— $
REVENUE
Net premiums earned
Net investment income
Investment gains (losses)
Other income
BENEFITS AND EXPENSES
Policyholder benefits paid
Amortization of deferred policy acquisition
costs
Commissions
General and administrative expenses
Taxes, licenses and fees
Interest expense
Income (Loss) Before Income Taxes
INCOME TAX EXPENSE (BENEFIT)
2,722
(78)
1,078
9,741
2,111
838
288
220
48
994
232
55
—
1,006
1,061
—
—
—
309
—
1,187
1,496
(435)
151
56,170
8,747
(2,621)
63,792
Net Income (Loss)
$
603 $
762 $
(586) $
— $
(540)
—
(1,862)
(2,402)
3,876
3,055
585
67,399
(408)
38,598
—
—
—
—
—
—
3,459
7,429
9,698
2,470
1,165
4,580
513
(2,402)
62,819
— $ 60,856
(540)
3,941
—
(2,081)
(552)
612
(2,621)
64,857
(2,053)
—
—
—
—
—
—
3,597
7,555
8,839
2,157
1,235
1,065
286
779
1,683
2,178
575
33,979
2,723
7,148
8,616
2,185
—
54,651
3,804
359
1,704
(474)
609
56,676
2,759
7,267
8,472
1,937
—
506
(97)
80
The following table presents the Company’s gross and net premiums written for the property and casualty segment
and the life and accident and health segment for the years ended December 31, 2019 and 2018, respectively:
$
54,019 $
5,864 $
— $
— $ 59,883
Life, accident and health operations premiums written:
($ in thousands)
Traditional life insurance
Accident and health insurance
Gross life, accident and health
Reinsurance premium ceded
Net life, accident and health premiums written
Property and Casualty operations premiums written:
Dwelling fire & extended coverage
Homeowners (Including mobile homeowners)
1,128
(1,994)
Other liability
Gross property and casualty
Reinsurance premium ceded
Net property and casualty written
Consolidated gross premiums written
Reinsurance premium ceded
Consolidated net premiums written
Years ended
December 31,
2019
2018
$
$
$
$
$
$
4,181 $
1,770
5,951
(77)
5,874 $
38,847 $
20,507
2,224
61,578
(7,041)
54,537 $
67,529 $
(7,118)
60,411 $
4,336
1,831
6,167
(81)
6,086
37,598
21,214
2,195
61,007
(6,376)
54,631
67,174
(6,457)
60,717
The following table presents the Company’s gross and net premiums earned for the property and casualty segment
and the life and accident and health segment for the years ended December 31, 2019 and 2018, respectively:
35,735
5,242
(568)
40,409
Net life, accident and health premiums earned
($ in thousands)
Life, accident and health operations premiums earned:
Traditional life insurance
Accident and health insurance
Gross life, accident and health
Reinsurance premium ceded
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage
Homeowners (Including mobile homeowners)
Other liability
Gross property and casualty
Reinsurance premium ceded
Net property and casualty earned
Consolidated gross premiums earned
Reinsurance premium ceded
Consolidated net premiums earned
81
81
Years ended
December 31,
2019
2018
$
$
$
$
$
$
4,165 $
1,776
5,941
(77)
5,864 $
38,090 $
20,758
2,212
61,060
(7,041)
54,019 $
67,001 $
(7,118)
59,883 $
4,273
1,827
6,100
(81)
6,019
37,232
21,801
2,180
61,213
(6,376)
54,837
67,313
(6,457)
60,856
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – CONTINGENCIES
In the ordinary course of business, the Company and its subsidiaries are routinely a defendant in or party to pending
or threatened legal actions and proceedings related to the conduct of their insurance operations. These suits can
involve alleged breaches of contracts, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent
acts of the Company's subsidiaries, and other miscellaneous causes of action. It is inherently difficult to predict the
outcome of such matters, particularly when the claimant seeks very large or indeterminate damages or when the
matters present novel legal theories or involve multiple parties. An accrued liability is established when loss
contingencies are both probable and estimable. However, there is potential loss exposure in excess of any accrued
amounts. The Company monitors pending matters for further development that could affect the amount of the accrued
liability.
The Company's property & casualty subsidiaries had one action remaining in Texas filed in the aftermath of Hurricane
Ike at December 31, 2018. This is an individual action with allegations of underpayment of a hurricane-related claim.
The suit seeks a variety of remedies, including actual and/or punitive damages in unspecified amounts and/or
declaratory relief. There are no other individual actions deemed material by management based upon evaluation of
information presently available.
The Company maintains loss and loss adjustment expense reserves on litigated claims that occur in the routine course
of business in the insurance operations of the subsidiaries. These reserves are included in the liability for benefit and
loss reserves on the balance sheet.
NOTE 17 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the year ended December 31, 2019 was $1,185,000 ($1,231,000 in 2018). Cash received
from income taxes during the year ended December 31, 2019 was $921,000. Cash paid for income taxes during the
year ended December 31, 2018 was $25,000.
During the year ended December 31, 2019, non-cash changes in equity included $5,000 in common stock issued to
Directors in lieu of cash compensation along with a corresponding $48,000 increase in additional paid-in capital.
NOTE 18 – SUBSEQUENT EVENTS
Management has evaluated subsequent events and their potential effects on these consolidated financial statements
through the filing date of this Form 10-K.
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
THE NATIONAL SECURITY GROUP, INC.
($ in thousands)
Schedule I. Summary of Investments Other Than Investments in Related Parties
December 31, 2019
December 31, 2018
Cost
Fair
Value
Cost
Fair
Value
Amount
per the
Balance
Sheet
Amount
per the
Balance
Sheet
Agency mortgage backed securities
$
Total Securities Held-to-Maturity
$
1,290
1,290
$
1,345
1,345
$
1,290
1,290
$
1,449
1,449
$
1,443
1,443
1,449
1,449
Securities Held-to-Maturity:
Securities Available-for-Sale:
Equity Securities:
Banks and insurance companies
Industrial and all other
Total equity securities
Debt Securities:
U.S. Government corporations and
agencies
Agency mortgage backed securities
Asset backed securities
Private label asset backed securities
Corporate bonds
States, municipalities and political
subdivisions
Foreign governments
Total Debt Securities
Total Available-for-Sale
Total Securities
Trading securities
Mortgage loans on real estate
Investment real estate
Policy loans
Company owned life insurance
Other invested assets
Total investments
843
1,284
2,127
2,335
2,968
5,303
2,335
2,968
5,303
1,064
778
1,842
2,044
2,262
4,306
2,044
2,262
4,306
4,131
4,281
4,281
4,820
4,744
4,744
32,283
10,307
6,815
36,074
6,669
823
97,102
99,229
100,519
149
147
2,934
1,895
4,082
2,336
32,987
10,274
7,252
37,820
6,777
869
100,260
105,563
106,908
149
147
2,934
1,895
4,655
2,336
32,987
10,274
7,252
37,820
6,777
869
100,260
105,563
106,853
149
147
2,934
1,895
4,655
2,336
27,492
10,901
5,869
36,935
10,059
801
96,877
98,719
107
156
2,945
1,854
4,315
2,148
27,106
10,660
5,947
35,791
10,073
804
95,125
99,431
107
156
2,945
1,854
4,600
2,148
27,106
10,660
5,947
35,791
10,073
804
95,125
99,431
107
156
2,945
1,854
4,600
2,148
100,168
100,874
100,880
$ 112,062
$ 119,024
$ 118,969
$ 111,693
$ 112,684
$ 112,690
82
82
83
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – CONTINGENCIES
In the ordinary course of business, the Company and its subsidiaries are routinely a defendant in or party to pending
or threatened legal actions and proceedings related to the conduct of their insurance operations. These suits can
involve alleged breaches of contracts, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent
acts of the Company's subsidiaries, and other miscellaneous causes of action. It is inherently difficult to predict the
outcome of such matters, particularly when the claimant seeks very large or indeterminate damages or when the
matters present novel legal theories or involve multiple parties. An accrued liability is established when loss
contingencies are both probable and estimable. However, there is potential loss exposure in excess of any accrued
amounts. The Company monitors pending matters for further development that could affect the amount of the accrued
liability.
The Company's property & casualty subsidiaries had one action remaining in Texas filed in the aftermath of Hurricane
Ike at December 31, 2018. This is an individual action with allegations of underpayment of a hurricane-related claim.
The suit seeks a variety of remedies, including actual and/or punitive damages in unspecified amounts and/or
declaratory relief. There are no other individual actions deemed material by management based upon evaluation of
information presently available.
The Company maintains loss and loss adjustment expense reserves on litigated claims that occur in the routine course
of business in the insurance operations of the subsidiaries. These reserves are included in the liability for benefit and
loss reserves on the balance sheet.
NOTE 17 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the year ended December 31, 2019 was $1,185,000 ($1,231,000 in 2018). Cash received
from income taxes during the year ended December 31, 2019 was $921,000. Cash paid for income taxes during the
year ended December 31, 2018 was $25,000.
During the year ended December 31, 2019, non-cash changes in equity included $5,000 in common stock issued to
Directors in lieu of cash compensation along with a corresponding $48,000 increase in additional paid-in capital.
NOTE 18 – SUBSEQUENT EVENTS
Management has evaluated subsequent events and their potential effects on these consolidated financial statements
through the filing date of this Form 10-K.
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule I. Summary of Investments Other Than Investments in Related Parties
THE NATIONAL SECURITY GROUP, INC.
($ in thousands)
December 31, 2019
December 31, 2018
Cost
Fair
Value
Amount
per the
Balance
Sheet
Cost
Fair
Value
Amount
per the
Balance
Sheet
Securities Held-to-Maturity:
Agency mortgage backed securities
Total Securities Held-to-Maturity
$
$
1,290
1,290
$
1,345
1,345
$
1,290
1,290
$
1,449
1,449
$
1,443
1,443
1,449
1,449
Securities Available-for-Sale:
Equity Securities:
Banks and insurance companies
Industrial and all other
Total equity securities
Debt Securities:
U.S. Government corporations and
agencies
Agency mortgage backed securities
Asset backed securities
Private label asset backed securities
Corporate bonds
States, municipalities and political
subdivisions
Foreign governments
Total Debt Securities
Total Available-for-Sale
Total Securities
Trading securities
Mortgage loans on real estate
Investment real estate
Policy loans
Company owned life insurance
Other invested assets
Total investments
843
1,284
2,127
2,335
2,968
5,303
2,335
2,968
5,303
1,064
778
1,842
2,044
2,262
4,306
2,044
2,262
4,306
4,131
4,281
4,281
4,820
4,744
4,744
32,283
10,307
6,815
36,074
32,987
10,274
7,252
37,820
32,987
10,274
7,252
37,820
27,492
10,901
5,869
36,935
27,106
10,660
5,947
35,791
27,106
10,660
5,947
35,791
6,669
823
97,102
99,229
100,519
149
147
2,934
1,895
4,082
2,336
$ 112,062
6,777
869
100,260
105,563
106,908
149
147
2,934
1,895
4,655
2,336
$ 119,024
6,777
869
100,260
105,563
106,853
149
147
2,934
1,895
4,655
2,336
$ 118,969
10,059
801
96,877
98,719
100,168
107
156
2,945
1,854
4,315
2,148
$ 111,693
10,073
804
95,125
99,431
100,874
107
156
2,945
1,854
4,600
2,148
$ 112,684
10,073
804
95,125
99,431
100,880
107
156
2,945
1,854
4,600
2,148
$ 112,690
82
83
83
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule II. Condensed Financial Information of Registrant
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
BALANCE SHEETS
December 31,
2019
2018
($ in thousands)
Assets
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
($ in thousands)
Fixed maturities available-for-sale, at estimated fair value
$
294 $
932
356
523
59,229
1,012
601
490
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by (used in)
Equity in undistributed earnings of subsidiaries
Net realized investment gains
Net income
operating activities:
Income taxes
Other, net
Years Ended
December 31,
2019
2018
$
4,067 $
779
(2,233)
(16)
370
750
2,938
663
663
(200)
(531)
(731)
2,870
523
(615)
—
58
85
(137)
490
490
(1,300)
(505)
(1,805)
(1,230)
1,753
523
$
3,393 $
Net cash provided by operating activities
Cash Flows from Investing Activities:
Net sales of investments
Net cash provided by investing activities
Cash Flows from Financing Activities:
Net repayments of debt
Cash dividends
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
Notes to Condensed Financial Information of Registrant
Note 1 - Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange Commission, the Condensed Financial Information
of the Registrant does not include all of the information and notes normally included with financial statements prepared
in accordance with generally accepted accounting principles. It is, therefore, suggested that this Condensed Financial
Information be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the
Registrant’s Annual Report as referenced in Form 10-K, Part II, Item 8, page 45.
Note 2 - Cash Dividends and Asset Transfers from Insurance Subsidiaries
In 2019, cash dividends of $2,750,000 were paid to the Registrant by its subsidiaries ($750,000 in 2018).
Investment real estate, at book value
Cash
Investment in subsidiaries (equity method) eliminated upon consolidation
Income tax recoverable
Deferred income tax asset
Other assets
Total Assets
Liabilities and Shareholders' Equity
Liabilities
Accrued general expenses
Interest rate swaps
Short-term notes payable
Long-term debt
Total Liabilities
Total Shareholders' Equity
$
$
Total Liabilities and Shareholders' Equity
$
71,102 $
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
71,102 $
63,143
($ in thousands)
Income
Dividends (eliminated upon consolidation)
Net realized investment gains
Holding company management service fees
Other income
Expenses
State taxes
Interest
Other expenses
Income before income taxes and equity in undistributed earnings of
subsidiaries
Income tax expense (benefit)
Income before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
$
356
3,393
65,329
491
714
525
3,412 $
65
500
13,664
17,641
53,461
1,019
56
3,841
51
1,122
1,077
2,250
1,591
(243)
1,834
2,233
4,067 $
2,691
234
2,200
12,152
17,277
45,866
63,143
750
—
1,006
55
1,811
43
1,187
266
1,496
315
151
164
615
779
Years Ended December 31,
2019
2018
$
2,750 $
16
84
84
85
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule II. Condensed Financial Information of Registrant
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
BALANCE SHEETS
December 31,
2019
2018
Fixed maturities available-for-sale, at estimated fair value
$
294 $
Investment real estate, at book value
Investment in subsidiaries (equity method) eliminated upon consolidation
Total Liabilities and Shareholders' Equity
$
71,102 $
($ in thousands)
Assets
Cash
Income tax recoverable
Deferred income tax asset
Other assets
Total Assets
Liabilities
Liabilities and Shareholders' Equity
Accrued general expenses
Interest rate swaps
Short-term notes payable
Long-term debt
Total Liabilities
Total Shareholders' Equity
Dividends (eliminated upon consolidation)
Net realized investment gains
Holding company management service fees
($ in thousands)
Income
Other income
Expenses
State taxes
Interest
Other expenses
71,102 $
63,143
$
$
356
3,393
65,329
491
714
525
3,412 $
65
500
13,664
17,641
53,461
1,019
16
56
3,841
51
1,122
1,077
2,250
1,591
(243)
1,834
2,233
932
356
523
59,229
1,012
601
490
2,691
234
2,200
12,152
17,277
45,866
63,143
750
—
1,006
55
1,811
43
1,187
266
1,496
315
151
164
615
779
Years Ended December 31,
2019
2018
$
2,750 $
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
($ in thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in undistributed earnings of subsidiaries
Net realized investment gains
Income taxes
Other, net
Net cash provided by operating activities
Cash Flows from Investing Activities:
Net sales of investments
Net cash provided by investing activities
Cash Flows from Financing Activities:
Net repayments of debt
Cash dividends
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
Years Ended
December 31,
2019
2018
$
4,067 $
779
(2,233)
(16)
370
750
2,938
663
663
(200)
(531)
(731)
2,870
523
3,393 $
(615)
—
58
(137)
85
490
490
(1,300)
(505)
(1,805)
(1,230)
1,753
523
$
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
Notes to Condensed Financial Information of Registrant
Note 1 - Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange Commission, the Condensed Financial Information
of the Registrant does not include all of the information and notes normally included with financial statements prepared
in accordance with generally accepted accounting principles. It is, therefore, suggested that this Condensed Financial
Information be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the
Registrant’s Annual Report as referenced in Form 10-K, Part II, Item 8, page 45.
Note 2 - Cash Dividends and Asset Transfers from Insurance Subsidiaries
In 2019, cash dividends of $2,750,000 were paid to the Registrant by its subsidiaries ($750,000 in 2018).
Income before income taxes and equity in undistributed earnings of
subsidiaries
Income tax expense (benefit)
Income before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
$
4,067 $
84
85
85
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule III. Supplementary Insurance Information
THE NATIONAL SECURITY GROUP, INC.
($ in thousands)
At December 31, 2019:
Life and accident and health insurance
Property and casualty insurance
Total
At December 31, 2018:
Life and accident and health insurance
Property and casualty insurance
Total
Deferred
Acquisition
Costs
Future
Policy
Benefits
Unearned
Premiums
Unpaid
Losses
$
$
$
$
4,227
$
38,315
$
10
$
3,439
—
30,545
7,666
$
38,315
$
30,555
$
4,416
$
37,474
$
10
$
3,418
—
29,989
7,834
$
37,474
$
29,999
$
1,053
7,199
8,252
792
7,075
7,867
Premium
Revenue
Net
Investment
Income
Other
Income
Benefits,
Claims,
Losses and
Settlement
Expenses
Commissions,
Amortization
of Policy
Acquisition
Costs
General
Expenses,
Taxes,
Licenses
and Fees
For the year ended December 31, 2019:
Life and accident and health insurance
$
5,864
$
2,677
$
Property and casualty insurance
Other
Total
For the year ended December 31, 2018:
54,019
—
1,683
56
853
575
1,019
$
5,027
$
1,017
$
2,233
33,979
—
9,871
—
10,801
1,128
$ 59,883
$
4,416
$
2,447
$
39,006
$
10,888
$
14,162
Life and accident and health insurance
$
6,019
$
2,722
$
1,078
$
5,242
$
1,126
$
2,331
Property and casualty insurance
Other
Total
54,837
—
1,704
55
609
1,006
35,735
—
10,026
10,409
—
309
$ 60,856
$
4,481
$
2,693
$
40,977
$
11,152
$
13,049
Note: Investment income and other operating expenses are reported separately by segment and not allocated.
Schedule IV. Reinsurance
($ in thousands)
For the year ended December 31, 2019
Life insurance in force
Premiums:
THE NATIONAL SECURITY GROUP, INC.
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
Net
Amount
Percentage
of Amount
Assumed to
Net
$ 202,663
$
9,761
$
— $ 192,902
Life insurance and accident and health insurance
$
5,941
$
77
$
— $
5,864
Property and casualty insurance
61,060
7,041
—
54,019
Total premiums
$
67,001
$
7,118
$
— $ 59,883
For the year ended December 31, 2018
Life insurance in force
Premiums:
$ 203,209
$
9,730
$
— $ 193,479
Life insurance and accident and health insurance
$
6,100
$
81
$
— $
6,019
Property and casualty insurance
61,213
6,376
—
54,837
Total premiums
$
67,313
$
6,457
$
— $ 60,856
86
86
—%
—%
—%
—%
—%
—%
—%
—%
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule V. Valuation and Qualifying Accounts
Balance, January 1 Allowance for Doubtful Accounts
Balance, December 31 Allowance for Doubtful Accounts
($ in thousands)
Additions
Deletions
None.
The National Security Group, Inc.
Years ended December 31, 2019 and 2018
2019
2018
$
$
4 $
4
3
5 $
4
8
8
4
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Company management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation
of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be filed in this annual report has been made known
to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
Management's Report on Internal Control over Financial Reporting
Management of The National Security Group, Inc. is responsible for establishing and maintaining effective internal
control over financial reporting. The Company's internal control system was designed to provide reasonable assurance
to management and board of directors regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles (GAAP).
The Company's internal control over financial reporting includes those policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the
framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO-2013) and the smaller reporting company guidance - COSO for Smaller Reporting
Companies released in 2007. Based on this evaluation, management concluded that the Company's internal control
over financial reporting was effective as of December 31, 2019.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
The National Security Group, Inc.
March 19, 2020
87
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule III. Supplementary Insurance Information
THE NATIONAL SECURITY GROUP, INC.
Deferred
Acquisition
Costs
Future
Policy
Benefits
Unearned
Premiums
Unpaid
Losses
$
$
$
$
4,227
$
38,315
$
10
$
3,439
—
30,545
7,666
$
38,315
$
30,555
$
4,416
$
37,474
$
10
$
3,418
—
29,989
7,834
$
37,474
$
29,999
$
1,053
7,199
8,252
792
7,075
7,867
($ in thousands)
At December 31, 2019:
Life and accident and health insurance
Property and casualty insurance
At December 31, 2018:
Life and accident and health insurance
Property and casualty insurance
Total
Total
For the year ended December 31, 2018:
Property and casualty insurance
Other
Total
Other
Total
Schedule IV. Reinsurance
($ in thousands)
For the year ended December 31, 2019
Life insurance in force
Premiums:
For the year ended December 31, 2018
Life insurance in force
Premiums:
Premium
Revenue
Net
Investment
Income
Other
Income
Benefits,
Claims,
Losses and
Settlement
Expenses
Commissions,
Amortization
of Policy
Acquisition
Costs
General
Expenses,
Taxes,
Licenses
and Fees
For the year ended December 31, 2019:
Property and casualty insurance
Life and accident and health insurance
$
5,864
$
2,677
$
$
5,027
$
1,017
$
2,233
54,019
—
1,683
56
33,979
—
9,871
—
10,801
1,128
$ 59,883
$
4,416
$
2,447
$
39,006
$
10,888
$
14,162
853
575
1,019
Life and accident and health insurance
$
6,019
$
2,722
$
1,078
$
5,242
$
1,126
$
2,331
54,837
—
1,704
55
609
1,006
35,735
—
10,026
10,409
—
309
$ 60,856
$
4,481
$
2,693
$
40,977
$
11,152
$
13,049
Note: Investment income and other operating expenses are reported separately by segment and not allocated.
THE NATIONAL SECURITY GROUP, INC.
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
Net
Amount
Percentage
of Amount
Assumed to
Net
$ 202,663
$
9,761
$
— $ 192,902
Life insurance and accident and health insurance
$
5,941
$
77
$
— $
5,864
Property and casualty insurance
61,060
7,041
—
54,019
Total premiums
$
67,001
$
7,118
$
— $ 59,883
$ 203,209
$
9,730
$
— $ 193,479
Life insurance and accident and health insurance
$
6,100
$
81
$
— $
6,019
Property and casualty insurance
61,213
6,376
—
54,837
Total premiums
$
67,313
$
6,457
$
— $ 60,856
86
—%
—%
—%
—%
—%
—%
—%
—%
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule V. Valuation and Qualifying Accounts
The National Security Group, Inc.
Years ended December 31, 2019 and 2018
($ in thousands)
Balance, January 1 Allowance for Doubtful Accounts
Additions
Deletions
Balance, December 31 Allowance for Doubtful Accounts
2019
2018
$
$
4 $
4
3
5 $
4
8
8
4
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Company management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation
of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be filed in this annual report has been made known
to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
Management's Report on Internal Control over Financial Reporting
Management of The National Security Group, Inc. is responsible for establishing and maintaining effective internal
control over financial reporting. The Company's internal control system was designed to provide reasonable assurance
to management and board of directors regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles (GAAP).
The Company's internal control over financial reporting includes those policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the
framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO-2013) and the smaller reporting company guidance - COSO for Smaller Reporting
Companies released in 2007. Based on this evaluation, management concluded that the Company's internal control
over financial reporting was effective as of December 31, 2019.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
The National Security Group, Inc.
March 19, 2020
87
87
Table of Contents
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers
JACK E. BRUNSON (63) has served as a director since 1999 and as President of NSFC since 1997. He also serves
on the Boards of Directors of NSFC and Omega. He joined the Company in 1982. Mr. Brunson is a Chartered Property
and Casualty Underwriter.
W. L. BRUNSON, JR. (61) has served as a director since 1999 and as President and Chief Executive Officer of the
Company since 2000. He also holds the position of President of NSIC. He joined the Company in 1983. Mr. Brunson
is also a director of NSFC, NATSCO, NSIC, and Omega. Mr. Brunson is a member of the Alabama State Bar.
• Consolidated Statements of Shareholders' Equity - Years ended December 31, 2019 and 2018
• Consolidated Statements of Cash Flows - Years ended December 31, 2019 and 2018
• Notes to the Consolidated Financial Statements
BRIAN R. MCLEOD (51) currently serves as Vice President of Finance & Operations, CFO and Treasurer of the
Company. From 1992-2002 he served as Controller. He joined the Company in 1992. Mr. McLeod is a Director of
NSIC, NSFC, Omega and NATSCO. Mr. McLeod is also a member of the Board of Directors for Trinity Bank, a
community bank in Dothan, Alabama. Mr. McLeod is a Certified Public Accountant.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to
directors and executive officers of the Company as well as Corporate Governance, is incorporated herein by reference
in response to this item.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to Audit
Committee and Audit Committee financial expert, is incorporated herein by reference in response to this item.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to
information on the beneficial ownership reporting for directors and executive officers, is incorporated herein by reference
in response to this item.
Item 11. Executive Compensation
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation
14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 6, 2020, with respect to executive compensation and transactions, is incorporated herein by reference in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation
14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 6, 2020, with respect to security ownership of certain beneficial owners and management is incorporated
herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation
14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 6, 2020, with respect to certain relationships and related transactions, is incorporated herein by reference
in response to this item.
Item 14. Principal Accounting Fees and Services
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation
14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 6, 2020, with respect to principal accountant fees and services, is incorporated herein by reference in
response to this item.
88
88
89
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Consolidated financial statements, notes thereto and related information of The National Security Group, Inc.
(the “Company”) are included in Item 8 of Part II of this report:
• Report of Independent Registered Public Accounting Firm
• Consolidated Balance Sheets - December 31, 2019 and 2018
• Consolidated Statements of Operations - Years ended December 31, 2019 and 2018
• Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2019 and
2018
2. Additional financial statement schedules and report of independent registered accounting firm are furnished
herewith pursuant to the requirements of Form 10-K:
The National Security Group, Inc.
Schedule I
Schedule II
Schedule III
Schedule IV
Schedule V
Summary of Investments Other Than Investments in Related Parties
Condensed Financial Information of the Registrant
Supplementary Insurance Information
Reinsurance
Valuation and Qualifying Accounts
3. Exhibits filed as part of this Form 10-K:
11. Computation of Earnings Per Share filed Herewith, See Note 1 to Consolidated Financial
Statements.
14. Code of Ethics, See Additional Information in Part 1, Item 1 of This Report
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the
31.2 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the
32.1 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Sarbanes-Oxley Act of 2002
Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
(b) During the last fiscal quarter of the period covered by this Report, the Company filed the following Current
Reports on Form 8-K:
Date of Report
Date Filed
Description
October 18, 2019
October 21, 2019
Press release announcing quarterly dividend.
November 13, 2019 November 13, 2019
September 30, 2019.
Press release announcing financial results for the period ended
November 20, 2019 November 20, 2019 Press release announcing stock repurchase plan.
Table of Contents
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers
JACK E. BRUNSON (63) has served as a director since 1999 and as President of NSFC since 1997. He also serves
on the Boards of Directors of NSFC and Omega. He joined the Company in 1982. Mr. Brunson is a Chartered Property
and Casualty Underwriter.
BRIAN R. MCLEOD (51) currently serves as Vice President of Finance & Operations, CFO and Treasurer of the
Company. From 1992-2002 he served as Controller. He joined the Company in 1992. Mr. McLeod is a Director of
NSIC, NSFC, Omega and NATSCO. Mr. McLeod is also a member of the Board of Directors for Trinity Bank, a
community bank in Dothan, Alabama. Mr. McLeod is a Certified Public Accountant.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to
directors and executive officers of the Company as well as Corporate Governance, is incorporated herein by reference
in response to this item.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to Audit
Committee and Audit Committee financial expert, is incorporated herein by reference in response to this item.
The information contained in The National Security Group's definitive proxy statement for the 2020 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or before April 6, 2020 with respect to
information on the beneficial ownership reporting for directors and executive officers, is incorporated herein by reference
in response to this item.
Item 11. Executive Compensation
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation
14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 6, 2020, with respect to executive compensation and transactions, is incorporated herein by reference in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation
14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 6, 2020, with respect to security ownership of certain beneficial owners and management is incorporated
herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation
14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 6, 2020, with respect to certain relationships and related transactions, is incorporated herein by reference
in response to this item.
Item 14. Principal Accounting Fees and Services
The information contained in The National Security Group's definitive proxy statement, filed pursuant to Regulation
14A, for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 6, 2020, with respect to principal accountant fees and services, is incorporated herein by reference in
response to this item.
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Consolidated financial statements, notes thereto and related information of The National Security Group, Inc.
(the “Company”) are included in Item 8 of Part II of this report:
• Report of Independent Registered Public Accounting Firm
• Consolidated Balance Sheets - December 31, 2019 and 2018
• Consolidated Statements of Operations - Years ended December 31, 2019 and 2018
• Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2019 and
2018
W. L. BRUNSON, JR. (61) has served as a director since 1999 and as President and Chief Executive Officer of the
Company since 2000. He also holds the position of President of NSIC. He joined the Company in 1983. Mr. Brunson
is also a director of NSFC, NATSCO, NSIC, and Omega. Mr. Brunson is a member of the Alabama State Bar.
• Consolidated Statements of Shareholders' Equity - Years ended December 31, 2019 and 2018
• Consolidated Statements of Cash Flows - Years ended December 31, 2019 and 2018
• Notes to the Consolidated Financial Statements
2. Additional financial statement schedules and report of independent registered accounting firm are furnished
herewith pursuant to the requirements of Form 10-K:
The National Security Group, Inc.
Schedule I
Schedule II
Schedule III
Schedule IV
Schedule V
Summary of Investments Other Than Investments in Related Parties
Condensed Financial Information of the Registrant
Supplementary Insurance Information
Reinsurance
Valuation and Qualifying Accounts
3. Exhibits filed as part of this Form 10-K:
11. Computation of Earnings Per Share filed Herewith, See Note 1 to Consolidated Financial
Statements.
14. Code of Ethics, See Additional Information in Part 1, Item 1 of This Report
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
(b) During the last fiscal quarter of the period covered by this Report, the Company filed the following Current
Reports on Form 8-K:
Date of Report
Date Filed
Description
October 18, 2019
October 21, 2019
Press release announcing quarterly dividend.
November 13, 2019 November 13, 2019
Press release announcing financial results for the period ended
September 30, 2019.
November 20, 2019 November 20, 2019 Press release announcing stock repurchase plan.
88
89
89
Table of Contents
SIGNATURE
Exhibit 21.1
Pursuant to the requirements of Section 13 or 15(d) 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.
THE NATIONAL SECURITY GROUP, INC.
Subsidiaries of The National Security Group, Inc.
The National Security Insurance Company (NSIC)
The National Security Fire & Casualty Company (NSFC)
Omega One Insurance Company (Omega One)
State of Incorporation
Alabama
Alabama
Alabama
/s/ Brian R. McLeod
Brian R. McLeod
/s/ William L. Brunson, Jr.
William L. Brunson, Jr.
Chief Financial Officer and Treasurer
President, Chief Executive Officer and Director
Date: March 19, 2020
POWER OF ATTORNEY
Know all by these present, that the undersigned hereby constitutes and appoints Brian R. McLeod, with full power of
substitution and/or revocation, the undersigned's true and lawful attorney-in-fact: to execute for and on behalf of the
undersigned, in the undersigned's capacity as a director of National Security Group, inc. (the “Company”), any and all
forms (including, without limitation Form 10-K) required or desired to be executed by or on behalf of the Company
pursuant to section 13 or 15(D) of the Securities Exchange Act of 1934, as amended, after said form has been approved
by the Company's audit committee; to do and perform any and all acts for and on behalf of the undersigned which
may be necessary or desirable to complete and execute any such Form and timely file such Form with the appropriate
governmental authority (including, without limitation, the United States Securities and Exchange Commission) and
any stock exchange or similar authority; and take any other action of any type whatsoever in connection with the
foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required
by, the undersigned, it being understood that the documents executed by any such attorney-in-fact on behalf of the
undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as
such attorney-in-fact may approve in such attorney-in-fact's discretion.
The undersigned hereby grants to each such attorney-in-fact full power and authority to do and perform any and every
act and thing whatsoever requisite, necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, with full
power of substitution or revocation, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-
fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights
and powers herein granted. The undersigned acknowledges that the foregoing attorneys-in-fact, and each of them,
in serving in such capacity at the request of the undersigned, are not assuming, nor is the Company assuming, any
of the undersigned's responsibilities to comply with section 13 or 15(D) of the Securities Exchange Act of 1934, as
amended.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in their capacity as a Director of The National Security Group, Inc. on
March 19, 2020:
/s/ Charles Arnold
/s/ Fleming Brooks
/s/ Jack E. Brunson
/s/ William L. Brunson, Jr.
/s/ Fred D. Clark, Jr.
/s/ Elizabeth Crawford
/s/ Brian R. McLeod
SIGNATURE
/s/ Mickey L. Murdock
/s/ Frank B. O'Neil
/s/ Donald Pittman
/s/ Paul C. Wesch
/s/ L. Brunson White
/s/ Walter P. Wilkerson
90
90
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.
333-233176) of our report dated March 19, 2020, with respect to the consolidated financial statements
of The National Security Group, Inc., included in this Annual Report on Form 10-K for the year ended
December 31, 2019.
Birmingham, Alabama
March 19, 2020
Table of Contents
SIGNATURE
/s/ Brian R. McLeod
Brian R. McLeod
Date: March 19, 2020
Pursuant to the requirements of Section 13 or 15(d) 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.
THE NATIONAL SECURITY GROUP, INC.
Subsidiaries of The National Security Group, Inc.
The National Security Insurance Company (NSIC)
The National Security Fire & Casualty Company (NSFC)
Omega One Insurance Company (Omega One)
State of Incorporation
Alabama
Alabama
Alabama
Exhibit 21.1
Chief Financial Officer and Treasurer
President, Chief Executive Officer and Director
/s/ William L. Brunson, Jr.
William L. Brunson, Jr.
POWER OF ATTORNEY
Know all by these present, that the undersigned hereby constitutes and appoints Brian R. McLeod, with full power of
substitution and/or revocation, the undersigned's true and lawful attorney-in-fact: to execute for and on behalf of the
undersigned, in the undersigned's capacity as a director of National Security Group, inc. (the “Company”), any and all
forms (including, without limitation Form 10-K) required or desired to be executed by or on behalf of the Company
pursuant to section 13 or 15(D) of the Securities Exchange Act of 1934, as amended, after said form has been approved
by the Company's audit committee; to do and perform any and all acts for and on behalf of the undersigned which
may be necessary or desirable to complete and execute any such Form and timely file such Form with the appropriate
governmental authority (including, without limitation, the United States Securities and Exchange Commission) and
any stock exchange or similar authority; and take any other action of any type whatsoever in connection with the
foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required
by, the undersigned, it being understood that the documents executed by any such attorney-in-fact on behalf of the
undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as
such attorney-in-fact may approve in such attorney-in-fact's discretion.
The undersigned hereby grants to each such attorney-in-fact full power and authority to do and perform any and every
act and thing whatsoever requisite, necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, with full
power of substitution or revocation, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-
fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights
and powers herein granted. The undersigned acknowledges that the foregoing attorneys-in-fact, and each of them,
in serving in such capacity at the request of the undersigned, are not assuming, nor is the Company assuming, any
of the undersigned's responsibilities to comply with section 13 or 15(D) of the Securities Exchange Act of 1934, as
amended.
March 19, 2020:
/s/ Charles Arnold
/s/ Fleming Brooks
/s/ Jack E. Brunson
/s/ William L. Brunson, Jr.
/s/ Fred D. Clark, Jr.
/s/ Elizabeth Crawford
/s/ Brian R. McLeod
SIGNATURE
/s/ Mickey L. Murdock
/s/ Frank B. O'Neil
/s/ Donald Pittman
/s/ Paul C. Wesch
/s/ L. Brunson White
/s/ Walter P. Wilkerson
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in their capacity as a Director of The National Security Group, Inc. on
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.
333-233176) of our report dated March 19, 2020, with respect to the consolidated financial statements
of The National Security Group, Inc., included in this Annual Report on Form 10-K for the year ended
December 31, 2019.
Birmingham, Alabama
March 19, 2020
90
91
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
Exhibit 31.2
I, William L. Brunson, Jr., certify that:
I, Brian R. McLeod, certify that:
1. I have reviewed this Annual Report on Form 10-K of The National Security Group, Inc.;
1. I have reviewed this Annual Report on Form 10-K of The National Security Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
being prepared;
principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 19, 2020
/s/ William L. Brunson, Jr.
William L. Brunson, Jr.
President and Chief Executive Officer
Date: March 19, 2020
/s/ Brian R. McLeod
Brian R. McLeod
Chief Financial Officer
92
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
Exhibit 31.2
I, William L. Brunson, Jr., certify that:
I, Brian R. McLeod, certify that:
1. I have reviewed this Annual Report on Form 10-K of The National Security Group, Inc.;
1. I have reviewed this Annual Report on Form 10-K of The National Security Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
being prepared;
principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 19, 2020
/s/ William L. Brunson, Jr.
William L. Brunson, Jr.
President and Chief Executive Officer
Date: March 19, 2020
/s/ Brian R. McLeod
Brian R. McLeod
Chief Financial Officer
93
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, the undersigned officer of the National Security Group, Inc. (the “Company”), hereby
certifies, to such officer’s knowledge, that the Company’s Annual Report on Form 10-K for the period ended December
31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15 (d), as applicable, of the Securities
Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 19, 2020
/s/ William L. Brunson, Jr.
Name: William L. Brunson, Jr.
Title: Chief Executive Officer
/s/ Brian R. McLeod
Name: Brian R. McLeod, CPA
Title: Chief Financial Officer
94
Dividends
Dividends
(per share)
(per share)
Selected Financial Data
Selected Financial Data
(In thousands except per share data)
(In thousands except per share data)
Board of Directors
Board of Directors
Corporate Profile
Corporate Profile
For the Year
For the Year
2019
2019
2018 of Change
2018 of Change
Earnings Per Share ...........................................
Earnings Per Share ...........................................
1.61
1.61
Earnings ..............................................................
Earnings ..............................................................
4,067
4,067
0.31
779
0.31
779
419.4%
419.4%
422.1%
422.1%
Net Premiums Earned .....................................
Net Premiums Earned .....................................
59,883
59,883
60,856
60,856
Net Investment Income .................................
Net Investment Income .................................
3,876
3,876
3,941
3,941
-1.6%
-1.6%
-1.6%
-1.6%
Return on Average Equity .............................
Return on Average Equity .............................
8.19%
8.19%
1.67%
1.67%
390.4%
390.4%
Weighted Average Shares Outstanding .......
Weighted Average Shares Outstanding .......
2,530
2,530
2,525
2,525
0.2%
0.2%
Percent
Percent
.325
.325
At Year End
At Year End
.55
.55
.60
.60
.60
.60
Shareholders’ Equity Per Share ....................
Shareholders’ Equity Per Share ....................
21.12
21.12
18.15
18.15
Shareholders’ Equity .......................................
Shareholders’ Equity .......................................
53,461
53,461
45,866
45,866
Total Assets .......................................................
Total Assets .......................................................
153,934
153,934
144,231
144,231
Shares Outstanding .........................................
Shares Outstanding .........................................
2,531
2,531
2,527
2,527
16.4%
16.4%
16.6%
16.6%
6.7%
0.2%
6.7%
0.2%
Stock Closing Prices
Stock Closing Prices
Dividends
Dividends
High
High
Low
Low
Per Share
Per Share
First Quarter .......................................................
First Quarter .......................................................
13.01
13.01
11.22
11.22
Second Quarter ................................................
Second Quarter ................................................
14.29
14.29
11.00
11.00
Third Quarter .....................................................
Third Quarter .....................................................
12.00
12.00
10.70
10.70
Fourth Quarter...................................................
Fourth Quarter...................................................
15.60
15.60
10.01
10.01
2019
2019
2018
2018
First Quarter .......................................................
First Quarter .......................................................
17.17
17.17
15.20
15.20
Second Quarter ................................................
Second Quarter ................................................
16.75
16.75
15.45
15.45
Third Quarter .....................................................
Third Quarter .....................................................
17.24
17.24
13.52
13.52
Fourth Quarter...................................................
Fourth Quarter...................................................
14.75
14.75
12.00
12.00
0.05
0.05
0.05
0.05
0.05
0.05
0.06
0.06
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
.21
.21
.20
.20
.20
.20
.18
.18
.16
.16
.12
.12
.10
.10
09
09
Assets
Assets
(at year end in millions)
(at year end in millions)
09
09
Market Price
Market Price
(at year end)
(at year end)
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
19
18
17
16
15
14
13
12
1 1
10
09
09
153.9
153.9
144.2
144.2
146.4
146.4
148.6
148.6
147.8
147.8
144.9
144.9
133.9
133.9
135.7
135.7
132.9
132.9
136.9
136.9
131.4
131.4
15.30
15.30
13.01
13.01
16.35
16.35
17.75
17.75
15.25
15.25
13.45
13.45
21.12
21.12
18.15
18.15
18.88
18.88
19.09
19.09
17.87
17.87
17.05
17.05
13.42
13.42
12.25
12.25
15.41
15.41
17.72
17.72
16.69
16.69
9.95
9.95
8.55
8.55
8.75
8.75
12.25
12.25
11.10
11.10
09
09
Book Value
Book Value
(per share)
(per share)
Sources Of Revenue
Sources Of Revenue
(in thousands)
(in thousands)
Net Investment Gains
Net Investment Gains
$3,055 4.5%
$3,055 4.5%
Investment & Other
Investment & Other
$4,461 6.6%
$4,461 6.6%
Life Company Premium
Life Company Premium
$5,864 8.7%
$5,864 8.7%
Property & Casualty
Property & Casualty
Company Premium
Company Premium
$54,019 80.1%
$54,019 80.1%
Walter P. Wilkerson, CPA
Walter P. Wilkerson, CPA
Chairman of the Board
Chairman of the Board
The National Security Group, Inc.
The National Security Group, Inc.
Consultant
Consultant
Brunson, Wilkerson, Bowden
Brunson, Wilkerson, Bowden
& Associates, P.C.
& Associates, P.C.
Enterprise, Alabama
Enterprise, Alabama
Charles B. Arnold
Assistant Controller
Church's Chicken
Buford, Georgia
Charles B. Arnold
Assistant Controller
Church's Chicken
Buford, Georgia
Fleming Brooks
Fleming Brooks
Chairman of the Board
Chairman of the Board
Brooks Agrico LLC
Brooks Agrico LLC
Samson, Alabama
Samson, Alabama
Jack E. Brunson
Jack E. Brunson
President
President
National Security Fire &
National Security Fire &
Casualty Company
Casualty Company
Elba, Alabama
Elba, Alabama
William L. Brunson, Jr.
William L. Brunson, Jr.
President & Chief Executive Officer
President & Chief Executive Officer
The National Security Group, Inc.
The National Security Group, Inc.
Elba, Alabama
Elba, Alabama
Fred Clark, Jr.
Fred Clark, Jr.
President & Chief Executive Officer
President & Chief Executive Officer
Alabama Municipal Electric Authority
Alabama Municipal Electric Authority
Montgomery, Alabama
Montgomery, Alabama
Elizabeth B. Crawford
Elizabeth B. Crawford
Attorney at Law
Attorney at Law
Birmingham, Alabama
Birmingham, Alabama
Brian R. McLeod
Brian R. McLeod
Chief Financial Officer
Chief Financial Officer
The National Security Group, Inc.
The National Security Group, Inc.
Elba, Alabama
Elba, Alabama
Mickey Murdock
Mickey Murdock
Retired Senior Vice President
Retired Senior Vice President
The National Security Group, Inc.
The National Security Group, Inc.
Mayor, City of Elba
Mayor, City of Elba
Elba, Alabama
Elba, Alabama
Frank B. O’Neil
Pro Assurance
Birmingham, Alabama
Frank B. O’Neil
Pro Assurance
Birmingham, Alabama
Donald S. Pittman
Attorney at Law
Enterprise, Alabama
Donald S. Pittman
Attorney at Law
Enterprise, Alabama
Paul C. Wesch
Finance Director
City of Mobile
Mobile, Alabama
Paul C. Wesch
Finance Director
City of Mobile
Mobile, Alabama
L. Brunson White
L. Brunson White
Principal
Principal
Brunson White Advisors, LLC
Brunson White Advisors, LLC
Vestavia Hills, Alabama
Vestavia Hills, Alabama
Directors Emeritus
Directors Emeritus
Winfield Baird
Winfield Baird
Director Emeritus
Director Emeritus
Chartered Financial Analyst
Chartered Financial Analyst
Retired Financial Advisor,
Retired Financial Advisor,
Baird Financial Management
Baird Financial Management
Birmingham, Alabama
Birmingham, Alabama
James B. Saxon
Director Emeritus
Retired Executive
Anderson Products
Square D Company
Birmingham, Alabama
James B. Saxon
Director Emeritus
Retired Executive
Anderson Products
Square D Company
Birmingham, Alabama
Corporate Information
Corporate Information
For Copy of Annual Report, Proxy or
10K, or For More Information Contact:
For Copy of Annual Report, Proxy or
10K, or For More Information Contact:
Auditors:
Auditors:
Brian R. McLeod
Brian R. McLeod
Chief Financial Officer
Chief Financial Officer
The National Security Group, Inc.
The National Security Group, Inc.
661 East Davis Street
661 East Davis Street
Elba, Alabama 36323
Elba, Alabama 36323
334-897-2273
334-897-2273
Annual Shareholders Meeting:
Annual Shareholders Meeting:
May 22, 2020
Executive Offices
Elba, Alabama
May 22, 2020
Executive Offices
Elba, Alabama
Warren Averett, LLC
Warren Averett, LLC
2500 Acton Road
2500 Acton Road
Birmingham, Alabama 35243
Birmingham, Alabama 35243
Life Company Actuaries:
Life Company Actuaries:
W A Consulting, LLC
33920 US Highway 19 North
Suite 151
Palm Harbor, Florida 34684
W A Consulting, LLC
33920 US Highway 19 North
Suite 151
Palm Harbor, Florida 34684
The 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 appear in the Wall Street
Journal and other financial publications.
The 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 appear in the Wall Street
Journal and other financial publications.
Trade Symbol: NSEC
Trade Symbol: NSEC
Transfer Agent: Computershare
P.O. Box 505000
Louisville, KY 40233
1-800-368-5948
www.computershare.com/investor
Transfer Agent: Computershare
P.O. Box 505000
Louisville, KY 40233
1-800-368-5948
www.computershare.com/investor
Founded in 1947, The National
Founded in 1947, The National
Security Group, Inc. (NSG) is
Security Group, Inc. (NSG) is
dedicated to helping people in
dedicated to helping people in
times of need by providing vital,
times of need by providing vital,
easily understood insurance
easily understood insurance
products and prompt professional
products and prompt professional
service. At National Security we
service. At National Security we
realize that your world is unique.
realize that your world is unique.
That’s why we’re committed to
That’s why we’re committed to
insuring your world – whatever it
insuring your world – whatever it
may be. The Company is composed
may be. The Company is composed
of three insurance companies:
of three insurance companies:
National Security Insurance
National Security Insurance
Company (NSIC), National Security
Company (NSIC), National Security
Fire and Casualty Company
Fire and Casualty Company
(NSFC) and Omega One Insurance
(NSFC) and Omega One Insurance
Company (Omega), a wholly
Company (Omega), a wholly
owned subsidiary of NSFC. These
owned subsidiary of NSFC. These
companies provide a diversified
companies provide a diversified
line of insurance coverage in
line of insurance coverage in
communities primarily in the South.
communities primarily in the South.
Natsco, Inc., is a wholly owned
Natsco, Inc., is a wholly owned
subsidiary formed in 1984. The
subsidiary formed in 1984. The
insurance lines currently offered
insurance lines currently offered
include: dwelling fire and extended
include: dwelling fire and extended
coverage, homeowners (including
coverage, homeowners (including
mobile homeowners), and other
mobile homeowners), and other
liability, as well as traditional life,
liability, as well as traditional life,
accident, and health insurance. The
accident, and health insurance. The
policies provided by The National
policies provided by The National
Security Group, Inc. are marketed
Security Group, Inc. are marketed
through independent insurance
through independent insurance
agents throughout the Southeastern
agents throughout the Southeastern
United States.
United States.
A Year of Growth.2019 Annual Report661 East Davis StreetElba, Alabama 36323nationalsecuritygroup.com