unprecedented
An
year.
2020 Annual Report
DIVIDENDS
(per share)
SELECTED FINANCIAL DATA
(In thousands except per share data)
For the Year
Earnings (Loss) Per Share .......................
Earnings (Loss) .......................................
Net Premiums Earned .............................
Net Investment Income ...........................
Return on Average Equity .......................
Weighted Average Shares Outstanding .....
2020
(3.41)
(8,619)
60,810
3,633
-17.44%
2,531
At Year End
17.93
Shareholders’ Equity Per Share ..............
45,366
Shareholders’ Equity ...............................
Total Assets ............................................. 150,540
2,530
Shares Outstanding ................................
2019
1.61
4,067
59,883
3,876
8.19%
2,530
21.12
53,461
153,934
2,531
Stock Closing Prices
2020
First Quarter .............................................
Second Quarter........................................
Third Quarter ............................................
Fourth Quarter .........................................
2019
First Quarter .............................................
Second Quarter........................................
Third Quarter ............................................
Fourth Quarter .........................................
High
15.98
16.10
15.20
12.49
13.01
14.29
12.00
15.60
Low
10.20
13.31
11.57
10.14
11.22
11.00
10.70
10.01
Percent
of Change
-311.8%
-311.9%
1.5%
-6.3%
-313.0%
0.0%
-15.1%
-15.1%
-2.2%
0.0%
Dividends
Per Share
0.06
0.06
0.06
0.06
0.05
0.05
0.05
0.06
SOURCES OF REVENUE
(in thousands)
Net Investment Gains
$1,623 2.4%
Investment & Other
$4,216 6.3%
Life Company Premium
$5,709 8.6%
.24
.21
.20
.20
.18
.16
.12
.10
20
19
18
17
16
15
14
13
12
11
10
ASSETS
(at year end in millions)
20
19
18
17
16
15
14
13
12
11
10
.325
.55
.60
150.5
153.9
144.2
146.4
148.6
147.8
144.9
133.9
135.7
132.9
136.9
MARKET PRICE
(at year end)
20
19
18
17
16
15
14
13
12
11
10
10.75
15.30
13.01
16.35
17.75
15.25
13.45
9.95
8.55
8.75
12.25
BOOK VALUE
(per share)
Property & Casualty
Company Premium
$55,101 82.7%
20
19
18
17
16
15
14
13
12
11
10
17.93
21.12
18.15
18.88
19.09
17.87
17.05
13.42
12.25
15.41
17.72
LETTER TO SHAREHOLDERS
In early 2020, as we were drafting our
2019 Letter to Shareholders, we were in the
early stages of the COVID-19 pandemic. As
a Nation, we all faced significant uncertainty
as risk to our health and economic stability
sky-rocketed over the course of just a few
weeks. However, with our Company financial
strength at record levels, we were cautiously
optimistic that we were prepared to weather
any challenges that the year would bring. Of
course, little did we know in March of 2020,
that coming to terms with a global pandemic
was just the opening act to the saga of “an
unprecedented year”.
“Unprecedented”
become
has
an
overused adjective. Yet, this single word
succinctly describes a year filled with
challenges, each of which individually would
have been “headline events” in any year. Since
our Annual Report ultimately memorializes each year of our
Company’s history, we thought it appropriate to recap the
more noteworthy events in this year’s Shareholders’ Letter.
In March of 2020, our government officials at the
national and state levels declared a State of Emergency
as the seriousness of COVID-19 became apparent, almost
overnight. While the evolution of technology has allowed
greater flexibility in the way businesses operate, this State of
Emergency set in motion events that were inconceivable just
a month earlier. We had to quickly adapt work arrangements
to accommodate rapidly changing impacts on the personal
lives of our employees. Over a very short period, we had
to quickly adapt to a “new normal” where our employees
were impacted by sudden school and daycare closures,
cancellation of events and forced closure of businesses
that were deemed “non-essential”. Over the course of
mere weeks, as a population we entered one of the most
transformative shifts to our personal and business lives in
modern history. We would continue to adapt to the ever-
changing impact of COVID-19 for the balance of the year.
In April of 2020, amid adapting to work environment
changes brought about by COVID-19, we experienced one
of the most active spring storm seasons in our Company
history. Over the course of three weeks, we were impacted
by three catastrophic events, including the second largest
non-hurricane catastrophe event in our history. These events
generated over 1,100 policyholder claims and insured losses
of more than $7.6 million. When all was done, by mid-year
the 2020 spring storm season added to an “unprecedented”
year, setting a record for retained non-hurricane catastrophe
losses.
By the second half of 2020, we had further adapted to
hybrid work arrangements, quarantines, and other impacts
of the virus on our staff and their families. However, once
again, a series of events that can only be characterized
an “unprecedented” began to unfold as we experienced
the impact of FOUR landfalling hurricanes in our coverage
areas in a single year. Throughout our long history, we had
experienced multiple hurricanes in a calendar year only
two times. We experienced two hurricanes in the same
season in both 2005 (Katrina and Rita) and 2008 (Gustav
and Ike) but had never incurred losses from more than two
significant tropical systems in a season. In a historic year of
activity in the Atlantic basin with a total of 30 named storms,
Hurricanes Laura, Sally, Delta and Zeta all made landfall in
the northern Gulf of Mexico, three making
landfall in Louisiana. Hurricane Laura would
enter the record books as the strongest
hurricane to impact Louisiana since 1856.
In the final tally, these four hurricanes
produced over 3,000 insured claims and
over $31 million in insured losses. While
we recovered $23 million in losses through
reinsurance, our retained losses from the
historic 2020 hurricane season exceeded
$8 million. For the full year, our retained
catastrophe losses exceeded $22 million,
another “unprecedented” level for retained
catastrophe losses in a single year.
In an unbelievable year, we weathered
the storm and remain in a strong financial
position. While an $8.6 million net loss and
15% decline in capital is not a desirable
outcome, in a year in which we faced
challenge after challenge, our capital is at the same level as
December 31, 2018. While we don’t like to lose any ground
and will continue to take action to mitigate future volatility,
we believe our previous measures helped limit the downside
risk in this challenging year.
While we are realistic and unsatisfied with our 2020
outcome, some perspective is necessary to properly gauge
the progress of our previous measures to improve our
business. In a year where we exceeded our previous levels of
retained catastrophe losses by a substantial amount, we only
lost one year of progress. We also have all hands on deck
with corrective action measures to react to the elevated level
of weather related events we have experienced. We continue
to believe that our strong capital levels and options to further
adapt to the increased frequency of severe weather leaves
us well positioned for future success. We are not naïve to
the reality of the increase in weather events but we provide
a product that is essential to our markets and do believe our
product will remain viable and ultimately profitable despite
the current challenges of adapting to our changing weather.
We would be remiss if we did not thank our staff for
unbelievable perseverance in the past year. In otherwise
normal circumstances, adapting to life amidst a pandemic
would have been one of the most significant personal and
professional challenges of a career. Our staff has not only
adapted to the pandemic but also adapted to record storm
activity and has reacted quickly to implement corrective
measures to improve our business going forward. We believe
challenges build resilience and ultimately, working through
the challenges of 2020 will make our business stronger.
In closing, while 2020 was not up to standards, we
continue to believe in our ability to create long term value.
We also believe that short term challenges can create long
term opportunity. We look forward to providing additional
details on the Company’s progress at our 2021 Annual
Shareholders’ Meeting, which we plan to hold in-person,
and in our quarterly updates to come. As always, thank you
for your support.
William L. Brunson, Jr.
President and CEO
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, 2020
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 o No þ
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 o No þ
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 þ No o
1
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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). þ Yes o 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
o
þ
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.
o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
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 $14,228,029.
Class
Outstanding March 19, 2021
Common Stock $1.00 par value
2,530,370 shares
Documents incorporated by reference in this Form 10-K
i.
Definitive proxy statement for the 2021 Annual Meeting of Stockholders to be held May 21, 2021 is incorporated by reference into Part
III of this report. The proxy statement will be filed no later than 120 days from December 31, 2020.
ii.
Current Report on Form 8-K for event occurring on February 26, 2021 is incorporated into Part IV of this report.
2
2
Table of Contents
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
19
19
19
19
19
21
23
45
47
90
90
91
91
91
91
91
91
92
93
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 91.5% 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.
4
4
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 can be adversely affected by increases in frequency and severity of policy
claims. While a generally manageable risk, frequency and severity can cause significant earnings volatility.
Increased claims frequency is typically driven by increases in severe weather outbreaks while severity can
be driven by inflation, increased claims settlement cost and litigation related expenses.
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 from catastrophe events. 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, along with liquidity at the holding company level. 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.
5
5
Table of Contents
The following table indicates allocation of direct premium written by state for the years ended December 31, 2020
and 2019:
($ in thousands)
State
Alabama
Arkansas
Georgia
Louisiana
Mississippi
Oklahoma
South Carolina
Tennessee
Percent of Direct Written Premium
2020
2019
$
$
16,770
1,649
11,577
4,300
11,213
7,206
7,069
3,161
62,945
26.7 % $
2.6 %
18.4 %
6.8 %
17.8 %
11.5 %
11.2 %
5.0 %
100.0 % $
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 %
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 $1,000 on dwelling property and homeowners lines of business.
The premiums or payments to be made by the insured for insurance policies of the property and casualty
subsidiaries are based upon expected costs of providing benefits, underwriting and administering the policies. In
determining the premium to be charged, the property and casualty subsidiaries utilize data from past claims
experience, modeled catastrophe losses and anticipated claims estimates along with catastrophe reinsurance cost,
commissions, taxes and general expenses.
The operating results of the property-casualty insurance industry are subject to significant fluctuations from quarter-
to-quarter and from year-to-year. These fluctuations are often due to the effect of competition on pricing,
unpredictable losses incurred in connection with weather-related and other catastrophic events, general economic
conditions and other factors, such as changes in tax laws and the regulatory environment.
The following table sets forth the premiums earned (net of reinsurance) during the periods reported for the property
and casualty insurance segment:
($ in thousands)
Net premiums earned:
Fire, allied lines and homeowners
Other
Total net earned premium
Property and Casualty Loss Reserves
Year Ended December 31,
2020
2019
$
$
55,101 $
54,019
—
—
55,101 $
54,019
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
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 2020 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Consolidated Balance Sheet
$ 13,184 $ 14,386 $ 11,214 $ 8,734 $ 8,321 $ 9,645 $ 7,530 $ 7,075 $ 8,208 $ 7,199 $ 10,177
Ceded reserves
(1,329)
(2,381)
(1,229)
(782)
(839)
(1,381)
(1,184)
(327)
(1,384)
(249)
(3,321)
Net unpaid losses
($ in thousands) $ 11,855 $ 12,005 $ 9,985 $ 7,952 $ 7,482 $ 8,264 $ 6,346 $ 6,748 $ 6,824 $ 6,950 $ 6,856
Cumulative net
payments:
1 year later
$ 5,738 $ 4,035 $ 4,827 $ 2,900 $ 2,990 $ 4,482 $ 2,950 $ 3,069 $ 3,320 $ 4,178
2 years later
7,239
5,346
6,670
3,539
3,503
4,839
3,364
3,411
3,857
3 years later
7,841
6,483
7,426
3,782
3,863
5,007
3,543
3,559
4 years later
8,382
7,001
7,496
3,910
4,113
5,076
3,661
5 years later
8,419
7,001
7,536
4,085
4,147
5,194
6 years later
8,433
7,060
7,572
4,121
4,134
7 years later
8,453
7,108
7,585
4,117
8 years later
8,452
7,115
7,640
9 years later
8,447
7,169
10 years later
8,447
Net Liability re-
estimated:
1 year later
11,443
9,606
9,354
6,698
5,597
6,333
4,495
5,060
4,839
5,683
2 years later
11,064
8,439
9,360
5,185
4,559
5,756
4,642
4,278
4,756
3 years later
9,725
8,500
8,483
4,348
4,605
5,916
4,267
4,153
4 years later
9,178
7,661
7,700
4,460
4,428
5,795
4,239
5 years later
8,854
7,091
7,683
4,365
4,272
5,752
6 years later
8,453
7,157
7,592
4,244
4,151
7 years later
8,457
7,124
7,697
4,134
8 years later
8,452
7,217
7,648
9 years later
8,447
7,172
10 years later
8,447
Net cumulative redundancy (deficiency)
$ 3,408 $ 4,833 $ 2,337 $ 3,818 $ 3,331 $ 2,512 $ 2,107 $ 2,595 $ 2,068 $ 1,267
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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,
2020
2019
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%
$
9,159
9,414
9,668
9,923
10,177
10,431
10,686
10,940
11,195
2.2%
1.7%
1.1%
0.6%
—%
(0.6)%
(1.1)%
(1.7)%
(2.2)%
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)%
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 written by state for the two years ended
December 31, 2020 and 2019:
($ in thousands)
State
Alabama
Florida
Georgia
Mississippi
South Carolina
Tennessee
Texas
Percentage of Total Direct Premiums
2020
2019
$
$
3,208
38
1,309
520
479
82
201
5,837
55.0 % $
0.7 %
22.4 %
8.9 %
8.2 %
1.4 %
3.4 %
100.0 % $
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 %
NSIC has two primary methods of distribution of insurance products: independent agents and home service
(career) agents. The independent agent distribution method accounts for 67.4% of total premium revenue in the life
insurance segment. Approximately 192 of the Company's independent agents produced new business during 2020.
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, 2020. The remaining 6.7% 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 (3.5%), 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
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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 2020 life segment premium produced by product and distribution method:
15
24
66
63
35
203
($ in thousands)
Line of Business
Industrial
Ordinary
Group Life
A&H Group
A&H Other
Home Service
Agent
Independent Agent
Other
$
39 $
— $
1,251
—
—
187
2,588
8
135
1,298
Total Premium by Distribution Method
$
1,477 $
4,029 $
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,
2020
2019
Ordinary-whole life
Term life
Industrial life
Life insurance issued:
Ordinary-whole life
Net premiums earned:
Life insurance
Accident and health insurance
$
$
$
$
$
$
162,765
$
23,886
14,898
201,549
$
16,675
16,675
$
$
3,991
$
1,718
5,709
$
175,248
12,118
15,297
202,663
18,622
18,622
4,088
1,776
5,864
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, 2020, cash and investments comprise 79% of total
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assets, and investment income (including realized gains) comprises 7.9% 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 2020
averaged approximately 10.9% 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 2020 averaged approximately 15% of
premiums on both new and renewal business. During 2020, 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 $3,389,000 or 6.2% 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, 2020, 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, 2020,
NSFC had contracts with approximately 1,600 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 2.2% in Alabama and
1.5% in Mississippi. In the homeowners line of business, our market share in both Alabama and Mississippi is less
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than 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, 2020, each subsidiary exceeds any levels that would require regulatory
actions.
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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 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 21, 2020, 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.
Demotech Rating
The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On December 12, 2020,
Demotech affirmed a Financial Stability Rating of A (Exceptional) for both NSFC and Omega.
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, 2020,
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
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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.
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
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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 2020, 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 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 2020 and 2019. Any losses above the $72.5
million upper limit are the responsibility of our Company. The contract in place during 2020 also allowed one
reinstatement for coverage under the contract for a second catastrophic event. In addition to the primary
catastrophe reinsurance coverage, the company maintained a catastrophe aggregate cover that provided $2 million
of additional coverage in excess of a $2 million per event retention and subject to a $2 million aggregate annual
deductible. This coverage had one reinstatement.
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,
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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.
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, 2020, the total reserves of NSIC
(consisting of reserves for accident and health insurance) were approximately $38,875,000. 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. Claims inflation can also be incurred following catastrophe events due to demand
surge of both building material and labor cost. In 2020 we also experienced claims inflation due to shortages of
building materials associated with factory slow-downs and/or shut downs. 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, 2020,
the property and casualty subsidiaries had reserves for unpaid claims of approximately $10,177,000, before
subtracting unpaid claims due from reinsurers of $3,321,000, leaving net unpaid claims of $6,856,000. 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, 2020 or 2019. 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 12 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
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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 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.
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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.
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. It should be noted that we experienced claims inflation in 2020 due to the frequency
of weather related events which created demand surge for building materials and labor. Also, we believe the
COVID-19 pandemic contributed to this inflation as some factories manufacturing building material periodically shut-
down or limited production for a period of time during the pandemic.
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
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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 hundred 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
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.
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.
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
have remained 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 have faced temporary and sporadic staffing
shortages over the course of the pandemic. The ability of insureds to obtain documentation required to complete
both the application and claim processes could be impacted; however, we believe we have adequately mitigated
this risk up to now. 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.
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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. While
investment markets and our economy has proven resilient to this point, events that unfold as part of the COVID-19
Pandemic may have a material impact on the valuations of our investments. Long term 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.
A secondary risk related to COVID-19 is an elevated level of death claims in our life insurance subsidiary. While it is
difficult to distinguish deaths related specifically to COVID-19 versus other underlying causes, our life insurance
subsidiary will have elevated claims due to the pandemic. It is our best estimate that approximately 10% of life
insurance benefits paid in 2020 had COVID-19 listed as one of the underlying causes of death on the death
certificate. While we do not anticipate COVID-19 deaths to materially impact our financial condition, the pandemic
could continue to lead to elevated death claims and could adversely impact our results of operations should the
pandemic persist.
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 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.
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The following table sets forth the high and low sales prices per share, as reported by NASDAQ, during the period
indicated:
Stock Closing Prices
2020
2019
High
Low
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
15.98 $
16.10 $
15.20 $
12.49 $
10.20 $
13.31 $
11.57 $
10.14 $
13.01 $
14.29 $
12.00 $
15.60 $
11.22
11.00
10.70
10.01
Shareholders
The number of shareholders of the Company's common stock was approximately 1,200 and the Company had
2,530,370 shares of common stock outstanding on March 19, 2021.
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
2019
2020
$
$
$
$
0.06 $
0.06 $
0.06 $
0.06 $
0.05
0.05
0.05
0.06
Discussion regarding dividend restrictions may be found on page 41 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 2020 totaled $607,000.
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 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.
Securities authorized for issuance under equity compensation plans
The following table sets forth securities authorized for issuance under the Company's equity compensations plan:
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
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)
—
—
—
198,237
—
198,237
—
—
—
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Share Repurchases in the Fourth Quarter of 2020
The following table sets forth information regarding the repurchase of shares of our common stock during the
quarter ended December 31, 2020:
Period
Oct. 1 - Oct. 31, 2020
Nov. 1 - Nov. 30, 2020
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)
86 $
59 $
145
11.82
11.73
2,886 $
483,524
2,945 $
2,945
482,832
(a) Effective June 1, 2020, the Board authorized the repurchase of up to $500,000 of the Company's outstanding
common stock. The plan expires May 31, 2021. Under the repurchase program, the Company is authorized to
repurchase shares in open market purchases as well as in privately negotiated transactions from time to time
through May 31, 2021. Stock purchased under this program will be held as treasury stock and will be available for
general corporate purposes. The repurchase program’s terms will comply with applicable securities laws and
regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The program is also
subject to market conditions, applicable legal requirements, alternative cash needs that may arise and other factors,
as determined by Company management. The repurchase program does not obligate the Company to acquire a
specific number of shares and may be suspended or terminated at any time. Repurchases of the Company’s
common stock will be financed primarily through free cash flow.
Item 6. Selected Financial Data
Under smaller reporting company rules we are not required to disclose information required under Item 6. However,
in order to provide information to our investors, we have elected to provide certain selected financial data.
Five-Year Financial Information
($ 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
2020
$ 61,406
$ 60,810
3,633
1,623
583
$ 66,649
2019
$ 60,411
$ 59,883
3,876
3,055
585
$ 67,399
2018
$ 60,717
$ 60,856
3,941
(552)
612
$ 64,857
2017
$ 61,388
$ 61,163
3,647
234
596
$ 65,640
2016
$ 61,525
$ 61,398
3,892
998
605
$ 66,893
$
$
(8,619)
(7,477)
$ 150,540
$ 13,677
$ 4,067
$ 8,080
$ 153,934
$ 14,164
$
$
779
(1,330)
$
$
(1,203)
1
$ 144,231
$ 14,352
$ 146,438
$ 15,639
$ 3,063
$ 3,545
$ 148,579
$ 17,126
Total shareholders' equity
$ 45,366
$ 53,461
$ 45,866
$ 47,625
$ 48,052
Shares outstanding (at year end)
2,530
2,531
2,527
2,522
2,517
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($ 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)
Per share data:
Book value
Net income (loss)
Dividends paid
($ in thousands)
Quarterly Information:
2020
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(17.44) %
3.33 %
30.15 %
126.10 %
8.19 %
3.35 %
26.49 %
100.10 %
1.67 %
3.47 %
31.29 %
101.31 %
(2.51) %
3.20 %
32.84 %
102.25 %
6.59 %
3.45 %
35.64 %
94.59 %
$ 24,196
$ 6,623
$ 14,516
$ 14,280
$ 9,742
43.45
12.13
16.48
25.67
17.47
$ 17.93
$ 21.12
$ 18.15
$ 18.88
$ 19.09
$
$
(3.41)
0.24
$
$
1.61
0.21
$
$
0.31
0.20
$
$
(0.48)
0.20
$
$
1.22
0.18
Premiums
Investment
& Other
Income
Investment
Gains
(Losses)
Claims and
Benefit
Payments
Net Income
(Loss)
Net Income
(Loss) Per
Share
$
$
$
$
14,955 $
15,172
15,289
15,394
60,810 $
14,718 $
14,990
15,209
14,966
59,883 $
1,109 $
1,104
1,046
957
4,216 $
1,108 $
1,103
1,137
1,113
4,461 $
(990) $
548
1,430
635
1,623 $
10,583 $
16,736
13,303
13,308
53,930 $
(860) $
(4,726)
(778)
(2,255)
(8,619) $
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 $
(0.34)
(1.87)
(0.30)
(0.90)
(3.41)
0.97
(0.23)
0.17
0.70
1.61
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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, 2020 compared to the year ended December 31, 2019 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 64.2% of total premium revenue generated in the
states of Alabama, Georgia 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 91.5% of gross
earned premium in 2020. The P&C segment operates in the states of Alabama, Arkansas, Georgia,
Louisiana, Mississippi, Oklahoma, South Carolina, and Tennessee.
The Life segment accounted for 8.5% of gross premium revenue in 2020. 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 operations are 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 operations are 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 21, 2020, 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 December 12, 2020,
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 insurance claims.
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.
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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 the 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.
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, 2020, the Company had a net loss of $8,619,000, $3.41 loss per share,
compared to a net income of $4,067,000, $1.61 income per share, for the year ended December 31, 2019. The
year to date pretax loss from operations, in 2020, totaled $12,641,000 compared to a pretax income from operations
of $1,525,000 in 2019. The primary reason for the significant loss in 2020, compared to the same period in 2019,
was a $15,332,000 increase in policyholder benefits; primarily driven by a significant increase in catastrophe claims
in the P&C segment. Results for 2020 were also impacted by investment gains of $1,623,000 compared to
investment gains of $3,055,000 in 2019.
For the twelve months ended December 31, 2020, the Company had insured claims (net of reinsurance recoveries)
totaling $53,930,000 compared to $38,598,000 for the same period last year. The P&C segment was the primary
source of this increase with claims up $15,446,000 in 2020, compared to 2019. The primary component of this
increase was claims reported from catastrophe events which increased $17,573,000, in 2020, compared to the
same period in 2019.
For the twelve months ended December 31, 2020, the Company had investment gains of $1,623,000 compared to
investment gains of $3,055,000 for the same period in 2019; a decrease of $1,432,000. The primary reason for the
investment gains in 2020 was a $1,361,000 gain on fixed maturities. In 2019, we had a gain on our COLI
investment totaling $1,792,000 which was the primary contributor to investment gains in 2019.
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Financial results for the year ended December 31, 2020 and 2019, based on U.S generally accepted accounting
principles, were as follows:
Consolidated Financial Summary
($ in thousands, except per share)
Gross premiums written
Net premiums written
Net premiums earned
Net investment income
Net investment gains
Other income
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 (Loss) Before Income Taxes
Income tax expense (benefit)
Net Income (Loss)
Income (Loss) Per Common Share
Reconciliation of Net Income (Loss) to non-GAAP Measurement
Net income (loss)
Income tax expense (benefit)
Investment (gains) losses, net
Pretax Income (Loss) From Operations
$
$
$
$
Year ended
December 31,
2020
2019
$
$
$
68,782 $
61,406 $
60,810 $
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
3,633
1,623
583
66,649
53,930
3,548
7,543
9,298
2,484
864
77,667
(11,018)
(2,399)
(8,619) $
(3.41) $
(8,619) $
(2,399)
(1,623)
(12,641) $
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 investment gains/losses. We typically
invest in equity securities with a long-term view. Short-term volatility due to changes in market value of equity
securities held for sale, along with realized investment gains/losses on both fixed maturity and equity investments,
can mask both the positive or negative performance of our insurance operations from period to period.
Premium Revenue:
For the year ended December 31, 2020, net premiums earned were up $927,000 at $60,810,000 compared to
$59,883,000 during the same period last year. The increase in premium revenue was primarily driven by an
increase in net earned premium in the P&C segment of $1,082,000 or 2.0%. The increase in P&C segment net
earned premium was primarily attributable to a 4.2% increase in gross earned premium in our dwelling fire program
due to rate increases in the program over the past twelve months. As mentioned previously, the increased
frequency of weather related losses over the past five years has driven the need to increase rates in states and
programs that have been most impacted by this persistent pattern of severe weather.
Investment Gains:
Investment gains, for the year ended December 31, 2020, were $1,623,000 compared to investment gains of
$3,055,000 for the same period last year. The primary reason for the investment gain, in 2020, was a gain on
available-for-sale fixed maturities of $1,361,000 compared to a gain on available-for-sale fixed maturities of $18,000
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for the same period last year. In 2020, an increase in value of COLI investments totaled $343,000 compared to an
increase of $295,000 for the same period last year. Partially offsetting the 2020 investment gains was a decline in
value of our equity investments totaling $344,000 compared to an increase in value of equity investments of
$712,000, in 2019. Investment gains in 2019 were also positively impacted by a realized gain on COLI of
$1,792,000.
Net Income (Loss):
For the year ended December 31, 2020, the Company had a net loss of $8,619,000, $3.41 loss per share,
compared to net income of $4,067,000, $1.61 income per share, for the same period last year. As mentioned
previously, the primary reason for the 2020 net loss, compared to the 2019 net income, was a significant increase in
property and casualty insured losses. The increase in P&C subsidiary losses was primarily driven by an increase in
catastrophe losses from severe weather events in April of 2020 coupled with losses from Hurricanes Laura and
Sally in the third quarter of 2020 as well as losses from Hurricanes Delta and Zeta in the fourth quarter of 2020.
Pretax Income (Loss) from Operations:
For the year ended December 31, 2020, our pretax loss from operations was $12,641,000 compared to a pretax
income from operations of $1,525,000 for the year ended December 31, 2019; a decrease of $14,166,000. As
discussed above, an increase in claim activity in our P&C segment was the primary reason for the loss from
operations, in 2020, compared to the same period last year.
P&C Segment Combined Ratio:
The P&C segment ended 2020 with a GAAP basis combined ratio of 126.1%. Reported catastrophe losses, net of
reinsurance recoveries, totaled $24,196,000 and added 43.5 percentage points to the combined ratio. In
comparison, the P&C segment ended 2019 with a GAAP basis combined ratio of 100.1% with $6,623,000 in
reported catastrophe losses increasing the combined ratio by 12.1 percentage points. Partially offsetting the
increase in reported catastrophe losses, in 2020, was a reduction in reported fire losses of $1,820,000. Reported
fire losses totaled $12,172,000, in 2020, and added 21.9 percentage points to the 2020 combined ratio. In
comparison, in 2019, reported fire losses totaled $13,992,000 and added 25.6 percentage points to the 2019
combined ratio. In addition, non-catastrophe wind and hail losses were down $1,267,000 in 2020 compared to
2019. Reported non-catastrophe wind and hail losses, in 2020, totaled $7,866,000 and added 14.1 percentage
points to the 2020 combined ratio. In comparison, non-catastrophe wind and hail losses reported during 2019
totaled $9,133,000 and added 16.7 percentage points to the 2019 combined ratio.
Overview - Balance Sheet highlights at December 31, 2020 compared to December 31, 2019
Selected Balance Sheet Highlights
December 31, 2020
December 31, 2019
($ in thousands, except per share)
Invested Assets
Cash
Total Assets
Policy Liabilities
Total Debt
Accumulated Other Comprehensive Income
Shareholders' Equity
Book Value Per Share
$
$
$
$
$
$
$
$
99,150 $
19,887 $
150,540 $
82,869 $
13,677 $
3,585 $
45,366 $
17.93 $
118,969
11,809
153,934
78,472
14,164
2,443
53,461
21.12
Invested Assets:
Invested assets as of December 31, 2020 were $99,150,000 compared to $118,969,000 as of December 31, 2019;
a decrease of 16.7%. The decrease in invested assets was primarily due to the sale of available-for-sale fixed
maturity securities and equity securities to meet the liquidity requirements of increased claim activity in the P&C
segment during 2020 compared to 2019.
Cash:
The Company, primarily through its insurance subsidiaries, had $19,887,000 in cash and cash equivalents at
December 31, 2020, compared to $11,809,000 at December 31, 2019. Cash increased $8,078,000 in 2020
primarily due to the sale of available-for-sale fixed maturity securities for the payment of weather related losses in
our P&C subsidiary. Cash fluctuated significantly during the last six months of 2020 due to timing differences in the
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payment of weather related insurance claims and recoveries from reinsurers under our catastrophe reinsurance
agreement.
Total Assets:
Total assets as of December 31, 2020 were $150,540,000 compared to $153,934,000 at December 31, 2019. Asset
growth in 2020 was hindered by catastrophe losses in the P&C segment and was the primary reason for the 2.2%
decrease in total assets at December 31, 2020 compared to total assets at December 31, 2019.
Policy Liabilities:
Policy related liabilities were $82,869,000 at December 31, 2020, compared to $78,472,000 at December 31, 2019;
an increase of $4,397,000 or 5.6%. The primary reason for the increase in policy liabilities was a $2,978,000
increase in P&C segment loss reserves, in 2020, compared to 2019, due to an increase in weather related claim
activity.
Debt Outstanding:
Total debt at December 31, 2020 was $13,677,000 compared to $14,164,000 at December 31, 2019. Debt was
reduced $487,000 during 2020 primarily from the reduction in long-term debt in our holding company.
Shareholders' Equity:
Shareholders' equity as of December 31, 2020 was $45,366,000, down $8,095,000, compared to December 31,
2019 Shareholders' equity of $53,461,000. Book value per share was $17.93 at December 31, 2020, compared to
$21.12 per share at December 31, 2019; a decline of 15.1% or $3.19 per share. The primary factors contributing to
the decrease in both book value per share and Shareholders' equity were a net loss of $8,619,000 and shareholder
dividends paid of $607,000. Partially offsetting these decreases was an increase in accumulated other
comprehensive income of $1,142,000. The accumulated comprehensive income was primarily driven by increases
in market value of our corporate bond investments available-for-sale.
Industry Segment Data:
Net premiums earned for our two operating segments are summarized as follows:
($ in thousands)
Life, accident and health insurance
Property and casualty insurance
Net premiums earned
2020
%
2019
$
$
5,709
55,101
60,810
9.4 % $
90.6 %
100.0 % $
5,864
54,019
59,883
%
9.8 %
90.2 %
100.0 %
The property and casualty segment composed 90.6% of consolidated net premiums earned in 2020 compared to
90.2% in 2019. Through the P&C segment, we offer primarily dwelling fire and homeowners insurance coverage to
our customers. The life segment composed 9.4% of net premiums earned in 2020 compared to 9.8% in 2019 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.
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Life and Accident and Health Insurance Operations:
Premium revenues and operating income for the life segment for the year ended December 31, 2020 and 2019 are
summarized below:
($ in thousands)
REVENUE
Net premiums earned
Net investment income
Net investment gains (losses)
Other income
2020
2019
$
5,709 $
2,583
567
1,242
5,864
2,677
861
853
Total Revenues
10,101
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
5,215
824
331
1,923
216
41
INCOME BEFORE INCOME TAXES
$
1,551 $
Total Expenses
8,550
5,027
736
281
1,948
285
43
8,320
1,935
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019:
Net premiums earned in the life segment was $5,709,000 at December 31, 2020 compared to $5,864,000 at
December 31, 2019; a decrease of 2.6%. The $155,000 decrease in net earned premium revenue was primarily
due to a decline in new business production in both the traditional life and supplemental accident and health
insurance products offered in NSIC.
The table below provides the major categories of investment income, primarily dividend and interest income, for the
year ended December 31, 2020 and 2019:
($ 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,
2020
2019
$
1,955 $
2,075
61
7
541
143
(15)
2,692
109
$
2,583 $
13
8
545
142
2
2,785
108
2,677
While NSIC composes only 9.4% of premium revenue, the subsidiary holds 39.5% of consolidated assets. The
majority of these assets consist of fixed maturity investments. Net investment income had a 3.5% decrease, at
$2,583,000 for the year ended December 31, 2020 compared to $2,677,000 for the same period last year. Lower
reinvestment yields on fixed maturity investments due to the declining interest rate environment experienced in
2020 was the primary factor contributing to the moderate decline in interest income.
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The table below provides investment gains and losses for the year ended December 31, 2020 and 2019:
($ in thousands)
Realized gains on fixed maturities
Realized gains on equity securities
Change in fair value of equity securities
Other gains principally real estate
Net investment gains
Year ended December 31,
2020
2019
$
$
459 $
—
104
4
567 $
37
233
589
2
861
NSIC net investment gains, for the year ended December 31, 2020, were $567,000 compared to net investment
gains of $861,000 for the same period last year; a decrease of $294,000. 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 primary factor
contributing to the decrease in net investment gains, in 2020, was an decrease in the change in value of equity
securities held for investment to a gain of $104,000 compared to a gain of $589,000 in the prior year. Another factor
contributing to the lower investment gains, in 2020, was a $233,000 realized gain, in 2019, 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.
Other income was $1,242,000 in 2020 compared to $853,000 for the same period last year; an increase of
$389,000. 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 21.8% in 2020 and 14.5% in 2019. The primary reason for the increase in
other income, in 2020 compared to 2019, was an increase in claims from storm activity in the P&C segment leading
to an increase in adjuster fees paid from NSFC to NSIC.
Claims were $5,215,000 through December 31, 2020 compared to $5,027,000 through December 31, 2019; an
increase of $188,000 or 3.7%. The primary reason for the increase was elevated claim payments, in 2020, due to
an increase in ordinary life related claims.
Deferred policy acquisition cost amortization and commission expenses increased $138,000 for the year ended
December 31, 2020 at $1,155,000 compared to $1,017,000 for the same period last year; an increase of 13.6%. As
a percent of net premiums earned, policy acquisition cost amortization and commission expense was 20.2% in 2020
compared to 17.3% in 2019.
General and administrative expenses were down slightly at $1,923,000, in 2020, compared to $1,948,000, in 2019.
As a percent of earned premium, general and administrative expenses were 33.7% and 33.2% at December 31,
2020 and 2019, respectively. The $25,000 decrease in general and administrative expenses, in 2020 compared to
2019, was primarily due to a decline in actuarial and consulting fees of $39,000.
For the year ended December 31, 2020 and 2019, insurance taxes, licenses and fees were $216,000 and
$285,000, respectively. As a percent of earned premium, insurance taxes, licenses and fees were 3.8% in 2020
and 4.9% in 2019. The primary reason for the decrease in, 2020 compared to 2019, was the payment of expenses
associated with our Alabama Department of Insurance examination, in 2019, which were not incurred in 2020.
Interest expense was $41,000 for the year ended December 31, 2020 compared to $43,000 for the year ended
December 31, 2019. Interest expense in NSIC is associated with interest payments on insurance policies with a
deposit fund. Deposit fund balances declined in 2020 leading to the slight reduction in interest expense.
For the year ended December 31, 2020, the life segment had pretax income of $1,551,000 compared to a pretax
income of $1,935,000 for the same period last year. The $155,000 decrease in life segment revenues, coupled with
the $188,000 increase in policyholder claims were the primary factors contributing to the $384,000 decrease in
pretax income.
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Property & Casualty Operations:
Pretax income for the P&C segment for the year ended December 31, 2020 and 2019 is summarized below:
($ in thousands)
REVENUE
Net premiums earned
Net investment income
Net investment gains
Other income
2020
2019
$
55,101 $
54,019
1,530
1,043
582
Total Revenues
58,256
1,683
2,178
575
58,455
BENEFITS AND EXPENSES
Policyholder benefits paid or provided
Amortization of deferred policy acquisition costs
Commissions
General and administrative expenses
Insurance taxes, licenses and fees
INCOME (LOSS) BEFORE INCOME TAXES
$
(11,962) $
Total Expenses
70,218
49,425
33,979
2,724
7,212
8,589
2,268
2,723
7,148
8,616
2,185
54,651
3,804
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019:
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)
2020
2019
Line of Business
Dwelling Fire/Allied Lines
Homeowners
Premium
Earned
%
of NPE
Premium
Earned
%
of NPE
$
42,005
20,392
76.2 % $
40,302
37.0 %
20,758
74.6 %
38.4 %
Catastrophe Reinsurance Premium Ceded
(7,296)
(13.2) %
(7,041)
(13.0) %
Net Premiums Earned
$
55,101
100.0 % $
54,019
100.0 %
2020
Increase
(Decrease)
over 2019
4.2 %
(1.8) %
3.6 %
2.0 %
Property and casualty segment net premiums earned for 2020 were $55,101,000 compared to $54,019,000 for the
same period last year. The primary reason for the increase, in 2020 compared to 2019, was a 4.2% increase in
gross earned premium revenue in our dwelling fire program primarily driven by rate increases in the program over
the last twelve months.
The primary source of premium revenue growth in the P&C segment was primarily the states of Alabama and
Georgia. Premium revenue in Alabama increased 7.6%, in 2020, while policy counts decreased 1.7% compared to
December 31, 2019. Increased rates were implemented in Alabama which lead to the year over year increase in
premium revenue in the state. In addition, Georgia premium revenue increased 6.8% in 2020, while policy counts
decreased 4.4%. The implementation of increased rates was the primary reason for the increase in premium
revenue in Georgia, in 2020, 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 2020, the
Company retained the first $4,000,000 in losses from a first event and $2 million in losses from a second event.
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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 2020 catastrophe reinsurance program can be found in Note 10 to
the Consolidated Financial Statements.
The Company maintains catastrophe reinsurance coverage to mitigate loss exposure from catastrophic events.
With our 2020 catastrophe contract placement, our single event catastrophe retention remained unchanged from
the prior year at $4 million. In our 2020 contract, we maintained our underlying catastrophe aggregate coverage of
$2 million in excess of $2 million, subject to a $2 million aggregate annual deductible. This additional coverage
effectively lowers our second event retention to $2 million. Also unchanged from last year, we maintain catastrophe
reinsurance covering incurred claims of a single catastrophe event up to $72.5 million. Our catastrophe reinsurance
has a reinstatement provision for one event and covers the cost of a second event up to the same $72.5 million
upper limit. 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 (net of reinsurance). It is noted, however, that hurricane
models are subject to significant risk and are only a tool to estimate the impact of catastrophe events. The
Company also has risk associated with multiple catastrophe events that individually may not exceed our $4 million
retention and would not be covered under our catastrophe reinsurance contract.
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 $4 million and the primary models utilized indicate that the Company's upper limit of
reinsurance is adequate to cover up to approximately a 250 year event (a single event with an estimated probability
of exceedance of 0.4% in a given year). It is noted, however, that hurricane models are subject to significant risks
and uncertainties and are continuously evolving. Catastrophe models are only a tool to estimate the impact of
catastrophe events and actual results can differ materially from model estimates.
We use the results of the Risk Management Solutions (RMS) and AIR Worldwide (AIR) models in our review of
exposure to hurricane risk. Each of these third party vendors provides two views of the modeled results as follows:
(i) a long-term view that closely relates modeled event frequency to historical hurricane activity; and (ii) a shorter-
term view that adjusts historical frequencies to reflect expectations of elevated hurricane activity in the near future.
We believe that modeled estimates provide a range of potential outcomes and we review multiple estimates for
purposes of understanding our catastrophic risk and variability. However, due to regulatory and competitive
limitations, we generally utilize long-term model output in the development of our product pricing.
The following table provides severe thunderstorm and hurricane single event model estimates for a range of return
periods based on a blended view of the RMS and AIR long-term models utilizing our actual inforce P&C segment
policy data as of December 31, 2020:
($ in
thousands)
Loss
Return
Period
20 Years
50 Years
100 Years
250 Years
500 Years
Gross Losses
Net Losses 1
Net Losses as
a Percent Equity 2
Yearly
Probability
of
Exceeding
Severe
Severe
Severe
Thunderstorm Hurricane
Thunderstorm Hurricane
Thunderstorm Hurricane
5 % $
2 % $
1 % $
0.4 % $
0.2 % $
3,200 $
15,858 $
4,759 $
28,487 $
6,222 $
40,556 $
8,655 $
60,710 $
10,980 $
76,017 $
2,528 $
3,160 $
3,160 $
3,160 $
3,160 $
3,160
3,160
3,160
3,160
5,938
5.6 %
7.0 %
7.0 %
7.0 %
7.0 %
7.0 %
7.0 %
7.0 %
7.0 %
13.1 %
1 - Net losses are net of reinsurance and after a 21% Federal income tax benefit.
2 - Equity as of December 31, 2020
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In 2020, the P&C segment had catastrophe losses from two hurricanes exceeding our $4 million catastrophe
reinsurance retention. In addition, the P&C segment had catastrophe losses from two additional hurricanes and a
significant spring storm event with losses attaching to our underlying catastrophe aggregate coverage. Furthermore,
the P&C segment was impacted, in 2020, by 23 additional smaller catastrophe events that individually did not
exceed our catastrophe reinsurance retention; but cumulatively generated incurred losses totaling $9,787,000. 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 $6,623,000.
Additional details regarding the structure of our 2020 catastrophe reinsurance program can be found in Note 10 to
the Consolidated Financial Statements.
The table below provides the major categories of investment income, primarily dividend and interest income, for the
year ended December 31, 2020 and 2019:
($ in thousands)
Fixed maturities
Equity securities
Other
Less: Investment expenses
Net investment income
Year ended December 31,
2020
2019
$
1,495 $
1,664
50
18
1,563
33
$
1,530 $
50
7
1,721
38
1,683
For the year ended December 31, 2020, net investment income was $1,530,000 compared to $1,683,000 for the
same period in 2019; a decrease of $153,000 or 9.1%. Lower yields on new investments in 2020 was the primary
factor contributing to this marginal decrease in net investment income.
The table below provides investment gains and losses for the year ended December 31, 2020 and 2019:
($ in thousands)
Realized gains (losses) on fixed maturities
Realized gains on equity 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-than-temporary impairments
Net investment gains
Year ended December 31,
2020
2019
$
$
902 $
426
(448)
343
—
(180)
1,043 $
(31)
—
122
295
1,792
—
2,178
Net investment gains, for the year ended December 31, 2020, were $1,043,000 compared to net investment gains
of $2,178,000 for the same period in 2019; a decrease of $1,135,000. The primary reason for the decrease in net
investment gains, in 2020 compared to 2019, was a gain on our company owned life insurance (COLI) investment
of $1,792,000, in 2019. In addition, for the year ended December 31, 2020, we had unrealized losses in our P&C
segment equity investments available for sale totaling $448,000 compared to unrealized gains in equity investments
of $122,000, in 2019.
Other income was comparable at $582,000 for the year ended December 31, 2020, compared to $575,000 in 2019;
an increase of $7,000. 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 2020 and 2019.
Policyholder claims in the property and casualty segment were $49,425,000 in 2020, compared to $33,979,000 for
the same period last year; an increase of $15,446,000 or 45.5%. Claims as a percentage of premium earned was
89.7% in 2020 compared to 62.9% in 2019. The primary reason for the increase in claims was a $17,573,000
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increase in P&C segment catastrophe weather claims. This increase was offset by decreases in non-catastrophe
weather claims and fire claims totaling $1,267,000 and $1,820,000, respectively.
Weather related losses create the most significant variability in our loss and loss adjustment expense payments
from year to year in our P&C segment. The following table provides a recap of P&C segment gross reported losses
and LAE by catastrophe event and non-catastrophe wind and hail losses and LAE for the year ended December 31,
2020 and 2019:
For the year ended December 31, 2020
For the year ended December 31, 2019
($ in thousands)
Catastrophe event
Reported
Losses &
LAE
Claim
Count
Catastrophe event
Reported
Losses &
LAE
Claim
Count
Cat 2012 (Jan 10-12)
$
1,337
314 Cat 1916 (Feb 23-26)
$
296
757
147
574
324
209
600
168
1,021
530
1,221
367
85
76
29
121
76
35
106
41
249
148
236
46
Cat 2014 (Feb 5-8)
Cat 2016 (Mar 2-4)
Cat 2018 (Mar 27-30)
Cat 2019 (Apr 7-9)
Cat 2020 (Apr 10-14)
Cat 2021 (Apr 18-20)
Cat 2022 (Apr 21-24)
Cat 2024 (Apr 27-30)
Cat 2025 (May 2-3)
Cat 2026 (May 4-5)
Cat 2027 (May 7-8)
Cat 2028 (May 13-15)
Cat 2030 (May 20-24)
Cat 2037 (June 6-9)
Cat 2040 (July 10-12)
Cat 2044 (July 30-Aug 4)
Cat 2050 (Aug 26-28)
Cat 2063 (Sept 14-16)
Cat 2071 (Oct 9-12)
Cat 2074 (Oct 28-29
Cat 2075 (Oct 25-28)
Misc cats less than $100k
631
362
391
198
3,933
1,971
1,732
173
217
647
103
147
304
318
540
189
18,000
3,680
2,796
161 Cat 1918 (Mar 3-4)
79 Cat 1920 (Mar 23-25)
40 Cat 1923 (Apr 12-15)
34 Cat 1924 (Apr 17-20)
567 Cat 1926 (Apr 30-May 2)
307 Cat 1927 (May 7-10)
233 Cat 1931 (May 20-22)
34 Cat 1943 (July 10-18)
32 Cat 1954 (Aug 28-Sept 6)
117 Cat 1963 (Oct 25-26)
22 Cat 1969 (Dec 16-17)
29
58
61
73
31
798
696
445
7,416
1,240
269
258
121
54 Misc cats less than $100k
409
105
Total Before Reinsurance
$
45,612
5,546 Total Cat Losses
$
6,623
1,353
Less: Reinsurance Recoveries
(21,416)
Total Net Cat Losses
$
24,196
Non-Cat Wind & Hail
$
7,866
1,731 Non-Cat Wind & Hail
$
9,133
2,197
During 2020, the P&C segment was impacted by 28 catastrophe events producing 5,546 policyholder claims
totaling $24,196,000 net of reinsurance recoveries. In comparison, the P&C segment was impacted by 23
catastrophe events during 2019 from 1,353 claims totaling $6,623,000. During 2020, the P&C segment had multiple
severe weather events that contributed to elevated insured losses due to damage from strong winds, hail and
tornadoes as well as insured losses from four hurricanes. Reported losses from the three largest non-hurricane
catastrophe events (all occurring in April) coupled with reported losses from Hurricane Laura (Cat 2050), Hurricane
Sally (Cat 2063), Hurricane Delta (Cat 2071) and Hurricane Zeta (Cat 2074) totaled $18,112,000, net of reinsurance
recoveries. The three April 2020 cat events accounted for 31.6% of all reported catastrophe event claims through
December 31, 2020 and added 13.7 percentage points to the current year P&C segment combined ratio. Net of
reinsurance, Hurricane Laura, Hurricane Sally, Hurricane Delta and Hurricane Zeta accounted for 43.3% of all
reported catastrophe event claims through December 31, 2020 and added 18.8 percentage points to the 2020 P&C
segment combined ratio. In comparison, reported losses in the P&C segment from Hurricane Barry (Cat 1943),
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Hurricane Dorian (Cat 1954) and Tropical Storm Olga (Cat 1963), in 2019, totaled $2,772,000 and accounted for
41.9% of all reported catastrophe event claims through December 31, 2019. Hurricane Barry, Hurricane Dorian
and Tropical Storm Olga added 5.1 percentage points to the 2019 P&C segment combined ratio.
Non-catastrophe wind and hail claims reported in 2020 totaled $7,866,000 compared to non-catastrophe wind and
hail claims reported in 2019 totaling $9,133,000; a decrease of $1,267,000. During 2020, the P&C segment had
1,731 non-cat wind and hail claims reported (an average of $4,500 per claim) compared to 2,197 non-cat wind and
hail claims reported during 2019 (an average of $4,200 per claim). Non-cat wind and hail claims reported during
2020 accounted for 15.9% of total P&C segment incurred losses in the current year and added 14.1 percentage
points to the 2020 P&C segment combined ratio. Non-cat wind and hail claims reported during 2019 accounted for
26.9% of total P&C segment incurred losses in 2019 and added 16.7 percentage points to the 2019 P&C segment
combined ratio.
Reported fire losses in 2020 were down $1,820,000 or 13.0% compared to fire losses reported during 2019. The
P&C segment had 416 fire losses reported in 2020 totaling $12,172,000 compared to 481 claims reported in 2019
totaling $13,992,000. The average cost per claim was $29,300 for fire losses reported in 2020 compared to
$29,100 for fire losses reported in 2019. Fire losses reported during 2020 added 21.9 percentage points to the P&C
segment combined ratio while fire losses reported during 2019 added 25.6 percentage points to the P&C segment
combined ratio.
Deferred policy acquisition costs were virtually unchanged at $2,724,000, in 2020, compared to $2,723,000 for the
same period last year; an increase of $1,000. 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 4.9% in 2020 and 5.0% in 2019.
Commission expense for 2020 was $7,212,000 (13.1% of premium revenue) compared to $7,148,000 (13.2% of
premium revenue) for the same period in 2019. The primary reason for the $64,000 increase in commission
expense was the 2.2% increase in gross written premium, in 2020, compared to 2019.
General and administrative expenses in the property and casualty segment totaled $8,589,000 in 2020 compared to
$8,616,000 in 2019; a 0.3% decrease. The primary factors contributing to the $27,000 decrease in general
expenses, in 2020, compared to the same period last year, was a $114,000 decline in actuarial fees.
Insurance taxes, licenses and fees were $2,268,000 through December 31, 2020, compared to $2,185,000 for the
same period last year. As a percentage of net premiums earned, insurance taxes, licenses and fees were 4.1% for
the year ended December 31, 2020, compared to 4.0% for year ended December 31, 2019. The primary reason for
the increase in taxes, licenses and fees, in 2020, compared to 2019, was the 2.2% increase in P&C segment gross
written premium, in 2020, compared to 2019.
For the year ended December 31, 2020, the Company had a pretax loss of $11,962,000 compared to pretax income
of $3,804,000 for the same period in 2019. The $15,766,000 decrease was primarily due to the $17,573,000
increase in catastrophe claims, in 2020 compared to 2019.
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.
incurred (e.g., agents'
The underwriting expense ratio, which measures underwriting expenses
commissions, premium taxes, and other administrative underwriting expenses) as a percentage of premium
revenue.
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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
2020
45.31 %
43.45 %
37.34 %
126.10 %
2019
50.11 %
12.13 %
37.86 %
100.10 %
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.
During 2020, the P&C segment experienced an increase of 26.0 percentage points in the combined ratio compared
to 2019. Catastrophe losses increased in 2020 compared to 2019, leading to a 31.32 percentage point increase in
the P&C segment combined ratio and was the primary reason for the overall increase. Non-catastrophe losses
decreased the P&C segment combined ratio 4.80 percentage points in the current year 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, 2020 and 2019 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
2020
2019
60 $
13
1,035
1,108
892
823
56
16
1,019
1,091
1,128
1,122
2,250
Total Expenses
1,715
LOSS BEFORE INCOME TAXES
$
(607) $
(1,159)
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019:
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 $892,000 in 2020 compared to $1,128,000 for the same period last
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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 decline in general expenses was a decrease in the liability
for unfunded non-qualified deferred compensation plans. Total interest expense associated with short-term and
long-term borrowings of NSG was $823,000 for the year ended December 31, 2020 and $1,122,000 for the same
period in 2019. The Company entered into two interest rates swaps during 2020 to reduce the rate of interest paid
on its trust preferred securities. See Note 8 to the Consolidated Financial Statements for additional information
about the interest rate swaps. A reduction in debt outstanding was also a factor in the decline in interest expense.
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, 2020, the Company's holdings in fixed maturity securities amounted to 83% of total investments
and 54.7% 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+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
Below Investment Grade
% of Total Bond Portfolio
2020
37.2%
4.0%
1.5%
1.9%
5.7%
6.0%
10.3%
19.5%
7.4%
6.5%
2019
46.5%
3.3%
2.4%
1.5%
4.2%
5.8%
5.2%
20.5%
6.1%
4.5%
There were no material changes in credit quality mix in 2020 as we continue to focus on investing in high quality
investment grade securities. Also, tight credit spreads throughout 2020 limited the rewards of investing in lower
quality issues.
Our holdings in below investment grade securities are primarily comprised of energy 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.
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The amortized cost and aggregate fair values of investments in investment securities at December 31, 2020 and
December 31, 2019 are as follows:
($ in thousands)
December 31, 2020
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
Total fixed maturities
Equity securities
$
4,300 $
19,773
8,233
1,418
35,930
6,587
76,241
1,918
323 $
919
137
50
3,771
189
5,389
2,832
9 $
63
27
55
50
27
231
—
4,614
20,629
8,343
1,413
39,651
6,749
81,399
4,750
Total $
78,159 $
8,221 $
231 $
86,149
Held-to-maturity securities:
Agency mortgage backed securities
$
Total $
873 $
873 $
73 $
73 $
— $
— $
946
946
($ 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
As shown in the tables above, the Company experienced an increase in unrealized gains in fixed maturity securities
in 2020 compared to 2019. The increase is primarily driven by the decline in interest rates and tightening of
corporate bond spreads in the fixed maturity investment portfolio.
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
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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, 2020, 6.5% 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, 2020, the Company realized $180,000 in other-than-temporary impairments related to fixed
maturities.
The amortized cost and aggregate fair value of debt securities at December 31, 2020, by contractual maturity, are
as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
($ 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
$
125 $
18,457
24,867
32,792
Total $
76,241 $
$
17 $
4
852
Total $
873 $
125
19,601
26,670
35,003
81,399
18
4
924
946
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, 2020 and 2019
follows:
($ in thousands)
Net investment income
Average current yield on investments
Total return on investments
Net gains on investments (before taxes)
Change in accumulated net unrealized gains (before income taxes)
Year Ended December 31,
2020
2019
3,633
$
3,876
3.3 %
6.6 %
1,623
2,000
$
$
3.3 %
10.2 %
3,055
4,910
$
$
$
Average current yield on investments in 2020 remained unchanged compared to 2019. The total return on
investments in 2020 was 6.6% compared to 10.2% in 2019. Increases in market value of fixed maturity investments
due to declines in market interest rates was a primary driver of total return on investments in 2020. A gain on our
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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 higher total return in 2019 compared 2020.
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
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 primarily 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 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 and 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, 2020, 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
$
125 $
18,457
24,867
32,792
76,241 $
$
— $
17
4
852
873 $
Total
125
18,474
24,871
33,644
77,114
Percentage
of Total
0.16 %
23.96 %
32.25 %
43.63 %
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 $3,826,000, or 4.7%, decline in the market value of fixed maturity investments. Alternatively, a 100
basis point decrease in interest rates will generate approximately $3,638,000, or 4.5%, 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, 2020, the Company had aggregate equity capital, unrealized investment gains (net of income
taxes) and retained earnings of $45,366,000, down $8,095,000, compared to $53,461,000 at December 31,
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2019. During the year ended December 31, 2020, shareholders' equity was decreased by a net loss of $8,619,000,
increased by comprehensive income due to changes in value of fixed maturity securities of $1,580,000 and
decreased by a comprehensive loss of $438,000 related to change in value of interest rate swaps. Equity was also
increased by common stock issued of $25,000. Equity was reduced $36,000 by the purchase of 2,509 common
stock shares held as treasury stock and by cash dividends paid totaling $607,000.
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 8% of our current fixed income portfolio to be reinvested or otherwise available
to meet Company obligations.
The Company, primarily through its insurance subsidiaries, had $19,887,000 in cash and cash equivalents at
December 31, 2020, compared to $11,809,000 at December 31, 2019. Cash used in operating activities decreased
cash by $13,890,000 during the year ended December 31, 2020. The decrease in cash from operating activities
was primarily related to the net loss for the period which was triggered by an increase in claims and claims related
expenses in the P&C segment from spring storms during the second quarter and hurricane losses during the third
and fourth quarters. Cash provided by operating activities increased cash by $5,373,000 for 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. Net cash provided by investing
activities totaled $23,083,000 for the year ended December 31, 2020, compared to $1,656,000 in 2019. The
increase in cash from investing activities was related to maturities, some increases in prepayments on mortgage
backed securities and sales of investments to maintain adequate liquidity to settle P&C segment hurricane claims.
Net cash provided by investing activities in 2019 primarily consisted of maturities of investments in which
reinvestment was delayed in order to increase liquidity during hurricane season. Net cash used in financing
activities totaled $1,115,000 for the year ended December 31, 2020, compared to $896,000 for the same period last
year. During the year ended December 31, 2020, the Company paid $607,000 in dividends to shareholders.
The Holding Company had $3,108,000 in cash at December 31, 2020. The Holding Company primarily relies on
cash from subsidiaries to meet its obligations, including payment of dividends to shareholders along with interest
and principal on outstanding debt. Currently the Holding Company has adequate liquidity on hand to meet its
anticipated obligations through 2021 without additional dividend payments from subsidiaries. Cash and cash
equivalents held by subsidiaries at December 31, 2020 totaled $16,779,000.
The Company had a total of $13,177,000 of long-term debt outstanding as of December 31, 2020, compared to
$13,664,000 at December 31, 2019, 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, $195,000 and $208,000,
respectively.
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($ 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
$
$
$
$
$
1,500 $
12,177 $
9,029 $
10,177 $
63,766 $
500 $
— $
714 $
9,027 $
4,392 $
1,000 $
— $
1,998 $
1,058 $
— $
— $
1,285 $
41 $
—
12,177
5,032
51
11,764 $
6,776 $
40,834
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,
2020 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, 2020. 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 $1,500,000 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 97.5% 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 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 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. However, a decline in regulatory capital in our P&C subsidiary in 2020 due
to increased catastrophe loss frequency will limit our ability to prepay any debt obligations beyond what is required
for at least the next two years.
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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 2020 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 2021 is statutorily limited to
$1,168,000 in the life insurance subsidiary and $3,650,000 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 $1,100,000 in dividends from its subsidiaries during the
year ended December 31, 2020. Due to a decline in statutory surplus in our P&C subsidiaries during 2020, the
result of increased in catastrophe losses, we do not expect to pay any dividends from these subsidiaries for at least
the next twelve months as our primary focus will be on rebuilding statutory surplus.
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.
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 4 to 1 at December 31, 2020.
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National Security Insurance Company (life insurer) has regulatory adjusted capital of $10,784,000 and $17,210,000
at December 31, 2020 and 2019, respectively, and a ratio of regulatory total adjusted capital to authorized control
level RBC of 8.9 and 15.0 at December 31, 2020 and 2019, respectively. Accordingly, National Security Insurance
Company exceeds the minimum RBC requirements.
National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of
$36,505,000 and $36,264,000 at December 31, 2020 and 2019, respectively, and a ratio of regulatory total adjusted
capital to authorized control level RBC of 4.8 and 5.1 at December 31, 2020 and 2019, 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 $7,083,000 and $11,430,000 at December 31, 2020 and 2019, and a ratio of
regulatory total adjusted capital to authorized control level RBC of 12.7 and 20.1 at December 31, 2020 and 2019,
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:
•
•
•
•
•
•
•
Reinsurance
Deferred Policy Acquisition Costs
Income Taxes
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.
During 2020, 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 2020 and 2019. Any losses above the
$72.5 million upper limit are the responsibility of our Company. The contract in place during 2020 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 due to placement of an aggregate Layer of coverage of $2
million in excess of a $2 million event minimum subject to a $2 million aggregate annual deductible.
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
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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, 2020, the estimated reinsurance recoverable recorded was $6,874,000 compared to $276,000 for
the same period last year. The Company does not anticipate any issues with collection of the recorded amount. In
2020, catastrophe reinsurance premiums ceded totaled $6,274,000 compared to $6,008,000 ceded in 2019.
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. In addition to catastrophe reinsurance, the Company placed
reinstatement premium protection (RPP) reinsurance during 2020 and 2019 totaling $1,022,000 and $1,033,000,
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, 2020 and 2019, the Company recorded $7,408,000 and $7,666,000, 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.
At December 31, 2020, 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.
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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, 2020 and 2019, the recorded liability for loss and loss adjustment expense was $10,177,000 and
$7,199,000, respectively, a $2,978,000 increase. The increase in claim and claim adjustment expense reserves is
primarily due to claims outstanding from third and fourth quarter hurricanes at December 31, 2020. 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
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.
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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 $4,750,000. 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, 2020 value, the fair value of the Company's common
stock investments would decrease by approximately $475,000.
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.
It should be noted that the impact of the COVID-19 pandemic has added a new element of uncertainty surrounding
market risk in our investment portfolio. The extent of short and long term economic damage from the global
shutdown due to this pandemic remains unknown due to uncertainty surrounding both the duration of the pandemic
and speed at which the US and global economies can fully resume some level of normalcy. The increased risk
associated with the COVID-19 pandemic continues to be difficult to quantify due to these uncertainties.
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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, 2020 and 2019
Consolidated Statements of Operations – Years Ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) – Years Ended December 31, 2020 and
2019
Consolidated Statements of Changes in Shareholders’ Equity – Years Ended December 31, 2020 and
2019
Consolidated Statements of Cash Flows – Years Ended December 2020 and 2019
Notes to Consolidated Financial Statements – December 31, 2020
Financial Statement Schedules:
Schedule I. Summary of Investments Other Than Investments in Related Parties – December 31, 2020
and 2019
Schedule II. Condensed Financial Information of Registrant – December 31, 2020 and 2019
Schedule III. Supplementary Insurance Information – December 31, 2020 and 2019
Schedule IV. Reinsurance – Years Ended December 31, 2020 and 2019
Schedule V. Valuation and Qualifying Accounts – Years Ended December 31, 2020 and 2019
All other Schedules are not required under related instructions or are not applicable and therefore have been
omitted.
48
50
51
52
53
54
55
86
87
89
89
90
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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, 2020 and 2019 and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the two-year
period ended December 31, 2020, 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, 2020
and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended
December 31, 2020, 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that: (1)
relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Description of
the Matter
Policy and Claim Reserves
As more fully described in Notes 1 and 9 to the consolidated financial statements, significant
estimates made by management include the reserves for future life insurance policy benefits
and property and casualty benefits and loss reserves.
The liability for future life insurance policy benefits is computed using a net level premium
method including assumptions based on the issuance policy year with a corresponding interest
rate with mortality assumptions with the withdrawal assumptions based on the Company’s
experience. Claim liabilities represent the estimated liability for claims reported plus claims
incurred but not yet reported and the related loss adjustment expenses which are determined
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How We
Addressed the
Matter in Our
Audit
using case-basis evaluations and statistical analysis. The Company generally seeks to reduce
its exposure to catastrophes through individual risk selection and the purchase of catastrophe
reinsurance. Management utilizes expected losses along with historical data analysis of paid
and incurred loss development patterns over the past ten years.
The principal considerations for our determination that the policy and claims reserves is a
critical audit matter is due to the significant judgment used by management in determining the
reserves. The significant judgment was primarily due to the sensitivity of management’s
estimates to the actuarial methods selected and assumptions used in the loss development
factors and ultimate claim costs
Our audit procedures related to the estimates and actuarial assumptions used by management
and the Company’s external actuaries included the following procedures, among others:
• We obtained an understanding of the reserve estimation process through inquiry of
management,
• We performed walkthroughs of the processing of the information from inception to
recording in the consolidated financial statements and related disclosures in the notes
to the consolidated financial statements,
• We obtained the actuarial reports from management and engaged independent
actuaries for review of the life policies and the property and casualty claims. The
independent actuaries reviewed
the
assumptions used and accepted actuarial methods
the methodology, consistency, validity of
• We agreed the information from the actuary reports to the Loss Triangle data for the
property and casualty policies and to the in-force file for the life insurance policies,
• We reviewed the reconciliations from the source data to the general ledger as
performed by management,
• We performed various analytics on the data as well as the rollforward of balances from
the balance sheet reporting dates,
• We used a specialist to assist us in evaluating the appropriates of the reserve balances
•
recorded by management, and
Finally, with the assistance of the specialist, we evaluated the incorporation of the
applicable assumptions into the model and tested the model's computational accuracy.
/s/ Warren Averett, LLC
We have served as the Company’s auditor since 2009.
Birmingham, Alabama
March 19, 2021
49
49
December 31,
2020
December 31,
2019
$
873 $
1,290
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
ASSETS
Investments
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2020 -
$946; 2019 - $1,345)
Fixed maturities available-for-sale, at estimated fair value (cost: 2020 -
$76,241; 2019 - $97,102)
Equity securities, at estimated fair value (cost: 2020 - $1,918; 2019 - $2,127)
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
Total Investments
Total Assets $
81,399
4,750
169
3
145
2,934
1,846
4,998
2,033
99,150
19,887
575
12,345
6,874
7,408
1,572
1,311
706
712
150,540 $
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, net
Other liabilities
Contingencies
Shareholders' equity
Common stock
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Treasury stock, at cost
$
10,177 $
4,144
34,731
31,166
1,309
1,342
500
13,177
—
—
8,628
105,174
2,533
5,626
3,585
33,665
(43)
Total Liabilities
The Notes to Consolidated Financial Statements are an integral part of these statements.
Total Shareholders' Equity
45,366
Total Liabilities and Shareholders' Equity $
150,540 $
50
50
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
153,934
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THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share)
REVENUES
Net premiums earned
Net investment income
Investment gains
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
Year ended
December 31,
2020
2019
$
60,810 $
59,883
3,633
1,623
583
Total Revenues
66,649
3,876
3,055
585
67,399
53,930
38,598
3,548
7,543
9,298
2,484
864
3,459
7,429
9,698
2,470
1,165
Total Benefits, Losses and Expenses
77,667
62,819
Income (Loss) Before Income Taxes
(11,018)
4,580
INCOME TAX EXPENSE (BENEFIT)
Current
Deferred
Net Income (Loss)
INCOME (LOSS) PER COMMON SHARE BASIC AND DILUTED
DIVIDENDS DECLARED PER SHARE
(1,293)
(1,106)
(2,399)
768
(255)
513
(8,619) $
4,067
(3.41) $
1.61
0.24 $
0.21
$
$
$
The Notes to Consolidated Financial Statements are an integral part of these statements.
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THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in thousands)
Year ended
December 31,
2020
2019
Net income (loss)
$
(8,619) $
4,067
Other comprehensive income (loss), net of tax
Changes in:
Unrealized gains on securities, net of reclassification adjustment of $1,263 and
$14 for 2020 and 2019, respectively
Unrealized gain (loss) on interest rate swap
Other comprehensive income, net of tax
1,580
(438)
3,879
134
1,142
4,013
Comprehensive income (loss)
$
(7,477) $
8,080
The Notes to Consolidated Financial Statements are an integral part of these statements.
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THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($ in thousands)
Total
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
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, 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)
Common stock reacquired
(36)
—
—
—
—
(36)
Comprehensive loss:
Net loss for December 31, 2020
(8,619)
(8,619)
—
Other comprehensive income (net of tax)
1,142
Common stock issued
25
—
—
Cash dividends
(607)
(607)
1,142
—
—
—
—
1
—
—
—
24
—
—
—
—
—
Balance at December 31, 2020
$ 45,366 $ 33,665 $
3,585 $ 2,533 $
5,626 $
(43)
The Notes to Consolidated Financial Statements are an integral part of these statements.
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THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation expense and amortization/accretion, net
Net gains 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
Net cash provided by (used in) operating activities
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 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 year
Year ended
December 31,
2020
2019
$
(8,619) $
4,067
261
(1,623)
(1,106)
3,548
53
131
(6,598)
(3,290)
(1,537)
4,082
838
(30)
(13,890)
365
(3,055)
(255)
3,459
(56)
68
1,496
(3,291)
1,689
(199)
1,086
(1)
5,373
(19,526)
(18,359)
(6)
(51)
451
42,161
3
—
51
23,083
(8)
(500)
(607)
(1,115)
8,078
11,809
(37)
(105)
173
17,972
11
2,031
(30)
1,656
(165)
(200)
(531)
(896)
6,133
5,676
$
19,887 $
11,809
The Notes to Consolidated Financial Statements are an integral part of these statements.
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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, 2020, 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 91.5% of consolidated direct written premium,
produced business during 2020 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 8.5% of consolidated direct
written premium, is licensed in seven states. However, over 77% of life segment direct premium is generated in the
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020, 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 consolidated 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
consolidated 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 consolidated 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
consolidated 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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
present value of the projected future cash flows. The recalculated yield is used to accrue income on investments for
subsequent periods.
Mortgage loans and policy loans are stated at the unpaid principal balance of such loans, net of any related
allowance for loan losses.
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, 2020 and December 31, 2019
was $4,998,000 and $4,655,000, respectively. Changes in cash surrender values are included in the consolidated
statement of operations. The change in surrender value included in the consolidated statement of operations for the
years ended December 31, 2020 and 2019 was an increase of $343,000 and an increase of $295,000, 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
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.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Policy Receivables
Receivable balances are reported at unpaid balances, less a provision for credit losses.
Policy Receivables and Agents' Balances
Policy receivables and agents' balances 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 consolidated 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, 2020 was $242,000 and the corresponding lease liability was
$251,000. 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 are 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
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 - 2020
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 2,530,651 at December 31, 2020 and 2,529,652 at
December 31, 2019. The Company did not have any dilutive securities as of December 31, 2020 and 2019.
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.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO 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.
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 2019 amounts have been reclassified from the prior year consolidated financial statements to conform to the
2020 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, 2020, the net amount exceeding FDIC
insured limits was $6,491,000 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, 2020, the single largest balance
due from one agent totaled $272,000.
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, 2020 and December 31,
2019, 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, 2020, 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
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (FASB) issued guidance that provides temporary optional
expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the
financial reporting burdens related to the expected market transition from the London Interbank Offered Rate
(LIBOR) and other interbank offered rates to alternative reference rates. The Company has exposure to LIBOR
based financial instruments through its subordinated debentures. The contracts with respect to these borrowings
contain alternative reference rates that would automatically take effect upon the phasing out of LIBOR and would
not materially change the liability exposure. The guidance was effective upon issuance and may be applied
prospectively to contract modifications made and hedging relationships entered into or evaluated on or before
December 31, 2022. The Company is evaluating the optional expedients and exceptions in the guidance but does
not expect the adoption of this guidance to have a material impact on its financial position or results of operations.
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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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,
2024 and interim periods within those fiscal years beginning after December 15, 2025. 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.
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
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued guidance 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 adopted this
guidance on January 1, 2020. The adoption of this guidance did not have a material impact on its financial position
or results of operations.
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 adopted this guidance on January 1, 2020. The adoption of this guidance did not have
a material impact on its financial position or results of operations.
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 $460,000 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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $93,000 and are included in Other Assets in the accompanying consolidated
balance sheets.
NOTE 3 – STATUTORY ACCOUNTING PRACTICES
The accompanying consolidated financial statements have been prepared in conformity with generally accepted
accounting principles (GAAP) which vary in certain respects from reporting practices prescribed or permitted by
insurance regulatory authorities. The significant differences for statutory reporting include: (a) acquisition costs of
acquiring new business are charged to operations as incurred, (b) life policy liabilities are established utilizing
interest and mortality factors specified by regulatory authorities, (c) the Asset Valuation Reserve (AVR) and the
Interest Maintenance Reserve (IMR) are recorded as liabilities in the life subsidiary, and (d) non-admitted assets
(primarily furniture and equipment, agents' debit balances and prepaid expenses) are charged directly to surplus.
Statutory net income (loss) and capital and surplus, excluding intercompany transactions, are summarized as
follows:
($ in thousands)
NSIC - including realized capital gains of $447 and $272, respectively
NSFC - including realized capital gains (losses) of $957 and $(10), respectively
Omega - including realized capital gains (losses) of $190 and $(21), respectively
Statutory risk-based adjusted capital:
NSIC - including AVR of $1,014 and $968, respectively
NSFC - including investment in Omega of $7,085 and $7,930, respectively
Omega
2020
2019
918 $
(8,823) $
(954) $
1,378
2,644
593
10,784 $
17,210
36,505 $
36,264
7,083 $
11,430
$
$
$
$
$
$
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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2020 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
Agency mortgage backed securities
Asset backed securities
Private label mortgage backed securities
Corporate bonds
States, municipalities and political subdivisions
Total Fixed Maturities
Equity securities
$
4,300 $
19,773
8,233
1,418
35,930
6,587
76,241
1,918
323 $
919
137
50
3,771
189
5,389
2,832
9 $
63
27
55
50
27
231
—
4,614
20,629
8,343
1,413
39,651
6,749
81,399
4,750
Total $
78,159 $
8,221 $
231 $
86,149
The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2020
are as follows:
($ in thousands)
Held-to-maturity securities:
Agency mortgage backed securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
Total $
873 $
873 $
73 $
73 $
— $
— $
946
946
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
Fair
Value
U.S. Government corporations and agencies
$
4,131 $
150 $
— $
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
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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
The amortized cost and aggregate fair value of debt securities at December 31, 2020, 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
$
125 $
18,457
24,867
32,792
Total $
76,241 $
$
17 $
4
852
Total $
873 $
125
19,601
26,670
35,003
81,399
18
4
924
946
A summary of securities available-for-sale with unrealized losses as of December 31, 2020, 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, 2020
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
$
666 $
9 $ — $
— $ 666 $
2,264
1,737
891
2,467
1,713
56
27
55
45
27
2
—
—
495
—
7
2,266
—
1,737
—
891
5
2,962
—
1,713
$ 9,738 $
219 $
497 $
12 $ 10,235 $
9
63
27
55
50
27
231
1
8
2
1
5
3
20
There were no securities held-to-maturity with unrealized losses as of December 31, 2020.
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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 $
104 $ 1,751 $
53 $ 7,414 $
4,241
33
1,579
71
5,820
1,060
6,363
4
—
54
1,484
—
1,060
16
7,847
512
1
—
—
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.
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 7% 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, 2020, the Company realized $180,000 other-than-temporary impairments. For
the year ended December 31, 2019, the Company realized no other-than-temporary impairments. At December 31,
2020, the three largest losses not realized as an impairment in the fixed maturity portfolio totaled $55,000, $37,000
and $27,000. After evaluation by management, it was determined that each of these losses were driven by changes
in market interest rates and, in some cases, a lack of liquidity in some sectors driven by market dislocation.
However, management currently has the intent and ability to hold these investments until recovery so no other-than-
temporary impairments were recognized. At December 31, 2019, the three largest losses not realized as an
impairment in the fixed maturity portfolio totaled $60,000, $23,000 and $20,000.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major categories of investment income are summarized as follows:
($ in thousands)
Fixed maturities
Equity securities
Mortgage loans on real estate
Investment real estate
Policy loans
Other
Less: Investment expenses
Net investment income
Major categories of investment gains and losses are summarized as follows:
($ in thousands)
Realized gains on fixed maturities
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 principally real estate
Other-than-temporary impairments
Net investment gains
$
Year ended
December 31,
2020
2019
$
3,482 $
3,752
128
7
1
143
15
3,776
143
$
3,633 $
Year ended
December 31,
2020
2019
$
1,361 $
86
8
4
142
30
4,022
146
3,876
18
233
5
712
295
1,792
—
—
3,055
426
13
(344)
343
—
4
(180)
1,623 $
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 on available-for-sale securities
December 31,
2020
December 31,
2019
$
$
2,000 $
(420)
1,580 $
4,910
(1,031)
3,879
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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, 2020 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
$
4,614 $
4,614 $
— $
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
20,629
8,343
39,651
1,413
6,749
—
169
4,750
12,044
2,343
—
891
—
—
169
3,248
8,585
6,000
39,651
522
6,749
—
—
—
$ 86,318 $ 23,309 $ 61,507 $
—
—
—
—
—
—
—
—
1,502
1,502
$
$
(619) $
(619) $
— $
— $
— $
— $
(619)
(619)
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately
traded equity securities are classified within Level 3.
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, 2020, Level 3 fair value measurements of assets include $1,502,000 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, 2020, Level 3 fair value measurements of liabilities include $619,000 net fair value of various
interest rate swap agreements whose value is based on analysis provided by a third party that utilizes financial
modeling tools and assumptions on interest and other factors. The Company does not develop the unobservable
inputs used in measuring fair value. Additional information regarding the interest rate swap agreements is provided
in Note 8.
The table below presents a reconciliation for all assets and for all liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the year ended December 31, 2020:
($ in thousands)
For the year ended December 31, 2020
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, 2020:
68
68
Equity Securities
Interest Rate Swap
$
1,315 $
187
—
—
—
—
—
—
(65)
—
(554)
—
—
—
—
—
$
$
1,502 $
(619)
187 $
—
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2020, there were no assets or liabilities measured at fair values on a
nonrecurring 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 $
— $
Agency mortgage backed securities
Asset backed securities
Corporate bonds
Private label asset backed securities
States, municipalities and political subdivisions
Foreign governments
Trading securities
32,987
10,274
37,820
7,252
6,777
869
149
19,330
2,601
—
1,060
—
869
149
Equity securities available-for-sale
5,303
3,988
13,657
7,673
37,820
6,192
6,777
—
—
—
$ 105,712 $ 32,278 $ 72,119 $
—
—
—
—
—
—
—
—
1,315
1,315
Total Financial Assets
Financial Liabilities
Interest rate swap
Total Financial Liabilities
$
$
(65) $
(65) $
— $
— $
— $
— $
(65)
(65)
The table below presents a reconciliation for all assets and for all liabilities 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 ended 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
Available-for-Sale
Interest Rate Swap
$
1,125 $
(234)
645
—
—
(455)
—
—
—
1,315 $
412 $
$
$
—
169
—
—
—
—
—
(65)
—
For the year ended December 31, 2019, 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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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:
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, 2020 and
December 31, 2019 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, 2020
Carrying
Value
Estimated
Fair Value
December 31, 2019
Carrying
Value
Estimated
Fair Value
$
873 $
946 $
1,290 $
1,345
145
1,846
4,998
2,033
1,342
500
145
1,846
4,998
2,033
1,342
500
147
1,895
4,655
2,280
1,350
500
147
1,895
4,655
2,280
1,350
500
Long-term debt
13,177
13,177
13,664
13,664
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020
December 31, 2019
$
$
3,491 $
1,498
483
5,472
3,900
1,572 $
3,472
1,470
483
5,425
3,795
1,630
Depreciation expense for the year ended December 31, 2020 was $109,000 ($124,000 for the year ended
December 31, 2019).
NOTE 7 – INCOME TAXES
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 2015. Tax returns have been
filed through the year 2019.
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 asset position of $706,000 at
December 31, 2020 and a net deferred tax liability $96,000 at December 31, 2019.
The tax effect of significant differences representing deferred tax assets and liabilities are as follows:
($ in thousands)
General expenses
Unearned premiums
Claims liabilities
NOL carryforward
Impairment on real estate owned
Unrealized loss on interest rate swaps
Deferred tax assets
Unrealized gains on 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,
2020
As of December 31,
2019
$
1,448 $
1,313
698
632
147
130
4,368
(3)
(95)
(1,555)
(331)
(1,083)
(595)
(3,662)
$
706 $
71
71
1,269
1,288
645
—
119
14
3,335
(1)
(93)
(1,610)
(397)
(663)
(667)
(3,431)
(96)
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The appropriate income tax effects of changes in temporary differences are as follows:
($ in thousands)
Deferred policy acquisition costs
Other-than-temporary impairments
Trading securities
Unearned premiums
General expenses
Depreciation
Claims liabilities
Impact of repeal of special provision on pre-1984 policyholder surplus
NOL carryforward
Unrealized gains (losses) on equity securities
Deferred income tax benefit
Year ended
December 31,
2020
2019
$
(55) $
(28)
2
(25)
(179)
2
(53)
(66)
(632)
(72)
$
(1,106) $
(35)
—
1
(23)
(202)
14
(93)
(66)
—
149
(255)
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,
2020
2019
21.0 %
0.1 %
0.7 %
— %
21.8 %
21.0 %
(0.3) %
(9.6) %
0.1 %
11.2 %
Short-term debt and current portion of long-term debt consisted of the following as of December 31, 2020 and
December 31, 2019:
($ in thousands)
Current portion of installment note payable due in November with variable
interest rate equal to the WSJ prime rate plus 0.5%, with a 4.75% floor.
Unsecured.
December 31,
2020
December 31,
2019
$
$
500 $
500 $
500
500
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consisted of the following as of December 31, 2020 and December 31, 2019:
($ in thousands)
December 31,
December 31,
2020
2019
Promissory note with variable interest rate equal to the WSJ prime rate plus
0.5%, with a 4.75% floor; maturity November 2023. Annual installment
payments beginning November 2020. Unsecured.
$
1,000 $
1,500
Subordinated debentures issued on December 15, 2005 with floating rate
interest equal to 3-Month LIBOR plus 375 basis points; net of $140,000 in
debt issuance cost ($150,000 in 2019); 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 $55,000 in debt
issuance cost ($58,000 in 2019); maturity June 15, 2037. Interest payable
quarterly. Redeemable prior to maturity. Unsecured.
9,139
9,129
3,038
$
13,177 $
3,035
13,664
Annual maturities of all outstanding debt for the next five years and beyond are as follows:
($ in thousands)
2021
2022
2023
2024
2025
Thereafter
$
500 $
500 $
500 $
— $
— $
12,177
The Company has entered into various swap agreements related to the trust preferred securities. On February 26,
2020, the Company entered into a forward swap effective March 16, 2020, 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
June 15, 2020, under the terms of the forward swap, the Company pays interest at a fixed rate of 4.93% until March
15, 2030. On February 26, 2020, the Company entered into a forward swap with a notional amount of $9,000,000
effective March 16, 2020, which hedges against changes in cash flows following the termination of the fixed rate
period. Quarterly, commencing June 15, 2020 under the terms of the forward swap, the Company pays interest at a
fixed rate of 5.28% until March 15, 2030. 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 paid interest at a fixed rate of 8.49% until March 15, 2020.
The interest rate swaps have fair values of $155,000 (liability) and $464,000 (liability), respectively, for a total liability
of $619,000 at December 31, 2020 ($65,000 at December 31, 2019). The swap liability is reported as a component
of other liabilities on the consolidated balance sheets. A net valuation loss of $438,000 (net of tax) is included in
accumulated other comprehensive income related to the swap agreements at December 31, 2020. A net valuation
gain of $134,000 (net of tax) was included in accumulated other comprehensive income related to the swap at
December 31, 2019. There is no portion of the existing valuation loss expected to be reclassified into earnings
within the next 12 months.
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, 2020, the Company has securities on deposit with fair market values of
$957,000 (all of which is posted as collateral). At December 31, 2019, the Company had securities on deposit with
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair market values of $294,000 (all of which was posted as collateral). See Note 5 for additional information about
the interest rate swaps.
NOTE 9 – POLICY AND CLAIM RESERVES
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:
Year ended
December 31,
2020
2019
$
7,199 $
249
6,950
8,208
1,384
6,824
35,312
(1,333)
33,979
30,179
3,674
33,853
6,950
249
($ 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
50,112
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
(687)
49,425
44,816
4,703
49,519
6,856
3,321
Claims and claim adjustment expense reserves at end of period
$
10,177 $
7,199
Claims and claim adjustment expense reserves before reinsurance recoverable at December 31, 2020 were up
compared to the same period last year due to an increase in hurricane activity in the third and fourth quarter of
2020. The most significant event contributing to remaining claim reserves at December 31, 2020 was Hurricane
Zeta which occurred in late October. The estimate for claims arising in prior years was reduced $687,000 in 2020
(reduced $1,333,000 in 2019) 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, particularly the
north-central Gulf of Mexico and the Georgia and South Carolina coast. 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, 2020, the Company's estimate of unpaid losses and adjustment expenses for claims incurred in prior
years related to catastrophes that exceeded our retention totaled $0 before reinsurance ($24,000 in 2019).
The claim development table that follows presents incurred and cumulative paid claims and adjustment expense by
accident year. Information presented is undiscounted and net of reinsurance.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Homeowners, Dwelling Fire and Other Liability
20111
20121
20131
20141
20151
20161
20171
20181
2019
2020
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
($ in thousands)
Years
IBNR
Reserves
Dec. 31,
2020
Cumulative
Number of
Reported
Claims
2011 $ 35,203 $ 33,957 $ 34,233 $ 34,711 $ 34,806 $ 34,650 $ 34,658 $ 34,663 $ 34,751 $ 34,706 $
2012
2013
2014
2015
2016
2017
2018
2019
2020
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
29,959
30,190
30,402
30,091
29,948
29,885
29,827
29,834
29,830
27,436
27,147
27,076
27,023
27,191
27,236
27,022
27,015
25,929
26,422
26,290
26,225
26,130
26,096
26,086
31,484
30,861
30,360
30,890
30,960
31,033
376
—
—
—
—
—
—
—
—
—
—
—
36,287
35,343
35,399
35,144
35,151
40,210
38,958
38,642
38,675
37,079
36,195
36,229
—
—
—
—
—
—
—
—
—
35,929
35,199
—
50,722
3,137
Total
$ 344,646
—
—
5
—
6
6
213
421
8,132
5,205
5,214
4,756
5,853
5,193
5,331
4,799
4,835
6,125
1
Required supplementary information (unaudited)
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
($ in thousands)
Years
20111
20121
20131
20141
20151
20161
20171
20181
2019
2020
2011 $ 31,488 $ 33,080 $ 33,484 $ 34,167 $ 34,622 $ 34,621 $ 34,641 $ 34,647 $ 34,650 $ 34,703
2012
2013
2014
2015
2016
2017
2018
2019
2020
—
—
—
—
—
—
—
—
—
26,162
29,135
29,614
29,765
29,834
29,835
29,823
29,824
29,825
—
—
—
—
—
—
—
—
24,157
26,114
26,487
26,661
26,788
26,976
27,011
27,006
—
—
—
—
—
—
—
22,844
25,461
25,800
26,033
26,095
26,094
26,086
—
—
—
—
—
—
25,923
30,066
30,190
30,296
30,366
30,492
—
—
—
—
—
31,893
34,722
35,030
35,139
35,131
—
—
—
—
35,209
38,245
38,499
38,659
—
—
—
32,456
35,543
35,924
—
—
30,796
34,593
—
45,423
Total $ 337,842
All outstanding liabilities before 2010, net of reinsurance
52
Liabilities for claims and claim adjustment expenses, net of reinsurance $ 6,856
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
88.7 %
8.8 %
1.0 %
0.6 %
0.3 %
0.1 %
0.4 %
— %
— %
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.
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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 2020 compared to prior years.
As shown in the table above depicting average annual payout of incurred claims, 88.7% of claims are settled within
twelve months of the date of loss and cumulatively, 97.5% 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 lessen 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,
2020
December 31,
2019
$
2,359 $
2,877
1,618
2
6,856
2,620
700
—
1
3,321
—
—
—
—
2,651
2,623
1,667
9
6,950
203
46
—
—
249
—
—
—
—
Total gross liability for unpaid claims and claim adjustment expense
$
10,177 $
7,199
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
$426,000 at December 31, 2020 ($417,000 at December 31, 2019). These claims are a component of policy and
contract claims which totaled $1,309,000 at December 31, 2020 ($1,053,000 at December 31, 2019).
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cumulative incurred and paid claims over the last three years, along with annual percentage payouts related to
accident and health claims, is as follows:
For the Years Ended December 31,
20181
2019
Incurred Claims and Allocated Claims Adjustment
Expenses, Net of Reinsurance ($ in thousands)
2020
$
1,037 $
Years
2018
2019
2020
1
Required supplementary information (unaudited)
IBNR Reserves
Dec. 31, 2020
Cumulative Number
of Reported Claims
1,120 $
935
1,020 $
968
818
—
—
426
1,489
1,454
805
Cumulative Paid Claims and Allocated Claims Adjustment
Expenses, Net of Reinsurance ($ in thousands)
20181
2019
2020
$
747 $
991 $
614
1,011
917
451
Years
2018
2019
2020
1
Required supplementary information (unaudited)
Average Annual Percentage Payout of Incurred Claims by
Age
Required supplementary information (unaudited)
Years
1
63.9%
2
32.0%
3
3.2%
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.
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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
Catastrophe Aggregate 100% of $2,000,000 in excess of $2,000,000 aggregate annual deductible
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, 2020, the largest reinsurance recoverable of a single reinsurer was $1,263,000 ($10,000 at
December 31, 2019). 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,
2020 and 2019 amounted to $191,000 and $181,000, 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, 2020
and 2019 amounted to approximate increases of $430,000 and $573,000 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 contributions of $100,000 during the year ended
December 31, 2020 and no contributions were made during the year ended December 31, 2019. 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.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, 2020, NSIC's retained earnings unrestricted for
the payment of dividends in the next twelve months amounted to $1,168,000.
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, 2020, NSFC's retained earnings unrestricted for the payment of dividends in the next twelve months
amounted to $3,650,000.
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, 2020, securities with market values of $3,349,000 ($3,188,000 at December 31, 2019) were
pledged with various states pursuant to statutory requirements.
NOTE 13 – SHAREHOLDERS' EQUITY
During the year ended December 31, 2020 and year ended December 31, 2019, changes in shareholders' equity
consisted of net loss of $8,619,000 and net income of $4,067,000, respectively; dividends paid of $607,000 in 2020
and $531,000 in 2019; other comprehensive income of $1,142,000 in 2020 and $4,013,000 in 2019; common stock
issued of $25,000 in 2020 and $53,000 in 2019; and the purchase of treasury shares of $36,000 in 2020 and $7,000
in 2019. Other comprehensive income 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.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below provides information regarding the Company's preferred and common stock as of December 31,
2020 and December 31, 2019:
December 31, 2020
Authorized
Issued
Treasury
Outstanding
Preferred Stock, $1 par value
500,000
Class A Common Stock, $1 par value 2,000,000
—
—
—
—
—
—
Common Stock, $1 par value
3,000,000
2,533,315
2,945
2,530,370
December 31, 2019
Authorized
Issued
Treasury
Outstanding
Preferred Stock, $1 par value
500,000
Class A Common Stock, $1 par value 2,000,000
—
—
—
—
—
—
Common Stock, $1 par value
3,000,000
2,531,552
436
2,531,116
On May 22, 2020, 1,763 shares of common stock were issued to directors as compensation under the 2019 Equity
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
May 2020. Effective June 1, 2020, the Board authorized the repurchase of up to $500,000 of the Company's
outstanding common stock. The plan expires May 31, 2021.
During the year ended December 31, 2020, the Company purchased 2,509 shares of common stock which were
placed in treasury stock. During the year ended December 31, 2019, the Company purchased 436 shares of
common stock which were placed in treasury stock.
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) ("AOCI") includes certain items that are reported directly within a
separate component of shareholders' equity. The following table presents changes in AOCI balances:
($ in thousands)
Unrealized Gains (Losses) on Cash Flow Hedges
Balance at beginning of period
Other comprehensive income (loss) for period:
Other comprehensive gain (loss) before reclassifications
Net current period other comprehensive income (loss)
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
Amounts reclassified from accumulated other comprehensive (income) loss
Net current period other comprehensive income
Balance at end of period
Total Accumulated Other Comprehensive Income at end of period
Year ended
December 31,
2020
2019
$
(51) $
(185)
(438)
(438)
$
(489) $
134
134
(51)
$
2,494 $
(1,385)
317
1,263
1,580
4,074 $
3,865
14
3,879
2,494
3,585 $
2,443
$
$
The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2020:
($ 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
$
$
1,599 Net investment gains
1,599 Total before tax
(336) Tax (expense) or benefit
1,263 Net of Tax
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) or benefit
14 Net of Tax
81
81
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020 and December 31, 2019 are summarized below:
($ in thousands)
Assets by industry segment
Total
P&C
Insurance
Operations
Life
Insurance
Operations
Non-
Insurance
Operations
December 31, 2020
$
150,540 $
85,375 $
59,394 $
5,771
December 31, 2019
$
153,934 $
83,917 $
65,605 $
4,412
82
82
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income (loss) by business segment for the year ended December 31, 2020 and 2019 is summarized below:
($ in thousands)
Year ended December 31, 2020
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)
$
55,101 $
5,709 $
— $
1,530
1,043
582
2,583
567
1,242
58,256
10,101
49,425
5,215
2,724
7,212
8,589
2,268
—
70,218
(11,962)
(2,583)
824
331
1,923
216
41
8,550
1,551
306
60
13
1,035
1,108
—
—
—
892
—
823
1,715
(607)
(122)
Net Income (Loss)
$
(9,379) $
1,245 $
(485) $
— $ 60,810
(540)
3,633
—
1,623
(2,276)
583
(2,816) 66,649
(710) 53,930
—
—
3,548
7,543
(2,106)
9,298
—
—
2,484
864
(2,816) 77,667
—
—
(11,018)
(2,399)
— $ (8,619)
($ 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)
$
54,019 $
5,864 $
— $
— $ 59,883
1,683
2,178
575
2,677
861
853
58,455
10,255
33,979
5,027
2,723
7,148
8,616
2,185
—
54,651
3,804
359
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)
(916) $
(540) 3,876
—
3,055
(1,862)
585
(2,402) 67,399
(408) 38,598
—
—
3,459
7,429
(1,994) 9,698
—
—
2,470
1,165
(2,402) 62,819
—
—
4,580
513
— $ 4,067
Net Income (Loss)
$
3,445 $
1,538 $
83
83
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended December 31, 2020 and 2019, respectively:
($ in thousands)
Life, accident and health operations premiums written:
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
Year ended
December 31,
2020
2019
$
$
$
$
$
$
4,110 $
1,727
5,837
(80)
5,757 $
40,590 $
20,143
2,212
62,945
(7,296)
55,649 $
68,782 $
(7,376)
61,406 $
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
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 year ended December 31, 2020 and 2019, respectively:
($ in thousands)
Life, accident and health operations premiums earned:
Traditional life insurance
Accident and health insurance
Gross life, accident and health
Reinsurance premium ceded
Net life, accident and health premiums earned
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
84
84
Year ended
December 31,
2020
2019
$
$
$
$
$
$
4,071 $
1,718
5,789
(80)
5,709 $
39,775 $
20,392
2,230
62,397
(7,296)
55,101 $
68,186 $
(7,376)
60,810 $
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
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 which was favorably resolved in the second quarter of 2020 with no material impact on these
consolidated financial statements.
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 and include estimates for associated legal costs. There are no
individual actions deemed material by management based upon evaluation of information presently available.
NOTE 17 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the year ended December 31, 2020 was $765,000 ($1,185,000 in 2019). Cash paid
for income taxes during the year ended December 31, 2020 was $244,000. Cash received from income taxes
during the year ended December 31, 2019 was $921,000.
During the year ended December 31, 2020, non-cash changes in equity included $1,000 in common stock issued to
Directors in lieu of cash compensation along with a corresponding $24,000 increase in additional paid-in capital.
NOTE 18 – SUBSEQUENT EVENTS
Management has evaluated subsequent events and their potential effects on these consolidated financial
statements through the filing date of this Form 10-K.
85
85
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule I. Summary of Investments Other Than Investments in Related Parties
THE NATIONAL SECURITY GROUP, INC.
($ in thousands)
December 31, 2020
December 31, 2019
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.................
873 $
873
946 $
946
873 $
873
1,290 $
1,290
1,345 $
1,345
1,290
1,290
Securities Available-for-Sale:
Equity Securities:
Banks and insurance companies.................
Industrial and all other..................................
Total equity securities.................................
842
1,076
1,918
2,545
2,205
4,750
2,545
2,205
4,750
843
1,284
2,127
2,335
2,968
5,303
2,335
2,968
5,303
Debt Securities:
U.S. Government corporations and
agencies.......................................................
Agency mortgage backed securities............
Asset backed securities................................
Private label asset backed securities...........
Corporate bonds...........................................
4,300
19,773
8,233
1,418
35,930
4,614
20,629
8,343
1,413
39,651
4,614
20,629
8,343
1,413
39,651
4,131
32,283
10,307
6,815
36,074
4,281
32,987
10,274
7,252
37,820
4,281
32,987
10,274
7,252
37,820
States, municipalities and political
6,777
subdivisions..................................................
869
Foreign governments...................................
100,260
Total Debt Securities...................................
105,563
Total Available-for-Sale...................................
106,853
Total Securities....................................................
149
Trading securities...................................................
147
Mortgage loans on real estate................................
2,934
Investment real estate............................................
1,895
Policy loans............................................................
4,655
Company owned life insurance..............................
Other invested assets.............................................
2,336
Total investments.................................................... $ 90,244 $ 99,223 $ 99,150 $ 112,062 $ 119,024 $ 118,969
6,669
823
97,102
99,229
100,519
149
147
2,934
1,895
4,082
2,336
6,777
869
100,260
105,563
106,908
149
147
2,934
1,895
4,655
2,336
6,749
—
81,399
86,149
87,095
169
145
2,934
1,846
4,998
2,036
6,749
—
81,399
86,149
87,022
169
145
2,934
1,846
4,998
2,036
6,587
—
76,241
78,159
79,032
169
145
2,934
1,846
4,082
2,036
86
86
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,
2020
2019
($ in thousands)
Assets
Fixed maturities available-for-sale, at estimated fair value
$
957 $
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
$
$
356
3,108
57,681
—
960
546
3,946 $
619
500
13,177
18,242
45,366
Total Liabilities and Shareholders' Equity
$
63,608 $
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
63,608 $
71,102
($ in thousands)
Income
Dividends (eliminated upon consolidation)
Net realized investment gains
Holding company management service fees
Other income
Expenses
State taxes
Interest
Other expenses
Years Ended December 31,
2020
2019
$
1,100 $
13
1,035
60
2,208
49
823
843
1,715
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 (losses) of subsidiaries
Net Income (Loss)
493
(122)
615
(9,234)
(8,619) $
$
87
87
294
356
3,393
65,329
491
714
525
3,412
65
500
13,664
17,641
53,461
71,102
2,750
16
1,019
56
3,841
51
1,122
1,077
2,250
1,591
(243)
1,834
2,233
4,067
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 (losses) of subsidiaries
Net realized investment gains
Income taxes
Other, net
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Net sales (purchases) of investments
Net Cash Provided by (Used in) 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
Years Ended
December 31,
2020
2019
$
(8,619) $
4,067
9,234
(13)
364
531
1,497
(675)
(675)
(500)
(607)
(1,107)
(285)
3,393
3,108 $
(2,233)
(16)
370
750
2,938
663
663
(200)
(531)
(731)
2,870
523
3,393
$
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 47.
Note 2 - Cash Dividends and Asset Transfers from Insurance Subsidiaries
In 2020, cash dividends of $1,100,000 were paid to the Registrant by its subsidiaries ($2,750,000 in 2019).
88
88
Table of Contents
THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule III. Supplementary Insurance Information
($ in thousands)
At December 31, 2020:
THE NATIONAL SECURITY GROUP, INC.
Deferred
Acquisition
Costs
Future
Policy
Benefits
Unearned
Premiums
Unpaid
Losses
Life and accident and health insurance
$
3,927 $
38,875 $
14 $
1,309
Property and casualty insurance
3,481
—
31,152
10,177
Total
At December 31, 2019:
$
7,408 $
38,875 $
31,166 $ 11,486
Life and accident and health insurance
$
4,227 $
38,315 $
10 $
1,053
Property and casualty insurance
3,439
—
30,545
7,199
Total
$
7,666 $
38,315 $
30,555 $
8,252
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, 2020:
Life and accident and health insurance
$ 5,709 $
2,583 $
1,242 $
5,215 $
1,155 $
2,139
Property and casualty insurance
55,101
Other
Total
For the year ended December 31, 2019:
1,530
60
582
1,035
49,425
—
9,936
10,857
—
892
$ 60,810 $
4,173 $
2,859 $
54,640 $
11,091 $ 13,888
Life and accident and health insurance
$ 5,864 $
2,677 $
853 $
5,027 $
1,017 $
2,233
Property and casualty insurance
54,019
1,683
56
575
1,019
33,979
—
9,871
10,801
—
1,128
$ 59,883 $
4,416 $
2,447 $
39,006 $
10,888 $ 14,162
Other
Total
—
—
Note: Investment income and other operating expenses are reported separately by segment and not allocated.
Schedule IV. Reinsurance
THE NATIONAL SECURITY GROUP, INC.
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
Net
Amount
Percentage
of Amount
Assumed to
Net
$ 201,549 $
9,514 $
— $ 192,035
— %
($ in thousands)
For the year ended December 31, 2020
Life insurance in force
Premiums:
Life insurance and accident and health insurance
$
5,789 $
80 $
— $
5,709
Property and casualty insurance
62,397
7,296
—
55,101
Total premiums
$ 68,186 $
7,376 $
— $ 60,810
— %
— %
— %
For the year ended December 31, 2019
Life insurance in force
Premiums:
$ 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
— %
— %
— %
89
89
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, 2020 and 2019
($ in thousands)
Balance, January 1 Allowance for Doubtful Accounts
Additions
Deletions
Balance, December 31 Allowance for Doubtful Accounts
2020
2019
$
$
5 $
4
3
6 $
4
4
3
5
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, 2020.
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, 2021
90
90
Table of Contents
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers
JACK E. BRUNSON (64) 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. (62) 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.
BRIAN R. MCLEOD (52) has served as a director since 2016 and 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 River Financial Corporation, a bank holding company headquartered in Prattville,
Alabama. Mr. McLeod is a Certified Public Accountant.
The information contained in The National Security Group's definitive proxy statement for the 2021 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission on or before April 7, 2021 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 2021 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission on or before April 7, 2021 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 2021 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission on or before April 7, 2021 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 2021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 7, 2021, 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 2021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 7, 2021, 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 2021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
before April 7, 2021, 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 2021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or
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before April 7, 2021, with respect to principal accountant fees and services, is incorporated herein by reference in
response to this item.
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, 2020 and 2019
Consolidated Statements of Operations - Years ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2020 and
2019
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows - Years ended December 31, 2020 and 2019
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 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
October 12, 2020
October 16, 2020
Date Filed
October 12, 2020
October 19, 2020
November 13, 2020 November 13, 2020
Description
Press release updating on 2020 Hurricane Losses
Press release announcing quarterly dividend.
Press release announcing financial results for the period ended
September 30, 2020.
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SIGNATURE
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.
/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, 2021
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, 2021:
/s/ Andrew J. Abernathey
/s/ Charles Arnold
/s/ Fleming Brooks
/s/ Jack E. Brunson
/s/ William L. Brunson, Jr.
/s/ Fred D. Clark, Jr.
/s/ Elizabeth Crawford
SIGNATURE
/s/ Brian R. McLeod
/s/ Mickey L. Murdock
/s/ Frank B. O'Neil
/s/ Donald Pittman
/s/ L. Brunson White
/s/ Walter P. Wilkerson
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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
94
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, 2021, 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, 2020.
/s/ Warren Averett, LLC
Birmingham, Alabama
March 19, 2021
95
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, William L. Brunson, Jr., certify that:
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;
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:
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:
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, 2021
/s/ William L. Brunson, Jr.
William L. Brunson, Jr.
President and Chief Executive Officer
96
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Brian R. McLeod, certify that:
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;
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:
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:
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, 2021
/s/ Brian R. McLeod
Brian R. McLeod
Chief Financial Officer
97
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, 2020 (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, 2021
/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
98
BOARD OF DIRECTORS
CORPORATE PROFILE
Walter P. Wilkerson, CPA
Chairman of the Board
The National Security Group, Inc.
Consultant
Brunson, Wilkerson, Bowden
& Associates, P.C.
Enterprise, Alabama
Andrew J. Abernathy
Founder & CEO
Abernathy Holding Company
Fargo, North Dakota
Charles B. Arnold
Assistant Controller
Church's Chicken
Buford, Georgia
Fleming Brooks
Chairman of the Board
Brooks Agrico LLC
Samson, Alabama
Jack E. Brunson
President
National Security Fire &
Casualty Company
Elba, Alabama
William L. Brunson, Jr.
President & Chief Executive Officer
The National Security Group, Inc.
Elba, Alabama
Fred Clark, Jr.
President & Chief Executive Officer
Alabama Municipal Electric Authority
Montgomery, Alabama
Elizabeth B. Crawford
Attorney at Law
Birmingham, Alabama
Brian R. McLeod
Chief Financial Officer
The National Security Group, Inc.
Elba, Alabama
Mickey Murdock
Retired Senior Vice President
The National Security Group, Inc.
Elba, Alabama
Frank B. O’Neil
Pro Assurance
Birmingham, Alabama
Donald S. Pittman
Attorney at Law
Enterprise, Alabama
L. Brunson White
Principal
Brunson White Advisors, LLC
Vestavia Hills, Alabama
Directors Emeritus
Winfield Baird
Director Emeritus
Chartered Financial Analyst
Retired Financial Advisor,
Baird Financial Management
Birmingham, Alabama
James B. Saxon
Director Emeritus
Retired Executive
Anderson Products
Square D Company
Birmingham, Alabama
CORPORATE INFORMATION
For Copy of Annual Report, Proxy or
10K, or For More Information Contact:
Brian R. McLeod
Chief Financial Officer
The National Security Group, Inc.
661 East Davis Street
Elba, Alabama 36323
334-897-2273
Annual Shareholders Meeting:
May 21, 2021
Executive Offices
Elba, Alabama
Auditors:
Warren Averett, LLC
2500 Acton Road
Birmingham, Alabama 35243
Life Company Actuaries:
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.
Trade Symbol: NSEC
Transfer Agent: Computershare
P.O. Box 505000
Louisville, KY 40233
1-800-368-5948
www.computershare.com/investor
Founded in 1947, The National
Security Group, Inc. (NSG) is
dedicated to helping people in
times of need by providing vital,
easily understood insurance
products and prompt professional
service. At National Security we
realize that your world is unique.
That’s why we’re committed to
insuring your world – whatever
it may be. The Company is
composed of three insurance
companies: National Security
Insurance Company (NSIC),
National Security Fire and Casualty
Company (NSFC) and Omega One
Insurance Company (Omega),
a wholly owned subsidiary of
NSFC. These companies provide
a diversified line of insurance
coverage in communities primarily
in the South. Natsco, Inc., is a
wholly owned subsidiary formed in
1984. The insurance lines currently
offered include: dwelling fire and
extended coverage, homeowners
(including mobile homeowners),
and other liability, as well as
traditional life, accident, and health
insurance. The policies provided by
The National Security Group, Inc.
are marketed through independent
insurance agents throughout the
Southeastern United States.
661 East Davis Street
Elba, Alabama 36323
nationalsecuritygroup.com