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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-K
  (Mark One)
☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021

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
nsec-20211231_g1.jpg
The National Security Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 63-1020300
(State or Other Jurisdiction of
Incorporation or Organization)		(IRS Employer
Identification No.)
  
661 East Davis Street
Elba,Alabama 36323
(Address of principal executive offices) (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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock,
par value $1.00 per share		NSECThe 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
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     o                         Accelerated filer          ☐ 
Non-accelerated filer      þ                         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 $11,354,291.
ClassOutstanding March 23, 2022
Common Stock $1.00 par value2,532,632 shares

Documents incorporated by reference in this Form 10-K

i.Current Report on Form 8-K for event occurring on January 26, 2022 is incorporated into Part IV of this report.

ii.Current Report on Form 8-K for event occurring on March 4, 2022 is incorporated into Part IV of this report.
2
THE NATIONAL SECURITY GROUP, INC.

TABLE OF CONTENTS
 Page No.
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. [Reserved]
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
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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




3
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 92.1% of gross earned premium.

The Company's life insurance subsidiary, National Security Insurance Company (NSIC), offers a basic line of life and health and accident insurance products in seven states.

The majority of our assets and investments are held in the insurance company subsidiaries.

The Company's website address is: www.nationalsecuritygroup.com. The “Investors” section of our website (http://investors.nationalsecuritygroup.com/) provides numerous resources for investors seeking additional information about us. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K are made available on our website soon after filing with the SEC. Additionally, stock trades by insiders as filed on Forms 3, 4, and 5 are posted to the website after filing with the SEC. The website also provides information regarding corporate governance, stock quotes and press releases. Investors are encouraged to visit our website for additional information about the Company.

Cautionary Statement Regarding Forward-Looking Statements

Any statement contained in this report which is not a historical fact, or which might otherwise be considered an opinion or projection concerning the Company or its business, whether expressed or implied, is meant as and should be considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1995. The following report contains forward-looking statements that are not strictly historical and that involve risks and uncertainties. Such statements include any statements containing the words “expect,” “plan,” “estimate,” “anticipate” or other words of a similar nature. Management cautions investors about forward-looking statements. Forward-looking statements involve certain evaluation criteria, such as risks, uncertainties, estimates, and/or assumptions made by individuals informed of the Company and industries in which we operate. Any variation in the preceding evaluation criteria could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, without limitation, the following:

▪The insurance industry is highly competitive and the Company encounters significant competition in all lines of business from other insurance companies. Many of the competing companies have more abundant financial resources than the Company.

▪Insurance is a highly regulated industry. It is possible that legislation may be enacted which would have an adverse effect on the Company's business.

▪The Company is subject to regulation by state governments for each of the states in which it conducts business. The Company cannot predict the subject of any future regulatory initiative(s) or its (their) impact on the Company's business. Company insurance rates are also subject to approval by state insurance departments in each of these states. We are often limited in the level of rate increases we can obtain.
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▪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.

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The following table indicates allocation of direct premium written by state for the years ended December 31, 2021 and 2020:
($ in thousands)Percent of Direct Written Premium
State20212020
Alabama$19,489 28.4 %$16,770 26.7 %
Arkansas1,782 2.6 %1,649 2.6 %
Georgia12,964 18.9 %11,577 18.4 %
Louisiana2,277 3.3 %4,300 6.8 %
Mississippi13,060 19.0 %11,213 17.8 %
Oklahoma7,652 11.2 %7,206 11.5 %
South Carolina7,917 11.6 %7,069 11.2 %
Tennessee3,416 5.0 %3,161 5.0 %
$68,557 100.0 %$62,945 100.0 %
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)Year Ended December 31,
20212020
Net premiums earned:
Fire, allied lines and homeowners$55,869 $55,101 
Other— — 
Total net earned premium$55,869 $55,101 
Property and Casualty Loss Reserves

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.

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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 2021 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 20112012201320142015201620172018201920202021
     Consolidated Balance Sheet$14,386 $11,214 $8,734 $8,321 $9,645 $7,530 $7,075 $8,208 $7,199 $10,177 $8,930 
Ceded reserves(2,381)(1,229)(782)(839)(1,381)(1,184)(327)(1,384)(249)(3,321)(2,139)
Net unpaid losses($ in thousands)$12,005 $9,985 $7,952 $7,482 $8,264 $6,346 $6,748 $6,824 $6,950 $6,856 $6,791 
Cumulative net payments:1 year later$4,035 $4,827 $2,900 $2,990 $4,482 $2,950 $3,069 $3,320 $4,178 $3,874 
2 years later5,346 6,670 3,539 3,503 4,839 3,364 3,411 3,857 4,677 
3 years later6,483 7,426 3,782 3,863 5,007 3,543 3,559 4,069 
4 years later7,001 7,496 3,910 4,113 5,076 3,661 3,575 
5 years later7,001 7,536 4,085 4,147 5,194 3,689 
6 years later7,060 7,572 4,121 4,134 5,221 
7 years later7,108 7,585 4,117 4,134 
8 years later7,115 7,640 4,117 
9 years later7,169 7,640 
10 years later7,169 
Net Liability re-estimated:1 year later9,606 9,354 6,698 5,597 6,333 4,495 5,060 4,839 5,683 5,966 
2 years later8,439 9,360 5,185 4,559 5,756 4,642 4,278 4,756 5,882 
3 years later8,500 8,483 4,348 4,605 5,916 4,267 4,153 4,948 
4 years later7,661 7,700 4,460 4,428 5,795 4,239 3,907 
5 years later7,091 7,683 4,365 4,272 5,752 4,010 
6 years later7,157 7,592 4,244 4,151 5,537 
7 years later7,124 7,697 4,134 4,147 
8 years later7,217 7,648 4,130 
9 years later7,172 7,646 
10 years later7,169 
Net cumulative redundancy (deficiency)$4,836 $2,339 $3,822 $3,335 $2,727 $2,336 $2,841 $1,876 $1,068 $890 
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Our reported results, financial position and liquidity could be affected by changes in key assumptions that determine our loss reserves. The table below illustrates the change to equity that would occur as a result of a change in loss reserves and reserves for loss adjustment expense:
($ in thousands)For The Years Ended December 31,
20212020
Change in Loss and LAE ReservesAdjusted Loss and LAE Reserves% Change in EquityAdjusted Loss and LAE Reserves% Change in Equity
*Loss and LAE reserves are in thousands
(10.0)%$8,037 2.0%$9,159 2.2%
(7.5)%8,260 1.5%9,414 1.7%
(5.0)%8,484 1.0%9,668 1.1%
(2.5)%8,707 0.5%9,923 0.6%
Reported8,930 —%10,177 —%
2.5%9,153 (0.5)%10,431 (0.6)%
5.0%9,377 (1.0)%10,686 (1.1)%
7.5%9,600 (1.5)%10,940 (1.7)%
10.0%9,823 (2.0)%11,195 (2.2)%
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, 2021 and 2020:
($ in thousands)Percentage of Total Direct Premiums
State20212020
Alabama$3,071 54.0 %$3,208 55.0 %
Florida38 0.7 %38 0.7 %
Georgia1,310 23.0 %1,309 22.4 %
Mississippi500 8.8 %520 8.9 %
South Carolina481 8.5 %479 8.2 %
Tennessee100 1.7 %82 1.4 %
Texas189 3.3 %201 3.4 %
$5,689 100.0 %$5,837 100.0 %
NSIC has two primary methods of distribution of insurance products: independent agents and home service (career) agents. The independent agent distribution method accounts for 69.3% of total premium revenue in the life insurance segment. Approximately 179 of the Company's independent agents produced new business during 2021. The home service distribution method of life insurance products accounts for 25.5% 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, 2021. The remaining 5.2% 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 (3.6%), and other miscellaneous business serviced directly through the home office (1.5%).

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 2021 life segment premium produced by product and distribution method:
($ in thousands)

Line of Business
Home Service AgentIndependent AgentOther
Industrial$34 $— $22 
Ordinary1,197 2,570 (32)
Group Life— 9 61 
A&H Group— 149 51 
A&H Other184 1,275 34 
Total Premium by Distribution Method$1,415 $4,003 $136 

The following table sets forth certain information with respect to the development of Life segment business:
($ in thousands)Year ended December 31,
20212020
Life insurance in force at end of period:
Ordinary-whole life$160,605 $162,765 
Term life22,616 23,886 
Industrial life14,493 14,898 
$197,714 $201,549 
Life insurance issued:
Ordinary-whole life$11,925 $16,675 
$11,925 $16,675 
Net premiums earned:
Life insurance$3,862 $3,991 
Accident and health insurance1,692 1,718 
$5,554 $5,709 
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, 2021, cash and investments comprise 80% of total
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assets, and investment income (including realized gains) comprises 6.4% 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 2021 averaged approximately 10.3% 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 2021 averaged approximately 15% of premiums on both new and renewal business. During 2021, 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 $2,739,000 or 4.9% 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, 2021, 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, 2021, 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 2.1% in Alabama and 1.4% 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, 2021, each subsidiary exceeds any levels that would require regulatory actions.


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AM Best Rating
AM 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 AM Best Company (Best). On April 29, 2021, AM 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, AM Best affirmed the FSR of B+ (Good) and Long-Term ICR of "bbb-" of Omega. The A.M Best outlook for the ratings was revised from "stable" to "negative" for NSFC and Omega. AM Best affirmed the FSR of B++ (Good) and the Long-Term ICR to "bbb" for NSIC. The outlook for the ratings of NSIC was revised from "stable" to "negative". AM Best also affirmed the Long-Term ICR of "bb" of the parent holding company, NSEC, with a revised outlook from "stable" to "negative". On January 31, 2022, AM Best placed the credit ratings of The National Security Group, Inc. and its subsidiaries under review with developing implications following the announcement that Company had entered into a merger agreement under which the Company will be acquired by VR Insurance Holdings, Inc. The "under review with developing implications" status reflects the need for AM Best to assess fully the impact of the acquisition on the Company's business strategy as well as any financial and operational impacts. The ratings will remain under review pending the completion of the acquisition and AM Best's assessment of post-acquisition rating fundamentals. The transaction is subject to customary closing conditions, including stockholder and regulatory approvals, and is expected to be completed by the second quarter of 2022. 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 November 30, 2021, 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 72 staff members as of December 31, 2021, none of which were represented by a labor union, with an average length of service of 16.6 years. This long tenure provides our company with a strong skill set and a depth of knowledge that is passed down to new hires to ensure continuity of service. 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. We consider our employee relations to be good.

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 that assist us in both recruiting and retention. These benefits include bonuses based on Company performance, 7 paid holidays, paid time off, extended illness leave (including maternity), health/dental/vision insurance, 401-k with company match, education/training to include employee tuition assistance plan, a college scholarship program for dependents and company paid life insurance. Over the past five years, our Company has contributed over $52,000 in tuition assistance for our employees. This benefit is an excellent recruiting tool and complements our retention initiatives.

We utilize our company website, the recruiting website Indeed, and employee referrals to advertise job openings. We also partner with local community colleges as well as a local four-year university to solicit potential candidates. These resources have been a cost-effective way to increase and diversify our candidate pool.

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.
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Item 1A. Risk Factors
As a “Smaller Reporting Company,” we are not required to provide any disclosure under Item 1A. In providing these risk factors, we do not represent, and no inference should be drawn, that the disclosures so provided comply with all requirements of Item 1A if we were subject to them. Risk factors are events and uncertainties over which the Company has limited or no control and which can have a material adverse impact on our financial condition or results of operations. We are subject to a variety of risk factors. The following information sets forth our evaluation of the risk factors we deem to be most material. We work to actively manage these risks, but the reader should be cautioned that we are only able to mitigate the impact of most risk factors, not eliminate the risk. Also, there may be other risks which we do not presently deem material that may become material in the future.

Underwriting and Product Pricing
The insurance subsidiaries maintain underwriting departments that seek to evaluate the risks associated with the issuance of an insurance policy. NSIC accepts standard risks and, to an extent, substandard risks. In the case of the property and casualty subsidiaries, the underwriting staff attempts to assess, in light of the type of insurance sought by an applicant, the risks associated with a prospective insured or insurance situation. The underwriting assessment may involve various components in the risk evaluation process including, but not limited to, potential liability or fire hazards, age of dwelling, loss history, credit history of insured, employment status, location of fire department, home value, home heat source, and general maintenance of the property. In general, the property and casualty subsidiaries specialize in writing nonstandard risks.

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
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to manage these exposures using alternatives to pricing, such as limits on new business production, to help us manage exposure concentrations and protect our capital position.
•Due to increasing catastrophe reinsurance cost, we have incurred increases in our reinsurance retentions/deductibles. Again, due to limits to profit margins, we are often not adequately compensated for the increased risk associated with these higher reinsurance retentions due to overall limits on underwriting margins in some of the states in which we operate.

Reinsurance, Risk of Loss from Catastrophic Event and Geographic Concentration
Both insurance subsidiaries customarily reinsure with other insurers certain portions of the insurance risk. The primary purpose of such reinsurance arrangements is to enable the Company to limit its risk on individual policies, and in the case of property insurance, limit its risk in the event of a catastrophe in various geographic areas. A reinsurance arrangement does not discharge the issuing company from primary liability to the insured, and the issuing company is required to discharge its liability to the insured even if the reinsurer is unable to meet its obligations under the reinsurance arrangements. Reinsurance, however, does make the reinsurer liable to the issuing company to the extent of any reinsurance in force at the time of the loss. Reinsurance arrangements also decrease premiums retained by the issuing company since that company pays the reinsuring company a portion of total premiums based upon the amount of liability reinsured. NSIC generally reinsures all risks in excess of $50,000 with respect to any one insured. The property and casualty subsidiaries have catastrophe excess reinsurance, which provide protection in part with respect to aggregate property losses arising out of a single catastrophe, such as a hurricane.

During 2021, 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 2021 and 2020. Any losses above the $72.5 million upper limit are the responsibility of our Company. The contract in place during 2021 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 0.4% probability of exceeding 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.

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Catastrophe modeling results play a major role in our decision making process regarding the upper limits of our catastrophe reinsurance protection. While the level of sophistication has increased significantly in recent years in the design of computer generated catastrophe modeling, there are risks inherent in the modeling process, and the process continues to evolve. We believe the chance of a catastrophe event exceeding the upper limits of our reinsurance protection is remote; however, with the unpredictability of natural disasters, we are unable to eliminate all risk of exceeding the upper limits of our reinsurance protection. Hurricane Katrina exceeded the upper limits of our coverage in 2005. We have since increased the upper limits of our coverage and catastrophe models have improved significantly, but should a future event exceed the upper limits of our reinsurance coverage by a material amount, our financial condition could be adversely impacted.

Climate Change
Some scientific evidence supports that there have been and continue to be significant changes in climate including temperature, precipitation and wind resulting from various natural factors, processes, and human activities. Rising temperatures and changes in weather patterns could impact storm frequency and severity in our coverage areas. Increases in storm frequency and severity could negatively impact reinsurance costs impacting product pricing and the areas in which we offer our products. With respect to our property and casualty segment, climate change may impact the types of storms in our coverage areas as well as the frequency and severity of storms, thereby adversely impacting underwriting results, reinsurance placement and rates. With respect to our life insurance segment, climate change may impact life expectancies, thereby influencing mortality assumptions used in pricing assumptions and reserve calculations. Climate change could impact future product offerings, exclusions and/or policy limitations.

The Company may be impacted by domestic legislation and regulation related to climate change. Governmental mandates could impede our ability to make a profit with our current product offerings, limit the products we can offer and/or impact the geographic locations in which we offer our products. The impact of climate change cannot be quantified at this time.

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, 2021, the total reserves of NSIC (including reserves for accident and health insurance) were approximately $39,315,000. We believe, based on current available information, reserves for future policy benefits are adequate. However, we are currently in a period of persistent and historically low interest rates. Should this period of low rates be sustained over the long term, it can impair our ability to make sufficient returns to cover future policy liabilities. Also, should actual mortality, morbidity, expense or withdrawal assumption differ materially from assumptions, our operating results could be negatively impacted.

The property and casualty subsidiaries are also required to maintain loss reserves (claim liabilities) for all lines of insurance. Such reserves are intended to cover the probable ultimate cost of settling all claims, including those incurred but not yet reported. The reserves of the property and casualty subsidiaries reflect estimates of the liability with respect to incurred claims and are determined by evaluating reported claims on an ongoing basis and by estimating liabilities for incurred but not reported claims. Such reserves include adjustment expenses to cover the cost of investigating losses and defending lawsuits. The establishment of accurate reserves is complicated by the fact that claims in some lines of insurance are settled many years after the policies have been issued, thus raising the possibility that inflation may have a significant effect on the amount of ultimate loss payment, especially when compared to initial loss estimates. Claims inflation can also be incurred following catastrophe events due to demand surge of both building material and labor cost. Also, over the past two years, we experienced claims inflation due to shortages of building materials associated with factory slow-downs and/or shut downs and other supply chain issues, at least partly attributable to the Covid 19 pandemic. 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, 2021, the property and casualty subsidiaries had reserves for unpaid claims of approximately $8,930,000, before subtracting unpaid claims due from reinsurers of $2,139,000, leaving net unpaid claims of $6,791,000. 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, 2021 or 2020. 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
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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 AM 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 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
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insurers must attempt to achieve competitive premium rates through greater volume, efficiency of operations and control of expenses.

NSIC primarily markets its life and health insurance products through the home service system and independent producers. Direct competition comes from home service companies and other insurance companies that utilize independent producers to sell insurance products, of which there are many. NSIC's life and health products also compete with products sold by ordinary life companies. NSIC writes policies primarily in Alabama, Georgia and Mississippi. The market share of the total life and health premiums written is small because of the number of insurers in this highly competitive field. The primary methods of competition in the field are service and price.

Because of the increased costs associated with a home service company, premium rates are generally higher than ordinary products; as a result, competition from these ordinary insurers must be met through service. Initial costs of distribution through independent agents are generally more than through home service distribution methods, but lower commissions are paid in years subsequent to the first year of the policy so costs decline rapidly as policies renew after the first year. The primary factor in controlling cost under the independent agent distribution method is maintaining a high persistency rate. The persistency rate is the rate at which new business is maintained in renewal periods subsequent to the first year. If a high persistency rate can be maintained, the overall costs of distribution are lowered due to lower commission rate payments on policies in force subsequent to the first year.

The property and casualty subsidiaries market their products through independent agents and brokers, concentrating primarily on dwelling fire and homeowners coverage. NSFC, though one of the larger writers of lower value dwelling fire insurance in Alabama, nevertheless faces a number of competitors in this niche market. Moreover, larger general line insurers also compete with NSFC. The market share in states other than Alabama is small. Price is the primary method of competition. Because the Company utilizes independent agents, commission rates and service to the agent are also important factors in whether the independent agent agrees to offer NSFC products over those of its competitors. The Company primarily relies on an established independent agency force to market our insurance products. The loss of independent agents could adversely impact both the retention of existing business and production of new business.

Significant changes in the competitive environment in which we operate could materially impact our financial condition or results of operations.

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 have experienced claims inflation in 2020 and 2021 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
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value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could adversely impact our results of operations and financial condition.

Litigation
We are routinely involved in litigation related to our insurance products. Litigation can involve claims for damages in excess of stated policy limits and include damages for bad faith. Defense of these claims can often be expensive adding to our loss adjustment expenses, and adverse jury verdicts could materially impact our results of operations and financial position.
Dependence of the Company on Dividends from Insurance Subsidiaries
The Company is an insurance holding company with no significant operations and limited outside sources of income. The primary asset of the Company is its stock in the insurance subsidiaries. The Company relies on dividends from the insurance subsidiaries in order to pay operating expenses, to service debt obligations and to provide liquidity for the payment of dividends to shareholders. The ability of the insurance subsidiaries to pay dividends is subject to regulatory restrictions discussed in detail in Note 12 of the Consolidated Financial Statements included herein. Should the insurance subsidiaries become subject to restrictions imposed by insurance regulations regarding the payment of dividends, the ability of the Company to pay expenses, meet debt service requirements and pay cash dividends to shareholders could be adversely impacted. Additionally, should business conditions deteriorate, we could be forced to further limit or suspend dividend payments in order to protect our capital position.

Low Common Stock Trading Volume and Liquidity Limitations
We are a small public company with a large percentage of common stock outstanding owned by founding family members, employees, officers and directors. Consequently, our average daily trading volume is very low with no shares traded on some days and only a few 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.

LIBOR Transition
The UK Financial Conduct Authority announced in July 2017 that the London Interbank Offered Rate (LIBOR) will be phased out. Currently, it is anticipated that LIBOR will no longer be available after mid-2023. The interest rate for the Company's subordinate debentures disclosed in Note 9 to the Consolidated Financial Statements is currently based on LIBOR. It is anticipated that our floating rate LIBOR based debt will transition to an alternative reference rate with the LIBOR phase out. The new reference rate is expected to be the Secured Overnight Financing Rate (SOFR).

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.
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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.  We have experienced no significant disruptions to our home office services; however, we have faced temporary and sporadic staffing shortages over the course of the pandemic. While some of our insureds may have experienced 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. We believe our efforts to mitigate disruptions to our operations have worked well throughout the pandemic.    

A second 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 and into 2021 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 has lead to elevated death claims in our life subsidiary.

Acquisition of The National Security Group, Inc. by VR Insurance Holdings, Inc.
On January 26, 2022, the Company issued a press release which announced the execution of a plan of merger agreement with VR Insurance Holdings, Inc. The Company believes the merger will provide certainty of value and liquidity to all stockholders, enabling stockholders to realize value created at the Company in recent years, while eliminating long-term business risks. The Board believes the merger is the most favorable available alternative for the Company in light of the consideration of the risks and uncertainty of achieving greater value for the stockholders by pursuing alternatives to the Merger (including continuing to execute on the Company’s current business plan), relative to the benefits of the Merger. The merger is subject to both stockholder and regulatory approval. There are a number of risks associated with the merger, including but not limited to: the risk that the transaction may not be completed in a timely manner or at all; the ability to secure regulatory approvals on the terms expected in a timely manner or at all; the effect of the announcement or pendency of the transaction on our business relationships, results of operations and business generally; the risk that the proposed transaction disrupts current plans and operations; the possibility that alternative acquisition proposals may or may not be made; the risk of litigation and/or regulatory actions related to the proposed transaction; the occurrence of any event, change or other circumstances that could give rise to the termination of the Plan of Merger; the effect of the announcement of the proposed transaction on Company’s relationships with its customers and agents, operating results and business generally; and the effects of the COVID‐19 pandemic and associated government actions on Company’s operations and financial performance, as well as the response to any of the aforementioned factors.

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 80 acres of undeveloped commercial real estate in Greenville, Alabama. We sell undeveloped lots from this development, and the development has no depreciable improvements.
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Capitalized along with the Greenville property are site preparation costs, including clearing, filling and leveling of land. There are no material improvements such as paving, parking lots or fencing that would be recorded as land improvements and depreciated over the appropriate useful life.

Item 3. Legal Proceedings
The Company and its subsidiaries are named parties to litigation related to the conduct of their insurance operations. Further information regarding details of pending suits can be found in Note 16 to the Consolidated Financial Statements.

Item 4. Mine Safety Disclosures
This section is not applicable.

Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The capital stock of the Company is traded in the NASDAQ Global Market. Quotations are furnished by the National Association of Security Dealers Automated Quotations System (NASDAQ). The trade symbol is NSEC.

The following table sets forth the high and low sales prices per share, as reported by NASDAQ, during the period indicated:
Stock Closing Prices
20212020
HighLowHighLow
  First Quarter$12.44 $10.12 $15.98 $10.20 
  Second Quarter$11.98 $9.97 $16.10 $13.31 
  Third Quarter$11.67 $10.22 $15.20 $11.57 
  Fourth Quarter$11.33 $8.92 $12.49 $10.14 
Shareholders
The number of shareholders of the Company's common stock was approximately 1,200 and the Company had 2,532,632 shares of common stock outstanding on March 23, 2022.

Dividends
The following table sets forth quarterly dividend payment information for the Company for the periods indicated:
Dividends Per Share
20212020
  First Quarter$0.06 $0.06 
  Second Quarter$0.06 $0.06 
  Third Quarter$0.06 $0.06 
  Fourth Quarter$0.06 $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 2021 totaled $608,000.

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.
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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 categoryNumber 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)
Equity compensation plans approved by security holders — — 195,975 
Equity compensation plans not approved by security holders— — — 
Total— — 195,975 

Item 6. [Reserved]

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, 2021 compared to the year ended December 31, 2020 and should be read in conjunction with the 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 66.2% 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 92.1% of gross earned premium in 2021.  The P&C segment operates in the states of Alabama, Arkansas, Georgia, Louisiana, Mississippi, Oklahoma, South Carolina, and Tennessee.  

•The Life segment accounted for 7.9% of gross premium revenue in 2021. 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
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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 AM Best Co (Best).  On April 29, 2021, AM 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, AM Best affirmed the FSR of B+ (Good) and Long-Term ICR of "bbb-" of Omega. The AM Best outlook for the ratings was revised from "stable" to "negative" for NSFC and Omega. AM Best affirmed the FSR of B++ (Good) and the Long-Term ICR to "bbb" for NSIC. The outlook for the ratings of NSIC was revised from "stable" to "negative". AM Best also affirmed the Long-Term ICR of "bb" of the parent holding company, NSEC, with a revised outlook from "stable" to "negative". Effective January 31, 2022, AM Best placed the companies under review with developing implications upon the announcement that NSG has entered into a merger agreement under which the group will be acquired by VR Insurance Holdings, Inc. The under review with developing implications status reflects the need for AM Best to assess fully the business strategy, financial and operational impacts on the group as a result of the acquisition. The ratings will remain under review pending the completion of the acquisition and AM Bests’ assessment of post-acquisition rating fundamentals.

The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On November 30, 2021, 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 generally classified as catastrophes (referred to as "catastrophe" or "cat" events/losses throughout the remainder of this document) by Property Claim Service (PCS) when an individual event causes $25 million or more in industry wide direct insured losses and affect a significant number of policyholders and insurers.

A primary process utilized by management to review financial performance is evaluating the operating performance of each segment before intercompany eliminations. By performing the evaluation in this manner, management can better assess the profitability of each segment on a standalone basis. To provide information similar to that utilized by management, industry segment information presented in this discussion is presented on a pretax basis by segment before eliminations. Note 15 to the Consolidated Financial Statements in this Form 10-K contains a reconciliation of 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, 2021, the Company had net income of $582,000, $0.23 income per share, compared to a net loss of $8,619,000, $3.41 loss per share, for the year ended December 31, 2020; a year over year improvement of $9,201,000. Pretax loss from operations for 2021 totaled $201,000 compared to a pretax loss from operations of $12,641,000 in 2020. Results for 2021 were positively impacted by a $12,658,000 decrease in claims and was the primary reason for the $12,440,000 improvement in pretax loss from operations in 2021, compared to the same period in 2020. While the P&C segment incurred losses from one hurricane during 2021, the P&C segment was impacted by multiple tornado events during the second quarter of 2020 coupled with four hurricanes during 2020. The decreased frequency of storm activity in 2021 was the primary reason for the improvement compared to last year.

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For the year ended December 31, 2021, the Company had investment gains of $885,000 compared to investment gains of $1,623,000 for the same period in 2020; a decrease of $738,000. The primary reason for the decrease in 2021 investment gains, compared to 2020 investment gains, was a $1,250,000 decline in realized gains on fixed maturity investments. In addition, our investment in company owned life insurance (COLI) decreased $272,000, in 2021 compared to 2020. Partially offsetting the decreases in realized investment gains on fixed maturities and COLI was a realized gain on equity securities totaling $1,237,000 in 2021, compared to a realized gain on equity securities totaling $426,000 in 2020; an increase of $811,000.

For the year ended December 31, 2021, the Company incurred claims, net of reinsurance, totaling $41,272,000 compared to $53,930,000 for the same period last year. The P&C segment was the primary source of this decrease with claims down $12,740,000 in 2021, compared to 2020. The primary component of this decrease was claims reported from weather related events which declined $14,023,000 for the year ended December 31, 2021, compared to the same period in 2020. During 2021, the P&C segment was impacted by Hurricane Ida which lead to reported losses totaling $4,000,000, net of reinsurance. In comparison, the P&C segment was impacted by Hurricanes Laura, Sally, Delta and Zeta, in 2020, with reported losses totaling $10,476,000, net of reinsurance. Partially offsetting the decreases in weather related claims was an increase of $1,648,000 in reported fire losses in 2021 compared to the same period last year.

The Company ended 2021 with an increase in general and administrative expenses of $363,000 compared to the same period last year. The primary reasons for this increase were costs associated with re-underwriting our P&C business, with a primary focus on property valuations, and an increase in litigation reserves. As of December 31, 2021, the primary phase of our re-underwriting project was substantially complete. The additional cost from this project began to decline in the third quarter of 2021 and should contribute to improvement in our attritional/non-cat loss ratio. The improvement in premium revenue gains from the re-underwriting and rate adjustment efforts are reflected in gross and net premiums written in the table that follows and will lead to further increases in earned premium into mid-2022.


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Financial results for the year ended December 31, 2021 and 2020, based on U.S generally accepted accounting principles, were as follows:
Unaudited Consolidated Financial SummaryYear ended
December 31,
     ($ in thousands, except per share)20212020
Gross premiums written$74,246 $68,782 
Net premiums written$64,179 $61,406 
Net premiums earned$61,423 $60,810 
Net investment income3,383 3,633 
Net investment gains885 1,623 
Other income519 583 
Total Revenues66,210 66,649 
Policyholder benefits and settlement expenses41,272 53,930 
Amortization of deferred policy acquisition costs3,490 3,548 
Commissions8,069 7,543 
General and administrative expenses9,661 9,298 
Taxes, licenses and fees2,442 2,484 
Interest expense592 864 
Total Benefits, Losses and Expenses65,526 77,667 
Income (Loss) Before Income Taxes684 (11,018)
Income tax expense (benefit)102 (2,399)
Net Income (Loss)$582 $(8,619)
Income (Loss) Per Common Share$0.23 $(3.41)
Reconciliation of Net Income (Loss) to non-GAAP Measurement
Net income (loss)$582 $(8,619)
Income tax expense (benefit)102 (2,399)
Investment gains, net(885)(1,623)
Pretax Loss From Operations$(201)$(12,641)
We provide a reconciliation of net loss to the non-GAAP measurement "pretax 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, 2021, net premiums earned were up $613,000 at $61,423,000 compared to $60,810,000 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 $768,000 or 1.4%. The increase in P&C segment net earned premium was primarily attributable to a 8.9% increase in gross earned premium in our dwelling fire program due to rate increases in the program over the past twelve months and additional premium generated by our re-underwriting project in which we reviewed valuations of properties insured due to increasing repair costs. The increase in P&C net earned premium was partially offset by a 36.8% increase in reinsurance premium ceded due to an increase in reinsurance costs related to our 2021 catastrophe reinsurance contract renewal. 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.


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Investment Gains:
Investment gains for the year ended December 31, 2021 were $885,000 compared to investment gains of $1,623,000 for the same period last year. The primary reason for the decline in investment gains, in 2021 compared to 2020, was a decrease in realized gains on fixed maturity investments of $1,250,000. In addition, the value of company owned life insurance (COLI) decreased $272,000, in 2021 compared to 2020. Partially offsetting the decreases in realized investment gains on fixed maturities and COLI was an increase in realized gain on equity securities totaling $811,000, in 2021, compared to the same period 2020.

Net Income (Loss):
For the year ended December 31, 2021, the Company had net income of $582,000, $0.23 income per share, compared to a net loss of $8,619,000, $3.41 loss per share, for the same period last year. As mentioned previously, while we ended 2021 with net income, the primary reason for the improved results compared to the 2020 net loss, was a significant decrease in property and casualty insured losses. The decrease in P&C subsidiary losses was primarily driven by a decline in catastrophe losses from severe weather events.

Pretax Loss from Operations:
For the year ended December 31, 2021, our pretax loss from operations was $201,000 compared to a pretax loss from operations of $12,641,000 for the year ended December 31, 2020; a decrease in pretax loss of $12,440,000. As discussed above, a decrease in claim activity in our P&C segment was the primary reason for the improvement in our loss from operations, in 2021, compared to the same period last year. However, weather related claims remained elevated, in 2021, due to the impact of Hurricane Ida as mentioned previously.

P&C Segment Combined Ratio:
The P&C segment ended 2021 with a GAAP basis combined ratio of 102.7%. Reported catastrophe losses totaled $11,797,000 and added 20.9 percentage points to the combined ratio. In comparison, the P&C segment ended 2020 with a GAAP basis combined ratio of 126.1% with $24,196,000 in reported catastrophe losses increasing the combined ratio by 43.5 percentage points. In addition, reported non-catastrophe wind and hail losses were down $1,624,000 in 2021 compared to 2020. Reported non-catastrophe wind and hail losses totaled $6,242,000, in 2021, and added 11.1 percentage points to the 2021 combined ratio. In comparison, non-catastrophe wind and hail losses reported during 2020 totaled $7,866,000 and added 14.1 percentage points to the 2020 combined ratio. Partially offsetting the decline in reported weather related claims was an increase in reported fire losses totaling $1,648,000. Reported fire losses totaled $13,820,000, in 2021, and added 24.5 percentage points to the 2021 combined ratio. In comparison, fire losses reported during 2020 totaled $12,172,000 and added 21.9 percentage points to the 2020 combined ratio.

Overview - Balance Sheet highlights at December 31, 2021 compared to December 31, 2020

Selected Balance Sheet HighlightsDecember 31, 2021December 31, 2020
     ($ in thousands, except per share)Unaudited
Invested Assets$111,819 $99,150 
Cash$10,034 $19,887 
Total Assets$151,683 $150,540 
Policy Liabilities$84,864 $82,869 
Total Debt$13,190 $13,677 
Accumulated Other Comprehensive Income$2,021 $3,585 
Shareholders' Equity$43,802 $45,366 
Book Value Per Share$17.29 $17.93 
Invested Assets:
Invested assets at December 31, 2021 were $111,819,000 compared to $99,150,000 at December 31, 2020; an increase of 12.8%. The increase in invested assets was primarily due to an increase in new investments of positive cash flow from operations and partial re-investment of December 31, 2020 available cash. This was partially offset by a decline, primarily in market value of available-for-sale fixed maturity investments, of $2,599,000. This decline in market value of fixed maturity investments was primarily driven by an increase in intermediate and long-term market interest rates during 2021.

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Cash:
The Company, primarily through its insurance subsidiaries, had $10,034,000 in cash and cash equivalents at December 31, 2021, compared to $19,887,000 at December 31, 2020. Cash decreased $9,853,000 in 2021 primarily due to the purchase of fixed maturity securities in our P&C subsidiary investment portfolio.

Total Assets:
Total assets at December 31, 2021 were $151,683,000 compared to $150,540,000 at December 31, 2020. Positive cash flow from insurance operations contributed to an increase in purchases of fixed maturity securities. Due to an increase in market interest rates, fixed maturity investments classified as available-for-sale decreased in market value, partially offsetting the increase in new investments in 2021.

Policy Liabilities:
Policy related liabilities were $84,864,000 at December 31, 2021, compared to $82,869,000 at December 31, 2020; an increase of $1,995,000 or 2.4%. The primary reason for the increase in policy liabilities was a $2,941,000 increase in P&C segment unearned premium, in 2021, compared to the same period in 2020. The increase in unearned premium was primarily driven by a 8.9% increase in P&C segment gross written premium in 2021. This increase in gross written premium was primarily due to the impact of increased average policy premium as we began re-underwriting our P&C in-force policies starting with January 1, 2021 renewals, coupled with the implementation of rate increases across our core P&C product lineup.

Debt Outstanding:
For the year ended December 31, 2021, total debt was $13,190,000 compared to $13,677,000 at December 31, 2020. Debt was reduced $487,000 during 2021 primarily from the reduction in long-term debt in our holding company.

Shareholders' Equity:
Shareholders' equity as of December 31, 2021 was $43,802,000, down $1,564,000, compared to December 31, 2020 Shareholders' equity of $45,366,000. Book value per share was $17.29 at December 31, 2021, compared to $17.93 per share at December 31, 2020; a decline of 3.6% or $0.64 per share. The primary factors contributing to the decrease in both book value per share and Shareholders' equity were a decrease in accumulated other comprehensive income of $1,564,000 and shareholder dividends paid of $608,000. These decreases were offset by net income of $582,000.

Industry Segment Data:
Net premiums earned for our two operating segments are summarized as follows:

($ in thousands)2021%2020%
Life, accident and health insurance$5,554 9.0 %$5,709 9.4 %
Property and casualty insurance55,869 91.0 %55,101 90.6 %
Net premiums earned$61,423 100.0 %$60,810 100.0 %

The property and casualty segment composed 91.0% of consolidated net premiums earned in 2021 compared to 90.6% in 2020. Through the P&C segment, we offer primarily dwelling fire and homeowners insurance coverage to our customers. The life segment composed 9.0% of net premiums earned in 2021 compared to 9.4% in 2020 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, 2021 and 2020 are summarized below:

($ in thousands)20212020
REVENUE
      Net premiums earned$5,554 $5,709 
      Net investment income2,419 2,583 
      Net investment gains606 567 
      Other income834 1,242 
Total Revenues9,413 10,101 
BENEFITS AND EXPENSES
      Policyholder benefits paid or provided4,973 5,215 
      Amortization of deferred policy acquisition costs742 824 
      Commissions310 331 
      General and administrative expenses1,961 1,923 
      Insurance taxes, licenses and fees192 216 
      Interest expense43 41 
Total Expenses8,221 8,550 
INCOME BEFORE INCOME TAXES$1,192 $1,551 

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020:
Net premiums earned in the life segment was $5,554,000 at December 31, 2021 compared to $5,709,000 at December 31, 2020; a decrease of 2.7%.  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, 2021 and 2020:

($ in thousands)Year ended December 31,
20212020
Fixed maturities$1,776 $1,955 
Equity securities70 61 
Mortgage loans on real estate7 7 
Investment real estate540 541 
Policy loans137 143 
Other— (15)
2,530 2,692 
Less: Investment expenses111 109 
Net investment income$2,419 $2,583 

While NSIC composes only 9.0% of premium revenue, the subsidiary holds 39.1% of consolidated assets. The majority of these assets consist of fixed maturity investments. Net investment income had a 6.3% decrease, at $2,419,000 for the year ended December 31, 2021 compared to $2,583,000 for the same period last year. Lower reinvestment yields on fixed maturity investments due to the declining interest rate environment experienced over the past two years 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, 2021 and 2020:

($ in thousands)Year ended December 31,
20212020
Realized gains on fixed maturities$109 $459 
Change in fair value of equity securities570 104 
Other gains (losses) principally real estate(73)4 
Net investment gains$606 $567 

NSIC net investment gains, for the year ended December 31, 2021, were $606,000 compared to net investment gains of $567,000 for the same period last year; an increase of $39,000. 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. The primary factor contributing to the increase in net investment gains, in 2021, was an increase in the change in value of equity securities held for investment of $570,000 compared to $104,000 in the prior year.

Other income was $834,000 in 2021 compared to $1,242,000 for the same period last year; a decrease of $408,000. 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 15.0% in 2021 and 21.8% in 2020. The primary reason for the decrease in other income, in 2021 compared to 2020, was a decrease in claims from storm activity in the P&C segment leading to a decline in adjuster fees paid from NSFC to NSIC.

Claims were $4,973,000 through December 31, 2021 compared to $5,215,000 through December 31, 2020; a decrease of $242,000 or 4.6%. The primary reason for the decrease was elevated claim payments in the prior year due to an increase in ordinary life related claims in 2020, primarily due to the pandemic.

Deferred policy acquisition cost amortization and commission expenses decreased $103,000 for the year ended December 31, 2021 at $1,052,000 compared to $1,155,000 for the same period last year; a decrease of 8.9%. As a percent of net premiums earned, policy acquisition cost amortization and commission expense was 18.9% in 2021 compared to 20.2% in 2020.

General and administrative expenses were up slightly at $1,961,000, in 2021, compared to $1,923,000, in 2020. As a percent of earned premium, general and administrative expenses were 35.3% and 33.7% at December 31, 2021 and 2020, respectively. The $38,000 increase in general and administrative expenses, in 2021 compared to 2020, was primarily due to an increase in actuarial and consulting fees of $93,000.

For the year ended December 31, 2021 and 2020, insurance taxes, licenses and fees were $192,000 and $216,000, respectively. As a percent of earned premium, insurance taxes, licenses and fees were 3.5% in 2021 and 3.8% in 2020.

Interest expense was virtually unchanged at $43,000 for the year ended December 31, 2021 compared to $41,000 for the year ended December 31, 2020. Interest expense in NSIC is associated with interest payments on insurance policies with a deposit fund.

For the year ended December 31, 2021, the life segment had income before income taxes of $1,192,000 compared to an income before income taxes of $1,551,000 for the same period last year. The $155,000 decrease in life segment net premium earned, coupled with the $164,000 decrease in investment income were the primary factors contributing to the $359,000 decrease in pretax income.


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Property & Casualty Operations:
Pretax income for the P&C segment for the year ended December 31, 2021 and 2020 is summarized below:

($ in thousands)20212020
REVENUE
     Net premiums earned$55,869 $55,101 
     Net investment income1,456 1,530 
     Net investment gains296 1,043 
     Other income518 582 
Total Revenues58,139 58,256 
BENEFITS AND EXPENSES
     Policyholder benefits paid or provided36,685 49,425 
     Amortization of deferred policy acquisition costs2,748 2,724 
     Commissions7,759 7,212 
     General and administrative expenses8,479 8,589 
     Insurance taxes, licenses and fees2,250 2,268 
Total Expenses57,921 70,218 
INCOME (LOSS) BEFORE INCOME TAXES$218 $(11,962)

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020:
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)20212020
Line of BusinessPremium Earned%
 of NPE		Premium Earned%
 of NPE		2021
Increase (Decrease) over 2020
Dwelling Fire/Allied Lines$45,754 81.9 %$42,005 76.2 %8.9 %
Homeowners20,097 36.0 %20,392 37.0 %(1.4)%
Catastrophe Reinsurance Premium Ceded(9,982)(17.9)%(7,296)(13.2)%36.8 %
Net Premiums Earned$55,869 100.0 %$55,101 100.0 %1.4 %

Property and casualty segment net premiums earned for 2021 were $55,869,000 compared to $55,101,000 for the same period last year. The primary reason for the increase, in 2021 compared to 2020, was an 8.9% increase in gross earned premium revenue in our dwelling fire program primarily driven by our re-underwriting project and 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 Mississippi. Premium revenue in Alabama increased 15.4%, in 2021, while policy counts decreased 9.2% compared to December 31, 2020. In addition, Mississippi premium revenue increased 16.4% in 2021, while policy counts decreased 9.4%. Increased rates were implemented in Alabama and Mississippi during 2021. These rate increases coupled with the re-underwriting project lead to the year over year increase in premium revenue in both states.

To summarize our catastrophe reinsurance structure, under the catastrophe reinsurance program in 2021, the Company retains the first $4 million in losses from a first event (exceeding $4 million in insured losses) and $2 million in losses from a second event.
  





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Reinsurance coverage is maintained in three layers as follows:

LayerReinsurers' Limits of Liability
First Layer
100% of $13,500,000 in excess of $4,000,000 retention
Second Layer
100% of $25,000,000 in excess of $17,500,000
Third Layer
100% of $30,000,000 in excess of $42,500,000
Catastrophe Aggregate
100% of $2,000,000 in excess of $2,000,000 after $2,000,000 aggregate deductible

Additional details regarding the structure of our 2021 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 2021 catastrophe contract placement, our single event catastrophe retention remained unchanged from the prior year at $4 million. In our 2021 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 excedance 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, 2021:
($ in thousands)Gross Losses
Net Losses 1
Net Losses as
a Percent Equity 2
Loss Return PeriodYearly Probability of Exceeding Severe ThunderstormHurricaneSevere ThunderstormHurricaneSevere ThunderstormHurricane
20 Years5 %$3,496 $15,640 $2,762 $3,160 6.3 %7.2 %
50 Years2 %$5,274 $28,576 $3,160 $3,160 7.2 %7.2 %
100 Years1 %$6,870 $41,831 $3,160 $3,160 7.2 %7.2 %
250 Years0.4 %$9,443 $61,421 $3,160 $3,160 7.2 %7.2 %
500 Years0.2 %$11,878 $78,483 $3,160 $7,887 7.2 %18.0 %
1 - Net losses are net of reinsurance and after a 21% Federal income tax benefit.
2 - Equity as of December 31, 2021.

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In 2021, the P&C segment had catastrophe losses from one hurricane exceeding our $4 million catastrophe reinsurance retention. Furthermore, the P&C segment was impacted, in 2021, by 28 additional smaller catastrophe events that individually did not exceed our catastrophe reinsurance retention; but cumulatively generated incurred losses totaling $7,797,000. 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 24 additional smaller catastrophe events that individually did not exceed our catastrophe reinsurance retention; but cumulatively generated incurred losses totaling $9,787,000.

The table below provides the major categories of investment income, primarily dividend and interest income, for the year ended December 31, 2021 and 2020:
($ in thousands)Year ended December 31,
20212020
Fixed maturities$1,435 $1,495 
Equity securities30 50 
Other25 18 
1,490 1,563 
Less: Investment expenses34 33 
Net investment income$1,456 $1,530 

For the year ended December 31, 2021, net investment income was $1,456,000 compared to $1,530,000 for the same period in 2020; a decrease of $74,000 or 4.8%. Lower yields on new investments in 2021 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, 2021 and 2020:
($ in thousands)Year ended December 31,
20212020
Realized gains on fixed maturities$22 $902 
Realized gains on equity securities1,238 426 
Change in fair value of equity securities(1,034)(448)
Change in surrender value of company owned life insurance70 343 
Other-than-temporary impairments— (180)
Net investment gains$296 $1,043 

Net investment gains, for the year ended December 31, 2021, were $296,000 compared to net investment gains of $1,043,000 for the same period in 2020; a decrease of $747,000. The primary reason for the decrease in net investment gains, in 2021 compared to 2020, was unrealized losses in our P&C segment equity investments available for sale totaling $1,034,000 compared to unrealized losses in equity investments of $448,000, in 2020.

Other income was $518,000 for the year ended December 31, 2021, compared to $582,000 in 2020; a decrease of $64,000. 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 0.9% in 2021 compared to 1.1% in 2020.

Policyholder claims in the property and casualty segment were $36,685,000 in 2021, compared to $49,425,000 for the same period last year; a decrease of $12,740,000 or 25.8%. Claims as a percentage of premium earned was 65.7% in 2021 compared to 89.7% in 2020. The primary reason for the decrease in claims was a $14,023,000 decrease in P&C segment weather related claims. This decrease was offset by an increase in fire claims totaling $1,648,000.

Weather related losses consistently create the most significant variability in our loss and loss adjustment expense payments from year to year in our P&C segment. The following table provides a recap of P&C segment gross
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reported losses and LAE by catastrophe event and non-catastrophe wind and hail losses and LAE for the year ended December 31, 2021 and 2020:

For the year ended December 31, 2021For the year ended December 31, 2020
($ in thousands)

Catastrophe event
Reported
Losses & LAE		Claim
Count		Catastrophe eventReported
Losses & LAE		Claim
Count
Cat 2113 (Jan 25-26)$132 6 Cat 2012 (Jan 10-12)$1,337 314 
Cat 2117 (Feb 16-20)825 223 Cat 2014 (Feb 5-8)631 161 
Cat 2120 (Mar 15-19)372 90 Cat 2016 (Mar 2-4)362 79 
Cat 2122 (Mar 24-26)1,142 127 Cat 2018 (Mar 27-30)391 40 
Cat 2123 (Mar 27-29)357 66 Cat 2019 (Apr 7-9)198 34 
Cat 2125 (Apr 9-11)278 49 Cat 2020 (Apr 10-14)3,933 567 
Cat 2128 (Apr 23-25)758 172 Cat 2021 (Apr 18-20)1,971 307 
Cat 2129 (Apr 27-May 2)474 70 Cat 2022 (Apr 21-24)1,732 233 
Cat 2130 (May 3-4)612 130 Cat 2024 (Apr 27-30)173 34 
Cat 2131 (May 7-11)192 47 Cat 2025 (May 2-3)217 32 
Cat 2133 (May 26-28)121 20 Cat 2026 (May 4-5)647 117 
Cat 2136 (June 7-9)235 61 Cat 2027 (May 7-8)103 22 
Cat 2137 (June 11-14)203 41 Cat 2028 (May 13-15)147 29 
Cat 2138 (June 18-21)446 70 Cat 2030 (May 20-24)304 58 
Cat 2140 (June 24-July 1)163 54Cat 2037 (June 6-9)318 61 
Cat 2141 (July 6-9)171 30 Cat 2040 (July 10-12)540 73 
Cat 2153 (Aug 14-20)162 42 Cat 2044 (July 30-Aug 4)189 31 
Cat 2160 (Aug 29-Sept 2)13,987 1,061 Cat 2050 (Aug 26-28)18,000 798 
Cat 2167 (Oct 4-7)103 30 Cat 2063 (Sept 14-16)3,680 696 
Cat 2168 (Oct 10-11)192 24 Cat 2071 (Oct 9-12)2,796 445 
Cat 2170 (Oct 24-28)122 18 Cat 2074 (Oct 28-297,416 1,240 
Cat 2176 (Dec 10-12)573 30 Cat 2075 (Oct 25-28)269 121 
Misc cats less than $100k164 42 Misc cats less than $100k258 54 
Total Cat losses$21,784 2,503 Total Cat losses$45,612 5,546 
Less: Reinsurance Recoveries(9,987)Less: Reinsurance Recoveries(21,416)
Total Net Cat Losses$11,797 Total Net Cat Losses$24,196 
Non-cat wind & hail$6,242 1,500 Non-cat wind & hail$7,866 1,731 

During 2021, the P&C segment was impacted by 29 catastrophe events producing 2,503 policyholder claims totaling $11,797,000, net of reinsurance recoveries. In comparison, the P&C segment was impacted by 28 catastrophe events during 2020 producing 5,546 claims totaling $24,196,000, net of reinsurance recoveries. During 2021, the P&C segment was impacted by Hurricane Ida (Cat 2160) which totaled $4,000,000, net of reinsurance recoveries. Net of reinsurance, Hurricane Ida accounted for 33.9% of all reported catastrophe event claims through December 31, 2021 and added 7.1 percentage points to the current year P&C segment combined ratio. 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.

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Non-catastrophe wind and hail claims reported in 2021 totaled $6,242,000 compared to non-catastrophe wind and hail claims reported in 2020 totaling $7,866,000; a decrease of $1,624,000. During 2021, the P&C segment had 1,500 non-cat wind and hail claims reported (an average of $4,200 per claim) compared to 1,731 non-cat wind and hail claims reported during 2020 (an average of $4,500 per claim). Non-cat wind and hail claims reported during 2021 accounted for 17.0% of total P&C segment incurred losses in the current year and added 11.1 percentage points to the 2021 P&C segment combined ratio. Non-cat wind and hail claims reported during 2020 accounted for 15.9% of total P&C segment incurred losses in 2020 and added 14.1 percentage points to the 2020 P&C segment combined ratio.

Reported fire losses in 2021 were up $1,648,000 or 13.5% compared to fire losses reported during 2020. The P&C segment had 406 fire losses reported in 2021 totaling $13,820,000 compared to 416 claims reported in 2020 totaling $12,172,000. The average cost per claim was $34,000 for fire losses reported in 2021 compared to $29,300 for fire losses reported in 2020. Fire losses reported during 2021 added 24.5 percentage points to the P&C segment combined ratio while fire losses reported during 2020 added 21.9 percentage points to the P&C segment combined ratio.

Amortization of deferred policy acquisition costs were comparable at $2,748,000, in 2021, compared to $2,724,000 for the same period last year; an increase of $24,000. Policy acquisition costs consist of amortization of previously capitalized distribution costs and current commission payments to agents. As a percentage of net premium earned, policy acquisition costs were 4.9% in both 2021 and 2020.

Commission expense for 2021 was $7,759,000 (13.9% of net premium earned) compared to $7,212,000 (13.1% of net premium earned) for the same period in 2020. The primary reason for the $547,000 increase in commission expense was the 8.9% increase in gross written premium, in 2021, compared to 2020.

General and administrative expenses were $8,479,000 in 2021 compared to $8,589,000 for the same period last year. As a percent of earned premium, general and administrative expenses were 15.2% and 15.6% at December 31, 2021 and 2020, respectively. The $110,000 decrease in general and administrative expenses, in 2021 compared to 2020, was due to a reduction in actuarial fees of $196,000 as well as a reduction in association dues of $267,000 primarily attributable to a $276,000 refund. Offsetting these declines was an increase in inspection reports of $344,000 associated with our re-underwriting project.

Insurance taxes, licenses and fees were comparable at $2,250,000 for 2021, compared to $2,268,000 for the same period in 2020; a decrease of $18,000. As a percent of earned premium, insurance taxes, licenses and fees were 4.0% in 2021 and 4.1% in 2020.

For the year ended December 31, 2021, the Company had income before income taxes of $218,000 compared to a loss before income taxes of $11,962,000 for the same period last year. The $12,180,000 increase was primarily due to the $14,023,000 decrease in weather related claims, in 2021 compared to 2020.

Property & Casualty Combined Ratio:
A measure used to analyze a property/casualty insurer's underwriting performance is the combined ratio based upon generally accepted accounting principles (GAAP). It is the sum of two ratios:

•The loss and loss expense ratio, which measures losses and loss adjustment expenses incurred as a percentage of premium revenue.
•The underwriting expense ratio, which measures underwriting expenses incurred (e.g., agents' commissions, premium taxes, and other administrative underwriting expenses) as a percentage of premium revenue.

The results of these ratios by significant component for the past two years were as follows:

20212020
Loss and LAE Ratio (Non-Cat)44.14 %45.31 %
Loss and LAE Ratio (Cat)20.92 %43.45 %
Underwriting Expense Ratio37.66 %37.34 %
Combined Ratio102.72 %126.10 %

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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 2021, the P&C segment experienced a decrease of 23.38 percentage points in the combined ratio compared to 2020. Catastrophe losses decreased in 2021 compared to 2020, leading to a 22.53 percentage point decrease in the P&C segment combined ratio and was the primary reason for the overall decline. Non-catastrophe losses decreased the P&C segment combined ratio 1.17 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, 2021 and 2020 are summarized as follows:
($ in thousands)20212020
REVENUE
     Net investment income$48 $60 
     Net realized investment gains (losses)(17)13 
     Other income 1,106 1,035 
Total Revenues1,137 1,108 
EXPENSES
     General and administrative expenses1,314 892 
     Interest expense549 823 
Total Expenses1,863 1,715 
LOSS BEFORE INCOME TAXES$(726)$(607)

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020:
Revenue for non-insurance operations primarily consists of interest on investments and other income. Other income is composed of management service fees from subsidiaries which are eliminated upon consolidation. General and administrative expenses totaled $1,314,000 in 2021 compared to $892,000 for the same period last year. The expenses of NSG are primarily associated with the public listing of our stock, taxes and fees, and directors' fees. The most significant item impacting the 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 $549,000 for the year ended December 31, 2021 and $823,000 for the same period in 2020. In early 2021, the Company terminated the two interest rates swaps. 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.

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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, 2021, the Company's holdings in fixed maturity securities amounted to 85% of total investments and 62.8% of total assets. The Company utilizes the ratings of various Nationally Recognized Statistical Rating Organizations when classifying fixed maturity investments by credit quality.

The following is a breakdown of the Company's fixed maturity investments by quality rating:
% of Total Bond Portfolio
S&P or Equivalent Ratings20212020
AAA/AA+32.9%37.2%
AA2.8%4.0%
AA-3.9%1.5%
A+0.6%1.9%
A5.8%5.7%
A-5.9%6.0%
BBB+13.1%10.3%
BBB22.6%19.5%
BBB-6.8%7.4%
Below Investment Grade5.7%6.5%

There were no material changes in credit quality mix in 2021 as we continue to focus on investing in high quality investment grade securities. Also, tight credit spreads throughout 2021 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, 2021 and December 31, 2020 are as follows:
($ in thousands)

December 31, 2021
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Available-for-sale securities:
U.S. Government corporations and agencies$5,171 $173 $19 $5,325 
Agency mortgage backed securities18,407 333 217 18,523 
Asset backed securities4,710 63 17 4,756 
Private label mortgage backed securities2,878 17 38 2,857 
Corporate bonds51,391 2,635 418 53,608 
States, municipalities and political subdivisions9,629 131 86 9,674 
Total fixed maturities92,186 3,352 795 94,743 
Equity securities1,609 2,368 — 3,977 
Total$93,795 $5,720 $795 $98,720 
Held-to-maturity securities:
Agency mortgage backed securities$608 $42 $— $650 
Total$608 $42 $— $650 

($ in thousands)

December 31, 2020
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Available-for-sale securities:
U.S. Government corporations and agencies$4,300 $323 $9 $4,614 
Agency mortgage backed securities19,773 919 63 20,629 
Asset backed securities8,233 137 27 8,343 
Private label mortgage backed securities1,418 50 55 1,413 
Corporate bonds35,930 3,771 50 39,651 
States, municipalities and political subdivisions6,587 189 27 6,749 
Total fixed maturities76,241 5,389 231 81,399 
Equity securities1,918 2,832 — 4,750 
Total$78,159 $8,221 $231 $86,149 
Held-to-maturity securities:
Agency mortgage backed securities$873 $73 $— $946 
Total$873 $73 $— $946 

As shown in the tables above, the Company experienced a decrease in unrealized gains in fixed maturity securities in 2021 compared to 2020. The decrease is primarily driven by an increase in market interest rates.

A number of factors influence portfolio allocation within each of the insurance subsidiaries. Within the property and casualty subsidiaries, due to the relatively short-term nature of segment liabilities, fixed income investments tend to be of shorter duration, with average maturities of less than five years. Also, due to higher levels of potential volatility of policy liabilities (severe weather related losses), a greater emphasis is placed upon overall liquidity of investments. In contrast, within the life insurance subsidiary, policy liabilities tend to be more stable and of significantly longer duration. In order to match the longer duration of liabilities, investments in the life insurance portfolio tend to have longer maturities, and higher average book yields. Also, less emphasis is placed upon short-term liquidity in the life subsidiary due to more predictable cash needs.

A downside of investing in longer duration securities in the life segment is that the portfolio is exposed to more significant price volatility as market interest rates rise. This exposure to sudden interest rate changes can lead to declines in market value of fixed income securities in a rising interest rate environment. Management currently maintains the life insurance portfolio in the intermediate duration range of 6.0 to guard against the adverse impact of rising rates. However, due to the necessity of matching the longer duration of life policy liabilities as closely as
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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, 2021, 8.1% 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, 2021, the Company realized no other-than-temporary impairments related to fixed maturities.

The amortized cost and aggregate fair value of debt securities at December 31, 2021, 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)Amortized
Cost		Fair
Value
Available-for-sale securities:
Due in one year or less$3,002 $3,032 
Due after one year through five years22,179 23,092 
Due after five years through ten years21,780 22,543 
Due after ten years45,225 46,076 
Total$92,186 $94,743 
Held-to-maturity securities:  
Due after one year through five years$8 $8 
Due after five years through ten years3 3 
Due after ten years597 639 
Total$608 $650 
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, 2021 and 2020 follows:

($ in thousands)Year Ended December 31,
20212020
Net investment income$3,383 $3,633 
Average current yield on investments3.2 %3.3 %
Total return on investments1.6 %6.6 %
Net gains on investments (before taxes)$885 $1,623 
Change in accumulated net unrealized gains (before income taxes)$(2,599)$2,000 

Average current yield on investments in 2021 declined one basis point compared to 2020 due to lower yields on new investments. The total return on investments in 2021 was 1.6% compared to 6.6% in 2020. A decrease in market values of fixed maturity investments due to increases in market interest rates was the primary driver of total return on investments in 2021.

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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, 2021, the contractual maturity schedule for all bonds and notes held by the Company, stated at amortized cost, was as follows:
($ in thousands)

                 Maturity
Available- for-SaleHeld-to-MaturityTotalPercentage of Total
Maturity in less than 1 year$3,002 $— $3,002 3.24 %
Maturity in 1-5 years22,179 8 22,187 23.91 %
Maturity in 5-10 years21,780 3 21,783 23.47 %
Maturity after 10 years45,225 597 45,822 49.38 %
$92,186 $608 $92,794 100.00 %
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 $5,331,000, or 5.6%, decline in the market value of fixed maturity investments. Alternatively, a 100 basis point decrease in interest rates will generate approximately $5,325,000, or 5.6%, 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, 2021, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $43,802,000, down $1,564,000, compared to $45,366,000 at December 31, 2020.  During the year ended December 31, 2021, shareholders' equity was increased by a net income of $582,000, a comprehensive loss due to changes in value of fixed maturity securities of $2,053,000 and cash
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dividends paid totaling $608,000. Equity was increased by a comprehensive gain of $489,000 related to change in value of interest rate swaps and common stock issued of $26,000.

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 8.9% of our current fixed income portfolio to be reinvested or otherwise available to meet Company obligations.

The Company, primarily through its insurance subsidiaries, had $10,034,000 in cash and cash equivalents at December 31, 2021, compared to $19,887,000 at December 31, 2020. Cash provided by operating activities increased cash by $5,182,000 during the year ended December 31, 2021. The increase in cash from operating activities in 2021 was primarily related to an increase in gross premium revenue coupled with the collection of reinsurance recoverables related to the 2020 hurricane season. Cash used in operating activities decreased cash by $13,890,000 for 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 quarter. Net cash used in investing activities totaled $13,887,000 for the year ended December 31, 2021, compared to cash provided by investing activities of $23,083,000 in 2020. The decrease in cash from investing activities during the year ended December 31, 2021 was related to reinvestment of cash on hand from maturities of fixed maturity securities, increased premium revenue and reinsurance recoveries. Net cash provided by investing activities in 2020 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 used in financing activities totaled $1,148,000 for the year ended December 31, 2021, compared to $1,115,000 for the same period last year. During the year ended December 31, 2021, the Company paid $608,000 in dividends to shareholders.

The Holding Company had $2,761,000 in cash at December 31, 2021. 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. Without consideration of the impact of the pending acquisition by VR Insurance Holdings, the Holding Company currently has adequate liquidity on hand to meet its anticipated obligations through at least the next 18 months without additional dividend payments from subsidiaries. Cash and cash equivalents held by subsidiaries at December 31, 2021 totaled $5,594,000.

The Company had a total of $12,690,000 of long-term debt outstanding as of December 31, 2021, compared to $13,177,000 at December 31, 2020, 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, $182,000 and $195,000, respectively.
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($ in thousands)Payments due by period
Contractual ObligationsTotalLess than
1 year		Years
1 through 3		Years
4 through 5		More than
5 years
Notes payable$1,000 $500 $500 $— $— 
Debt obligations1
$12,190 $— $— $— $12,190 
Interest on debt obligations1
$6,921 $503 $1,461 $958 $3,999 
Property and casualty claim reserves2
$8,930 $7,921 $964 $45 $— 
Future life insurance obligations3
$61,743 $4,175 $11,109 $6,428 $40,031 
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, 2021 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, 2021. 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 $1,000,000 unsecured loan renewed in December 2019. The unsecured loan matures in November 2023.
In estimating the time interval for payment of property and casualty claim reserves, the Company utilized historical payment patterns. By the nature of the insurance contracts under which these liabilities exist, there can be no certainty that actual payments will fall in the periods indicated above. However, management believes that current liquidity and capital resources are sufficient to pay these obligations as they come due. Also, due to the relatively short-tail nature of the majority of the Company's property and casualty claim liabilities, management can conclude with a reasonable level of confidence that historical patterns indicate that approximately 97.5% 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 limited exposure to below investment grade fixed income investments, which might be especially subject to liquidity limitations 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 insurance subsidiaries are 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 combined regulatory capital in our insurance subsidiaries in 2020, primarily due to increased catastrophe loss frequency in our P&C subsidiary, will limit our ability to prepay any debt obligations beyond what is required for over the next two years.
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Dividends paid to the holding company 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 2021 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 2022 is statutorily limited to $1,097,000 in the life insurance subsidiary and $3,541,000 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 the holding company. 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 the holding company substantially below the above referenced regulatory maximums. The Company did not receive any dividends from its subsidiaries during the year ended December 31, 2021. Due to a decline in combined statutory surplus in our subsidiaries during 2020, the result of increased in catastrophe losses in the P&C segment, we do not expect to pay any dividends from the insurance subsidiaries during 2022 as our primary focus will be on organic growth of 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 periods with challenging weather patterns in the property and casualty subsidiaries over the past five years, the insurance subsidiaries are well capitalized. However, further strengthening of subsidiary capital and improvement in P&C underwriting profitability are top priorities for Company 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         2.0
    Regulatory action level         1.5
    Authorized control level         1.0
    Mandatory control level         0.7

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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, 2021.

National Security Insurance Company (life insurer) has regulatory adjusted capital of $12,034,000 and $10,784,000 at December 31, 2021 and 2020, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 9.0 and 8.9 at December 31, 2021 and 2020, respectively. Accordingly, National Security Insurance Company exceeds the minimum RBC requirements.

National Security Fire & Casualty Company (property/casualty insurer) has regulatory adjusted capital of $35,405,000 and $36,505,000 at December 31, 2021 and 2020, respectively, and a ratio of regulatory total adjusted capital to authorized control level RBC of 4.7 and 4.8 at December 31, 2021 and 2020, 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 $6,946,000 and $7,083,000 at December 31, 2021 and 2020, and a ratio of regulatory total adjusted capital to authorized control level RBC of 12.8 and 12.7 at December 31, 2021 and 2020, 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 2021, 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 2021 and 2020. Any losses above the $72.5 million upper limit are the responsibility of our Company. The contract in place during 2021 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.
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The property and casualty subsidiaries utilize our actual in force policy data modeled utilizing two different industry accepted catastrophe models to structure catastrophe reinsurance and determine upper limits of catastrophe reinsurance agreements. Historically, reinsurance has been maintained to meet at least a 250 year modeled event level. While this estimate is subject to some uncertainty and model risk, through obtaining coverage that meets at least a 250 year modeled event level, the models indicate that we maintain catastrophe reinsurance upper limits to cover an event that has less than a 0.5% probability of occurring in a given year.

At December 31, 2021, the estimated reinsurance recoverable recorded was $2,489,000 compared to $6,874,000 for the same period last year. The Company does not anticipate any issues with collection of the recorded amount. In 2021, catastrophe reinsurance premiums ceded totaled $8,185,000 compared to $6,274,000 ceded in 2020. 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 2021 and 2020 totaling $1,797,000 and $1,022,000, 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, 2021 and 2020, the Company recorded $7,332,000 and $7,408,000, 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, 2021, 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.

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The Company evaluates all tax positions taken on its U.S. federal income tax return. No material uncertainties exist for any tax positions taken by the Company.

Fair Values of Financial Instruments
Investments are recorded at fair value based upon quoted prices when available. Quoted prices are available for most investment debt and equity securities included in the financial statements. Further discussion of fair value methodology is discussed in Note 5 to the Consolidated Financial Statements. Periodically, the carrying values of an individual investment may become temporarily impaired because of time value, volatility, credit quality and existing market conditions. Management evaluates investments to determine whether the impairment is other-than-temporary. Evaluation criteria include credit quality of security, severity of decrease between cost and market value, length of time of the impairment and likelihood that the impairment will reverse in the near future. This evaluation requires significant assumptions, estimates and judgments by management. If the impairment is determined to be other-than-temporary, the investment is written down to the current fair value and a realized loss is recorded on the income statement. We have very limited exposure to less liquid and difficult to value investments.

Claim Liabilities
Property and casualty loss reserves are maintained to cover the estimated unpaid liability for losses and loss adjustment expenses with respect to reported and unreported incurred claims. Loss reserves are an estimation based on actuarial projection techniques common in the insurance industry. Reserves are management's expectations of what the settlement and administration of claims will cost. Management's estimate of reserves are based on historical settlement patterns, estimated salvage and subrogation, and an appraisal of the related facts and circumstances. Management's reserve estimates are reviewed by consulting actuaries to determine their adequacy and reasonableness. The reserve analysis performed by management is reviewed by the actuaries during the third quarter each year with a final comprehensive review performed at year-end.

At December 31, 2021 and 2020, the recorded liability for loss and loss adjustment expense was $8,930,000 and $10,177,000, respectively, a $1,247,000 decrease. The decrease in claim and claim adjustment expense reserves is primarily due to significantly fewer third and fourth quarter catastrophe events in 2021 compared to the unprecedented 2020 hurricane season. 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 $3,977,000. 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, 2021 value, the fair value of the Company's common stock investments would decrease by approximately $398,000.

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. While we are optimistic that the direct risk due to COVID-19 is waning, the extent of short and long term economic damage and political policy resulting from the pandemic remains unclear. 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, 2021 and 2020
Consolidated Statements of Operations – Years Ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Loss – Years Ended December 31, 2021 and
     2020
Consolidated Statements of Changes in Shareholders’ Equity – Years Ended December 31, 2021 and
     2020
Consolidated Statements of Cash Flows – Years Ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedule I. Summary of Investments Other Than Investments in Related Parties – December 31, 2021
     and 2020
Schedule II. Condensed Financial Information of Registrant – December 31, 2021 and 2020
Schedule III. Supplementary Insurance Information – December 31, 2021 and 2020
Schedule IV. Reinsurance – Years Ended December 31, 2021 and 2020
Schedule V. Valuation and Qualifying Accounts – Years Ended December 31, 2021 and 2020
All other Schedules are not required under related instructions or are not applicable and therefore have been omitted.

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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, 2021 and 2020, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, 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 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 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 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 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 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 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.

Policy and Claim Reserves
Description of the Matter
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.
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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 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.
How We Addressed the Matter in Our Audit
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 methodology, consistency, validity of the assumptions used and accepted actuarial methods,
•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 appropriateness 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
PCAOB ID # 2226
We have served as the Company’s auditor since 2009.
Birmingham, Alabama
March 23, 2022



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THE NATIONAL SECURITY GROUP, INC.
CONSOLIDATED BALANCE SHEETS

($ in thousands)December 31,
2021		December 31, 2020
ASSETS 
Investments  
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2021 -
      $650; 2020 - $946)
$608 $873 
Fixed maturities available-for-sale, at estimated fair value (cost: 2021 -
      $92,186; 2020 - $76,241)
94,743 81,399 
Equity securities, at estimated fair value (cost: 2021 - $1,609; 2020 - $1,918)
3,977 4,750 
Trading securities191 169 
Receivable for securities sold1,032 3 
Mortgage loans on real estate, at cost142 145 
Investment real estate, at book value2,671 2,934 
Policy loans1,767 1,846 
Company owned life insurance5,069 4,998 
Other invested assets1,619 2,033 
Total Investments111,819 99,150 
Cash and cash equivalents10,034 19,887 
Accrued investment income698 575 
Policy receivables and agents' balances, net14,379 12,345 
Reinsurance recoverable2,489 6,874 
Deferred policy acquisition costs7,332 7,408 
Property and equipment, net1,536 1,572 
Income tax recoverable280 1,311 
Deferred income tax asset, net2,403 706 
Other assets713 712 
Total Assets$151,683 $150,540 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Property and casualty benefit and loss reserves$8,930 $10,177 
Accident and health benefit and loss reserves4,349 4,144 
Life and annuity benefit and loss reserves34,966 34,731 
Unearned premiums34,107 31,166 
Policy and contract claims1,210 1,309 
Other policyholder funds1,302 1,342 
Short-term notes payable and current portion of long-term debt500 500 
Long-term debt12,690 13,177 
Other liabilities9,827 8,628 
Total Liabilities107,881 105,174 
Contingencies
Shareholders' equity  
Common stock2,535 2,533 
Additional paid-in capital5,650 5,626 
Accumulated other comprehensive income2,021 3,585 
Retained earnings33,639 33,665 
Treasury stock, at cost(43)(43)
Total Shareholders' Equity43,802 45,366 
Total Liabilities and Shareholders' Equity$151,683 $150,540 
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 OPERATIONS

($ in thousands, except per share)Year ended
December 31,
 20212020
REVENUES  
Net premiums earned$61,423 $60,810 
Net investment income3,383 3,633 
Investment gains885 1,623 
Other income519 583 
Total Revenues66,210 66,649 
BENEFITS, LOSSES AND EXPENSES  
Policyholder benefits and settlement expenses41,272 53,930 
Amortization of deferred policy acquisition costs3,490 3,548 
Commissions8,069 7,543 
General and administrative expenses9,661 9,298 
Taxes, licenses and fees2,442 2,484 
Interest expense592 864 
Total Benefits, Losses and Expenses65,526 77,667 
Income (Loss) Before Income Taxes684 (11,018)
INCOME TAX EXPENSE (BENEFIT)  
Current1,383 (1,293)
Deferred(1,281)(1,106)
 102 (2,399)
Net Income (Loss)$582 $(8,619)
INCOME (LOSS) PER COMMON SHARE BASIC AND DILUTED$0.23 $(3.41)
DIVIDENDS DECLARED PER SHARE$0.24 $0.24 

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 LOSS
($ in thousands)Year ended
December 31,
20212020
Net income (loss)$582 $(8,619)
Other comprehensive income (loss), net of tax
Changes in:
Unrealized gains (losses) on securities, net of reclassification adjustment of $88 and $1,263 for 2021 and 2020, respectively
(2,053)1,580 
Unrealized gain (loss) on interest rate swap489 (438)
Other comprehensive income (loss), net of tax(1,564)1,142 
Comprehensive loss$(982)$(7,477)

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)TotalRetained
Earnings		Accumulated
Other
Comprehensive
Income		Common
Stock		Additional
Paid-in
Capital		Treasury Stock
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 — 1,142 — — — 
Common stock issued25 — — 1 24 — 
Cash dividends(607)(607)— — — — 
Balance at December 31, 2020$45,366 $33,665 $3,585 $2,533 $5,626 $(43)

Comprehensive loss:     
Net income for December 31, 2021582 582 — — — — 
Other comprehensive loss (net of tax)(1,564)— (1,564)— — — 
Common stock issued26 — — 2 24 — 
Cash dividends(608)(608)— — — — 
Balance at December 31, 2021$43,802 $33,639 $2,021 $2,535 $5,650 $(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)Year ended
December 31,
 20212020
Cash Flows from Operating Activities  
Net income (loss)$582 $(8,619)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: 
Depreciation expense and amortization/accretion, net289 261 
Net gains on investments(885)(1,623)
Deferred income taxes(1,281)(1,106)
Amortization of deferred policy acquisition costs3,490 3,548 
Changes in assets and liabilities:
Change in receivable for securities sold(1,029)53 
Change in accrued investment income(123)131 
Change in reinsurance recoverable4,385 (6,598)
Policy acquisition costs deferred(3,414)(3,290)
Change in accrued income taxes1,031 (1,537)
Change in net policy liabilities and claims(6)4,082 
Change in other assets/liabilities, net2,135 838 
Other, net8 (30)
Net cash provided by (used in) operating activities5,182 (13,890)
Cash Flows from Investing Activities 
Purchase of:
Available-for-sale securities(36,595)(19,526)
Trading securities and short-term investments(19)(6)
Property and equipment(62)(51)
Proceeds from sale or maturities of:
Held-to-maturity securities272 451 
Available-for-sale securities22,244 42,161 
Real estate held for investment183 3 
Property and equipment7 — 
Other invested assets, net83 51 
Net cash provided by (used in) investing activities(13,887)23,083 
Cash Flows from Financing Activities  
Change in other policyholder funds(40)(8)
Change in short-term notes payable(500)(500)
Dividends paid(608)(607)
Net cash used in financing activities(1,148)(1,115)
Net change in cash and cash equivalents(9,853)8,078 
Cash and cash equivalents, beginning of period19,887 11,809 
Cash and cash equivalents, end of period$10,034 $19,887 

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, 2021, 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 92.3% of consolidated direct written premium, produced business during 2021 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 is currently in the process of exiting Louisiana to mitigate Gulf Coast hurricane exposure concentration.

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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company's life, accident and health insurance subsidiary, composing approximately 7.7% of consolidated direct written premium, is licensed in seven states. However, over 77% of life segment direct premium is generated in the states of Alabama and Georgia. Consequently, changes in the legal, regulatory or economic environment in these states could adversely impact the Company.

For the year ended December 31, 2021, there was not an agency that 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 (loss).

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 (loss).

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
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THE NATIONAL SECURITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


method will result in a recalculated effective yield that will equate the carrying amount of the investment to the present value of the projected future cash flows. The recalculated yield is used to accrue income on investments for subsequent periods.

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, 2021 and December 31, 2020 was $5,069,000 and $4,998,000, 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, 2021 and 2020 was an increase of $71,000 and an increase of $343,000, 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.

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.

Cash and Cash Equivalents
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.


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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, 2021 was $251,000 and the corresponding lease liability was $258,000. The ROU asset recognized by the Company at December 31, 2020 was $242,000 and the corresponding lease liability was $251,000.

Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents 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 IssueInterest Rate
1947 - 19684%
1969 - 1978
 6% graded to 5%
1979 - 2003
   7% graded to 6%
2004 - 20125.25%
2013 - 20144.25%
2015 - 20214%

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 2,531,764 at December 31, 2021 and 2,530,651 at December 31, 2020. The Company did not have any dilutive securities as of December 31, 2021 and 2020.

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 (loss). Changes in deferred tax assets and liabilities associated with components of other comprehensive income (loss) are charged or credited to other comprehensive income (loss).

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Contingencies
Liabilities for loss contingencies arising from, but not limited to, litigation, claims, assessments, fines and penalties are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Significant attorney fees are estimated and recorded when incurred.

Reclassifications
Certain 2020 amounts have been reclassified from the prior year consolidated financial statements to conform to the 2021 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, 2021, the net amount exceeding FDIC insured limits was $6,716,000 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, 2021, the single largest balance due from one agent totaled $52,000.

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, 2021 and December 31, 2020, 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, 2021, 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.

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,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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
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 adopted this guidance on January 1, 2021. 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 $555,000 at December 31, 2021 ($460,000 at December 31, 2020) and is included as a component of Other Invested Assets in the accompanying consolidated balance sheets.

In December 2005, the Company formed National Security Capital Trust I, a statutory trust created under the Delaware Statutory Trust Act, for the sole purpose of issuing, in private placement transactions, $9,000,000 of trust preferred securities (TPS) and using the proceeds thereof, together with the equity proceeds received from the Company in the initial formation of the Trust, to purchase $9,279,000 of variable rate subordinated debentures issued by the Company. The Company owns all voting securities of the Trust and the subordinated debentures are the sole assets of the Trust. The Trust will meet the obligations of the TPS with the interest and principal paid on the subordinated debentures. The Company received net proceeds from the TPS transactions, after commissions and other costs of issuance, of $9,005,000. The Company also holds all the voting securities issued by the Trust and such trusts are considered to be VIE's. The Trust is not consolidated because the Company is not the primary beneficiary of the trust. The Subordinated Debentures, disclosed in Note 8, are reported in the accompanying consolidated balance sheets as a component of long-term debt. The Company's equity investments in the Trust total $279,000 and are included in Other Assets in the accompanying consolidated balance sheets.

In June 2007, the Company formed National Security Capital Trust II for the sole purpose of issuing, in private placement transactions, $3,000,000 of trust preferred securities and using the proceeds thereof, together with the equity proceeds received from the Company in the initial formation of the Trust, to purchase $3,093,000 of 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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)20212020
NSIC - including realized capital gains of $36 and $447, respectively
$677 $918 
NSFC - including realized capital gains of $10 and $957, respectively
$(971)$(8,823)
Omega - including realized capital gains of $1,249 and $190, respectively
$884 $(954)
Statutory risk-based adjusted capital:
NSIC - including AVR of $1,063 and $1,014, respectively
$12,034 $10,784 
NSFC - including investment in Omega of $6,949 and $7,085, respectively
$35,405 $36,505 
Omega$6,946 $7,083 

The above amounts exclude allocation of direct expenses of the Company. NSIC, NSFC and Omega are in compliance with statutory restrictions with regard to minimum amounts of surplus and capital.

NOTE 4 – INVESTMENTS

Our investment in available-for-sale securities, which are reported at fair value, includes fixed maturity securities and equity securities. Net unrealized gains or losses on fixed maturities are reported after-tax as a component of other comprehensive income (loss). 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, 2021 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$5,171 $173 $19 $5,325 
Agency mortgage backed securities18,407 333 217 18,523 
Asset backed securities4,710 63 17 4,756 
Private label mortgage backed securities2,878 17 38 2,857 
Corporate bonds51,391 2,635 418 53,608 
States, municipalities and political subdivisions9,629 131 86 9,674 
Total Fixed Maturities92,186 3,352 795 94,743 
Equity securities1,609 2,368 — 3,977 
Total$93,795 $5,720 $795 $98,720 


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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, 2021 are as follows:
($ in thousands)

Held-to-maturity securities:
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Agency mortgage backed securities$608 $42 $— $650 
Total$608 $42 $— $650 


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$4,300 $323 $9 $4,614 
Agency mortgage backed securities19,773 919 63 20,629 
Asset backed securities8,233 137 27 8,343 
Private label mortgage backed securities1,418 50 55 1,413 
Corporate bonds35,930 3,771 50 39,651 
States, municipalities and political subdivisions6,587 189 27 6,749 
Total Fixed Maturities76,241 5,389 231 81,399 
Equity securities1,918 2,832 — 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:
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Agency mortgage backed securities$873 $73 $— $946 
Total$873 $73 $— $946 

The amortized cost and aggregate fair value of debt securities at December 31, 2021, 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.
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($ in thousands)Amortized
Cost		Fair
Value
Available-for-sale securities:
Due in one year or less$3,002 $3,032 
Due after one year through five years22,179 23,092 
Due after five years through ten years21,780 22,543 
Due after ten years45,225 46,076 
Total$92,186 $94,743 
Held-to-maturity securities:  
Due after one year through five years$8 $8 
Due after five years through ten years3 3 
Due after ten years597 639 
Total$608 $650 


A summary of securities available-for-sale with unrealized losses as of December 31, 2021, 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 months12 months or longerTotal
December 31, 2021Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Total
Securities in a Loss Position
U.S. Government corporations and agencies$1,814 $19 $— $— $1,814 $19 2
Agency mortgage backed securities10,129 217 — — 10,129 217 19
Asset backed securities1,501 17 — — 1,501 17 3
Private label mortgage backed securities1,963 38 — — 1,963 38 2
Corporate bonds11,121 418 — — 11,121 418 18
States, municipalities and political subdivisions3,629 77 798 9 4,427 86 7
 $30,157 $786 $798 $9 $30,955 $795 51

There were no securities held-to-maturity with unrealized losses as of December 31, 2021.

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:
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($ in thousands)Less than 12 months12 months or longerTotal
December 31, 2020Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Total
Securities in a Loss Position
U.S. Government corporations and agencies$666 $9 $— $— $666 $9 1
Agency mortgage backed securities2,264 56 2 7 2,266 63 8
Asset backed securities1,737 27 — — 1,737 27 2
Private label mortgage backed securities891 55 — — 891 55 1
Corporate bonds2,467 45 495 5 2,962 50 5
States, municipalities and political subdivisions1,713 27 — — 1,713 27 3
 $9,738 $219 $497 $12 $10,235 $231 20

There were no securities held-to-maturity with unrealized losses as of December 31, 2020.

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 (loss), 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 6% 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 the securities in an accumulated loss position in the portfolio were temporary impairments.

For the year ended December 31, 2021, the Company realized no other-than-temporary impairments. For the year ended December 31, 2020, the Company realized $180,000 other-than-temporary impairments. At December 31, 2021, the three largest losses not realized as an impairment in the fixed maturity portfolio totaled $105,000, $44,000 and $39,000. After evaluation by management, it was determined that each of these losses were driven by changes in market interest rates. Management currently has the intent and ability to hold these investments until recovery so no other-than-temporary impairments were recognized. 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.


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Major categories of investment income are summarized as follows:
($ in thousands)Year ended
December 31,
20212020
Fixed maturities$3,222 $3,482 
Equity securities114 128 
Mortgage loans on real estate7 7 
Investment real estate— 1 
Policy loans137 143 
Other47 15 
3,527 3,776 
Less: Investment expenses144 143 
Net investment income$3,383 $3,633 

Major categories of investment gains (losses) are summarized as follows:
($ in thousands)Year ended
December 31,
20212020
Realized gains on fixed maturities$111 $1,361 
Realized gains on equity securities1,237 426 
Gains on trading securities3 13 
Change in fair value of equity securities(464)(344)
Change in surrender value of company owned life insurance71 343 
Other gains (losses) principally real estate(73)4 
Other-than-temporary impairments— (180)
Net investment gains$885 $1,623 


An analysis of the net change in unrealized gains (losses) on available-for-sale securities follows:
($ in thousands)December 31,
2021		December 31,
2020
Fixed maturities$(2,599)$2,000 
Deferred income tax546 (420)
Change in net unrealized gains (losses) on available-for-sale securities$(2,053)$1,580 

NOTE 5 – FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Our available-for-sale securities consists of fixed maturity and equity securities which are recorded at fair value in the accompanying consolidated balance sheets.  

We are permitted to elect to measure financial instruments and certain other items at fair value, with the change in fair value recorded in earnings.  We elected not to measure any eligible items using the fair value option.

Accounting standards define fair value as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework to make the measurement of fair value more consistent and comparable.  In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or
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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 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 measured at fair value on a recurring basis as of December 31, 2021 are summarized in the following table by the type of inputs applicable to the fair value measurements:
($ in thousands)Fair Value Measurements at Reporting Date Using
DescriptionTotalLevel 1Level 2Level 3
Financial Assets    
Fixed maturities available-for-sale
U.S. Government corporations and agencies$5,325 $5,325 $— $— 
Agency mortgage backed securities18,523 11,916 6,607 — 
Asset backed securities4,756 2,730 2,026 — 
Corporate bonds53,608 — 53,608 — 
Private label asset backed securities2,857 — 2,857 — 
States, municipalities and political subdivisions9,674 — 9,674 — 
Trading securities191 191 — — 
Equity securities3,977 2,363 — 1,614 
Total Financial Assets$98,911 $22,525 $74,772 $1,614 

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
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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, 2021, Level 3 fair value measurements of assets include $1,614,000 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, 2021, there were no liabilities with Level 3 fair value measurements. In 2020, liabilities with Level 3 fair value measurements included various interest rate swap agreements whose value was 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, 2021:

($ in thousands)

For the year ended December 31, 2021
Equity SecuritiesInterest Rate Swap
Beginning balance$1,502 $(619)
Total gains or losses (realized and unrealized):  
Included in earnings112 — 
Included in other comprehensive income— 619 
Purchases:— — 
Sales:— — 
Issuances:— — 
Settlements:— — 
Transfers in/(out) of Level 3— — 
Ending balance$1,614 $— 
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, 2021:
$112 $— 

For the year ended December 31, 2021, there were no assets or liabilities measured at fair values on a nonrecurring basis.


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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)Fair Value Measurements at Reporting Date Using
DescriptionTotalLevel 1Level 2Level 3
Financial Assets    
Fixed maturities available-for-sale
U.S. Government corporations and agencies$4,614 $4,614 $— $— 
Agency mortgage backed securities20,629 12,044 8,585 — 
Asset backed securities8,343 2,343 6,000 — 
Corporate bonds39,651 — 39,651 — 
Private label asset backed securities1,413 891 522 — 
States, municipalities and political subdivisions6,749 — 6,749 — 
Trading securities169 169 — — 
Equity securities available-for-sale4,750 3,248 — 1,502 
Total Financial Assets$86,318 $23,309 $61,507 $1,502 
Financial Liabilities    
Interest rate swap$(619)$— $— $(619)
Total Financial Liabilities$(619)$— $— $(619)

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
Equity Securities Available-for-SaleInterest Rate Swap
Beginning balance$1,315 $(65)
Total gains or losses (realized and unrealized):  
Included in earnings187 — 
Included in other comprehensive income— (554)
Purchases:— — 
Sales:— — 
Issuances:— — 
Settlements:— — 
Transfers in/(out) of Level 3— — 
Ending balance$1,502 $(619)
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:$187 $— 

For the year ended December 31, 2020, there were no assets or liabilities measured at fair value on a nonrecurring basis.

The Company is exposed to certain risks in the normal course of its business operations.  The primary risk that is managed through the use of derivatives is interest rate risk on floating rate borrowings.  This risk is managed through the use of interest rate swap agreements which are designated as cash flow hedges.  For cash flow hedges, the effective portion of the gain or loss on the interest rate swap is included as a component of other comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction
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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, 2021 and December 31, 2020 are as follows:
($ in thousands)December 31, 2021December 31, 2020
Assets and related instrumentsCarrying
Value		Estimated
Fair Value		Carrying
Value		Estimated
Fair Value
Held-to-maturity securities$608 $650 $873 $946 
Mortgage loans142 142 145 145 
Policy loans1,767 1,767 1,846 1,846 
Company owned life insurance5,069 5,069 4,998 4,998 
Other invested assets1,619 1,619 2,033 2,033 
Liabilities and related instruments    
Other policyholder funds1,302 1,302 1,342 1,342 
Short-term notes payable and current portion of long-term debt500 500 500 500 
Long-term debt12,690 12,690 13,177 13,177 

NOTE 6 – PROPERTY AND EQUIPMENT
Major categories of property and equipment are summarized as follows:
($ in thousands)December 31, 2021December 31, 2020
Building and improvements$3,504 $3,491 
Electronic data processing equipment1,511 1,498 
Furniture and fixtures475 483 
5,490 5,472 
Less accumulated depreciation3,954 3,900 
Property and equipment, net$1,536 $1,572 
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Depreciation expense for the year ended December 31, 2021 was $96,000 ($109,000 for the year ended December 31, 2020).

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 2020.
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 net deferred tax asset positions of $2,403,000 at December 31, 2021 and $706,000 at December 31, 2020.

The tax effect of significant differences representing deferred tax assets and liabilities are as follows:

($ in thousands)As of December 31,
 2021		As of December 31,
 2020
General expenses$1,548 $1,448 
Unearned premiums1,436 1,313 
Claims liabilities751 698 
NOL carryforward1,459 632 
Impairment on real estate owned147 147 
Unrealized loss on interest rate swaps— 130 
Deferred tax assets5,341 4,368 
Unrealized gains on trading securities— (3)
Depreciation(99)(95)
Deferred policy acquisition costs(1,540)(1,555)
Pre-1984 policyholder surplus account(265)(331)
Unrealized gains on securities available-for-sale(537)(1,083)
Unrealized gains on equity securities(497)(595)
Deferred tax liabilities(2,938)(3,662)
Net deferred tax asset$2,403 $706 


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The appropriate income tax effects of changes in temporary differences are as follows:

($ in thousands)Year ended
December 31,
 20212020
Deferred policy acquisition costs$(15)$(55)
Other-than-temporary impairments— (28)
Trading securities(3)2 
Unearned premiums(123)(25)
General expenses(100)(179)
Depreciation4 2 
Claims liabilities(53)(53)
Impact of repeal of special provision on pre-1984 policyholder surplus(66)(66)
NOL carryforward(827)(632)
Unrealized losses on equity securities(98)(72)
Deferred income tax benefit$(1,281)$(1,106)

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:
 Year ended
December 31,
 20212020
Federal income tax rate applied to pre-tax income (loss)21.0 %21.0 %
Dividends received deduction and tax-exempt interest(1.0)%0.1 %
Company owned life insurance(2.2)%0.7 %
Rate differential - NOL carryback(8.1)%— %
Other, net5.2 %— %
Effective federal income tax rate14.9 %21.8 %

At December 31, 2021, the Company has approximately $6,950,000 of net operating loss carryforwards available ($1,459,000 tax benefit) to be applied to future periods. These carryforwards expire in 2040.

NOTE 8 – NOTES PAYABLE AND LONG-TERM DEBT

Short-term debt and current portion of long-term debt consisted of the following as of December 31, 2021 and December 31, 2020:
($ in thousands)December 31,December 31,
 20212020
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.
$500 $500 
$500 $500 

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Long-term debt consisted of the following as of December 31, 2021 and December 31, 2020:
($ in thousands)December 31,December 31,
 20212020
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.
$500 $1,000 
Subordinated debentures issued on December 15, 2005 with floating rate interest equal to 3-Month LIBOR plus 375 basis points; net of $131,000 in debt issuance cost ($140,000 in 2020); maturity December 15, 2035.  Interest payable quarterly.  Redeemable prior to maturity. Unsecured.
9,148 9,139 
Subordinated debentures issued on June 21, 2007 with floating rate interest equal to 3-Month LIBOR plus 340 basis points; net of $51,000 in debt issuance cost ($55,000 in 2020); maturity June 15, 2037. Interest payable quarterly.  Redeemable prior to maturity. Unsecured.
3,042 3,038 
 $12,690 $13,177 

Annual maturities of all outstanding debt for the next five years and beyond are as follows:
($ in thousands)
20222023202420252026Thereafter
$500 $500 $— $— $— $12,190 
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 paid interest at a fixed rate of 4.93%. This swap was terminated on March 22, 2021. 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%. This swap was terminated on March 22, 2021. At December 31, 2020, the swaps had fair values of $155,000 (liability) and $464,000 (liability), respectively, for a total liability of $619,000. The December 31, 2020 swap liability is reported as a component of other liabilities on the consolidated balance sheets.  A net valuation gain of $489,000 (net of tax) is included in accumulated other comprehensive income related to the swap agreements at December 31, 2021.  A net valuation loss of $438,000 (net of tax) was included in accumulated other comprehensive income related to the swap at December 31, 2020.

The Company’s interest rate swaps included provisions requiring the Company to post collateral when the derivative is in a net liability position.  At December 31, 2020, the Company had securities on deposit with fair market values of $957,000 (all of which was posted as collateral). Due to swap termination in 2021, there was no collateral on deposit related to the swaps at December 31, 2021.

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.


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The following table is a reconciliation of beginning and ending property and casualty reserve balances for claims and claim adjustment expense:
($ in thousands)Year ended
December 31,
20212020
Summary of claims and claim adjustment expense reserves
Balance, beginning of year$10,177 $7,199 
Less reinsurance recoverable on unpaid losses3,321 249 
Net balances at beginning of year6,856 6,950 
Net losses:
Provision for claims and claim adjustment expenses for claims arising in current year37,207 50,112 
Estimated claims and claim adjustment expenses for claims arising in prior years(522)(687)
Total increases36,685 49,425 
Claims and claim adjustment expense payments for claims arising in:
Current year32,579 44,816 
Prior years4,171 4,703 
Total payments36,750 49,519 
Net balance at end of period6,791 6,856 
Plus reinsurance recoverable on unpaid losses2,139 3,321 
Claims and claim adjustment expense reserves at end of period$8,930 $10,177 

Claims and claim adjustment expense reserves before reinsurance recoverables at December 31, 2021 were down significantly compared to prior year primarily due to fewer outstanding hurricane losses at the balance sheet date compared to prior year. The estimate for claims arising in prior years was reduced $522,000 in 2021 (reduced $687,000 in 2020) 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, 2021, the Company's estimate of unpaid losses and adjustment expenses for claims incurred in prior years related to catastrophes that exceeded our retention totaled $117,000 before reinsurance ($0 in 2020).

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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Homeowners, Dwelling Fire and Other Liability
For the Years Ended December 31,
20121
20131
20141
20151
20161
20171
20181
201920202021
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
($ in thousands)
YearsIBNR
Reserves
Dec. 31,
2021		Cumulative
Number of
Reported
Claims
2012$29,959 $30,190 $30,402 $30,091 $29,948 $29,885 $29,827 $29,834 $29,830 $29,831 $— 5,206 
2013— 27,436 27,147 27,076 27,023 27,191 27,236 27,022 27,015 27,013 3 5,217 
2014— — 25,929 26,422 26,290 26,225 26,130 26,096 26,086 26,086 — 4,759 
2015— — — 31,484 30,861 30,360 30,890 30,960 31,033 30,822 193 5,868 
2016— — — — 36,287 35,343 35,399 35,144 35,151 35,137 — 5,207 
2017— — — — — 40,210 38,958 38,642 38,675 38,685 4 5,341 
2018— — — — — — 37,079 36,195 36,229 36,668 349 4,813 
2019— — — — — — — 35,929 35,199 35,231 135 4,852 
2020— — — — — — — — 50,722 49,911 495 6,366 
2021— — — — — — — — — 37,814 2,595 4,947 
Total$347,198 
1Required supplementary information (unaudited)
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
($ in thousands)
Years
20121
20131
20141
20151
20161
20171
20181
201920202021
2012$26,162 $29,135 $29,614 $29,765 $29,834 $29,835 $29,823 $29,824 $29,825 $29,825 
2013— 24,157 26,114 26,487 26,661 26,788 26,976 27,011 27,006 27,006 
2014— — 22,844 25,461 25,800 26,033 26,095 26,094 26,086 26,086 
2015— — — 25,923 30,066 30,190 30,296 30,366 30,492 30,519 
2016— — — — 31,893 34,722 35,030 35,139 35,131 35,132 
2017— — — — — 35,209 38,245 38,499 38,659 38,674 
2018— — — — — — 32,456 35,543 35,924 36,121 
2019— — — — — — — 30,796 34,593 34,905 
2020— — — — — — — — 45,423 49,024 
2021— — — — — — — — — 33,185 
 Total$340,477 
All outstanding liabilities before 2011, net of reinsurance70 
Liabilities for claims and claim adjustment expenses, net of reinsurance$6,791 
1Required 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)
Years12345678910
88.5 %9.3 %1.0 %0.5 %0.3 %0.2 %— %0.2 %— %— %

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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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 2021 compared to prior years.

As shown in the table above depicting average annual payout of incurred claims, 88.5% of claims are settled within twelve months of the date of loss and cumulatively, 97.8% 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)December 31, 2021December 31, 2020
Net outstanding liabilities
     Homeowners' insurance$2,399 $2,359 
     Dwelling fire insurance2,483 2,877 
     Other Liability insurance1,908 1,618 
     Other short-duration insurance lines1 2 
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance6,791 6,856 
Reinsurance recoverable on unpaid claims
     Homeowners' insurance2,064 2,620 
     Dwelling fire insurance75 700 
     Other Liability insurance— — 
     Other short-duration insurance lines— 1 
Total reinsurance recoverable on unpaid claims2,139 3,321 
Insurance lines other than short-duration— — 
Unallocated claims adjustment expenses— — 
Other— — 
— — 
Total gross liability for unpaid claims and claim adjustment expense$8,930 $10,177 

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 $390,000 at December 31, 2021 ($426,000 at December 31, 2020). These claims are a component of policy and contract claims which totaled $1,210,000 at December 31, 2021 ($1,309,000 at December 31, 2020).


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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,
20191
20202021
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in thousands)
YearsIBNR Reserves
Dec. 31, 2021		Cumulative Number
 of Reported Claims
2019$935 $968 $935 $— 1,468 
2020818 741 — 1,019 
2021778 390 793 
1Required supplementary information (unaudited)

Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in thousands)
Years
20191
20202021
2019$614 $917 $929 
2020451 703 
2021433 
1Required supplementary information (unaudited)

Average Annual Percentage Payout of Incurred Claims by Age
Required supplementary information (unaudited)
Years123
60.7%35.7%2.9%

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Catastrophe reinsurance coverage is maintained in three layers as follows:
LayerReinsurers' Limits of Liability
First Layer
100% of $13,500,000 in excess of $4,000,000 retention
Second Layer
100% of $25,000,000 in excess of $17,500,000
Third Layer
100% of $30,000,000 in excess of $42,500,000
Catastrophe Aggregate
100% of $2,000,000 in excess of $2,000,000 after $2,000,000 aggregate 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 AM 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, 2021, the largest reinsurance recoverable of a single reinsurer was $219,000 ($1,263,000 at December 31, 2020). 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, 2021 amounted to $185,000 ($191,000 in 2020). The Company contributes dollar-for-dollar matching contributions up to 5% of compensation subject to government limits.

The Company established a non-qualified deferred compensation 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, 2021 and 2020 amounted to an approximate increase of $234,000 and an increase of $430,000 in employee benefit related expenses, respectively.

The Company and its subsidiaries established an Employee Stock Ownership Plan (ESOP) in January 2010, to enable eligible employees to acquire a proprietary interest in the Company's common stock and to provide retirement and other benefits to such employees. There were no contributions during the year ended December 31, 2021 and contributions of $100,000 were made during the year ended December 31, 2020. 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, 2021, NSIC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $1,097,000.

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, 2021, NSFC's retained earnings unrestricted for the payment of dividends in the next twelve months amounted to $3,541,000.

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 AM Best and Demotech.

At December 31, 2021, securities with market values of $3,203,000 ($3,349,000 at December 31, 2020) were pledged with various states pursuant to statutory requirements.

NOTE 13 – SHAREHOLDERS' EQUITY

During the year ended December 31, 2021 and year ended December 31, 2020, changes in shareholders' equity consisted of net income of $582,000 and a net loss of $8,619,000, respectively; dividends paid of $608,000 in 2021 and $607,000 in 2020; an other comprehensive loss of $1,564,000 in 2021 and other comprehensive income of $1,142,000 in 2020; common stock issued of $26,000 in 2021 and $25,000 in 2020; and the purchase of treasury shares of $36,000 in 2020.  Other comprehensive income (loss) consisted of changes in accumulated unrealized gains/losses on securities available-for-sale and changes in accumulated unrealized losses on interest rate swaps.

Preferred Stock
Preferred Stock may be issued in one or more series as shall from time to time be determined and authorized by the Board of Directors. The directors may make specific provisions regarding (a) the voting rights, if any (b) whether such dividends are to be cumulative or noncumulative (c) the redemption provisions, if any (d) participating rights, if any (e) any sinking fund or other retirement provisions (f) dividend rates (g) the number of shares of such series and (h) liquidation preference. There is currently no Preferred Stock issued or outstanding.

Common Stock
The holders of the Class A Common Stock will have one-twentieth of one vote per share, and the holders of the common stock will have one vote per share. There is currently no Class A Common Stock issued or outstanding.

In the event of any liquidation, dissolution or distribution of the assets of the Company remaining after the payments to the holders of the Preferred Stock of the full preferential amounts to which they may be entitled as provided in the resolution or resolutions creating any series thereof, the remaining assets of the Company shall be divided and distributed among the holders of both classes of common stock, except as may otherwise be provided in any such resolution or resolutions.


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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, 2021 and December 31, 2020:
December 31, 2021
AuthorizedIssuedTreasuryOutstanding
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 2,535,577 2,945 2,532,632 

December 31, 2020
AuthorizedIssuedTreasuryOutstanding
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 

On May 21, 2021, 2,262 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 expired May 31, 2021.

During the year ended December 31, 2021, the Company repurchased no shares of common stock. During the year ended December 31, 2020, the Company purchased 2,509 shares of common stock which were placed in treasury stock.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income ("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)Year ended
December 31,
20212020
Unrealized Gains (Losses) on Cash Flow Hedges
Balance at beginning of period$(489)$(51)
Other comprehensive income (loss) for period:
Other comprehensive gain (loss) before reclassifications489 (438)
Net current period other comprehensive income (loss)489 (438)
Balance at end of period$— $(489)
Unrealized Gains (Losses) on Available-for-Sale Securities
Balance at beginning of period
$4,074 $2,494 
Other comprehensive income (loss) for period:
Other comprehensive income (loss) before reclassifications(1,965)317 
Amounts reclassified from accumulated other comprehensive loss(88)1,263 
Net current period other comprehensive income (loss)(2,053)1,580 
Balance at end of period$2,021 $4,074 
Total Accumulated Other Comprehensive Income at end of period$2,021 $3,585 

The following table presents the amounts reclassified out of AOCI for the year ended December 31, 2021:
($ in thousands)

Details about Accumulated Other Comprehensive Income Components
Amounts Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the Statement Where Net Income is Presented
Unrealized Gains on
Available-for-Sale Securities		$111 Net investment gains
111 Total before tax
(23)Tax expense
$88 Net of Tax

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
Amounts Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the Statement Where Net Income is Presented
Unrealized Gains on
Available-for-Sale Securities		$1,599 Net investment gains
1,599 Total before tax
(336)Tax expense
$1,263 Net of Tax


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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, 2021 and December 31, 2020 are summarized below:

($ in thousands)

Assets by industry segment
TotalP&C Insurance OperationsLife Insurance OperationsNon-Insurance Operations
    
December 31, 2021$151,683 $87,657 $59,278 $4,748 
December 31, 2020$150,540 $85,375 $59,394 $5,771 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Net income (loss) by business segment for the year ended December 31, 2021 and 2020 is summarized below:
($ in thousands)
Year ended December 31, 2021
P&C Insurance OperationsLife Insurance OperationsNon-Insurance OperationsInter- company EliminationsTotal
REVENUES    
Net premiums earned$55,869 $5,554 $— $— $61,423 
Net investment income1,456 2,419 48 (540)3,383 
Investment gains (losses)296 606 (17)— 885 
Other income518 834 1,106 (1,939)519 
 58,139 9,413 1,137 (2,479)66,210 
BENEFITS AND EXPENSES    
Policyholder benefits paid36,685 4,973 — (386)41,272 
Amortization of deferred policy acquisition costs2,748 742 — — 3,490 
Commissions7,759 310 — — 8,069 
General and administrative expenses8,479 1,961 1,314 (2,093)9,661 
Taxes, licenses and fees2,250 192 — — 2,442 
Interest expense— 43 549 — 592 
 57,921 8,221 1,863 (2,479)65,526 
Income (Loss) Before Income Taxes218 1,192 (726)— 684 
INCOME TAX EXPENSE (BENEFIT)(26)280 (152)— 102 
Net Income (Loss)$244 $912 $(574)$— $582 


($ in thousands)

Year ended December 31, 2020
P&C Insurance OperationsLife Insurance OperationsNon-Insurance OperationsInter-company
Eliminations		Total
REVENUES   
Net premiums earned$55,101 $5,709 $— $— $60,810 
Net investment income1,530 2,583 60 (540)3,633 
Investment gains1,043 567 13 — 1,623 
Other income582 1,242 1,035 (2,276)583 
 58,256 10,101 1,108 (2,816)66,649 
BENEFITS AND EXPENSES    
Policyholder benefits paid49,425 5,215 — (710)53,930 
Amortization of deferred policy acquisition costs2,724 824 — — 3,548 
Commissions7,212 331 — — 7,543 
General and administrative expenses8,589 1,923 892 (2,106)9,298 
Taxes, licenses and fees2,268 216 — — 2,484 
Interest expense— 41 823 — 864 
 70,218 8,550 1,715 (2,816)77,667 
Income (Loss) Before Income Taxes(11,962)1,551 (607)— (11,018)
INCOME TAX EXPENSE (BENEFIT)(2,583)306 (122)— (2,399)
Net Income (Loss)$(9,379)$1,245 $(485)$— $(8,619)

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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, 2021 and 2020, respectively:
($ in thousands)Year ended
December 31,
 20212020
Life, accident and health operations premiums written:  
Traditional life insurance$3,997 $4,110 
Accident and health insurance1,692 1,727 
Gross life, accident and health5,689 5,837 
Reinsurance premium ceded(85)(80)
Net life, accident and health premiums written$5,604 $5,757 
Property and Casualty operations premiums written:  
Dwelling fire & extended coverage$46,896 $40,590 
Homeowners (Including mobile homeowners)19,688 20,143 
Other liability1,973 2,212 
Gross property and casualty68,557 62,945 
Reinsurance premium ceded(9,982)(7,296)
Net property and casualty written$58,575 $55,649 
Consolidated gross premiums written$74,246 $68,782 
Reinsurance premium ceded(10,067)(7,376)
Consolidated net premiums written$64,179 $61,406 

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, 2021 and 2020, respectively:
($ in thousands)Year ended
December 31,
 20212020
Life, accident and health operations premiums earned:  
Traditional life insurance$3,947 $4,071 
Accident and health insurance1,692 1,718 
Gross life, accident and health5,639 5,789 
Reinsurance premium ceded(85)(80)
Net life, accident and health premiums earned$5,554 $5,709 
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage$43,663 $39,775 
Homeowners (Including mobile homeowners)20,097 20,392 
Other liability2,091 2,230 
Gross property and casualty65,851 62,397 
Reinsurance premium ceded(9,982)(7,296)
Net property and casualty earned$55,869 $55,101 
Consolidated gross premiums earned$71,490 $68,186 
Reinsurance premium ceded(10,067)(7,376)
Consolidated net premiums earned$61,423 $60,810 
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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 longstanding 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 for individual claims. In addition the Company has a current accrual of $750,000 for legal expenses and third party claimant settlement cost. There are no individual actions not accrued that are deemed material by management based upon an evaluation of information presently available.

NOTE 17 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest during the year ended December 31, 2021 was $562,000 ($765,000 in 2020). Cash paid for income taxes during the year ended December 31, 2021 was $352,000. Cash paid for income taxes during the year ended December 31, 2020 was $244,000.

During the year ended December 31, 2021, non-cash changes in equity included $2,000 in common stock issued to Directors in lieu of cash compensation along with a corresponding $24,000 increase in additional paid-in capital. 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. Subsequent to the date of these consolidated financial statements and prior to the filing date of this Form 10-K the Company executed a plan of merger agreement with VR Insurance Holdings, Inc. Further details can be found on the 8-K filed on January 27, 2022.


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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, 2021 December 31, 2020
       
  Cost   Fair Value Amount per the Balance Sheet CostFair ValueAmount per the Balance Sheet
Securities Held-to-Maturity:      
Agency mortgage backed securities$608 $650 $608 $873 $946 $873 
Total Securities Held-to-Maturity608 650 608 873 946 873 
Securities Available-for-Sale:
Equity Securities:
Banks and insurance companies842 2,966 2,966 842 2,545 2,545 
Industrial and all other767 1,011 1,011 1,076 2,205 2,205 
Total equity securities1,609 3,977 3,977 1,918 4,750 4,750 
Debt Securities:
U.S. Government corporations and agencies5,171 5,325 5,325 4,300 4,614 4,614 
Agency mortgage backed securities18,407 18,523 18,523 19,773 20,629 20,629 
Asset backed securities4,710 4,756 4,756 8,233 8,343 8,343 
Private label asset backed securities2,878 2,857 2,857 1,418 1,413 1,413 
Corporate bonds51,391 53,608 53,608 35,930 39,651 39,651 
States, municipalities and political subdivisions9,629 9,674 9,674 6,587 6,749 6,749 
Total Debt Securities92,186 94,743 94,743 76,241 81,399 81,399 
Total Available-for-Sale93,795 98,720 98,720 78,159 86,149 86,149 
Total Securities94,403 99,370 99,328 79,032 87,095 87,022 
Trading securities191 191 191 169 169 169 
Mortgage loans on real estate142 142 142 145 145 145 
Investment real estate2,671 2,671 2,671 2,934 2,934 2,934 
Policy loans1,767 1,767 1,767 1,846 1,846 1,846 
Company owned life insurance4,082 5,069 5,069 4,082 4,998 4,998 
Other invested assets2,651 2,651 2,651 2,036 2,036 2,036 
Total investments$105,907 $111,861 $111,819 $90,244 $99,223 $99,150 

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THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule II. Condensed Financial Information of Registrant
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
BALANCE SHEETS
($ in thousands)
December 31,
20212020
Assets
Fixed maturities available-for-sale, at estimated fair value$— $957 
Investment real estate, at book value356 356 
Cash2,761 3,108 
Investment in subsidiaries (equity method) eliminated upon consolidation56,787 57,681 
Income tax recoverable91 — 
Deferred income tax asset892 960 
Other assets564 546 
       Total Assets$61,451 $63,608 
Liabilities and Shareholders' Equity
Liabilities
Accrued general expenses$4,459 $3,946 
Interest rate swaps— 619 
Short-term notes payable500 500 
Long-term debt12,690 13,177 
       Total Liabilities17,649 18,242 
       Total Shareholders' Equity43,802 45,366 
       Total Liabilities and Shareholders' Equity$61,451 $63,608 
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
($ in thousands)
Years Ended December 31,
20212020
Income
    Dividends (eliminated upon consolidation)$— $1,100 
Net realized investment gains(17)13 
Holding company management service fees1,106 1,035 
    Other income48 60 
1,137 2,208 
Expenses
State taxes49 49 
Interest549 823 
Other expenses1,265 843 
1,863 1,715 
Income (loss) before income taxes and equity in undistributed earnings of
     subsidiaries		(726)493 
Income tax benefit(152)(122)
Income (loss) before equity in undistributed earnings of subsidiaries(574)615 
Equity in undistributed earnings (losses) of subsidiaries1,156 (9,234)
Net Income (Loss)$582 $(8,619)
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THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
($ in thousands)
 Years Ended
 December 31,
 20212020
Cash Flows from Operating Activities: 
Net income (loss)$582 $(8,619)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: 
Equity in undistributed earnings (losses) of subsidiaries(1,156)9,234 
Net realized investment (gains) losses17 (13)
Income taxes(153)364 
Other, net535 531 
Net Cash Provided by (Used in) Operating Activities(175)1,497 
Cash Flows from Investing Activities: 
Net sales (purchases) of investments936 (675)
Net Cash Provided by (Used in) Investing Activities936 (675)
Cash Flows from Financing Activities: 
Net repayments of debt(500)(500)
Cash dividends(608)(607)
Net Cash Used in Financing Activities(1,108)(1,107)
Net change in cash and cash equivalents(347)(285)
Cash and cash equivalents, at beginning of year3,108 3,393 
Cash and Cash Equivalents, at End of Year$2,761 $3,108 
Notes to Condensed Financial Information of Registrant

Note 1 - Basis of Presentation

Pursuant to the rules and regulations of the Securities and Exchange Commission, the Condensed Financial Information of the Registrant does not include all of the information and notes normally included with financial statements prepared in accordance with generally accepted accounting principles.  It is, therefore, suggested that this Condensed Financial Information be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Registrant’s Annual Report as referenced in Form 10-K, Part II, Item 8, page 46.

Note 2 - Cash Dividends and Asset Transfers from Insurance Subsidiaries

In 2021, no cash dividends were paid to the Registrant by its subsidiaries ($1,100,000 in 2020).

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THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule III. Supplementary Insurance Information
THE NATIONAL SECURITY GROUP, INC.
 ($ in thousands)
  Deferred Acquisition CostsFuture Policy BenefitsUnearned PremiumsUnpaid
Losses
At December 31, 2021:     
Life and accident and health insurance$3,663 $39,315 $11 $1,210 
Property and casualty insurance 3,669 — 34,096 8,930 
Total $7,332 $39,315 $34,107 $10,140 
At December 31, 2020:
Life and accident and health insurance$3,927 $38,875 $14 $1,309 
Property and casualty insurance3,481 — 31,152 10,177 
Total$7,408 $38,875 $31,166 $11,486 
 Premium RevenueNet Investment IncomeOther IncomeBenefits, Claims, Losses and Settlement ExpensesCommissions, Amortization
of Policy Acquisition Costs		General Expenses,
Taxes, Licenses and Fees
For the year ended December 31, 2021:      
Life and accident and health insurance$5,554 $2,419 $834 $4,973 $1,052 $2,153 
Property and casualty insurance55,869 1,456 518 36,685 10,507 10,729 
Other— 48 1,106 — — 1,314 
Total$61,423 $3,923 $2,458 $41,658 $11,559 $14,196 
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 insurance55,101 1,530 582 49,425 9,936 10,857 
Other— 60 1,035 — — 892 
Total$60,810 $4,173 $2,859 $54,640 $11,091 $13,888 
Note: Investment income and other operating expenses are reported separately by segment and not allocated.

Schedule IV. Reinsurance
THE NATIONAL SECURITY GROUP, INC.
 ($ in thousands)
Gross AmountCeded to Other CompaniesAssumed from Other CompaniesNet AmountPercentage of Amount Assumed to Net
For the year ended December 31, 2021     
Life insurance in force$197,714 $9,126 $— $188,588 — %
Premiums:     
Life insurance and accident and health insurance$5,639 $85 $— $5,554 — %
Property and casualty insurance65,851 9,982 — 55,869 — %
Total premiums$71,490 $10,067 $— $61,423 — %
For the year ended December 31, 2020
Life insurance in force$201,549 $9,514 $— $192,035 — %
Premiums:
Life insurance and accident and health insurance$5,789 $80 $— $5,709 — %
Property and casualty insurance62,397 7,296 — 55,101 — %
Total premiums$68,186 $7,376 $— $60,810 — %

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THE NATIONAL SECURITY GROUP, INC.
FINANCIAL STATEMENT SCHEDULES
Schedule V. Valuation and Qualifying Accounts
The National Security Group, Inc.
Years ended December 31, 2021 and 2020
($ in thousands)
20212020
Balance, January 1 Allowance for Doubtful Accounts$6 $5 
Additions16 4 
Deletions15 3 
Balance, December 31 Allowance for Doubtful Accounts$7 $6 
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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, 2021.

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 23, 2022

Item 9B. Other Information
None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.

Part III

Item 10. Directors, Executive Officers and Corporate Governance
In 1990, National Security Insurance Company was reorganized as a holding company system pursuant to a plan of exchange whereby The National Security Group, Inc., (the "Company"), became the holding company for National Security Insurance Company (NSIC), and its prior subsidiaries: National Security Fire & Casualty Company (NSFC),
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and NATSCO, Inc. ("NATSCO"). Subsequently Omega One Insurance Company (“Omega One”) was formed as a wholly owned subsidiary of NSFC. References to tenure with the Company (in the following biographical section) include the individual's tenure with NSIC prior to the reorganization. Director ages are at December 31, 2021. The following is a biographical summary for each of our directors:

Fleming G. Brooks, 76
Dividend Committee Chairman




Fleming G. Brooks is Chairman of the Board of Brooks Agrico LLC, of Samson, Alabama and various affiliates of that Company.  He either serves currently or has served in the past, in various positions with associations of the agricultural community.  Mr. Brooks has extensive executive management and leadership experience having served as chairman and CEO of a diversified privately held agribusiness entity and industry knowledge developed through his tenure as a director.
Samson, Alabama   
Term Expires 2024NSEC Board and Board CommitteesMeeting Attendance
Director since 2004Board of Directors7 of 7100%
IndependentDividend Committee3 of 3100%
 Nominating Committee1 of 1100%

Jack E. Brunson, 65


Jack E. Brunson 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 One.  He joined the Company in 1982.  Mr. Brunson has extensive leadership experience as president of an insurance subsidiary, financial acumen and risk management experience developed through his operational and director experiences, as well as extensive industry knowledge gained over his tenure with the Company. Mr. Brunson holds the Chartered Property and Casualty Underwriter designation.
Elba, Alabama   
Term Expires 2024NSEC Board and Board CommitteesMeeting Attendance
Director since 1999Board of Directors7 of 7100%

Elizabeth B. Crawford, 52




Elizabeth B. Crawford is an attorney and former Director of a United Way Agency.  She served as an advisory board member of The National Security Group, Inc. prior to her election as a Director in 2017.  She presently serves on a number of non-profit board of directors in the Birmingham area. Mrs. Crawford has executive experience, a knowledge of governmental agencies, strong leadership and board experience.
Birmingham, Alabama   
Term Expires 2024NSEC Board and Board CommitteesMeeting Attendance
Director since 2017Board of Directors7 of 767%
IndependentDividend Committee3 of 3100%

Walter P. Wilkerson, 74
Chairman of the Board


Walter P. Wilkerson is a certified public accountant and consultant for the firm of Brunson, Wilkerson, Bowden & Associates, P.C. in Enterprise, Alabama.  He is also a member of the American Institute of Certified Public Accountants and Alabama Society of Certified Public Accountants.  Mr. Wilkerson has extensive leadership experience as a managing partner, financial acumen and risk management experience developed through his experience in public accounting and involvement in business operations and planning.  He served on the Audit Committee and was designated as the Audit Committee financial expert under NASDAQ listing standards prior to becoming Chairman of the Board in May 2018. Mr. Wilkerson has developed significant industry knowledge through his tenure as a director.
Enterprise, Alabama   
Term Expires 2024NSEC Board and Board CommitteesMeeting Attendance
Director since 1984Board of Directors7 of 7100%
IndependentExecutive CommitteeNone during 2021 

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Andrew J. Abernathey, 27Andrew J. Abernathey is the founder and Chief Executive Officer of Abernathey Holdings. He served as an advisory board member of The National Security Group, Inc. prior to his election as a Director in July 2020. He is a partner in Abernathey Brothers Farm. Mr. Abernathey has industry experience in finance, real estate and privately held businesses.
Fargo, North Dakota   
Term Expires 2023NSEC Board and Board CommitteesMeeting Attendance
Director since 2020Board of Directors6 of 786%
Independent

W. L. Brunson, Jr., 63
President/CEO



William L. Brunson, Jr. has served as a director since 1999 and as President and Chief Executive Officer of the Company since 2000.  He holds the position of President of NSIC.  He joined the Company in 1983.  Mr. Brunson is a Director of NSFC, NATSCO, NSIC and Omega One.  Mr. Brunson is also a member of the Alabama State Bar.  Mr. Brunson has extensive knowledge of the insurance industry and regulation as well as significant experience in the areas of operations, corporate strategy, structure and law.
Elba, Alabama   
Term Expires 2023NSEC Board and Board CommitteesMeeting Attendance
Director since 1999Board of Directors7 of 7100%
 Executive CommitteeNone during 2021 

Fred Clark, Jr., 61
Nominating Committee Chairman










Fred Clark, Jr. is currently President and Chief Executive Officer of Alabama Municipal Electric Authority in Montgomery, Alabama.  He was formerly Executive Director of The Electric Cities of Alabama, Executive Director of the Alabama Farmers Federation, President of Alabama Rural Electric Association of Cooperatives, Montgomery, Alabama, State Director for U. S. Senator Richard Shelby, Legislative Representative for National Rural Electric Cooperative Association and Legislative Assistant to U. S. Senator Howell Heflin.  Mr. Clark has extensive leadership skills, experience in power supply, experience in a heavily regulated industry, financial acumen developed through his extensive executive and board experience, and has developed significant industry knowledge through his tenure as a director.
Matthews, Alabama   
Term Expires 2023NSEC Board and Board CommitteesMeeting Attendance
Director since 1996Board of Directors7 of 7100%
IndependentCompensation Committee2 of 2100%
 Nominating Committee1 of 1100%
 Executive CommitteeNone during 2021 
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Mickey L. Murdock, 79
Audit Committee Chairman


Financial Expert






Mickey L. Murdock has served as a director since 1976.  Mr. Murdock was appointed Mayor of Elba, Alabama in September 2011, to fill the unexpired term of the deceased mayor and was elected mayor in 2012 and re-elected in 2016. Mr. Murdock retired as Mayor of Elba following expiration of his second full term in 2020. Mr. Murdock also recently retired as a Director of Power South, a provider of wholesale energy to 16 electric cooperatives and four municipal electric systems in Alabama and northwest Florida. Mr. Murdock retired from the Company in 2009 having served as Senior Vice President.  From 1982 to 2002, he served as Chief Financial Officer and Treasurer of the Company.  Prior to that time, he served as Vice President and Controller of the Company.  He joined the Company in 1970.  Mr. Murdock previously served as a Director of NSIC, NSFC, Omega One, and NATSCO.  Mr. Murdock is a Certified Public Accountant (retired).  Mr. Murdock has extensive knowledge of the insurance industry and regulation coupled with significant experience in operations, risk management, budgeting, financial reporting and investor communications.
Huntsville, Alabama   
Term Expires 2023NSEC Board and Board CommitteesMeeting Attendance
Director since 1976Board of Directors7 of 7100%
IndependentAudit Committee5 of 683%
Nominating Committee1 of 1100%
Executive Committeenone during 2021

Charles B. Arnold, 44
Financial Expert



Charles B. Arnold currently serves as an assistant controller for Church’s Chicken. He served as an advisory board member of The National Security Group, Inc. prior to his election as a Director in 2017. Mr. Arnold has experience in financial reporting and project management in various industries and has worked in the public accounting field for several years before moving to industry. He is a certified public accountant.
Buford, Georgia   
Term Expires 2022NSEC Board and Board CommitteesMeeting Attendance
Director since 2017Board of Directors7 of 7100%
IndependentDividend Committee3 of 3100%
Audit Committee6 of 6100%

Frank B. O'Neil, 68
Compensation Committee Chairman
Frank B. O'Neil retired from his executive role at ProAssurance Corporation (NYSE: PRA) of Birmingham, Alabama, in May, 2019 and served the Company in an advisory role until his full retirement on December 31, 2020.  He is a member of National Investor Relations Institute and holds the Investor Relations Charter designation. He is a former member and chairman of the Board of Directors of the Alabama Insurance Planning Commission.  Mr. O'Neil formerly served as Chairman of the Rating Agency Liaison Committee for the Physician Insurers Association of America, a group representing medical professional liability insurance companies. Mr. O'Neil has extensive knowledge of the insurance industry and regulation, financial reporting, investor communications, corporate governance, risk management and experience working with other company boards of both public and mutual through his involvement in more than 20 M&A transactions in the last thirty years.
Birmingham, Alabama   
Term Expires 2022NSEC Board and Board CommitteesMeeting Attendance
Director since 2004Board of Directors7 of 7100%
IndependentCompensation Committee2 of 2100%
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Donald S. Pittman, 61


Donald S. Pittman has been in the private practice of law since June of 1988, in Enterprise, Alabama.  He is a member of the Coffee County and State of Alabama Bar Associations and serves on the Board of Directors of Alfab, Inc.  Mr. Pittman has extensive experience with real estate, corporate, tax and estate law as well as risk management, financial acumen and industry knowledge developed through his tenure as a director and prior service as Audit Committee Chairman.
Enterprise, Alabama   
Term Expires 2022NSEC Board and Board CommitteesMeeting Attendance
Director since 2002Board of Directors7 of 7100%
IndependentAudit Committee5 of 683%
Executive CommitteeNone during 2021

Brian R. McLeod, 53
Vice President of Finance and Operations, Chief Financial Officer
Brian R. McLeod is Vice President of Finance and Operations and Chief Financial Officer of the Company.  He joined the Company in 1992 and has served in various financial and operational roles during his tenure.  He serves on the Boards of Directors of Company subsidiaries NSIC, NSFC, Omega One 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. He is a certified public accountant and also holds a chartered global management accountant designation.  Mr. McLeod has extensive knowledge of the insurance industry and regulation stemming from his experience in areas of operations, project management, corporate strategy, financial management and regulatory reporting. 
Elba, Alabama   
Term Expires 2022NSEC Board and Board CommitteesMeeting Attendance
Director since 2016Board of Directors7 of 7100%

L. Brunson White, 65L. Brunson White is a Principal and owner of Brunson White Advisors, LLC, a strategy and technology consulting company. He was Secretary of Information Technology for the State of Alabama from 2013 through 2015. In this role, Mr. White served on the Governor's Cabinet where he was responsible for the governance of approximately $345 million in information technology spending. Prior to his gubernatorial appointment, Mr. White served as a Director of The National Security Group, Inc. from 2002-2013. Mr. White is retired from Energen Corporation (NYSE:EGN) where he worked as Chief Information Officer for much of his 33 year tenure. He has extensive technology and regulatory experience, having served as chief information officer of a highly regulated publicly traded company. Mr. White's risk management experience, financial acumen and industry knowledge have developed through his time as a director and previous service as a member of the Audit Committee for The National Security Group, Inc.
Birmingham, Alabama
Term Expires 2022NSEC Board and Board CommitteesMeeting Attendance
Director since 2016Board of Directors7 of 7100%
IndependentCompensation Committee2 of 2100%
Director Compensation

The Compensation Committee periodically reviews levels of director compensation for non-employee directors of the Company. The goal of the compensation review is to provide a median level of director compensation relative to peer group companies to attract and retain individuals to provide independent oversight of management and bring diverse business ideas in order to provide input into strategic plans and objectives of the organization.

Non-employee directors are currently paid an annual base retainer of $23,000. Reflecting the additional workload of their oversight duties and Committee assignments, the Chairman of the Board of Directors, effective May 2020, is paid an additional $10,000 per year ($33,000 in total); Audit Committee members are paid an additional $4,000 per year ($27,000 in total) and its Chairman is paid an additional $5,000 per year ($28,000 in total); Compensation Committee members are paid an additional $2,000 per year ($25,000 in total) and its Chairman is paid an additional $3,000 per year ($26,000 in total). 

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Directors may choose to receive their compensation in cash and/or stock pursuant to the 2019 Equity Incentive Plan and have the ability to defer compensation. Currently, new Directors must elect to receive 50% or more of their compensation in Company stock pursuant to any stockholder approved equity incentive plan until ownership standards are met. The Board of Directors adopted an Anti-Hedging Policy which states that: No employee of National Security Group, Inc. or any of its subsidiary companies, nor any member of the National Security Group, Inc. Board of Directors may purchase financial instruments (including, but not limited to: prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of the common stock of National Security Group, Inc. This policy is designed to further align the financial interests of employees and directors with the financial interests of National Security Group, Inc. stockholders.

Directors are required to attend at least 75% of the total of all Board of Directors meetings and Committee meetings for any consecutive twelve-month period. If this attendance standard is not met, the Director's retainer for the following twelve-month period will be proportionately reduced. Full reimbursement is provided for travel expenses associated with Board or Committee meetings or other Company functions.

Directors may annually elect to defer compensation into a non-qualified deferred compensation plan (NQDC). Participants in the NQDC plan may select from a group of externally managed investment options. The Company also does not guarantee returns for any component of funds deferred in the NQDC plan.

Director Compensation Table
NameFees Earned or paid in CashStock AwardsOption AwardsNon-Equity Incentive Plan CompensationChange in Pension Value and Non-qualified Deferred CompensationAll Other CompensationTotal
Andrew J. Abernathey$23,000 $— $— $— $— $— $23,000 
Charles B. Arnold27,000 — — — — — 27,000 
Winfield Baird4,000 — — — — — 4,000 
Fleming G. Brooks23,000 — — — — — 23,000 
Fred Clark, Jr.25,000 — — — — — 25,000 
Elizabeth B. Crawford23,000 — — — — — 23,000 
Mickey L. Murdock28,000 — — — — — 28,000 
Frank B. O'Neil— 26,000 — — — — 26,000 
Donald S. Pittman27,000 — — — — — 27,000 
L. Brunson White25,000 — — — — — 25,000 
Walter P. Wilkerson33,000 — — — — — 33,000 

Selection of Directors

The Board of Directors is responsible for management oversight, and its goal is to assemble a board that works cohesively and that constructively challenges and questions management. The Nominating Committee Charter sets forth the following guidelines for Board membership:
•Experience as a board member of another publicly traded corporation
•Experience in industries or with technologies relevant to the Company
•Experience in accounting or financial reporting
•Other such professional experience as the Nominating Committee shall determine to qualify an individual for Board Service
It is the goal of the Nominating Committee to ensure that the Board and its Committees include independent directors as promulgated by NASDAQ and the Securities and Exchange Commission. Directors shall exercise good business judgment and even temperament. Directors shall exhibit high ethical standards. Directors shall also be independent thinkers with the intelligence to articulate their thoughts and opinions in a constructive manner. As stated in the Nominating Committee's Charter, it is the Company's policy to not discriminate on the basis of race, gender or ethnicity and the board is supportive of any qualified candidate who would also provide the board with more diversity. The Board has not adopted any policy on diversity with respect to its directors, but seeks a balance of experience among the directors so that the Board as a whole has experience and training from various disciplines and industries.
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To review the charter of the Nominating Committee in its entirety, please visit: https://investors.nationalsecuritygroup.com/corporate-information/documents/.

Board Leadership Structure and Risk Oversight

While the By-laws and corporate governance policy do not require that the Chairman and Chief Executive Officer positions be separate, the Board believes that having separate positions is the appropriate leadership structure for the Company at this time. Currently, the Board is comprised of ten independent directors, three employee directors and two non-voting directors emeriti. Independent directors and management have different perspectives and roles in strategy development. The Company does not have a lead independent director as the current board chairperson is an independent director. Independent directors bring experience, oversight and expertise from outside the organization, while employee directors bring industry experience and expertise.

Management is responsible for the day-to-day management of risks, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. Executive Officers are present at every board meeting and most committee meetings and are available to address any questions or concerns raised by the directors regarding risk management and any other matters. In addition, executive officers present information regarding the Company's operations, including associated risks and mitigation measures at each Board meeting. The Audit Committee lends support to the Board of Directors in reviewing the Company's consideration of material risks and overseeing the Company's management of material risks.

Corporate Governance

The system of governance followed by the Company is codified in the Policy on Corporate Governance, Senior Financial Officers' Code of Ethics and the charters of the Nominating and Audit Committees of the Board of Directors. The guidelines provided in these documents are intended to give surety that the Board will have the necessary power and practices in place to review and evaluate the Company's business operations and to make decisions that are independent of the Company's management.

The corporate governance documents, including committee charters, are reviewed periodically and updated when necessary to reflect changes in practice and regulatory requirements. The Board has five committees: an Audit Committee, a Compensation Committee, a Dividend Committee, a Nominating Committee and an Executive Committee. The corporate governance policy, Nominating Committee Charter, Audit Committee Charter and Code of Ethics are posted on the Company's website at http://investors.nationalsecuritygroup.com/govdocs. If you would like to receive a copy of the corporate governance documents, send your request in writing to The National Security Group, Inc., Office of the Corporate Secretary, 661 East Davis Street, Elba, Alabama 36323.

Meetings and Executive Sessions of the Board

The Board of Directors holds regularly scheduled quarterly meetings. During the last full calendar year, the Board of Directors of the Company held four regularly scheduled meetings and two telephonic meetings. Executive sessions of independent directors followed each regularly scheduled board meeting. All directors attended at least 75% of the aggregate of meetings of the Board of Directors and Committees of the Board on which he/she served. The Company has not adopted a formal policy regarding Board members' attendance at the Company's annual stockholder meetings; however, the Company encourages all Board members to attend the annual stockholder meetings. All of the Company's directors attended the 2021 Annual Meeting of Stockholders.

The following provides a description of each committee of the Board of Directors. Each of the committees has authority to engage legal counsel or other experts or consultants at its discretion when it is believed the services of said persons are necessary to carry out the committee's responsibilities. The Board of Directors has determined that each member of each committee meets the standards of independence under the NASDAQ listing standards.

Committees of the Board

Committee appointments are made in May of each year. Currently the Board has five standing committees: Audit, Compensation, Dividend, Nominating and Executive.


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Audit Committee
The Audit Committee assists the Board in its supervisory function, specifically in the oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company. Responsibilities include overseeing the Company's internal accounting function, as well as compliance with applicable legal, ethical and regulatory requirements. The Committee is also charged with the appointment, compensation, retention and oversight of the Company's independent registered public accounting firm. The Committee has confidence in the expertise and knowledge of management and the independent registered public accounting firm. The Committee relies on management and the independent registered public accounting firm in carrying out the duties with which it is charged. The Committee's duties are described in detail in the Audit Committee Charter which is available on the Company's website https://investors.nationalsecuritygroup.com/corporate-information/documents/. The Board has designated Mickey L. Murdock and Charles B. Arnold as the audit committee financial experts as defined by the Securities and Exchange Commission rules.

Compensation Committee
The primary responsibilities of the Compensation Committee include: responsibility for recommending officers, setting the salaries of officers, setting fees for directors, approval of officer bonuses and presenting such information to the Board of Directors for full consideration.

Dividend Committee
The key responsibility of the Dividend Committee is to determine the amount of dividends paid to stockholders and recommend such payments for consideration to the full Board.

Nominating Committee
The key responsibilities of the Nominating Committee are to determine the slate of director nominees for election to the Company's Board of Directors and identify and propose candidates to fill vacancies occurring between annual stockholder meetings. No procedure has been established by the committee for considering nominations by the stockholders.

Executive Committee
The Executive Committee is empowered by the By-laws to act with the authority of the full board when necessary should events arise in which the full board is unavailable. There have been no meetings of the Executive Committee.

Independent Directors

The Board evaluates the independence of each director in accordance with applicable laws and regulations, the listing standards of the NASDAQ Stock Market and the standards set forth in the Policy on Corporate Governance. The Board has determined that the following directors are considered independent based on the aforementioned guidelines: Andrew J. Abernathey, Charles B. Arnold, Fleming G. Brooks, Fred Clark, Jr., Elizabeth B. Crawford, Mickey L. Murdock, Frank B. O'Neil, Donald S. Pittman, L. Brunson White and Walter P. Wilkerson.

See Item 12 on page 100 for information on the beneficial ownership reporting for directors and executive officers.

Item 11. Executive Compensation
Executive Compensation

The primary oversight of the Company's compensation plan for executive officers rests with the Compensation Committee of the Board of Directors, which is composed entirely of independent directors.

The primary objective of the Compensation Committee in setting compensation levels for executive officers is to enhance the Company's ability to attract and retain talented individuals for its executive positions by ensuring that we provide competitive benefits relative to our size and geographic location. The current compensation plan consists of three elements: base salary, short-term cash incentive compensation and retirement benefits under a 401(k) plan and a supplemental executive retirement plan (SERP). Base salaries are set by the Compensation Committee, including any annual increases, and are ratified by the independent directors. The Compensation Committee considers factors such as industry surveys, particularly focusing on those companies of similar size and business focus, individual performance and changes in job duties of named executives in any material adjustments in individual compensation levels.

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The Compensation Committee reviews salary levels periodically relative to the compensation of peer group executive officers. As part of our review, we utilize insurance industry executive compensation surveys, particularly those which provide composite information for the Company's applicable size category, as determined by annual insurance premium revenue and/or asset size. The committee also periodically engages consultants to independently review our executive compensation practices. Due to other considerations such as geographic location of the Company, base compensation levels for the executive officers of the Company are typically at or below median levels for each of the applicable job classifications provided in the executive compensation surveys.

The objective of the incentive plan provided to executive officers is to reward executives for achieving quantifiable targets linked to the Company's strategic and operational goals. The incentive plan further rewards performance that builds financial strength and enhances stockholder value. The incentive plan uses weighted ranges of returns on equity (50%), growth in gross written premium (10%) and statutory combined ratio of the property and casualty subsidiaries (40%) to determine incentive rewards. The incentive plan also sets a three-year rolling minimum threshold of a 5% average return on GAAP equity inclusive of the subject bonus year. This minimum threshold must be reached before any award is made under the incentive plan. No incentive plan awards were made for 2021.

Executive officers are covered by two primary retirement benefit plans. We offer a defined contribution 401(k) plan under which all employees may defer a portion of compensation, subject to IRS limits for 2021 of $19,500 per year and over age 50 "catch-up" contributions for 2021 of $6,500 per year. The Company will match employee deferrals on a dollar for dollar basis up to 5% of compensation subject to IRS limits. During 2021, the Company match paid to all executive officers totaled $33,445. We also provide a supplemental executive retirement plan (SERP) for our named executive officers. The Company contributes 15% of each executive's compensation under the terms of this plan; contributions are fully vested upon the earlier of death, disability, change in control, or ten years of participation in the plan. Payments under the SERP are payable following death, separation from service, or change in control. The benefits credited to participant accounts for 2021 totaled $100,934. The total vested balance at December 31, 2021 was $2,622,313.

The Company also offers its executive officers and directors a non-qualified deferred compensation (NQDC) plan. Executives have the option of deferring up to 25% of base pay and 100% of bonus into the NQDC plan. Participants in the NQDC plan may select from a group of externally managed investment options, none of which contain equity components tied to Company stock performance. The Company also does not guarantee returns for any component of deferrals in the NQDC plan. The Compensation Committee may recommend to the Board of Directors discretionary company contributions to the NQDC plan for named executives; however, no such discretionary contributions were made for 2021. The total vested balance for officers and directors at December 31, 2021 was $1,571,058.

The Company currently does not have a long-term incentive compensation plan or any stock based compensation arrangements for executive officers, other than an Employee Stock Ownership Plan in which all employees participate. These compensation arrangements, while not currently offered, may be considered by the Compensation Committee as a future element of executive compensation. Even though the Company does not currently offer long-term incentive compensation or stock based compensation as a component of executive compensation, the Compensation Committee does believe that the long-term interests of the executives are tied to the Company as the executive group and immediate family members of certain executives own, through various direct and indirect ownership arrangements, in excess of 25% of the total outstanding common stock of the Company.

We do not offer any perquisites to any of our executive officers with an aggregate value greater than $10,000.

All forms of executive compensation, with the exception of amounts deferred under NQDC plans and Company SERP contributions, are currently deductible by the Company under Federal Income Tax laws. The Compensation Committee does not believe that the deductibility limitations of Section 162(m) of the Internal Revenue Code as amended by the Tax Cuts and Jobs Act of 2017 applies to the Company in 2021 as no individual of the Company received more than $1 million in compensation.

The Board of Directors has adopted an anti-hedging policy for directors and employees. The Board has also adopted stock ownership targets for directors requiring their ownership of the greater of 3,000 shares or an amount of shares equal to three years' annual Board cash compensation. New directors have three years to comply with this policy.

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None of the executive officers are currently under written employment agreements or other written agreements providing for severance or change in control benefits other than immediate vesting of SERP plan balances under a change in control.

In accordance with the SEC's Smaller Reporting Company guidelines, the above compensation discussion and analysis is not required, but has been included to inform investors of executive compensation practices. Also in accordance with the SEC's Smaller Reporting Company guidelines, the following table provides a summary of compensation for the President and CEO as well as the next two most highly compensated executive officers.
Summary Compensation Table
Name and Principle PositionYearSalaryBonus*Stock AwardsOption AwardsNon-Equity Incentive Plan CompensationChange in Pension Value and Non-qualified Deferred Plan Compensation
All Other Compensation**
Total
W. L. Brunson, Jr.2021$256,620 $— $6,390 $— $— $— $62,528 $325,538 
President and CEO
The National Security Group, Inc.		2020256,620 — — — — — 61,633 318,253 
2019256,620 — 15,992 — — — 57,680 330,292 
Jack E. Brunson2021$182,070 $— $4,593 $— $— $— $46,294 $232,957 
President, National Security Fire and Casualty2020182,070 — — — — — 45,984 228,054 
2019182,070 — 11,284 — — — 44,451 237,805 
Brian R. McLeod2021$234,200 $— $5,757 $— $— $— $56,417 $296,374 
Vice President and CFO
The National Security Group, Inc.		2020234,200 — — — — — 53,761 287,961 
2019214,200 — 13,460 — — — 50,012 277,672 
*Bonus amounts are generally paid in March or April following the year in which the bonus is earned.
**"All Other Compensation" includes the following for W. L. Brunson, Jr. for the year 2021: 401(k) Retirement Plan contributions of $12,688, SERP contributions of $38,493 and other employee benefits of $11,347; Jack E. Brunson total for the year 2021 includes: 401(k) Retirement Plan contributions of $8,659, SERP contributions of $27,311 and other employee benefits of $10,324; Brian R. McLeod total for the year 2021 includes: 401(k) Retirement Plan contributions of $12,098, SERP contributions of $35,130 and other employee benefits of $9,189.

Non-Qualified Deferred Compensation Table*
NameExecutive Contributions in Last FYRegistrant Contributions in Last FY**Aggregate Earnings in Last FYAggregate Withdrawals/DistributionsAggregate Vested Balance at Last FY
W. L. Brunson, Jr.$— $38,493 $142,397 $— $1,212,097 
Jack E. Brunson— 27,311 80,280 — 915,309 
Brian R. McLeod— 35,130 108,965 — 696,492 
*Deferred amounts and contributions are credited with deemed investment earnings as if they were invested in one or more designated mutual funds pursuant to an investment election made by the participants as of the date of deferral.
**Registrant contributions are included in “Other Compensation” to Executives in the Summary Compensation Table.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information with respect to the holdings of: (1) each person known to us to be the beneficial owner of more than 5% of our common stock; (2) directors and executive officers; (3) all directors, executive officers and certain beneficial owners as a group; and (4) shares held in the employee stock ownership plan. This information is as of the record date, except as otherwise indicated. To the best of our knowledge, each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated.
Names
 Number of Shares Owned1
Percent of Common Stock
W. L. Brunson, Jr.445,538 
2, 3
17.59 %
Andrew J. Abernathey380,499 
4
15.02 %
Winfield Baird**121,221 4.79 %
Jack E. Brunson118,826 
5
4.69 %
Fred Clark, Jr.101,325 4.00 %
Donald S. Pittman40,863 1.61 %
Brian R. McLeod31,347 1.24 %
James B. Saxon**24,038 *
Mickey L. Murdock23,813 *
Frank B. O'Neil21,573 *
Charles B. Arnold17,400 *
Walter P. Wilkerson11,273 *
L. Brunson White10,038 *
Fleming G. Brooks8,265 *
Elizabeth B. Crawford4,375 *
Directors, Executive Officers and Certain Beneficial Owners (as a group, 15 persons including persons named above)
1,360,394 
6
53.71 %
National Security Employee Stock Ownership Plan (excluding shares included above)
87,662 3.46 %
1,448,056 57.17 %
** Director Emeritus (non-voting member of the board)  * Less than 1%
1For purposes of this table, an individual is considered to "beneficially own" any shares of the Company if he or she directly or indirectly has or shares (i) voting power, which includes power to vote or direct voting of the shares; or (ii) investment power, which includes the power to dispose or direct the disposition of the shares. All amounts include stock held in a spouse's name.
2Includes stock held in Brunson Properties, a partnership (W.L. Brunson Estate), W. L. Brunson, Jr., Managing Partner.
3Includes 57,713 shares held by the Jerry B. Brunson Marital Trust and the Jerry B. Brunson Family Trust. Sara B. Brunson and W. L. Brunson, Jr. co-trustees. W. L. Brunson, Jr. disclaims beneficial ownership of these shares.
4Includes 380,499 shares owned by Meridian Investments I, LLC. Andrew Abernathey is the President and sole director of Meridian Investments I, LLC and holds sole voting and dispositive power over the securities held by Meridian Investments I, LLC.
5Includes 45,641 shares held in Jack R. Brunson Estate.
6Includes 32,228 units held in 401-K plan and 20,444 units held in the National Security Employee Stock Ownership Plan.

Item 13. Certain Relationships and Related Transactions and Director Independence
The family relationships, not more remote than first cousin, which exist among the directors and nominees as of December 31, 2021, are as follows: W. L. Brunson, Jr., Donald S. Pittman and Jack E. Brunson are first cousins. Mr. James Saxon (Director Emeritus) is the uncle of L. Brunson White. Winfield Baird (Director Emeritus) is the father of Elizabeth B. Crawford.


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Item 14. Principal Accounting Fees and Services
Aggregate fees for professional services rendered for the Company by Warren Averett, LLC during the years ended December 31, 2021 and 2020 were as follows:
Year Ended December 31,2021%2020%
Audit Fees(1)
$254,350 76 %$243,519 83 %
Audit-Related Fees(2)
— — %1,044 — %
Tax Fees(3)
77,385 23 %50,950 17 %
All Other Fees(4)
3,950 1 %— — %
Total$335,685 100 %$295,513 100 %
(1) Audit Fees were for professional services rendered, including out of pocket fees, in connection with the audit of the Company's annual financial statements for the year ended December 31, 2021, and same period for the prior year as well as for the review of the Company's interim financial statements included in quarterly reports on Form 10-Q during the year ended December 31, 2021, and same period for the prior year.
(2) Audit-Related Fees PPP loan research (2020).
(3) Tax Fees were for tax related services and totaled approximately $77,385, including fees for both federal and state tax return preparation in addition to NOL carryback returns (2021) and tax research (2021). The audit committee does not consider the tax related fees of $77,385 to impair the auditor's independence.
(4) All Other Fees were for professional services rendered in connection with the acquisition of the Company by VR Insurance Holdings, Inc. (2021).

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, 2021 and 2020
•Consolidated Statements of Operations - Years ended December 31, 2021 and 2020
•Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2021 and 2020
•Consolidated Statements of Shareholders' Equity - Years ended December 31, 2021 and 2020
•Consolidated Statements of Cash Flows - Years ended December 31, 2021 and 2020
•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 ISummary of Investments Other Than Investments in Related Parties
Schedule IICondensed Financial Information of the Registrant
Schedule IIISupplementary Insurance Information
Schedule IVReinsurance
Schedule VValuation and Qualifying Accounts
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3.Exhibits filed as part of this Form 10-K:

Agreement and Plan of Merger, dated as of January 26, 2022 among The National Security Group, Inc, VR Insurance Holdings, Inc. and VR Insurance Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed with the SEC on January 27, 2022 (File No. 000-18649))
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
Subsidiaries of the Registrant
Consent of Independent Registered Accounting Firm
Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

(b) During the last fiscal quarter of the period covered by this Report, the Company filed the following Current
Reports on Form 8-K:
Date of Report Date Filed Description
October 22, 2021October 22, 2021Press release announcing quarterly dividend.
November 12, 2021November 12, 2021Press release announcing financial results for the period ended September 30, 2021.
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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/s/ William L. Brunson, Jr.
Brian R. McLeodWilliam L. Brunson, Jr.
Chief Financial Officer and TreasurerPresident, Chief Executive Officer and Director

Date: March 23, 2022

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 23, 2022:

SIGNATURE
/s/ Andrew J. Abernathey/s/ Brian R. McLeod
/s/ Charles Arnold/s/ Mickey L. Murdock
/s/ Fleming Brooks/s/ Frank B. O'Neil
/s/ Jack E. Brunson/s/ Donald Pittman
/s/ William L. Brunson, Jr./s/ L. Brunson White
/s/ Fred D. Clark, Jr./s/ Walter P. Wilkerson
/s/ Elizabeth Crawford
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