UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-Q

  (Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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

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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.00 per share	NSEC	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No  þ

Class	Outstanding August 13, 2021
Common Stock $1.00 par value	2,532,632 shares

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THE NATIONAL SECURITY GROUP, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
			Page No.
	Item 1.  Financial Statements
		Condensed Consolidated Balance Sheets (UNAUDITED EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)	5
		Condensed Consolidated Statements of Operations (UNAUDITED)	6
		Condensed Consolidated Statements of Comprehensive Loss (UNAUDITED)	7
		Condensed Consolidated Statements of Changes in Shareholders’ Equity (UNAUDITED)	8
		Condensed Consolidated Statements of Cash Flows (UNAUDITED)	10
		Notes to Condensed Consolidated Financial Statements (UNAUDITED EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)	11
		Report of Independent Registered Public Accounting Firm	34
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
	Item 3.  Quantitative and Qualitative Disclosures about Market Risk		51
	Item 4.  Controls and Procedures		52
PART II. OTHER INFORMATION
	Item 1.    Legal Proceedings		52
	Item 1A. Risk Factors		52
	Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of                Equity Securities		52
	Item 3.    Defaults Upon Senior Securities		52
	Item 4. Mine Safety Disclosures		52
	Item 5.    Other Information		52
	Item 6.    Exhibits		53
SIGNATURE			54

3

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.

▪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.

4

PART I

Item 1. Financial Statements

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands)	June 30, 2021		December 31, 2020
ASSETS	(UNAUDITED)
Investments
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2021 -       $754; 2020 - $946)	$	697	$	873
Fixed maturities available-for-sale, at estimated fair value (cost: 2021 -       $90,262; 2020 - $76,241)	94,114		81,399
Equity securities, at estimated fair value (cost: 2021 - $1,761; 2020 - $1,918)	4,790		4,750
Trading securities	183		169
Receivable for securities sold	—		3
Mortgage loans on real estate, at cost	144		145
Investment real estate, at book value	2,934		2,934
Policy loans	1,788		1,846
Company owned life insurance	5,059		4,998
Other invested assets	1,839		2,033
Total Investments	111,548		99,150
Cash and cash equivalents	11,122		19,887
Accrued investment income	693		575
Policy receivables and agents' balances, net	15,243		12,345
Reinsurance recoverable	1,881		6,874
Deferred policy acquisition costs	7,685		7,408
Property and equipment, net	1,526		1,572
Income tax recoverable	1,703		1,311
Deferred income tax asset, net	910		706
Other assets	1,237		712
Total Assets	$	153,548	$	150,540
LIABILITIES AND SHAREHOLDERS' EQUITY
Property and casualty benefit and loss reserves	$	8,679	$	10,177
Accident and health benefit and loss reserves	4,188		4,144
Life and annuity benefit and loss reserves	34,836		34,731
Unearned premiums	36,126		31,166
Policy and contract claims	1,029		1,309
Other policyholder funds	1,368		1,342
Short-term notes payable and current portion of long-term debt	500		500
Long-term debt	13,183		13,177
Other liabilities	9,410		8,628
Total Liabilities	109,319		105,174
Contingencies
Shareholders' equity
Common stock	2,535		2,533
Additional paid-in capital	5,650		5,626
Accumulated other comprehensive income	3,043		3,585
Retained earnings	33,044		33,665
Treasury stock, at cost	(43)		(43)
Total Shareholders' Equity	44,229		45,366
Total Liabilities and Shareholders' Equity	$	153,548	$	150,540

The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

5

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

($ in thousands, except per share)	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
REVENUES
Net premiums earned	$	14,814	$	15,172	$	29,876	$	30,127
Net investment income	867		961		1,671		1,925
Investment gains (losses)	431		548		741		(442)
Other income	131		143		267		288
Total Revenues	16,243		16,824		32,555		31,898
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits and settlement expenses	11,709		16,736		21,012		27,319
Amortization of deferred policy acquisition costs	830		848		1,801		1,913
Commissions	1,699		2,047		3,835		4,122
General and administrative expenses	2,566		2,493		4,870		3,887
Taxes, licenses and fees	628		594		1,164		1,315
Interest expense	153		199		291		460
Total Benefits, Losses and Expenses	17,585		22,917		32,973		39,016
Loss Before Income Taxes	(1,342)		(6,093)		(418)		(7,118)
INCOME TAX BENEFIT
Current	(9)		(1,280)		(41)		(1,333)
Deferred	(294)		(87)		(60)		(199)
	(303)		(1,367)		(101)		(1,532)
Net Loss	$	(1,039)	$	(4,726)	$	(317)	$	(5,586)
LOSS PER COMMON SHARE BASIC AND DILUTED	$	(0.42)	$	(1.87)	$	(0.13)	$	(2.21)
DIVIDENDS DECLARED PER SHARE	$	0.06	$	0.06	$	0.12	$	0.12

The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

6

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

($ in thousands)	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Net loss	$	(1,039)	$	(4,726)	$	(317)	$	(5,586)
Other comprehensive income (loss), net of tax
Changes in:
Unrealized gains (losses) on securities, net of reclassification adjustment of $84 and $13 for 2021 and 2020, respectively	604		3,435		(1,031)		1,495
Unrealized gain (loss) on interest rate swap	—		(74)		489		(619)
Other comprehensive income (loss), net of tax	604		3,361		(542)		876
Comprehensive loss	$	(435)	$	(1,365)	$	(859)	$	(4,710)

The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

7

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

For the six months ended June 30, 2021:

($ in thousands)	Total		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Common Stock		Additional Paid-in Capital		Treasury Stock
Balance at December 31, 2020	$	45,366	$	33,665	$	3,585	$	2,533	$	5,626	$	(43)
Comprehensive loss:
Net loss for June 30, 2021	(317)		(317)		—		—		—		—
Other comprehensive loss (net of tax)	(542)		—		(542)		—		—		—
Common stock issued	26		—		—		2		24		—
Cash dividends	(304)		(304)		—		—		—		—
Balance at June 30, 2021	$	44,229	$	33,044	$	3,043	$	2,535	$	5,650	$	(43)

For the three months ended June 30, 2021:

($ in thousands)	Total		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Common Stock		Additional Paid-in Capital		Treasury Stock
Balance at March 31, 2021	$	44,790	$	34,235	$	2,439	$	2,533	$	5,626	$	(43)
Comprehensive loss:
Net loss for June 30, 2021	(1,039)		(1,039)		—		—		—		—
Other comprehensive income (net of tax)	604		—		604		—		—		—
Common stock issued	26		—		—		2		24		—
Cash dividends	(152)		(152)		—		—		—		—
Balance at June 30, 2021	$	44,229	$	33,044	$	3,043	$	2,535	$	5,650	$	(43)

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THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

For the six months ended June 30, 2020:

($ in thousands)	Total		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		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	(21)		—		—		—		—		(21)
Comprehensive loss:
Net loss for June 30, 2020	(5,586)		(5,586)		—		—		—		—
Other comprehensive income (net of tax)	876		—		876		—		—		—
Common stock issued	25		—		—		1		24		—
Cash dividends	(304)		(304)		—		—		—		—
Balance at June 30, 2020	$	48,451	$	37,001	$	3,319	$	2,533	$	5,626	$	(28)

For the three months ended June 30, 2020:

($ in thousands)	Total		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Common Stock		Additional Paid-in Capital		Treasury Stock
Balance at March 31, 2020	$	49,958	$	41,879	$	(42)	$	2,532	$	5,602	$	(13)
Common stock reacquired	(15)		—		—		—		—		(15)
Comprehensive loss:
Net loss for June 30, 2020	(4,726)		(4,726)		—		—		—		—
Other comprehensive income (net of tax)	3,361		—		3,361		—		—		—
Common stock issued	25		—		—		1		24		—
Cash dividends	(152)		(152)		—		—		—		—
Balance at June 30, 2020	$	48,451	$	37,001	$	3,319	$	2,533	$	5,626	$	(28)

The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

9

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

($ in thousands)	Six months ended June 30,
	2021		2020
Cash Flows from Operating Activities
Net loss	$	(317)	$	(5,586)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense and amortization/accretion, net	143		123
Net (gains) losses on investments	(741)		442
Deferred income taxes	(60)		(199)
Amortization of deferred policy acquisition costs	1,801		1,913
Changes in assets and liabilities:
Change in receivable for securities sold	3		54
Change in accrued investment income	(118)		27
Change in reinsurance recoverable	4,993		(8)
Policy acquisition costs deferred	(2,078)		(1,968)
Change in accrued income taxes	(392)		(1,333)
Change in net policy liabilities and claims	421		1,527
Change in other assets/liabilities, net	1,035		(261)
Other, net	12		(13)
Net cash provided by (used in) operating activities	4,702		(5,282)
Cash Flows from Investing Activities
Purchase of:
Available-for-sale securities	(27,942)		(13,194)
Trading securities and short-term investments	(1)		(2)
Property and equipment	(3)		(32)
Proceeds from sale or maturities of:
Held-to-maturity securities	181		138
Available-for-sale securities	14,510		15,739
Real estate held for investment	—		3
Property and equipment	7		—
Other invested assets, net	59		9
Net cash provided by (used in) investing activities	(13,189)		2,661
Cash Flows from Financing Activities
Change in other policyholder funds	26		(24)
Dividends paid	(304)		(304)
Net cash used in financing activities	(278)		(328)
Net change in cash and cash equivalents	(8,765)		(2,949)
Cash and cash equivalents, beginning of period	19,887		11,809
Cash and cash equivalents, end of period	$	11,122	$	8,860

The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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Table of Contents

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Principles of Consolidation and Basis of Presentation

The accompanying condensed 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 condensed 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 condensed consolidated financial statements have been included. All significant intercompany transactions and accounts have been eliminated in the condensed consolidated financial statements. The financial information presented herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which includes information and disclosures not presented herein.

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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these condensed 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 condensed consolidated financial statements.

Earnings Per Share

Earnings per share of common stock is based on the weighted average number of shares outstanding during each year. The adjusted weighted average shares outstanding were 2,530,882 at June 30, 2021 and 2,530,745 at June 30, 2020. The Company did not have any dilutive securities as of June 30, 2021 and 2020.

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 June 30, 2021, the net amount exceeding FDIC insured limits was $6,759,000 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 June 30, 2021, the single largest balance due from one agent totaled $657,000.

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 June 30, 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 June 30, 2021, management does not believe the Company is exposed to any significant credit risk related to its reinsurance program.

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

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

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, 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 $522,000 at June 30, 2021 ($460,000 at December 31, 2020) and is included as a component of Other Invested Assets in the accompanying condensed 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

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

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 7, are reported in the accompanying condensed 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 condensed 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 7, are reported in the accompanying condensed 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 condensed consolidated balance sheets.

NOTE 3 – INVESTMENTS

Our investment in available-for-sale securities, which are reported at fair value, includes fixed maturity securities and equity securities. Net unrealized gains or losses on fixed maturities are reported after-tax as a component of other comprehensive income. Changes in fair value of equity securities are reported in investment gains/losses as a component of net income.

The amortized cost and aggregate fair values of investments in available-for-sale securities as of June 30, 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	$	5,169	$	242	$	3	$	5,408
Agency mortgage backed securities	20,718		530		154		21,094
Asset backed securities	6,076		137		—		6,213
Private label mortgage backed securities	1,931		46		6		1,971
Corporate bonds	47,747		3,211		270		50,688
States, municipalities and political subdivisions	8,621		174		55		8,740
Total Fixed Maturities	90,262		4,340		488		94,114
Equity securities	1,761		3,029		—		4,790
Total	$	92,023	$	7,369	$	488	$	98,904

The amortized cost and aggregate fair values of investments in held-to-maturity securities as of June 30, 2021 are as follows:

($ in thousands) Held-to-maturity securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Agency mortgage backed securities	$	697	$	57	$	—	$	754
Total	$	697	$	57	$	—	$	754

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

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 securities	19,773		919		63		20,629
Asset backed securities	8,233		137		27		8,343
Private label mortgage backed securities	1,418		50		55		1,413
Corporate bonds	35,930		3,771		50		39,651
States, municipalities and political subdivisions	6,587		189		27		6,749
Total Fixed Maturities	76,241		5,389		231		81,399
Equity securities	1,918		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 June 30, 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.

($ in thousands)	Amortized Cost		Fair Value
Available-for-sale securities:
Due in one year or less	$	1,204	$	1,226
Due after one year through five years	20,913		21,993
Due after five years through ten years	24,563		25,654
Due after ten years	43,582		45,241
Total	$	90,262	$	94,114
Held-to-maturity securities:
Due after one year through five years	$	12	$	12
Due after five years through ten years	3		4
Due after ten years	682		738
Total	$	697	$	754

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

A summary of securities available-for-sale with unrealized losses as of June 30, 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 months				12 months or longer				Total
June 30, 2021	Fair 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	$	854	$	3	$	—	$	—	$	854	$	3	1
Agency mortgage backed securities	8,264		154		—		—		8,264		154		14
Private label mortgage backed securities	1,002		6		—		—		1,002		6		1
Corporate bonds	7,243		269		499		1		7,742		270		13
States, municipalities and political subdivisions	3,009		55		—		—		3,009		55		4
	$	20,372	$	487	$	499	$	1	$	20,871	$	488	33

There were no securities held-to-maturity with unrealized losses as of June 30, 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:

($ in thousands)	Less than 12 months				12 months or longer				Total
December 31, 2020	Fair 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 securities	2,264		56		2		7		2,266		63		8
Asset backed securities	1,737		27		—		—		1,737		27		2
Private label mortgage backed securities	891		55		—		—		891		55		1
Corporate bonds	2,467		45		495		5		2,962		50		5
States, municipalities and political subdivisions	1,713		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

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment.  The credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.

Management has evaluated each security in a significant unrealized loss position in the fixed maturity investment portfolio. The Company has no material exposure to sub-prime mortgage loans and approximately 7% of the fixed income investment portfolio is rated below investment grade.  Based on a review of the available financial information, the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was determined that the securities in an accumulated loss position in the portfolio were temporary impairments.

For the six months ended June 30, 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 June 30, 2021, the three largest losses not realized as an impairment in the fixed maturity portfolio totaled $104,000, $59,000 and $43,000. 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.

Major categories of investment income are summarized as follows:

($ in thousands)	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Fixed maturities	$	833	$	956	$	1,590	$	1,872
Equity securities	21		31		70		72
Mortgage loans on real estate	2		2		4		4
Investment real estate	—		—		—		1
Policy loans	35		36		69		72
Other	13		(26)		15		(22)
	904		999		1,748		1,999
Less: Investment expenses	37		38		77		74
Net investment income	$	867	$	961	$	1,671	$	1,925

Major categories of investment gains (losses) are summarized as follows:

($ in thousands)	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Realized gains on fixed maturities	$	106	$	133	$	106	$	16
Realized gains on equity securities	—		—		357		—
Gains on trading securities	6		19		13		(6)
Change in fair value of equity securities	195		104		198		(495)
Change in surrender value of company owned life insurance	118		291		61		40
Other gains principally real estate	6		1		6		3
Net investment gains (losses)	$	431	$	548	$	741	$	(442)

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

An analysis of the net change in unrealized gains (losses) on available-for-sale securities follows for the six month periods:

($ in thousands)	June 30, 2021		June 30, 2020
Fixed maturities	$	(1,305)	$	1,892
Deferred income tax	274		(397)
Change in net unrealized gains on available-for-sale securities	$	(1,031)	$	1,495

NOTE 4 – 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 condensed consolidated balance sheets.  

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

Accounting standards define fair value as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework to make the measurement of fair value more consistent and comparable.  In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets. The Company categorizes assets and liabilities carried at their fair value based upon a fair value hierarchy:

Level 1 - Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 assets and liabilities consist of money market fund deposits and certain of our marketable debt and equity instruments, including equity instruments offsetting deferred compensation, that are traded in an active market with sufficient volume and frequency of transactions.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include certain of our marketable debt and equity instruments with quoted market prices that are traded in less active markets or priced using a quoted market price for similar instruments. Level 2 assets also include marketable equity instruments with security-specific restrictions that would transfer to the buyer, marketable debt instruments priced using indicator prices which represent non-binding market consensus prices that can be corroborated by observable market quotes, as well as derivative contracts and debt instruments priced using inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  Marketable debt instruments in this category generally include commercial paper, bank time deposits, repurchase agreements for fixed-income instruments, and a majority of floating-rate notes, corporate bonds, and municipal bonds.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. Level 3 assets and liabilities include marketable debt instruments, non-marketable equity investments, derivative contracts, and company issued debt with values are determined using inputs that are both unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable debt instruments that are priced using indicator prices that we were unable to corroborate with observable market quotes. Marketable debt instruments in this category generally include asset-backed securities and certain floating-rate notes, corporate bonds, and municipal bonds.

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

Assets/Liabilities Measured at Fair Value on a Recurring Basis

Financial assets measured at fair value on a recurring basis as of June 30, 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
Description	Total		Level 1		Level 2		Level 3
Financial Assets
Fixed maturities available-for-sale
U.S. Government corporations and agencies	$	5,408	$	5,408	$	—	$	—
Agency mortgage backed securities	21,094		13,469		7,625		—
Asset backed securities	6,213		3,098		3,115		—
Corporate bonds	50,688		—		50,688		—
Private label asset backed securities	1,971		—		1,971		—
States, municipalities and political subdivisions	8,740		—		8,740		—
Trading securities	183		183		—		—
Equity securities	4,790		3,238		—		1,552
Total Financial Assets	$	99,087	$	25,396	$	72,139	$	1,552

The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below.

Fixed maturities available-for-sale — The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Consistent with the fair value hierarchy described above, securities with quoted market prices in active markets for identical assets are reflected within Level 1 while securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs.

Trading securities — Trading securities consist primarily of mutual funds whose fair values are determined consistent with similar instruments described above under “Fixed Maturities” and below under “Equity Securities.”

Equity securities — Equity securities consist principally of investments in common and preferred stock of publicly traded companies and privately traded securities. The fair values of our publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy.

Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately traded equity securities are classified within Level 3.

Interest rate swaps — Interest rate swaps are recorded at fair value either as assets, within other assets or as liabilities, within other liabilities. The fair values of our interest rate swaps are provided by a third-party broker and are classified within Level 3.

As of June 30, 2021, Level 3 fair value measurements of assets include $1,552,000 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 June 30, 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 7.

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

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 six months ended June 30, 2021:

($ in thousands) For the six months ended June 30, 2021	Equity Securities		Interest Rate Swap
Beginning balance	$	1,502	$	(619)
Total gains or losses (realized and unrealized):
Included in earnings	50		—
Included in other comprehensive income	—		619
Purchases:	—		—
Sales:	—		—
Issuances:	—		—
Settlements:	—		—
Transfers in/(out) of Level 3	—		—
Ending balance	$	1,552	$	—
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 June 30, 2021:	$	50	$	—

For the six months ended June 30, 2021, there were no assets or liabilities measured at fair values on a nonrecurring basis.

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 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
Description	Total		Level 1		Level 2		Level 3
Financial Assets
Fixed maturities available-for-sale
U.S. Government corporations and agencies	$	4,614	$	4,614	$	—	$	—
Agency mortgage backed securities	20,629		12,044		8,585		—
Asset backed securities	8,343		2,343		6,000		—
Corporate bonds	39,651		—		39,651		—
Private label asset backed securities	1,413		891		522		—
States, municipalities and political subdivisions	6,749		—		6,749		—
Trading securities	169		169		—		—
Equity securities available-for-sale	4,750		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)

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

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-Sale		Interest Rate Swap
Beginning balance	$	1,315	$	(65)
Total gains or losses (realized and unrealized):
Included in earnings	187		—
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 values on a nonrecurring basis.

The Company is exposed to certain risks in the normal course of its business operations.  The primary risk that is managed through the use of derivatives is interest rate risk on floating rate borrowings.  This risk is managed through the use of interest rate swap agreements which are designated as cash flow hedges.  For cash flow hedges, the effective portion of the gain or loss on the interest rate swap is included as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction is recognized in earnings.  The Company does not hold or issue derivatives that are not designated as hedging instruments.  See Note 7 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.

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

The carrying amount and estimated fair value of the Company’s financial instruments as of June 30, 2021 and December 31, 2020 are as follows:

($ in thousands)	June 30, 2021				December 31, 2020
Assets and related instruments	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Held-to-maturity securities	$	697	$	754	$	873	$	946
Mortgage loans	144		144		145		145
Policy loans	1,788		1,788		1,846		1,846
Company owned life insurance	5,059		5,059		4,998		4,998
Other invested assets	1,839		1,839		2,033		2,033
Liabilities and related instruments
Other policyholder funds	1,368		1,368		1,342		1,342
Short-term notes payable and current portion of long-term debt	500		500		500		500
Long-term debt	13,183		13,183		13,177		13,177

NOTE 5 – PROPERTY AND EQUIPMENT

Major categories of property and equipment are summarized as follows:

($ in thousands)	June 30, 2021		December 31, 2020
Building and improvements	$	3,491	$	3,491
Electronic data processing equipment	1,502		1,498
Furniture and fixtures	478		483
	5,471		5,472
Less accumulated depreciation	3,945		3,900
Property and equipment, net	$	1,526	$	1,572

Depreciation expense for the six months ended June 30, 2021 was $48,000 ($109,000 for the year ended December 31, 2020).

NOTE 6 – INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense.  The Company files income tax returns in the U.S. federal jurisdiction and various states.  The Company is not subject to examinations by authorities related to its U.S. federal or state income tax filings for years prior to 2015. Tax returns have been filed through the year 2019.

Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. Management believes that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. The Company recognized net deferred tax asset positions of $910,000 at June 30, 2021 and $706,000 at December 31, 2020.

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

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

($ in thousands)	As of June 30,  2021		As of December 31,  2020
General expenses	$	1,505	$	1,448
Unearned premiums	1,518		1,313
Claims liabilities	694		698
NOL carryforward	497		632
Impairment on real estate owned	147		147
Unrealized loss on interest rate swaps	—		130
Deferred tax assets	4,361		4,368
Unrealized gains on trading securities	(3)		(3)
Depreciation	(91)		(95)
Deferred policy acquisition costs	(1,614)		(1,555)
Pre-1984 policyholder surplus account	(298)		(331)
Unrealized gains on securities available-for-sale	(809)		(1,083)
Unrealized gains on equity securities	(636)		(595)
Deferred tax liabilities	(3,451)		(3,662)
Net deferred tax asset	$	910	$	706

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

($ in thousands)	Six months ended June 30,
	2021		2020
Deferred policy acquisition costs	$	59	$	20
Other-than-temporary impairments	—		10
Trading securities	—		(2)
Unearned premiums	(205)		(119)
General expenses	(57)		20
Depreciation	(4)		(3)
Claims liabilities	4		12
Impact of repeal of special provision on pre-1984 policyholder surplus	(33)		(33)
NOL carryforward	135		—
Unrealized gains (losses) on equity securities	41		(104)
Deferred income tax benefit	$	(60)	$	(199)

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

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:

	Six months ended June 30,
	2021		2020
Federal income tax rate applied to pre-tax income (loss)	21.0	%	21.0	%
Dividends received deduction and tax-exempt interest	1.1	%	0.1	%
Company owned life insurance	3.0	%	0.1	%
Other, net	(0.9)	%	0.3	%
Effective federal income tax rate	24.2	%	21.5	%

NOTE 7 – NOTES PAYABLE AND LONG-TERM DEBT

Short-term debt and current portion of long-term debt consisted of the following as of June 30, 2021 and December 31, 2020:

($ in thousands)	June 30,		December 31,
	2021		2020
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

Long-term debt consisted of the following as of June 30, 2021 and December 31, 2020:

($ in thousands)	June 30,		December 31,
	2021		2020
Promissory note with variable interest rate equal to the WSJ prime rate plus 0.5%, with a 4.75% floor; maturity November 2023. Annual installment payments beginning November 2020. Unsecured.	$	1,000	$	1,000
Subordinated debentures issued on December 15, 2005 with floating rate interest equal to 3-Month LIBOR plus 375 basis points; net of $136,000 in debt issuance cost ($140,000 in 2020); maturity December 15, 2035.  Interest payable quarterly.  Redeemable prior to maturity. Unsecured.	9,143		9,139
Subordinated debentures issued on June 21, 2007 with floating rate interest equal to 3-Month LIBOR plus 340 basis points; net of $53,000 in debt issuance cost ($55,000 in 2020); maturity June 15, 2037. Interest payable quarterly.  Redeemable prior to maturity. Unsecured.	3,040		3,038
	$	13,183	$	13,177

On February 26, 2020, the Company entered into a forward swap effective March 16, 2020, with a notional amount of $3,000,000 and designated the swap as a hedge against changes in cash flows attributable to changes in the benchmark interest rate (LIBOR) associated with the subordinated debentures issued June 21, 2007. Quarterly, commencing June 15, 2020, under the terms of the forward swap, the Company pays interest at a fixed rate of 4.93% until March 15, 2030. On February 26, 2020, the Company entered into a forward swap with a notional amount of $9,000,000 effective March 16, 2020, which hedges against changes in cash flows following the termination of the fixed rate period. Quarterly, commencing June 15, 2020 under the terms of the forward swap, the Company pays interest at a fixed rate of 5.28% until March 15, 2030. These swaps were terminated on March 22, 2021. At December 31, 2020, the swaps had fair values of $155,000 (liability) and $464,000 (liability), respectively,

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

for a total liability of $619,000. The December 31, 2020 swap liability is reported as a component of other liabilities on the condensed 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 June 30, 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).

NOTE 8 – POLICY AND CLAIM RESERVES

The Company regularly updates its reserve estimates as new information becomes available and events occur that may impact the resolution of unsettled claims. Reserve estimation can be an inherently uncertain process and reserve estimates can be revised up or down depending on changes in circumstances. Changes in prior years' reserve estimates are reflected in the results of operations in the year such changes are determined.

The following table is a reconciliation of beginning and ending property and casualty reserve balances for claims and claim adjustment expense:

($ in thousands)	Six months ended June 30,
	2021		2020
Summary of claims and claim adjustment expense reserves
Balance, beginning of year	$	10,177	$	7,199
Less reinsurance recoverable on unpaid losses	3,321		249
Net balances at beginning of year	6,856		6,950
Net losses:
Provision for claims and claim adjustment expenses for claims arising in current year	19,571		25,956
Estimated claims and claim adjustment expenses for claims arising in prior years	(907)		(544)
Total increases	18,664		25,412
Claims and claim adjustment expense payments for claims arising in:
Current year	15,321		21,320
Prior years	3,329		3,889
Total payments	18,650		25,209
Net balance at end of period	6,870		7,153
Plus reinsurance recoverable on unpaid losses	1,809		230
Claims and claim adjustment expense reserves at end of period	$	8,679	$	7,383

Claims and claim adjustment expense reserves before reinsurance recoverable at June 30, 2021 were down significantly compared to beginning of year due to a decline in claims outstanding stemming from hurricane activity in the third and fourth quarter of 2020. The estimate for claims arising in prior years was reduced $907,000 in 2021 (reduced $544,000 in 2020) due to favorable loss development during the year on claims arising in prior years.

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 $384,000 at June 30, 2021 ($426,000 at December 31, 2020). These claims are a component of policy and contract claims which totaled $1,029,000 at June 30, 2021 ($1,309,000 at December 31, 2020).

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

NOTE 9 – 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.  

Catastrophe reinsurance coverage is maintained in three layers as follows:

Layer	Reinsurers' 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 A.M. Best ratings of A- (Excellent) or higher, or equivalent ratings.

The Company's catastrophe reinsurance contract allows for one reinstatement. The Company maintains reinstatement premium protection (RPP) to cover reinstatement premiums incurred. The RPP further reduces risk from a major catastrophe and serves to protect the Company's capital position by reducing the modeled 100 year event net cost.

Amounts recoverable from re-insurers are estimated in a manner consistent with the claim liability associated with the underlying insurance policies.  Amounts paid for prospective reinsurance contracts are reported as prepaid reinsurance premiums and amortized over the remaining contract period.

In the normal course of business, NSIC seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to reinsurance companies under excess coverage contracts.  NSIC retains a maximum of $50,000 of coverage per individual life.  Cost is amortized over the reinsurance contract period.

At June 30, 2021, the largest reinsurance recoverable of a single reinsurer was $36,000 ($1,263,000 at December 31, 2020). Amounts reported as ceded incurred losses were related to development of losses from prior year catastrophes.

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

NOTE 10 – 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 six months ended June 30, 2021 amounted to $90,000 ( $92,000 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 six months ended June 30, 2021 and 2020 amounted to an approximate increase of $205,000 and a decrease of $31,000 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 six months ended June 30, 2021 and contributions of $100,000 were made during the six months ended June 30, 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.

NOTE 11 – SHAREHOLDERS' EQUITY

During the six months ended June 30, 2021 and year ended December 31, 2020, changes in shareholders' equity consisted of net loss of $317,000 and a net loss of $8,619,000, respectively; dividends paid of $304,000 in 2021 and $607,000 in 2020; an other comprehensive loss of $542,000 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 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

The table below provides information regarding the Company's preferred and common stock as of June 30, 2021 and December 31, 2020:

	June 30, 2021
	Authorized	Issued	Treasury	Outstanding
Preferred Stock, $1 par value	500,000	—	—	—
Class A Common Stock, $1 par value	2,000,000	—	—	—
Common Stock, $1 par value	3,000,000	2,535,577	2,945	2,532,632

	December 31, 2020
	Authorized	Issued	Treasury	Outstanding
Preferred Stock, $1 par value	500,000	—	—	—
Class A Common Stock, $1 par value	2,000,000	—	—	—
Common Stock, $1 par value	3,000,000	2,533,315	2,945	2,530,370

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 six months ended June 30, 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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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) ("AOCI") includes certain items that are reported directly within a separate component of shareholders' equity. The following table presents changes in AOCI balances:

($ in thousands)	Six months ended June 30,
	2021		2020
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 reclassifications	489		(619)
Net current period other comprehensive income (loss)	489		(619)
Balance at end of period	$	—	$	(670)
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	(947)		1,508
Amounts reclassified from accumulated other comprehensive loss	(84)		(13)
Net current period other comprehensive income (loss)	(1,031)		1,495
Balance at end of period	$	3,043	$	3,989
Total Accumulated Other Comprehensive Income at end of period	$	3,043	$	3,319

The following table presents the amounts reclassified out of AOCI for the six months ended June 30, 2021:

($ in thousands) Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income		Affected Line Item in the Statement Where Net Income is Presented
Unrealized Gains and Losses on Available-for-Sale Securities	$	106	Net investment gains
	106		Total before tax
	(22)		Tax (expense) or benefit
	$	84	Net of Tax

The following table presents the amounts reclassified out of AOCI for the six months ended June 30, 2020:

($ in thousands) Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income		Affected Line Item in the Statement Where Net Income is Presented
Unrealized Gains and Losses on Available-for-Sale Securities	$	16	Net investment gains
	16		Total before tax
	(3)		Tax (expense) or benefit
	$	13	Net of Tax

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

NOTE 13 – 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 June 30, 2021 and December 31, 2020 are summarized below:

($ in thousands) Assets by industry segment	Total		P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations
June 30, 2021	$	153,548	$	88,030	$	59,744	$	5,774
December 31, 2020	$	150,540	$	85,375	$	59,394	$	5,771

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

Net income (loss) by business segment for the three and six months ended June 30, 2021 and 2020 is summarized below:

($ in thousands) Three months ended June 30, 2021	P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations		Inter- company Eliminations		Total
REVENUES
Net premiums earned	$	13,319	$	1,495	$	—	$	—	$	14,814
Net investment income	418		575		9		(135)		867
Investment gains (losses)	137		306		(12)		—		431
Other income	131		215		311		(526)		131
	14,005		2,591		308		(661)		16,243
BENEFITS AND EXPENSES
Policyholder benefits paid	10,708		1,116		—		(115)		11,709
Amortization of deferred policy acquisition costs	687		143		—		—		830
Commissions	1,619		80		—		—		1,699
General and administrative expenses	2,217		505		390		(546)		2,566
Taxes, licenses and fees	589		39		—		—		628
Interest expense	—		10		143		—		153
	15,820		1,893		533		(661)		17,585
Income (Loss) Before Income Taxes	(1,815)		698		(225)		—		(1,342)
INCOME TAX EXPENSE (BENEFIT)	(403)		(111)		211		—		(303)
Net Income (Loss)	$	(1,412)	$	809	$	(436)	$	—	$	(1,039)

($ in thousands) Three months ended June 30, 2020	P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations		Inter- company Eliminations		Total
REVENUES
Net premiums earned	$	13,688	$	1,484	$	—	$	—	$	15,172
Net investment income	355		726		15		(135)		961
Investment gains	453		76		19		—		548
Other income	142		329		291		(619)		143
	14,638		2,615		325		(754)		16,824
BENEFITS AND EXPENSES
Policyholder benefits paid	15,822		1,124		—		(210)		16,736
Amortization of deferred policy acquisition costs	681		167		—		—		848
Commissions	1,990		57		—		—		2,047
General and administrative expenses	2,065		442		530		(544)		2,493
Taxes, licenses and fees	557		37		—		—		594
Interest expense	—		10		189		—		199
	21,115		1,837		719		(754)		22,917
Income (Loss) Before Income Taxes	(6,477)		778		(394)		—		(6,093)
INCOME TAX EXPENSE (BENEFIT)	(1,422)		137		(82)		—		(1,367)
Net Income (Loss)	$	(5,055)	$	641	$	(312)	$	—	$	(4,726)

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

($ in thousands) Six months ended June 30, 2021	P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations		Inter- company Eliminations		Total
REVENUES
Net premiums earned	$	26,991	$	2,885	$	—	$	—	$	29,876
Net investment income	723		1,197		21		(270)		1,671
Investment gains (losses)	238		509		(6)		—		741
Other income	267		419		551		(970)		267
	28,219		5,010		566		(1,240)		32,555
BENEFITS AND EXPENSES
Policyholder benefits paid	18,664		2,563		—		(215)		21,012
Amortization of deferred policy acquisition costs	1,374		427		—		—		1,801
Commissions	3,678		157		—		—		3,835
General and administrative expenses	4,288		907		700		(1,025)		4,870
Taxes, licenses and fees	1,038		126		—		—		1,164
Interest expense	—		20		271		—		291
	29,042		4,200		971		(1,240)		32,973
Income (Loss) Before Income Taxes	(823)		810		(405)		—		(418)
INCOME TAX EXPENSE (BENEFIT)	(183)		(88)		170		—		(101)
Net Income (Loss)	$	(640)	$	898	$	(575)	$	—	$	(317)

($ in thousands) Six months ended June 30, 2020	P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations		Inter-company Eliminations		Total
REVENUES
Net premiums earned	$	27,210	$	2,917	$	—	$	—	$	30,127
Net investment income	780		1,389		26		(270)		1,925
Investment gains (losses)	15		(451)		(6)		—		(442)
Other income	287		587		522		(1,108)		288
	28,292		4,442		542		(1,378)		31,898
BENEFITS AND EXPENSES
Policyholder benefits paid	25,413		2,262		—		(356)		27,319
Amortization of deferred policy acquisition costs	1,362		551		—		—		1,913
Commissions	3,980		142		—		—		4,122
General and administrative expenses	3,886		842		181		(1,022)		3,887
Taxes, licenses and fees	1,176		139		—		—		1,315
Interest expense	—		19		441		—		460
	35,817		3,955		622		(1,378)		39,016
Income (Loss) Before Income Taxes	(7,525)		487		(80)		—		(7,118)
INCOME TAX EXPENSE (BENEFIT)	(1,590)		75		(17)		—		(1,532)
Net Income (Loss)	$	(5,935)	$	412	$	(63)	$	—	$	(5,586)

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

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 three and six months ended June 30, 2021 and 2020, respectively:

($ in thousands)	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Life, accident and health operations premiums written:
Traditional life insurance	$	1,013	$	1,025	$	2,031	$	2,083
Accident and health insurance	394		385		786		792
Gross life, accident and health	1,407		1,410		2,817		2,875
Reinsurance premium ceded	(16)		(22)		(59)		(57)
Net life, accident and health premiums written	$	1,391	$	1,388	$	2,758	$	2,818
Property and Casualty operations premiums written:
Dwelling fire & extended coverage	$	12,760	$	11,142	$	24,623	$	21,394
Homeowners (Including mobile homeowners)	5,683		5,893		10,710		10,728
Other liability	544		612		1,078		1,191
Gross property and casualty	18,987		17,647		36,411		33,313
Reinsurance premium ceded	(2,522)		(1,783)		(4,927)		(3,548)
Net property and casualty written	$	16,465	$	15,864	$	31,484	$	29,765
Consolidated gross premiums written	$	20,394	$	19,057	$	39,228	$	36,188
Reinsurance premium ceded	(2,538)		(1,805)		(4,986)		(3,605)
Consolidated net premiums written	$	17,856	$	17,252	$	34,242	$	32,583

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 three and six months ended June 30, 2021 and 2020, respectively:

($ in thousands)	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Life, accident and health operations premiums earned:
Traditional life insurance	$	1,119	$	1,121	$	2,161	$	2,187
Accident and health insurance	392		385		783		787
Gross life, accident and health	1,511		1,506		2,944		2,974
Reinsurance premium ceded	(16)		(22)		(59)		(57)
Net life, accident and health premiums earned	$	1,495	$	1,484	$	2,885	$	2,917
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage	$	10,691	$	9,836	$	20,869	$	19,488
Homeowners (Including mobile homeowners)	4,617		5,080		9,979		10,161
Other liability	533		555		1,070		1,109
Gross property and casualty	15,841		15,471		31,918		30,758
Reinsurance premium ceded	(2,522)		(1,783)		(4,927)		(3,548)
Net property and casualty earned	$	13,319	$	13,688	$	26,991	$	27,210
Consolidated gross premiums earned	$	17,352	$	16,977	$	34,862	$	33,732
Reinsurance premium ceded	(2,538)		(1,805)		(4,986)		(3,605)
Consolidated net premiums earned	$	14,814	$	15,172	$	29,876	$	30,127

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THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED AMOUNTS EXCEPT FOR DECEMBER 31, 2020 AMOUNTS)

NOTE 14 – 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 $625,000 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 15 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest during the six months ended June 30, 2021 was $301,000 ($419,000 in 2020). Cash paid for income taxes during the six months ended June 30, 2021 was $350,000. There was no cash received or paid from income taxes during the six months ended June 30, 2020.

During the six months ended June 30, 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 six months ended June 30, 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 16 – SUBSEQUENT EVENTS

Management has evaluated subsequent events and their potential effects on these condensed consolidated financial statements through the filing date of this Form 10-Q.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

of The National Security Group, Inc.

Results of Review of Interim Financial Information

We have reviewed the condensed consolidated balance sheet of The National Security Group, Inc. (the Company) as of June 30, 2021, and the related condensed consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity for the three-month and six-month periods ended June 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the six-month periods then ended, and the related notes (collectively referred to as the interim financial statements). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 19, 2021, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

Basis for Review Results

These interim financial statements are the responsibility of the Company’s management. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. 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.

/s/ Warren Averett, LLC

Birmingham, Alabama

August 13, 2021

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Item 2. 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, this discussion covers the three and six-month periods ended June 30, 2021 and 2020 and should be read in conjunction with the Consolidated Financial Statements and Notes which accompany this report. The financial information presented herein should also be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which includes information and disclosures not presented herein. 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 65.2% of total premium revenue generated in the states of Alabama, Georgia and Mississippi.  We operate in two business segments summarized as follows:

•The Property and Casualty (P&C) segment is the most significant segment, accounting for 91.6% of gross earned premium for the year to date 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 8.4% 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 insurance regulators of each state in which it is licensed to transact business.  Insurance rates charged by each of the insurance subsidiaries are typically subject to review and approval by the insurance department for the respective state in which the rates will apply.

All of our insurance companies have been assigned ratings by A.M. Best Co (Best).  On April 29, 2021, A.M. Best affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb" of NSFC. In addition, A.M. Best affirmed the FSR of B+ (Good) and Long-Term ICR of "bbb-" of Omega. The A.M. Best outlook for the ratings was revised from "stable" to "negative" for NSFC and Omega. A.M. 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". A.M. Best also affirmed the Long-Term ICR of "bb" of the parent holding company, NSEC, with a revised outlook from "stable" to "negative".

The property and casualty subsidiaries have been assigned ratings by Demotech, Inc. On March 30, 2021, Demotech affirmed a Financial Stability Rating of A (Exceptional) for both NSFC and Omega.

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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.

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 three months ended June 30, 2021, the Company had a net loss of $1,039,000, $0.42 loss per share, compared to a net loss of $4,726,000, $1.87 loss per share, for the three months ended June 30, 2020; a quarter over quarter improvement of $3,687,000. Pretax loss from operations for the second quarter of 2021 totaled $1,773,000 compared to a pretax loss from operations of $6,641,000 in the second quarter of 2020. Results for the second quarter of 2021 were positively impacted by a $5,027,000 decrease in claims and was the primary reason for the $4,868,000 improvement in pretax loss from operations in the second quarter of 2021, compared to the same period in 2020. The second quarter of each year is typically the peak of the spring tornado and severe thunderstorm season and the second quarter of both 2021 and 2020 experienced elevated levels of storm activity.

For the three months ended June 30, 2021, the Company had investment gains of $431,000 compared to investment gains of $548,000 for the three months ended June 30, 2020. A primary reason for the decrease in second quarter 2021 investment gains, compared to second quarter 2020 investment gains, was a $173,000 decline in the change in value of the surrender value of company owned life insurance.

In the second quarter of 2021, the Company incurred claims totaling $11,709,000 compared to $16,736,000 for the same period last year. The P&C segment was the primary source of the decrease with overall claims down $5,114,000 in second quarter 2021 compared to second quarter of 2020. The primary component of the decline was claims associated with weather related events which declined $5,768,000, in the second quarter of 2021, compared to the same period last year.

For the six months ended June 30, 2021, the Company had a net loss of $317,000, $0.13 loss per share, compared to a net loss of $5,586,000, $2.21 loss per share, for the six months ended June 30, 2020; a year to date improvement of $5,269,000 compared to last year. Pretax loss from operations for 2021 totaled $1,159,000 compared to a pretax loss from operations of $6,676,000 in 2020. Results for the second quarter of 2021 were positively impacted by a $6,307,000 decrease in claims and was the primary reason for the $5,517,000 improvement in pretax loss from operations in the second quarter of 2021, compared to the same period in 2020. While spring storm activity in 2021 was somewhat elevated, there were fewer significant tornado events compared to 2020.

For the six months ended June 30, 2021, the Company had investment gains of $741,000 compared to investment losses of $442,000 for the same period in 2020; an improvement of $1,183,000. The primary reason for the investment gains in 2021, was a gain due to change in fair value of equity securities totaling $198,000, compared to a loss due to change in value of equity securities of $495,000 in 2020. In addition, we had a $357,000 increase in realized gains from the sale of equity securities in 2021 compared to 2020.

For the six months ended June 30, 2021, the Company incurred claims totaling $21,012,000 compared to $27,319,000 for the same period last year. The P&C segment was the primary source of this decrease with claims down $6,749,000 in 2021, compared to 2020. The primary component of this decrease was claims reported from catastrophe events which declined $6,302,000 for the six months ended June 30 2021, compared to the same period in 2020.

Partially offsetting the decrease in claims was an increase in general and administrative expenses. The Company ended the first six months of 2021 with an increase in general and administrative expenses of $983,000 compared to the same period last year. The primary reasons for this increase were cost associated with the acceleration of multiple rate filings completed and submitted during the first half of 2021, additional cost associated with re-underwriting our P&C business with a primary focus on property valuations, and an increase in litigation reserves. Rate filings resulted in an overall 10.5% increase in rates across all P&C programs. Rate increases will be implemented as policies renew over the next twelve months and will improve margins which have been adversely

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impacted by the increased frequency of weather related losses and increased reinsurance cost. At mid-year, our re-underwriting project was approximately 70% complete and the additional cost from this project will decline in the second half of 2021 and should contribute to improvement in our attritional loss ratio.

Financial results for the three and six months ended June 30, 2021 and 2020, based on U.S generally accepted accounting principles, were as follows:

Unaudited Consolidated Financial Summary	Three months ended June 30,				Six months ended June 30,
($ in thousands, except per share)	2021		2020		2021		2020
Gross premiums written	$	20,394	$	19,057	$	39,228	$	36,188
Net premiums written	$	17,856	$	17,252	$	34,242	$	32,583
Net premiums earned	$	14,814	$	15,172	$	29,876	$	30,127
Net investment income	867		961		1,671		1,925
Net investment gains (losses)	431		548		741		(442)
Other income	131		143		267		288
Total Revenues	16,243		16,824		32,555		31,898
Policyholder benefits and settlement expenses	11,709		16,736		21,012		27,319
Amortization of deferred policy acquisition costs	830		848		1,801		1,913
Commissions	1,699		2,047		3,835		4,122
General and administrative expenses	2,566		2,493		4,870		3,887
Taxes, licenses and fees	628		594		1,164		1,315
Interest expense	153		199		291		460
Total Benefits, Losses and Expenses	17,585		22,917		32,973		39,016
Loss Before Income Taxes	(1,342)		(6,093)		(418)		(7,118)
Income tax benefit	(303)		(1,367)		(101)		(1,532)
Net Ioss	$	(1,039)	$	(4,726)	$	(317)	$	(5,586)
Loss Per Common Share	$	(0.42)	$	(1.87)	$	(0.13)	$	(2.21)
Reconciliation of Net Loss to non-GAAP Measurement
Net loss	$	(1,039)	$	(4,726)	$	(317)	$	(5,586)
Income tax benefit	(303)		(1,367)		(101)		(1,532)
Investment (gains) losses, net	(431)		(548)		(741)		442
Pretax Loss From Operations	$	(1,773)	$	(6,641)	$	(1,159)	$	(6,676)

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.

Three-month period ended June 30, 2021 compared to three-month period ended June 30, 2020

Premium Revenue:

For the three months ended June 30, 2021, net premiums earned were down $358,000 at $14,814,000 compared to $15,172,000 during the same period last year. The decrease in net premium earned was due to a 2.7% decrease in net premium earned in the P&C segment. The decrease in P&C segment net earned premium was primarily attributable to a 41.4% increase in reinsurance premium ceded due to an increase in reinsurance costs related to our 2021 catastrophe reinsurance contract renewal. It should be noted that reinsurance cost is partially driven by total insured value which has a seasonal peak at mid-year. Our full year reinsurance cost is expected to be up approximately 30%.

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We have implemented multiple rate increases to help offset the 29.4% reinsurance rate increase incurred with the 2021 renewal of our catastrophe reinsurance placement. We have focused on implementing rate increases in the states and programs most impacted by the increase in catastrophe reinsurance cost, primarily states with costal/hurricane exposure. With the rising costs of reinsurance taking effect on January 1, 2021, we have worked diligently to incorporate these increases into our rate filings as quickly as possible in 2021. We have completed and implemented the majority of the current year rate filings for most of our states and programs as of June 30, 2021 with increases taking effect at each annual policy renewal over the subsequent twelve months of renewals in each program. The average increase across all P&C states and programs is approximately 10.5%.

In addition to the rate increases, a re-underwriting project in our P&C subsidiary began during the fourth quarter of 2020 for policy renewals beginning in January 2021. In order to mitigate the impact of an increase in average claim cost due to inflation associated with increasing cost of home repairs and construction materials, we are currently re-underwriting our book of P&C business. We are placing particular focus on adequacy of property valuations to better reflect an increase in our average claim cost due to increases in repair cost. Through this process of re-underwriting, we will work through substantially all of our annual policy renewals by December 31, 2021. The renewal rate on policies renewing in the first half of 2021 was 92.5%, which is in line with our five year average renewal rate. While our policy risk count as of June 30, 2021 is down approximately 3.7% compared to June 30, 2020, P&C segment gross written premium is up 9.3% for the six months ended June 30, 2021 compared to the same period last year reflecting a higher average premium per policy. With the current expanded re-underwriting process just taking effect at 2021 policy renewal dates, this increase in written premium is expected to lead to increasing quarter over quarter earned premium in subsequent quarters of 2021 as the project nears completion.

Investment Gains:

Investment gains, for the three months ended June 30, 2021, were $431,000 compared to investment gains of $548,000 for the same period last year. For the three months ended June 30, 2021, gains related to the change in the value of COLI investments decreased $173,000 and was the primary reason for the $117,000 decrease in second quarter 2021 investment gains compared to second quarter 2020 investment gains. Partially offsetting this decrease was an increase in market value of our equity investments totaling $195,000 compared to an increase in market value of equity investments of $104,000 for the same period last year.

Net Loss:

For the three months ended June 30, 2021, the Company had a net loss of $1,039,000, $0.42 loss per share, compared to a net loss of $4,726,000, $1.87 loss per share, for the same period last year. The primary reason for the $3,687,000 improvement in second quarter 2021 net loss, compared to the second quarter 2020 net loss, was a decrease in property and casualty insured losses. The $5,768,000 reduction in weather related claims in the P&C segment through June 30, 2021, compared to June 30, 2020, was the primary reason for the decline in claims.

Pretax Loss from Operations:

For the three months ended June 30, 2021, our pretax loss from operations was $1,773,000 compared to a pretax loss from operations of $6,641,000 for the three months ended June 30, 2020; an improvement of $4,868,000. As discussed above, a decrease in weather related claim activity in our P&C segment was the primary reason for the improvement in the loss from operations in the second quarter of 2021, compared to the same period last year. However, 2021 weather related losses were still elevated compared to historical averages, contributing to our year to date net loss.

P&C Segment Combined Ratio:

The P&C segment ended the second quarter of 2021 with a GAAP basis combined ratio of 117.6%. Reported catastrophe losses totaled $3,953,000 and added 29.4 percentage points to the combined ratio. In comparison, the P&C segment ended the second quarter of 2020 with a GAAP basis combined ratio of 152.7% with $9,739,000 in reported catastrophe losses increasing the combined ratio by 70.4 percentage points. Non-catastrophe wind and hail losses were up $18,000 for the three months ended June 30, 2021 compared to the same period in 2020. Reported non-catastrophe wind and hail losses, in the second quarter of 2021, totaled $1,996,000 and added 14.8 percentage points to the second quarter 2021 combined ratio. In comparison, non-catastrophe wind and hail losses reported in the second quarter of 2020 totaled $1,978,000 and added 14.3 percentage points to the second quarter 2020 combined ratio. In addition, reported fire losses were up $705,000 during the second quarter of 2021 compared to the second quarter of 2020. Reported fire losses totaled $3,724,000, for the three months ended June 30, 2021, and added 27.7 percentage points to the 2021 combined ratio. In comparison, in the second quarter of 2020, reported fire losses totaled $3,019,000 and added 21.8 percentage points to the 2020 combined ratio.

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Six-month period ended June 30, 2021 compared to six-month period ended June 30, 2020

Premium Revenue:

For the six-month period ended June 30, 2021, net premiums earned were down $251,000 at $29,876,000 compared to $30,127,000 during the same period last year. The decrease in P&C segment net earned premium was primarily attributable to a 38.9% 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.

Investment Gains (Losses):

Investment gains for the six-month period ended June 30, 2021 were $741,000 compared to investment losses of $442,000 for the same period last year. The primary reason for the investment gains, in 2021, was an increase in value of our equity investments totaling $198,000 compared to a decrease in value of equity investments of $495,000, in 2020. In the first six months of 2021, we had realized gains from the sale of equity investments totaling $357,000. We did not have any gains from equity investment sales during the first half of 2020.

Net Loss:

For the six months ended June 30, 2021, the Company had a net loss of $317,000, $0.13 loss per share, compared to a net loss of $5,586,000, $2.21 loss per share, for the same period last year. As mentioned previously, while we ended the first half of 2021 with a net loss, 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 an decline in catastrophe losses from severe weather events.

Pretax Loss from Operations:

For the six months ended June 30, 2021, our pretax loss from operations was $1,159,000 compared to a pretax loss from operations of $6,676,000 for the six months ended June 30, 2020; a decrease in pretax loss of $5,517,000. 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 the first six months of 2021, compared to the same period last year. However, weather related claims remained elevated, particularly in the second quarter of 2021.

P&C Segment Combined Ratio:

The P&C segment ended the first six months of 2021 with a GAAP basis combined ratio of 106.5%. Reported catastrophe losses totaled $5,689,000 and added 20.9 percentage points to the combined ratio. In comparison, the P&C segment ended the first six months of 2020 with a GAAP basis combined ratio of 130.3% with $11,991,000 in reported catastrophe losses increasing the combined ratio by 43.6 percentage points. In addition, reported non-catastrophe wind and hail losses were down $299,000 in the first half of 2021. Reported non-catastrophe wind and hail losses for the first six months of 2021 totaled $3,289,000 and added 12.1 percentage points to the 2021 combined ratio. In comparison, non-catastrophe wind and hail losses reported during the first six months of 2020 totaled $3,588,000 and added 13.0 percentage points to the 2020 combined ratio. Partially offsetting the decline in reported weather related claims was an increase in reported fire losses totaling $435,000. Reported fire losses for the first six months of 2021 totaled $6,994,000 and added 25.7 percentage points to the 2021 combined ratio. In comparison, fire losses reported during the first six months of 2020 totaled $6,559,000 and added 23.9 percentage points to the 2020 combined ratio.

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Overview - Balance Sheet highlights at June 30, 2021 compared to December 31, 2020

Selected Balance Sheet Highlights	June 30, 2021		December 31, 2020
($ in thousands, except per share)	Unaudited
Invested Assets	$	111,548	$	99,150
Cash	$	11,122	$	19,887
Total Assets	$	153,548	$	150,540
Policy Liabilities	$	86,226	$	82,869
Total Debt	$	13,683	$	13,677
Accumulated Other Comprehensive Income	$	3,043	$	3,585
Shareholders' Equity	$	44,229	$	45,366
Book Value Per Share	$	17.47	$	17.93

Invested Assets:

Invested assets at June 30, 2021 were $111,548,000 compared to $99,150,000 at December 31, 2020; an increase of 12.5%. 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 offset by a decline, primarily in market value of available-for-sale fixed maturity investments, of $1,305,000. This decline in market value of fixed maturity investments was primarily driven by an increase in intermediate and long-term market interest rates in early 2021.

Cash:

The Company, primarily through its insurance subsidiaries, had $11,122,000 in cash and cash equivalents at June 30, 2021, compared to $19,887,000 at December 31, 2020. Cash decreased $8,765,000 in the first half of 2021 primarily due to the purchase of fixed maturity securities in our P&C subsidiary investment portfolio.

Total Assets:

Total assets at June 30, 2021 were $153,548,000 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 the first quarter of 2021.

Policy Liabilities:

Policy related liabilities were $86,226,000 at June 30, 2021, compared to $82,869,000 at December 31, 2020; an increase of $3,357,000 or 4.1%. The primary reason for the increase in policy liabilities was a $2,488,000 increase in P&C segment unearned premium, in the first half of 2021, compared to 2020. The increase in unearned premium was primarily driven by a 9.3% increase in P&C segment gross written premium in the first half of 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.

Debt Outstanding:

Total debt was virtually unchanged at June 30, 2021 at $13,683,000 compared to $13,677,000 at December 31, 2020. Our debt is held at the holding company level.

Shareholders' Equity:

Shareholders' equity as of June 30, 2021 was $44,229,000, down $1,137,000, compared to December 31, 2020 Shareholders' equity of $45,366,000. Book value per share was $17.47 at June 30, 2021, compared to $17.93 per share at December 31, 2020; a decline of 2.6% or $0.46 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 $542,000 and shareholder dividends paid of $304,000 as well as the net loss of $317,000.

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Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020

Premium Revenue:

The table below provides earned premium revenue by segment for the three months ended June 30, 2021 and 2020:

($ in thousands)	Three months ended June 30,				Percent
	2021		2020		increase (decrease)
Life, accident and health segment premiums earned:
Traditional life insurance	$	1,119	$	1,121	(0.2)	%
Accident and health insurance	392		385		1.8	%
Gross life, accident and health	1,511		1,506		0.3	%
Reinsurance premium ceded	(16)		(22)		(27.3)	%
Net life, accident and health premiums earned	$	1,495	$	1,484	0.7	%
Property and Casualty segment premiums earned:
Dwelling fire & extended coverage	$	10,691	$	9,836	8.7	%
Homeowners (Including mobile homeowners)	4,617		5,080		(9.1)	%
Other liability	533		555		(4.0)	%
Gross property and casualty premium earned	15,841		15,471		2.4	%
Reinsurance premium ceded	(2,522)		(1,783)		41.4	%
Net property and casualty premiums earned	$	13,319	$	13,688	(2.7)	%
Consolidated gross premiums earned	$	17,352	$	16,977	2.2	%
Reinsurance premium ceded	(2,538)		(1,805)		40.6	%
Consolidated net premiums earned	$	14,814	$	15,172	(2.4)	%

Consolidated net premium earned was down 2.4% for the quarter ended June 30, 2021, at $14,814,000 compared to $15,172,000 for the same period last year. The decrease in net premium earned was due to a 2.7% decrease in net premium earned in the P&C segment driven primarily by a 41.4% increase in reinsurance premium ceded due to an increase in reinsurance cost related to our 2021 catastrophe reinsurance contract renewal.

Investment Income:

The table below provides the major categories of investment income, primarily dividend and interest income, for the three months ended June 30, 2021 and 2020:

($ in thousands)	Three months ended June 30,
	2021		2020
Fixed maturities	$	833	956
Equity securities	21		31
Mortgage loans on real estate	2		2
Policy loans	35		36
Other	13		(26)
	904		999
Less: Investment expenses	37		$	38
Net investment income	$	867	$	961

For the three months ended June 30, 2021, net investment income was $867,000 compared to $961,000 for the same period in 2020; a decrease of $94,000 or 9.8%. A combination of a decline in our invested assets due to increased catastrophe claim frequency throughout 2020, coupled with lower reinvestment yields on fixed maturity investments, our investment income declined in 2021. While reinvestment rates remain low, investment income should increase moderately on a quarter over quarter basis as we reinvest our current cash balances.

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Investment Gains:

The table below provides investment gains and losses for the three months ended June 30, 2021 and 2020:

($ in thousands)	Three months ended June 30,
	2021		2020
Realized gains on fixed maturities	$	106	$	133
Gains on trading securities	6		19
Change in fair value of equity securities	195		104
Change in surrender value of company owned life insurance	118		291
Other losses principally real estate	6		1
Net investment gains	$	431	$	548

Net investment gains, for the three months ended June 30, 2021, were $431,000 compared to net investment gains of $548,000 for the same period in 2020; a decrease of $117,000. A primary reason for the decrease in second quarter 2021 investment gains, compared to second quarter 2020 investment gains, was a $173,000 decline in gains related to change in surrender value of company owned life insurance.

Other Income:

Other income was comparable at $131,000 for the three months ended June 30, 2021, compared to $143,000 for the same period last year; a decrease of $12,000. Other income consists primarily of fees related to the issuance of our property insurance policies as well as other miscellaneous income.

Policyholder Benefits:

Policyholder claim related expenses totaled $11,709,000 for the second quarter of 2021, compared to $16,736,000 for the same period last year; a decrease of $5,027,000 or 30.0%. Claims as a percentage of premium earned was 79.0% in the second quarter of 2021 compared to 110.3% in the second quarter of 2020. The primary reason for the decrease in claims was a $5,768,000 decrease in P&C segment reported weather related claims.

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Weather related losses consistently create the most significant variability in our loss and loss adjustment expense payments from year to year in our P&C segment. The following table provides a recap of P&C segment gross reported losses and LAE by catastrophe event and non-catastrophe wind and hail losses and LAE for the three-month periods ended June 30, 2021 and 2020:

For the three months ended June 30, 2021				For the three months ended June 30, 2020
($ in thousands) Catastrophe event	Reported Losses & LAE		Claim Count	Catastrophe event	Reported Losses & LAE		Claim Count
Cat 2113 (Jan 25-26)	$	—	—	Cat 2012 (Jan 10-12)	$	18	$	3
Cat 2117 (Feb 16-20)	49		19	Cat 2014 (Feb 5-8)	—		2
Cat 2120 (Mar 15-19)	64		20	Cat 2016 (Mar 2-4)	48		10
Cat 2122 (Mar 24-26)	646		37	Cat 2018 (Mar 27-30)	357		35
Cat 2123 (Mar 27-29)	315		58	Cat 2019 (Apr 7-9)	177		30
Cat 2125 (Apr 9-11)	277		49	Cat 2020 (Apr 10-14)	3,808		543
Cat 2128 (Apr 23-25)	626		143	Cat 2021 (Apr 18-20)	1,915		294
Cat 2129 (Apr 27-May 2)	408		62	Cat 2022 (Apr 21-24)	1,673		221
Cat 2130 (May 3-4)	599		124	Cat 2023 (Apr 24-26)	100		19
Cat 2131 (May 7-11)	169		41	Cat 2024 (Apr 27-30)	133		26
Cat 2136 (June 7-9)	210		55	Cat 2025 (May 2-3)	220		30
Cat 2137 (June 11-14)	185		35	Cat 2026 (May 4-5)	469		78
Cat 2138 (June 18-21)	333		63	Cat 2028 (May 13-15)	110		25
				Cat 2030 (May 20-24)	227		51
				Cat 2037 (June 6-9)	278		58
Misc cats less than $100k	72		11	Misc cats less than $100k	206		39
Total Cat Losses	$	3,953	717	Total Cat Losses	$	9,739	1,464
Non-Cat Wind & Hail	$	1,996	433	Non-Cat Wind & Hail	$	1,978	402

During the second quarter of 2021, the P&C segment was impacted by 13 catastrophe events producing 717 policyholder claims totaling $3,953,000. In comparison, the P&C segment was impacted by 15 catastrophe events during the second quarter of 2020 producing 1,464 claims totaling $9,739,000. During the second quarter of 2021, the P&C segment had reported losses three consecutive weeks from Cat 2128, Cat 2129 and Cat 2130 totaling $1,633,000 from 329 claims. These cat events accounted for 41.3% of total reported losses from cat events during the second quarter of 2021 and added 12.1 percentage points to the second quarter 2021 P&C segment loss ratio. During the second quarter of 2020, NSFC was negatively impacted by multiple severe weather events that contributed to elevated insured losses due to damage from strong winds, hail and tornadoes. April of 2020 was our most active month of any spring storm season since 2011 with six cat events occurring during the month. These six cat events impacted policyholders in every state in which our P&C subsidiary operates and generated $7,806,000 in insured losses during the second quarter of 2020 from 1,133 reported claims through June 30, 2020. These catastrophe events added 56.4 percentage points to the second quarter 2020 P&C combined ratio and accounted for 80.2% of all reported losses from catastrophe events during the second quarter of 2020.

Non-catastrophe wind and hail claims reported in the second quarter of 2021 totaled $1,996,000 compared to non-catastrophe wind and hail claims reported in the second quarter of 2020 totaling $1,978,000; an increase of $18,000. During the second quarter of 2021, the P&C segment had 433 non-cat wind and hail claims reported (an average of $4,600 per claim) compared to 402 non-cat wind and hail claims reported during the second quarter of 2020 (an average of $4,900 per claim). Non-cat wind and hail claims reported during the second quarter of 2021 accounted for 18.6% of total P&C segment incurred losses in the current year and added 14.8 percentage points to the 2021 P&C segment combined ratio. Non-cat wind and hail claims reported during the second quarter of 2020 accounted for 12.5% of total P&C segment incurred losses in 2020 and added 14.3 percentage points to the 2020 P&C segment combined ratio.

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Reported fire losses in the second quarter of 2021 were up $705,000 or 23.4% compared to fire losses reported during the second quarter of 2020. The P&C segment had 93 fire losses reported in the second quarter of 2021 totaling $3,724,000 compared to 93 claims reported in the second quarter of 2020 totaling $3,019,000. The average cost per claim was $40,000 for fire losses reported in the second quarter of 2021 compared to $32,500 for fire losses reported in the second quarter of 2020. Fire losses reported during the second quarter of 2021 added 27.7 percentage points to the P&C segment combined ratio while fire losses reported during the second quarter of 2020 added 21.8 percentage points to the P&C segment combined ratio.

Policy Acquisition Cost (Commissions and Amortization of Deferred Acquisition Cost):

For the three months ended June 30, 2021, policy acquisition costs were $2,529,000 compared to $2,895,000 for the same period last year; a decrease of $366,000. Policy acquisition costs consist of amortization of previously capitalized distribution costs and current commission payments to agents. As a percentage of premium revenue, policy acquisition costs were comparable at 17.1% in the second quarter of 2021 compared to 19.1% for the same period last year.

General Expenses:

General and administrative expenses were $2,566,000 in the second quarter of 2021, compared to $2,493,000 for the same period last year. As a percent of earned premium, general and administrative expenses were 17.3% and 16.4% at June 30, 2021 and 2020, respectively. Prior year general and administrative expenses were lower than normal levels due to a decline in value of SERP and deferred compensation related liabilities of $434,000, with a corresponding decline in general expenses. This decline was driven by a pandemic related decline in the value of underlying investment options in the plans. For the quarter ending June 30, 2021, we had an increase in accounting, actuarial and consulting fees totaling $117,000 and additional expenses directly associated with re-underwriting our P&C business of $74,000. Deferred compensation plan expenses totaled $246,000 for the quarter ending June 30, 2021. We expect general expenses to moderate significantly in the second half of 2021 as much of the increase in early 2021 is associated with the acceleration of P&C rate filings to reflect the increase in cost of our 2021 catastrophe reinsurance and upfront cost associated with our re-underwriting project.

Taxes, Licenses and Fees:

For the quarter ended June 30, 2021, insurance taxes, licenses and fees were $628,000 compared to $594,000 for the same period last year. As a percent of earned premium, insurance taxes, licenses and fees were 4.2% in the second quarter of 2021 and 3.9% in the second quarter of 2020.

Interest Expense:

Interest expense was $153,000 for the three months ended June 30, 2021, compared to $199,000 for the three months ended June 30, 2020. A reduction in total debt outstanding and a decrease in interest rates on long-term debt over the past twelve months was the primary factor contributing to the $46,000 decrease.

Income Benefits:

For the three months ended June 30, 2021, the Company had a loss before income taxes of $1,342,000 compared to a loss before income taxes of $6,093,000 for the same period last year. The $303,000 tax benefit for the second quarter of 2021 consisted of current tax benefit of $9,000 and deferred tax benefit of $294,000. The $1,367,000 tax benefit for the second quarter of 2020 consisted of current tax benefit of $1,280,000 and deferred tax benefit of $87,000. The effective tax rate for the second quarter of 2021 was 22.6% compared to 22.4% for the second quarter of 2020.

Net Loss:

The Company ended the second quarter of 2021 with a net loss of $1,039,000 compared to a net loss of $4,726,000 for the same period last year. The primary factor contributing to the $3,687,000 increase was the $5,027,000 decrease in policyholder benefits and settlement expenses, primarily in the P&C segment, discussed in detail in the preceding commentary in this discussion.

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Six Months Ended June 30, 2021 compared to Six Months Ended June 30, 2020

Premium Revenue:

The table below provides earned premium revenue by segment for the six months ended June 30, 2021 and 2020:

($ in thousands)	Six months ended June 30,				Percent
	2021		2020		increase (decrease)
Life, accident and health operations premiums earned:
Traditional life insurance	$	2,161	$	2,187	(1.2)	%
Accident and health insurance	783		787		(0.5)	%
Gross life, accident and health	2,944		2,974		(1.0)	%
Reinsurance premium ceded	(59)		(57)		3.5	%
Net life, accident and health premiums earned	$	2,885	$	2,917	(1.1)	%
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage	$	20,869	$	19,488	7.1	%
Homeowners (Including mobile homeowners)	9,979		10,161		(1.8)	%
Other liability	1,070		1,109		(3.5)	%
Gross property and casualty	31,918		30,758		3.8	%
Reinsurance premium ceded	(4,927)		(3,548)		38.9	%
Net property and casualty premiums earned	$	26,991	$	27,210	(0.8)	%
Consolidated gross premiums earned	$	34,862	$	33,732	3.3	%
Reinsurance premium ceded	(4,986)		(3,605)		38.3	%
Consolidated net premiums earned	$	29,876	$	30,127	(0.8)	%

Consolidated net premium earned was down 0.8% for the six month period ended June 30, 2021, at $29,876,000 compared to $30,127,000 for the same period last year. The decrease in net premium earned was due to a 0.8% decrease in net premium earned in the P&C segment. The decrease in P&C segment net earned premium was primarily attributable to a 38.9% increase in ceded premium in 2021 compared to 2020.

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 with a $2 million aggregate annual deductible. This aggregate coverage effectively lowers our second event retention to $2 million. The catastrophe aggregate cover also has two reinstatements. Also unchanged from last year, we maintain primary catastrophe excess reinsurance covering incurred claims of a single catastrophe event up to $72.5 million. Our primary catastrophe excess 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, such as those experienced in 2020, that individually may not exceed our $4 million retention and would not be covered under our primary catastrophe reinsurance contract. To mitigate the impact of these smaller events, we added an additional reinstatement to our catastrophe aggregate coverage for 2021.

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:

Layer	Reinsurers' 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

We purchase reinstatement premium protection on our primary catastrophe excess reinsurance (layers one through three above) for one reinstatement. Our catastrophe aggregate coverage is subject to a $2 million aggregate annual deductible and has a contract provision for two reinstatements. Additional details regarding the structure of our 2021 catastrophe reinsurance program can be found in Note 9 to the Condensed Consolidated Financial Statements.

Investment Income:

The table below provides the major categories of investment income, primarily dividend and interest income, for the six months ended June 30, 2021 and 2020:

($ in thousands)	Six months ended June 30,
	2021		2020
Fixed maturities	$	1,590	$	1,872
Equity securities	70		72
Mortgage loans on real estate	4		4
Investment real estate	—		1
Policy loans	69		72
Other	15		(22)
	1,748		1,999
Less: Investment expenses	77		74
Net investment income	$	1,671	$	1,925

For the six months ended June 30, 2021, net investment income was $1,671,000 compared to $1,925,000 for the same period in 2020; a decrease of $254,000 or 13.2%. A combination of a decline in our invested assets due to increased catastrophe claim frequency throughout 2020, coupled with lower reinvestment yields on fixed maturity investments, our investment income declined in 2021. While reinvestment rates remain low, investment income should increase moderately on a quarter over quarter basis over the remainder of 2021 as we reinvest current cash balances.

Investment Gains (Losses):

The table below provides investment gains and losses for the six months ended June 30, 2021 and 2020:

($ in thousands)	Six months ended June 30,
	2021		2020
Realized gains on fixed maturities	$	106	$	16
Realized gains on equity securities	357		—
Gains (losses) on trading securities	13		(6)
Change in fair value of equity securities	198		(495)
Change in surrender value of company owned life insurance	61		40
Other gains principally real estate	6		3
Net investment gains (losses)	$	741	$	(442)

Net investment gains, for the six months ended June 30, 2021, were $741,000 compared to net investment losses of $442,000 for the same period in 2020; an increase of $1,183,000. The primary reason for 2021 investment gains, compared to the 2020 investment losses, was unrealized gains due to change in market value of our equity investments totaling $198,000 compared to unrealized losses in equity investments of $495,000 in the first six

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months of 2020. In addition, during 2021, we had realized gains on equity securities totaling $357,000 while we had no realized gains from equity securities during the first half of 2020.

Other Income:

Other income was comparable at $267,000 for the six months ended June 30, 2021, compared to $288,000 for the same period last year; a decrease of $21,000. Other income consists primarily of fees related to the issuance of our property insurance policies as well as other miscellaneous income.

Policyholder Benefits:

Policyholder claims were $21,012,000 for the six months ended June 30, 2021, compared to $27,319,000 for the same period last year; a decrease of $6,307,000 or 23.1%. Claims as a percentage of premium earned was 70.3% in 2021 compared to 90.7% in 2020. The primary reason for the decrease in claims was a $6,601,000 decrease in P&C segment reported weather claims. This decrease was partially offset by an increase in reported fire losses totaling $435,000.

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 reported losses and LAE by catastrophe event and non-catastrophe wind and hail losses and LAE for the six-month periods ended June 30, 2021 and 2020:

For the six months ended June 30, 2021				For the six months ended June 30, 2020
($ in thousands) Catastrophe event	Reported Losses & LAE		Claim Count	Catastrophe event	Reported Losses & LAE		Claim Count
Cat 2113 (Jan 25-26)	$	132	6	Cat 2012 (Jan 10-12)	$	1,352	313
Cat 2117 (Feb 16-20)	809		215	Cat 2014 (Feb 5-8)	630		159
Cat 2120 (Mar 15-19)	346		86	Cat 2016 (Mar 2-4)	309		71
Cat 2122 (Mar 24-26)	1,140		122	Cat 2018 (Mar 27-30)	357		35
Cat 2123 (Mar 27-29)	315		58	Cat 2019 (Apr 7-9)	177		30
Cat 2125 (Apr 9-11)	277		49	Cat 2020 (Apr 10-14)	3,808		543
Cat 2128 (Apr 23-25)	626		143	Cat 2021 (Apr 18-20)	1,915		294
Cat 2129 (Apr 27-May 2)	408		62	Cat 2022 (Apr 21-24)	1,673		221
Cat 2130 (May 3-4)	599		124	Cat 2023 (Apr 24-26)	100		19
Cat 2131 (May 7-11)	169		41	Cat 2024 (Apr 27-30)	133		26
Cat 2136 (June 7-9)	210		55	Cat 2025 (May 2-3)	220		30
Cat 2137 (June 11-14)	185		35	Cat 2026 (May 4-5)	469		78
Cat 2138 (June 18-21)	333		63	Cat 2028 (May 13-15)	110		25
				Cat 2030 (May 20-24)	227		51
				Cat 2037 (June 6-9)	278		58
Misc cats less than $100k	140		27	Misc cats less than $100k	233		49
Total Cat losses	$	5,689	1,086	Total Cat losses	$	11,991	2,002
Non-cat wind & hail	$	3,289	727	Non-cat wind & hail	$	3,588	816

During the first six months of 2021, the P&C segment was impacted by 19 catastrophe events producing 1,086 policyholder claims totaling $5,689,000. In comparison, the P&C segment was impacted by 20 catastrophe events during the first six months of 2020 producing 2,002 claims totaling $11,991,000. During 2021, the P&C segment had reported losses from Cat 2117 and Cat 2122 (winter storms) totaling $1,949,000 from 337 claims. These cat events accounted for 34.3% of total reported losses from cat events during the first half of 2021 and added 7.2 percentage points to the 2021 P&C segment loss 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. Reported losses from three of these catastrophe events (all occurring in April) totaled $7,396,000 and accounted for 61.7% of all reported catastrophe event claims through June 30, 2020. The three April 2020 catastrophe events added 26.9 percentage points to the current year P&C segment combined ratio.

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Non-catastrophe wind and hail claims reported in 2021 totaled $3,289,000 compared to non-catastrophe wind and hail claims reported in 2020 totaling $3,588,000 a decrease of $299,000. During the first six months of 2021, the P&C segment had 727 non-cat wind and hail claims reported (an average of $4,500 per claim) compared to 816 non-cat wind and hail claims reported during the first six months of 2020 (an average of $4,400 per claim). Non-cat wind and hail claims reported during 2021 accounted for 17.6% of total P&C segment incurred losses in the current year and added 12.1 percentage points to the 2021 P&C segment combined ratio. Non-cat wind and hail claims reported during 2020 accounted for 14.1% of total P&C segment incurred losses in 2020 and added 13.0 percentage points to the 2020 P&C segment combined ratio.

Reported fire losses in the first six months of 2021 were up $435,000 or 6.6% compared to fire losses reported during the first six months of 2020. The P&C segment had 213 fire losses reported in 2021 totaling $6,994,000 compared to 199 claims reported in 2020 totaling $6,559,000. The average cost per claim was $32,800 for fire losses reported in 2021 compared to $33,000 for fire losses reported in 2020. Fire losses reported during 2021 added 25.7 percentage points to the P&C segment combined ratio while fire losses reported during 2020 added 23.9 percentage points to the P&C segment combined ratio.

Policy Acquisition Cost (Commissions and Amortization of Deferred Acquisition Cost):

For the six months ended June 30, 2021, policy acquisition costs were $5,636,000 compared to $6,035,000 for the same period last year; a decrease of $399,000. Policy acquisition costs consist of amortization of previously capitalized distribution costs and current commission payments to agents. As a percentage of premium revenue, policy acquisition costs were 18.9% in the first six months of 2021 compared to 20.0% for the same period last year.

General Expenses:

General and administrative expenses were $4,870,000 in 2021 compared to $3,887,000 for the same period last year. As a percent of earned premium, general and administrative expenses were 16.3% and 12.9% at June 30, 2021 and 2020, respectively. The $983,000 increase in general and administrative expenses, in 2021 compared to 2020, were due to cost associated with the acceleration of multiple rate filings completed and submitted during the first half of 2021, additional cost associated with re-underwriting our P&C business with a primary focus on property valuations, and an increase in litigation reserves. Rate filings resulted in an overall 10.5% increase in rates across all P&C programs. Rate increases will be implemented as policies renew over the next twelve months and will improve margins which have been adversely impacted by the increased frequency of weather related losses and increased reinsurance cost. At mid-year, our re-underwriting project was approximately 70% complete and the additional cost from this project will decline in the second half of 2021 and should contribute to improvement in our attritional loss ratio.

Taxes, Licenses and Fees:

Insurance taxes, licenses and fees were $1,164,000 for the six months ended June 30, 2021, compared to $1,315,000 for the same period in 2020; a decrease of $151,000. As a percent of earned premium, insurance taxes, licenses and fees were 3.9% in the first six months of 2021 and 4.4% for the six months ended June 30, 2020.

Interest Expense:

Interest expense for the first six months of 2021 was $291,000 compared to $460,000 for the same period in 2020; a decrease of 36.7%. A reduction in total debt outstanding over the past twelve months coupled a decline interest rates on debt was the primary factor contributing to the $169,000 decrease.

Income Benefits:

For the six months ended June 30, 2021, the Company had a loss before income taxes of $418,000 compared to a loss before income taxes of $7,118,000 for the same period last year. The $101,000 tax benefit for 2021 consisted of current tax benefit of $41,000 and deferred tax benefit of $60,000. The $1,532,000 tax benefit for 2020 consisted of current tax benefit of $1,333,000 and deferred tax benefit of $199,000. The effective tax rate for 2021 was 24.2% compared to 21.5% in 2020.

Net Loss:

The Company ended the first six months of 2021 with a net loss of $317,000 compared to a net loss of $5,586,000 for the same period last year. The primary factor contributing to the $5,269,000 improvement was the $6,307,000 decrease in policyholder benefits and settlement expenses, primarily in the P&C segment, mentioned previously.

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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 June 30, 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-Sale		Held-to-Maturity		Total		Percentage of Total
Maturity in less than 1 year	$	1,204	$	—	$	1,204	1.32	%
Maturity in 1-5 years	20,913		12		20,925		23.00	%
Maturity in 5-10 years	24,563		3		24,566		27.01	%
Maturity after 10 years	43,582		682		44,264		48.67	%
	$	90,262	$	697	$	90,959	100.00	%

It should be noted that the above table represents maturities based on stated/contractual maturity. Due to call and prepayment features inherent in some fixed maturity securities, actual repayment, or effective maturities, will differ from stated maturities. The Company routinely evaluates the impact of changing interest rates on the projected maturities of bonds in the portfolio and actively manages the portfolio in order to minimize the impact of interest rate risk. However, due to other factors, both regulatory and those associated with good investment management practices associated with asset/liability matching, we do have exposure to changes in market values of securities due to changes in interest rates. Currently, a 100 basis point immediate increase in interest rates would generate approximately a $4,979,000, or 5.2%, decline in the market value of fixed maturity investments. Alternatively, a 100 basis point decrease in interest rates will generate approximately $4,903,000, or 5.2%, 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 June 30, 2021, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $44,229,000, down $1,137,000, compared to $45,366,000 at December 31, 2020.  During the six months ended June 30, 2021, shareholders' equity was reduced by a net loss of $317,000, a comprehensive loss due to changes in value of fixed maturity securities of $1,031,000 and cash dividends paid totaling $304,000. 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

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payments on mortgage backed securities, likelihood of call provisions being enacted and regular contractual maturities, we expect approximately 2.3% of our current fixed income portfolio to be reinvested or otherwise available to meet Company obligations.

The Company, primarily through its insurance subsidiaries, had $11,122,000 in cash and cash equivalents at June 30, 2021, compared to $8,860,000 at June 30, 2020. Cash provided by operating activities increased cash by $4,702,000 during the six months ended June 30, 2021. The increase in cash from operating activities was primarily related to reinsurance recoveries on paid losses related to 2020 hurricane events. Cash used in operating activities decreased cash by $5,282,000 for the six months ended June 30, 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. Net cash used in investing activities totaled $13,189,000 for the six months ended June 30, 2021, compared to cash provided by investing activities of $2,661,000 in 2020. The decrease in cash from investing activities during the six months ended June 30, 2021 was related to reinvestment of cash on hand from maturities of fixed maturity securities and reinsurance recoveries. Net cash provided by investing activities in 2020 was related to maturities and some increases in prepayments on mortgage backed securities. Net cash used in financing activities totaled $278,000 for the six months ended June 30, 2021, compared to $328,000 for the same period last year. During the six months ended June 30, 2021, the Company paid $304,000 in dividends to shareholders.

The Holding Company had $3,790,000 in cash at June 30, 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. Currently the Holding Company 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 June 30, 2021 totaled $7,332,000.

The Company had a total of $13,183,000 of long-term debt outstanding as of June 30, 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, $189,000 and $195,000, respectively.

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.

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 2020 Annual Report on Form 10-K, the amount that The National Security Group's insurance subsidiaries can transfer in the form of dividends to the parent company during 2021 is statutorily limited to $1,168,000 in the life insurance subsidiary and $3,650,000 in the property/casualty insurance subsidiary. Dividends are limited to the greater of net income (operating income for life subsidiary) or 10% of statutory capital,

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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 six months ended June 30, 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 2021 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Under smaller reporting company rules we are not required to disclose information required under Item 3. 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.

Since the Company's assets and liabilities are largely monetary in nature, the Company's financial position and earnings are subject to risks resulting from changes in interest rates at varying maturities, changes in spreads over U.S. Treasuries on new investment opportunities and changes in the yield curve and equity pricing risks.

The Company is exposed to equity price risk on its equity securities. The Company holds common stock with a fair value of $4,790,000. 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 June 30, 2021 value, the fair value of the Company's common stock investments would decrease by approximately $479,000.

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 4 in the Condensed Consolidated Financial Statements present additional disclosures concerning fair values of Financial Assets and Financial Liabilities and are incorporated by reference herein.

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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.

Item 4. Controls and Procedures

Our management carried out an evaluation, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2021. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13A-15(d) under the Exchange Act that occurred during the six months ended June 30, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II

Item 1. Legal Proceedings

Please refer to Note 14 to the Condensed Consolidated Financial Statements included herein, and the 2020 Annual Report filed on Form 10-K.

Item 1A. Risk Factors

There has been no material change in risk factors previously disclosed under Item 1A. of the Company’s Annual Report for 2020 on Form 10-K. Risks related to the COVID-19 pandemic continue to evolve. Additional commentary is included in Part I, Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 3. - Quantitative and Qualitative Disclosures About Market Risk.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

None

Item 3.  Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information    

None

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Item 6.   Exhibits

a.  Exhibits

31.1	Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

b. During the last fiscal quarter of the period covered by this Report, the Company filed the following Current

Reports on Form 8-K:

Date of Report	Date Filed	Description
April 9, 2021	April 9, 2021	Press release, dated April 9 2021, issued by The National Security Group, Inc.
May 14, 2021	May 14, 2021	Press release, dated May 14, 2021, issued by The National Security Group, Inc.
May 21, 2021	May 24, 2021	Item 5.01 - announcement of annual meeting voting results

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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. McLeod	William L. Brunson, Jr.
Chief Financial Officer and Treasurer	President, Chief Executive Officer and Director

Date: August 13, 2021

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