NATIONAL SECURITY GROUP INC – 10-Q – 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 nine-month periods ended
September 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 65.8% 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 91.7% 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 8.3% 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 September 30, 2021, the Company had a net loss of
$644,000, $0.25 loss per share, compared to a net loss of $778,000, $0.30 loss
per share, for the three months ended September 30, 2020; a quarter over quarter
improvement of $134,000. Pretax loss from operations for the third quarter of
2021 totaled $820,000 compared to a pretax loss from operations of $2,413,000 in
the third quarter of 2020. Results for the third quarter of 2021 were positively
impacted by a $1,530,000 decrease in claims and was the primary reason for the
$1,593,000 improvement in pretax loss from operations in the third quarter of
2021, compared to the same period in 2020.

For the three months ended September 30, 2021, the Company had investment gains
of $11,000 compared to investment gains of $1,430,000 for the three months ended
September 30, 2020. The primary reason for the decrease in third quarter 2021
investment gains, compared to third quarter 2020 investment gains, was a
$1,091,000 decline in realized gains on fixed maturities. In 2020, fixed
maturity investments were sold to provide liquidity for multiple hurricane
events which was the primary factor contributing to the higher prior year
investment gains.

In the third quarter of 2021, the Company incurred claims, net of reinsurance
recoveries, totaling $11,773,000 compared to $13,303,000 for the same period
last year. The P&C segment was the primary source of the decrease with overall
claims down $1,414,000 in the third quarter of 2021 compared to the third
quarter of 2020. The primary component of the decline was claims associated with
weather related events which declined $1,497,000, in the third quarter of 2021,
compared to the same period last year. During the third quarter of 2021, the P&C
segment was impacted by Hurricane Ida. Reported losses from this catastrophe
event totaled $4,000,000, net of reinsurance. In comparison, the P&C segment was
impacted by Hurricane Laura and Hurricane Sally during the third quarter of 2020
with reported losses totaling $2,072,000 and $2,000,000, respectively, net of
reinsurance. Partially offsetting the decreases in weather related claims was an
increase of $202,000 in reported fire losses for the third quarter of 2021
compared to the same period last year.

For the nine months ended September 30, 2021, the Company had a net loss of
$961,000, $0.38 loss per share, compared to a net loss of $6,364,000, $2.51 loss
per share, for the nine months ended September 30, 2020; a year to date
improvement of $5,403,000 compared to last year. Pretax loss from operations for
2021 totaled $1,979,000 compared to a pretax loss from operations of $9,089,000
in 2020. Results for 2021 were positively impacted by a $7,837,000 decrease in
claims and was the primary reason for the $7,110,000 improvement in pretax loss
from operations in 2021, compared to the same period in 2020. While the P&C
segment incurred losses from one hurricane during 2021, the P&C segment was
impacted by multiple tornado events during the second quarter of 2020 coupled
with two hurricanes during the third quarter of 2020. The decreased frequency of
storm activity in 2021 was the primary reason for the improvement compared to
last year.

For the nine months ended September 30, 2021, the Company had investment gains
of $752,000 compared to investment gains of $988,000 for the same period in
2020; a decrease of $236,000. The primary reason for the decrease in 2021
investment gains, compared to 2020 investment gains, was a $1,001,000 decline in
realized gains on fixed maturities. Partially offsetting the decrease in
realized investment gains on fixed maturities was a realized gain on equity
securities totaling $357,000, in 2021, compared to no gains on equity securities
in 2020 as well as an increase in fair value of equity securities of $516,000.

For the nine months ended September 30, 2021, the Company incurred claims, net
of reinsurance, totaling $32,785,000 compared to $40,622,000 for the same period
last year. The P&C segment was the primary source of this decrease with claims
down $8,163,000 in 2021, compared to 2020. The primary component of this
decrease was claims reported from weather related events which declined
$8,098,000 for the nine months ended September 30, 2021, compared to the same
period in 2020. During 2021, the P&C segment was impacted by Hurricane Ida
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which lead to reported losses totaling $4,000,000, net of reinsurance. In
comparison, the P&C segment was impacted by Hurricane Laura and Hurricane Sally,
in 2020, with reported losses before reinsurance totaling $2,072,000 and
$2,000,000, respectively, net of reinsurance. Partially offsetting the decreases
in weather related claims was an increase of $637,000 in reported fire losses in
2021 compared to the same period last year.

The Company ended the first nine months of 2021 with an increase in general and
administrative expenses of $654,000 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 nine months 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 adjustments approved in the first nine months of 2021 resulted in an
average 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. As of September 30, 2021,
our re-underwriting project was approximately 90% complete and the additional
cost from this project began to decline in the third quarter of 2021 and should
contribute to improvement in our attritional/non-cat loss ratio. The early
improvement in premium revenue gains from the re-underwriting and rate
adjustment efforts are reflected in gross and net premiums written in the table
that follows and will lead to further increases in earned premium into mid-2022.

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

                                                      Three months ended    

Nine months ended

 Unaudited Consolidated Financial Summary                September 30,      

September 30,

    ($ in thousands, except per share)                2021           2020  

       2021           2020

 Gross premiums written                           $   18,504      $ 17,618      $  57,732      $ 53,806
 Net premiums written                             $   15,949      $ 15,605      $  50,191      $ 48,188

 Net premiums earned                              $   15,681      $ 15,289      $  45,557      $ 45,416
 Net investment income                                   852           884          2,523         2,809
 Net investment gains                                     11         1,430            752           988

 Other income                                            127           162            394           450
                                Total Revenues        16,671        17,765         49,226        49,663

Policyholder benefits and settlement expenses 11,773 13,303

32,785 40,622

Amortization of deferred policy acquisition

 costs                                                   855           836  

2,656 2,749

 Commissions                                           2,066         1,493  

5,901 5,615

 General and administrative expenses                   1,983         2,312          6,853         6,199

 Taxes, licenses and fees                                632           604          1,796         1,919
 Interest expense                                        171           200            462           660
           Total Benefits, Losses and Expenses        17,480        18,748         50,453        57,764

 Loss Before Income Taxes                               (809)         (983)        (1,227)       (8,101)

 Income tax benefit                                     (165)         (205)          (266)       (1,737)

 Net Ioss                                         $     (644)     $   (778)     $    (961)     $ (6,364)

 Loss Per Common Share                            $    (0.25)     $  (0.30)     $   (0.38)     $  (2.51)

Reconciliation of Net Loss to non-GAAP

 Measurement

 Net loss                                         $     (644)     $   (778)     $    (961)     $ (6,364)
 Income tax benefit                                     (165)         (205)          (266)       (1,737)
 Investment gains, net                                   (11)       (1,430)          (752)         (988)

 Pretax Loss From Operations                      $     (820)     $ (2,413)     $  (1,979)     $ (9,089)


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
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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 September 30, 2021 compared to three-month period ended
September 30, 2020

Premium Revenue:
For the three months ended September 30, 2021, net premiums earned were up
$392,000 at $15,681,000 compared to $15,289,000 during the same period last
year. The increase in net premium earned was due to a 3.3% increase in net
premium earned in the P&C segment. The increase in P&C segment net earned
premium was primarily attributable to a 10.9% increase in gross earned premium
in our dwelling fire program. The increase in P&C net earned premium was
partially offset by a 27.0% 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% in 2021 compared to last
year.

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 all of the current year rate filings for
most of our states and programs as of September 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
building material and labor 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 nine months of 2021
was approximately 91%, which is in line with our five year average renewal rate.
While our policy risk count as of September 30, 2021 is down approximately 8.5%
compared to September 30, 2020, P&C segment gross written premium is up 5.6% for
the three months ended September 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 through the fourth quarter of 2021 as the project nears
completion.

Investment Gains:
Investment gains, for the three months ended September 30, 2021, were $11,000
compared to investment gains of $1,430,000 for the same period last year. For
the three months ended September 30, 2021, realized gains on fixed maturities
decreased $1,091,000 and was the primary reason for the $1,419,000 decrease in
third quarter 2021 investment gains compared to third quarter 2020 investment
gains.

Net Loss:
For the three months ended September 30, 2021, the Company had a net loss of
$644,000, $0.25 loss per share, compared to a net loss of $778,000, $0.30 loss
per share, for the same period last year. The primary reason for the $134,000
improvement in third quarter 2021 net loss, compared to the third quarter 2020
net loss, was a decrease in property and casualty insured losses. The $1,497,000
reduction in weather related claims in the P&C segment during the third quarter
of 2021, compared to the third quarter of 2020, was the primary reason for the
decline in claims.

Pretax Loss from Operations:
For the three months ended September 30, 2021, our pretax loss from operations
was $820,000 compared to a pretax loss from operations of $2,413,000 for the
three months ended September 30, 2020; an improvement of $1,593,000. As
discussed above, a decrease in weather related claim activity in our P&C segment
was the primary reason for the decrease in the loss from operations in the third
quarter of 2021, compared to the same period last
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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 third quarter of 2021 with a GAAP basis combined ratio
of 108.8%. Reported catastrophe losses totaled $4,990,000 and added 34.7
percentage points to the combined ratio. In comparison, the P&C segment ended
the third quarter of 2020 with a GAAP basis combined ratio of 118.7% with
$5,319,000 in reported catastrophe losses increasing the combined ratio by 38.1
percentage points. Non-catastrophe wind and hail losses were down $1,168,000 for
the three months ended September 30, 2021 compared to the same period in 2020.
Reported non-catastrophe wind and hail losses, in the third quarter of 2021,
totaled $1,808,000 and added 12.6 percentage points to the third quarter 2021
combined ratio. In comparison, non-catastrophe wind and hail losses reported in
the third quarter of 2020 totaled $2,976,000 and added 21.3 percentage points to
the third quarter 2020 combined ratio. Partially offsetting the decreases in
reported weather related claims was an increase in reported fire losses of
$202,000 during the third quarter of 2021 compared to the third quarter of 2020.
Reported fire losses totaled $2,573,000, for the three months ended September
30, 2021, and added 17.9 percentage points to the 2021 combined ratio. In
comparison, in the third quarter of 2020, reported fire losses totaled
$2,371,000 and added 17.0 percentage points to the 2020 combined ratio.

Nine-month period ended September 30, 2021 compared to nine-month period ended
September 30, 2020

Premium Revenue:
For the nine-month period ended September 30, 2021, net premiums earned were up
$141,000 at $45,557,000 compared to $45,416,000 during the same period last
year. The 4.6% increase in P&C segment gross earned premium was primarily
attributable to an 8.4% increase in gross earned premium in the dwelling fire
program in our P&C segment. Partially offsetting the increase in P&C segment
gross earned premium was a 34.6% 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 to help offset our increased reinsurance cost.

Investment Gains:
Investment gains for the nine-month period ended September 30, 2021 were
$752,000 compared to investment gains of $988,000 for the same period last year.
The primary reason for the decline in investment gains, in 2021 compared to
2020, was a decrease in realized gains on fixed maturity investments of
$1,001,000. Partially offsetting the decrease in realized investment gains on
fixed maturities was a realized gain on equity securities totaling $357,000, in
2021, compared to no gains on equity securities in 2020 as well as an increase
in fair value of equity securities of $516,000.

Net Loss:
For the nine months ended September 30, 2021, the Company had a net loss of
$961,000, $0.38 loss per share, compared to a net loss of $6,364,000, $2.51 loss
per share, for the same period last year. As mentioned previously, while we
ended the first nine months 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 a decline in catastrophe losses from severe weather events.

Pretax Loss from Operations:
For the nine months ended September 30, 2021, our pretax loss from operations
was $1,979,000 compared to a pretax loss from operations of $9,089,000 for the
nine months ended September 30, 2020; a decrease in pretax loss of $7,110,000.
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
nine months of 2021, compared to the same period last year. However, weather
related claims remained elevated, particularly in the third quarter of 2021, due
to the impact of Hurricane Ida as mentioned previously.

P&C Segment Combined Ratio:
The P&C segment ended the first nine months of 2021 with a GAAP basis combined
ratio of 107.3%. Reported catastrophe losses totaled $10,679,000 and added 25.7
percentage points to the combined ratio. In comparison, the P&C segment ended
the first nine months of 2020 with a GAAP basis combined ratio of 126.4% with
$17,310,000 in reported catastrophe losses increasing the combined ratio by 41.8
percentage points. In addition, reported non-catastrophe wind and hail losses
were down $1,467,000 in 2021 compared to 2020. Reported non-
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catastrophe wind and hail losses for the first nine months of 2021 totaled
$5,097,000 and added 12.2 percentage points to the 2021 combined ratio. In
comparison, non-catastrophe wind and hail losses reported during the first nine
months of 2020 totaled $6,564,000 and added 15.8 percentage points to the 2020
combined ratio. Partially offsetting the decline in reported weather related
claims was an increase in reported fire losses totaling $637,000. Reported fire
losses for the first nine months of 2021 totaled $9,567,000 and added 23.0
percentage points to the 2021 combined ratio. In comparison, fire losses
reported during the first nine months of 2020 totaled $8,930,000 and added 21.5
percentage points to the 2020 combined ratio.

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

   Selected Balance Sheet Highlights            September 30, 2021      

December 31, 2020

      ($ in thousands, except per share)            Unaudited
   Invested Assets                             $          113,195      $           99,150
   Cash                                        $            9,285      $           19,887
   Total Assets                                $          163,259      $          150,540
   Policy Liabilities                          $           97,188      $           82,869
   Total Debt                                  $           13,686      $           13,677
   Accumulated Other Comprehensive Income      $            2,628      $            3,585
   Shareholders' Equity                        $           43,018      $           45,366
   Book Value Per Share                        $            16.98      $            17.93


Invested Assets:
Invested assets at September 30, 2021 were $113,195,000 compared to $99,150,000
at December 31, 2020; an increase of 14.2%. The increase in invested assets was
primarily due to an increase in new investments of positive cash flow from
operations and partial re-investment of December 31, 2020 available cash. This
was partially offset by a decline, primarily in market value of
available-for-sale fixed maturity investments, of $1,830,000. This decline in
market value of fixed maturity investments was primarily driven by an increase
in intermediate and long-term market interest rates during 2021.

Cash:

The Company, primarily through its insurance subsidiaries, had $9,285,000 in
cash and cash equivalents at September 30, 2021, compared to $19,887,000 at
December 31, 2020. Cash decreased $10,602,000 in 2021 primarily due to the
purchase of fixed maturity securities in our P&C subsidiary investment
portfolio.

Total Assets:
Total assets at September 30, 2021 were $163,259,000 compared to $150,540,000 at
December 31, 2020. Positive cash flow from insurance operations contributed to
an increase in purchases of fixed maturity securities. Due to an increase in
market interest rates, fixed maturity investments classified as
available-for-sale decreased in market value, partially offsetting the increase
in new investments in 2021.

Policy Liabilities:
Policy related liabilities were $97,188,000 at September 30, 2021, compared to
$82,869,000 at December 31, 2020; an increase of $14,319,000 or 17.3%. The
primary reason for the increase in policy liabilities was a $5,148,000 increase
in P&C segment unearned premium, in the first nine months of 2021, compared to
the same period in 2020. The increase in unearned premium was primarily driven
by a 8.1% increase in P&C segment gross written premium in 2021. This increase
in gross written premium was primarily due to the impact of increased average
policy premium as we began re-underwriting our P&C in-force policies starting
with January 1, 2021 renewals, coupled with the implementation of rate increases
across our core P&C product lineup.

Debt Outstanding:
Total debt was virtually unchanged at September 30, 2021 at $13,686,000 compared
to $13,677,000 at December 31, 2020. Our debt is held at the holding company
level.

Shareholders' Equity:
Shareholders' equity as of September 30, 2021 was $43,018,000, down $2,348,000,
compared to December 31, 2020 Shareholders' equity of $45,366,000. Book value
per share was $16.98 at September 30, 2021, compared to $17.93 per share at
December 31, 2020; a decline of 5.3% or $0.95 per share. The primary factors
contributing to
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the decrease in both book value per share and Shareholders' equity were a
decrease in accumulated other comprehensive income of $957,000 and shareholder
dividends paid of $456,000 as well as the net loss of $961,000.

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

Premium Revenue:
The table below provides earned premium revenue by segment for the three months
ended September 30, 2021 and 2020:
                                                Three months ended
($ in thousands)                                  September 30,                    Percent
                                                2021           2020          increase (decrease)
Life, accident and health segment
premiums earned:
Traditional life insurance                  $      920      $    978                        (5.9) %
Accident and health insurance                      539           539                           -  %
Gross life, accident and health                  1,459         1,517                        (3.8) %
   Reinsurance premium ceded                       (16)          (14)                       14.3  %
Net life, accident and health premiums
earned                                      $    1,443      $  1,503                        (4.0) %

Property and Casualty segment premiums
earned:
Dwelling fire & extended coverage           $   11,203      $ 10,103                        10.9  %

Homeowners (Including mobile homeowners) 5,055 5,120

                 (1.3) %
Other liability                                    519           562                        (7.7) %
Gross property and casualty premium
earned                                          16,777        15,785                         6.3  %
   Reinsurance premium ceded                    (2,539)       (1,999)                       27.0  %
Net property and casualty premiums
earned                                      $   14,238      $ 13,786                         3.3  %

Consolidated gross premiums earned $ 18,236 $ 17,302

                  5.4  %
   Reinsurance premium ceded                    (2,555)       (2,013)                       26.9  %
Consolidated net premiums earned            $   15,681      $ 15,289                         2.6  %



Consolidated net premium earned was up 2.6% for the quarter ended September 30,
2021, at $15,681,000 compared to $15,289,000 for the same period last year. The
increase in net premium earned was due to a 3.3% increase in net premium earned
in the P&C segment driven primarily by a 10.9% increase in gross earned premium
in our dwelling fire program. The increase was partially offset by a 27.0%
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 September 30, 2021 and
2020:

($ in thousands)                           Three months ended September 30,
                                                                         2021       2020
Fixed maturities                                                        $ 824        824
Equity securities                                                          21         30
Mortgage loans on real estate                                               1          1

Policy loans                                                               34         36

Other                                                                       8         28
                                                                          888        919
Less: Investment expenses                                                  36      $  35
Net investment income                                                   $ 852      $ 884



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For the three months ended September 30, 2021, net investment income was
$852,000 compared to $884,000 for the same period in 2020; a decrease of $32,000
or 3.6%. 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 slightly in
the third quarter of 2021. While reinvestment rates remain low, investment
income should increase moderately on a quarter over quarter basis as we reinvest
our current cash balances.

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

($ in thousands)                                       Three months ended September 30,
                                                                                   2021       2020
Realized gains on fixed maturities                                          

$ - $ 1,091

Gains on trading securities                                                          -            5
Change in fair value of equity securities                                           46          223
Change in surrender value of company owned life
insurance                                                                   

(35) 125

Other losses principally real estate                                                 -          (14)

Net investment gains                                                              $ 11      $ 1,430



Net investment gains, for the three months ended September 30, 2021, were
$11,000 compared to net investment gains of $1,430,000 for the same period in
2020; a decrease of $1,419,000. A primary reason for the decrease in third
quarter 2021 investment gains, compared to third quarter 2020 investment gains,
was a $1,091,000 decline in realized gains on fixed maturities.

Other Income:
Other income was down slightly at $127,000 for the three months ended September
30, 2021, compared to $162,000 for the same period last year; a decrease of
$35,000. 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 $11,773,000 for the third quarter of
2021, compared to $13,303,000 for the same period last year; a decrease of
$1,530,000 or 11.5%. Claims as a percentage of premium earned was 75.1% in the
third quarter of 2021 compared to 87.0% in the third quarter of 2020. The
primary reason for the decrease in claims was a $1,497,000 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 September 30, 2021 and 2020:

               For the three months ended September 30, 2021                                      For the three months ended September 30, 2020
($ in thousands)
                                           Reported                                                                           Reported
Catastrophe event                        Losses & LAE          Claim Count         Catastrophe event                        Losses & LAE          Claim 

Count

Cat 2113 (Jan 25-26)                   $           -                 -             Cat 2012 (Jan 10-12)                   $         (15)                1
Cat 2117 (Feb 16-20)                              17                 8             Cat 2014 (Feb 5-8)                                 1                 2
Cat 2120 (Mar 15-19)                              25                 4             Cat 2016 (Mar 2-4)                                26                 5
Cat 2122 (Mar 24-26)                              (3)                2             Cat 2018 (Mar 27-30)                              29                 4
Cat 2123 (Mar 27-29)                              42                 8             Cat 2019 (Apr 7-9)                                25                 4
Cat 2125 (Apr 9-11)                                5                 -     

       Cat 2020 (Apr 10-14)                             120               

18

Cat 2128 (Apr 23-25)                             111                23             Cat 2021 (Apr 18-20)                              47                 9
Cat 2129 (Apr 27-May 2)                           24                 5             Cat 2022 (Apr 21-24)                              66                 8
Cat 2130 (May 3-4)                                10                 4             Cat 2024 (Apr 27-30)                              23                 5
Cat 2131 (May 7-11)                               21                 5             Cat 2025 (May 2-3)                                (1)                1
Cat 2136 (June 7-9)                               21                 5             Cat 2026 (May 4-5)                               141                34
Cat 2137 (June 11-14)                             16                 5             Cat 2027 (May 7-8)                                 4                 1
Cat 2138 (June 18-21)                            113                 7             Cat 2028 (May 13-15)                              34                 3
Cat 2140 (June 24-July 1)                        127                49             Cat 2030 (May 20-24)                              58                 6
Cat 2141 (July 6-9)                              175                30             Cat 2037 (June 6-9)                               40                 3
Cat 2153 (Aug 14-20)                             163                38             Cat 2040 (July 10-12)                            519               

68

Cat 2160 (Aug 29-Sept 2)                       7,576               970             Cat 2044 (July 30-Aug 4)                         104                25
                                                                                   Cat 2050 (Aug 26-28)                          11,476               758
                                                                                   Cat 2063 (Sept 14-16)                          2,418               543
Misc cats less than $100k                        123                29             Misc cats less than $100k                         26                 4
Total Cat Losses                       $       8,566             1,192             Total Cat Losses                       $      15,141             1,502
Less: Reinsurance Recoveries                  (3,576)                              Less: Reinsurance Recoveries                  (9,822)
Total Net Cat Losses                   $       4,990                               Total Net Cat Losses                   $       5,319

Non-Cat Wind & Hail                    $       1,808               480             Non-Cat Wind & Hail                    $       2,976               621



During the third quarter of 2021, the P&C segment was impacted by four
catastrophe events and development from 20 catastrophe events from first and
second quarter of 2021 producing 1,192 policyholder claims totaling $8,566,000
($4,990,000 net of reinsurance). In comparison, the P&C segment was impacted by
five catastrophe events during the third quarter of 2020 and development from 20
catastrophe events from first and second quarter of 2020 producing 1,502 claims
totaling $15,141,000 ($5,319,000 net of reinsurance).

During the third quarter of 2021, NSFC was negatively impacted by Hurricane Ida
(Cat 2160). Hurricane Ida primarily impacted policyholders in Louisiana. This
hurricane generated $7,576,000 in gross insured losses ($4,000,000 net of
reinsurance) during the third quarter of 2021 from 970 reported claims through
September 30, 2021. Hurricane Ida added 27.8 percentage points to the third
quarter 2021 P&C combined ratio and accounted for 80.2% of all reported losses
from catastrophe events during the third quarter of 2021. In comparison, during
the third quarter of 2020, NSFC was negatively impacted by Hurricane Laura (Cat
2050) and Hurricane Sally (Cat 2063). Hurricane Laura primarily impacted
policyholders in Louisiana while Hurricane Sally primarily impacted
policyholders in Alabama. These two hurricanes generated $13,894,000 in gross
insured losses ($4,072,000 net of reinsurance) during the third quarter of 2020
from 1,301 reported claims through September 30, 2020. Hurricane Laura and
Hurricane Sally added 29.2 percentage points to the third quarter 2020 P&C
combined ratio and accounted for 76.6% of all reported losses from catastrophe
events during the third quarter of 2020.
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Non-catastrophe wind and hail claims reported in the third quarter of 2021
totaled $1,808,000 compared to non-catastrophe wind and hail claims reported in
the third quarter of 2020 totaling $2,976,000; a decrease of $1,168,000. During
the third quarter of 2021, the P&C segment had 480 non-cat wind and hail claims
reported (an average of $3,800 per claim) compared to 621 non-cat wind and hail
claims reported during the third quarter of 2020 (an average of $4,800 per
claim). Non-cat wind and hail claims reported during the third quarter of 2021
accounted for 17.3% of total P&C segment incurred losses in the current year and
added 12.6 percentage points to the 2021 P&C segment combined ratio. Non-cat
wind and hail claims reported during the third quarter of 2020 accounted for
25.1% of total P&C segment incurred losses in 2020 and added 21.3 percentage
points to the 2020 P&C segment combined ratio.

Reported fire losses in the third quarter of 2021 were up $202,000 or 8.5%
compared to fire losses reported during the third quarter of 2020. The P&C
segment had 85 fire losses reported in the third quarter of 2021 totaling
$2,573,000 compared to 93 claims reported in the third quarter of 2020 totaling
$2,371,000. The average cost per claim was $30,300 for fire losses reported in
the third quarter of 2021 compared to $25,500 for fire losses reported in the
third quarter of 2020. Fire losses reported during the third quarter of 2021
added 17.9 percentage points to the P&C segment combined ratio while fire losses
reported during the third quarter of 2020 added 17.0 percentage points to the
P&C segment combined ratio.

Policy Acquisition Cost (Commissions and Amortization of Deferred Acquisition
Cost):
For the three months ended September 30, 2021, policy acquisition costs were
$2,921,000 compared to $2,329,000 for the same period last year; an increase of
$592,000. 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 18.6%
in the third quarter of 2021 compared to 15.2% for the same period last year.

General Expenses:
General and administrative expenses were $1,983,000 in the third quarter of
2021, compared to $2,312,000 for the same period last year. As a percent of
earned premium, general and administrative expenses were 12.6% and 15.1% at
September 30, 2021 and 2020, respectively. Prior year general and administrative
expenses were higher than normal levels due to a recovery in value of SERP and
deferred compensation related balances leading to higher interest expense in
2020. For the quarter ending September 30, 2021, we had a decrease in actuarial
and consulting fees totaling $81,000 primarily due to 2021 rate filings being
completed within the first half of the year while prior year rate filings were
still being filed during third quarter of 2020. Association dues were
artificially low in third quarter of 2021, down $276,000, due to a refund of
prior assessments. No refund was received during third quarter of 2020.

Taxes, Licenses and Fees:
For the quarter ended September 30, 2021, insurance taxes, licenses and fees
were $632,000 compared to $604,000 for the same period last year. As a percent
of earned premium, insurance taxes, licenses and fees were 4.0% in the third
quarter of 2021 and 2020.

Interest Expense:
Interest expense was $171,000 for the three months ended September 30, 2021,
compared to $200,000 for the three months ended September 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 $29,000
decrease.

Income Tax Benefit:
For the three months ended September 30, 2021, the Company had a loss before
income taxes of $809,000 compared to a loss before income taxes of $983,000 for
the same period last year. The $165,000 tax benefit for the third quarter of
2021 consisted of current tax expense of $65,000 and deferred tax benefit of
$230,000. The $205,000 tax benefit for the third quarter of 2020 consisted of
current tax expense of $21,000 and deferred tax benefit of $226,000. The
effective tax rate for the third quarter of 2021 was 20.4% compared to 20.9% for
the third quarter of 2020.

Net Loss:
The Company ended the third quarter of 2021 with a net loss of $644,000 compared
to a net loss of $778,000 for the same period last year. The primary factor
contributing to the $134,000 improvement was the $1,530,000 decrease in
policyholder benefits and settlement expenses, primarily in the P&C segment,
discussed in detail in the
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preceding commentary in this discussion. The reduction in claims was offset by a
$1,419,000 decline in investment gains during the third quarter of 2021 compared
to the same period last year.

Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30,
2020

Premium Revenue:
The table below provides earned premium revenue by segment for the nine months
ended September 30, 2021 and 2020:
                                                Nine months ended
($ in thousands)                                  September 30,                   Percent
                                               2021           2020          increase (decrease)
Life, accident and health operations
premiums earned:
Traditional life insurance                  $   3,081      $  3,165                        (2.7) %
Accident and health insurance                   1,322         1,326                        (0.3) %
Gross life, accident and health                 4,403         4,491                        (2.0) %
   Reinsurance premium ceded                      (75)          (71)                        5.6  %
Net life, accident and health premiums
earned                                      $   4,328      $  4,420                        (2.1) %

Property and Casualty operations
premiums earned:
Dwelling fire & extended coverage           $  32,072      $ 29,591                         8.4  %

Homeowners (Including mobile homeowners) 15,034 15,281

               (1.6) %
Other liability                                 1,589         1,671                        (4.9) %
Gross property and casualty                    48,695        46,543                         4.6  %
   Reinsurance premium ceded                   (7,466)       (5,547)                       34.6  %
Net property and casualty premiums
earned                                      $  41,229      $ 40,996                         0.6  %

Consolidated gross premiums earned $ 53,098 $ 51,034

                 4.0  %
   Reinsurance premium ceded                   (7,541)       (5,618)                       34.2  %
Consolidated net premiums earned            $  45,557      $ 45,416                         0.3  %



Consolidated net premium earned was up 0.3% for the nine month period ended
September 30, 2021, at $45,557,000 compared to $45,416,000 for the same period
last year. The increase in net premium earned was due to an 8.4% increase in
gross premium earned in the dwelling fire program in the P&C segment. The
increase in P&C segment gross earned premium was offset by a 34.6% increase in
ceded premium in 2021 compared to 2020, associated with increased catastrophe
reinsurance cost.

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 further mitigate the frequency of hurricane
related catastrophe losses and increased catastrophe reinsurance cost, our P&C
subsidiary is exiting Louisiana with a full exit expected over the next twelve
months.

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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.

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
                                  100% of $2,000,000 in excess of $2,000,000 after $2,000,000 aggregate
Catastrophe 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 nine months ended September 30, 2021 and
2020:

($ in thousands)                           Nine months ended September 30,
                                                                       2021         2020
Fixed maturities                                                     $ 2,414      $ 2,696
Equity securities                                                         91          102
Mortgage loans on real estate                                              5            5
Investment real estate                                                     -            1
Policy loans                                                             103          108

Other                                                                     23            6
                                                                       2,636        2,918
Less: Investment expenses                                                113          109
Net investment income                                                $ 2,523      $ 2,809



For the nine months ended September 30, 2021, net investment income was
$2,523,000 compared to $2,809,000 for the same period in 2020; a decrease of
$286,000 or 10.2%. 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.














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Investment Gains:
The table below provides investment gains and losses for the nine months ended
September 30, 2021 and 2020:

($ in thousands)                                       Nine months ended September 30,
                                                                                  2021        2020
Realized gains on fixed maturities                                               $ 106      $ 1,107
Realized gains on equity securities                                                357            -
Gains (losses) on trading securities                                                13           (1)
Change in fair value of equity securities                                          244         (272)
Change in surrender value of company owned life
insurance                                                                   

26 165

Other gains (losses) principally real estate                                         6          (11)

Net investment gains                                                             $ 752      $   988

Net investment gains, for the nine months ended September 30, 2021, were
$752,000 compared to net investment gains of $988,000 for the same period in
2020; a decrease of $236,000. The primary reason for the decline in 2021
investment gains, compared to the 2020 investment gains, was a decrease in
realized gains on fixed maturities of $1,001,000. Partially offsetting the
decrease was an increase in fair value of equity securities of $516,000.

Other Income:
Other income was $394,000 for the nine months ended September 30, 2021, compared
to $450,000 for the same period last year; a decrease of $56,000. 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 $32,785,000 for the nine months ended September 30,
2021, compared to $40,622,000 for the same period last year; a decrease of
$7,837,000 or 19.3%. Claims as a percentage of premium earned was 72.0% in 2021
compared to 89.4% in 2020. The primary reason for the decrease in claims was a
$8,098,000 decrease in P&C segment reported weather claims. This decrease was
partially offset by an increase in reported fire losses totaling $637,000.


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

              For the nine months ended September 30, 2021                                    For the nine months ended September 30, 2020

($ in thousands)
                                           Reported              Claim                                                     Reported              Claim
Catastrophe event                        Losses & LAE            Count          Catastrophe event                        Losses & LAE            Count
Cat 2113 (Jan 25-26)                   $         132                6           Cat 2012 (Jan 10-12)                   $       1,337              314
Cat 2117 (Feb 16-20)                             826              223           Cat 2014 (Feb 5-8)                               631              161
Cat 2120 (Mar 15-19)                             371               90           Cat 2016 (Mar 2-4)                               335               76
Cat 2122 (Mar 24-26)                           1,137              124           Cat 2018 (Mar 27-30)                             386               39
Cat 2123 (Mar 27-29)                             357               66           Cat 2019 (Apr 7-9)                               202               34
Cat 2125 (Apr 9-11)                              282               49           Cat 2020 (Apr 10-14)                           3,928              561
Cat 2128 (Apr 23-25)                             737              166           Cat 2021 (Apr 18-20)                           1,962              303
Cat 2129 (Apr 27-May 2)                          432               67           Cat 2022 (Apr 21-24)                           1,739              229
Cat 2130 (May 3-4)                               609              128           Cat 2024 (Apr 27-30)                             156               31
Cat 2131 (May 7-11)                              190               46           Cat 2025 (May 2-3)                               219               31
Cat 2136 (June 7-9)                              231               60           Cat 2026 (May 4-5)                               610              112
Cat 2137 (June 11-14)                            201               40           Cat 2027 (May 7-8)                               101               21
Cat 2138 (June 18-21)                            446               70           Cat 2028 (May 13-15)                             144               28
Cat 2140 (June 24-July 1)                        127                   49       Cat 2030 (May 20-24)                             285               57
Cat 2141 (July 6-9)                              175               30           Cat 2037 (June 6-9)                              318               61
Cat 2153 (Aug 14-20)                             163               38           Cat 2040 (July 10-12)                            519               68
Cat 2160 (Aug 29-Sept 2)                       7,576              970           Cat 2044 (July 30-Aug 5)                         104               25
                                                                                Cat 2050 (Aug 26-28)                          11,476              758
                                                                                Cat 2063 (Sept 14-18)                          2,418              543

Misc cats less than $100k                        263               56           Misc cats less than $100k                        262               52
Total Cat losses                       $      14,255            2,278           Total Cat losses                       $      27,132            3,504
Less: Reinsurance Recoveries                  (3,576)                           Less: Reinsurance Recoveries                  (9,822)
Total Net Cat Losses                   $      10,679                            Total Net Cat Losses                   $      17,310

Non-cat wind & hail                    $       5,097            1,207           Non-cat wind & hail                    $       6,564            1,437



During the first nine months of 2021, the P&C segment was impacted by 24
catastrophe events producing 2,278 policyholder claims totaling $10,679,000, net
of reinsurance recoveries. In comparison, the P&C segment was impacted by 25
catastrophe events during the first nine months of 2020 producing 3,504 claims
totaling $17,310,000, net of reinsurance recoveries. During 2021, the P&C
segment was impacted by Hurricane Ida (Cat 2160) totaled $4,000,000, net of
reinsurance recoveries. Net of reinsurance, Hurricane Ida accounted for 37.5% of
all reported catastrophe event claims through September 20, 2021 and added 9.6
percentage points to the current year P&C segment combined ratio. During 2020,
the P&C segment had multiple severe weather events that contributed to elevated
insured losses due to damage from strong winds, hail and tornadoes. Reported
losses from the three largest non-hurricane catastrophe events (all occurring in
April) coupled with reported losses from Hurricane Laura (Cat 2050) and
Hurricane Sally (Cat 2063) totaled $11,701,000, net of reinsurance recoveries.
The three April 2020 cat events accounted for 44.1% of all reported catastrophe
event claims through September 30, 2020 and added 18.4 percentage points to the
prior year P&C segment combined ratio. Net of reinsurance, Hurricane Laura and
Hurricane Sally accounted for 23.5% of all reported catastrophe event claims
through September 30, 2020 and added 9.8 percentage points to the 2020 P&C
segment combined ratio.

Non-catastrophe wind and hail claims reported in 2021 totaled $5,097,000
compared to non-catastrophe wind and hail claims reported in 2020 totaling
$6,564,000; a decrease of $1,467,000. During the first nine months of 2021,

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the P&C segment had 1,207 non-cat wind and hail claims reported (an average of
$4,200 per claim) compared to 1,437 non-cat wind and hail claims reported during
the first nine months of 2020 (an average of $4,600 per claim). Non-cat wind and
hail claims reported during 2021 accounted for 17.5% of total P&C segment
incurred losses in the current year and added 12.2 percentage points to the 2021
P&C segment combined ratio. Non-cat wind and hail claims reported during 2020
accounted for 17.6% of total P&C segment incurred losses in 2020 and added 15.8
percentage points to the 2020 P&C segment combined ratio.

Reported fire losses in the first nine months of 2021 were up $637,000 or 7.1%
compared to fire losses reported during the first nine months of 2020. The P&C
segment had 298 fire losses reported in 2021 totaling $9,567,000 compared to 292
claims reported in 2020 totaling $8,930,000. The average cost per claim was
$32,100 for fire losses reported in 2021 compared to $30,600 for fire losses
reported in 2020. Fire losses reported during 2021 added 23.0 percentage points
to the P&C segment combined ratio while fire losses reported during 2020 added
21.5 percentage points to the P&C segment combined ratio.

Policy Acquisition Cost (Commissions and Amortization of Deferred Acquisition
Cost):
For the nine months ended September 30, 2021, policy acquisition costs were
$8,557,000 compared to $8,364,000 for the same period last year; an increase of
$193,000. 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 18.8% in the first
nine months of 2021 compared to 18.4% for the same period last year.

General Expenses:
General and administrative expenses were $6,853,000 in 2021 compared to
$6,199,000 for the same period last year. As a percent of earned premium,
general and administrative expenses were 15.0% and 13.6% at September 30, 2021
and 2020, respectively. The $654,000 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
nine months 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 September 30, 2021, our re-underwriting project was
approximately 90% complete and the additional cost from this project will
decline the remainder of 2021 and should contribute to improvement in our
attritional/non-cat loss ratio.

Taxes, Licenses and Fees:
Insurance taxes, licenses and fees were $1,796,000 for the nine months ended
September 30, 2021, compared to $1,919,000 for the same period in 2020; a
decrease of $123,000. As a percent of earned premium, insurance taxes, licenses
and fees were 3.9% in the first nine months of 2021 and 4.2% for the nine months
ended September 30, 2020.

Interest Expense:
Interest expense for the first nine months of 2021 was $462,000 compared to
$660,000 for the same period in 2020; a decrease of 30.0%. A reduction in total
debt outstanding over the past twelve months coupled with a decline in interest
rates on debt was the primary factor contributing to the $198,000 decrease.

Income Tax Benefit:
For the nine months ended September 30, 2021, the Company had a loss before
income taxes of $1,227,000 compared to a loss before income taxes of $8,101,000
for the same period last year. The $266,000 tax benefit for 2021 consisted of
current tax expense of $24,000 and deferred tax benefit of $290,000. The
$1,737,000 tax benefit for 2020 consisted of current tax benefit of $1,312,000
and deferred tax benefit of $425,000. The effective tax rate for 2021 was 21.7%
compared to 21.4% in 2020.

Net Loss:
The Company ended the first nine months of 2021 with a net loss of $961,000
compared to a net loss of $6,364,000 for the same period last year. The primary
factor contributing to the $5,403,000 improvement was the $7,837,000 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 September 30, 2021, the contractual maturity schedule for
all bonds and notes held by the Company, stated at amortized cost, was as
follows:
($ in thousands)
                                                      Available-
         Maturity                                      for-Sale             Held-to-Maturity             Total            Percentage of Total
Maturity in less than 1 year                        $      1,702          $               -          $    1,702                         1.83  %
Maturity in 1-5 years                                     22,218                         10              22,228                        23.84  %
Maturity in 5-10 years                                    22,800                          3              22,803                        24.46  %
Maturity after 10 years                                   45,873                        619              46,492                        49.87  %
                                                    $     92,593          $             632          $   93,225                       100.00  %


It should be noted that the above table represents maturities based on
stated/contractual maturity. Due to call and prepayment features inherent in
some fixed maturity securities, actual repayment, or effective maturities, will
differ from stated maturities. The Company routinely evaluates the impact of
changing interest rates on the projected maturities of bonds in the portfolio
and actively manages the portfolio in order to minimize the impact of interest
rate risk. However, due to other factors, both regulatory and those associated
with good investment management practices associated with asset/liability
matching, we do have exposure to changes in market values of securities due to
changes in interest rates. Currently, a 100 basis point immediate increase in
interest rates would generate approximately a $5,289,000, or 5.5%, decline in
the market value of fixed maturity investments. Alternatively, a 100 basis point
decrease in interest rates will generate approximately $5,233,000, or 5.4%,
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 September 30, 2021, the Company had aggregate equity capital, unrealized
investment gains (net of income taxes) and retained earnings of $43,018,000,
down $2,348,000, compared to $45,366,000 at December 31, 2020. During the nine
months ended September 30, 2021, shareholders' equity was reduced by a net loss
of $961,000, a comprehensive loss due to changes in value of fixed maturity
securities of $1,446,000 and cash dividends paid totaling $456,000. 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 8.9% of our
current fixed income portfolio to be reinvested or otherwise available to meet
Company obligations.

The Company, primarily through its insurance subsidiaries, had $9,285,000 in
cash and cash equivalents at September 30, 2021, compared to $15,057,000 at
September 30, 2020. Cash provided by operating activities increased cash by
$5,301,000 during the nine months ended September 30, 2021. The increase in cash
from operating activities in 2021 was primarily related to an increase in gross
premium revenue reflected in an increase in policy liabilities associated with
unearned premium and claim reserves. Cash used in operating activities decreased
cash by $12,220,000 for the nine months ended September 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 from spring storms during the second quarter and hurricane
losses during the third quarter. Net cash used in investing activities totaled
$15,470,000 for the nine months ended September 30, 2021, compared to cash
provided by investing activities of $15,932,000 in 2020. The decrease in cash
from investing activities during the nine months ended September 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, some increases in prepayments on mortgage
backed securities and sales of investments to maintain adequate liquidity to
settle P&C segment hurricane claims. Net cash used in financing activities
totaled $433,000 for the nine months ended September 30, 2021, compared to
$464,000 for the same period last year. During the nine months ended
September 30, 2021, the Company paid $456,000 in dividends to shareholders.

The Holding Company had $3,691,000 in cash at September 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 September 30, 2021 totaled $5,594,000.

The Company had a total of $13,186,000 of long-term debt outstanding as of
September 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, $186,000 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
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Group's insurance subsidiaries can transfer in the form of dividends to the
parent company during 2021 is statutorily limited to $1,168,000 in the life
insurance subsidiary and $3,650,000 in the property/casualty insurance
subsidiary. Dividends are limited to the greater of net income (operating income
for life subsidiary) or 10% of statutory capital, and regulators consider
dividends paid within the preceding twelve months when calculating the available
dividend capacity. Therefore, all of the above referenced dividend capacity will
not be available for consideration of payment until dividends paid in the
preceding twelve months have been considered on a rolling basis. The Company
also has to continuously evaluate other factors such as subsidiary operating
performance, subsidiary capital requirements and potential impact by rating
agencies in making decisions on how much capital can be released from insurance
subsidiaries for payment of dividends to 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 nine
months ended September 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.