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A.M. Best Revises Outlook to Stable for National Security Group, Inc. and Its Subsidiaries; Affirms Ratings

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A.M. Best has revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of B++ (Good) and the issuer credit rating (ICR) of “bbb” of National Security Fire and Casualty Company (NSFC).

In addition, A.M. Best has affirmed the FSRs of B+ (Good) and ICRs of “bbb-” of NSFC’s wholly owned subsidiary, Omega One Insurance Company, Inc. (Omega) and National Security Insurance Company (NSIC), an affiliated life/health insurer. The outlook for these ratings remains stable.

Concurrently, A.M. Best has affirmed the ICR of “bb” of the parent holding company, The National Security Group, Inc. (NSGI) (Wilmington, DE) [NASDAQ: NSEC]. The outlook for this rating has been revised to stable from negative. All companies are domiciled in Elba, AL, unless otherwise specified.

The ratings for NSFC are based on the consolidation of the company with its wholly owned subsidiary, Omega. The ratings and revised outlook for NSFC reflect the improved operating performance and adequate capitalization along with the stability and planning at the holding company to eliminate its debt. Surplus has increased in three of the past five years with 2014 on target for solid surplus growth as well. Management has a long-term plan in place to pay down holding company debt; the earnings in the insurance subsidiaries will assist in the process. Additionally, management has put in place initiatives to further enhance operating performance by streamlining operations and consolidating departments. Partially offsetting these positive rating factors is the geographic concentration in the southeastern United States. As a property writer, surplus is exposed to frequent and severe weather-related events. Negative rating action may occur if operating results begin to deteriorate or if there is a notable decline in the risk-adjusted capitalization. Positive rating action is contingent upon consistently favorable operating performance and improved overall risk-adjusted capitalization.

The ratings of Omega reflect its strong risk-adjusted capitalization and voluntary run-off status after terminating its non-standard auto and property insurance programs. The ratings may come under pressure if capitalization significantly weakens. This is not expected to occur while the company is in run-off; surplus is more than adequate to handle any existing open claims.

In affirming the ratings of NSIC, A.M. Best believes the company’s financial resources will not be materially impacted as it supports the overall expense and debt obligations of NSGI. The ratings also acknowledge NSIC’s solid stand-alone risk-adjusted capitalization, modest capital growth, positive – albeit modest – net operating performance trends, and its multiple distribution channel strategy.

Offsetting these positive factors are NSIC’s limited geographic profile and the challenges it faces to manage its limited levels of capital, sustain and improve its overall net operating performance and reverse declining total net premium trends.

Future positive rating actions could result from further positive movement in its parent’s ratings. Key rating factors that could lead to a negative rating action include a sustained decline in risk-adjusted capitalization that no longer supports the current ratings; overall net operating performance that does not meet A.M. Best’s expectations; a material shift in business profile skewed more heavily toward less creditworthy lines of business; or negative rating actions on NSGI or its property and casualty affiliate, NSFC.

The rating of NSGI is based on the consolidated financial strength of its subsidiaries, which is driven mainly by the property/casualty companies, and its acceptable level of debt.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

o Risk Management and the Rating Process for Insurance Companies

o Understanding BCAR for Property/Casualty Insurers

o Understanding BCAR for U.S. and Canadian Life/Health Insurers

o A.M. Best’s Liquidity Model for U.S. Life Insurers

o Catastrophe Analysis in A.M. Best Ratings

o Evaluating U.S. Surplus Notes

o Equity Credit for Hybrid Securities

o Rating Members of Insurance Groups

o Evaluating Non-Insurance Ultimate Parents

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright (c) 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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