The following discussion addresses the financial condition of The National Security Group, Inc. (referred to in this document as we, our, us, the Company or NSEC) as of March 31, 2009, compared with December 31, 2008 and its results of operations and cash flows for the quarter ending March 31, 2009, compared with the same period last year. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

This discussion will primarily consist of an analysis of the two segments of our operations. The life segment consists of the operations of our life insurance subsidiary, National Security Insurance Company (NSIC). The property and casualty (P&C) segment consists of the operations of our two property and casualty insurance subsidiaries, National Security Fire & Casualty Company (NSFC) and Omega One Insurance Company (Omega).

This discussion contains forward-looking statements that are not historical facts, including statements about our beliefs and expectations. These statements are based upon current plans, estimates and projections. Our actual results may differ materially from those projected in these forward-looking statements as a result of various factors. See "Cautionary Statement Regarding Forward-Looking Statements" contained on Page 4included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the Securities and Exchange Commission.

The reader is assumed to have access to the Company's 2008 Annual Report. This discussion should be read in conjunction with the Annual Report and with consolidated financial statements on pages 3 through 7 of this form 10-Q.

Information in this discussion is presented in whole dollars rounded to the nearest thousand.

The National Security Group operates in the property and casualty and life, accident and supplemental health insurance businesses and markets products primarily through independent agents. The Company operates in eleven states with over 60% of total premium revenue generated in the states of Alabama and Mississippi. Over 91.5% of total premium revenue is generated from dwelling property (fire and extended coverage), homeowners and mobile homeowners lines of business. Property and casualty insurance is the most significant segment accounting for 88.3% of total insurance premium revenue in the first quarter of 2009.

Our first quarter 2009 net income was up 89% compared to the first quarter of 2008. Net income increased from $782,000 in 2008 to $1,481,000 in 2009. The primary contributing factor to the increase was the $2.8 million decline in policyholder benefits paid or provided due to a decrease in storm related claims in our property and casualty subsidiary.

The property and casualty segment ended the first quarter of 2009 with losses related to catastrophes down from $1,816,000 in 2008 to $546,000 in 2009. The primary reason for the decline was the significant reduction in wind and tornado related storm events in 2009 as compared to the same period last year. Through the first quarter of 2008, five storms classified as catastrophes had affected eight of the states where the property and casualty subsidiaries conduct business. In comparison, the first quarter of 2009 had only two catastrophe related weather events affecting the property and casualty segment which caused significantly less damage than storms in 2008.

Premium revenue decreased 8.23% for the first quarter of 2009 compared to the first quarter of 2008. Premium revenue declines for 2009 are expected to continue and will likely fall in the range of 6% to 9% for the year. The decline in premium revenue is primarily attributable to the current recessionary economic environment as policy lapse rates have increased and a drop in new business production has occurred. We expect the trend of moderate declines in premium revenue to continue through the remainder of 2009. In addition to an unfavorable economic environment, our reduced capital position has limited our ability to retain levels of current property insurance exposure in coastal areas. Reducing our coastal exposure will lead to further declines in premium revenue but will reduce risk of additional insurance claims related capital deterioration.

CONSOLIDATED RESULTS OF OPERATIONS

Premium revenues:

The primary component of our revenues is insurance premium revenue generated by our life and P&C insurance operations. Life segment revenue consists of life, accident and health insurance policies issued in the states of Alabama, Florida, Georgia, Mississippi, South Carolina, and Texas. P&C segment revenue consists primarily of dwelling fire, homeowners, and private passenger auto insurance but we also offer commercial auto and ocean marine insurance in select markets. The P&C segment operates in the states of Alabama, Arkansas, Florida (ocean marine only), Georgia, Kentucky, Louisiana, Mississippi, Missouri, Oklahoma, South Carolina, Tennessee, Texas and West Virginia.

The following table sets forth premium revenue by major line of business for the three months ended March 31, 2009 compared to the same period last year:

                                               Three months ended March 31,            Percent
                                                 2009                2008        increase (decrease)

Life, accident and health operations:
Traditional life insurance               $       1,397,000 $         1,479,000                (5.54) %
Accident and health insurance                      444,000             380,000                 16.84 %
Total life, accident and health                  1,841,000           1,859,000                (0.97) %

Property and Casualty operations:
Dwelling fire & extended coverage                7,028,000           7,087,000                (0.83) %
Homeowners (Including mobile homeowners)         6,841,000           7,257,000                (5.73) %
Ocean marine                                       294,000             388,000               (24.23) %
Other liability                                    355,000             388,000                (8.51) %
Private passenger auto liability                   144,000             479,000               (69.94) %
Commercial auto liability                          158,000             144,000                  9.72 %
Auto physical damage                                91,000             198,000               (54.04) %
Reinsurance premium ceded                      (1,532,000)         (1,214,000)                 26.19 %
Total property and casualty                     13,379,000          14,727,000                (9.15) %

Total earned premium revenue             $      15,220,000 $        16,586,000                (8.24) %

The Company ended the first quarter of 2009 with premium revenue of $15,220,236; down from $16,586,059 in 2008 to for an overall decline of 8.23%. While revenue in both segments was down, the property and casualty segment showed the largest decreases as compared to first quarter 2008. The following provides information related to the declines for both the life segment and the property and casualty segment.

Premium revenue in the life segment accounts for 12.1% of total premium income of the Company. NSIC has two primary methods of distribution of insurance products, employee agents and independent agents. Employee agents consist largely of home service agents that sell policies and collect premium primarily in the insured's home. Revenue from business in-force serviced by home service agents accounted for 33.4% of total NSIC premium revenue for the quarter. This has been the primary method of product distribution for NSIC since it's founding in 1947. Independent agents now account for over 87% of all new business production in NSIC. Revenue from business in-force serviced by independent agents now accounts for 60% of total NSIC premium revenue. Premium revenue generated from the servicing of discontinued books of business and inactive programs contributed approximately 3.7% of total revenue in the life segment during the first quarter of 2009 compared to approximately 9.9% for the same period last year.

Premium revenue in NSIC consists of traditional life insurance products and supplemental accident and health products. The preceding table presents the breakdown of premium revenue for the life segment between traditional life insurance products which decreased 5.58% and the accident and health insurance products which increased 16.96% compared to first quarter of 2008. The independent agent distribution channel produced slightly more than 10% of the first quarter 2009 revenue for the life segment which was comparable to the 9.95% contribution for the same period last year. As mentioned previously, premium revenue generated by the home service distribution channel declined as a percentage of total NSIC premium revenue. As compared to first quarter of 2008, premium revenue from the home service distribution channel in 2009 was down 6.3%. We will continue to maintain the home service distribution method but it is expected to continue to decline at a modest pace of 5% to 8% during 2009.

Premium revenue in the property and casualty segment was down for the first quarter of 2009 compared to 2008. The P&C segment ended March 2008 with net premiums earned of $14,727,230 compared to $13,379,501 for 2009; a decline of 9.15%. The primary reason for the decrease was the slower growth rate experienced by the P&C companies related to new business production. The decline, which is partially a result of the economic constraints imposed on the middle and lower income households we serve, is expected to continue during 2009.

The Company is conducting in depth reviews of risk concentrations primarily in Alabama and Louisiana coastal areas which may leave the Company susceptible to substantial losses in the wake of a large catastrophic event. Management continues to monitor this information and is making changes necessary to limit exposure. Several measures have already been implemented including reducing new business writing by several agents to limit the coastal exposure in both Louisiana and Alabama. Because of the measures taken by the company to encourage slower growth and more profitable business, net premiums earned will likely continue to be down with the expected range between 6% and 9% for 2009.

The property and casualty segment experienced declines in premium revenue in all lines of business with the exception of the commercial auto program. The property lines of business consist of our dwelling program and homeowners program which showed year to date declines in premium revenue of .83% and 5.73%, respectively. The declines experienced in these programs will persist throughout the year as we continue to seek reductions of coastal business to mitigate risk. The overall weakened economy will also play a role in the continued reduction of premium revenue during the year.

Reinsurance premium ceded increased 26.19% in the first quarter of 2009 compared to the same period last year. The primary reason for the increase relates to the rate increases we experienced from 2008 to 2009. The cost of the coverage provided under our catastrophe reinsurance contract for the first three layers increased over 33% as compared to the rates paid for the same period last year. Our retention remained unchanged for 2009 with a $3.5 million deductible and coverage up to $57.5 million for a single event with one reinstatement.

As mentioned in the overview of this discussion, we expect our overall premium revenue to remain in a decline mode with an overall annual decrease of 6% to 9% as compared to the same period last year. The personal lines property and casualty insurance business, in which 88% of total premium revenue is derived, has historically been cyclical in nature with periods of intense price competition among insurers followed by periods of increased pricing flexibility. P&C margins were compressed in the first quarter of 2009 due to the price increases in our catastrophe coverage and the lag time in our ability to increase our rates. Also, due to regulatory hurdles in developing rates and submitting to various state regulatory agencies, we are unable to adjust the rates we charge as rapidly as reinsurance companies can adjust the rates we pay for catastrophe reinsurance. We have attempted to proactively manage our premium rate adjustments in order to minimize lag time between rate increases we incur on our catastrophe reinsurance and rate adjustments we obtain as a result of these increases. Because we have to obtain rate adjustments in each state in which we operate, we have had mixed results in relation to our ability to obtain quick and adequate rate adjustments.

Net investment income:

Net investment income decreased from $1,321,000 in the first quarter of 2008 to $1,237,000 in the first quarter of 2009; a 6% decline. A decline in invested assets in the first quarter of 2009 compared to the first quarter of 2008 is the primary factor leading to the decline in invested assets. Invested assets were down compared to the same quarter last year due to increased claims activity from hurricanes Gustav and Ike. Claims settlements from these two storms reduced cash flow available for investment and reduced invested assets in the third and fourth quarters of 2008.

Realized capital gains were $1,094 during the first quarter of 2009 compared to $66,000 for the same period last year. Realized capital gains are subject to significant fluctuations from quarter to quarter and year to year depending on prevailing market conditions and changes in investment mix.

Other income:

Other income was $141,000 for the first quarter of 2009 compared to $321,000 for the first quarter of 2008; a decrease of 56.1%. Other income is composed primarily of insurance related billing and policy fees. In the first quarter of 2009 these fees decreased due to a decline in written premium. Also, in 2008 there was a one-time servicing fee in the life insurance subsidiary of $50,000 which increased other income for 2008.

Policyholder benefits and settlement expenses:

Policyholder benefits and settlement expenses decreased to $7,792,000 in 2009 compared to $10,560,000 in 2008; a decline of 26.2%. The primary reason for the decline relates to the decrease in losses from the property and casualty segment. During the first quarter of 2008, the P&C segment was impacted by five catastrophic events which increased incurred losses by over $1.8 million. The storm related losses were widespread and impacted eight of the states in which we operate from Oklahoma to Georgia. Furthermore, during 2008 the P&C segment incurred an additional $238,000 of losses related to adverse claims development related to Hurricane Katrina which topped out of the 2005 catastrophe reinsurance coverage at the end of 2007. The combination of these events left the property and casualty segment with a much higher incurred loss total. In contrast, during the first quarter of 2009, the property and casualty segment was impacted by only two catastrophe related wind and tornado events which added an additional $546,000 to incurred losses.

Policy acquisition costs:

Policy acquisition costs decreased to $3,092,000 in the first quarter of 2009 from $3,253,000 in the first quarter of 2008. Both the first quarter of 2009 and 2008 ended with policy acquisition costs of 20% of earned premiums. General and administrative expenses:

General expenses as a percent of earned premium were 17.8% in the first quarter of 2009 compared to 15.8% in the first quarter of 2008. The Company is currently undergoing an intensive review of cost saving measures related to general expenses. A major area of review relates to company staffing and payroll expenses. We are currently working toward reducing company payroll through attrition of employees as well as re-assigning employees to other areas of the company as the need arises. Furthermore, other general expense items are being analyzed to determine their necessity to the company as well as how costs can be reduced to achieve general expenses at a more acceptable percentage of premium. The primary factor contributing to the increase in general expenses was an accrual for legal fees of $140,000 related to a litigation matter which was closed during the first quarter of 2009.

Taxes, licenses, and fees:

Taxes, licenses and fees were 3% of earned premium for both first quarter 2009 and first quarter 2008.

Interest Expense:

Interest expense is in line with last year. Interest expense as of first quarter 2009 was $277,000 compared to $286,000 for the same period last year; a decline of $9,000. Short-term notes payable of $900,000 were repaid in 2008 accounting for the slight decline.

Summary:

We had consolidated net income of $1,481,000 in the first quarter of 2009 compared to $782,000 in the first quarter of 2008. The primary reason for the increase in net income was the decrease in losses related to significant storm activity as compared to the same period last year. During first quarter 2008, five catastrophic wind and tornado events occurred increasing incurred losses by over $1.8 million. Furthermore, the property and casualty segment booked an additional $238,000 of claims development related to Hurricane Katrina claims which were not reinsured. The impact of these events increased the year to date loss ratio for 2008 by 3.2 percentage points as compared to 2007. In contrast, losses were incurred from only two catastrophic weather events during the first quarter 2009 increasing losses by just over $546,000. Overall, the loss ratio for 2009 was down 12.6 percentage points compared to the same period in 2008.

Investments:

Investments at March 31, 2009 were up $2.9 million compared to December 31, 2008. Positive cash flow from insurance operations and stabilization of pricing in many of our available for sale securities were the primary factors contributing to the increase in invested assets.

The Company considers any fixed income investment with a Standard & Poor's rating of BB+ or lower to be below investment grade (Commonly referred to as "Junk Bonds"). At March 31, 2009 less than 2% of the Company's investment portfolio was invested in fixed income investments rated below investment grade. The Company currently has no bonds in the investment portfolio in default.

The Company monitors its level of investments in debt and equity securities held in issuers of below investment grade debt securities. Management believes the level of such investments is not significant to the Company's financial condition.

Income taxes:

Income taxes expense increased from $304,000 in first quarter 2008 to $796,000 in first quarter 2009. The primary reason for the increase was related to the increase of over $1.2 million in income from operations. Additional information related to the changes in income taxes between current and deferred components can be found in Note 5 of the consolidated financial statements.

Liquidity and capital resources:

At March 31, 2009, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $35,045,000 up $397,000 compared to December 31, 2008. The increase reflects net income of $1,481,000, a decrease in accumulated unrealized investment gains of $699,000, an unrealized loss on an interest rate swap of $15,000 and dividends paid of $370,000. The decrease in accumulated unrealized investment gains was due to declines in market value of available for sale securities, principally in the equity portfolio. The major equity indexes hit twelve year lows in March of 2009 and the Company maintains a portion of the investment portfolio in equity securities. However, reductions in equity allocations over the past five years limited the downside risk to our capital position despite additional pressures on the overall equity market during the first quarter of 2009.

The Company has $12.3 million in long term debt consisting of trust preferred securities issued in 2005 and 2007. The trust preferred securities have 30 year final maturities and will mature in 2035 and 2037. No principal prepayments are expected to be paid in 2009.

The Company had $516,000 in cash and cash equivalents at March 31, 2009. Net cash provided by operating activities totaled $2,215,000 in the first quarter of 2009. The increase in cash flow from operations was primarily due to favorable underwriting results in the property and casualty insurance subsidiaries.

The liquidity requirements of the Company are primarily met by funds provided from operations of the life insurance and property/casualty subsidiaries. The Company receives funds from its subsidiaries consisting of dividends, payments for federal income taxes, and reimbursement of expenses incurred at the corporate level for the subsidiaries. These funds are used to pay stockholder dividends, corporate interest, corporate administrative expenses, federal income taxes, and for funding investments in subsidiaries.

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 consists of readily marketable securities, which can be sold for cash.

The Company's business is concentrated primarily in the Southeastern United States. Accordingly, unusually severe storms or other disasters in the Southeastern United States might have a more significant effect on the Company than on a more geographically diversified insurance company. Unusually severe storms, other natural disasters and other events could have an adverse impact on the Company's financial condition and operating results. However, the Company maintains a catastrophe reinsurance program to limit the effect of such catastrophic events on the Company's financial condition.