10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 (Mark One)

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

For Quarterly Period Ended June 30, 2012

or      

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

For the transition period from           to          .

Commission File Number 0-18649

The National Security Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	63-1020300
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
661 East Davis Street Elba, Alabama	36323
(Address of principal executive offices)	(Zip-Code)

Registrant’s Telephone Number including Area Code (334) 897-2273

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    þ Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in rule 12b-2 of the Act).  (Check One) :    Large accelerated filer o Accelerated filer  o Non-accelerated filer  o Smaller reporting company  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  þ

As of August 6, 2012, there were 2,466,600 shares, $1.00 par value, of the registrant’s common stock outstanding.

1

THE NATIONAL SECURITY GROUP, INC.

INDEX

PART I. FINANCIAL INFORMATION
			Page No.
	Item 1.  Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Income	4
		Condensed Consolidated Statements of Comprehensive Income	5
		Condensed Consolidated Statement of Shareholders’ Equity	6
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
		Review Report of Independent Registered Public Accounting Firm	14
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3.  Quantitative and Qualitative Disclosures about Market Risk		25
	Item 4.  Controls and Procedures		25
PART II. OTHER INFORMATION
	Item 1.    Legal Proceedings		25
	Item 1A. Risk Factors		25
	Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds		25
	Item 3.    Defaults Upon Senior Securities		25
	Item 4. Mine Safety Disclosures		25
	Item 5.    Other Information		25
	Item 6.    Exhibits		26
SIGNATURE			27

2

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

▪ The Company is subject to regulation by state governments for each of the states in which it conducts business.  The Company cannot predict the subject of any future regulatory initiative(s) or its (their) impact on the Company’s business.

▪ The Company is rated by various insurance rating agencies.  If a rating is downgraded from its current level by one of these agencies, sales of the Company’s products and stock could be adversely impacted.

▪ The Company’s financial results are adversely affected by increases in policy claims received by the Company.  While a manageable risk, this fluctuation is often unpredictable.

▪ The Company’s investments are subject to a variety of risks.  Investments are subject to defaults and changes in market value.  Market value can be affected by changes in interest rates, market performance and the economy.

▪ The Company mitigates risk associated with life policies through implementing effective underwriting and reinsurance strategies.  These factors mitigate, not eliminate, risk related to mortality and morbidity exposure.  The Company has established reserves for claims and future policy benefits based on amounts determined by independent actuaries.  There is no assurance that these estimated reserves will prove to be sufficient or that the Company will not incur claims exceeding reserves, which could result in operating losses.

▪ The Company mitigates risk associated with property and casualty policies through implementing effective underwriting and reinsurance strategies.  The Company obtains reinsurance which increases underwriting capacity and limits the risk associated with policy claims.  The Company is subject to credit risk with regard to reinsurers as reinsurance does not alleviate the Company’s liability to its insured’s for the ceded risks.  The Company utilizes a third-party to develop a reinsurance treaty with reinsurers who are reliable and financially stable.  However, there is no guarantee that booked reinsurance recoverable will actually be recovered.  A reinsurer’s insolvency or inability to make payments due could have a material adverse impact on the financial condition of the Company.

▪ The Company’s ability to continue to pay dividends to shareholders is contingent upon profitability and capital adequacy of the insurance subsidiaries.  The insurance subsidiaries operate under regulatory restrictions that could limit the ability to fund future dividend payments of the Company.  An adverse event or series of events could materially impact the ability of the insurance subsidiaries to fund future dividends and consequently the Board of Directors would have to suspend the declaration of dividends to shareholders.

▪ The Company is subject to the risk of adverse settlements or judgments resulting from litigation.  It is difficult to predict or quantify the expected results of litigation because the outcome depends on decisions of the court and jury that are based on facts and legal arguments presented at the trial.

3

Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30,		December 31,
	2012		2011
ASSETS	(unaudited)
Investments
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2012 - $2,501; 2011 - $3,497)	$	2,336	$	3,303
Fixed maturities available-for-sale, at estimated fair value (cost: 2012 - $68,936; 2011 -$69,980)	72,446		73,074
Equity securities available-for-sale, at estimated fair value (cost: 2012 - $4,559; 2011 - $4,931)	7,875		8,547
Trading securities	40		80
Mortgage loans on real estate, at cost	386		390
Investment real estate, at book value	5,774		5,745
Policy loans	1,241		1,244
Company owned life insurance	5,831		5,660
Other invested assets	3,848		3,929
Total Investments	99,777		101,972
Cash	6,345		3,393
Accrued investment income	776		706
Policy receivables and agents' balances, net	10,109		8,805
Reinsurance recoverable	1,960		2,778
Deferred policy acquisition costs	9,703		9,558
Property and equipment, net	2,482		2,528
Accrued income tax recoverable	1,496		1,669
Deferred income tax asset	4,282		—
Other assets	1,200		1,045
Total Assets	$	138,130	$	132,454
LIABILITIES AND SHAREHOLDERS' EQUITY
Property and casualty benefit and loss reserves	$	12,369	$	14,386
Accident and health benefit and loss reserves	2,172		2,122
Life and annuity benefit and loss reserves	29,813		29,605
Unearned premiums	26,906		25,232
Policy and contract claims	686		652
Other policyholder funds	1,429		1,408
Short-term notes payable	625		485
Litigation settlement	13,000		—
Long-term debt	12,372		12,372
Deferred income tax liability	—		86
Other liabilities	8,095		8,091
Total Liabilities	107,467		94,439
Contingencies
Shareholders' equity
Common stock	2,467		2,467
Additional paid-in capital	4,951		4,951
Accumulated other comprehensive income	3,557		3,640
Retained earnings	19,688		26,957
Total Shareholders' Equity	30,663		38,015
Total Liabilities and Shareholders' Equity	$	138,130	$	132,454

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

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
REVENUES
Net premiums earned	$	12,533		$	13,321		$	26,029		$	28,191
Net investment income	1,066			1,171			2,201			2,228
Net realized investment gains	865			261			1,071			1,031
Other income	193			256			390			511
Total revenues	14,657			15,009			29,691			31,961
EXPENSES
Policyholder benefits paid	7,976			15,682			15,821			25,004
Policy acquisition costs	2,933			3,071			5,705			5,995
General expenses	1,835			2,418			4,323			4,589
Litigation settlement and defense costs	12,670			482			13,259			789
Taxes, licenses and fees	438			622			930			1,102
Interest expense	288			285			580			570
Total expenses	26,140			22,560			40,618			38,049
Loss Before Income Taxes	(11,483		)	(7,551		)	(10,927		)	(6,088		)
INCOME TAX (BENEFIT) EXPENSE
Current	145			(2,515		)	173			(2,165		)
Deferred	(4,322		)	(91		)	(4,325		)	27
	(4,177		)	(2,606		)	(4,152		)	(2,138		)
Net Loss	$	(7,306	)	$	(4,945	)	$	(6,775	)	$	(3,950	)
LOSS PER COMMON SHARE	$	(2.96	)	$	(2.00	)	$	(2.75	)	$	(1.60	)
DIVIDENDS DECLARED PER SHARE	$	0.10		$	0.15		$	0.20		$	0.30

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

4

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)

	Three Months  Ended June 30,						Six Months Ended  June 30,
	2012			2011			2012			2011
Net loss:	$	(7,306	)	$	(4,945	)	$	(6,775	)	$	(3,950	)
Other comprehensive income (loss), net of tax
Changes in:
Unrealized gains (losses) on securities	(201		)	465			76			285
Unrealized loss on interest rate swap	(244		)	(103		)	(159		)	(55		)
Other comprehensive income (loss), net of tax	(445		)	362			(83		)	230
Comprehensive loss	$	(7,751	)	$	(4,583	)	$	(6,858	)	$	(3,720	)

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

5

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands)

	Total			Retained Earnings			Accumulated Other Comprehensive Income			Common Stock		Additional Paid-in Capital
Balance at December 31, 2011	$	38,015		$	26,957		$	3,640		$	2,467	$	4,951
Comprehensive income
Net loss six months ended 6/30/2012	(6,775		)	(6,775		)
Other comprehensive income, net of tax:
Unrealized gain on securities, net of reclassification adjustment of $704	76						76
Unrealized gain on interest rate swap	(159		)				(159		)
Total comprehensive loss	(6,858		)
Cash dividends	(494		)	(494		)
Balance at June 30, 2012 (Unaudited)	$	30,663		$	19,688		$	3,557		$	2,467	$	4,951

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

THE NATIONAL SECURITY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Six Months Ended
	June 30,
	2012			2011
Cash Flows from Operating Activities
Net loss	$	(6,775	)	$	(3,950	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Change in accrued investment income	(70		)	109
Change in reinsurance recoverable	818			(1,832		)
Change in deferred policy acquisition costs	(145		)	(27		)
Change in accrued income tax recoverable	173			(2,604		)
Change in deferred income taxes	(4,325		)	(27		)
Depreciation expense	286			187
Change in policy liabilities and claims	(1,376		)	2,195
Change in litigation settlement	13,000			—
Other, net	(1,569		)	(1,660		)
Net cash provided (used) by operating activities	17			(7,609		)
Cash Flows from Investing Activities
Cost of investments acquired	(15,267		)	(11,777		)
Sale and maturity of investments	18,690			19,847
Purchase of property and equipment	(155		)	(31		)
Net cash provided by investing activities	3,268			8,039
Cash Flows from Financing Activities
Change in other policyholder funds	21			28
Change in short-term notes payable	140			(325		)
Dividends paid	(494		)	(740		)
Net cash used in financing activities	(333		)	(1,037		)
Net change in cash and cash equivalents	2,952			(607		)
Cash and cash equivalents, beginning of period	3,393			1,572
Cash and cash equivalents, end of period	$	6,345		$	965

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

6

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of The National Security Group, Inc. (the Company) and its wholly-owned subsidiaries:  National Security Insurance Company (NSIC), National Security Fire and Casualty Company (NSFC) and  NATSCO, Inc. (NATSCO).  NSFC includes a wholly-owned subsidiary - Omega One Insurance Company (Omega).  The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  All significant intercompany transactions and accounts have been eliminated.  The financial information presented herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which includes information and disclosures not presented herein.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these financial statements are reserves for future policy benefits, liabilities for losses and loss adjustment expenses, reinsurance recoverable asset on associated loss and loss adjustment expense liabilities, deferred policy acquisition costs, deferred income tax assets and liabilities, assessments of other-than-temporary impairments on investments and accruals for contingencies.   Actual results could differ from those estimates.

Recently Adopted Accounting Standards

Presentation of Comprehensive Income

In June and December 2011, the Financial Accounting Standards Board (FASB) issued guidance amending the presentation of comprehensive income and its components. Under the new guidance, a reporting entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements.  The Company adopted the new guidance in the first quarter of 2012.  The Company opted to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in two separate but consecutive statements. The Unaudited Condensed Consolidated Financial Statements included herein reflect the adoption of this updated guidance. The new guidance affects presentation only and therefore had no impact on the Company's results of operations or financial position.

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance contracts.  The guidance specifies that the costs must be directly related to the successful acquisition of insurance contracts.  The guidance also specifies that advertising costs should be included as deferred acquisition costs ("DAC") only when the direct-response advertising accounting criteria are met.  Under the new guidance, only acquisition costs associated with "successful sales" are allowed to be deferred. Successful sales ratios will be reviewed quarterly and the new guidance will reduce the amount of acquisition cost that can be deferred to future periods. The Company adopted the new guidance on a prospective basis as of January 1, 2012. 

Amendments to Fair Value Measurement and Disclosure Requirements

In May 2011, the FASB issued guidance that clarifies the application of existing fair value measurement and disclosure requirements and amends certain fair value measurement principles, requirements and disclosures.  The guidance is to be applied prospectively for reporting periods beginning after December 15, 2011.  The adoption of this guidance as of January 1, 2012 had no impact on the Company's results of operations or financial position. The expanded disclosures required by this guidance are included in Note 9.

Accounting Changes Not Yet Adopted

Disclosures about Offsetting Assets and Liabilities for Financial Instruments and Derivative Instruments

In December 2011, the FASB issued guidance requiring expanded disclosures, including both gross and net information, for financial instruments and derivative instruments that are either offset in the reporting entity's financial statements or those that are subject to an enforceable master netting arrangement or similar agreement.  The guidance is effective for reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively.  The new guidance affects disclosures only and will have no impact on the Company's results of operations or financial position.

NOTE 2 – REINSURANCE

In the normal course of business, NSFC seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers.  NSFC maintains a catastrophe reinsurance agreement to cover losses from catastrophic events, primarily hurricanes.

Under the catastrophe reinsurance program, the Company retains the first $4,000,000 in losses from each event.  Reinsurance is maintained in four layers as follows:

Layer	Reinsurers' Limits of Liability
First Layer	95% of  $6,000,000 in excess of $4,000,000
Second Layer	95% of  $7,500,000 in excess of $10,000,000
Third Layer	100% of  $25,000,000 in excess of $17,500,000
Fourth Layer	100% of  $30,000,000 in excess of $42,500,000

Layers 1-4 cover events occurring from January 1-December 31 of the contract year.  All significant reinsurers under the program carry A.M. Best ratings of A- (Excellent) or higher, or equivalent ratings.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy.  Amounts paid for prospective reinsurance contracts are reported as prepaid reinsurance premiums and amortized over the remaining contract period.

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

NOTE 3 – CALCULATION OF EARNINGS PER SHARE

Earnings per share were based on net income divided by the weighted average common shares outstanding.  The weighted average number of shares outstanding for the three-month and six-month periods ending June 30, 2012 and 2011 were 2,466,600.

NOTE 4 – CHANGES IN SHAREHOLDERS' EQUITY

During the six month periods ended June 30, 2012 and 2011, there were no changes in shareholders' equity except for a net loss of $6,775,000 and $3,950,000, respectively; dividends paid of $494,000 in 2012 and $740,000 in 2011; changes in accumulated other comprehensive loss, net of applicable taxes, $83,000 in 2012 and changes in accumulated other comprehensive income of $230,000 in 2011.  Other comprehensive income/loss consists of accumulated unrealized gains and losses on securities and unrealized gains and losses on interest rate swaps.

NOTE 5 – INVESTMENTS

The amortized cost and aggregate fair values of investments in available-for-sale securities as of June 30, 2012 are as follows:

Available-for-sale securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	30,876	$	1,703	$	233	$	32,346
Trust preferred securities	537		—		2		535
Mortgage backed securities	6,640		215		22		6,833
Private label mortgage backed securities	8,354		212		5		8,561
Obligations of states and political subdivisions	14,334		1,187		—		15,521
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	8,195		465		10		8,650
Total fixed maturities	68,936		3,782		272		72,446
Equity securities	4,559		3,859		543		7,875
Total	$	73,495	$	7,641	$	815	$	80,321

The amortized cost and aggregate fair values of investments in held-to-maturity securities as of June 30, 2012 are as follows:

Held-to-maturity securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage backed securities	$	1,619	$	121	$	—	$	1,740
Private label mortgage backed securities	—		—		—		—
Obligations of states and political subdivisions	515		27		—		542
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	202		17		—		219
Total	$	2,336	$	165	$	—	$	2,501

The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31, 2011 are as follows:

Available-for-sale securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	19,907	$	1,340	$	267	$	20,980
Trust preferred securities	537		—		58		479
Mortgage backed securities	7,587		307		23		7,871
Private label mortgage backed securities	9,716		199		62		9,853
Obligations of states and political subdivisions	18,355		1,142		15		19,482
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	13,878		534		3		14,409
Total fixed maturities	69,980		3,522		428		73,074
Equity securities	4,931		4,206		590		8,547
Total	$	74,911	$	7,728	$	1,018	$	81,621

The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2011 are as follows:

Held-to-maturity securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage backed securities	$	2,026	$	125	$	—	$	2,151
Private label mortgage backed securities	55		1		—		56
Obligations of states and political subdivisions	996		50		—		1,046
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	226		18		—		244
Total	$	3,303	$	194	$	—	$	3,497

The amortized cost and aggregate fair value of debt securities at June 30, 2012, by contractual maturity, are presented in the following table.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	(Dollars in Thousands)
	Amortized Cost		Fair Value
Available-for-sale securities:
Due in one year or less	$	1,115	$	1,134
Due after one year through five years	14,420		15,489
Due after five years through ten years	21,148		22,329
Due after ten years	32,253		33,494
Total	$	68,936	$	72,446
Held-to-maturity securities:
Due in one year or less	$	—	$	—
Due after one year through five years	516		544
Due after five years through ten years	473		507
Due after ten years	1,347		1,450
Total	$	2,336	$	2,501

A summary of securities available-for-sale with unrealized losses as of June 30, 2012, along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:

	Less than 12 months				12 months or longer				Total
June 30, 2012	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Securities in a Loss Position
Fixed maturities
Corporate debt securities	$	8,368	$	81	$	2,647	$	152	$	11,015	$	233	27
Trust preferred securities	—		—		535		2		535		2		1
Mortgage backed securities	1,155		22		—		—		1,155		22		4
Private label mortgage backed securities	—		—		117		5		117		5		1
Obligations of state and political subdivisions	—		—		—		—		—		—		0
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	608		2		254		8		862		10		3
Equity securities	184		8		1,050		535		1,234		543		5
	$	10,315	$	113	$	4,603	$	702	$	14,918	$	815	41

A summary of securities available-for-sale with unrealized losses as of December 31, 2011, along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:

	Less than 12 months				12 months or longer				Total
December 31, 2011	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Securities in a Loss Position
Fixed maturities
Corporate debt securities	$	4,703	$	166	$	899	$	101	$	5,602	$	267	15
Trust preferred securities	479		58		—		—		479		58		1
Mortgage backed securities	883		21		198		2		1,081		23		3
Private label mortgage backed securities	1,860		15		1,094		47		2,954		62		9
Obligations of state and political subdivisions	—		—		1,803		15		1,803		15		5
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	260		3		—		—		260		3		1
Equity securities	391		49		802		541		1,193		590		6
	$	8,576	$	312	$	4,796	$	706	$	13,372	$	1,018	40

There were no securities held-to-maturity with unrealized losses as of June 30, 2012 and December 31, 2011.

The Company conducts periodic reviews to identify and evaluate securities in an unrealized loss position in order to identify other-than-temporary-impairments. For securities in an unrealized loss position, the Company assesses whether the Company has the intent to sell the security or more likely than not will be required to sell the security before the anticipated recovery.  If either of these conditions is met, the Company is required to recognize an other-than-temporary impairment with the entire unrealized loss reported in earnings.  For securities in an unrealized loss position that do not meet these conditions, the Company assesses whether the impairment of a security is other-than-temporary.  If the impairment is determined to be other-than-temporary, the Company is required to separate the other-than-temporary impairments into two components:  the amount representing the credit loss and the amount related to all other factors.  The credit loss is the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment.  The credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.

Management has evaluated each security in a significant unrealized loss position.  The Company has no material exposure to sub-prime mortgage loans and less than 4% of the fixed income investment portfolio is rated below investment grade.  In evaluating whether or not the equity loss positions were other-than-temporary impairments, Management evaluated financial information on each company and where available reviewed analyst reports from at least two independent sources.  Based on a review of the available financial information, the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was determined that the securities in an accumulated loss position in the portfolio were temporary impairments.

For the quarter ended June 30, 2012, the Company realized no additional other-than-temporary impairments.  The single largest accumulated loss was in the equity portfolio and totaled $498,000.  The second largest loss position was in the bond portfolio and totaled $75,000.  The third largest loss position was in the bond portfolio and totaled $25,000.  

For the year ended December 31, 2011, the Company realized $398,000 in other-than-temporary impairments.   The single largest accumulated loss was in the equity portfolio and totaled $501,000.  The second largest loss position was in the bond portfolio and totaled $70,000.  The third largest loss position was in the bond portfolio and totaled $58,000. 

An analysis of the net change in unrealized appreciation on available-for-sale securities follows:

	(Dollars in thousands)
	Six-month period ended June 30, 2012			Year Ended December 31, 2011
	(unaudited)
Net change in unrealized appreciation on available-for-sale securities before deferred tax	$	115		$	1,792
Deferred income tax	(39		)	(534		)
Net change in unrealized appreciation on available-for-sale securities	$	76		$	1,258

NOTE 6 – INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense.  The Company has not incurred any income tax related interest and penalties as of June 30, 2012 and $1,000 as of December 31, 2011. The Company files income tax returns in the U.S. federal jurisdiction and various states.  The Company is not subject to examinations by authorities related to its U.S. federal or state income tax filings for years prior to 2006. Tax returns have been filed through the year 2011.

Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws.  Management believes that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets.  The Company recognized net deferred tax asset position of $4,282,000 at June 30, 2012, and net deferred tax liability position of $86,000 at December 31, 2011.

The tax effect of significant differences representing deferred tax assets and liabilities are as follows (dollars in thousands):

	June 30, 2012			December 31, 2011
	(unaudited)
General expenses	$	1,211		$	1,576
Unearned premiums	1,827			1,714
Claims liabilities	249			271
Litigation settlement	4,420			—
NOL carry forward	1,594			1,363
Other-than-temporary impairments on securities owned	231			258
Unrealized loss on interest rate swaps	489			407
Deferred tax assets	10,021			5,589
Depreciation	(120		)	(144		)
Deferred policy acquisition costs	(3,299		)	(3,250		)
Unrealized gains on securities available-for-sale	(2,320		)	(2,281		)
Deferred tax liabilities	(5,739		)	(5,675		)
Net deferred tax asset (liability)	$	4,282		$	(86	)

7

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The appropriate income tax effects of changes in temporary differences are as follows (dollars in thousands):

	Six Months Ended June 30,
	2012			2011
Deferred policy acquisition costs	$	49		$	304
Other-than-temporary impairments	27			(69		)
Trading securities	—			10
Unearned premiums	(113		)	(102		)
General expenses	(61		)	(98		)
Depreciation	(24		)	(16		)
Claim liabilities	22			(2		)
Litigation settlement	(3,995		)	—
NOL carry forward	(230		)	—
Deferred income tax (benefit) expense	$	(4,325	)	$	27

Total income tax (benefit) expense varies from amounts computed by applying current federal income tax rates to income or loss before income taxes.  The reason for these differences and the approximate tax effects are as follows:

	Six Months Ended June 30,
	2012		2011
Federal income tax rate applied to pre-tax income/loss	34.00	%	34.00	%
Dividends received deduction and tax-exempt interest	0.80	%	1.70	%
Company owned life insurance	0.50	%	0.70	%
Small life deduction	2.10	%	3.10	%
Other, net	0.60	%	(4.40	)%
Effective federal income tax rate	38.00	%	35.10	%

NOTE 7 –NOTES PAYABLE AND LONG-TERM DEBT

Short-term notes payable consisted of the following as of June 30, 2012 and December 31, 2011:

	(Dollars in thousands)
	2012		2011
Line of credit with variable interest rate equal to the WSJ prime rate, subject to a 5.0% floor; maturity January 2013.  Interest payments due quarterly.  Unsecured.	$	625	$	485

8

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Long-term debt consisted of the following as of June 30, 2012 and December 31, 2011:

	(Dollars in thousands)
	2012		2011
Subordinated debentures issued on December 15, 2005 with fixed interest rate of 8.83% each distribution period thereafter until December 15, 2015 when the coupon rate shall equal the 3-Month LIBOR plus 3.75% applied to the outstanding principal; maturity December 2035.  Interest payments due quarterly.  All may be redeemed at any time following the tenth anniversary of issuance.  Unsecured.	$	9,279	$	9,279
Subordinated debentures issued on June 21, 2007 with a floating interest rate equal to the 3 Month LIBOR plus 3.40% applied to the outstanding principal; maturity June 15, 2037. Interest payments due quarterly.  All may be redeemed at any time following the fifth anniversary of issuance.  Unsecured.	3,093		3,093
	$	12,372	$	12,372

The subordinated debentures (debentures) have the same maturities and other applicable terms and features as the associated trust preferred securities (TPS).  Payment of interest may be deferred for up to 20 consecutive quarters; however, stockholder dividends cannot be paid during any extended interest payment period or any time the debentures are in default.  All have stated maturities of thirty years.  None of the securities require the Company to maintain minimum financial covenants. The Company has guaranteed that amounts paid to the Trusts will be remitted to the holders of the associated TPS.  This guarantee, when taken together with the obligations of the Company under the debentures, the Indentures pursuant to which the debentures were issued, and the related trust agreement (including obligations to pay related trust fees, expenses, debt and other obligations with respect to the TPS), provides a full and unconditional guarantee of amounts due the Trusts.  The amount guaranteed is not expected to at any time exceed the obligations of the TPS, and no additional liability has been recorded related to the guarantee.

The Company has entered into various swap agreements related to the trust preferred securities. On March 19, 2009, the Company entered into a forward swap effective September 17, 2012, with a notional amount of $3,000,000 and designated the swap as a hedge against changes in cash flows attributable to changes in the benchmark interest rate (LIBOR) associated with the subordinated debentures issued June 21, 2007. Commencing September 17, 2012, under the terms of the forward swap, the Company will receive interest at the three-month LIBOR rate plus 3.4% and pay interest at the fixed rate of 7.02%.  This forward swap will effectively fix the interest rate on $3,000,000 in debt until September of 2019.

On May 26, 2010, the Company entered into a forward swap with a notional amount of $9,000,000 effective December 15, 2015, which will hedge against changes in cash flows following the termination of the fixed rate period. Quarterly, commencing March 16, 2016 under the terms of the forward swap, the Company will pay interest at a fixed rate of 8.49% until March 15, 2020.

The swaps entered into in 2009 and 2010 have fair values $469,000 (liability) and $968,000 (liability), respectively, for a total liability of $1,437,000 at June 30, 2012 ($1,196,000 at December 31, 2011).  The swap liability is reported as a component of other liabilities on the condensed consolidated balance sheets.  A net valuation loss of $159,000 is included in accumulated other comprehensive income related to the swap agreements for the current period.  A net valuation loss of $640,000 was included in accumulated other comprehensive income related to the swap at December 31, 2011.

We use dollar offset at the hedge's inception and for each reporting period thereafter to assess whether the derivative used in a hedging transaction is expected to be, and has been, effective in offsetting changes in the fair value of the hedged item. Since inception, no portion of the hedged item has been deemed ineffective. For all hedges, we discontinue hedge accounting if it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge.

The Company’s interest rate swaps include provisions requiring the Company to post collateral when the derivative is in a net liability position.  The Company has cash collateral on deposit of $100,000, in addition to securities on deposit with fair market values of $1,335,000 (all of which is posted as collateral). At December 31, 2011, the Company had cash collateral on deposit of $310,000 in addition to securities on deposit with fair market values of $877,000, all of which is posted as collateral. See Note

9

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9 for additional information about the interest rate swaps.

In January 2012, the Company renewed an unsecured line of credit for $700,000, with an interest rate of 5%, to be made available for general corporate purposes.  As of June 30, 2012, $625,000 was drawn on this line ($485,000 at December 31, 2011).

NOTE 8 – CONTINGENCIES

Litigation

The Company and its subsidiaries continue to be named individually as parties to litigation related to the conduct of their insurance operations.  These suits involve alleged breaches of contracts, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of the Company's subsidiaries, and miscellaneous other causes of action. 

The Company's property & casualty subsidiaries are defending a limited number of matters filed in the aftermath of Hurricanes Katrina and Rita in Mississippi, Louisiana and Alabama.  These actions include individual lawsuits with allegations of underpayment of hurricane-related claims, including allegations that the flood exclusion found in the Company's subsidiaries' policies, and in certain actions other insurance companies' policies, is either ambiguous, unenforceable as unconscionable or contrary to public policy, or inapplicable to the damage sustained. 

The various suits seek a variety of remedies, including actual and/or punitive damages in unspecified amounts and/or declaratory relief.  All of these matters are in various stages of development and the Company's subsidiaries intend to vigorously defend them.  The outcome of these disputes is currently uncertain. 

In April 2007, the Company sold substantially all of its 50% interest in Mobile Attic, Inc., to Bagley Family Revocable Trust (the "Purchaser"). The Company, Peter L. Cash and Russell L. Cash (collectively the "Sellers") sold to Purchaser 61% of the outstanding stock of Mobile Attic under the terms of a Stock Purchase Agreement dated April 5, 2007, executed by Sellers, Mobile Attic and Purchaser's assignor, James W. Bagley (the "Stock Purchase Agreement"). 

Under the terms of the Stock Purchase Agreement, the Purchaser paid the Company $2,700,000 for 45% of the total outstanding stock of Mobile Attic and paid the other Sellers $960,000 for an additional 16% of the total outstanding stock in Mobile Attic, thus obtaining a controlling interest of 61% of the outstanding stock.  The Stock Purchase Agreement provided that Purchaser was to use his best efforts to cause the Company to be released from its guaranty of a bank loan to Mobile Attic having an outstanding principal balance of approximately $9,400,000.  The bank loan was secured by portable storage containers of Mobile Attic. The Sellers made certain warranties to the Purchaser in the Stock Purchase Agreement regarding the financial condition of Mobile Attic and agreed to jointly and severally indemnify the Purchaser for any damages resulting from a breach of any of the warranties.

As previously disclosed , the Company and the Purchaser have been involved in litigation regarding this transaction The Purchaser asserted claims against the Company seeking indemnification of Purchaser's losses and damages as a result of the breach of representations and warranties regarding Mobile Attic's financial condition, as set forth in the Stock Purchase Agreement.

On June 20, 2012, the Company and Bagley Trust reached a settlement agreement to dispose of this action. Under the terms of the settlement the Company agreed to pay Bagley Trust $13,000,000 . The terms of the agreement are to be formalized in the form of a promissory note in accordance with the following payment schedule: $2.5 million on September 18, 2012, and the balance payable in 9 equal annual installments on November 15 each year beginning in 2013 with a final payment in 2021. The unpaid principal will bear interest at Wall Street Journal prime rate plus 1% per annum. The settlement will allow the ability to defer payments in years in which the Company's P&C subsidiaries incur substantial catastrophe losses thus allowing capital management flexibility in the P&C subsidiaries. Under the expected terms of the agreement, annual debt service payments on the note must equal or exceed any payment of dividends to shareholders in the preceding twelve months.

NOTE 9 – FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Our available-for-sale securities consists of fixed maturity and equity securities which are recorded at fair value in the accompanying condensed consolidated balance sheets.  The change in the fair value of these investments, unless deemed to be other than temporarily impaired, is recorded as a component of other comprehensive income.

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

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

The Company categorizes assets and liabilities carried at their fair value based upon a fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 1 assets and liabilities consist of money market fund deposits and certain of our marketable debt and equity instruments, including equity instruments offsetting deferred compensation, that are traded in an active market with sufficient volume and frequency of transactions.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

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

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

Level 3 assets and liabilities include marketable debt instruments, non-marketable equity investments, derivative contracts, and company issued debt whose values are determined using inputs that are both unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable debt instruments that are priced using indicator prices that we were unable to corroborate with observable market quotes.

Marketable debt instruments in this category generally include asset-backed securities and certain of our floating-rate notes, corporate bonds, and municipal bonds.

Assets/Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):

	Fair Value Measurements at Reporting Date Using
Description	Total		Level 1		Level 2		Level 3
Financial Assets
Fixed maturities available-for-sale
Corporate debt securities	$	32,346	$	—	$	32,346	$	—
Trust preferred securities	535		—		535		—
Mortgage backed securities	6,833		—		6,833		—
Private label mortgage backed securities	8,561		—		8,561		—
Obligations of states and political subdivisions	15,521		—		15,521		—
U.S. Treasury securities and obligations of U.S.    Government corporations and agencies	8,650		8,650		—		—
Trading securities	40		40		—		—
Equity securities available-for-sale	7,875		7,087		—		788
Total Financial Assets	$	80,361	$	15,777	$	63,796	$	788
Financial Liabilities
Interest rate swap	$	1,437	$	—	$	—	$	1,437
Total Financial Liabilities	$	1,437	$	—	$	—	$	1,437

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

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

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

Equity securities—Equity securities consist principally of investments in common and preferred stock of publicly traded companies and privately traded securities. The fair values of our publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately traded equity securities are classified within Level 3.

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

As of June 30, 2012, Level 3 fair value measurements of assets include $788,000 of equity securities in a local community bank whose value is based on an evaluation of the financial statements of the entity. The Company does not develop the unobservable inputs used in measuring fair value.

As of June 30, 2012, Level 3 fair value measurements of liabilities include $1,437,000 net fair value of various interest rate swaps whose value is based on analysis provided by a third party broker. The Company does not develop the unobservable inputs used in measuring fair value. Additional information regarding the interest rate swaps is provided in Note 7.

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter endedJune 30, 2012 (in thousands):

For the quarter ended June 30, 2012	Equity Securities Available-for-Sale		Interest Rate Swap
Beginning balance	$	642	$	(1,196	)
Total gains or losses (realized and unrealized):
Included in earnings	—		—
Included in other comprehensive income	3		(241		)
Purchases:	143		—
Sales:	—		—
Issuances:	—		—
Settlements	—		—
Transfers in/(out) of Level 3	—		—
Ending balance	$	788	$	(1,437	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of June 30, 2012:	$	—	$	—

For the quarter ended June 30, 2012, there were no assets or liabilities measured at fair values on a nonrecurring basis.

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):

	Fair Value Measurements at Reporting Date Using
Description	Total		Level 1		Level 2		Level 3
Financial Assets
Fixed maturities available-for-sale
Corporate debt securities	$	20,980	$	—	$	20,980	$	—
Trust preferred securities	479		—		479		—
Mortgage backed securities	7,871		—		7,871		—
Private label mortgage backed securities	9,853		—		9,853		—
Obligations of states and political subdivisions	19,482		—		19,482		—
U.S. Treasury securities and obligations of U.S.    Government corporations and agencies	14,409		14,409		—		—
Trading securities	80		80		—		—
Equity securities available-for-sale	8,547		7,905		—		642
Total Financial Assets	$	81,701	$	22,394	$	58,665	$	642
Financial Liabilities
Interest rate swap	$	1,196	$	—	$	—	$	1,196
Total Financial Liabilities	$	1,196	$	—	$	—	$	1,196

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year endedDecember 31, 2011 (in thousands):

For the year ended December 31, 2011	Equity Securities Available-for-Sale			Interest Rate Swap
Beginning balance	$	787		$	(227	)
Total gains or losses (realized and unrealized):
Included in earnings	—			—
Included in other comprehensive income	(145		)	(969		)
Purchases:	—			—
Sales:	—			—
Issuances:	—			—
Settlements	—			—
Transfers in/(out) of Level 3	—			—
Ending balance	$	642		$	(1,196	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of December 31, 2011:	$	—		$	—

For the year ended December 31, 2011, there were no assets or liabilities measured at fair values on a nonrecurring basis.

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

The following methods and assumptions were used to estimate fair value of each class of financial instrument for which it is practical to estimate that value:

Cash and cash equivalents—the carrying amount is a reasonable estimate of fair value.

Mortgage receivables—the carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited marketability of the mortgage notes.

Other invested assets—the carrying amount is a reasonable estimate of fair value.

Other policyholder funds—the carrying amount is a reasonable estimate of fair value.

Debt—the carrying amount is a reasonable estimate of fair value.

The carrying amount and estimate fair value of the Company’s financial instruments as of June 30, 2012 and December 31, 2011 are as follows (in thousands):

	June 30, 2012				December 31, 2011
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets and related instruments
Mortgage loans	$	386	$	386	$	390	$	390
Policy loans	1,241		1,241		1,244		1,244
Company owned life insurance	5,831		5,831		5,660		5,660
Other invested assets	3,848		3,848		3,929		3,929
Liabilities and related instruments
Other policyholder funds	1,429		1,429		1,408		1,408
Short-term debt	625		625		485		485
Long-term debt	12,372		12,372		12,372		12,372

NOTE 10 – SEGMENTS

The Company’s property and casualty insurance operations comprise one business segment.  The property and casualty insurance segment consists of seven lines of business:  dwelling fire and extended coverage, homeowners (including mobile homeowners), ocean marine, other liability, private passenger auto liability, commercial auto liability and auto physical damage.  Management organizes the business utilizing a niche strategy focusing on lower valued dwellings as well as non-standard automobile products.  Our chief decision makers (President, Chief Financial Officer and Chief Executive Officer) review results and operating plans making decisions on resource allocations on a company-wide basis.  The Company’s products are primarily produced through agents within the states in which we operate.  The Company’s life and accident and health operations comprise the second business segment.  The life and accident and health insurance segment consists of two lines of business: traditional life insurance and accident and health insurance. Premium revenues and operating income by industry segment for the three and six-month periods ended June 30, 2012, and 2011 (unaudited) are summarized below (dollars in thousands):

Three-Month Period Ended June 30, 2012	Total			P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	12,533		$	10,814	$	1,719	$	—
Net investment income	1,066			529		520		17
Net realized investment gains	865			75		790		—
Other income	193			192		1		—
	14,657			11,610		3,030		17
BENEFITS AND EXPENSES
Policyholder benefits paid	7,976			6,763		1,213		—
Policy acquisition costs	2,933			2,594		339		—
General and administrative expenses	1,835			1,111		644		80
Litigation settlement and defense costs	12,670			—		—		12,670
Taxes, licenses and fees	438			385		53		—
Interest expense	288			—		35		253
	26,140			10,853		2,284		13,003
Income (Loss) Before Income Taxes	$	(11,483	)	$	757	$	746	$	(12,986	)

10

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three-Month Period Ended June 30, 2011	Total			P&C Insurance Operations			Life Insurance Operations			Non-Insurance Operations
REVENUE
Net premiums earned	$	13,321		$	11,544		$	1,777		$	—
Net investment income	1,171			606			461			104
Net realized investment gains	261			257			4			—
Other income	256			254			2			—
	15,009			12,661			2,244			104
BENEFITS AND EXPENSES
Policyholder benefits paid	15,682			14,386			1,296			—
Policy acquisition costs	3,071			2,751			320			—
General and administrative expenses	2,418			1,601			594			223
Litigation settlement and defense costs	482			—			—			482
Taxes, licenses and fees	622			516			106			—
Interest expense	285			—			16			269
	22,560			19,254			2,332			974
Loss Before Income Taxes	$	(7,551	)	$	(6,593	)	$	(88	)	$	(870	)

Six-Month Period Ended June 30, 2012	Total			P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	26,029		$	22,558	$	3,471	$	—
Net investment income	2,201			1,140		1,028		33
Net realized investment gains	1,071			207		862		2
Other income	390			388		2		—
	29,691			24,293		5,363		35
BENEFITS AND EXPENSES
Policyholder benefits paid	15,821			13,176		2,645		—
Policy acquisition costs	5,705			5,138		567		—
General and administrative expenses	4,323			2,940		1,092		291
Litigation settlement and defense costs	13,259			—		—		13,259
Taxes, licenses and fees	930			815		115		—
Interest expense	580			—		37		543
	40,618			22,069		4,456		14,093
Income (Loss) Before Income Taxes	$	(10,927	)	$	2,224	$	907	$	(14,058	)

11

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Six-Month Period Ended June 30, 2011	Total			P&C Insurance Operations			Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	28,191		$	24,545		$	3,646	$	—
Net investment income	2,228			1,233			958		37
Net realized investment gains	1,031			643			358		30
Other income	511			509			2		—
	31,961			26,930			4,964		67
BENEFITS AND EXPENSES
Policyholder benefits paid	25,004			22,197			2,807		—
Policy acquisition costs	5,995			5,491			504		—
General and administrative expenses	4,589			3,052			1,174		363
Litigation settlement and defense costs	789			—			—		789
Taxes, licenses and fees	1,102			876			226		—
Interest expense	570			—			31		539
	38,049			31,616			4,742		1,691
Income (Loss) Before Income Taxes	$	(6,088	)	$	(4,686	)	$	222	$	(1,624	)

The following table presents the Company’s gross and net premiums written for the property and casualty segment and the life and accident and health segment for the three and six-month periods ended June 30, 2012 and 2011, respectively:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012		2011
Life, accident and health operations premiums written:
Traditional life insurance	$	1,248		$	1,226		2,458		$	2,531
Accident and health insurance	455			474			919		958
Total life, accident and health	1,703			1,700			3,377		3,489
Property and Casualty operations premiums written:
Dwelling fire & extended coverage	7,825			7,271			14,752		13,968
Homeowners (Including mobile homeowners)	6,745			7,439			12,232		13,446
Ocean marine	363			397			447		516
Other liability	409			377			766		711
Private passenger auto liability	(12		)	393			57		1,247
Commercial auto liability	—			92			6		211
Auto physical damage	(5		)	175			31		511
Total property and casualty	15,325			16,144			28,291		30,610
Gross premiums written	17,028			17,844			31,668		34,099
Reinsurance premium ceded	(2,443		)	(3,039		)	(4,126	)	(4,568		)
Net premiums written	$	14,585		$	14,805		27,542		$	29,531

12

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s gross and net premiums earned for the property and casualty segment and the life and accident and health segment for the three and six-month periods ended June 30, 2012 and 2011, respectively:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Life, accident and health operations premiums earned:
Traditional life insurance	$	1,270		$	1,302		$	2,558		$	2,688
Accident and health insurance	449			475			913			958
Total life, accident and health	1,719			1,777			3,471			3,646
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage	6,665			6,666			13,212			13,165
Homeowners (Including mobile homeowners)	5,790			6,227			11,694			12,471
Ocean marine	275			300			543			619
Other liability	343			321			683			631
Private passenger auto liability	93			685			328			1,441
Commercial auto liability	—			92			6			211
Auto physical damage	44			274			151			571
Total property and casualty	13,210			14,565			26,617			29,109
Gross premiums earned	14,929			16,342			30,088			32,755
Reinsurance premium ceded	(2,396		)	(3,021		)	(4,059		)	(4,564		)
Net premiums earned	$	12,533		$	13,321		$	26,029		$	28,191

NOTE 11 – PREFERRED AND COMMON STOCK

The table below provides information regarding the Company's preferred and common stock as of June 30, 2012 and December 31, 2011:

	June 30, 2012			December 31, 2011
	Authorized	Issued	Outstanding	Authorized	Issued	Outstanding
Preferred Stock, $1 par value	500,000	—	—	500,000	—	—
Class A Common Stock, $1 par value	2,000,000	—	—	2,000,000	—	—
Common Stock, $1 par value	3,000,000	2,466,600	2,466,600	3,000,000	2,466,600	2,466,600

13

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

The National Security Group, Inc.

We have reviewed the condensed consolidated balance sheet of The National Security Group, Inc. as of June 30, 2012, and condensed consolidated statements of income and comprehensive income for the three and six-month periods ended June 30, 2012 and 2011, the condensed consolidated statement of shareholders' equity for the six-month period ended June 30, 2012 and cash flows for the six-month period ended June 30, 2012 and 2011.   These condensed consolidated financial statements are the responsibility of the company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The National Security Group, Inc. as of December 31, 2011, and the related consolidated statements of income (loss), shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 26, 2012, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. 

/s/ Warren Averett, LLC

Birmingham, Alabama

August 7, 2012

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Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 June 30, 2012, compared with December 31, 2011 and its results of operations for the three-month period ending June 30, 2012 and its statements of shareholders' equity and cash flows for the six-month period ended June 30, 2012, all compared with the same periods 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 year ended December 31, 2011.

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 3of this report.

The reader is assumed to have access to the Company’s 2011 Annual Report.  This discussion should be read in conjunction with the Annual Report and with the condensed consolidated financial information on pages 4 through 26 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 just under 48.6% of total premium revenue generated in the states of Alabama and Mississippi.  Property and casualty insurance is the most significant segment, accounting for 86.7% of total insurance premium revenue during the first six months of 2012.  Revenue generated from the life segment accounted for 13.3% of total insurance premium revenue.

National Security Insurance Company (NSIC) is a life, accident and health insurance company founded in 1947 and is the oldest subsidiary of the Company.  The premium revenue produced in NSIC from the traditional life products and accident and health products accounted for 9.9% and 3.4%, respectively, of total premium revenue.  All references to NSIC in the remainder of thismanagement discussion and analysis will refer to the combined life, accident and health insurance operations and will compose the life segment of the Company.  NSIC is licensed to underwrite life and accident and health insurance in Alabama, Florida, Georgia, Mississippi, South Carolina and Texas.

Omega One Insurance Company (Omega) is a property and casualty insurance company incorporated in 1992.  Omega is a wholly owned subsidiary of National Security Fire and Casualty Company (NSFC) and is the smallest of the insurance subsidiaries, accounting for approximately 3.7% of consolidated premium revenue.  Omega is licensed and underwrites property and casualty insurance in the states of Alabama and Louisiana.  There is no material product differentiation between those products underwritten by NSFC and Omega as both primarily underwrite personal lines of insurance.

National Security Fire and Casualty Company (NSFC) is a property and casualty insurance company and is the largest of the insurance subsidiaries, accounting for over 83.0% of total premium revenue of the Company.  NSFC operates primarily in the personal lines segment of the property and casualty insurance market.  NSFC has been in operation since 1959.  NSFC is licensed and underwrites property and casualty insurance in the states of Alabama, Arkansas, Florida, Georgia, Mississippi, Oklahoma, South Carolina and Tennessee.  NSFC is licensed, but does not currently underwrite any business, in the states of Kentucky and West Virginia.  NSFC also underwrites insurance on a non-admitted or surplus lines basis in the states of Louisiana, Missouri and Texas.

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 reviewed and approved by each insurance department for the respective state to which the rates will apply.

15

All of our insurance companies have been assigned ratings by A.M. Best.  The property and casualty group has been assigned a group rating of “B++” (Good) with a negative outlook.  In addition, A.M. Best has assigned an issuer credit rating of “bbb” with a negative outlook.  NSFC, the largest of the insurance subsidiaries, carries the same A.M. Best ratings as the group.  Omega carries an A.M. Best rating of “B+” (Good) with a stable outlook and an issuer credit rating of “bbb-” with a stable outlook.  The life insurance subsidiary, NSIC, has been assigned a rating of “B” (Fair) with a stable outlook and an issuer credit ratio of “bb+” with a stable outlook.  All ratings are reviewed at least annually by A.M. Best with the latest ratings effective date of December 19, 2011.

The two primary segments in which we report insurance operations are the personal lines property and casualty segment (NSFC) and the life, accident and health insurance segment (NSIC).  Please note that due to the small amount of premium revenue produced by Omega and the fact that Omega is a wholly owned subsidiary of NSFC underwriting similar lines of business, all references to NSFC in the remainder of this management discussion and analysis will include the insurance operations of both NSFC and Omega.  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.

CONSOLIDATED RESULTS OF OPERATIONS

Summary:

For the three-months endedJune 30, 2012, the Company had a net loss of $7,306,000, $2.96 per share, compared to a net loss of $4,945,000, $2.00 per share, for the same period last year. The primary factor contributing to the net loss for the quarter-endedJune 30, 2012 was the settlement of longstanding litigation related to the Company's sale of an investment in Mobile Attic, Inc. The litigation was settled for $13,000,000 on June 18, 2012. The June 30, 2012 condensed consolidated financial statements reflect the remaining charge for this settlement. Additional discussion related to the settlement can be found in the liquidity and capital resources section of Management Discussion and Analysis and in Note 8 to the condensed consolidated financial statements. Related to the three-months ended June 30, 2011, the net loss included a significant increase in policyholder benefits paid resulting from tornado and wind claims related to a series of severe weather events occurring during the month of April 2011.

For the three-months ended June 30, 2012, claims were down $7,706,000 at $7,976,000 compared to $15,682,000 for the same period last year. Incurred losses and loss adjustment expenses (LAE) in the P&C segment decreased $6,695,000 in 2012 compared to 2011. P&C segment losses were substantially elevated in 2011 as the Company incurred a record number of claims for a spring storm season. Most notable was the impact of tornado outbreaks in Mississippi, Alabama and Georgia from April 25-27, 2011 (formally assigned catastrophe number 46 by the Property Claims Service) which caused widespread damage and led to $9,936,000 in gross incurred losses and LAE ($3,822,000 net of reinsurance) in the P&C segment.

For the three-months endedJune 30, 2012, earned premium revenue was $12,533,000 compared to $13,321,000for the three-months endedJune 30, 2011; a $788,000 or 5.9% decrease. The P&C segment was the primary contributor to the decrease accounting for $730,000 or 92.6% of the decline. Earned premium revenue in the P&C segment property programs was down $438,000 or 3.4%for the three-months endedJune 30, 2012 compared to the same period last year. Also contributing to the decline in earned premium revenue was the termination of the automobile programs. Earned premium revenue for these program was $137,000for the quarter-endedJune 30, 2012; down 87.0% from $1,051,000 for the same period last year.

For the six-months ended June 30, 2012, the Company had a net loss of $6,775,000, $2.75 per share, compared to a net loss of $3,950,000, $1.60 per share, for the same period last year. As discussed previously, charges related to the litigation settlement was the primary factor impacting the first six months of 2012. The first six months of 2011 were adversely impacted by the unprecedented increase in tornado and wind related losses during the month of April, the most significant of which was the April 27th, 2011 tornado outbreak that ripped through the Southeastern United States.

Claims were $15,821,000 (60.8% of net premiums earned) for the six-months endedJune 30, 2012 compared to $25,004,000 (88.7% of net premiums earned) for the same period last year. Policyholder benefits paid were down $9,183,000 or 36.7%for the six-months endingJune 30, 2012 compared to the same period last year. The primary reason for the decline was the lack of storm activity in the current year and the large increase in incurred losses and LAE in our property programs in the prior year due to the significant storm activity. In addition, our automobile programs were discontinued in the fourth quarter of 2011 which reduced incurred losses and LAE in 2012 compared to 2011. Incurred losses and LAE from the automobile programs decreased $1,780,000; accounting for 19.4% of the total decline in claims in 2012 compared to 2011.

16

Year-to-date earned premium revenue was $26,029,000for the six-months endedJune 30, 2012 compared to $28,191,000 for the same period last year. The life segment accounted for $175,000 or 8.1% of the decline in premium revenue with decreases in both the traditional life and A&H lines of business. The P&C segment accounted for the remaining $1,987,000 of the $2,162,000 premium revenue decline. As mentioned above, decreases in premium revenue from the P&C segment related to the property programs coupled with the reduction in premium revenue from the discontinuation of the automobile programs were the primary reasons for the overall decline in premium revenue in 2012 compared to 2011 in the P&C segment.

Shareholders’ equity as of June 30, 2012 was $30,663,000, down $7,352,000 compared to $38,015,000 as of December 31, 2011. Book value per share decreased $2.98 per share for the period ended June 30, 2012 to $12.43 per share compared to $15.41 per share at December 31, 2011. Factors contributing to the change in equity were a year to date net loss of $6,775,000, increase in market values of fixed maturities and equity securities of $76,000, a net loss on interest rate swaps of $159,000 and dividends paid of $494,000.

Three-months ended June 30, 2012 compared to three-months ended June 30, 2011:

Premium Revenue:

The table below provides earned premium revenue by segment for the three-months ended June 30, 2012 and 2011:

	Three-Months Ended						Percent
	2012			2011			increase (decrease)
Life, accident and health segment:
Traditional life insurance	$	1,270,000		$	1,302,000		(2.5	)%
Accident and health insurance	449,000			475,000			(5.5	)%
Total life, accident and health	1,719,000			1,777,000			(3.3	)%
Property and Casualty segment:
Dwelling fire & extended coverage	6,665,000			6,666,000			—	%
Homeowners (Including mobile homeowners)	5,790,000			6,227,000			(7.0	)%
Ocean marine	275,000			300,000			(8.3	)%
Other liability	343,000			321,000			6.9	%
Private passenger auto liability	93,000			685,000			(86.4	)%
Commercial auto liability	—			92,000			(100.0	)%
Auto physical damage	44,000			274,000			(83.9	)%
Reinsurance premium ceded	(2,396,000		)	(3,021,000		)	(20.7	)%
Total property and casualty	10,814,000			11,544,000			(6.3	)%
Total earned premium revenue	$	12,533,000		$	13,321,000		(5.9	)%

Consolidated premium revenue was $12,533,000 for the three-months ended June 30, 2012 compared to $13,321,000 for the same period last year; a decrease of $788,000 or 5.9%. The decline in revenue was primarily concentrated in the P&C segment. The primary reason for the decline in P&C segment premium revenue was the termination of the private passenger non-standard and commercial automobile programs. Due to unprofitable underwriting results for multiple years, the decision was made by management to discontinue the automobile program in late 2011. The termination of these programs led to a $914,000 decline in automobile earned premium for the quarter-endedJune 30, 2012 compared to the same period last year. In addition, premium revenue was down in the homeowners program. For the quarter-endedJune 30, 2012, premium revenue from the homeowners program was $5,790,000 compared to $6,227,000 for the same period last year; a decline of $437,000 or 7.0%. The implementation of more stringent underwriting standards and an ongoing comprehensive review of property risks within this program was the primary reasons for the decline in homeowners premium revenue in the current quarter compared to the same period last year.

Partially offsetting the decline in premium revenue was a reduction in ceded premium in the current year compared to the prior year. For the three-months ended June 30, 2012 reinsurance premium ceded was down 20.7% compared to the quarter-ended June 30, 2011. The primary reason for the $625,000 decline was a reduction in the amount of reinstatement premium incurred during the current year compared to the prior year. In 2011 we incurred $1.5 million in catastrophe reinstatement premium triggered by the tornado and wind losses of catastrophe 46 while we incurred no major spring storm season catastrophes in 2012. However, partially offsetting the decline in ceded premium in 2012, due to a lack of reinstatement premium, was an increase in our base

17

catastrophe reinsurance costs. Our base cost for catastrophe reinsurance increased $843,000 for the quarter in 2012 compared to last year. A 19% increase in catastrophe reinsurance premium coupled with the addition of reinstatement premium protection were the primary reasons for the increase in ceded premium during 2012 compared to 2011. We are currently implementing rate increases to adjust for our increased cost of catastrophe reinsurance. However, because rates in the reinsurance market are unregulated and our rates generally have to be approved by the state insurance departments of each respective state in which we operate, we incur significant lag time in our ability to recover cost related to increased reinsurance costs and our 2012 increase is temporarily compressing our profit margins.

Investment income:

Investment income decreased $105,000 to $1,066,000 for the three-months ended June 30, 2012 from $1,171,000 for the same period last year.  A decrease in average invested assets in the second quarter of 2012 compared to the second quarter of 2011 was the primary factor contributing to the decline in investment income. As a result of the severe storm activity in 2011, investment holdings in the P&C subsidiaries were sold to increase liquidity necessary to pay storm claims during the second quarter of that year. The reduction in invested assets caused by last year's spring storm activity led to reduced investment income in the current year. Furthermore, the continued low investment rate environment has pushed down overall book yields as maturing investments are generally reinvested at current historically low interest rates.

Realized investment gains and losses:

For the quarter-endedJune 30, 2012, realized investment gains totaled $865,000 compared to $261,000 for the same period last year; an increase of $604,000.  The increase in realized capital gains was primarily associated with an increase in trading activity during the second quarter of 2012 compared to the second quarter of 2011. The realization of capital gains in the investment portfolio is influenced by both market conditions and liquidity requirements of the insurance subsidiaries and therefore can vary significantly from quarter to quarter. Other activities, such as tax planning strategies, may also lead to significant variation in realized capital gains from quarter to quarter.

Other income:

Other income was $193,000 for the three-months ended June 30, 2012 compared to $256,000for the quarter-endedJune 30, 2011; a decrease of 24.6%.  Other income is primarily composed of billing, payment and policy fees associated with residential property and automobile policies issued in the P&C segment.  Due to the discontinuation of the automobile program, billing, payment and policy fees decreased $63,000. This decrease was the primary reason for the overall reduction in other income for the current quarter compared to the same period last year.

Policyholder benefits paid:

The P&C segment is sometimes affected by storm systems classified as "catastrophes" by Property Claims Service (PCS) [referred to as cat events throughout the remainder of this discussion]. PCS generally deems a cat event to be a single storm system or other natural disaster which causes in excess of $25 million in industry losses. During the second quarter of 2012, the P&C segment was not materially impacted by any cat events. In contrast, during the second quarter of 2011, the P&C segment was impacted by ten cat events with incurred losses and LAE totaling $12,632,000 before reinsurance and $6,518,000 net of reinsurance.

Policyholder benefits paid (claims) as a percent of net premiums earned was 63.6%for the three-months endedJune 30, 2012 compared to 117.7%for the three-months endedJune 30, 2011. Policyholder benefits for the three-months ended June 30, 2012 were $7,976,000 compared to $15,682,000 for the same period last year; a decrease of 49.1%. The $7,706,000 decrease in claims was primarily associated with declines in year to date losses and LAE incurred in the P&C segment. Year-to-date incurred losses and LAE in the P&C segment decreased $7,623,000 for the three-months endedJune 30, 2012 compared to the same period in 2011 and accounted for 98.9% of the total decrease. As mentioned previously, the decline was primarily due to the increase in claim activity during 2011 from the multitude of tornado, wind and hail events, including catastrophe 46, during the second quarter of the prior year.

Another factor contributing to the decrease in incurred losses and incurred LAE for the three-months ended June 30, 2012 compared to the quarter-ended June 30, 2011 was a decrease in fire losses in the P&C segment. Fire losses incurred during the quarter were down $273,000 for the three-month period ended June 30, 2012 compared to the same period last year. The severity per claim for the quarter in 2012 and 2011 were $29,000 and $26,000, respectively, while the frequency decreased by 20 claims in the second quarter of 2012 compared to the second quarter of 2011. Because fire losses cost significantly more, on average, on a per claim basis, a slight change in the frequency of fire losses can significantly influence quarterly underwriting results.

18

Policy acquisition cost:

For the three-months endedJune 30, 2012, policy acquisition costs were $2,933,000 compared to $3,071,000 for the same period last year. The decrease was primarily associated with the 1.5% reduction in written premium for the three-month period in the current year compared to the same period last year. Policy acquisition costs were 23.4% of premium revenue for the second quarter of 2012 compared to 23.1% for the same period last year.

General expenses:

General expenses were down for the three-months ended June 30, 2012 at $1,835,000 compared to $2,418,000 for the same period last year; a decrease of $583,000. As a percent of earned premium, general expenses were 14.6% and 18.2%, respectively for the three-months endedJune 30, 2012 and 2011.   The Company has implemented significant cost reduction measures over the past nine months and continues to work on streamlining processes and reducing overhead in order to reduce general expenses.

Litigation settlement and defense costs:

On June 18, 2012, NSG settled longstanding litigation related to the Company's sale of an investment in Mobile Attic, Inc. The final settlement totaled $13,000,000 and the impact of the settlement and remaining legal fees are reflected in these financial statements. Additional information related to the settlement can be found in the liquidity and capital resources section of the Management Discussion and Analysis and in Note 8 to the financial statements.

Taxes, licenses and fees:

Taxes, licenses and fees for the three-months endedJune 30, 2012 and 2011 were $438,000 and $622,000. respectively. Taxes, licenses and fees as a percentage of earned premiums were 3.5%for the quarter-endedJune 30, 2012 and 4.7% for the same period last year. The primary reason for the $184,000 decrease was the $819,000 decline in P&C gross written premium for the second quarter of 2012 compared to the second quarter of 2011.

Interest expense:

Interest expense was virtually unchanged at $288,000for the quarter-endedJune 30, 2012 compared to $285,000 for the same period last year.

Income taxes:

For the quarter-endedJune 30, 2012, income tax benefit was $4,177,000 compared to an income tax benefit of $2,606,000 for the same period last year. The effective tax rate for the three-months endedJune 30, 2012 was 36.4% compared to 34.5%for the three-months endedJune 30, 2011. Income tax expense/(benefit) was composed of current taxes totaling $145,000for the quarter-endedJune 30, 2012 compared to income tax benefit of $(2,515,000) for the same period last year. Deferred tax benefit totaled $4,322,000for the three-months endedJune 30, 2012 compared to income tax benefit of $91,000for the three-months endedJune 30, 2011.

Net (loss) income:

The Company ended the first three months of 2012 with a year to date net loss of $7,306,000 compared to a net loss of $4,945,000 for the same period last year. The primary reason for the net loss for the three-months endedJune 30, 2012 was an additional $12,670,000 in net litigation settlement related expenses incurred in June. The primary reason for the net loss for the three-months endedJune 30, 2011 was an increase in claims incurred in the P&C segment related to significant storm activity, including catastrophe 46, during April 2011.

Six-months ended June 30, 2012 compared to six-months ended June 30, 2011:

Premium Revenue:

The table below provides earned premium revenue by segment for the six months ended June 30, 2012 and 2011:

19

	Six months ended June 30,						Percent
	2012			2011			increase (decrease)
Life, accident and health operations:
Traditional life insurance	$	2,558,000		$	2,688,000		(4.8	)%
Accident and health insurance	913,000			958,000			(4.7	)%
Total life, accident and health	3,471,000			3,646,000			(4.8	)%
Property and Casualty operations:
Dwelling fire & extended coverage	13,212,000			13,165,000			0.4	%
Homeowners (Including mobile homeowners)	11,694,000			12,471,000			(6.2	)%
Ocean marine	543,000			619,000			(12.3	)%
Other liability	683,000			631,000			8.2	%
Private passenger auto liability	328,000			1,441,000			(77.2	)%
Commercial auto liability	6,000			211,000			(97.2	)%
Auto physical damage	151,000			571,000			(73.6	)%
Reinsurance premium ceded	(4,059,000		)	(4,564,000		)	(11.1	)%
Total property and casualty	22,558,000			24,545,000			(8.1	)%
Total earned premium revenue	$	26,029,000		$	28,191,000		(7.7	)%

Consolidated premium revenue was $26,029,000for the six-months endedJune 30, 2012 compared to $28,191,000 for the same period last year; a decrease of $2,162,000 or 7.7%. The decrease was primarily driven by declines in earned premium in the P&C segment. Year-to-date P&C segment earned premium was down 8.1% due to the discontinuation of the non-standard private passenger and commercial automobile programs in late 2011 along with the implementation of more stringent underwriting standards during the prior year which led to a decline in homeowners earned premium. A reduction in catastrophe reinstatement premium in the current year partially offset the P&C earned premium decreases.

The P&C segment ended June 2012 with year-to-date net earned premiums of $22,558,000 compared to $24,545,000 for the same period last year. As mentioned above, the primary reason for the decrease in earned premium was related to the discontinuation of the automobile programs. In late 2011, management decided to terminate the automobile programs due to continued unprofitable underwriting results. Year-to-date automobile earned premium was $485,000 through June 30, 2012 compared to $2,223,000 for the same period last year; a decrease of 78.2%. Because this program is now in runoff, it will not be a significant contributor to total P&C segment premium revenue in 2012. Furthermore, earned premium from the homeowners programs also declined in 2012 compared to 2011. Year-to-date homeowners earned premium totaled $11,694,000 in 2012 compared to $12,471,000 in 2011; a decrease of 6.2%. As we continue to implement strategies to improve underwriting margins and reduce coastal exposure, we expect the P&C segment to continue to incur marginal declines in premium revenue in the near term.

Partially offsetting the decline in P&C premium revenue was a reduction in ceded premium in the current year compared to the prior year. For the six-months endedJune 30, 2012, reinsurance premium ceded was down 11.1% compared to the six-months endedJune 30, 2011. The primary reason for the $505,000 decline was a reduction in the amount of reinstatement premium incurred during the current year compared to the prior year. Due to the impact of catastrophe 46, the P&C segment incurred nearly $1.5 million in catastrophe reinstatement premium in the first six months of 2011. In contrast, due to a lack of major spring storm activity, we incurred no reinstatement premium charges related to 2012 spring storm events. Without the impact of reinstatement premium, reinsurance premium ceded is up $878,000 for the first six months of 2012 compared to last year. A 19% increase in catastrophe reinsurance premium coupled with the addition of reinstatement premium protection were the primary reasons for the increase in ceded premium during 2012 compared to 2011. In addition to the increase in base reinsurance cost, the additional catastrophe reinsurance coverage will increase ceded reinsurance cost by approximately $1.3 million in 2012. However, in the event of a major catastrophe, the pretax impact on earnings of a 100 year cat event has been reduced by over $5 million.

The life segment ended June 2012 with year- to-date premium revenue of $3,471,000; a decrease of 4.8% compared to $3,646,000 through June 2011. The life segment earned premium was down primarily due to more stringent underwriting standards in the current year compared to the prior year.

Investment income:

Investment income decreased $27,000 to $2,201,000 through June 30, 2012 compared to $2,228,000 through June 30, 2011.  The decrease in investment income was primarily due to lower yields on reinvested cash flows from sales and maturities in the fixed

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income portfolio. Also, P&C segment investment holdings were sold during the second quarter of 2011 to increase liquidity necessary to pay storm claims in the P&C subsidiaries and therefore reduced invested assets, leading to a reduction in investment income.

Realized investment gains and losses:

For the six-months endedJune 30, 2012 and 2011, realized investment gains were comparable at $1,071,000 and $1,031,000, respectively.  The realization of capital gains in the investment portfolio is influenced by both market conditions and liquidity requirements of the insurance subsidiaries and therefore can vary significantly from year to year.

Other income:

Other income was $390,000 through June 30, 2012 compared to $511,000 through June 30, 2011; a decrease of 23.7%.  Other income is primarily composed of billing, payment and policy fees associated with residential property and automobile policies issued in the P&C segment.  Due to the termination of our automobile programs, billing, payment and policy fees declined and was the primary reason for the overall reduction in other income for the current year.

Policyholder benefits:

Claims were $15,821,000for the six-months endedJune 30, 2012 compared to $25,004,000 for the same period last year; a decrease of $9,183,000 or 36.7%.  The primary reason for the current year decline was the reduction in claim activity from tornado, wind and hail storms in the P&C segment in 2012 compared to 2011. During the prior year, claim activity in the P&C segment was significantly higher due to a greater frequency of severe wind, hail and tornado damage incurred from April storms including catastrophe 46. The losses incurred from cat 46 exceeded our catastrophe reinsurance retention of $3,500,000 and triggered coverage under our catastrophe reinsurance program. The P&C segment incurred losses and loss adjustment expenses before reinsurance totaling $9,936,000 ($3,822,000 net of reinsurance) from catastrophe 46. The net incurred losses and LAE from catastrophe 46 claims increased the overall loss ratio 13.6 percentage points in 2012 compared to 2011. The non-reinsured April 2011 cat events totaled $1,760,000 and added 6.2 percentage points to the 2011 loss ratio.

During the first half of 2012, the P&C segment was impacted by seven cat events totaling $644,000. The P&C subsidiaries incurred 201 claims from these cat events which added 2.5 percentage points to the loss ratio. The average severity per claim related to the 2012 cat events was $3,200 per claim. In contrast, the P&C subsidiaries were impacted by 16 cat events during the first half of the prior year and incurred 2,474 claims. The average severity per claim was $5,300 before reinsurance and $2,600 net of reinsurance. The net impact of 2011 cat events added 24.5 percentage points to the prior year loss ratio.

Fire losses incurred in the P&C segments were down $569,000 through June 2012 compared to the same period last year. The P&C subsidiaries incurred fire losses totaling $6,512,000 in 2012 compared to $7,081,000 in 2011. The fire losses incurred during 2012 resulted in 253 claims compared to fire losses incurred during 2011 from 298 claims. These losses had an average severity per claim of $26,000 and $24,000 for 2012 and 2011, respectively.

Life segment claims were down 5.8% ending June 2012 at $2,645,000 compared to $2,807,000 for the same period last year. Declines in claims incurred in both the ordinary and industrial lines of business were the primary reasons for the $162,000 decrease in year to date claims in the life segment for 2012 compared to 2011.

Policy acquisition cost:

For the six-months endedJune 30, 2012, policy acquisition costs were $5,705,000 compared to $5,995,000 for the same period last year; a decrease of $290,000. The decrease was primarily attributable to the decline in premium revenue which reduced commission costs in 2012 compared to the same period last year.

General Expenses:

General expenses were down $266,000 through June 30, 2012 at $4,323,000 compared to $4,589,000 through June 30, 2011.  The reduction in general expenses was primarily associated with a reduction in costs associated with the discontinued auto programs, along with continued company wide cost reduction measures.

Litigation Settlement:

On June 18, 2012, the Company settled longstanding litigation related to the Company's sale of Mobile Attic, Inc. The final

21

settlement and legal costs incurred resulted in expenses of $13,259,000 in the first six months of 2012 compared to costs associated with the matter of $789,000 in the first six months of 2011. Additional information and discussion related to the settlement can be found in the liquidity and capital resources section of Management Discussion and Analysis and in Note 8 to the condensed consolidated financial statements.

Taxes, licenses and fees:

Taxes, licenses and fees were down $172,000for the six-months endingJune 30, 2012 at $930,000 compared to $1,102,000 for the same period last year.  Taxes, licenses and fees as a percentage of earned premiums were 3.6% through June 2012 compared to 3.9% through June 2011.

Interest expense:

Interest expense was comparable at $580,000for the six-months endedJune 30, 2012 compared to $570,000 for the same period last year.

Income taxes:

For the period ended June 30, 2012, income tax benefit totaled $4,152,000 compared to income tax benefit of $2,138,000 for the same period last year. The effective tax rate through June 30, 2012 was 38.0% compared to 35.1% through June 30, 2011 . Income tax expense/(benefit) was composed of current taxes totaling $173,000for the six-months endedJune 30, 2012 compared to income tax benefit of $(2,165,000)for the six-months endedJune 30, 2011. Deferred tax (benefit)/expense totaled $(4,325,000) for 2012 and $27,000 for 2011. The litigation settlement in 2012 was the primary reason for the income tax benefit in 2012 while the significant number of losses incurred from spring storms was the primary contributor to the 2011 tax benefit.

Net (loss) income:

For the six-months endedJune 30, 2012, the Company had a net loss of $6,775,000 compared to a net loss of $3,950,000 for the same period last year. The primary contributing factor to the current year net loss was the litigation settlement expenses incurred during June 2012. The prior year net loss was primarily attributable to P&C segment claims incurred from tornado, wind and hail related weather events, including catastrophe 46, during April 2011.

Liquidity and capital resources:

At June 30, 2012, the Company had aggregate equity capital, unrealized investment gains (net of income taxes) and retained earnings of $30,663,000 down $7,352,000 compared to $38,015,000 at December 31, 2011.  Components of the change in equity were a net loss of $6,775,000, net unrealized gains on investments of $76,000, a net unrealized loss of $159,000 related to interest rate swaps and cash dividends paid totaling $494,000.

The Company has $12,372,000 in debt outstanding consisting of long-term debt from the proceeds of two separate trust preferred securities issuances, the latest of which totaled $3,000,000 and was completed in June 2007.  The Company has an operating line of credit to allow flexibility with respect to cash management at the holding company level.  The outstanding balance on the line, at June 30, 2012, was $625,000. We had $75,000 available at June 30, 2012, under the operating credit line.

The Company, primarily through its insurance subsidiaries, had $6,345,000 in cash and cash equivalents at June 30, 2012, compared to $965,000 at June 30, 2011.   Cash used in operations for the six-month period endedJune 30, 2012 totaled $17,000 compared to cash used in the same period last year totaling $7,609,000.

Net cash provided by investing activities totaled $3,268,000for the six-months endingJune 30, 2012 compared to cash provided of $8,039,000 for the same period last year. A $3,490,000 increase in costs related to the acquisition of investments combined with a $1,157,000 decrease in cash flows from the sale and maturity of investments were the primary reasons for the $4,771,000 decline in cash provided by investing activities in 2012 compared to 2011. During the prior year, investment sales were necessary to increase liquidity in order to pay storm claims in the P&C segment during the second quarter as a result of losses from catastrophe 46.

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 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, interest on debt, corporate

22

administrative expenses, federal income taxes, and for funding investments in the subsidiaries. The Company maintains minimal liquidity in order to maximize liquidity within the insurance subsidiaries in order to support ongoing insurance operations. 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 P&C segment, which composes the largest segment of our insurance operations, incurred substantial operating losses in 2011. These operating losses contributed to a decline of over 16% in capital levels in the segment. These reduced capital levels, while adequate to operate our existing business, have substantially reduced our ability to pay dividends upstream to the holding company in the near term. Dividends paid 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 Consolidated Financial Statements filed in the 2011 Form 10-K, the amount that The National Security Group's insurance subsidiaries can transfer in the form of dividends to the parent company during 2012 is limited to $1,039,000 in the life insurance subsidiary and $2,546,000 in the property/casualty insurance subsidiary.

Regulators consider dividends paid within the preceding twelve months when calculating the available dividend. As of June 30, 2012, the total amount available to dividend up to the holding company was $985,000 ($339,000 in the life insurance subsidiary and $646,000 in the property/casualty insurance subsidiary). The payment of any subsidiary dividend requires prior notice to the regulatory authorities who may disallow the dividend if, in their judgment, payment of the dividend would have an adverse effect on the surplus of the subsidiary.

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.

Due to the erosion in capital levels in the P&C subsidiaries in 2011, stemming from a very active spring storm season and underwriting losses in our automobile line of business, we have made changes in order to reduce capital/surplus strain in the P&C subsidiaries and help protect capital levels from substantial further erosion resulting from a major catastrophic even. These changes include a combination of reduction in underwriting leverage and an increase in catastrophe reinsurance protection a summary of each change follows:

• In late 2011, we discontinued both our private passenger and commercial automobile programs. These two program accounted for approximately 6% of net written premium in 2011, down from nearly 10% in 2010 but had produced significant underwriting losses over the last five years. Due to a combination of reduced capital levels and a view that it would take some time to achieve underwriting profitability, we made the decision to discontinue the program in order to reduce surplus strain and underwriting leverage in the P&C subsidiaries.

• We have incurred substantial losses from catastrophe events over the past seven years. These events have driven up catastrophe reinsurance cost and forced our catastrophe reinsurance deductible up from $2 million in 2005 to $4 million in our 2012 renewal. As our cat retention has increased, we have attempted to achieve higher margins in our insurance rate structure in order to compensate for the additional risk of the higher catastrophe reinsurance retention but with limited success due to regulatory constraints primarily because this additional retention was not a "hard dollar" cost in our rate structure. So, since we were limited in our ability to increase margins for this additional retained risk and due to the capital erosion incurred in 2011, in the second quarter of 2012 we placed additional reinsurance cover in the form of reinsurance premium protection (RPP). The RPP cover will serve to reduce our risk from a major catastrophe and strengthen our capital position. The effect of adding this additional RPP cover is to reduce our modeled 100 year event net cost (net of reinsurance recoveries) from approximately $9 million (pretax) to an estimated $4.5 million (pretax). A 100 year event is defined a an event that has approximately a 1% probability of occurring in a given year. This additional cover added $1.3 million to our cat reinsurance cost and will compress margins in 2012 as we go through the process of updating rates to reflect this higher cost but will help protect capital from major events going forward.

As disclosed in Note 8 to these Condensed Consolidated Financial Statements regarding contingencies, the Company has been involved in litigation related its divestiture of Mobile Attic, Inc. The Company's insurance subsidiaries were not involved in this litigation and the Company has funded all costs associated with defending this action. The defense cost has placed a strain on our liquidity in the holding company leading up to the date of the jury trial which was set for June of 2012. As was disclosed in our previous filings, the Company believed that the damages claimed in the litigation were excessive in amount and that a substantial portion of the claimed damages was unrelated to the Company's involvement in the Mobile Attic transaction. The Company believed that the damages should be limited to a diminished value of the purchaser's original investment in Mobile Attic resulting from the claimed breach of warranty in the stock purchase agreement. The Company had filed motions for summary judgment

23

requesting a court ruling as to how damages should be measured as a matter of law. As was disclosed in our first quarter Form 10-Q, on April 24, 2012, the Court heard oral arguments on the motion for summary judgment and took the matter under advisement.

Several events unfolded in June of 2012, leading up to trial that caused the Company to reexamine positions with regard to the litigation. First, shortly before trial, Mobile Attic's former auditors and our co-defendant in the matter reached an out of court settlement with plaintiff and therefore would not be defending their actions which were expected to help support the defense of claims. Second, one of the remaining co-defendants with whom the Company was jointly liable for claims under the stock purchase agreement was the former president of Mobile Attic who was sentenced to Federal Prison for bank fraud in 2010 and is currently serving a five year sentence in a West Virginia Federal Penitentiary. Third, the Court had not made a definitive ruling prior to commencement of the trial on how damages would be calculated. Fourth, with the lack of clarity on potential damages, it appeared that damage amounts were potentially going to be left in the hands of a jury in a matter that involved very complex legal and accounting issues with the potential to include damages for other actions involving our co-defendants in which we had no involvement. Fifth, while we believe it is possible that a jury would have returned a verdict for less than the amount for which we settled, we believe it would have been difficult to negotiate post trial settlement terms that would allow us to support our insurance operations and maintain our rating agency ratings. Finally, with no guidance on damages, in the event of an excess verdict we would have faced significant liquidity constraints in supporting a potentially long, expensive and arduous appeal process.

Immediately before the trial, settlement discussions with the plaintiff approached the amount of the financial benefit that NSG had received from the purchaser in the Mobile Attic transaction. After careful consideration of the aforementioned factors, management made a decision to reach a settlement agreement just as the trial was about the commence. Under the terms of the settlement agreement, the Company will pay a total of $13 million to the plaintiff. In order to manage the liquidity constraints, the settlement will be in the form of an interest-bearing note with amounts to be paid over nine years with the ability to defer payments in years in which the Company's P&C subsidiaries incur substantial catastrophe losses thus allowing capital management flexibility in the P&C subsidiaries. Under the expected terms of the agreement, the annual debt service on the note cannot be less than the dividends paid to our shareholders in the last twelve months. The last details of the agreement are expected to be finalized in August of 2012.

It is expected that cash to fund the litigation settlement will come from three primary sources. First, the Company owns 3,000 acres of timber property with a carrying value of approximately $1.4 million and an estimated fair market value of $6 million. We will initially use this property as collateral to obtain an operating line of credit through a regional bank to aide in restoring short-term liquidity and allow flexibility in managing holding company liquidity. Ultimately the Company will seek to sell the property or use the proceeds from timber sales on the property to retire the debt. Second, the holding Company has significant deferred tax assets associated with a net operating loss (NOL) carryforward generated by a combination of this settlement and defense costs incurred over the last two years. This NOL carryforward will generate tax benefits that will offset a portion of future tax liabilities of the P&C insurance subsidiaries in our consolidated tax returns. It is expected that this NOL carry-forward will generate approximately $5 million in tax benefits over the term of the settlement. Finally, dividends and management fees paid by the insurance subsidiaries will provide an additional source of proceeds to pay this obligation.

The Company is seeking recovery of a portion of amounts to be paid under this settlement from its insurance carrier but to date no recovery had been obtained and no allowance has been made for any recovery.

In order to improve holding company liquidity, we are in the process of obtaining an operating line of credit secured by certain real estate investments. The Company has received a commitment to place the line of credit with a regional bank and terms are expected to be finalized in August of 2012.

Except as discussed above and in Note 8 to these Condensed Consolidated Financial Statements, 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.

The Company maintains an operating line of credit, with a $700,000 limit, to allow flexibility with respect to cash management at the holding company level. The outstanding balance at June 30, 2012 was $625,000.

We have taken and continue to take corrective action to improve our profitability and capital position. However, due to the adverse effects of five major hurricanes in the last eight years, the financial market meltdown in 2008, continued historically low interest rates, an unprecedented tornado outbreak in April of 2011 and the recently settled litigation, we have experienced significant reduction in equity capital. While we are beginning to see improvement and have put some major obstacles behind us, we are in a position where we have to preserve capital in the near term in order to put our Company in the best position to be successful moving forward. In order to improve our capital position we will revisit our dividend policy in the near term. It is likely that we

24

will reduce quarterly dividends by at least 50% with a range of actions up to and including the suspension of dividends beginning in the fourth quarter of 2012 as we rebuild our capital position in our P&C subsidiaries. Due to various factors discussed herein, we must remain flexible in our dividend policy until we achieve more consistent profitability and capital growth.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Under smaller reporting company rules, we are not required to disclose information required under Item 3.  However, in order to provide information to our investors, we have elected to provide information related to market risk.

The Company’s primary objectives in managing its investment portfolio are to maximize investment income and total investment returns while minimizing overall credit risk.  Investment strategies are developed based on many factors including changes in interest rates, overall market conditions, underwriting results, regulatory requirements, and tax position.  Investment decisions are made by management and reviewed by the Board of Directors.  Market risk represents the potential for loss due to adverse changes in fair value of securities.  The three potential risks related to the Company’s fixed maturity portfolio are interest rate risk, prepayment risk, and default risk.  The primary risk related to the Company’s equity portfolio is equity price risk.  The Company has not incurred material losses in its investment portfolio in the quarter endedJune 30, 2012 related to interest rate changes, defaults on certain securities and changes in value of equity investments.  Changes are discussed in detail under Item 2 of this Form 10-Q.   For further information regarding market risk, reference is made to the Company’s Form 10-K for the year ended December 31, 2011.

Item 4.  Controls and Procedures

Our management carried out an evaluation, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2012. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13A-15(d) under the Exchange Act that occurred during the six-month period ended June 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.   Legal Proceedings

Please refer to Note 8 to the condensed consolidated financial statements included herein, and the 2011 Annual Report filed on Form 10-K.

Item 1A. Risk Factors

There has been no material change in risk factors previously disclosed under Item 1A. of the Company’s annual report for 2011 on Form 10-K.

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

None

Item 3.  Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5.  Other Information

None

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Item 6.  Exhibits

a.  Exhibits

10.1	Settlement Agreement between Bagley Family Revocable Trust, Mobile Attic, Inc. and The National Security Group, Inc. dated August 3, 2012.
10.2	Promissory Note between Bagley Family Revocable Trust and The National Security Group, Inc. dated August 3, 2012.
31.1	Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

b.  Reports on Form 8-K during the quarter ended June 30, 2012

Date of Report	Date Filed	Description
April 13, 2012	April 17, 2012	Press release, dated April 17, 2012, issued by The National Security Group, Inc.
May 14, 2012	May 14, 2012	Press release, dated May 14, 2012, issued by The National Security Group, Inc.
May 18, 2012	May 22, 2012	Item 5.07 - announcement of annual meeting voting results
June 20, 2012	June 22, 2012	Item 8.01 - announcement of litigation settlement

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned duly authorized officer, on its behalf and in the capacity indicated.

The National Security Group, Inc.

/s/ William L. Brunson, Jr.	/s/ Brian R. McLeod
William L. Brunson, Jr.	Brian R. McLeod
President and Chief Executive Officer	Vice President  and Chief Financial Officer

Dated: August 7, 2012

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EX-10.1

Exhibit 10.2

$13,000,000.00Birmingham, Alabama

August 3, 2012

PROMISSORY NOTE

FOR VALUE RECEIVED, without grace, National Security Group, Inc., a Delaware corporation (the “Borrower”), promises to pay to the order of the Bagley Family Revocable Trust, a statutory trust formed under the laws of the State of California (herein called the “Lender,” and together with any subsequent holder of this Promissory Note called the “Holder”), in the manner set forth below, the principal sum of Thirteen Million and No/100 Dollars ($13,000,000.00), plus interest according to the terms set forth in this Promissory Note (this “Note”).

The Borrower agrees with the Holder as follows:

SECTION 1 -Rules of Construction. For the purposes of this Note, except as otherwise expressly provided or unless the context otherwise requires:

(a)Words of masculine, feminine or neuter gender include the correlative words of other genders.

(b)Singular terms include the plural as well as the singular, and vice versa.

(c)All references herein to designated “Sections” and other subdivisions are to the designated Sections and subdivisions hereof unless expressly otherwise designated in context. All Section and other subdivision captions herein are used for reference only and do not limit or describe the scope or intent of, or in any way affect, this Note.

(d)The terms “include,” “including,” and similar terms shall be construed as if followed by the phrase “without being limited to.”

(e)The terms “herein,” “hereof” and “hereunder” and other words of similar import refer to this Note as a whole and not to any particular Section or other subdivision.

(f)No inference in favor of or against any party shall be drawn from the fact that such party or such party's counsel has drafted any portion hereof.

(g)All references in this Note to a separate agreement or instrument are to such separate agreement or instrument as the same may be amended or supplemented from time to time pursuant to the applicable provisions thereof.

(h)All accounting terms not otherwise defined herein have the meanings defined for them under generally accepted accounting principles, and all computations provided for herein shall be made in accordance with generally accepted accounting principles.

SECTION 2 -Definitions. As used in this Note, the following terms are defined as follows:

(a)“Actual/360 Day Basis” means a method of computing interest and other charges on the basis of an assumed year of 360 days for the actual number of days elapsed, meaning that the interest accrued for each day will be computed by multiplying the interest rate applicable on that day by the unpaid principal balance on that day and dividing the result by 360.

(b)“Authorized Officer” is defined in Section 21(a)(ii).

(c)“Business Day” means any day, excluding Saturday and Sunday, on which banks in Dallas, Texas are open to the public for carrying on substantially all of their banking business.

(d)“Catastrophic Event” is defined in Section 7(c).

(e)“Change of Control” means the occurrence of any one or more of the following:

(i)any Person or “group” (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision), in a single transaction or in a series of transactions, by way of merger, consolidation, business combination, restructuring, recapitalization, repurchase of equity interest, leveraged buyout, purchase of securities or otherwise, becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act or any successor provision, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire (an “option right”), whether such right is exercisable immediately or only after the passage of time) of fifty percent (50%) or more of the outstanding voting and/or economic interest in the Borrower's capital stock or Equity Interests of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully-diluted basis (and taking into account all such Equity Interests that such person or group has the right to acquire pursuant to any option right); or

(ii)a majority of the members of the board of directors or other equivalent governing body of the Borrower cease to be composed of individuals (A) who were members of that board or equivalent governing body as of the date of this Note, (B) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (C) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (B) and clause (C), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); or

(iii)the sale, lease, transfer or exchange, in a single or a series of related transactions, of all or substantially all of the assets of the Borrower; or

(iv)any “Change of Control” or equivalent term, as defined in any other agreement or instrument evidencing Debt of the Borrower or any of its subsidiaries (excluding the Obligations under this Note), shall occur.

(f)“Debentures” means the Fixed/Floating Rate Junior Subordinated Deferrable Interest Debenture of the Borrower, dated December 15, 2005, and the Floating Rate Junior Subordinated Deferrable Interest Debenture of the Borrower, dated December 21, 2007, that were issued by the Borrower under the 2005 Indenture and the 2007 Indenture, respectively. Reference to the Debentures shall include the interest rate swap agreements executed in connection therewith.

(g)“Debt” of any person means (A) all indebtedness, whether or not represented by bonds, debentures, notes or other securities, for the repayment of borrowed money, (B) all deferred indebtedness for the payment of the purchase price of property or assets purchased, (C) all capitalized lease obligations, (D) all indebtedness secured by any Lien on any property of such person, whether or not indebtedness secured thereby has been assumed, (E) all obligations with respect to any conditional sale contract or title retention agreement, (F) all indebtedness and obligations arising under acceptance facilities or in connection with surety or similar bonds, and the outstanding amount of all letters of credit issued for the account of such person, and (G) all obligations with respect to interest rate swap agreements.

(h)“Equity Interests” means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership (or profit) interests

in a Person (other than a corporation), securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interest in) such Person, and any and all warrants, rights or options to purchase any of the foregoing, whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination.

(i)“Event of Default” is defined in Section 11. An Event of Default “exists” if an Event of Default has occurred and is continuing.

(j)“Exchange Act” means the Securities Exchange Act of 1934, as amended, together with rules of the SEC promulgated thereunder.

(k)“Governing Documents” means, with respect to any person that is not a natural person, all organizational and governing documents applicable thereto. The term includes its certificate or articles of incorporation and bylaws, if a corporation, its partnership agreement, if a partnership, its articles of organization and operating agreement, if a limited liability company, its trust agreement, indenture of trust or other document establishing the trust, if a trust, and all applicable resolutions or other directions of the directors, shareholders, officers, partners, members, settlors, beneficiaries, owners, or other relevant persons comprising, owning, managing or operating the person in question.

(l)“Governmental Authority” means any national, state, county, municipal or other government, domestic or foreign, and any agency, authority, department, commission, bureau, board, court or other instrumentality thereof.

(m)“Governmental Requirements” means all laws, rules, regulations, ordinances, judgments, decrees, codes, orders, injunctions, notices and demand letters of any Governmental Authority.

(n)“Indentures” means, collectively, the 2005 Indenture, the 2007 Indenture and any indenture or similar instrument entered into by the Borrower after the date hereof in connection with the issuance of securities by a finance subsidiary, including a trust, of the Borrower.

(o)“2005 Indenture” means that certain Indenture, dated as of December 15, 2005, by and between the Borrower and Wilmington Trust Company, as trustee, as amended, supplemented and modified.

(p)“2007 Indenture” means that certain Indenture, dated as of June 21, 2007, by and between the Borrower and Wilmington Trust Company, as trustee, as amended, supplemented and modified.

(q)“Initial Payment” is defined in Section 3(a).

(r)“Installment Payment” is defined in Section 3(b).

(s)“Lien” means any mortgage, pledge, assignment, charge, encumbrance, lien, security title, security interest or other preferential arrangement.

(t)“Net Proceeds” is defined in Section 6(b)(ii).

(u)“Obligations” means (A) the payment of all amounts now or hereafter becoming due and payable under this Note, including the principal amount of this Note, all interest (including interest that, but for the filing of a petition in bankruptcy, would accrue on any such principal) and all other fees, charges and costs (including attorneys' fees and disbursements) payable in connection therewith; (B) the observance and performance by the Borrower of all of the provisions of this Note; and (C) all renewals, extensions, modifications and amendments of any of the foregoing.

(v)“Person” means any individual, corporation, limited liability company, partnership, joint venture, joint stock company, trust, land trust, business trust, employee benefit plan or trust, unincorporated

organization or other entity.

(w)“Sale Transaction” is defined in Section 6(b)(i).

(x)“SEC” means the United States Securities and Exchange Commission.

(y)“Settlement Agreement” means that certain Mutual Release and Settlement Agreement, dated as of August __, 2012, by and among the Borrower, the Lender and Mobile Attic, Inc.

(z)“Solvent” means, with respect to any person on a particular date, that as of such date (1) the fair value of the property of such person is greater than the total amount of liabilities (including contingent liabilities) of such person, (2) the present fair salable value of the assets of such person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (3) such person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such person's property would constitute an unreasonably small capital, and (4) such person does not intend to, or believe or reasonably should have believed that it will, incur debts beyond its ability to repay as they become due.

SECTION 3Initial Payment of Portion of Principal. The Borrower shall pay to the Holder the principal sum of Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00), without interest thereon, on or before September 18, 2012 (such payment, the “Initial Payment”).

SECTION 4Additional Payments of Principal and Interest.

(a)Periodic Installment Payments. The Borrower shall pay to the Holder the principal sum of Ten Million Five Hundred Thousand and No/100 Dollars ($10,500,000.00), together with interest at the rate per annum equal to the “prime rate” plus 1.0% (100 basis points) on the unpaid principal from September 18, 2012 until payment in full. Such principal shall be payable in eight (8) annual installments of $1,166,666.66 each commencing on November 15, 2013, and on each anniversary thereof through and including November 15, 2020, and one final installment of $1,166,666.72 payable on November 15, 2021 (each such payment, an “Installment Payment”). Accrued and unpaid interest shall be payable with each installment of principal based on the “prime rate” published in The Wall Street Journal on November 15 in the year preceding the payment date plus 1.0% (100 basis points). Interest will be computed on an Actual/360 Day Basis. Installment Payments that are due on a day that is not a Business Day shall be payable on the next succeeding Business Day, and any interest payable thereon shall be payable for such extended time at the specified rate.

(b)Application of Payments. All payments made pursuant to Sections 4, 5 and 6 shall be first applied to interest and the balance to principal.

SECTION 5 -Optional Prepayments. The Borrower may at any time prepay any amount due under this Note, in whole or in part, prior to the applicable due date, without premium or penalty. Any prepayment shall be accompanied by the payment of accrued interest to the date of prepayment on the principal amount prepaid. Upon application of any prepayment of principal under this Section 5, the amount of each of the remaining annual installments of principal shall be adjusted and modified so that each such remaining installment will be in an amount to be determined by dividing the then outstanding principal amount by the number of remaining annual installments.

SECTION 6Mandatory Prepayments.

(a)Mandatory Prepayment Based Upon Dividends. Each annual Installment Payment of principal and interest to the Holder must be no less than the total dividends paid by the Borrower to its shareholders during the twelve whole calendar months immediately preceding the date of the applicable Installment Payment. If the total dividends paid by the Borrower to its shareholders during any such period exceeds the annual principal and interest payment that would otherwise be due and payable under Section 4, the Borrower shall

prepay the amount due hereunder in an amount equal to such difference. Such prepayment shall be due with the applicable annual Installment Payment. Any prepayment shall be accompanied by payment of accrued interest to the date of prepayment on the principal amount prepaid. Upon application of any prepayment of principal under this Section 6(a), the amount of each of the remaining annual installments of principal under Section 4 shall be adjusted and modified so that each such remaining installment will be in an amount to be determined by dividing the then outstanding principal amount by the number of remaining annual installments.

(b)Mandatory Prepayment Upon Disposition of Assets.

(i)If, prior to the Borrower's payment in full of all of its Obligations hereunder, the Borrower, directly or indirectly, sells, disposes of or otherwise transfers any material portion of its assets, including all or any portion of the stock of any of its direct or indirect subsidiary companies, outside the ordinary course of business, or any of the Borrower's subsidiary companies sells, disposes of or otherwise transfers any material portion of its assets outside the ordinary course of business (a “Sale Transaction”), the Borrower shall pay the Net Proceeds from any such Sale Transaction to the Holder in an amount equal to the lesser of (1) the remaining balance due under Section 4 of this Note or (2) 75% of the Net Proceeds from such Sale Transaction, in which event the payment shall be applied in accordance with Section 5. For purposes of this Section 6(b), issuances or sales of debt securities or equity securities for cash consideration by the Borrower or any its subsidiaries (excluding issuances of notes to banks pursuant to commercial loan transactions and excluding issuances of equity securities of the Borrower to employees and directors of the Borrower or its subsidiaries under duly authorized equity compensation plans in the ordinary course of business) shall be deemed to be a Sale Transaction.

(ii)The term “Net Proceeds” shall mean and refer to either (1) the cash proceeds received by the Borrower from a Sale Transaction or (2) in the case of a Sale Transaction in which the proceeds are received by a subsidiary of the Borrower, the cash proceeds derived from the Sale Transaction and that are distributed to the Borrower, in each case after deducting the amount of reasonable expenses relating to the Sale Transaction and the amount of any indebtedness required to be paid in connection with the Sale Transaction; provided, however, that Net Proceeds shall not include proceeds received from an issuance of equity or debt securities by the Borrower that are contributed to one or more insurance company subsidiaries of the Borrower in order to satisfy applicable regulatory requirements or maintain a rating from a nationally recognized statistical rating organization. In the event of a Sale Transaction in which a subsidiary of the Borrower sells a material portion of its assets outside of the ordinary course of its business or issues securities, in either case, to anyone other than the Borrower or another subsidiary of the Borrower, the Borrower shall, subject to applicable regulatory requirements, cause such subsidiary to distribute the proceeds to the Borrower in at least an amount sufficient to comply with the Borrower's payment obligations under Section 6(b)(i).

(iii)Within 45 days after the completion of any Sale Transaction described in Section 6(b)(i), the Borrower shall provide a written report to the Holder which shall include a description of the Sale Transaction, a calculation of the Net Proceeds, if any, received or to be received by the Borrower as a result of the Sale Transaction and such other information as the Holder shall reasonably request. Said report shall be accompanied by payment of the amount due to the Holder hereunder; provided that if regulatory approval is required to distribute the Net Proceeds to the Holder, the notice shall describe the approval required and the date that the payment to the Holder is expected to be made if such approval is obtained. Notwithstanding anything herein to the contrary, the Borrower shall not be required to apply any non-cash proceeds received in a Sale Transaction with a member of its insurance holding company system as defined in Section 27-29-1(4) of the Code of Alabama 1975, as amended, and all transactions in connection with the management of the investments of the insurance subsidiaries shall be deemed to be in the ordinary course of business; provided that the Borrower shall not distribute the stock of any of its subsidiaries as a dividend or other distribution to its shareholders. Upon application of any prepayment of principal under this Section 6(b), the amount of each of the remaining annual installments of principal under Section 4 shall be adjusted and modified so that each such remaining installment will be in an amount to be determined by dividing the then outstanding principal amount by the number of remaining annual installments.

SECTION 7Deferred Payment Based Upon Catastrophic Losses.

(a)If one or more of the Borrower's property and casualty subsidiary insurance companies suffers losses from one or more Catastrophic Events in an aggregate amount greater than $3.5 million during the twelve month period ending on October 31 immediately preceding the date of the next Installment Payment due under Section 4 hereof (except that the look-back period for the Installment Payment due on November 15, 2013 shall extend from September 18, 2012 to October 31, 2013), the Borrower may, at its option after delivery of notice as herein required, elect to defer the annual Installment Payment due on that payment date in accordance with the terms of this Section 7(a). Upon any such deferral, the amount of each of the remaining annual installments of principal shall be adjusted and modified so that each such remaining installment will be in an amount to be determined by dividing the then outstanding principal amount by the number of remaining annual installments; provided, that, in the event the Borrower elects to defer an annual Installment Payment that is due on November 15, 2018, November 15, 2019 or November 15, 2020 pursuant to this Section 7, then 25% of the total amount of principal and accrued interest being deferred (the “Deferred Amount”), together with interest thereon, shall be payable on each of the remaining annual Installment Payment dates, with the remainder of the Deferred Amount, together with interest thereon, being payable no later than November 15, 2022; provided further, that, in the event the Borrower elects to defer the annual Installment Payment that is due on November 15, 2021 pursuant to this Section 7, such annual Installment Payment shall be paid in full no later than November 15, 2022. As an example, which shall be for illustrative purposes only, in the event that the Borrower elects to defer the annual Installment Payment of $1,166,666.66, plus accrued interest thereon, that is due on November, 15, 2019 as a result of a Catastrophic Event, then 25% of such Deferred Amount, together with interest thereon, shall be payable on November 15, 2020, 25% of such Deferred Amount, together with interest thereon, shall be payable on November 15, 2021, and the remaining 50% of such Deferred Amount, together with interest thereon, shall be payable on November 15, 2022. Deferred principal and interest will accumulate additional interest at the rate specified in Section 4(a), compounded annually, until payment in full.

(b)Notwithstanding the foregoing, this Section 7 shall in no way affect the mandatory prepayment provisions set forth in Section 6. That is, if the Borrower pays dividends to its shareholders during the twelve months following the payment date of the deferred installment, the Borrower must pay the Holder an amount equal to the amount of dividends paid during that period as and when such dividends are paid, and the amount of such payments shall be applied as provided in Section 4(b) above with any payment of principal reducing the amount of the deferred payment. Furthermore, if a Sale Transaction occurs, then the provisions of Section 6(b) shall apply, and the amount of any payment paid pursuant to Section 6(b) shall be applied as provided in Section 4(b) above with any payment of principal reducing the amount of the deferred payment.

(c)For purposes of this Section 7, a “Catastrophic Event” shall mean an event which meets the definition of a catastrophe of Property Claims Service and which has been assigned a separate serial number by Property Claims Service. In order to elect to defer payment as permitted in this Section 7, at least ten days before such payment is due, the Borrower shall provide the Holder with written notice specifying the amount of loss for each Catastrophic Event by the serial number assigned by Property Claims Service together with such other information as the Holder shall reasonably request.

SECTION 8 -Place and Time of Payments.

(a)All payments by the Borrower to the Holder under this Note shall be made in lawful currency of the United States and in immediately available funds to the Lender at #5 Stephens Court, Trophy Club, Texas 76262 or at such other address within the continental United States as shall be specified by the Holder by notice to the Borrower. Any payment received by the Holder after 5:00 p.m. (Dallas, Texas time) on a Business Day (or at any time on a day that is not a Business Day) shall be deemed made by the Borrower and received by the Holder on the following Business Day.

(b)All amounts payable by the Borrower to the Holder under this Note shall be payable on the specified due date without notice or demand by the Holder.

(c)Payments that are due on a day that is not a Business Day shall be payable on the next succeeding Business Day, and any interest payable thereon shall be payable for such extended time at the specified rate.

SECTION 9 -Representations and Warranties of the Borrower. The Borrower represents and warrants to the Lender as follows:

(a)-Organization, Powers, Existence. The Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) has the right, power and authority to own its properties and assets and to carry on its business as now being conducted, and (iii) has the right, power and authority to execute, deliver and perform the Settlement Agreement and each agreement, instrument or other document executed by the Borrower pursuant to the Settlement Agreement, including this Note.

(b)-Authorization. The execution, delivery and performance of this Note and the Settlement Agreement, and the consummation of the transactions consummated hereby and thereby, have been duly and effectively authorized by all requisite corporate action on the part of the Borrower. This Note and the Settlement Agreement constitute legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms.

(c)No Violation. The execution, delivery and performance of this Note and the Settlement Agreement, and the consummation of the transactions consummated hereby and thereby, will not, with or without the giving of notice and the lapse of time, or both, (a) violate any provision of law, statute, rule, regulation, executive order or Governmental Requirement to which the Borrower or any of its subsidiaries is subject; (b) violate any judgment, order, writ or decree of any court applicable to the Borrower or any of its subsidiaries; (c) violate, result in the breach of, or conflict with, any term, covenant, condition or provision of the Governing Documents of the Borrower or any of its subsidiaries; or (d) violate, result in the breach of, conflict with, or constitute a default under, any agreement or instrument (including the 2005 Indenture and the 2007 Indenture) to which the Borrower or any of its subsidiaries is a party.

(d)Consents. No consent, authorization or approval of, notice to, or exemption by, any person, including without limitation any Governmental Authority, is required in connection with the execution, delivery and performance by the Borrower of this Note or the Settlement Agreement, or the taking of any action herein or therein contemplated, which would prevent or hinder the consummation of the transactions contemplated hereby or therein.

(e)Litigation. As of the date hereof, there are no actions, suits, proceedings or governmental investigations or inquiries pending or, to the knowledge of the Borrower, threatened against it or any of its subsidiaries which, in its reasonable judgment, would prevent or hinder the consummation of the transactions contemplated by the Settlement Agreement or this Note.

(f)-Financial Statements. Except for the Obligations evidenced by this Note or as otherwise disclosed in writing to the Lender on or prior to the date hereof, the Borrower does not have any obligations for borrowed money or other debts, obligations or liabilities, direct or contingent, other than those reflected in the Borrower's most recent financial statements filed with the SEC. Such financial statements were prepared in accordance with generally accepted accounting principles; and all of the Borrower's financial statements filed with the SEC are correct and complete and present fairly the financial condition of the Borrower as of the dates thereof.

(g)-Taxes. The Borrower has filed all tax returns that are required to be filed with any Governmental Authority and has paid all taxes as shown on said returns or on any assessment received by the Borrower to the extent that such taxes have become due.

(h)-Agreements. The Borrower is not in default in the performance or observance of any of the

obligations contained in any agreement or instrument to which the Borrower is a party, which default could have a material adverse effect upon the Borrower's operations or condition.

(i)-Solvency; No Fraudulent Transfer. The Borrower is Solvent and, after taking into account the consummation of the transactions provided for in the Settlement Agreement and this Note (including the payments by the Borrower pursuant to this Note), will be Solvent. No transfer of property is being made and no obligation is being incurred by the Borrower or any subsidiary of the Borrower in connection with the transactions contemplated by this Note or the Settlement Agreement with the intent to hinder, delay or defraud either present or future creditors of the Borrower or any of its subsidiaries.

SECTION 10 -Covenants of the Borrower. From the date hereof until payment in full of the principal amount of this Note and all of the interest that accrues hereunder and all other amounts payable by the Borrower under this Note, the Borrower covenants and agrees that, unless the Holder shall otherwise consent in writing:

(a)-Existence, Properties, etc. The Borrower shall (i) do or cause to be done all things necessary to preserve and keep in full force and effect the Borrower's corporate existence, rights and franchises and comply with all Governmental Requirements applicable to the Borrower, and (ii) at all times maintain, preserve and protect all franchises, licenses and trade names and preserve all the remainder of the Borrower's property used or useful in the conduct of the Borrower's business and keep the same in good repair, working order and condition, and from time to time make, or cause to be made, all needful and proper repairs and improvements thereto, so that the business carried on in connection therewith may be properly and advantageously conducted at all times.

(b)-Payment of Indebtedness, Taxes, etc. The Borrower shall (i) pay the Borrower's Debts in accordance with normal terms and (ii) pay and discharge or cause to be paid and discharged promptly all taxes, assessments and other charges or levies of Governmental Authorities imposed upon the Borrower or upon the Borrower's income and profits or upon any of the Borrower's properties, before the same shall become in default.

(c)-Notification. The Borrower shall promptly notify the Holder concerning the occurrence of any event or circumstance that would cause or constitute an Event of Default or a material breach of any of the Borrower's representations, warranties or covenants contained herein or that would, at the time or given the passage of time, make it impossible, difficult or unlikely to satisfy any of the Borrower's Obligations under this Note; and the Borrower shall use commercially reasonable efforts to prevent or promptly respond to same. Additionally, at any time that the Borrower is not required to file, or does not timely file, periodic reports with the SEC pursuant to the Exchange Act, the Borrower shall promptly notify the Holder concerning (i) any material change of the Borrower's financial condition; and (ii) any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated) or the institution or the threat of any material litigation that in each case would make it impossible, difficult or unlikely to satisfy any of the Borrower's obligations under this Note or might materially and adversely affect the business or condition, financial or otherwise, of the Borrower.

(d)-Further Assurances. At the Borrower's cost and expense, upon the request of the Holder, the Borrower shall duly execute and deliver, or cause to be duly executed and delivered, to the Holder such further instruments and do and cause to be done such further acts as may be reasonably necessary or proper in the opinion of the Holder or its counsel to carry out more effectively the provisions and purposes of this Note.

SECTION 11 -Events of Default. The occurrence of any of the following events shall constitute an event of default (“Event of Default”) under this Note (whatever the reason for such event and whether or not it shall be voluntary or involuntary or be effected by operation of law or pursuant to any Governmental Requirement):

(a)any representation or warranty made in this Note or the Settlement Agreement shall prove to

be false or misleading in any material respect as of the time made; or

(b)any failure by the Borrower to make the Initial Payment by September 18, 2012; or

(c)any payment due under this Note (other than the Initial Payment) is not paid within fifteen (15) days after the date when due; or

(d)default shall be made in the due observance or performance of any covenant, condition or agreement on the part of the Borrower to be observed or performed pursuant to the terms of this Note or the Settlement Agreement (other than any covenant, condition or agreement, default in the observance or performance of which is elsewhere in this Section 11 specifically dealt with) and such default shall continue unremedied for a period of thirty (30) days; or

(e)(A) default shall be made with respect to any Debt (other than the Obligations) of the Borrower or its subsidiaries (including Debt incurred by the Borrower under the Indentures), if the effect of such default is to accelerate the maturity of such Debt or to permit the holder thereof to cause such Debt to become due prior to its stated maturity, or (B) any such Debt shall not be paid when due (after giving effect to any applicable notice, grace or cure periods); or

(f)a Change of Control shall have occurred without the prior written consent of the Holder; or

(g)the Borrower shall (A) apply for or consent to the appointment of a receiver, trustee, liquidator or other custodian of the Borrower or any of the Borrower's properties or assets, (B) fail or admit in writing the Borrower's inability to pay the Borrower's Debts generally as they become due, (C) make a general assignment for the benefit of creditors, (D) suffer or permit an order for relief to be entered against the Borrower in any proceeding under the federal Bankruptcy Code, or (E) file a voluntary petition in bankruptcy, or a petition or an answer seeking an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of Debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against the Borrower in any proceeding under any such law or statute, or if limited liability company action shall be taken by the Borrower for the purpose of effecting any of the foregoing; or

(h)a petition shall be filed, without the application, approval or consent of the Borrower in any court of competent jurisdiction, seeking bankruptcy, reorganization, rearrangement, dissolution or liquidation of the Borrower or of all or a substantial part of the properties or assets of the Borrower, or seeking any other relief under any law or statute of the type referred to in Section 11(g)(E) against the Borrower, or the appointment of a receiver, trustee, liquidator or other custodian of the Borrower or of all or a substantial part of the properties or assets of the Borrower, and such petition shall not have been stayed or dismissed within sixty (60) days after the filing thereof; or

(i)the Borrower shall be dissolved or liquidated, cease to be Solvent or suspend business; or

(j)any writ of execution, attachment or garnishment shall be issued against the assets of the Borrower and such writ of execution, attachment or garnishment shall not be dismissed, discharged or quashed within 30 days of issuance.

SECTION 12 -Acceleration Upon Event of Default. If an Event of Default exists, the Holder shall have the right, without further notice or demand to the Borrower, to declare the entire unpaid principal balance of the indebtedness evidenced by this Note, with accrued interest, to be immediately due and payable. The Holder may accept late or partial payments without waiver of its right to declare a default for untimely or incomplete payment or with respect to any other defaults. Even if, at a time when the Borrower is in default, the Holder does not require the Borrower to pay immediately in full as described above, the Holder will still have the right to do so if the Borrower is in default at a later time.

SECTION 13 -Certain Waivers and Agreements by the Borrower.

(a)As to the Obligations evidenced by this Note, the Borrower (i) waives demand, presentment, protest, notice of protest, suit and all other requirements necessary to hold liable the Borrower; and (ii) agrees to pay all costs of collection, including reasonable attorney's fees, in the event default should be made in the payment of any of the Obligations evidenced by this Note.

(b)The Borrower acknowledges that the Holder has not made any representations or entered into any agreements with the Borrower to induce the Borrower to enter into the transactions contemplated by this Note except as set forth in writing in the Settlement Agreement.

SECTION 14-Heirs, Successors and Assigns. Whenever in this Note any party hereto is referred to, such reference shall be deemed to include the heirs, successors and assigns of such party, except that the Borrower may not assign or transfer its obligations under this Note without the prior written consent of the Holder; and all obligations of the Borrower under this Note shall bind the Borrower's successors and assigns and shall inure to the benefit of the successors and assigns of the Holder. The Borrower promises and agrees that it shall obtain a written agreement from any successor or assign to the Borrower (whether direct or indirect, by purchase, merger, consolidation or otherwise) to assume and agree to perform this Note and the Settlement Agreement in the same manner and to the same extent that the Borrower would be required to perform if no succession or assignment had taken place.

SECTION 15 -Governing Law. This Note shall be construed in accordance with and governed by the internal laws of the State of Alabama except as required by mandatory provisions of law (without regard to conflict of law principles).

SECTION 16 -Separability Clause. If any provision of this Note shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

SECTION 17 -No Oral Agreements. This Note is the final expression of the agreement between the parties hereto, and this Note may not be contradicted by evidence of any prior oral agreement between such parties. All previous oral agreements between the parties hereto have been incorporated into this Note and the Settlement Agreement, and there is no unwritten oral agreement between the parties hereto in existence.

SECTION 18 -Waiver and Election. The exercise by the Holder of any option given under this Note shall not constitute a waiver of the right to exercise any other option. No failure or delay on the part of the Holder in exercising any right, power or remedy under this Note shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any further exercise thereof or the exercise of any other right, power or remedy. No modification, termination or waiver of any provisions of this Note, nor consent to any departure by the Borrower therefrom, shall be effective unless in writing and signed by an authorized officer of the Holder, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances.

SECTION 19 -Time of Essence. Time is of the essence of this Note.

SECTION 20 -Usury Laws. Any provision of this Note to the contrary notwithstanding, the Borrower and the Lender agree that they do not intend for the interest or other consideration provided for in this Note to be greater than the maximum amount permitted by applicable law. Regardless of any provision in this Note, the Lender shall not be entitled to receive, collect or apply, as interest on the Obligations, any amount in excess of the maximum rate of interest permitted to be charged under applicable law until such time, if any, as that interest, together with all other interest then payable, falls within the then applicable maximum lawful rate of interest. If the Lender shall receive, collect or apply any amount in excess of the then maximum rate of interest, the amount that would be excessive interest shall be applied first to the reduction

of the principal amount of the Obligations then outstanding in the inverse order of maturity, and second, if such principal amount is paid in full, any excess shall forthwith be returned to the Borrower. In determining whether the interest paid or payable under any specific contingency exceeds the highest lawful rate, the Borrower and the Lender shall, to the maximum extent permitted under applicable law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, (c) consider all the Obligations as one general obligation of the Borrower, and (d) “spread” the total amount of the interest throughout the entire term of this Note so that the interest rate is uniform throughout the entire term of this Note.

SECTION 21 -Financial Statements and Reports. Until all of the Obligations of the Borrower under this Note have been satisfied in full: 

(a)At any time that the Borrower is not required to file, or does not timely file, periodic reports with the SEC pursuant to the Exchange Act, the Borrower shall furnish to the Lender:

(i)not later than 90 days after the end of each fiscal year, financial statements (including a consolidated balance sheet and the related statements of income, cash flows and retained earnings) of the Borrower prepared in accordance with generally accepted accounting principles (or other comprehensive basis of accounting acceptable to the Lender) for such fiscal year, together with statements in comparative form for the preceding fiscal year, audited and accompanied by a report and opinion of an independent registered public accounting firm, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any “going concern” or like qualification or exception or any qualification or exception as to the scope of such audit; and

(ii)not later than 45 days after the end of each of the first three (3) fiscal quarters of each fiscal year, unaudited financial statements (including a consolidated balance sheet and the related statements of income, cash flows and retained earnings) of the Borrower prepared in accordance with generally accepted accounting principles (or other comprehensive basis of accounting acceptable to the Lender) for such quarterly fiscal period, setting forth in each case in comparative form the figures for the corresponding fiscal quarter of the previous fiscal year, all in reasonable detail and certified by the principal executive officer or principal financial officer (an “Authorized Officer”) of the Borrower as fairly presenting in all material respects the financial condition, results of operations, stockholders' equity and cash flows of the Borrower and its subsidiaries in accordance with GAAP, subject only to changes resulting from audit, normal year-end adjustments and the absence of footnotes; and

(b)To the extent that the Borrower is required pursuant to the terms of any agreement or instrument relating to outstanding Debt to prepare such reports, the Borrower shall furnish to the Lender any annual reports, quarterly reports and other periodic reports (without exhibits) actually prepared by the Borrower as soon as available.

SECTION 22Inspection Rights. Until all of the Borrower's Obligations under this Note have been satisfied in full, the Borrower shall, and shall cause its officers, directors and employees to, (i) afford the Holder and its representatives, during normal business hours and upon reasonable notice, reasonable access to the Borrower's books and records, with such right of access (A) to be conditioned upon the Holder entering into a reasonable confidentiality agreement with the Borrower, to the extent necessary for the Borrower to comply with the SEC's Regulation FD under the Exchange Act, if applicable, and (B) to be exercised by the Holder and its representatives in a manner that does not unreasonably interfere with the operations of the Borrower; and (ii) afford the Holder the opportunity to consult with its officers from time to time regarding the Borrower's affairs, finances and accounts as the Holder may reasonably request upon reasonable notice.

SECTION 23Ranking. The Obligations under this Note constitute Senior Indebtedness (as such term is defined in the Indentures) for purposes of the Indentures and shall rank senior in all respects, including in right of payment, to the Debentures and all Debt incurred by or related obligations of the Borrower under the Indentures. The Borrower represents and warrants to the Holder, and shall take all steps necessary to

ensure, that the foregoing sentence is and continues to be true and correct in all respects.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the undersigned has caused this Note dated August 3, 2012 to be executed and delivered under seal by its duly authorized representative.

National Security Group, Inc.

By:	/s/ W. L. Brunson, Jr.
Its:	President

Borrower's Tax Identification No.: 63-1020300

EX-10.2

Exhibit 10.1

MUTUAL GENERAL RELEASE AND

SETTLEMENT AGREEMENT

This Mutual General Release and Settlement Agreement (“Agreement”) is entered into and executed this __3rd___ day of August, 2012 by and among National Security Group, Inc. (“NSG”), the Bagley Family Revocable Trust (the “Bagley Trust”) and Mobile Attic, Inc. (“Mobile Attic”) (individually, a “Party” and collectively, “the Parties”).

WHEREAS, on or about January 9, 2009, the Bagley Trust, Mobile Attic and others filed suit in that matter styled as Mobile Attic, Inc.; et al. v. Peter L. Cash; et al., Case No. 1:09-cv-00024-MHT, in the United States District Court for the Middle District of Alabama (the “Lawsuit”);

WHEREAS, on August 17, 2009, NSG intervened in the Lawsuit and filed a Complaint in Intervention, which was amended on August 13, 2010, asserting claims against, inter alia, the Bagley Trust and Mobile Attic;

WHEREAS, on September 8, 2009, the Bagley Trust filed a counterclaim, which was amended on August 23, 2010, asserting claims against NSG seeking recovery of the Bagley Trust's losses incurred in its investment in Mobile Attic; and

WHEREAS, the Parties desire to settle all claims between them.

NOW, THEREFORE, in consideration of the mutual promises, covenants, and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties expressly agree as follows:

1.Consideration. As set forth in the Promissory Note attached hereto as “Exhibit A” (the “Promissory Note”), the terms of which are adopted and incorporated herein, NSG promises to pay to the Bagley Trust the principal sum of Thirteen Million and No/100 Dollars ($13,000,000.00), payable according to the terms set forth in the Promissory Note. NSG and the Bagley Trust

acknowledge, understand and agree that the Promissory Note is material and necessary to the execution of this Agreement and that an Event of Default (as defined in the Promissory Note) shall constitute a breach by NSG of this Agreement. Furthermore, nothing in this Agreement shall be construed as a waiver or release of the Bagley Trust's or NSG's rights, obligations and/or duties under the Promissory Note.

2.Notices. All notices made under this Agreement to the Bagley Trust shall be delivered to the Bagley Family Revocable Trust, #5 Stephens Court, Trophy Club, Texas 76262, unless and until the Bagley Trust designates in writing an alternative address for notices, with a copy to Mark Bagley, 348 Dogwood Trail, Coppell, Texas 75019. All notices to NSG shall be delivered to 661 East Davis Street, Elba, Alabama 36323.

3.Additional Covenants.

(a)Executive Compensation. Until NSG has satisfied all of its Obligations (as defined in the Promissory Note) under the Promissory Note, NSG shall not increase the Total Compensation paid to its Officers at a rate in excess of 5% per annum. For purposes of this Section 3, the term “Officer” shall have the meaning ascribed to such term in SEC Rule 16a‑1(f) and the term “Total Compensation” shall be calculated as follows. The “Total Compensation” of an Officer shall include all of the components of compensation paid to or earned by the Officer in a calendar year that would be required to be disclosed for an executive officer in the “Total Compensation” column of the Summary Compensation Table pursuant to Item 402(c)(2)(x) of SEC Regulation S-K or Item 402(n)(2)(x) of SEC Regulation S-K, as applicable (or any successor rule thereto), after deducting the following amounts: (i) annual bonus or incentive compensation paid to an executive for the calendar year in accordance with the bonus plan disclosed in NSG's proxy statement for the annual meeting held on May 18, 2012; (ii) any incentive compensation that is payable in shares of NSG's common stock; and (iii) “changes in pension value and non-qualified deferred compensation earnings” described in Item 402(c)(2)(viii) of SEC Regulation S-K. In the event NSG shall elect a new Officer in any calendar year, the annualized amount of the Total Compensation

payable to the new Officer shall be added to the current calendar year and the comparable calendar year when calculating this limitation.

(b)Non-contravention. As a material inducement for the Bagley Trust and Mobile Attic to enter into this Agreement, except as expressly permitted by the terms of this Agreement, NSG promises and agrees that, neither NSG nor any of its subsidiaries or other affiliates (either alone or in concert with any other person or entity) shall take any action, or shall enter into, agree to, authorize, permit, structure, or engage in any transaction or course of action (including without limitation any dissolution, liquidation, winding up, dividend, distribution, reorganization, recapitalization, spin-off, merger, consolidation, Change of Control (as defined in the Promissory Note), sale of assets, securities repurchase, reverse stock split, reclassification, or transaction similar to any of the foregoing in nature or result), with the effect of directly or indirectly (i) terminating, circumventing or voiding any of NSG's obligations under this Agreement or the Promissory Note in part or in whole, or (ii) violating any of NSG's covenants or agreements in the Promissory Note, including without limitation, in each case, the timely payment of all amounts due to the Bagley Trust under the Promissory Note. The foregoing sentence is meant to be broadly applied and interpreted to the benefit of the Bagley Trust.

(c)Additional Indebtedness. Until NSG has satisfied all of its Obligations (as defined in the Promissory Note) under the Promissory Note, NSG shall not incur any indebtedness ranking senior or pari passu in any respect to the Obligations of NSG under the Promissory Note that exceeds in aggregate principal amount the greater of either (A) $6.5 million or (B) such amount as, when added to the then outstanding principal amount of, and accrued but unpaid interest under, the Promissory Note, will equal $13.0 million. For purposes of this covenant, the interest rate swap agreements executed by NSG in connection with the Debentures (as defined in the Promissory Note) shall not be deemed to be senior or pari passu to the Obligations of NSG under the Promissory Note..

(d)Dividends, Payments. Until NSG has satisfied all of its Obligations (as defined in the Promissory Note) under the Promissory Note, NSG shall use its best efforts, subject to applicable

regulatory requirements, to cause its subsidiaries to pay cash dividends or make other cash payments to NSG in at least an amount sufficient to allow NSG to timely comply with its payment obligations under the Promissory Note.

(e)Non-Disparagement. After the date hereof, neither NSG nor any of its Officers, directors or shareholders will disparage the Bagley Trust or any of its grantors, trustees or beneficiaries in any public statement (whether written or oral) or disclosure.

(f)Notice of SEC filings. After the date hereof, NSG will use its best efforts to provide prompt notice to Bagley Trust of all reports and filings that it makes with the Securities and Exchange Commission (“SEC”) pursuant to the Exchange Act. Notice under this provision may be made by email to James W. Bagley and Mark Bagley at the email addresses separately provided to NSG.

4.Mutual General Release. Each Party, for and on behalf of itself and its current and former officers, directors, employees, subsidiaries, parent and sister corporations, predecessors, successors, agents, assigns, affiliates, trustees, servants, attorneys, personal representatives, executors, administrators, insurers, reinsurers, subrogees, and all those in whose right the foregoing might have claimed, does hereby irrevocably, unconditionally, fully, finally, and forever release, remise and discharge every other Party and all of its current and former officers, directors, employees, subsidiaries, parent and sister corporations, predecessors, successors, agents, assigns, affiliates, trustees, servants, attorneys, personal representatives, executors, administrators, insurers, reinsurers, subrogees, and all those in whose right the foregoing might have claimed, of and from any and all rights, claims, demands, suits, actions, causes of action, obligations, damages, costs, losses, interest, expenses and liabilities of any kind or nature whatsoever, whether legal, equitable or statutory, liquidated or unliquidated, known or unknown, suspected or unsuspected, reasonably discoverable or not, present, fixed or contingent, whether accrued or unaccrued, arising out of anything that shall have occurred, or based upon any action, omission or event, that each Party, from the beginning of time to the date hereof, ever had, now has or could have had against any other Party; provided, however, nothing in this paragraph shall be deemed to release any claim

relating to or otherwise seeking enforcement of the terms of this Agreement. Further, notwithstanding the foregoing, each Party shall retain whatever rights and claims it has or may have against Peter L. Cash or under any insurance policy covering such released claims.

5.Dismissal of the Lawsuit. Upon execution of this Agreement, the Parties agree to file all such documents as may be necessary to effectuate the dismissal, with prejudice, of all claims currently pending in the Lawsuit, with each party to bear its own costs. The Parties agree that no appeals shall be taken from the dismissal of any claims in the Lawsuit.

6.Entire Agreement. This Agreement, together with the Promissory Note, contains the entire, complete, and integrated statement of each and every term and provision agreed to by and among the Parties. It contains the entire agreement and understanding between the Parties relating to the subject matter contained herein, superseding any prior oral or written agreements pertaining to said subject matter. No other promises, representations or other inducements have been made to any Party in exchange for this Agreement.

7.Modification. No provision of this Agreement may be waived, altered, amended, or modified in any respect or particular whatsoever except by written agreement duly executed by each of the parties to this Agreement.

8.Successors and Assigns. The provisions of this Agreement shall be binding and inure to the benefit of each of the Parties and their respective heirs, executors, administrators, agents, representatives, successors, and assigns.

9.No Admissions. The Parties agree that neither this Agreement, nor any action taken by the Parties, either previously or in connection with the compromise reflected in this Agreement, shall be deemed or construed to be an admission of the truth or falsity of any matter pertaining to the Lawsuit or any claim, demand, or cause of action referred to herein or relating to the subject matter of this Agreement, or evidence of any violation of any statute or law or of any liability or wrongdoing by any Party, or any acknowledgment by them of any fault or liability to any Party hereto or to any other person

or entity.

10.Jointly Drafted. This Agreement has been jointly drafted and negotiated by and between the parties through their attorneys. No entity or counsel to any party or entity shall be deemed to have drafted, prepared, or otherwise written this Agreement, and the Agreement shall not be construed in favor of or against any party hereto.

11.Governing Law. This Agreement shall be construed, interpreted and enforced according to the laws of the State of Alabama, without regard to Alabama's conflict of laws principles.

12.Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

13.Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree shall remain in full force and effect to the extent not held invalid or unenforceable.

14.Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

15.Headings. The headings of this Agreement are for convenience or reference only, and shall not limit, expand, modify, or otherwise affect the meaning hereof.

REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

IN WITNESS WHEREOF, the Parties, by their duly authorized officers and agents, have executed this Agreement as of the date first written above.

BAGLEY FAMILY REVOCABLE TRUST

By:	/s/ James W. Bagley
Its:	Trustee

STATE OF CALIFORNIA)

ALAMEDA COUNTY)

Before me, the undersigned authority, a notary public, in and for said County and said State, personally appeared James W. Bagley, Authorized Representative for and on behalf of The Bagley Family Revocable Trust, who after first being duly sworn does say that being informed and aware of the contents of the foregoing Agreement he has executed it on the day that appears on the Agreement.

SWORN TO and subscribed to before me this 06 day of August, 2012.

/s/ Susan K. Hickman
Notary Public
My Commission Expires:	2/28/2014

IN WITNESS WHEREOF, the Parties, by their duly authorized officers and agents, have executed this Agreement as of the date first written above.

MOBILE ATTIC, INC.

By:	/s/ James W. Bagley
Its:	President

STATE OF CALIFORNIA)

ALAMEDA COUNTY)

Before me, the undersigned authority, a notary public, in and for said County and said State, personally appeared James W. Bagley, Authorized Representative for and on behalf of Mobile Attic, Inc., who after first being duly sworn does say that being informed and aware of the contents of the foregoing Agreement he has executed it on the day that appears on the Agreement.

SWORN TO and subscribed to before me this 06 day of August, 2012.

/s/ Susan K. Hickman
Notary Public
My Commission Expires:	2/28/2014

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above.

NATIONAL SECURITY GROUP, INC.

By:	/s/ W. L. Brunson, Jr.
Its:	President

STATE OF ALABAMA

COUNTY OF COFFEE

Before me, the undersigned authority, a notary public, in and for said County and said State, personally appeared William L. Brunson, Authorized Representative for and on behalf of National Security Group, Inc., who after first being duly sworn does say that being informed and aware of the contents of the foregoing Agreement he has executed it on the day that appears on the Agreement.

SWORN TO and subscribed to before me this 3 day of August, 2012.

/s/ Ann Holley
Notary Public
My Commission Expires:	7/26/16

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, William L. Brunson, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The National Security Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 7, 2012

/s/ William L. Brunson, Jr.

William L. Brunson, Jr.

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Brian R. McLeod, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The National Security Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 7, 2012

/s/ Brian R. McLeod

Brian R. McLeod

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. § 1350, the undersigned officer of the National Security Group, Inc. (the “Company”), hereby certifies, to such officer’s knowledge, that the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) or 15 (d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 7, 2012
/s/ William L. Brunson, Jr.	/s/ Brian R. McLeod
Name: William L. Brunson, Jr. Title: Chief Executive Officer		Name: Brian R. McLeod, CPA Title: Chief Financial Officer

XML

Income Taxes (Schedule of Income Tax Effects of Changes in Temporary Differences) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Income Tax Disclosure [Abstract]
Deferred policy acquisition costs			$ 49	$ 304
Other-than-temporary impairments			27	(69)
Trading securities			0	10
Unearned premiums			(113)	(102)
General expenses			(61)	(98)
Depreciation			(24)	(16)
Claim liabilities			22	(2)
Litigation settlement			(3,995)	0
NOL carry forward			(230)	0
Deferred income tax (benefit) expense	$ (4,322)	$ (91)	$ (4,325)	$ 27

XML

Fair Value of Financial Assets and Financial Liabilities (Fair Value of Assets and Liabilities) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Long-term Debt [Member]
Liabilities and Related Instruments [Abstract]
Carrying Value, Liabilities	$ 12,372	$ 12,372
Estimated Fair Value, Liabilities	12,372	12,372
Short-term Debt [Member]
Liabilities and Related Instruments [Abstract]
Carrying Value, Liabilities	625	485
Estimated Fair Value, Liabilities	625	485
Insurance Claims [Member]
Liabilities and Related Instruments [Abstract]
Carrying Value, Liabilities	1,429	1,408
Estimated Fair Value, Liabilities	1,429	1,408
Other Long-term Investments [Member]
Assets and Related Instruments [Abstract]
Carrying Value, Assets	3,848	3,929
Estimated Fair Value, Assets	3,848	3,929
Cash Surrender Value [Member]
Assets and Related Instruments [Abstract]
Carrying Value, Assets	5,831	5,660
Estimated Fair Value, Assets	5,831	5,660
Policy Loans [Member]
Assets and Related Instruments [Abstract]
Carrying Value, Assets	1,241	1,244
Estimated Fair Value, Assets	1,241	1,244
Mortgage Loans on Real Estate [Member]
Assets and Related Instruments [Abstract]
Carrying Value, Assets	386	390
Estimated Fair Value, Assets	$ 386	$ 390

XML

Fair Value of Financial Assets and Financial Liabilities (Assets/Liabilities Measured at Fair Value on a Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trading securities	$ 40	$ 80
Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Financial Assets	80,361	81,701
Total Financial Liabilities	1,437	1,196
Corporate Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	32,346	20,980
Trust Preferred Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	535	479
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	6,833	7,871
Mortgage-backed Securities, Issued by Private Enterprises [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	8,561	9,853
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	15,521	19,482
US Government Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	8,650	14,409
Trading Account Assets [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trading securities	40	80
Equity Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	7,875	8,547
Fair Value, Inputs, Level 1 [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Financial Assets	15,777	22,394
Total Financial Liabilities	0	0
Fair Value, Inputs, Level 1 [Member] | Corporate Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 1 [Member] | Trust Preferred Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 1 [Member] | Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 1 [Member] | Mortgage-backed Securities, Issued by Private Enterprises [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 1 [Member] | US States and Political Subdivisions Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 1 [Member] | US Government Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	8,650	14,409
Fair Value, Inputs, Level 1 [Member] | Trading Account Assets [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trading securities	40	80
Fair Value, Inputs, Level 1 [Member] | Equity Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	7,087	7,905
Fair Value, Inputs, Level 2 [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Financial Assets	63,796	58,665
Total Financial Liabilities	0	0
Fair Value, Inputs, Level 2 [Member] | Corporate Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	32,346	20,980
Fair Value, Inputs, Level 2 [Member] | Trust Preferred Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	535	479
Fair Value, Inputs, Level 2 [Member] | Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	6,833	7,871
Fair Value, Inputs, Level 2 [Member] | Mortgage-backed Securities, Issued by Private Enterprises [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	8,561	9,853
Fair Value, Inputs, Level 2 [Member] | US States and Political Subdivisions Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	15,521	19,482
Fair Value, Inputs, Level 2 [Member] | US Government Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 2 [Member] | Trading Account Assets [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trading securities	0	0
Fair Value, Inputs, Level 2 [Member] | Equity Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 3 [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Financial Assets	788	642
Total Financial Liabilities	1,437	1,196
Fair Value, Inputs, Level 3 [Member] | Corporate Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 3 [Member] | Trust Preferred Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 3 [Member] | Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 3 [Member] | Mortgage-backed Securities, Issued by Private Enterprises [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 3 [Member] | US States and Political Subdivisions Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 3 [Member] | US Government Debt Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	0	0
Fair Value, Inputs, Level 3 [Member] | Trading Account Assets [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trading securities	0	0
Fair Value, Inputs, Level 3 [Member] | Equity Securities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fixed maturities available-for-sale	788	642
Interest Rate Swap [Member] | Derivative Financial Instruments, Liabilities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Financial Liabilities	1,437	1,196
Interest Rate Swap [Member] | Fair Value, Inputs, Level 1 [Member] | Derivative Financial Instruments, Liabilities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Financial Liabilities	0	0
Interest Rate Swap [Member] | Fair Value, Inputs, Level 2 [Member] | Derivative Financial Instruments, Liabilities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Financial Liabilities	0	0
Interest Rate Swap [Member] | Fair Value, Inputs, Level 3 [Member] | Derivative Financial Instruments, Liabilities [Member] | Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Financial Liabilities	$ 1,437	$ 1,196

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Investments (Held-to-Maturity Securities) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Schedule of Held-to-maturity Securities [Line Items]
Amortized Cost	$ 2,336	$ 3,303
Gross Unrecognized Gains	165	194
Gross Unrecognized Losses	0	0
Fair Value	2,501	3,497
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Held-to-maturity Securities [Line Items]
Amortized Cost	1,619	2,026
Gross Unrecognized Gains	121	125
Gross Unrecognized Losses	0	0
Fair Value	1,740	2,151
Mortgage-backed Securities, Issued by Private Enterprises [Member]
Schedule of Held-to-maturity Securities [Line Items]
Amortized Cost	0	55
Gross Unrecognized Gains	0	1
Gross Unrecognized Losses	0	0
Fair Value	0	56
US States and Political Subdivisions Debt Securities [Member]
Schedule of Held-to-maturity Securities [Line Items]
Amortized Cost	515	996
Gross Unrecognized Gains	27	50
Gross Unrecognized Losses	0	0
Fair Value	542	1,046
US Treasury Securities [Member]
Schedule of Held-to-maturity Securities [Line Items]
Amortized Cost	202	226
Gross Unrecognized Gains	17	18
Gross Unrecognized Losses	0	0
Fair Value	$ 219	$ 244

XML

Fair Value of Financial Assets and Financial Liabilities (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):

	Fair Value Measurements at Reporting Date Using
Description	Total		Level 1		Level 2		Level 3
Financial Assets
Fixed maturities available-for-sale
Corporate debt securities	$	32,346	$	—	$	32,346	$	—
Trust preferred securities	535		—		535		—
Mortgage backed securities	6,833		—		6,833		—
Private label mortgage backed securities	8,561		—		8,561		—
Obligations of states and political subdivisions	15,521		—		15,521		—
U.S. Treasury securities and obligations of U.S.    Government corporations and agencies	8,650		8,650		—		—
Trading securities	40		40		—		—
Equity securities available-for-sale	7,875		7,087		—		788
Total Financial Assets	$	80,361	$	15,777	$	63,796	$	788
Financial Liabilities
Interest rate swap	$	1,437	$	—	$	—	$	1,437
Total Financial Liabilities	$	1,437	$	—	$	—	$	1,437

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):

	Fair Value Measurements at Reporting Date Using
Description	Total		Level 1		Level 2		Level 3
Financial Assets
Fixed maturities available-for-sale
Corporate debt securities	$	20,980	$	—	$	20,980	$	—
Trust preferred securities	479		—		479		—
Mortgage backed securities	7,871		—		7,871		—
Private label mortgage backed securities	9,853		—		9,853		—
Obligations of states and political subdivisions	19,482		—		19,482		—
U.S. Treasury securities and obligations of U.S.    Government corporations and agencies	14,409		14,409		—		—
Trading securities	80		80		—		—
Equity securities available-for-sale	8,547		7,905		—		642
Total Financial Assets	$	81,701	$	22,394	$	58,665	$	642
Financial Liabilities
Interest rate swap	$	1,196	$	—	$	—	$	1,196
Total Financial Liabilities	$	1,196	$	—	$	—	$	1,196

Schedule of Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year endedDecember 31, 2011 (in thousands):

For the year ended December 31, 2011	Equity Securities Available-for-Sale			Interest Rate Swap
Beginning balance	$	787		$	(227	)
Total gains or losses (realized and unrealized):
Included in earnings	—			—
Included in other comprehensive income	(145		)	(969		)
Purchases:	—			—
Sales:	—			—
Issuances:	—			—
Settlements	—			—
Transfers in/(out) of Level 3	—			—
Ending balance	$	642		$	(1,196	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of December 31, 2011:	$	—		$	—

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter endedJune 30, 2012 (in thousands):

For the quarter ended June 30, 2012	Equity Securities Available-for-Sale		Interest Rate Swap
Beginning balance	$	642	$	(1,196	)
Total gains or losses (realized and unrealized):
Included in earnings	—		—
Included in other comprehensive income	3		(241		)
Purchases:	143		—
Sales:	—		—
Issuances:	—		—
Settlements	—		—
Transfers in/(out) of Level 3	—		—
Ending balance	$	788	$	(1,437	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of June 30, 2012:	$	—	$	—

Schedule of Fair Value, by Balance Sheet Grouping

The carrying amount and estimate fair value of the Company’s financial instruments as of June 30, 2012 and December 31, 2011 are as follows (in thousands):

	June 30, 2012				December 31, 2011
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets and related instruments
Mortgage loans	$	386	$	386	$	390	$	390
Policy loans	1,241		1,241		1,244		1,244
Company owned life insurance	5,831		5,831		5,660		5,660
Other invested assets	3,848		3,848		3,929		3,929
Liabilities and related instruments
Other policyholder funds	1,429		1,429		1,408		1,408
Short-term debt	625		625		485		485
Long-term debt	12,372		12,372		12,372		12,372

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Segments (Schedule of Gross and Net Premiums Written) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Life, accident and health operations premiums written:
Traditional life insurance	$ 1,248	$ 1,226	$ 2,458	$ 2,531
Accident and health insurance	455	474	919	958
Total life, accident and health	1,703	1,700	3,377	3,489
Property and Casualty operations premiums written:
Gross premiums written	17,028	17,844	31,668	34,099
Reinsurance premium ceded	2,443	3,039	4,126	4,568
Net premiums written	14,585	14,805	27,542	29,531
Consolidated Property and Casualty Insurance Entity [Member]
Property and Casualty operations premiums written:
Dwelling fire & extended coverage	7,825	7,271	14,752	13,968
Homeowners (Including mobile homeowners)	6,745	7,439	12,232	13,446
Ocean marine	363	397	447	516
Other liability	409	377	766	711
Private passenger auto liability	(12)	393	57	1,247
Commercial auto liability	0	92	6	211
Auto physical damage	(5)	175	31	511
Total property and casualty	$ 15,325	$ 16,144	$ 28,291	$ 30,610

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Notes Payable and Long-Term Debt (Short-Term Debt) (Details) (USD $) In Thousands, unless otherwise specified			6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012 Unsecured Debt [Member]
Short-term Debt [Line Items]
Line of credit with variable interest rate equal to the WSJ prime rate, subject to a 5.0% floor; Maturity January 2013. Interest payments due quarterly. Unsecured.	$ 625	$ 485
Interest rate at period end	5.00%		5.00%
Payment terms			Interest payments due quarterly

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Income Taxes Income Taxes (Narrative) (Details) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Income Tax Disclosure [Abstract]
Income tax related interest and penalties	$ 0	$ 1,000
Deferred income tax asset	4,282,000	0
Deferred income tax liability	$ 0	$ 86,000

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Preferred and Common Stock (Details) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Class of Stock [Line Items]
Preferred stock, par value	$ 1	$ 1
Preferred stock, shares authorized	500,000	500,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 1	$ 1
Common stock, shares authorized	3,000,000	3,000,000
Common stock, shares issued	2,466,600	2,466,600
Common stock, shares outstanding	2,466,600	2,466,600
Common Class A [Member]
Class of Stock [Line Items]
Common stock, par value	$ 1	$ 1
Common stock, shares authorized	2,000,000	2,000,000
Common stock, shares issued	0	0
Common stock, shares outstanding	0	0

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Fair Value of Financial Assets and Financial Liabilities (Level 3 Reconciliation) (Details) (USD $)	3 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Ending balance	$ 788,000
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Ending balance	(1,437,000)
Fair Value, Measurements, Recurring [Member] | Interest Rate Swap [Member]
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Beginning balance		(227,000)
Included in earnings	0	0
Included in other comprehensive income	(241,000)	(969,000)
Purchases:	0	0
Sales:	0	0
Issuances:	0	0
Settlements	0	0
Transfers in/(out) of Level 3	0	0
Ending balance	(1,437,000)	(1,196,000)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of June 30, 2012:	0	0
Fair Value, Measurements, Recurring [Member] | Available-for-sale Securities [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Beginning balance		787,000
Included in earnings	0	0
Included in other comprehensive income	3,000	(145,000)
Purchases:	143,000	0
Sales:	0	0
Issuances:	0	0
Settlements	0	0
Transfers in/(out) of Level 3	0	0
Ending balance	788,000	642,000
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of June 30, 2012:	$ 0	$ 0

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Significant Accounting Policies

6 Months Ended

Jun. 30, 2012

Accounting Policies [Abstract]

Significant Accounting Policies

SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of The National Security Group, Inc. (the Company) and its wholly-owned subsidiaries:  National Security Insurance Company (NSIC), National Security Fire and Casualty Company (NSFC) and  NATSCO, Inc. (NATSCO).  NSFC includes a wholly-owned subsidiary - Omega One Insurance Company (Omega).  The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  All significant intercompany transactions and accounts have been eliminated.  The financial information presented herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which includes information and disclosures not presented herein.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these financial statements are reserves for future policy benefits, liabilities for losses and loss adjustment expenses, reinsurance recoverable asset on associated loss and loss adjustment expense liabilities, deferred policy acquisition costs, deferred income tax assets and liabilities, assessments of other-than-temporary impairments on investments and accruals for contingencies.   Actual results could differ from those estimates.

Recently Adopted Accounting Standards

Presentation of Comprehensive Income

In June and December 2011, the Financial Accounting Standards Board (FASB) issued guidance amending the presentation of comprehensive income and its components. Under the new guidance, a reporting entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements.  The Company adopted the new guidance in the first quarter of 2012.  The Company opted to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in two separate but consecutive statements. The Unaudited Condensed Consolidated Financial Statements included herein reflect the adoption of this updated guidance. The new guidance affects presentation only and therefore had no impact on the Company's results of operations or financial position.

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance contracts.  The guidance specifies that the costs must be directly related to the successful acquisition of insurance contracts.  The guidance also specifies that advertising costs should be included as deferred acquisition costs ("DAC") only when the direct-response advertising accounting criteria are met.  Under the new guidance, only acquisition costs associated with "successful sales" are allowed to be deferred. Successful sales ratios will be reviewed quarterly and the new guidance will reduce the amount of acquisition cost that can be deferred to future periods. The Company adopted the new guidance on a prospective basis as of January 1, 2012. 

Amendments to Fair Value Measurement and Disclosure Requirements

In May 2011, the FASB issued guidance that clarifies the application of existing fair value measurement and disclosure requirements and amends certain fair value measurement principles, requirements and disclosures.  The guidance is to be applied prospectively for reporting periods beginning after December 15, 2011.  The adoption of this guidance as of January 1, 2012 had no impact on the Company's results of operations or financial position. The expanded disclosures required by this guidance are included in Note 9.

Accounting Changes Not Yet Adopted

Disclosures about Offsetting Assets and Liabilities for Financial Instruments and Derivative Instruments

In December 2011, the FASB issued guidance requiring expanded disclosures, including both gross and net information, for financial instruments and derivative instruments that are either offset in the reporting entity's financial statements or those that are subject to an enforceable master netting arrangement or similar agreement.  The guidance is effective for reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively.  The new guidance affects disclosures only and will have no impact on the Company's results of operations or financial position.

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Notes Payable and Long-Term Debt (Schedule of Long-Term Debt) (Details) (USD $) In Thousands, unless otherwise specified				0 Months Ended	6 Months Ended		0 Months Ended	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Mar. 19, 2009	Dec. 15, 2005 Trust Preferred Security Offering, 2005 [Member]	Jun. 30, 2012 Trust Preferred Security Offering, 2005 [Member]	Dec. 31, 2011 Trust Preferred Security Offering, 2005 [Member]	Jun. 21, 2007 Trust Preferred Security Offering, 2007 [Member]	Jun. 30, 2012 Trust Preferred Security Offering, 2007 [Member]	Dec. 31, 2011 Trust Preferred Security Offering, 2007 [Member]	Dec. 15, 2005 Trust Preferred Security Offering, 2007 [Member]
Debt Instrument [Line Items]
Long-term debt	$ 12,372	$ 12,372			$ 9,279	$ 9,279		$ 3,093	$ 3,093
Fixed interest rate				8.83%
Description of variable rate basis				3-month LIBOR			3-month LIBOR
Basis spread on variable rate			3.40%	3.75%						3.40%
Payment terms					Interest payments due quarterly.			Interest payments due quarterly.

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Calcuation of Earnings Per Share (Details)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Earnings Per Share, Basic [Abstract]
Weighted average number of shares outstanding	2,466,600	2,466,600

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Reinsurance (Narrative) (Details) (USD $)	6 Months Ended
	Jun. 30, 2012
Reinsurance Maintained by Layers [Line Items]
Catastrophe reinsurance retention	$ 4,000,000
Life insurance policy reinsurance limit	50,000
First Layer [Member]
Reinsurance Maintained by Layers [Line Items]
Percent of reinsured losses covered by layer	95.00%
Covered losses	6,000,000
Reinsurer's limit of liability	4,000,000
Second Layer [Member]
Reinsurance Maintained by Layers [Line Items]
Percent of reinsured losses covered by layer	95.00%
Covered losses	7,500,000
Reinsurer's limit of liability	10,000,000
Third Layer [Member]
Reinsurance Maintained by Layers [Line Items]
Percent of reinsured losses covered by layer	100.00%
Covered losses	25,000,000
Reinsurer's limit of liability	17,500,000
Fourth Layer [Member]
Reinsurance Maintained by Layers [Line Items]
Percent of reinsured losses covered by layer	100.00%
Covered losses	30,000,000
Reinsurer's limit of liability	$ 42,500,000

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Contingencies (Details) (USD $)					0 Months Ended			0 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Mar. 19, 2009	Apr. 05, 2007	Apr. 05, 2007 Mobile Attic, Inc., [Member]	Apr. 05, 2007 Bagley Family Revocable Trust [Member]	Jun. 20, 2012 Bagley Family Revocable Trust [Member]	Jun. 20, 2012 Bagley Family Revocable Trust [Member] Litigation Settlement [Member]
Loss Contingencies [Line Items]
Ownership percentage					50.00%
Percent of oustanding stock sold under stock purchase agreement				61.00%		61.00%
Proceeds from divestiture of businesses						$ 2,700,000
Percent of oustanding stock sold under stock purchase agreement by the company						45.00%
Proceeds recieved by non-controlling interest						960,000
Ownership percentage by noncontrolling owners						0.00%
Guarantor obligations, maximum exposure, undiscounted						9,400,000
Litigation settlement	13,000,000	0					13,000,000
Initial settlement payment							$ 2,500,000
Payment terms								9 equal annual installments on November 15 each year beginning in 2013 with a final payment in 2021
Debt Instrument, description of variable rate basis								Wall Street Journal prime rate
Long-term debt, basis spread on variable rate			3.40%					1.00%

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Changes in Shareholders' Equity (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Stockholders' Equity Note [Abstract]
Net loss	$ (7,306,000)	$ (4,945,000)	$ (6,775,000)	$ (3,950,000)
Cash dividends			494,000	740,000
Other comprehensive income (loss), net of tax	$ (445,000)	$ 362,000	$ (83,000)	$ 230,000

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Investments (Narrative) (Details) (USD $)	12 Months Ended
	Dec. 31, 2011	Jun. 30, 2012
Gain (Loss) on Investments [Line Items]
Held-to-maturity securities, unrealized losses	$ 0	$ 0
Single largest loss position	501,000	498,000
Second largest loss position	70,000	75,000
Third largest loss position	58,000	25,000
Other-than-temporary impairments, available-for-sale securities	$ 398,000
Maximum [Member]
Gain (Loss) on Investments [Line Items]
Percent of investment portfolio below investment grade		4.00%

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Condensed Consolidated Statement of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash Flows from Operating Activities
Net loss	$ (6,775,000)	$ (3,950,000)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Change in accrued investment income	(70,000)	109,000
Change in reinsurance recoverable	818,000	(1,832,000)
Change in deferred policy acquisition costs	(145,000)	(27,000)
Change in accrued income tax receivable	173,000	(2,604,000)
Change in deferred income taxes	(4,325,000)	(27,000)
Depreciation expense	286,000	187,000
Change in policy liabilities and claims	(1,376,000)	2,195,000
Change in litigation settlement	13,000,000	0
Other, net	(1,569,000)	(1,660,000)
Net cash provided (used) by operating activities	17,000	(7,609,000)
Cash Flows from Investing Activities
Cost of investments acquired	(15,267,000)	(11,777,000)
Sale and maturity of investments	18,690,000	19,847,000
Purchase of property and equipment	(155,000)	(31,000)
Net cash provided by investing activities	3,268,000	8,039,000
Cash Flows from Financing Activities
Change in other policyholder funds	21,000	28,000
Change in short-term notes payable	140,000	(325,000)
Dividends paid	(494,000)	(740,000)
Net cash used in financing activities	(333,000)	(1,037,000)
Net change in cash and cash equivalents	2,952,000	(607,000)
Cash and cash equivalents, beginning of period	3,393,000	1,572,000
Cash and cash equivalents, end of period	$ 6,345,000	$ 965,000

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Investments (Available-for-Sale Securities) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 73,495	$ 74,911
Gross Unrealized Gains	7,641	7,728
Gross Unrealized Losses	815	1,018
Fair Value	80,321	81,621
Corporate Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	30,876	19,907
Gross Unrealized Gains	1,703	1,340
Gross Unrealized Losses	233	267
Fair Value	32,346	20,980
Trust Preferred Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	537	537
Gross Unrealized Gains	0	0
Gross Unrealized Losses	2	58
Fair Value	535	479
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	6,640	7,587
Gross Unrealized Gains	215	307
Gross Unrealized Losses	22	23
Fair Value	6,833	7,871
Mortgage-backed Securities, Issued by Private Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	8,354	9,716
Gross Unrealized Gains	212	199
Gross Unrealized Losses	5	62
Fair Value	8,561	9,853
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	14,334	18,355
Gross Unrealized Gains	1,187	1,142
Gross Unrealized Losses	0	15
Fair Value	15,521	19,482
US Treasury Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	8,195	13,878
Gross Unrealized Gains	465	534
Gross Unrealized Losses	10	3
Fair Value	8,650	14,409
Available-for-sale Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	68,936	69,980
Gross Unrealized Gains	3,782	3,522
Gross Unrealized Losses	272	428
Fair Value	72,446	73,074
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	4,559	4,931
Gross Unrealized Gains	3,859	4,206
Gross Unrealized Losses	543	590
Fair Value	$ 7,875	$ 8,547

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Income Taxes (Schedule of Effective Income Tax Rate Reconciliation) (Details)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Income Tax Disclosure [Abstract]
Federal income tax rate applied to pre-tax income/loss	34.00%	34.00%
Dividends received deduction and tax-exempt interest	0.80%	1.70%
Company owned life insurance	0.50%	0.70%
Small life deduction	2.10%	3.10%
Other, net	0.60%	(4.40%)
Effective federal income tax rate	38.00%	35.10%

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Condensed Consolidated Balance Sheets (Unaudited) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Investments
Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2012 - $2,501;2011 - $3,497)	$ 2,336,000	$ 3,303,000
Fixed maturities available-for-sale, at estimated fair value (cost: 2012 - $68,936;2011 -$69,980)	72,446,000	73,074,000
Equity securities available-for-sale, at estimated fair value (cost: 2012 - $4,559;2011 - $4,931)	7,875,000	8,547,000
Trading securities	40,000	80,000
Mortgage loans on real estate, at cost	386,000	390,000
Investment real estate, at book value	5,774,000	5,745,000
Policy loans	1,241,000	1,244,000
Company owned life insurance	5,831,000	5,660,000
Other invested assets	3,848,000	3,929,000
Total Investments	99,777,000	101,972,000
Cash	6,345,000	3,393,000
Accrued investment income	776,000	706,000
Policy receivables and agents' balances, net	10,109,000	8,805,000
Reinsurance recoverable	1,960,000	2,778,000
Deferred policy acquisition costs	9,703,000	9,558,000
Property and equipment, net	2,482,000	2,528,000
Accrued income tax recoverable	1,496,000	1,669,000
Deferred income tax asset	4,282,000	0
Other assets	1,200,000	1,045,000
Total Assets	138,130,000	132,454,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Property and casualty benefit and loss reserves	12,369,000	14,386,000
Accident and health benefit and loss reserves	2,172,000	2,122,000
Life and annuity benefit and loss reserves	29,813,000	29,605,000
Unearned premiums	26,906,000	25,232,000
Policy and contract claims	686,000	652,000
Other policyholder funds	1,429,000	1,408,000
Short-term notes payable	625,000	485,000
Litigation settlement	13,000,000	0
Long-term debt	12,372,000	12,372,000
Deferred income tax liability	0	86,000
Other liabilities	8,095,000	8,091,000
Total Liabilities	107,467,000	94,439,000
Contingencies
Shareholders' equity
Common stock	2,467,000	2,467,000
Additional paid-in capital	4,951,000	4,951,000
Accumulated other comprehensive income	3,557,000	3,640,000
Retained earnings	19,688,000	26,957,000
Total Shareholders' Equity	30,663,000	38,015,000
Total Liabilities and Shareholders' Equity	$ 138,130,000	$ 132,454,000

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Fair Value of Financial Assets and Financial Liabilities (Narrative) (Details) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Fair Value Disclosures [Abstract]
Fair value measurements of assets	$ 788,000
Fair value measurements of liabilities	1,437,000
Assets or liabilities measured at fair values on a nonrecurring basis	$ 0	$ 0

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Condensed Consolidated Statement of Shareholders' Equity (Unaudited) (USD $)	Total	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]
Beginning Balance at Dec. 31, 2011	$ 38,015,000	$ 26,957,000	$ 3,640,000	$ 2,467,000	$ 4,951,000
Comprehensive income
Net loss six months ended 6/30/2012	(6,775,000)	(6,775,000)
Other comprehensive income, net of tax:
Unrealized gain on securities, net of reclassification adjustment of $704	76,000		76,000
Unrealized gain on interest rate swap	(159,000)		(159,000)
Total comprehensive loss	(6,858,000)
Cash dividends	(494,000)	(494,000)
Ending Balance at Jun. 30, 2012	$ 30,663,000	$ 19,688,000	$ 3,557,000	$ 2,467,000	$ 4,951,000

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Investments (Schedule of Continuous Losses) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	$ 10,315	$ 8,576
Less than 12 Months, Gross Unrealized Losses	113	312
12 Months or Longer, Fair Value	4,603	4,796
12 Months or Longer, Gross Unrealized Losses	702	706
Total Fair Value	14,918	13,372
Total Gross Unrealized Losses	815	1,018
Total Securities in a Loss Position	41	40
Corporate Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	8,368	4,703
Less than 12 Months, Gross Unrealized Losses	81	166
12 Months or Longer, Fair Value	2,647	899
12 Months or Longer, Gross Unrealized Losses	152	101
Total Fair Value	11,015	5,602
Total Gross Unrealized Losses	233	267
Total Securities in a Loss Position	27	15
Trust Preferred Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	0	479
Less than 12 Months, Gross Unrealized Losses	0	58
12 Months or Longer, Fair Value	535	0
12 Months or Longer, Gross Unrealized Losses	2	0
Total Fair Value	535	479
Total Gross Unrealized Losses	2	58
Total Securities in a Loss Position	1	1
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	1,155	883
Less than 12 Months, Gross Unrealized Losses	22	21
12 Months or Longer, Fair Value	0	198
12 Months or Longer, Gross Unrealized Losses	0	2
Total Fair Value	1,155	1,081
Total Gross Unrealized Losses	22	23
Total Securities in a Loss Position	4	3
Mortgage-backed Securities, Issued by Private Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	0	1,860
Less than 12 Months, Gross Unrealized Losses	0	15
12 Months or Longer, Fair Value	117	1,094
12 Months or Longer, Gross Unrealized Losses	5	47
Total Fair Value	117	2,954
Total Gross Unrealized Losses	5	62
Total Securities in a Loss Position	1	9
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	0	0
Less than 12 Months, Gross Unrealized Losses	0	0
12 Months or Longer, Fair Value	0	1,803
12 Months or Longer, Gross Unrealized Losses	0	15
Total Fair Value	0	1,803
Total Gross Unrealized Losses	0	15
Total Securities in a Loss Position	0	5
US Treasury Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	608	260
Less than 12 Months, Gross Unrealized Losses	2	3
12 Months or Longer, Fair Value	254	0
12 Months or Longer, Gross Unrealized Losses	8	0
Total Fair Value	862	260
Total Gross Unrealized Losses	10	3
Total Securities in a Loss Position	3	1
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 Months, Fair Value	184	391
Less than 12 Months, Gross Unrealized Losses	8	49
12 Months or Longer, Fair Value	1,050	802
12 Months or Longer, Gross Unrealized Losses	535	541
Total Fair Value	1,234	1,193
Total Gross Unrealized Losses	$ 543	$ 590
Total Securities in a Loss Position	5	6

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Investments (Tables)

6 Months Ended

Jun. 30, 2012

Investments [Abstract]

Schedule of Amortized Cost and Aggregate Fair Values of Investments in Available-for-Sale Securities

The amortized cost and aggregate fair values of investments in available-for-sale securities as of June 30, 2012 are as follows:

Available-for-sale securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	30,876	$	1,703	$	233	$	32,346
Trust preferred securities	537		—		2		535
Mortgage backed securities	6,640		215		22		6,833
Private label mortgage backed securities	8,354		212		5		8,561
Obligations of states and political subdivisions	14,334		1,187		—		15,521
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	8,195		465		10		8,650
Total fixed maturities	68,936		3,782		272		72,446
Equity securities	4,559		3,859		543		7,875
Total	$	73,495	$	7,641	$	815	$	80,321

The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31, 2011 are as follows:

Available-for-sale securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	19,907	$	1,340	$	267	$	20,980
Trust preferred securities	537		—		58		479
Mortgage backed securities	7,587		307		23		7,871
Private label mortgage backed securities	9,716		199		62		9,853
Obligations of states and political subdivisions	18,355		1,142		15		19,482
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	13,878		534		3		14,409
Total fixed maturities	69,980		3,522		428		73,074
Equity securities	4,931		4,206		590		8,547
Total	$	74,911	$	7,728	$	1,018	$	81,621

Schedule of Amortized Sost and Aggregate Fair Values of Investments in Held-to-Maturity Securities

The amortized cost and aggregate fair values of investments in held-to-maturity securities as of June 30, 2012 are as follows:

Held-to-maturity securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage backed securities	$	1,619	$	121	$	—	$	1,740
Private label mortgage backed securities	—		—		—		—
Obligations of states and political subdivisions	515		27		—		542
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	202		17		—		219
Total	$	2,336	$	165	$	—	$	2,501

The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2011 are as follows:

Held-to-maturity securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage backed securities	$	2,026	$	125	$	—	$	2,151
Private label mortgage backed securities	55		1		—		56
Obligations of states and political subdivisions	996		50		—		1,046
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	226		18		—		244
Total	$	3,303	$	194	$	—	$	3,497

Schedule of Amortized Cost and Aggregate Fair Value of Debt Securities, by Contractual Maturity

The amortized cost and aggregate fair value of debt securities at June 30, 2012, by contractual maturity, are presented in the following table.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	(Dollars in Thousands)
	Amortized Cost		Fair Value
Available-for-sale securities:
Due in one year or less	$	1,115	$	1,134
Due after one year through five years	14,420		15,489
Due after five years through ten years	21,148		22,329
Due after ten years	32,253		33,494
Total	$	68,936	$	72,446
Held-to-maturity securities:
Due in one year or less	$	—	$	—
Due after one year through five years	516		544
Due after five years through ten years	473		507
Due after ten years	1,347		1,450
Total	$	2,336	$	2,501

Schedule of Securities Available-for-Sale with Unrealized Losses

A summary of securities available-for-sale with unrealized losses as of December 31, 2011, along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:

	Less than 12 months				12 months or longer				Total
December 31, 2011	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Securities in a Loss Position
Fixed maturities
Corporate debt securities	$	4,703	$	166	$	899	$	101	$	5,602	$	267	15
Trust preferred securities	479		58		—		—		479		58		1
Mortgage backed securities	883		21		198		2		1,081		23		3
Private label mortgage backed securities	1,860		15		1,094		47		2,954		62		9
Obligations of state and political subdivisions	—		—		1,803		15		1,803		15		5
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	260		3		—		—		260		3		1
Equity securities	391		49		802		541		1,193		590		6
	$	8,576	$	312	$	4,796	$	706	$	13,372	$	1,018	40

A summary of securities available-for-sale with unrealized losses as of June 30, 2012, along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:

	Less than 12 months				12 months or longer				Total
June 30, 2012	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Securities in a Loss Position
Fixed maturities
Corporate debt securities	$	8,368	$	81	$	2,647	$	152	$	11,015	$	233	27
Trust preferred securities	—		—		535		2		535		2		1
Mortgage backed securities	1,155		22		—		—		1,155		22		4
Private label mortgage backed securities	—		—		117		5		117		5		1
Obligations of state and political subdivisions	—		—		—		—		—		—		0
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	608		2		254		8		862		10		3
Equity securities	184		8		1,050		535		1,234		543		5
	$	10,315	$	113	$	4,603	$	702	$	14,918	$	815	41

Schedule of Net Change in Unrealized Appreciation

An analysis of the net change in unrealized appreciation on available-for-sale securities follows:

	(Dollars in thousands)
	Six-month period ended June 30, 2012			Year Ended December 31, 2011
	(unaudited)
Net change in unrealized appreciation on available-for-sale securities before deferred tax	$	115		$	1,792
Deferred income tax	(39		)	(534		)
Net change in unrealized appreciation on available-for-sale securities	$	76		$	1,258

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Investments (Schedule of Unrealized Appreciation) (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Investments [Abstract]
Net change in unrealized appreciation on available-for-sale securities before deferred tax	$ 115	$ 1,792
Deferred income tax	(39)	(534)
Net change in unrealized appreciation on available-for-sale securities	$ 76	$ 1,258

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Notes Payable and Long-Term Debt (Tables)

6 Months Ended

Jun. 30, 2012

Debt Disclosure [Abstract]

Schedule of Short-term Debt

Short-term notes payable consisted of the following as of June 30, 2012 and December 31, 2011:

	(Dollars in thousands)
	2012		2011
Line of credit with variable interest rate equal to the WSJ prime rate, subject to a 5.0% floor; maturity January 2013.  Interest payments due quarterly.  Unsecured.	$	625	$	485

Schedule of Long-term Debt Instruments

Long-term debt consisted of the following as of June 30, 2012 and December 31, 2011:

	(Dollars in thousands)
	2012		2011
Subordinated debentures issued on December 15, 2005 with fixed interest rate of 8.83% each distribution period thereafter until December 15, 2015 when the coupon rate shall equal the 3-Month LIBOR plus 3.75% applied to the outstanding principal; maturity December 2035.  Interest payments due quarterly.  All may be redeemed at any time following the tenth anniversary of issuance.  Unsecured.	$	9,279	$	9,279
Subordinated debentures issued on June 21, 2007 with a floating interest rate equal to the 3 Month LIBOR plus 3.40% applied to the outstanding principal; maturity June 15, 2037. Interest payments due quarterly.  All may be redeemed at any time following the fifth anniversary of issuance.  Unsecured.	3,093		3,093
	$	12,372	$	12,372

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Condensed Consolidated Statements of Shareholders' Equity (Parenthetical) (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2012
Other comprehensive income, net of tax:
Reclassification adjustment	$ 704

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Condensed Consolidated Balance Sheets (Parenthetical) (Unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Investments
Fixed maturities held-to-maturity, at estimated fair value	$ 2,501	$ 3,497
Fixed maturities available-for-sale, at cost	68,936	69,980
Equity securities available-for-sale, at cost	$ 4,559	$ 4,931

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Fair Value of Financial Assets and Financial Liabilities

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets and Financial Liabilities

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Our available-for-sale securities consists of fixed maturity and equity securities which are recorded at fair value in the accompanying condensed consolidated balance sheets.  The change in the fair value of these investments, unless deemed to be other than temporarily impaired, is recorded as a component of other comprehensive income.

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

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

The Company categorizes assets and liabilities carried at their fair value based upon a fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 1 assets and liabilities consist of money market fund deposits and certain of our marketable debt and equity instruments, including equity instruments offsetting deferred compensation, that are traded in an active market with sufficient volume and frequency of transactions.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

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

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

Level 3 assets and liabilities include marketable debt instruments, non-marketable equity investments, derivative contracts, and company issued debt whose values are determined using inputs that are both unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable debt instruments that are priced using indicator prices that we were unable to corroborate with observable market quotes.

Marketable debt instruments in this category generally include asset-backed securities and certain of our floating-rate notes, corporate bonds, and municipal bonds.

Assets/Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):

	Fair Value Measurements at Reporting Date Using
Description	Total		Level 1		Level 2		Level 3
Financial Assets
Fixed maturities available-for-sale
Corporate debt securities	$	32,346	$	—	$	32,346	$	—
Trust preferred securities	535		—		535		—
Mortgage backed securities	6,833		—		6,833		—
Private label mortgage backed securities	8,561		—		8,561		—
Obligations of states and political subdivisions	15,521		—		15,521		—
U.S. Treasury securities and obligations of U.S.    Government corporations and agencies	8,650		8,650		—		—
Trading securities	40		40		—		—
Equity securities available-for-sale	7,875		7,087		—		788
Total Financial Assets	$	80,361	$	15,777	$	63,796	$	788
Financial Liabilities
Interest rate swap	$	1,437	$	—	$	—	$	1,437
Total Financial Liabilities	$	1,437	$	—	$	—	$	1,437

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

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

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

Equity securities—Equity securities consist principally of investments in common and preferred stock of publicly traded companies and privately traded securities. The fair values of our publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately traded equity securities are classified within Level 3.

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

As of June 30, 2012, Level 3 fair value measurements of assets include $788,000 of equity securities in a local community bank whose value is based on an evaluation of the financial statements of the entity. The Company does not develop the unobservable inputs used in measuring fair value.

As of June 30, 2012, Level 3 fair value measurements of liabilities include $1,437,000 net fair value of various interest rate swaps whose value is based on analysis provided by a third party broker. The Company does not develop the unobservable inputs used in measuring fair value. Additional information regarding the interest rate swaps is provided in Note 7.

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter endedJune 30, 2012 (in thousands):

For the quarter ended June 30, 2012	Equity Securities Available-for-Sale		Interest Rate Swap
Beginning balance	$	642	$	(1,196	)
Total gains or losses (realized and unrealized):
Included in earnings	—		—
Included in other comprehensive income	3		(241		)
Purchases:	143		—
Sales:	—		—
Issuances:	—		—
Settlements	—		—
Transfers in/(out) of Level 3	—		—
Ending balance	$	788	$	(1,437	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of June 30, 2012:	$	—	$	—

For the quarter ended June 30, 2012, there were no assets or liabilities measured at fair values on a nonrecurring basis.

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):

	Fair Value Measurements at Reporting Date Using
Description	Total		Level 1		Level 2		Level 3
Financial Assets
Fixed maturities available-for-sale
Corporate debt securities	$	20,980	$	—	$	20,980	$	—
Trust preferred securities	479		—		479		—
Mortgage backed securities	7,871		—		7,871		—
Private label mortgage backed securities	9,853		—		9,853		—
Obligations of states and political subdivisions	19,482		—		19,482		—
U.S. Treasury securities and obligations of U.S.    Government corporations and agencies	14,409		14,409		—		—
Trading securities	80		80		—		—
Equity securities available-for-sale	8,547		7,905		—		642
Total Financial Assets	$	81,701	$	22,394	$	58,665	$	642
Financial Liabilities
Interest rate swap	$	1,196	$	—	$	—	$	1,196
Total Financial Liabilities	$	1,196	$	—	$	—	$	1,196

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year endedDecember 31, 2011 (in thousands):

For the year ended December 31, 2011	Equity Securities Available-for-Sale			Interest Rate Swap
Beginning balance	$	787		$	(227	)
Total gains or losses (realized and unrealized):
Included in earnings	—			—
Included in other comprehensive income	(145		)	(969		)
Purchases:	—			—
Sales:	—			—
Issuances:	—			—
Settlements	—			—
Transfers in/(out) of Level 3	—			—
Ending balance	$	642		$	(1,196	)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held as of December 31, 2011:	$	—		$	—

For the year ended December 31, 2011, there were no assets or liabilities measured at fair values on a nonrecurring basis.

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

The following methods and assumptions were used to estimate fair value of each class of financial instrument for which it is practical to estimate that value:

Cash and cash equivalents—the carrying amount is a reasonable estimate of fair value.

Mortgage receivables—the carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited marketability of the mortgage notes.

Other invested assets—the carrying amount is a reasonable estimate of fair value.

Other policyholder funds—the carrying amount is a reasonable estimate of fair value.

Debt—the carrying amount is a reasonable estimate of fair value.

The carrying amount and estimate fair value of the Company’s financial instruments as of June 30, 2012 and December 31, 2011 are as follows (in thousands):

	June 30, 2012				December 31, 2011
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets and related instruments
Mortgage loans	$	386	$	386	$	390	$	390
Policy loans	1,241		1,241		1,244		1,244
Company owned life insurance	5,831		5,831		5,660		5,660
Other invested assets	3,848		3,848		3,929		3,929
Liabilities and related instruments
Other policyholder funds	1,429		1,429		1,408		1,408
Short-term debt	625		625		485		485
Long-term debt	12,372		12,372		12,372		12,372

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Document and Entity Information Document	6 Months Ended
	Jun. 30, 2012	Aug. 06, 2012
Entity Information [Line Items]
Entity Registrant Name	NATIONAL SECURITY GROUP INC
Entity Central Index Key	0000865058
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding		2,466,600

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Segments

6 Months Ended

Jun. 30, 2012

Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]

Segments

SEGMENTS

The Company’s property and casualty insurance operations comprise one business segment.  The property and casualty insurance segment consists of seven lines of business:  dwelling fire and extended coverage, homeowners (including mobile homeowners), ocean marine, other liability, private passenger auto liability, commercial auto liability and auto physical damage.  Management organizes the business utilizing a niche strategy focusing on lower valued dwellings as well as non-standard automobile products.  Our chief decision makers (President, Chief Financial Officer and Chief Executive Officer) review results and operating plans making decisions on resource allocations on a company-wide basis.  The Company’s products are primarily produced through agents within the states in which we operate.  The Company’s life and accident and health operations comprise the second business segment.  The life and accident and health insurance segment consists of two lines of business: traditional life insurance and accident and health insurance. Premium revenues and operating income by industry segment for the three and six-month periods ended June 30, 2012, and 2011 (unaudited) are summarized below (dollars in thousands):

Three-Month Period Ended June 30, 2012	Total			P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	12,533		$	10,814	$	1,719	$	—
Net investment income	1,066			529		520		17
Net realized investment gains	865			75		790		—
Other income	193			192		1		—
	14,657			11,610		3,030		17
BENEFITS AND EXPENSES
Policyholder benefits paid	7,976			6,763		1,213		—
Policy acquisition costs	2,933			2,594		339		—
General and administrative expenses	1,835			1,111		644		80
Litigation settlement and defense costs	12,670			—		—		12,670
Taxes, licenses and fees	438			385		53		—
Interest expense	288			—		35		253
	26,140			10,853		2,284		13,003
Income (Loss) Before Income Taxes	$	(11,483	)	$	757	$	746	$	(12,986	)

Three-Month Period Ended June 30, 2011	Total			P&C Insurance Operations			Life Insurance Operations			Non-Insurance Operations
REVENUE
Net premiums earned	$	13,321		$	11,544		$	1,777		$	—
Net investment income	1,171			606			461			104
Net realized investment gains	261			257			4			—
Other income	256			254			2			—
	15,009			12,661			2,244			104
BENEFITS AND EXPENSES
Policyholder benefits paid	15,682			14,386			1,296			—
Policy acquisition costs	3,071			2,751			320			—
General and administrative expenses	2,418			1,601			594			223
Litigation settlement and defense costs	482			—			—			482
Taxes, licenses and fees	622			516			106			—
Interest expense	285			—			16			269
	22,560			19,254			2,332			974
Loss Before Income Taxes	$	(7,551	)	$	(6,593	)	$	(88	)	$	(870	)

Six-Month Period Ended June 30, 2012	Total			P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	26,029		$	22,558	$	3,471	$	—
Net investment income	2,201			1,140		1,028		33
Net realized investment gains	1,071			207		862		2
Other income	390			388		2		—
	29,691			24,293		5,363		35
BENEFITS AND EXPENSES
Policyholder benefits paid	15,821			13,176		2,645		—
Policy acquisition costs	5,705			5,138		567		—
General and administrative expenses	4,323			2,940		1,092		291
Litigation settlement and defense costs	13,259			—		—		13,259
Taxes, licenses and fees	930			815		115		—
Interest expense	580			—		37		543
	40,618			22,069		4,456		14,093
Income (Loss) Before Income Taxes	$	(10,927	)	$	2,224	$	907	$	(14,058	)

Six-Month Period Ended June 30, 2011	Total			P&C Insurance Operations			Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	28,191		$	24,545		$	3,646	$	—
Net investment income	2,228			1,233			958		37
Net realized investment gains	1,031			643			358		30
Other income	511			509			2		—
	31,961			26,930			4,964		67
BENEFITS AND EXPENSES
Policyholder benefits paid	25,004			22,197			2,807		—
Policy acquisition costs	5,995			5,491			504		—
General and administrative expenses	4,589			3,052			1,174		363
Litigation settlement and defense costs	789			—			—		789
Taxes, licenses and fees	1,102			876			226		—
Interest expense	570			—			31		539
	38,049			31,616			4,742		1,691
Income (Loss) Before Income Taxes	$	(6,088	)	$	(4,686	)	$	222	$	(1,624	)

The following table presents the Company’s gross and net premiums written for the property and casualty segment and the life and accident and health segment for the three and six-month periods ended June 30, 2012 and 2011, respectively:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012		2011
Life, accident and health operations premiums written:
Traditional life insurance	$	1,248		$	1,226		2,458		$	2,531
Accident and health insurance	455			474			919		958
Total life, accident and health	1,703			1,700			3,377		3,489
Property and Casualty operations premiums written:
Dwelling fire & extended coverage	7,825			7,271			14,752		13,968
Homeowners (Including mobile homeowners)	6,745			7,439			12,232		13,446
Ocean marine	363			397			447		516
Other liability	409			377			766		711
Private passenger auto liability	(12		)	393			57		1,247
Commercial auto liability	—			92			6		211
Auto physical damage	(5		)	175			31		511
Total property and casualty	15,325			16,144			28,291		30,610
Gross premiums written	17,028			17,844			31,668		34,099
Reinsurance premium ceded	(2,443		)	(3,039		)	(4,126	)	(4,568		)
Net premiums written	$	14,585		$	14,805		27,542		$	29,531

The following table presents the Company’s gross and net premiums earned for the property and casualty segment and the life and accident and health segment for the three and six-month periods ended June 30, 2012 and 2011, respectively:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Life, accident and health operations premiums earned:
Traditional life insurance	$	1,270		$	1,302		$	2,558		$	2,688
Accident and health insurance	449			475			913			958
Total life, accident and health	1,719			1,777			3,471			3,646
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage	6,665			6,666			13,212			13,165
Homeowners (Including mobile homeowners)	5,790			6,227			11,694			12,471
Ocean marine	275			300			543			619
Other liability	343			321			683			631
Private passenger auto liability	93			685			328			1,441
Commercial auto liability	—			92			6			211
Auto physical damage	44			274			151			571
Total property and casualty	13,210			14,565			26,617			29,109
Gross premiums earned	14,929			16,342			30,088			32,755
Reinsurance premium ceded	(2,396		)	(3,021		)	(4,059		)	(4,564		)
Net premiums earned	$	12,533		$	13,321		$	26,029		$	28,191

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Condensed Consolidated Statements of Income (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
REVENUES
Net premiums earned	$ 12,533,000	$ 13,321,000	$ 26,029,000	$ 28,191,000
Net investment income	1,066,000	1,171,000	2,201,000	2,228,000
Net realized investment gains	865,000	261,000	1,071,000	1,031,000
Other income	193,000	256,000	390,000	511,000
Total Revenues	14,657,000	15,009,000	29,691,000	31,961,000
EXPENSES
Policyholder benefits paid	7,976,000	15,682,000	15,821,000	25,004,000
Policy acquisition costs	2,933,000	3,071,000	5,705,000	5,995,000
General expenses	1,835,000	2,418,000	4,323,000	4,589,000
Litigation settlement and defense costs	12,670,000	482,000	13,259,000	789,000
Taxes, licenses and fees	438,000	622,000	930,000	1,102,000
Interest expense	288,000	285,000	580,000	570,000
Total expenses	26,140,000	22,560,000	40,618,000	38,049,000
Income Before Income Taxes	(11,483,000)	(7,551,000)	(10,927,000)	(6,088,000)
INCOME TAX (BENEFIT) EXPENSE
Current	145,000	(2,515,000)	173,000	(2,165,000)
Deferred	(4,322,000)	(91,000)	(4,325,000)	27,000
Total income tax (benefit) expense	(4,177,000)	(2,606,000)	(4,152,000)	(2,138,000)
Net Loss	$ (7,306,000)	$ (4,945,000)	$ (6,775,000)	$ (3,950,000)
EARNINGS PER COMMON SHARE	$ (2.96)	$ (2.00)	$ (2.75)	$ (1.60)
DIVIDENDS DECLARED PER SHARE	$ 0.10	$ 0.15	$ 0.20	$ 0.30

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Changes in Shareholders' Equity

6 Months Ended

Jun. 30, 2012

Stockholders' Equity Note [Abstract]

Changes in Shareholders' Equity

CHANGES IN SHAREHOLDERS' EQUITY

During the six month periods ended June 30, 2012 and 2011, there were no changes in shareholders' equity except for a net loss of $6,775,000 and $3,950,000, respectively; dividends paid of $494,000 in 2012 and $740,000 in 2011; changes in accumulated other comprehensive loss, net of applicable taxes, $83,000 in 2012 and changes in accumulated other comprehensive income of $230,000 in 2011.  Other comprehensive income/loss consists of accumulated unrealized gains and losses on securities and unrealized gains and losses on interest rate swaps.

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Calcuation of Earnings Per Share

6 Months Ended

Jun. 30, 2012

Earnings Per Share, Basic [Abstract]

Calcuation of Earnings Per Share

CALCULATION OF EARNINGS PER SHARE

Earnings per share were based on net income divided by the weighted average common shares outstanding.  The weighted average number of shares outstanding for the three-month and six-month periods ending June 30, 2012 and 2011 were 2,466,600.

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2012

Income Tax Disclosure [Abstract]

Schedule of Deferred Tax Assets and Liabilities

The tax effect of significant differences representing deferred tax assets and liabilities are as follows (dollars in thousands):

	June 30, 2012			December 31, 2011
	(unaudited)
General expenses	$	1,211		$	1,576
Unearned premiums	1,827			1,714
Claims liabilities	249			271
Litigation settlement	4,420			—
NOL carry forward	1,594			1,363
Other-than-temporary impairments on securities owned	231			258
Unrealized loss on interest rate swaps	489			407
Deferred tax assets	10,021			5,589
Depreciation	(120		)	(144		)
Deferred policy acquisition costs	(3,299		)	(3,250		)
Unrealized gains on securities available-for-sale	(2,320		)	(2,281		)
Deferred tax liabilities	(5,739		)	(5,675		)
Net deferred tax asset (liability)	$	4,282		$	(86	)

Changes in Temporary Differences in Federal Income Tax

The appropriate income tax effects of changes in temporary differences are as follows (dollars in thousands):

	Six Months Ended June 30,
	2012			2011
Deferred policy acquisition costs	$	49		$	304
Other-than-temporary impairments	27			(69		)
Trading securities	—			10
Unearned premiums	(113		)	(102		)
General expenses	(61		)	(98		)
Depreciation	(24		)	(16		)
Claim liabilities	22			(2		)
Litigation settlement	(3,995		)	—
NOL carry forward	(230		)	—
Deferred income tax (benefit) expense	$	(4,325	)	$	27

Schedule of Effective Income Tax Rate Reconciliation

Total income tax (benefit) expense varies from amounts computed by applying current federal income tax rates to income or loss before income taxes.  The reason for these differences and the approximate tax effects are as follows:

	Six Months Ended June 30,
	2012		2011
Federal income tax rate applied to pre-tax income/loss	34.00	%	34.00	%
Dividends received deduction and tax-exempt interest	0.80	%	1.70	%
Company owned life insurance	0.50	%	0.70	%
Small life deduction	2.10	%	3.10	%
Other, net	0.60	%	(4.40	)%
Effective federal income tax rate	38.00	%	35.10	%

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Preferred and Common Stock

6 Months Ended

Jun. 30, 2012

Preferred and Common Stock [Abstract]

Preferred and Common Stock

PREFERRED AND COMMON STOCK

The table below provides information regarding the Company's preferred and common stock as of June 30, 2012 and December 31, 2011:

	June 30, 2012			December 31, 2011
	Authorized	Issued	Outstanding	Authorized	Issued	Outstanding
Preferred Stock, $1 par value	500,000	—	—	500,000	—	—
Class A Common Stock, $1 par value	2,000,000	—	—	2,000,000	—	—
Common Stock, $1 par value	3,000,000	2,466,600	2,466,600	3,000,000	2,466,600	2,466,600

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Notes Payable and Long-Term Debt

6 Months Ended

Jun. 30, 2012

Debt Disclosure [Abstract]

Notes Payable and Long-Term Debt

NOTES PAYABLE AND LONG-TERM DEBT

Short-term notes payable consisted of the following as of June 30, 2012 and December 31, 2011:

	(Dollars in thousands)
	2012		2011
Line of credit with variable interest rate equal to the WSJ prime rate, subject to a 5.0% floor; maturity January 2013.  Interest payments due quarterly.  Unsecured.	$	625	$	485

Long-term debt consisted of the following as of June 30, 2012 and December 31, 2011:

	(Dollars in thousands)
	2012		2011
Subordinated debentures issued on December 15, 2005 with fixed interest rate of 8.83% each distribution period thereafter until December 15, 2015 when the coupon rate shall equal the 3-Month LIBOR plus 3.75% applied to the outstanding principal; maturity December 2035.  Interest payments due quarterly.  All may be redeemed at any time following the tenth anniversary of issuance.  Unsecured.	$	9,279	$	9,279
Subordinated debentures issued on June 21, 2007 with a floating interest rate equal to the 3 Month LIBOR plus 3.40% applied to the outstanding principal; maturity June 15, 2037. Interest payments due quarterly.  All may be redeemed at any time following the fifth anniversary of issuance.  Unsecured.	3,093		3,093
	$	12,372	$	12,372

The subordinated debentures (debentures) have the same maturities and other applicable terms and features as the associated trust preferred securities (TPS).  Payment of interest may be deferred for up to 20 consecutive quarters; however, stockholder dividends cannot be paid during any extended interest payment period or any time the debentures are in default.  All have stated maturities of thirty years.  None of the securities require the Company to maintain minimum financial covenants. The Company has guaranteed that amounts paid to the Trusts will be remitted to the holders of the associated TPS.  This guarantee, when taken together with the obligations of the Company under the debentures, the Indentures pursuant to which the debentures were issued, and the related trust agreement (including obligations to pay related trust fees, expenses, debt and other obligations with respect to the TPS), provides a full and unconditional guarantee of amounts due the Trusts.  The amount guaranteed is not expected to at any time exceed the obligations of the TPS, and no additional liability has been recorded related to the guarantee.

The Company has entered into various swap agreements related to the trust preferred securities. On March 19, 2009, the Company entered into a forward swap effective September 17, 2012, with a notional amount of $3,000,000 and designated the swap as a hedge against changes in cash flows attributable to changes in the benchmark interest rate (LIBOR) associated with the subordinated debentures issued June 21, 2007. Commencing September 17, 2012, under the terms of the forward swap, the Company will receive interest at the three-month LIBOR rate plus 3.4% and pay interest at the fixed rate of 7.02%.  This forward swap will effectively fix the interest rate on $3,000,000 in debt until September of 2019.

On May 26, 2010, the Company entered into a forward swap with a notional amount of $9,000,000 effective December 15, 2015, which will hedge against changes in cash flows following the termination of the fixed rate period. Quarterly, commencing March 16, 2016 under the terms of the forward swap, the Company will pay interest at a fixed rate of 8.49% until March 15, 2020.

The swaps entered into in 2009 and 2010 have fair values $469,000 (liability) and $968,000 (liability), respectively, for a total liability of $1,437,000 at June 30, 2012 ($1,196,000 at December 31, 2011).  The swap liability is reported as a component of other liabilities on the condensed consolidated balance sheets.  A net valuation loss of $159,000 is included in accumulated other comprehensive income related to the swap agreements for the current period.  A net valuation loss of $640,000 was included in accumulated other comprehensive income related to the swap at December 31, 2011.

We use dollar offset at the hedge's inception and for each reporting period thereafter to assess whether the derivative used in a hedging transaction is expected to be, and has been, effective in offsetting changes in the fair value of the hedged item. Since inception, no portion of the hedged item has been deemed ineffective. For all hedges, we discontinue hedge accounting if it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge.

The Company’s interest rate swaps include provisions requiring the Company to post collateral when the derivative is in a net liability position.  The Company has cash collateral on deposit of $100,000, in addition to securities on deposit with fair market values of $1,335,000 (all of which is posted as collateral). At December 31, 2011, the Company had cash collateral on deposit of $310,000 in addition to securities on deposit with fair market values of $877,000, all of which is posted as collateral. See Note 9 for additional information about the interest rate swaps.

In January 2012, the Company renewed an unsecured line of credit for $700,000, with an interest rate of 5%, to be made available for general corporate purposes.  As of June 30, 2012, $625,000 was drawn on this line ($485,000 at December 31, 2011).

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Investments

6 Months Ended

Jun. 30, 2012

Investments [Abstract]

Investments

INVESTMENTS

The amortized cost and aggregate fair values of investments in available-for-sale securities as of June 30, 2012 are as follows:

Available-for-sale securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	30,876	$	1,703	$	233	$	32,346
Trust preferred securities	537		—		2		535
Mortgage backed securities	6,640		215		22		6,833
Private label mortgage backed securities	8,354		212		5		8,561
Obligations of states and political subdivisions	14,334		1,187		—		15,521
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	8,195		465		10		8,650
Total fixed maturities	68,936		3,782		272		72,446
Equity securities	4,559		3,859		543		7,875
Total	$	73,495	$	7,641	$	815	$	80,321

The amortized cost and aggregate fair values of investments in held-to-maturity securities as of June 30, 2012 are as follows:

Held-to-maturity securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage backed securities	$	1,619	$	121	$	—	$	1,740
Private label mortgage backed securities	—		—		—		—
Obligations of states and political subdivisions	515		27		—		542
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	202		17		—		219
Total	$	2,336	$	165	$	—	$	2,501

The amortized cost and aggregate fair values of investments in available-for-sale securities as of December 31, 2011 are as follows:

Available-for-sale securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate debt securities	$	19,907	$	1,340	$	267	$	20,980
Trust preferred securities	537		—		58		479
Mortgage backed securities	7,587		307		23		7,871
Private label mortgage backed securities	9,716		199		62		9,853
Obligations of states and political subdivisions	18,355		1,142		15		19,482
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	13,878		534		3		14,409
Total fixed maturities	69,980		3,522		428		73,074
Equity securities	4,931		4,206		590		8,547
Total	$	74,911	$	7,728	$	1,018	$	81,621

The amortized cost and aggregate fair values of investments in held-to-maturity securities as of December 31, 2011 are as follows:

Held-to-maturity securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage backed securities	$	2,026	$	125	$	—	$	2,151
Private label mortgage backed securities	55		1		—		56
Obligations of states and political subdivisions	996		50		—		1,046
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	226		18		—		244
Total	$	3,303	$	194	$	—	$	3,497

The amortized cost and aggregate fair value of debt securities at June 30, 2012, by contractual maturity, are presented in the following table.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	(Dollars in Thousands)
	Amortized Cost		Fair Value
Available-for-sale securities:
Due in one year or less	$	1,115	$	1,134
Due after one year through five years	14,420		15,489
Due after five years through ten years	21,148		22,329
Due after ten years	32,253		33,494
Total	$	68,936	$	72,446
Held-to-maturity securities:
Due in one year or less	$	—	$	—
Due after one year through five years	516		544
Due after five years through ten years	473		507
Due after ten years	1,347		1,450
Total	$	2,336	$	2,501

A summary of securities available-for-sale with unrealized losses as of June 30, 2012, along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:

	Less than 12 months				12 months or longer				Total
June 30, 2012	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Securities in a Loss Position
Fixed maturities
Corporate debt securities	$	8,368	$	81	$	2,647	$	152	$	11,015	$	233	27
Trust preferred securities	—		—		535		2		535		2		1
Mortgage backed securities	1,155		22		—		—		1,155		22		4
Private label mortgage backed securities	—		—		117		5		117		5		1
Obligations of state and political subdivisions	—		—		—		—		—		—		0
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	608		2		254		8		862		10		3
Equity securities	184		8		1,050		535		1,234		543		5
	$	10,315	$	113	$	4,603	$	702	$	14,918	$	815	41

A summary of securities available-for-sale with unrealized losses as of December 31, 2011, along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:

	Less than 12 months				12 months or longer				Total
December 31, 2011	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Securities in a Loss Position
Fixed maturities
Corporate debt securities	$	4,703	$	166	$	899	$	101	$	5,602	$	267	15
Trust preferred securities	479		58		—		—		479		58		1
Mortgage backed securities	883		21		198		2		1,081		23		3
Private label mortgage backed securities	1,860		15		1,094		47		2,954		62		9
Obligations of state and political subdivisions	—		—		1,803		15		1,803		15		5
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	260		3		—		—		260		3		1
Equity securities	391		49		802		541		1,193		590		6
	$	8,576	$	312	$	4,796	$	706	$	13,372	$	1,018	40

There were no securities held-to-maturity with unrealized losses as of June 30, 2012 and December 31, 2011.

The Company conducts periodic reviews to identify and evaluate securities in an unrealized loss position in order to identify other-than-temporary-impairments. For securities in an unrealized loss position, the Company assesses whether the Company has the intent to sell the security or more likely than not will be required to sell the security before the anticipated recovery.  If either of these conditions is met, the Company is required to recognize an other-than-temporary impairment with the entire unrealized loss reported in earnings.  For securities in an unrealized loss position that do not meet these conditions, the Company assesses whether the impairment of a security is other-than-temporary.  If the impairment is determined to be other-than-temporary, the Company is required to separate the other-than-temporary impairments into two components:  the amount representing the credit loss and the amount related to all other factors.  The credit loss is the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment.  The credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.

Management has evaluated each security in a significant unrealized loss position.  The Company has no material exposure to sub-prime mortgage loans and less than 4% of the fixed income investment portfolio is rated below investment grade.  In evaluating whether or not the equity loss positions were other-than-temporary impairments, Management evaluated financial information on each company and where available reviewed analyst reports from at least two independent sources.  Based on a review of the available financial information, the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was determined that the securities in an accumulated loss position in the portfolio were temporary impairments.

For the quarter ended June 30, 2012, the Company realized no additional other-than-temporary impairments.  The single largest accumulated loss was in the equity portfolio and totaled $498,000.  The second largest loss position was in the bond portfolio and totaled $75,000.  The third largest loss position was in the bond portfolio and totaled $25,000.  

For the year ended December 31, 2011, the Company realized $398,000 in other-than-temporary impairments.   The single largest accumulated loss was in the equity portfolio and totaled $501,000.  The second largest loss position was in the bond portfolio and totaled $70,000.  The third largest loss position was in the bond portfolio and totaled $58,000. 

An analysis of the net change in unrealized appreciation on available-for-sale securities follows:

	(Dollars in thousands)
	Six-month period ended June 30, 2012			Year Ended December 31, 2011
	(unaudited)
Net change in unrealized appreciation on available-for-sale securities before deferred tax	$	115		$	1,792
Deferred income tax	(39		)	(534		)
Net change in unrealized appreciation on available-for-sale securities	$	76		$	1,258

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Income Taxes

6 Months Ended

Jun. 30, 2012

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense.  The Company has not incurred any income tax related interest and penalties as of June 30, 2012 and $1,000 as of December 31, 2011. The Company files income tax returns in the U.S. federal jurisdiction and various states.  The Company is not subject to examinations by authorities related to its U.S. federal or state income tax filings for years prior to 2006. Tax returns have been filed through the year 2011.

Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws.  Management believes that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets.  The Company recognized net deferred tax asset position of $4,282,000 at June 30, 2012, and net deferred tax liability position of $86,000 at December 31, 2011.

The tax effect of significant differences representing deferred tax assets and liabilities are as follows (dollars in thousands):

	June 30, 2012			December 31, 2011
	(unaudited)
General expenses	$	1,211		$	1,576
Unearned premiums	1,827			1,714
Claims liabilities	249			271
Litigation settlement	4,420			—
NOL carry forward	1,594			1,363
Other-than-temporary impairments on securities owned	231			258
Unrealized loss on interest rate swaps	489			407
Deferred tax assets	10,021			5,589
Depreciation	(120		)	(144		)
Deferred policy acquisition costs	(3,299		)	(3,250		)
Unrealized gains on securities available-for-sale	(2,320		)	(2,281		)
Deferred tax liabilities	(5,739		)	(5,675		)
Net deferred tax asset (liability)	$	4,282		$	(86	)

The appropriate income tax effects of changes in temporary differences are as follows (dollars in thousands):

	Six Months Ended June 30,
	2012			2011
Deferred policy acquisition costs	$	49		$	304
Other-than-temporary impairments	27			(69		)
Trading securities	—			10
Unearned premiums	(113		)	(102		)
General expenses	(61		)	(98		)
Depreciation	(24		)	(16		)
Claim liabilities	22			(2		)
Litigation settlement	(3,995		)	—
NOL carry forward	(230		)	—
Deferred income tax (benefit) expense	$	(4,325	)	$	27

Total income tax (benefit) expense varies from amounts computed by applying current federal income tax rates to income or loss before income taxes.  The reason for these differences and the approximate tax effects are as follows:

	Six Months Ended June 30,
	2012		2011
Federal income tax rate applied to pre-tax income/loss	34.00	%	34.00	%
Dividends received deduction and tax-exempt interest	0.80	%	1.70	%
Company owned life insurance	0.50	%	0.70	%
Small life deduction	2.10	%	3.10	%
Other, net	0.60	%	(4.40	)%
Effective federal income tax rate	38.00	%	35.10	%

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Contingencies

6 Months Ended

Jun. 30, 2012

Commitments and Contingencies Disclosure [Abstract]

Contingencies

CONTINGENCIES

Litigation

The Company and its subsidiaries continue to be named individually as parties to litigation related to the conduct of their insurance operations.  These suits involve alleged breaches of contracts, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of the Company's subsidiaries, and miscellaneous other causes of action. 

The Company's property & casualty subsidiaries are defending a limited number of matters filed in the aftermath of Hurricanes Katrina and Rita in Mississippi, Louisiana and Alabama.  These actions include individual lawsuits with allegations of underpayment of hurricane-related claims, including allegations that the flood exclusion found in the Company's subsidiaries' policies, and in certain actions other insurance companies' policies, is either ambiguous, unenforceable as unconscionable or contrary to public policy, or inapplicable to the damage sustained. 

The various suits seek a variety of remedies, including actual and/or punitive damages in unspecified amounts and/or declaratory relief.  All of these matters are in various stages of development and the Company's subsidiaries intend to vigorously defend them.  The outcome of these disputes is currently uncertain. 

In April 2007, the Company sold substantially all of its 50% interest in Mobile Attic, Inc., to Bagley Family Revocable Trust (the "Purchaser"). The Company, Peter L. Cash and Russell L. Cash (collectively the "Sellers") sold to Purchaser 61% of the outstanding stock of Mobile Attic under the terms of a Stock Purchase Agreement dated April 5, 2007, executed by Sellers, Mobile Attic and Purchaser's assignor, James W. Bagley (the "Stock Purchase Agreement"). 

Under the terms of the Stock Purchase Agreement, the Purchaser paid the Company $2,700,000 for 45% of the total outstanding stock of Mobile Attic and paid the other Sellers $960,000 for an additional 16% of the total outstanding stock in Mobile Attic, thus obtaining a controlling interest of 61% of the outstanding stock.  The Stock Purchase Agreement provided that Purchaser was to use his best efforts to cause the Company to be released from its guaranty of a bank loan to Mobile Attic having an outstanding principal balance of approximately $9,400,000.  The bank loan was secured by portable storage containers of Mobile Attic. The Sellers made certain warranties to the Purchaser in the Stock Purchase Agreement regarding the financial condition of Mobile Attic and agreed to jointly and severally indemnify the Purchaser for any damages resulting from a breach of any of the warranties.

As previously disclosed , the Company and the Purchaser have been involved in litigation regarding this transaction The Purchaser asserted claims against the Company seeking indemnification of Purchaser's losses and damages as a result of the breach of representations and warranties regarding Mobile Attic's financial condition, as set forth in the Stock Purchase Agreement.

On June 20, 2012, the Company and Bagley Trust reached a settlement agreement to dispose of this action. Under the terms of the settlement the Company agreed to pay Bagley Trust $13,000,000 . The terms of the agreement are to be formalized in the form of a promissory note in accordance with the following payment schedule: $2.5 million on September 18, 2012, and the balance payable in 9 equal annual installments on November 15 each year beginning in 2013 with a final payment in 2021. The unpaid principal will bear interest at Wall Street Journal prime rate plus 1% per annum. The settlement will allow the ability to defer payments in years in which the Company's P&C subsidiaries incur substantial catastrophe losses thus allowing capital management flexibility in the P&C subsidiaries. Under the expected terms of the agreement, annual debt service payments on the note must equal or exceed any payment of dividends to shareholders in the preceding twelve months.

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Investments (Amortized Cost and Aggregate Fair Value of Debt Securities, by Contractual Maturity) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Investments [Abstract]
Available-for-sale Securities, Due in one year or less, Amortized Cost	$ 1,115
Available-for-sale Securities, Due in one year or less, Fair Value	1,134
Available-for-sale Securities, Due after one year through five years, Amortized Cost	14,420
Available-for-sale Securities, Due after one year through five years, Fair Value	15,489
Available-for-sale Securities, Due after five years through ten years, Amortized Cost	21,148
Available-for-sale Securities, Due after five years through ten years, Fair Value	22,329
Available-for-sale Securities, Due after ten years, Amortized Cost	32,253
Available-for-sale Securities, Due after ten years, Fair Value	33,494
Available-for-sale securities, Amortized Cost	68,936	69,980
Available-for-sale Securities, Fair Value	72,446
Held-to-maturity Securities, Due in one year or less, Amortized Cost	0
Held-to-maturity Securities, Due in one year or less, Fair Value	0
Held-to-maturity Securities, Due after one year through five years, Amortized Cost	516
Held-to-maturity Securities, Due after one year through five years, Fair Value	544
Held-to-maturity Securities, Due after five years through ten years, Amortized Cost	473
Held-to-maturity Securities, Due after five years through ten years, Fair Value	507
Held-to-maturity Securities, Due after ten years, Amortized Cost	1,347
Held-to-maturity Securities, Due after ten years, Fair Value	1,450
Held-to-maturity Securities, Amortized Cost	2,336	3,303
Held-to-maturity Securities, Fair Value	$ 2,501	$ 3,497

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Segments (Schedule of Gross and Net Premiums Earned) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Property and Casualty operations premiums earned:
Total property and casualty	$ 14,929	$ 16,342	$ 30,088	$ 32,755
Reinsurance premium ceded	(2,396)	(3,021)	(4,059)	(4,564)
Net premiums earned	12,533	13,321	26,029	28,191
Life Insurance Segment [Member]
Life, accident and health operations premiums earned:
Traditional life insurance	1,270	1,302	2,558	2,688
Accident and health insurance	449	475	913	958
Total life, accident and health	1,719	1,777	3,471	3,646
Property and Casualty operations premiums earned:
Net premiums earned	1,719	1,777	3,471	3,646
Consolidated Property and Casualty Insurance Entity [Member]
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage	6,665	6,666	13,212	13,165
Homeowners (Including mobile homeowners)	5,790	6,227	11,694	12,471
Ocean marine	275	300	543	619
Other liability	343	321	683	631
Private passenger auto liability	93	685	328	1,441
Commercial auto liability	0	92	6	211
Auto physical damage	44	274	151	571
Total property and casualty	13,210	14,565	26,617	29,109
Net premiums earned	$ 10,814	$ 11,544	$ 22,558	$ 24,545

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Reinsurance (Tables)

6 Months Ended

Jun. 30, 2012

Reinsurance Disclosures [Abstract]

Schedule of Reinsurance

Reinsurance is maintained in four layers as follows:

Layer	Reinsurers' Limits of Liability
First Layer	95% of  $6,000,000 in excess of $4,000,000
Second Layer	95% of  $7,500,000 in excess of $10,000,000
Third Layer	100% of  $25,000,000 in excess of $17,500,000
Fourth Layer	100% of  $30,000,000 in excess of $42,500,000

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Segments (Tables)

6 Months Ended

Jun. 30, 2012

Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]

Schedule of Segment Reporting Information, by Segment

Premium revenues and operating income by industry segment for the three and six-month periods ended June 30, 2012, and 2011 (unaudited) are summarized below (dollars in thousands):

Three-Month Period Ended June 30, 2012	Total			P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	12,533		$	10,814	$	1,719	$	—
Net investment income	1,066			529		520		17
Net realized investment gains	865			75		790		—
Other income	193			192		1		—
	14,657			11,610		3,030		17
BENEFITS AND EXPENSES
Policyholder benefits paid	7,976			6,763		1,213		—
Policy acquisition costs	2,933			2,594		339		—
General and administrative expenses	1,835			1,111		644		80
Litigation settlement and defense costs	12,670			—		—		12,670
Taxes, licenses and fees	438			385		53		—
Interest expense	288			—		35		253
	26,140			10,853		2,284		13,003
Income (Loss) Before Income Taxes	$	(11,483	)	$	757	$	746	$	(12,986	)

Three-Month Period Ended June 30, 2011	Total			P&C Insurance Operations			Life Insurance Operations			Non-Insurance Operations
REVENUE
Net premiums earned	$	13,321		$	11,544		$	1,777		$	—
Net investment income	1,171			606			461			104
Net realized investment gains	261			257			4			—
Other income	256			254			2			—
	15,009			12,661			2,244			104
BENEFITS AND EXPENSES
Policyholder benefits paid	15,682			14,386			1,296			—
Policy acquisition costs	3,071			2,751			320			—
General and administrative expenses	2,418			1,601			594			223
Litigation settlement and defense costs	482			—			—			482
Taxes, licenses and fees	622			516			106			—
Interest expense	285			—			16			269
	22,560			19,254			2,332			974
Loss Before Income Taxes	$	(7,551	)	$	(6,593	)	$	(88	)	$	(870	)

Six-Month Period Ended June 30, 2012	Total			P&C Insurance Operations		Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	26,029		$	22,558	$	3,471	$	—
Net investment income	2,201			1,140		1,028		33
Net realized investment gains	1,071			207		862		2
Other income	390			388		2		—
	29,691			24,293		5,363		35
BENEFITS AND EXPENSES
Policyholder benefits paid	15,821			13,176		2,645		—
Policy acquisition costs	5,705			5,138		567		—
General and administrative expenses	4,323			2,940		1,092		291
Litigation settlement and defense costs	13,259			—		—		13,259
Taxes, licenses and fees	930			815		115		—
Interest expense	580			—		37		543
	40,618			22,069		4,456		14,093
Income (Loss) Before Income Taxes	$	(10,927	)	$	2,224	$	907	$	(14,058	)

Six-Month Period Ended June 30, 2011	Total			P&C Insurance Operations			Life Insurance Operations		Non-Insurance Operations
REVENUE
Net premiums earned	$	28,191		$	24,545		$	3,646	$	—
Net investment income	2,228			1,233			958		37
Net realized investment gains	1,031			643			358		30
Other income	511			509			2		—
	31,961			26,930			4,964		67
BENEFITS AND EXPENSES
Policyholder benefits paid	25,004			22,197			2,807		—
Policy acquisition costs	5,995			5,491			504		—
General and administrative expenses	4,589			3,052			1,174		363
Litigation settlement and defense costs	789			—			—		789
Taxes, licenses and fees	1,102			876			226		—
Interest expense	570			—			31		539
	38,049			31,616			4,742		1,691
Income (Loss) Before Income Taxes	$	(6,088	)	$	(4,686	)	$	222	$	(1,624	)

Schedule of Gross and Net Premiums Written

The following table presents the Company’s gross and net premiums written for the property and casualty segment and the life and accident and health segment for the three and six-month periods ended June 30, 2012 and 2011, respectively:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012		2011
Life, accident and health operations premiums written:
Traditional life insurance	$	1,248		$	1,226		2,458		$	2,531
Accident and health insurance	455			474			919		958
Total life, accident and health	1,703			1,700			3,377		3,489
Property and Casualty operations premiums written:
Dwelling fire & extended coverage	7,825			7,271			14,752		13,968
Homeowners (Including mobile homeowners)	6,745			7,439			12,232		13,446
Ocean marine	363			397			447		516
Other liability	409			377			766		711
Private passenger auto liability	(12		)	393			57		1,247
Commercial auto liability	—			92			6		211
Auto physical damage	(5		)	175			31		511
Total property and casualty	15,325			16,144			28,291		30,610
Gross premiums written	17,028			17,844			31,668		34,099
Reinsurance premium ceded	(2,443		)	(3,039		)	(4,126	)	(4,568		)
Net premiums written	$	14,585		$	14,805		27,542		$	29,531

Schedule of Gross and Net Premiums Earned

The following table presents the Company’s gross and net premiums earned for the property and casualty segment and the life and accident and health segment for the three and six-month periods ended June 30, 2012 and 2011, respectively:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Life, accident and health operations premiums earned:
Traditional life insurance	$	1,270		$	1,302		$	2,558		$	2,688
Accident and health insurance	449			475			913			958
Total life, accident and health	1,719			1,777			3,471			3,646
Property and Casualty operations premiums earned:
Dwelling fire & extended coverage	6,665			6,666			13,212			13,165
Homeowners (Including mobile homeowners)	5,790			6,227			11,694			12,471
Ocean marine	275			300			543			619
Other liability	343			321			683			631
Private passenger auto liability	93			685			328			1,441
Commercial auto liability	—			92			6			211
Auto physical damage	44			274			151			571
Total property and casualty	13,210			14,565			26,617			29,109
Gross premiums earned	14,929			16,342			30,088			32,755
Reinsurance premium ceded	(2,396		)	(3,021		)	(4,059		)	(4,564		)
Net premiums earned	$	12,533		$	13,321		$	26,029		$	28,191

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Segments (Schedule of Segment Reporting Information, by Segment) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 Segments	Jun. 30, 2011
Segment Reporting Information [Line Items]
Number of operating segments			1
Net premiums earned	$ 12,533,000	$ 13,321,000	$ 26,029,000	$ 28,191,000
Net investment income	1,066,000	1,171,000	2,201,000	2,228,000
Net realized investment gains	865,000	261,000	1,071,000	1,031,000
Other income	193,000	256,000	390,000	511,000
Total Revenues	14,657,000	15,009,000	29,691,000	31,961,000
Policyholder benefits paid	7,976,000	15,682,000	15,821,000	25,004,000
Policy acquisition costs	2,933,000	3,071,000	5,705,000	5,995,000
General expenses	1,835,000	2,418,000	4,323,000	4,589,000
Litigation settlement and defense costs	12,670,000	482,000	13,259,000	789,000
Taxes, licenses and fees	438,000	622,000	930,000	1,102,000
Interest expense	288,000	285,000	580,000	570,000
Total expenses	26,140,000	22,560,000	40,618,000	38,049,000
Income Before Income Taxes	(11,483,000)	(7,551,000)	(10,927,000)	(6,088,000)
P&C Insurance Operations [Member]
Segment Reporting Information [Line Items]
Net premiums earned	10,814,000	11,544,000	22,558,000	24,545,000
Net investment income	529,000	606,000	1,140,000	1,233,000
Net realized investment gains	75,000	257,000	207,000	643,000
Other income	192,000	254,000	388,000	509,000
Total Revenues	11,610,000	12,661,000	24,293,000	26,930,000
Policyholder benefits paid	6,763,000	14,386,000	13,176,000	22,197,000
Policy acquisition costs	2,594,000	2,751,000	5,138,000	5,491,000
General expenses	1,111,000	1,601,000	2,940,000	3,052,000
Litigation settlement and defense costs	0	0	0	0
Taxes, licenses and fees	385,000	516,000	815,000	876,000
Interest expense	0	0	0	0
Total expenses	10,853,000	19,254,000	22,069,000	31,616,000
Income Before Income Taxes	757,000	(6,593,000)	2,224,000	(4,686,000)
Life Insurance Operations [Member]
Segment Reporting Information [Line Items]
Net premiums earned	1,719,000	1,777,000	3,471,000	3,646,000
Net investment income	520,000	461,000	1,028,000	958,000
Net realized investment gains	790,000	4,000	862,000	358,000
Other income	1,000	2,000	2,000	2,000
Total Revenues	3,030,000	2,244,000	5,363,000	4,964,000
Policyholder benefits paid	1,213,000	1,296,000	2,645,000	2,807,000
Policy acquisition costs	339,000	320,000	567,000	504,000
General expenses	644,000	594,000	1,092,000	1,174,000
Litigation settlement and defense costs	0	0	0	0
Taxes, licenses and fees	53,000	106,000	115,000	226,000
Interest expense	35,000	16,000	37,000	31,000
Total expenses	2,284,000	2,332,000	4,456,000	4,742,000
Income Before Income Taxes	746,000	(88,000)	907,000	222,000
Non-Insurance Operations [Member]
Segment Reporting Information [Line Items]
Net premiums earned	0	0	0	0
Net investment income	17,000	104,000	33,000	37,000
Net realized investment gains	0	0	2,000	30,000
Other income	0	0	0	0
Total Revenues	17,000	104,000	35,000	67,000
Policyholder benefits paid	0	0	0	0
Policy acquisition costs	0	0	0	0
General expenses	80,000	223,000	291,000	363,000
Litigation settlement and defense costs	12,670,000	482,000	13,259,000	789,000
Taxes, licenses and fees	0	0	0	0
Interest expense	253,000	269,000	543,000	539,000
Total expenses	13,003,000	974,000	14,093,000	1,691,000
Income Before Income Taxes	$ (12,986,000)	$ (870,000)	$ (14,058,000)	$ (1,624,000)

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Notes Payable and Long-Term Debt (Narrative) (Details) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	May 26, 2010	Mar. 19, 2009
Debt Instrument [Line Items]
Notional amount of interest rate						$ 9,000,000	$ 3,000,000
Long-term debt, basis spread on variable rate							3.40%
Interest rate, stated percentage							7.02%
Derivative, fixed interest rate						8.49%
Cash flow hedge, derivative instrument liabilities at fair value	1,437,000		1,437,000		1,196,000
Unrealized gain on interest rate swap	(244,000)	(103,000)	(159,000)	(55,000)	640,000
Collateral already posted, aggregate fair value	100,000		100,000		310,000
Available-for-sale securities pledged as collateral	1,335,000		1,335,000		877,000
Line of credit facility, maximum borrowing capacity	700,000		700,000
Line of credit facility, interest rate	5.00%		5.00%
Short-term notes payable	625,000		625,000		485,000
Interest Rate Swap [Member]
Debt Instrument [Line Items]
Cash flow hedge, liability at fair value	469,000		469,000
Cash Flow Hedging [Member]
Debt Instrument [Line Items]
Cash flow hedge, liability at fair value	$ 968,000		$ 968,000

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Condensed Consolidated Statement of Comprehensive Income (Unaudited) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Net loss:	$ (7,306,000)	$ (4,945,000)	$ (6,775,000)	$ (3,950,000)
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities	(201,000)	465,000	76,000	285,000
Unrealized gain on interest rate swap	(244,000)	(103,000)	(159,000)	(55,000)	640,000
Other comprehensive income (loss), net of tax	(445,000)	362,000	(83,000)	230,000
Comprehensive loss	$ (7,751,000)	$ (4,583,000)	$ (6,858,000)	$ (3,720,000)

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Reinsurance

6 Months Ended

Jun. 30, 2012

Reinsurance Disclosures [Abstract]

Reinsurance

REINSURANCE

In the normal course of business, NSFC seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers.  NSFC maintains a catastrophe reinsurance agreement to cover losses from catastrophic events, primarily hurricanes.

Under the catastrophe reinsurance program, the Company retains the first $4,000,000 in losses from each event.  Reinsurance is maintained in four layers as follows:

Layer	Reinsurers' Limits of Liability
First Layer	95% of  $6,000,000 in excess of $4,000,000
Second Layer	95% of  $7,500,000 in excess of $10,000,000
Third Layer	100% of  $25,000,000 in excess of $17,500,000
Fourth Layer	100% of  $30,000,000 in excess of $42,500,000

Layers 1-4 cover events occurring from January 1-December 31 of the contract year.  All significant reinsurers under the program carry A.M. Best ratings of A- (Excellent) or higher, or equivalent ratings.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy.  Amounts paid for prospective reinsurance contracts are reported as prepaid reinsurance premiums and amortized over the remaining contract period.

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

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Preferred and Common Stock (Tables)

6 Months Ended

Jun. 30, 2012

Preferred and Common Stock [Abstract]

Schedule of Stock by Class

The table below provides information regarding the Company's preferred and common stock as of June 30, 2012 and December 31, 2011:

	June 30, 2012			December 31, 2011
	Authorized	Issued	Outstanding	Authorized	Issued	Outstanding
Preferred Stock, $1 par value	500,000	—	—	500,000	—	—
Class A Common Stock, $1 par value	2,000,000	—	—	2,000,000	—	—
Common Stock, $1 par value	3,000,000	2,466,600	2,466,600	3,000,000	2,466,600	2,466,600

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Income Taxes (Deferred Tax Assets and Liabilities) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Income Tax Disclosure [Abstract]
General expenses	$ 1,211	$ 1,576
Unearned premiums	1,827	1,714
Claims liabilities	249	271
Litigation settlement	4,420	0
NOL carry forward	1,594	1,363
Other-than-temporary impairments on securities owned	231	258
Unrealized loss on interest rate swaps	489	407
Deferred tax assets	10,021	5,589
Depreciation	(120)	(144)
Deferred policy acquisition costs	(3,299)	(3,250)
Unrealized gains on securities available-for-sale	(2,320)	(2,281)
Deferred tax liabilities	(5,739)	(5,675)
Net deferred tax asset (liability)	$ 4,282	$ (86)

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Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2012

Accounting Policies [Abstract]

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of The National Security Group, Inc. (the Company) and its wholly-owned subsidiaries:  National Security Insurance Company (NSIC), National Security Fire and Casualty Company (NSFC) and  NATSCO, Inc. (NATSCO).  NSFC includes a wholly-owned subsidiary - Omega One Insurance Company (Omega).  The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  All significant intercompany transactions and accounts have been eliminated.  The financial information presented herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which includes information and disclosures not presented herein.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these financial statements are reserves for future policy benefits, liabilities for losses and loss adjustment expenses, reinsurance recoverable asset on associated loss and loss adjustment expense liabilities, deferred policy acquisition costs, deferred income tax assets and liabilities, assessments of other-than-temporary impairments on investments and accruals for contingencies.   Actual results could differ from those estimates.

Marketable Securities

For securities in an unrealized loss position, the Company assesses whether the Company has the intent to sell the security or more likely than not will be required to sell the security before the anticipated recovery.  If either of these conditions is met, the Company is required to recognize an other-than-temporary impairment with the entire unrealized loss reported in earnings.  For securities in an unrealized loss position that do not meet these conditions, the Company assesses whether the impairment of a security is other-than-temporary.  If the impairment is determined to be other-than-temporary, the Company is required to separate the other-than-temporary impairments into two components:  the amount representing the credit loss and the amount related to all other factors.  The credit loss is the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment.  The credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.

 In evaluating whether or not the equity loss positions were other-than-temporary impairments, Management evaluated financial information on each company and where available reviewed analyst reports from at least two independent sources.

Income Taxes

The Company recognizes tax-related interest and penalties as a component of tax expense. 

Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. 

Derivatives

We use dollar offset at the hedge's inception and for each reporting period thereafter to assess whether the derivative used in a hedging transaction is expected to be, and has been, effective in offsetting changes in the fair value of the hedged item. Since inception, no portion of the hedged item has been deemed ineffective. For all hedges, we discontinue hedge accounting if it is determined that a derivative is not expected to be, or has ceased to be, effective as a hedge.

The swap liability is reported as a component of other liabilities on the condensed consolidated balance sheets.

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

Fair Value of Financial Instruments

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

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

Equity securities—Equity securities consist principally of investments in common and preferred stock of publicly traded companies and privately traded securities. The fair values of our publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for our privately traded equity securities require a substantial level of judgment. Privately traded equity securities are classified within Level 3.

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

The following methods and assumptions were used to estimate fair value of each class of financial instrument for which it is practical to estimate that value:

Cash and cash equivalents—the carrying amount is a reasonable estimate of fair value.

Mortgage receivables—the carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited marketability of the mortgage notes.

Other invested assets—the carrying amount is a reasonable estimate of fair value.

Other policyholder funds—the carrying amount is a reasonable estimate of fair value.

Debt—the carrying amount is a reasonable estimate of fair value.

Our available-for-sale securities consists of fixed maturity and equity securities which are recorded at fair value in the accompanying condensed consolidated balance sheets.  The change in the fair value of these investments, unless deemed to be other than temporarily impaired, is recorded as a component of other comprehensive income.

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

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

The Company categorizes assets and liabilities carried at their fair value based upon a fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 1 assets and liabilities consist of money market fund deposits and certain of our marketable debt and equity instruments, including equity instruments offsetting deferred compensation, that are traded in an active market with sufficient volume and frequency of transactions.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

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

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

Level 3 assets and liabilities include marketable debt instruments, non-marketable equity investments, derivative contracts, and company issued debt whose values are determined using inputs that are both unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable debt instruments that are priced using indicator prices that we were unable to corroborate with observable market quotes.

Marketable debt instruments in this category generally include asset-backed securities and certain of our floating-rate notes, corporate bonds, and municipal bonds.

Segment Reporting

 The Company’s life and accident and health operations comprise the second business segment.  The life and accident and health insurance segment consists of two lines of business: traditional life insurance and accident and health insurance.

The Company’s property and casualty insurance operations comprise one business segment.  The property and casualty insurance segment consists of seven lines of business:  dwelling fire and extended coverage, homeowners (including mobile homeowners), ocean marine, other liability, private passenger auto liability, commercial auto liability and auto physical damage.