----

----

----

----

| Delaware                                                            |   | 63-1020300                             |
|---------------------------------------------------------------------|--------|----------------------------------------|
|  (State or Other Jurisdiction ofIncorporation or Organization) |   |  (IRS EmployerIdentification No.) |
|                                                                |   |                                   |
| 661 East Davis StreetElba, Alabama                                  |   | 36323                                  |
|  (Address of principal executive  offices)           |   |  (Zip-Code)                       |

----

----

|                          |  Class    |             |  Outstanding March 26, 2010     |
|-------------------------------|-------------------------------|------------------|----------------------------------------------------------|
| Common Stock, $1.00 par value |                          | 2,466,600 shares |

----

| Part I   |     |                                                                                                               | Page   |
|----------|----------|--------------------------------------------------------------------------------------------------------------------|--------|
|     |     |                                                                                                               |   |
|     | Item 1.  | Business                                                                                                           | 3      |
|     | Item 1A. | Risk Factors                                                                                                       | 13     |
|     | Item 1B. | Unresolved Staff Comments                                                                                          | 18     |
|     | Item 2.  | Properties                                                                                                         | 18     |
|     | Item 3.  | Legal Proceedings                                                                                                  | 19     |
|     | Item 4.  | Submission of Matters to a Vote of Security Holders                                                                | 19     |
| Part II  |     |                                                                                                               |   |
|     |     |                                                                                                               |   |
|     | Item 5.  | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 19     |
|     | Item 6.  | Selected Financial Data                                                                                            | 20     |
|     | Item 7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                        | 22     |
|     | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                                                         | 41     |
|     | Item 8.  | Financial Statements and Supplementary Data                                                                        | 43     |
|     | Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                               | 83     |
|     | Item 9A. | Controls and Procedures                                                                                            | 83     |
|     | Item 9B. | Other Information                                                                                                  | 83     |
|     |     |                                                                                                               |   |
| Part III |     |                                                                                                               |   |
|     |     |                                                                                                               |   |
|     | Item 10. | Directors and Executive Officers and Corporate Governance                                                          | 84     |
|     | Item 11. | Executive Compensation                                                                                             | 84     |
|     | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                     | 84     |
|     | Item 13. | Certain Relationships and Related Transactions and Director Independence                                           | 84     |
|     | Item 14. | Principal Accounting Fees and Services                                                                             | 85     |
|     |     |                                                                                                               |   |
| Part IV. |     |                                                                                                               |   |
|     |     |                                                                                                               |   |
|     | Item 15. | Exhibits and Financial Statement Schedules                                                                         | 85     |
|     |     |                                                                                                               |   |
|     |     | Signature Page                                                                                                     | 87     |
|     |     |                                                                                                               |   |
|     |     | Certifications                                                                                                     | 89     |

| 1.   | Definitive proxy statement for the 2010 Annual Meeting of Stockholders to be held May 14, 2010 is incorporated by reference into Part III of this report.  The proxy statement will be filed no later than 120 days from December 31, 2009. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | Current Report on Form 8-K for event occurring on February 26, 2010 is incorporated into Part IV of this report. |
|----------------|------------------------------------------------------------------------------------------------------------------|

----

Item 1.  Business

----

| §   | 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. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| State          |   | Percent of Direct Written Premium |   |
|----------------|--------|-----------------------------------|--------|
|           |   | 2009                              |   |   | 2008 |   |
| Alabama        |   |                              | 32.53  | % |   |   | 36.39 | % |
| Arkansas       |   |                              | 7.61   | % |   |   | 9.62 | % |
| Georgia        |   |                              | 6.34   | % |   |   | 5.28 | % |
| Louisiana      |   |                              | 14.24  | % |   |   | 11.42 | % |
| Mississippi    |   |                              | 16.43  | % |   |   | 19.22 | % |
| South Carolina |   |                              | 9.59   | % |   |   | 8.16 | % |
| Florida        |   |                              | 0.18   | % |   |   | 0.21 | % |
| Missouri       |   |                              | 0.93   | % |   |   | 1.23 | % |
| Oklahoma       |   |                              | 3.98   | % |   |   | 3.11 | % |
| Tennessee      |   |                              | 5.94   | % |   |   | 3.71 | % |
| Texas          |   |                              | 2.23   | % |   |   | 1.65 | % |
|           |   |                              | 100.00 | % |   |   | 100.00 | % |

----

|                              |   | Year Ended December 31 |   |
|-----------------------------------|--------|------------------------|--------|
|                              |   | (Amounts In Thousands) |   |
|                              |   | 2009                   |   |   | 2008 |   |
| Net premiums earned:              |   |                   |   |   |   |   |
| Fire, Allied lines and Homeowners |   | $                      | 49,310 |   |   | $ | 46,741 |   |
| Automobile                        |   |                   | 2,206  |   |   |   | 1,633 |   |
| Other                             |   |                   | 879    |   |   |   | 934 |   |
|                              |   | $                      | 52,395 |   |   | $ | 49,308 |   |
|                              |   |                   |   |   |   |   |   |   |
| Income (Loss) before taxes        |   | $                      | 6,617  |   |   | $ | (5,649 | ) |

----

|                                               |           |         | 1999          |         | 2000          |         | 2001          |         | 2002          |         | 2003          |         | 2004          |          | 2005          |         | 2006          |         | 2007         |         | 2008          |         | 2009         |
|----------------------------------------------------|----------------|--------------|---------------|--------------|---------------|--------------|---------------|--------------|---------------|--------------|---------------|--------------|---------------|---------------|---------------|--------------|---------------|--------------|--------------|--------------|---------------|--------------|--------------|
| Gross unpaid losses per                            |           |         |          |         |          |         |          |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|     Consolidated Balance Sheet | $              |  18,463 | $             |  15,409 | $             |  11,489 | $             |  11,513 | $             |  11,343 | $             |  13,094 | $             |  19,511  | $             |  12,498 | $             |  11,973 | $            |  14,436 | $             |  12,646 |
| Ceded reserves                                     |           |         |  (3,899) |         |  (3,092) |         |  (2,396) |         |  (1,555) |         |  (1,232) |         |  (2,611) |          |  (8,560) |         |  (1,783) |         |  (555)  |         |  (2,421) |         |  (549)  |
| Net unpaid losses                                  |           | $            |  14,564  | $            |  12,317  | $            |  9,093   | $            |  9,958   | $            |  10,111  | $            |  10,483  | $             |  10,951  | $            |  10,715  | $            |  11,418 | $            |  12,015  | $            |  12,097 |
|                                               |           |         |          |         |          |         |          |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
| Cumulative net payments:                           | 1 year later   | $            |  4,423   | $            |  3,907   | $            |  3,362   | $            |  4,342   | $            |  5,567   | $            |  5,584   | $             |  7,384   | $            |  6,438   |         |  4,797  |         | 5636          |         |         |
|                                               | 2 years later  |         |  5,758   |         |  5,643   |         |  4,416   |         |  5,520   |         |  6,765   |         |  7,006   |          |  9,063   |         |  8,103   |         |  6,496  |         |          |         |         |
|                                               | 3 years later  |         |  7,266   |         |  6,359   |         |  5,076   |         |  5,865   |         |  7,038   |         |  7,521   |          |  10,198  |         |  9,652   |         |         |         |          |         |         |
|                                               | 4 years later  |         |  7,744   |         |  6,737   |         |  5,221   |         |  5,945   |         |  7,274   |         |  7,811   |          |  11,439  |         |          |         |         |         |          |         |         |
|                                               | 5 years later  |         |  8,039   |         |  6,837   |         |  5,106   |         |  6,136   |         |  7,351   |         |  8,018   |          |          |         |          |         |         |         |          |         |         |
|                                               | 6 years later  |         |  8,139   |         |  6,731   |         |  5,164   |         |  6,167   |         |  7,390   |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               | 7 years later  |         |  8,028   |         |  6,773   |         |  5,180   |         |  6,183   |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               | 8 years later  |         |  8,067   |         |  6,789   |         |  5,193   |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               | 9 years later  |         |  8,088   |         |  6,822   |         |          |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               | 10 years later |         |  8,121   |         |          |         |          |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               |           |         |          |         |          |         |          |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
| Net Liability re-estimated:                        | 1 year later   |         |  11,067  |         |  8,847   |         |  6,805   |         |  7,334   |         |  9,186   |         |  9,042   |          |  11,844  |         |  11,817  |         |  9,046  |         | 9438          |         |         |
|                                               | 2 years later  |         |  9,261   |         |  7,863   |         |  6,017   |         |  7,165   |         |  8,607   |         |  9,118   |          |  11,827  |         |  11,061  |         |  8,739  |         |          |         |         |
|                                               | 3 years later  |         |  8,931   |         |  7,460   |         |  5,856   |         |  6,906   |         |  8,098   |         |  8,669   |          |  12,161  |         |  11,121  |         |         |         |          |         |         |
|                                               | 4 years later  |         |  8,556   |         |  7,236   |         |  5,699   |         |  6,509   |         |  7,863   |         |  8,404   |          |  12,337  |         |          |         |         |         |          |         |         |
|                                               | 5 years later  |         |  8,422   |         |  7,240   |         |  5,436   |         |  6,499   |         |  7,629   |         |  8,274   |          |          |         |          |         |         |         |          |         |         |
|                                               | 6 years later  |         |  8,519   |         |  6,995   |         |  5,413   |         |  6,313   |         |  7,570   |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               | 7 years later  |         |  8,264   |         |  6,961   |         |  5,297   |         |  6,314   |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               | 8 years later  |         |  8,245   |         |  6,897   |         |  5,308   |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               | 9 years later  |         |  8,193   |         |  6,928   |         |          |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               | 10 years later |         |  8,227   |         |          |         |          |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
|                                               |           |         |          |         |          |         |          |         |          |         |          |         |          |          |          |         |          |         |         |         |          |         |         |
| Net cumulative redundancy (deficiency)             | $              |  6,337  | $             |  5,389  | $             |  3,785  | $             |  3,644  | $             |  2,541  | $             |  2,209  | $             |  (1,386) | $             |  (406)  | $             |  2,679  |         |  2,577  |          |         |

| For the Years Ended December 31, |
|----------------------------------|
|                             |   | 2009 |   | 2008 |
| Change in Loss and LAE Reserves  |   | Adjusted Loss and LAE Reserves | % Change in Equity |   | Adjusted Loss and LAE Reserves | % Change in Equity |
|                             |   | *Loss and LAE reserves are in thousands |
| ↓10.0%                     |   | $ 11,381 | ↑3.07% |   | $ 12,992 | ↑2.75% |
| ↓  7.5%          |   |    11,698 | ↑2.30% |   |    13,353 | ↑2.06% |
| ↓  5.0%          |   |    12,014 | ↑1.54% |   |    13,714 | ↑1.38% |
| ↓  2.5%          |   |    12,330    | ↑0.77% |   |    14,075 | ↑0.68% |
| Reported                         |   |    12,646   | - |   |    14,436 | - |
| ↑  2.5%          |   |    12,962    |  ↓ 0.77% |   |    14,796 |  ↓ 0.69% |
| ↑  5.0%          |   |    13,278 |  ↓ 1.54% |   |    15,157 |  ↓ 1.37% |
| ↑  7.5%          |   |    13,594 |  ↓ 2.30% |   |    15,519 |  ↓ 2.06% |
| ↑10.0%                     |   |    13,911 |  ↓ 3.07% |   |    15,879 |  ↓ 2.75% |

----

| State          |   | Percentage of Total Direct Premiums |   |
|----------------|--------|-------------------------------------|--------|
|           |   | 2009                                |   |   | 2008 |   |
| Alabama        |   |                                | 57.02  | % |   |   | 57.25 | % |
| Georgia        |   |                                | 21.54  | % |   |   | 21.79 | % |
| Mississippi    |   |                                | 10.20  | % |   |   | 10.13 | % |
| South Carolina |   |                                | 7.09   | % |   |   | 6.21 | % |
| Florida        |   |                                | 2.56   | % |   |   | 1.90 | % |
| Texas          |   |                                | 1.59   | % |   |   | 2.72 | % |
|           |   |                                | 100.00 | % |   |   | 100.00 | % |

| Line of Business                     |   | Home Service Agent |   |   | Independent Agent |   |   | Other  |   |
|--------------------------------------|--------|--------------------|--------|--------|-------------------|--------|--------|--------|--------|
| Industrial                           |   | $                  | 100    |   |              | $      | -      |   |   | $ | 76 |   |
| Ordinary                             |   |               | 1,975  |   |              |   | 3,040  |   |   |   | 29 |   |
| Group Life                           |   |               | -      |   |              |   | 14     |   |   |   | 73 |   |
| A&H Group                        |   |               | -      |   |              |   | -      |   |   |   | 90 |   |
| A&H Other                        |   |               | 332    |   |              |   | 1,405  |   |   |   | 65 |   |
| Total Premium by Distribution Method |   | $                  | 2,407  |   |              | $      | 4,459  |   |   | $ | 333 |   |

----

|                                      |   | Year Ended December 31 |    |
|-------------------------------------------|--------|------------------------|---------|
|                                      |   | (Amounts In Thousands) |    |
|                                      |   | 2009                   |    |   | 2008 |   |
| Life insurance in force at end of period: |   |                   |    |   |   |   |
| Ordinary-whole life                       |   | $                      | 168,400 |   |   | $ | 167,000 |   |
| Term life                                 |   |                   | 25,000  |   |   |   | 25,000 |   |
| Industrial life                           |   |                   | 21,600  |   |   |   | 22,200 |   |
| Other                                     |   |                   | -       |   |   |   | - |   |
|                                      |   | $                      | 215,000 |   |   | $ | 214,200 |   |
|                                      |   |                   |    |   |   |   |   |   |
| Life insurance issued:                    |   |                   |    |   |   |   |   |   |
| Ordinary-whole life                       |   | $                      | 39,000  |   |   | $ | 40,000 |   |
| Term life                                 |   |                   | -       |   |   |   | 4,300 |   |
| Industrial life                           |   |                   | -       |   |   |   | - |   |
| Other                                     |   |                   | -       |   |   |   | - |   |
|                                      |   | $                      | 39,000  |   |   | $ | 44,300 |   |
|                                      |   |                   |    |   |   |   |   |   |
|                                      |   |                   |    |   |   |   |   |   |
| Net premiums earned:                      |   |                   |    |   |   |   |   |   |
| Life insurance                            |   | $                      | 5,282   |   |   | $ | 5,389 |   |
| Accident and health insurance             |   |                   | 1,917   |   |   |   | 1,567 |   |
|                                      |   | $                      | 7,199   |   |   | $ | 6,956 |   |

----

----

----

----

Item 1A.  Risk Factors

----

----

----

----

----

Item 1B.  Unresolved Staff Comments

Item 2.  Properties

----

Item 3.  Legal Proceedings

Item 4.  Submission of Matters to a Vote of Security Holders

Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

|                       |   | Stock Closing Prices |   |
|----------------------------|--------|----------------------|--------|
|                       |   | High                 |   |   | Low |   |
| 2009                       |   |                 |   |   |   |   |
|   First Quarter  |   | $                    | 7.14   |   |   | $ | 5.87 |   |
|   Second Quarter |   |                 | 10.85  |   |   |   | 6.76 |   |
|   Third Quarter  |   |                 | 9.08   |   |   |   | 7.50 |   |
|   Fourth Quarter |   |                 | 11.10  |   |   |   | 7.61 |   |
|                       |   |                 |   |   |   |   |   |   |
| 2008                       |   |                 |   |   |   |   |   |   |
|   First Quarter  |   | $                    | 17.74  |   |   | $ | 15.25 |   |
|   Second Quarter |   |                 | 16.76  |   |   |   | 14.77 |   |
|   Third Quarter  |   |                 | 16.73  |   |   |   | 13.67 |   |
|   Fourth Quarter |   |                 | 13.79  |   |   |   | 5.16 |   |

|                       |   | Dividends |   |
|----------------------------|--------|-----------|--------|
|                       |   | Per Share |   |
| 2009                       |   |      |   |
|   First Quarter  |   | $         | 0.15   |   |
|   Second Quarter |   | $         | 0.15   |   |
|   Third Quarter  |   | $         | 0.15   |   |
|   Fourth Quarter |   | $         | 0.15   |   |
|                       |   |      |   |   |
| 2008                       |   |      |   |   |
|   First Quarter  |   | $         | 0.225  |   |
|   Second Quarter |   | $         | 0.225  |   |
|   Third Quarter  |   | $         | 0.225  |   |
|   Fourth Quarter |   | $         | 0.225  |   |

----

Item 6.  Selected Financial Data

| Operating results                      |   | 2009   |   |   | 2008   |   |   | 2007   |   |   | 2006   |   |   | 2005   |   |
|----------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net premiums earned                    |   | $      | 59,594 |   |   | $      | 56,264 |   |   | $      | 62,250 |   |   | $      | 58,874 |   |   | $ | 53,563 |   |
| Net investment income                  |   |   | 5,289  |   |   |   | 4,368  |   |   |   | 4,749  |   |   |   | 4,463  |   |   |   | 3,964 |   |
| Net realized investment (losses) gains |   |   | 357    |   |   |   | (1,049 | )      |   |   | 1,493  |   |   |   | 2,565  |   |   |   | 3,493 |   |
| Other income                           |   |   | 764    |   |   |   | 1,107  |   |   |   | 1,071  |   |   |   | 1,211  |   |   |   | 1,416 |   |
| Total revenues                         |   | $      | 66,004 |   |   | $      | 60,690 |   |   | $      | 69,563 |   |   | $      | 67,113 |   |   | $ | 62,436 |   |
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                      |   | $      | 4,224  |   |   | $      | (5,204 | )      |   | $      | 6,040  |   |   | $      | 4,250  |   |   | $ | 1,558 |   |
| Net income (loss) per share            |   | $      | 1.71   |   |   | $      | (2.11  | )      |   | $      | 2.45   |   |   | $      | 1.72   |   |   | $ | 0.63 |   |

| Other Selected Financial Data          |   | 2009   |    |   | 2008   |   |    | 2007   |   |   | 2006    |   |   | 2005   |    |
|----------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|
|                                   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |
| Total shareholders' equity             |   | $      | 41,168  |   |   | $      | 34,648  |   |   | $      | 48,447  |   |   | $      | 45,379  |   |   | $ | 43,556 |   |
| Book value per share                   |   | $      | 16.69   |   |   | $      | 14.04   |   |   | $      | 19.64   |   |   | $      | 18.39   |   |   | $ | 17.66 |   |
| Dividends per share                    |   | $      | 0.600   |   |   | $      | 0.900   |   |   | $      | 0.900   |   |   | $      | 0.885   |   |   | $ | 0.865 |   |
| Net change in unrealized               |   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |   |   |
|   capital gains (net of tax) |   | $      | 3,520   |   |   | $      | (6,147  | )      |   | $      | (664    | )      |   | $      | (244    | ) |   | $ | (2,544 | ) |
| Total assets                           |   | $      | 131,396 |   |   | $      | 124,890 |   |   | $      | 135,585 |   |   | $      | 134,911 |   |   | $ | 139,226 |   |

----

|    |   | Premiums |   |   | Investment & Other Income |   |   | Realized Investment Gains (Losses) |   |   | Claims and Benefit Payments |   |   | Net Income (Loss) |   |   | Net Income (Loss) Per Share |   |
|---------|--------|----------|--------|--------|-------------------------------|--------|--------|-----------------------------------------|--------|--------|-----------------------------|--------|--------|-------------------|--------|--------|-----------------------------|--------|
| 2009    |   |     |   |   |                          |   |   |                                    |   |   |                        |   |   |              |   |   |                        |   |
| 1st QTR |   | $        | 15,220 |   |                          | $      | 1,378  |                                    |   | $      | 1                           |   |   | $                 | 7,792  |   |                        | $      | 1,481 |   |   | $ | 0.60 |   |
| 2nd QTR |   |     | 15,373 |   |                          |   | 1,566  |                                    |   |   | (231                        | )      |   |              | 11,314 |   |                        |   | 92 |   |   |   | 0.04 |   |
| 3rd QTR |   |     | 14,357 |   |                          |   | 1,584  |                                    |   |   | 79                          |   |   |              | 9,131  |   |                        |   | 651 |   |   |   | 0.26 |   |
| 4th QTR |   |     | 14,644 |   |                          |   | 1,525  |                                    |   |   | 508                         |   |   |              | 7,602  |   |                        |   | 2,000 |   |   |   | 0.81 |   |
|    |   | $        | 59,594 |   |                          | $      | 6,053  |                                    |   | $      | 357                         |   |   | $                 | 35,839 |   |                        | $      | 4,224 |   |   | $ | 1.71 |   |
|    |   |     |   |   |                          |   |   |                                    |   |   |                        |   |   |              |   |   |                        |   |   |   |   |   |   |   |
| 2008    |   |     |   |   |                          |   |   |                                    |   |   |                        |   |   |              |   |   |                        |   |   |   |   |   |   |   |
| 1st QTR |   | $        | 16,586 |   |                          | $      | 1,642  |                                    |   | $      | 66                          |   |   | $                 | 10,560 |   |                        | $      | 782 |   |   | $ | 0.32 |   |
| 2nd QTR |   |     | 13,968 |   |                          |   | 1,593  |                                    |   |   | 82                          |   |   |              | 10,812 |   |                        |   | (36 | ) |   |   | (0.01 | ) |
| 3rd QTR |   |     | 11,707 |   |                          |   | 1,586  |                                    |   |   | (1,452                      | )      |   |              | 15,795 |   |                        |   | (6,945 | ) |   |   | (2.82 | ) |
| 4th QTR |   |     | 14,003 |   |                          |   | 654    |                                    |   |   | 255                         |   |   |              | 7,579  |   |                        |   | 995 |   |   |   | 0.40 |   |
|    |   | $        | 56,264 |   |                          | $      | 5,475  |                                    |   | $      | (1,049                      | )      |   | $                 | 44,746 |   |                        | $      | (5,204 | ) |   | $ | (2.11 | ) |

----

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

|                               |   | Year               |       |
|------------------------------------|--------|--------------------|------------|
|                               |   | Ended December 31, |       |
|                               |   | 2009               |       |   | 2008 |   |
| Premium Earned                     |   | $                  | 59,594,000 |   |   | $ | 56,264,000 |   |
| Investment Income                  |   |               | 5,289,000  |   |   |   | 4,368,000 |   |
| Realized Investment Gains (Losses) |   |               | 357,000    |   |   |   | (1,049,000 | ) |
| Other Income                       |   |               | 764,000    |   |   |   | 1,107,000 |   |
| Total Revenues                     |   |               | 66,004,000 |   |   |   | 60,690,000 |   |
| Net Income (Loss)                  |   | $                  | 4,224,000  |   |   | $ | (5,204,000 | ) |
|                               |   |               |       |   |   |   |   |   |
| Net Income (Loss) Per Share        |   | $                  | 1.71       |   |   | $ | (2.11 | ) |
|                               |   |               |       |   |   |   |   |   |

----

----

| Premium revenues:                   |   |   |   |   |   |   |   |   |   |   |   |   |
|-------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                |   | 2009   |   |   | %      |   |   | 2008   |   |   | %      |   |
|                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Life, accident and health insurance |   | $      | 7,199  |   |   |   | 12.08  | %      |   | $      | 6,956  |   |   |   | 12.36 | % |
| Property and casualty insurance     |   |   | 52,395 |   |   |   | 87.92  | %      |   |   | 49,308 |   |   |   | 87.64 | % |
|                                |   | $      | 59,594 |   |   |   | 100.00 | %      |   | $      | 56,264 |   |   |   | 100.00 | % |

----

|                                              |   | 2009   |   |   | 2008   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|
| REVENUE                                           |   |   |   |   |   |   |
| Net premiums earned                               |   | $      | 7,199  |   |   | $      | 6,956 |   |
| Net investment income                             |   |   | 2,114  |   |   |   | 1,940 |   |
| Net realized investment gains (losses)            |   |   | 234    |   |   |   | (1,423 | ) |
| Other income                                      |   |   | 3      |   |   |   | 60 |   |
|                                              |   |   | 9,550  |   |   |   | 7,533 |   |
|                                              |   |   |   |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | 4,931  |   |   |   | 5,027 |   |
| Amortization of deferred policy acquisition costs |   |   | 276    |   |   |   | 1,032 |   |
| Commissions                                       |   |   | 546    |   |   |   | 490 |   |
| General and administrative expenses               |   |   | 2,543  |   |   |   | 1,614 |   |
| Insurance taxes, licenses and fees                |   |   | 244    |   |   |   | 288 |   |
| Interest expense                                  |   |   | 49     |   |   |   | 61 |   |
|                                              |   |   | 8,589  |   |   |   | 8,512 |   |
|                                              |   |   |   |   |   |   |   |   |
| (Loss) Income Before Income Taxes                 |   |   | 961    |   |   |   | (979 | ) |
|                                              |   |   |   |   |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                      |   |   |   |   |   |   |   |   |
| Current                                           |   |   | 105    |   |   |   | (281 | ) |
| Deferred                                          |   |   | 392    |   |   |   | 161 |   |
|                                              |   |   | 497    |   |   |   | (120 | ) |
|                                              |   |   |   |   |   |   |   |   |
| NET INCOME (LOSS)                                 |   | $      | 464    |   |   | $      | (859 | ) |

----

|                                              |   | 2009   |   |   | 2008   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|
| REVENUE                                           |   |   |   |   |   |   |
| Net premiums earned                               |   | $      | 52,395 |   |   | $      | 49,308 |   |
| Net investment income                             |   |   | 3,125  |   |   |   | 2,852 |   |
| Net realized investment gains                     |   |   | 120    |   |   |   | 372 |   |
| Other income                                      |   |   | 761    |   |   |   | 1,047 |   |
|                                              |   |   | 56,401 |   |   |   | 53,579 |   |
|                                              |   |   |   |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | 30,908 |   |   |   | 39,719 |   |
| Amortization of deferred policy acquisition costs |   |   | 3,397  |   |   |   | 3,312 |   |
| Commissions                                       |   |   | 7,317  |   |   |   | 7,772 |   |
| General and administrative expenses               |   |   | 6,775  |   |   |   | 7,265 |   |
| Insurance taxes, licenses and fees                |   |   | 1,387  |   |   |   | 1,159 |   |
| Interest expense                                  |   |   | -      |   |   |   | 1 |   |
|                                              |   |   | 49,784 |   |   |   | 59,228 |   |
|                                              |   |   |   |   |   |   |   |   |
| Income (Loss) Before Income Taxes                 |   |   | 6,617  |   |   |   | (5,649 | ) |
|                                              |   |   |   |   |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                      |   |   |   |   |   |   |   |   |
| Current                                           |   |   | 1,369  |   |   |   | (2,919 | ) |
| Deferred                                          |   |   | 97     |   |   |   | 867 |   |
|                                              |   |   | 1,466  |   |   |   | (2,052 | ) |
|                                              |   |   |   |   |   |   |   |   |
| NET INCOME (LOSS)                                 |   | $      | 5,151  |   |   | $      | (3,597 | ) |

----

|                         |   | Net Premium Earned |       |   | % of NPE |   |   | Net Premium Earned |   |   | % of NPE   |   |
|------------------------------|--------|--------------------|------------|--------|----------|--------|--------|--------------------|--------|--------|------------|--------|
| Line of Business             |   | 2009               |       |   | 2009     |   |   | 2008               |   |   | 2008       |   |
| Dwelling Fire                |   | $                  | 20,023,000 |   |     |   | 38.2   | %                  |   | $      | 20,572,000 |   |   |   | 41.7 | % |
| Allied Lines                 |   |               | 5,501,000  |   |     |   | 10.5   | %                  |   |   | 5,113,000  |   |   |   | 10.4 | % |
| Homeowners                   |   |               | 23,787,000 |   |     |   | 45.4   | %                  |   |   | 21,056,000 |   |   |   | 42.7 | % |
| Ocean Marine                 |   |               | 879,000    |   |     |   | 1.7    | %                  |   |   | 934,000    |   |   |   | 1.9 | % |
| Private Passenger Automobile |   |               | 1,586,000  |   |     |   | 3.0    | %                  |   |   | 976,000    |   |   |   | 2.0 | % |
| Commercial Automobile        |   |               | 619,000    |   |     |   | 1.2    | %                  |   |   | 657,000    |   |   |   | 1.3 | % |
|                         |   | $                  | 52,395,000 |   |     |   | 100.0  | %                  |   | $      | 49,308,000 |   |   |   | 100.0 | % |

----

| a.   | The loss and loss expense ratio, which measures losses and loss adjustment expenses incurred as a     percentage of premium revenue. |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| b.   | The underwriting expense ratio, which measures underwriting expenses incurred (e.g., agents’ commissions, premium taxes, and other administrative underwriting expenses) as a percentage of premium revenue. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                       |   | 2009   |   |   | 2008   |   |
|----------------------------|--------|--------|--------|--------|--------|--------|
| Loss and LAE Ratio         |   |   | 59.0   | %      |   |   | 80.5 | % |
| Underwriting Expense Ratio |   |   | 36.0   | %      |   |   | 39.5 | % |
| Combined Ratio             |   |   | 95.0   | %      |   |   | 120.0 | % |

|                                              |   | 2009   |   |   | 2008   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|
| REVENUE                                           |   |   |   |   |   |   |
| Net premiums earned                               |   | $      | -      |   |   | $      | - |   |
| Net investment income                             |   |   | 50     |   |   |   | 119 |   |
| Net realized investment gains                     |   |   | 3      |   |   |   | 2 |   |
| Other income                                      |   |   | -      |   |   |   | - |   |
|                                              |   |   | 53     |   |   |   | 121 |   |
|                                              |   |   |   |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | -      |   |   |   | - |   |
| Amortization of deferred policy acquisition costs |   |   | -      |   |   |   | - |   |
| Commissions                                       |   |   | -      |   |   |   | - |   |
| General and administrative expenses               |   |   | 1,078  |   |   |   | 222 |   |
| Insurance taxes, licenses and fees                |   |   | -      |   |   |   | - |   |
| Interest expense                                  |   |   | 1,077  |   |   |   | 1,085 |   |
|                                              |   |   | 2,155  |   |   |   | 1,307 |   |
|                                              |   |   |   |   |   |   |   |   |
| Loss Before Income Taxes                          |   |   | (2,102 | )      |   |   | (1,186 | ) |
|                                              |   |   |   |   |   |   |   |   |
| INCOME TAX (BENEFIT) EXPENSE                      |   |   |   |   |   |   |   |   |
| Current                                           |   |   | (338   | )      |   |   | (295 | ) |
| Deferred                                          |   |   | (373   | )      |   |   | (143 | ) |
|                                              |   |   | (711   | )      |   |   | (438 | ) |
|                                              |   |   |   |   |   |   |   |   |
| NET LOSS                                          |   | $      | (1,391 | )      |   | $      | (748 | ) |

----

| Bond Portfolio Ratings        |
|-------------------------------|
|                          |   |   |
| S&P or Equivalent Ratings | % of Total Bond Portfolio |
| AAA                           |   | 46.83% |
| AA+                           |   | 3.72% |
| AA                            |   | 3.68% |
| AA-                           |   | 4.71% |
| A+                            |   | 3.57% |
| A                             |   | 12.31% |
| A-                            |   | 5.49% |
| BBB+                          |   | 4.86% |
| BBB                           |   | 6.21% |
| BBB-                          |   | 5.15% |
| BB+                           |   | 0.83% |
| B+                            |   | 0.34% |
| B-                            |   | 1.31% |
| In default                    |   | 0.99% |

|                                 |   | (Dollars in thousands) |   |   | December 31, 2009   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities                     |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate                            |   | $                      | 1,856  |   |                | $      | 21 |   |   | $ | 6,772 |   |   | $ | 498 |   |   | $ | 8,628 |   |   | $ | 519 |   |   |   | 23 |   |
| Mortgage backed securities           |   |                   | 1,443  |   |                |   | 156 |   |   |   | 71 |   |   |   | 9 |   |   |   | 1,514 |   |   |   | 165 |   |   |   | 6 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | 2,660  |   |                |   | 72 |   |   |   | 4,651 |   |   |   | 738 |   |   |   | 7,311 |   |   |   | 810 |   |   |   | 15 |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | 5,889  |   |                |   | 199 |   |   |   | 991 |   |   |   | 137 |   |   |   | 6,880 |   |   |   | 336 |   |   |   | 21 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | 3,708  |   |                |   | 80 |   |   |   | - |   |   |   | - |   |   |   | 3,708 |   |   |   | 80 |   |   |   | 11 |   |
| Equity securities                    |   |                   | 78     |   |                |   | 13 |   |   |   | 2,283 |   |   |   | 793 |   |   |   | 2,361 |   |   |   | 806 |   |   |   | 13 |   |
|                                 |   | $                      | 15,634 |   |                | $      | 541 |   |   | $ | 14,768 |   |   | $ | 2,175 |   |   | $ | 30,402 |   |   | $ | 2,716 |   |   |   | 89 |   |

----

|                                   |   |                   |   |   |   |   |
|----------------------------------------|--------|------------------------|--------|--------|--------|--------|
|                                   |   | (Dollars in Thousands) |   |
|                                   |   | Amortized              |   |   | Fair   |   |
| Available-for-sale securities:         |   | Cost                   |   |   | Value  |   |
| Due in one year or less                |   | $                      | 419    |   |   | $      | 425 |   |
| Due after one year through five years  |   |                   | 14,320 |   |   |   | 15,551 |   |
| Due after five years through ten years |   |                   | 24,013 |   |   |   | 24,433 |   |
| Due after ten years                    |   |                   | 31,044 |   |   |   | 29,860 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Total                                  |   | $                      | 69,796 |   |   | $      | 70,269 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Held-to-maturity securities:           |   |                   |   |   |   |   |   |   |
| Due in one year or less                |   | $                      | 303    |   |   | $      | 309 |   |
| Due after one year through five years  |   |                   | 802    |   |   |   | 828 |   |
| Due after five years through ten years |   |                   | 1,929  |   |   |   | 1,991 |   |
| Due after ten years                    |   |                   | 2,908  |   |   |   | 2,952 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Total                                  |   | $                      | 5,942  |   |   | $      | 6,080 |   |

----

|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |
|--------------------------------------------------|--------|------------------------|--------|--------|------------|--------|--------|------------|--------|--------|--------|--------|
|                                             |   | (Dollars in thousands) |   |
|                                             |   | December 31, 2009      |   |
|                                             |   |                   |   |   | Gross      |   |   | Gross      |   |   |   |   |
|                                             |   | Amortized              |   |   | Unrealized |   |   | Unrealized |   |   | Fair   |   |
|                                             |   | Cost                   |   |   | Gains      |   |   | Losses     |   |   | Value  |   |
| Available-for-sale securities:                   |   |                   |   |   |       |   |   |       |   |   |   |   |
| Corporate debt securities                        |   | $                      | 26,786 |   |       | $      | 1,557  |       |   | $      | 519    |   |   | $ | 27,824 |   |
| Mortgage backed securities                       |   |                   | 8,203  |   |       |   | 282    |       |   |   | 165    |   |   |   | 8,320 |   |
| Private label mortgage backed securities         |   |                   | 9,634  |   |       |   | 72     |       |   |   | 810    |   |   |   | 8,896 |   |
| Obligations of states and political subdivisions |   |                   | 15,641 |   |       |   | 211    |       |   |   | 336    |   |   |   | 15,516 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 9,532  |   |       |   | 261    |       |   |   | 80     |   |   |   | 9,713 |   |
| Total fixed maturities                           |   |                   | 69,796 |   |       |   | 2,383  |       |   |   | 1,910  |   |   |   | 70,269 |   |
| Equity securities                                |   |                   | 5,851  |   |       |   | 3,990  |       |   |   | 806    |   |   |   | 9,035 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 75,647 |   |       | $      | 6,373  |       |   | $      | 2,716  |   |   | $ | 79,304 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Held-to-maturity securities:                     |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Mortgage backed securities                       |   | $                      | 3,175  |   |       | $      | 101    |       |   | $      | 25     |   |   | $ | 3,251 |   |
| Private label mortgage backed securities         |   |                   | 187    |   |       |   | 5      |       |   |   | -      |   |   |   | 192 |   |
| Obligations of states and political subdivisions |   |                   | 2,139  |   |       |   | 51     |       |   |   | 8      |   |   |   | 2,182 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 441    |   |       |   | 14     |       |   |   | -      |   |   |   | 455 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 5,942  |   |       | $      | 171    |       |   | $      | 33     |   |   | $ | 6,080 |   |

|                                             |   |              |   |   |       |   |   |       |   |   |   |   |
|--------------------------------------------------|--------|-------------------|--------|--------|------------|--------|--------|------------|--------|--------|--------|--------|
|                                             |   | December 31, 2008 |   |
|                                             |   |              |   |   | Gross      |   |   | Gross      |   |   |   |   |
|                                             |   | Amortized         |   |   | Unrealized |   |   | Unrealized |   |   | Fair   |   |
|                                             |   | Cost              |   |   | Gains      |   |   | Losses     |   |   | Value  |   |
| Available-for-sale securities:                   |   |              |   |   |       |   |   |       |   |   |   |   |
| Corporate debt securities                        |   | $                 | 21,153 |   |       | $      | 84     |       |   | $      | 2,277  |   |   | $ | 18,960 |   |
| Mortgage backed securities                       |   |              | 11,101 |   |       |   | 257    |       |   |   | 24     |   |   |   | 11,334 |   |
| Private label mortgage backed securities         |   |              | 6,590  |   |       |   | 2      |       |   |   | 1,369  |   |   |   | 5,223 |   |
| Obligations of states and political subdivisions |   |              | 13,401 |   |       |   | 81     |       |   |   | 875    |   |   |   | 12,607 |   |
| U.S. Treasury securities and obligations of      |   |              |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |              | 9,551  |   |       |   | 433    |       |   |   | 1      |   |   |   | 9,983 |   |
| Total fixed maturities                           |   |              | 61,796 |   |       |   | 857    |       |   |   | 4,546  |   |   |   | 58,107 |   |
| Equity securities                                |   |              | 5,467  |   |       |   | 3,130  |       |   |   | 1,028  |   |   |   | 7,569 |   |
|                                             |   |              |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                 | 67,263 |   |       | $      | 3,987  |       |   | $      | 5,574  |   |   | $ | 65,676 |   |
|                                             |   |              |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Held-to-maturity securities:                     |   |              |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Corporate debt securities                        |   | $                 | 88     |   |       | $      | -      |       |   | $      | 3      |   |   | $ | 85 |   |
| Mortgage backed securities                       |   |              | 4,087  |   |       |   | 20     |       |   |   | 41     |   |   |   | 4,066 |   |
| Private label mortgage backed securities         |   |              | 249    |   |       |   | -      |       |   |   | 1      |   |   |   | 248 |   |
| Obligations of states and political subdivisions |   |              | 2,141  |   |       |   | 34     |       |   |   | 14     |   |   |   | 2,161 |   |
| U.S. Treasury securities and obligations of      |   |              |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |              | 4,387  |   |       |   | 48     |       |   |   | -      |   |   |   | 4,435 |   |
|                                             |   |              |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                 | 10,952 |   |       | $      | 102    |       |   | $      | 59     |   |   | $ | 10,995 |   |

----

|                                                      |   | Year Ended December 31, |   |
|-----------------------------------------------------------|--------|-------------------------|--------|
|                                                      |   | 2009                    |   |   | 2008 |   |
| Net investment income                                     |   | $                       | 5,289  |   |   | $ | 4,368 |   |
| Average current yield on investments                      |   |                    | 5.5    | % |   |   | 4.9 | % |
| Total return on investments                               |   |                    | 11.5   | % |   |   | -4.5 | % |
| Net realized (losses) gains on investments (before taxes) |   | $                       | 357    |   |   | $ | (1,049 | ) |
| Change in accumulated net unrealized gains                |   |                    |   |   |   |   |   |   |
|   (before income taxes)                         |   | $                       | 5,339  |   |   | $ | (8,335 | ) |

----

| Other-than-Temporary Impairments |                |
|----------------------------------|---------------------|
|                             |                |   |   |   |
|                             | Issuer              |   | OTTI Loss |   |
| 2009                             | General Motors      |   | $ | (88,000 | ) |
|                             | CIT-bond            |   |   | (165,000 | ) |
|                             | CIT-stock           |   |   | (21,000 | ) |
|                             | Harborview          |   |   | (92,000 | ) |
|                             | Masco               |   |   | (77,000 | ) |
|                             |                |   | $ | (443,000 | ) |
|                             |                |   |   |   |   |
| 2008                             | Lehman Brothers     |   | $ | (583,000 | ) |
|                             | Washington Mutual   |   |   | (239,000 | ) |
|                             | Harborview Mortgage |   |   | (234,000 | ) |
|                             | American General    |   |   | (961,000 | ) |
|                             | FHLMC 5.66% PFD     |   |   | (469,000 | ) |
|                             | FNMA PFD            |   |   | (487,000 | ) |
|                             |                |   | $ | (2,973,000 | ) |

| Maturity                     |   | Available- for-sale |   |   | Held-to-Maturity |   |   | Total  |   |   | Percentage of Total |   |
|------------------------------|--------|---------------------|--------|--------|------------------|--------|--------|--------|--------|--------|---------------------|--------|
| Maturity in less than 1 year |   | $                   | 419    |   |             | $      | 303    |   |   | $      | 722                 |   |   |   | 1.0 | % |
| Maturity in 1-5 years        |   |                | 14,320 |   |             |   | 802    |   |   |   | 15,122              |   |   |   | 20.0 | % |
| Maturity in 5-10 years       |   |                | 24,013 |   |             |   | 1,929  |   |   |   | 25,942              |   |   |   | 34.3 | % |
| Maturity after 10 years      |   |                | 31,044 |   |             |   | 2,908  |   |   |   | 33,952              |   |   |   | 44.7 | % |
|                         |   | $                   | 69,796 |   |             | $      | 5,942  |   |   | $      | 75,738              |   |   |   | 100.0 | % |

----

| Contractual Obligations and Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | Payments due by period |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | ($ in thousands) |   |
| Contractual Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | Total |   |   | Less than 1 year |   |   | 1-3 years |   |   | 4-5 years |   |   | More than 5 years |   |
| Debt obiligations1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | $ | 12,372 |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | 12,372 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest on debt obligations1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $ | 25,907 |   |   | $ | 1,036 |   |   | $ | 3,109 |   |   | $ | 2,073 |   |   | $ | 19,689 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property and casualty claim reserves2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $ | 12,646 |   |   | $ | 7,714 |   |   | $ | 4,045 |   |   | $ | 632 |   |   | $ | 255 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Future life insurance obligations3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | $ | 73,679 |   |   | $ | 4,277 |   |   | $ | 11,108 |   |   | $ | 6,545 |   |   | $ | 51,749 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *to be calculated                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1 Long-term debt, consisting of two separate issues of trust preferred securities, is assumed to be settled at contractual maturity. Interest on long-term debt is calculated using the interest rates in effect at December 31, 2009 for each issue. Interest on long-term debt is accrued and settled quarterly. Therefore, the timing and amount of interest payments may vary from the calculated value included in the table above. These calculations do not take into account any potential prepayments. For additional information regarding long-term debt and interest on long-term debt, please see Note 9, Notes Payable and Long-term Debt, in the notes to consolidated financial statements.                                                                                                                                                                                                                                                                         |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 2 The anticipated payout of property and casualty claim reserves, which includes loss and loss adjustment expenses, are based upon historical payout patterns. Both the timing and amount of these payments may vary from the payment indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 3 Future life insurance obligations consist primarily of estimated future contingent benefit payments and surrender benefits on policies inforce at December 31, 2009. These estimated payments are computed using assumptions for future mortality, morbidity and persistency. In contrast to this table, the majority of NSIC’s obligations is recorded on the balance sheet at the current account values and do not incorporate an expectation of future market growth, interest crediting or future deposits. Therefore, the estimated future life insurance obligations presented in this table significantly exceed the liabilities recorded in the Company’s consolidated balance sheet. Due to the significance of the assumptions used, the actual amount and timing of such payments may differ significantly from the estimated amounts. Management believes that current assets, future premiums and investment income will be sufficient to fund all future life insurance obligations. |   |

----

----

|  Regulatory Event                                                                                |   |    Ratio of Total Adjusted Capital toAuthorized Control Level RBC(Less Than or Equal to) |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
|  Company action lever                                                                                                     |   |  2.0                                                                                               |
| Regulatory action level                                                                |   |  1.5                                                                                               |
| Authorized control level                                                |   |  1.0                                                                                               |
|  Mandatory control level                                                                                        |   |  0.7                                                                                               |
|                                                                                                                                                                                                                                                                                                               |   |                                                                                                    |

| §   | Reinsurance |
|--------------------|-------------|

| §   | Deferred Policy Acquisition Costs |
|--------------------|-----------------------------------|

| §   | Income Taxes |
|--------------------|--------------|

| §   | Fair Values of Financial Instruments |
|--------------------|--------------------------------------|

| §   | Claim Liabilities |
|--------------------|-------------------|

| §   | Recognition of Revenue |
|--------------------|------------------------|

| §   | Contingencies |
|--------------------|---------------|

| §   | Recently Issued Accounting Standards |
|--------------------|--------------------------------------|

----

----

----

| ·   | This new accounting standard states that an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more-likely-than-not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more-likely-than-not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more-likely-than-not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | This new accounting standard requires that companies record, as of the beginning of the interim period of adoption, a cumulative-effect adjustment to reclassify the noncredit component of a previously recognized OTTI loss from retained earnings to other comprehensive income if the company does not intend to sell the security and it is more-likely-than-not that the company will not be required to sell the security before recovery of its amortized cost basis. The adoption had no impact on our financial position or results of operations. The Company had no cumulative-effect adjustment upon adoption at the beginning of the second quarter. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

----

----

Item 8.  Financial Statements and Supplementary Data

| Index to Financial Statements                                                             |   |   |   |
|-------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                      |   |   |   |
| Consolidated Financial Statements:                                                        |   |   |   |
|                                                                                      |   |   |   |
| Report of Independent Registered Public Accounting Firm                                   |   |   | 44     |   |
|                                                                                      |   |   |   |   |
| Consolidated Balance Sheets –                                                       |   |   |   |   |
|    December 31, 2009 and 2008                                              |   |   | 45     |   |
|                                                                                      |   |   |   |   |
| Consolidated Statements of Operations –                                             |   |   |   |   |
|   Years Ended December 31, 2009 and 2008                                        |   |   | 47     |   |
|                                                                                      |   |   |   |   |
| Consolidated Statements of Shareholders’ Equity –                             |   |   |   |   |
|   Years Ended December 31, 2009 and 2008                                        |   |   | 48     |   |
|                                                                                      |   |   |   |   |
| Consolidated Statements of Cash Flows –                                             |   |   |   |   |
|   Years Ended December 31, 2009 and 2008                                        |   |   | 49     |   |
|                                                                                      |   |   |   |   |
| Notes to Consolidated Financial Statements –                                        |   |   |   |   |
|   December 31, 2009                                                             |   |   | 50     |   |
|                                                                                      |   |   |   |   |
| Financial Statement Schedules:                                                            |   |   |   |   |
|                                                                                      |   |   |   |   |
| Schedule I. Summary of Investments Other Than Investments in Related Parties – |   |
|   December 31, 2009 and 2008                                                    |   |   | 75     |   |
|                                                                                      |   |   |   |   |
| Schedule II.  Condensed Financial Information of Registrant –             |   |   |   |   |
|   December 31, 2009 and 2008                                                    |   |   | 76     |   |
|                                                                                      |   |   |   |   |
| Schedule III.  Supplementary Insurance Information –                      |   |   |   |   |
|   December 31, 2009 and 2008                                                    |   |   | 80     |   |
|                                                                                      |   |   |   |   |
| Schedule IV.  Reinsurance –                                               |   |   |   |   |
|   Years Ended December 31, 2009 and 2008                                        |   |   | 81     |   |
|                                                                                      |   |   |   |   |
| Schedule V.  Valuation and Qualifying Accounts –                          |   |   | 82     |   |
|   Years Ended December 31, 2009 and 2008                                        |   |   |   |   |
|                                                                                      |   |   |   |   |
| All other Schedules are not required under related instructions or are                    |   |
| not applicable and therefore have been omitted.                                           |   |

----

| /s/ Warren, Averett, Kimbrough & Marino, LLC |
|--------------------------------------------------|
|                                             |   |
| Birmingham, Alabama                              |
| March 26, 2010                                   |   |

----

| The National Security Group, Inc.                                               |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |
|---------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|-----------------------|---------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|-------------------------------------------------------|-----------------------------------------------------------------------|
|                                                                            |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |   |
| CONSOLIDATED BALANCE SHEETS                                                     |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |
|                                                                            |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |   |
|                                                                            |                                                                                       |                  |                                                                                        | (Dollars in thousands)                                                                 |                                                  |
|                                                                            |                                                                                       |                  |                                                                                        | December 31,                                                                           |                                                  |                                                                  |   |
| ASSETS                                                                          |                                                                                       |                  | 2009                                                                                        |                                                                                   |                                                  | 2008                                                                  |
|                                                                            |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |   |
| Investments                                                                     |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |
|                                                                            | Fixed maturities held-to-maturity, at amortized cost (estimated fair value: 2009 - $6,080; |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |
|                                                                            |                                                                                       |  2008 - $10,995) |                                                                                        | $                                                                                      |         5,942 |                                                                  | $ |       10,952 |
|                                                                            | Fixed maturities available-for-sale, at estimated fair value (cost: 2009 - $69,796;        |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |
|                                                                            |                                                                                       |  2008- $61,796)  |                                                                                        |                                                                                   |      70,269                  |                                                                  |   |       58,107 |
|                                                                            | Equity securities available-for-sale, at estimated fair value (cost: 2009 - $5,851         |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |
|                                                                            |                                                                                       |  2008 - $5,467)  |                                                                                        |                                                                                   |         9,035 |                                                                  |   |         7,569 |
|                                                                            | Trading securities                                                                         |                  |                                                                                        |            374                  |                                                  |                                                                  |            253 |
|                                                                            | Receivable for securities                                                                  |                  |                                                                                        |               96 |                                                  |                                                                  |             513 |
|                                                                            | Mortgage loans on real estate, at cost                                                     |                  |                                                                                        |           1,041                      |                                                  |                                                                  |            502 |
|                                                                            | Investment real estate, at book value (accumulated depreciation: 2009 - $18; 2008 - $18)   |                  |                                                                                        |          4,815                            |                                                  |                                                                  |         4,754 |
|                                                                            | Policy loans                                                                               |                  |                                                                                        |           1,018                      |                                                  |                                                                  |            968 |
|                                                                            | Company owned life insurance                                                               |                  |                                                                                        |          5,197                            |                                                  |                                                                  |          1,957 |
|                                                                            | Other invested assets                                                                      |                  |                                                                                        |         3,933                                  |                                                  |                                                                  |         4,557 |
|                                                                            |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |   |
|                                                                            |                                                                                       | Total Investments     |                                                                                        |                                                                                   |      101,720                 |                                                                  |   |       90,132 |
|                                                                            |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |   |
| Cash                                                                            |                                                                                       |                  |         4,686                                       |                                                                                   |                                                  |         3,027                 |
| Accrued investment income                                                       |                                                                                       |                  |            802                       |                                                                                   |                                                  |            804 |
| Policy receivables and agents' balances, less allowance (2009 - $0; 2008 - $59) |                                                                                       |                  |         9,700                                       |                                                                                   |                                                  |          9,179           |
| Reinsurance recoverable                                                         |                                                                                       |                  |            784                       |                                                                                   |                                                  |          4,146           |
| Deferred policy acquisition costs                                               |                                                                                       |                  |        10,210                                            |                                                                                   |                                                  |         9,825                 |
| Property and equipment, net                                                     |                                                                                       |                  |         2,537                                       |                                                                                   |                                                  |         2,844                 |
| Deferred income tax asset                                                       |                                                                                       |                  |                - |                                                                                   |                                                  |          1,839           |
| Accrued income tax recoverable                                                  |                                                                                       |                  |                - |                                                                                   |                                                  |          2,321           |
| Other assets                                                                    |                                                                                       |                  |            957                       |                                                                                   |                                                  |            773 |
|                                                                            |                                                                                       |                  |                                                                                        |                                                                                   |                                                  |                                                                  |   |   |
|                                                                            |                                                                                       | Total Assets          |                                                                                        | $                                                                                      |      131,396                 |                                                                  | $ |     124,890 |

----

| The National Security Group, Inc.                                                           |                   |
|---------------------------------------------------------------------------------------------|------------------------|
|                                                                                        |                   |   |   |   |   |   |
| CONSOLIDATED BALANCE SHEETS                                                                 |                   |
|                                                                                        |                   |   |   |   |   |   |
|                                                                                        | (Dollars in thousands) |   |
|                                                                                        | December 31,           |   |
| LIABILITIES AND SHAREHOLDERS' EQUITY                                                        |                   | 2009 |   |   | 2008 |   |
|                                                                                        |                   |   |   |   |   |   |
| Property and casualty benefit and loss reserves                                             |                   | $ | 12,646 |   |   | $ | 14,436 |   |
| Accident and health benefit and loss reserves                                               |                   |   | 1,612 |   |   |   | 1,222 |   |
| Life and annuity benefit and loss reserves                                                  |                   |   | 28,579 |   |   |   | 28,045 |   |
| Unearned premiums                                                                           |                   |   | 27,381 |   |   |   | 27,764 |   |
| Policy and contract claims                                                                  |                   |   | 535 |   |   |   | 503 |   |
| Other policyholder funds                                                                    |                   |   | 1,347 |   |   |   | 1,344 |   |
| Long-term debt                                                                              |                   |   | 12,372 |   |   |   | 12,372 |   |
| Accrued income taxes                                                                        |                   |   | 111 |   |   |   | - |   |
| Deferred income tax liability                                                               |                   |   | 61 |   |   |   | - |   |
| Other liabilities                                                                           |                   |   | 5,584 |   |   |   | 4,556 |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Total Liabilities                                                                           |                   |   | 90,228 |   |   |   | 90,242 |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Contingencies                                                                               |                   |   | - |   |   |   | - |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Shareholders' Equity                                                                        |                   |   |   |   |   |   |   |   |
| Preferred stock, $1 par value, 500,000 shares authorized, none issued or outstanding        |                   |   | - |   |   |   | - |   |
| Class A common stock, $1 par value, 2,000,000 shares authorized, none issued or outstanding |                   |   | - |   |   |   | - |   |
| Common stock, $1 par value, 3,000,000 and 10,000,000 shares authorized, respectively,       |                   |   |   |   |   |   |   |   |
| 2,466,600 shares issued and outstanding                                                     |                   |   | 2,467 |   |   |   | 2,467 |   |
| Additional paid-in capital                                                                  |                   |   | 4,951 |   |   |   | 4,951 |   |
| Accumulated other comprehensive income (loss)                                               |                   |   | 2,265 |   |   |   | (1,511 | ) |
| Retained earnings                                                                           |                   |   | 31,485 |   |   |   | 28,741 |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Total Shareholders' Equity                                                                  |                   |   | 41,168 |   |   |   | 34,648 |   |
|                                                                                        |                   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders' Equity                                                  |                   | $ | 131,396 |   |   | $ | 124,890 |   |

----

| The National Security Group, Inc.                 |   |
|---------------------------------------------------|--------|
|                                              |   |
| CONSOLIDATED STATEMENTS OF OPERATIONS             |   |
|                                              |   |   |   |   |   |   |
|                                              |   |   |   |   |   |   |
|                                              |   | (Dollars in thousands |   |
|                                              |   | except per share amounts) |   |
|                                              |   | Year Ended December 31, |   |
|                                              |   | 2009 |   |   | 2008 |   |
| REVENUES                                          |   |   |   |   |   |   |
| Net premiums earned                               |   | $ | 59,594 |   |   | $ | 56,264 |   |
| Net investment income                             |   |   | 5,289 |   |   |   | 4,368 |   |
| Net realized investment gains (losses)            |   |   | 357 |   |   |   | (1,049 | ) |
| Other income                                      |   |   | 764 |   |   |   | 1,107 |   |
|                                              |   |   | 66,004 |   |   |   | 60,690 |   |
|                                              |   |   |   |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | 35,839 |   |   |   | 44,746 |   |
| Amortization of deferred policy acquisition costs |   |   | 3,673 |   |   |   | 4,344 |   |
| Commissions                                       |   |   | 7,863 |   |   |   | 8,262 |   |
| General and administrative expenses               |   |   | 10,396 |   |   |   | 8,558 |   |
| Taxes, licenses and fees                          |   |   | 1,631 |   |   |   | 1,447 |   |
| Interest expense                                  |   |   | 1,126 |   |   |   | 1,147 |   |
|                                              |   |   | 60,528 |   |   |   | 68,504 |   |
|                                              |   |   |   |   |   |   |   |   |
|                                              |   |   |   |   |   |   |   |   |
| Income (Loss) Before Income Tax Expense (Benefit) |   |   | 5,476 |   |   |   | (7,814 | ) |
|                                              |   |   |   |   |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                      |   |   |   |   |   |   |   |   |
| Current                                           |   |   | 1,136 |   |   |   | (3,495 | ) |
| Deferred                                          |   |   | 116 |   |   |   | 885 |   |
|                                              |   |   | 1,252 |   |   |   | (2,610 | ) |
|                                              |   |   |   |   |   |   |   |   |
| Net Income(Loss)                                  |   | $ | 4,224 |   |   | $ | (5,204 | ) |
|                                              |   |   |   |   |   |   |   |   |
|                                              |   |   |   |   |   |   |   |   |
| Net Earnings (Loss) Per Common Share              |   | $ | 1.71 |   |   | $ | (2.11 | ) |

----

| THE NATIONAL SECURITY GROUP, INC.               |                                                                        |
|-------------------------------------------------|-----------------------------------------------------------------------------|
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |                                                                        |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| (Dollars in thousands)                          |                                                                        |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
|                                            |                                                                        |   |   |   |   |   |   | Accumulated |   |   |   |   |   |
|                                            |                                                                        |   |   |   |   |   |   | Other |   |   |   |   |   |
|                                            |                                                                        |   | Comprehensive |   | Retained |   | Comprehensive | Common |   | Paid-in |   |
|                                            | Total                                                                       |   | Income (Loss) |   | Earnings |   | Income (Loss) | Stock |   | Capital |   |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2007                    |  $  48,447                                                   |  $ |                  -    |   | $ | 36,165 |   |  $  4,864 |  $   2,467 |   | $ | 4,951 |   |
| Comprehensive loss:                             |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss for 2008                               |       (5,204)                                 |   |        (5,204) |   |   |        (5,204) |   |                - |                 - |   |   |                - |   |
| Other comprehensive loss, net of tax            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on securities, net              |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| of reclassification adjustment of ($978)   |        (6,147)                           |   |         (6,147) |   |   |                    - |   |      (6,147) |                 - |   |   |                - |   |
| Unrealized loss on interest rate swap           |           (228)           |   |            (228) |   |   |                    - |   |        (228) |                 - |   |   |                - |   |
| Comprehensive loss                              |                                                                        |   |        (11,579) |   |   |   |   |   |   |   |   |   |   |
| Cash dividends ($0.90 per share)                |       (2,220)                                 |   |   |   |   |        (2,220) |   |                - |                 - |   |   |                - |   |
| Balance at December 31, 2008                    |       34,648                                  |   |     |   |   |         28,741 |   |        (1,511) |        2,467 |   |   |        4,951 |   |
| Comprehensive income:                           |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income for 2009                             |         4,224                       |   |          4,224 |   |   |          4,224 |   |                - |                 - |   |   |                - |   |
| Other comprehensive income, net of tax          |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on securities, net              |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| of reclassification adjustment of $282     |         3,520                       |   |          3,520 |   |   |                    - |   |       3,520 |                 - |   |   |                - |   |
| Unrealized gain on interest rate swap           |             256 |   |              256 |   |   |                    - |   |          256 |                 - |   |   |                - |   |
| Comprehensive income                            |                                                                        |   |          8,000 |   |   |   |   |   |   |   |   |   |   |
| Cash dividends ($0.60 per share)                |        (1,480)                           |   |   |   |   |         (1,480) |   |                - |                 - |   |   |                - |   |
|                                            |                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2009                    |  $    41,168                                       |   |   |   | $ | 31,485 |   |  $  2,265 |  $   2,467 |   | $ | 4,951 |   |

----

| The National Security Group, Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                            |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                              |   | (Dollars in thousands)Year ended December 31, |   |
|                                                                                                                                              | 2009   |   |   | 2008 |
| Cash flows from operating activities:                                                                                                             |   |   |   |   |   |   |
|                                                                                                                                              |   |   |   |   |   |   |
| Net income (loss)                                                                                                                                 |   | $ | 4,224 |   |   | $ | (5,204 | ) |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities:                                                       |   |   |   |   |   |   |   |   |
|   Depreciation expense and amortization/accretion, net                                                                                  |   |   | 229 |   |   |   | 409 |   |
|   Increase in cash surrender of company owned life insurance                                                                            |   |   | ( 740 | ) |   |   | 543 |   |
|   Net realized (gains) losses on investments                                                                                            |   |   | ( 357 | ) |   |   | 1,049 |   |
|   Deferred income taxes                                                                                                                 |   |   | 116 |   |   |   | ( 885 | ) |
|   Amortization of deferred policy acquisition costs                                                                                     |   |   | 3,673 |   |   |   | 4,344 |   |
|   Changes in assets and liabilities:                                                                                                    |   |   |   |   |   |   |   |   |
|     Change in receivable for securities                                                                                       |   |   | 417 |   |   |   | ( 513 | ) |
|     Change in accrued investment income                                                                                       |   |   | 2 |   |   |   | ( 10 | ) |
|     Change in reinsurance recoverable                                                                                         |   |   | 3,362 |   |   |   | ( 3,229 | ) |
|     Policy acquisition costs deferred                                                                                         |   |   | ( 4,058 | ) |   |   | ( 5,176 | ) |
|     Change in accrued income taxes                                                                                            |   |   | 2,432 |   |   |   | ( 3,400 | ) |
|     Change in prepaid reinsurance premiums                                                                                    |   |   | ( 10 | ) |   |   | ( 2 | ) |
|     Change in net policy liabilities and claims                                                                               |   |   | ( 1,738 | ) |   |   | 8,105 |   |
|     Change in other liabilities                                                                                               |   |   | 1,284 |   |   |   | ( 2,204 | ) |
|     Other, net                                                                                                                |   |   | ( 113 | ) |   |   | 281 |   |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities                                                                                               |   |   | 8,723 |   |   |   | ( 5,892 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                                                             |   |   |   |   |   |   |   |   |
| Purchases of:                                                                                                                                     |   |   |   |   |   |   |   |   |
|   Available-for-sale securities                                                                                                         |   |   | (30,594 | ) |   |   | (22,514 | ) |
|   Trading securities and short-term investments                                                                                         |   |   | ( 141 | ) |   |   | ( 154 | ) |
|   Real estate held for investment                                                                                                       |   |   | ( 66 | ) |   |   | ( 446 | ) |
|   Company owned life insurance                                                                                                          |   |   | ( 2,500 | ) |   |   | ( 2,500 | ) |
|   Other invested assets                                                                                                                 |   |   | ( 108 | ) |   |   | ( 3,714 | ) |
|   Property and equipment                                                                                                                |   |   | ( 116 | ) |   |   | ( 368 | ) |
| Proceeds from sale or maturities of:                                                                                                              |   |   |   |   |   |   |   |   |
|   Held-to-maturity securities                                                                                                           |   |   | 4,926 |   |   |   | 6,377 |   |
|   Available-for-sale securities                                                                                                         |   |   | 22,830 |   |   |   | 28,938 |   |
|   Trading securities and short-term investments                                                                                         |   |   | 20 |   |   |   | 1,165 |   |
|   Real estate held for investment                                                                                                       |   |   | 19 |   |   |   | 720 |   |
|   Other invested assets                                                                                                                 |   |   | 732 |   |   |   | 1,259 |   |
| Other                                                                                                                                             |   |   | ( 589 | ) |   |   | ( 58 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Net cash (used in) provided by investing activities                                                                                     |   |   | ( 5,587 | ) |   |   | 8,705 |   |
| Cash flows from financing activities:                                                                                                             |   |   |   |   |   |   |   |   |
|   (Repayment of) Proceeds from short-term debt                                                                                          |   |   | - |   |   |   | ( 900 | ) |
|   Change in other policyholder funds                                                                                                    |   |   | 3 |   |   |   | 35 |   |
|   Dividends paid                                                                                                                        |   |   | ( 1,480 | ) |   |   | ( 2,220 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
|                   Net cash used in financing activities |   |   | ( 1,477 | ) |   |   | ( 3,085 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash                                                                                                                   |   |   | 1,659 |   |   |   | ( 272 | ) |
|                                                                                                                                              |   |   |   |   |   |   |   |   |
| Cash at beginning of year                                                                                                                         |   |   | 3,027 |   |   |   | 3,299 |   |
| Cash at end of year                                                                                                                               |   | $ | 4,686 |   |   | $ | 3,027 |   |
|                                                                                                                                              |   |
| See accompanying notes to consolidated financial statements.                                                                                      |   |

----

----

| ·   | Securities Held-to-Maturity.  Bonds, notes and redeemable preferred stock for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using methods which approximate level yields over the period to maturity. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Securities Available-for-Sale.  Bonds, notes, common stock and non-redeemable preferred stock not classified as either held-to-maturity, or trading are reported at fair value, and adjusted for other-than-temporary declines in fair value. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Trading Securities.  Trading securities are classified as such on the balance sheet and reported at fair value. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------|

| ·   | the Company has the intent to sell the security |
|--------------------|-------------------------------------------------|

| ·   | it is more likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------|

| ·   | the Company does not expect to recover the entire amortized cost basis of the security. |
|--------------------|-----------------------------------------------------------------------------------------|

----

----

----

| Layer        | Reinsurers' Limits of Liability                                   |   |
|--------------|-------------------------------------------------------------------|--------|
| First Layer  |   95% of  $6,500,000 in excess of $3,500,000  |
| 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     |

----

| ·   | This new accounting standard states that an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered in circumstances where (1) an entity has the intent to sell a security, (2) it is more-likely-than-not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more-likely-than-not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more-likely-than-not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | This new accounting standard requires that companies record, as of the beginning of the interim period of adoption, a cumulative-effect adjustment to reclassify the noncredit component of a previously recognized OTTI loss from retained earnings to other comprehensive income if the Company does not intend to sell the security and it is more-likely-than-not that the Company will not be required to sell the security before recovery of its amortized cost basis. The adoption had no impact on our financial position or results of operations. The Company had no cumulative-effect adjustment upon adoption at the beginning of the second quarter. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                                                |   | 2009   |   |   | 2008   |   |
|-------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| NSIC - including realized capital gains (losses) of $234 and $(1,509), respectively |   | $      | 1,314  |   |   | $      | (442 | ) |
| NSFC - including realized capital gains of $198 and $615, respectively              |   | $      | 4,179  |   |   | $      | (5,730 | ) |
| Omega - including realized capital (losses) of $(78) and $(231), respectively       |   | $      | 246    |   |   | $      | (344 | ) |
|                                                                                |   |   |   |   |   |   |   |   |
| Statutory risk-based adjusted capital:                                              |   |   |   |   |   |   |   |   |
| NSIC - including AVR of $517 and $191, respectively                                 |   | $      | 9,642  |   |   | $      | 8,396 |   |
| NSFC                                                                                |   | $      | 28,742 |   |   | $      | 26,783 |   |
| Omega                                                                               |   | $      | 9,568  |   |   | $      | 9,087 |   |

----

|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |
|--------------------------------------------------|--------|------------------------|--------|--------|------------|--------|--------|------------|--------|--------|--------|--------|
|                                             |   | (Dollars in thousands) |   |
|                                             |   | December 31, 2009      |   |
|                                             |   |                   |   |   | Gross      |   |   | Gross      |   |   |   |   |
|                                             |   | Amortized              |   |   | Unrealized |   |   | Unrealized |   |   | Fair   |   |
|                                             |   | Cost                   |   |   | Gains      |   |   | Losses     |   |   | Value  |   |
| Available-for-sale securities:                   |   |                   |   |   |       |   |   |       |   |   |   |   |
| Corporate debt securities                        |   | $                      | 26,786 |   |       | $      | 1,557  |       |   | $      | 519    |   |   | $ | 27,824 |   |
| Mortgage backed securities                       |   |                   | 8,203  |   |       |   | 282    |       |   |   | 165    |   |   |   | 8,320 |   |
| Private label mortgage backed securities         |   |                   | 9,634  |   |       |   | 72     |       |   |   | 810    |   |   |   | 8,896 |   |
| Obligations of states and political subdivisions |   |                   | 15,641 |   |       |   | 211    |       |   |   | 336    |   |   |   | 15,516 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 9,532  |   |       |   | 261    |       |   |   | 80     |   |   |   | 9,713 |   |
| Total fixed maturities                           |   |                   | 69,796 |   |       |   | 2,383  |       |   |   | 1,910  |   |   |   | 70,269 |   |
| Equity securities                                |   |                   | 5,851  |   |       |   | 3,990  |       |   |   | 806    |   |   |   | 9,035 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 75,647 |   |       | $      | 6,373  |       |   | $      | 2,716  |   |   | $ | 79,304 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Held-to-maturity securities:                     |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Mortgage backed securities                       |   | $                      | 3,175  |   |       | $      | 101    |       |   | $      | 25     |   |   |   | 3,251 |   |
| Private label mortgage backed securities         |   |                   | 187    |   |       |   | 5      |       |   |   | -      |   |   |   | 192 |   |
| Obligations of states and political subdivisions |   |                   | 2,139  |   |       |   | 51     |       |   |   | 8      |   |   |   | 2,182 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 441    |   |       |   | 14     |       |   |   | -      |   |   |   | 455 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 5,942  |   |       | $      | 171    |       |   | $      | 33     |   |   | $ | 6,080 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
|                                             |   | December 31, 2008      |   |
|                                             |   |                   |   |   |       | Gross  |   |       | Gross  |   |   |   |   |   |
|                                             |   | Amortized              |   |   | Unrealized |   |   | Unrealized |   |   | Fair   |   |
|                                             |   | Cost                   |   |   | Gains      |   |   | Losses     |   |   | Value  |   |
| Available-for-sale securities:                   |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Corporate debt securities                        |   | $                      | 21,153 |   |       | $      | 84     |       |   | $      | 2,277  |   |   | $ | 18,960 |   |
| Mortgage backed securities                       |   |                   | 11,101 |   |       |   | 257    |       |   |   | 24     |   |   |   | 11,334 |   |
| Private label mortgage backed securities         |   |                   | 6,590  |   |       |   | 2      |       |   |   | 1,369  |   |   |   | 5,223 |   |
| Obligations of states and political subdivisions |   |                   | 13,401 |   |       |   | 81     |       |   |   | 875    |   |   |   | 12,607 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 9,551  |   |       |   | 433    |       |   |   | 1      |   |   |   | 9,983 |   |
| Total fixed maturities                           |   |                   | 61,796 |   |       |   | 857    |       |   |   | 4,546  |   |   |   | 58,107 |   |
| Equity securities                                |   |                   | 5,467  |   |       |   | 3,130  |       |   |   | 1,028  |   |   |   | 7,569 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 67,263 |   |       | $      | 3,987  |       |   | $      | 5,574  |   |   | $ | 65,676 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Held-to-maturity securities:                     |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Corporate debt securities                        |   | $                      | 88     |   |       | $      | -      |       |   | $      | 3      |   |   | $ | 85 |   |
| Mortgage backed securities                       |   |                   | 4,087  |   |       |   | 20     |       |   |   | 41     |   |   |   | 4,066 |   |
| Private label mortgage backed securities         |   |                   | 249    |   |       |   | -      |       |   |   | 1      |   |   |   | 248 |   |
| Obligations of states and political subdivisions |   |                   | 2,141  |   |       |   | 34     |       |   |   | 14     |   |   |   | 2,161 |   |
| U.S. Treasury securities and obligations of      |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Government corporations and agencies        |   |                   | 4,387  |   |       |   | 48     |       |   |   | -      |   |   |   | 4,435 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total                                            |   | $                      | 10,952 |   |       | $      | 102    |       |   | $      | 59     |   |   | $ | 10,995 |   |
|                                             |   |                   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |
|                                             |   |

----

|                                   |   |                   |   |   |   |   |
|----------------------------------------|--------|------------------------|--------|--------|--------|--------|
|                                   |   | (Dollars in Thousands) |   |
|                                   |   | Amortized              |   |   | Fair   |   |
| Available-for-sale securities:         |   | Cost                   |   |   | Value  |   |
| Due in one year or less                |   | $                      | 419    |   |   | $      | 425 |   |
| Due after one year through five years  |   |                   | 14,320 |   |   |   | 15,551 |   |
| Due after five years through ten years |   |                   | 24,013 |   |   |   | 24,433 |   |
| Due after ten years                    |   |                   | 31,044 |   |   |   | 29,860 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Total                                  |   | $                      | 69,796 |   |   | $      | 70,269 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Held-to-maturity securities:           |   |                   |   |   |   |   |   |   |
| Due in one year or less                |   | $                      | 303    |   |   | $      | 309 |   |
| Due after one year through five years  |   |                   | 802    |   |   |   | 828 |   |
| Due after five years through ten years |   |                   | 1,929  |   |   |   | 1,991 |   |
| Due after ten years                    |   |                   | 2,908  |   |   |   | 2,952 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Total                                  |   | $                      | 5,942  |   |   | $      | 6,080 |   |

|                                 |   | (Dollars in thousands) |   |   | December 31, 2009   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities:                    |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   | $                      | 1,856  |   |                | $      | 21 |   |   | $ | 6,772 |   |   | $ | 498 |   |   | $ | 8,628 |   |   | $ | 519 |   |   |   | 23 |   |
| Mortgage backed securities           |   |                   | 1,443  |   |                |   | 156 |   |   |   | 71 |   |   |   | 9 |   |   |   | 1,514 |   |   |   | 165 |   |   |   | 6 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | 2,660  |   |                |   | 72 |   |   |   | 4,651 |   |   |   | 738 |   |   |   | 7,311 |   |   |   | 810 |   |   |   | 15 |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | 5,889  |   |                |   | 199 |   |   |   | 991 |   |   |   | 137 |   |   |   | 6,880 |   |   |   | 336 |   |   |   | 21 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | 3,708  |   |                |   | 80 |   |   |   | - |   |   |   | - |   |   |   | 3,708 |   |   |   | 80 |   |   |   | 11 |   |
| Equity securities                    |   |                   | 78     |   |                |   | 13 |   |   |   | 2,283 |   |   |   | 793 |   |   |   | 2,361 |   |   |   | 806 |   |   |   | 13 |   |
|                                 |   | $                      | 15,634 |   |                | $      | 541 |   |   | $ | 14,768 |   |   | $ | 2,175 |   |   | $ | 30,402 |   |   | $ | 2,716 |   |   |   | 89 |   |

----

|                                 |   | (Dollars in thousands) |   |   | December 31, 2008   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities:                    |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   | $                      | 9,904  |   |                | $      | 1,337 |   |   | $ | 4,396 |   |   | $ | 940 |   |   | $ | 14,300 |   |   | $ | 2,277 |   |   |   | 45 |   |
| Mortgage backed securities           |   |                   | 315    |   |                |   | 5 |   |   |   | 1,868 |   |   |   | 19 |   |   |   | 2,183 |   |   |   | 24 |   |   |   | 9 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | 412    |   |                |   | 87 |   |   |   | 4,354 |   |   |   | 1,282 |   |   |   | 4,766 |   |   |   | 1,369 |   |   |   | 11 |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | 3,745  |   |                |   | 332 |   |   |   | 4,812 |   |   |   | 543 |   |   |   | 8,557 |   |   |   | 875 |   |   |   | 25 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | 295    |   |                |   | 1 |   |   |   | - |   |   |   | - |   |   |   | 295 |   |   |   | 1 |   |   |   | 1 |   |
| Equity securities                    |   |                   | 981    |   |                |   | 446 |   |   |   | 731 |   |   |   | 582 |   |   |   | 1,712 |   |   |   | 1,028 |   |   |   | 12 |   |
|                                 |   | $                      | 15,652 |   |                | $      | 2,208 |   |   | $ | 16,161 |   |   | $ | 3,366 |   |   | $ | 31,813 |   |   | $ | 5,574 |   |   |   | 103 |   |

|                                 |   | (Dollars in thousands) |   |   | December 31, 2009   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities:                    |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   | $                      | -      |   |                | $      | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   |   | - |   |
| Mortgage backed securities           |   |                   | -      |   |                |   | - |   |   |   | 333 |   |   |   | 25 |   |   |   | 333 |   |   |   | 25 |   |   |   | 2 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | -      |   |                |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | 160    |   |                |   | 4 |   |   |   | 351 |   |   |   | 4 |   |   |   | 511 |   |   |   | 8 |   |   |   | 2 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | -      |   |                |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                 |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   | $                      | 160    |   |                | $      | 4 |   |   | $ | 684 |   |   | $ | 29 |   |   | $ | 844 |   |   | $ | 33 |   |   |   | 4 |   |

|                                 |   | (Dollars in thousands) |   |   | December 31, 2008   |   |
|--------------------------------------|--------|------------------------|--------|--------|---------------------|--------|
|                                 |   | Less than 12 months    |   |   | 12 months or longer |   |   | Total |   |
|                                 |   |                   |   |   | Gross               |   |   |   |   |   | Gross |   |   |   |   |   | Gross |   |   | Total |   |
|                                 |   | Fair                   |   |   | Unrealized          |   |   | Fair |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |   | Securities in a |   |
|                                 |   | Value                  |   |   | Losses              |   |   | Value |   |   | Losses |   |   | Value |   |   | Losses |   |   | Loss Position |   |
| Fixed maturities:                    |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   | $                      | 84     |   |                | $      | 3 |   |   | $ | - |   |   | $ | - |   |   | $ | 84 |   |   | $ | 3 |   |   |   | 1 |   |
| Mortgage backed securities           |   |                   | -      |   |                |   | - |   |   |   | 2,408 |   |   |   | 41 |   |   |   | 2,408 |   |   |   | 41 |   |   |   | 7 |   |
| Private label mortgage backed        |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  securities                     |   |                   | 249    |   |                |   | 1 |   |   |   | - |   |   |   | - |   |   |   | 249 |   |   |   | 1 |   |   |   | 1 |   |
| Obligations of state and             |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  political subdivisions         |   |                   | -      |   |                |   | - |   |   |   | 646 |   |   |   | 14 |   |   |   | 646 |   |   |   | 14 |   |   |   | 2 |   |
| U.S. Treasury securities and         |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  obligations of U.S. government |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  corporations and agencies      |   |                   | -      |   |                |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                 |   |                   |   |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   | $                      | 333    |   |                | $      | 4 |   |   | $ | 3,054 |   |   | $ | 55 |   |   | $ | 3,387 |   |   | $ | 59 |   |   |   | 11 |   |

----

|                                              | (Dollars in thousands)  |   |
|---------------------------------------------------|-------------------------|--------|
|                                              | Year ended December 31, |   |
|                                              |                    | 2009   |   |   | 2008 |   |
|                                              |                    |   |   |   |   |   |
| Fixed maturities                                  |                    | $      | 4,075 |   |   | $ | 4,357 |   |
| Equity securities                                 |                    |   | 199 |   |   |   | 364 |   |
| Mortgage loans on real estate                     |                    |   | 62 |   |   |   | 32 |   |
| Investment real estate                            |                    |   | 82 |   |   |   | 65 |   |
| Policy loans                                      |                    |   | 73 |   |   |   | 68 |   |
| Company owned life insurance                      |                    |   | 740 |   |   |   | (543 | ) |
| Other, principally short-term investments         |                    |   | 346 |   |   |   | 367 |   |
|                                              |                    |   | 5,577 |   |   |   | 4,710 |   |
| Less: Investment expenses                         |                    |   | 288 |   |   |   | 342 |   |
| Net investment income                             |                    | $      | 5,289 |   |   | $ | 4,368 |   |
|                                              |                    |   |   |   |   |   |   |   |
| An analysis of investment gains (losses) follows: | Year ended December 31, |   |
|                                              |                    |   | 2009 |   |   |   | 2008 |   |
| Net realized investment gains (losses):           |                    |   |   |   |   |   |   |   |
| Fixed maturities                                  |                    | $      | 548 |   |   | $ | 179 |   |
| Equity securities                                 |                    |   | 234 |   |   |   | 1,313 |   |
| Other, principally real estate                    |                    |   | 18 |   |   |   | 432 |   |
| Other than temporary impairments                  |                    |   | (443 | ) |   |   | (2,973 | ) |
|                                              |                    | $      | 357 |   |   | $ | (1,049 | ) |

----

|                                                |   |                    |   |   |   |   |
|-----------------------------------------------------|--------|-------------------------|--------|--------|--------|--------|
|                                                |   | (Dollars in thousands)  |   |
|                                                |   | Year ended December 31, |   |
|                                                |   | 2009                    |   |   | 2008   |   |
|                                                |   |                    |   |   |   |   |
| Net change in unrealized appreciation on available- |   |                    |   |   |   |   |
| for-sale securities before deferred tax             |   | $                       | 5,304  |   |   | $      | (8,335 | ) |
| Deferred income tax                                 |   |                    | (1,784 | )      |   |   | 2,188 |   |
|                                                |   |                    |   |   |   |   |   |   |
| Net change in unrealized appreciation on available- |   |                    |   |   |   |   |   |   |
| for-sale securities                                 |   | $                       | 3,520  |   |   | $      | (6,147 | ) |

----

|                                 |   | Fair Value Measurements at Reporting Date Using |   |
|--------------------------------------|--------|-------------------------------------------------|--------|
| Description                          |   | Total                                           |   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
| Financial Assets                     |   |                                            |   |   |   |   |   |   |   |   |   |   |
| Fixed maturities available-for-sale  |   | $                                               | 70,269 |   |   | $ | 9,214 |   |   | $ | 60,478 |   |   | $ | 577 |   |
| Short-term investments               |   |                                            | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Trading securities                   |   |                                            | 374    |   |   |   | 374 |   |   |   | - |   |   |   | - |   |
| Equity securities available-for-sale |   |                                            | 9,035  |   |   |   | 8,373 |   |   |   | - |   |   |   | 662 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Financial Assets               |   | $                                               | 79,678 |   |   | $ | 17,961 |   |   | $ | 60,478 |   |   | $ | 1,239 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial Liabilities                |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap                   |   | $                                               | 60     |   |   | $ | - |   |   | $ | - |   |   | $ | 60 |   |
|                                 |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Financial Liabilities          |   | $                                               | 60     |   |   | $ | - |   |   | $ | - |   |   | $ | 60 |   |

|                                                           |   | For the year ended December 31, 2009 |   |
|----------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                           |   | Fixed Maturities Available for sale  |   |   | Equity Securities Available for Sale |   |   | Interest |   |
| (In Thousands)                                                 |   | Rate Swap                            |   |
| Beginning balance                                              |   | $                                    | 652    |   |   | $ | 733 |   |   | $ | (316 | ) |
|   Total gains or losses (realized and                |   |                                 |   |   |   |   |   |   |   |   |   |   |
|     unrealized):                           |   |                                 |   |   |   |   |   |   |   |   |   |   |
|     Included in earnings                   |   |                                 | -      |   |   |   | - |   |   |   | - |   |
|     Included in other comprehensive income |   |                                 | (75    | ) |   |   | (71 | ) |   |   | 256 |   |
|   Purchases, sales, issuances and settlements,       |   |                                 |   |   |   |   |   |   |   |   |   |   |
|     net                                    |   |                                 | -      |   |   |   | - |   |   |   | - |   |
|   Transfers in/(out) of Level 3                      |   |                                 | -      |   |   |   | - |   |   |   | - |   |
| Ending balance                                                 |   | $                                    | 577    |   |   | $ | 662 |   |   | $ | (60 | ) |
| 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, 2009                                  |   | $                                    | -      |   |   | $ | - |   |   | $ | - |   |

----

|                                                           |   | For the year ended December 31, 2008 |   |   |                                 |   |
|----------------------------------------------------------------|--------|--------------------------------------|--------|--------|--------------------------------------|--------|
|                                                           |   | Fixed Maturities Available for sale  |   |   | Equity Securities Available for Sale |   |   | Interest |   |
| (In Thousands)                                                 |   | Rate Swap                            |   |
| Year ended December 31, 2008                                   |   |                                 |   |   |                                 |   |   |   |   |
| Beginning balance                                              |   | $                                    | 702    |   |                                 | $      | 999 |   |   | $ | (88 | ) |
|   Total gains or losses (realized and                |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|     unrealized):                           |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|     Included in earnings                   |   |                                 | -      |   |                                 |   | - |   |   |   | - |   |
|     Included in other comprehensive income |   |                                 | (50    | )      |                                 |   | (266 | ) |   |   | (228 | ) |
|   Purchases, sales, issuances and settlements,       |   |                                 |   |   |                                 |   |   |   |   |   |   |   |
|     net                                    |   |                                 | -      |   |                                 |   | - |   |   |   | - |   |
|   Transfers in/(out) of Level 3                      |   |                                 | -      |   |                                 |   | - |   |   |   | - |   |
| Ending balance                                                 |   | $                                    | 652    |   |                                 | $      | 733 |   |   | $ | (316 | ) |
| 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, 2008                                  |   | $                                    | -      |   |                                 | $      | - |   |   | $ | - |   |

----

|                                |   | In Thousands of Dollars at December 31, |   |
|-------------------------------------|--------|-----------------------------------------|--------|
|                                |   | 2009                                    |   |   | 2008 |   |
|                                |   | Carrying                                |   |   | Estimated |   |   | Carrying |   |   | Estimated |   |
|                                |   | Value                                   |   |   | Fair Value |   |   | Value |   |   | Fair Value |   |
| Assets and related instruments      |   |                                    |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans                      |   | $                                       | 1,041  |   |   | $ | 1,041 |   |   | $ | 502 |   |   | $ | 502 |   |
| Policy loans                        |   |                                    | 1,018  |   |   |   | 1,018 |   |   |   | 968 |   |   |   | 968 |   |
| Company owned life insurance        |   |                                    | 5,197  |   |   |   | 5,197 |   |   |   | 1,957 |   |   |   | 1,957 |   |
| Other invested assets               |   |                                    | 3,933  |   |   |   | 3,933 |   |   |   | 4,557 |   |   |   | 4,557 |   |
|                                |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and related instruments |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other policyholder funds            |   |                                    | 1,347  |   |   |   | 1,347 |   |   |   | 1,344 |   |   |   | 1,344 |   |
| Long-term debt                      |   |                                    | 12,372 |   |   |   | 12,372 |   |   |   | 12,372 |   |   |   | 12,372 |   |

|                                 |   | (Dollars in Thousands) |   |
|--------------------------------------|--------|------------------------|--------|
|                                 |   | 2009                   |   |   | 2008 |   |
| Building and improvements            |   | $                      | 3,196  |   |   | $ | 3,196 |   |
| Electronic data processing equipment |   |                   | 2,472  |   |   |   | 2,549 |   |
| Furniture and fixtures               |   |                   | 1,005  |   |   |   | 1,085 |   |
|                                 |   |                   | 6,673  |   |   |   | 6,830 |   |
| Less accumulated depreciation        |   |                   | 4,136  |   |   |   | 3,986 |   |
|                                 |   | $                      | 2,537  |   |   | $ | 2,844 |   |

----

|                                                 |   | (Dollars in Thousands) |   |
|------------------------------------------------------|--------|------------------------|--------|
|                                                 |   | December 31,           |   |   | December 31, |   |
|                                                 |   | 2009                   |   |   | 2008 |   |
| General insurance expenses                           |   | $                      | 1,135  |   |   | $ | 769 |   |
| Unearned premiums                                    |   |                   | 1,814  |   |   |   | 1,885 |   |
| Claims liabilities                                   |   |                   | 298    |   |   |   | 337 |   |
| Unrealized losses on securities available-for-sale   |   |                   | -      |   |   |   | 392 |   |
| Other than temporary impairments on securities owned |   |                   | 501    |   |   |   | 734 |   |
|   Deferred tax assets                      |   |                   | 3,748  |   |   |   | 4,117 |   |
|                                                 |   |                   |   |   |   |   |   |   |
| Depreciation                                         |   |                   | (126   | ) |   |   | (118 | ) |
| Deferred policy acquisition costs                    |   |                   | (2,291 | ) |   |   | (2,160 | ) |
| Unrealized gains on securities available-for-sale    |   |                   | (1,392 | ) |   |   | - |   |
|   Deferred tax liabilities                 |   |                   | (3,809 | ) |   |   | (2,278 | ) |
|                                                 |   |                   |   |   |   |   |   |   |
| Net deferred tax (liability) asset                   |   | $                      | (61    | ) |   | $ | 1,839 |   |

|                                                 |   | (Dollars in thousands)  |   |
|------------------------------------------------------|--------|-------------------------|--------|
|                                                 |   | Year ended December 31, |   |
|                                                 |   | 2009                    |   |   | 2008 |   |
|                                                 |   |                    |   |   |   |   |
| Federal income tax rate applied to pre-tax income    |   | $                       | 1,862  |   |   | $ | (2,657 | ) |
| Dividends received deduction and tax-exempt interest |   |                    | (201   | ) |   |   | (137 | ) |
| Company owned life insurance                         |   |                    | (252   | ) |   |   | 185 |   |
| Small life deduction                                 |   |                    | (145   | ) |   |   | (174 | ) |
| Other, net                                           |   |                    | (12    | ) |   |   | 173 |   |
|                                                 |   |                    |   |   |   |   |   |   |
| Federal income tax expense (benefit)                 |   | $                       | 1,252  |   |   | $ | (2,610 | ) |

|                              |   | Year ended December 31, |   |
|-----------------------------------|--------|-------------------------|--------|
|                              |   | 2009                    |   |   | 2008 |   |
|                              |   |                    |   |   |   |   |
| Deferred policy acquisition costs |   | $                       | 131    |   |   | $ | (261 | ) |
| Other-than-temporary impairments  |   |                    | 233    |   |   |   | 734 |   |
| Unearned premiums                 |   |                    | 71     |   |   |   | 362 |   |
| General insurance expenses        |   |                    | (366   | ) |   |   | (69 | ) |
| Depreciation                      |   |                    | 8      |   |   |   | 40 |   |
| Claim liabilities                 |   |                    | 39     |   |   |   | 79 |   |
|                              |   |                    |   |   |   |   |   |   |
|                              |   | $                       | 116    |   |   | $ | 885 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (Dollars in thousands) |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 2009                   |   |   | 2008 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                   |   |   |   |   |
| 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 |   |

----

|                                                          |   | (Dollars in thousands) |   |
|---------------------------------------------------------------|--------|------------------------|--------|
|                                                          |   | 2009                   |   |   | 2008 |   |
| Claims and claim adjustment expense                           |   |                   |   |   |   |   |
|    reserves at beginning of year               |   | $                      | 14,436 |   |   | $ | 11,973 |   |
| Less reinsurance recoverables on                              |   |                   |   |   |   |   |   |   |
|    unpaid losses                               |   |                   | 2,421  |   |   |   | 555 |   |
| Net balances at beginning of year                             |   |                   | 12,015 |   |   |   | 11,418 |   |
| Provision for claims and claim adjustment                     |   |                   |   |   |   |   |   |   |
|    expenses for claims arising in current year |   |                   | 34,239 |   |   |   | 43,284 |   |
| Estimated claims and claim adjustment                         |   |                   |   |   |   |   |   |   |
|    expenses for claims arising in prior years  |   |                   | (2,626 | ) |   |   | (2,374 | ) |
| Total increases                                               |   |                   | 31,613 |   |   |   | 40,910 |   |
| Claims and claim adjustment expense                           |   |                   |   |   |   |   |   |   |
|    payments for claims arising in:             |   |                   |   |   |   |   |   |   |
|       Current year              |   |                   | 25,941 |   |   |   | 35,516 |   |
|       Prior years               |   |                   | 5,590  |   |   |   | 4,797 |   |
| Total payments                                                |   |                   | 31,531 |   |   |   | 40,313 |   |
| Net balance at end of year                                    |   |                   | 12,097 |   |   |   | 12,015 |   |
| Plus reinsurance recoverables on                              |   |                   |   |   |   |   |   |   |
|    unpaid losses                               |   |                   | 549    |   |   |   | 2,421 |   |
| Claims and claim adjustment expense                           |   |                   |   |   |   |   |   |   |
|    reserves at end of year                     |   | $                      | 12,646 |   |   | $ | 14,436 |   |
|                                                          |   |                   |   |   |   |   |   |   |
|                                                          |   |                   |   |   |   |   |   |   |

----

|    |   | (Dollars in Thousands) |
|---------|--------|------------------------|
|    |   | 2009                   |   |   |   |   |   |   |   |   |   |
|    |   | Life                   |   |   |   |   | Property & Casualty |
|    |   |  Written          |   |  Earned |   |  Written |   |  Earned |
|    |   |                   |   |   |   |   |   |   |   |   |   |   |
| Direct  |   | $                      |          7,251 |   |  $ |    7,247 |   |  $ |       58,185 |   |  $ |       59,213 |
| Assumed |   |                   |                    - |   |   |               - |   |   |                    - |   |   |                    - |
| Ceded   |   |                   |              (48) |   |   |          (48) |   |   |       (6,660) |   |   |        (6,818) |
| Net     |   | $                      |         7,203 |   |  $ |     7,199 |   |  $ |       51,525 |   |  $ |      52,395 |
|    |   |                   |   |   |   |   |   |   |   |   |   |   |
|    |   |                   |   |   |   |   |   |   |   |   |   |   |
|    |   | 2008                   |   |   |   |   |   |   |   |   |   |
|    |   | Life                   |   |   |   |   |   | Property & Casualty |   |   |
|    |   |  Written          |   |  Earned |   |  Written |   |  Earned |
|    |   |                   |   |   |   |   |   |   |   |   |   |   |
| Direct  |   | $                      |         7,049 |   |  $ |    7,003 |   |  $ |        61,197 |   |  $ |      55,866 |
| Assumed |   |                   |                    - |   |   |               - |   |   |                    - |   |   |                    - |
| Ceded   |   |                   |              (47) |   |   |          (47) |   |   |       (6,487) |   |   |       (6,558) |
| Net     |   | $                      |         7,002 |   |  $ |    6,956 |   |  $ |       54,710 |   |  $ |      49,308 |

----

----

|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|-----------------------------------|--------|--------|---------|--------|------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
| (Dollars in thousands)            |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|                              |   | Total  |    |   | P&C Insurance Operations |   |   | Life Insurance Operations |   |   | Non-Insurance Operations |   |
| December 31, 2009                 |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |
| Selected Assets                   |   |   |    |   |                         |   |   |                      |   |   |                     |   |
| Investments                       |   | $      | 101,720 |   |                         | $      | 60,768 |                      |   | $      | 40,079                   |   |   | $ | 873 |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Reinsurance recoverable           |   | $      | 784     |   |                         | $      | 784    |                      |   | $      | -                        |   |   | $ | - |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Deferred policy acquisition costs |   | $      | 10,210  |   |                         | $      | 3,915  |                      |   | $      | 6,295                    |   |   | $ | - |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Total Assets                      |   | $      | 131,396 |   |                         | $      | 79,321 |                      |   | $      | 49,872                   |   |   | $ | 2,203 |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Total Liabilities                 |   | $      | 90,228  |   |                         | $      | 43,099 |                      |   | $      | 34,348                   |   |   | $ | 12,781 |   |

|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|-----------------------------------|--------|--------|---------|--------|------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
| (Dollars in thousands)            |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|                              |   | Total  |    |   | P&C Insurance Operations |   |   | Life Insurance Operations |   |   | Non-Insurance Operations |   |
| December 31, 2008                 |   |   |    |   |                         |   |   |                      |   |   |                     |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |
| Selected Assets                   |   |   |    |   |                         |   |   |                      |   |   |                     |   |
| Investments                       |   | $      | 90,132  |   |                         | $      | 56,422 |                      |   | $      | 33,200                   |   |   | $ | 510 |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Reinsurance recoverable           |   | $      | 4,146   |   |                         | $      | 4,146  |                      |   | $      | -                        |   |   | $ | - |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Deferred policy acquisition costs |   | $      | 9,825   |   |                         | $      | 4,037  |                      |   | $      | 5,788                    |   |   | $ | - |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Total Assets                      |   | $      | 124,890 |   |                         | $      | 78,802 |                      |   | $      | 43,653                   |   |   | $ | 2,435 |   |
|                              |   |   |    |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Total Liabilities                 |   | $      | 90,242  |   |                         | $      | 45,476 |                      |   | $      | 31,627                   |   |   | $ | 13,139 |   |

----

| (Dollars in thousands)                            |   |   |   |   |                         |   |   |                      |   |   |                     |   |
|---------------------------------------------------|--------|--------|--------|--------|------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
|                                              |   | Total  |   |   | P&C Insurance Operations |   |   | Life Insurance Operations |   |   | Non-Insurance Operations |   |
| Year ended December 31, 2009                      |   |   |   |   |                         |   |   |                      |   |   |                     |   |
| REVENUE                                           |   |   |   |   |                         |   |   |                      |   |   |                     |   |
| Net premiums earned                               |   | $      | 59,594 |   |                         | $      | 52,395 |                      |   | $      | 7,199                    |   |   | $ | - |   |
| Net investment income                             |   |   | 5,289  |   |                         |   | 3,125  |                      |   |   | 2,114                    |   |   |   | 50 |   |
| Net realized investment gains                     |   |   | 357    |   |                         |   | 120    |                      |   |   | 234                      |   |   |   | 3 |   |
| Other income                                      |   |   | 764    |   |                         |   | 761    |                      |   |   | 3                        |   |   |   | - |   |
|                                              |   |   | 66,004 |   |                         |   | 56,401 |                      |   |   | 9,550                    |   |   |   | 53 |   |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | 35,839 |   |                         |   | 30,908 |                      |   |   | 4,931                    |   |   |   | - |   |
| Amortization of deferred policy acquisition costs |   |   | 3,673  |   |                         |   | 3,397  |                      |   |   | 276                      |   |   |   | - |   |
| Commissions                                       |   |   | 7,863  |   |                         |   | 7,317  |                      |   |   | 546                      |   |   |   | - |   |
| General and administrative expenses               |   |   | 10,396 |   |                         |   | 6,775  |                      |   |   | 2,543                    |   |   |   | 1,078 |   |
| Insurance taxes, licenses and fees                |   |   | 1,631  |   |                         |   | 1,387  |                      |   |   | 244                      |   |   |   | - |   |
| Interest expense                                  |   |   | 1,126  |   |                         |   | -      |                      |   |   | 49                       |   |   |   | 1,077 |   |
|                                              |   |   | 60,528 |   |                         |   | 49,784 |                      |   |   | 8,589                    |   |   |   | 2,155 |   |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Income (Loss) Before Income Taxes                 |   |   | 5,476  |   |                         |   | 6,617  |                      |   |   | 961                      |   |   |   | (2,102 | ) |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                      |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Current                                           |   |   | 1,136  |   |                         |   | 1,369  |                      |   |   | 105                      |   |   |   | (338 | ) |
| Deferred                                          |   |   | 116    |   |                         |   | 97     |                      |   |   | 392                      |   |   |   | (373 | ) |
|                                              |   |   | 1,252  |   |                         |   | 1,466  |                      |   |   | 497                      |   |   |   | (711 | ) |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| NET INCOME (LOSS)                                 |   | $      | 4,224  |   |                         | $      | 5,151  |                      |   | $      | 464                      |   |   | $ | (1,391 | ) |

----

| (Dollars in thousands)                            |   |   |   |   |                         |   |   |                      |   |   |                     |   |
|---------------------------------------------------|--------|--------|--------|--------|------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
|                                              |   | Total  |   |   | P&C Insurance Operations |   |   | Life Insurance Operations |   |   | Non-Insurance Operations |   |
| Year ended December 31, 2008                      |   |   |   |   |                         |   |   |                      |   |   |                     |   |
| REVENUE                                           |   |   |   |   |                         |   |   |                      |   |   |                     |   |
| Net premiums earned                               |   | $      | 56,264 |   |                         | $      | 49,308 |                      |   | $      | 6,956                    |   |   | $ | - |   |
| Net investment income                             |   |   | 4,368  |   |                         |   | 2,309  |                      |   |   | 1,940                    |   |   |   | 119 |   |
| Net realized investment (losses) gains            |   |   | (1,049 | )      |                         |   | 372    |                      |   |   | (1,423                   | )      |   |   | 2 |   |
| Other income                                      |   |   | 1,107  |   |                         |   | 1,047  |                      |   |   | 60                       |   |   |   | - |   |
|                                              |   |   | 60,690 |   |                         |   | 53,036 |                      |   |   | 7,533                    |   |   |   | 121 |   |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| BENEFITS AND EXPENSES                             |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Policyholder benefits paid or provided            |   |   | 44,746 |   |                         |   | 39,719 |                      |   |   | 5,027                    |   |   |   | - |   |
| Amortization of deferred policy acquisition costs |   |   | 4,344  |   |                         |   | 3,312  |                      |   |   | 1,032                    |   |   |   | - |   |
| Commissions                                       |   |   | 8,262  |   |                         |   | 7,772  |                      |   |   | 490                      |   |   |   | - |   |
| General and administrative expenses               |   |   | 8,558  |   |                         |   | 6,722  |                      |   |   | 1,614                    |   |   |   | 222 |   |
| Insurance taxes, licenses and fees                |   |   | 1,447  |   |                         |   | 1,159  |                      |   |   | 288                      |   |   |   | - |   |
| Interest expense                                  |   |   | 1,147  |   |                         |   | 1      |                      |   |   | 61                       |   |   |   | 1,085 |   |
|                                              |   |   | 68,504 |   |                         |   | 58,685 |                      |   |   | 8,512                    |   |   |   | 1,307 |   |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Loss Before Income Taxes                          |   |   | (7,814 | )      |                         |   | (5,649 | )                         |   |   | (979                     | )      |   |   | (1,186 | ) |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                      |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| Current                                           |   |   | (3,495 | )      |                         |   | (2,919 | )                         |   |   | (281                     | )      |   |   | (295 | ) |
| Deferred                                          |   |   | 885    |   |                         |   | 867    |                      |   |   | 161                      |   |   |   | (143 | ) |
|                                              |   |   | (2,610 | )      |                         |   | (2,052 | )                         |   |   | (120                     | )      |   |   | (438 | ) |
|                                              |   |   |   |   |                         |   |   |                      |   |   |                     |   |   |   |   |   |
| NET LOSS                                          |   | $      | (5,204 | )      |                         | $      | (3,597 | )                         |   | $      | (859                     | )      |   | $ | (748 | ) |

----

----

| THE NATIONAL SECURITY GROUP, INC.                                              |   |
|--------------------------------------------------------------------------------|--------|
| SCHEDULE I. SUMMARY OF INVESTMENTS (CONSOLIDATED)                         |   |
| (Dollars in Thousands)                                                         |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   | December 31, 2009 |   |   | December 31, 2008 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   | Amount per |   |   |   |   |   |   |   |   | Amount per |   |
|                                                                           |   |   |   |   | Fair |   |   | the Balance |   |   |   |   |   | Fair |   |   | the Balance |   |
|                                                                           |   | Cost |   |   | Value |   |   | Sheet |   |   | Cost |   |   | Value |   |   | Sheet |   |
| Securities Held-to-Maturity:                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States government . . . . . . . . . . .                                 |   | $ | 441 |   |   | $ | 455 |   |   | $ | 441 |   |   | $ | 4,387 |   |   | $ | 4,435 |   |   | $ | 4,387 |   |
| States, municipalities and                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| political subdivisions . . .                                                   |   |   | 2,139 |   |   |   | 2,182 |   |   |   | 2,139 |   |   |   | 2,141 |   |   |   | 2,161 |   |   |   | 2,141 |   |
| Mortgage backed securities . . . . . . . . . . .                               |   |   | 3,175 |   |   |   | 3,251 |   |   |   | 3,175 |   |   |   | 4,087 |   |   |   | 4,066 |   |   |   | 4,087 |   |
| Private label mortgage backed securities . . . . .                             |   |   | 187 |   |   |   | 192 |   |   |   | 187 |   |   |   | 249 |   |   |   | 248 |   |   |   | 249 |   |
| Industrial and Miscellaneous . . . . . . . . .                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 88 |   |   |   | 85 |   |   |   | 88 |   |
| Total Securities Held-to-Maturity . . . . . . .                                |   |   | 5,942 |   |   |   | 6,080 |   |   |   | 5,942 |   |   |   | 10,952 |   |   |   | 10,995 |   |   |   | 10,952 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities Available-for-Sale:                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|           Equity Securities: |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Banks and insurance companies  . . . . . .                           |   |   | 1,489 |   |   |   | 989 |   |   |   | 989 |   |   |   | 1,256 |   |   |   | 1,699 |   |   |   | 1,699 |   |
| Industrial and all other . . . . . . . . . . . . . .                           |   |   | 4,362 |   |   |   | 8,046 |   |   |   | 8,046 |   |   |   | 4,211 |   |   |   | 5,870 |   |   |   | 5,870 |   |
| Total equity securities  . . . . . . . . . . . . .                   |   |   | 5,851 |   |   |   | 9,035 |   |   |   | 9,035 |   |   |   | 5,467 |   |   |   | 7,569 |   |   |   | 7,569 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|           Debt Securities:   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States government . . . . . . . . . . .                                 |   |   | 9,532 |   |   |   | 9,713 |   |   |   | 9,713 |   |   |   | 9,551 |   |   |   | 9,983 |   |   |   | 9,983 |   |
| States, municipalities and                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| political subdivisions . . .                                                   |   |   | 15,641 |   |   |   | 15,516 |   |   |   | 15,516 |   |   |   | 13,401 |   |   |   | 12,607 |   |   |   | 12,607 |   |
| Mortgage backed securities . . . . . . . . . . .                               |   |   | 8,203 |   |   |   | 8,320 |   |   |   | 8,320 |   |   |   | 11,101 |   |   |   | 11,334 |   |   |   | 11,334 |   |
| Private label mortgage backed securities . . . . .                             |   |   | 9,634 |   |   |   | 8,896 |   |   |   | 8,896 |   |   |   | 6,590 |   |   |   | 5,223 |   |   |   | 5,223 |   |
| Public Utilities . . . . . . . . . .  . . . . . . . . .              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 549 |   |   |   | 554 |   |   |   | 554 |   |
| Industrial and Miscellaneous . . . . . . . . .                                 |   |   | 26,786 |   |   |   | 27,824 |   |   |   | 27,824 |   |   |   | 20,604 |   |   |   | 18,406 |   |   |   | 18,406 |   |
| Total Debt Securities . . . . . . . . . . . . . .                              |   |   | 69,796 |   |   |   | 70,269 |   |   |   | 70,269 |   |   |   | 61,796 |   |   |   | 58,107 |   |   |   | 58,107 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Available-for-Sale . . . . . . . . .                                     |   |   | 75,647 |   |   |   | 79,304 |   |   |   | 79,304 |   |   |   | 67,263 |   |   |   | 65,676 |   |   |   | 65,676 |   |
|                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Securities . . . . . . . . . . . . . . ..                                |   |   | 81,589 |   |   |   | 85,384 |   |   | $ | 85,246 |   |   |   | 78,215 |   |   |   | 76,671 |   |   |   | 76,628 |   |
| Trading securities. . . . . . . . . . . .  . . . . .. . . . . . .    |   |   | 314 |   |   |   | 374 |   |   |   | 374 |   |   |   | 354 |   |   |   | 253 |   |   |   | 253 |   |
| Receivable for securities. . . . . . . . . . . . .                             |   |   | 96 |   |   |   | 96 |   |   |   | 96 |   |   |   | 513 |   |   |   | 513 |   |   |   | 513 |   |
| Mortgage loans on real estate . . . . . . . . . . . . .                        |   |   | 1,041 |   |   |   | 1,041 |   |   |   | 1,041 |   |   |   | 502 |   |   |   | 502 |   |   |   | 502 |   |
| Investment real estate . . . . . . . . . . . . . . . . . . . .                 |   |   | 4,815 |   |   |   | 4,815 |   |   |   | 4,815 |   |   |   | 4,754 |   |   |   | 4,754 |   |   |   | 4,754 |   |
| Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .           |   |   | 1,018 |   |   |   | 1,018 |   |   |   | 1,018 |   |   |   | 968 |   |   |   | 968 |   |   |   | 968 |   |
| Company  owned life insurance. . . . . . . . . . . . . .             |   |   | 5,000 |   |   |   | 5,197 |   |   |   | 5,197 |   |   |   | 2,500 |   |   |   | 1,957 |   |   |   | 1,957 |   |
| Other invested assets. . . . . . . . . . . . . . . . . . . .                   |   |   | 3,933 |   |   |   | 3,933 |   |   |   | 3,933 |   |   |   | 4,557 |   |   |   | 4,557 |   |   |   | 4,557 |   |
| Total investments . . .                                                        |   | $ | 97,806 |   |   | $ | 101,858 |   |   | $ | 101,720 |   |   | $ | 92,363 |   |   | $ | 90,175 |   |   | $ | 90,132 |   |

----

|                                                                                 |   |         |   |   |   |   |
|--------------------------------------------------------------------------------------|--------|--------------|--------|--------|--------|--------|
| THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)                                   |   |
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT                          |   |
| BALANCE SHEETS                                                                       |   |
| (Amounts in thousands)                                                               |   |
|                                                                                 |   |         |   |   |   |   |
|                                                                                 |   | December 31, |   |
|                                                                                 |   | 2009         |   |   | 2008   |   |
| Assets                                                                               |   |         |   |   |   |   |
| Cash                                                                                 |   | $            | 382    |   |   | $      | 454 |   |
| Investment in subsidiaries (equity method)                                           |   |         |   |   |   |   |   |   |
|     eliminated upon consolidation                                |   |         | 51,658 |   |   |   | 45,380 |   |
| Other assets                                                                         |   |         | 2,866  |   |   |   | 2,269 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
|        Total Assets                               |   | $            | 54,906 |   |   | $      | 48,103 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
| Liabilities and Shareholders' Equity                                                 |   |         |   |   |   |   |   |   |
| Accrued general expenses                                                             |   | $            | 1,366  |   |   | $      | 1,083 |   |
| Notes payable                                                                        |   |         | 12,372 |   |   |   | 12,372 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
|        Total Liabilities                          |   |         | 13,738 |   |   |   | 13,455 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
|        Total Shareholders' Equity                 |   |         | 41,168 |   |   |   | 34,648 |   |
|                                                                                 |   |         |   |   |   |   |   |   |
|        Total Liabilities and Shareholders' Equity |   | $            | 54,906 |   |   | $      | 48,103 |   |

----

| THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)                |   |
|-------------------------------------------------------------------|--------|
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT       |   |
| STATEMENTS OF INCOME (LOSS)                                       |   |
| (Amounts in thousands)                                            |   |
|                                                              |   | Years Ended |   |
|                                                              |   | December 31, |   |
|                                                              |   | 2009 |   |   | 2008 |   |
| Income                                                            |   |   |   |   |   |   |
|                                                              |   |   |   |   |   |   |
|     Dividends (eliminated upon consolidation) |   | $ | 2,800 |   |   | $ | - |   |
|     Other income                              |   |   | 52 |   |   |   | 119 |   |
|                                                              |   |   | 2,852 |   |   |   | 119 |   |
|                                                              |   |   |   |   |   |   |   |   |
| Expenses                                                          |   |   |   |   |   |   |   |   |
| State taxes                                                       |   |   | 1 |   |   |   | 1 |   |
| Other expenses                                                    |   |   | 2,154 |   |   |   | 1,300 |   |
|                                                              |   |   | 2,155 |   |   |   | 1,301 |   |
| Income before income taxes and equity in                          |   |   |   |   |   |   |   |   |
| undistributed earnings (loss) of subsidiaries                     |   |   | 697 |   |   |   | (1,182 | ) |
| Income tax (benefit) expense                                      |   |   | (711 | ) |   |   | (437 | ) |
|                                                              |   |   |   |   |   |   |   |   |
| Income (loss) before equity in undistributed earnings (loss)      |   |   |   |   |   |   |   |   |
| of subsidiaries                                                   |   |   | 1,408 |   |   |   | (745 | ) |
| Equity in undistributed (losses) earnings of subsidiaries         |   |   | 2,816 |   |   |   | (4,459 | ) |
|                                                              |   |   |   |   |   |   |   |   |
| Net (loss) income                                                 |   | $ | 4,224 |   |   | $ | (5,204 | ) |

----

| THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)                            |   |
|-------------------------------------------------------------------------------|--------|
| SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT                   |   |
| STATEMENTS OF CASH FLOWS                                                      |   |
| (Amounts in thousands)                                                        |   |
|                                                                          |   | Years Ended |   |
|                                                                          |   | December 31, |   |
|                                                                          |   | 2009 |   |   | 2008 |   |
| Cash flows from operating activities:                                         |   |   |   |   |   |   |
| Net income (loss)                                                             |   | $ | 4,224 |   |   | $ | (5,204 | ) |
| Adjustments to reconcile net income (loss) to net                             |   |   |   |   |   |   |   |   |
| cash provided by operating activities:                                        |   |   |   |   |   |   |   |   |
|     Equity in undistributed loss (income) of subsidiaries |   |   | (2,816 | ) |   |   | 4,459 |   |
|     Change in other assets                                |   |   | (539 | ) |   |   | 3,246 |   |
|     Change in accrued general expenses                    |   |   | 539 |   |   |   | (659 | ) |
| Net cash provided by                                                          |   |   |   |   |   |   |   |   |
|     operating activities                                  |   |   | 1,408 |   |   |   | 1,842 |   |
|                                                                          |   |   |   |   |   |   |   |   |
|                                                                          |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                         |   |   |   |   |   |   |   |   |
| Net cash provided by investing activities                                     |   |   | - |   |   |   | - |   |
| Net cash provided by                                                          |   |   |   |   |   |   |   |   |
|     investing activities                                  |   |   | - |   |   |   | - |   |
|                                                                          |   |   |   |   |   |   |   |   |
|                                                                          |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                         |   |   |   |   |   |   |   |   |
| Cash dividends                                                                |   |   | (1,480 | ) |   |   | (2,220 | ) |
| Net cash used in                                                              |   |   |   |   |   |   |   |   |
|     financing activities                                  |   |   | (1,480 | ) |   |   | (2,220 | ) |
|                                                                          |   |   |   |   |   |   |   |   |
| Net (decrease) increase in cash and cash equivalents                          |   |   | (72 | ) |   |   | (378 | ) |
|                                                                          |   |   |   |   |   |   |   |   |
| Cash at beginning of year                                                     |   |   | 454 |   |   |   | 832 |   |
|                                                                          |   |   |   |   |   |   |   |   |
| Cash at end of year                                                           |   | $ | 382 |   |   | $ | 454 |   |

----

| THE NATIONAL SECURITY GROUP, INC. (PARENT COMPANY)     |
|--------------------------------------------------------|
| Notes to Condensed Financial Information of Registrant |
|                                                   |   |   |   |   |   |   |   |   |
|                                                   |   |   |   |   |   |   |   |   |
| Note 1-Basis of Presentation                           |   |   |   |   |   |   |
|                                                   | Pursuant to the rules and regulations of the Securities and Exchange Commission, the Condensed Financial |
|                                                   | Information of the Registrant does not include all of the information and notes normally included with financial |
|                                                   | statements prepared in accordance with generally accepted accounting principles.  It is, therefore, suggested |
|                                                   | that this Condensed Financial Information be read in conjunction with the Consolidated Financial Statements |
|                                                   | and Notes thereto included in the Registrant’s Annual Report as referenced in Form 10-K, Part II, Item 8, page 44. |
|                                                   |   |   |   |   |   |   |   |   |
| Note 2-Cash Dividends from Subsidiaries                |   |   |   |   |   |   |
|                                                   | In 2009, dividends of $2.8 million were paid to the Registrant by its subsidiaries.  No dividends were |
|                                                   | received from subsidiaries during 2008. |   |   |   |   |   |   |

----

| THE NATIONAL SECURITY GROUP, INC.                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
| SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)                                            |   |
| (Amounts in thousands)                                                                                          |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Deferred |   |   | Future |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Acquisition |   |   | Policy |   |   | Unearned |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Costs |   |   | Benefits |   |   | Premiums |   |
| At December 31, 2009:                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life and accident and health insurance . . . . . . . . . . . . . . .                                            |   |   |   |   |   | $ | 6,295 |   |   | $ | 30,726 |   |   | $ | 16 |   |
| Property and casualty insurance . . . . . ... . . . . . . . . . . . .                                      |   |   |   |   |   | 3,915 |   |   |   | - |   |   |   | 27,365 |   |
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        |   |   | $ | 10,210 |   |   | $ | 30,726 |   |   | $ | 27,381 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2008:                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life and accident and health insurance . . . . . . . . . . . . . . .                                            |   |   |   |   |   | $ | 5,788 |   |   | $ | 29,770 |   |   | $ | 44 |   |
| Property and casualty insurance . . . . . ... . . . . . . . . . . . .                                      |   |   |   |   |   | 4,037 |   |   |   | - |   |   |   | 27,720 |   |
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        |   |   | $ | 9,825 |   |   | $ | 29,770 |   |   | $ | 27,764 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Commissions, |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Benefits, |   |   | Amortization |   |   | General |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   | Claims, |   |   | of Deferred |   |   | Expenses, |   |
|                                                                                                            |   |   |   |   | Net |   |   |   |   |   | Losses and |   |   | Policy |   |   | Taxes, |   |
|                                                                                                            |   | Premium |   |   | Investment |   |   | Other |   |   | Settlement |   |   | Acquisition |   |   | Licenses |   |
|                                                                                                            |   | Revenue |   |   | Income |   |   | Income |   |   | Expenses |   |   | Costs |   |   | and Fees |   |
| For the year ended December 31, 2009:                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life and accident and health insurance                                                                          |   | $ | 7,199 |   |   | $ | 2,114 |   |   | $ | 3 |   |   | $ | 4,931 |   |   | $ | 822 |   |   | $ | 2,787 |   |
| Property and casualty insurance . . . . . .                                                                     |   |   | 52,395 |   |   |   | 3,125 |   |   |   | 761 |   |   |   | 30,908 |   |   |   | 10,714 |   |   |   | 8,162 |   |
| Other . . . . . . . . .                                                                                         |   |   | - |   |   |   | 50 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,078 |   |
|     Total . . . .. . . .                                                                    |   | $ | 59,594 |   |   | $ | 5,289 |   |   | $ | 764 |   |   | $ | 35,839 |   |   | $ | 11,536 |   |   | $ | 12,027 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the year ended December 31, 2008:                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life and accident and health insurance                                                                          |   | $ | 6,956 |   |   | $ | 1,940 |   |   | $ | 60 |   |   | $ | 5,027 |   |   | $ | 1,522 |   |   | $ | 1,614 |   |
| Property and casualty insurance . . . . . .                                                                     |   |   | 49,308 |   |   |   | 2,309 |   |   |   | 1,047 |   |   |   | 39,719 |   |   |   | 11,084 |   |   |   | 6,722 |   |
| Other . . . . . . . . .                                                                                         |   |   | - |   |   |   | 119 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 222 |   |
|     Total . . . .. . . .                                                                    |   | $ | 56,264 |   |   | $ | 4,368 |   |   | $ | 1,107 |   |   | $ | 44,746 |   |   | $ | 12,606 |   |   | $ | 10,005 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Note: Investment income and other operating expenses are reported separately by segment and not allocated. |   |   |   |   |   |   |   |   |   |

----

| THE NATIONAL SECURITY GROUP, INC.                                                                                    |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
| SCHEDULE IV. REINSURANCE (CONSOLIDATED)                                                                         |   |
| (Amounts in thousands)                                                                                               |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   | Percentage |   |
|                                                                                                                 |   |   |   |   | Ceded |   |   | Assumed |   |   |   |   |   | of Amount |   |
|                                                                                                                 |   | Gross |   |   | to Other |   |   | from Other |   |   | Net |   |   | Assumed |   |
|                                                                                                                 |   | Amount |   |   | Companies |   |   | Companies |   |   | Amount |   |   | to Net |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the year ended December 31, 2009                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life insurance in force  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   |   | $ | 215,028 |   |   | $ | 12,034 |   |   | $ | - |   |   | $ | 202,994 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Premiums:                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life insurance and accident and health insurance . . . . . . . . . . . . .                                           |   |   | 7,247 |   |   |   | 48 |   |   |   | - |   |   |   | 7,199 |   |   |   | 0.00 | % |
| Property and casualty insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              |   |   | 59,213 |   |   |   | 6,818 |   |   |   | - |   |   |   | 52,395 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Total premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |   | $ | 66,460 |   |   | $ | 6,866 |   |   | $ | - |   |   | $ | 59,594 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the year ended December 31, 2008                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life insurance in force  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   |   | $ | 214,160 |   |   | $ | 10,115 |   |   | $ | - |   |   | $ | 204,045 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Premiums:                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Life insurance and accident and health insurance . . . . . . . . . . . . .                                           |   |   | 7,003 |   |   |   | 47 |   |   |   | - |   |   |   | 6,956 |   |   |   | 0.00 | % |
| Property and casualty insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              |   |   | 55,866 |   |   |   | 6,558 |   |   |   | - |   |   |   | 49,308 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Total premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |   | $ | 62,869 |   |   | $ | 6,605 |   |   | $ | - |   |   | $ | 56,264 |   |   |   | 0.00 | % |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For the year ended December 31, 2006                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| The National Security Group, Inc                   |
|----------------------------------------------------|
|                                               |   |   |   |   |   |   |
| Schedule V. Valuation and Qualifying Accounts |
| Years ended December 31, 2009 and 2008        |
|                                               |   |   |   |   |   |   |
|                                               |   |   |   |   |   |   |
|                                               | 2009 |   | 2008 |   |
|                                               | (Dollars in thousands) |
|                                               |   |   |   |   |   |   |
| Balance, January 1                                 |   | $ | 59 |   |   | $ | 110 |   |
| Additions                                          |   |   | 0 |   |   |   | 0 |   |
| Deletions                                          |   |   | 59 |   |   |   | 51 |   |
|                                               |   |   |   |   |   |   |   |   |
| Balance, December 31                               |   | $ | 0 |   |   | $ | 59 |   |

----

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.  Controls and Procedures

Item 9B.  Other Information                                                      

----

Item 10.  Directors, Executive Officers and Corporate Governance

Item 11.  Executive Compensation

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.  Certain Relationships and Related Transactions and Director Independence

----

Item 14. Principal Accounting Fees and Services

Item 15. Exhibits and Financial Statement Schedules

| 1.   | Consolidated financial statements, notes thereto and related information of The National Security Group, Inc. (the “Company”) are included in Item 8 of Part II of this report: |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Report of Independent Registered Public Accounting Firm |
|--------|---------------------------------------------------------|

|   | Consolidated Statements of Operation – Years ended December 31, 2009 and 2008 |
|--------|-------------------------------------------------------------------------------------|

|   | Consolidated Balance Sheets – December 31, 2009 and 2008 |
|--------|----------------------------------------------------------------|

|   | Consolidated Statements of Shareholders’ Equity – Years ended December 31, 2009 and 2008 |
|--------|------------------------------------------------------------------------------------------------------|

|   | Consolidated Statements of Cash Flows – Years ended December 31, 2009 and 2008 |
|--------|--------------------------------------------------------------------------------------|

|   | Consolidated Notes to the Financial Statements |
|--------|------------------------------------------------|

| 2.   | Additional financial statement schedules and report of independent registered accounting firm are furnished herewith pursuant to the requirements of Form 10-K: |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                              |                                                             |   |
|-----------------------------------|------------------------------------------------------------------|--------|
| The National Security Group, Inc. |                                                             |
|                              |                                                             |   |
| Schedule I                        | Summary of Investments Other Than Investments in Related Parties |
| Schedule II                       | Condensed Financial Information of Registrant                    |   |
| Schedule III                      | Supplementary Insurance Information (Consolidated)               |   |
| Schedule IV                       | Reinsurance (Consolidated)                                       |   |
| Schedule V                        | Valuation and Qualifying Accounts                                |   |

| 3.   | Exhibits filed as part of this Form 10-K: |
|----------------|-------------------------------------------|

| 11.   |  Computation of Earnings Per Share Filed Herewith, See Note 1 to Consolidated Financial |
|-----------------|----------------------------------------------------------------------------------------------|

| 21.   |  Subsidiaries of the registrant. |
|-----------------|---------------------------------------|

|  31.1 |  Certification of Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  31.2 |   Certification of Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  32.  |  Certification Chief Executive Officer and Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (b)   | During the last fiscal quarter of the period covered by this Report, the Company filed the following Current Reports on Form 8-K: |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------|

| Date of Report    |   | Date Filed        |   | Description                                                                     |
|-------------------|--------|-------------------|--------|---------------------------------------------------------------------------------|
|              |   |              |   |                                                                            |   |   |   |   |   |
| November 13, 2009 |   | November 13, 2009 |   | Press release announcing financial results for period ended September 30, 2009. |
| October 16, 2009  |   | October 19, 2009  |   | Press release announcing quarterly dividend.                                    |

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SIGNATURE

| /s/ Brian R. McLeod         |   | /s/ William L. Brunson, Jr. |
|-----------------------------|--------|-----------------------------|
| Brian R. McLeod             |   | William L. Brunson, Jr.     |
| Chief Financial Officer and |   | President, Chief Executive  |
| Treasurer                   |   | Officer and Director        |

| /s/ Winfield Baird          | /s/ Mickey L. Murdock   |
|-----------------------------|-------------------------|
| /s/ Fleming Brooks          | /s/ Donald Pittman      |
| /s/ Jack E. Brunson         | /s/ Paul C. Wesch       |
| /s/ William L. Brunson, Jr. | /s/ L. Brunson White    |
| /s/ Fred D. Clark, Jr.      | /s/ Walter P. Wilkerson |
| /s/ Frank B. O’Neil   |                    |

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