NATIONAL SECURITY GROUP INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion highlights significant factors influencing the
consolidated financial position and results of operations of The National
Security Group, Inc. (referred to in this document as "we", "our", "us",
"Company" or "NSEC") and its subsidiaries. We are a "smaller reporting company"
under Securities and Exchange Commission (SEC) regulations and therefore qualify
for the scaled disclosure of smaller reporting companies. In general, the same
information is required to be disclosed in the management discussion and
analysis by smaller reporting companies except that the discussion need only
cover the latest two year period and disclosures relating to contractual
obligations are not required. In accordance with the scaled disclosure
requirements, this discussion covers the three month period ended March 31, 2022
and 2021 and should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes which accompany this report. The financial
information presented herein should also be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2021, which
includes information and disclosures not presented herein. Please refer to our
note regarding forward-looking statements on page 4 of this report.

The National Security Group, Inc. operates in ten states with 68.2% of total
premium revenue generated in the states of Alabama, Georgia and Mississippi. We
operate in two business segments summarized as follows:

•The Property and Casualty (P&C) segment is the most significant segment,
accounting for 92.2% of gross earned premium in 2022.  The P&C segment operates
in the states of Alabama, Arkansas, Georgia, Louisiana, Mississippi, Oklahoma,
South Carolina, and Tennessee.

•The Life segment accounted for 7.8% of gross premium revenue in 2022. The Life
segment is licensed to underwrite life and accident and health insurance in
Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee and Texas.

The P&C segment operations are conducted through National Security Fire &
Casualty Company (NSFC), a wholly owned subsidiary of the Company organized in
1959, and Omega One Insurance Company (Omega), a wholly owned subsidiary of NSFC
organized in 1992. Omega produces no direct written premium and is authorized to
underwrite lines of business similar to NSFC; therefore, all references to NSFC
or P&C segment in the remainder of this discussion will include the insurance
operations of both NSFC and Omega.

The Life segment operations are conducted through National Security Insurance
Company (NSIC), a wholly owned subsidiary of the Company organized in 1947. All
references to NSIC or life segment in the remainder of this management
discussion and analysis will refer to the combined life, accident and health
insurance operations.

Our income is principally derived from net underwriting profits and investment
income. Net underwriting profit is principally derived from earned premiums
received less claims paid, sales commissions to agents, costs of underwriting
and insurance taxes and fees. Investment income includes interest and dividend
income and gains and losses on investment holdings.

All of the insurance subsidiaries are Alabama domiciled insurance companies;
therefore, the Alabama Department of Insurance is the primary insurance
regulator. However, each subsidiary is subject to regulation by the respective
insurance regulators of each state in which it is licensed to transact
business. Insurance rates charged by each of the insurance subsidiaries are
typically subject to review and approval by the insurance department for the
respective state in which the rates will apply.

All of our insurance companies have been assigned ratings by AM Best Co (Best).
On April 29, 2021, AM Best affirmed the Financial Strength Rating (FSR) of B++
(Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb" of NSFC.
In addition, AM Best affirmed the FSR of B+ (Good) and Long-Term ICR of "bbb-"
of Omega. The AM Best outlook for the ratings was revised from "stable" to
"negative" for NSFC and Omega. AM Best affirmed the FSR of B++ (Good) and the
Long-Term ICR to "bbb" for NSIC. The outlook for the ratings of NSIC was revised
from "stable" to "negative". AM Best also affirmed the Long-Term ICR of "bb" of
the parent holding company, NSEC, with a revised outlook from "stable" to
"negative". Effective January 31, 2022, AM Best placed the companies under
review with developing implications upon the announcement that NSG has entered
into a merger agreement under which the group will be acquired by VR Insurance
Holdings, Inc. The under review with developing implications status reflects the
need for AM Best to assess fully the business strategy, financial and
operational impacts on the group as a result of the acquisition. The ratings
will remain under review pending the
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completion of the acquisition and AM Bests' assessment of post-acquisition
rating fundamentals. Currently, the acquisition is expected to close by the end
of the second quarter of 2022.

The property and casualty subsidiaries have been assigned ratings by Demotech,
Inc. On November 30, 2021, Demotech affirmed a Financial Stability Rating of A
(Exceptional) for both NSFC and Omega.

The earnings in the property and casualty segment have seasonal volatility due
to severe storm activity resulting in incurred losses and loss adjustment
expenses from hurricane, tornado, wind and hail related insurance claims These
storm systems or other natural disasters are generally classified as
catastrophes (referred to as "catastrophe" or "cat" events/losses throughout the
remainder of this document) by Property Claim Service (PCS) when an individual
event causes $25 million or more in industry wide direct insured losses and
affect a significant number of policyholders and insurers.

Information in this discussion is presented in whole dollars rounded to the
nearest thousand, except for per share information. Tabular amounts are
presented in thousands.

Summary:

For the three months ended March 31, 2022, the Company had net income of
$963,000, $0.38 income per share, compared to net income of $722,000, $0.29
income per share, for the three months ended March 31, 2021; an increase of
$241,000. Pretax income from operations for the first quarter of 2022 totaled
$1,587,000 compared to a pretax income from operations of $614,000 in the first
quarter of 2021. Results for the first quarter of 2022 were positively impacted
by a $453,000 increase in net premiums earned, coupled with a $511,000 decrease
in claims and were the primary reasons for the $973,000 increase in pretax
income from operations in the first quarter of 2022, compared to the same period
in 2021.

For the three months ended March 31, 2022, the Company had investment losses of
$272,000 compared to investment gains of $310,000 for the three months ended
March 31 2021; a decrease of $582,000. The primary reason for the first quarter
2022 investment losses, compared to the first quarter 2021 investment gains, was
our investment in company owned life insurance (COLI) decreased $312,000. In
addition, we had no realized gains on the sale of equity securities during the
first quarter of 2022 compared to $357,000 in realized gains on the sale of
equity securities for the same period in 2021.

In the first quarter of 2022, the Company incurred claims totaling $8,792,000
compared to $9,303,000 for the same period last year. Life segment claims were
down $300,000 and P&C segment claims were down $214,000 in the first quarter of
2022, compared to the first quarter of 2021. Life segment claims incurred from
whole life insurance policies decreased $260,000 in the first quarter of 2022
compared to the same period last year. The primary component of the decline in
the P&C segment was claims from a reduction in claims other than weather and
fire perils which declined $325,000, in the first quarter of 2022, compared to
the same period last year. In addition, reported losses from weather related
events were down $65,000. Partially offsetting the declines mentioned previously
was an increase in reported fire losses of $262,000 in the first quarter of 2022
compared to the first quarter of 2021.

The Company ended the first three months of 2022 with a decrease in general and
administrative expenses of $185,000 compared to the same period last year. The
primary reasons for this decrease were a $458,000 reduction in costs associated
with director's expenses, employee benefits and litigation expenses in the first
quarter of 2022 compared to the same period last year. Partially offsetting
these decreases was a $155,000 increase in consulting fees in the first quarter
of 2022 compared to the first quarter of 2021. The primary reason for the
increase in consulting fees was expenses associated with the pending merger with
VR Insurance Holdings.


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Financial results for the three months ended March 31, 2022 and 2021, based on
U.S generally accepted accounting principles, were as follows:

                                                                     Three months ended
Unaudited Consolidated Financial Summary                                 

March 31,

   ($ in thousands, except per share)                                               2022          2021

Gross premiums written                                                           $ 18,639      $ 18,834
Net premiums written                                                             $ 16,035      $ 16,386

Net premiums earned                                                              $ 15,515      $ 15,062
Net investment income                                                                 868           804
Net investment gains (losses)                                                        (272)          310

Other income                                                                          122           136
                                         Total Revenues                            16,233        16,312

Policyholder benefits and settlement expenses                                       8,792         9,303
Amortization of deferred policy acquisition costs                                     990           971
Commissions                                                                         2,100         2,136
General and administrative expenses                                                 2,119         2,304

Taxes, licenses and fees                                                              770           536
Interest expense                                                                      147           138
                    Total Benefits, Losses and Expenses                            14,918        15,388

Income Before Income Taxes                                                          1,315           924

Income tax expense                                                                    352           202

Net Income                                                                       $    963      $    722

Income Per Common Share                                                          $   0.38      $   0.29

Reconciliation of Net Income to non-GAAP Measurement

Net income                                                                       $    963      $    722
Income tax expense                                                                    352           202
Investment (gains) losses, net                                              

272 (310)

Pretax Income From Operations                                               

$ 1,587 $ 614

We provide a reconciliation of net income to the non-GAAP measurement "pretax
income from operations". The purpose of this reconciliation is to provide
investors with information routinely utilized by management in analyzing and
comparing the performance of our insurance operations between periods. This
information reflects the financial performance of our insurance operations
without the impact of investment gains/losses. We typically invest in equity
securities with a long-term view. Short-term volatility due to changes in market
value of equity securities held for sale, along with realized investment
gains/losses on both fixed maturity and equity investments, can mask both the
positive or negative performance of our insurance operations from period to
period.

Premium Revenue:
For the three months ended March 31, 2022, net premiums earned were up $453,000
at $15,515,000 compared to $15,062,000 during the same period last year. The
increase in premium revenue was primarily driven by an increase in net earned
premium in the P&C segment of $489,000 or 3.6%. The increase in P&C segment net
earned premium was primarily attributable to a 13.1% increase in gross earned
premium in our dwelling fire program. This increase was due to rate increases in
the program over the past twelve months and additional premium generated by our
re-underwriting project in the dwelling fire program in which we reviewed
valuations of properties insured due to increasing repair costs and claims
inflation. The increase in P&C net earned premium was partially offset by a 6.1%
increase in reinsurance premium ceded due to an increase in reinsurance costs
related to our 2022 catastrophe reinsurance contract renewal. As mentioned
previously, the increased frequency of weather related losses over the past
several years has driven the need to increase rates in states and programs that
have been most impacted by this persistent pattern of severe weather.


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Investment Gains (Losses):
Investment losses, for the three months ended March 31, 2022, were $272,000
compared to investment gains of $310,000 for the same period last year. The
primary reason for the first quarter 2022 investment losses, compared to the
first quarter 2021 investment gains, was our investment in company owned life
insurance (COLI) decreased $312,000. In addition, we had no realized gains on
the sale of equity securities during the first quarter of 2022 compared to
$357,000 in realized gains on the sale of equity securities for the same period
in 2021.

Net Income:
For the three months ended March 31, 2022, the Company had net income of
$963,000, $0.38 income per share, compared to net income of $722,000, $0.29
income per share, for the same period last year. As mentioned previously,
results for the first quarter of 2022 were positively impacted by a $453,000
increase in net premiums earned coupled with a $511,000 decrease in claims and
were the primary reasons for the increase in net income in the first quarter of
2022 compared to the first quarter of 2021.

Pretax Income from Operations:
For the three months ended March 31, 2022, our pretax income from operations was
$1,587,000 compared to pretax income from operations of $614,000 for the three
months ended March 31, 2021; an increase in pretax income of $973,000. As
discussed above, an increase in earned premium and a decrease in claim activity
were the primary reasons for the improvement in our income from operations, in
the first quarter of 2022, compared to the same period last year.

P&C Segment Combined Ratio:
The P&C segment ended the first quarter of 2022 with a GAAP basis combined ratio
of 92.2%. Reported catastrophe losses totaled $1,687,000 and added 11.8
percentage points to the combined ratio. In comparison, the P&C segment ended
the first quarter of 2021 with a GAAP basis combined ratio of 95.8% with
$1,736,000 in reported catastrophe losses increasing the combined ratio by 12.6
percentage points. Non-catastrophe wind and hail losses were down $16,000 for
the three months ended March 31, 2022 compared to the same period in 2021.
Reported non-catastrophe wind and hail losses, in the first quarter of 2022,
totaled $1,277,000 and added 8.9 percentage points to the first quarter 2021
combined ratio. In comparison, non-catastrophe wind and hail losses reported in
the first quarter of 2021 totaled $1,293,000 and added 9.4 percentage points to
the first quarter 2021 combined ratio. Partially offsetting these decreases was
an increase in reported fire losses of $262,000 during the first quarter of 2022
compared to the first quarter of 2021. Reported fire losses totaled $3,532,000,
for the three months ended March 31, 2022, and added 24.7 percentage points to
the 2022 combined ratio. In comparison, in the first quarter of 2021, reported
fire losses totaled $3,270,000 and added 23.7 percentage points to the 2021
combined ratio.

Overview - Balance Sheet highlights at March 31, 2022 compared to December 31,