The following is management's discussion and analysis of the financial condition and results of operations of Atlantic American Corporation ("Atlantic American" or the "Parent") and its subsidiaries (collectively, the "Company") for the three month period ended March 31, 2009. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein, as well as with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

Atlantic American is an insurance holding company whose operations are conducted primarily through its insurance subsidiaries: American Southern Insurance Company and American Safety Insurance Company (together known as "American Southern") and Bankers Fidelity Life Insurance Company ("Bankers Fidelity"). Each operating company is managed separately, offers different products and is evaluated on its individual performance.

In December 2007, the Company entered into an agreement for the sale of its regional property and casualty operations, Association Casualty Insurance Company and Association Risk Management General Agency, Inc. (together known as "Association Casualty") and Georgia Casualty & Surety Company ("Georgia Casualty") to Columbia Mutual Insurance Company. This transaction was completed on March 31, 2008. In accordance with generally accepted accounting principles, the consolidated financial statements included in this quarterly report reflect the operating results of the regional property and casualty operations as discontinued operations. Accordingly, unless otherwise noted, amounts and analyses contained herein reflect the continuing operations of the Company and exclude the regional property and casualty operations. References to income and loss from operations are identified as continuing operations or discontinued operations, while references to net income or net loss reflect the consolidated net results of both continuing and discontinued operations.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and, in management's belief, conform to general practices within the insurance industry. The following is an explanation of the Company's accounting policies and the resultant estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management's initial estimates determined using these policies. Atlantic American does not expect that changes in the estimates determined using these policies will have a material effect on the Company's financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.

Unpaid loss and loss adjustment expenses comprised 26% of the Company's total liabilities at March 31, 2009. This obligation includes estimates for: 1) unpaid losses on claims reported prior to March 31, 2009, 2) development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to March 31, 2009 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to March 31, 2009. Quantification of loss estimates for each of these components involves a significant degree of judgment and estimates may vary, materially, from period to period. Estimated unpaid losses on reported claims are developed based on historical experience with similar claims by the Company. Development on reported claims, estimates of unpaid ultimate losses on claims incurred prior to March 31, 2009 but not yet reported, and estimates of unpaid loss adjustment expenses, are developed based on the Company's historical experience, using actuarial methods to assist in the analysis. The Company's actuary develops ranges of estimated development on reported and unreported claims as well as loss adjustment expenses using various methods including the paid-loss development method, the reported-loss development method, the paid Bornhuetter-Ferguson method and the reported Bornhuetter-Ferguson method. Any single method used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes affecting the business environment and the Company's administrative policies. Further, a variety of external factors, such as legislative changes, medical cost inflation, and others may directly or indirectly impact the relative adequacy of liabilities for unpaid losses and loss adjustment expenses. The Company's approach is to select an estimate of ultimate losses based on comparing results of a variety of reserving methods, as opposed to total reliance on any single method. Unpaid loss and loss adjustment expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used to develop such estimates, the amount of the Company's recorded liability for unpaid loss and loss adjustment expenses is adjusted. In the event the Company's actual reported losses in any period are materially in excess of the previous estimated amounts, such losses, to the extent reinsurance coverage does not exist, could have a material adverse effect on the Company's results of operations.

Future policy benefitscomprised 32% of the Company's total liabilities at March 31, 2009. These liabilities relate primarily to life insurance products and are based upon assumed future investment yields, mortality rates, and withdrawal rates after giving effect to possible risks of adverse deviation. The assumed mortality and withdrawal rates are based upon the Company's experience. If actual results differ from the initial assumptions, the amount of the Company's recorded liability could require adjustment.

Deferred acquisition costscomprised 8% of the Company's total assets at March 31, 2009. Deferred acquisition costs are commissions, premium taxes, and other costs that vary with and are primarily related to the acquisition of new and renewal business and are generally deferred and amortized. The deferred amounts are recorded as an asset on the balance sheet and amortized to expense in a systematic manner. Traditional life insurance and long-duration health insurance deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the related liability for policy benefit reserves. The deferred acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance). Assessments of recoverability for property and casualty and short-duration health insurance are extremely sensitive to the estimates of a subsequent year's projected losses related to the unearned premiums. Projected loss estimates for a current block of business for which unearned premiums remain to be earned may vary significantly from the indicated losses incurred in any given previous calendar year.

Receivables are amounts due from reinsurers, insureds and agents and comprised 7% of the Company's total assets at March 31, 2009. Insured and agent balances are evaluated periodically for collectibility. Annually, the Company performs an analysis of the credit worthiness of the Company's reinsurers using various data sources. Failure of reinsurers to meet their obligations due to insolvencies or disputes could result in uncollectible amounts and losses to the Company. Allowances for uncollectible amounts are established, as and when a loss has been determined probable, against the related receivable. Losses are recognized when determined on a specific account basis and a general provision for loss is made based on the Company's historical experience.

Cash and investmentscomprised 79% of the Company's total assets at March 31, 2009. Substantially all investments are in bonds and common and preferred stocks, the values of which are subject to significant market fluctuations. The Company carries all investments as available for sale and, accordingly, at their estimated fair values. The Company owns certain fixed maturity securities, that do not have publicly quoted values, with an estimated fair value as determined by management of $1.8 million at March 31, 2009. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. On occasion, the value of an investment may decline to a value below its amortized purchase price and remain at such value for an extended period of time. When an investment's indicated fair value has declined below its cost basis for a period of time, the Company evaluates such investment for other than a temporary impairment. The evaluation for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. The risks and uncertainties include changes in general economic conditions, an issuer's financial condition or near term recovery prospects and the effects of changes in interest rates. In evaluating impairment, the Company considers, among other factors, the intent and ability to hold these securities, the nature of the investment and the prospects for the issuer and its industry, the issuers' continued satisfaction of the investment obligations in accordance with their contractual terms, and management's expectation that they will continue to do so, as well as rating actions that affect the issuer's credit status. If other than a temporary impairment is deemed to exist, then the Company will write down the amortized cost basis of the investment to its estimated fair value. While such write down does not impact the reported value of the investment in the Company's balance sheet, it is reflected as a realized investment loss in the Company's consolidated statements of operations.

Effective January 1, 2008, on a prospective basis, the Company determines the fair values of certain financial instruments based on the fair market hierarchy established in Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price at which an asset could be sold or a liability settled in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 provides guidance on measuring fair value when required under existing accounting standards and establishes a hierarchy that prioritizes the inputs to valuation techniques. The first level of such hierarchy determines fair value at the quoted price (unadjusted) in active markets for identical assets (Level 1). The second level determines fair value using valuation methodology including quoted prices for similar assets and liabilities in active markets and other inputs that are observable for the asset or liability, either directly or indirectly for substantially similar terms (Level 2). The third level for determining fair value utilizes inputs to valuation methodology which are unobservable for the asset or liability (Level
3). Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. A financial asset's or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The fair values for fixed maturity and equity securities are largely determined by either independent methods prescribed by the National Association of Insurance Commissioners ("NAIC"), which do not differ materially from nationally quoted market prices, when available, or independent broker quotations.

The Company's Level 1 instruments consist of short-term investments.

The Company's Level 2 instruments include most of its fixed maturity securities, which consist of U.S. Treasury securities and U.S. government securities, municipal bonds, and certain corporate fixed maturity securities as well as its common and non-redeemable preferred stocks.

The Company's Level 3 instruments include certain fixed maturity securities and a zero cost rate collar. Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. As of March 31, 2009, the Company's fixed maturity securities valued using Level 3 criteria totaled $1.8 million and the zero cost rate collar was a liability of $2.0 million (See Note 6).

Assets measured at fair value, as of March 31, 2009, on a recurring basis are summarized below:

                          Quoted Prices
                            in Active     Significant
                             Markets         Other       Significant
                          for Identical    Observable    Unobservable
                             Assets          Inputs         Inputs
                            (Level 1)      (Level 2)      (Level 3)        Total
                          -------------   ------------   ------------   ------------
                                                (In thousands)
Fixed maturity securities  $          -   $    164,769   $      1,808   $    166,577
Equity securities                     -          3,754              -          3,754
Short-term investments           18,725              -              -         18,725
                          -------------   ------------   ------------   ------------
     Total                 $     18,725   $    168,523   $      1,808   $    189,056
                          -------------   ------------   ------------   ------------

Deferred income taxescomprised approximately 5% of the Company's total assets at March 31, 2009. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for tax purposes. These deferred income taxes are measured by applying currently enacted tax laws and rates. Valuation allowances are recognized to reduce the deferred tax assets to the amount that is deemed more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income and tax planning strategies.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards applicable to the Company, see Note 2 of the accompanying notes to the consolidated financial statements.

OVERALL CORPORATE RESULTS

On a consolidated basis, the Company had net income of $0.3 million, or $0.01 per diluted share, for the three month period ended March 31, 2009, compared to a net loss of $1.7 million, or $0.10 per diluted share, for the three month period ended March 31, 2008. Income from continuing operations was $0.3 million in the three month period ended March 31, 2009, compared to $0.4 million in the three month period ended March 31, 2008. The net loss in the three month period ended March 31, 2008 was due to the $2.2 million loss from discontinued operations. Premium revenue for the three month period ended March 31, 2009 decreased $0.2 million, or 1.0%, to $22.8 million from $23.0 million in the comparable period of 2008. The decrease in premiums in the three month period ended March 31, 2009 was primarily attributable to continued softening in the property and casualty markets combined with the market competition in the Medicare supplement line of business. Income before tax from continuing operations decreased $0.4 million, or 57.4%, in the three month period ended March 31, 2009, from the comparable period in 2008. The decrease in income before tax from continuing operations was primarily due to several large automobile claims incurred in the Company's property and casualty operations during the three month period ended March 31, 2009. These losses were partially offset by a reduction in the accrual for profit sharing commissions and the related agent contracts.

A more detailed analysis of the individual operating companies and other corporate activities is provided below.

American Southern

    The following is a summary of American Southern's premiums for the three
month period ended March 31, 2009 and the comparable period in 2008 (in
thousands):

                              Three Months Ended
                                   March 31,
                       ---------------------------------
                             2009              2008
                       ----------------   --------------
Gross written premiums $          8,877    $       8,788
Ceded premiums                  (1,666)          (1,467)
                       ----------------   --------------
Net written premiums   $          7,211   $        7,321
                       ----------------   --------------
Net earned premiums     $         8,986   $        9,266
                       ----------------   --------------

Gross written premiums at American Southern increased $0.1 million, or 1.0%, during the three month period ended March 31, 2009 over the comparable period in 2008. The increase in gross written premiums during the three month period ended March 31, 2009 was primarily due to an increase in commercial automobile business marketed through a single general agent. Partially offsetting this increase were decreases in gross written premiums in the general liability and surety lines of business due primarily to the weak construction industry.

Ceded premiums increased $0.2 million, or 13.6%, during the three month period ended March 31, 2009 over the comparable period in 2008. The increase in ceded premiums during the three month period ended March 31, 2009 was primarily attributable to higher reinsurance rates resulting from changes in the composition of business. Ceded premiums increased disproportionately due to the higher reinsurance costs associated with the commercial automobile business versus the reinsurance costs in the declining lines of business.

The following presents American Southern's net earned premiums by line of business for the three month period ended March 31, 2009 and the comparable period in 2008 (in thousands):

                           Three Months Ended
                                March 31,
                      -----------------------------
                          2009            2008
                      -------------   -------------
Commercial automobile $       4,691   $       4,261
General liability             1,658           2,210
Property                        615             595
Surety                        2,022           2,200
                      -------------   -------------
Total                 $       8,986   $       9,266
                      -------------   -------------

Net earned premiums decreased $0.3 million, or 3.0%, during the three month period ended March 31, 2009 from the comparable period in 2008, primarily due to the reasons discussed previously. In addition, gross written premiums are earned ratably over their respective policy terms, and therefore premiums earned in the current year are related to policies written during both the current and prior year.

The following sets forth American Southern's loss and expense ratios for the three month period ended March 31, 2009 and for the comparable period in 2008:

                 Three Months Ended
                     March 31,
               ----------------------
                 2009         2008
               ---------    ---------
Loss ratio         48.2%        38.1%
Expense ratio      48.0%        52.8%
               ---------    ---------
Combined ratio     96.2%        90.9%
               ---------    ---------

The loss ratio for the three month period ended March 31, 2009 increased to 48.2% from 38.1% in the comparable period of 2008. The increase in the loss ratio for the three month period ended March 31, 2009 was primarily attributable to several large claims in the commercial automobile line of business. Also, during the three month period ended March 31, 2008, American Southern had favorable loss experience in the property and surety lines of business which did not recur in the three month period ended March 31, 2009.

The expense ratio for the three month period ended March 31, 2009 decreased to 48.0% from 52.8% in the comparable period of 2008. The decrease in the expense ratio in the three month period ended March 31, 2009 was primarily due to American Southern's variable commission structure, which compensates the company's agents in relation to the loss ratios of the business they write. In periods where the loss ratio decreases, commissions and underwriting expenses will increase and conversely in periods where the loss ratio increases, commissions and underwriting expenses will decrease.

Bankers Fidelity

    The following summarizes Bankers Fidelity's earned premiums for the three
month period ended March 31, 2009 and the comparable period in 2008 (in
thousands):

                         Three Months Ended
                             March 31,
                    ----------------------------
                        2009           2008
                    ------------   -------------
Medicare supplement $     10,324   $      10,371
Other health                 899             865
Life                       2,588           2,530
                    ------------   -------------
Total               $     13,811   $      13,766
                    ------------   -------------

Premium revenue at Bankers Fidelity increased slightly during the three month period ended March 31, 2009 over the comparable period in 2008. Premiums from the Medicare supplement line of business decreased 0.5% during the three month period ended March 31, 2009, due primarily to the non-renewal of certain policies that resulted from increased pricing and product competition. Although premium revenues from the Medicare supplement line of business have declined, rate increases implemented in varying amounts by state and plan have partially offset these decreases. Premiums from the life insurance line of business increased $0.1 million, or 2.3%, during the three month period ended March 31, 2009 over the comparable period in 2008, due to an increase in sales related activities. The other health products premiums increased 3.9% during the three month period ended March 31, 2009 over the comparable period in 2008 due primarily to an increase in sales of short-term care products.

The following summarizes Bankers Fidelity's operating expenses for the three month period ended March 31, 2009 and the comparable period in 2008 (in thousands):

                            Three Months Ended
                                 March 31,
                     ---------------------------------
                          2009              2008
                     ---------------   ---------------
Benefits and losses  $        10,552   $        10,385
Commission and other
   expenses                    4,295             4,398
                     ---------------   ---------------
Total expenses       $        14,847   $        14,783
                     ---------------   ---------------

Benefits and losses increased $0.2 million, or 1.6%, during the three month period ended March 31, 2009 over the comparable period in 2008. As a percentage of premiums, benefits and losses were 76.4% for the three month period ended March 31, 2009, compared to 75.4% for the three month period ended March 31, 2008. The increase in the loss ratio was primarily due to increased medical costs in the Medicare supplement line of business.

Commissions and other expenses decreased $0.1 million, or 2.3%, during the three month period ended March 31, 2009 from the comparable period in 2008. Bankers Fidelity has been reasonably successful in controlling operating costs. As a percentage of premiums, these expenses were 31.1% for the three month period ended March 31, 2009, compared to 31.9% for the three month period ended March 31, 2008.

INVESTMENT INCOME AND REALIZED GAINS

Investment income increased 1.7% during the three month period ended March 31, 2009 over the comparable period in 2008. The increase in investment income for the three month period ended March 31, 2009 was primarily due to an increased level of invested assets which resulted from the Company investing the proceeds received from the sale of its regional property and casualty operations in the second quarter of 2008. Also contributing to the increase in investment income for the three month period ended March 31, 2009 was a shift from short-term investments to higher yielding fixed maturity securities. Partially offsetting this increase in investment income was a large number of called securities, the proceeds from which the Company was not able to reinvest at equivalent market rates.

The Company had net realized investment gains of $13,000 during the three month period ended March 31, 2009, compared to net realized investment gains of $24,000 in the three month period ended March 31, 2008. Management continually evaluates the Company's investment portfolio and, as needed, makes adjustments for impairments and/or will divest investments. (See Item 3 of the accompanying consolidated financial statements for a discussion of market risks).

INTEREST EXPENSE

Interest expense decreased $0.2 million, or 22.2%, during the three month period ended March 31, 2009 from the comparable period in 2008. The decrease in interest expense for the three month period ended March 31, 2009 was due to a decrease in the London Interbank Offered Rate ("LIBOR"), as the interest rates on the Company's trust preferred obligations and outstanding bank debt are based on LIBOR. In addition, on April 1, 2008, the Company repaid the outstanding balance of $3.8 million under the Company's credit agreement (the "Credit Agreement") with Wachovia Bank, National Association ("Wachovia"), which decreased interest expense by reducing the Company's average debt level for the three month period ended March 31, 2009 as compared to the same period in 2008.