The discussion in this Item includes forward-looking statements and should be read in the context of the risks, uncertainties and other variables referred to below under the caption "Forward-Looking Statements."

Business Operations

Overview

The Company reported net income of $2.0 million for the first quarter of 2009, compared to net income of $0.2 million for the first quarter of 2008. In the first quarter of 2009, the Company recorded net realized losses of approximately $0.2 million on investments; approximately $2.5 million related to write downs for other-than-temporary declines in fair value of various investments of which $2.4 million of the other-than-temporary impairment was recognized in other comprehensive loss, a component of shareholders' equity. Net premiums earned were $46.0 million and $43.3 million in the first quarter of 2009 and 2008, respectively, and gross premiums written were $53.2 million and $52.0 million in the first quarter of 2009 and 2008, respectively.

As of March 31, 2009, our statutory surplus was $88.5 million compared to $89.8 million as of December 31, 2008. The unpaid claims and claim adjustment expenses was $76.4 million at March 31, 2009 and $75.5 million at December 31, 2008, of which unpaid claims and claim adjustment expenses attributable to ongoing nonstandard personal automobile lines was $67.1 million and $66.0 million, respectively.

As discussed further below, the Company achieved improvement in its C & CAE ratio for nonstandard personal auto insurance in the first quarter of 2009 (71.7%) as compared with the first quarter of 2008 (74.8%). We believe this is the result of numerous factors, including the improvements in pricing and underwriting, upgrades of claims systems, procedures and personnel, and actions to closely monitor and address emerging claims trends. The Company's ability to maintain or improve upon this C & CAE ratio is subject to the significant risks and uncertainties identified in the Annual Report on Form 10-K for the year ended December 31, 2008 (the "Form 10-K"), including the risks associated with growth in premiums and the fact that new business generally produces higher claims ratios than renewal business; see ITEM 1A. Risk Factors in the Form 10-K.

The Company markets its policies through approximately 4,400 independent agency locations in Arizona, Florida, Nevada, New Mexico, South Carolina and Texas and one general agency in California that markets through approximately 900 insurance broker locations.

The following table presents selected financial information in thousands of dollars:

                                               Three months ended March 31,
                                                 2009                 2008
       Gross premiums written               $        53,150             51,966

       Earned premiums                      $        45,999             43,340

       Income before Federal income taxes   $         2,091                179

       Federal income tax expense           $            44                 12

       Net income                           $         2,047                167


       GAAP C & CAE ratio (1)                          70.4 %             74.8 %
       GAAP Expense ratio (2) (3)                      25.3 %             25.8 %

       GAAP Combined ratio (2)                         95.7 %            100.6 %

(1) C & CAE is an abbreviation for Claims and Claims Adjustment expenses, stated as a percentage of net premiums earned.

(2) The Expense and Combined ratios do not reflect expenses of the holding company which include interest expense on the note payable and subordinated debentures.

(3) Commissions, change in deferred acquisition costs, underwriting expenses and operating expenses (insurance subsidiary only) are offset by agency revenues and are stated as a percentage of net premiums earned.

We believe product enhancements, rate adjustments and expanding marketing efforts in the Southeast region are the main reasons for the increase in gross premiums written and net premiums earned for the comparative years. The decrease in the C & CAE ratio in 2009 from the 2008 periods was primarily due to favorable development for claims occurring in prior accident years on the nonstandard personal auto lines and improvement in the 2009 accident period as compared to the 2008 accident period.

The Company believes it is pursuing a strategy that has the potential to build a larger, competitively distinctive and successful franchise in the nonstandard personal auto business over time and is endeavoring to manage its investments and risks to achieve this result. These risks and other challenges are occurring in rapidly changing economic, financial, competitive, regulatory and claims environments. The Company's operating and financial results vary from period to period as a result of numerous factors inherent in the insurance business, many of which are affected by such changes.

Discontinuance of Commercial Lines

The Company continues to settle and reduce its inventory of commercial lines claims. At March 31, 2009 and December 31, 2008, there were 30 claims associated with the Company's runoff book outstanding. As of March 31, 2009, in respect of its runoff lines, the Company had $6.4 million in net unpaid claims and claim adjustment expenses ("C & CAE") compared to $7.1 million as of December 31, 2008. For the periods presented, the Company has recorded favorable development in unpaid C & CAE from the runoff lines with the settlement and reduction in the inventory of commercial lines claims. See "Results of Operations - Claims and claim adjustment expenses." Due to the long tail and litigious nature of these claims, the Company anticipates it will take a substantial number of years to complete the adjustment and settlement process with regard to existing claims and the additional claims it expects to receive in the future from its past business writings. Most of the remaining claims are in suit and the Company's future results may or may not be impacted either negatively or positively based on its ability to settle the remaining claims and new anticipated claims within its established reserve levels.

Results of Operations

The discussion below primarily relates to the Company's insurance operations, although the selected consolidated financial data appearing elsewhere is on a consolidated basis. The expense item "Underwriting and operating expenses" includes the operating expenses of the holding company, GAN.

Revenue

Gross premiums written in the first quarter of 2009 increased 2% as compared to
the first quarter of 2008. We believe the primary reasons for the increase to be
the result of product enhancements, rate adjustments and expanding marketing
efforts in the Southeast region. The following table presents gross premiums
written by region in thousands of dollars:



                                                   Three months ended March 31,
                                                      2009                 2008
     Region:                                          (Amounts in thousands)
     Southeast (Florida, South Carolina)       $    34,375      65 %   30,250    58 %
     South Central (Texas)                          10,204      19     12,632    25
     Southwest (Arizona, Nevada, New Mexico)         8,170      15      8,458    16
     West (California)                                 401       1        626     1

     Total                                     $    53,150     100 %   51,966   100 %

Each of the regions, except Southeast, recorded premium declines in 2009 from 2008. The percent of premium increase (decrease) by region for 2009 from 2008 is as follows: Southeast 14%, South Central (19)%, Southwest (3)% and West (36)%. We believe the decline in the regions, other than Southeast, is due to rate increases, selective reduction in the agency force and the effects of the slowing economy. Net premiums earned increased 6% in the first quarter of 2009 from the first quarter of 2008 primarily as a result of an increase in gross premiums written in the fourth quarter of 2008 and the first quarter of 2009 as compared with comparable periods in the preceding years.

Net investment income decreased $437,000 (20%) in the first quarter of 2009 from the first quarter of 2008 primarily due to the decline in short-term interest rates. At March 31, 2009, Bonds available for sale comprised 64% of Investments versus 67% at March 31, 2008. The return on average investments was 3.9% for the first quarter of 2009 versus 4.4% for the first quarter of 2008.

In the first quarter of 2009, the Company recorded net realized losses of approximately $229,000, of which approximately $148,000 related to other-than-temporary impairments of various investments. The Company recorded approximately $2,509,000 related to write downs for other-than-temporary declines in fair value of various investments of which $2,361,000 of the other-than-temporary impairment was recognized in other comprehensive loss, a component of shareholders' equity, due to the adoption of FSP 115-2 and FAS 124-2.

Agency revenues increased $216,000 (7%) in the first quarter of 2009 primarily as a result of the increase in writings in the fourth quarter of 2008 and the first quarter of 2009 from the respective prior years' quarters. Agency revenues are primarily fees charged on insureds' premiums due.

Expenses

Claims and claim adjustment expenses decreased $55,000 in the first quarter of 2009 as compared with the first quarter of 2008. The C & CAE ratio was 70.4% in the first quarter of 2009 versus 74.8% in the first quarter of 2008. The runoff lines recorded favorable development for prior accident years of approximately $466,000 in the first quarter of 2009 versus $42,000 in the first quarter of 2008. The C & CAE ratio for nonstandard personal auto was 71.7% for the first quarter of 2009 versus 74.8% for the first quarter of 2008. The decrease in the C & CAE ratio in the first quarter of 2009 from the first quarter of 2008 was primarily due to favorable development for claims occurring in prior accident years of approximately $2,262,000 in the first quarter of 2009 versus unfavorable development of approximately $1,718,000 in the first quarter of 2008 and improvement in the first quarter of 2009 accident period as compared to the first quarter of 2008.

The following presents the favorable (unfavorable) development for claims occurring in prior accident years for each region in the first quarter of 2009:

• Southeast Region (Florida and South Carolina)-$664,000

• South Central Region (Texas)-$1,043,000

• Southwest Region (Arizona, Nevada and New Mexico)-$681,000

• West Region (California)-($126,000)

The favorable development for prior accident years for nonstandard personal auto in the first quarter of 2009 is primarily the result of actual and projected decreases in severity associated with most of our coverages, particularly material damage claims. The favorable development for prior accident years was offset by approximately $20,000 recognized in the first quarter of 2009 relating to "extra-contractual" claims, in which claimants seek to recover amounts significantly in excess of applicable policy limits. In the first quarter of 2008, the Company incurred "extra-contractual" claims of approximately $300,000 primarily related to prior accident years; see ITEM 1A. Risk Factors - "Litigation may adversely affect our financial condition, results of operations and cash flows" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008).

Claims for "extra-contractual" liability arise when a claim is originally denied or the claimant asserts that a claim has been handled inappropriately, and the claimant further asserts that such denial or allegedly inappropriate response was improper or in "bad faith." In such cases, which tend to arise in cases involving serious injury or death, it is not unusual for the amount of the claim to exceed by a substantial amount the policy limits that would otherwise be applicable. Where the Company becomes aware of such a potential claim, it typically consults with outside counsel and, if appropriate, seeks to settle the claim on terms as favorable as possible in light of all the relevant circumstances. The amounts required for settlement of such claims, and the potential award if a case cannot be settled on acceptable terms, vary widely depending on the specific facts of the claim, the applicable law and other factors.

We believe it is reasonably likely that our loss costs could increase or decrease by 2% from current estimates, as remaining claims are recorded and resolved. Loss costs reflect the incurred loss per unit of exposure and are the product of frequency and severity. A 2% increase or decrease in our loss costs would result in unfavorable or favorable development of $9.2 million (based on C & CAE incurred as of March 31, 2009). This estimate of sensitivity is informational only, is not a projection of future results and does not take into account possible effects of extraordinary litigation events (such as class action claims).

With regard to environmental and product liability claims, the Company has an immaterial amount of exposure. The Company did not provide environmental impairment coverage and excluded pollution and asbestos related coverages in its policies. A portion of the Company's remaining claims is related to construction defects.

Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.

Policy acquisition costs include commissions, premium taxes, marketing and underwriting expenses and the amortization of the premium deficiency. The expenses are charged to operations over the period in which the related premiums are earned. The increase of $401,000 (6%) in the first quarter of 2009 was primarily due to increases in commission and marketing expenses. Commissions increased primarily as a result of the increase in premiums. The increase in marketing expenses occurred primarily as a result of an increase in underwriting reports, travel expenses and salaries of territory managers. Commissions are paid to the independent agents based upon premium writings. The marketing expenses are primarily salaries, telephone and travel expenses of our territory managers who oversee the efforts of the agents within a geographical area. Their time is focused on the supervision, relationship management and support of existing agents and recruiting new agents, as well as actively soliciting new business from these agents. Accordingly, these costs vary with and are primarily related to the acquisition of new and renewal insurance policies. The ratio of Policy acquisition costs to Net premiums earned was 16.5% and 16.6% for the first quarter of 2009 and 2008, respectively.

Underwriting and operating expenses increased $164,000 (2%) in the first quarter of 2009 from the first quarter of 2008 primarily due to an increase in compensation expense. As a result, underwriting and operating expenses as a percent of Net premiums earned and Agency revenues were 16.3% and 17.0% for the first quarter of 2009 and 2008, respectively.

The decrease in interest expense of $345,000 (37)% is primarily due to the decline in the 3-month London Interbank Offered Rate for U.S. dollar deposits ("LIBOR") in the first quarter of 2009 as compared to the first quarter of 2008.

Liquidity and Capital Resources

Parent Company

GAN provides administrative and financial services for its wholly owned subsidiaries. GAN needs cash during 2009 primarily for administrative expenses and interest on the Subordinated debentures and the Note payable. GAN has approximately $2.3 million in cash and marketable securities that can be used for general corporate purposes. Another source of cash to meet obligations is statutorily permitted dividend payments from its insurance subsidiary, which requires approval from the Texas Department of Insurance (see note 8 of Notes to Condensed Consolidated Financial Statements which appear in Item 1 of this Report). GAN believes the cash available from its cash and marketable securities, available dividends from its insurance subsidiary, if permitted, and dividends from its agency subsidiary should be sufficient to meet its expected obligations for 2009.

Net Operating Loss Carryforwards

Deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. See Note 1(d) "Federal Income Taxes" in Notes to Consolidated Financial Statement appearing under Part 1. Financial Information - Item 1. "Financial Statements" of this report for further discussion.

As a result of losses in prior years, as of March 31, 2009, the Company had net operating loss carryforwards for tax purposes aggregating $69,499,000. These net operating loss carryforwards of $8,328,000, $33,950,000, $13,687,000, $633,000, and $12,901,000, if not utilized, will expire in 2020, 2021, 2022, 2023 and 2027, respectively. As of March 31, 2009, the tax benefit of the net operating loss carryforwards is $23,630,000, which is calculated by applying the Federal statutory income tax rate of 34% against the net operating loss carryforwards of $69,499,000.

As of March 31, 2009 and December 31, 2008, the net deferred tax asset before valuation allowance was $33,029,000 and $32,397,000 and the valuation allowance was $29,165,000 and $29,905,000, respectively. The Company does not record a tax valuation allowance relating to the net unrealized losses on investments, excluding equity securities because it is more likely than not that these losses would reverse or be used in future periods. The Company has the ability and it is the Company's intent to fully recover the principal, which could require the Company to hold these securities until their maturity; therefore, the Company considers the impairment to be temporary.

Subsidiaries, Principally Insurance Operations

The primary sources of the insurance subsidiary's liquidity are funds generated from insurance premiums, net investment income and maturing investments. The short-term investments and cash are intended to provide adequate funds to pay claims without selling fixed maturity investments. At March 31, 2009, the insurance subsidiary held short-term investments and cash that the insurance subsidiary believes are adequate for the payment of claims and other short-term commitments.

With regard to liquidity, the average duration of the investment portfolio is approximately 2.2 years. The fair value of the investment portfolio at March 31, 2009 was $11,410,000 below amortized cost, before taxes (see notes 2 and 3 of Notes to Condensed Consolidated Financial Statements which appear in Item 1 of this Report). Various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At March 31, 2009 and December 31, 2008, the balance on deposit for the benefit of such policyholders totaled $5,470,000 and $5,447,000, respectively.

Net cash provided by operating activities remained relatively stable at $2,990,000 in the first quarter of 2009 versus $3,004,000 in the first quarter of 2008.

Investments and Cash decreased in the first quarter of 2009 primarily as a result of the decline in fair value of the investment securities. At March 31, 2009, 68% of the Company's investments were rated investment grade. The average duration was approximately 2.2 years, including approximately 33% of the Investments that were held in Short-term investments. The Company classifies its bond securities as available for sale and trading. The net unrealized loss associated with the investment portfolio was $7,546,000 (net of tax effects) at March 31, 2009 (see note 2 of Notes to Condensed Consolidated Financial Statements which appear in Item 1 of this Report).

Premiums receivable increased primarily due to the increase in premium writings for the six months ended March 31, 2009 over the six months ended December 31, 2008. This balance is comprised primarily of premiums due from insureds. Most of the policies are written with a down payment and monthly payment terms of up to four months on six month policies. The Company recorded an allowance for doubtful accounts of $751,000 and $1,029,000 as of March 31, 2009 and December 31, 2008, respectively, which it considers adequate. The decrease in the allowance for doubtful accounts was due primarily to a decrease in over thirty day receivables.

Deferred policy acquisition costs are principally commissions, premium taxes, marketing expenses and some underwriting expenses which are deferred. The increase was primarily due to the increase in deferred commissions as a result of the increase in unearned premiums.

Deferred Federal income taxes include temporary differences and the tax asset from net operating loss carryforwards less a valuation allowance that fully reserves these two items, see "Liquidity and Capital Resources - Net Operating Loss Carryforwards." The increase is primarily due to the increase in unrealized losses on investments, excluding common stocks.

Unpaid C & CAE increased primarily as a result of an increase in outstanding claims due to growth for the nonstandard personal automobile lines. As of March 31, 2009, the Company had $73,506,000 in net unpaid C & CAE (Unpaid C & CAE of $76,367,000 less Ceded unpaid C & CAE of $2,861,000). This amount represents management's best estimate of the ultimate liabilities. The significant operational changes we have recently made in the nonstandard personal auto claims adjustment process and changing claims trends increase the uncertainties which exist in the estimation process and could lead to inaccurate estimates of claim and claim adjustment expense.

The reserve estimates were made by our in-house actuarial staff. An analysis provided by an independent actuarial firm was used to corroborate the reserve selections made by the in-house actuarial staff.

As of March 31, 2009 and December 31, 2008, in respect of its runoff lines, the Company had $6,377,000 and $7,118,000, respectively, in net unpaid C & CAE. Historically, the Company has experienced significant volatility in its reserve projections for its commercial lines. This volatility has been primarily attributable to its commercial automobile and general liability product lines. On February 7, 2002, the Company announced it had decided to discontinue writing commercial lines insurance due to continued adverse claims development and unprofitable results. The Company has been settling and reducing its remaining inventory of commercial claims; see Business Operations - "Discontinuance of Commercial Lines." As of March 31, 2009 and December 31, 2008, 30 runoff claims remained. The average runoff claim reserve was approximately $213,000 per claim and $237,000 per claim at March 31, 2009 and December 31, 2008, respectively.

Unearned premiums increased primarily as a result of the increase in premium writings for the six months ended March 31, 2009 over the six months ended December 31, 2008.

Premiums payable, Commissions payable and Reinsurance balances payable all decreased primarily due to a fronting reinsurance arrangement that continues to decrease.

Accounts payable increased primarily due to increases in return premiums due policyholders, Florida hurricane assessments and bonuses payable based on production.

Cash overdraft is primarily comprised of outstanding claim checks. The increase is due to the increase in claim settlements during the first quarter of 2009 over the fourth quarter of 2008.

Accumulated deficit decreased due to the net income recorded during the first quarter of 2009.

Accumulated other comprehensive loss increased as a result of an increase in the unrealized losses on investments, which is a result of the activity in the credit markets.

The Company's statutory capital exceeds the benchmark capital level under the Risk Based Capital formula for its insurance company. Risk Based Capital is a method for establishing the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile.

Critical Accounting Policies

Item 7, included in Part II of our Annual Report on Form 10-K for the year ended
December 31, 2008, includes a description of the accounting policies and related estimates that we believe are the most critical to understanding our condensed consolidated financial statements, financial condition, and results of operations and cash flows, and which require complex management judgment and assumptions or involve uncertainties. These include, among other things, investments, deferred policy acquisition costs and policy acquisition costs, goodwill, unpaid claims and claim adjustment expenses and income taxes.

Information regarding other significant accounting policies is included in the notes to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2008 and to the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Transactions and Related Matters

There are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships of the Company with unconsolidated entities or other persons that have, or may have, a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.

Forward-Looking Statements

Some of the statements made in this Report are forward-looking statements. Forward-looking statements relate to future events or our future financial performance and may involve known or unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

These forward-looking statements reflect our current views, but they are based on assumptions and are subject to risks, uncertainties, and other variables which you should consider in making an investment decision, including,
(a) current and future economic conditions and uncertainties and disruptions in . . .