UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2022

or

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

Commission File Number 0-3722

ATLANTIC AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)

Georgia
  
58-1027114
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)

4370 Peachtree Road, N.E.,
Atlanta, Georgia
  
30319
(Address of principal executive offices)
  
(Zip Code)

(404) 266-5500
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
  
Trading Symbol(s)
  
Name of each exchange on which registered
Common Stock, par value $1.00 per share
  
AAME
  
NASDAQ Global Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☑   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☐   Accelerated filer  ☐   Non-accelerated filer  ☑  Smaller reporting company  ☑   Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

The total number of shares of the registrant’s Common Stock, $1 par value, outstanding on June 30, 2022 was 20,398,497.
 
ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

 
2
     
Part I.
Financial Information
 
     
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
19
     
Item 4.
25
     
Part II.
Other Information
  
     
Item 2.
26
     
Item 6.
26
     
 
27

FORWARD-LOOKING STATEMENTS

This report contains and references certain information that constitutes forward-looking statements as that term is defined in the federal securities laws. Forward-looking statements are all statements other than those of historical fact. Such forward-looking statements are made based upon management’s current assessments of various risks and uncertainties, as well as assumptions made in accordance with the “safe harbor” provisions of the federal securities laws. Forward-looking statements are inherently subject to various risks and uncertainties and the Company’s actual results could differ materially from the results expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those described in Part I, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and other subsequent filings made by the Company from time to time with the Securities and Exchange Commission. In addition, other risks and uncertainties not known by us, or that we currently determine to not be material, may materially adversely affect our financial condition, results of operations or cash flows. The Company undertakes no obligation to update any forward-looking statement as a result of subsequent developments, changes in underlying assumptions or facts, or otherwise, except as may be required by law.

2
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

   
Unaudited
June 30,
2022
    
December 31,
2021
  
ASSETS
  
Cash and cash equivalents
  
$
15,910
    
$
24,753
  
Investments:
                
Fixed maturities, available-for-sale, at fair value (amortized cost: $238,401 and $238,597)
    
219,282
      
260,986
  
Equity securities, at fair value (cost: $4,906 and $4,907)
    
16,450
      
19,124
  
Other invested assets (cost: $5,628 and $698)
    
5,128
      
198
  
Policy loans
    
1,799
      
1,858
  
Real estate
    
38
      
38
  
Investment in unconsolidated trusts
    
1,238
      
1,238
  
Total investments
    
243,935
      
283,442
  
Receivables:
                
Reinsurance
    
26,017
      
27,416
  
Insurance premiums and other (net of allowance for doubtful accounts: $175 and $188)
    
29,087
      
14,959
  
Deferred income taxes, net
    
11,166
      
1,755
  
Deferred acquisition costs
    
42,244
      
38,698
  
Other assets
    
8,371
      
8,719
  
Intangibles
    
2,544
      
2,544
  
Total assets
  
$
379,274
    
$
402,286
  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
  
Insurance reserves and policyholder funds:
                
Future policy benefits
  
$
85,204
    
$
87,348
  
Unearned premiums
    
38,650
      
27,469
  
Losses and claims
    
87,098
      
85,620
  
Other policy liabilities
    
922
      
1,360
  
Total insurance reserves and policyholder funds
    
211,874
      
201,797
  
Accounts payable and accrued expenses
    
23,561
      
25,465
  
Revolving credit facility
     1,000       —  
Junior subordinated debenture obligations, net
    
33,738
      
33,738
  
Total liabilities
    
270,173
      
261,000
  
                 
Commitments and contingencies (Note 12)
    
     
 
Shareholders’ equity:
                
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, 55,000 shares issued and outstanding; $5,500 redemption value
    
55
      
55
  
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,400,894; shares outstanding: 20,398,497 and 20,378,576
    
22,401
      
22,401
  
Additional paid-in capital
    
57,443
      
57,441
  
Retained earnings
    
51,820
      
51,264
  
Accumulated other comprehensive income (loss)
    
(15,103
)
    
17,688
  
Unearned stock grant compensation
    
(79
)
    
(73
)
Treasury stock, at cost: 2,002,397 and 2,022,318 shares
    
(7,436
)
    
(7,490
)
Total shareholders’ equity
    
109,101
      
141,286
  
Total liabilities and shareholders’ equity
  
$
379,274
    
$
402,286
  

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands, except per share data)

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
     2022     2021  
Revenue:
                        
Insurance premiums, net
  
$
47,065
    
$
45,133
     $ 94,146     $ 91,223  
Net investment income
    
2,529
      
2,266
       4,869       4,379  
Realized investment gains (losses), net
    
(62
)
    
50
       (72 )     171  
Unrealized gains (losses) on equity securities, net
    
(4,866
)
    
4,003
       (2,673 )     4,747  
Other income
    
3
      
5
       7       12  
Total revenue
    
44,669
      
51,457
       96,277       100,532  
                                 
Benefits and expenses:
                                
Insurance benefits and losses incurred
    
32,753
      
31,703
       63,922       64,975  
Commissions and underwriting expenses
    
10,215
      
12,179
       23,051       24,743  
Interest expense
    
414
      
347
       768       693  
Other expense
    
3,402
      
3,474
       6,855       6,914  
Total benefits and expenses
    
46,784
      
47,703
       94,596       97,325  
Income (loss) before income taxes
    
(2,115
)
    
3,754
       1,681       3,207  
Income tax expense (benefit)
    
(436
)
    
792
       518       676  
Net income (loss)
    
(1,679
)
    
2,962
       1,163       2,531  
Preferred stock dividends
    
(100
)
    
(100
)
     (199 )     (199 )
Net income (loss) applicable to common shareholders
  
$
(1,779
)
  
$
2,862
     $ 964     $ 2,332  
Earnings (loss) per common share (basic)
   $ (0.09 )   $ 0.14     $ 0.05     $ 0.11  
Earnings (loss) per common share (diluted)   $ (0.09 )   $ 0.14     $ 0.05     $ 0.11  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; Dollars in thousands)

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
     2022     2021  
Net income (loss)
  
$
(1,679
)
  
$
2,962
     $ 1,163     $ 2,531  
Other comprehensive income (loss):
                                
Available-for-sale fixed maturity securities:
                                
Gross unrealized holding gain (loss) arising in the period
    
(19,748
)
    
7,940
       (41,561 )     (5,807 )
Related income tax effect
    
4,147
      
(1,668
)
     8,728       1,219  
Subtotal
    
(15,601
)
    
6,272
       (32,833 )     (4,588 )
Less: reclassification adjustment for net realized (gains) losses included in net income (loss)
    
43
      
(50
)
     53       (171 )
Related income tax effect
    
(8
)
    
11
       (11 )     36  
Subtotal
    
35
      
(39
)
     42       (135 )
Total other comprehensive income (loss), net of tax
    
(15,566
)
    
6,233
       (32,791 )     (4,723 )
Total comprehensive income (loss)
  
$
(17,245
)
  
$
9,195
     $ (31,628 )   $ (2,192 )

The accompanying notes are an integral part of these condensed consolidated financial statements.

5
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited; Dollars in thousands except share data)

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
     2022
     2021
  
Preferred stock:
                        
Balance, beginning of period
  
$
55
    
$
55
     $ 55     $ 55  
Balance, end of period
    
55
      
55
       55       55  
Common stock:
                                
Balance, beginning of period
    
22,401
      
22,401
       22,401       22,401  
Balance, end of period
    
22,401
      
22,401
       22,401       22,401  
Additional paid-in capital:
                                
Balance, beginning of period
    
57,443
      
57,438
       57,441       57,437  
Restricted stock grants, net of forfeitures
    
—
      
—
       2       —  
Issuance of shares under stock plans
    
—
      
1
       —       2  
Balance, end of period
    
57,443
      
57,439
       57,443       57,439  
Retained earnings:
                                
Balance, beginning of period
    
53,599
      
46,852
       51,264       47,790  
Net income (loss)
    
(1,679
)
    
2,962
       1,163       2,531  
Dividends on common stock
    
—
      
—
       (408 )     (408 )
Dividends accrued on preferred stock
    
(100
)
    
(100
)
     (199 )     (199 )
Balance, end of period
    
51,820
      
49,714
       51,820       49,714  
Accumulated other comprehensive income (loss):
                                
Balance, beginning of period
    
463
      
14,044
       17,688       25,000  
Other comprehensive income (loss), net of tax
    
(15,566
)
    
6,233
       (32,791 )     (4,723 )
Balance, end of period
    
(15,103
)
    
20,277
       (15,103 )     20,277  
Unearned stock grant compensation:
                                
Balance, beginning of period
    
(117
)
    
(217
)
     (73 )     (284 )
Restricted stock grants, net of forfeitures
    
—
      
—
       (71 )     —  
Amortization of unearned compensation
    
38
      
67
       65       134  
Balance, end of period
    
(79
)
    
(150
)
     (79 )     (150 )
Treasury stock:
                                
Balance, beginning of period
    
(7,421
)
    
(7,338
)
     (7,490 )     (7,339 )
Restricted stock grants, net of forfeitures
    
—
      
—
       69       —  
Net shares acquired related to employee share-based compensation plans
     (15 )     (24 )     (15 )     (24 )
Issuance of shares under stock plans
    
—
      
1
       —       2  
Balance, end of period
    
(7,436
)
    
(7,361
)
     (7,436 )     (7,361 )
                                 
Total shareholders’ equity
  
$
109,101
    
$
142,375
     $ 109,101     $ 142,375  
Dividends declared on common stock per share
  
$
—
    
$
—
     $ 0.02     $ 0.02  
Common shares outstanding:
                                
Balance, beginning of period
     20,403,576
       20,415,782
       20,378,576       20,415,243  
Net shares acquired under employee share-based compensation plans     (5,079 )     (5,479 )     (5,079 )     (5,479 )
Issuance of shares under stock plans
     —
       460
       —       999  
Restricted stock grants, net of forfeitures
     —
       —
       25,000       —  
Balance, end of period     20,398,497
       20,410,763
       20,398,497       20,410,763  

The accompanying notes are an integral part of these condensed consolidated financial statements.

6
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; In thousands)

   
Six Months Ended
June 30,
  
   
2022
    
2021
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income
  
$
1,163
    
$
2,531
  
Adjustments to reconcile net income to net cash used in operating activities:
                
(Additions to) amortization of acquisition costs, net
    
(3,546
)
    
1,149
  
Realized investment losses (gains), net
    
72
      
(171
)
Unrealized  (gains) losses on equity securities, net
    
2,673
      
(4,747
)
Earnings from equity method investees
     18       —  
Compensation expense related to share awards
    
65
      
134
  
Depreciation and amortization
    
465
      
510
  
Deferred income tax benefit
    
(694
)
    
(393
)
Increase in receivables, net
     (12,729 )    
(14,734
)
Increase in insurance reserves and policyholder funds
    
10,077
      
7,197
  
Decrease in accounts payable and accrued expenses
    
(2,104
)
    
(4,112
)
Other, net
    
124
      
(1,250
)
Net cash used in operating activities
    
(4,416
)
    
(13,886
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Proceeds from investments sold
    
221
      
14,546
  
Proceeds from investments matured, called or redeemed
    
6,241
      
7,064
  
Investments purchased
    
(11,398
)
    
(17,018
)
Additions to property and equipment
    
(68
)
    
(65
)
Net cash (used in) provided by investing activities
    
(5,004
)
    
4,527
  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Payment of dividends on common stock
     (408 )     (408 )
Proceeds from shares issued under stock plans
    
—
      
4
  
Treasury stock acquired — net employee share-based compensation
     (15 )     (24 )
Proceeds from revolving credit facility, net
     1,000       —  
Net cash provided by (used in) financing activities
    
577
      
(428
)
                 
Net decrease in cash and cash equivalents
    
(8,843
)
    
(9,787
)
Cash and cash equivalents at beginning of period
    
24,753
      
19,319
  
Cash and cash equivalents at end of period
  
$
15,910
    
$
9,532
  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                
Cash paid for interest
  
$
726
    
$
697
  
Cash paid for income taxes
   $ 899     $ 2,602  

The accompanying notes are an integral part of these condensed consolidated financial statements.

7
ATLANTIC AMERICAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Dollars in thousands, except per share amounts)
Note 1.
Basis of Presentation


The accompanying unaudited condensed consolidated financial statements include the accounts of Atlantic American Corporation (the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”). The Parent’s primary operating subsidiaries, American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”) and Bankers Fidelity Life Insurance Company and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”), operate in two principal business units. American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The unaudited condensed consolidated financial statements included herein and these related notes should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”). The Company’s financial condition and results of operations and cash flows as of and for the three and six month periods ended June 30, 2022 are not necessarily indicative of the financial condition or results of operations and cash flows that may be expected for the year ending December 31, 2022 or for any other future period.

The Company’s significant accounting policies have not changed materially from those set out in the 2021 Annual Report, except as noted below for the adoption of new accounting standards.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Note 2.
Recently Issued Accounting Standards


Future Adoption of New Accounting Standards

For more information regarding accounting standards that the Company has not yet adopted, see the “Recently Issued Accounting Standards - Future Adoption of New Accounting Standards” section of Note 1 of Notes to Consolidated Financial Statements in the 2021 Annual Report.
8
Note 3.
Investments
   

The following tables set forth the estimated fair value, gross unrealized gains, gross unrealized losses and cost or amortized cost of the Company’s investments in fixed maturities and equity securities, aggregated by type and industry, as of June 30, 2022 and December 31, 2021.
  

Fixed maturities were comprised of the following:
 
   
June 30, 2022
  
   
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Cost or
Amortized
Cost
  
Fixed maturities:
                        
Bonds:
                        
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  
$
45,353
    
$
—
    
$
3,968
    
$
49,321
  
Obligations of states and political subdivisions
     9,825


179


1,244


10,890
  
Corporate securities:
    












 
Utilities and telecom
     24,779


496


2,500


26,783
  
Financial services
     61,193


551


5,124


65,766
  
Other business – diversified
     31,375


108


3,350


34,617
  
Other consumer – diversified
     46,526


88


4,393


50,831
  
Total corporate securities
     163,873


1,243


15,367


177,997
  
Redeemable preferred stocks:
    












 
Other consumer – diversified
     231


38


—


193
  
Total redeemable preferred stocks
     231


38


—


193
  
Total fixed maturities
  
$
 219,282

$
 1,460

$
 20,579

$
 238,401
  
 
   
December 31, 2021
  
   
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Cost or
Amortized
Cost
  
Fixed maturities:
                        
Bonds:
                        
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  
$
50,298
    
$
763
    
$
416
    
$
49,951
  
Obligations of states and political subdivisions
     11,644       749
       —
       10,895
  
Corporate securities:
                                
Utilities and telecom
     29,717       2,961       44       26,800  
Financial services
     70,921       6,759       48       64,210  
Other business – diversified
     40,216       4,631       106       35,691  
Other consumer – diversified
     57,940       7,185       103       50,858  
Total corporate securities
     198,794       21,536       301       177,559  
Redeemable preferred stocks:
                                
Other consumer – diversified
     250       58       —       192  
Total redeemable preferred stocks
     250       58       —       192  
Total fixed maturities
   $
 260,986     $
 23,106     $
 717     $ 238,597  
  

Bonds having an amortized cost of $11,049 and $11,169 and included in the tables above were on deposit with insurance regulatory authorities as of June 30, 2022 and December 31, 2021, respectively, in accordance with statutory requirements. Additionally, bonds having an amortized cost of $7,872 and $5,371 and included in the tables above were pledged as collateral to the Federal Home Loan Bank of Atlanta ("FHLB") at June 30, 2022 and December 31, 2021, respectively.


9

Equity securities were comprised of the following:
   
   
June 30, 2022
        
   
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Cost
  
Equity securities:
                        
Common and non-redeemable preferred stocks:
                        
Financial services
  
$
 721

$
 448

$
 —

$
 273
  
Other business – diversified
     15,729


11,096


—


4,633
  
Total equity securities
  
$
 16,450

$
 11,544

$
 —

$
 4,906
  

   
December 31, 2021
  
   
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Cost
  
Equity securities:
                        
Common and non-redeemable preferred stocks:
                        
Financial services
  
$
 799

$
 525

$
 —

$
 274
  
Other business – diversified
     18,325


13,692


—


4,633
  
Total equity securities
  
$
 19,124

$
 14,217

$
 —

$
 4,907
  
    

The carrying value and amortized cost of the Company’s investments in fixed maturities at June 30, 2022 and December 31, 2021 by contractual maturity were as follows. Actual maturities may differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.
  
   
June 30, 2022
    
December 31, 2021
  
   
Carrying
Value
    
Amortized
Cost
    
Carrying
Value
    
Amortized
Cost
  
Due in one year or less
  
$
 4,414

$
 4,402

$
 1,734

$
 1,730
  
Due after one year through five years
     29,475


30,290


24,926


23,593
  
Due after five years through ten years
     58,472


62,750


73,725


68,338
  
Due after ten years
     92,483


103,117


122,045


106,181
  
Asset backed securities
     34,438


37,842


38,556


38,755
  
Totals
  
$
 219,282

$
 238,401

$
 260,986

$
 238,597
  
    

The following tables present the Company’s unrealized loss aging for securities by type and length of time the security was in a continuous unrealized loss position as of June 30, 2022 and December 31, 2021.
 
   
June 30, 2022
  
   
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
   $ 40,587     $ 3,139     $ 4,570     $ 829     $ 45,157     $ 3,968  
Obligations of states and political subdivisions
     6,114       1,244       —       —       6,114       1,244  
Corporate securities
     141,293
       14,203
       4,559
       1,164
       145,852
       15,367
  
Total temporarily impaired securities
   $ 187,994     $ 18,586     $ 9,129     $ 1,993     $ 197,123     $ 20,579  
   
   
December 31, 2021
  
   
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  
$
 30,141

$
 416

$
 —

$
 —

$
 30,141

$
 416
  
Corporate securities
     3,326


49


4,761


252


8,087


301
  
Total temporarily impaired securities
  
$
 33,467

$
 465

$
 4,761

$
 252

$
 38,228

$
 717
  
    

The evaluation for an other than temporary impairment (“OTTI”) 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. Potential risks and uncertainties include, among other things, 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 a potential impairment, the Company considers, among other factors, management’s intent and ability to hold the securities until price recovery, the nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit status.
 
10

There were no OTTI charges recorded during the three month and six month periods ended June 30, 2022 and 2021.



As of June 30, 2022 and December 31, 2021, there were 227 and 61 securities, respectively, in an unrealized loss position, which primarily included certain of the Company’s investments in fixed maturities within the financial services, other diversified business and other diversified consumer sectors. The increase in the number of securities in an unrealized loss position during the six month period ended June 30, 2022 was primarily attributable to a decline in market values in certain of the Company’s fixed maturity securities as a result of a rising interest rate environment. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, including those described above, the Company has deemed these securities to be temporarily impaired as of June 30, 2022.
    

The following tables summarize realized investment gains (losses) for the three month and six month periods ended June 30, 2022 and 2021.
   
   
Three Months Ended
June 30, 2022
  
   
Fixed
Maturities
    
Equity
Securities
    
Other
Invested
Assets
    
Total
  
Gains
  
$
—
    
$
—
    
$
—
    
$
—
  
Losses
     (43 )     —       (19 )     (62 )
Realized investment losses, net
  
$
(43
)
  
$
—
    
$
(19
)
  
$
(62
)
 
   
Three Months Ended
June 30, 2021
  
   
Fixed
Maturities
    
Equity
Securities
    
Other
Invested
Assets
    
Total
  
Gains
  
$
50
    
$
—
    
$
—
    
$
50
  
Losses
    
—
      
—
      
—
      
—
  
Realized investment gains, net
  
$
50
    
$
—
    
$
—
    
$
50
  
 
   
Six Months Ended
June 30, 2022
  
   
Fixed
Maturities
    
Equity
Securities
    
Other
Invested
Assets
    
Total
  
Gains
  
$
—
    
$
—
    
$
—
    
$
—
  
Losses
    
(53
)
    
—
      
(19
)
    
(72
)
Realized investment losses, net
  
$
(53
)
  
$
—
    
$
(19
)
  
$
(72
)

   
Six Months Ended
June 30, 2021
  
   
Fixed
Maturities
    
Equity
Securities
    
Other
Invested
Assets
    
Total
  
Gains   $ 171     $ —     $ —     $ 171  
Losses
    
—
      
—
      
—
      
—
  
Realized investment gains, net
  
$
171
    
$
—
    
$
—
    
$
171
  

11

The following table presents the portion of unrealized gains (losses) related to equity securities still held for the three month and six month periods ended June 30, 2022 and 2021.

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
    2022     2021
    2022
     2021  
Net realized and unrealized gains (losses) recognized during the period on equity securities
  
$
(4,866
)
  
$
4,003
     $ (2,673 )   $ 4,747  
Less: Net realized gains (losses) recognized during the period on equity securities sold during the period
    
—
      
—
       —       —  
Unrealized gains (losses) recognized during the reporting period on equity securities, net
  
$
(4,866
)
  
$
4,003
     $ (2,673 )   $ 4,747  
  

Variable Interest Entities
 

The Company holds passive interests in a number of entities that are considered to be variable interest entities (“VIEs”) under GAAP guidance. The Company’s VIE interests principally consist of interests in limited liability companies formed for the purpose of achieving diversified equity returns. The Company’s VIE interests, carried as a part of other invested assets, totaled $5,128 and $198 as of June 30, 2022 and December 31, 2021, respectively. The Company’s VIE interests, carried as a part of investment in unconsolidated trusts, totaled $1,238 as of June 30, 2022 and December 31, 2021.


The Company does not have power over the activities that most significantly impact the economic performance of these VIEs and thus is not the primary beneficiary. Therefore, the Company has not consolidated these VIEs. The Company’s involvement with each VIE is limited to its direct ownership interest in the VIE. The Company has no arrangements with any of the VIEs to provide other financial support to or on behalf of the VIE. The Company’s maximum loss exposure relative to these investments was limited to the carrying value of the Company’s investment in the VIEs, which amount to $6,366 and $1,436, as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022 and December 31, 2021, the Company had outstanding commitments totaling $5,872 and $1,997, respectively, whereby the Company is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses.

Note 4.
Fair Values of Financial Instruments


The estimated fair values have been determined by the Company using available market information from various market sources and appropriate valuation methodologies as of the respective dates. However, considerable judgment is necessary to interpret market data and to develop the estimates of fair value. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, the estimates presented herein are not necessarily indicative of the amounts which the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following describes the fair value hierarchy and provides information as to the extent to which the Company uses fair value to measure the value of its financial instruments and information about the inputs used to value those financial instruments. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad levels.

Level 1
Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. The Company’s financial instruments valued using Level 1 criteria include cash equivalents and exchange traded common stocks.

Level 2
Observable inputs, other than quoted prices included in Level 1, for an asset or liability or prices for similar assets or liabilities. The Company’s financial instruments valued using Level 2 criteria include significantly most of its fixed maturities, which consist of U.S. Treasury securities, U.S. Government securities, obligations of states and political subdivisions, and certain corporate fixed maturities, as well as its non-redeemable preferred stocks. In determining fair value measurements of its fixed maturities and non-redeemable preferred stocks using Level 2 criteria, the Company utilizes data from outside sources, including nationally recognized pricing services and broker/dealers.  Prices for the majority of the Company’s Level 2 fixed maturities and non-redeemable preferred stocks were determined using unadjusted prices received from pricing services that utilize models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Level 3
Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. With little or no observable market, the determination of fair values uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. The Company’s financial instruments valued using Level 3 criteria consist of two fixed maturity securities and one equity security. As of June 30, 2022 and December 31, 2021, the value of the fixed maturities valued using Level 3 criteria was $0 and $250, respectively. As of June 30, 2022 and December 31, 2021, the value of the equity security valued using Level 3 criteria was $156 and $157, respectively. The equity security is not traded and is valued at cost. The use of different criteria or assumptions regarding data may have yielded materially different valuations.

12

As of June 30, 2022, financial instruments carried at fair value were measured on a recurring basis as summarized below:
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Total
  
Assets:
                        
Fixed maturities
  
$
—
    
$
219,282
    
$
—
    
$
219,282
  
Equity securities
    
16,294
      
—
      
156
      
16,450
  
Cash equivalents
    
10,019
      
—
      
—
      
10,019
  
Total
  
$
26,313
    
$
219,282
    
$
156
    
$
245,751
  


As of December 31, 2021, financial instruments carried at fair value were measured on a recurring basis as summarized below:
   
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Total
  
Assets:
                        
Fixed maturities
  
$
250
    
$
260,486
    
$
250
    
$
260,986
  
Equity securities
    
18,967
      
—
      
157
      
19,124
  
Cash equivalents
    
12,713
      
—
      
—
      
12,713
  
Total
  
$
31,930
    
$
260,486
    
$
407
    
$
292,823
  


The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of the Company’s financial instruments as of June 30, 2022 and December 31, 2021.
       
June 30, 2022
    
December 31, 2021
  
 
Level in Fair
Value
Hierarchy (1)
    
Carrying
Amount
    
Estimated
Fair Value
    
Carrying
Amount
    
Estimated
Fair Value
  
Assets:
                            
Cash and cash equivalents
Level 1
    
$
15,910
    
$
15,910
    
$
24,753
    
$
24,753
  
Fixed maturities
  
 (1)     
219,282
      
219,282
      
260,986
      
260,986
  
Equity securities
(1) 
    
16,450
      
16,450
      
19,124
      
19,124
  
Other invested assets
Level 3
      
5,128
      
5,128
      
198
      
198
  
Policy loans
Level 2
      
1,799
      
1,799
      
1,858
      
1,858
  
Investment in unconsolidated trusts
Level 2
      
1,238
      
1,238
      
1,238
      
1,238
  
                                     
Liabilities:
                                    
Junior subordinated debentures, net
Level 2
      
33,738
      
32,489
      
33,738
      
33,728
  

(1)
See the aforementioned information for a description of the fair value hierarchy as well as a description of levels for classes of these financial assets.

Note 5.
Internal-Use Software


On March 3, 2021, the Company entered into a hosting arrangement through a service contract with a third party software solutions vendor to provide a suite of policy, billing, claim, and customer management services.  The software is managed, hosted, supported, and delivered as a cloud-based software service product offering (software-as-a-service).  The initial term of the arrangement is five years from the effective date with a renewal term of an additional five years.


Service fees related to the hosting arrangement are recorded as an expense in the Company’s condensed consolidated statement of operations as incurred.  Implementation expenses incurred related to third party professional and consulting services have been capitalized.  The Company will begin amortizing, on a straight-line basis over the expected ten year term of the hosting arrangement, when the software is substantially ready for its intended use.  The Company incurred and capitalized implementation costs of $500 during the year ended December 31, 2021, and $958 during the six months ended June 30, 2022.  As a result, the Company has capitalized $1,458 in implementation costs in its condensed consolidated balance sheet as of June 30, 2022.  The Company expects the software will be substantially ready for its intended use during 2023.  Accordingly, the Company has not recorded any amortization expense related to software implementation costs for the six months ended June 30, 2022.


13
Note 6.
Insurance Reserves for Losses and Claims


The roll-forward of insurance reserves for losses and claims for the six months ended June 30, 2022 and 2021 is as follows:
   
Six Months Ended
June 30,
  
   
2022
    
2021
  
Beginning insurance reserves for losses and claims, gross  
$
85,620
    
$
79,147
  
Less: Reinsurance recoverable on unpaid losses
    
(17,690
)
    
(17,600
)
Beginning insurance reserves for losses and claims, net
    
67,930
      
61,547
  
                 
Incurred related to:
                
Current accident year
    
66,260
      
63,836
  
Prior accident year development (1)
     (3,195 )(2)    
589
(3) 
Total incurred
    
63,065
      
64,425
  
                 
Paid related to:
                
Current accident year
    
32,630
      
33,295
  
Prior accident years
    
28,754
      
28,429
  
Total paid
    
61,384
      
61,724
  
Ending insurance reserves for losses and claims, net
    
69,611
      
64,248
  
Plus: Reinsurance recoverable on unpaid losses
    
17,487
      
17,225
  
Ending insurance reserves for losses and claims, gross
  
$
87,098
    
$
81,473
  

(1)
In establishing property and casualty reserves, the Company initially reserves for losses at the higher end of the reasonable range if no other value within the range is determined to be more probable. Selection of such an initial loss estimate is an attempt by management to give recognition that initial claims information received generally is not conclusive with respect to legal liability, is generally not comprehensive with respect to magnitude of loss and generally, based on historical experience, will develop more adversely as time passes and more information becomes available. Accordingly, the Company generally experiences reserve redundancies when analyzing the development of prior year losses in a current period.

(2)
Prior years’ development was primarily the result of favorable development in the property and casualty operations, as well as favorable development in the Medicare supplement line of business in the life and health operations.

(3)
Prior years’ development was primarily the result of unfavorable development in the loss and claim reserves for the Medicare supplement line of business in Bankers Fidelity. Partially offsetting the unfavorable development was favorable development in the property and casualty operations.


Following is a reconciliation of total incurred losses to total insurance benefits and losses incurred:
   
Six Months Ended
June 30,
  
   
2022
    
2021
  
Total incurred losses
  
$
63,065
    
$
64,425
  
Cash surrender value and matured endowments
    
1,154
      
1,692
  
Benefit reserve changes
    
(297
)
    
(1,142
)
Total insurance benefits and losses incurred
  
$
63,922
    
$
64,975
  

Note 7.
Credit Arrangements



The Company is preparing for the expected discontinuation of LIBOR by identifying, assessing and monitoring risks associated with LIBOR transition. Preparation includes taking steps to update operational processes to support alternative reference  rates and models, as well as evaluating legacy contracts for any changes that may be required, including the determination of applicable fallbacks.


14

Bank Debt



On May 12, 2021, the Company entered into a Revolving Credit Agreement (the “Credit Agreement”) with Truist Bank as the lender (the “Lender”). The Credit Agreement provides for an unsecured $10,000 revolving credit facility that matures on April 12, 2024. Under the Credit Agreement, the Company will pay interest on the unpaid principal balance of outstanding revolving loans at the LIBOR Rate (as defined in the Credit Agreement) plus 2.00%, subject to a LIBOR floor rate of 1.00%.

The Credit Agreement requires the Company to comply with certain covenants, including a debt to capital ratio that restricts the Company from incurring consolidated indebtedness that exceeds 35% of the Company’s consolidated capitalization at any time. The Credit Agreement also contains customary representations and warranties and events of default. Events of default include, among others, (a) the failure by the Company to pay any amounts owed under the Credit Agreement when due, (b) the failure to perform and not timely remedy certain covenants, (c) a change in control of the Company and (d) the occurrence of bankruptcy or insolvency events. Upon an event of default, the Lender may, among other things, declare all obligations under the Credit Agreement immediately due and payable and terminate the revolving commitments. As of June 30, 2022, the Company had outstanding borrowings of $1,000 under the Credit Agreement.

Junior Subordinated Debentures


The Company has two unconsolidated Connecticut statutory business trusts, which exist for the exclusive purposes of: (i) issuing trust preferred securities (“Trust Preferred Securities”) representing undivided beneficial interests in the assets of the trusts; (ii) investing the gross proceeds of the Trust Preferred Securities in junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of Atlantic American; and (iii) engaging in those activities necessary or incidental thereto.



The financial structure of each of Atlantic American Statutory Trust I and II as of June 30, 2022 was as follows:
   
Atlantic American
Statutory Trust I
    
Atlantic American
Statutory Trust II
  
JUNIOR SUBORDINATED DEBENTURES (1) (2)
            
Principal amount owed June 30, 2022
  
$
18,042
    
$
23,196
  
Less: Treasury debt (3)
    
—
      
(7,500
)
Net balance June 30, 2022
  
$
18,042
    
$
15,696
  
Net balance December 31, 2021
  
$
18,042
    
$
15,696
  
Coupon rate
  
LIBOR + 4.00%
    
LIBOR + 4.10%
  
Interest payable
  
Quarterly
    
Quarterly
  
Maturity date   December 4, 2032     May 15, 2033  
Redeemable by issuer
  
Yes
    
Yes
  
TRUST PREFERRED SECURITIES
                
Issuance date
  
December 4, 2002
    
May 15, 2003
  
Securities issued
    
17,500
      
22,500
  
Liquidation preference per security
  
$
1
    
$
1
  
Liquidation value
  
$
17,500
    
$
22,500
  
Coupon rate
  
LIBOR + 4.00%
     LIBOR + 4.10%  
Distribution payable
  
Quarterly
    
Quarterly
  
Distribution guaranteed by (4)
  
Atlantic American Corporation
    
Atlantic American Corporation
  

(1)
For each of the respective debentures, the Company has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures’ respective maturity dates. During any such period, interest will continue to accrue and the Company may not declare or pay any cash dividends or distributions on, or purchase, the Company’s common stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank equally with or junior to the Junior Subordinated Debentures. The Company has the right at any time to dissolve each of the trusts and cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Preferred Securities.

(2)
The Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all senior debt of the Parent and are effectively subordinated to all existing and future liabilities of its subsidiaries.

(3)
On August 4, 2014, the Company acquired $7,500 of the Junior Subordinated Debentures.

(4)
The Parent has guaranteed, on a subordinated basis, all of the obligations under the Trust Preferred Securities, including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation.

15
Note 8.
Earnings (Loss) Per Common Share



A reconciliation of the numerator and denominator used in the earnings (loss) per common share calculations is as follows:
   
Three Months Ended
June 30, 2022
  
   
Loss
    
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
  
Basic and Diluted Loss Per Common Share:
                
Net loss
   $ (1,679 )     20,402
      
Less preferred stock dividends
     (100 )     —
        
   Net loss applicable to common shareholders
   $ (1,779 )     20,402
   $ (0.09 )


   
Three Months Ended
June 30, 2021
  
   
Income
    
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
  
Basic Earnings Per Common Share:
                
Net income
   $ 2,962       20,414
  
 
Less preferred stock dividends
     (100 )
     —
  
 
   Net income applicable to common shareholders
     2,862
       20,414
   $ 0.14
  
Diluted Earnings Per Common Share:
                      
Effect of Series D preferred stock
     100
       1,378
        
Net income applicable to common shareholders
   $ 2,962       21,792
   $ 0.14
  

   
Six Months Ended
June 30, 2022
  
   
Income
    
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
  
Basic and Diluted Income Per Common Share:
                
Net income
   $ 1,163       20,391
    
 
Less preferred stock dividends
     (199 )     —
        
Net income applicable to common shareholders
   $ 964       20,391
   $ 0.05  

   
Six Months Ended
June 30, 2021
  
   
Income
    
Weighted
Average
Shares
(In thousands)
    
Per Share
Amount
  
Basic and Diluted Income Per Common Share:
                  
Net income
   $ 2,531     20,415
      
 
Less preferred stock dividends
     (199 )     —
          
Net income applicable to common shareholders
   $ 2,332     20,415
     $ 0.11


The assumed conversion of the Company’s Series D preferred stock was excluded from the earnings (loss) per common share calculation for all periods presented, except for the three month period ended June 30, 2021, since its impact would have been antidilutive.

Note 9.
Equity and Incentive Compensation Plan



On May 1, 2012, the Company’s shareholders approved the 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan authorizes the grant of up to 2,000,000 stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units and other awards for the purpose of providing the Company’s non-employee directors, consultants, officers and other employees incentives and rewards for superior performance. During the six month period ended June 30, 2022, a total of 25,000 restricted shares, with an estimated fair value of $69 were issued under the 2012 Plan.  During 2021, there were no restricted shares issued under the 2012 Plan. The estimated fair value of the restricted shares issued under the 2012 Plan during 2022 was based on the common stock price at date of grant. Stock grants are generally issued from treasury shares. Vesting of restricted shares generally occurs after a one to three year period following the date of grant. The Company accounts for forfeitures as they occur. There were no stock options granted or outstanding under the 2012 Plan in 2022 or 2021. Shares available for future grant under the 2012 Plan at December 31, 2021 were 935,200.  The 2012 Plan expired on April 30, 2022, ten years after its effective date. As such, no grants have been or will be made under the 2012 Plan on or after its expiration, but outstanding awards granted thereunder will continue in accordance with their terms.

16

On May 24, 2022, the Company’s shareholders approved the 2022 Equity and Incentive Compensation Plan (the “2022 Plan”). The 2022 Plan authorizes the grant of up to 3,000,000 stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units and other awards, and succeeded the 2012 Plan for the purpose of providing the Company’s non-employee directors, consultants, officers and other employees incentives and rewards for superior performance.  As of June 30, 2022, no shares have been issued under the 2022 Plan.

Note 10.
Income Taxes



A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and income tax expense (benefit) is as follows:
   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
    
2022
    
2021
  
Federal income tax provision at statutory rate of 21%
  
$
(444
)
  
$
788
    
$
353
    
$
673
  
Dividends-received deduction
    
(6
)
    
(5
)
    
(12
)
    
(14
)
Meals and entertainment
    
10
      
10
      
20
      
14
  
Vested stock and club dues
     —       (5 )     —       (5 )
Parking disallowance
    
4
      
4
      
8
      
8
  
Penalties and fines
     —       —       149       —  
Income tax expense (benefit)
  
$
(436
)
  
$
792
    
$
518
    
$
676
  



The components of income tax expense (benefit) were:
   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
    
2022