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, 2021

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 July 31, 2021 was 20,410,763.
 


ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

Part I.
Financial Information
 
     
Item 1.
2
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
17
     
Item 4.
23
     
Part II.
Other Information
 
     
Item 2.
24
     
Item 6.
24
     
  25

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

   
Unaudited
June 30,
2021
   
December 31,
2020
 
ASSETS
 
Cash and cash equivalents
 
$
9,532
   
$
19,319
 
Investments:
               
Fixed maturities, available-for-sale, at fair value (amortized cost: $232,141 and $222,461)
   
257,808
     
254,106
 
Equity securities, at fair value (cost: $4,833 and $6,393)
   
21,903
     
18,716
 
Other invested assets (cost: $3,765 and $3,765)
   
3,117
     
3,238
 
Policy loans
   
1,920
     
1,975
 
Real estate
   
38
     
38
 
Investment in unconsolidated trusts
   
1,238
     
1,238
 
Total investments
   
286,024
     
279,311
 
Receivables:
               
Reinsurance
   
29,149
     
29,086
 
Insurance premiums and other (net of allowance for doubtful accounts: $199 and $198)
   
29,505
     
27,512
 
Deferred income taxes, net
   
347
     
 
Deferred acquisition costs
   
38,462
     
39,611
 
Other assets
   
8,923
     
7,804
 
Intangibles
   
2,544
     
2,544
 
Total assets
 
$
404,486
   
$
405,187
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Insurance reserves and policyholder funds:
               
Future policy benefits
 
$
88,351
   
$
90,872
 
Unearned premiums
   
35,022
     
27,131
 
Losses and claims
   
81,473
     
79,147
 
Other policy liabilities
   
1,027
     
1,526
 
Total insurance reserves and policyholder funds
   
205,873
     
198,676
 
Accounts payable and accrued expenses
   
22,500
     
26,412
 
Deferred income taxes, net
   
     
1,301
 
Junior subordinated debenture obligations, net
   
33,738
     
33,738
 
Total liabilities
   
262,111
     
260,127
 
                 
Commitments and contingencies (Note 10)
           
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: 20,410,763 and 20,415,243
   
22,401
     
22,401
 
Additional paid-in capital
   
57,439
     
57,437
 
Retained earnings
   
49,714
     
47,790
 
Accumulated other comprehensive income
   
20,277
     
25,000
 
Unearned stock grant compensation
   
(150
)
   
(284
)
Treasury stock, at cost: 1,990,131 and 1,985,651 shares
   
(7,361
)
   
(7,339
)
Total shareholders’ equity
   
142,375
     
145,060
 
Total liabilities and shareholders’ equity
 
$
404,486
   
$
405,187
 

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

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,
 
   
2021
   
2020
    2021     2020  
Revenue:
                       
Insurance premiums, net
 
$
45,133
   
$
46,499
    $ 91,223     $ 92,049  
Net investment income
   
2,266
     
1,850
      4,379       3,889  
Realized investment gains, net
   
50
     
      171       249  
Unrealized gains (losses) on equity securities, net
   
4,003
     
1,355
      4,747       (7,100 )
Other income
   
5
     
33
      12       60  
Total revenue
   
51,457
     
49,737
      100,532       89,147  
                                 
Benefits and expenses:
                               
Insurance benefits and losses incurred
   
31,703
     
27,076
      64,975       60,659  
Commissions and underwriting expenses
   
12,179
     
10,854
      24,743       23,480  
Interest expense
   
347
     
414
      693       890  
Other expense
   
3,474
     
3,112
      6,914       6,064  
Total benefits and expenses
   
47,703
     
41,456
      97,325       91,093  
Income (loss) before income taxes
   
3,754
     
8,281
      3,207       (1,946 )
Income tax expense (benefit)
   
792
     
1,749
      676       (391 )
Net income (loss)
   
2,962
     
6,532
      2,531       (1,555 )
Preferred stock dividends
   
(100
)
   
(100
)
    (199 )     (199 )
Net income (loss) applicable to common shareholders
 
$
2,862
   
$
6,432
    $ 2,332     $ (1,754 )
Earnings (loss) per common share (basic)
  $ 0.14     $ 0.31     $ 0.11     $ (0.09 )
Earnings (loss) per common share (diluted)   $ 0.14     $ 0.30     $ 0.11     $ (0.09 )

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

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in thousands)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2021
   
2020
    2021     2020  
Net income (loss)
 
$
2,962
   
$
6,532
    $ 2,531     $ (1,555 )
Other comprehensive income (loss):
                               
Available-for-sale fixed maturity securities:
                               
Gross unrealized holding gain (loss) arising in the period
   
7,940
     
19,997
      (5,807 )     9,117  
Related income tax effect
   
(1,668
)
   
(4,200
)
    1,219       (1,915 )
Subtotal
   
6,272
     
15,797
      (4,588 )     7,202  
Less: reclassification adjustment for net realized gains included in net income (loss)
   
(50
)
   
      (171 )     (249 )
Related income tax effect
   
11
     
      36       52  
Subtotal
   
(39
)
   
      (135 )     (197 )
Total other comprehensive income (loss), net of tax
   
6,233
     
15,797
      (4,723 )     7,005  
Total comprehensive income (loss)
 
$
9,195
   
$
22,329
    $ (2,192 )   $ 5,450  

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

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,
 
   
2021
   
2020
    2021     2020  
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
   
57,438
     
57,777
      57,437       57,820  
Restricted stock grants, net of forfeitures
   
     
(333
)
          (377 )
Issuance of 999 and 2,741 shares, as of 2021 and 2020, respectively, under stock plans
   
1
     
(9
)
    2       (8 )
Balance, end of period
   
57,439
     
57,435
      57,439       57,435  
Retained earnings:
                               
Balance, beginning of period
   
46,852
     
27,834
      47,790       36,020  
Net income (loss)
   
2,962
     
6,532
      2,531       (1,555 )
Dividends on common stock
   
     
      (408 )      
Dividends accrued on preferred stock
   
(100
)
   
(100
)
    (199 )     (199 )
Balance, end of period
   
49,714
     
34,266
      49,714       34,266  
Accumulated other comprehensive income:
                               
Balance, beginning of period
   
14,044
     
1,667
      25,000       10,459  
Other comprehensive income (loss), net of tax
   
6,233
     
15,797
      (4,723 )     7,005  
Balance, end of period
   
20,277
     
17,464
      20,277       17,464  
Unearned Stock Grant Compensation:
                               
Balance, beginning of period
   
(217
)
   
(584
)
    (284 )     (781 )
Restricted stock grants, net of forfeitures
   
     
(37
)
          61  
Amortization of unearned compensation
   
67
     
155
      134       254  
Balance, end of period
   
(150
)
   
(466
)
    (150 )     (466 )
Treasury Stock:
                               
Balance, beginning of period
   
(7,338
)
   
(7,632
)
    (7,339 )     (7,580 )
Restricted stock grants, net of forfeitures
   
     
370
            316  
    Net shares acquired of 5,479 and 5,902 in 2021 and 2020, respectively related to employee share-based
      compensation plans
    (24 )     (10 )     (24 )     (10 )
Issuance of 999 and 2,741 shares, as of 2021 and 2020, respectively, under stock plans
   
1
     
11
      2       13  
Balance, end of period
   
(7,361
)
   
(7,261
)
    (7,361 )     (7,261 )
                                 
Total shareholders’ equity
 
$
142,375
   
$
123,894
    $ 142,375     $ 123,894  
Dividends declared on common stock per share
 
$
   
$
    $ 0.02     $  

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

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)

   
Six Months Ended
June 30,
 
   
2021
   
2020
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
2,531
   
$
(1,555
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
               
Amortization of (additions to) acquisition costs, net
   
1,149
     
(287
)
Realized investment gains, net
   
(171
)
   
(249
)
Unrealized  (gains) losses on equity securities, net
   
(4,747
)
   
7,100
 
Compensation expense related to share awards
   
134
     
254
 
Depreciation and amortization
   
510
     
503
 
Deferred income tax benefit
   
(393
)
   
(2,693
)
Increase in receivables, net
    (14,734 )    
(6,078
)
Increase in insurance reserves and policyholder funds
   
7,197
     
2,805
 
Decrease in accounts payable and accrued expenses
   
(4,112
)
   
(393
)
Other, net
   
(1,250
)
   
1,151
 
Net cash (used in) provided by operating activities
   
(13,886
)
   
558
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from investments sold
   
14,546
     
7,448
 
Proceeds from investments matured, called or redeemed
   
7,064
     
3,031
 
Investments purchased
   
(17,018
)
   
(7,411
)
Additions to property and equipment
   
(65
)
   
(160
)
Net cash provided by investing activities
   
4,527
     
2,908
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
    Payment of dividends on common stock
    (408 )      
Proceeds from shares issued under stock plans
   
4
     
5
 
Treasury stock acquired — net employee share-based compensation
    (24 )     (10 )
Net cash used in financing activities
   
(428
)
   
(5
)
                 
Net (decrease) increase in cash and cash equivalents
   
(9,787
)
   
3,461
 
Cash and cash equivalents at beginning of period
   
19,319
     
12,893
 
Cash and cash equivalents at end of period
 
$
9,532
   
$
16,354
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
 
$
697
   
$
944
 
Cash paid for income taxes
   $ 2,602      $  

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

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, 2020 (the “2020 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, 2021 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, 2021 or for any other future period.



The Company’s significant accounting policies have not changed materially from those set out in the 2020 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.



On March 11, 2020, the World Health Organization declared the Novel Coronavirus (“COVID-19”) outbreak a global pandemic. The impact of COVID-19 and related actions to attempt to control its spread began to impact the Company’s business operations in March 2020, and we expect that the pandemic, actions that have been or will be taken in response to it and its overall impact on the economy, will continue to have an effect on our business operations and our operating results. The Company’s insurance subsidiaries may experience difficulties collecting premiums from some policyholders, and policyholders with financial difficulties may decide not to renew insurance policies with the Company.  Although the ultimate impact cannot be predicted with certainty at this time, the Company’s insurance subsidiaries do not expect a direct material impact from the outbreak of COVID-19 in terms of increased claims and losses, but that may change as more information becomes available.  In addition, economic uncertainty related to COVID-19 has led to, and may continue to create, increased volatility in the investment markets.  The impact of COVID-19 on the economy and on the Company continues to evolve and its future effects are uncertain. The Company continues to monitor the effects and risks of COVID-19 to assess its impact on the Company’s business, financial condition, results of operations, liquidity and capital position.

Note 2.
Recently Issued Accounting Standards

Adoption of New Accounting Standards


Income Taxes – Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2020, although earlier adoption is permitted. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.


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 2020 Annual Report.
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, 2021 and December 31, 2020.
  

Fixed maturities were comprised of the following:
 
   
June 30, 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
 
$
37,393
   
$
887
   
$
156
   
$
36,662
 
Obligations of states and political subdivisions
   
11,843
     
943
     
     
10,900
 
Corporate securities:
                               
Utilities and telecom
   
30,813
     
3,363
     
29
     
27,479
 
Financial services
   
77,409
     
8,032
     
63
     
69,440
 
Other business – diversified
   
40,936
     
5,094
     
89
     
35,931
 
Other consumer – diversified
   
59,164
     
7,723
     
96
     
51,537
 
Total corporate securities
   
208,322
     
24,212
     
277
     
184,387
 
Redeemable preferred stocks:
                               
Other consumer – diversified
   
250
     
58
     
     
192
 
Total redeemable preferred stocks
   
250
     
58
     
     
192
 
Total fixed maturities
 
$
257,808
   
$
26,100
   
$
433
   
$
232,141
 
 
   
December 31, 2020
 
   
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
 
$
30,762
   
$
1,381
   
$
26
   
$
29,407
 
Obligations of states and political subdivisions
   
11,802
     
898
     
     
10,904
 
Corporate securities:
                               
Utilities and telecom
   
30,359
     
4,423
     
     
25,936
 
Financial services
   
78,258
     
9,811
     
6
     
68,453
 
Other business – diversified
   
41,145
     
5,689
     
15
     
35,471
 
Other consumer – diversified
   
61,530
     
9,479
     
47
     
52,098
 
Total corporate securities
   
211,292
     
29,402
     
68
     
181,958
 
Redeemable preferred stocks:
                               
Other consumer – diversified
   
250
     
58
     
     
192
 
Total redeemable preferred stocks
   
250
     
58
     
     
192
 
Total fixed maturities
 
$
254,106
   
$
31,739
   
$
94
   
$
222,461
 
  

Bonds having an amortized cost of $10,923 and $10,670 and included in the tables above were on deposit with insurance regulatory authorities as of June 30, 2021 and December 31, 2020, respectively, in accordance with statutory requirements. Additionally, bonds having an amortized cost of $6,394 and $1,997 and included in the tables above were pledged as collateral to FHLB at June 30, 2021 and December 31, 2020, respectively.


Equity securities were comprised of the following:
   
   
June 30, 2021
       
   
Estimated
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Cost
 
Equity securities:
                       
Common and non-redeemable preferred stocks:
                       
Financial services
 
$
681
   
$
481
   
$
   
$
200
 
Other business – diversified
   
21,222
     
16,589
     
     
4,633
 
Total equity securities
 
$
21,903
   
$
17,070
   
$
   
$
4,833
 

   
December 31, 2020
 
   
Estimated
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Cost
 
Equity securities:
                       
Common and non-redeemable preferred stocks:
                       
Financial services
 
$
2,111
    $
351
    $
    $
1,760
 
Other business – diversified
   
16,605
     
11,972
     
     
4,633
 
Total equity securities
 
$
18,716
   
$
12,323
   
$
   
$
6,393
 
    

The carrying value and amortized cost of the Company’s investments in fixed maturities at June 30, 2021 and December 31, 2020 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, 2021
   
December 31, 2020
 
   
Carrying
Value
   
Amortized
Cost
   
Carrying
Value
   
Amortized
Cost
 
Due in one year or less
 
$
2,520
   
$
2,501
   
$
2,041
   
$
2,015
 
Due after one year through five years
   
22,991
     
21,415
     
18,373
     
17,039
 
Due after five years through ten years
   
83,491
     
76,075
     
89,892
     
79,993
 
Due after ten years
   
123,313
     
106,754
     
124,609
     
104,527
 
Asset backed securities
   
25,493
     
25,396
     
19,191
     
18,887
 
Totals
 
$
257,808
   
$
232,141
   
$
254,106
   
$
222,461
 
    

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, 2021 and December 31, 2020.
 
   
June 30, 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
 
$
12,341
   
$
156
   
$
   
$
   
$
12,341
   
$
156
 
Corporate securities
   
7,944
     
277
     
     
     
7,944
     
277
 
Total temporarily impaired securities
 
$
20,285
   
$
433
   
$
   
$
   
$
20,285
   
$
433
 
   
   
December 31, 2020
 
   
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
 
$
7,045
   
$
26
   
$
   
$
   
$
7,045
   
$
26
 
Corporate securities
   
4,602
     
68
     
     
     
4,602
     
68
 
Total temporarily impaired securities
 
$
11,647
   
$
94
   
$
   
$
   
$
11,647
   
$
94
 
     

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.
   

There were no OTTI charges recorded during the three month and six month periods ended June 30, 2021 and 2020.



As of June 30, 2021 and December 31, 2020, there were twenty-six and twenty 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, 2021, 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, 2021.
    

The following tables summarize realized investment gains for the three month period ended June 30, 2021 and the six month periods ended June 30, 2021 and 2020. There were no realized investment gains (losses) in the three month period ended June 30, 2020.
   
   
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, 2021
 
   
Fixed
Maturities
   
Equity
Securities
   
Other
Invested
Assets
   
Total
 
Gains
 
$
171
   
$

   
$

   
$
171
 
Losses
   

     

     

     

 
Realized investment gains, net
 
$
171
   
$

   
$

   
$
171
 

   
Six Months Ended
June 30, 2020
 
   
Fixed
Maturities
   
Equity
Securities
   
Other
Invested
Assets
   
Total
 
Gains    $ 249
     $
     $
     $ 249
 
Losses
   
     
     
     
 
Realized investment gains, net
 
$
249
   
$
   
$
   
$
249
 


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, 2021 and 2020.

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
    2021    
2020
    2021     2020
 
Net realized and unrealized gains (losses) recognized during the period on equity securities
 
$
4,003
   
$
1,355
    $ 4,747     $ (7,100 )
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
 
$
4,003
   
$
1,355
    $ 4,747     $ (7,100 )
   

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 partnerships and 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 $3,117 and $3,238 as of June 30, 2021 and December 31, 2020, respectively. The Company’s VIE interests, carried as a part of investment in unconsolidated trusts, totaled $1,238 as of June 30, 2021 and December 31, 2020.


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 $4,355 and $4,476, as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021 and December 31, 2020, the Company had outstanding commitments totaling $1,997, 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, 2021 and December 31, 2020, the value of the fixed maturities valued using Level 3 criteria was $124 and $0, respectively. As of June 30, 2021 and December 31, 2020, the value of the equity security valued using Level 3 criteria was $83 and $143, respectively. The equity security is not traded and valued at cost. The use of different criteria or assumptions regarding data may have yielded materially different valuations.


As of June 30, 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
 
$
   
$
257,684
   
$
124
   
$
257,808
 
Equity securities
   
21,820
     
     
83
     
21,903
 
Cash equivalents
   
7,121
     
     
     
7,121
 
Total
 
$
28,941
   
$
257,684
   
$
207
   
$
286,832
 


As of December 31, 2020, 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
 
$
   
$
254,106
   
$
   
$
254,106
 
Equity securities
   
18,573
     
     
143
     
18,716
 
Cash equivalents
   
12,010
     
     
     
12,010
 
Total
 
$
30,583
   
$
254,106
   
$
143
   
$
284,832
 


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, 2021 and December 31, 2020.

         
June 30, 2021
   
December 31, 2020
 
   
Level in Fair
Value
Hierarchy (1)
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
Assets:
                             
Cash and cash equivalents
 
Level 1
   
$
9,532
   
$
9,532
   
$
19,319
   
$
19,319
 
Fixed maturities
    (1)

   
257,808
     
257,808
     
254,106
     
254,106
 
Equity securities
    (1)
 
   
21,903
     
21,903
     
18,716
     
18,716
 
Other invested assets
 
Level 3
     
3,117
     
3,117
     
3,238
     
3,238
 
Policy loans
 
Level 2
     
1,920
     
1,920
     
1,975
     
1,975
 
Investment in unconsolidated trusts
 
Level 2
     
1,238
     
1,238
     
1,238
     
1,238
 
                                         
Liabilities:
                                       
Junior subordinated debentures, net
 
Level 2
     
33,738
     
34,259
     
33,738
     
32,297
 

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

Note 5.
Liabilities for Unpaid Losses, Claims and Loss Adjustment Expenses


The roll-forward of liabilities for unpaid losses, claims and loss adjustment expenses for the six months ended June 30, 2021 and 2020 is as follows:

   
Six Months Ended
June 30,
 
   
2021
   
2020
 
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
79,147
   
$
81,448
 
Less: Reinsurance recoverable on unpaid losses
   
(17,600
)
   
(18,339
)
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
   
61,547
     
63,109
 
                 
Incurred related to:
               
Current accident year
   
63,836
     
62,262
 
                 
Prior accident year development (1)
    589
(2)    
(2,302
)(3)
Total incurred
   
64,425
     
59,960
 
                 
Paid related to:
               
Current accident year
   
33,295
     
33,911
 
Prior accident years
   
28,429
     
29,587
 
Total paid
   
61,724
     
63,498
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
   
64,248
     
59,571
 
Plus: Reinsurance recoverable on unpaid losses
   
17,225
     
16,927
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
81,473
   
$
76,498
 

(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 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.

(3)
Prior years’ development was primarily the result of favorable development in the loss and claim reserves for the Medicare supplement line of business in Bankers Fidelity.  Rate increases on existing business and the resultant improvement in rate adequacy was more favorable than expected.


Following is a reconciliation of total incurred losses to total insurance benefits and losses incurred:

   
Six Months Ended
June 30,
 
   
2021
   
2020
 
Total incurred losses
 
$
64,425
   
$
59,960
 
Cash surrender value and matured endowments
   
1,692
     
697
 
Benefit reserve changes
   
(1,142
)
   
2
Total insurance benefits and losses incurred
 
$
64,975
   
$
60,659
 

Note 6.
Credit Arrangements


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 million 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, 2021, the Company does not have any outstanding borrowings 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, 2021 was as follows:

   
Atlantic American
Statutory Trust I
   
Atlantic American
Statutory Trust II
 
JUNIOR SUBORDINATED DEBENTURES (1) (2)
           
Principal amount owed June 30, 2021
 
$
18,042
   
$
23,196
 
Less: Treasury debt (3)
   
     
(7,500
)
Net balance June 30, 2021
 
$
18,042
   
$
15,696
 
Net balance December 31, 2020
 
$
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 20consecutive 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.

Note 7.
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, 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
 


   
Three Months Ended
June 30, 2020
 
   
Income
   
Weighted
Average
Shares
(In thousands)
 
Per Share
Amount
 
Basic Earnings Per Common Share:
               
Net income
  $ 6,532       20,440
 
 
Less preferred stock dividends
    (100 )
   
 
 
   Net income applicable to common shareholders
    6,432
      20,440
    $ 0.31
 
Diluted Earnings Per Common Share:
                       
Effect of Series D preferred stock
    100
      1,378
         
Net income applicable to common shareholders
  $ 6,532       21,818
    $ 0.30
 

   
Six Months Ended
June 30, 2021
 
   
Income
   
Weighted
Average
Shares
(In thousands)
   
Per Share
Amount
 
Basic and Diluted Earnings 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  



   
Six Months Ended
June 30, 2020
 
   
Loss
   
Weighted
Average
Shares
(In thousands)
   
Per Share
Amount
 
Basic and Diluted Loss Per Common Share:
                 
Net loss
  $ (1,555 )     20,455
     
 
Less preferred stock dividends
    (199 )    
         
Net loss applicable to common shareholders
  $ (1,754 )     20,455
    $ (0.09 )



The assumed conversion of the Company’s Series D preferred stock was included in the earnings (loss) per common share calculation for the three month periods ended June 30, 2021 and 2020.  The assumed conversion of the Company’s Series D preferred stock was excluded from the earnings (loss) per common share calculation for the six month periods ended June 30, 2021 and 2020 since its impact would have been antidilutive.

Note 8.
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,
 
   
2021
   
2020
   
2021
   
2020
 
Federal income tax provision at statutory rate of 21%
 
$
788
   
$
1,739
   
$
673
   
$
(409
)
Dividends-received deduction
   
(5
)
   
(3
)
   
(14
)
   
(6
)
Meals & entertainment
   
10
     
6
     
14
     
13
 
Vested stock & club dues
   
(5
)
   
3
     
(5
)
   
3
 
Parking disallowance
   
4
     
4
     
8
     
8
 
Income tax expense (benefit)
 
$
792
   
$
1,749
   
$
676
   
$
(391
)



The components of income tax expense (benefit) were:


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2021
   
2020
   
2021
   
2020
 
Current – Federal
 
$
693
   
$
2,173
   
$
1,069
   
$
2,302
 
Deferred – Federal
   
99
     
(424
)
   
(393
)
   
(2,693
)
Total
 
$
792
   
$
1,749
   
$
676
   
$
(391
)



In addition, the Company determined there were no significant tax implications as a result of the CARES Act.

Note 9.
Leases


The Company has two operating lease agreements, each for the use of office space in the ordinary course of business. The first lease renews annually on an automatic basis and based on original assumptions, management is reasonably certain to exercise the renewal option through 2026. The original term of the second lease was ten years and amended in January 2017 to provide for an additional seven years, with a termination date on September 30, 2026. The rate used in determining the present value of lease payments is based upon an estimate of the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.



These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease. Lease expense reported for the six months ended June 30, 2021 and June 30, 2020 was $507.



Additional information regarding the Company’s real estate operating leases is as follows:

   
Six Months Ended
June 30,
 
Other information on operating leases:
 
2021
   
2020
 
Cash payments included in the measurement of lease liabilities reported in operating cash flows
 
$
504
   
$
475
 
Right-of-use assets included in other assets on the condensed consolidated balance sheet
   
4,493
     
5,159
 
Weighted average discount rate
   
6.8
%
   
6.8
%
Weighted average remaining lease term in years
 
5.4 years
   
6.4 years
 


The following table presents maturities and present value of the Company’s lease liabilities:

   
Lease Liability
 
Remainder of 2021
 
$
511
 
2022
   
1,031
 
2023
   
1,048
 
2024
   
1,065
 
2025
   
1,083
 
Thereafter
   
942
 
Total undiscounted lease payments
   
5,680
 
Less: present value adjustment
   
948
 
Operating lease liability included in accounts payable and accrued expenses on the condensed consolidated balance sheet
 
$
4,732
 


As of June 30, 2021, the Company has no operating leases that have not yet commenced.

Note 10.
Commitments and Contingencies


From time to time, the Company is, and expects to continue to be, involved in various claims and lawsuits incidental to and in the ordinary course of its businesses. In the opinion of management, any such known claims are not expected to have a material effect on the financial condition or results of operations of the Company.

Note 11.
Segment Information
   

The Parent’s primary insurance subsidiaries, American Southern and Bankers Fidelity, operate in two principal business units, each focusing on specific products. American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market. Each business unit is managed independently and is evaluated on its individual performance. The following sets forth the assets, revenue and income (loss) before income taxes for each business unit as of and for the periods ended 2021 and 2020.
 
Assets
 
June 30,
2021
   
December 31,
2020
 
American Southern
 
$
162,761
   
$
158,808
 
Bankers Fidelity
   
230,595
     
236,197
 
Corporate and Other
   
11,130
     
10,182
 
Total assets
 
$
404,486
   
$
405,187
 


Revenues
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2021
    2020    
2021
    2020  
American Southern
 
$
17,522
   
$
16,896
    $ 35,048     $ 32,123  
Bankers Fidelity
   
33,680
     
32,871
      65,220       57,744  
Corporate and Other
   
255
     
(30
)
    264       (720 )
Total revenue
 
$
51,457
   
$
49,737
    $ 100,532     $ 89,147  
 
 

 Income (Loss) Before Income Taxes  
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 

 
2021
   
2020
   
2021
    2020  
American Southern
 
$
2,073
   
$
2,087
    $ 3,563     $ 2,965  
Bankers Fidelity
   
3,377
     
8,039
      3,511       (742 )
Corporate and Other
   
(1,696
)
   
(1,845
)
    (3,867 )     (4,169 )
Income (loss) before income taxes
 
$
3,754
   
$
8,281
    $ 3,207     $ (1,946 )
     

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Overview

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 with the Parent, the “Company”) as of and for the three month and six month periods ended June 30, 2021. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere herein, as well as with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”).

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 and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”). Each operating company is managed separately, offers different products and is evaluated on its individual performance.

Recent Events and Outlook

On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic.  In March 2020, the impact of COVID-19 and related actions to attempt to control its spread began to impact our business operations, and we expect that the pandemic, actions that have been or will be taken in response to it and its overall impact on the economy, will continue to have an effect on our business operations and our operating results. See “Expected Impact of COVID-19 on the Company’s Financial Condition and Results of Operations.”

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates. The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company’s critical accounting policies and the resultant estimates considered most significant by management are disclosed in the 2020 Annual Report. Except as disclosed in Note 2 of Notes to Condensed Consolidated Financial Statements, the Company’s critical accounting policies are consistent with those disclosed in the 2020 Annual Report.

Overall Corporate Results

The following presents the Company’s revenue, expenses and net income (loss) for the three month and six month periods ended June 30, 2021 and the comparable periods in 2020:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2021
   
2020
   
2021
   
2020
 
                         
Insurance premiums, net
 
$
45,133
   
$
46,499
   
$
91,223
   
$
92,049
 
Net investment income
   
2,266
     
1,850
     
4,379
     
3,889
 
Realized investment gains, net
   
50
     
     
171
     
249
 
Unrealized gains (losses) on equity securities, net
   
4,003
     
1,355
     
4,747
     
(7,100
)
Other income
   
5
     
33
     
12
     
60
 
Total revenue
   
51,457
     
49,737
     
100,532
     
89,147
 
Insurance benefits and losses incurred
   
31,703
     
27,076
     
64,975
     
60,659
 
Commissions and underwriting expenses
   
12,179
     
10,854
     
24,743
     
23,480
 
Interest expense
   
347
     
414
     
693
     
890
 
Other expense
   
3,474
     
3,112
     
6,914
     
6,064
 
Total benefits and expenses
   
47,703
     
41,456
     
97,325
     
91,093
 
Income (loss) before income taxes
 
$
3,754
   
$
8,281
   
$
3,207
   
$
(1,946
)
Net income (loss)
 
$
2,962
   
$
6,532
   
$
2,531
   
$
(1,555
)

Management also considers and evaluates performance by analyzing the non-GAAP measure operating income (loss), and believes it is a useful metric for investors, potential investors, securities analysts and others because it isolates the “core” operating results of the Company before considering certain items that are either beyond the control of management (such as taxes, which are subject to timing, regulatory and rate changes depending on the timing of the associated revenues and expenses) or are not expected to regularly impact the Company’s operational results (such as any realized and unrealized investment gains, which are not a part of the Company’s primary operations and are, to a limited extent, subject to discretion in terms of timing of realization).

A reconciliation of net income (loss) to operating income (loss) for the three month and six month periods ended June 30, 2021 and the comparable periods in 2020 is as follows:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
Reconciliation of Non-GAAP Financial Measure
 
2021
   
2020
   
2021
   
2020
 
   
(In thousands)
 
Net income (loss)
 
$
2,962
   
$
6,532
   
$
2,531
   
$
(1,555
)
Income tax expense (benefit)
   
792
     
1,749
     
676
     
(391
)
Realized investment gains, net
   
(50
)
   
     
(171
)
   
(249
)
Unrealized (gains) losses on equity securities, net
   
(4,003
)
   
(1,355
)
   
(4,747
)
   
7,100
 
Non-GAAP operating income (loss)
 
$
(299
)
 
$
6,926
   
$
(1,711
)
 
$
4,905
 

On a consolidated basis, the Company had net income of $3.0 million, or $0.14 per diluted share, for the three month period ended June 30, 2021, compared to net income of $6.5 million, or $0.30 per diluted share, for the three month period ended June 30, 2020.  The Company had net income of $2.5 million, or $0.11 per diluted share, for the six month period ended June 30, 2021, compared to net loss of $1.6 million, or $0.09 per diluted share, for the six month period ended June 30, 2020.  For the three month period ended June 30, 2021, premium revenue decreased $1.4 million, or 2.9%, to $45.1 million from $46.5 million in the comparable period in 2020. For the six month period ended June 30, 2021, premium revenue decreased $0.8 million, or 0.9%, to $91.2 million from $92.0 million in the comparable period in 2020. The decrease in premium revenue was primarily attributable to a decrease in the Medicare supplement line of business in the life and health operations.

Operating income decreased $7.2 million in the three month period ended June 30, 2021 from the three month period ended June 30, 2020.  For the six month period ended June 30, 2021, operating income decreased $6.6 million from the comparable period in 2020.  The decrease in operating income was primarily due to less favorable loss experience in the life and health operations, resulting from a significant increase in the number of incurred claims within the Medicare supplement line of business.  During 2021, utilization of Medicare supplement insurance benefits has increased, returning to historical averages relative to the exceptionally low utilization experienced after the onset of the COVID-19 pandemic when many policyholders were sheltered in place.

A more detailed analysis of the individual operating segments and other corporate activities follows.

American Southern

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2021 and the comparable periods in 2020:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2021
   
2020