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
    
2021
  
Current – Federal
  
$
1,144
    
$
693
    
$
1,212
    
$
1,069
  
Deferred – Federal
    
(1,580
)
    
99
      
(694
)
    
(393
)
Total
  
$
(436
)
  
$
792
    
$
518
    
$
676
  

Note 11.
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, 2022 and June 30, 2021 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:
  
2022
   
2021
 
Cash payments included in the measurement of lease liabilities reported in operating cash flows
  
$
512
    
$
504
  
Right-of-use assets included in other assets on the condensed consolidated balance sheet
    
3,781
      
4,493
  
Weighted average discount rate
    
6.8
%
    
6.8
%
Weighted average remaining lease term in years
  
4.4 years
    
5.4 years
  

17

The following table presents maturities and present value of the Company’s lease liabilities:
    Lease Liability 
 
Remainder of 2022
  
$
519
  
2023
    
1,048
  
2024
    
1,065
  
2025
    
1,083
  
2026
    
942
  
Thereafter
    
—
  
Total undiscounted lease payments
    
4,657
  
Less: present value adjustment
    
647
  
Operating lease liability included in accounts payable and accrued expenses on the condensed consolidated balance sheet
  
$
4,010
  


As of June 30, 2022, the Company has no operating leases that have not yet commenced.
Note 12.
Commitments and Contingencies

Litigation



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 business. 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.

Regulatory Matters

Like all domestic insurance companies, the Company’s insurance subsidiaries are subject to regulation and supervision in the jurisdictions in which they do business.  Statutes typically delegate regulatory, supervisory, and administrative powers to state insurance commissioners.  From time to time, and in the ordinary course of business, the Company receives notices and inquiries from state insurance departments with respect to various matters.



In November 2021, the Company was made aware by a state regulatory authority of alleged violations relating to certain sales of insurance policies and that the Company may be subject to regulatory action, including fines.  The Company agreed to settle the matter through a consent order which included a penalty that was recorded in the financial statements in March 2022.

Note 13.
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 2022 and 2021.
 
Assets
  
June 30,
2022
   
December 31,
2021
 
American Southern
  
$
153,533
    
$
161,788
  
Bankers Fidelity
    
202,864
      
227,395
  
Corporate and Other
    
22,877
      
13,103
  
Total assets
  
$
379,274
    
$
402,286
  


Revenues
  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
     2021    
2022
     2021  
American Southern
  
$
19,496
    
$
17,522
     $ 38,002     $ 35,048  
Bankers Fidelity
    
25,569
      
33,680
       58,458       65,220  
Corporate and Other
    
(396
)
    
255
       (183 )     264  
Total revenue
  
$
44,669
    
$
51,457
     $ 96,277     $ 100,532  
 
 Income (Loss) Before Income Taxes  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  

 
2022
    
2021
    
2022
     2021  
American Southern
  
$
682
    
$
2,073
     $ 2,767     $ 3,563  
Bankers Fidelity
    
(517
)
    
3,377
       2,934       3,511  
Corporate and Other
    
(2,280
)
    
(1,696
)
     (4,020 )     (3,867 )
Income (loss) before income taxes
  
$
(2,115
)
  
$
3,754
     $ 1,681     $ 3,207  
     
18
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, 2022. 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, 2021 (the “2021 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.

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 2021 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 2021 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, 2022 and the comparable periods in 2021:

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
    
2022
    
2021
  
                         
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
  
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
  
Net income (loss)
  
$
(1,679
)
  
$
2,962
    
$
1,163
    
$
2,531
  

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).

19
A reconciliation of net income (loss) to operating income (loss) for the three month and six month periods ended June 30, 2022 and the comparable periods in 2021 is as follows:

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
Reconciliation of Non-GAAP Financial Measure
  
2022
    
2021
    
2022
    
2021
  
   
(In thousands)
  
Net income (loss)
  
$
(1,679
)
  
$
2,962
    
$
1,163
    
$
2,531
  
Income tax expense (benefit)
    
(436
)
    
792
      
518
      
676
  
Realized investment (gains) losses, net
    
62
      
(50
)
    
72
      
(171
)
Unrealized (gains) losses on equity securities, net
    
4,866
      
(4,003
)
    
2,673
      
(4,747
)
Non-GAAP operating income (loss)
  
$
2,813
    
$
(299
)
  
$
4,426
    
$
(1,711
)

On a consolidated basis, the Company had net loss of $1.7 million, or $0.09 per diluted share, for the three month period ended June 30, 2022, compared to net income of $3.0 million, or $0.14 per diluted share, for the three month period ended June 30, 2021.  The Company had net income of $1.2 million, or $0.05 per diluted share, for the six month period ended June 30, 2022, compared to net income of $2.5 million, or $0.11 per diluted share, for the six month period ended June 30, 2021. The decrease in net income for the three month and six month periods ended June 30, 2022 was primarily attributable to the decrease in unrealized gains of $8.9 million and $7.4 million, respectively, over the comparable periods in 2021.

For the three month period ended June 30, 2022, premium revenue increased $1.9 million, or 4.3%, to $47.1 million from $45.1 million in the comparable period in 2021.  For the six month period ended June 30, 2022, premium revenue increased $2.9 million, or 3.2%, to $94.1 million from $91.2 million in the comparable period in 2021.  The increase in premium revenue was primarily attributable to an increase in business writings and price increases in certain programs within the automobile physical damage and automobile liability lines of business in the property and casualty operations.  Also contributing to this increase in premium revenue was an increase in the life insurance premiums in the life and health operations.  Partially offsetting this increase was a decrease in the Medicare supplement line of business in the life and health operations.

Operating income increased $3.1 million in the three month period ended June 30, 2022 from the three month period ended June 30, 2021.  For the six month period ended June 30, 2022, operating income increased $6.1 million from the comparable period in 2021.  The increase in operating income was primarily due to favorable loss experience in the life and health operations, resulting from an increase in earned premium within the group lines of business coupled with a decrease in the number of claims incurred in the Medicare supplement line of business.

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, 2022 and the comparable periods in 2021:

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
    
2022
    
2021
  
   
(Dollars in thousands)
  
Gross written premiums
  
$
39,600
    
$
33,053
    
$
51,158
    
$
44,515
  
Ceded premiums
    
(1,722
)
    
(1,565
)
    
(3,339
)
    
(3,249
)
Net written premiums
  
$
37,878
    
$
31,488
    
$
47,819
    
$
41,266
  
Net earned premiums
  
$
18,769
    
$
16,362
    
$
36,112
    
$
32,977
  
Insurance benefits and losses incurred
    
14,040
      
10,157
      
24,518
      
21,906
  
Commissions and underwriting expenses
    
4,774
      
5,293
      
10,717
      
9,579
  
Underwriting income
  
$
(45
)
  
$
912
    
$
877
    
$
1,492
  
Loss ratio
    
74.8
%
    
62.1
%
    
67.9
%
    
66.4
%
Expense ratio
    
25.4
      
32.3
      
29.7
      
29.0
  
Combined ratio
    
100.2
%
    
94.4
%
    
97.6
%
    
95.4
%

Gross written premiums at American Southern increased $6.5 million, or 19.8%, during the three month period ended June 30, 2022 and $6.6 million, or 14.9%, during the six month period ended June 30, 2022, from the comparable periods in 2021. The increase in gross written premiums during the three month and six month periods ended June 30, 2022 was primarily attributable to an increase in premiums written in the automobile physical damage and automobile liability lines of business, resulting from new business writings and price increases in certain programs.

Ceded premiums increased $0.2 million, or 10.0%, during the three month period ended June 30, 2022 and $0.1 million, or 2.8%, during the six month period ended June 30, 2022, from the comparable periods in 2021. American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally increase or decrease as earned premiums increase or decrease.  Partially offsetting the increase in ceded premiums in 2022 was a decrease in ceding rates for two large programs in the automobile liability line of business.

20
The following presents American Southern’s net earned premiums by line of business for the three month and six month periods ended June 30, 2022 and the comparable periods in 2021:

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
    
2022
    
2021
  
   
(In thousands)
  
Automobile liability
  
$
8,560
    
$
7,276
    
$
16,185
    
$
15,013
  
Automobile physical damage
    
6,447
      
5,483
      
12,470
      
11,017
  
General liability
    
1,430
      
1,424
      
2,859
      
2,677
  
Surety
    
1,503
      
1,327
      
2,968
      
2,644
  
Other lines
    
829
      
852
      
1,630
      
1,626
  
Total
  
$
18,769
    
$
16,362
    
$
36,112
    
$
32,977
  

Net earned premiums increased $2.4 million, or 14.7%, during the three month period ended June 30, 2022, and $3.1 million, or 9.5%, during the six month period ended June 30, 2022, over the comparable periods in 2021. The increase in net earned premiums was primarily attributable to an increase in business writings and price increases in certain programs within the automobile physical damage and automobile liability lines of business as previously mentioned. Premiums are earned ratably over their respective policy terms, and therefore premiums earned in the current year are related to policies written during both the current year and immediately preceding year.

The performance of an insurance company is often measured by its combined ratio. The combined ratio represents the percentage of losses, loss adjustment expenses and other expenses that are incurred for each dollar of premium earned by the company. A combined ratio of under 100% represents an underwriting profit while a combined ratio of over 100% indicates an underwriting loss. The combined ratio is divided into two components, the loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) and the expense ratio (the ratio of expenses incurred to premiums earned).

Insurance benefits and losses incurred at American Southern increased $3.9 million, or 38.2%, during the three month period ended June 30, 2022, and increased $2.6 million, or 11.9%, during the six month period ended June 30, 2022, over the comparable periods in 2021. As a percentage of earned premiums, insurance benefits and losses incurred were 74.8% in the three month period ended June 30, 2022, compared to 62.1% in the three month period ended June 30, 2021.  For the six month period ended June 30, 2022, this ratio increased to 67.9% from 66.4% in the comparable period in 2021.  The increase in the loss ratio during the three month and six month periods ended June 30, 2022 was mainly due to severity of losses reported from programs within the automobile liability line of business.  Partially offsetting this increase was a decrease in the frequency of claims in the automobile physical damage line of business.

Commissions and underwriting expenses decreased $0.5 million, or 9.8%, during the three month period ended June 30, 2022, and increased $1.1 million, or 11.9% during the six month period ended June 30, 2022, over the comparable periods in 2021. As a percentage of earned premiums, underwriting expenses were 25.4% in the three month period ended June 30, 2022, compared to 32.3% in the three month period ended June 30, 2021. For the six month period ended June 30, 2022, this ratio increased to 29.7% from 29.0% in the comparable period in 2021.  The decrease in the expense ratio during the three month period ended June 30, 2022 was primarily due to American Southern’s use of a variable commission structure with certain agents, which compensates the participating agents in relation to the loss ratios of the business they write. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease.  During the three month period ended June 30, 2022, variable commissions decreased by $0.7 million from the comparable period in 2021 due to less favorable loss experience from accounts subject to variable commissions. During the six month period ended June 30, 2022, variable commissions increased by $0.4 million, respectively, from the comparable period in 2021 due to favorable loss experience from accounts subject to variable commissions.

21
Bankers Fidelity

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2022 and the comparable periods in 2021:

   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2022
    
2021
    
2022
    
2021
  
   
(Dollars in thousands)
  
Medicare supplement
  
$
37,276
    
$
40,866
    
$
75,247
    
$
81,858
  
Other health products
    
2,949
      
2,368
      
5,922
      
4,755
  
Life insurance
    
3,570
      
2,450
      
8,087
      
5,337
  
Gross earned premiums
    
43,795
      
45,684
      
89,256
      
91,950
  
Ceded premiums
    
(15,499
)
    
(16,913
)
    
(31,222
)
    
(33,704
)
Net earned premiums
    
28,296
      
28,771
      
58,034
      
58,246
  
Insurance benefits and losses incurred
    
18,713
      
21,546
      
39,404
      
43,069
  
Commissions and underwriting expenses
    
7,373
      
8,756
      
16,119
      
18,640
  
Total expenses
    
26,086
      
30,302
      
55,523
      
61,709
  
Underwriting income (loss)
  
$
2,210
    
$
(1,531
)
  
$
2,511
    
$
(3,463
)
Loss ratio
    
66.1
%
    
74.9
%
    
67.9
%
    
73.9
%
Expense ratio
    
26.1
      
30.4
      
27.8
      
32.0
  
Combined ratio
    
92.2
%
    
105.3
%
    
95.7
%
    
105.9
%

Net earned premium revenue at Bankers Fidelity decreased $0.5 million, or 1.7%, during the three month period ended June 30, 2022, and $0.2 million, or 0.4%, during the six month period ended June 30, 2022, from the comparable periods in 2021. Gross earned premiums from the Medicare supplement line of business decreased $3.6 million, or 8.8%, during the three month period ended June 30, 2022, and $6.6 million, or 8.1%, during the six month period ended June 30, 2022, due primarily to non-renewals exceeding the level of new business writings. Other health product premiums increased $0.6 million, or 24.5%, during the three month period ended June 30, 2022, and $1.2 million, or 24.5%, during the six month period ended June 30, 2022, over the comparable periods in 2021, primarily as a result of new sales of the company’s group health and individual cancer  products. Gross earned premiums from the life insurance line of business increased $1.1 million, or 45.7%, during the three month period ended June 30, 2022, and increased $2.8 million, or 51.5%, during the six month period ended June 30, 2022, over the comparable periods in 2021, primarily due to an increase in the group life products premium.  Partially offsetting this increase was a decrease in individual life products premium, resulting from the redemption and settlement of existing individual life policy obligations exceeding the level of new individual life sales.  Premiums ceded decreased $1.4 million, or 8.4%, during the three month period ended June 30, 2022 and $2.5 million, or 7.4%, during the six month period ended June 30, 2022.  The decrease in ceded premiums for the three month and six month periods ended June 30, 2022 was due to a decrease in Medicare supplement premiums subject to reinsurance.

Insurance benefits and losses incurred decreased $2.8 million, or 13.1%, during the three month period ended June 30, 2022, and $3.7 million, or 8.5%, during the six month period ended June 30, 2022, from the comparable periods in 2021.  As a percentage of earned premiums, benefits and losses were 66.1% in the three month period ended June 30, 2022, compared to 74.9% in the three month period ended June 30, 2021.  For the six month period ended June 30, 2022, this ratio decreased to 67.9% from 73.9% in the comparable period in 2021.  The decrease in the loss ratio for the three month and six month periods ended June 30, 2022 was primarily due to a decrease in the loss ratio in the Medicare supplement line of business as a result of improved rate adequacy, as well as a decrease in the loss ratio in the group lines of business.

Commissions and underwriting expenses decreased $1.4 million, or 15.8%, during the three month period ended June 30, 2022, and $2.5 million, or 13.5%, during the six month period ended June 30, 2022, over the comparable periods in 2021.  As a percentage of earned premiums, underwriting expenses were 26.1% in the three month period ended June 30, 2022, compared to 30.4% in the three month period ended June 30, 2021.  For the six month period ended June 30, 2022, this ratio decreased to 27.8% from 32.0% in the comparable period in 2021. The decrease in the expense ratio for the three month and six month periods ended June 30, 2022 was primarily due to the level of additions to deferred acquisition costs ("DAC") exceeding the amortization of DAC.

Net Investment Income and Realized Gains (Losses)

Investment income increased $0.3 million, or 11.6%, during the three month period ended June 30, 2022, and $0.5 million, or 11.2%, during the six month period ended June 30, 2022, over the comparable periods in 2021. The increase in investment income was primarily attributable to prepayment income of $0.3 million in each of the three month and six month periods ended June 30, 2022, from the comparable periods in 2021, related to the redemption of certain fixed maturities.  Also, contributing to the increase in investment income was an increase in the equity in earnings from investments in the Company's limited liability companies of $0.04 million and $0.1 million, respectively.

The Company had net realized investment losses of $0.1 million during the three month period ended June 30, 2022, compared to net realized investment gains of $0.1 during the three month period ended June 30, 2021.  The Company had net realized investment losses of $0.1 million during the six month period ended June 30, 2022 and net realized investment gains of $0.2 during the six month period ended June 30, 2021.  The net realized investment losses during the three month and six month periods ended June 30, 2022 resulted primarily from the redemption of several of the Company’s investments in fixed maturity securities. The net realized investment gains during the three month and six month periods ended June 30, 2021 resulted from the disposition of several of the Company’s investments in fixed maturity securities. Management continually evaluates the Company’s investment portfolio and makes adjustments for impairments and/or divests investments as may be determined to be appropriate.

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Unrealized Gains (Losses) on Equity Securities

Investments in equity securities are measured at fair value at the end of the reporting period, with any changes in fair value reported in net income during the period, with certain exceptions. The Company recognized net unrealized losses on equity securities of $4.9 million during the three month period ended June 30, 2022 and unrealized gains on equity securities of $4.0 million during the three month period ended June 30, 2021.  The Company recognized net unrealized losses on equity securities of $2.7 million during the six month period ended June 30, 2022 and unrealized gains on equity securities of $4.7 million during the six month period ended June 30, 2021.  Changes in unrealized gains on equity securities for the applicable periods are primarily the result of fluctuations in the market value of certain of the Company’s equity securities.

Interest Expense

Interest expense increased $0.1 million, or 19.3%, during the three month period ended June 30, 2022, and $0.1 million, or 10.8%, during the six month period ended June 30, 2022, from the comparable periods in 2021. Changes in interest expense were primarily due to changes in the London Interbank Offered Rate (“LIBOR”), as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) are directly related to LIBOR.  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.

Liquidity and Capital Resources

The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and surplus levels, and meeting debt service requirements. Current and expected patterns of claim frequency and severity may change from period to period but generally are expected to continue within historical ranges. The Company’s primary sources of cash are written premiums, investment income and proceeds from the sale and maturity of its invested assets. The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts and reinsurance collections will be adequate to fund the payment of claims and operating expenses as needed.

Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the subsidiaries. The principal cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be authorized and approved by the Company’s board of directors from time to time. At June 30, 2022, the Parent had approximately $4.4 million of unrestricted cash and investments.

The Parent’s insurance subsidiaries reported statutory net income of $2.2 million for the six month period ended June 30, 2022, compared to statutory net income of $1.5 million for the six month period ended June 30, 2021. Statutory results are impacted by the recognition of all costs of acquiring business. In periods in which the Company’s first year premiums increase, statutory results are generally lower than results determined under GAAP. Statutory results for the Company’s property and casualty operations may differ from the Company’s results of operations under GAAP due to the deferral of acquisition costs for financial reporting purposes. The Company’s life and health operations’ statutory results may differ from GAAP results primarily due to the deferral of acquisition costs for financial reporting purposes, as well as the use of different reserving methods.

Over 90% of the invested assets of the Parent’s insurance subsidiaries are invested in marketable securities that can be converted into cash, if required; however, the use of such assets by the Company is limited by state insurance regulations. Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At June 30, 2022, American Southern had $52.5 million of statutory capital and surplus and Bankers Fidelity had $35.9 million of statutory capital and surplus. In 2022, dividend payments by the Parent’s insurance subsidiaries in excess of $5.6 million would require prior approval. Through June 30, 2022, the Parent received dividends of $3.0 million from its subsidiaries.

The Parent provides certain administrative and other services to each of its insurance subsidiaries. The amounts charged to and paid by the subsidiaries include reimbursements for various shared services and other expenses incurred directly on behalf of the subsidiaries by the Parent. In addition, there is in place a formal tax-sharing agreement between the Parent and its insurance subsidiaries. As a result of the Parent’s tax loss, it is anticipated that the tax-sharing agreement will continue to provide the Parent with additional funds from profitable subsidiaries to assist in meeting its cash flow obligations.

The Company has two statutory trusts which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trusts and investing the gross proceeds of the trust preferred securities in Junior Subordinated Debentures. The outstanding $18.0 million and $15.7 million of Junior Subordinated Debentures mature on December 4, 2032 and May 15, 2033, respectively, are callable quarterly, in whole or in part, only at the option of the Company, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to 4.10%. At June 30, 2022, the effective interest rate was 5.56%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust’s obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities. As of June 30, 2022, the Company has not made such an election.

23
The Company intends to pay its obligations under the Junior Subordinated Debentures using existing cash balances, dividend and tax-sharing payments from the operating subsidiaries, or from existing or potential future financing arrangements.

At June 30, 2022, the Company had 55,000 shares of Series D preferred stock (“Series D Preferred Stock”) outstanding. All of the shares of Series D Preferred Stock are held by an affiliate of the Company’s controlling shareholder. The outstanding shares of Series D Preferred Stock have a stated value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at the option of the board of directors of the Company) and are cumulative. In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,378,000 shares of the Company’s common stock, subject to certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval; and are redeemable solely at the Company’s option. The Series D Preferred Stock is not currently convertible. At June 30, 2022, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.2 million.

Bankers Fidelity Life Insurance Company (''BFLIC") is a member of the Federal Home Loan Bank of Atlanta ("FHLB"), for the primary purpose of enhancing financial flexibility. As a member, BFLIC can obtain access to low-cost funding and also receive dividends on FHLB stock. The membership arrangement provides for credit availability of five percent of statutory admitted assets, or approximately $8.2 million, as of June 30, 2022. Additional FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB.  As of June 30, 2022, BFLIC has pledged bonds having an amortized cost of $7.9 million to the FHLB.  BFLIC may be required to post additional acceptable forms of collateral for any borrowings that it makes in the future from the FHLB.  As of 2022, BFLIC does not have any outstanding borrowings from the FHLB.

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, 2022, the Company had outstanding borrowings of $1.0 million under the Credit Agreement.

Cash and cash equivalents decreased from $24.8 million at December 31, 2021 to $15.9 million at June 30, 2022. The decrease in cash and cash equivalents during the six month period ended June 30, 2022 was primarily attributable to net cash used in investing activities of $5.0 million primarily as a result of investment purchases exceeding investment sales and maturity of securities. Also contributing to the decrease in cash and cash equivalents was net cash used in operating activities of $4.4 million. Partially offsetting the decrease in cash and cash equivalents was net cash provided by financing activities primarily as a result of proceeds from bank financing of $1.0 million.

The Company believes that existing cash balances as well as the dividends, fees, and tax-sharing payments it expects to receive from its subsidiaries and, if needed, borrowings under its credit facilities or additional borrowings from financial institutions, will enable the Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current recommendations by regulatory authorities, which, if implemented, would have a material adverse effect on the Company’s liquidity, capital resources or operations.

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the intentional acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and may not be detected. An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

25
PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On October 31, 2016, the Board of Directors of the Company approved a plan that allows for the repurchase of up to 750,000 shares of the Company’s common stock (the “Repurchase Plan”) on the open market or in privately negotiated transactions, as determined by an authorized officer of the Company. Any such repurchases can be made from time to time in accordance with applicable securities laws and other requirements.

Other than pursuant to the Repurchase Plan, no purchases of common stock of the Company were made by or on behalf of the Company during the periods described below.

The table below sets forth information regarding repurchases by the Company of shares of its common stock on a monthly basis during the three month period ended June 30, 2022.

Period
  
Total Number
of Shares
Purchased
    
Average
Price Paid
per Share
    
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
    
Maximum Number
of Shares that
May Yet be
Purchased
Under the Plans
or Programs
  
April 1 – April 30, 2022
    
—
    
$
—
      
—
      
325,129
  
May 1 – May 31, 2022
    
—
      
—
      
—
      
325,129
  
June 1 – June 30, 2022
    
—
      
—
      
—
      
325,129
  
Total
    
—
    
$
—
      
—
          

Item 6. Exhibits

Atlantic American Corporation 2022 Equity and Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 the Registrant’s Current Report on Form 8-K filed May 31, 2022).
   
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101. INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
   
101. SCH
Inline XBRL Taxonomy Extension Schema Document.
   
101. CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
   
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
   
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
   
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
   
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

26
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ATLANTIC AMERICAN CORPORATION

(Registrant)




Date: August 12, 2022
By:
/s/ J. Ross Franklin


J. Ross Franklin


Vice President and Chief Financial Officer


(Principal Financial and Accounting Officer)


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