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 March 31, 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 April 30, 2022 was 20,403,576.
 


ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS


Forward-Looking Statements
2
     
Part I.

     
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
18
     
Item 4.
23
     
Part II.
Other Information
 
     
Item 2.
24
     
Item 6.
24
     
  25

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.

PART I. FINANCIAL INFORMATION

Item 1 . Financial Statements

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

   
Unaudited
March 31,
2022
   
December 31,
2021
 
ASSETS
 
Cash and cash equivalents
 
$
15,612
   
$
24,753
 
Investments:
               
Fixed maturities, available-for-sale, at fair value (amortized cost: $239,452 and $238,597)
   
240,038
     
260,986
 
Equity securities, at fair value (cost: $4,906 and $4,907)
   
21,316
     
19,124
 
Other invested assets (cost: $918 and $698)
   
420
     
198
 
Policy loans
   
1,814
     
1,858
 
Real estate
   
38
     
38
 
Investment in unconsolidated trusts
   
1,238
     
1,238
 
Total investments
   
264,864
     
283,442
 
Receivables:
               
Reinsurance
   
27,036
     
27,416
 
Insurance premiums and other (net of allowance for doubtful accounts: $185 and $188)
   
11,550
     
14,959
 
Deferred income taxes, net
   
5,447
     
1,755
 
Deferred acquisition costs
   
39,875
     
38,698
 
Other assets
   
8,103
     
8,719
 
Intangibles
   
2,544
     
2,544
 
Total assets
 
$
375,031
   
$
402,286
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Insurance reserves and policyholder funds:
               
Future policy benefits
 
$
85,541
   
$
87,348
 
Unearned premiums
   
19,834
     
27,469
 
Losses and claims
   
85,235
     
85,620
 
Other policy liabilities
   
961
     
1,360
 
Total insurance reserves and policyholder funds
   
191,571
     
201,797
 
Accounts payable and accrued expenses
   
23,299
     
25,465
 
Junior subordinated debenture obligations, net
   
33,738
     
33,738
 
Total liabilities
   
248,608
     
261,000
 
                 
Commitments and contingencies (Note 11)
           
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: 20,403,576 and 20,378,576
   
22,401
     
22,401
 
Additional paid-in capital
   
57,443
     
57,441
 
Retained earnings
   
53,599
     
51,264
 
Accumulated other comprehensive income
   
463
     
17,688
 
Unearned stock grant compensation
   
(117
)
   
(73
)
Treasury stock, at cost: 1,997,318 and 2,022,318 shares
   
(7,421
)
   
(7,490
)
Total shareholders’ equity
   
126,423
     
141,286
 
Total liabilities and shareholders’ equity
 
$
375,031
   
$
402,286
 

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

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

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
Revenue:
           
Insurance premiums, net
 
$
47,081
   
$
46,090
 
Net investment income
   
2,340
     
2,113
 
Realized investment gains (losses), net
   
(10
)
   
121
 
Unrealized gains on equity securities, net
   
2,193
     
744
 
Other income
   
4
     
7
 
Total revenue
   
51,608
     
49,075
 
Benefits and expenses:
               
Insurance benefits and losses incurred
   
31,169
     
33,272
 
Commissions and underwriting expenses
   
12,836
     
12,564
 
Interest expense
   
354
     
346
 
Other expense
   
3,453
     
3,440
 
Total benefits and expenses
   
47,812
     
49,622
 
Income (loss) before income taxes
   
3,796
     
(547
)
Income tax expense (benefit)
   
954
     
(116
)
Net income (loss)
   
2,842
     
(431
)
Preferred stock dividends
   
(99
)
   
(99
)
Net income (loss) applicable to common shareholders
 
$
2,743
   
$
(530
)
Earnings (loss) per common share (basic)
 
$
0.13
    $ (0.03 )
Earnings (loss) per common share (diluted)   $ 0.13     $ (0.03 )

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

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited; In thousands)

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
Net income (loss)
 
$
2,842
   
$
(431
)
Other comprehensive loss:
               
Available-for-sale fixed maturity securities:
               
Gross unrealized holding loss arising in the period
   
(21,813
)
   
(13,747
)
Related income tax effect
   
4,581
     
2,887
 
Subtotal
   
(17,232
)
   
(10,860
)
Less: reclassification adjustment for net realized (gains) losses included in net income (loss)
   
10
     
(121
)
Related income tax effect
   
(3
)
   
25
 
Subtotal
   
7
     
(96
)
Total other comprehensive loss, net of tax
   
(17,225
)
   
(10,956
)
Total comprehensive loss
 
$
(14,383
)
 
$
(11,387
)

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

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited; In thousands except share and per share data)

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
Preferred stock:
           
Balance, beginning of period
 
$
55
   
$
55
 
Balance, end of period
   
55
     
55
 
Common stock:
               
Balance, beginning of period
   
22,401
     
22,401
 
Balance, end of period
   
22,401
     
22,401
 
Additional paid-in capital:
               
Balance, beginning of period
   
57,441
     
57,437
 
Restricted stock grants, net of forfeitures
   
2
     
 
Issuance of shares under stock plans
   
     
1
 
Balance, end of period
   
57,443
     
57,438
 
Retained earnings:
               
Balance, beginning of period
   
51,264
     
47,790
 
Net income (loss)
   
2,842
     
(431
)
Dividends on common stock
   
(408
)
   
(408
)
Dividends accrued on preferred stock
   
(99
)
   
(99
)
Balance, end of period
   
53,599
     
46,852
 
Accumulated other comprehensive income:
               
Balance, beginning of period
   
17,688
     
25,000
 
Other comprehensive loss, net of tax
   
(17,225
)
   
(10,956
)
Balance, end of period
   
463
     
14,044
 
Unearned Stock Grant Compensation:
               
Balance, beginning of period
   
(73
)
   
(284
)
Restricted stock grants, net of forfeitures
   
(71
)
   
 
Amortization of unearned compensation
   
27
     
67
 
Balance, end of period
   
(117
)
   
(217
)
Treasury Stock:
               
Balance, beginning of period
   
(7,490
)
   
(7,339
)
Restricted stock grants, net of forfeitures
   
69
     
 
Issuance of shares under stock plans
   
     
1
 
Balance, end of period
   
(7,421
)
   
(7,338
)
Total shareholders’ equity
 
$
126,423
   
$
133,235
 
Dividends declared on common stock per share
 
$
0.02
   
$
0.02
 
Common shares outstanding:
               
Balance, beginning of period
    20,378,576
      20,415,243
 
Issuance of shares under stock plans
   
      539
 
Restricted stock grants, net of forfeitures
    25,000
     
 
Balance, end of period     20,403,576
      20,415,782
 

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

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

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
2,842
   
$
(431
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
               
(Additions to) amortization of acquisition costs, net
   
(1,177
)
   
1,513
 
Realized investment losses (gains), net
   
10
     
(121
)
Unrealized  gains on equity securities, net
   
(2,193
)
   
(744
)
Earnings from equity method investees
    (2 )      
Compensation expense related to share awards
   
27
     
67
 
Depreciation and amortization
   
240
     
264
 
Deferred income tax expense (benefit)
   
886
     
(492
)
Decrease in receivables, net
    3,789      
4,559
 
Decrease in insurance reserves and policyholder funds
   
(10,226
)
   
(6,693
)
Decrease in accounts payable and accrued expenses
   
(2,676
)
   
(2,250
)
Other, net
   
473
     
(1,716
)
Net cash used in operating activities
   
(8,007
)
   
(6,044
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from investments sold
   
44
     
13,266
 
Proceeds from investments matured, called or redeemed
   
3,875
     
4,506
 
Investments purchased
   
(5,052
)
   
(10,564
)
Additions to property and equipment
   
(1
)
   
(39
)
Net cash (used in) provided by investing activities
   
(1,134
)
   
7,169
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from shares issued under stock plans
   
     
2
 
Net cash provided by financing activities
   
     
2
 
                 
Net (decrease) increase in cash and cash equivalents
   
(9,141
)
   
1,127
 
Cash and cash equivalents at beginning of period
   
24,753
     
19,319
 
Cash and cash equivalents at end of period
 
$
15,612
   
$
20,446
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
 
$
346
   
$
351
 

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

ATLANTIC AMERICAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Dollars in thousands, except per share amounts)

Note 1.
Basis of Presentation


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

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 March 31, 2022 and December 31, 2021.


Fixed maturities were comprised of the following:

   
March 31, 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
 
$
47,852
   
$
172
   
$
2,098
   
$
49,778
 
Obligations of states and political subdivisions
   
11,058
     
228
     
63
     
10,893
 
Corporate securities:
                               
Utilities and telecom
   
27,051
     
955
     
695
     
26,791
 
Financial services
   
65,895
     
1,868
     
1,250
     
65,277
 
Other business – diversified
   
36,107
     
1,255
     
823
     
35,675
 
Other consumer – diversified
   
51,832
     
1,701
     
714
     
50,845
 
Total corporate securities
   
180,885
     
5,779
     
3,482
     
178,588
 
Redeemable preferred stocks:
                               
Other consumer – diversified
   
243
     
50
     
     
193
 
Total redeemable preferred stocks
   
243
     
50
     
     
193
 
Total fixed maturities
 
$
240,038
   
$
6,229
   
$
5,643
   
$
239,452
 
   
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 $10,879 and $11,169 and included in the tables above were on deposit with insurance regulatory authorities as of March 31, 2022 and December 31, 2021, respectively, in accordance with statutory requirements. Additionally, bonds having an amortized cost of $4,762 and $5,371 and included in the tables above were pledged as collateral to the Federal Home Loan Bank of Atlanta (“FHLB”) at March 31, 2022 and December 31, 2021, respectively.


Equity securities were comprised of the following:

   
March 31, 2022
 
   
Estimated
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Cost or
Amortized
Cost
 
Equity securities:
                       
Common and non-redeemable preferred stocks:
                       
Financial services
 
$
878
   
$
605
   
$
   
$
273
 
Other business – diversified
   
20,438
     
15,805
     
     
4,633
 
Total equity securities
 
$
21,316
   
$
16,410
   
$
   
$
4,906
 

   
December 31, 2021
 
   
Estimated
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Cost or
Amortized
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 March 31, 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.

   
March 31, 2022
   
December 31, 2021
 
   
Carrying
Value
   
Amortized
Cost
   
Carrying
Value
   
Amortized
Cost
 
Due in one year or less
 
$
1,407
   
$
1,403
   
$
1,734
   
$
1,730
 
Due after one year through five years
   
29,051
     
28,969
     
24,926
     
23,593
 
Due after five years through ten years
   
65,067
     
65,159
     
73,725
     
68,338
 
Due after ten years
   
107,568
     
105,175
     
122,045
     
106,181
 
Asset backed securities
   
36,945
     
38,746
     
38,556
     
38,755
 
Totals
 
$
240,038
   
$
239,452
   
$
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 March 31, 2022 and December 31, 2021.

   
March 31, 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
 
$
33,399
   
$
1,555
   
$
5,041
   
$
543
   
$
38,440
   
$
2,098
 
Obligations of states and political subdivisions
    3,394       63                   3,394       63  
Corporate securities
   
65,680
     
2,732
     
4,978
     
750
     
70,658
     
3,482
 
Total temporarily impaired securities
 
$
102,473
   
$
4,350
   
$
10,019
   
$
1,293
   
$
112,492
   
$
5,643
 

   
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.


There were no OTTI charges recorded during the three month periods ended March 31, 2022 and 2021.



As of March 31, 2022 and December 31, 2021, there were 141 and 61 securities, respectively, in an unrealized loss position which primarily included certain of the Company’s investments in fixed maturities within the utilities and telecom, financial services, other diversified business and other diversified consumer sectors. The increase in the number of securities in an unrealized loss position during the three month period ended March 31, 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 March 31, 2022.

The following table is a summary of realized investment gains (losses) for the three month period ended March 31, 2022 and 2021.

   
Three Months Ended
March 31, 2022
 
   
Fixed
Maturities
   
Equity
Securities
   
Other
Invested
Assets
   
Total
 
Gains
 
$
   
$
   
$
   
$
 
Losses
   
(10
)
   
     
     
(10
)
Realized investment losses, net
 
$
(10
)
 
$
   
$
   
$
(10
)

   
Three Months Ended
March 31, 2021
 
   
Fixed
Maturities
   
Equity
Securities
   
Other
Invested
Assets
   
Total
 
Gains
 
$
121
   
$
   
$
   
$
121
 
Losses
   
     
     
     
 
Realized investment gains, net
 
$
121
   
$
   
$
   
$
121
 


The following table presents the portion of unrealized gains related to equity securities still held for the three month period ended March 31, 2022 and 2021.

   
Three Months Ended
March 31,
 
   
2022
    2021  
Net realized and unrealized gains recognized during the period on equity securities
 
$
2,193
   
$
744
 
Less: Net realized gains recognized during the period on equity securities sold during the period
   
     
 
Unrealized gains recognized during the reporting period on equity securities, net
 
$
2,193
   
$
744
 


Variable Interest Entities


The Company holds passive interests in a number of entities that are considered to be variable interest entities (“VIEs”) under GAAP guidance. The Company’s VIE interests principally consist of interests in limited partnerships and limited liability companies formed for the purpose of achieving diversified equity returns. The Company’s VIE interests, carried as a part of other invested assets, totaled $420 and $198 as of March 31, 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 March 31, 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 $1,658 and $1,436, as of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the Company had outstanding commitments totaling $12,777 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 March 31, 2022 and December 31, 2021, the value of the fixed maturities valued using Level 3 criteria was $0 and $250, respectively. As of March 31, 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.


As of March 31, 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
 
$
   
$
240,038
   
$
   
$
240,038
 
Equity securities
   
21,160
     
     
156
     
21,316
 
Cash equivalents
   
11,534
     
     
     
11,534
 
Total
 
$
32,694
   
$
240,038
   
$
156
   
$
272,888
 


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 March 31, 2022 and December 31, 2021.

       
March 31, 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
   
$
15,612
   
$
15,612
   
$
24,753
   
$
24,753
 
Fixed maturities
 
(1)     
240,038
     
240,038
     
260,986
     
260,986
 
Equity securities

(1) 
   
21,316
     
21,316
     
19,124
     
19,124
 
Other invested assets
Level 3
     
420
     
420
     
198
     
198
 
Policy loans
Level 2
     
1,814
     
1,814
     
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
     
33,115
     
33,738
     
33,728
 

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

Note 5.
Insurance Reserves for Losses and Claims


The roll-forward of insurance reserves for losses and claims for the three months ended March 31, 2022 and 2021 is as follows:

   
Three Months Ended
March 31,
 
   
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
   
32,542
     
32,928
 
Prior accident year development (1)
    (1,523 )(2)    
475
(3) 
Total incurred
   
31,019
     
33,403
 
                 
Paid related to:
               
Current accident year
   
10,629
     
10,917
 
Prior accident years
   
19,966
     
20,984
 
Total paid
   
30,595
     
31,901
 
Ending insurance reserves for losses and claims, net
   
68,354
     
63,049
 
Plus: Reinsurance recoverable on unpaid losses
   
16,881
     
18,236
 
Ending insurance reserves for losses and claims, gross
 
$
85,235
   
$
81,285
 

(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 both the life and health and the property and casualty 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:

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
Total incurred losses
 
$
31,019
   
$
33,403
 
Cash surrender value and matured endowments
   
362
     
247
 
Benefit reserve changes
   
(212
)
   
(378
)
Total insurance benefits and losses incurred
 
$
31,169
   
$
33,272
 

Note 6.
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.



Bank Debt



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



The Credit Agreement requires the Company to comply with certain covenants, including a debt to capital ratio that restricts the Company from incurring consolidated indebtedness that exceeds 35% of the Company’s consolidated capitalization at any time. The Credit Agreement also contains customary representations and warranties and events of default. Events of default include, among others, (a) the failure by the Company to pay any amounts owed under the Credit Agreement when due, (b) the failure to perform and not timely remedy certain covenants, (c) a change in control of the Company and (d) the occurrence of bankruptcy or insolvency events. Upon an event of default, the Lender may, among other things, declare all obligations under the Credit Agreement immediately due and payable and terminate the revolving commitments. As of March 31, 2022, the Company does not have any outstanding borrowings under the Credit Agreement.



Junior Subordinated Debentures


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



The financial structure of each of Atlantic American Statutory Trust I and II as of March 31, 2022 was as follows:

   
Atlantic American
Statutory Trust I
   
Atlantic American
Statutory Trust II
 
JUNIOR SUBORDINATED DEBENTURES (1) (2)
           
Principal amount owed March 31, 2022
 
$
18,042
   
$
23,196
 
Less: Treasury debt (3)
   
     
(7,500
)
Net balance March 31, 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.

Note 7.
Earnings (Loss) Per Common Share


A reconciliation of the numerator and denominator used in the earnings (loss) per common share calculations is as follows:

   
Three Months Ended
March 31, 2022
 
   
Income
   
Weighted
Average
Shares
(In thousands)
   
Per Share
Amount
 
Basic Earnings Per Common Share:
                 
Net income
 
$
2,842
     
20,380
   
 
Less preferred stock dividends
   
(99
)
   
       
Net income applicable to common shareholders
   
2,743
     
20,380
   
$
0.13
 
Diluted Earnings Per Common Share:
                       
Effect of Series D preferred stock
    99       1,378          
Net income applicable to common shareholders
  $ 2,842       21,758     $ 0.13  

   
Three Months Ended
March 31, 2021
 
 
 
Loss
   
Weighted
Average
Shares
(In thousands)
   
Per Share
Amount
 
Basic and Diluted Loss Per Common Share:
                 
Net loss
 
$
(431
)
   
20,415
     
 
Less preferred stock dividends
   
(99
)
   
     
 
Net loss applicable to common shareholders
 
$
(530
)
   
20,415
     
(0.03
)


The assumed conversion of the Company’s Series D preferred stock was excluded from the loss per common share calculation for three month period ended March 31, 2021 since its impact would have been antidilutive.


Note 8.          Equity Incentive 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 three month period ended March 31, 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 for 2022 and 2021 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. 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 at March 31, 2022 and December 31, 2021 were 910,200 and 935,200, respectively.
Note 9.
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
March 31,
 
   
2022
   
2021
 
Federal income tax provision at statutory rate of 21%
 
$
797
   
$
(115
)
Dividends-received deduction
   
(6
)
   
(9
)
Meals and entertainment
    10       4  
Parking disallowance
   
4
     
4
 
Penalties and fines
    149        
Income tax expense (benefit)
 
$
954
   
$
(116
)


The components of income tax expense (benefit) were:

   
Three Months Ended
March 31,
 
     
2022
     
2021
 
Current – Federal
 
$
68
   
$
376
 
Deferred – Federal
   
886
     
(492
)
Total
 
$
954
   
$
(116
)

Note 10.
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 three months ended March 31, 2022 and March 31, 2021 was $254.



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

   
Three Months Ended
March 31,
 
Other information on operating leases:
 
2022
   
2021
 
Cash payments included in the measurement of lease liabilities reported in operating cash flows
 
$
255
   
$
251
 
Right-of-use assets included in other assets on the condensed consolidated balance sheet
   
3,963
     
4,664
 
Weighted average discount rate
   
6.8
%
   
6.8
%
Weighted average remaining lease term in years
 
4.6 years
   
5.6 years
 


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

    Lease Liability 
 
Remainder of 2022
 
$
776
 
2023
   
1,048
 
2024
   
1,065
 
2025
   
1,083
 
2026
   
942
 
Thereafter
   
 
Total undiscounted lease payments
   
4,914
 
Less: present value adjustment
   
717
 
Operating lease liability included in accounts payable and accrued expenses on the condensed consolidated balance sheet
 
$
4,197
 


As of March 31, 2022, the Company has no operating leases that have not yet commenced.

Note 11.
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.  Subsequent to March 31, 2022, the Company agreed to settle the matter through a consent order which included a penalty that has been recorded as a liability in the financial statements as of March 31, 2022.

Note 12.
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
 
March 31,
2022
   
December 31,
2021
 
American Southern
 
$
141,480
   
$
161,788
 
Bankers Fidelity
   
217,617
     
227,395
 
Corporate and Other
   
15,934
     
13,103
 
Total assets
 
$
375,031
   
$
402,286
 


 
Three Months Ended
March 31,
 
Revenues
 
2022
   
2021
 
American Southern
 
$
18,506
   
$
17,526
 
Bankers Fidelity
   
32,889
     
31,540
 
Corporate and Other
   
213
     
9
Total revenue
 
$
51,608
   
$
49,075
 


 
Three Months Ended
March 31,
 
Income (Loss) Before Income Taxes
 
2022
   
2021
 
American Southern
 
$
2,085
   
$
1,490
 
Bankers Fidelity
   
3,451
     
134
Corporate and Other
   
(1,740
)
   
(2,171
)
Income (loss) before income taxes
 
$
3,796
 
$
(547
)

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 three month period ended March 31, 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 period ended March 31, 2022 and the comparable period in 2021:

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
   
(In thousands)
 
Insurance premiums, net
 
$
47,081
   
$
46,090
 
Net investment income
   
2,340
     
2,113
 
Realized investment gains (losses), net
   
(10
)
   
121
 
Unrealized gains on equity securities, net
   
2,193
     
744
 
Other income
   
4
     
7
 
Total revenue
   
51,608
     
49,075
 
Insurance benefits and losses incurred
   
31,169
     
33,272
 
Commissions and underwriting expenses
   
12,836
     
12,564
 
Interest expense
   
354
     
346
 
Other expense
   
3,453
     
3,440
 
Total benefits and expenses
   
47,812
     
49,622
 
Income (loss) before income taxes
 
$
3,796
   
$
(547
)
Net income (loss)
 
$
2,842
   
$
(431
)

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

A reconciliation of net income (loss) to operating income (loss) for the three month period ended March 31, 2022 and the comparable period in 2021 is as follows:

   
Three Months Ended
March 31,
 
Reconciliation of Non-GAAP Financial Measure
 
2022
   
2021
 
   
(In thousands)
 
Net income (loss)
 
$
2,842
   
$
(431
)
Income tax expense (benefit)
   
954
     
(116
)
Realized investment (gains) losses, net
   
10
     
(121
)
Unrealized gains on equity securities, net
   
(2,193
)
   
(744
)
Non-GAAP operating income (loss)
 
$
1,613
   
$
(1,412
)

On a consolidated basis, the Company had net income of $2.8 million, or $0.13 per diluted share, for the three month period ended March 31, 2022, compared to net loss of $0.4 million, or $0.03 per diluted share, for the three month period ended March 31, 2021.  Premium revenue for the three month period ended March 31, 2022 increased $1.0 million, or 2.2%, to $47.1 million from $46.1 million in the three month period ended March 31, 2021.   The increase in premium revenue was primarily attributable to an increase in the automobile physical damage line 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.

Operating income increased $3.0 million in the three month period ended March 31, 2022 from the three month period ended March 31, 2021.  The increase in operating income was primarily due to favorable loss experience in the property and casualty operations due to a decrease in the frequency and severity of claims within the automobile physical damage line of business. Also contributing to the increase in operating income was favorable loss experience in the life and health operations, primarily as a result of an increase in earned premium within the group lines 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 period ended March 31, 2022 and the comparable period in 2021:

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
   
(Dollars in thousands)
 
Gross written premiums
 
$
11,558
   
$
11,462
 
Ceded premiums
   
(1,617
)
   
(1,684
)
Net written premiums
 
$
9,941
   
$
9,778
 
Net earned premiums
 
$
17,343
   
$
16,615
 
Insurance benefits and losses incurred
   
10,478
     
11,749
 
Commissions and underwriting expenses
   
5,943
     
4,286
 
Underwriting income
 
$
922
   
$
580
 
Loss ratio
   
60.4
%
   
70.7
%
Expense ratio
   
34.3
     
25.8
 
Combined ratio
   
94.7
%
   
96.5
%

Gross written premiums at American Southern increased $0.1 million, or 0.8%, during the three month period ended March 31, 2022 from the comparable period in 2021. The increase in gross written premiums was primarily attributable to an increase in premiums written in the automobile physical damage line of business from existing agencies, as well as increases in the surety line of business.  Partially offsetting the increase in gross written premiums was a decrease in premiums written in the auto liability line of business and retro premium adjustments.

Ceded premiums decreased $0.1 million, or 4.0%, during the three month period ended March 31, 2022 from the comparable period in 2021. The decrease in ceded premiums in 2022 was primarily due to a decrease in ceding rates for two large programs in the auto liability line of business.

The following presents American Southern’s net earned premiums by line of business for the three month period ended March 31, 2022 and the comparable period in 2021:

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
   
(In thousands)
 
Automobile liability
 
$
7,625
   
$
7,737
 
Automobile physical damage
   
6,023
     
5,534
 
General liability
   
1,429
     
1,253
 
Surety
   
1,465
     
1,317
 
Other lines
   
801
     
774
 
Total
 
$
17,343
   
$
16,615
 

Net earned premiums increased $0.7 million, or 4.4%, during the three month period ended March 31, 2022 over the comparable period in 2021. The increase in net earned premiums was primarily attributable to an increase in automobile physical damage coverage resulting from existing agencies 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 decreased $1.3 million, or 10.8%, during the three month period ended March 31, 2022 over the comparable period in 2021. As a percentage of earned premiums, insurance benefits and losses incurred were 60.4% in the three month period ended March 31, 2022, compared to 70.7% in the three month period ended March 31, 2021. The decrease in the loss ratio during the three month period ended March 31, 2022 was primarily due to a decrease in the frequency and severity of claims in the automobile physical damage line of business, as well as in the inland marine segment of the other line of business.

Commissions and underwriting expenses increased $1.7 million, or 38.7%, during the three month period ended March 31, 2022, over the comparable period in 2021. As a percentage of earned premiums, underwriting expenses were 34.3% in the three month period ended March 31, 2022, compared to 25.8% in the three month period ended March 31, 2021. The increase in the expense ratio during the three month period ended March 31, 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 March 31, 2022, variable commissions at American Southern increased by $1.1 million from the comparable period in 2021 due to more favorable loss experience from accounts subject to variable commissions.

Bankers Fidelity

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month period ended March 31, 2022 and the comparable period in 2021:

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
   
(Dollars in thousands)
 
Medicare supplement
 
$
37,971
   
$
40,992
 
Other health products
   
2,973
     
2,387
 
Life insurance
   
4,517
     
2,887
 
Gross earned premiums
   
45,461
     
46,266
 
Ceded premiums
   
(15,723
)
   
(16,791
)
Net earned premiums
   
29,738
     
29,475
 
Insurance benefits and losses incurred
   
20,691
     
21,523
 
Commissions and underwriting expenses
   
8,746
     
9,885
 
Total expenses
   
29,437
     
31,408
 
Underwriting income (loss)
 
$
301
   
$
(1,933
)
Loss ratio
   
69.6
%
   
73.0
%
Expense ratio
   
29.4
     
33.5
 
Combined ratio
   
99.0
%
   
106.5
%

Net earned premium revenue at Bankers Fidelity increased $0.3 million, or 0.9%, during the three month period ended March 31, 2022, from the comparable period in 2021. Gross earned premiums from the Medicare supplement line of business decreased $3.0 million, or 7.4%, during the three month period ended March 31, 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 March 31, 2022, over the comparable period in 2021, primarily as a result of new sales of the company’s group health products. Gross earned premiums from the life insurance line of business increased $1.6 million, or 56.5%, during the three month period ended March 31, 2022 over the comparable period in 2021 due to an increase in the group life products premium. Partially offsetting the increase in gross earned premiums from the life insurance line 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 $1.1 million, or 6.4%, during the three month period ended March 31, 2022, from the comparable period in 2021.  The decrease in ceded premiums for the three month period ended March 31, 2022 was due to a decrease in Medicare supplement premiums subject to reinsurance.

Insurance benefits and losses incurred decreased $0.8 million, or 3.9%, during the three month period ended March 31, 2022, from the comparable period in 2021.  As a percentage of earned premiums, insurance benefits and losses incurred were 69.6% in the three month period ended March 31, 2022, compared to 73.0% in the three month period ended March 31, 2021.  The decrease in the loss ratio for the three month period ended March 31, 2022 was primarily due to a decrease in the number of incurred claims within the Medicare supplement line of business.

Commissions and underwriting expenses decreased $1.1 million, or 11.5%, during the three month period ended March 31, 2022, over the comparable period in 2021.  As a percentage of earned premiums, underwriting expenses were 29.4% in the three month period ended March 31, 2022, compared to 33.5% in the three month period ended March 31, 2021.  The decrease in the expense ratio for the three month period ended March 31, 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

Investment income increased $0.2 million, or 10.7%, during the three month period ended March 31, 2022, from the comparable period in 2021. The increase in investment income was attributable to an increase in the equity in earnings from investments in the Company’s limited partnerships and limited liability companies of $0.1 million.

The Company had net realized investment losses of $0.01 million during the three month period ended March 31, 2022, compared to net realized investment gains of $0.1 million during the three month period ended March 31, 2021.   The net realized investment losses during the three month period ended March 31, 2022 resulted primarily from the redemption of the Company’s investment in a fixed maturity. The net realized investment gains during the three month period ended March 31, 2021 resulted primarily from the disposition of several of the Company’s investments in fixed maturities. Management continually evaluates the Company’s investment portfolio and makes adjustments for impairments and/or divests investments as may be determined to be appropriate.

Unrealized Gains 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. The Company recognized net unrealized gains on equity securities of $2.2 million during the three month period ended March 31, 2022 and unrealized gains on equity securities of $0.7 million during the three month period ended March 31, 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 slightly during the three month period ended March 31, 2022, from the comparable period 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 March 31, 2022, the Parent had approximately $3.5 million of unrestricted cash and investments.

The Parent’s insurance subsidiaries reported statutory net income of $1.3 million for the three month period ended March 31, 2022, compared to statutory net income of $2.1 million for the three month period ended March 31, 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 March 31, 2022, American Southern had $53.4 million of statutory capital and surplus and Bankers Fidelity had $38.5 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 March 31, 2022, the Parent received dividends of $1.5 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 March 31, 2022, the effective interest rate was 4.57%. 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 March 31, 2022, the Company has not made such an election.

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 March 31, 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 March 31, 2022, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.1 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 $8.1 million, as of March 31, 2022. Additional FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB.  As of March 31, 2022, BFLIC has pledged bonds having an amortized cost of $4.8 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 March 31, 2022, the Company does not have any outstanding borrowings under the Credit Agreement.

Cash and cash equivalents decreased from $24.8 million at December 31, 2021 to $15.6 million at March 31, 2022. The decrease in cash and cash equivalents during the three month period ended March 31, 2022 was primarily attributable to net cash used in operating activities of $8.0 million. Also contributing to the decrease in cash and cash equivalents was net cash used in investing activities of $1.1 million as a result of investment purchases exceeding investment sales and maturity of securities.

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.

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.

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 March 31, 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
 
January 1 – January 31, 2022
   
   
$
     
     
325,129
 
February 1 – February 28, 2022
   
     
     
     
325,129
 
March 1 – March 31, 2022
   
     
     
     
325,129
 
Total
   
   
$
     
         

Item 6. Exhibits

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).

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: May 11, 2022
By:
/s/ J. Ross Franklin
 
   
J. Ross Franklin
   
Vice President and Chief Financial Officer
   
(Principal Financial and Accounting Officer)


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