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, 2023

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 12, 2023 was 20,404,699.
 
ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS
     
 
2
     
  Forward-Looking Statements
2
     
Part I.
Financial Information
  
     
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
20
     
Item 4.
25
     
Part II.
Other Information
  
     
Item 2.
27
     
Item 6.
27
     
 
28

EXPLANATORY NOTE

As disclosed in the Company’s Form 12b-25 filed on April 3, 2023 and Form 12b-25 filed on May 22, 2023, the Company was unable to file its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”), and  its Quarterly Report on Form 10-Q for the three month period ended March 31, 2023 (this “Form 10-Q”), respectively, within the prescribed time periods because the Company required additional time to finalize its actuarial valuation procedures and related financial statement balances within the Company’s life and health segment, Bankers Fidelity.  The need for additional time resulted from a change in the systems used to perform the actuarial valuations, as further described below.

During the fourth quarter of 2022, Bankers Fidelity commenced a conversion of the actuarial valuation system for its Medicare Supplement line of business.  In connection with the implementation of the new system, parallel valuation procedures were performed using the new system (the “New System”) and were compared to the legacy system (the “Legacy System”) for historical periods.  As part of that process, the Company concluded that additional time was required in order to undertake and finalize analyses of the valuation procedures, assumptions and results, and the related financial statement balances. Due to the scope of the review and the time and effort required to complete the implementation of the New System and analyze the resulting valuations, the Company was unable to timely file the Form 10-K and this Form 10-Q.

After the Company completed the implementation of the New System and the associated valuation procedures and analyses during the first half of 2023, the Company was able to complete the preparation of its financial statements and the Form 10-K and this Form 10-Q, which are being filed concurrently on the date hereof, and there were no changes to any of the Company’s historical financial statements.  In connection with the foregoing, and the related evaluations of the Company’s internal control over financial reporting, the Company’s management identified certain deficiencies in internal control that management believes rise to the level of a material weakness, and management took steps to implement changes to remediate those deficiencies during the periods covered by the Form 10-K and this Form 10-Q, all as described under Part I, Item 4. “Controls and Procedures” in this Form 10-Q.

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 identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 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
March 31,
2023
    
December 31,
2022
  
ASSETS
  
Cash and cash equivalents
  
$
13,548
    
$
28,863
  
Investments:
                
Fixed maturities, available-for-sale, at fair value (amortized cost: $241,342 and $236,766; no allowance for credit losses)
    
218,038
      
208,729
  
Equity securities, at fair value (cost: $4,904 and $4,907)
    
9,181
      
11,562
  
Other invested assets (cost: $5,628 and $5,628)
    
5,372
      
5,386
  
Policy loans
    
1,792
      
1,759
  
Real estate
    
38
      
38
  
Investment in unconsolidated trusts
    
1,238
      
1,238
  
Total investments
    
235,659
      
228,712
  
Receivables:
                
Reinsurance (net of allowance for uncollectible reinsurance of $69 and $0)
    
24,916
      
25,913
  
Insurance premiums and other (net of allowance for expected credit losses $197 and net of allowance for doubtful accounts $177)
    
11,555
      
15,386
  
Deferred income taxes, net
    
13,721
      
14,163
  
Deferred acquisition costs
    
42,259
      
42,281
  
Other assets
    
9,393
      
9,202
  
Intangibles
    
2,544
      
2,544
  
Total assets
  
$
353,595
    
$
367,064
  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
  
Insurance reserves and policyholder funds:
                
Future policy benefits
  
$
84,667
    
$
85,564
  
Unearned premiums
    
19,400
      
28,348
  
Losses and claims
    
86,250
      
87,484
  
Other policy liabilities
    
926
      
1,255
  
Total insurance reserves and policyholder funds
    
191,243
      
202,651
  
Accounts payable and accrued expenses
    
21,235
      
26,473
  
Revolving credit facility
     3,000       2,009  
Junior subordinated debenture obligations, net
    
33,738
      
33,738
  
Total liabilities
    
249,216
      
264,871
  
                 
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: 20,404,699 and 20,407,229
    
22,401
      
22,401
  
Additional paid-in capital
    
57,425
      
57,425
  
Retained earnings
    
50,362
      
51,982
  
Accumulated other comprehensive income
    
(18,410
)
    
(22,149
)
Unearned stock grant compensation
    
(59
)
    
(132
)
Treasury stock, at cost: 1,996,195 and 1,993,665 shares
    
(7,395
)
    
(7,389
)
Total shareholders’ equity
    
104,379
      
102,193
  
Total liabilities and shareholders’ equity
  
$
353,595
    
$
367,064
  

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

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

   
Three Months Ended
March 31,
  
   
2023
    
2022
  
Revenue:
            
Insurance premiums, net
  
$
46,100
    
$
47,081
  
Net investment income
    
2,541
      
2,340
  
Realized investment losses, net
    
—
      
(10
)
Unrealized gains (losses) on equity securities, net
    
(2,375
)
    
2,193
  
Other income
    
3
      
4
  
Total revenue
    
46,269
      
51,608
  
Benefits and expenses:
                
Insurance benefits and losses incurred
    
30,460
      
31,169
  
Commissions and underwriting expenses
    
12,918
      
12,836
  
Interest expense
    
750
      
354
  
Other expense
    
3,959
      
3,453
  
Total benefits and expenses
    
48,087
      
47,812
  
Income (loss) before income taxes
    
(1,818
)
    
3,796
  
Income tax expense (benefit)
    
(372
)
    
954
  
Net income (loss)
    
(1,446
)
    
2,842
  
Preferred stock dividends
    
(99
)
    
(99
)
Net income (loss) applicable to common shareholders
  
$
(1,545
)
  
$
2,743
  
Earnings (loss) per common share (basic and diluted)
  
$
(0.08
)
   $ 0.13  

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; In thousands)

   
Three Months Ended
March 31,
  
   
2023
    
2022
  
Net income (loss)
  
$
(1,446
)
  
$
2,842
  
Other comprehensive income (loss):
                
Available-for-sale fixed maturity securities:
                
Gross unrealized holding gains (losses) arising in the period
    
4,733
      
(21,813
)
Related income tax effect
    
(994
)
    
4,581
  
Subtotal
    
3,739
      
(17,232
)
Less: reclassification adjustment for net realized losses included in net income (loss)
    
—
      
10
  
Related income tax effect
    
—
      
(3
)
Subtotal
    
—
      
7
  
Total other comprehensive income (loss), net of tax
    
3,739
      
(17,225
)
Total comprehensive income (loss)
  
$
2,293
    
$
(14,383
)

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

5
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited; In thousands except share and per share data)

   
Three Months Ended
March 31,
  
   
2023
    
2022
  
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
    
57,425
      
57,441
  
Restricted stock grants, net of forfeitures
    
—
      
2
  
Balance, end of period
    
57,425
      
57,443
  
Retained earnings:
                
Balance, beginning of period
    
51,982
      
51,264
  
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2023
    
(75
)
    
—
  
Net income (loss)
     (1,446 )     2,842  
Dividends on common stock
    
—
      
(408
)
Dividends accrued on preferred stock
    
(99
)
    
(99
)
Balance, end of period
    
50,362
      
53,599
  
Accumulated other comprehensive income (loss):
                
Balance, beginning of period
    
(22,149
)
    
17,688
  
Other comprehensive income (loss), net of tax
    
3,739
      
(17,225
)
Balance, end of period
    
(18,410
)
    
463
  
Unearned Stock Grant Compensation:
                
Balance, beginning of period
    
(132
)
    
(73
)
Restricted stock grants, net of forfeitures
    
—
      
(71
)
Amortization of unearned compensation
    
73
      
27
  
Balance, end of period
    
(59
)
    
(117
)
Treasury Stock:
                
Balance, beginning of period
    
(7,389
)
    
(7,490
)
Restricted stock grants, net of forfeitures
    
—
      
69
  
Net shares acquired related to employee share-based compensation plans
     (6 )     —  
Balance, end of period
    
(7,395
)
    
(7,421
)
Total shareholders’ equity
  
$
104,379
    
$
126,423
  
Dividends declared on common stock per share
  
$
0.02
    
$
0.02
  
                 
Common shares outstanding:
                
Balance, beginning of period
     20,407,229
       20,378,576
  
Net shares acquired under employee share-based compensation plans     (2,530 )     —  
Restricted stock grants, net of forfeitures
     —
       25,000
  
Balance, end of period     20,404,699
       20,403,576
  

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)

   
Three Months Ended
March 31,
  
   
2023
    
2022
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net (loss) income
  
$
(1,446
)
  
$
2,842
  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
                
Amortization of (additions to) acquisition costs, net
    
22
      
(1,177
)
Realized investment losses, net
    
—
      
10
  
Unrealized losses (gains) on equity securities, net
    
2,375
      
(2,193
)
Losses (earnings) from equity method investees
     15       (2 )
Compensation expense related to share awards
    
73
      
27
  
Depreciation and amortization
    
188
      
240
  
Deferred income tax (benefit) expense
    
(552
)
    
886
  
Decrease in receivables, net
     4,828      
3,789
  
Decrease in insurance reserves and policyholder funds
    
(11,408
)
    
(10,226
)
Decrease in accounts payable and accrued expenses
    
(5,338
)
    
(2,676
)
Other, net
    
(367
)
    
473
  
Net cash used in operating activities
    
(11,610
)
    
(8,007
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Proceeds from investments sold
    
9
      
44
  
Proceeds from investments matured, called or redeemed
    
1,769
      
3,875
  
Investments purchased
    
(6,418
)
    
(5,052
)
Additions to property and equipment
    
(59
)
    
(1
)
Net cash used in investing activities
    
(4,699
)
    
(1,134
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Treasury stock acquired — net employee share-based compensation
     (6 )     —  
Proceeds from revolving credit facility, net
     1,000       —  
Net cash provided by financing activities
    
994
      
—
  
                 
Net decrease in cash and cash equivalents
    
(15,315
)
    
(9,141
)
Cash and cash equivalents at beginning of period
    
28,863
      
24,753
  
Cash and cash equivalents at end of period
  
$
13,548
    
$
15,612
  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                
Cash paid for interest
  
$
759
    
$
346
  

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, Bankers Fidelity Assurance Company and Atlantic Capital Life 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, 2022 (the “2022 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, 2023 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, 2023 or for any other future period.



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


Adoption of New Accounting Standards



Financial Instruments – Credit Losses. In June 2016, the FASB issued accounting standards update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (including reinsurance recoverables, premium and other receivables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, are recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.



The updated guidance also amends the previous other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.



The Company adopted the updated guidance as of January 1, 2023. The updated guidance was applied by a cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2023, the beginning of the period of adoption. The adoption of this guidance resulted in the recognition of an after-tax cumulative effect adjustment of $0.1 million to reflect the impact of recognizing expected credit losses, as compared to incurred credit losses recognized under the previous guidance. This adjustment is primarily associated with reinsurance recoverables, premium and other receivables. The cumulative effect adjustment decreased retained earnings as of January 1, 2023 and increased the allowance for estimated uncollectible reinsurance.



Impact of Adoption on Condensed Consolidated Balance Sheet


8

Reinsurance Recoverables



The following table presents the balances of reinsurance recoverables, net of the allowance for estimated uncollectible reinsurance, at January 1, 2023 and March 31, 2023, and the changes in the allowance for estimated uncollectible reinsurance for the three months ended March 31, 2023.

   
At and for the three months ended, March 31, 2023
  
(in thousands)
  
Reinsurance Recoverables, Net
of Allowance for Estimated
Uncollectible Reinsurance
    
Allowance for Estimated
Uncollectible Reinsurance
  
Balance, beginning of period
  
$
25,913
    
$
—
  
Cumulative effect of adoption of updated accounting guidance for
 credit losses at January 1, 2023
     —      
75
  
Current period change for estimated uncollectible reinsurance
     —      
(6
)
Write-offs of uncollectible reinsurance recoverables
     —      
—
  
Balance, end of period
  
$
24,916
    
$
69
  



Insurance Premium and Other Receivables



The following table presents the balances of insurance premiums and other, net of the allowance for expected credit losses, at January 1, 2023 and March 31, 2023, and the changes in the allowance for doubtful accounts/expected credit losses for the three months ended March 31, 2023.


   
At and for the three months ended, March 31, 2023
  
(in thousands)
  
Insurance Premiums and Other,
Net of Expected Credit Losses
    
Allowance for Doubtful
Accounts/Expected Credit Losses
  
Balance, beginning of period
  
$
15,386
    
$
177
  
Cumulative effect of adoption of updated accounting guidance for
 credit losses at January 1, 2023
     —      
—
  
Current period change for expected credit losses
     —      
20
  
Write-offs of uncollectible insurance premiums and other receivables
     —       —  
Balance, end of period
  
$
11,555
    
$
197
  



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 2022 Annual Report.



Accounting Policies



The following accounting policies have been updated to reflect the Company’s adoption of Financial Instruments - Credit Losses, as described above.



Credit Impairments of Fixed Maturities



The Company’s investments in fixed maturities, which include bonds and redeemable preferred stocks, are classified as “available-for-sale” and, accordingly, are carried at fair value with the after-tax difference from amortized cost, less Allowance for Credit Losses (“ACL”), as adjusted if applicable, reflected in shareholders’ equity as a component of accumulated other comprehensive income or loss. The Company’s equity securities, which include common and non-redeemable preferred stocks, are carried at fair value with changes in fair value reported in net income. The fair values of fixed maturities and equity securities are largely determined from publicly quoted market prices, when available, or independent broker quotations. Values that are not determined using quoted market prices inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility than the value of securities with publicly quoted market prices.


9

Prior to January 1, 2023, the Company applied other than temporary impairment (“OTTI”) guidance for securities in an unrealized loss position. An OTTI was recognized in earnings within realized investment gains (losses) when it was anticipated that the amortized cost would not be recovered. When either: (i) the Company had the intent to sell the security, or (ii) it was more likely than not that the Company would be required to sell the security before recovery, the reduction of amortized cost and the OTTI recognized in earnings was the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions existed, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected was recognized as a reduction of amortized cost and an OTTI in earnings. If the estimated fair value was less than the present value of projected future cash flows expected to be collected, this portion of the decline in value related to other-than-credit factors was recorded in OCI.



On January 1, 2023, the Company adopted ASU 2016-13 using a modified retrospective approach. Under ASU 2016-13, for securities in an unrealized loss position, a credit loss is recognized in earnings within realized investment gains (losses) when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the reduction of amortized cost and the loss recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized as a credit loss by establishing an ACL with a corresponding charge to earnings in realized investment gains (losses). However, the ACL is limited by the amount that the fair value is less than the amortized cost. This limitation is known as the “fair value floor.” If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of the decline in value related to other-than-credit factors (“noncredit loss”) is recorded in OCI.



Reinsurance Recoverables



The Company’s insurance subsidiaries from time to time purchase reinsurance from unaffiliated insurers and reinsurers to reduce their potential liability on individual risks and to protect against catastrophic losses. In a reinsurance transaction, an insurance company transfers, or “cedes,” a portion or all of its exposure on insurance policies to a reinsurer. The reinsurer assumes the exposure in return for a portion of the premiums. The ceding of insurance does not legally discharge the insurer from primary liability for the full amount of the policies written by it, and the ceding company will incur a loss if the reinsurer fails to meet its obligations under the reinsurance agreement.



Amounts currently recoverable under reinsurance agreements are included in reinsurance receivables and amounts currently payable are included in other liabilities. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.



Insurance Premiums and Other Receivables



Receivables amounts due from insureds and agents are evaluated periodically for collectibility. Allowances for expected credit losses are established, as and when a loss has been determined probable, against the related receivable. An allowance for expected credit loss is recognized by the Company when determined on a specific account basis and a general provision for loss is made based on the Company’s historical and expected experience.

Note 3.
Investments
 

The following tables set forth the estimated fair value, gross unrealized gains, gross unrealized losses, allowance for credit 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, 2023 and December 31, 2022.
 
10

Fixed maturities were comprised of the following:
 
   
March 31, 2023
  
   
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Allowance for
Credit Losses
    
Cost or
Amortized
Cost
  
Fixed maturities:
                              
Bonds:
                              
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  
$
49,729
    
$
25
    
$
5,324
     $
—    
$
55,028
  
Obligations of states and political subdivisions
     9,545
       30
       1,367
       —       10,882
  
Corporate securities:
                                        
Utilities and telecom
     22,747
       230
       2,744
       —       25,261
  
Financial services
     59,765
       456
       6,422
       —       65,731
  
Other business – diversified
     32,176
       225
       3,620
       —       35,571
  
Other consumer – diversified
     43,844
       52
       4,884
       —       48,676
  
Total corporate securities
     158,532
       963
       17,670
       —       175,239
  
Redeemable preferred stocks:
                                        
Other consumer – diversified
     232
       39
       —
       —       193
  
Total redeemable preferred stocks
     232
       39
       —
       —       193
  
Total fixed maturities
   $ 218,038     $ 1,057     $ 24,361     $
—     $ 241,342  

   
December 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
  
$
44,412
    
$
5
    
$
5,926
    
$
50,333
  
Obligations of states and political subdivisions
     9,187       4
       1,702
       10,885  
Corporate securities:
                                
Utilities and telecom
     22,090       120       3,299       25,269  
Financial services
     59,054       397       7,085       65,742  
Other business – diversified
     31,058       161       4,689       35,586  
Other consumer – diversified
     42,705       35       6,089       48,759  
Total corporate securities
     154,907       713       21,162       175,356  
Redeemable preferred stocks:
                                
Other consumer – diversified
     223       31       —       192  
Total redeemable preferred stocks
     223       31       —       192  
Total fixed maturities
   $
 208,729     $
 753     $
 28,790     $ 236,766  
 

Bonds having an amortized cost of $11,576 and $12,333 and included in the tables above were on deposit with insurance regulatory authorities as of March 31, 2023 and December 31, 2022, respectively, in accordance with statutory requirements. Additionally, bonds having an amortized cost of $7,761 and $7,221 and included in the tables above were pledged as collateral to the Federal Home Loan Bank of Atlanta (“FHLB”) at March 31, 2023 and December 31, 2022, respectively.


Equity securities were comprised of the following:
   
   
March 31, 2023
  
   
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Cost or
Amortized
Cost
  
Equity securities:
                        
Common and non-redeemable preferred stocks:
                        
Financial services
  
$
 768

$
 497

$
 —

$
 271
  
Other business – diversified
     8,413


3,780


—


4,633
  
Total equity securities
  
$
 9,181

$
 4,277

$
 —

$
 4,904
  

   
December 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
  
$
 790

$
 516

$
 —

$
 274  
Other business – diversified
     10,772


6,139


—


4,633  
Total equity securities
  
$
 11,562

$
 6,655

$
 —

$
 4,907  

11

The carrying value and amortized cost of the Company’s investments in fixed maturities at March 31, 2023 and December 31, 2022 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, 2023
    
December 31, 2022
  
   
Carrying
Value
    
Amortized
Cost
    
Carrying
Value
    
Amortized
Cost
  
Due in one year or less
  
$
 2,615

$
 2,625

$
 3,776

$
 3,797
  
Due after one year through five years
     54,206


56,694


40,150


42,174
  
Due after five years through ten years
     39,358


43,465


44,044


49,711
  
Due after ten years
     85,702


97,844


87,719


103,095
  
Asset backed securities
     36,157


40,714


33,040


37,989
  
Totals
  
$
 218,038

$
 241,342

$
 208,729

$
 236,766
  
    

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, 2023 and December 31, 2022.
 
   
March 31, 2023
  
   
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
   $ 9,917     $ 227     $ 35,838     $ 5,097     $ 45,755     $ 5,324  
Obligations of states and political subdivisions
     —       —       5,991       1,367       5,991       1,367  
Corporate securities
     21,274
       525
       125,555
       17,145
       146,829
       17,670
  
Total temporarily impaired securities
   $ 31,191     $ 752     $ 167,384     $ 23,609     $ 198,575     $ 24,361  

   
December 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
  
$
 23,763

$
 2,410

$
 19,259

$
 3,516

$
 43,022

$
 5,926
  
Obligations of states and political subdivisions
    8,183       1,702       —       —       8,183       1,702  
Corporate securities
     127,928


16,214


14,514


4,948


142,442


21,162
  
Total temporarily impaired securities
  
$
 159,874

$
 20,326

$
 33,773

$
 8,464

$
 193,647

$
 28,790
  
    

Analysis of Securities in Unrealized Loss Positions


As of March 31, 2023 and December 31, 2022, there were 243 and 237 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 unrealized losses on the Company’s fixed maturity securities investments have been primarily related to general market changes in interest rates and/or the levels of credit spreads rather than specific concerns with the issuer’s ability to pay interest and repay principal.


For any of its fixed maturity securities with significant declines in fair value, the Company performs detailed analyses to identify whether the drivers of the declines are due to general market drivers, such as the recent rise in interest rates, or due to credit-related factors. Identifying the drivers of the declines in fair value helps to align and allocate the Company‘s resources to securities with real credit-related concerns that could impact the ultimate collection of principal and interest. For any significant declines in fair value determined to be non-interest rate or market related, the Company performs a more focused review of the related issuers’ specific credit profile.


For corporate issuers, the Company evaluates their assets, business profile including industry dynamics and competitive positioning, financial statements and other available financial data. For non-corporate issuers, the Company analyzes all sources of credit support, including issuer-specific factors. The Company utilizes information available in the public domain and, for certain private placement issuers, from consultations with the issuers directly. The Company also considers ratings from Nationally Recognized Statistical Rating Organizations (NRSROs), as well as the specific characteristics of the security it owns including seniority in the issuer’s capital structure, covenant protections, or other relevant features. From these reviews, the Company evaluates the issuers’ continued ability to service the Company’s investment through payment of interest and principal.

12

Assuming no credit-related factors develop, unrealized gains and losses on fixed maturity securities are expected to diminish as investments near maturity. Based on its credit analysis, the Company believes that the issuers of its fixed maturity investments in the sectors shown in the table above have the ability to service their obligations to the Company, and the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.


However, from time to time the Company identifies certain available-for-sale fixed maturity securities where the amortized cost basis exceeds the present value of the cash flows expected to be collected due to credit related factors and as a result, a credit allowance will be estimated.  The Company had no ACL on its available-for-sale fixed maturities as of March 31, 2023.
 

The following table is a summary of realized investment gains (losses) for the three month period ended March 31, 2023 and 2022.
   
   
Three Months Ended
March 31, 2023
  
   
Fixed
Maturities
    
Equity
Securities
    
Other
Invested
Assets
    
Total
  
Gains
  
$
—
    
$
—
    
$
—
    
$
—
  
Losses
     —
    —       —
    —
Realized investment losses, net
  
$
—

 
$
—
    
$
—

 
$
—


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


The following table presents the portion of unrealized gains (losses) related to equity securities still held for the three month period ended March 31, 2023 and 2022.

 
Three Months Ended
March 31,
  
  2023   2022
 
Net realized and unrealized gains (losses) recognized during the period on equity securities
  
$
(2,375
)
  
$
2,193
  
Less: Net realized gains recognized during the period on equity securities sold during the period
    
—
      
—
  
Unrealized gains (losses) recognized during the reporting period on equity securities, net
  
$
(2,375
)
  
$
2,193
  
  

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 $5,372 and $5,386 as of March 31, 2023 and December 31, 2022, respectively. The Company’s VIE interests, carried as a part of investment in unconsolidated trusts, totaled $1,238 as of March 31, 2023 and December 31, 2022.


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 $6,610 and $6,624, as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, the Company had outstanding commitments totaling $5,872, 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.

13
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 one equity security.  As of March 31, 2023 and December 31, 2022, the value of the equity security valued using Level 3 criteria was $154 and $156, 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, 2023, 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
  
$
—
    
$
218,038
    
$
—
    
$
218,038
  
Equity securities
    
9,027
      
—
      
154
      
9,181
  
Cash equivalents
    
9,884
      
—
      
—
      
9,884
  
Total
  
$
18,911
    
$
218,038
    
$
154
    
$
237,103
  

14

As of December 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
  
$
—
    
$
208,729
    
$
—
    
$
208,729
  
Equity securities
    
11,406
      
—
      
156
      
11,562
  
Cash equivalents
    
18,861
      
—
      
—
      
18,861
  
Total
  
$
30,267
    
$
208,729
    
$
156
    
$
239,152
  


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, 2023 and December 31, 2022.

       
March 31, 2023
    
December 31, 2022
  
 
Level in Fair
Value
Hierarchy (1)
    
Carrying
Amount
    
Estimated
Fair Value
    
Carrying
Amount
    
Estimated
Fair Value
  
Assets:
                            
Cash and cash equivalents
Level 1
    
$
13,548
    
$
13,548
    
$
28,863
    
$
28,863
  
Fixed maturities
  
 (1)     
218,038
      
218,038
      
208,729
      
208,729
  
Equity securities
(1) 
    
9,181
      
9,181
      
11,562
      
11,562
  
Other invested assets
Level 3
      
5,372
      
5,372
      
5,386
      
5,386
  
Policy loans
Level 2
      
1,792
      
1,792
      
1,759
      
1,759
  
Investment in unconsolidated trusts
Level 2
      
1,238
      
1,238
      
1,238
      
1,238
  
                                     
Liabilities:
                                    
Junior subordinated debentures, net
Level 2
      
33,738
      
33,585
      
33,738
      
33,810
  
Revolving credit facility
  Level 2       3,000       3,000       2,009       2,009  

(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 $592 and $8 during the three months ended March 31, 2023 and 2022, respectively.  As a result, the Company has capitalized $3,614 in implementation costs in other assets within its condensed consolidated balance sheet as of March 31, 2023.  The Company expects the software will be substantially ready for its intended use in the three months ended September 30, 2023.  Accordingly, the Company has not recorded any amortization expense related to software implementation costs for the three months ended March 31, 2023.

Note 6.
Insurance Reserves for Losses and Claims


The roll-forward of insurance reserves for losses and claims for the three months ended March 31, 2023 and 2022 is as follows:

   
Three Months Ended
March 31,
  
   
2023
   
2022
 
Beginning insurance reserves for losses and claims, gross  
$
87,484
    
$
85,620
  
Less: Reinsurance recoverable on unpaid losses
    
(17,647
)
    
(17,690
)
Beginning insurance reserves for losses and claims, net
    
69,837
      
67,930
  
                 
Incurred related to:
                
Current accident year
    
30,836
      
32,542
  
Prior accident year development (1)
     (638 )(2)    
(1,523
)(3)
Total incurred
    
30,198
      
31,019
  
                 
Paid related to:
                
Current accident year
    
9,174
      
10,629
  
Prior accident years
    
21,504
      
19,966
  
Total paid
    
30,678
      
30,595
  
Ending insurance reserves for losses and claims, net
    
69,357
      
68,354
  
Plus: Reinsurance recoverable on unpaid losses