10-Q 1 form10q.htm 10-Q

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

FORM 10-Q

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

For the quarterly period ended June 30, 2019

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 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, smaller reporting company, or an emerging growth company. See 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  ☐  (Do not check if a smaller reporting company)  Smaller reporting company  ☑   Emerging growth company  ☐

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

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

The total number of shares of the registrant’s Common Stock, $1 par value, outstanding on July 26, 2019 was 20,160,859.



ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

Part I.
Financial Information

     
Item 1.
2
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
22
     
Item 4.
29
     
Part II.
Other Information
 
     
Item 2.
30
     
Item 6.
30
     
 
31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

ASSETS

   
Unaudited
June 30,
2019
   
December 31,
2018
 
Cash and cash equivalents
 
$
11,450
   
$
12,630
 
Investments:
               
Fixed maturities, available-for-sale, at fair value (amortized cost: $217,291 and $219,924)
   
223,275
     
210,386
 
Equity securities, at fair value (cost: $9,060 and $10,515)
   
20,455
     
20,758
 
Other invested assets (cost: $7,005 and $6,905)
   
7,380
     
7,424
 
Policy loans
   
2,007
     
2,085
 
Real estate
   
38
     
38
 
Investment in unconsolidated trusts
   
1,238
     
1,238
 
Total investments
   
254,393
     
241,929
 
Receivables:
               
Reinsurance
   
30,253
     
26,110
 
Insurance premiums and other (net of allowance for doubtful accounts: $187 and $207)
   
23,891
     
15,223
 
Deferred income taxes, net
   
1,537
     
4,184
 
Deferred acquisition costs
   
38,144
     
37,094
 
Other assets
   
9,518
     
4,560
 
Intangibles
   
2,544
     
2,544
 
Total assets
 
$
371,730
   
$
344,274
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Insurance reserves and policyholder funds:
               
Future policy benefits
 
$
92,108
   
$
90,257
 
Unearned premiums
   
33,947
     
24,206
 
Losses and claims
   
75,155
     
72,612
 
Other policy liabilities
   
1,331
     
1,973
 
Total insurance reserves and policyholder funds
   
202,541
     
189,048
 
Other liabilities
   
22,681
     
20,116
 
Junior subordinated debenture obligations, net
   
33,738
     
33,738
 
Total liabilities
   
258,960
     
242,902
 
                 
Commitments and contingencies (Note 10)
               
Shareholders’ equity:
               
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, 55,000 shares issued and outstanding; $5,500 redemption value
   
55
     
55
 
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,400,894; shares outstanding: 20,160,859 and 20,170,360
   
22,401
     
22,401
 
Additional paid-in capital
   
57,444
     
57,414
 
Retained earnings
   
36,342
     
37,208
 
Accumulated other comprehensive income (loss)
   
4,727
     
(7,535
)
Unearned stock grant compensation
   
(150
)
   
(186
)
Treasury stock, at cost: 2,240,035 and 2,230,534 shares
   
(8,049
)
   
(7,985
)
Total shareholders’ equity
   
112,770
     
101,372
 
Total liabilities and shareholders’ equity
 
$
371,730
   
$
344,274
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Revenue:
                       
Insurance premiums, net
 
$
45,469
   
$
42,845
   
$
90,251
   
$
85,047
 
Net investment income
   
2,313
     
2,537
     
4,647
     
4,896
 
Realized investment gains (losses), net
   
610
     
(57
)
   
1,995
     
313
 
Unrealized gains (losses) on equity securities, net
   
(5,337
)
   
4,089
     
1,152
     
(330
)
Other income
   
72
     
29
     
100
     
57
 
Total revenue
   
43,127
     
49,443
     
98,145
     
89,983
 
                                 
Benefits and expenses:
                               
Insurance benefits and losses incurred
   
34,151
     
32,219
     
69,458
     
65,391
 
Commissions and underwriting expenses
   
11,509
     
9,715
     
22,524
     
19,734
 
Interest expense
   
545
     
506
     
1,091
     
968
 
Other expense
   
2,511
     
2,970
     
5,376
     
6,208
 
Total benefits and expenses
   
48,716
     
45,410
     
98,449
     
92,301
 
Income (loss) before income taxes
   
(5,589
)
   
4,033
     
(304
)
   
(2,318
)
Income tax expense (benefit)
   
(1,163
)
   
848
     
(40
)
   
(479
)
Net income (loss)
   
(4,426
)
   
3,185
     
(264
)
   
(1,839
)
Preferred stock dividends
   
(100
)
   
(100
)
   
(199
)
   
(199
)
Net income (loss) applicable to common shareholders
 
$
(4,526
)
 
$
3,085
   
$
(463
)
 
$
(2,038
)
Earnings (loss) per common share (basic)
 
$
(.22
)
 
$
.15
   
$
(.02
)
 
$
(.10
)
Earnings (loss) per common share (diluted)
 
$
(.22
)
 
$
.15
   
$
(.02
)
 
$
(.10
)

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

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Net income (loss)
 
$
(4,426
)
 
$
3,185
   
$
(264
)
 
$
(1,839
)
Other comprehensive income (loss):
                               
Available-for-sale fixed maturity securities:
                               
Gross unrealized holding gain (loss) arising in the period
   
7,964
     
(3,616
)
   
16,404
     
(10,390
)
Related income tax effect
   
(1,673
)
   
760
     
(3,445
)
   
2,182
 
Subtotal
   
6,291
     
(2,856
)
   
12,959
     
(8,208
)
Less: reclassification adjustment for net realized (gains) losses included in net income (loss)
   
(610
)
   
57
     
(882
)
   
(313
)
Related income tax effect
   
128
     
(12
)
   
185
     
66
 
Subtotal
   
(482
)
   
45
     
(697
)
   
(247
)
Total other comprehensive income (loss), net of tax
   
5,809
     
(2,811
)
   
12,262
     
(8,455
)
Total comprehensive income (loss)
 
$
1,383
   
$
374
   
$
11,998
   
$
(10,294
)

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

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Preferred stock:
                       
Balance, beginning of period
 
$
55
   
$
55
   
$
55
   
$
55
 
Repurchases of preferred stock
   
-
     
-
     
-
     
-
 
Net issuance of preferred stock
   
-
     
-
     
-
     
-
 
Balance, end of period
   
55
     
55
     
55
     
55
 
Common stock:
                               
Balance, beginning of period
   
22,401
     
22,401
     
22,401
     
22,401
 
Repurchases of common stock
   
-
     
-
     
-
     
-
 
Net issuance of common stock
   
-
     
-
     
-
     
-
 
Balance, end of period
   
22,401
     
22,401
     
22,401
     
22,401
 
Additional paid-in capital:
                               
Balance, beginning of period
   
57,417
     
57,431
     
57,414
     
57,495
 
Restricted stock grants, net of forfeitures
   
24
     
(20
)
   
24
     
(88
)
Issuance of shares under stock plans
   
3
     
5
     
6
     
9
 
Balance, end of period
   
57,444
     
57,416
     
57,444
     
57,416
 
Retained earnings:
                               
Balance, beginning of period
   
40,868
     
33,188
     
37,208
     
30,993
 
Cumulative effect of adoption of  updated accounting guidance for  equity financial instruments at January 1, 2018
   
-
     
-
     
-
     
9,825
 
Reclassification of certain tax effects  from accumulated other  comprehensive income at  January 1, 2018
   
-
     
-
     
-
     
(2,100
)
Net income (loss)
   
(4,426
)
   
3,185
     
(264
)
   
(1,839
)
Dividends on common stock
   
-
     
-
     
(403
)
   
(407
)
Dividends accrued on preferred stock
   
(100
)
   
(100
)
   
(199
)
   
(199
)
Balance, end of period
   
36,342
     
36,273
     
36,342
     
36,273
 
Accumulated other comprehensive income (loss):
                               
Balance, beginning of period
   
(1,082
)
   
(3,618
)
   
(7,535
)
   
9,751
 
Cumulative effect of adoption of  updated accounting guidance for  equity financial instruments at January 1, 2018
   
-
     
-
     
-
     
(9,825
)
Reclassification of certain tax effects  from accumulated other  comprehensive income at  January 1, 2018
   
-
     
-
     
-
     
2,100
 
Other comprehensive income (loss), net of tax
   
5,809
     
(2,811
)
   
12,262
     
(8,455
)
Balance, end of period
   
4,727
     
(6,429
)
   
4,727
     
(6,429
)
Unearned Stock Grant Compensation:
                               
Balance, beginning of period
   
(128
)
   
(387
)
   
(186
)
   
(579
)
Restricted stock grants, net of forfeitures
   
(71
)
   
20
     
(71
)
   
135
 
Amortization of unearned compensation
   
49
     
45
     
107
     
122
 
Balance, end of period
   
(150
)
   
(322
)
   
(150
)
   
(322
)
Treasury Stock:
                               
Balance, beginning of period
   
(8,044
)
   
(7,346
)
   
(7,985
)
   
(7,133
)
Restricted stock grants, net of forfeitures
   
47
     
-
     
47
     
(47
)
Purchase of shares for treasury
   
(22
)
   
(281
)
   
(71
)
   
(360
)
Net shares acquired related to employee share-based compensation plans
   
(35
)
   
(107
)
   
(49
)
   
(197
)
Issuance of shares under stock plans
   
5
     
7
     
9
     
10
 
Balance, end of period
   
(8,049
)
   
(7,727
)
   
(8,049
)
   
(7,727
)
                                 
Total shareholders’ equity
 
$
112,770
   
$
101,667
   
$
112,770
   
$
101,667
 
Dividends declared on common stock per share
 
$
-
   
$
-
   
$
(.02
)
 
$
(.02
)

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

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

   
Six Months Ended
June 30,
 
   
2019
   
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(264
)
 
$
(1,839
)
Adjustments to reconcile loss to net cash used in operating activities:
               
Acquisition costs deferred, net
   
(1,050
)
   
(1,499
)
Realized investment gains, net
   
(1,995
)
   
(313
)
Unrealized (gains) losses on equity securities, net
   
(1,152
)
   
330
 
Distributions received from equity method investees
   
106
     
202
 
Compensation expense related to share awards
   
107
     
122
 
Depreciation and amortization
   
337
     
532
 
Deferred income tax benefit
   
(612
)
   
(1,218
)
Increase in receivables, net
   
(13,393
)
   
(12,691
)
Increase in insurance reserves and policyholder funds
   
13,493
     
17,837
 
Increase (decrease) in other liabilities
   
2,366
     
(7,712
)
Other, net
   
(5,162
)
   
(147
)
Net cash used in operating activities
   
(7,219
)
   
(6,396
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from investments sold
   
70,171
     
25,849
 
Proceeds from investments matured, called or redeemed
   
3,628
     
3,985
 
Investments purchased
   
(67,220
)
   
(39,329
)
Additions to property and equipment
   
(32
)
   
(224
)
Net cash provided by (used in) investing activities
   
6,547
     
(9,719
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment of dividends on common stock
   
(403
)
   
(407
)
Proceeds from shares issued under stock plans
   
15
     
19
 
Treasury stock acquired — share repurchase authorization
   
(71
)
   
(360
)
Treasury stock acquired — net employee share-based compensation
   
(49
)
   
(197
)
Net cash used in financing activities
   
(508
)
   
(945
)
                 
Net decrease in cash and cash equivalents
   
(1,180
)
   
(17,060
)
Cash and cash equivalents at beginning of period
   
12,630
     
24,547
 
                 
Cash and cash equivalents at end of period
 
$
11,450
   
$
7,487
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
 
$
1,100
   
$
941
 
Cash paid for income taxes
 
$
850
   
$
1,412
 

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, 2018 (the “2018 Annual Report”). The Company’s financial condition and results of operations and cash flows as of and for the three month and six month periods ended June 30, 2019 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, 2019 or for any other future period.

The Company’s significant accounting policies have not changed materially from those set out in the 2018 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

Adoption of New Accounting Standards

Leases. On January 1, 2019, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The objective of this ASU, along with several related ASUs issued subsequently, is to increase transparency and comparability between organizations that enter into lease agreements. For lessees, the key difference of the new standard from the previous guidance (Topic 840) is the recognition of a right-of-use (“ROU”) asset and lease liability on the balance sheet. The most significant change is the requirement to recognize ROU assets and lease liabilities for leases classified as operating leases. The new standard requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

As part of the transition to the new standard, the Company was required to measure and recognize leases that existed at January 1, 2019 and elected to use a modified retrospective approach. For leases that existed at the effective date, the Company elected the package of three transition practical expedients and therefore did not reassess any of the following: (i) whether an arrangement is or contains a lease, (ii) lease classification, or (iii) what qualifies as an initial direct cost.

The adoption of this ASU resulted in the Company recognizing a ROU asset of $6,088 as part of other assets and a lease liability of $6,088 as part of other liabilities in the consolidated balance sheet. The adoption of this ASU did not have a material effect on the Company’s results of operations or liquidity.

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09, as modified, provides guidance for recognizing revenue which excludes insurance contracts and financial instruments. Revenue is to be recognized when, or as, goods or services are transferred to customers in an amount that reflects the consideration that an entity is expected to be entitled in exchange for those goods or services. For the six months ended June 30, 2019 and 2018, approximately $100 and $57, respectively, or approximately one-tenth of 1% of the Company’s total revenues, were within the scope of this updated guidance. The Company adopted ASU 2014-09 as of January 1, 2018. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

Future Adoption of New Accounting Standards

For 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 2018 Annual Report.

Note 3.
Investments

The following tables set forth the estimated fair value, gross unrealized gains, gross unrealized losses and cost or amortized cost of the Company’s investments in fixed maturities and equity securities, aggregated by type and industry, as of June 30, 2019 and December 31, 2018.

Fixed maturities were comprised of the following:

   
June 30, 2019
 
   
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
 
$
27,929
   
$
560
   
$
329
   
$
27,698
 
Obligations of states and political subdivisions
   
4,999
     
420
     
-
     
4,579
 
Corporate securities:
                               
Utilities and telecom
   
17,482
     
1,654
     
-
     
15,828
 
Financial services
   
61,103
     
2,506
     
474
     
59,071
 
Other business – diversified
   
43,516
     
1,667
     
658
     
42,507
 
Other consumer – diversified
   
68,054
     
1,889
     
1,251
     
67,416
 
Total corporate securities
   
190,155
     
7,716
     
2,383
     
184,822
 
Redeemable preferred stocks:
                               
Other consumer – diversified
   
192
     
     
     
192
 
Total redeemable preferred stocks
   
192
     
     
     
192
 
Total fixed maturities
 
$
223,275
   
$
8,696
   
$
2,712
   
$
217,291
 

   
December 31, 2018
 
   
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
 
$
27,422
   
$
36
   
$
1,061
   
$
28,447
 
Obligations of states and political subdivisions
   
8,364
     
347
     
72
     
8,089
 
Corporate securities:
                               
Utilities and telecom
   
19,642
     
873
     
431
     
19,200
 
Financial services
   
49,477
     
747
     
2,942
     
51,672
 
Other business – diversified
   
49,196
     
226
     
2,844
     
51,814
 
Other consumer – diversified
   
56,093
     
84
     
4,501
     
60,510
 
Total corporate securities
   
174,408
     
1,930
     
10,718
     
183,196
 
Redeemable preferred stocks:
                               
Other consumer – diversified
   
192
     
     
     
192
 
Total redeemable preferred stocks
   
192
     
     
     
192
 
Total fixed maturities
 
$
210,386
   
$
2,313
   
$
11,851
   
$
219,924
 

Bonds having an amortized cost of $10,444 and $10,452 and included in the tables above were on deposit with insurance regulatory authorities as of June 30, 2019 and December 31, 2018, respectively, in accordance with statutory requirements.

Equity securities were comprised of the following:

   
June 30, 2019
 
   
Estimated
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Cost or
Amortized
Cost
 
Equity securities:
                       
Common and non-redeemable preferred stocks:
                       
Financial services
 
$
4,799
   
$
419
   
$
   
$
4,380
 
Other business – diversified
   
318
     
271
     
     
47
 
Other consumer – diversified
   
15,338
     
10,705
     
     
4,633
 
Total equity securities
 
$
20,455
   
$
11,395
   
$
   
$
9,060
 

   
December 31, 2018
 
   
Estimated
Fair Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Cost or
Amortized
Cost
 
Equity securities:
                       
Common and non-redeemable preferred stocks:
                       
Utilities and telecom
 
$
1,686
   
$
722
   
$
   
$
964
 
Financial services
   
4,552
     
172
     
     
4,380
 
Other business – diversified
   
306
     
259
     
     
47
 
Other consumer – diversified
   
14,214
     
9,090
     
     
5,124
 
Total equity securities
 
$
20,758
   
$
10,243
   
$
   
$
10,515
 

The carrying value and amortized cost of the Company’s investments in fixed maturities at June 30, 2019 and December 31, 2018 by contractual maturity were as follows. Actual maturities may differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.

   
June 30, 2019
   
December 31, 2018
 
   
Carrying
Value
   
Amortized
Cost
   
Carrying
Value
   
Amortized
Cost
 
Due in one year or less
 
$
-
   
$
-
   
$
3,150
   
$
3,150
 
Due after one year through five years
   
16,262
     
16,345
     
19,787
     
19,699
 
Due after five years through ten years
   
93,243
     
91,052
     
127,617
     
133,863
 
Due after ten years
   
97,444
     
93,488
     
43,823
     
46,338
 
Asset backed securities
   
16,326
     
16,406
     
16,009
     
16,874
 
Totals
 
$
223,275
   
$
217,291
   
$
210,386
   
$
219,924
 

The following tables present the Company’s unrealized losses for securities by type and length of time the security was in a continuous unrealized loss position as of June 30, 2019 and December 31, 2018.

 
June 30, 2019
 
 
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
 
$
   
$
   
$
10,865
   
$
329
   
$
10,865
   
$
329
 
Corporate securities
   
2,051
     
5
     
32,070
     
2,378
     
34,121
     
2,383
 
Total temporarily impaired securities
 
$
2,051
   
$
5
   
$
42,935
   
$
2,707
   
$
44,986
   
$
2,712
 

 
December 31, 2018
 
 
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
 
$
   
$
   
$
24,786
   
$
1,061
   
$
24,786
   
$
1,061
 
Obligations of states and political subdivisions
   
     
     
3,980
     
72
     
3,980
     
72
 
Corporate securities
   
49,633
     
1,592
     
97,012
     
9,126
     
146,645
     
10,718
 
Total temporarily impaired securities
 
$
49,633
   
$
1,592
   
$
125,778
   
$
10,259
   
$
175,411
   
$
11,851
 

The evaluation for an other than temporary impairment (“OTTI”) is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. Potential risks and uncertainties include, among other things, changes in general economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. In evaluating a potential impairment, the Company considers, among other factors, management’s intent and ability to hold the securities until price recovery, the nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit status.

There were no OTTI charges recorded during the three month and six month periods ended June 30, 2019 and 2018.

As of June 30, 2019 and December 31, 2018, there were thirty-three and one hundred forty securities, respectively, in an unrealized loss position which primarily included certain of the Company’s investments in fixed maturities within the financial services, other diversified business and other diversified consumer sectors. The decrease in the number and value of securities in an unrealized loss position during the six month period ended June 30, 2019 was primarily attributable to the appreciation of fixed maturity market prices due to the current interest rate environment. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, including those described above, the Company has deemed these securities to be temporarily impaired as of June 30, 2019.

The following table is a summary of realized investment gains (losses) for the three month and six month periods ended June 30, 2019 and 2018.

 
Three Months Ended
June 30, 2019
 
 
Fixed
Maturities
 
Equity
Securities
 
Other
Invested
Assets
 
Total
 
Gains
 
$
610
   
$
   
$
   
$
610
 
Losses
   
     
     
     
 
Realized investment gains (losses), net
 
$
610
   
$
   
$
   
$
610
 

 
Three Months Ended
June 30, 2018
 
 
Fixed
Maturities
 
Equity
Securities
 
Other
Invested
Assets
 
Total
 
Gains
 
$
247
   
$
   
$
   
$
247
 
Losses
   
(304
)
   
     
     
(304
)
Realized investment gains (losses), net
 
$
(57
)
 
$
   
$
   
$
(57
)

 
Six Months Ended
June 30, 2019
 
 
Fixed
Maturities
 
Equity
Securities
 
Other
Invested
Assets
 
Total
 
Gains
 
$
882
   
$
1,113
   
$
   
$
1,995
 
Losses
   
     
     
     
 
Realized investment gains (losses), net
 
$
882
   
$
1,113
   
$
   
$
1,995
 

 
Six Months Ended
June 30, 2018
 
 
Fixed
Maturities
 
Equity
Securities
 
Other
Invested
Assets
 
Total
 
Gains
 
$
617
   
$
   
$
   
$
617
 
Losses
   
(304
)
   
     
     
(304
)
Realized investment gains (losses), net
 
$
313
   
$
   
$
   
$
313
 

The following table presents the portion of unrealized gains (losses) related to equity securities still held for the three month and six month periods ended June 30, 2019 and 2018.

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Net gains (losses) recognized during the period on equity securities
 
$
(5,337
)
 
$
4,089
   
$
2,265
   
$
(330
)
Less: Net gains (losses) recognized during the period on equity securities sold during the period
   
-
     
-
     
1,113
     
-
 
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date
 
$
(5,337
)
 
$
4,089
   
$
1,152
   
$
(330
)

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 $7,380 and $7,424 as of June 30, 2019 and December 31, 2018, respectively. The Company’s VIE interests, carried as a part of investment in unconsolidated trusts, totaled $1,238 as of June 30, 2019 and December 31, 2018.

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 $8,618 and $8,662, as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019 and December 31, 2018, the Company has outstanding commitments totaling $4,900 and $0, respectively, whereby the Company is committed to fund these investments and may be called by such VIEs 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, U.S. Treasury securities 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. 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 a matrix pricing concept, which is a mathematical technique used widely in the industry to value debt securities based on various relationships to other benchmark quoted prices.

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. The Company’s financial instruments valued using Level 3 criteria consist of a limited number of fixed maturities. As of June 30, 2019 and December 31, 2018, the value of the Company’s fixed maturities valued using Level 3 criteria was $1,174 and $1,066, respectively. The use of different criteria or assumptions regarding data may have yielded materially different valuations.

As of June 30, 2019, 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
 
$
11,603
 
$
210,498
   
$
1,174
(1) 
 
$
223,275
 
Equity securities
   
15,855
   
4,600
(1) 
   
     
20,455
 
Cash equivalents
   
6,925
   
     
     
6,925
 
Total
 
$
34,383
 
$
215,098
   
$
1,174
   
$
250,655
 


(1)
All underlying securities are financial services industry related.

As of December 31, 2018, 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
 
$
11,413
 
$
197,907
   
$
1,066
(1) 
 
$
210,386
 
Equity securities
   
16,398
   
4,360
(1) 
   
     
20,758
 
Cash equivalents
   
8,250
   
     
     
8,250
 
Total
 
$
36,061
 
$
202,267
   
$
1,066
   
$
239,394
 


(1)
All underlying securities are financial services industry related.

The following tables provide a roll-forward of the Company’s financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month and six month periods ended June 30, 2019 and 2018.

   
Fixed
Maturities
 
Balance, December 31, 2018
 
$
1,066
 
Total unrealized gains included in other comprehensive loss
   
49
 
Balance, March 31, 2019
   
1,115
 
Total unrealized gains included in other comprehensive income
   
59
 
Balance, June 30, 2019
 
$
1,174
 

   
Fixed
Maturities
 
Balance, December 31, 2017
 
$
1,369
 
Total unrealized losses included in other comprehensive loss
   
(30
)
Balance, March 31, 2018
   
1,339
 
Total unrealized gains included in other comprehensive loss
   
7
 
Balance, June 30, 2018
 
$
1,346
 

The Company’s fixed maturities valued using Level 3 inputs consist solely of issuances of pooled debt obligations of multiple, smaller financial services companies that are not actively traded. There are no assumed prepayments and/or default probability assumptions as a majority of these instruments contain certain U.S. government agency strips to support repayment of the principal. Other qualitative and quantitative information received from the original underwriter of the pooled offerings is also considered, as applicable.

The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of the Company’s financial instruments as of June 30, 2019 and December 31, 2018.

           
June 30, 2019
   
December 31, 2018
 
Level in Fair
Value
Hierarchy (1)
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
Assets:
                             
Cash and cash equivalents
 
Level 1
   
$
11,450
   
$
11,450
   
$
12,630
   
$
12,630
 
Fixed maturities
  (1
)
   
223,275
     
223,275
     
210,386
     
210,386
 
Equity securities
  (1
)
   
20,455
     
20,455
     
20,758
     
20,758
 
Other invested assets
 
Level 3
     
7,380
     
7,380
     
7,424
     
7,424
 
Policy loans
 
Level 2
     
2,007
     
2,007
     
2,085
     
2,085
 
Real estate
 
Level 2
     
38
     
38
     
38
     
38
 
Investment in unconsolidated trusts
 
Level 2
     
1,238
     
1,238
     
1,238
     
1,238
 
                                       
Liabilities:
                                     
Junior subordinated debentures, net
 
Level 2
     
33,738
     
33,738
     
33,738
     
33,738
 


(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.

There have not been any transfers between Level 1, Level 2 and Level 3 during the periods presented in these condensed consolidated financial statements.

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

The roll-forward of liabilities for unpaid losses, claims and loss adjustment expenses is as follows:

   
Six Months Ended
June 30,
 
   
2019
   
2018
 
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
72,612
   
$
65,689
 
Less: Reinsurance recoverable on unpaid losses
   
(14,354
)
   
(11,968
)
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
   
58,258
     
53,721
 
                 
Incurred related to:
               
Current accident year
   
68,157
     
63,230
 
Prior accident year development
   
103
     
(163
)
Total incurred
   
68,260
     
63,067
 
                 
Paid related to:
               
Current accident year
   
38,875
     
36,508
 
Prior accident years
   
28,576
     
22,872
 
Total paid
   
67,451
     
59,380
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
   
59,067
     
57,408
 
Plus: Reinsurance recoverable on unpaid losses
   
16,088
     
14,667
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
75,155
   
$
72,075
 

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

   
Six Months Ended
June 30,
 
   
2019
   
2018
 
Total incurred losses
 
$
68,260
   
$
63,067
 
Cash surrender value and matured endowments
   
588
     
707
 
Benefit reserve changes
   
610
     
1,617
 
Total insurance benefits and losses incurred
 
$
69,458
   
$
65,391
 

Note 6.
Junior Subordinated Debentures

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

The financial structure of each of Atlantic American Statutory Trust I and II as of June 30, 2019 was as follows:

   
Atlantic American
Statutory Trust I
   
Atlantic American
Statutory Trust II
 
JUNIOR SUBORDINATED DEBENTURES (1) (2)
           
Principal amount owed June 30, 2019
 
$
18,042
   
$
23,196
 
Less: Treasury debt (3)
   
     
(7,500
)
Net balance June 30, 2019
 
$
18,042
   
$
15,696
 
Net balance December 31, 2018
 
$
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 loss per common share calculations is as follows:

   
Three Months Ended
June 30, 2019
 
   
Loss
   
Weighted
Average
Shares
(In thousands)
 
Per Share
Amount
 
Basic and Diluted Loss Per Common Share:
           
 
Net loss
 
$
(4,426
)
   
20,146
        
Less preferred stock dividends
   
(100
)
   
        
Net loss applicable to common shareholders
 
$
(4,526
)
   
20,146

$
(.22
)

   
Three Months Ended
June 30, 2018
 
   
Income
   
Weighted
Average
Shares
(In thousands)
   
Per Share
Amount
 
Basic Earnings Per Common Share:
                 
Net income
 
$
3,185
     
20,286
 

 
Less preferred stock dividends
   
(100
)
         
 
Net income applicable to common shareholders
   
3,085
     
20,286
   
$
.15
 
Diluted Earnings Per Common Share:
                       
Effect of Series D preferred stock
   
100
     
1,378
         
Net income applicable to common shareholders
 
$
3,185
     
21,664
   
$
.15
 

   
Six Months Ended
June 30, 2019
 
   
Loss
   
Weighted
Average
Shares
(In thousands)
 
Per Share
Amount
 
Basic and Diluted Loss Per Common Share:
           
 
Net loss
 
$
(264
)
   
20,152
    
 
Less preferred stock dividends
   
(199
)
   
    
 
Net loss applicable to common shareholders
 
$
(463
)
   
20,152

$
(.02
)

   
Six Months Ended
June 30, 2018
 
   
Loss
   
Weighted
Average
Shares
(In thousands)
 
Per Share
Amount
 
Basic and Diluted Loss Per Common Share:
           
 
Net loss
 
$
(1,839
)
   
20,352
        
Less preferred stock dividends
   
(199
)
   
        
Net loss applicable to common shareholders
 
$
(2,038
)
   
20,352

$
(.10
)

The assumed conversion of the Company’s Series D preferred stock was excluded from the earnings (loss) per common share calculation for all periods presented, except for the three month period ended June 30, 2018, since its impact would have been antidilutive.

Note 8.
Income Taxes

A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and income tax benefit is as follows:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Federal income tax provision at statutory rate of 21%
 
$
(1,174
)
 
$
847
   
$
(64
)
 
$
(487
)
Dividends-received deduction
   
(5
)
   
(10
)
   
(14
)
   
(20
)
Other permanent differences
   
16
     
11
     
38
     
28
 
Income tax expense (benefit)
 
$
(1,163
)
 
$
848
   
$
(40
)
 
$
(479
)
 
The components of income tax benefit were:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Current - Federal
 
$
572
   
$
703
   
$
572
   
$
739
 
Deferred - Federal
   
(1,735
)
   
145
     
(612
)
   
(1,218
)
Total
 
$
(1,163
)
 
$
848
   
$
(40
)
 
$
(479
)


Note 9.
Leases

The Company has identified 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 for an additional eight years from the January 1, 2019 effective date of the new lease guidance. The original term of the second lease was ten years and amended in January 2017 to provide for an additional seven years, with a termination date on September 30, 2026. The rate used in determining the present value of lease payments is based upon an estimate of the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.

These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease. Lease expense reported for the six months ended June 30, 2019 was $507. See the “Adoption of New Accounting Standards – Leasessection of Note 2 of Notes to Condensed Consolidated Financial Statements for additional information regarding the accounting for leases.

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

   
Six Months
Ended
June 30,
 
   
2019
 
Other information on operating leases:
     
Cash payments included in the measurement of lease liabilities reported in operating cash flows
 
$
450
 
Right-of-use assets included in other assets on the condensed consolidated balance sheet
   
5,785
 
Weighted average discount rate
   
6.8
%
Weighted average remaining lease term in years
 
7.4 years
 

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

   
Lease Liability
 
Remainder of 2019
 
$
365
 
2020
   
978
 
2021
   
1,015
 
2022
   
1,031
 
2023
   
1,048
 
Thereafter
   
3,091
 
Total undiscounted lease payments
   
7,528
 
Less: present value adjustment
   
1,685
 
Operating lease liability included in other liabilities on the condensed consolidated balance sheet
 
$
5,843
 

As of June 30, 2019, the Company has no operating leases that have not yet commenced.

Note 10.
Commitments and Contingencies

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

Note 11.
Segment Information

The Parent’s primary insurance subsidiaries, American Southern and Bankers Fidelity, operate in two principal business units, each focusing on specific products. American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market. Each business unit is managed independently and is evaluated on its individual performance. The following sets forth the assets, revenue and income (loss) before income taxes for each business unit as of and for the periods ended 2019 and 2018.

Assets
 
June 30,
2019
   
December 31,
2018
 
American Southern
 
$
142,059
   
$
122,724
 
Bankers Fidelity
   
206,513
     
195,663
 
Corporate and Other
   
148,424
     
134,643
 
Adjustments & Eliminations
   
(125,266
)
   
(108,756
)
Total assets
 
$
371,730
   
$
344,274
 

Revenues
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
American Southern
 
$
15,740
   
$
14,643
   
$
30,975
   
$
28,176
 
Bankers Fidelity
   
31,244
     
31,641
     
65,620
     
61,754
 
Corporate and Other
   
(1,261
)
   
5,939
     
6,617
     
5,419
 
Adjustments & Eliminations
   
(2,596
)
   
(2,780
)
   
(5,067
)
   
(5,366
)
Total revenue
 
$
43,127
   
$
49,443
   
$
98,145
   
$
89,983
 

Income (Loss) Before Income Taxes
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
American Southern
 
$
1,396
   
$
1,929
   
$
3,378
   
$
2,897
 
Bankers Fidelity
   
(1,998
)
   
261
     
(2,494
)
   
(2,274
)
Corporate and Other
   
(4,987
)
   
1,843
     
(1,188
)
   
(2,941
)
Income (loss) before income taxes
 
$
(5,589
)
 
$
4,033
   
$
(304
)
 
$
(2,318
)

Note 12.
Related Party Transactions

During the three month period ended June 30, 2019, the Company transferred its remaining fractional interest in an aircraft arrangement to Gray Television, Inc., a related party, for $151.

Item 2.

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

The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”) as of and for the three month and six month periods ended June 30, 2019. This discussion should be read in conjunction with the unaudited 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, 2018 (the “2018 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 2018 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 2018 Annual Report.

Overall Corporate Results

The following presents the Company’s revenue, expenses and net income (loss) for the three month and six month periods ended June 30, 2019 and the comparable period in 2018:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
   
(In thousands)
 
Insurance premiums, net
 
$
45,469
   
$
42,845
   
$
90,251
   
$
85,047
 
Net investment income
   
2,313
     
2,537
     
4,647
     
4,896
 
Realized investment gains (losses), net
   
610
     
(57
)
   
1,995
     
313
 
Unrealized gains (losses) on equity securities, net
   
(5,337
)
   
4,089
     
1,152
     
(330
)
Other income
   
72
     
29
     
100
     
57
 
Total revenue
   
43,127
     
49,443
     
98,145
     
89,983
 
Insurance benefits and losses incurred
   
34,151
     
32,219
     
69,458
     
65,391
 
Commissions and underwriting expenses
   
11,509
     
9,715
     
22,524
     
19,734
 
Interest expense
   
545
     
506
     
1,091
     
968
 
Other expense
   
2,511
     
2,970
     
5,376
     
6,208
 
Total benefits and expenses
   
48,716
     
45,410
     
98,449
     
92,301
 
Income (loss) before income taxes
 
$
(5,589
)
 
$
4,033
   
$
(304
)
 
$
(2,318
)
Net income (loss)
 
$
(4,426
)
 
$
3,185
   
$
(264
)
 
$
(1,839
)

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 loss for the three month and six month periods ended June 30, 2019 and the comparable period in 2018 is as follows:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
Reconciliation of  Non-GAAP Financial Measure
 
2019
   
2018
   
2019
   
2018
 
   
(In thousands)
 
Net income (loss)
 
$
(4,426
)
 
$
3,185
   
$
(264
)
 
$
(1,839
)
Income tax expense (benefit)
   
(1,163
)
   
848
     
(40
)
   
(479
)
Realized investment (gains) losses, net
   
(610
)
   
57
     
(1,995
)
   
(313
)
Unrealized (gains) losses on equity securities, net
   
5,337
     
(4,089
)
   
(1,152
)
   
330
 
Non-GAAP operating income (loss)
 
$
(862
)
 
$
1
   
$
(3,451
)
 
$
(2,301
)

On a consolidated basis, the Company had net loss of $4.4 million, or $0.22 per diluted share, for the three month period ended June 30, 2019, compared to net income of $3.2 million, or $0.15 per diluted share, for the three month period ended June 30, 2018.  The Company had net loss of $0.3 million, or $0.02 per diluted share, for the six month period ended June 30, 2019, compared to net loss of $1.8 million, or $0.10 per diluted share, for the six month period ended June 30, 2018.  Premium revenue for the three month period ended June 30, 2019 increased $2.6 million, or 6.1%, to $45.5 million from $42.8 million in the three month period ended June 30, 2018.  For the six month period ended June 30, 2019, premium revenue increased $5.2 million, or 6.1%, to $90.3 million from $85.0 million in the comparable period in 2018.  The increase in premium revenue was primarily attributable to an increase in Medicare supplement business in the life and health operations, coupled with an increase in the automobile physical damage line of business in the property and casualty operations. Operating loss increased $0.9 million in the three month period ended June 30, 2019 from the three month period ended June 30, 2018.  For the six month period ended June 30, 2019, the operating loss increased $1.2 million over the comparable period in 2018.  The increase in operating loss was primarily due to unfavorable loss experience in the life and health operations.

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

American Southern

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2019 and the comparable periods in 2018:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
   
(Dollars in thousands)
 
Gross written premiums
 
$
32,581
   
$
28,501
   
$
40,275
   
$
35,342
 
Ceded premiums
   
(1,313
)
   
(1,228
)
   
(2,688
)
   
(2,431
)
Net written premiums
 
$
31,268
   
$
27,273
   
$
37,587
   
$
32,911
 
Net earned premiums
 
$
14,754
   
$
13,542
   
$
28,560
   
$
26,249
 
Net loss and loss adjustment expenses
   
9,863
     
8,695
     
18,906
     
17,872
 
Underwriting expenses
   
4,480
     
4,019
     
8,690
     
7,406
 
Underwriting income
 
$
411
   
$
828
   
$
964
   
$
971
 
Loss ratio
   
66.8
%
   
64.2
%
   
66.2
%
   
68.1
%
Expense ratio
   
30.4
     
29.7
     
30.4
     
28.2
 
Combined ratio
   
97.2
%
   
93.9
%
   
96.6
%
   
96.3
%

Gross written premiums at American Southern increased $4.1 million, or 14.3%, during the three month period ended June 30, 2019 and $4.9 million, or 14.0%, during the six month period ended June 30, 2019, from the comparable periods in 2018. The increase in gross written premiums was primarily attributable to an increase in premiums written in the automobile physical damage line of business due to increased writings from certain agencies and a new agency that started in the second half of 2018. Partially offsetting the increase in gross written premiums was a decline in premiums written in the surety line of business as a result of increased competition.

Ceded premiums increased $0.1 million, or 6.9%, during the three month period ended June 30, 2019 and $0.3 million, or 10.6%, during the six month period ended June 30, 2019, from the comparable periods in 2018. The increase in ceded premiums in 2019 was due primarily to an increase in earned premiums in certain accounts within the automobile physical damage and general liability lines of business, which are subject to reinsurance.

The following presents American Southern’s net earned premiums by line of business for the three month and six month periods ended June 30, 2019 and the comparable periods in 2018:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
   
(In thousands)
 
Automobile liability
 
$
7,813
   
$
7,380
   
$
14,837
   
$
14,245
 
Automobile physical damage
   
3,799
     
2,897
     
7,401
     
5,352
 
General liability
   
819
     
715
     
1,603
     
1,453
 
Surety
   
1,608
     
1,778