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 September 30, 2017
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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 November 7, 2017 was 20,439,411.
 


ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS


Part I.     Financial Information
Page No.
   
Item 1.
Financial Statements:
   
 
2
   
 
3
   
 
4
   
 
5
   
 
6
   
 
7
   
Item 2.
21
   
Item 4.
29
     
Part II.    Other Information
 
   
Item 2.
30
     
Item 6.
30
   
Signatures
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
September 30,
2017
   
December 31,
2016
 
Cash and cash equivalents
 
$
9,473
   
$
13,252
 
Investments:
               
Fixed maturities (cost: $215,241 and $210,505)
   
217,999
     
210,670
 
Common and non-redeemable preferred stocks (cost: $10,918 and $11,453)
   
21,582
     
20,257
 
Other invested assets (cost: $9,167 and $9,709)
   
9,167
     
9,709
 
Policy loans
   
2,113
     
2,265
 
Real estate
   
38
     
38
 
Investment in unconsolidated trusts
   
1,238
     
1,238
 
Total investments
   
252,137
     
244,177
 
Receivables:
               
Reinsurance
   
16,871
     
11,703
 
Insurance premiums and other (net of allowance for doubtful accounts: $219 and $280)
   
15,572
     
12,581
 
Deferred income taxes, net
   
-
     
160
 
Deferred acquisition costs
   
32,159
     
28,975
 
Other assets
   
5,549
     
5,208
 
Intangibles
   
2,544
     
2,544
 
Total assets
 
$
334,305
   
$
318,600
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Insurance reserves and policyholder funds:
               
Future policy benefits
 
$
80,015
   
$
74,843
 
Unearned premiums
   
26,501
     
23,208
 
Losses and claims
   
67,184
     
62,562
 
Other policy liabilities
   
1,492
     
2,066
 
Total insurance reserves and policyholder funds
   
175,192
     
162,679
 
Accounts payable and accrued expenses
   
14,880
     
16,677
 
Deferred income taxes, net
   
975
     
-
 
Junior subordinated debenture obligations, net
   
33,738
     
33,738
 
Total liabilities
   
224,785
     
213,094
 
                 
Commitments and contingencies (Note 9)
               
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: 20,453,217 and 20,446,705
   
22,401
     
22,401
 
Additional paid-in capital
   
57,420
     
57,114
 
Retained earnings
   
28,551
     
27,272
 
Accumulated other comprehensive income
   
8,725
     
5,830
 
Unearned stock grant compensation
   
(587
)
   
(428
)
Treasury stock, at cost: 1,947,677 and 1,954,189 shares
   
(7,045
)
   
(6,738
)
Total shareholders’ equity
   
109,520
     
105,506
 
Total liabilities and shareholders’ equity
 
$
334,305
   
$
318,600
 

The accompanying notes are an integral part of these consolidated financial statements.
 
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands, except per share data)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Revenue:
                       
Insurance premiums
 
$
42,094
   
$
39,432
   
$
122,996
   
$
117,012
 
Investment income
   
2,136
     
2,453
     
6,380
     
7,523
 
Realized investment gains, net
   
539
     
527
     
2,818
     
1,411
 
Other income
   
29
     
35
     
95
     
102
 
Total revenue
   
44,798
     
42,447
     
132,289
     
126,048
 
                                 
Benefits and expenses:
                               
Insurance benefits and losses incurred
   
30,417
     
26,955
     
87,446
     
78,702
 
Commissions and underwriting expenses
   
10,176
     
11,558
     
31,800
     
34,339
 
Interest expense
   
440
     
396
     
1,273
     
1,154
 
Other expense
   
3,134
     
3,221
     
9,301
     
9,803
 
Total benefits and expenses
   
44,167
     
42,130
     
129,820
     
123,998
 
Income before income taxes
   
631
     
317
     
2,469
     
2,050
 
Income tax expense (benefit)
   
(116
)
   
168
     
483
     
762
 
Net income
   
747
     
149
     
1,986
     
1,288
 
Preferred stock dividends
   
(100
)
   
(100
)
   
(299
)
   
(299
)
Net income applicable to common shareholders
 
$
647
   
$
49
   
$
1,687
   
$
989
 
                                 
Earnings per common share (basic and diluted)
 
$
.03
   
$
-
   
$
.08
   
$
.05
 

The accompanying notes are an integral part of these consolidated financial statements.
 
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in thousands)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net income
 
$
747
   
$
149
   
$
1,986
   
$
1,288
 
Other comprehensive income:
                               
Available-for-sale securities:
                               
Gross unrealized holding gain arising in the period
   
2,852
     
1,842
     
7,271
     
10,554
 
Related income tax effect
   
(997
)
   
(645
)
   
(2,544
)
   
(3,694
)
Less: reclassification adjustment for net realized gains included in net income (1)
   
(539
)
   
(527
)
   
(2,818
)
   
(1,411
)
Related income tax effect (2)
   
188
     
185
     
986
     
494
 
Total other comprehensive income, net of tax
   
1,504
     
855
     
2,895
     
5,943
 
Total comprehensive income
 
$
2,251
   
$
1,004
   
$
4,881
   
$
7,231
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited; Dollars in thousands)

 
 
Nine Months Ended September 30, 2017
 
Preferred
Stock
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Unearned
Stock Grant
Compensation
   
Treasury
Stock
   
Total
 
Balance, December 31, 2016
 
$
55
   
$
22,401
   
$
57,114
   
$
27,272
   
$
5,830
   
$
(428
)
 
$
(6,738
)
 
$
105,506
 
Net income
   
-
     
-
     
-
     
1,986
     
-
     
-
     
-
     
1,986
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
2,895
     
-
     
-
     
2,895
 
Dividends on common stock
   
-
     
-
     
-
     
(408
)
   
-
     
-
     
-
     
(408
)
Dividends accrued on preferred stock
   
-
     
-
     
-
     
(299
)
   
-
     
-
     
-
     
(299
)
Restricted stock grants
   
-
     
-
     
293
     
-
     
-
     
(522
)
   
229
     
-
 
Amortization of unearned compensation
   
-
     
-
     
-
     
-
     
-
     
363
     
-
     
363
 
Purchase of shares for treasury
   
-
     
-
     
-
     
-
     
-
     
-
     
(546
)
   
(546
)
Issuance of shares under stock plans
   
-
     
-
     
13
     
-
     
-
     
-
     
10
     
23
 
Balance, September 30, 2017
 
$
55
   
$
22,401
   
$
57,420
   
$
28,551
   
$
8,725
   
$
(587
)
 
$
(7,045
)
 
$
109,520
 
                                                                 
Nine Months Ended September 30, 2016
                                                               
Balance, December 31, 2015
 
$
55
   
$
22,401
   
$
56,623
   
$
25,443
   
$
4,584
   
$
(273
)
 
$
(6,341
)
 
$
102,492
 
Net income
   
-
     
-
     
-
     
1,288
     
-
     
-
     
-
     
1,288
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
5,943
     
-
     
-
     
5,943
 
Dividends on common stock
   
-
     
-
     
-
     
(408
)
   
-
     
-
     
-
     
(408
)
Dividends accrued on preferred stock
   
-
     
-
     
-
     
(299
)
   
-
     
-
     
-
     
(299
)
Restricted stock grants
   
-
     
-
     
346
     
-
     
-
     
(556
)
   
210
     
-
 
Amortization of unearned compensation
   
-
     
-
     
-
     
-
     
-
     
457
     
-
     
457
 
Purchase of shares for treasury
   
-
     
-
     
-
     
-
     
-
     
-
     
(565
)
   
(565
)
Issuance of shares under stock plans
   
-
     
-
     
26
     
-
     
-
     
-
     
17
     
43
 
Balance, September 30, 2016
 
$
55
   
$
22,401
   
$
56,995
   
$
26,024
   
$
10,527
   
$
(372
)
 
$
(6,679
)
 
$
108,951
 

The accompanying notes are an integral part of these consolidated financial statements.
 
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)

   
Nine Months Ended
September 30,
 
   
2017
   
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
1,986
   
$
1,288
 
Adjustments to reconcile net income to net cash used in operating activities:
               
Amortization of deferred acquisition costs
   
8,696
     
6,764
 
Acquisition costs deferred
   
(11,880
)
   
(7,689
)
Realized investment gains, net
   
(2,818
)
   
(1,411
)
Compensation expense related to share awards
   
363
     
457
 
Depreciation and amortization
   
1,149
     
860
 
Deferred income tax (benefit) expense
   
(423
)
   
161
 
Increase in receivables, net
   
(8,289
)
   
(65
)
Increase (decrease) in insurance reserves
   
12,513
     
(1,745
)
Decrease in other liabilities
   
(2,096
)
   
(644
)
Other, net
   
(344
)
   
(252
)
Net cash used in operating activities
   
(1,143
)
   
(2,276
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from investments sold
   
52,760
     
48,729
 
Proceeds from investments matured, called or redeemed
   
8,982
     
9,247
 
Investments purchased
   
(63,346
)
   
(58,193
)
Additions to property and equipment
   
(101
)
   
(335
)
Net cash used in investing activities
   
(1,705
)
   
(552
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment of dividends on common stock
   
(408
)
   
(408
)
Proceeds from shares issued under stock plans
   
23
     
43
 
Purchase of shares for treasury
   
(546
)
   
(565
)
Net cash used in financing activities
   
(931
)
   
(930
)
                 
Net decrease in cash and cash equivalents
   
(3,779
)
   
(3,758
)
Cash and cash equivalents at beginning of period
   
13,252
     
15,622
 
Cash and cash equivalents at end of period
 
$
9,473
   
$
11,864
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
 
$
1,263
   
$
1,142
 
Cash paid for income taxes
 
$
1,400
   
$
675
 

The accompanying notes are an integral part of these 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, 2016 (the “Annual Report”).  The Company’s financial condition and results of operations and cash flows as of and for the three month and nine month periods ended September 30, 2017 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, 2017 or for any other future period.

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

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

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). This guidance applies to all entities that issue share-based payment awards to their employees and is designed to simplify several areas of the accounting for share-based payment transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities and related classification on the statement of cash flows.  The guidance requires the excess tax benefit or deficiency on vesting or settlement of awards to be recognized in earnings as an income tax benefit or expense, respectively.  The Company adopted ASU 2016-09 as of January 1, 2017.  Adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). This guidance eliminates the requirement to retroactively adopt the equity method of accounting when an investment qualifies for the use of the equity method as a result of an increase in the level of ownership or degree of influence.  Under ASU 2016-07, the equity method investor is required to add the cost of acquiring the additional interest in the investee to the current basis of the previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.  The Company adopted ASU 2016-07 as of January 1, 2017.  Adoption of ASU 2016-07 did not have an impact on the Company’s consolidated financial statements.

Future Adoption of New Accounting Standards

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). This guidance shortens the amortization period for certain callable debt securities held at a premium to the earliest call date.  Under current GAAP, premiums and discounts on callable securities generally are amortized to the maturity date.  ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018, although earlier adoption is permitted.  The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
 
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. The guidance 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. This guidance is effective retrospectively on January 1, 2018, with a choice of restating prior  periods or recognizing a cumulative effect for contracts in place as of adoption. Early adoption is permitted as of January 1, 2017. The Company will adopt this ASU on January 1, 2018. Based on current evaluations, the adoption is not expected to have a material impact on the Company's consolidated financial statements.
 
Note 3.
Investments

The following tables set forth the carrying value, gross unrealized gains, gross unrealized losses and cost or amortized cost of the Company’s investments, aggregated by type and industry, as of September 30, 2017 and December 31, 2016.

   
September 30, 2017
 
   
Carrying
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
 
$
32,426
   
$
189
   
$
414
   
$
32,651
 
Obligations of states and political subdivisions
   
17,882
     
696
     
54
     
17,240
 
Corporate securities:
                               
Utilities and telecom
   
20,463
     
1,636
     
76
     
18,903
 
Financial services
   
51,927
     
2,161
     
411
     
50,177
 
Other business – diversified
   
41,339
     
941
     
1,499
     
41,897
 
Other consumer – diversified
   
53,770
     
910
     
1,321
     
54,181
 
Total corporate securities
   
167,499
     
5,648
     
3,307
     
165,158
 
Redeemable preferred stocks:
                               
Other consumer – diversified
   
192
     
-
     
-
     
192
 
Total redeemable preferred stocks
   
192
     
-
     
-
     
192
 
Total fixed maturities
   
217,999
     
6,533
     
3,775
     
215,241
 
Equity securities:
                               
Common and non-redeemable preferred stocks:
                               
Utilities and telecom
   
1,484
     
520
     
-
     
964
 
Financial services
   
5,579
     
796
     
-
     
4,783
 
Other business – diversified
   
275
     
228
     
-
     
47
 
Other consumer – diversified
   
14,244
     
9,120
     
-
     
5,124
 
Total equity securities
   
21,582
     
10,664
     
-
     
10,918
 
Other invested assets
   
9,167
     
-
     
-
     
9,167
 
Policy loans
   
2,113
     
-
     
-
     
2,113
 
Real estate
   
38
     
-
     
-
     
38
 
Investments in unconsolidated trusts
   
1,238
     
-
     
-
     
1,238
 
Total investments
 
$
252,137
   
$
17,197
   
$
3,775
   
$
238,715
 
 
   
December 31, 2016
 
   
Carrying
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
 
$
31,102
   
$
197
   
$
553
   
$
31,458
 
Obligations of states and political subdivisions
   
17,572
     
625
     
308
     
17,255
 
Corporate securities:
                               
Utilities and telecom
   
18,034
     
1,462
     
88
     
16,660
 
Financial services
   
57,282
     
1,880
     
911
     
56,313
 
Other business – diversified
   
57,419
     
1,071
     
2,337
     
58,685
 
Other consumer – diversified
   
29,069
     
471
     
1,344
     
29,942
 
Total corporate securities
   
161,804
     
4,884
     
4,680
     
161,600
 
Redeemable preferred stocks:
                               
Other consumer – diversified
   
192
     
-
     
-
     
192
 
Total redeemable preferred stocks
   
192
     
-
     
-
     
192
 
Total fixed maturities
   
210,670
     
5,706
     
5,541
     
210,505
 
Equity securities:                                
Common and non-redeemable preferred stocks:
                               
Utilities and telecom
   
1,601
     
637
     
-
     
964
 
Financial services
   
5,402
     
574
     
-
     
4,828
 
Other business – diversified
   
244
     
197
     
-
     
47
 
Other consumer – diversified
   
13,010
     
7,396
     
-
     
5,614
 
Total equity securities
   
20,257
     
8,804
     
-
     
11,453
 
Other invested assets
   
9,709
     
-
     
-
     
9,709
 
Policy loans
   
2,265
     
-
     
-
     
2,265
 
Real estate
   
38
     
-
     
-
     
38
 
Investments in unconsolidated trusts
   
1,238
     
-
     
-
     
1,238
 
Total investments
 
$
244,177
   
$
14,510
   
$
5,541
   
$
235,208
 

Bonds having an amortized cost of $11,219 and $11,435 and included in the tables above were on deposit with insurance regulatory authorities at September 30, 2017 and December 31, 2016, respectively, in accordance with statutory requirements.

The carrying value and amortized cost of the Company’s investments in fixed maturities at September 30, 2017 and December 31, 2016 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.

   
September 30, 2017
   
December 31, 2016
 
   
Carrying
Value
   
Amortized
Cost
   
Carrying
Value
   
Amortized
Cost
 
Due in one year or less
 
$
1,415
   
$
1,411
   
$
2,544
   
$
2,507
 
Due after one year through five years
   
16,612
     
16,795
     
20,278
     
20,038
 
Due after five years through ten years
   
104,519
     
103,571
     
90,667
     
90,926
 
Due after ten years
   
75,117
     
72,923
     
80,099
     
79,627
 
Varying maturities
   
20,336
     
20,541
     
17,082
     
17,407
 
Totals
 
$
217,999
   
$
215,241
   
$
210,670
   
$
210,505
 
 
The following table sets forth the carrying value, cost or amortized cost, and net unrealized gains (losses) of the Company’s investments aggregated by industry as of September 30, 2017 and December 31, 2016.

   
September 30, 2017
   
December 31, 2016
 
   
Carrying
Value
   
Cost or
Amortized
Cost
   
Unrealized
Gains
 (Losses)
   
Carrying
Value
   
Cost or
Amortized
Cost
   
Unrealized
Gains
(Losses)
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
32,426
   
$
32,651
   
$
(225
)
 
$
31,102
   
$
31,458
   
$
(356
)
Obligations of states and political subdivisions
   
17,882
     
17,240
     
642
     
17,572
     
17,255
     
317
 
Utilities and telecom
   
21,947
     
19,867
     
2,080
     
19,635
     
17,624
     
2,011
 
Financial services
   
57,506
     
54,960
     
2,546
     
62,684
     
61,141
     
1,543
 
Other business – diversified
   
41,614
     
41,944
     
(330
)
   
57,663
     
58,732
     
(1,069
)
Other consumer – diversified
   
68,206
     
59,497
     
8,709
     
42,271
     
35,748
     
6,523
 
Other investments
   
12,556
     
12,556
     
-
     
13,250
     
13,250
     
-
 
Investments
 
$
252,137
   
$
238,715
   
$
13,422
   
$
244,177
   
$
235,208
   
$
8,969
 

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 September 30, 2017 and December 31, 2016.

   
September 30, 2017
 
   
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
 
$
15,900
   
$
188
   
$
9,016
   
$
226
   
$
24,916
   
$
414
 
Obligations of states and political subdivisions
   
2,994
     
17
     
1,978
     
37
     
4,972
     
54
 
Corporate securities
   
30,340
     
451
     
33,204
     
2,856
     
63,544
     
3,307
 
Total temporarily impaired securities
 
$
49,234
   
$
656
   
$
44,198
   
$
3,119
   
$
93,432
   
$
3,775
 

   
December 31, 2016
 
   
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
 
$
23,494
   
$
553
   
$
-
   
$
-
   
$
23,494
   
$
553
 
Obligations of states and political subdivisions
   
8,747
     
308
     
-
     
-
     
8,747
     
308
 
Corporate securities
   
59,404
     
2,124
     
20,587
     
2,556
     
79,991
     
4,680
 
Total temporarily impaired securities
 
$
91,645
   
$
2,985
   
$
20,587
   
$
2,556
   
$
112,232
   
$
5,541
 
 
The evaluation for an other than temporary impairment 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.

As of September 30, 2017, there were sixty-three securities in an unrealized loss position which primarily included certain of the Company’s investments in fixed maturities within the other diversified business and other diversified consumer sectors. Securities in an unrealized loss position reported in the other diversified business sector included gross unrealized losses of $1,006 related to investments in fixed maturities of five different issuers, all related to the oil and gas industry. The oil and gas companies represent a diversified group of businesses which include, among others, exploration and production, pipeline owners and operators, deep water offshore rig owners and operators, all of which we believe are in continuing stages of rationalizing their current operations, investments, future capital expenditures and carefully managing and modifying their capital and liquidity positions.  Based on publicly available information, the companies are continuing to assess and revise short-term, intermediate and long-term business plans in response to the current trends in oil and gas markets.  While these companies have generally experienced credit downgrades or may be currently under credit rating review, the Company believes that many of the downgrades are in response to external market forces and not necessarily specific credit events of any obligor which would currently indicate that an other than temporary impairment need be recorded.  All of the investees have continued to make regular interest payments on their debt when and as due and the Company continues to perform in-depth analyses of the publicly available financial disclosures of each of the investees on a regular basis.  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 September 30, 2017.

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 all of its fixed maturities, which consist of U.S. Treasury securities and 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 September 30, 2017 and December 31, 2016, the value of the Company’s fixed maturities valued using Level 3 criteria was $1,351 and $1,264, respectively. The use of different criteria or assumptions regarding data may have yielded materially different valuations.
 
As of September 30, 2017, financial instruments carried at fair value were measured on a recurring basis as summarized below:

   
Quoted Prices
in Active
Markets
for Identical
Assets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Assets:
                       
Fixed maturities
 
$
-
   
$
216,648
   
$
1,351
(1) 
 
$
217,999
 
Equity securities
   
16,233
     
5,349
(1) 
 
-
     
21,582
 
Cash equivalents
   
8,884
     
-
   
 
-
     
8,884
 
Total
 
$
25,117
   
$
221,997
   
$
1,351
   
$
248,465
 

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

As of December 31, 2016, financial instruments carried at fair value were measured on a recurring basis as summarized below:

   
Quoted Prices
in Active
Markets
for Identical
Assets
   
Significant
Other
Observable
 Inputs
   
Significant
Unobservable
Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Assets:
                       
Fixed maturities
 
$
-
   
$
209,406
   
$
1,264
(1) 
 
$
210,670
 
Equity securities
   
15,153
     
5,104
(1) 
   
-
     
20,257
 
Cash equivalents
   
9,811
     
-
     
-
     
9,811
 
Total
 
$
24,964
   
$
214,510
   
$
1,264
   
$
240,738
 

(1)
All underlying securities are financial service 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 nine month periods ended September 30, 2017 and 2016.

   
Fixed
Maturities
 
Balance, December 31, 2016
 
$
1,264
 
Total unrealized gains included in other comprehensive income
   
38
 
Balance, March 31, 2017
   
1,302
 
Total unrealized gains included in other comprehensive income
   
30
 
Balance, June 30, 2017
   
1,332
 
Total unrealized gains included in other comprehensive income
   
19
 
Balance, September 30, 2017
 
$
1,351
 

   
Fixed
Maturities
 
Balance, December 31, 2015
 
$
2,237
 
Total unrealized gains included in other comprehensive income
   
63
 
Balance, March 31, 2016
   
2,300
 
Total unrealized gains included in other comprehensive income
   
68
 
Balance, June 30, 2016
   
2,368
 
Total realized gains included in earnings
   
57
 
Total unrealized losses included in other comprehensive income
   
(61
)
Settlements
   
(1,000
)
Balance, September 30, 2016
 
$
1,364
 
 
The Company’s fixed maturities valued using Level 3 inputs consist solely of issuances of pooled debt obligations of multiple, smaller financial services companies. They are not actively traded and valuation techniques used to measure fair value are based on future estimated cash flows (based on current cash flows) discounted at reasonable estimated rates of interest.  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 is a summary of realized investment gains (losses) for the three month and nine month periods ended September 30, 2017 and 2016.

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Gross gains
 
$
539
   
$
543
   
$
2,879
   
$
1,497
 
Gross losses
   
-
     
(16
)
   
(61
)
   
(86
)
Realized investment gains, net
 
$
539
   
$
527
   
$
2,818
   
$
1,411
 

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 table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of the Company’s financial instruments as of September 30, 2017 and December 31, 2016.

         
September 30, 2017
   
December 31, 2016
 
   
Level in Fair
Value
 Hierarchy (1)
   
Carrying
Amount
   
Estimated
 Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
Assets:
                             
Cash and cash equivalents
 
Level 1
   
$
9,473
   
$
9,473
   
$
13,252
   
$
13,252
 
Fixed maturities
   
(1)
   
217,999
     
217,999
     
210,670
     
210,670
 
Equity securities
   
(1)
   
21,582
     
21,582
     
20,257
     
20,257
 
Other invested assets
 
Level 3
     
9,167
     
9,167
     
9,709
     
9,709
 
Policy loans
 
Level 2
     
2,113
     
2,113
     
2,265
     
2,265
 
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 Note 3 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, by major product, is as follows:

Property and Casualty Insurance Products
 
Nine Months Ended
September 30,
 
   
2017
   
2016
 
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
49,556
   
$
51,200
 
Less: Reinsurance recoverable on unpaid losses
   
(9,806
)
   
(11,639
)
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
   
39,750
     
39,561
 
                 
Incurred related to:
               
Current accident year
   
27,359
     
26,534
 
Prior accident year development (1)
   
(1,480
)
   
(1,296
)
Total incurred
   
25,879
     
25,238
 
                 
Paid related to:
               
Current accident year
   
9,858
     
9,799
 
Prior accident years
   
13,720
     
15,950
 
Total paid
   
23,578
     
25,749
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
   
42,051
     
39,050
 
Plus: Reinsurance recoverable on unpaid losses
   
9,455
     
9,234
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
51,506
   
$
48,284
 

(1)
In establishing property and casualty reserves, the Company initially reserves for losses at the higher end of the reasonable range if no other value within the range is determined to be more probable.  Selection of such an initial loss estimate is an attempt by management to give recognition that initial claims information received generally is not conclusive with respect to legal liability, is generally not comprehensive with respect to magnitude of loss and generally, based on historical experience, will develop more adversely as time passes and more information becomes available.  However, as a result, the Company generally experiences reserve redundancies when analyzing the development of prior year losses in a current period.

Medicare Supplement Insurance Products
 
Nine Months Ended
September 30,
 
   
2017
   
2016
 
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
11,263
   
$
10,547
 
Less: Reinsurance recoverable on unpaid losses
   
(990
)
   
-
 
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
   
10,273
     
10,547
 
                 
Incurred related to:
               
Current accident year
   
50,733
     
46,295
 
Prior accident year development
   
720
     
(1,009
)
Total incurred
   
51,453
     
45,286
 
                 
Paid related to:
               
Current accident year
   
40,801
     
35,986
 
Prior accident years
   
10,445
     
9,267
 
Total paid
   
51,246
     
45,253
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
   
10,480
     
10,580
 
Plus: Reinsurance recoverable on unpaid losses
   
3,640
     
-
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
14,120
   
$
10,580
 
 
Other Life and Health Insurance Products
 
Nine Months Ended
September 30,
 
   
2017
   
2016
 
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
1,743
   
$
2,123
 
Less: Reinsurance recoverable on unpaid losses
   
-
     
-
 
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
   
1,743
     
2,123
 
                 
Incurred related to:
               
Current accident year
   
6,226
     
5,489
 
Prior accident year development
   
(104
)
   
(173
)
Total incurred
   
6,122
     
5,316
 
                 
Paid related to:
               
Current accident year
   
4,807
     
4,206
 
Prior accident years
   
1,500
     
1,494
 
Total paid
   
6,307
     
5,700
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
   
1,558
     
1,739
 
Plus: Reinsurance recoverable on unpaid losses
   
-
     
-
 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
 
$
1,558
   
$
1,739
 

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

   
Nine Months Ended
September 30,
 
   
2017
   
2016
 
Total incurred losses
 
$
83,454
   
$
75,840
 
Cash surrender value and matured endowments
   
1,167
     
1,037
 
Benefit reserve changes
   
2,825
     
1,825
 
Total insurance benefits and losses incurred
 
$
87,446
   
$
78,702
 
 
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 September 30, 2017 was as follows:

   
Atlantic American
Statutory Trust I
   
Atlantic American
Statutory Trust II
 
JUNIOR SUBORDINATED DEBENTURES (1) (2)
           
Principal amount owed
 
$
18,042
   
$
23,196
 
Balance September 30, 2017
 
$
18,042
   
$
23,196
 
Less: Treasury debt (3)
   
-
     
(7,500
)
Net balance September 30, 2017
 
$
18,042
   
$
15,696
 
Net balance December 31, 2016
 
$
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 Per Common Share

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

   
Three Months Ended
September 30, 2017
 
   
Income
   
Shares
(In thousands)
   
Per Share
Amount
 
Basic and Diluted Earnings Per Common Share:
                   
Net income
 
$
747
     
20,440
       
Less: preferred stock dividends
   
(100
)
   
-
       
Net income applicable to common shareholders
 
$
647
     
20,440
  $
.03
 

   
Three Months Ended
September 30, 2016
 
   
Income
   
Shares
(In thousands)
   
Per Share
Amount
 
Basic and Diluted Earnings Per Common Share:
                   
Net income
 
$
149
     
20,451
       
Less: preferred stock dividends
   
(100
)
   
-
       
Net income applicable to common shareholders
 
$
49
     
20,451
 
   -
 

   
Nine Months Ended
September 30, 2017
 
   
Income
   
Shares
(In thousands)
   
Per Share
Amount
 
Basic and Diluted Earnings Per Common Share:
                   
Net income
 
$
1,986
     
20,428
       
Less: preferred stock dividends
   
(299
)
   
-
       
Net income applicable to common shareholders
 
$
1,687
     
20,428
 
.08
 

   
Nine Months Ended
September 30, 2016
 
   
Income
   
Shares
(In thousands)
   
Per Share
Amount
 
Basic and Diluted Earnings Per Common Share:
                   
Net income
 
$
1,288
     
20,433
       
Less: preferred stock dividends
   
(299
)
   
-
       
Net income applicable to common shareholders
 
$
989
     
20,433
 
 .05
 
 
The assumed conversion of the Company’s Series D preferred stock was excluded from the earnings per common share calculation for all periods presented since its impact would have been antidilutive.
 
Note 8.
Income Taxes

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Federal income tax provision at statutory rate of 35%
 
$
221
   
$
110
   
$
864
   
$
717
 
Dividends-received deduction
   
(23
)
   
(25
)
   
(71
)
   
(71
)
Small life insurance company deduction
   
(313
)
   
-
     
(343
)
   
-
 
Other permanent differences
   
18
     
12
     
52
     
45
 
Adjustment for prior years’ estimates to actual
   
(19
)
   
71
     
(19
)
   
71
 
Income tax expense (benefit)
 
$
(116
)
 
$
168
   
$
483
   
$
762
 

The components of income tax expense (benefit) were:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Current - Federal
 
$
(157
)
 
$
11
   
$
906
   
$
601
 
Deferred - Federal
   
41
     
157
     
(423
)
   
161
 
Total
 
$
(116
)
 
$
168
   
$
483
   
$
762
 

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and nine month periods ended September 30, 2017 resulted from the dividends-received deduction (“DRD”) and the small life insurance company deduction (“SLD”).  The current estimated DRD is adjusted as underlying factors change and can vary from estimates based on, but not limited to, actual distributions from investments as well as the amount of the Company’s taxable income.  The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”).  The SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3,000 and is ultimately phased out at $15,000.

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and nine month periods ended September 30, 2016 resulted from provision-to-filed return adjustments, as described below, and the DRD.

The provision-to-filed return adjustments are generally updated at the completion of the third quarter of each fiscal year and were $19 and $71 in the three month and nine month periods ended September 30, 2017 and 2016, respectively.

Note 9.
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 10.
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 revenues and income before income taxes for each business unit for the three month and nine month periods ended September 30, 2017 and 2016.

Revenues
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
American Southern
 
$
15,047
   
$
14,112
   
$
43,402
   
$
43,743
 
Bankers Fidelity
   
29,661
     
28,225
     
87,757
     
81,947
 
Corporate and Other
   
90
     
110
     
1,130
     
358
 
Total revenue
 
$
44,798
   
$
42,447
   
$
132,289
   
$
126,048
 

Income Before Income Taxes
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
American Southern
 
$
1,860
   
$
1,855
   
$
5,941
   
$
5,971
 
Bankers Fidelity
   
402
     
164
     
190
     
1,111
 
Corporate and Other
   
(1,631
)
   
(1,702
)
   
(3,662
)
   
(5,032
)
Income before income taxes
 
$
631
   
$
317
   
$
2,469
   
$
2,050
 

Note 11.
Accumulated Other Comprehensive Income

The following table sets forth the balance of the only component of accumulated other comprehensive income as of September 30, 2017 and December 31, 2016, and the changes in the balance of that component during the nine month period ended September 30, 2017, net of taxes.

   
Unrealized Gains
on Available-for-
Sale Securities
 
Balance, December 31, 2016
 
$
5,830
 
Other comprehensive income before reclassifications
   
4,727
 
Amounts reclassified from accumulated other comprehensive income
   
(1,832
)
Net current period other comprehensive income
   
2,895
 
Balance, September 30, 2017
 
$
8,725
 
 
Note 12.
Related Party Transactions

For the nine month period ended September 30, 2017, Gray Television, Inc., a related party, paid the Company approximately $448 in premiums related to a group accident plan.
 
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 nine month periods ended September 30, 2017. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere herein, as well as with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “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 Annual Report. During the nine month period ended September 30, 2017, there were no changes to the critical accounting policies or related estimates from those disclosed in the Annual Report.

Overall Corporate Results

The following presents the Company’s revenue, expenses and net income for the three month and nine month periods ended September 30, 2017 and the comparable periods in 2016:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(In thousands)
 
Insurance premiums
 
$
42,094
   
$
39,432
   
$
122,996
   
$
117,012
 
Investment income
   
2,136
     
2,453
     
6,380
     
7,523
 
Realized investment gains, net
   
539
     
527
     
2,818
     
1,411
 
Other income
   
29
     
35
     
95
     
102
 
Total revenue
   
44,798
     
42,447
     
132,289
     
126,048
 
Insurance benefits and losses incurred
   
30,417
     
26,955
     
87,446
     
78,702
 
Commissions and underwriting expenses
   
10,176
     
11,558
     
31,800
     
34,339
 
Other expense
   
3,134
     
3,221
     
9,301
     
9,803
 
Interest expense
   
440
     
396
     
1,273
     
1,154
 
Total benefits and expenses
   
44,167
     
42,130
     
129,820
     
123,998
 
Income before income taxes
 
$
631
   
$
317
   
$
2,469
   
$
2,050
 
Net income
 
$
747
   
$
149
   
$
1,986
   
$
1,288
 
 
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 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 to operating income (loss) for the three month and nine month periods ended September 30, 2017 and the comparable periods in 2016 is as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
Reconciliation of  Non-GAAP Financial Measure
 
2017
   
2016
   
2017
   
2016
 
   
(In thousands)
 
Net income
 
$
747
   
$
149
   
$
1,986
   
$
1,288
 
Income tax expense (benefit)
   
(116
)
   
168
     
483
     
762
 
Realized investment gains, net
   
(539
)
   
(527
)
   
(2,818
)
   
(1,411
)
Operating income (loss)
 
$
92
   
$
(210
)
 
$
(349
)
 
$
639
 

On a consolidated basis, the Company had net income of $0.7 million, or $0.03 per diluted share, for the three month period ended September 30, 2017, compared to net income of $0.1 million, or nil per diluted share, for the three month period ended September 30, 2016.  The Company had net income of $2.0 million, or $0.08 per diluted share, for the nine month period ended September 30, 2017, compared to net income of $1.3 million, or $0.05 per diluted share, for the nine month period ended September 30, 2016.  Premium revenue for the three month period ended September 30, 2017 increased $2.7 million, or 6.8%, to $42.1 million from $39.4 million in the three month period ended September 30, 2016.  For the nine month period ended September 30, 2017, premium revenue increased $6.0 million, or 5.1%, to $123.0 million from $117.0 million in the comparable 2016 period.  The increase in premium revenue for the three month and nine month periods ended September 30, 2017 was primarily attributable to an increase in Medicare supplement business in the life and health operations.  The increase in net income for the three month and nine month periods ended September 30, 2017 was due primarily to the increase in premium revenue, as well as an increase in realized investment gains.  Operating income increased $0.3 million in the three month period ended September 30, 2017 over the three month period ended September 30, 2016, and decreased $1.0 million during the nine month period ended September 30, 2017, from the comparable period in 2016.  The increase in operating income for the three month period ended September 30, 2017 was primarily due to increased profitability in the property and casualty operations.   Partially offsetting the increase in operating income for the three month period ended September 30, 2017 was a decrease in investment income attributable to a decrease in the average yield on the Company’s investments in fixed maturities and a loss from the equity in earnings from investments in real estate partnerships.  The decrease in operating income for the nine month period ended September 30, 2017 was primarily attributable to unfavorable loss experience in the life and health operations and the decrease in investment income discussed previously.
 
A more detailed analysis of the individual operating companies and other corporate activities follows.
 
American Southern

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month and nine month periods ended September 30, 2017 and the comparable periods in 2016:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(Dollars in thousands)
 
Gross written premiums
 
$
9,520
   
$
8,704
   
$
46,505
   
$
43,766
 
Ceded premiums
   
(1,238
)
   
(1,184
)
   
(3,592
)
   
(3,519
)
Net written premiums
 
$
8,282
   
$
7,520
   
$
42,913
   
$
40,247
 
Net earned premiums
 
$
14,046
   
$
12,884
   
$
40,268
   
$
40,376
 
Net loss and loss adjustment expenses
   
9,663
     
8,507
     
25,879
     
25,238
 
Underwriting expenses
   
3,525
     
3,751
     
11,583
     
12,535
 
Underwriting income
 
$
858
   
$
626
   
$
2,806
   
$
2,603
 
Loss ratio
   
68.8
%
   
66.0
%
   
64.3
%
   
62.5
%
Expense ratio
   
25.1
     
29.1
     
28.7
     
31.1
 
Combined ratio
   
93.9
%
   
95.1
%
   
93.0
%
   
93.6
%

Gross written premiums at American Southern increased $0.8 million, or 9.4%, during the three month period ended September 30, 2017, and $2.7 million, or 6.3%, during the nine month period ended September 30, 2017, over the comparable periods in 2016.  The increase in gross written premiums for the three month and nine month periods ended September 30, 2017 was primarily attributable to an increase in automobile liability written premiums from existing programs. Also contributing to the increase in gross written premiums for the nine month period ended September 30, 2017 were increases in automobile physical damage and surety business from two new agencies.

Ceded premiums increased slightly during the three month and nine month periods ended September 30, 2017 over the comparable periods in 2016 due primarily to a reinsurance rate increase in the automobile liability line of business.

The following presents American Southern’s net earned premiums by line of business for the three month and nine month periods ended September 30, 2017 and the comparable periods in 2016:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(In thousands)
 
Automobile liability
 
$
7,971
   
$
6,646
   
$
22,103
   
$
20,804
 
Automobile physical damage
   
2,424
     
2,511
     
7,297
     
7,675
 
General liability
   
745
     
747
     
2,211
     
2,274
 
Surety
   
2,091
     
2,212