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, 2018
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 2, 2018 was 20,199,314.

ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

Part I.      Financial Information
Page No.
   
Item 1.
 Financial Statements:  
   
 
2
 

 
3
 

 
4
 

 
5
 

 
6
   
 
7
   
Item 2.
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
   
Item 4.
 Controls and Procedures
29
     
Part II. Other Information
  
   
Item 2.
 Unregistered Sales of Equity Securities and Use of Proceeds
30
     
Item 6.
 Exhibits
30
   
31

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

ASSETS
  
   
Unaudited
September 30,
    
December 31,
  
   
2018
    
2017
  
Cash and cash equivalents
  
$
10,038
    
$
24,547
  
Investments:
                
Fixed maturities, available-for-sale (cost: $215,698 and $212,544)
    
207,138
      
215,108
  
Equity securities (cost: $10,515 and $10,918)
    
23,705
      
23,355
  
Other invested assets
    
10,817
      
5,626
  
Policy loans
    
2,084
      
2,146
  
Real estate
    
38
      
38
  
Investment in unconsolidated trusts
    
1,238
      
1,238
  
Total investments
    
245,020
      
247,511
  
Receivables:
                
Reinsurance
    
24,022
      
17,613
  
Insurance premiums and other (net of allowance for doubtful accounts: $216 and $209)
    
14,972
      
13,241
  
Deferred income taxes, net
    
3,077
      
-
  
Deferred acquisition costs
    
34,934
      
32,694
  
Other assets
    
4,942
      
5,089
  
Intangibles
    
2,544
      
2,544
  
Total assets
  
$
339,549
    
$
343,239
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
  
Insurance reserves and policyholder funds:
                
Future policy benefits
  
$
88,437
    
$
82,435
  
Unearned premiums
    
26,272
      
23,449
  
Losses and claims
    
71,816
      
65,689
  
Other policy liabilities
    
1,288
      
2,010
  
Total insurance reserves and policyholder funds
    
187,813
      
173,583
  
Accounts payable and accrued expenses
    
15,880
      
22,342
  
Deferred income taxes, net
    
-
      
593
  
Junior subordinated debenture obligations, net
    
33,738
      
33,738
  
Total liabilities
    
237,431
      
230,256
  
                 
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: 20,218,836 and 20,449,531
    
22,401
      
22,401
  
Additional paid-in capital
    
57,419
      
57,495
  
Retained earnings
    
37,107
      
30,993
  
Accumulated other comprehensive income (loss)
    
(6,762
)
    
9,751
  
Unearned stock grant compensation
    
(252
)
    
(579
)
Treasury stock, at cost: 2,182,058 and 1,951,363 shares
    
(7,850
)
    
(7,133
)
Total shareholders’ equity
    
102,118
      
112,983
  
Total liabilities and shareholders’ equity
  
$
339,549
    
$
343,239
  

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

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

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2018
    
2017
    
2018
    
2017
  
Revenue:
                        
Insurance premiums
  
$
42,557
    
$
42,094
    
$
127,604
    
$
122,996
  
Net investment income
    
2,215
      
2,136
      
7,111
      
6,380
  
Realized investment gains, net
    
484
      
539
      
797
      
2,818
  
Unrealized gains on equity securities, net
    
1,083
      
-
      
753
      
-
  
Other income
    
31
      
29
      
88
      
95
  
Total revenue
    
46,370
      
44,798
      
136,353
      
132,289
  
                                 
Benefits and expenses:
                                
Insurance benefits and losses incurred
    
33,087
      
30,417
      
98,478
      
87,446
  
Commissions and underwriting expenses
    
8,722
      
10,176
      
28,456
      
31,800
  
Interest expense
    
529
      
440
      
1,497
      
1,273
  
Other expense
    
2,960
      
3,134
      
9,168
      
9,301
  
Total benefits and expenses
    
45,298
      
44,167
      
137,599
      
129,820
  
Income (loss) before income taxes
    
1,072
      
631
      
(1,246
)
    
2,469
  
Income tax expense (benefit)
    
138
      
(116
)
    
(341
)
    
483
  
Net income (loss)
    
934
      
747
      
(905
)
    
1,986
  
Preferred stock dividends
    
(100
)
    
(100
)
    
(299
)
    
(299
)
Net income (loss) applicable to common shareholders
  
$
834
    
$
647
    
$
(1,204
)
  
$
1,687
  
                                 
Earnings (loss) per common share (basic and diluted)
  
$
.04
    
$
.03
    
$
(.06
)
  
$
.08
  
Dividends per common share
  
$
-
    
$
-
    
$
.02
    
$
.02
  

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

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

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2018
    
2017
    
2018
    
2017
  
Net income (loss)
  
$
934
    
$
747
    
$
(905
)
  
$
1,986
  
Other comprehensive income (loss):
                                
Available-for-sale securities:
                                
Gross unrealized holding gain (loss) arising in the period
    
63
      
2,852
      
(10,327
)
    
7,271
  
Related income tax effect
    
(13
)
    
(997
)
    
2,169
      
(2,544
)
Subtotal
    
50
      
1,855
      
(8,158
)
    
4,727
  
Less: reclassification adjustment for net realized losses included in net income (loss)
    
(484
)
    
(539
)
    
(797
)
    
(2,818
)
Related income tax effect
    
101
      
188
      
167
      
986
  
Subtotal
    
(383
)
    
(351
)
    
(630
)
    
(1,832
)
Total other comprehensive income (loss), net of tax
    
(333
)
    
1,504
      
(8,788
)
    
2,895
  
Total comprehensive income (loss)
  
$
601
    
$
2,251
    
$
(9,693
)
  
$
4,881
  

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

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

 
 
Nine Months Ended September 30, 2018
  
Preferred
Stock
    
Common
Stock
    
Additional
Paid-In
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income
    
Unearned
Stock Grant
Compensation
    
Treasury
Stock
    
Total
  
Balance, December 31, 2017
  
$
55
    
$
22,401
    
$
57,495
    
$
30,993
    
$
9,751
    
$
(579
)
  
$
(7,133
)
  
$
112,983
  
Cumulative effect of adoption of accounting guidance for equity financial instruments at January 1, 2018
    
-
      
-
      
-
      
9,825
      
(9,825
)
    
-
      
-
      
-
  
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018
    
-
      
-
      
-
      
(2,100
)
    
2,100
      
-
      
-
      
-
  
Net loss
    
-
      
-
      
-
      
(905
)
    
-
      
-
      
-
      
(905
)
Other comprehensive loss, net of tax
    
-
      
-
      
-
      
-
      
(8,788
)
    
-
      
-
      
(8,788
)
Dividends on common stock
    
-
      
-
      
-
      
(407
)
    
-
      
-
      
-
      
(407
)
Dividends accrued on preferred stock
    
-
      
-
      
-
      
(299
)
    
-
      
-
      
-
      
(299
)
Restricted stock grants, net
    
-
      
-
      
(88
)
    
-
      
-
      
135
      
(47
)
    
-
  
Amortization of unearned compensation
    
-
      
-
      
-
      
-
      
-
      
192
      
-
      
192
  
Purchase of shares for treasury
    
-
      
-
      
-
      
-
      
-
      
-
      
(463
)
    
(463
)
Net shares acquired related to employee share-based compensation plans
    
-
      
-
      
-
      
-
      
-
      
-
      
(223
)
    
(223
)
Issuance of shares under stock plans
    
-
      
-
      
12
      
-
      
-
      
-
      
16
      
28
  
Balance, September 30, 2018
  
$
55
    
$
22,401
    
$
57,419
    
$
37,107
    
$
(6,762
)
  
$
(252
)
  
$
(7,850
)
  
$
102,118
  
                                                                 
Nine Months Ended September 30, 2017
                                                                
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
  

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

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

   
Nine Months Ended
September 30,
  
   
2018
    
2017
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net (loss) income
  
$
(905
)
  
$
1,986
  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
                
Amortization of deferred acquisition costs
    
8,986
      
8,696
  
Acquisition costs deferred
    
(11,226
)
    
(11,880
)
Realized investment gains, net
    
(797
)
    
(2,818
)
Unrealized losses on equity securities, net
    
(753
)
    
-
  
Distributions received from equity method investees
    
725
      
58
  
Compensation expense related to share awards
    
192
      
363
  
Depreciation and amortization
    
783
      
1,149
  
Deferred income tax benefit
    
(1,335
)
    
(423
)
Increase in receivables, net
    
(7,882
)
    
(8,289
)
Increase in insurance reserves
    
14,230
      
12,513
  
Decrease in other liabilities
    
(6,760
)
    
(2,096
)
Other, net
    
(377
)
    
(344
)
Net cash used in operating activities
    
(5,119
)
    
(1,085
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Proceeds from investments sold
    
28,177
      
52,702
  
Proceeds from investments matured, called or redeemed
    
4,577
      
8,982
  
Investments purchased
    
(40,827
)
    
(63,346
)
Additions to property and equipment
    
(252
)
    
(101
)
Net cash used in investing activities
    
(8,325
)
    
(1,763
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Payment of dividends on common stock
    
(407
)
    
(408
)
Proceeds from shares issued under stock plans
    
28
      
23
  
Treasury stock acquired — share repurchase authorization
    
(463
)
    
(546
)
Treasury stock acquired — net employee share-based compensation
    
(223
)
    
-
  
Net cash used in financing activities
    
(1,065
)
    
(931
)
                 
Net decrease in cash and cash equivalents
    
(14,509
)
    
(3,779
)
Cash and cash equivalents at beginning of period
    
24,547
      
13,252
  
Cash and cash equivalents at end of period
  
$
10,038
    
$
9,473
  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                
Cash paid for interest
  
$
1,471
    
$
1,263
  
Cash paid for income taxes
  
$
1,892
    
$
1,400
  

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

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

Note 1.
Basis of Presentation

The accompanying unaudited 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 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, 2017 (the “2017 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, 2018 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, 2018 or for any other future period.

The Company’s significant accounting policies have not changed materially from those set out in the Company’s 2017 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

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”).  The FASB issued this guidance for the effect on deferred tax assets and liabilities related to items recorded in accumulated other comprehensive income ("AOCI") resulting from legislated tax reform enacted on December 22, 2017. The tax reform reduced the federal tax rate applied to the Company’s deferred tax balances from 35% to 21% on enactment. The Company recorded the total effect of the change in enacted tax rates on deferred tax balances in the income tax expense component of net income. ASU 2018-02 permits the Company to reclassify out of AOCI and into retained earnings the “stranded” tax effects that resulted from recording the tax effects of unrealized investment gains at a 35% tax rate because the 14% reduction in tax rate was recognized in net income instead of other comprehensive income. The Company adopted ASU 2018-02 as of January 1, 2018. As a result, on January 1, 2018, the Company reclassified $2,100 of stranded tax effects related to continuing operations which increased AOCI and reduced retained earnings.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).  ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  The issues addressed in ASU 2016-15 are:  1) debt prepayment or debt extinguishment costs, 2) settlement of zero-coupon debt instruments, 3) contingent consideration payments made after a business combination,  4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions and 8) separately identifiable cash flows and application of the predominance principle.  The Company adopted ASU 2016-15 as of January 1, 2018, which impacted the classification of distributions from equity method investees. The Company made the election to use the nature of distributions approach.  For the nine month period ended September 30, 2018,  the Company classified distributions from equity method investees of $725 as cash flows from operating activities and reclassified $58 as cash flows from investing activities to cash flows from operating activities for the nine month period ended September 30, 2017, in its consolidated statements of cash flows.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) (“ASU 2016-01”).  ASU 2016-01 provides updated guidance for the recognition and measurement of financial instruments. The guidance requires investments in equity securities to be measured at fair value with any changes in valuation reported in net income except for investments that are consolidated or are accounted for under the equity method of accounting. The guidance also requires a deferred tax asset resulting from net unrealized losses on available-for-sale (AFS) fixed maturities that are recognized in AOCI to be evaluated for recoverability in combination with the Company’s other deferred tax assets. Under previous guidance, the Company measured investments in equity securities at fair value with any changes in fair value reported in other comprehensive income. The Company adopted ASU 2016-01 as of January 1, 2018.  The adoption of this guidance resulted in the recognition of $9,825 of net after tax unrealized gains on equity securities as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased AOCI by the same amount.  The Company elected to report changes in the fair value of equity securities in a separate line item on the Company’s consolidated statements of operations.  At December 31, 2017, equity securities were classified as AFS in the Company’s consolidated balance sheets. However, upon adoption, the updated guidance eliminated the AFS balance sheet classification for equity securities.

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.  The Company adopted ASU No. 2014-09 as of January 1, 2018. For the nine months ended September 30, 2018, approximately $88, or less than one-tenth of 1% of the Company's total revenues, were within the scope of this updated guidance.  The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

Future Adoption of New Accounting Standards

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This guidance removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels, and (3) the valuation processes for Level 3 fair value measurements.  This disclosure also includes the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, 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 August 2018, the FASB issued ASU No. 2018-12, Financial Services —Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (“ASU 2018-12”).   This guidance (1) improves the timeliness of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows, (2) simplifies and improves the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, (3) simplifies the amortization of deferred acquisition costs, and (4) improves the effectiveness of the required disclosures.  ASU 2018-12 is effective for interim and annual reporting periods beginning after December 15, 2020, although earlier adoption is permitted.  The Company has not yet determined the method or timing for adoption or estimated the impact on the Company’s consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”).  This guidance was issued to clarify the comparative reporting requirements for initial adoption and to provide an additional and optional transition method to adopt the new lease standard. The Company has not yet made an election on the optional transition method.  See Note 1 – Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2017 Annual Report for more information on the future adoption of the new lease accounting standard.  The Company does not expect the adoption of the new lease standard to have a material impact on its consolidated financial statements; however, it is expected that assets and liabilities will increase based on the present value of remaining lease payments for the minor number of leases which will be in place at the adoption date.

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 September 30, 2018 and December 31, 2017.

Fixed maturities were comprised of the following:

   
September 30, 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
  
$
26,240
    
$
7
    
$
1,449
    
$
27,682
  
Obligations of states and political subdivisions
    
8,224
      
259
      
135
      
8,100
  
Corporate securities:
                                
Utilities and telecom
    
18,891
      
855
      
756
      
18,792
  
Financial services
    
51,517
      
1,031
      
2,142
      
52,628
  
Other business – diversified
    
47,267
      
240
      
2,668
      
49,695
  
Other consumer – diversified
    
54,807
      
87
      
3,889
      
58,609
  
Total corporate securities
    
172,482
      
2,213
      
9,455
      
179,724
  
Redeemable preferred stocks:
                                
Other consumer – diversified
    
192
      
-
      
-
      
192
  
Total redeemable preferred stocks
    
192
      
-
      
-
      
192
  
Total fixed maturities
  
$
207,138
    
$
2,479
    
$
11,039
    
$
215,698
  

   
December 31, 2017
  
   
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
  
$
31,155
    
$
149
    
$
511
    
$
31,517
  
Obligations of states and political subdivisions
    
10,809
      
630
      
1
      
10,180
  
Corporate securities:
                                
Utilities and telecom
    
21,882
      
1,709
      
130
      
20,303
  
Financial services
    
53,686
      
2,049
      
453
      
52,090
  
Other business – diversified
    
44,184
      
1,024
      
1,349
      
44,509
  
Other consumer – diversified
    
53,200
      
924
      
1,477
      
53,753
  
Total corporate securities
    
172,952
      
5,706
      
3,409
      
170,655
  
Redeemable preferred stocks:
                                
Other consumer – diversified
    
192
      
-
      
-
      
192
  
Total redeemable preferred stocks
    
192
      
-
      
-
      
192
  
Total fixed maturities
  
$
215,108
    
$
6,485
    
$
3,921
    
$
212,544
  

Bonds having an amortized cost of $9,896 and $11,178 and included in the tables above were on deposit with insurance regulatory authorities as of September 30, 2018 and December 31, 2017, respectively, in accordance with statutory requirements.

Equity securities were comprised of the following:

   
September 30, 2018
  
   
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Cost
  
Equity securities:
                        
Common and non-redeemable preferred stocks:
                        
Utilities and telecom
  
$
1,602
    
$
637
    
$
-
    
$
965
  
Financial services
    
4,770
      
390
      
-
      
4,380
  
Other business – diversified
    
320
      
273
      
-
      
47
  
Other consumer – diversified
    
17,013
      
11,890
      
-
      
5,123
  
Total equity securities
  
$
23,705
    
$
13,190
    
$
-
    
$
10,515
  

   
December 31, 2017
  
   
Estimated
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Cost
  
Equity securities:
                        
Common and non-redeemable preferred stocks:
                        
Utilities and telecom
  
$
1,588
    
$
624
    
$
-
    
$
964
  
Financial services
    
5,634
      
851
      
-
      
4,783
  
Other business – diversified
    
297
      
250
      
-
      
47
  
Other consumer – diversified
    
15,836
      
10,712
      
-
      
5,124
  
Total equity securities
  
$
23,355
    
$
12,437
    
$
-
    
$
10,918
  

The carrying value and amortized cost of the Company’s investments in fixed maturities at September 30, 2018 and December 31, 2017 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, 2018
    
December 31, 2017
  
   
Carrying
Value
    
Amortized
Cost
    
Carrying
Value
    
Amortized
Cost
  
Due in one year or less
  
$
3,148
    
$
3,150
    
$
1,653
    
$
1,655
  
Due after one year through five years
    
19,055
      
19,408
      
13,738
      
14,056
  
Due after five years through ten years
    
126,581
      
131,961
      
112,847
      
112,116
  
Due after ten years
    
42,251
      
43,970
      
67,328
      
64,928
  
Varying maturities
    
16,103
      
17,209
      
19,542
      
19,789
  
Totals
  
$
207,138
    
$
215,698
    
$
215,108
    
$
212,544
  

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, 2018 and December 31, 2017.

   
September 30, 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
  
$
3,923
    
$
178
    
$
20,812
    
$
1,271
    
$
24,735
    
$
1,449
  
Obligations of states and political subdivisions
    
4,402
      
135
      
-
      
-
      
4,402
      
135
  
Corporate securities
    
90,396
      
4,116
      
50,934
      
5,339
      
141,330
      
9,455
  
Total temporarily impaired securities
  
$
98,721
    
$
4,429
    
$
71,746
    
$
6,610
    
$
170,467
    
$
11,039
  

   
December 31, 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
  
$
12,175
    
$
162
    
$
12,737
    
$
349
    
$
24,912
    
$
511
  
Obligations of states and political subdivisions
    
999
      
1
      
-
      
-
      
999
      
1
  
Corporate securities
    
40,108
      
653
      
32,667
      
2,756
      
72,775
      
3,409
  
Total temporarily impaired securities
  
$
53,282
    
$
816
    
$
45,404
    
$
3,105
    
$
98,686
    
$
3,921
  

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, 2018 and December 31, 2017, there were one hundred thirty-three and sixty-nine securities, respectively, in an unrealized loss position which primarily included certain of the Company’s investments in fixed maturities within the financial services, other diversified business and other diversified consumer sectors. The increase in the number and value of securities in an unrealized loss position during the nine month period ended September 30, 2018, was primarily attributable to the rising interest rate environment.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, including those described above, the Company has deemed these securities to be temporarily impaired as of September 30, 2018.

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, 2018 and December 31, 2017, the value of the Company’s fixed maturities valued using Level 3 criteria was $1,018 and $1,369, respectively. The use of different criteria or assumptions regarding data may have yielded materially different valuations.

As of September 30, 2018, 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
  
$
-
    
$
206,120
    
$
1,018
(1) 
  
$
207,138
  
Equity securities
    
19,155
      
4,550
(1) 
    
-
      
23,705
  
Cash equivalents
    
8,653
      
-
      
-
      
8,653
  
Total
  
$
27,808
    
$
210,670
    
$
1,018
    
$
239,496
  


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

As of December 31, 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
  
$
-
    
$
213,739
    
$
1,369
(1) 
  
$
215,108
  
Equity securities
    
17,973
      
5,382
(1) 
    
-
      
23,355
  
Cash equivalents
    
13,855
      
-
      
-
      
13,855
  
Total
  
$
31,828
    
$
219,121
    
$
1,369
    
$
252,318
  


(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, 2018 and 2017.

   
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
  
Total realized gains included in earnings
    
208
  
Total unrealized losses included in other comprehensive loss
    
(53
)
Settlements
    
(483
)
Balance, September 30, 2018
  
$
1,018
  

   
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
  

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 is a summary of realized investment gains (losses) for the three month and nine month periods ended September 30, 2018 and 2017.

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2018
    
2017
    
2018
    
2017
  
Gross gains
  
$
484
    
$
539
    
$
1,101
    
$
2,879
  
Gross losses
    
-
      
-
      
(304
)
    
(61
)
Realized investment gains, net
  
$
484
    
$
539
    
$
797
    
$
2,818
  

The following table presents the portion of unrealized gains (losses) related to equity securities still held for the three month and nine month periods ended September 30, 2018 and 2017.

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2018
    
2017
    
2018
    
2017
  
Net gains recognized during the period on equity securities
  
$
1,355
    
$
-
    
$
1,025
    
$
-
  
Less: Net losses recognized during the period on equity securities sold during the period
    
(272
)
    
-
      
(272
)
    
-
  
Net unrealized gains recognized during the reporting period on equity securities still held at the reporting date
  
$
1,083
    
$
-
    
$
753
    
$
-
  

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, 2018 and December 31, 2017.

   
   
September 30, 2018
    
December 31, 2017
  
   
 Level in Fair
Value
Hierarchy (1)
    
Carrying
Amount
    
Estimated
Fair Value
    
Carrying
Amount
    
Estimated
Fair Value
  
Assets:
                              
Cash and cash equivalents
  
Level 1
    
$
10,038
    
$
10,038
    
$
24,547
    
$
24,547
  
Fixed maturities
    
(1)

   
207,138
      
207,138
      
215,108
      
215,108
  
Equity securities
    
(1)

   
23,705
      
23,705
      
23,355
      
23,355
  
Other invested assets
  
Level 3
      
10,817
      
10,817
      
5,626
      
5,626
  
Policy loans
  
Level 2
      
2,084
      
2,084
      
2,146
      
2,146
  
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 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,
  
   
2018
    
2017
  
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
47,997
    
$
49,556
  
Less: Reinsurance recoverable on unpaid losses
    
(7,220
)
    
(9,806
)
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
    
40,777
      
39,750
  
                 
Incurred related to:
                
Current accident year
    
30,339
      
27,359
  
Prior accident year development (1)
    
(1,795
)
    
(1,480
)
Total incurred
    
28,544
      
25,879
  
                 
Paid related to:
                
Current accident year
    
10,716
      
9,858
  
Prior accident years
    
15,693
      
13,720
  
Total paid
    
26,409
      
23,578
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
    
42,912
      
42,051
  
Plus: Reinsurance recoverable on unpaid losses
    
6,928
      
9,455
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
49,840
    
$
51,506
  


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

Medicare Supplement Insurance Products
  
Nine Months Ended
September 30,
  
   
2018
    
2017
  
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
15,859
    
$
11,263
  
Less: Reinsurance recoverable on unpaid losses
    
(4,748
)
    
(990
)
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
    
11,111
      
10,273
  
                 
Incurred related to:
                
Current accident year
    
59,356
      
50,733
  
Prior accident year development
    
817
      
720
  
Total incurred
    
60,173
      
51,453
  
                 
Paid related to:
                
Current accident year
    
46,734
      
40,801
  
Prior accident years
    
11,594
      
10,445
  
Total paid
    
58,328
      
51,246
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
    
12,956
      
10,480
  
Plus: Reinsurance recoverable on unpaid losses
    
7,340
      
3,640
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
20,296
    
$
14,120
  

Other Life and Health Insurance Products
  
Nine Months Ended
September 30,
  
   
2018
    
2017
  
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
1,833
    
$
1,743
  
Less: Reinsurance recoverable on unpaid losses
    
-
      
-
  
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
    
1,833
      
1,743
  
                 
Incurred related to:
                
Current accident year
    
6,729
      
6,226
  
Prior accident year development
    
(71
)
    
(104
)
Total incurred
    
6,658
      
6,122
  
                 
Paid related to:
                
Current accident year
    
5,148
      
4,807
  
Prior accident years
    
1,663
      
1,500
  
Total paid
    
6,811
      
6,307
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
    
1,680
      
1,558
  
Plus: Reinsurance recoverable on unpaid losses
    
-
      
-
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
1,680
    
$
1,558
  

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

   
Nine Months Ended
September 30,
  
   
2018
    
2017
  
Total incurred losses
  
$
95,375
    
$
83,454
  
Cash surrender value and matured endowments
    
1,057
      
1,167
  
Benefit reserve changes
    
2,046
      
2,825
  
Total insurance benefits and losses incurred
  
$
98,478
    
$
87,446
  

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, 2018 was as follows:

   
Atlantic American
Statutory Trust I
    
Atlantic American
Statutory Trust II
  
JUNIOR SUBORDINATED DEBENTURES (1) (2)
            
Principal amount owed September 30, 2018
  
$
18,042
    
$
23,196
  
Less: Treasury debt (3)
    
-
      
(7,500
)
Net balance September 30, 2018
  
$
18,042
    
$
15,696
  
Net balance December 31, 2017
  
$
18,042
    
$
15,696
  
Coupon rate
  
LIBOR + 4.00%
    
LIBOR + 4.10%
  
Interest payable
  
Quarterly
    
Quarterly
  
Maturity date
  
December 4, 2032
    
May 15, 2033
  
Redeemable by issuer
  
Yes
    
Yes
  
TRUST PREFERRED SECURITIES
                
Issuance date
  
December 4, 2002
    
May 15, 2003
  
Securities issued
    
17,500
      
22,500
  
Liquidation preference per security
  
$
1
    
$
1
  
Liquidation value
  
$
17,500
    
$
22,500
  
Coupon rate
  
LIBOR + 4.00%
    
LIBOR + 4.10%
  
Distribution payable
  
Quarterly
    
Quarterly
  
Distribution guaranteed by (4)
  
Atlantic American Corporation
    
Atlantic American Corporation
  


(1)
For each of the respective debentures, the Company has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures’ respective maturity dates.  During any such period, interest will continue to accrue and the Company may not declare or pay any cash dividends or distributions on, or purchase, the Company’s common stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank equally with or junior to the Junior Subordinated Debentures.  The Company has the right at any time to dissolve each of the trusts and cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Preferred Securities.


(2)
The Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all senior debt of the Parent and are effectively subordinated to all existing and future liabilities of its subsidiaries.


(3)
On August 4, 2014, the Company acquired $7,500 of the Junior Subordinated Debentures.


(4)
The Parent has guaranteed, on a subordinated basis, all of the obligations under the Trust Preferred Securities, including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation.

Note 7.
Earnings (Loss) Per Common Share

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

   
Three Months Ended
September 30, 2018
  
   
Income
    
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
  
Basic and Diluted Earnings Per Common Share:
                  
Net income
  
$
934
      
20,420
        
Less: preferred stock dividends
    
(100
)
    
-
        
Net income applicable to common shareholders
  
$
834
      
20,420
   $ .04  

   
Three Months Ended
September 30, 2017
  
   
Income
    
Weighted
Average
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  

   
Nine Months Ended
September 30, 2018
  
   
Income
    
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
  
Basic and Diluted Loss Per Common Share:
                    
Net loss
  
$
(905
)
    
20,314
        
Less: preferred stock dividends