ATLANTIC AMERICAN CORP - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-3722

ATLANTIC AMERICAN CORPORATION

(Exact name of registrant as specified in its charter)

Georgia		58-1027114
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4370 Peachtree Road, N.E., Atlanta, Georgia		30319
(Address of principal executive offices)		(Zip Code)

(404) 266-5500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $1.00 per share		AAME		NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑ Emerging growth company ☐

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

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

The total number of shares of the registrant’s Common Stock, $1 par value, outstanding on July 31, 2023 was 20,402,288.

ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

	Forward-Looking Statements	2

Part I.	Financial Information

Item 1.	Financial Statements:	3

	Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022	3

	Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2023 and 2022	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and six months ended June 30, 2023 and 2022	5

	Condensed Consolidated Statements of Shareholders’ Equity for the three months and six months ended June 30, 2023 and 2022	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 4.	Controls and Procedures	28

Part II.	Other Information

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

Signatures		31

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FORWARD-LOOKING STATEMENTS

This report contains and references certain information that constitutes forward-looking statements as that term is defined in the federal securities laws. Forward-looking statements are all statements other than those of historical fact. Such forward-looking statements are made based upon management’s current assessments of various risks and uncertainties, as well as assumptions made in accordance with the “safe harbor” provisions of the federal securities laws. Forward-looking statements are inherently subject to various risks and uncertainties and the Company’s actual results could differ materially from the results expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and other subsequent filings made by the Company from time to time with the Securities and Exchange Commission. In addition, other risks and uncertainties not known by us, or that we currently determine to not be material, may materially adversely affect our financial condition, results of operations or cash flows. The Company undertakes no obligation to update any forward-looking statement as a result of subsequent developments, changes in underlying assumptions or facts, or otherwise, except as may be required by law.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	Unaudited June 30, 2023			December 31, 2022
ASSETS
Cash and cash equivalents	$	24,247		$	28,863
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost: $235,013 and $236,766; no allowance for credit losses)		208,472			208,729
Equity securities, at fair value (cost: $4,905 and $4,907)		9,679			11,562
Other invested assets (cost: $6,982 and $5,628)		6,724			5,386
Policy loans		1,811			1,759
Real estate		38			38
Investment in unconsolidated trusts		1,238			1,238
Total investments		227,962			228,712
Receivables:
Reinsurance (net of allowance for uncollectible reinsurance of $66 and $0)		22,261			25,913
Insurance premiums and other (net of allowance for expected credit losses $213 and net of allowance for doubtful accounts $177)		30,825			15,386
Deferred income taxes, net		15,149			14,163
Deferred acquisition costs		41,211			42,281
Other assets		8,756			9,202
Intangibles		2,544			2,544
Total assets	$	372,955		$	367,064

LIABILITIES AND SHAREHOLDERS’ EQUITY
Insurance reserves and policyholder funds:
Future policy benefits	$	84,506		$	85,564
Unearned premiums		37,875			28,348
Losses and claims		85,984			87,484
Other policy liabilities		939			1,255
Total insurance reserves and policyholder funds		209,304			202,651
Accounts payable and accrued expenses		23,427			26,473
Revolving credit facility		3,000			2,009
Junior subordinated debenture obligations, net		33,738			33,738
Total liabilities		269,469			264,871

Commitments and contingencies (Note 11)
Shareholders’ equity:
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, 55,000 shares issued and outstanding; $5,500 redemption value		55			55
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,400,894; shares outstanding: 20,402,288 and 20,407,229		22,401			22,401
Additional paid-in capital		57,425			57,425
Retained earnings		52,006			51,982
Accumulated other comprehensive income		(20,967	)		(22,149	)
Unearned stock grant compensation		(33	)		(132	)
Treasury stock, at cost: 1,998,606 and 1,993,665 shares		(7,401	)		(7,389	)
Total shareholders’ equity		103,486			102,193
Total liabilities and shareholders’ equity	$	372,955		$	367,064

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

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ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Dollars in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Revenue:
Insurance premiums, net	$	46,060		$	47,065		$	92,160		$	94,146
Net investment income		2,559			2,529			5,100			4,869
Realized investment gains (losses), net		70			(62	)		70			(72	)
Unrealized gains (losses) on equity securities, net		494			(4,866	)		(1,881	)		(2,673	)
Other income		5			3			8			7
Total revenue		49,188			44,669			95,457			96,277

Benefits and expenses:
Insurance benefits and losses incurred		29,365			32,753			59,825			63,922
Commissions and underwriting expenses		12,848			10,215			25,766			23,051
Interest expense		807			414			1,557			768
Other expense		3,951			3,402			7,910			6,855
Total benefits and expenses		46,971			46,784			95,058			94,596
Income (loss) before income taxes		2,217			(2,115	)		399			1,681
Income tax expense (benefit)		473			(436	)		101			518
Net income (loss)		1,744			(1,679	)		298			1,163
Preferred stock dividends		(100	)		(100	)		(199	)		(199	)
Net income (loss) applicable to common shareholders	$	1,644		$	(1,779	)	$	99		$	964
Earnings (loss) per common share (basic)	$	0.08		$	(0.09	)	$	—		$	0.05
Earnings (loss) per common share (diluted)	$	0.08		$	(0.09	)	$	—		$	0.05

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

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ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net income (loss)	$	1,744		$	(1,679	)	$	298		$	1,163
Other comprehensive income (loss):
Available-for-sale fixed maturity securities:
Gross unrealized holding gains (losses) arising in the period		(3,167	)		(19,748	)		1,566			(41,561	)
Related income tax effect		665			4,147			(329	)		8,728
Subtotal		(2,502	)		(15,601	)		1,237			(32,833	)
Less: reclassification adjustment for net realized gains (losses) included in net income (loss)		(70	)		43			(70	)		53
Related income tax effect		15			(8	)		15			(11	)
Subtotal		(55	)		35			(55	)		42
Total other comprehensive income (loss), net of tax		(2,557	)		(15,566	)		1,182			(32,791	)
Total comprehensive income (loss)	$	(813	)	$	(17,245	)	$	1,480		$	(31,628	)

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

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ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited; Dollars in thousands except share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Preferred stock:
Balance, beginning of period	$	55		$	55		$	55		$	55
Balance, end of period		55			55			55			55
Common stock:
Balance, beginning of period		22,401			22,401			22,401			22,401
Balance, end of period		22,401			22,401			22,401			22,401
Additional paid-in capital:
Balance, beginning of period		57,425			57,443			57,425			57,441
Restricted stock grants, net of forfeitures		—			—			—			2
Balance, end of period		57,425			57,443			57,425			57,443
Retained earnings:
Balance, beginning of period		50,362			53,599			51,982			51,264
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2023		—			—			(75	)		—
Net income (loss)		1,744			(1,679	)		298			1,163
Dividends on common stock		—			—			—			(408	)
Dividends accrued on preferred stock		(100	)		(100	)		(199	)		(199	)
Balance, end of period		52,006			51,820			52,006			51,820
Accumulated other comprehensive income (loss):
Balance, beginning of period		(18,410	)		463			(22,149	)		17,688
Other comprehensive income (loss), net of tax		(2,557	)		(15,566	)		1,182			(32,791	)
Balance, end of period		(20,967	)		(15,103	)		(20,967	)		(15,103	)
Unearned stock grant compensation:
Balance, beginning of period		(59	)		(117	)		(132	)		(73	)
Restricted stock grants, net of forfeitures		—			—			—			(71	)
Amortization of unearned compensation		26			38			99			65
Balance, end of period		(33	)		(79	)		(33	)		(79	)
Treasury stock:
Balance, beginning of period		(7,395	)		(7,421	)		(7,389	)		(7,490	)
Restricted stock grants, net of forfeitures		—			—			—			69
Net shares acquired related to employee share-based compensation plans		(6	)		(15	)		(12	)		(15	)
Balance, end of period		(7,401	)		(7,436	)		(7,401	)		(7,436	)

Total shareholders’ equity	$	103,486		$	109,101		$	103,486		$	109,101
Dividends declared on common stock per share	$	—		$	—		$	—		$	0.02

Common shares outstanding:
Balance, beginning of period		20,404,699			20,403,576			20,407,229			20,378,576
Net shares acquired under employee share-based compensation plans		(2,411	)		(5,079	)		(4,941	)		(5,079	)
Restricted stock grants, net of forfeitures		—			—			—			25,000
Balance, end of period		20,402,288			20,398,497			20,402,288			20,398,497

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

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ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; In thousands)

	Six Months Ended June 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	298		$	1,163
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of (additions to) acquisition costs, net		1,070			(3,546	)
Realized investment (gains) losses, net		(70	)		72
Unrealized losses on equity securities, net		1,881			2,673
Losses from equity method investees		16			18
Compensation expense related to share awards		99			65
Depreciation and amortization		357			465
Deferred income tax benefit		(1,300	)		(694	)
Increase in receivables, net		(11,787	)		(12,729	)
Increase in insurance reserves and policyholder funds		6,653			10,077
Decrease in accounts payable and accrued expenses		(3,246	)		(2,104	)
Other, net		1,133			124
Net cash used in operating activities		(4,896	)		(4,416	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold		3,685			221
Proceeds from investments matured, called or redeemed		7,675			6,241
Investments purchased		(12,000	)		(11,398	)
Additions to property and equipment		(68	)		(68	)
Net cash used in investing activities		(708	)		(5,004	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends on common stock		—			(408	)
Treasury stock acquired — net employee share-based compensation		(12	)		(15	)
Proceeds from revolving credit facility, net		1,000			1,000
Net cash provided by financing activities		988			577

Net decrease in cash and cash equivalents		(4,616	)		(8,843	)
Cash and cash equivalents at beginning of period		28,863			24,753
Cash and cash equivalents at end of period	$	24,247		$	15,910

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	1,547		$	726
Cash paid for income taxes	$	776		$	899

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

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ATLANTIC AMERICAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; Dollars in thousands, except per share amounts)

Note 1.

Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Atlantic American Corporation (the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”). The Parent’s primary operating subsidiaries, American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”) and Bankers Fidelity Life Insurance Company, Bankers Fidelity Assurance Company and Atlantic Capital Life Assurance Company (together known as “Bankers Fidelity”), operate in two principal business units. American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The unaudited condensed consolidated financial statements included herein and these related notes should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”). The Company’s financial condition and results of operations and cash flows as of and for the three month and six month periods ended June 30, 2023 are not necessarily indicative of the financial condition or results of operations and cash flows that may be expected for the year ending December 31, 2023 or for any other future period.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Note 2.

Recently Issued Accounting Standards

Adoption of New Accounting Standards

Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This guidance provides optional expedients and exceptions for applying GAAP to investments, derivatives, or other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. Along with the optional expedients, the amendments include a general principle that permits an entity to consider contract modifications due to reference reform to be an event that does not require contract re-measurement at the modification date or reassessment of a previous accounting determination. Additionally, a company may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that were classified as held to maturity before January 1, 2020. This standard may be elected over time through December 31, 2024 as reference rate reform activities occur. The Company adopted the guidance as of June 30, 2023. The adoption of the guidance had no significant impact on the Company’s financial condition and results of operations.

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

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

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

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Impact of Adoption on Condensed Consolidated Balance Sheet

Reinsurance Recoverables

The following table presents the balances of reinsurance recoverables, net of the allowance for estimated uncollectible reinsurance, at January 1, 2023 and June 30, 2023, and the changes in the allowance for estimated uncollectible reinsurance for the six months ended June 30, 2023.

	At and for the six months ended June 30, 2023
(in thousands)	Reinsurance Recoverables, Net of Allowance for Estimated Uncollectible Reinsurance		Allowance for Estimated Uncollectible Reinsurance
Balance, beginning of period	$	25,913	$	—
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2023		—		75
Current period change for estimated uncollectible reinsurance		—		(9	)
Write-offs of uncollectible reinsurance recoverables		—		—
Balance, end of period	$	22,261	$	66

Insurance Premium and Other Receivables

The following table presents the balances of insurance premiums and other, net of the allowance for expected credit losses, at January 1, 2023 and June 30, 2023, and the changes in the allowance for doubtful accounts/expected credit losses for the six months ended June 30, 2023.

	At and for the six months ended June 30, 2023
(in thousands)	Insurance Premiums and Other, Net of Expected Credit Losses		Allowance for Doubtful Accounts/Expected Credit Losses
Balance, beginning of period	$	15,386	$	177
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2023		—		—
Current period change for expected credit losses		—		36
Write-offs of uncollectible insurance premiums and other receivables		—		—
Balance, end of period	$	30,825	$	213

Future Adoption of New Accounting Standards

For more information regarding accounting standards that the Company has not yet adopted, see the “Recently Issued Accounting Standards - Future Adoption of New Accounting Standards” section of Note 1 of Notes to Consolidated Financial Statements in the 2022 Annual Report.

Accounting Policies

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

Credit Impairments of Fixed Maturities

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

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

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On January 1, 2023, the Company adopted accounting standards update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), using a modified retrospective approach. Under ASU 2016-13, for securities in an unrealized loss position, a credit loss is recognized in earnings within realized investment gains (losses) when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the reduction of amortized cost and the loss recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized as a credit loss by establishing an ACL with a corresponding charge to earnings in realized investment gains (losses). However, the ACL is limited by the amount that the fair value is less than the amortized cost. This limitation is known as the “fair value floor.” If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of the decline in value related to other-than-credit factors (“noncredit loss”) is recorded in OCI.

Reinsurance Recoverables

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

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

Insurance Premiums and Other Receivables

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

Note 3.

Investments

The following tables set forth the estimated fair value, gross unrealized gains, gross unrealized losses, ACL and cost or amortized cost of the Company’s investments in fixed maturities and equity securities, aggregated by type and industry, as of June 30, 2023 and December 31, 2022.

Fixed maturities were comprised of the following:

	June 30, 2023
	Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Cost or Amortized Cost
Fixed maturities:
Bonds:
U.S. Treasury securities and obligations of U.S. Government agencies and authorities	$	48,880	$	1	$	5,948	$	—	$	54,827
Obligations of states and political subdivisions		8,148		—		1,370		—		9,518
Corporate securities:
Utilities and telecom		20,195		86		3,146		—		23,255
Financial services		57,242		439		6,948		—		63,751
Other business – diversified		31,871		173		4,107		—		35,805
Other consumer – diversified		41,909		42		5,797		—		47,664
Total corporate securities		151,217		740		19,998		—		170,475
Redeemable preferred stocks:
Other consumer – diversified		227		34		—		—		193
Total redeemable preferred stocks		227		34		—		—		193
Total fixed maturities	$	208,472	$	775	$	27,316	$	—	$	235,013

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	December 31, 2022
	Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Cost or Amortized Cost
Fixed maturities:
Bonds:
U.S. Treasury securities and obligations of U.S. Government agencies and authorities	$	44,412	$	5	$	5,926	$	50,333
Obligations of states and political subdivisions		9,187		4		1,702		10,885
Corporate securities:
Utilities and telecom		22,090		120		3,299		25,269
Financial services		59,054		397		7,085		65,742
Other business – diversified		31,058		161		4,689		35,586
Other consumer – diversified		42,705		35		6,089		48,759
Total corporate securities		154,907		713		21,162		175,356
Redeemable preferred stocks:
Other consumer – diversified		223		31		—		192
Total redeemable preferred stocks		223		31		—		192
Total fixed maturities	$	208,729	$	753	$	28,790	$	236,766

Bonds having an amortized cost of $11,766 and $12,333 and included in the tables above were on deposit with insurance regulatory authorities as of June 30, 2023 and December 31, 2022, respectively, in accordance with statutory requirements. Additionally, bonds having an amortized cost of $7,548 and $7,221 and included in the tables above were pledged as collateral to the Federal Home Loan Bank of Atlanta (“FHLB”) at June 30, 2023 and December 31, 2022, respectively.

Equity securities were comprised of the following:

	June 30, 2023
	Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Cost
Equity securities:
Common and non-redeemable preferred stocks:
Financial services	$	842	$	570	$	—	$	272
Other business – diversified		8,837		4,204		—		4,633
Total equity securities	$	9,679	$	4,774	$	—	$	4,905

	December 31, 2022
	Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Cost
Equity securities:
Common and non-redeemable preferred stocks:
Financial services	$	790	$	516	$	—	$	274
Other business – diversified		10,772		6,139		—		4,633
Total equity securities	$	11,562	$	6,655	$	—	$	4,907

The carrying value and amortized cost of the Company’s investments in fixed maturities at June 30, 2023 and December 31, 2022 by contractual maturity were as follows. Actual maturities may differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.

	June 30, 2023				December 31, 2022
	Carrying Value		Amortized Cost		Carrying Value		Amortized Cost
Due in one year or less	$	123	$	125	$	3,776	$	3,797
Due after one year through five years		56,828		59,924		40,150		42,174
Due after five years through ten years		35,227		39,835		44,044		49,711
Due after ten years		81,244		95,113		87,719		103,095
Asset backed securities		35,050		40,016		33,040		37,989
Totals	$	208,472	$	235,013	$	208,729	$	236,766

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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 June 30, 2023 and December 31, 2022.

	June 30, 2023
	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government agencies and authorities	$	11,404	$	287	$	36,608	$	5,661	$	48,012	$	5,948
Obligations of states and political subdivisions		2,143		18		6,005		1,352		8,148		1,370
Corporate securities		16,587		554		126,125		19,444		142,712		19,998
Total temporarily impaired securities	$	30,134	$	859	$	168,738	$	26,457	$	198,872	$	27,316

	December 31, 2022
	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government agencies and authorities	$	23,763	$	2,410	$	19,259	$	3,516	$	43,022	$	5,926
Obligations of states and political subdivisions		8,183		1,702		—		—		8,183		1,702
Corporate securities		127,928		16,214		14,514		4,948		142,442		21,162
Total temporarily impaired securities	$	159,874	$	20,326	$	33,773	$	8,464	$	193,647	$	28,790

Analysis of Securities in Unrealized Loss Positions

As of June 30, 2023 and December 31, 2022, there were 248 and 237 securities, respectively, in an unrealized loss position which primarily included certain of the Company’s investments in fixed maturities within the utilities and telecom, financial services, other diversified business and other diversified consumer sectors. The unrealized losses on the Company’s fixed maturity securities investments have been primarily related to general market changes in interest rates and/or the levels of credit spreads rather than specific concerns with the issuer’s ability to pay interest and repay principal.

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

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

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

However, from time to time the Company identifies certain available-for-sale fixed maturity securities where the amortized cost basis exceeds the present value of the cash flows expected to be collected due to credit related factors and as a result, a credit allowance will be estimated. The Company had no ACL on its available-for-sale fixed maturities as of June 30, 2023.

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The following tables summarize realized investment gains (losses) for the three month and six month periods ended June 30, 2023 and 2022.

	Three Months Ended June 30, 2023
	Fixed Maturities		Equity Securities		Other Invested Assets		Total
Gains	$	70	$	—	$	—	$	70
Losses		—		—		—		—
Realized investment losses, net	$	70	$	—	$	—	$	70

	Three Months Ended June 30, 2022
	Fixed Maturities			Equity Securities		Other Invested Assets			Total
Gains	$	—		$	—	$	—		$	—
Losses		(43	)		—		(19	)		(62	)
Realized investment gains, net	$	(43	)	$	—	$	(19	)	$	(62	)

	Six Months Ended June 30, 2023
	Fixed Maturities		Equity Securities		Other Invested Assets		Total
Gains	$	70	$	—	$	—	$	70
Losses		—		—		—		—
Realized investment gains, net	$	70	$	—	$	—	$	70

	Six Months Ended June 30, 2022
	Fixed Maturities			Equity Securities		Other Invested Assets			Total
Gains	$	—		$	—	$	—		$	—
Losses		(53	)		—		(19	)		(72	)
Realized investment gains, net	$	(53	)	$	—	$	(19	)	$	(72	)

The following table presents the change in unrealized gains (losses) related to equity securities still held for the three month and six month periods ended June 30, 2023 and 2022.

	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023			2022
Net realized and unrealized gains (losses) recognized during the period on equity securities	$	494	$	(4,866	)	$	(1,881	)	$	(2,673	)
Less: Net realized gains recognized during the period on equity securities sold during the period		—		—			—			—
Unrealized gains (losses) recognized during the reporting period on equity securities, net	$	494	$	(4,866	)	$	(1,881	)	$	(2,673	)

Variable Interest Entities

The Company holds passive interests in a number of entities that are considered to be variable interest entities (“VIEs”) under GAAP guidance. The Company’s VIE interests principally consist of interests in limited liability companies formed for the purpose of achieving diversified equity returns. The Company’s VIE interests, carried as a part of other invested assets, totaled $6,724 and $5,386 as of June 30, 2023 and December 31, 2022, respectively. The Company’s VIE interests, carried as a part of investment in unconsolidated trusts, totaled $1,238 as of June 30, 2023 and December 31, 2022.

The Company does not have power over the activities that most significantly impact the economic performance of these VIEs and thus is not the primary beneficiary. Therefore, the Company has not consolidated these VIEs. The Company’s involvement with each VIE is limited to its direct ownership interest in the VIE. The Company has no arrangements with any of the VIEs to provide other financial support to or on behalf of the VIE. The Company’s maximum loss exposure relative to these investments was limited to the carrying value of the Company’s investment in the VIEs, which amount to $7,962 and $6,624, as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023 and December 31, 2022, the Company had outstanding commitments totaling $4,518 and $5,872, respectively, whereby the Company is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses.

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Note 4.

Fair Values of Financial Instruments

The estimated fair values have been determined by the Company using available market information from various market sources and appropriate valuation methodologies as of the respective dates. However, considerable judgment is necessary to interpret market data and to develop the estimates of fair value. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, the estimates presented herein are not necessarily indicative of the amounts which the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following describes the fair value hierarchy and provides information as to the extent to which the Company uses fair value to measure the value of its financial instruments and information about the inputs used to value those financial instruments. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad levels.

Level 1

Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. The Company’s financial instruments valued using Level 1 criteria include cash equivalents and exchange traded common stocks.

Level 2

Observable inputs, other than quoted prices included in Level 1, for an asset or liability or prices for similar assets or liabilities. The Company’s financial instruments valued using Level 2 criteria include significantly most of its fixed maturities, which consist of U.S. Treasury securities, U.S. Government securities, obligations of states and political subdivisions, and certain corporate fixed maturities, as well as its non-redeemable preferred stocks. In determining fair value measurements of its fixed maturities and non-redeemable preferred stocks using Level 2 criteria, the Company utilizes data from outside sources, including nationally recognized pricing services and broker/dealers. Prices for the majority of the Company’s Level 2 fixed maturities and non-redeemable preferred stocks were determined using unadjusted prices received from pricing services that utilize models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Level 3

Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. With little or no observable market, the determination of fair values uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. The Company’s financial instruments valued using Level 3 criteria consist of one equity security. As of June 30, 2023 and December 31, 2022, the value of the equity security valued using Level 3 criteria was $154 and $156, respectively. The equity security is not traded and is valued at cost. The use of different criteria or assumptions regarding data may have yielded materially different valuations.

As of June 30, 2023, financial instruments carried at fair value were measured on a recurring basis as summarized below:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Fixed maturities	$	—	$	208,472	$	—	$	208,472
Equity securities		9,525		—		154		9,679
Cash equivalents		15,051		—		—		15,051
Total	$	24,576	$	208,472	$	154	$	233,202

As of December 31, 2022, financial instruments carried at fair value were measured on a recurring basis as summarized below:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Fixed maturities	$	—	$	208,729	$	—	$	208,729
Equity securities		11,406		—		156		11,562
Cash equivalents		18,861		—		—		18,861
Total	$	30,267	$	208,729	$	156	$	239,152

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The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of the Company’s financial instruments as of June 30, 2023 and December 31, 2022.

			June 30, 2023				December 31, 2022
	Level in Fair Value Hierarchy ⁽¹⁾		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	Level 1		$	24,247	$	24,247	$	28,863	$	28,863
Fixed maturities	⁽¹	⁾		208,472		208,472		208,729		208,729
Equity securities	⁽¹	⁾		9,679		9,679		11,562		11,562
Other invested assets	Level 3			6,724		6,724		5,386		5,386
Policy loans	Level 2			1,811		1,811		1,759		1,759
Investment in unconsolidated trusts	Level 2			1,238		1,238		1,238		1,238

Liabilities:
Junior subordinated debentures, net	Level 2			33,738		32,724		33,738		33,810
Revolving credit facility	Level 2			3,000		3,000		2,009		2,009

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

Note 5.

Internal-Use Software

On March 3, 2021, the Company entered into a hosting arrangement through a service contract with a third party software solutions vendor to provide a suite of policy, billing, claim, and customer management services. The software is managed, hosted, supported, and delivered as a cloud-based software service product offering (software-as-a-service). The initial term of the arrangement is five years from the effective date with a renewal term of an additional five years.

Service fees related to the hosting arrangement are recorded as an expense in the Company’s condensed consolidated statement of operations as incurred. Implementation expenses incurred related to third party professional and consulting services have been capitalized. The Company will begin amortizing, on a straight-line basis over the expected ten year term of the hosting arrangement, when the software is substantially ready for its intended use. The Company incurred and capitalized implementation costs of $628 and $958 during the six months ended June 30, 2023 and 2022, respectively. As a result, the Company has capitalized $3,650 in implementation costs in other assets within its condensed consolidated balance sheet as of June 30, 2023. The Company expects the software will be substantially ready for its intended use in the three months ended September 30, 2023. Accordingly, the Company has not recorded any amortization expense related to software implementation costs for the six months ended June 30, 2023.

Note 6.

Insurance Reserves for Losses and Claims

The roll-forward of insurance reserves for losses and claims for the six months ended June 30, 2023 and 2022 is as follows:

	Six Months Ended June 30,
	2023			2022
Beginning insurance reserves for losses and claims, gross	$	87,484		$	85,620
Less: Reinsurance recoverable on unpaid losses		(17,647	)		(17,690	)
Beginning insurance reserves for losses and claims, net		69,837			67,930

Incurred related to:
Current accident year		57,320			66,260
Prior accident year development ⁽¹⁾		1,636	⁽²⁾		(3,195	)⁽³⁾
Total incurred		58,956			63,065

Paid related to:
Current accident year		25,834			32,630
Prior accident years		33,019			28,754
Total paid		58,853			61,384
Ending insurance reserves for losses and claims, net		69,940			69,611
Plus: Reinsurance recoverable on unpaid losses		16,044			17,487
Ending insurance reserves for losses and claims, gross	$	85,984		$	87,098

(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.

(2)	Prior years’ development was primarily the result of unfavorable development in the property and casualty operations due to inflationary factors.

(3)	Prior years’ development was primarily the result of favorable development in the property and casualty operations, as well as favorable development in the Medicare supplement line of business in the life and health operations.

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

	Six Months Ended June 30,
	2023		2022
Total incurred losses	$	58,956	$	63,065
Cash surrender value and matured endowments		812		1,154
Benefit reserve changes		57		(297	)
Total insurance benefits and losses incurred	$	59,825	$	63,922

Note 7.

Credit Arrangements

As expected, discontinuation of LIBOR occurred on June 30, 2023 (“LIBOR Cessation Date”) and will affect the rates used in the Company’s Credit Arrangements after that date. On March 15, 2022, the U.S. Congress enacted the Adjustable Interest Rate LIBOR Act (the “LIBOR Act”) to address LIBOR’s cessation and to establish a clear and uniform process for replacing the overnight and one-, three-, six- and 12-month tenors of USD LIBOR in existing contracts that do not provide for the use of a clearly defined or practicable replacement benchmark rate (“tough legacy contracts”). Further, the Board of Governors of the Federal Reserve System (the “Board”) has issued regulations, 12 C.F.R. Part 253, “Regulations Implementing the Adjustable Interest Rate LIBOR Act (Regulation ZZ)” together with the LIBOR Act, constitute the “Federal LIBOR Legislation,” which relates to the LIBOR transition.

Bank Debt

On June 28, 2023, the Company received a LIBOR cessation notice from the Lender detailing the replacement rates that would be used effective immediately after the LIBOR Cessation Date of June 30, 2023, as provided for in the Credit Agreement. The use of an alternate benchmark rate selected by the Lender (“Benchmark Replacement”) in place of LIBOR will not be used until the first reset date under the terms of the Credit Agreement following the LIBOR Cessation Date. The Benchmark Replacement that will be used is the Term Secured Overnight Financing Rate (“SOFR”) published by CME Group Benchmark Administration Limited (“CME”) and provides an indicative, forward-looking measurement of the SOFR based on market expectations implied from leading derivatives markets.

The Credit Agreement requires the Company to comply with certain covenants, including a debt to capital ratio that restricts the Company from incurring consolidated indebtedness that exceeds 35% of the Company’s consolidated capitalization at any time. The Credit Agreement also contains customary representations and warranties and events of default. Events of default include, among others, (a) the failure by the Company to pay any amounts owed under the Credit Agreement when due, (b) the failure to perform and not timely remedy certain covenants, (c) a change in control of the Company and (d) the occurrence of bankruptcy or insolvency events. Upon an event of default, the Lender may, among other things, declare all obligations under the Credit Agreement immediately due and payable and terminate the revolving commitments. As of June 30, 2023, the Company had outstanding borrowings of $3,000 under the Credit Agreement.

Junior Subordinated Debentures

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

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On May 1, 2023, the Company received notice from its trustee and administrator of the statutory business trusts, that Federal LIBOR Legislation (discussed above) provides that the benchmark rate for tough legacy contracts, such as the statutory trusts contracts, will be replaced by operation of law on the first London banking day after June 30, 2023 with a benchmark replacement selected by the Board, as adjusted by the applicable spread adjustment recommended by the Board. The trustee and administrator has determined that our contracts will be replaced with 3-month CME Term SOFR plus applicable tenor spread of 0.26161 percent.

The financial structure of each of Atlantic American Statutory Trust I and II as of June 30, 2023 was as follows:

	Atlantic American Statutory Trust I		Atlantic American Statutory Trust II
JUNIOR SUBORDINATED DEBENTURES ^{(1) (2)}
Principal amount owed June 30, 2023	$	18,042	$	23,196
Less: Treasury debt ⁽³⁾		—		(7,500	)
Net balance June 30, 2023	$	18,042	$	15,696
Net balance December 31, 2022	$	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 8.

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 June 30, 2023
	Income			Weighted Average Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:
Net income	$	1,744			20,404
Less preferred stock dividends		(100	)		—
Net income applicable to common shareholders		1,644			20,404		0.08
Diluted Earnings Per Common Share:
Effect of Series D preferred stock		100			1,378
Net income applicable to common shareholders	$	1,744			21,782	$	0.08

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	Three Months Ended June 30, 2022
	Income			Weighted Average Shares (In thousands)		Per Share Amount
Basic and Diluted Loss Per Common Share:
Net loss	$	(1,679	)		20,402
Less preferred stock dividends		(100	)		—
Net loss applicable to common shareholders	$	(1,779	)		20,402	$	(0.09	)

	Six Months Ended June 30, 2023
	Income			Weighted Average Shares (In thousands)		Per Share Amount
Basic and Diluted Earnings Per Common Share:
Net income	$	298			20,406
Less preferred stock dividends		(199	)		—
Net income applicable to common shareholders	$	99			20,406	$	—

	Six Months Ended June 30, 2022
	Income			Weighted Average Shares (In thousands)		Per Share Amount
Basic and Diluted Earnings Per Common Share:
Net income	$	1,163			20,391
Less preferred stock dividends		(199	)		—
Net income applicable to common shareholders	$	964			20,391	$	0.05

The assumed conversion of the Company’s Series D preferred stock was excluded from the earnings (loss) per common share calculation for all periods presented, except for the three month period ended June 30, 2023, since its impact would have been antidilutive.

Note 9.

Income Taxes

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Federal income tax provision at statutory rate of 21%	$	466		$	(444	)	$	84		$	353
Dividends-received deduction		(10	)		(6	)		(17	)		(12	)
Meals and entertainment		11			10			23			20
Vested stock and club dues		2			—			3			—
Parking disallowance		4			4			8			8
Penalties and fines		—			—			—			149
Income tax expense (benefit)	$	473		$	(436	)	$	101		$	518

The components of income tax expense (benefit) were:

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Current – Federal	$	1,221		$	1,144		$	1,401		$	1,212
Deferred – Federal		(748	)		(1,580	)		(1,300	)		(694	)
Total	$	473		$	(436	)	$	101		$	518

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Note 10.

Leases

The Company has two operating lease agreements, each for the use of office space in the ordinary course of business. The first lease renews annually on an automatic basis and based on original assumptions, management is reasonably certain to exercise the renewal option through 2026. The original term of the second lease was ten years and amended in January 2017 to provide for an additional seven years, with a termination date on September 30, 2026. The rate used in determining the present value of lease payments is based upon an estimate of the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.

These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease. Lease expense reported for the six months ended June 30, 2023 and June 30, 2022 was $507.

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

	Six Months Ended June 30,
Other information on operating leases:	2023			2022
Cash payments included in the measurement of lease liabilities reported in operating cash flows	$	520		$	512
Right-of-use assets included in other assets on the condensed consolidated balance sheet		3,016			3,781
Weighted average discount rate		6.8	%		6.8	%
Weighted average remaining lease term in years	3.4 years			4.4 years

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

	Lease Liability
Remainder of 2023	$	528
2024		1,065
2025		1,083
2026		942
Thereafter		—
Total undiscounted lease payments		3,618
Less: present value adjustment		397
Operating lease liability included in accounts payable and accrued expenses on the condensed consolidated balance sheet	$	3,221

As of June 30, 2023, the Company has no operating leases that have not yet commenced.

Note 11.

Commitments and Contingencies

Litigation

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

Regulatory Matters

Like all domestic insurance companies, the Company’s insurance subsidiaries are subject to regulation and supervision in the jurisdictions in which they do business. Statutes typically delegate regulatory, supervisory, and administrative powers to state insurance commissioners. From time to time, and in the ordinary course of business, the Company receives notices and inquiries from state insurance departments with respect to various matters. In the opinion of management, any such known regulatory matters are not expected to have a material effect on the financial condition or results of operations of the Company.

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Note 12.

Segment Information

The Parent’s primary insurance subsidiaries, American Southern and Bankers Fidelity, operate in two principal business units, each focusing on specific products. American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market. Each business unit is managed independently and is evaluated on its individual performance. The following sets forth the assets, revenue and income (loss) before income taxes for each business unit as of and for the periods ended 2023 and 2022.

Assets	June 30, 2023		December 31, 2022
American Southern	$	151,902	$	144,455
Bankers Fidelity		192,456		195,028
Corporate and Other		28,597		27,581
Total assets	$	372,955	$	367,064

Revenues	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023			2022
American Southern	$	18,965	$	19,496		$	37,165		$	38,002
Bankers Fidelity		30,193		25,569			58,383			58,458
Corporate and Other		30		(396	)		(91	)		(183	)
Total revenue	$	49,188	$	44,669		$	95,457		$	96,277

Income (Loss) Before Income Taxes	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
American Southern	$	2,716		$	682		$	2,386		$	2,767
Bankers Fidelity		1,851			(517	)		3,203			2,934
Corporate and Other		(2,350	)		(2,280	)		(5,190	)		(4,020	)
Income (loss) before income taxes	$	2,217		$	(2,115	)	$	399		$	1,681

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Note 13.

Subsequent Events

On August 8, 2023, the Company’s board of directors declared an annual cash dividend of $0.02 per share of common stock that is payable to shareholders of record as of the close of business on August 22, 2023.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview

The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”) as of and for the three month and six month periods ended June 30, 2023. 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, 2022 (the “2022 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, Bankers Fidelity Assurance Company and Atlantic Capital Life 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 2022 Annual Report. Except as disclosed in Note 2 of Notes to Condensed Consolidated Financial Statements, the Company’s critical accounting policies are consistent with those disclosed in the 2022 Annual Report.

Overall Corporate Results

The following presents the Company’s revenue, expenses and net income (loss) for the three month and six month periods ended June 30, 2023 and the comparable periods in 2022:

	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023			2022

Insurance premiums, net	$	46,060	$	47,065		$	92,160		$	94,146
Net investment income		2,559		2,529			5,100			4,869
Realized investment gains (losses), net		70		(62	)		70			(72	)
Unrealized gains (losses) on equity securities, net		494		(4,866	)		(1,881	)		(2,673	)
Other income		5		3			8			7
Total revenue		49,188		44,669			95,457			96,277
Insurance benefits and losses incurred		29,365		32,753			59,825			63,922
Commissions and underwriting expenses		12,848		10,215			25,766			23,051
Interest expense		807		414			1,557			768
Other expense		3,951		3,402			7,910			6,855
Total benefits and expenses		46,971		46,784			95,058			94,596
Income (loss) before income taxes	$	2,217	$	(2,115	)	$	399		$	1,681
Net income (loss)	$	1,744	$	(1,679	)	$	298		$	1,163

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

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A reconciliation of net income (loss) to operating income for the three month and six month periods ended June 30, 2023 and the comparable periods in 2022 is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
Reconciliation of Non-GAAP Financial Measure	2023			2022			2023			2022
	(In thousands)
Net income (loss)	$	1,744		$	(1,679	)	$	298		$	1,163
Income tax expense (benefit)		473			(436	)		101			518
Realized investment gains (losses), net		(70	)		62			(70	)		72
Unrealized (gains) losses on equity securities, net		(494	)		4,866			1,881			2,673
Non-GAAP operating income	$	1,653		$	2,813		$	2,210		$	4,426

On a consolidated basis, the Company had net income of $1.7 million, or $0.08 per diluted share, for the three month period ended June 30, 2023, compared to net loss of $1.7 million, or $0.09 per diluted share, for the three month period ended June 30, 2022. The Company had net income of $0.3 million, or $0.00 per diluted share, for the six month period ended June 30, 2023, compared to net income of $1.2 million, or $0.05 per diluted share, for the six month period ended June 30, 2022. The increase in net income for the three month period ended June 30, 2023 was primarily the result of a $5.4 million increase in unrealized gains on equity securities due to fluctuations in market values in addition to more favorable loss experience in the life and health operations, from the comparable period in 2022. The decrease in net income for the six month period ended June 30, 2023 was primarily attributable to ancillary costs related to the new actuarial valuation system, coupled with an increase in administrative costs related to the growth in the group lines of business within the life and health operations.

For the three month period ended June 30, 2023, premium revenue decreased $1.0 million, or 2.1%, to $46.1 million from $47.1 million in the comparable period in 2022. For the six month period ended June 30, 2023, premium revenue decreased $2.0 million, or 2.1%, to $92.2 million from $94.1 million in the comparable period in 2022. The decrease in premium revenue was primarily attributable to a decrease in premium revenue in the automobile physical damage line of business in the property and casualty operations. Also contributing to this decrease was a decrease in the Medicare supplement insurance premiums in the life and health operations.

Operating income decreased $1.2 million in the three month period ended June 30, 2023 from the three month period ended June 30, 2022. For the six month period ended June 30, 2023, operating income decreased $2.2 million from the comparable period in 2022. The decrease in operating income for the three and six month periods ended June 30, 2023 was primarily attributable to ancillary costs related to the new actuarial valuation system, coupled with an increase in administrative costs related to the growth in the group lines of business within the life and health operations, as mentioned above.

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

American Southern

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2023 and the comparable periods in 2022:

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(Dollars in thousands)
Gross written premiums	$	38,075		$	39,600		$	47,505		$	51,158
Ceded premiums		(1,478	)		(1,722	)		(2,975	)		(3,339	)
Net written premiums	$	36,597		$	37,878		$	44,530		$	47,819
Net earned premiums	$	17,880		$	18,769		$	35,091		$	36,112
Insurance benefits and losses incurred		13,548			14,040			26,208			24,518
Commissions and underwriting expenses		4,382			4,774			8,571			10,717
Underwriting income (loss)	$	(50	)	$	(45	)	$	312		$	877
Loss ratio		75.8	%		74.8	%		74.7	%		67.9	%
Expense ratio		24.5			25.4			24.4			29.7
Combined ratio		100.3	%		100.2	%		99.1	%		97.6	%

Gross written premiums at American Southern decreased $1.5 million, or 3.9%, during the three month period ended June 30, 2023 and decreased $3.7 million, or 7.1%, during the six month period ended June 30, 2023, from the comparable periods in 2022. The decrease in gross written premiums during the three month and six month periods ended June 30, 2023 was primarily attributable to the decrease in premiums written in the automobile physical damage line of business due to a reduction in the number of agencies. Partially offsetting the decrease in gross written premiums was an increase in premiums written in the automobile liability line of business due to price increases in certain programs.

Ceded premiums decreased $0.2 million, or 14.2%, during the three month period ended June 30, 2023 and decreased $0.4 million, or 10.9%, during the six month period ended June 30, 2023, from the comparable periods in 2022. American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally increase or decrease as earned premiums increase or decrease.

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The following presents American Southern’s net earned premiums by line of business for the three month and six month periods ended June 30, 2023 and the comparable periods in 2022:

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(In thousands)
Automobile liability	$	10,495	$	8,560	$	19,815	$	16,185
Automobile physical damage		3,793		6,447		8,040		12,470
General liability		1,419		1,430		2,851		2,859
Surety		1,539		1,503		3,104		2,968
Other lines		634		829		1,281		1,630
Total	$	17,880	$	18,769	$	35,091	$	36,112

Net earned premiums decreased $0.9 million, or 4.7%, during the three month period ended June 30, 2023, and $1.0 million, or 2.8%, during the six month period ended June 30, 2023, over the comparable periods in 2022. The decrease in net earned premiums was primarily attributable to a decrease in earned premiums in the automobile physical damage line of business due to a reduction in the number of agencies as previously mentioned, partially offset by the increase in the automobile liability line of business. Premiums are earned ratably over their respective policy terms, and therefore premiums earned in the current year are related to policies written during both the current year and immediately preceding year.

The performance of an insurance company is often measured by its combined ratio. The combined ratio represents the percentage of losses, loss adjustment expenses and other expenses that are incurred for each dollar of premium earned by the company. A combined ratio of under 100% represents an underwriting profit while a combined ratio of over 100% indicates an underwriting loss. The combined ratio is divided into two components, the loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) and the expense ratio (the ratio of expenses incurred to premiums earned).

Insurance benefits and losses incurred at American Southern decreased $0.5 million, or 3.5%, during the three month period ended June 30, 2023, and increased $1.7 million, or 6.9%, during the six month period ended June 30, 2023, over the comparable periods in 2022. As a percentage of earned premiums, insurance benefits and losses incurred were 75.8% in the three month period ended June 30, 2023, compared to 74.8% in the three month period ended June 30, 2022. For the six month period ended June 30, 2023, this ratio increased to 74.7% from 67.9% in the comparable period in 2022. The increase in the loss ratio during the three month and six month periods ended June 30, 2023 was mainly due to an increase in the frequency and severity of claims in the automobile liability line of business, as well as in the surety line of business. Partially offsetting the increase in the loss ratio was a decrease in losses related to the automobile physical damage line of business due to a decrease in exposure.

Commissions and underwriting expenses decreased $0.4 million, or 8.2%, during the three month period ended June 30, 2023, and $2.1 million, or 20.0% during the six month period ended June 30, 2023, over the comparable periods in 2022. As a percentage of earned premiums, underwriting expenses were 24.5% in the three month period ended June 30, 2023, compared to 25.4% in the three month period ended June 30, 2022. For the six month period ended June 30, 2023, this ratio decreased to 24.4% from 29.7% in the comparable period in 2022. The decrease in the expense ratio during the three month and six month periods ended June 30, 2023 was primarily due to American Southern’s use of a variable commission structure with certain agents, which compensates the participating agents in relation to the loss ratios of the business they write. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease.

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Bankers Fidelity

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2023 and the comparable periods in 2022:

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(Dollars in thousands)
Medicare supplement	$	33,606		$	37,276		$	67,858		$	75,247
Other health products		4,104			2,949			7,382			5,922
Life insurance		4,504			3,570			10,072			8,087
Gross earned premiums		42,214			43,795			85,312			89,256
Ceded premiums		(14,034	)		(15,499	)		(28,243	)		(31,222	)
Net earned premiums		28,180			28,296			57,069			58,034
Insurance benefits and losses incurred		15,817			18,713			33,617			39,404
Commissions and underwriting expenses		10,843			7,373			21,563			16,119
Total expenses		26,660			26,086			55,180			55,523
Underwriting income	$	1,520		$	2,210		$	1,889		$	2,511
Loss ratio		56.1	%		66.1	%		58.9	%		67.9	%
Expense ratio		38.5			26.1			37.8			27.8
Combined ratio		94.6	%		92.2	%		96.7	%		95.7	%

Net earned premium revenue at Bankers Fidelity decreased $0.1 million, or 0.4%, during the three month period ended June 30, 2023, and $1.0 million, or 1.7%, during the six month period ended June 30, 2023, from the comparable periods in 2022. Gross earned premiums from the Medicare supplement line of business decreased $3.7 million, or 9.8%, during the three month period ended June 30, 2023, and $7.4 million, or 9.8%, during the six month period ended June 30, 2023, due primarily to non-renewals exceeding the level of new business writings. Other health product premiums increased $1.2 million, or 39.2%, during the three month period ended June 30, 2023, and $1.5 million, or 24.7%, during the six month period ended June 30, 2023, over the comparable periods in 2022, primarily as a result of new sales of the company’s group health and individual cancer products. Gross earned premiums from the life insurance line of business increased $0.9 million, or 26.2%, during the three month period ended June 30, 2023, and increased $2.0 million, or 24.5%, during the six month period ended June 30, 2023, over the comparable periods in 2022, primarily due to an increase in the group life products premium. Partially offsetting this increase was a decrease in individual life products premium, resulting from the redemption and settlement of existing individual life policy obligations exceeding the level of new individual life sales. Premiums ceded decreased $1.5 million, or 9.5%, during the three month period ended June 30, 2023 and $3.0 million, or 9.5%, during the six month period ended June 30, 2023, from the comparable periods in 2022. The decrease in ceded premiums for the three month and six month periods ended June 30, 2023 was due to a decrease in Medicare supplement premiums subject to reinsurance.

Insurance benefits and losses incurred decreased $2.9 million, or 15.5%, during the three month period ended June 30, 2023, and $5.8 million, or 14.7%, during the six month period ended June 30, 2023, from the comparable periods in 2022. As a percentage of earned premiums, benefits and losses were 56.1% in the three month period ended June 30, 2023, compared to 66.1% in the three month period ended June 30, 2022. For the six month period ended June 30, 2023, this ratio decreased to 58.9% from 67.9% in the comparable period in 2022. The decrease in the loss ratio for the three month and six month periods ended June 30, 2023 was primarily due to improved rate adequacy and a decrease in the number of incurred claims within the Medicare supplement line of business. This decrease was marginally offset by increased loss ratios on the other health lines of business.

Commissions and underwriting expenses increased $3.5 million, or 47.1%, during the three month period ended June 30, 2023, and $5.4 million, or 33.8%, during the six month period ended June 30, 2023, over the comparable periods in 2022. As a percentage of earned premiums, underwriting expenses were 38.5% in the three month period ended June 30, 2023, compared to 26.1% in the three month period ended June 30, 2022. For the six month period ended June 30, 2023, this ratio increased to 37.8% from 27.8% in the comparable period in 2022. The increase in the expense ratio for the three and six month periods ended June 30, 2023 was primarily due to an increase in administrative costs related to the growth in the group lines of business, coupled with increased Medicare supplement servicing costs.

Net Investment Income and Realized Gains (Losses)

Investment income remained consistent during the three month period ended June 30, 2023, and increased $0.2 million, or 4.7%, during the six month period ended June 30, 2023, over the comparable period in 2022. The increase in investment income in the six month period ended June 30, 2023, from the comparable periods in 2022, was primarily attributable to a rising interest rate environment which has contributed to an increase in income received within the investment portfolio.

The Company had net realized investment gains of $0.1 million during the three month period ended June 30, 2023, compared to net realized investment losses of $0.1 million during the three month period ended June 30, 2022. The Company had net realized investment gains of $0.1 during the six month period ended June 30, 2023 and net realized investment losses of $0.1 million during the six month period ended June 30, 2022. The net realized investment gains during the three month and six month periods ended June 30, 2023 resulted primarily from the disposition of several of the Company’s investments in fixed maturity securities. The net realized investment losses during the three month and six month periods ended June 30, 2022 resulted from the redemption of several of the Company’s investments in fixed maturity securities. Management continually evaluates the Company’s investment portfolio and makes adjustments for impairments and/or divests investments as may be determined to be appropriate.

Unrealized Gains (Losses) on Equity Securities

Investments in equity securities are measured at fair value at the end of the reporting period, with any changes in fair value reported in net income during the period, with certain exceptions. The Company recognized net unrealized gains on equity securities of $0.5 million during the three month period ended June 30, 2023 and unrealized losses on equity securities of $4.9 million during the three month period ended June 30, 2022. The Company recognized net unrealized losses on equity securities of $1.9 million during the six month period ended June 30, 2023 and unrealized losses on equity securities of $2.7 million during the six month period ended June 30, 2022. Changes in unrealized gains on equity securities for the applicable periods are primarily the result of fluctuations in the market value of certain of the Company’s equity securities.

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Interest Expense

Interest expense increased $0.4 million, or 94.9%, during the three month period ended June 30, 2023, and $0.8 million, or 102.7%, during the six month period ended June 30, 2023, from the comparable periods in 2022. Changes in interest expense were primarily due to changes in the London Interbank Offered Rate (“LIBOR”), as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) and the revolving credit facility are directly related to LIBOR. As expected, discontinuation of LIBOR occurred on June 30, 2023, which will affect the rates used in the Company’s credit arrangements after that date. The U.S. Congress enacted the Adjustable Interest Rate LIBOR Act (the “LIBOR Act”) to address LIBOR’s cessation and the Board of Governors of the Federal Reserve System (the “Board”) has issued regulations, 12 C.F.R. Part 253, “Regulations Implementing the Adjustable Interest Rate LIBOR Act (Regulation ZZ)” together with the LIBOR Act, constitute the “Federal LIBOR Legislation,” which relates to the LIBOR transition. The trustee and administrator of the Junior Subordinated Debentures has informed the Company that according to these laws, they have replaced the LIBOR rate for the debentures with a benchmark replacement rate and applicable spread adjustment recommended by the Board. For more details about the LIBOR transition see Note 7 (Credit Arrangements).

Liquidity and Capital Resources

The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and surplus levels, and meeting debt service requirements. Current and expected patterns of claim frequency and severity may change from period to period but generally are expected to continue within historical ranges. The Company’s primary sources of cash are written premiums, investment income and proceeds from the sale and maturity of its invested assets. The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts and reinsurance collections will be adequate to fund the payment of claims and operating expenses as needed for the next 12 months and beyond.

Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the subsidiaries. The principal cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be authorized and approved by the Company’s board of directors from time to time. At June 30, 2023, the Parent had approximately $5.3 million of unrestricted cash and investments.

The Parent’s insurance subsidiaries reported statutory net income of $4.1 million for the six month period ended June 30, 2023, compared to statutory net income of $2.2 million for the six month period ended June 30, 2022. Statutory results are impacted by the recognition of all costs of acquiring business. In periods in which the Company’s first year premiums increase, statutory results are generally lower than results determined under GAAP. Statutory results for the Company’s property and casualty operations may differ from the Company’s results of operations under GAAP due to the deferral of acquisition costs for financial reporting purposes. The Company’s life and health operations’ statutory results may differ from GAAP results primarily due to the deferral of acquisition costs for financial reporting purposes, as well as the use of different reserving methods.

Over 90% of the invested assets of the Parent’s insurance subsidiaries are invested in marketable securities that can be converted into cash, if required; however, the use of such assets by the Company is limited by state insurance regulations. Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At June 30, 2023, American Southern had $52.0 million of statutory capital and surplus and Bankers Fidelity had $35.7 million of statutory capital and surplus. In 2023, dividend payments by the Parent’s insurance subsidiaries in excess of $8.7 million would require prior approval. Through June 30, 2023, the Parent received dividends of $3.6 million from its subsidiaries.

The Parent provides certain administrative and other services to each of its insurance subsidiaries. The amounts charged to and paid by the subsidiaries include reimbursements for various shared services and other expenses incurred directly on behalf of the subsidiaries by the Parent. In addition, there is in place a formal tax-sharing agreement between the Parent and its insurance subsidiaries. As a result of the Parent’s tax loss, it is anticipated that the tax-sharing agreement will continue to provide the Parent with additional funds from profitable subsidiaries to assist in meeting its cash flow obligations.

The Company has two statutory trusts which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trusts and investing the gross proceeds of the trust preferred securities in Junior Subordinated Debentures. The outstanding $18.0 million and $15.7 million of Junior Subordinated Debentures mature on December 4, 2032 and May 15, 2033, respectively, are callable quarterly, in whole or in part, only at the option of the Company, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to 4.10%. At June 30, 2023, the effective interest rate was 9.45%. As previously discussed, in Footnote 7 (Credit Arrangements) and in the Interest Expense section above, LIBOR was discontinued on June 30, 2023 and a new benchmark rate to be used after June 30, 2023, has been determined by the trustee and administrator of the statutory trusts based on a benchmark replacement selected by the Board. The Benchmark Replacement that will be used is the Term Secured Overnight Financing Rate (“SOFR”) published by CME Group Benchmark Administration Limited (“CME”) and provides an indicative, forward-looking measurement of the SOFR based on market expectations implied from leading derivatives markets. It has been determined that our contracts will be replaced with 3-month CME Term SOFR plus applicable tenor spread of 0.26161 percent. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust’s obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities. As of June 30, 2023, the Company has not made such an election.

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The Company intends to pay its obligations under the Junior Subordinated Debentures using existing cash balances, dividend and tax-sharing payments from the operating subsidiaries, or from existing or potential future financing arrangements.

At June 30, 2023, the Company had 55,000 shares of Series D preferred stock (“Series D Preferred Stock”) outstanding. All of the shares of Series D Preferred Stock are held by an affiliate of the Company’s controlling shareholder. The outstanding shares of Series D Preferred Stock have a stated value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at the option of the board of directors of the Company) and are cumulative. In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,378,000 shares of the Company’s common stock, subject to certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval; and are redeemable solely at the Company’s option. The Series D Preferred Stock is not currently convertible. At June 30, 2023, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.2 million.

Bankers Fidelity Life Insurance Company (‘‘BFLIC”) is a member of the Federal Home Loan Bank of Atlanta (“FHLB”), for the primary purpose of enhancing financial flexibility. As a member, BFLIC can obtain access to low-cost funding and also receive dividends on FHLB stock. The membership arrangement provides for credit availability of five percent of statutory admitted assets, or approximately $7.8 million, as of June 30, 2023. Additional FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB. As of June 30, 2023, BFLIC has pledged bonds having an amortized cost of $7.5 million to the FHLB. BFLIC may be required to post additional acceptable forms of collateral for any borrowings that it makes in the future from the FHLB. As of June 30, 2023, BFLIC does not have any outstanding borrowings from the FHLB.

On May 12, 2021, the Company entered into a Revolving Credit Agreement (the “Credit Agreement”) with Truist Bank as the lender (the “Lender”). The Credit Agreement provides for an unsecured $10.0 million revolving credit facility that matures on April 12, 2024. Under the Credit Agreement, the Company paid interest on the unpaid principal balance of outstanding revolving loans at the LIBOR Rate (as defined in the Credit Agreement) plus 2.00%, subject to a LIBOR floor rate of 1.00%. On June 28, 2023, the Company received notification from the Lender detailing replacement rates that would be used after the LIBOR cessation date of June 30, 2023, as provided in the Credit Agreement. Please see Note 7 (Credit Agreements) for more details about the LIBOR replacement.

Cash and cash equivalents decreased from $28.9 million at December 31, 2022 to $24.2 million at June 30, 2023. The decrease in cash and cash equivalents during the six month period ended June 30, 2023 was primarily attributable to net cash used in operating activities of $4.9 million. Also contributing to the decrease in cash and cash equivalents was net cash used in investing activities of $0.7 million primarily as a result of investment purchases exceeding investment sales and maturity of securities. Partially offsetting the decrease in cash and cash equivalents was net cash provided by financing activities of $1.0 million primarily as a result of proceeds from bank financing.

The Company believes that existing cash balances as well as the dividends, fees, and tax-sharing payments it expects to receive from its subsidiaries and, if needed, borrowings under its credit facilities or additional borrowings from financial institutions, will enable the Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current recommendations by regulatory authorities, which, if implemented, would have a material adverse effect on the Company’s liquidity, capital resources or operations.

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Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the intentional acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and may not be detected.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of that date due to a material weakness in internal control over financial reporting described below.

Material Weakness in Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting system has been designed to provide reasonable assurance regarding the reliability and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management recognizes that there are inherent limitations in the effectiveness of any internal control system. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Furthermore, the application of any evaluations of effectiveness on future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As previously disclosed in Part II, Item 9A. “Controls and Procedures” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, we identified certain deficiencies in internal control that we believe rise to the level of a material weakness. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, management determined that certain process controls over the development, testing, and implementation of our actuarial models used to estimate certain values in the Medicare supplement line of business within our life and health segment were not effective and the related management review controls did not operate at an appropriate level of precision to identify anomalies in results timely enough to allow management to respond without delays in our financial reporting process for the quarter and year ended December 31, 2022 and the quarter ended March 31, 2023. Notwithstanding these deficiencies, management believes that, as a result of the actions taken by management to address and correct these deficiencies prior to the completion and filing of the relevant periodic reports for those periods, and the effective operation of other internal controls over financial reporting, the material weakness did not result in any identified material misstatements to our financial statements. As a result, there were no changes to any of our previously-released financial statements.

Changes in Internal Control Over Financial Reporting

The Company has implemented changes in processes that include enhanced controls over the development, testing, and implementation of actuarial models, and additional controls over the reporting of the financial information that is obtained from these models. Specifically, the Company has taken the following actions:

•

Developed enhanced documentation of the product parameters and assumptions used in actuarial models and enhanced controls over their testing and implementation in the models.

•

Improved reconciliations of the policyholder data between the source administrative systems and the actuarial models.

•

Implemented additional controls over the reporting processes, including enhanced analytical procedures and establishing a second independent reviewer.

•

Hired additional actuarial staff to assist with actuarial model implementation and actuarial valuation.

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Except for the changes described above, which were initiated during the quarter ended December 31, 2022, and continued into the six months ending June 30, 2023, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

No system of controls, no matter how well designed and implemented, can provide absolute assurance that the objectives of the system of controls are met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud within a company have been detected.

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On October 31, 2016, the Board of Directors of the Company approved a plan that allows for the repurchase of up to 750,000 shares of the Company’s common stock (the “Repurchase Plan”) on the open market or in privately negotiated transactions, as determined by an authorized officer of the Company. Any such repurchases can be made from time to time in accordance with applicable securities laws and other requirements.

Other than pursuant to the Repurchase Plan, no purchases of common stock of the Company were made by or on behalf of the Company during the periods described below.

The table below sets forth information regarding repurchases by the Company of shares of its common stock on a monthly basis during the three month period ended June 30, 2023.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that may Yet be Purchased Under the Plans or Programs
April 1 – April 30, 2023		—	$	—		—		325,129
May 1 – May 31, 2023		—		—		—		325,129
June 1 – June 30, 2023		—		—		—		325,129
Total		—	$	—		—

Item 5. Other Information

None of the Company’s directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2023, as such terms are defined under Item 408(a) of Regulation S-K.

Item 6. Exhibits

31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101. INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).

101. SCH	Inline XBRL Taxonomy Extension Schema Document.

101. CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ATLANTIC AMERICAN CORPORATION
	(Registrant)

Date: August 8, 2023	By:	/s/ J. Ross Franklin
		J. Ross Franklin
		Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)