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

FORM 10-Q
 
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018
OR

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

Commission File Number 0-3722

ATLANTIC AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)

Georgia
  
58-1027114
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
4370 Peachtree Road, N.E.,
  
30319
Atlanta, Georgia
  
 (Zip Code)
 (Address of principal executive offices)
  

(404) 266-5500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☑   No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☑   No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐  Accelerated filer ☐  Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☑  Emerging growth company  ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐   No ☑
 
The total number of shares of the registrant's Common Stock, $1 par value, outstanding on May 7, 2018 was 20,264,477.
 
ATLANTIC AMERICAN CORPORATION
 
TABLE OF CONTENTS

Part I.       Financial Information
Page No.
     
Item 1.
Financial Statements:
  
     
 
2
     
 
3
   
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
20
     
Item 4.
26
     
Part II.      Other Information
  
     
Item 2.
27
     
Item 6.
27
     
 
28
 
PART I.  FINANCIAL INFORMATION
Item 1.      Financial Statements

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
ASSETS
            
     
Unaudited
March 31,
2018
    
December 31,
2017
  
Cash and cash equivalents
  
$
8,438
    
$
24,547
  
Investments:
                
Fixed maturities, available-for-sale (cost: $222,428 and $212,544)
    
217,848
      
215,108
  
Equity securities (cost: $10,918 and $10,918)
    
18,936
      
23,355
  
Other invested assets (cost: $5,663 and $5,626)
    
5,663
      
5,626
  
Policy loans
    
2,105
      
2,146
  
Real estate
    
38
      
38
  
Investment in unconsolidated trusts
    
1,238
      
1,238
  
Total investments
    
245,828
      
247,511
  
Receivables:
                
Reinsurance
    
20,883
      
17,613
  
Insurance premiums and other (net of allowance for doubtful accounts: $223 and $209)
    
7,896
      
13,241
  
Deferred income taxes, net
    
2,271
      
-
  
Deferred acquisition costs
    
33,163
      
32,694
  
Other assets
    
4,787
      
5,089
  
Intangibles
    
2,544
      
2,544
  
Total assets
  
$
325,810
    
$
343,239
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Insurance reserves and policyholder funds:
                
Future policy benefits
  
$
84,368
    
$
82,435
  
Unearned premiums
    
16,887
      
23,449
  
Losses and claims
    
70,120
      
65,689
  
Other policy liabilities
    
1,577
      
2,010
  
Total insurance reserves and policyholder funds
    
172,952
      
173,583
  
Accounts payable and accrued expenses
    
17,396
      
22,342
  
Deferred income taxes, net
    
-
      
593
  
Junior subordinated debenture obligations, net
    
33,738
      
33,738
  
Total liabilities
    
224,086
      
230,256
  
                 
Commitments and contingencies (Note 9)
                
Shareholders’ equity:
                
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, 55,000 shares issued and outstanding; $5,500 redemption value
    
55
      
55
  
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,400,894; shares outstanding: 20,372,444 and 20,449,531
    
22,401
      
22,401
  
Additional paid-in capital
    
57,431
      
57,495
  
Retained earnings
    
33,188
      
30,993
  
Accumulated other comprehensive income (loss)
    
(3,618
)
    
9,751
  
Unearned stock grant compensation
    
(387
)
    
(579
)
Treasury stock, at cost: 2,028,450 and 1,951,363 shares
    
(7,346
)
    
(7,133
)
Total shareholders’ equity
    
101,724
      
112,983
  
Total liabilities and shareholders’ equity
  
$
325,810
    
$
343,239
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
-2-
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands, except per share data)
 
   
Three Months Ended
March 31,
  
   
2018
    
2017
  
Revenue:
            
Insurance premiums
  
$
42,202
    
$
40,782
  
Investment income
    
2,359
      
2,159
  
Realized investment gains, net
    
370
      
883
  
Unrealized losses on equity securities, net
    
(4,419
)
    
-
  
Other income
    
28
      
35
  
Total revenue
    
40,540
      
43,859
  
                 
Benefits and expenses:
                
Insurance benefits and losses incurred
    
33,172
      
29,997
  
Commissions and underwriting expenses
    
10,019
      
10,614
  
Interest expense
    
462
      
409
  
Other expense
    
3,238
      
3,186
  
Total benefits and expenses
    
46,891
      
44,206
  
Loss before income taxes
    
(6,351
)
    
(347
)
Income tax benefit
    
(1,327
)
    
(126
)
Net loss
    
(5,024
)
    
(221
)
Preferred stock dividends
    
(99
)
    
(99
)
Net loss applicable to common shareholders
  
$
(5,123
)
  
$
(320
)
                 
Loss per common share (basic and diluted)
  
$
(.25
)
  
$
(.02
)

The accompanying notes are an integral part of these consolidated financial statements.
 
-3-
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; Dollars in thousands)

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
Net loss
  
$
(5,024
)
  
$
(221
)
Other comprehensive income (loss):
                
Available-for-sale securities:
                
Gross unrealized holding gain (loss) arising in the period
    
(6,774
)
    
4,243
  
Related income tax effect
    
1,422
      
(1,485
)
Less: reclassification adjustment for net realized gains included in net loss
    
(370
)
    
(883
)
Related income tax effect
    
78
      
309
  
Total other comprehensive income (loss), net of tax
    
(5,644
)
    
2,184
  
Total comprehensive income (loss)
  
$
(10,668
)
  
$
1,963
  

The accompanying notes are an integral part of these consolidated financial statements.
 
-4-
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited; Dollars in thousands)
 
 
 
Three Months Ended March 31, 2018
  
Preferred
Stock
    
Common
Stock
    
Additional
Paid-In
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income
    
Unearned
Stock Grant
Compensation
    
Treasury
Stock
    
Total
  
Balance, December 31, 2017
  
$
55
    
$
22,401
    
$
57,495
    
$
30,993
    
$
9,751
    
$
(579
)
  
$
(7,133
)
  
$
112,983
  
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018
    
-
      
-
      
-
      
9,825
      
(9,825
)
    
-
      
-
      
-
  
Reclassification of certain tax effects from accumulated other comprehensive income at January 1,2018
    
-
      
-
      
-
      
(2,100
)
    
2,100
      
-
      
-
      
-
  
Net loss
    
-
      
-
      
-
      
(5,024
)
    
-
      
-
      
-
      
(5,024
)
Other comprehensive loss, net of tax
    
-
      
-
      
-
      
-
      
(5,644
)
    
-
      
-
      
(5,644
)
Dividends declared on common stock
    
-
      
-
      
-
      
(407
)
    
-
      
-
      
-
      
(407
)
Dividends accrued on preferred stock
    
-
      
-
      
-
      
(99
)
    
-
      
-
      
-
      
(99
)
Restricted stock grants
    
-
      
-
      
(68
)
    
-
      
-
      
115
      
(47
)
    
-
  
Amortization of unearned compensation
    
-
      
-
      
-
      
-
      
-
      
77
      
-
      
77
  
Purchase of shares for treasury
    
-
      
-
      
-
      
-
      
-
      
-
      
(169
)
    
(169
)
Issuance of shares under stock plans
    
-
      
-
      
4
      
-
      
-
      
-
      
3
      
7
  
Balance, March 31, 2018
  
$
55
    
$
22,401
    
$
57,431
    
$
33,188
    
$
(3,618
)
  
$
(387
)
  
$
(7,346
)
  
$
101,724
  
 
                                                                
Three Months Ended March 31, 2017
                                                                
Balance, December 31, 2016
  
$
55
    
$
22,401
    
$
57,114
    
$
27,272
    
$
5,830
    
$
(428
)
  
$
(6,738
)
  
$
105,506
  
Net loss
    
-
      
-
      
-
      
(221
)
    
-
      
-
      
-
      
(221
)
Other comprehensive income, net of tax
    
-
      
-
      
-
      
-
      
2,184
      
-
      
-
      
2,184
  
Dividends declared on common stock
    
-
      
-
      
-
      
(408
)
    
-
      
-
      
-
      
(408
)
Dividends accrued on preferred stock
    
-
      
-
      
-
      
(99
)
    
-
      
-
      
-
      
(99
)
Amortization of unearned compensation
    
-
      
-
      
-
      
-
      
-
      
116
      
-
      
116
  
Purchase of shares for treasury
    
-
      
-
      
-
      
-
      
-
      
-
      
(105
)
    
(105
)
Issuance of shares under stock plans
    
-
      
-
      
5
      
-
      
-
      
-
      
3
      
8
  
Balance, March 31, 2017
  
$
55
    
$
22,401
    
$
57,119
    
$
26,544
    
$
8,014
    
$
(312
)
  
$
(6,840
)
  
$
106,981
  

The accompanying notes are an integral part of these consolidated financial statements.
 
-5-
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net loss
  
$
(5,024
)
  
$
(221
)
Adjustments to reconcile net loss to net cash used in operating activities:
                
Amortization of deferred acquisition costs
    
3,719
      
3,399
  
Acquisition costs deferred
    
(4,188
)
    
(5,036
)
Realized investment gains, net
    
(370
)
    
(883
)
Unrealized losses on equity securities, net
    
4,419
      
-
  
Compensation expense related to share awards
    
77
      
116
  
Depreciation and amortization
    
273
      
387
  
Deferred income tax benefit
    
(1,363
)
    
(126
)
Decrease in receivables, net
    
1,567
      
4,671
  
Decrease in insurance reserves
    
(631
)
    
(4,276
)
Decrease in other liabilities
    
(5,453
)
    
(4,281
)
Other, net
    
98
      
102
  
Net cash used in operating activities
    
(6,876
)
    
(6,148
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Proceeds from investments sold
    
13,373
      
19,782
  
Proceeds from investments matured, called or redeemed
    
1,529
      
5,842
  
Investments purchased
    
(23,955
)
    
(21,870
)
Additions to property and equipment
    
(18
)
    
(83
)
Net cash (used in) provided by investing activities
    
(9,071
)
    
3,671
  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from shares issued under stock plans
    
7
      
8
  
Purchase of shares for treasury
    
(169
)
    
(105
)
Net cash used in financing activities
    
(162
)
    
(97
)
                 
Net decrease in cash and cash equivalents
    
(16,109
)
    
(2,574
)
Cash and cash equivalents at beginning of period
    
24,547
      
13,252
  
Cash and cash equivalents at end of period
  
$
8,438
    
$
10,678
  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                
Cash paid for interest
  
$
452
    
$
408
  

The accompanying notes are an integral part of these consolidated financial statements.
 
-6-
 ATLANTIC AMERICAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited; Dollars in thousands, except per share amounts)

Note 1.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Atlantic American Corporation (the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”).  The Parent’s primary operating subsidiaries, American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”) and Bankers Fidelity Life Insurance Company and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”), operate in two principal business units.  American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  The unaudited condensed consolidated financial statements included herein and these related notes should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”).  The Company’s financial condition and results of operations and cash flows as of and for the three month period ended March 31, 2018 are not necessarily indicative of the financial condition or results of operations and cash flows that may be expected for the year ending December 31, 2018 or for any other future period.

The Company’s significant accounting policies have not changed materially from those set out in the Company’s 2017 Annual Report, except as noted below for the adoption of new accounting standards.

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

Note 2.
Recently Issued Accounting Standards

Adoption of New Accounting Standards

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).  ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  The issues addressed in ASU 2016-15 are:  1) debt prepayment or debt extinguishment costs, 2) settlement of zero-coupon debt instruments, 3) contingent consideration payments made after a business combination,  4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions and 8) separately identifiable cash flows and application of the predominance principle.  The Company adopted ASU 2016-15 as of January 1, 2018. The adoption of this ASU did not have an impact on the Company’s consolidated statements of cash flows.
 
-7-
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) (“ASU 2016-01”).  ASU 2016-01 provides updated guidance for the recognition and measurement of financial instruments. The guidance requires investments in equity securities to be measured at fair value with any changes in valuation reported in net income except for investments that are consolidated or are accounted for under the equity method of accounting. The guidance also requires a deferred tax asset resulting from net unrealized losses on available-for-sale (AFS) fixed maturities that are recognized in AOCI to be evaluated for recoverability in combination with the Company’s other deferred tax assets. Under previous guidance, the Company measured investments in equity securities at fair value with any changes in fair value reported in other comprehensive income. The Company adopted ASU 2016-01 as of January 1, 2018.  The adoption of this guidance resulted in the recognition of $9,825 of net after tax unrealized gains on equity securities as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased AOCI by the same amount.  The Company elected to report changes in the fair value of equity securities in a separate line item on the Company’s consolidated statements of operations.  At December 31, 2017, equity securities were classified as AFS in the Company’s consolidated balance sheets. However, upon adoption, the updated guidance eliminated the AFS balance sheet classification for equity securities.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09, as modified, provides guidance for recognizing revenue which excludes insurance contracts and financial instruments. Revenue is to be recognized when, or as, goods or services are transferred to customers in an amount that reflects the consideration that an entity is expected to be entitled in exchange for those goods or services.  For the three months ended March 31, 2018, approximately $28, or less than one-tenth of 1% of the Company's total revenues, were within the scope of this updated guidance.  The Company adopted ASU No. 2014-09 as of January 1, 2018. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.
 
-8-
Note 3.
Investments
 
The following tables set forth the carrying value, gross unrealized gains, gross unrealized losses and cost or amortized cost of the Company’s investments, aggregated by type and industry, as of March 31, 2018 and December 31, 2017.
 
Investments were comprised of the following:
 
   
March 31, 2018
  
   
Carrying
Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
 Losses
    
Cost or
Amortized
Cost
  
Fixed maturities:
                        
Bonds:
                                
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  
$
29,978
    
$
87
    
$
966
    
$
30,857
  
Obligations of states and political subdivisions
    
10,666
      
476
      
50
      
10,240
  
Corporate securities:
                                
Utilities and telecom
    
18,592
      
1,262
      
487
      
17,817
  
Financial services
    
54,061
      
1,394
      
1,412
      
54,079
  
Other business – diversified
    
49,639
      
491
      
2,366
      
51,514
  
Other consumer – diversified
    
54,720
      
266
      
3,275
      
57,729
  
Total corporate securities
    
177,012
      
3,413
      
7,540
      
181,139
  
Redeemable preferred stocks:
                                
Other consumer – diversified
    
192
      
-
      
-
      
192
  
Total redeemable preferred stocks
    
192
      
-
      
-
      
192
  
Total fixed maturities
    
217,848
      
3,976
      
8,556
      
222,428
  
Equity securities:
                                
Common and non-redeemable preferred stocks:
                                
Utilities and telecom
    
1,434
      
470
      
-
      
964
  
Financial services
    
5,500
      
716
      
-
      
4,784
  
Other business – diversified
    
299
      
252
      
-
      
47
  
Other consumer – diversified
    
11,703
      
6,580
      
-
      
5,123
  
Total equity securities
    
18,936
      
8,018
      
-
      
10,918
  
Other invested assets
    
5,663
      
-
      
-
      
5,663
  
Policy loans
    
2,105
      
-
      
-
      
2,105
  
Real estate
    
38
      
-
      
-
      
38
  
Investments in unconsolidated trusts
    
1,238
      
-
      
-
      
1,238
  
Total investments
  
$
245,828
    
$
11,994
    
$
8,556
    
$
242,390
  
 
-9-
   
December 31, 2017
  
   
 
Carrying
Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Cost or
Amortized
Cost
  
Fixed maturities:
                        
Bonds:
                                
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  
$
31,155
    
$
149
    
$
511
    
$
31,517
  
Obligations of states and political subdivisions
    
10,809
      
630
      
1
      
10,180
  
Corporate securities:
                                
Utilities and telecom
    
21,882
      
1,709
      
130
      
20,303
  
Financial services
    
53,686
      
2,049
      
453
      
52,090
  
Other business – diversified
    
44,184
      
1,024
      
1,349
      
44,509
  
Other consumer – diversified
    
53,200
      
924
      
1,477
      
53,753
  
Total corporate securities
    
172,952
      
5,706
      
3,409
      
170,655
  
Redeemable preferred stocks:
                                
Other consumer – diversified
    
192
      
-
      
-
      
192
  
Total redeemable preferred stocks
    
192
      
-
      
-
      
192
  
Total fixed maturities
    
215,108
      
6,485
      
3,921
      
212,544
  
Equity securities:
                                
Common and non-redeemable preferred stocks:
                                
Utilities and telecom
    
1,588
      
624
      
-
      
964
  
Financial services
    
5,634
      
851
      
-
      
4,783
  
Other business – diversified
    
297
      
250
      
-
      
47
  
Other consumer – diversified
    
15,836
      
10,712
      
-
      
5,124
  
Total equity securities
    
23,355
      
12,437
      
-
      
10,918
  
Other invested assets
    
5,626
      
-
      
-
      
5,626
  
Policy loans
    
2,146
      
-
      
-
      
2,146
  
Real estate
    
38
      
-
      
-
      
38
  
Investments in unconsolidated trusts
    
1,238
      
-
      
-
      
1,238
  
Total investments
  
$
247,511
    
$
18,922
    
$
3,921
    
$
232,510
  

Bonds having an amortized cost of $11,209 and $11,178 and included in the tables above were on deposit with insurance regulatory authorities at March 31, 2018 and December 31, 2017, respectively, in accordance with statutory requirements.

The carrying value and amortized cost of the Company’s investments in fixed maturities at March 31, 2018 and December 31, 2017 by contractual maturity were as follows.  Actual maturities may differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.

   
March 31, 2018
    
December 31, 2017
  
   
Carrying
Value
    
Amortized
Cost
    
Carrying
Value
    
Amortized
Cost
  
Due in one year or less
  
$
1,498
    
$
1,502
    
$
1,653
    
$
1,655
  
Due after one year through five years
    
16,936
      
17,402
      
13,738
      
14,056
  
Due after five years through ten years
    
127,271
      
130,853
      
112,847
      
112,116
  
Due after ten years
    
53,646
      
53,539
      
67,328
      
64,928
  
Varying maturities
    
18,497
      
19,132
      
19,542
      
19,789
  
Totals
  
$
217,848
    
$
222,428
    
$
215,108
    
$
212,544
  
 
-10-
The following tables present the Company’s unrealized loss aging for securities by type and length of time the security was in a continuous unrealized loss position as of March 31, 2018 and December 31, 2017.

   
March 31, 2018
  
   
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair
Value
    
Unrealized
 Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  
$
15,379
    
$
445
    
$
12,018
    
$
521
    
$
27,397
    
$
966
  
Obligations of states and political subdivisions
    
4,029
      
50
      
-
      
-
      
4,029
      
50
  
Corporate securities
    
97,572
      
4,118
      
29,050
      
3,422
      
126,622
      
7,540
  
Total temporarily impaired securities
  
$
116,980
    
$
4,613
    
$
41,068
    
$
3,943
    
$
158,048
    
$
8,556
  

   
December 31, 2017
  
   
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair
Value
    
Unrealized
 Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  
$
12,175
    
$
162
    
$
12,737
    
$
349
    
$
24,912
    
$
511
  
Obligations of states and political subdivisions
    
999
      
1
      
-
      
-
      
999
      
1
  
Corporate securities
    
40,108
      
653
      
32,667
      
2,756
      
72,775
      
3,409
  
Total temporarily impaired securities
  
$
53,282
    
$
816
    
$
45,404
    
$
3,105
    
$
98,686
    
$
3,921
  

The evaluation for an other than temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. Potential risks and uncertainties include, among other things, changes in general economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. In evaluating a potential impairment, the Company considers, among other factors, management’s intent and ability to hold the securities until price recovery, the nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit status.
 
-11-
As of March 31, 2018 and December 31, 2017, there were one hundred twenty-one and sixty-nine securities, respectively, in an unrealized loss position which primarily included certain of the Company’s investments in fixed maturities within the other diversified business and other diversified consumer sectors. Securities in an unrealized loss position as of March 31, 2018, reported in the other diversified business sector included gross unrealized losses of $987 related to investments in fixed maturities of five different issuers, all related to the oil and gas industry. These issuers represent a diversified group of businesses which include, among others, exploration and production, pipeline owners and operators, deep water offshore rig owners and operators, all of which we believe are in continuing stages of rationalizing their current operations, investments, future capital expenditures and carefully managing and modifying their capital and liquidity positions.  Based on publicly available information, the companies are continuing to assess and revise short-term, intermediate and long-term business plans in response to the current trends in oil and gas markets.  All of the investees have continued to make regular interest payments on their debt when and as due and the Company continues to perform analyses of publicly available financial disclosures of each of the investees on a regular basis.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, including those described above, the Company has deemed these securities to be temporarily impaired as of March 31, 2018.

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

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

Level 2
Observable inputs, other than quoted prices included in Level 1, for an asset or liability or prices for similar assets or liabilities. The Company’s financial instruments valued using Level 2 criteria include significantly all of its fixed maturities, which consist of U.S. Treasury securities and U.S. Government securities, obligations of states and political subdivisions, and certain corporate fixed maturities, as well as its non-redeemable preferred stocks. In determining fair value measurements of its fixed maturities and non-redeemable preferred stocks using Level 2 criteria, the Company utilizes data from outside sources, including nationally recognized pricing services and broker/dealers.  Prices for the majority of the Company’s Level 2 fixed maturities and non-redeemable preferred stocks were determined using unadjusted prices received from pricing services that utilize a matrix pricing concept, which is a mathematical technique used widely in the industry to value debt securities based on various relationships to other benchmark quoted prices.

Level 3
Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk).  Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. The Company’s financial instruments valued using Level 3 criteria consist of a limited number of fixed maturities. As of March 31, 2018 and December 31, 2017, the value of the Company’s fixed maturities valued using Level 3 criteria was $1,339 and $1,369, respectively. The use of different criteria or assumptions regarding data may have yielded materially different valuations.

As of March 31, 2018, financial instruments carried at fair value were measured on a recurring basis as summarized below:

   
Quoted Prices
 in Active
Markets
for Identical
Assets
    
 
Significant
 Other
 Observable
 Inputs
    
 
 
Significant
Unobservable
 Inputs
        
   
(Level 1)
    
(Level 2)
    
(Level 3)
    
Total
  
Assets:
                        
Fixed maturities
  
$
-
    
$
216,509
    
$
1,339
(1) 
  
$
217,848
  
Equity securities
    
13,657
      
5,279
(1) 
    
-
      
18,936
  
Cash equivalents
    
6,807
      
-
      
-
      
6,807
  
Total
  
$
20,464
    
$
221,788
    
$
1,339
    
$
243,591
  

(1)
All underlying securities are financial service industry related.
 
-12-
As of December 31, 2017, financial instruments carried at fair value were measured on a recurring basis as summarized below:

 
Quoted Prices
 in Active
Markets
for Identical
Assets
    
Significant
Other
 Observable
Inputs
    
 
Significant
 Unobservable
 Inputs
        
   
(Level 1)
    
(Level 2)
    
(Level 3)
    
Total
  
Assets:
                        
Fixed maturities
  
$
-
    
$
213,739
    
$
1,369
(1) 
  
$
215,108
  
Equity securities
    
17,973
      
5,382
(1) 
    
-
      
23,355
  
Cash equivalents
    
13,855
      
-
      
-
      
13,855
  
Total
  
$
31,828
    
$
219,121
    
$
1,369
    
$
252,318
  

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

The following tables provide a roll-forward of the Company’s financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month periods ended March 31, 2018 and 2017.

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

   
Fixed
Maturities
  
Balance, December 31, 2016
  
$
1,264
  
Total unrealized gains included in other comprehensive income
    
38
  
Balance, March 31, 2017
  
$
1,302
  

The Company’s fixed maturities valued using Level 3 inputs consist solely of issuances of pooled debt obligations of multiple, smaller financial services companies. They are not actively traded and valuation techniques used to measure fair value are based on future estimated cash flows (based on current cash flows) discounted at reasonable estimated rates of interest.  There are no assumed prepayments and/or default probability assumptions as a majority of these instruments contain certain U.S. government agency strips to support repayment of the principal.  Other qualitative and quantitative information received from the original underwriter of the pooled offerings is also considered, as applicable.

The following table is a summary of realized investment gains (losses) for the three month periods ended March 31, 2018 and 2017.

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
Gross gains
  
$
370
    
$
931
  
Gross losses
    
-
      
(48
)
Realized investment gains, net
  
$
370
    
$
883
  
 
-13-
The following table presents the portion of unrealized gains (losses) related to equity securities still held for the three month periods ended March 31, 2018 and 2017.

 
  
Three Months Ended
March 31,
  
   
2018
    
2017
  
Net losses recognized during the period on equity securities
  
$
(4,419
)
  
$
-
  
Less: Net gains (losses) recognized during the period on equity securities sold during the period
    
-
      
-
  
Unrealized losses recognized during the reporting period on equity securities still held at the reporting date
  
$
(4,419
)
  
$
-
  

Note 4.
Fair Values of Financial Instruments

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

The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of the Company’s financial instruments as of March 31, 2018 and December 31, 2017.

       
March 31, 2018
    
December 31, 2017
  
   
Level in Fair
 Value
Hierarchy (1)
  
Carrying
 Amount
    
Estimated
Fair Value
    
Carrying
 Amount
    
Estimated
Fair Value
  
Assets:
                            
Cash and cash equivalents
  
Level 1
  
$
8,438
    
$
8,438
    
$
24,547
    
$
24,547
  
Fixed maturities
  
(1)
    
217,848
      
217,848
      
215,108
      
215,108
  
Equity securities
  
(1)
    
18,936
      
18,936
      
23,355
      
23,355
  
Other invested assets
  
Level 3
    
5,663
      
5,663
      
5,626
      
5,626
  
Policy loans
  
Level 2
    
2,105
      
2,105
      
2,146
      
2,146
  
Real estate
  
Level 2
    
38
      
38
      
38
      
38
  
Investment in unconsolidated trusts
  
Level 2
    
1,238
      
1,238
      
1,238
      
1,238
  
                                     
Liabilities:                                    
Junior subordinated debentures, net
  
Level 2
    
33,738
      
33,738
      
33,738
      
33,738
  

(1)
See Note 3 for a description of the fair value hierarchy as well as a disclosure of levels for classes of these financial assets.
 
There have not been any transfers between Level 1, Level 2 and Level 3 during the periods presented in these condensed consolidated financial statements.
 
-14-
Note 5.
Liabilities for Unpaid Losses, Claims and Loss Adjustment Expenses

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

Property and Casualty Insurance Products
  
Three Months Ended
March 31,
  
   
2018
    
2017
  
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
47,997
    
$
49,556
  
Less: Reinsurance recoverable on unpaid losses
    
(7,220
)
    
(9,806
)
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
    
40,777
      
39,750
  
                 
Incurred related to:
                
Current accident year
    
9,602
      
8,806
  
Prior accident year development (1)
    
(425
)
    
(522
)
Total incurred
    
9,177
      
8,284
  
                 
Paid related to:
                
Current accident year
    
2,348
      
2,312
  
Prior accident years
    
5,976
      
5,836
  
Total paid
    
8,324
      
8,148
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
    
41,630
      
39,886
  
Plus: Reinsurance recoverable on unpaid losses
    
7,158
      
9,011
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
48,788
    
$
48,897
  

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

Medicare Supplement Insurance Products
  
Three Months Ended
March 31,
  
   
2018
    
2017
  
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
15,859
    
$
11,263
  
Less: Reinsurance recoverable on unpaid losses
    
(4,748
)
    
(990
)
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
    
11,111
      
10,273
  
                 
Incurred related to:
                
Current accident year
    
17,615
      
18,035
  
Prior accident year development
    
3,343
(2) 
    
241
  
Total incurred
    
20,958
      
18,276
  
                 
Paid related to:
                
Current accident year
    
5,873
      
8,797
  
Prior accident years
    
13,252
      
8,354
  
Total paid
    
19,125
      
17,151
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
    
12,944
      
11,398
  
Plus: Reinsurance recoverable on unpaid losses
    
6,535
      
1,819
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
19,479
    
$
13,217
  
 
-15-
(2)
The prior accident year development for Medicare supplement insurance products was primarily due to influenza, the usual driver of elevated morbidity in winter, which was significantly higher than in the previous year and ultimately had an unfavorable effect on the Company’s loss patterns.

Other Life and Health Insurance Products
  
Three Months Ended
March 31,
  
   
2018
    
2017
  
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
1,833
    
$
1,743
  
Less: Reinsurance recoverable on unpaid losses
    
-
      
-
  
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net
    
1,833
      
1,743
  
                 
Incurred related to:
                
Current accident year
    
2,516
      
1,527
  
Prior accident year development
    
(284
)
    
653
  
Total incurred
    
2,232
      
2,180
  
                 
Paid related to:
                
Current accident year
    
998
      
1,056
  
Prior accident years
    
1,214
      
1,221
  
Total paid
    
2,212
      
2,277
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net
    
1,853
      
1,646
  
Plus: Reinsurance recoverable on unpaid losses
    
-
      
-
  
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross
  
$
1,853
    
$
1,646
  

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

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
Total incurred losses
  
$
32,367
    
$
28,740
  
Cash surrender value and matured endowments
    
378
      
483
  
Benefit reserve changes
    
427
      
774
  
Total insurance benefits and losses incurred
  
$
33,172
    
$
29,997
  
 
-16-
Note 6.
Junior Subordinated Debentures
 
The Company has two unconsolidated Connecticut statutory business trusts, which exist for the exclusive purposes of: (i) issuing trust preferred securities (“Trust Preferred Securities”) representing undivided beneficial interests in the assets of the trusts; (ii) investing the gross proceeds of the Trust Preferred Securities in junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of Atlantic American; and (iii) engaging in those activities necessary or incidental thereto.

The financial structure of each of Atlantic American Statutory Trust I and II as of March 31, 2018 was as follows:

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

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

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

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

(4)
The Parent has guaranteed, on a subordinated basis, all of the obligations under the Trust Preferred Securities, including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation.
 
-17-
Note 7.
Loss Per Common Share
 
A reconciliation of the numerator and denominator used in the loss per common share calculations is as follows:
 
   
Three Months Ended
March 31, 2018
  
   
Loss
    
Shares
(In thousands)
    
Per Share
Amount
  
Basic and Diluted Loss Per Common Share:
                  
Net loss
  
$
(5,024
)
    
20,419
        
Less preferred stock dividends
    
(99
)
    
-
        
Net loss applicable to common shareholders
  
$
(5,123
)
    
20,419
    
$
(.25
)
 
   
Three Months Ended
March 31, 2017
  
   
Loss
    
Shares
(In thousands)
    
Per Share
Amount
  
Basic and Diluted Loss Per Common Share:
                  
Net loss
  
$
(221
)
    
20,432
        
Less preferred stock dividends
    
(99
)
    
-
        
Net loss applicable to common shareholders
  
$
(320
)
    
20,432
    
$
(.02
)
 
The assumed conversion of the Company’s Series D preferred stock was excluded from the loss per common share calculation for all periods presented since its impact would have been antidilutive.
 
Note 8.
Income Taxes
 
A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and income tax benefit is as follows:

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
Federal income tax provision at statutory rate of 21% and 35% for 2018 and 2017, respectively
  
$
(1,334
)
  
$
(121
)
Dividends-received deduction
    
(10
)
    
(24
)
Other permanent differences
    
17
      
19
  
Income tax benefit
  
$
(1,327
)
  
$
(126
)

The components of income tax benefit were:
 
   
Three Months Ended
March 31,
  
   
2018
    
2017
  
Current – Federal
  
$
36
    
$
-
  
Deferred – Federal
    
(1,363
)
    
(126
)
Total
  
$
(1,327
)
  
$
(126
)

Note 9.
Commitments and Contingencies

From time to time, the Company is, and expects to continue to be, involved in various claims and lawsuits incidental to and in the ordinary course of its businesses.  In the opinion of management, any such known claims are not expected to have a material effect on the financial condition or results of operations of the Company.
 
-18-
Note 10.
Segment Information

The Parent’s primary insurance subsidiaries, American Southern and Bankers Fidelity, operate in two principal business units, each focusing on specific products.  American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market.  Each business unit is managed independently and is evaluated on its individual performance.  The following sets forth the revenue and income (loss) before income taxes for each business unit for the three month periods ended March 31, 2018 and 2017.

Revenues
  
Three Months Ended
March 31,
  
   
2018
    
2017
  
American Southern
  
$
13,533
    
$
14,301
  
Bankers Fidelity
    
30,113
      
29,537
  
Corporate and Other
    
(3,106
)
    
21
  
Total revenue
  
$
40,540
    
$
43,859
  

Income (Loss) Before Income Taxes
  
Three Months Ended
March 31,
  
   
2018
    
2017
  
American Southern
  
$
968
    
$
2,150
  
Bankers Fidelity
    
(2,535
)
    
(835
)
Corporate and Other
    
(4,784
)
    
(1,662
)
Loss before income taxes
  
$
(6,351
)
  
$
(347
)
 
Note 11.
Accumulated Other Comprehensive Income (Loss)
 
The following table sets forth the balance of the only component of accumulated other comprehensive income (loss) as of March 31, 2018 and December 31, 2017, and the changes in the balance of that component thereof during the three month period ended March 31, 2018, net of taxes.
 
   
Unrealized Gains
on Available-for-
Sale Securities
  
Balance, December 31, 2017
  
$
9,751
  
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018
    
(9,825
)
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018
    
2,100
  
Total effect of adoption of updated accounting   guidance at January 1, 2018
    
(7,725
)
Other comprehensive loss before reclassifications
    
(5,352
)
Amounts reclassified from accumulated other comprehensive loss
    
(292
)
Net current period other comprehensive loss
    
(5,644
)
Balance, March 31, 2018
  
$
(3,618
)
 
Note 12.
Related Party Transactions

For the three month periods ended March 31, 2018 and 2017, Gray Television, Inc., a related party, paid the Company approximately $105 and $145, respectively, in employer paid insurance premiums related to a group accident plan.
 
-19-
Item 2.

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

The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”) as of and for the three month period ended March 31, 2018. 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, 2017 (the “2017 Annual Report”).

Atlantic American is an insurance holding company whose operations are conducted primarily through its insurance subsidiaries: American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”) and Bankers Fidelity Life Insurance Company and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”).  Each operating company is managed separately, offers different products and is evaluated on its individual performance.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures.   Actual results could differ significantly from those estimates.  The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company’s critical accounting policies and the resultant estimates considered most significant by management are disclosed in the Company’s 2017 Annual Report.  Except as disclosed in Note 2, the Company’s critical accounting policies are consistent with those disclosed in the Company’s 2017 Annual Report.

Overall Corporate Results

The following presents the Company’s revenue, expenses and net loss for the three month period ended March 31, 2018 and the comparable period in 2017:

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
   
(In thousands)
  
Insurance premiums
  
$
42,202
    
$
40,782
  
Investment income
    
2,359
      
2,159
  
Realized investment gains, net
    
370
      
883
  
Unrealized losses on equity securities, net
    
(4,419
)
    
-
  
Other income
    
28
      
35
  
Total revenue
    
40,540
      
43,859
  
Insurance benefits and losses incurred
    
33,172
      
29,997
  
Commissions and underwriting expenses
    
10,019
      
10,614
  
Other expense
    
3,238
      
3,186
  
Interest expense
    
462
      
409
  
Total benefits and expenses
    
46,891
      
44,206
  
Loss before income taxes
  
$
(6,351
)
  
$
(347
)
Net loss
  
$
(5,024
)
  
$
(221
)
 
-20-
Management also considers and evaluates performance by analyzing the non-GAAP measure operating income (loss), and believes it is a useful metric for investors, potential investors, securities analysts and others because it isolates the “core” operating results of the Company before considering certain items that are either beyond the control of management (such as taxes, which are subject to timing, regulatory and rate changes depending on the timing of the associated revenues and expenses) or are not expected to regularly impact the Company’s operational results (such as any realized investment gains, which are not a part of the Company’s primary operations and are, to a limited extent, subject to discretion in terms of timing of realization).

A reconciliation of net loss to operating loss for the three month period ended March 31, 2018 and the comparable period in 2017 is as follows:

   
Three Months Ended
March 31,
  
Reconciliation of Non-GAAP Financial Measure
  
2018
    
2017
  
   
(In thousands)
  
Net loss
  
$
(5,024
)
  
$
(221
)
Income tax benefit
    
(1,327
)
    
(126
)
Realized investment gains, net
    
(370
)
    
(883
)
Unrealized losses on equity securities, net
    
4,419
      
-
  
Operating loss
  
$
(2,302
)
  
$
(1,230
)

On a consolidated basis, the Company had a net loss of $5.0 million, or a loss of $0.25 per diluted share, for the three month period ended March 31, 2018, compared to net loss of $0.2 million, or a loss of $0.02 per diluted share, for the three month period ended March 31, 2017. Premium revenue for the three month period ended March 31, 2018 increased $1.4 million, or 3.5%, to $42.2 million. The increase in premium revenue was primarily attributable to an increase in Medicare supplement business in the life and health operations.  Operating loss increased $1.1 million in the three month period ended March 31, 2018 from the comparable period of 2017.  The increase in operating loss was primarily due to unfavorable loss experience in both the property and casualty and the life and health operations.  Partially offsetting the increase in operating loss for the three month period ended March 31, 2018 was an increase in investment income attributable to a $0.2 million loss from the equity in earnings from investments in real estate partnerships during the three month period ended March 31, 2017 that did not recur in the comparable 2018 period.

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

American Southern

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month period ended March 31, 2018 and the comparable period in 2017:

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
   
(Dollars in thousands)
  
Gross written premiums
  
$
6,841
    
$
7,297
  
Ceded premiums
    
(1,203
)
    
(1,149
)
Net written premiums
  
$
5,638
    
$
6,148
  
Net earned premiums
  
$
12,707
    
$
13,091
  
Net loss and loss adjustment expenses
    
9,177
      
8,284
  
Underwriting expenses
    
3,387
      
3,867
  
Underwriting income
  
$
143
    
$
940
  
Loss ratio
    
72.2
%
    
63.3
%
Expense ratio
    
26.7
      
29.5
  
Combined ratio
    
98.9
%
    
92.8
%
 
-21-
Gross written premiums at American Southern decreased $0.5 million, or 6.2%, during the three month period ended March 31, 2018 from the comparable period in 2017.  The decrease in gross written premiums was primarily attributable to a decline in premiums written in the surety line of business as a result of increased competition during the three month period ended March 31, 2018.

Ceded premiums increased slightly during the three month period ended March 31, 2018 from the comparable period in 2017 due primarily to an increase in earned premiums in certain accounts within the automobile liability and automobile physical damage lines of business, which are subject to reinsurance.

The following presents American Southern’s net earned premiums by line of business for the three month period ended March 31, 2018 and the comparable period in 2017:

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
   
(In thousands)
  
Automobile liability
  
$
6,865
    
$
7,328
  
Automobile physical damage
    
2,455
      
2,244
  
General liability
    
738
      
730
  
Surety
    
1,934
      
2,086
  
Other lines
    
715
      
703
  
Total
  
$
12,707
    
$
13,091
  

Net earned premiums decreased $0.4 million, or 2.9%, during the three month period ended March 31, 2018 from the comparable period in 2017.  The decrease in net earned premiums was primarily attributable to a decrease in automobile liability coverage resulting from the termination of an automobile account as well as a returned premium related to a retrospective agreement with an insured entity.  Also contributing to the decrease was a decline in premiums written in the surety line of business, as discussed above.  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).

Net loss and loss adjustment expenses at American Southern increased $0.9 million, or 10.8%, during the three month period ended March 31, 2018 from the comparable period in 2017.  As a percentage of earned premiums, net loss and loss adjustment expenses were 72.2% in the three month period ended March 31, 2018, compared to 63.3% in the three month period ended March 31, 2017.  The increase in the loss ratio was primarily due to an increase in the frequency and severity of claims in the automobile liability, automobile physical damage and surety lines of business during the three month period ended March 31, 2018.  Partially offsetting the increase in the loss ratio during the three month period ended March 31, 2018 was more favorable loss experience in the general liability line of business.

Underwriting expenses decreased $0.5 million, or 12.4%, during the three month period ended March 31, 2018 from the comparable period in 2017.  As a percentage of earned premiums, underwriting expenses were 26.7% in the three month period ended March 31, 2018, compared to 29.5% in the three month period ended March 31, 2017.  The decrease in the expense ratio 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 the three month period ended March 31, 2018, variable commissions at American Southern decreased $0.3 million from the comparable period in 2017 due to unfavorable loss experience from accounts subject to variable commissions.
 
-22-
Bankers Fidelity

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month period ended March 31, 2018 and the comparable period in 2017:

   
Three Months Ended
March 31,
  
   
2018
    
2017
  
   
(Dollars in thousands)
  
Medicare supplement
  
$
25,356
    
$
23,851
  
Other health products
    
1,846
      
1,464
  
Life insurance
    
2,293
      
2,376
  
Total earned premiums
    
29,495
      
27,691
  
Insurance benefits and losses
    
23,995
      
21,713
  
Underwriting expenses
    
8,652
      
8,658
  
Total expenses
    
32,647
      
30,371
  
Underwriting loss
  
$
(3,152
)
  
$
(2,680
)
Loss ratio
    
81.4
%
    
78.4
%
Expense ratio
    
29.3
      
31.3
  
Combined ratio
    
110.7
%
    
109.7
%

Premium revenue at Bankers Fidelity increased $1.8 million, or 6.5%, during the three month period ended March 31, 2018 from the comparable period in 2017.  Premiums from the Medicare supplement line of business increased $1.5 million, or 6.3%, during the three month period ended March 31, 2018, due primarily to successful execution of new business generating strategies with both new and existing agents.  Other health product premiums increased $0.4 million, or 26.1%, during the same comparable period, primarily as a result of new sales of the company’s disability income and group health products. Premiums from the life insurance line of business decreased $0.1 million, or 3.5%, during the three month period ended March 31, 2018 due to the redemption and settlement of existing policy obligations exceeding the level of new sales activity.  Medicare supplement premiums ceded under the reinsurance agreement during the three month periods ended March 31, 2018 and 2017 were approximately $13.8 million and $3.9 million, respectively.  The increase in ceded premiums was due to a significant increase in Medicare supplement gross earned premiums subject to the reinsurance agreement.

Benefits and losses increased $2.3 million, or 10.5%, during the three month period ended March 31, 2018 from the comparable period in 2017.  As a percentage of earned premiums, benefits and losses were 81.4% in the three month period ended March 31, 2018, compared to 78.4% in the three month period ended March 31, 2017.  The increase in the loss ratio was primarily attributable to unfavorable loss experience in the Medicare supplement line of business.  Throughout 2017 and continuing into the three month period ended March 31, 2018, Bankers Fidelity experienced a higher than expected level of claims in the Medicare supplement line of business which had an unfavorable effect on the company’s loss patterns and increased the resultant loss ratio.

Underwriting expenses decreased slightly during the three month period ended March 31, 2018 from the comparable period in 2017.  As a percentage of earned premiums, underwriting expenses were 29.3% in the three month period ended March 31, 2018, compared to 31.3% in the three month period ended March 31, 2017.  The decrease in the expense ratio was primarily due to the increase in earned premiums coupled with a relatively consistent level of fixed general and administrative expenses.  Also contributing to the decrease in the expense ratio was a reinsurance expense-reimbursement allowance associated with the reinsurance agreement, which reimbursed the company for a portion of its indirect underwriting expenses.

INVESTMENT INCOME AND REALIZED GAINS

Investment income increased $0.2 million, or 9.3%, during the three month period ended March 31, 2018 from the comparable period in 2017.  The increase in investment income was primarily attributable to a $0.2 million loss from the equity in earnings from investments in real estate partnerships during the three month period ended March 31, 2017 that did not recur in the comparable 2018 period.
 
-23-
The Company had net realized investment gains of $0.4 million during the three month period ended March 31, 2018, compared to net realized investment gains of $0.9 million in the three month period ended March 31, 2017.  The net realized investment gains in the three month periods ended March 31, 2018 and 2017 resulted from the disposition of several of the Company’s investments in fixed maturities.  Management continually evaluates the Company’s investment portfolio and, as may be determined to be appropriate, makes adjustments for impairments and/or will divest investments.

UNREALIZED LOSSES ON EQUITY SECURITIES

As described above, on January 1, 2018 the Company adopted ASU No. 2016-01, which requires, among other things, investments in equity securities to be 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.  As a result of the adoption of ASU No. 2016-01, the Company recognized net unrealized losses on equity securities still held of $4.4 million during the quarter ended March 31, 2018.  In accordance with then-applicable accounting guidance, the Company recognized changes in the fair value of equity securities then held through other comprehensive income during the quarter ended March 31, 2017.

INTEREST EXPENSE

Interest expense increased slightly during the three month period ended March 31, 2018 from the comparable period in 2017.  The increase in interest expense was due to an increase in the London Interbank Offered Rate (“LIBOR”), as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) are directly related to LIBOR.

OTHER EXPENSES

Other expenses (commissions, underwriting expenses, and other expenses) decreased $0.5 million, or 3.9%, during the three month period ended March 31, 2018 from the comparable period in 2017.  The decrease in other expenses was primarily attributable to a $0.3 million decrease in the variable commission accrual in the property and casualty operations.  On a consolidated basis, as a percentage of earned premiums, other expenses decreased to 31.4% in the three month period ended March 31, 2018 from 33.8% in the three month period ended March 31, 2017.  The decrease in the expense ratio was primarily attributable to the increase in earned premiums coupled with a lower level of general and administrative expenses and the decrease in the variable commission accrual.

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.

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 March 31, 2018, the Parent had approximately $16.0 million of unrestricted cash and investments.

The Parent’s insurance subsidiaries reported a statutory net loss of $0.5 million for the three month period ended March 31, 2018, compared to statutory net income of $0.4 million for the three month period ended March 31, 2017.  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.
 
-24-
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 March 31, 2018, American Southern had $43.2 million of statutory surplus and Bankers Fidelity had $31.7 million of statutory surplus. In 2018, dividend payments by the Parent’s insurance subsidiaries in excess of $4.8 million would require prior approval.  Through March 31, 2018, the Parent received dividends of $1.2 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 March 31, 2018, the effective interest rate was 5.98%.  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 March 31, 2018, the Company has not made such an election.

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 potential future financing arrangements.

At March 31, 2018, 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 March 31, 2018, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.1 million.

Cash and cash equivalents decreased from $24.5 million at December 31, 2017 to $8.4 million at March 31, 2018. The decrease in cash and cash equivalents during the three month period ended March 31, 2018 was primarily attributable to net cash used in operating activities of $6.9 million, a $9.1 million decrease resulting from investment purchases exceeding the sale and maturity of securities and the purchase of shares for treasury for $0.2 million.

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, 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.
 
-25-
Item 4. 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 SEC’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.  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 our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.  Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

CAUTIONARY NOTE REGARDING 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.  Statements, to the extent they are not statements of historical facts, should be considered forward-looking statements, and are subject to various risks and uncertainties.  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.  The Company’s actual results could differ materially from the results anticipated in these forward-looking statements as a result of such risks and uncertainties, including those identified in 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.
 
-26-
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 March 31, 2018.

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
  
January 1 – January 31, 2018
    
13,962
    
$
3.50
      
13,962
      
530,480
  
February 1 – February 28, 2018
    
4,331
      
3.48
      
4,331
      
526,149
  
March 1 – March 31, 2018
    
4,412
      
3.38
      
4,412
      
521,737
  
Total
    
22,705
    
$
3.47
      
22,705
          

Item 6.  Exhibits

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS
 XBRL Instance Document.
   
101.SCH
XBRL Taxonomy Extension Schema.
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
   
101.LAB
XBRL Taxonomy Extension Label Linkbase.
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.


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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:
May 11, 2018
By:
/s/ J. Ross Franklin
     
J. Ross Franklin
     
Vice President and Chief Financial Officer
     
(Principal Financial and Accounting Officer)
 
 
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