Edgar Filing: ATLANTIC AMERICAN CORP

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

o 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 þ No o

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 þ No ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company þ

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

The total number of shares of the registrant's Common Stock, $1 par value, outstanding on November 7, 2011, was 22,400,694.

ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

Part I. Financial Information	Page No.

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets - September 30, 2011 and December 31, 2010	2

Condensed Consolidated Statements of Operations -Three months and nine months ended September 30, 2011 and 2010	3

Condensed Consolidated Statements of Shareholders’ Equity - Nine months ended September 30, 2011 and 2010	4

Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2011 and 2010	5

Notes to Condensed Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 4. Controls and Procedures	27

Part II. Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6. Exhibits	28

Signatures	29

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

ASSETS

	Unaudited
	September 30,		December 31,
	2011		2010
Cash and cash equivalents	$	22,385	$	28,325
Investments:
Fixed maturities (cost: $189,959 and $171,882)		206,688		171,648
Common and non-redeemable preferred stocks (cost: $9,979 and $9,979)		7,978		8,524
Other invested assets (cost: $591 and $980)		591		980
Policy and student loans		2,231		2,200
Real estate		38		38
Investment in unconsolidated trusts		1,238		1,238
Total investments		218,764		184,628
Receivables:
Reinsurance		15,016		14,301
Investment sales pending settlement		675		15,438
Insurance premiums and other (net of allowance for doubtful accounts: $423 and $442)		9,487		7,051
Deferred income taxes, net		-		3,228
Deferred acquisition costs		23,396		21,239
Other assets		1,010		1,228
Goodwill		2,128		2,128
Total assets	$	292,861	$	277,566

LIABILITIES AND SHAREHOLDERS’ EQUITY

Insurance reserves and policyholder funds:
Future policy benefits	$	62,446		$	60,811
Unearned premiums		21,168			21,170
Losses and claims		56,030			53,961
Other policy liabilities		1,548			1,960
Total policy liabilities		141,192			137,902
Accounts payable and accrued expenses		12,385			15,733
Deferred income taxes, net		2,920			-
Junior subordinated debenture obligations		41,238			41,238
Total liabilities		197,735			194,873

Commitments and contingencies (Note 9)
Shareholders’ equity:
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, 70,000 shares issued and outstanding; $7,000 redemption value		70			70
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,373,900; shares outstanding: 22,223,394 and 22,257,035		22,374			22,374
Additional paid-in capital		57,129			57,129
Retained earnings		6,928			5,389
Accumulated other comprehensive income (loss)		8,858			(2,107	)
Treasury stock, at cost: 150,506 and 116,865 shares		(233	)		(162	)
Total shareholders’ equity		95,126			82,693
Total liabilities and shareholders’ equity	$	292,861		$	277,566

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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenue:
Insurance premiums	$	27,211		$	24,577		$	78,830		$	72,322
Investment income		2,652			2,302			7,912			7,435
Realized investment gains, net		903			211			974			224
Other income		34			56			212			215
Total revenue		30,800			27,146			87,928			80,196

Benefits and expenses:
Insurance benefits and losses incurred		19,301			16,451			54,153			49,266
Commissions and underwriting expenses		6,746			7,409			22,192			21,376
Interest expense		653			660			1,940			1,955
Other		2,332			2,045			6,915			6,381
Total benefits and expenses		29,032			26,565			85,200			78,978

Income before income taxes		1,768			581			2,728			1,218

Income tax expense		64			56			363			200

Net income		1,704			525			2,365			1,018

Preferred stock dividends		(127	)		(127	)		(381	)		(381	)

Net income applicable to common stock	$	1,577		$	398		$	1,984		$	637

Net income per common share (basic and diluted)	$	.07		$	.02		$	.09		$	.03

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)

Nine Months Ended September 30, 2011	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, December 31, 2010	$	70	$	22,374	$	57,129	$	5,389		$	(2,107	)	$	(162	)	$	82,693
Comprehensive income:
Net income		-		-		-		2,365			-			-			2,365
Increase in unrealized investment gains		-		-		-		-			16,416			-			16,416
Fair value adjustment to derivative financial instrument		-		-		-		-			453			-			453
Deferred income tax attributable to other comprehensive income		-		-		-		-			(5,904	)		-			(5,904	)
Total comprehensive income																	13,330
Dividends declared on common stock		-		-		-		(445	)		-			-			(445	)
Dividends accrued on preferred stock		-		-		-		(381	)		-			-			(381	)
Purchase of shares for treasury		-		-		-		-			-			(71	)		(71	)
Balance, September 30, 2011	$	70	$	22,374	$	57,129	$	6,928		$	8,858		$	(233	)	$	95,126

Nine Months Ended September 30, 2010
Balance, December 31, 2009	$	70	$	22,374	$	57,129	$	3,404		$	(5,405	)	$	(102	)	$	77,470
Comprehensive income:
Net income		-		-		-		1,018			-			-			1,018
Increase in unrealized investment gains		-		-		-		-			13,879			-			13,879
Fair value adjustment to derivative financial instrument		-		-		-		-			(251	)		-			(251	)
Deferred income tax attributable to other comprehensive income		-		-		-		-			(4,770	)		-			(4,770	)
Total comprehensive income																	9,876
Dividends accrued on preferred stock		-		-		-		(381	)		-			-			(381	)
Purchase of shares for treasury		-		-		-		-			-			(26	)		(26	)
Balance, September 30, 2010	$	70	$	22,374	$	57,129	$	4,041		$	3,453		$	(128	)	$	86,939

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; Dollars in thousands)

	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,365		$	1,018
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of deferred acquisition costs		7,816			7,250
Acquisition costs deferred		(9,239	)		(8,355	)
Realized investment gains		(974	)		(224	)
Increase in insurance reserves		2,454			3,900
Depreciation and amortization		283			292
Deferred income tax expense		244			853
Increase in receivables, net		(3,149	)		(2,307	)
Decrease in other liabilities		(124	)		(1,524	)
Other, net		302			(580	)
Net cash (used in) provided by operating activities		(22	)		323

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, called or matured		46,450			73,142
Investments purchased		(51,804	)		(28,611	)
Additions to property and equipment		(48	)		(50	)
Net cash (used in) provided by investing activities		(5,402	)		44,481

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends on common stock		(445	)		-
Purchase of shares for treasury		(71	)		(26	)
Net cash used in financing activities		(516	)		(26	)

Net (decrease) increase in cash and cash equivalents		(5,940	)		44,778
Cash and cash equivalents at beginning of period		28,325			20,129
Cash and cash equivalents at end of period	$	22,385		$	64,907

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	1,945		$	1,962
Cash paid for income taxes	$	-		$	-

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

September 30, 2011

(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”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying 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, 2010. The Company’s results of operations for the three month and nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 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

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 is intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Intangibles – Goodwill and Other (Topic 350). Previous guidance under Topic 350 required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount (step one). If the fair value of the reporting unit is less than its carrying value, then the second step of the test must be performed to measure the amount of impairment loss. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. The Company expects to adopt ASU 2011-08 on January 1, 2012 and does not expect the adoption to have a material impact on the Company’s financial condition or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires all nonowner changes in stockholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. If an entity elects the single continuous statement method of presentation, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two separate statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and should include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. ASU 2011-05 does not change: the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income; the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented; and how earnings per share are calculated or presented. ASU 2011-05 should be applied retrospectively. For public entities, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company expects to adopt ASU 2011-05 on January 1, 2012. As ASU 2011-05 changes only the presentation of certain financial statement information, there will be no impact on the Company’s financial condition or results of operations.

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In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). This guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and International Financial Reporting Standards. While many of the amendments to GAAP are not expected to have a significant effect on practice, this guidance changes some fair value measurement principles and disclosure requirements. ASU 2011-04 is to be applied prospectively. For public entities, this guidance is effective during the interim and annual periods beginning after December 15, 2011. Early adoption by public companies is not permitted. The Company expects to adopt the amendments in ASU 2011-04 on January 1, 2012 and does not expect the adoption to have a material impact on the Company’s financial condition or results of operations.

In October 2010, the FASB issued ASU No. 2010-26, Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”) which specifies which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. In accordance with ASU 2010-26, incremental direct costs of contract acquisition should be capitalized. Advertising costs should be included in deferred acquisition costs only if the capitalization criteria in the direct-response advertising guidance in Subtopic 340-20, Other Assets and Deferred Costs – Capitalized Advertising Costs, are met. All other acquisition related costs, including costs incurred by the insurer in soliciting potential customers, market research, training, administration, unsuccessful acquisition or renewal efforts, and product development, should be expensed as incurred. If the initial application of ASU 2010-26 results in the capitalization of acquisition costs that had not been capitalized previously, the entity may elect not to capitalize those types of costs. ASU 2010-26 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. ASU 2010-26 should be applied prospectively upon adoption; although retrospective application to all prior periods presented upon the date of adoption is also permitted, but not required. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company expects to adopt ASU 2010-26 on January 1, 2012 and does not expect the adoption to have a material impact on the Company’s financial condition or results of operations.

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Note 3. Segment Information

The Company’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”) 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 tax for each business unit for the three month and nine month periods ended September 30, 2011 and 2010.

Revenues	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
American Southern	$	10,446	$	9,825	$	31,928	$	28,924
Bankers Fidelity		20,212		17,162		55,505		50,814
Corporate and Other		142		159		495		458

Total revenue	$	30,800	$	27,146	$	87,928	$	80,196

Income (loss) before income taxes	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
American Southern	$	974		$	1,256		$	3,491		$	3,128
Bankers Fidelity		2,391			546			3,824			1,793
Corporate and Other		(1,597	)		(1,221	)		(4,587	)		(3,703	)

Income before income taxes	$	1,768		$	581		$	2,728		$	1,218

Note 4. Credit Arrangements

Bank Debt

At September 30, 2011, the Company had a revolving credit facility (the “Credit Agreement”) with Wells Fargo Bank, National Association, successor-in-interest by merger to Wachovia Bank, National Association (“Wells Fargo”), pursuant to which the Company is able to borrow or reborrow up to $5,000, subject to the terms and conditions thereof. The interest rate on amounts outstanding under the Credit Agreement is, at the option of the Company, equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the London Interbank Offered Rate (“LIBOR”) determined on an interest period of 1-month, 2-months, 3-months or 6-months, plus 2.00%. Interest on amounts outstanding is payable quarterly. The Credit Agreement requires the Company to comply with certain covenants, including, among others, ratios that relate funded debt to both total capitalization and earnings before interest, taxes, depreciation and amortization, as well as the maintenance of minimum levels of tangible net worth. The Company must also comply with limitations on capital expenditures, certain payments, additional debt obligations, equity repurchases and certain redemptions, as well as minimum risk-based capital levels. Upon the occurrence of an event of default, Wells Fargo may terminate the Credit Agreement and declare all amounts outstanding due and payable in full. On August 31, 2011, the Company and Wells Fargo entered into the fifth amendment to the Credit Agreement (the “Fifth Amendment”). The Fifth Amendment provided for the extension of the term of the Credit Agreement to August 31, 2012. During the nine month period ended September 30, 2011, there was no balance outstanding under this Credit Agreement and the Company was in compliance with all terms of the Credit Agreement.

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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 only those activities necessary or incidental thereto.

The financial structure of each of Atlantic American Statutory Trust I and II, as of September 30, 2011 was as follows:

	Atlantic American Statutory Trust I		Atlantic American Statutory Trust II
JUNIOR SUBORDINATED DEBENTURES (1) (2)
Principal amount owed	$	18,042	$	23,196
Balance September 30, 2011		18,042		23,196
Balance December 31, 2010		18,042		23,196
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 (3)	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)

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 5. Derivative Financial Instruments

On February 21, 2006, the Company entered into a zero cost interest rate collar with Wells Fargo to hedge future interest payments on a portion of the Junior Subordinated Debentures. The notional amount of the collar was $18,042 with an effective date of March 6, 2006. The collar has a LIBOR floor rate of 4.77% and a LIBOR cap rate of 5.85%, and adjusts quarterly on the 4th of each March, June, September and December through termination on March 4, 2013. The Company began making payments to Wells Fargo under the zero cost interest rate collar on June 4, 2008. As a result of interest rates remaining below the LIBOR floor rate of 4.77% through September 30, 2011, these payments to Wells Fargo have continued. While the Company may be exposed to counterparty risk should Wells Fargo fail to perform its obligations under this agreement, based on the current level of interest rates coupled with the current macroeconomic outlook, the Company believes that its current counterparty risk exposure is minimal.

The estimated fair value and related carrying value of the Company’s interest rate collar at September 30, 2011 was a liability of approximately $1,100 with a corresponding decrease in accumulated other comprehensive income in shareholders’ equity, net of deferred tax.

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Note 6. Reconciliation of Other Comprehensive Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Net realized gains on investments included in net income	$	903		$	211		$	974		$	224

Other components of comprehensive income:
Net pre-tax unrealized gains on investments arising during period	$	14,806		$	4,300		$	17,054		$	14,103
Reclassification adjustment		(567	)		(211	)		(638	)		(224	)
Net pre-tax unrealized gains on investments recognized in other comprehensive income		14,239			4,089			16,416			13,879
Fair value adjustment to derivative financial instrument		188			(65	)		453			(251	)
Deferred income tax attributable to other comprehensive income		(5,049	)		(1,409	)		(5,904	)		(4,770	)
Change in accumulated other comprehensive income		9,378			2,615			10,965			8,858
Accumulated other comprehensive income (loss), beginning of period		(520	)		838			(2,107	)		(5,405	)
Accumulated other comprehensive income, end of period	$	8,858		$	3,453		$	8,858		$	3,453

Note 7. Earnings Per Common Share

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

	Three Months Ended September 30, 2011
	Income			Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:

Net income	$	1,704			22,226

Less preferred stock dividends		(127	)

Net income applicable to common shareholders		1,577			22,226	$	.07

Diluted Earnings Per Common Share:

Effect of dilutive stock options					146

Net income applicable to common shareholders	$	1,577			22,372	$	.07

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	Three Months Ended September 30, 2010
	Income			Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:

Net income	$	525			22,281

Less preferred stock dividends		(127	)

Net income applicable to common shareholders		398			22,281	$	.02

Diluted Earnings Per Common Share:

Effect of dilutive stock options					31

Net income applicable to common shareholders	$	398			22,312	$	.02

	Nine Months Ended September 30, 2011
	Income			Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:

Net income	$	2,365			22,239

Less preferred stock dividends		(381	)

Net income applicable to common shareholders		1,984			22,239	$	.09

Diluted Earnings Per Common Share:

Effect of dilutive stock options					157

Net income applicable to common shareholders	$	1,984			22,396	$	.09

	Nine Months Ended September 30, 2010
	Income			Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:

Net income	$	1,018			22,286

Less preferred stock dividends		(381	)

Net income applicable to common shareholders		637			22,286	$	.03

Diluted Earnings Per Common Share:

Effect of dilutive stock options					32

Net income applicable to common shareholders	$	637			22,318	$	.03

The assumed conversion of the Company’s Series D Preferred Stock was excluded from the earnings per common share calculation for all periods presented since its impact would have been antidilutive.

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Note 8. Income Taxes

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Federal income tax provision at statutory rate of 35%	$	619		$	203		$	955		$	426
Dividends-received deduction		(60	)		(55	)		(130	)		(147	)
Small life insurance company deduction		(187	)		-			(187	)		-
Other permanent differences		4			16			37			29
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets		(361	)		-			(361	)		-
Adjustment for prior years’ estimates to actual		49			(108	)		49			(108	)
Income tax expense	$	64		$	56		$	363		$	200

The components of the income tax expense were:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Current - Federal	$	115		$	(659	)	$	119		$	(653	)
Deferred - Federal		310			715			605			853
Change in deferred tax asset valuation allowance		(361	)		-			(361	)		-
Total	$	64		$	56		$	363		$	200

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and nine month periods ended September 30, 2011 resulted from the dividends-received deduction (“DRD”), the small life insurance company deduction (“SLD”), the change in deferred tax asset valuation allowance and the provision-to-filed return adjustments. The current estimated DRD is adjusted as underlying factors change and can vary from the estimates based on, but not limited to, actual distributions from these investments as well as appropriate levels of taxable income. The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”). The amount of the SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3,000 and is ultimately phased out at $15,000. The change in deferred tax asset valuation allowance was primarily due to the utilization of certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation allowance reserve. The provision-to-filed return adjustments are generally updated at the completion of the third quarter of each fiscal year and were $49 in the three month and nine month periods ended September 30, 2011.

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and nine month periods ended September 30, 2010 resulted from the DRD and the provision-to-filed return adjustments. The provision-to-filed return adjustments of $108 for the three month and nine month periods ended September 30, 2010 were primarily due to adjustments related to the carryback and utilization of capital losses on investments in the Company’s life and health operation.

Note 9. Commitments and Contingencies

From time to time, the Company is 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.

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Note 10. Investments

The following tables set forth the carrying value, gross unrealized gains, gross unrealized losses and amortized cost of the Company’s investments, aggregated by type and industry, as of September 30, 2011 and December 31, 2010.

	September 30, 2011
	Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
Fixed maturities:
Bonds:
U.S. Treasury securities and obligations of U.S. Government agencies and authorities	$	38,031	$	4,167	$	-	$	33,864
Obligations of states and political subdivisions		17,109		1,829		-		15,280
Corporate securities:
Utilities and telecom		18,452		2,537		-		15,915
Financial services		31,495		734		2,322		33,083
Media		2,437		84		-		2,353
Other business – diversified		46,376		4,380		41		42,037
Other consumer – diversified		45,320		5,595		-		39,725
Total corporate securities		144,080		13,330		2,363		133,113
Redeemable preferred stocks:
Utilities and telecom		2,694		194		-		2,500
Financial services		4,581		18		446		5,009
Other consumer – diversified		193		-		-		193
Total redeemable preferred stocks		7,468		212		446		7,702
Total fixed maturities		206,688		19,538		2,809		189,959
Equity securities:
Common and non-redeemable preferred stocks:
Utilities and telecom		1,104		140		-		964
Financial services		5,052		517		254		4,789
Media		643		-		2,555		3,198
Other business – diversified		107		60		-		47
Other consumer – diversified		1,072		91		-		981
Total equity securities		7,978		808		2,809		9,979
Other invested assets		591		-		-		591
Policy and student loans		2,231		-		-		2,231
Real estate		38		-		-		38
Investments in unconsolidated trusts		1,238		-		-		1,238

Total investments	$	218,764	$	20,346	$	5,618	$	204,036

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	December 31, 2010
	Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
Fixed maturities:
Bonds:
U.S. Treasury securities and obligations of U.S. Government agencies and authorities	$	46,630	$	1,454	$	52	$	45,228
Obligations of states and political subdivisions		21,007		32		876		21,851
Corporate securities:
Utilities and telecom		23,010		1,079		355		22,286
Financial services		21,400		324		1,745		22,821
Media		2,506		153		-		2,353
Other business – diversified		25,919		422		529		26,026
Other consumer – diversified		23,532		149		232		23,615
Total corporate securities		96,367		2,127		2,861		97,101
Redeemable preferred stocks:
Utilities and telecom		2,670		170		-		2,500
Financial services		4,781		22		250		5,009
Other consumer – diversified		193		-		-		193
Total redeemable preferred stocks		7,644		192		250		7,702
Total fixed maturities		171,648		3,805		4,039		171,882
Equity securities:
Common and non-redeemable preferred stocks:
Utilities and telecom		1,073		109		-		964
Financial services		5,461		754		82		4,789
Media		885		-		2,313		3,198
Other business – diversified		120		73		-		47
Other consumer – diversified		985		4		-		981
Total equity securities		8,524		940		2,395		9,979
Other invested assets		980		-		-		980
Policy and student loans		2,200		-		-		2,200
Real estate		38		-		-		38
Investments in unconsolidated trusts		1,238		-		-		1,238

Total investments	$	184,628	$	4,745	$	6,434	$	186,317

The amortized cost and carrying value of fixed maturities at September 30, 2011 by contractual maturity were as follows. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2011
	Carrying Value		Amortized Cost
Due in one year or less	$	3,384	$	3,350
Due after one year through five years		8,193		7,656
Due after five years through ten years		30,928		30,066
Due after ten years		163,035		147,893
Varying maturities		1,148		994
Totals	$	206,688	$	189,959

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The following table sets forth the carrying value, amortized cost, and net unrealized gains or losses of the Company’s investments aggregated by industry as of September 30, 2011 and December 31, 2010.

	September 30, 2011							December 31, 2010
	Carrying Value		Amortized Cost		Unrealized Gains (Losses)			Carrying Value		Amortized Cost		Unrealized Gains (Losses)
U.S. Treasury securities and U.S. Government agencies	$	38,031	$	33,864	$	4,167		$	46,630	$	45,228	$	1,402
Obligations of states and political subdivisions		17,109		15,280		1,829			21,007		21,851		(844	)
Utilities and telecom		22,250		19,379		2,871			26,753		25,750		1,003
Financial services		41,128		42,881		(1,753	)		31,642		32,619		(977	)
Media (1)		3,080		5,551		(2,471	)		3,391		5,551		(2,160	)
Other business – diversified		46,483		42,084		4,399			26,039		26,073		(34	)
Other consumer – diversified		46,585		40,899		5,686			24,710		24,789		(79	)
Other investments		4,098		4,098		-			4,456		4,456		-
Investments	$	218,764	$	204,036	$	14,728		$	184,628	$	186,317	$	(1,689	)

(1)

Media includes related party investments in Gray Television, Inc. with an amortized cost basis of $3,198 and which had an aggregate carrying value of $643 and $885 at September 30, 2011 and December 31, 2010, respectively.

The following tables present the Company’s unrealized loss aging for securities by type and length of time the security was in a continuous unrealized loss position as of September 30, 2011 and December 31, 2010.

	September 30, 2011
	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate securities	$	18,166	$	850	$	3,487	$	1,513	$	21,653	$	2,363
Redeemable preferred stocks		-		-		2,823		446		2,823		446
Equity securities		1,801		215		1,870		2,594		3,671		2,809
Total temporarily impaired securities	$	19,967	$	1,065	$	8,180	$	4,553	$	28,147	$	5,618

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	December 31, 2010
	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	$	5,490	$	52	$	-	$	-	$	5,490	$	52
Obligations of states and political subdivisions		18,919		876		-		-		18,919		876
Corporate securities		40,426		1,263		3,402		1,598		43,828		2,861
Redeemable preferred stocks		2,188		53		2,072		197		4,260		250
Equity securities		972		28		3,114		2,367		4,086		2,395
Total temporarily impaired securities	$	67,995	$	2,272	$	8,588	$	4,162	$	76,583	$	6,434

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 these securities until price recovery, the nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit status.

As of September 30, 2011, securities in an unrealized loss position primarily included certain of the Company’s investments in fixed maturities and common and non-redeemable preferred stocks within the financial services and media sectors. Investments in the media sector include related party investments in Gray Television, Inc., which had unrealized losses of $2,555 as of September 30, 2011. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, including those described above, the Company has deemed these securities to be temporarily impaired as of September 30, 2011.

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, municipal bonds, and certain corporate fixed maturity securities, as well as its non-redeemable preferred stocks. In determining fair value measurements using Level 2 criteria, the Company utilizes various external pricing sources.

Level 3

Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). The Company’s financial instruments valued using Level 3 criteria include certain fixed maturity securities and a zero cost interest rate collar. Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. As of September 30, 2011, the value of the Company’s fixed maturities valued using Level 3 criteria was $1,994 and the value of the zero cost interest rate collar was a liability of $1,100 (See Note 5). The use of different criteria or assumptions regarding data may have yielded different valuations.

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As of September 30, 2011, 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	$	-	$	204,694	$	1,994	$	206,688
Equity securities		3,078		4,900		-		7,978
Cash equivalents		21,586		-		-		21,586

Total	$	24,664	$	209,594	$	1,994	$	236,252

Liabilities:
Derivative	$	-	$	-	$	1,100	$	1,100

As of December 31, 2010, 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	$	-	$	169,705	$	1,943	$	171,648
Equity securities		3,273		5,251		-		8,524
Cash equivalents		27,630		-		-		27,630

Total	$	30,903	$	174,956	$	1,943	$	207,802

Liabilities:
Derivative	$	-	$	-	$	1,553	$	1,553

The following is a roll-forward of the financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month and nine month periods ended September 30, 2011.

	Fixed Maturities			Derivative (Liability)
Balance, December 31, 2010	$	1,943		$	(1,553	)
Total unrealized gains (losses) included in total comprehensive income		(197	)		191
Balance, March 31, 2011	$	1,746		$	(1,362	)
Total unrealized gains included in total comprehensive income		41			74
Balance, June 30, 2011	$	1,787		$	(1,288	)
Total unrealized gains included in total comprehensive income		207			188
Balance, September 30, 2011	$	1,994		$	(1,100	)

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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 discounted at a reasonably estimated rate of interest. Other qualitative and quantitative information received from the original underwriter of the pooled offerings is also considered, as applicable. As the derivative is an interest rate collar, changes in valuation are more closely correlated with changes in interest rates and, accordingly, values are estimated using projected cash flows at current interest rates discounted at a reasonably estimated rate of interest. Fair value quotations are also obtained and considered, as applicable, from the counterparty to the transaction.

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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”) for the three month and nine month periods ended September 30, 2011. 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, 2010.

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”). Each operating company is managed separately, offers different products and is evaluated on its individual performance.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and, in management’s belief, conform to general practices within the insurance industry. The following is an explanation of the Company’s critical accounting policies and the resultant estimates considered most significant by management, which policies and estimates do not differ materially from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. These accounting policies inherently require significant judgment and assumptions, and actual operating results could differ significantly from management’s estimates determined using these policies. Atlantic American does not expect that changes in the estimates determined using these policies will have a material effect on the Company’s financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.

Unpaid loss and loss adjustment expenses comprised 28% of the Company’s total liabilities at September 30, 2011. This liability includes estimates for: 1) unpaid losses on claims reported prior to September 30, 2011, 2) future development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to September 30, 2011 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to September 30, 2011. Quantification of loss estimates for each of these components involves a significant degree of judgment and estimates may vary, materially, from period to period. Estimated unpaid losses on reported claims are developed based on historical experience with similar claims by the Company. Development on reported claims, estimates of unpaid ultimate losses on claims incurred prior to September 30, 2011 but not yet reported, and estimates of unpaid loss adjustment expenses are developed based on the Company’s historical experience, using actuarial methods to assist in the analysis. The Company’s actuaries develop ranges of estimated development on reported and unreported claims as well as loss adjustment expenses using various methods, including the paid-loss development method, the reported-loss development method, the paid Bornhuetter-Ferguson method and the reported Bornhuetter-Ferguson method. Any single method used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes affecting the business environment and the Company’s administrative policies. Further, a variety of external factors, such as legislative changes, medical cost inflation, and others may directly or indirectly impact the relative adequacy of liabilities for unpaid losses and loss adjustment expenses. The Company’s approach is to select an estimate of ultimate losses based on comparing results of a variety of reserving methods, as opposed to total reliance on any single method. Unpaid loss and loss adjustment expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used to develop such estimates, the amount of the Company’s recorded liability for unpaid loss and loss adjustment expenses is adjusted. In the event the Company’s actual reported losses in any period are materially in excess of the previously estimated amounts, such losses, to the extent reinsurance coverage does not exist, could have a material adverse effect on the Company’s results of operations.