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 June 30, 2012

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 August 7, 2012, was 21,251,540.

ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

Part I. Financial Information		Page No.

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets - June 30, 2012 and December 31, 2011	2

	Condensed Consolidated Statements of Operations - Three months and six months ended June 30, 2012 and 2011	3

	Condensed Consolidated Statements of Comprehensive Income - Three months and six months ended June 30, 2012 and 2011	4

	Condensed Consolidated Statements of Shareholders’ Equity - Six months ended June 30, 2012 and 2011	5

	Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2012 and 2011	6

	Notes to Condensed Consolidated Financial Statements	7

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

Item 4.	Controls and Procedures	25

Part II. Other Information

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 6.	Exhibits	27

Signatures		28

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

ASSETS

	Unaudited
	June 30,		December 31,
	2012		2011
Cash and cash equivalents	$	21,858	$	21,285
Investments:
Fixed maturities (cost: $198,977 and $198,506)		222,059		217,348
Common and non-redeemable preferred stocks (cost: $8,477 and $7,477)		10,155		8,348
Other invested assets (cost: $572 and $567)		572		567
Policy loans		2,282		2,246
Real estate		38		38
Investment in unconsolidated trusts		1,238		1,238
Total investments		236,344		229,785
Receivables:
Reinsurance		14,975		15,673
Insurance premiums and other (net of allowance for doubtful accounts: $386 and $405)		7,039		8,289
Deferred acquisition costs		25,449		24,259
Other assets		934		706
Goodwill		2,128		2,128
Total assets	$	308,727	$	302,125

LIABILITIES AND SHAREHOLDERS’ EQUITY

Insurance reserves and policyholder funds:
Future policy benefits	$	64,987		$	63,321
Unearned premiums		22,864			23,646
Losses and claims		59,807			57,975
Other policy liabilities		1,614			2,252
Total insurance reserves and policyholder funds		149,272			147,194
Accounts payable and accrued expenses		11,404			14,100
Deferred income taxes, net		5,221			3,316
Junior subordinated debenture obligations		41,238			41,238
Total liabilities		207,135			205,848

Commitments and contingencies (Note 8)
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: 22,400,894; shares outstanding: 21,306,854 and 21,274,241		22,401			22,401
Additional paid-in capital		57,158			57,136
Retained earnings		7,937			6,179
Accumulated other comprehensive income		15,750			12,244
Treasury stock, at cost: 1,094,040 and 1,126,653 shares		(1,724	)		(1,753	)
Total shareholders’ equity		101,592			96,277
Total liabilities and shareholders’ equity	$	308,727		$	302,125

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

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ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenue:
Insurance premiums	$	31,592		$	26,197		$	62,273		$	51,619
Investment income		2,855			2,691			5,738			5,260
Realized investment gains, net		470			70			1,428			71
Other income		36			115			65			178
Total revenue		34,953			29,073			69,504			57,128

Benefits and expenses:
Insurance benefits and losses incurred		23,095			18,221			45,767			34,852
Commissions and underwriting expenses		7,970			7,545			15,003			15,446
Interest expense		658			647			1,315			1,287
Other		2,376			2,328			4,845			4,583
Total benefits and expenses		34,099			28,741			66,930			56,168
Income before income taxes		854			332			2,574			960
Income tax expense		73			140			136			299
Net income		781			192			2,438			661
Preferred stock dividends		(127	)		(127	)		(254	)		(254	)
Net income applicable to common shareholders	$	654		$	65		$	2,184		$	407

Net income per common share (basic and diluted)	$	.03		$	-		$	.10		$	.02

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

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ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net income	$	781		$	192		$	2,438		$	661
Other comprehensive income (loss):
Available-for-sale securities:
Gross unrealized holding gain arising in the period		7,921			3,470			6,475			2,248
Related tax expense		(2,772	)		(1,215	)		(2,266	)		(787	)
Less: reclassification adjustment for net realized gains included in net income		470			70			1,428			71
Related tax expense		(164	)		(25	)		(500	)		(25	)
Net effect on other comprehensive income		4,843			2,210			3,281			1,415
Derivative financial instrument:
Fair value adjustment to derivative financial instrument		193			74			346			265
Related tax expense		(67	)		(26	)		(121	)		(93	)
Net effect on other comprehensive income		126			48			225			172
Total other comprehensive income, net of tax		4,969			2,258			3,506			1,587
Total comprehensive income	$	5,750		$	2,450		$	5,944		$	2,248

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

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ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited; Dollars in thousands)

Six Months Ended June 30, 2012	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total
Balance, December 31, 2011	$	70	$	22,401	$	57,136	$	6,179		$	12,244		$	(1,753	)	$	96,277
Net income		-		-		-		2,438			-			-			2,438
Other comprehensive income, net of tax		-		-		-		-			3,506			-			3,506
Dividends on common stock		-		-		-		(426	)		-			-			(426	)
Dividends accrued on preferred stock		-		-		-		(254	)		-			-			(254	)
Purchase of shares for treasury		-		-		-		-			-			(49	)		(49	)
Issuance of shares for stock options		-		-		22		-			-			78			100
Balance, June 30, 2012	$	70	$	22,401	$	57,158	$	7,937		$	15,750		$	(1,724	)	$	101,592

Six Months Ended June 30, 2011
Balance, December 31, 2010	$	70	$	22,374	$	57,129	$	3,886		$	(604	)	$	(162	)	$	82,693
Net income		-		-		-		661			-			-			661
Other comprehensive income, net of tax		-		-		-		-			1,587			-			1,587
Dividends on common stock		-		-		-		(445	)		-			-			(445	)
Dividends accrued on preferred stock		-		-		-		(254	)		-			-			(254	)
Purchase of shares for treasury		-		-		-		-			-			(54	)		(54	)
Balance, June 30, 2011	$	70	$	22,374	$	57,129	$	3,848		$	983		$	(216	)	$	84,188

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

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ATLANTIC AMERICAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; Dollars in thousands)

	Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,438		$	661
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred acquisition costs		5,490			5,384
Acquisition costs deferred		(6,680	)		(6,064	)
Realized investment gains		(1,428	)		(71	)
Increase (decrease) in insurance reserves		2,078			(499	)
Depreciation and amortization		220			187
Deferred income tax expense		18			295
Decrease (increase) in receivables, net		1,945			(416	)
Decrease in other liabilities		(3,235	)		(513	)
Other, net		(144	)		(7	)
Net cash provided by (used in) operating activities		702			(1,043	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, called or matured		32,849			26,884
Investments purchased		(31,947	)		(28,987	)
Additions to property and equipment		(148	)		(28	)
Net cash provided by (used in) investing activities		754			(2,131	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		100			-
Payment of dividends on Series D Preferred Stock		(508	)		-
Payment of dividends on common stock		(426	)		(445	)
Purchase of shares for treasury		(49	)		(54	)
Net cash used in financing activities		(883	)		(499	)

Net increase (decrease) in cash and cash equivalents		573			(3,673	)
Cash and cash equivalents at beginning of period		21,285			28,325
Cash and cash equivalents at end of period	$	21,858		$	24,652

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	1,314		$	1,293
Cash paid for income taxes	$	80		$	-

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

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ATLANTIC AMERICAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1.

Basis of Presentation

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, 2011. The Company’s results of operations for the three month and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 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 June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 would then immediately follow the statement of net income and would include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. Regardless of the presentation an entity chooses, 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 is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (“ASU 2011-12”). The amendments in ASU 2011-12 are being made to allow the FASB time to evaluate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. The Company adopted all the requirements in ASU 2011-05 not affected by ASU 2011-12 on January 1, 2012. See Condensed Consolidated Statements of Comprehensive Income.

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 resulted 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 applied prospectively. For public entities, this guidance is effective during the interim and annual periods beginning after December 15, 2011. The Company adopted ASU 2011-04 on January 1, 2012. See Note 10 for expanded disclosures.

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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 are capitalized. Advertising costs are 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, are 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 was required to be applied prospectively upon adoption; although retrospective application to all prior periods presented upon the date of adoption is also permitted, but not required. The Company adopted ASU 2010-26 on January 1, 2012 on a prospective basis. Adoption of ASU 2010-26 did not 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 six month periods ended June 30, 2012 and 2011.

Revenues	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
American Southern	$	10,887	$	10,906	$	22,151	$	21,482
Bankers Fidelity		23,857		17,960		46,938		35,293
Corporate and Other		209		207		415		353
Total revenue	$	34,953	$	29,073	$	69,504	$	57,128

Income (loss) before income taxes	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
American Southern	$	1,045		$	1,189		$	1,760		$	2,517
Bankers Fidelity		1,159			548			3,775			1,433
Corporate and Other		(1,350	)		(1,405	)		(2,961	)		(2,990	)
Income before income taxes	$	854		$	332		$	2,574		$	960

Note 4.

Credit Arrangements

Bank Debt

At June 30, 2012, the Company had a revolving credit facility (the “Credit Agreement”) with Wells Fargo 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. During the six month period ended June 30, 2012, there was no balance outstanding under this Credit Agreement and the Company was in compliance with all financial covenants of the Credit Agreement. The termination date of this Credit Agreement is August 31, 2012.

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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 June 30, 2012 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 June 30, 2012		18,042		23,196
Balance December 31, 2011		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 June 30, 2012, 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 exposure to nonperformance risks is minimal.

The estimated fair value and related carrying value of the Company’s interest rate collar at June 30, 2012 was a liability of approximately $530 with a corresponding decrease in accumulated other comprehensive income in shareholders’ equity, net of deferred tax.

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Note 6.

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 June 30, 2012
	Income			Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:
Net income	$	781			21,272
Less preferred stock dividends		(127	)
Net income applicable to common shareholders		654			21,272	$	.03
Diluted Earnings Per Common Share:
Effect of dilutive stock options					79
Net income applicable to common shareholders	$	654			21,351	$	.03

	Three Months Ended June 30, 2011
	Income			Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:
Net income	$	192			22,238
Less preferred stock dividends		(127	)
Net income applicable to common shareholders		65			22,238	$	-
Diluted Earnings Per Common Share:
Effect of dilutive stock options					168
Net income applicable to common shareholders	$	65			22,406	$	-

	Six Months Ended June 30, 2012
	Income			Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:
Net income	$	2,438			21,273
Less preferred stock dividends		(254	)
Net income applicable to common shareholders		2,184			21,273	$	.10
Diluted Earnings Per Common Share:
Effect of dilutive stock options					84
Net income applicable to common shareholders	$	2,184			21,357	$	.10

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	Six Months Ended June 30, 2011
	Income			Shares (In thousands)		Per Share Amount
Basic Earnings Per Common Share:
Net income	$	661			22,246
Less preferred stock dividends		(254	)
Net income applicable to common shareholders		407			22,246	$	.02
Diluted Earnings Per Common Share:
Effect of dilutive stock options					127
Net income applicable to common shareholders	$	407			22,373	$	.02

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

Note 7.

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 June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Federal income tax provision at statutory rate of 35%	$	299		$	116		$	901		$	336
Dividends received deduction		(38	)		(21	)		(82	)		(70	)
Small life insurance company deduction		(32	)		20			(237	)		-
Other permanent differences		8			25			16			33
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets		(164	)		-			(462	)		-
Income tax expense	$	73		$	140		$	136		$	299

The components of the income tax expense were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Current - Federal	$	22		$	(11	)	$	118		$	4
Deferred - Federal		215			151			480			295
Change in deferred tax asset valuation allowance		(164	)		-			(462	)		-
Total	$	73		$	140		$	136		$	299

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and six month periods ended June 30, 2012 resulted from the dividends received deduction (“DRD”), the small life insurance company deduction (“SLD”) and the change in deferred tax asset valuation allowance. 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 unanticipated utilization of certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation allowance reserve.

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Note 8.

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.

Note 9.

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 June 30, 2012 and December 31, 2011.

Investments were comprised of the following:

	June 30, 2012
	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	$	27,203	$	4,297	$	-	$	22,906
Obligations of states and political subdivisions		17,694		2,434		-		15,260
Corporate securities:
Utilities and telecom		17,593		2,743		-		14,850
Financial services		40,522		1,865		553		39,210
Other business – diversified		62,382		5,338		112		57,156
Other consumer – diversified		50,200		7,121		64		43,143
Total corporate securities		170,697		17,067		729		154,359
Redeemable preferred stocks:
Utilities and telecom		1,504		4		-		1,500
Financial services		4,768		45		36		4,759
Other consumer – diversified		193		-		-		193
Total redeemable preferred stocks		6,465		49		36		6,452
Total fixed maturities		222,059		23,847		765		198,977
Equity securities:
Common and non-redeemable preferred stocks:
Utilities and telecom		1,333		369		-		964
Financial services		6,694		908		3		5,789
Other business – diversified		125		78		-		47
Other consumer – diversified		2,003		401		75		1,677
Total equity securities		10,155		1,756		78		8,477
Other invested assets		572		-		-		572
Policy loans		2,282		-		-		2,282
Real estate		38		-		-		38
Investments in unconsolidated trusts		1,238		-		-		1,238
Total investments	$	236,344	$	25,603	$	843	$	211,584

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	December 31, 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	$	35,922	$	4,186	$	-	$	31,736
Obligations of states and political subdivisions		17,030		1,757		-		15,273
Corporate securities:
Utilities and telecom		18,598		2,736		-		15,862
Financial services		34,900		725		1,346		35,521
Other business – diversified		56,553		5,043		152		51,662
Other consumer – diversified		46,908		6,170		12		40,750
Total corporate securities		156,959		14,674		1,510		143,795
Redeemable preferred stocks:
Utilities and telecom		2,668		168		-		2,500
Financial services		4,576		29		462		5,009
Other consumer – diversified		193		-		-		193
Total redeemable preferred stocks		7,437		197		462		7,702
Total fixed maturities		217,348		20,814		1,972		198,506
Equity securities:
Common and non-redeemable preferred stocks:
Utilities and telecom		1,203		239		-		964
Financial services		5,148		558		199		4,789
Other business – diversified		115		68		-		47
Other consumer – diversified		1,882		205		-		1,677
Total equity securities		8,348		1,070		199		7,477
Other invested assets		567		-		-		567
Policy loans		2,246		-		-		2,246
Real estate		38		-		-		38
Investments in unconsolidated trusts		1,238		-		-		1,238
Total investments	$	229,785	$	21,884	$	2,171	$	210,072

The amortized cost and carrying value of the Company’s investments in fixed maturities at June 30, 2012 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.

	June 30, 2012
	Carrying Value		Amortized Cost
Due in one year or less	$	1,535	$	1,499
Due after one year through five years		4,619		4,220
Due after five years through ten years		37,670		35,723
Due after ten years		177,054		156,541
Varying maturities		1,181		994
Totals	$	222,059	$	198,977

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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 June 30, 2012 and December 31, 2011.

	June 30, 2012						December 31, 2011
	Carrying Value		Amortized Cost		Unrealized Gains		Carrying Value		Amortized Cost		Unrealized Gains (Losses)
U.S. Treasury securities and obligations of U.S. Government agencies and authorities	$	27,203	$	22,906	$	4,297	$	35,922	$	31,736	$	4,186
Obligations of states and political subdivisions		17,694		15,260		2,434		17,030		15,273		1,757
Utilities and telecom		20,430		17,314		3,116		22,469		19,326		3,143
Financial services		51,984		49,758		2,226		44,624		45,319		(695	)
Other business – diversified		62,507		57,203		5,304		56,668		51,709		4,959
Other consumer – diversified		52,396		45,013		7,383		48,983		42,620		6,363
Other investments		4,130		4,130		-		4,089		4,089		-
Investments	$	236,344	$	211,584	$	24,760	$	229,785	$	210,072	$	19,713

The following tables present the Company’s unrealized loss aging for securities by type and length of time the security was in a continuous unrealized loss position as of June 30, 2012 and December 31, 2011.

	June 30, 2012
	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate securities	$	13,554	$	205	$	1,476	$	524	$	15,030	$	729
Redeemable preferred stocks		-		-		1,883		36		1,883		36
Common and non-redeemable preferred stocks		622		75		997		3		1,619		78
Total temporarily impaired securities	$	14,176	$	280	$	4,356	$	563	$	18,532	$	843

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	December 31, 2011
	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate securities	$	30,675	$	1,112	$	1,602	$	398	$	32,277	$	1,510
Redeemable preferred stocks		-		-		2,807		462		2,807		462
Common and non-redeemable preferred stocks		824		176		1,245		23		2,069		199
Total temporarily impaired securities	$	31,499	$	1,288	$	5,654	$	883	$	37,153	$	2,171

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 June 30, 2012, securities in an unrealized loss position primarily included certain of the Company’s investments in fixed maturities within the financial services sector. 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 June 30, 2012.

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 maturities, 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 maturities 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 June 30, 2012, the value of the Company’s fixed maturities valued using Level 3 criteria was $2,099 and the value of the zero cost interest rate collar was a liability of $530 (See Note 5). The use of different criteria or assumptions regarding data may have yielded different valuations.

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As of June 30, 2012, 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	$	-	$	219,960	$	2,099	$	222,059
Equity securities		3,660		6,495		-		10,155
Cash equivalents		18,598		-		-		18,598
Total	$	22,258	$	226,455	$	2,099	$	250,812
Liabilities:
Derivative	$	-	$	-	$	530	$	530

As of December 31, 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	$	-	$	215,313	$	2,035	$	217,348
Equity securities		3,374		4,974		-		8,348
Cash equivalents		19,519		-		-		19,519
Total	$	22,893	$	220,287	$	2,035	$	245,215
Liabilities:
Derivative	$	-	$	-	$	876	$	876

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 six month periods ended June 30, 2012.

	Fixed Maturities			Derivative (Liability)
Balance, December 31, 2011	$	2,035		$	(876	)
Total unrealized gains (losses) included in comprehensive income		(61	)		153
Balance, March 31, 2012		1,974			(723	)
Total unrealized gains included in comprehensive income		125			193
Balance, June 30, 2012	$	2,099		$	(530	)

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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 (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. 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. At June 30, 2012, the value of the derivative was determined based on the difference between the contractual interest rate of 4.77% and the current 3-month LIBOR rate of 0.47%. Fair value quotations are also obtained and considered, as applicable, from the counterparty to the transaction.

Note 10.

Fair Values of Financial Instruments

The estimated fair value amounts 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. Accordingly, 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 June 30, 2012 and December 31, 2011.

			June 30, 2012				December 31, 2011
	Level in Fair Value Hierarchy (1)		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	Level 1		$	21,858	$	21,858	$	21,285	$	21,285
Fixed maturities		(1)		222,059		222,059		217,348		217,348
Equity securities		(1)		10,155		10,155		8,348		8,348
Other invested assets	Level 3			572		572		567		567
Policy loans	Level 2			2,282		2,282		2,246		2,246
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	Level 2			41,238		41,238		41,238		41,238
Derivative	Level 3			530		530		876		876

(1)

See Note 9 for a description of the fair value hierarchy as well as a disclosure of levels for classes of these financial assets.

The fair value estimates as of June 30, 2012 and December 31, 2011 were based on pertinent information available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, current estimates of fair value may differ significantly from amounts that might ultimately be realized in a market exchange on any subsequent date.

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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”) as of and for the three month and six month periods ended June 30, 2012. 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, 2011.

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 preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 critical 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 Annual Report on Form 10-K for the year ended December 31, 2011. During the six month period ended June 30, 2012, there were no changes to the critical accounting policies or related estimates previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards applicable to the Company, see Note 2 of the accompanying notes to the unaudited condensed consolidated financial statements.

OVERALL CORPORATE RESULTS

On a consolidated basis, the Company had net income of $0.8 million, or $0.03 per diluted share, for the three month period ended June 30, 2012, compared to net income of $0.2 million, or nil per diluted share, for the three month period ended June 30, 2011. The Company had net income of $2.4 million, or $0.10 per diluted share, for the six month period ended June 30, 2012, compared to net income of $0.7 million, or $0.02 per diluted share, for the six month period ended June 30, 2011. The increase in net income for the three month and six month periods ended June 30, 2012 was primarily due to an increase in premium revenue, investment income and realized investment gains, in conjunction with maintaining a relatively consistent level of fixed general and administrative expenses. Premium revenue for the three month period ended June 30, 2012 increased $5.4 million, or 20.6%, to $31.6 million. For the six month period ended June 30, 2012, premium revenue increased $10.7 million, or 20.6%, to $62.3 million. The increase in premium revenue was primarily attributable to an increase in Medicare supplement business in the life and health operations. Operating income (income before income taxes and realized investment gains) was $0.4 million in the three month period ended June 30, 2012 compared to $0.3 million in the three month period ended June 30, 2011. Operating income in the six month periods ended June 30, 2012 and 2011 was $1.1 million and $0.9 million, respectively. While the life and health operations experienced significant growth in premium revenue and related profitability during the three month and six month periods ended June 30, 2012, operating income was moderated by unfavorable loss experience in the property and casualty operations.

A more detailed analysis of the individual operating companies and other corporate activities is provided below.

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American Southern

The following is a summary of American Southern’s premiums for the three month and six month periods ended June 30, 2012 and the comparable periods in 2011 (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011

Gross written premiums	$	12,030		$	12,247		$	21,579		$	19,817
Ceded premiums		(1,904	)		(1,507	)		(3,819	)		(2,974	)
Net written premiums	$	10,126		$	10,740		$	17,760		$	16,843
Net earned premiums	$	9,666		$	9,731		$	19,478		$	19,164

Gross written premiums at American Southern decreased $0.2 million, or 1.8%, during the three month period ended June 30, 2012 from the three month period ended June 30, 2011, and increased $1.8 million, or 8.9%, during the six month period ended June 30, 2012, over the comparable period in 2011. The decrease in gross written premiums for the three month period ended June 30, 2012 was due primarily to a decrease in the general liability line of business. The increase in gross written premiums for the six month period ended June 30, 2012 was primarily attributable to increases of $1.8 million in commercial automobile business written by a newly appointed agency and $1.6 million in commercial automobile business written by an existing agency. Partially offsetting the increase in gross written premiums for the six month period ended June 30, 2012 was a decrease of $1.8 million in commercial automobile written premiums resulting from the cancellation of two agencies in the first quarter of 2012 due to unfavorable loss experience.

Ceded premiums increased $0.4 million, or 26.3%, during the three month period ended June 30, 2012, and $0.8 million, or 28.4%, during the six month period ended June 30, 2012, over the comparable periods in 2011. The increase in ceded premiums for the three month and six month periods ended June 30, 2012 was primarily due to increased cession rates as well as an increase in commercial automobile earned premiums which have higher contractual cession rates than other lines of business.

The following presents American Southern’s net earned premiums by line of business for the three month and six month periods ended June 30, 2012 and the comparable periods in 2011 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011

Commercial automobile	$	6,540	$	6,454	$	12,860	$	12,569
General liability		783		1,067		1,946		2,200
Property		556		495		998		1,003
Surety		1,787		1,715		3,674		3,392
Total	$	9,666	$	9,731	$	19,478	$	19,164

Net earned premiums decreased slightly during the three month period ended June 30, 2012 from the three month period ended June 30, 2011, and increased $0.3 million, or 1.6%, during the six month period ended June 30, 2012, over the comparable period in 2011. The decrease in net earned premiums for the three month period ended June 30, 2012 was primarily attributable to the continued decline in the general liability line of business. The increase in net earned premiums for the six month period ended June 30, 2012 was primarily due to the volume of commercial automobile and surety business written in the current year and during 2011. 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.

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The following sets forth American Southern’s loss and expense ratios for the three month and six month periods ended June 30, 2012 and for the comparable periods in 2011:

	Three Months Ended June 30,						Six Month Ended June 30,
	2012			2011			2012			2011

Loss ratio		69.7	%		59.6	%		75.8	%		57.9	%
Expense ratio		32.1	%		40.2	%		28.9	%		41.1	%
Combined ratio		101.8	%		99.8	%		104.7	%		99.0	%

The loss ratio for the three month period ended June 30, 2012 increased to 69.7% from 59.6% in the three month period ended June 30, 2011 and to 75.8% in the six month period ended June 30, 2012 from 57.9% in the comparable period of 2011. The increase in the loss ratio for the three month and six month periods ended June 30, 2012 was attributable to increases in the frequency and severity of claims in substantially all lines of business during 2012 as compared to the same periods in 2011.

The expense ratio for the three month period ended June 30, 2012 decreased to 32.1% from 40.2% in the three month period ended June 30, 2011 and to 28.9% in the six month period ended June 30, 2012 from 41.1% in the comparable period of 2011. The decrease in the expense ratio for the three month and six month periods ended June 30, 2012 was primarily due to American Southern’s variable commission structure, which compensates the company’s agents in relation to the loss ratios of the business they write. During periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease, and conversely, during periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase. During the three month and six month periods ended June 30, 2012, these commissions at American Southern decreased $0.9 million and $2.2 million, respectively, from the comparable periods in 2011 due to the unfavorable loss experience.

Bankers Fidelity

The following summarizes Bankers Fidelity’s earned premiums for the three month and six month periods ended June 30, 2012 and the comparable periods in 2011 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011

Medicare supplement	$	17,745	$	12,510	$	34,619	$	24,764
Other health		1,116		1,065		2,234		2,106
Life		3,065		2,891		5,942		5,585
Total	$	21,926	$	16,466	$	42,795	$	32,455

Premium revenue at Bankers Fidelity increased $5.5 million, or 33.2%, during the three month period ended June 30, 2012, and $10.3 million, or 31.9%, during the six month period ended June 30, 2012, over the comparable periods in 2011. Premiums from the Medicare supplement line of business increased $5.2 million, or 41.8%, during the three month period ended June 30, 2012, and $9.9 million, or 39.8%, during the six month period ended June 30, 2012, due primarily to an increase in business generated from the company’s core producers, new business issued in the state of Missouri, and rate increases on renewal business. Other health products premiums increased slightly during the same comparable periods, primarily as a result of increased sales of the company’s short-term care product. Premiums from the life insurance line of business increased $0.2 million, or 6.0%, during the three month period ended June 30, 2012, and $0.4 million, or 6.4%, during the six month period ended June 30, 2012 due to normal new sales activity.

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The following summarizes Bankers Fidelity’s operating expenses for the three month and six month periods ended June 30, 2012 and the comparable periods in 2011 (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011