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, 2012
OR

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, 2012 was 21,112,488.
 


 
 

 

ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS
 
Part I.   Financial Information
Page No.
   
Item 1.
 
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
19
     
Item 4.
25
     
Part II.  Other Information
 
     
Item 2.
26
     
Item 6.
27
     
28

 
 


PART I.  FINANCIAL INFORMATION
Item 1.   Financial Statements
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

ASSETS
 
   
Unaudited
       
   
September 30,
   
December 31,
 
   
2012
   
2011
 
Cash and cash equivalents
  $ 19,137     $ 21,285  
Investments:
               
Fixed maturities (cost: $200,928 and $198,506)
    230,188       217,348  
Common and non-redeemable preferred stocks (cost: $9,477 and $7,477)
    11,539       8,348  
Other invested assets (cost: $588 and $567)
    588       567  
Policy loans
    2,320       2,246  
Real estate
    38       38  
Investment in unconsolidated trusts
    1,238       1,238  
Total investments
    245,911       229,785  
Receivables:
               
Reinsurance
    16,965       15,673  
Insurance premiums and other (net of allowance for doubtful accounts: $379 and $405)
    8,561       8,289  
Deferred acquisition costs
    25,914       24,259  
Other assets
    838       706  
Goodwill
    2,128       2,128  
Total assets
  $ 319,454     $ 302,125  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
                 
Insurance reserves and policyholder funds:
               
Future policy benefits
  $ 66,153     $ 63,321  
Unearned premiums
    22,252       23,646  
Losses and claims
    61,879       57,975  
Other policy liabilities
    1,421       2,252  
Total insurance reserves and policyholder funds
    151,705       147,194  
Accounts payable and accrued expenses
    12,833       14,100  
Deferred income taxes, net
    7,242       3,316  
Junior subordinated debenture obligations
    41,238       41,238  
Total liabilities
    213,018       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: 21,124,050 and 21,274,241
    22,401       22,401  
Additional paid-in capital
    57,161       57,136  
Retained earnings
    8,895       6,179  
Accumulated other comprehensive income
    20,137       12,244  
Treasury stock, at cost: 1,276,844 and 1,126,653 shares
    (2,228 )     (1,753 )
Total shareholders’ equity
    106,436       96,277  
Total liabilities and shareholders’ equity
  $ 319,454     $ 302,125  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
-2-


ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands, except per share data)
 
   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue:
                       
Insurance premiums
  $ 32,381     $ 27,211     $ 94,654     $ 78,830  
Investment income
    2,880       2,652       8,618       7,912  
Realized investment gains, net
    -       903       1,428       974  
Other income
    41       34       106       212  
Total revenue
    35,302       30,800       104,806       87,928  
                                 
Benefits and expenses:
                               
Insurance benefits and losses incurred
    22,289       19,301       68,056       54,153  
Commissions and underwriting expenses
    8,962       6,746       23,965       22,192  
Interest expense
    662       653       1,977       1,940  
Other
    2,433       2,332       7,278       6,915  
Total benefits and expenses
    34,346       29,032       101,276       85,200  
Income before income taxes
    956       1,768       3,530       2,728  
Income tax (benefit) expense
    (128 )     64       8       363  
Net income
    1,084       1,704       3,522       2,365  
Preferred stock dividends
    (127 )     (127 )     (381 )     (381 )
Net income applicable to common shareholders
  $ 957     $ 1,577     $ 3,141     $ 1,984  
                                 
Basic earnings per common share
  $ .05     $ .07     $ .15     $ .09  
Diluted earnings per common share
  $ .04     $ .07     $ .15     $ .09  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
-3-


ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in thousands)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income
  $ 1,084     $ 1,704     $ 3,522     $ 2,365  
Other comprehensive income:
                               
Available-for-sale securities:
                               
Gross unrealized holding gain arising in the period
    6,562       14,806       13,037       17,054  
Related tax expense
    (2,297 )     (5,182 )     (4,563 )     (5,969 )
Less: reclassification adjustment for net realized gains included in net income
    -       567       1,428       638  
Related tax expense
    -       (198 )     (500 )     (223 )
Net effect on other comprehensive income
    4,265       9,255       7,546       10,670  
Derivative financial instrument:
                               
Fair value adjustment to derivative financial instrument
    188       188       534       453  
Related tax expense
    (66 )     (65 )     (187 )     (158 )
Net effect on other comprehensive income
    122       123       347       295  
Total other comprehensive income, net of tax
    4,387       9,378       7,893       10,965  
Total comprehensive income
  $ 5,471     $ 11,082     $ 11,415     $ 13,330  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
-4-

 
ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited; Dollars in thousands)
 
 
 
Nine Months Ended September 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
    -       -       -       3,522       -       -       3,522  
Other comprehensive income, net of tax
    -       -       -       -       7,893       -       7,893  
Dividends on common stock
    -       -       -       (425 )     -       -       (425 )
Dividends accrued on preferred stock
    -       -       -       (381 )     -       -       (381 )
Purchase of shares for treasury
    -       -       -       -       -       (556 )     (556 )
Issuance of shares under stock plans
    -       -       25       -       -       81       106  
Balance, September 30, 2012
  $ 70     $ 22,401     $ 57,161     $ 8,895     $ 20,137     $ (2,228 )   $ 106,436  
                                                         
Nine Months Ended September 30, 2011
                                                       
Balance, December 31, 2010
  $ 70     $ 22,374     $ 57,129     $ 3,886     $ (604 )   $ (162 )   $ 82,693  
Net income
    -       -       -       2,365       -       -       2,365  
Other comprehensive income, net of tax
    -       -       -       -       10,965       -       10,965  
Dividends 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     $ 5,425     $ 10,361     $ (233 )   $ 95,126  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
-5-


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

   
Nine Months Ended
September 30,
 
   
2012
    2011  
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 3,522     $ 2,365  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Amortization of deferred acquisition costs
    7,932       7,816  
Acquisition costs deferred
    (9,587 )     (9,239 )
Realized investment gains
    (1,428 )     (974 )
Increase in insurance reserves
    4,511       2,454  
Depreciation and amortization
    341       283  
Deferred income tax (benefit) expense
    (323 )     244  
Increase in receivables, net
    (1,568 )     (3,149 )
Decrease in other liabilities
    (1,606 )     (124 )
Other, net
    (86 )     302  
Net cash provided by (used in) operating activities
    1,708       (22 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from investments sold, called or matured
    34,358       46,450  
Investments purchased
    (36,672 )     (51,804 )
Additions to property and equipment
    (159 )     (48 )
Net cash used in investing activities
    (2,473 )     (5,402 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from shares issued under stock plans
    106       -  
Payment of dividends on Series D Preferred Stock
    (508 )     -  
Payment of dividends on common stock
    (425 )     (445 )
Purchase of shares for treasury
    (556 )     (71 )
Net cash used in financing activities
    (1,383 )     (516 )
                 
Net decrease in cash and cash equivalents
    (2,148 )     (5,940 )
Cash and cash equivalents at beginning of period
    21,285       28,325  
Cash and cash equivalents at end of period
  $ 19,137     $ 22,385  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
  $ 1,981     $ 1,945  
Cash paid for income taxes
  $ 180     $ -  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
-6-


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

Note 1.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Atlantic American Corporation (the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”).  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 nine month periods ended September 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.
 
 
-7-


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.
 
 
-8-


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, 2012 and 2011.

Revenues
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
American Southern
  $ 10,482     $ 10,446     $ 32,633     $ 31,928  
Bankers Fidelity
    24,604       20,212       71,542       55,505  
Corporate and Other
    216       142       631       495  
Total revenue
  $ 35,302     $ 30,800     $ 104,806     $ 87,928  

Income (loss) before income taxes
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
American Southern
  $ 233     $ 974     $ 1,993     $ 3,491  
Bankers Fidelity
    2,230       2,391       6,005       3,824  
Corporate and Other
    (1,507 )     (1,597 )     (4,468 )     (4,587 )
Income before income taxes
  $ 956     $ 1,768     $ 3,530     $ 2,728  

Note 4.
Credit Arrangements

Bank Debt

The Company’s revolving credit facility (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”) expired on August 31, 2012, the stated maturity date, by its terms.  There were no balances outstanding under the Credit Agreement at that time.  The Company has not entered into any replacement credit facility, but expects that it will evaluate the need to enter into any such facility when, as and if necessary in the future.
 
 
-9-


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, 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 September 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 September 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 September 30, 2012 was a liability of approximately $342 with a corresponding decrease in accumulated other comprehensive income in shareholders’ equity, net of deferred tax.
 
 
-10-


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
September 30, 2012
 
   
Income
   
Shares
(In thousands)
   
Per Share
Amount
 
Basic Earnings Per Common Share:
                 
Net income
  $ 1,084       21,212        
Less preferred stock dividends
    (127 )              
Net income applicable to common shareholders
    957       21,212     $ .05  
Diluted Earnings Per Common Share:
                       
Effect of dilutive stock options
            76          
Net income applicable to common shareholders
  $ 957       21,288     $ .04  
 
   
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  
 
   
Nine Months Ended
September 30, 2012
 
   
Income
   
Shares
(In thousands)
   
Per Share
Amount
 
Basic Earnings Per Common Share:
                 
Net income
  $ 3,522       21,253        
Less preferred stock dividends
    (381 )              
Net income applicable to common shareholders
    3,141       21,253     $ .15  
Diluted Earnings Per Common Share:
                       
Effect of dilutive stock options
            66          
Net income applicable to common shareholders
  $ 3,141       21,319     $ .15  

 
-11-


   
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  

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 (benefit) expense is as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Federal income tax provision at statutory rate of 35%
  $ 335     $ 619     $ 1,236     $ 955  
Dividends received deduction
    (45 )     (60 )     (127 )     (130 )
Small life insurance company deduction
    (375 )     (187 )     (612 )     (187 )
Other permanent differences
    12       4       28       37  
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets
    24       (361 )     (438 )     (361 )
Adjustment for prior years’ estimates to actual
    (79 )     49       (79 )     49  
Income tax (benefit) expense
  $ (128 )   $ 64     $ 8     $ 363  

The components of the income tax (benefit) expense were as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Current - Federal
  $ 213     $ 115     $ 331     $ 119  
Deferred - Federal
    (365 )     310       115       605  
Change in deferred tax asset valuation allowance
    24       (361 )     (438 )     (361 )
Total
  $ (128 )   $ 64     $ 8     $ 363  

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, 2012 and 2011 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 investments as well as the amount of the Company’s 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 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.  The provision-to-filed return adjustments are generally updated at the completion of the third quarter of each fiscal year and were $79 and $49 in the three month and nine month periods ended September 30, 2012 and 2011, respectively.
 
 
-12-


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 September 30, 2012 and December 31, 2011.
 
Investments were comprised of the following:
 
   
September 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
  $ 27,548     $ 4,648     $ -     $ 22,900  
Obligations of states and political subdivisions
    17,849       2,596       -       15,253  
Corporate securities:
                               
Utilities and telecom
    17,888       3,039       -       14,849  
Financial services
    43,343       3,326       468       40,485  
Other business – diversified
    65,934       7,556       -       58,378  
Other consumer – diversified
    51,647       8,538       2       43,111  
Total corporate securities
    178,812       22,459       470       156,823  
Redeemable preferred stocks:
                               
Financial services
    5,786       41       14       5,759  
Other consumer – diversified
    193       -       -       193  
Total redeemable preferred stocks
    5,979       41       14       5,952  
Total fixed maturities
    230,188       29,744       484       200,928  
Equity securities:
                               
Common and non-redeemable preferred stocks:
                               
Utilities and telecom
    1,367       403       -       964  
Financial services
    7,690       915       14       6,789  
Other business – diversified
    132       85       -       47  
Other consumer – diversified
    2,350       673       -       1,677  
Total equity securities
    11,539       2,076       14       9,477  
Other invested assets
    588       -       -       588  
Policy loans
    2,320       -       -       2,320  
Real estate
    38       -       -       38  
Investments in unconsolidated trusts
    1,238       -       -       1,238  
Total investments
  $ 245,911     $ 31,820     $ 498     $ 214,589  
 
 
-13-

 
   
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 September 30, 2012 by contractual maturity were as follows.  Actual maturities may differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.

   
September 30, 2012
 
   
Carrying
Value
   
Amortized
Cost
 
Due in one year or less
  $ 1,523     $ 1,500  
Due after one year through five years
    4,666       4,219  
Due after five years through ten years
    40,238       36,987  
Due after ten years
    182,582       157,228  
Varying maturities
    1,179       994  
Totals
  $ 230,188     $ 200,928  

 
-14-


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, 2012 and December 31, 2011.

   
September 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
  $ 27,548     $ 22,900     $ 4,648     $ 35,922     $ 31,736     $ 4,186  
Obligations of states and political subdivisions
    17,849       15,253       2,596       17,030       15,273       1,757  
Utilities and telecom
    19,255       15,813       3,442       22,469       19,326       3,143  
Financial services
    56,819       53,033       3,786       44,624       45,319       (695 )
Other business – diversified
    66,066       58,425       7,641       56,668       51,709       4,959  
Other consumer – diversified
    54,190       44,981       9,209       48,983       42,620       6,363  
Other investments
    4,184       4,184       -       4,089       4,089       -  
Investments
  $ 245,911     $ 214,589     $ 31,322     $ 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 September 30, 2012 and December 31, 2011.

   
September 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
  $ 2,888     $ 30     $ 1,560     $ 440     $ 4,448     $ 470  
Redeemable preferred stocks
    1,909       10       996       4       2,905       14  
Common and non-redeemable preferred stocks
    986       14       -       -       986       14  
Total temporarily impaired securities
  $ 5,783     $ 54     $ 2,556     $ 444     $ 8,339     $ 498  

 
-15-


   
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 September 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 September 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 substantially 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 September 30, 2012, the value of the Company’s fixed maturities valued using Level 3 criteria was $2,100 and the value of the zero cost interest rate collar was a liability of $342 (See Note 5). The use of different criteria or assumptions regarding data may have yielded different valuations.
 
 
-16-

 
As of September 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
  $ -     $ 228,088     $ 2,100     $ 230,188  
Equity securities
    4,059       7,480       -       11,539  
Cash equivalents
    18,870       -       -       18,870  
Total
  $ 22,929     $ 235,568     $ 2,100     $ 260,597  
Liabilities:
                               
Derivative
  $ -     $ -     $ 342     $ 342  

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 nine month periods ended September 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 )
Total unrealized gains included in comprehensive income
    1       188  
Balance, September 30, 2012
  $ 2,100     $ (342 )

 
-17-


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 September 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 0.42%.  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 September 30, 2012 and December 31, 2011.

         
September 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
    $ 19,137     $ 19,137     $ 21,285     $ 21,285  
Fixed maturities
    (1)       230,188       230,188       217,348       217,348  
Equity securities
    (1)       11,539       11,539       8,348       8,348  
Other invested assets
 
Level 3
      588       588       567       567  
Policy loans
 
Level 2
      2,320       2,320       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
      342       342       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 September 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.
 
 
-18-


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 nine month periods ended September 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 nine month period ended September 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 $1.1 million, or $0.04 per diluted share, for the three month period ended September 30, 2012, compared to net income of $1.7 million, or $0.07 per diluted share, for the three month period ended September 30, 2011.  The Company had net income of $3.5 million, or $0.15 per diluted share, for the nine month period ended September 30, 2012, compared to net income of $2.4 million, or $0.09 per diluted share, for the nine month period ended September 30, 2011.  The decrease in net income for the three month period ended September 30, 2012 was solely due to a decrease in realized investment gains. During the three month period ended September 30, 2011 the Company had $0.9 million in realized investment gains.  There were no realized investment gains in the comparable 2012 quarter.  The increase in net income for the nine month period ended September 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 September 30, 2012 increased $5.2 million, or 19.0%, to $32.4 million. For the nine month period ended September 30, 2012, premium revenue increased $15.8 million, or 20.1%, to $94.7 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 $1.0 million in the three month period ended September 30, 2012 compared to $0.9 million in the three month period ended September 30, 2011.  Operating income in the nine month periods ended September 30, 2012 and 2011 was $2.1 million and $1.8 million, respectively. While the life and health operations experienced significant growth in premium revenue and related profitability during the three month and nine month periods ended September 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.
 
 
-19-


American Southern

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Gross written premiums
  $ 10,885     $ 11,919     $ 32,464     $ 31,736  
Ceded premiums
    (1,910 )     (1,631 )     (5,729 )     (4,605 )
Net written premiums
  $ 8,975     $ 10,288     $ 26,735     $ 27,131  
Net earned premiums
  $ 9,362     $ 9,023     $ 28,840     $ 28,187  

Gross written premiums at American Southern decreased $1.0 million, or 8.7%, during the three month period ended September 30, 2012 from the three month period ended September 30, 2011, and increased $0.7 million, or 2.3%, during the nine month period ended September 30, 2012, over the comparable period in 2011.  The decrease in gross written premiums for the three month period ended September 30, 2012 was primarily attributable to a decrease in commercial automobile business due to agency cancellations, as described below, and the cancellation of certain general liability programs.  The increase in gross written premiums for the nine month period ended September 30, 2012 was primarily attributable to increases of $3.1 million in commercial automobile business written by a newly appointed agency and $1.8 million in commercial automobile business written by an existing agency.  Partially offsetting the increase in gross written premiums for the nine month period ended September 30, 2012 was a decrease of $3.4 million in commercial automobile written premiums resulting from the cancellation of two agencies in the first quarter of 2012 due to unfavorable loss experience; as well as the cancellation of certain general liability programs.

Ceded premiums increased $0.3 million, or 17.1%, during the three month period ended September 30, 2012, and $1.1 million, or 24.4%, during the nine month period ended September 30, 2012, over the comparable periods in 2011.  The increase in ceded premiums for the three month and nine month periods ended September 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.  Also contributing to the increase in ceded premiums was the increase in related earned premiums.  As American Southern’s premiums are determined and ceded as a percentage of earned premiums, an increase in ceded premiums occurs when earned premiums increase.

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Commercial automobile
  $ 6,371     $ 5,798     $ 19,231     $ 18,367  
General liability
    745       958       2,691       3,158  
Property
    523       547       1,521       1,550  
Surety
    1,723       1,720       5,397       5,112  
Total
  $ 9,362     $ 9,023     $ 28,840     $ 28,187  
 
Net earned premiums increased $0.3 million, or 3.8%, during the three month period ended September 30, 2012, and $0.7 million, or 2.3%, during the nine month period ended September 30, 2012, over the comparable periods in 2011.  The increase in net earned premiums for the three month and nine month periods ended September 30, 2012 was primarily related 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 nine month periods ended September 30, 2012 and for the comparable periods in 2011:

   
Three Months Ended
September 30,
   
Nine Month Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Loss ratio
    69.1 %     72.8 %     73.6 %     62.7 %
Expense ratio
    40.4 %     32.2 %     32.6 %     38.2 %
Combined ratio
    109.5 %     105.0 %     106.2 %     100.9 %

The loss ratio for the three month period ended September 30, 2012 decreased to 69.1% from 72.8% in the three month period ended September 30, 2011 and increased to 73.6% in the nine month period ended September 30, 2012 from 62.7% in the comparable period of 2011. The decrease in the loss ratio for the three month period ended September 30, 2012 was primarily attributable to more favorable loss experience in the surety line of business in the three month period ended September 30, 2012 as compared to the three month period ended September 30, 2011.  The increase in the loss ratio for the nine month period ended September 30, 2012 was due to increases in the frequency and severity of claims in the commercial automobile line of business and higher claims in the general liability line of business during the nine month period ended September 30, 2012 as compared to the same period in 2011.

The expense ratio for the three month period ended September 30, 2012 increased to 40.4% from 32.2% in the three month period ended September 30, 2011 and decreased to 32.6% in the nine month period ended September 30, 2012 from 38.2% in the comparable period of 2011.  The increase in the expense ratio for the three month period ended September 30, 2012 and the decrease in the expense ratio for the nine month period ended September 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 period ended September 30, 2012, these commissions at American Southern increased $0.6 million over the three month period ended September 30, 2011 due primarily to the favorable loss experience in the surety line of business, which has higher variable commission rates than other larger lines of business.  During the nine month period ended September 30, 2012 these commissions decreased $1.6 million from the comparable period in 2011 due to unfavorable loss experience in the commercial automobile and general liability lines of business.

Bankers Fidelity

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011