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, 2014
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 6, 2014 was 20,622,126.
 


ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

Part I.                Financial Information
Page No.
     
Item 1.
Financial Statements:
 
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
18
     
Item 4.
25
     
Part II.             Other Information
 
     
Item 2.
26
     
Item 6.
26
     
Signatures
27


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,
2014
   
December 31,
2013
 
Cash and cash equivalents
 
$
16,494
   
$
33,102
 
Investments:
               
Fixed maturities (cost: $206,184 and $201,217)
   
213,100
     
201,303
 
Common and non-redeemable preferred stocks (cost: $11,969 and $12,432)
   
15,783
     
21,890
 
Other invested assets (cost: $3,064 and $2,123)
   
3,064
     
2,123
 
Policy loans
   
2,206
     
2,369
 
Real estate
   
38
     
38
 
Investment in unconsolidated trusts
   
1,238
     
1,238
 
Total investments
   
235,429
     
228,961
 
Receivables:
               
Reinsurance
   
15,588
     
14,314
 
Insurance premiums and other (net of allowance for doubtful accounts: $378 and $339)
   
14,045
     
9,343
 
Deferred income taxes, net
   
-
     
363
 
Deferred acquisition costs
   
26,992
     
27,509
 
Other assets
   
5,833
     
3,245
 
Intangibles
   
2,544
     
2,544
 
Total assets
 
$
316,925
   
$
319,381
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
Insurance reserves and policyholder funds:
       
Future policy benefits
 
$
70,651
   
$
69,864
 
Unearned premiums
   
27,143
     
27,415
 
Losses and claims
   
66,388
     
63,018
 
Other policy liabilities
   
1,382
     
2,076
 
Total insurance reserves and policyholder funds
   
165,564
     
162,373
 
Accounts payable and accrued expenses
   
15,054
     
14,843
 
Deferred income taxes, net
   
387
     
-
 
Junior subordinated debenture obligations, net (Note 3)
   
33,738
     
41,238
 
Total liabilities
   
214,743
     
218,454
 
                 
Commitments and contingencies (Note 6)
               
Shareholders’ equity:
               
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, 65,000 shares issued and outstanding; $6,500 redemption value
   
65
     
65
 
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,400,894; shares outstanding: 20,638,210 and 21,117,874
   
22,401
     
22,401
 
Additional paid-in capital
   
57,473
     
57,103
 
Retained earnings
   
21,111
     
18,738
 
Accumulated other comprehensive income
   
6,975
     
6,204
 
Unearned stock grant compensation
   
(564
)
   
(485
)
Treasury stock, at cost: 1,762,684 and 1,283,020 shares
   
(5,279
)
   
(3,099
)
Total shareholders’ equity
   
102,182
     
100,927
 
Total liabilities and shareholders’ equity
 
$
316,925
   
$
319,381
 

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,
 
   
2014
   
2013
   
2014
   
2013
 
Revenue:
               
Insurance premiums
 
$
38,337
   
$
38,385
   
$
115,211
   
$
107,777
 
Investment income
   
2,678
     
2,534
     
7,875
     
8,213
 
Realized investment gains, net
   
848
     
2,283
     
1,441
     
8,415
 
Other income (Note 3)
   
793
     
45
     
875
     
140
 
Total revenue
   
42,656
     
43,247
     
125,402
     
124,545
 
                                 
Benefits and expenses:
                               
Insurance benefits and losses incurred
   
27,094
     
26,786
     
80,991
     
75,147
 
Commissions and underwriting expenses
   
10,238
     
10,396
     
30,219
     
30,081
 
Interest expense
   
388
     
442
     
1,251
     
1,457
 
Other expense
   
3,349
     
2,934
     
9,375
     
8,097
 
Total benefits and expenses
   
41,069
     
40,558
     
121,836
     
114,782
 
Income before income taxes
   
1,587
     
2,689
     
3,566
     
9,763
 
Income tax expense
   
136
     
9
     
418
     
201
 
Net income
   
1,451
     
2,680
     
3,148
     
9,562
 
Preferred stock dividends
   
(117
)
   
(118
)
   
(353
)
   
(364
)
Net income applicable to common shareholders
 
$
1,334
   
$
2,562
   
$
2,795
   
$
9,198
 
                                 
Earnings per common share (basic)
 
$
.06
   
$
.12
   
$
.13
   
$
.43
 
Earnings per common share (diluted)
 
$
.06
   
$
.12
   
$
.13
   
$
.42
 
 
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,
 
   
2014
   
2013
   
2014
   
2013
 
Net income
 
$
1,451
   
$
2,680
   
$
3,148
   
$
9,562
 
Other comprehensive income (loss):
                               
Available-for-sale securities:
                               
Gross unrealized holding gain (loss) arising in the period
   
(7,103
)
   
(3,912
)
   
2,627
     
(16,921
)
Related income tax effect
   
2,487
     
1,369
     
(919
)
   
5,922
 
Less: reclassification adjustment for net realized gains included in net income (1)
   
(848
)
   
(2,283
)
   
(1,441
)
   
(8,415
)
Related income tax effect (2)
   
296
     
799
     
504
     
2,945
 
Net effect on other comprehensive income (loss)
   
(5,168
)
   
(4,027
)
   
771
     
(16,469
)
Derivative financial instrument:
                               
Fair value adjustment to derivative financial instrument
   
-
     
-
     
-
     
141
 
Related income tax effect
   
-
     
-
     
-
     
(49
)
Net effect on other comprehensive income (loss)
   
-
     
-
     
-
     
92
 
Total other comprehensive income (loss), net of tax
   
(5,168
)
   
(4,027
)
   
771
     
(16,377
)
Total comprehensive income (loss)
 
$
(3,717
)
 
$
(1,347
)
 
$
3,919
   
$
(6,815
)

(1) Realized gains on available-for-sale securities recognized in realized investment gains, net on the accompanying condensed consolidated statements of operations.
(2) Income tax effect on reclassification adjustment for net realized gains included in income tax expense on the accompanying condensed consolidated statements of operations.

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, 2014
 
Preferred
Stock
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained Earnings
   
Accumulated
Other
Comprehensive
Income
   
Unearned Stock Grant Compensation
   
Treasury
Stock
   
Total
 
Balance, December 31, 2013
 
$
65
   
$
22,401
   
$
57,103
   
$
18,738
   
$
6,204
   
$
(485
)
 
$
(3,099
)
 
$
100,927
 
Net income
   
-
     
-
     
-
     
3,148
     
-
     
-
     
-
     
3,148
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
771
     
-
     
-
     
771
 
Dividends on common stock
   
-
     
-
     
-
     
(422
)
   
-
     
-
     
-
     
(422
)
Dividends accrued on preferred stock
   
-
     
-
     
-
     
(353
)
   
-
     
-
     
-
     
(353
)
Restricted stock grants
   
-
     
-
     
328
     
-
     
-
     
(559
)
   
231
     
-
 
Amortization of unearned compensation
   
-
     
-
     
-
     
-
     
-
     
480
     
-
     
480
 
Purchase of shares for treasury
   
-
     
-
     
-
     
-
     
-
     
-
     
(2,440
)
   
(2,440
)
Issuance of shares under stock plans
   
-
     
-
     
42
     
-
     
-
     
-
     
29
     
71
 
Balance, September 30, 2014
 
$
65
   
$
22,401
   
$
57,473
   
$
21,111
   
$
6,975
   
$
(564
)
 
$
(5,279
)
 
$
102,182
 
                                                                 
Nine Months Ended September 30, 2013
                                                               
Balance, December 31, 2012
 
$
70
   
$
22,401
   
$
57,180
   
$
8,621
   
$
19,571
   
$
-
   
$
(2,107
)
 
$
105,736
 
Net income
   
-
     
-
     
-
     
9,562
     
-
     
-
     
-
     
9,562
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
-
     
(16,377
)
   
-
     
-
     
(16,377
)
Preferred stock redeemed
   
(5
)
   
-
     
(495
)
   
-
     
-
     
-
     
-
     
(500
)
Dividends on common stock
   
-
     
-
     
-
     
(423
)
   
-
     
-
     
-
     
(423
)
Dividends accrued on preferred stock
   
-
     
-
     
-
     
(364
)
   
-
     
-
     
-
     
(364
)
Restricted stock grants
   
-
     
-
     
393
     
-
     
-
     
(704
)
   
311
     
-
 
Amortization of unearned compensation
   
-
     
-
     
-
     
-
     
-
     
137
     
-
     
137
 
Purchase of shares for treasury
   
-
     
-
     
-
     
-
     
-
     
-
     
(867
)
   
(867
)
Issuance of shares under stock plans
   
-
     
-
     
18
     
-
     
-
     
-
     
108
     
126
 
Balance, September 30, 2013
 
$
65
   
$
22,401
   
$
57,096
   
$
17,396
   
$
3,194
   
$
(567
)
 
$
(2,555
)
 
$
97,030
 

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,
 
   
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
       
Net income
 
$
3,148
   
$
9,562
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Amortization of deferred acquisition costs
   
8,060
     
7,862
 
Acquisition costs deferred
   
(7,543
)
   
(9,418
)
Realized investment gains, net
   
(1,441
)
   
(8,415
)
Gain on purchase of debt securities (Note 3)
   
(750
)
   
-
 
Increase in insurance reserves
   
3,191
     
12,646
 
Compensation expense related to share awards
   
480
     
137
 
Depreciation and amortization
   
675
     
450
 
Deferred income tax expense
   
335
     
28
 
Increase in receivables, net
   
(5,976
)
   
(5,870
)
(Decrease) increase in other liabilities
   
(1,788
)
   
519
 
Other, net
   
(164
)
   
49
 
Net cash (used in) provided by operating activities
   
(1,773
)
   
7,550
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from investments sold, called or matured
   
53,534
     
107,681
 
Investments purchased
   
(55,051
)
   
(95,004
)
Additions to property and equipment
   
(3,777
)
   
(262
)
Net cash (used in) provided by investing activities
   
(5,294
)
   
12,415
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment for debt securities (Note 3)
   
(6,750
)
   
-
 
Redemption of Series D preferred stock
   
-
     
(500
)
Payment of dividends on common stock
   
(422
)
   
(423
)
Proceeds from shares issued under stock plans
   
71
     
126
 
Purchase of shares for treasury
   
(2,440
)
   
(867
)
Net cash used in financing activities
   
(9,541
)
   
(1,664
)
                 
Net (decrease) increase in cash and cash equivalents
   
(16,608
)
   
18,301
 
Cash and cash equivalents at beginning of period
   
33,102
     
18,951
 
Cash and cash equivalents at end of period
 
$
16,494
   
$
37,252
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
 
$
1,296
   
$
1,522
 
Cash paid for income taxes
 
$
442
   
$
486
 

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 financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  The unaudited condensed consolidated financial statements included herein and these related notes should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  The Company’s financial condition and results of operations as of and for the three month and nine month periods ended September 30, 2014 are not necessarily indicative of the financial condition or results of operations that may be expected for the year ending December 31, 2014 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.
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 and Bankers Fidelity Assurance Company (together known as “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 before income taxes for each business unit for the three month and nine month periods ended September 30, 2014 and 2013.

Revenues
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
American Southern
 
$
14,819
   
$
14,994
   
$
43,167
   
$
40,231
 
Bankers Fidelity
   
26,909
     
28,036
     
81,040
     
83,097
 
Corporate and Other
   
928
     
217
     
1,195
     
1,217
 
Total revenue
 
$
42,656
   
$
43,247
   
$
125,402
   
$
124,545
 

Income Before Income Taxes
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
American Southern
 
$
1,500
   
$
1,912
   
$
3,695
   
$
6,531
 
Bankers Fidelity
   
1,051
     
2,445
     
3,833
     
7,169
 
Corporate and Other
   
(964
)
   
(1,668
)
   
(3,962
)
   
(3,937
)
Income before income taxes
 
$
1,587
   
$
2,689
   
$
3,566
   
$
9,763
 

-7-

Note 3.
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, 2014 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, 2014
 
$
18,042
   
$
23,196
 
Less: Treasury debt (3)
   
-
     
(7,500
)
Net balance September 30, 2014
 
$
18,042
   
$
15,696
 
Net balance December 31, 2013
 
$
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 (4)
 
Atlantic American Corporation
   
Atlantic American Corporation
 

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

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

(3) On August 4, 2014, the Company acquired $7,500 of the Junior Subordinated Debentures.  Consideration tendered, upon settlement, was $6,750 plus accrued interest resulting in a gain of $750 recognized in other income on the accompanying condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2014.

(4) The Parent has guaranteed, on a subordinated basis, all of the obligations under the Trust Preferred Securities, including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation.
 
-8-

Note 4.
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, 2014
 
   
Income
   
Shares
(In thousands)
   
Per Share Amount
 
Basic and Diluted Earnings Per Common Share:
           
Net income
 
$
1,451
     
20,768
       
Less preferred stock dividends
   
(117
)
   
-
         
Net income applicable to common shareholders
 
$
1,334
     
20,768
   
$
.06
 

   
Three Months Ended
September 30, 2013
 
   
Income
   
Shares
(In thousands)
   
Per Share Amount
 
Basic Earnings Per Common Share:
           
Net income
 
$
2,680
     
21,299
       
Less preferred stock dividends
   
(118
)
   
-
         
Net income applicable to common shareholders
   
2,562
     
21,299
   
$
.12
 
Diluted Earnings Per Common Share:
                       
Effect of Series D preferred stock
   
118
     
1,629
         
Net income applicable to common shareholders
 
$
2,680
     
22,928
   
$
.12
 

   
Nine Months Ended
September 30, 2014
 
   
Income
   
Shares
(In thousands)
   
Per Share Amount
 
Basic and Diluted Earnings Per Common Share:
           
Net income
 
$
3,148
     
20,885
       
Less preferred stock dividends
   
(353
)
   
-
         
Net income applicable to common shareholders
 
$
2,795
     
20,885
   
$
.13
 

   
Nine Months Ended
September 30, 2013
 
   
Income
   
Shares
(In thousands)
   
Per Share Amount
 
Basic Earnings Per Common Share:
           
Net income
 
$
9,562
     
21,250
       
Less preferred stock dividends
   
(364
)
   
-
         
Net income applicable to common shareholders
   
9,198
     
21,250
   
$
.43
 
Diluted Earnings Per Common Share:
                       
Effect of dilutive stock options
   
-
     
19
         
Effect of Series D preferred stock
   
364
     
1,629
         
Net income applicable to common shareholders
 
$
9,562
     
22,898
   
$
.42
 

The assumed conversion of the Company’s Series D preferred stock was excluded from the earnings per common share calculation for the three month and nine month periods ended September 30, 2014 since its impact would have been antidilutive.
 
-9-

Note 5.
Income Taxes

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Federal income tax provision at statutory rate of 35%
 
$
555
   
$
941
   
$
1,248
   
$
3,417
 
Dividends-received deduction
   
(27
)
   
(41
)
   
(88
)
   
(119
)
Small life insurance company deduction
   
(114
)
   
(107
)
   
(275
)
   
(185
)
Other permanent differences
   
17
     
9
     
36
     
27
 
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets
   
(365
)
   
(799
)
   
(573
)
   
(2,945
)
Adjustment for prior years’ estimates to actual
   
70
     
6
     
70
     
6
 
Income tax expense
 
$
136
   
$
9
   
$
418
   
$
201
 

The components of income tax expense were:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Current - Federal
 
$
(46
)
 
$
76
   
$
83
   
$
173
 
Deferred - Federal
   
547
     
732
     
908
     
2,973
 
Change in deferred tax asset valuation allowance
   
(365
)
   
(799
)
   
(573
)
   
(2,945
)
Total
 
$
136
   
$
9
   
$
418
   
$
201
 

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, 2014 and 2013 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 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 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 $70 and $6 in the three month and nine month periods ended September 30, 2014 and 2013, respectively.

Note 6.
Commitments and Contingencies

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

Note 7.
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, 2014 and December 31, 2013.
 
Investments were comprised of the following:
 
   
September 30, 2014
 
   
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
 
$
33,497
   
$
711
   
$
104
   
$
32,890
 
Obligations of states and political subdivisions
   
5,203
     
588
     
-
     
4,615
 
Corporate securities:
                               
Utilities and telecom
   
13,726
     
2,103
     
-
     
11,623
 
Financial services
   
56,370
     
3,113
     
269
     
53,526
 
Other business – diversified
   
74,696
     
2,467
     
909
     
73,138
 
Other consumer – diversified
   
28,811
     
272
     
1,061
     
29,600
 
Total corporate securities
   
173,603
     
7,955
     
2,239
     
167,887
 
Redeemable preferred stocks:
                               
Financial services
   
605
     
5
     
-
     
600
 
Other consumer – diversified
   
192
     
-
     
-
     
192
 
Total redeemable preferred stocks
   
797
     
5
     
-
     
792
 
Total fixed maturities
   
213,100
     
9,259
     
2,343
     
206,184
 
Equity securities:
                               
Common and non-redeemable preferred stocks:
                               
Utilities and telecom
   
1,499
     
535
     
-
     
964
 
Financial services
   
5,934
     
590
     
-
     
5,344
 
Other business – diversified
   
207
     
160
     
-
     
47
 
Other consumer – diversified
   
8,143
     
2,529
     
-
     
5,614
 
Total equity securities
   
15,783
     
3,814
     
-
     
11,969
 
Other invested assets
   
3,064
     
-
     
-
     
3,064
 
Policy loans
   
2,206
     
-
     
-
     
2,206
 
Real estate
   
38
     
-
     
-
     
38
 
Investments in unconsolidated trusts
   
1,238
     
-
     
-
     
1,238
 
Total investments
 
$
235,429
   
$
13,073
   
$
2,343
   
$
224,699
 

-11-

   
December 31, 2013
 
   
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
 
$
17,240
   
$
576
   
$
210
   
$
16,874
 
Obligations of states and political subdivisions
   
7,611
     
402
     
17
     
7,226
 
Corporate securities:
                               
Utilities and telecom
   
16,532
     
1,353
     
7
     
15,186
 
Financial services
   
50,531
     
1,736
     
320
     
49,115
 
Other business – diversified
   
70,326
     
870
     
2,906
     
72,362
 
Other consumer – diversified
   
36,712
     
391
     
1,745
     
38,066
 
Total corporate securities
   
174,101
     
4,350
     
4,978
     
174,729
 
Redeemable preferred stocks:
                               
Financial services
   
2,159
     
4
     
41
     
2,196
 
Other consumer – diversified
   
192
     
-
     
-
     
192
 
Total redeemable preferred stocks
   
2,351
     
4
     
41
     
2,388
 
Total fixed maturities
   
201,303
     
5,332
     
5,246
     
201,217
 
Equity securities:
                               
Common and non-redeemable preferred stocks:
                               
Utilities and telecom
   
1,474
     
510
     
-
     
964
 
Financial services
   
5,761
     
514
     
560
     
5,807
 
Other business – diversified
   
178
     
131
     
-
     
47
 
Other consumer – diversified
   
14,477
     
8,863
     
-
     
5,614
 
Total equity securities
   
21,890
     
10,018
     
560
     
12,432
 
Other invested assets
   
2,123
     
-
     
-
     
2,123
 
Policy loans
   
2,369
     
-
     
-
     
2,369
 
Real estate
   
38
     
-
     
-
     
38
 
Investments in unconsolidated trusts
   
1,238
     
-
     
-
     
1,238
 
Total investments
 
$
228,961
   
$
15,350
   
$
5,806
   
$
219,417
 

The carrying value and amortized cost of the Company’s investments in fixed maturities at September 30, 2014 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, 2014
 
   
Carrying
Value
   
Amortized
Cost
 
Due in one year or less
 
$
1,000
   
$
1,001
 
Due after one year through five years
   
15,053
     
14,407
 
Due after five years through ten years
   
116,074
     
113,310
 
Due after ten years
   
63,936
     
60,885
 
Varying maturities
   
17,037
     
16,581
 
Totals
 
$
213,100
   
$
206,184
 

-12-

The following table sets forth the carrying value, amortized cost, and net unrealized gains (losses) of the Company’s investments aggregated by industry as of September 30, 2014 and December 31, 2013.

   
September 30, 2014
   
December 31, 2013
 
   
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
 
$
33,497
   
$
32,890
   
$
607
   
$
17,240
   
$
16,874
   
$
366
 
Obligations of states and political subdivisions
   
5,203
     
4,615
     
588
     
7,611
     
7,226
     
385
 
Utilities and telecom
   
15,225
     
12,587
     
2,638
     
18,006
     
16,150
     
1,856
 
Financial services
   
62,909
     
59,470
     
3,439
     
58,451
     
57,118
     
1,333
 
Other business – diversified
   
74,903
     
73,185
     
1,718
     
70,504
     
72,409
     
(1,905
)
Other consumer – diversified
   
37,146
     
35,406
     
1,740
     
51,381
     
43,872
     
7,509
 
Other investments
   
6,546
     
6,546
     
-
     
5,768
     
5,768
     
-
 
Investments
 
$
235,429
   
$
224,699
   
$
10,730
   
$
228,961
   
$
219,417
   
$
9,544
 

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, 2014 and December 31, 2013.

   
September 30, 2014
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
12,326
   
$
62
   
$
2,679
   
$
42
   
$
15,005
   
$
104
 
Corporate securities
   
44,814
     
765
     
18,518
     
1,474
     
63,332
     
2,239
 
Total temporarily impaired securities
 
$
57,140
   
$
827
   
$
21,197
   
$
1,516
   
$
78,337
   
$
2,343
 

-13-

   
December 31, 2013
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
8,326
   
$
210
   
$
-
   
$
-
   
$
8,326
   
$
210
 
Obligations of states and political subdivisions
   
1,018
     
17
     
-
     
-
     
1,018
     
17
 
Corporate securities
   
92,049
     
3,714
     
6,938
     
1,264
     
98,987
     
4,978
 
Redeemable preferred stocks
   
704
     
41
     
-
     
-
     
704
     
41
 
Common and non-redeemable preferred stocks
   
3,724
     
560
     
-
     
-
     
3,724
     
560
 
Total temporarily impaired securities
 
$
105,821
   
$
4,542
   
$
6,938
   
$
1,264
   
$
112,759
   
$
5,806
 

The evaluation for an other than temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. Potential risks and uncertainties include, among other things, changes in general economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. In evaluating a potential impairment, the Company considers, among other factors, management’s intent and ability to hold the securities until price recovery, the nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit status.

The following is a summary of investment impairments the Company recorded due to other than temporary declines in values for the three month and nine month periods ended September 30, 2014 and 2013.

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Common and non-redeemable preferred stocks
 
$
196
   
$
-
   
$
196
   
$
-
 

During the three month and nine month periods ended September 30, 2014, the Company recorded a $196 realized loss due to other than temporary impairments in certain of its investments in non-redeemable preferred stocks. There were no impairments recorded during the three month and nine month periods ended September 30, 2013.

As of September 30, 2014, securities in an unrealized loss position primarily included certain of the Company’s investments in fixed maturities within the other diversified business, other diversified consumer and financial services sectors. 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, 2014.
 
-14-

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, obligations of states and political subdivisions, 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).  Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. The Company’s financial instruments valued using Level 3 criteria consist of a limited number of fixed maturities. As of September 30, 2014 and December 31, 2013, the value of the Company’s fixed maturities valued using Level 3 criteria was $2,155 and $1,991, respectively. The use of different criteria or assumptions regarding data may have yielded materially different valuations.

As of September 30, 2014, 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
 
$
-
   
$
210,945
   
$
2,155
   
$
213,100
 
Equity securities
   
10,140
     
5,643
     
-
     
15,783
 
Cash equivalents
   
13,712
     
-
     
-
     
13,712
 
Total
 
$
23,852
   
$
216,588
   
$
2,155
   
$
242,595
 

As of December 31, 2013, 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
 
$
-
   
$
199,312
   
$
1,991
   
$
201,303
 
Equity securities
   
16,406
     
5,484
     
-
     
21,890
 
Cash equivalents
   
31,618
     
-
     
-
     
31,618
 
Total
 
$
48,024
   
$
204,796
   
$
1,991
   
$
254,811
 

-15-

The following is a roll-forward of the Company’s financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month and nine month periods ended September 30, 2014.

   
Fixed Maturities
 
Balance, December 31, 2013
 
$
1,991
 
Total unrealized gains included in other comprehensive income
   
65
 
Balance, March 31, 2014
   
2,056
 
Total unrealized gains included in other comprehensive income
   
61
 
Balance, June 30, 2014
   
2,117
 
Total unrealized gains included in other comprehensive income
   
38
 
Balance, September 30, 2014
 
$
2,155
 

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.

Note 8.
Fair Values of Financial Instruments

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

The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of the Company’s financial instruments as of September 30, 2014 and December 31, 2013.

       
September 30, 2014
   
December 31, 2013
 
   
Level in Fair Value Hierarchy (1)
   
Carrying Amount
   
Estimated Fair Value
   
Carrying Amount
   
Estimated Fair Value
 
Assets:
                   
Cash and cash equivalents
 
Level 1
   
$
16,494
   
$
16,494
   
$
33,102
   
$
33,102
 
Fixed maturities
   
(1)
   
213,100
     
213,100
     
201,303
     
201,303
 
Equity securities
   
(1)
   
15,783
     
15,783
     
21,890
     
21,890
 
Other invested assets
 
Level 3
     
3,064
     
3,064
     
2,123
     
2,123
 
Policy loans
 
Level 2
     
2,206
     
2,206
     
2,369
     
2,369
 
Real estate
 
Level 2
     
38
     
38
     
38
     
38
 
Investment in unconsolidated trusts
 
Level 2
     
1,238
     
1,238
     
1,238
     
1,238
 
 
Liabilities:
                                       
Junior subordinated debentures, net
 
Level 2
     
33,738
     
33,738
     
41,238
     
41,238
 

(1) See Note 7 for a description of the fair value hierarchy as well as a disclosure of levels for classes of these financial assets.
 
-16-

Note 9.
Accumulated Other Comprehensive Income

The following table sets forth the balance of each component of accumulated other comprehensive income as of September 30, 2014 and December 31, 2013, and the changes in the balance of each component thereof during the nine month period ended September 30, 2014, net of taxes.

   
Unrealized Gains
on Available-for-
Sale Securities
 
Balance, December 31, 2013
 
$
6,204
 
Other comprehensive income before reclassifications
   
1,708
 
Amounts reclassified from accumulated other comprehensive income
   
(937
)
Net current-period other comprehensive income
   
771
 
Balance, September 30, 2014
 
$
6,975
 

Note 10.
Subsequent Event

On October 28, 2014, the Company’s board of directors declared a special dividend of $0.02 per share that is payable on or about December 5, 2014, to shareholders of record as of the close of business on November 14, 2014.
 
-17-

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, 2014. 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, 2013.

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures.   Actual results could differ significantly from those estimates.  The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company’s critical accounting policies and the resultant estimates considered most significant by management are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. During the three month period ended September 30, 2014, there were no changes to the critical accounting policies or related estimates from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Overall Corporate Results

The following presents the Company’s revenue, expenses and net income for the three month and nine month periods ended September 30, 2014 and the comparable periods in 2013:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(In thousands)
 
Insurance premiums
 
$
38,337
   
$
38,385
   
$
115,211
   
$
107,777
 
Investment income
   
2,678
     
2,534
     
7,875
     
8,213
 
Realized investment gains, net
   
848
     
2,283
     
1,441
     
8,415
 
Other income
   
793
     
45
     
875
     
140
 
Total revenue
   
42,656
     
43,247
     
125,402
     
124,545
 
Insurance benefits and losses incurred
   
27,094
     
26,786
     
80,991
     
75,147
 
Commissions and underwriting expenses
   
10,238
     
10,396
     
30,219
     
30,081
 
Other expense
   
3,349
     
2,934
     
9,375
     
8,097
 
Interest expense
   
388
     
442
     
1,251
     
1,457
 
Total benefits and expenses
   
41,069
     
40,558
     
121,836
     
114,782
 
Income before income taxes
 
$
1,587
   
$
2,689
   
$
3,566
   
$
9,763
 
Net income
 
$
1,451
   
$
2,680
   
$
3,148
   
$
9,562
 

-18-

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

A reconciliation of net income to operating income (loss) for the three month and nine month periods ended September 30, 2014 and the comparable periods in 2013 is as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
Reconciliation of Net Income to non-GAAP Measurement
 
2014
   
2013
   
2014
   
2013
 
   
(In thousands)
 
Net income
 
$
1,451
   
$
2,680
   
$
3,148
   
$
9,562
 
Income tax expense
   
136
     
9
     
418
     
201
 
Realized investment gains, net
   
(848
)
   
(2,283
)
   
(1,441
)
   
(8,415
)
Gain on purchase of debt securities (1)
   
(750
)
   
-
     
(750
)
   
-
 
Operating income (loss)
 
$
(11
)
 
$
406
   
$
1,375
   
$
1,348
 

(1) Gain from the purchase of $7.5 million of the Company’s junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”).  See Note 3 of the accompanying notes to the unaudited condensed consolidated financial statements.

On a consolidated basis, the Company had net income of $1.5 million, or $0.06 per diluted share, for the three month period ended September 30, 2014, compared to net income of $2.7 million, or $0.12 per diluted share, for the three month period ended September 30, 2013.  The Company had net income of $3.1 million, or $0.13 per diluted share, for the nine month period ended September 30, 2014, compared to net income of $9.6 million, or $0.42 per diluted share, for the nine month period ended September 30, 2013.  Premium revenue for the three month period ended September 30, 2014 decreased slightly from the comparable 2013 period.  For the nine month period ended September 30, 2014, premium revenue increased $7.4 million, or 6.9%, to $115.2 million from the comparable 2013 period.  The decrease in premium revenue for the three month period ended September 30, 2014 was primarily attributable to declining first year premiums in the life and health operations.  The increase in premium revenue for the nine month period ended September 30, 2014 was primarily due to an increase in commercial automobile earned premiums in the property and casualty operations resulting from a significant state contract which incepted in the second quarter of 2013. The decrease in net income for the three month and nine month periods ended September 30, 2014 was primarily due to a decrease in realized investment gains.  During the three month and nine month periods ended September 30, 2014, realized investment gains decreased by $1.4 million and $7.0 million, respectively, as the Company sold several higher yielding longer-term investments in 2013 in order to shorten the average maturity of its investment portfolio.  The Company had a small operating loss in the three month period ended September 30, 2014 compared to operating income of $0.4 million in the three month period ended September 30, 2013.  The decrease in operating income for the three month period ended September 30, 2014 was attributable to higher losses in the property and casualty operations, increases in agency and underwriting related expenses, including increased hiring to support worksite product initiatives as well as amortization of unearned compensation from stock awards.  Operating income increased to $1.4 million in the nine month period ended September 30, 2014 from $1.3 million in the comparable period of 2013.  The increase in operating income for the nine month period ended September 30, 2014 was due primarily to increased profitability in the life and health operations resulting from more favorable loss experience in the nine month period ended September 30, 2014 as compared to the same period in 2013. Partially offsetting the increase in operating income was an increase in agency and underwriting related expense as well as increased compensation expense from stock awards, both described previously.  Further, investment income decreased during the nine month period ended September 30, 2014 from the comparable period in 2013 due to the sale of several of the Company’s higher yielding longer-term investments in 2013, also discussed previously.

A more detailed analysis of the individual operating companies and other corporate activities is provided below.
 
-19-

American Southern

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month and nine month periods ended September 30, 2014 and the comparable periods in 2013:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Dollars in thousands)
 
Gross written premiums
 
$
9,293
   
$
10,919
   
$
43,452
   
$
48,009
 
Ceded premiums
   
(1,445
)
   
(1,856
)
   
(4,694
)
   
(5,703
)
Net written premiums
 
$
7,848
   
$
9,063
   
$
38,758
   
$
42,306
 
Net earned premiums
 
$
13,191
   
$
13,137
   
$
39,142
   
$
33,418
 
Net loss and loss adjustment expenses
   
9,530
     
9,154
     
29,207
     
21,533
 
Underwriting expenses
   
3,789
     
3,929
     
10,265
     
12,167
 
Underwriting income (loss)
 
$
(128
)
 
$
54
   
$
(330
)
 
$
(282
)
Loss ratio
   
72.3
%
   
69.7
%
   
74.6
%
   
64.4
%
Expense ratio
   
28.7
     
29.9
     
26.2
     
36.4
 
Combined ratio
   
101.0
%
   
99.6
%
   
100.8
%
   
100.8
%

Gross written premiums at American Southern decreased $1.6 million, or 14.9%, during the three month period ended September 30, 2014, and $4.6 million, or 9.5%, during the nine month period ended September 30, 2014, from the comparable periods in 2013.  The decrease in gross written premiums in both the three month and nine month periods ended September 30, 2014 was primarily attributable to a decrease in commercial automobile written premiums resulting from the cancellation by the company of an agency due to unfavorable loss experience.  During the three month and nine month periods ended September 30, 2014, gross written premiums from this agency decreased $1.6 million and $7.1 million, respectively, from the comparable periods in 2013.  Partially offsetting the decrease was an increase in commercial automobile and property business from new and existing programs in both periods.

Ceded premiums decreased $0.4 million, or 22.1%, during the three month period ended September 30, 2014, and $1.0 million, or 17.7%, during the nine month period ended September 30, 2014, from the comparable periods in 2013.  American Southern’s ceded premiums are determined as a percentage of earned premiums and generally increase or decrease as earned premiums increase or decrease.  However, the change in ceded premiums during the nine month period ended September 30, 2014 was disproportionate to the increase in earned premiums due to the execution of a separate reinsurance agreement to specifically reinsure the commercial automobile business in a state contract awarded to American Southern in the second quarter of 2013.  Otherwise, the decrease in ceded premiums for the three month and nine month periods ended September 30, 2014 was primarily attributable to the decline in commercial automobile earned premiums resulting from the agency cancellation discussed previously.  Commercial automobile business generally has higher contractual reinsurance 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 nine month periods ended September 30, 2014 and the comparable periods in 2013 (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(In thousands)
 
Commercial automobile
 
$
9,486
   
$
9,714
   
$
28,176
   
$
23,711
 
General liability
   
940
     
964
     
2,807
     
2,589
 
Property
   
972
     
742
     
2,700
     
1,941
 
Surety
   
1,793
     
1,717
     
5,459
     
5,177
 
Total
 
$
13,191
   
$
13,137
   
$
39,142
   
$
33,418
 

-20-

Net earned premiums increased slightly during the three month period ended September 30, 2014, and $5.7 million, or 17.1%, during the nine month period ended September 30, 2014, over the comparable periods in 2013.  The increase in net earned premiums for the three month period ended September 30, 2014 was primarily due to increases in property and surety earned premiums partially offset by a decrease in commercial automobile business resulting from the agency cancellation discussed previously.  The increase in net earned premiums for the nine month period ended September 30, 2014 was primarily attributable to the increase in commercial automobile earned premiums from the state contract referenced previously.  Also contributing were increases in general liability, property and surety earned premiums resulting from both new and existing programs.  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.

Net loss and loss adjustment expenses at American Southern increased $0.4 million, or 4.1%, during the three month period ended September 30, 2014, and $7.7 million, or 35.6%, during the nine month period ended September 30, 2014, over the comparable periods in 2013.  As a percentage of premiums, net loss and loss adjustment expenses were 72.3% in the three month period ended September 30, 2014, compared to 69.7% in the three month period ended September 30, 2013.  For the nine month period ended September 30, 2014, this ratio increased to 74.6% from 64.4% in the comparable period of 2013.  The increase in the loss ratio for the three month and nine month periods ended September 30, 2014 was primarily due to increased losses, which were anticipated, in the commercial automobile line of business resulting from the state contract referenced previously.  Also contributing to the increase in the loss ratio were increased losses from other commercial automobile programs as well as higher claims in the property and surety lines of business.

Underwriting expenses decreased $0.1 million, or 3.6%, during the three month period ended September 30, 2014, and $1.9 million, or 15.6%, during the nine month period ended September 30, 2014, from the comparable periods in 2013.  As a percentage of premiums, underwriting expenses were 28.7% in the three month period ended September 30, 2014, compared to 29.9% in the three month period ended September 30, 2013.  For the nine month period ended September 30, 2014, this ratio decreased to 26.2% from 36.4% in the comparable period of 2013.  The decrease in the expense ratio for the three month and nine month periods ended September 30, 2014 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 nine month periods ended September 30, 2014, these commissions at American Southern decreased $0.1 million and $2.0 million, respectively, from the comparable periods in 2013 due to unfavorable loss experience.  Also contributing to the decrease in the 2014 year to date expense ratio was the increase in earned premiums coupled with a relatively consistent level of fixed general and administrative expenses.

Bankers Fidelity

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month and nine month periods ended September 30, 2014 and the comparable periods in 2013:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Dollars in thousands)
 
Medicare supplement
 
$
21,218
   
$
21,276
   
$
64,118
   
$
62,340
 
Other health products
   
1,183
     
1,174
     
3,556
     
3,484
 
Life insurance
   
2,745
     
2,798
     
8,395
     
8,535
 
Total earned premiums
   
25,146
     
25,248
     
76,069
     
74,359
 
Insurance benefits and losses
   
17,564
     
17,632
     
51,784
     
53,614
 
Underwriting expenses
   
8,294
     
7,960
     
25,423
     
22,315
 
Total expenses
   
25,858
     
25,592
     
77,207
     
75,929
 
Underwriting loss
 
$
(712
)
 
$
(344
)
 
$
(1,138
)
 
$
(1,570
)
Loss ratio
   
69.8
%
   
69.8
%
   
68.1
%
   
72.1
%
Expense ratio