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

FORM 10-Q

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

For the quarterly period ended September 30, 20192020

or

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

Commission File Number 0-3722

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

Georgia 58-1027114
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

4370 Peachtree Road, N.E.,
Atlanta, Georgia
 30319
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class 
Trading
Symbol(s)
 Name of each exchange on which registered
Common Stock, par value $1.00 per share AAME NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☑   No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☑   No  ☐

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

Large accelerated filer  ☐   Accelerated filer  ☐   Non-accelerated filer  ☐  (Do not check if a smaller reporting company)  Smaller reporting company  ☑   Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

The total number of shares of the registrant’s Common Stock, $1 par value, outstanding on October 23, 201922, 2020 was 20,479,50120,414,279.

ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

Part I.Financial Information
Part I.Financial Information
Item 1.
2
   
 2
   
 3
   
 4
   
 5
   
 6
   
 7
   
Item 2.
22
18
   
Item 4.
29
24
   
Part II.Other Information 
   
Item 2.
30
25
   
Item 6.
3025
   
3126

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

  
Unaudited
September 30,
2020
  
December 31,
2019
 
ASSETS 
Cash and cash equivalents 
$
8,940
  
$
12,893
 
Investments:        
Fixed maturities, available-for-sale, at fair value (amortized cost: $222,969 and $219,233)  
247,997
   
232,472
 
Equity securities, at fair value (cost: $6,400 and $7,168)  
14,323
   
22,922
 
Other invested assets (cost: $9,908 and $9,908)  
9,097
   
9,960
 
Policy loans  
1,964
   
2,007
 
Real estate  
38
   
38
 
Investment in unconsolidated trusts  
1,238
   
1,238
 
Total investments  
274,657
   
268,637
 
Receivables:        
Reinsurance  
29,961
   
32,135
 
Insurance premiums and other (net of allowance for doubtful accounts: $198 and $183)  
20,039
   
13,134
 
Deferred income taxes, net  
679
   
314
 
Deferred acquisition costs  
39,769
   
38,861
 
Other assets  
8,363
   
9,108
 
Intangibles  
2,544
   
2,544
 
Total assets 
$
384,952
  
$
377,626
 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Insurance reserves and policyholder funds:        
Future policy benefits 
$
91,694
  
$
92,490
 
Unearned premiums  
30,198
   
26,035
 
Losses and claims  
78,157
   
81,448
 
Other policy liabilities  
1,015
   
1,933
 
Total insurance reserves and policyholder funds  
201,064
   
201,906
 
Accounts payable and accrued expenses  
22,135
   
23,588
 
Junior subordinated debenture obligations, net  
33,738
   
33,738
 
Total liabilities  
256,937
   
259,232
 
         
Commitments and contingencies (Note 10)        
Shareholders’ equity:        
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, 55,000 shares issued and outstanding; $5,500 redemption value  
55
   
55
 
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,400,894; shares outstanding: 20,414,279 and 20,472,162  
22,401
   
22,401
 
Additional paid-in capital  
57,436
   
57,820
 
Retained earnings  
36,042
   
36,020
 
Accumulated other comprehensive income  
19,772
   
10,459
 
Unearned stock grant compensation  
(350
)
  
(781
)
Treasury stock, at cost: 1,986,615 and 1,928,732 shares  
(7,341
)
  
(7,580
)
Total shareholders’ equity  
128,015
   
118,394
 
Total liabilities and shareholders’ equity 
$
384,952
  
$
377,626
 
ASSETS
  
Unaudited
September 30,
2019
  
December 31,
2018
 
Cash and cash equivalents 
$
36,013
  
$
12,630
 
Investments:        
Fixed maturities, available-for-sale, at fair value (amortized cost: $205,124 and $219,924)  
217,517
   
210,386
 
Equity securities, at fair value (cost: $7,168 and $10,515)  
19,507
   
20,758
 
Other invested assets (cost: $7,005 and $6,905)  
7,103
   
7,424
 
Policy loans  
1,989
   
2,085
 
Real estate  
38
   
38
 
Investment in unconsolidated trusts  
1,238
   
1,238
 
Total investments  
247,392
   
241,929
 
Receivables:        
Reinsurance  
30,481
   
26,110
 
Insurance premiums and other (net of allowance for doubtful accounts: $192 and $207)  
17,996
   
15,223
 
Deferred income taxes, net  
175
   
4,184
 
Deferred acquisition costs  
38,801
   
37,094
 
Other assets  
9,933
   
4,560
 
Intangibles  
2,544
   
2,544
 
Total assets 
$
383,335
  
$
344,274
 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Insurance reserves and policyholder funds:        
Future policy benefits 
$
92,685
  
$
90,257
 
Unearned premiums  
28,152
   
24,206
 
Losses and claims  
76,261
   
72,612
 
Other policy liabilities  
1,226
   
1,973
 
Total insurance reserves and policyholder funds  
198,324
   
189,048
 
Other liabilities  
34,862
   
20,116
 
Junior subordinated debenture obligations, net  
33,738
   
33,738
 
Total liabilities  
266,924
   
242,902
 
         
Commitments and contingencies (Note 10)        
Shareholders’ equity:        
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, 55,000 shares issued and outstanding; $5,500 redemption value  
55
   
55
 
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,400,894; shares outstanding: 20,479,501 and 20,170,360  
22,401
   
22,401
 
Additional paid-in capital  
57,819
   
57,414
 
Retained earnings  
34,850
   
37,208
 
Accumulated other comprehensive income (loss)  
9,791
   
(7,535
)
Unearned stock grant compensation  
(943
)
  
(186
)
Treasury stock, at cost: 1,921,393 and 2,230,534 shares  
(7,562
)
  
(7,985
)
Total shareholders’ equity  
116,411
   
101,372
 
Total liabilities and shareholders’ equity 
$
383,335
  
$
344,274
 

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

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,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020  2019  2020  2019 
Revenue:                        
Insurance premiums, net 
$
45,005
  
$
42,557
  
$
135,256
  
$
127,604
  
$
44,978
  
$
45,005
  
$
137,027
  
$
135,256
 
Net investment income 
2,187
  
2,215
  
6,834
  
7,111
  
1,828
  
2,187
  
5,717
  
6,834
 
Realized investment gains (losses), net 
(430
)
 
484
  
1,565
  
797
  
183
  
(430
)
 
432
  
1,565
 
Unrealized gains on equity securities, net 
944
  
1,083
  
2,096
  
753
 
Unrealized gains (losses) on equity securities, net 
(731
)
 
944
  
(7,831
)
 
2,096
 
Other income  
39
   
31
   
139
   
88
   
11
   
39
   
71
   
139
 
Total revenue  
47,745
   
46,370
   
145,890
   
136,353
   
46,269
   
47,745
   
135,416
   
145,890
 
                        
Benefits and expenses:                        
Insurance benefits and losses incurred 
34,719
  
33,087
  
104,177
  
98,478
  
29,219
  
34,719
  
89,878
  
104,177
 
Commissions and underwriting expenses 
11,471
  
8,722
  
33,995
  
28,456
  
11,202
  
11,471
  
34,682
  
33,995
 
Interest expense 
533
  
529
  
1,624
  
1,497
  
363
  
533
  
1,253
  
1,624
 
Other expense  
2,766
   
2,960
   
8,142
   
9,168
   
3,052
   
2,766
   
9,116
   
8,142
 
Total benefits and expenses  
49,489
   
45,298
   
147,938
   
137,599
   
43,836
   
49,489
   
134,929
   
147,938
 
Income (loss) before income taxes 
(1,744
)
 
1,072
  
(2,048
)
 
(1,246
)
 
2,433
  
(1,744
)
 
487
  
(2,048
)
Income tax expense (benefit)  
(352
)
  
138
   
(392
)
  
(341
)
  
557
   
(352
)
  
166
   
(392
)
Net income (loss) 
(1,392
)
 
934
  
(1,656
)
 
(905
)
 
1,876
  
(1,392
)
 
321
  
(1,656
)
Preferred stock dividends  
(100
)
  
(100
)
  
(299
)
  
(299
)
  
(100
)
  
(100
)
  
(299
)
  
(299
)
Net income (loss) applicable to common shareholders 
$
(1,492
)
 
$
834
  
$
(1,955
)
 
$
(1,204
)
 
$
1,776
  
$
(1,492
)
 
$
22
  
$
(1,955
)
Earnings (loss) per common share (basic and diluted) 
$
(.07
)
 
$
.04
  
$
(.10
)
 
$
(.06
)
Earnings (loss) per common share (basic) 
$
.09
  
$
(.07
)
 
$
—
  
$
(.10
)
Earnings (loss) per common share (diluted) 
$
.09
  
$
(.07
)
 
$
—
  
$
(.10
)

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

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; Dollars in thousands)

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020 2019 2020 2019 
Net income (loss) 
$
(1,392
)
 
$
934
  
$
(1,656
)
 
$
(905
)
 
$
1,876
  
$
(1,392
)
 
$
321
  
$
(1,656
)
Other comprehensive income (loss):            
Other comprehensive income:            
Available-for-sale fixed maturity securities:
                        
Gross unrealized holding gain (loss) arising in the period 
5,871
  
63
  
22,275
  
(10,327
)
Gross unrealized holding gain arising in the period 
3,016
  
5,871
  
12,133
  
22,275
 
Related income tax effect  
(1,232
)
  
(13
)
  
(4,677
)
  
2,169
   
(633
)
  
(1,232
)
  
(2,548
)
  
(4,677
)
Subtotal 
4,639
  
50
  
17,598
  
(8,158
)
 
2,383
  
4,639
  
9,585
  
17,598
 
Less: reclassification adjustment for net realized (gains) losses included in net income (loss) 
538
  
(484
)
 
(344
)
 
(797
)
Less: reclassification adjustment for net realized gains (losses) included in net income (loss) 
(95
)
 
538
  
(344
)
 
(344
)
Related income tax effect  
(113
)
  
101
   
72
   
167
   
20
   
(113
)
  
72
   
72
 
Subtotal  
425
   
(383
)
  
(272
)
  
(630
)
  
(75
)
  
425
   
(272
)
  
(272
)
Total other comprehensive income (loss), net of tax  
5,064
   
(333
)
  
17,326
   
(8,788
)
Total comprehensive income (loss) 
$
3,672
  
$
601
  
$
15,670
  
$
(9,693
)
Total other comprehensive income, net of tax  
2,308
   
5,064
   
9,313
   
17,326
 
Total comprehensive income 
$
4,184
  
$
3,672
  
$
9,634
  
$
15,670
 

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

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited; Dollars in thousands except per share data)

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020  2019  2020  2019 
Preferred stock:                        
Balance, beginning of period 
$
55
  
$
55
  
$
55
  
$
55
  
$
55
  
$
55
  
$
55
  
$
55
 
Repurchases of preferred stock 
-
  
-
  
-
  
-
 
Net issuance of preferred stock  
-
   
-
   
-
   
-
 
Balance, end of period 
55
  
55
  
55
  
55
  
55
  
55
  
55
  
55
 
Common stock:                        
Balance, beginning of period 
22,401
  
22,401
  
22,401
  
22,401
  
22,401
  
22,401
  
22,401
  
22,401
 
Repurchases of common stock 
-
  
-
  
-
  
-
 
Net issuance of common stock  
-
   
-
   
-
   
-
 
Balance, end of period 
22,401
  
22,401
  
22,401
  
22,401
  
22,401
  
22,401
  
22,401
  
22,401
 
Additional paid-in capital:                        
Balance, beginning of period 
57,444
  
57,416
  
57,414
  
57,495
  
57,435
  
57,444
  
57,820
  
57,414
 
Restricted stock grants, net of forfeitures 
372
  
-
  
396
  
(88
)
 
—
  
372
  
(377
)
 
396
 
Issuance of shares under stock plans  
3
   
3
   
9
   
12
   
1
   
3
   
(7
)
  
9
 
Balance, end of period 
57,819
  
57,419
  
57,819
  
57,419
  
57,436
  
57,819
  
57,436
  
57,819
 
Retained earnings:                        
Balance, beginning of period 
36,342
  
36,273
  
37,208
  
30,993
  
34,266
  
36,342
  
36,020
  
37,208
 
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018 
-
  
-
  
-
  
9,825
 
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018 
-
  
-
  
-
  
(2,100
)
Net income (loss) 
(1,392
)
 
934
  
(1,656
)
 
(905
)
 
1,876
  
(1,392
)
 
321
  
(1,656
)
Dividends on common stock 
-
  
-
  
(403
)
 
(407
)
 
—
  
—
  
—
  
(403
)
Dividends accrued on preferred stock  
(100
)
  
(100
)
  
(299
)
  
(299
)
  
(100
)
  
(100
)
  
(299
)
  
(299
)
Balance, end of period 
34,850
  
37,107
  
34,850
  
37,107
  
36,042
  
34,850
  
36,042
  
34,850
 
Accumulated other comprehensive income (loss):                        
Balance, beginning of period 
4,727
  
(6,429
)
 
(7,535
)
 
9,751
  
17,464
  
4,727
  
10,459
  
(7,535
)
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018 
-
  
-
  
-
  
(9,825
)
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018 
-
  
-
  
-
  
2,100
 
Other comprehensive income (loss), net of tax  
5,064
   
(333
)
  
17,326
   
(8,788
)
Other comprehensive income, net of tax  
2,308
   
5,064
   
9,313
   
17,326
 
Balance, end of period 
9,791
  
(6,762
)
 
9,791
  
(6,762
)
 
19,772
  
9,791
  
19,772
  
9,791
 
Unearned Stock Grant Compensation:                        
Balance, beginning of period 
(150
)
 
(322
)
 
(186
)
 
(579
)
 
(466
)
 
(150
)
 
(781
)
 
(186
)
Restricted stock grants, net of forfeitures 
(877
)
 
-
  
(948
)
 
135
  
—
  
(877
)
 
61
  
(948
)
Amortization of unearned compensation  
84
   
70
   
191
   
192
   
116
   
84
   
370
   
191
 
Balance, end of period 
(943
)
 
(252
)
 
(943
)
 
(252
)
 
(350
)
 
(943
)
 
(350
)
 
(943
)
Treasury Stock:                        
Balance, beginning of period 
(8,049
)
 
(7,727
)
 
(7,985
)
 
(7,133
)
 
(7,261
)
 
(8,049
)
 
(7,580
)
 
(7,985
)
Restricted stock grants, net of forfeitures 
505
  
-
  
552
  
(47
)
 
—
  
505
  
316
  
552
 
Purchase of shares for treasury 
-
  
(103
)
 
(71
)
 
(463
)
Purchase of 0 and 26,210 shares, as of 2020 and 2019, respectively, for treasury 
—
  
—
  
—
  
(71
)
Net shares acquired related to employee share-based compensation plans 
(23
)
 
(26
)
 
(72
)
 
(223
)
 
(81
)
 
(23
)
 
(91
)
 
(72
)
Issuance of shares under stock plans  
5
   
6
   
14
   
16
   
1
   
5
   
14
   
14
 
Balance, end of period  
(7,562
)
  
(7,850
)
  
(7,562
)
  
(7,850
)
  
(7,341
)
  
(7,562
)
  
(7,341
)
  
(7,562
)
                        
Total shareholders’ equity 
$
116,411
  
$
102,118
  
$
116,411
  
$
102,118
  
$
128,015
  
$
116,411
  
$
128,015
  
$
116,411
 
Dividends declared on common stock per share 
$
-
  
$
-
  
$
.02
  
$
.02
  
$
—
  
$
—
  
$
—
  
$
(.02
)

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

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

 
Nine Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2019  2018  2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss 
$
(1,656
)
 
$
(905
)
Adjustments to reconcile loss to net cash used in operating activities:      
Acquisition costs deferred, net 
(1,707
)
 
(2,240
)
Net income (loss) 
$
321
  
$
(1,656
)
Adjustments to reconcile income (loss) to net cash used in operating activities:      
Additions to acquisition costs, net 
(908
)
 
(1,707
)
Realized investment gains, net 
(1,565
)
 
(797
)
 
(432
)
 
(1,565
)
Unrealized gains on equity securities, net 
(2,096
)
 
(753
)
Unrealized losses (gains) on equity securities, net 
7,831
  
(2,096
)
Distributions received from equity method investees 
379
  
725
  
—
  
379
 
Compensation expense related to share awards 
191
  
192
  
370
  
191
 
Depreciation and amortization 
588
  
783
  
772
  
588
 
Deferred income tax benefit 
(596
)
 
(1,335
)
 
(2,841
)
 
(596
)
Increase in receivables, net 
(7,917
)
 
(7,882
)
 
(4,731
)
 
(7,917
)
Increase in insurance reserves and policyholder funds 
9,276
  
14,230
 
Increase (decrease) in other liabilities 
3,271
  
(6,760
)
(Decrease) increase in insurance reserves and policyholder funds 
(842
)
 
9,276
 
(Decrease) increase in accounts payable and accrued expenses 
(1,752
)
 
3,271
 
Other, net  
(5,738
)
  
(377
)
  
1,308
   
(5,738
)
Net cash used in operating activities  
(7,570
)
  
(5,119
)
  
(904
)
  
(7,570
)
            
CASH FLOWS FROM INVESTING ACTIVITIES:            
Proceeds from investments sold 
119,929
  
28,177
  
8,916
  
119,929
 
Proceeds from investments matured, called or redeemed 
5,907
  
4,577
  
5,584
  
5,907
 
Investments purchased 
(94,316
)
 
(40,827
)
 
(17,277
)
 
(94,316
)
Additions to property and equipment  
(44
)
  
(252
)
  
(188
)
  
(44
)
Net cash provided by (used in) investing activities  
31,476
   
(8,325
)
Net cash (used in) provided by investing activities  
(2,965
)
  
31,476
 
            
CASH FLOWS FROM FINANCING ACTIVITIES:            
Payment of dividends on common stock 
(403
)
 
(407
)
 
—
  
(403
)
Proceeds from shares issued under stock plans 
23
  
28
  
7
  
23
 
Treasury stock acquired — share repurchase authorization 
(71
)
 
(463
)
 
—
  
(71
)
Treasury stock acquired — net employee share-based compensation  
(72
)
  
(223
)
  
(91
)
  
(72
)
Net cash used in financing activities  
(523
)
  
(1,065
)
  
(84
)
  
(523
)
            
Net increase (decrease) in cash and cash equivalents 
23,383
  
(14,509
)
Net (decrease) increase in cash and cash equivalents 
(3,953
)
 
23,383
 
Cash and cash equivalents at beginning of period  
12,630
   
24,547
   
12,893
   
12,630
 
      
Cash and cash equivalents at end of period 
$
36,013
  
$
10,038
  
$
8,940
  
$
36,013
 
            
SUPPLEMENTAL CASH FLOW INFORMATION:            
Cash paid for interest 
$
1,644
  
$
1,471
  
$
1,309
  
$
1,644
 
Cash paid for income taxes 
$
1,625
  
$
1,892
  
$
3,310
  
$
1,625
 

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

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

Note 1.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Atlantic American Corporation (the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”). The Parent’s primary operating subsidiaries, American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”) and Bankers Fidelity Life Insurance Company and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”), operate in two principal business units. American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The unaudited condensed consolidated financial statements included herein and these related notes should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 (the “2018“2019 Annual Report”). The Company’s financial condition and results of operations and cash flows as of and for the three month and nine month periods ended September 30, 20192020 are not necessarily indicative of the financial condition or results of operations and cash flows that may be expected for the year ending December 31, 20192020 or for any other future period.

The Company’s significant accounting policies have not changed materially from those set out in the 20182019 Annual Report, except as noted below for the adoption of new accounting standards.

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

On March 11, 2020, the World Health Organization declared the Novel Coronavirus (“COVID-19”) outbreak a global pandemic. The impact of COVID-19 and related actions to attempt to control its spread began to impact the Company’s business operations in March 2020, and we expect that the pandemic, actions that have been or will be taken in response to it and its overall impact on the economy, will continue to have an effect on our business operations and our operating results. The Company’s insurance subsidiaries may experience difficulties collecting premiums from some policyholders, and policyholders with financial difficulties may decide not to renew insurance policies with the Company.  Although it cannot be predicted with certainty at this time, the Company’s insurance subsidiaries do not expect a direct material impact from the outbreak of COVID-19 in terms of increased claims and losses, but that may change as more information becomes available.  In addition, economic uncertainty related to COVID-19 has led to, and may continue to create, increased volatility in the investment markets.  The impact of COVID-19 on the economy and on the Company continues to evolve and its future effects are uncertain. The Company continues to monitor the effects and risks of COVID-19 to assess its impact on the Company’s business, financial condition, results of operations, liquidity and capital position.

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is intended to provide fast and direct economic assistance for American workers and families, small businesses, and to preserve jobs in American industries. The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The Company does not qualify as a small business under the CARES Act and therefore did not apply for any of the government loan programs; however, the Company intends to monitor and assess the availability of resources and other benefits that might be available to the Company under the CARES Act and through other programs.

Note 2.2.
Recently Issued Accounting Standards

Adoption of New Accounting Standards

Leases. On January 1, 2019,Fair Value Measurement – Changes to the Company adoptedDisclosure Requirements for Fair Value Measurement. In August 2018, the requirements ofFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases2018-13, Fair Value Measurement (Topic 842)820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The objectiveThis guidance removes the following disclosure requirements from Topic 820: (1) the amount of this ASU, along with several related ASUs issued subsequently, is to increase transparency and comparabilityreasons for transfers between organizations that enter into lease agreements. For lessees, the key differenceLevel 1 and Level 2 of the new standard fromfair value hierarchy, (2) the previous guidance (Topic 840) ispolicy for timing of transfers between levels, and (3) the recognition of a right-of-use (“ROU”) assetvaluation processes for Level 3 fair value measurements.  This disclosure also includes the changes in unrealized gains and lease liability onlosses for the balance sheet. The most significant change isperiod included in other comprehensive income for recurring Level 3 fair value measurements held at the requirement to recognize ROU assets and lease liabilities for leases classified as operating leases. The new standard requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

As partend of the transitionreporting period and the range and weighted average of significant unobservable inputs used to the new standard, the Company was required to measure and recognize leases that existed at January 1, 2019 and elected to use a modified retrospective approach. For leases that existed at the effective date, the Company elected the package of three transition practical expedients and therefore did not reassess any of the following: (i) whether an arrangement is or contains a lease, (ii) lease classification, or (iii) what qualifies as an initial direct cost.

The adoption of this ASU resulted in the Company recognizing a ROU asset of $6,088 as part of other assets and a lease liability of $6,088 as part of other liabilities in the consolidated balance sheet. The adoption of this ASU did not have a material effect on the Company’s results of operations or liquidity.

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09, as modified, provides guidance for recognizing revenue which excludes insurance contracts and financial instruments. Revenue is to be recognized when, or as, goods or services are transferred to customers in an amount that reflects the consideration that an entity is expected to be entitled in exchange for those goods or services. For the nine months ended September 30, 2019 and 2018, approximately $139 and $88, respectively, or approximately one-tenth of 1% of the Company’s total revenues, were within the scope of this updated guidance.develop Level 3 fair value measurements.  The Company adopted ASU 2014-092018-13 as of January 1, 2018.2020. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

TableGoodwill. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”).  ASU 2017-04 is intended to simplify the evaluation of Contentsgoodwill.  The updated guidance requires recognition and measurement of goodwill impairment based on the excess of the carrying value of the reporting unit compared to its estimated fair value, with the amount of the impairment not to exceed the carrying value of the reporting unit’s goodwill. Under the prior accounting guidance, if the reporting unit’s carrying value exceeds its estimated fair value, the Company allocates the fair value of the reporting unit to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. An impairment loss is then recognized for the excess, if any, of the carrying value of the reporting unit’s goodwill compared to the implied goodwill value. The Company adopted ASU 2017-04 as of January 1, 2020. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

Future Adoption of New Accounting Standards

Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This guidance provides optional expedients and exceptions for applying GAAP to investments, derivatives, or other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. Along with the optional expedients, the amendments include a general principle that permits an entity to consider contract modifications due to reference reform to be an event that does not require contract re-measurement at the modification date or reassessment of a previous accounting determination. Additionally, a company may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that were classified as held to maturity before January 1, 2020. This standard may be elected over time through December 31, 2022 as reference rate reform activities occur. The Company is currently assessing the effect of adopting this guidance on its financial condition and results of operations.

Investments – Equity Securities. In January 2020, the FASB issued ASU No. 2020-01 (“ASU 2020-01”) Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This update, among others, clarifies the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323 when there is a change in level of ownership or degree of influence. ASU 2020-01 is effective for the Company beginning with the first quarter of 2021 and will be applied prospectively. Early adoption is permitted. This guidance is not expected to have a material impact on the Company’s consolidated financial statements.

For more information regarding other accounting standards that the Company has not yet adopted, see the “Recently Issued Accounting Standards - Future Adoption of New Accounting Standards” section of Note 1 of Notes to Consolidated Financial Statements in the 20182019 Annual Report.

Note 3.
Investments

The following tables set forth the estimated fair value, gross unrealized gains, gross unrealized losses and cost or amortized cost of the Company’s investments in fixed maturities and equity securities, aggregated by type and industry, as of September 30, 20192020 and December 31, 2018.2019.

Fixed maturities were comprised of the following:

 September 30, 2019  September 30, 2020 
 
Estimated
Fair Value
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Cost or
Amortized
Cost
  
Estimated
Fair Value
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Cost or
Amortized
Cost
 
Fixed maturities:                        
Bonds:                        
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
19,338
  
$
624
  
$
122
  
$
18,836
  
$
21,039
  
$
1,598
  
$
21
  
$
19,462
 
Obligations of states and political subdivisions  
4,999
   
432
   
-
   
4,567
   
11,752
   
845
   
—
   
10,907
 
Corporate securities:                        
Utilities and telecom 
21,287
  
2,110
  
3
  
19,180
  
31,491
  
4,404
  
14
  
27,101
 
Financial services 
58,290
  
3,510
  
69
  
54,849
  
77,366
  
7,573
  
149
  
69,942
 
Other business – diversified 
51,719
  
2,446
  
87
  
49,360
  
45,067
  
4,030
  
960
  
41,997
 
Other consumer – diversified  
61,692
   
3,644
   
92
   
58,140
   
61,032
   
7,903
   
239
   
53,368
 
Total corporate securities  
192,988
   
11,710
   
251
   
181,529
   
214,956
   
23,910
   
1,362
   
192,408
 
Redeemable preferred stocks:                        
Other consumer – diversified  
192
   
—
   
—
   
192
   
250
   
58
   
—
   
192
 
Total redeemable preferred stocks  
192
   
—
   
—
   
192
   
250
   
58
   
—
   
192
 
Total fixed maturities 
$
217,517
  
$
12,766
  
$
373
  
$
205,124
  
$
247,997
  
$
26,411
  
$
1,383
  
$
222,969
 

-8-8
 December 31, 2018  December 31, 2019 
 
Estimated
Fair Value
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Cost or
Amortized
Cost
  
Estimated
Fair Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Cost or
Amortized
Cost
 
Fixed maturities:                        
Bonds:                        
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
27,422
  
$
36
  
$
1,061
  
$
28,447
  
$
20,259
  
$
467
  
$
53
  
$
19,845
 
Obligations of states and political subdivisions 
8,364
  
347
  
72
  
8,089
   
11,940
   
371
   
53
   
11,622
 
Corporate securities:                        
Utilities and telecom 
19,642
  
873
  
431
  
19,200
  
26,648
  
2,404
  
32
  
24,276
 
Financial services 
49,477
  
747
  
2,942
  
51,672
  
73,917
  
4,249
  
57
  
69,725
 
Other business – diversified 
49,196
  
226
  
2,844
  
51,814
  
41,706
  
2,335
  
98
  
39,469
 
Other consumer – diversified  
56,093
   
84
   
4,501
   
60,510
   
57,752
   
3,702
   
54
   
54,104
 
Total corporate securities  
174,408
   
1,930
   
10,718
   
183,196
   
200,023
   
12,690
   
241
   
187,574
 
Redeemable preferred stocks:                        
Other consumer – diversified  
192
   
—
   
—
   
192
   
250
   
58
   
—
   
192
 
Total redeemable preferred stocks  
192
   
—
   
—
   
192
   
250
   
58
   
—
   
192
 
Total fixed maturities 
$
210,386
  
$
2,313
  
$
11,851
  
$
219,924
  
$
232,472
  
$
13,586
  
$
347
  
$
219,233
 

-9-
Bonds having an amortized cost of $10,444 and $10,452$10,669 and included in the tables above were on deposit with insurance regulatory authorities as of September 30, 20192020 and December 31, 2018,2019, respectively, in accordance with statutory requirements.

Equity securities were comprised of the following:

 September 30, 2019  September 30, 2020
 
Estimated
Fair Value
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Cost or
Amortized
Cost
  
Estimated
Fair Value
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Cost 
Equity securities:                        
Common and non-redeemable preferred stocks:           ��            
Financial services 
$
2,797
  
$
309
  
$
—
  
$
2,488
  
$
2,080
  
$
316
  
$
3
  
$
1,767
 
Other business – diversified 
312
  
265
  
—
  
47
   
12,243
   
7,610
   
—
   
4,633
 
Other consumer – diversified  
16,398
   
11,765
   
—
   
4,633
 
Total equity securities 
$
19,507
  
$
12,339
  
$
—
  
$
7,168
  
$
14,323
  
$
7,926
  
$
3
  
$
6,400
 

 December 31, 2018  December 31, 2019 
 
Estimated
Fair Value
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Cost or
Amortized
Cost
  
Estimated
Fair Value
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Cost 
Equity securities:                        
Common and non-redeemable preferred stocks:                        
Utilities and telecom 
$
1,686
  
$
722
  
$
—
  
$
964
 
Financial services 
4,552
  
172
  
—
  
4,380
  
$
3,159
  
624
  
—
  
2,535
 
Other business – diversified 
306
  
259
  
—
  
47
   
19,763
   
15,130
   
—
   
4,633
 
Other consumer – diversified  
14,214
   
9,090
   
—
   
5,124
 
Total equity securities 
$
20,758
  
$
10,243
  
$
—
  
$
10,515
  
$
22,922
  
$
15,754
  
$
—
  
$
7,168
 

The carrying value and amortized cost of the Company’s investments in fixed maturities at September 30, 20192020 and December 31, 20182019 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, 2019  December 31, 2018  September 30, 2020 December 31, 2019 
 
Carrying
Value
  
Amortized
Cost
  
Carrying
Value
  
Amortized
Cost
  
Carrying
Value
 
Amortized
Cost
 
Carrying
Value
 
Amortized
Cost
 
Due in one year or less 
$
-
  
$
-
  
$
3,150
  
$
3,150
  
$
1,040
  
$
1,019
  
$
—
  
$
—
 
Due after one year through five years 
13,665
  
13,267
  
19,787
  
19,699
  
20,424
  
19,301
  
14,664
  
14,280
 
Due after five years through ten years 
76,413
  
72,480
  
127,617
  
133,863
  
94,670
  
86,920
  
77,934
  
73,521
 
Due after ten years 
119,335
  
111,267
  
43,823
  
46,338
  
122,558
  
106,788
  
130,680
  
122,321
 
Asset backed securities  
8,104
   
8,110
   
16,009
   
16,874
   
9,305
   
8,941
   
9,194
   
9,111
 
Totals 
$
217,517
  
$
205,124
  
$
210,386
  
$
219,924
  
$
247,997
  
$
222,969
  
$
232,472
  
$
219,233
 

-10-
The following tables present the Company’s unrealized lossesloss aging for securities by type and length of time the security was in a continuous unrealized loss position as of September 30, 20192020 and December 31, 2018.2019.


9
  September 30, 2019 
  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 
$
1,020
  
$
4
  
$
7,689
  
$
118
  
$
8,709
  
$
122
 
Corporate securities  
22,791
   
61
   
7,430
   
190
   
30,221
   
251
 
Total temporarily impaired securities 
$
23,811
  
$
65
  
$
15,119
  
$
308
  
$
38,930
  
$
373
 
   September 30, 2020 
   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 $2,053  $21  $—  $—  $2,053  $21 
Corporate securities  19,743   1,362   —   —   19,743   1,362 
Total temporarily impaired securities $21,796  $1,383  $—  $—  $21,796  $1,383 

 December 31, 2018  December 31, 2019 
 Less than 12 months  12 months or longer  Total  Less than 12 months  12 months or longer  Total 
 
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
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 
$
—
  
$
—
  
$
24,786
  
$
1,061
  
$
24,786
  
$
1,061
  $3,432  $22  $3,533  $31  $6,965  $53 
Obligations of states and political subdivisions 
—
  
—
  
3,980
  
72
  
3,980
  
72
   3,106   53   —   —   3,106   53 
Corporate securities  
49,633
   
1,592
   
97,012
   
9,126
   
146,645
   
10,718
   23,245   145   2,504   96   25,749   241 
Total temporarily impaired securities 
$
49,633
  
$
1,592
  
$
125,778
  
$
10,259
  
$
175,411
  
$
11,851
  $29,783  $220  $6,037  $127  $35,820  $347 

The evaluation for an other than temporary impairment (“OTTI”) 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.

There were no OTTI charges recorded during the three month and nine month periods ended September 30, 20192020 and 2018.2019.

As of September 30, 20192020 and December 31, 2018,2019, there were twenty-fourtwenty and one hundred fortythirty securities, respectively, in an unrealized loss position which primarily included certain of the Company’s investments in fixed maturities within the financial services, other diversified business and other diversified consumer sectors. The decrease in the number and value of securities in an unrealized loss position during the nine month period ended September 30, 20192020, was primarily attributable to improvement in market values in certain of the appreciation ofCompany’s fixed maturity market prices due to the currentsecurities as a result of a declining interest rate environment.  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, 2019.2020.

-11-
Table of Contents
The following table is a summary oftables summarize realized investment gains (losses) for the three month and nine month periods ended September 30, 20192020 and 2018.2019.

  
Three Months Ended
September 30, 2020
 
  
Fixed
Maturities
  
Equity
Securities
  
Other
Invested
Assets
  Total 
Gains $95  $88  $—  $183 
Losses  —   —   —   — 
Realized investment gains, net $95  $88  $—  $183 

  
Three Months Ended
September 30, 2019
 
  
Fixed
Maturities
  
Equity
Securities
  
Other
Invested
Assets
  Total 
Gains 
$
1,112
  
$
108
  
$
—
  
$
1,220
 
Losses  
(1,650
)
  
—
   
—
   
(1,650
)
Realized investment gains (losses), net 
$
(538
)
 
$
108
  
$
—
  
$
(430
)

  
Three Months Ended
September 30, 2018
 
  
Fixed
Maturities
  
Equity
Securities
  
Other
Invested
Assets
  Total 
Gains 
$
212
  
$
272
  
$
—
  
$
484
 
Losses  
—
   
—
   
—
   
—
 
Realized investment gains (losses), net 
$
212
  
$
272
  
$
—
  
$
484
 

  
Nine Months Ended
September 30, 2019
 
  
Fixed
Maturities
  
Equity
Securities
  
Other
Invested
Assets
  Total 
Gains 
$
1,994
  
$
1,221
  
$
—
  
$
3,215
 
Losses  
(1,650
)
  
—
   
—
   
(1,650
)
Realized investment gains (losses), net 
$
344
  
$
1,221
  
$
—
  
$
1,565
 

-12-10
  
Nine Months Ended
September 30, 2020
 
  
Fixed
Maturities
  
Equity
Securities
  
Other
Invested
Assets
  Total 
Gains $344  $88  $—  $432 
Losses  —   —   —   — 
Realized investment gains, net $344  $88  $—  $432 

 
Nine Months Ended
September 30, 2018
  
Nine Months Ended
September 30, 2019
 
 
Fixed
Maturities
  
Equity
Securities
  
Other
Invested
Assets
  Total  
Fixed
Maturities
  
Equity
Securities
  
Other
Invested
Assets
  Total 
Gains 
$
829
  
$
272
  
$
—
  
$
1,101
  $1,994  $1,221  $—  $3,215 
Losses  
(304
)
  
—
   
—
   
(304
)
  (1,650)  —   —   (1,650)
Realized investment gains (losses), net 
$
525
  
$
272
  
$
—
  
$
797
 
Realized investment gains, net $344  $1,221  $—  $1,565 

The following table presents the portion of unrealized gains (losses) onrelated to equity securities still held for the three month and nine month periods ended September 30, 20192020 and 2018.2019.

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020 2019 2020 2019 
Net realized and unrealized gains (losses) recognized during the period on equity securities 
$
1,052
  
$
1,355
  
$
3,317
  
$
1,025
  
$
(643
)
 
$
1,052
  
$
(7,743
)
 
$
3,317
 
Less: Net realized gains (losses) recognized during the period on equity securities sold during the period  
108
   
272
   
1,221
   
272
   
88
   
108
   
88
   
1,221
 
Unrealized gains (losses) on equity securities, net 
$
944
  
$
1,083
  
$
2,096
  
$
753
 
Unrealized gains (losses) recognized during the reporting period on equity securities, net 
$
(731
)
 
$
944
  
$
(7,831
)
 
$
2,096
 

Variable Interest Entities

The Company holds passive interests in a number of entities that are considered to be variable interest entities (“VIEs”) under GAAP guidance. The Company’s VIE interests principally consist of interests in limited partnerships and limited liability companies formed for the purpose of achieving diversified equity returns. The Company’s VIE interests, carried as a part of other invested assets, totaled $7,103$9,097 and $7,424$9,960 as of September 30, 20192020 and December 31, 2018,2019, respectively. The Company’s VIE interests, carried as a part of investment in unconsolidated trusts, totaled $1,238 as of September 30, 20192020 and December 31, 2018.2019.

The Company does not have power over the activities that most significantly impact the economic performance of these VIEs and thus is not the primary beneficiary. Therefore, the Company has not consolidated these VIEs. The Company’s involvement with each VIE is limited to its direct ownership interest in the VIE. The Company has no arrangements with any of the VIEs to provide other financial support to or on behalf of the VIE. The Company’s maximum loss exposure relative to these investments was limited to the carrying value of the Company’s investment in the VIEs, which amount to $8,341$10,335 and $8,662,$11,198, as of September 30, 20192020 and December 31, 2018,2019, respectively. As of September 30, 20192020 and December 31, 2018,2019, the Company hashad outstanding commitments totaling $4,900 and $0, respectively,$1,997, whereby the Company is committed to fund these investments and may be called by such VIEsthe partnership during the commitment period to fund the purchase of new investments and partnership expenses.

Note 4.
Fair Values of Financial Instruments

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

The following 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 U.S. Treasury securities and exchange traded common stocks.

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

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 consistWith little or no observable market, the determination of a limited number of fixed maturities. As of September 30, 2019fair values uses considerable judgment and December 31, 2018, the value ofrepresents the Company’s fixed maturities valued using Level 3 criteria was $1,220 and $1,066, respectively. The usebest estimate of different criteriaan amount that could be realized in a market exchange for the asset or assumptions regarding data may have yielded materially different valuations.liability.

As of September 30, 2020, financial instruments carried at fair value were measured on a recurring basis as summarized below:

  
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total 
Assets:
            
Fixed maturities 
$
—
  
$
247,997
  
$
—
  
$
247,997
 
Equity securities  
14,180
   
—
   
143
   
14,323
 
Cash equivalents  
7,769
   
—
   
—
   
7,769
 
Total 
$
21,949
  
$
247,997
  
$
143
  
$
270,089
 

As of December 31, 2019, financial instruments carried at fair value were measured on a recurring basis as summarized below:

 
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total 
Assets:
                     
Fixed maturities 
$
11,233
  
$
205,064
  
$
1,220
(1)
 
$
217,517
  
$
—
  
$
232,472
  
$
—
  
$
232,472
 
Equity securities  
16,921
   
2,586
(1)  
—
   
19,507
  
22,922
  
—
  
—
  
22,922
 
Cash equivalents  
29,132
   
—
   
—
   
29,132
   
7,173
   
—
   
—
   
7,173
 
Total 
$
57,286
  
$
207,650
  
$
1,220
  
$
266,156
  
$
30,095
  
$
232,472
  
$
—
  
$
262,567
 


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

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

  
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  Total 
Assets:
            
Fixed maturities 
$
11,413
  
$
197,907

 
$
1,066
(1) 
$
210,386
 
Equity securities  
16,398
   
4,360
(1)  
—
   
20,758
 
Cash equivalents  
8,250
   
—
   
—
   
8,250
 
Total 
$
36,061
  $
202,267
  
$
1,066
  
$
239,394
 


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

The following tables provide a roll-forward of the Company’s financial instrumentsCompany does not have any fixed maturities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month and nine month periods endedas of September 30, 20192020 and 2018.


 
Fixed
Maturities
 
Balance, December 31, 2018 
$
1,066
 
Total unrealized gains included in other comprehensive loss  
49
 
Balance, March 31, 2019  
1,115
 
Total unrealized gains included in other comprehensive income  
59
 
Balance, June 30, 2019  
1,174
 
Total unrealized gains included in other comprehensive income  
46
 
Balance, September 30, 2019 
$
1,220
 


 
Fixed
Maturities
 
Balance, December 31, 2017 
$
1,369
 
Total unrealized losses included in other comprehensive loss  
(30
)
Balance, March 31, 2018  
1,339
 
Total unrealized gains included in other comprehensive loss  
7
 
Balance, June 30, 2018  
1,346
 
Total realized gains included in earnings  
208
 
Total unrealized losses included in other comprehensive loss  
(53
)
Settlements  
(483
)
Balance, September 30, 2018 
$
1,018
 

The Company’s fixed maturities valued using Level 3 inputs consist solely of issuances of pooled debt obligations of multiple, smaller financial services companies that are not actively traded. 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.December 31, 2019.

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, 20192020 and December 31, 2018.2019.


    September 30, 2019  December 31, 2018    September 30, 2020 December 31, 2019 
 
Level in Fair
Value
Hierarchy (1)
  
Carrying
Amount
  
Estimated
Fair Value
  
Carrying
Amount
  
Estimated
Fair Value
  
Level in Fair
Value
Hierarchy (1)
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
Assets:
                              
Cash and cash equivalents Level 1  
$
36,013
  
$
36,013
  
$
12,630
  
$
12,630
  Level 1  
$
8,940
  
$
8,940
  
$
12,893
  
$
12,893
 
Fixed maturities  (1
) 
 
217,517
  
217,517
  
210,386
  
210,386
   
(1) 
 
247,997
  
247,997
  
232,472
  
232,472
 
Equity securities (1
) 
 
19,507
  
19,507
  
20,758
  
20,758
   
(1) 
 
14,323
  
14,323
  
22,922
  
22,922
 
Other invested assets Level 3  
7,103
  
7,103
  
7,424
  
7,424
  Level 3  
9,097
  
9,097
  
9,960
  
9,960
 
Policy loans Level 2  
1,989
  
1,989
  
2,085
  
2,085
  Level 2  
1,964
  
1,964
  
2,007
  
2,007
 
Real estate Level 2  
38
  
38
  
38
  
38
  Level 2  
38
  
38
  
38
  
38
 
Investment in unconsolidated trusts Level 2  
1,238
  
1,238
  
1,238
  
1,238
  Level 2  
1,238
  
1,238
  
1,238
  
1,238
 
                              
Liabilities:
                              
Junior subordinated debentures, net Level 2  
33,738
  
33,738
  
33,738
  
33,738
  Level 2  
33,738
  
31,901
  
33,738
  
35,977
 


(1)
See the aforementioned information for a description of the fair value hierarchy as well as a disclosure of levels for classes of these financial assets.

There have not been any transfers between Level 1, Level 2 and Level 3 during the periods presented in these condensed consolidated financial statements.

Note 5.
Liabilities for Unpaid Losses, Claims and Loss Adjustment Expenses

The roll-forward of liabilities for unpaid losses, claims and loss adjustment expenses for the nine months ended September 30, 20192020 and 20182019 is as follows:


 
Nine Months Ended
September 30,
  
Nine Months Ended
September 30,
 

 2019  2018  2020 2019 
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross 
$
72,612
  
$
65,689
  $81,448  $72,612 
Less: Reinsurance recoverable on unpaid losses  
(14,354
)
  
(11,968
)
  (18,339)
  (14,354)
Beginning liabilities for unpaid losses, claims and loss adjustment expenses, net  
58,258
   
53,721
   63,109   58,258 
              
Incurred related to:              
Current accident year 
103,017
  
96,424
   91,788   103,017 
Prior accident year development(1)  
(629
)
  
(1,049
)
  (2,740)(2)
 (629)
Total incurred  
102,388
   
95,375
   89,048   102,388 
              
Paid related to:              
Current accident year 
66,682
  
62,598
   57,676   66,682 
Prior accident years  
34,314
   
28,950
   34,435   34,314 
Total paid  
100,996
   
91,548
   92,111   100,996 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, net 
59,650
  
57,548
   60,046   59,650 
Plus: Reinsurance recoverable on unpaid losses  
16,611
   
14,268
   18,111   16,611 
Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross 
$
76,261
  
$
71,816
  $78,157  $76,261 

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

(2)
Prior years’ development was primarily the result of favorable development in the loss and claim reserves for the Medicare supplement line of business in Bankers Fidelity. Rate increases on existing business and the resultant improvement in rate adequacy was more favorable than expected.

Following is a reconciliation of total incurred losses to total insurance benefits and losses incurred for the nine months ended September 30, 2019 and 2018:incurred:


 
Nine Months Ended
September 30,
  
Nine Months Ended
September 30,
 

 2019  2018  2020 2019 
Total incurred losses 
$
102,388
  
$
95,375
  
$
89,048
  
$
102,388
 
Cash surrender value and matured endowments 
1,020
  
1,057
  
962
  
1,020
 
Benefit reserve changes  
769
   
2,046
   
(132
)
  
769
 
Total insurance benefits and losses incurred 
$
104,177
  
$
98,478
  
$
89,878
  
$
104,177
 

Note 6.
Junior Subordinated Debentures

The Company has two unconsolidated Connecticut statutory business trusts, which exist for the exclusive purposes of: (i) issuing trust preferred securities (“Trust Preferred Securities”) representing undivided beneficial interests in the assets of the trusts; (ii) investing the gross proceeds of the Trust Preferred Securities in junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of Atlantic American; and (iii) engaging in those activities necessary or incidental thereto.

The financial structure of each of Atlantic American Statutory Trust I and II as of September 30, 20192020 was as follows:

 
Atlantic American
Statutory Trust I
  
Atlantic American
Statutory Trust II
  
Atlantic American
Statutory Trust I
 
Atlantic American
Statutory Trust II
 
JUNIOR SUBORDINATED DEBENTURES (1) (2)
             
Principal amount owed September 30, 2019 
$
18,042
  
$
23,196
 
Principal amount owed September 30, 2020 $
18,042 $
23,196 
Less: Treasury debt (3)
  
—
   
(7,500
)
  —  (7,500)
Net balance September 30, 2019 
$
18,042
  
$
15,696
 
Net balance December 31, 2018 
$
18,042
  
$
15,696
 
Net balance September 30, 2020 $
18,042 $
15,696 
Net balance December 31, 2019 $
18,042 $
15,696 
Coupon rate LIBOR + 4.00% LIBOR + 4.10
%
  LIBOR + 4.00%  LIBOR + 4.10% 
Interest payable Quarterly  Quarterly   Quarterly  Quarterly 
Maturity date December 4, 2032  May 15, 2033   December 4, 2032  May 15, 2033 
Redeemable by issuer Yes  Yes   Yes  Yes 
TRUST PREFERRED SECURITIES             
Issuance date December 4, 2002  May 15, 2003   December 4, 2002  May 15, 2003 
Securities issued 
17,500
  
22,500
   17,500  22,500 
Liquidation preference per security 
$
1
  
$
1
  $
1 $
1 
Liquidation value 
$
17,500
  
$
22,500
  $
17,500  22,500 
Coupon rate LIBOR + 4.00% LIBOR + 4.10%  LIBOR + 4.00%  LIBOR + 4.10% 
Distribution payable Quarterly  Quarterly   Quarterly  Quarterly 
Distribution guaranteed by (4)
 
Atlantic American
Corporation
  
Atlantic American
Corporation
   Atlantic American Corporation  Atlantic American Corporation 

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

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

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

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

Note 7.
Earnings (Loss) Per Common Share

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


 
Three Months Ended
September 30, 2019
 

 Loss  
Weighted
Average
Shares
(In thousands)
 
Per Share
Amount
 
Basic and Diluted Loss Per Common Share:            
Net loss 
$
(1,392
)
  
20,250
     
Less preferred stock dividends  
(100
)
  
—
     
Net loss applicable to common shareholders 
$
(1,492
)
  
20,250
 
$
(.07)


 
Three Months Ended
September 30, 2018
  
Three Months Ended
September 30, 2020
 

 Income  
Weighted
Average
Shares
(In thousands)
 
Per Share
Amount
  Income 
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
 
Basic and Diluted Earnings Per Common Share:            
Basic Earnings Per Common Share:        
Net income 
$
934
  
20,420
      
$
1,876
  
20,438
   
Less preferred stock dividends  
(100
)
  
—
       
(100
)
  
—
   
Net income applicable to common shareholders 
$
834
   
20,420
 
$
.04  
1,776
  
20,438
  
$
.09
 
Diluted Earnings Per Common Share:         
Effect of Series D preferred stock  
100
   
1,378
    
Net income applicable to common shareholders 
$
1,876
   
21,816
  
$
.09
 

 
Nine Months Ended
September 30, 2019
 
Three Months Ended
September 30, 2019
 Loss  
Weighted
Average
Shares
(In thousands)
 
Per Share
Amount
  Loss 
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
Basic and Diluted Loss Per Common Share:                      
Net loss 
$
(1,656
)
 
20,185
      $(1,392)  20,250    
Less preferred stock dividends  
(299
)
  
—
       (100)  —    
Net loss applicable to common shareholders 
$
(1,955
)
  
20,185
 
$
(.10) $(1,492)  20,250 $(.07)

  
Nine Months Ended
September 30, 2018
 
  Loss  
Weighted
Average
Shares
(In thousands)
 
Per Share
Amount
 
Basic and Diluted Loss Per Common Share:            
Net loss 
$
(905
)
  
20,314
     
Less preferred stock dividends  
(299
)
  
—
     
Net loss applicable to common shareholders 
$
(1,204
)
  
20,314
 
$
(.06)
  
Nine Months Ended
September 30, 2020
  Income  
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
Basic and Diluted Income Per Common Share:          
Net income 
$
321
   
20,450
    
Less preferred stock dividends  
(299
)
  
—
    
Net income applicable to common shareholders 
$
22
   
20,450
 $—

  
Nine Months Ended
September 30, 2019
  Loss  
Weighted
Average
Shares
(In thousands)
  
Per Share
Amount
Basic and Diluted Loss Per Common Share:          
Net loss 
$
(1,656
)
  
20,185
    
Less preferred stock dividends  
(299
)
  
—
    
Net loss applicable to common shareholders 
$
(1,955
)
  
20,185
 $(.10)

The assumed conversion of the Company’s Series D preferred stock was excluded from the earnings (loss) per common share calculation for all periods presented, except for the three month period ended September 30, 2020, since its impact would have been antidilutive.

Note 8.
Income Taxes

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

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020  2019  2020  2019 
Federal income tax provision at statutory rate of 21% 
$
(366
)
 
$
225
  
$
(430
)
 
$
(262
)
 
$
511
  
$
(366
)
 
$
102
  
$
(430
)
Dividends-received deduction 
(6
)
 
(10
)
 
(20
)
 
(30
)
 
(3
)
 
(6
)
 
(9
)
 
(20
)
Other permanent differences 
41
  
22
  
79
  
50
  
31
  
41
  
55
  
79
 
Adjustment for prior years’ estimates to actual  
(21
)
  
(99
)
  
(21
)
  
(99
)
  
18
   
(21
)
  
18
   
(21
)
Income tax expense (benefit) 
$
(352
)
 
$
138
  
$
(392
)
 
$
(341
)
 
$
557
  
$
(352
)
 
$
166
  
$
(392
)

The components of income tax expense (benefit)benefit were:

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
Current - Federal 
$
(368
)
 
$
255
  
$
204
  
$
994
 
Deferred - Federal  
16
   
(117
)
  
(596
)
  
(1,335
)
Total 
$
(352
)
 
$
138
  
$
(392
)
 
$
(341
)
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2020  2019  2020  2019 
Current – Federal 
$
705
  
$
(368
)
 
$
3,007
  
$
204
 
Deferred – Federal  
(148
)
  
16
   
(2,841
)
  
(596
)
Total 
$
557
  
$
(352
)
 
$
166
  
$
(392
)

In addition, the Company determined there were no significant tax implications as a result of the CARES Act.
Note 9.
Leases

The Company has identified two operating lease agreements, each for the use of office space in the ordinary course of business.

The first lease renews annually on an automatic basis and based on original assumptions, management is reasonably certain to exercise the renewal option for an additional eight years from the January 1, 2019 effective date of the new lease guidance. The original term of the second lease was ten years and amended in January 2017 to provide for an additional seven years, with a termination date on September 30, 2026. The rate used in determining the present value of lease payments is based upon an estimate of the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.

These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease. Lease expense reported for the nine months ended September 30, 2020 and September 30, 2019 was $761. See the “Adoption of New Accounting Standards – Leases” section of Note 2 of Notes to Condensed Consolidated Financial Statements for additional information regarding the accounting for leases.$507.

Additional information regarding the Company’s real estate operating leases is as follows:

 
Nine Months
Ended
September 30,
 
 2019  
Nine Months Ended
September 30,
 
Other information on operating leases:    2020  2019 
Cash payments included in the measurement of lease liabilities reported in operating cash flows 
$
632
  
$
726
  
$
632
 
Right-of-use assets included in other assets on the condensed consolidated balance sheet 
5,631
  
4,997
  
5,631
 
Weighted average discount rate 
6.8
%
 
6.8
%
 
6.8
%
Weighted average remaining lease term in years 7.1 years  6.1 years  7.1 years 

The following table presents maturities and present value of the Company’s lease liabilities:

 Lease Liability  Lease Liability 
Remainder of 2019 
$
182
 
2020 
978
 
Remainder of 2020 
$
251
 
2021 
1,015
  
1,015
 
2022 
1,031
  
1,031
 
2023 
1,048
  
1,048
 
2024 
1,065
 
Thereafter  
3,091
   
2,025
 
Total undiscounted lease payments 
7,345
  
6,435
 
Less: present value adjustment  
1,585
   
1,204
 
Operating lease liability included in other liabilities on the condensed consolidated balance sheet 
$
5,760
 
Operating lease liability included in accounts payable and accrued expenses on the condensed consolidated balance sheet 
$
5,231
 

As of September 30, 2019,2020, the Company has no operating leases that have not yet commenced.

Note 10.
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.

Note 11.
Segment Information

The Parent’s primary insurance subsidiaries, American Southern and Bankers Fidelity, operate in two principal business units, each focusing on specific products. American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market. Each business unit is managed independently and is evaluated on its individual performance. Substantially all revenue other than in the corporate and other segment is from external sources. The following sets forth the assets, revenue and income (loss) before income taxes for each business unit as of and for the periods ended 20192020 and 2018.2019.

Assets 
September 30,
2019
  
December 31,
2018
 
American Southern 
$
141,569
  
$
122,724
 
Bankers Fidelity  
216,850
   
195,663
 
Corporate and Other  
154,527
   
134,643
 
Adjustments & Eliminations  
(129,611
)
  
(108,756
)
Total assets 
$
383,335
  
$
344,274
 

Revenues 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
American Southern 
$
14,605
  
$
13,998
  
$
45,580
  
$
42,174
 
Bankers Fidelity  
32,311
   
31,196
   
97,931
   
92,950
 
Corporate and Other  
3,069
   
3,703
   
9,686
   
9,122
 
Adjustments & Eliminations  
(2,240
)
  
(2,527
)
  
(7,307
)
  
(7,893
)
Total revenue 
$
47,745
  
$
46,370
  
$
145,890
  
$
136,353
 

Income (Loss) Before Income Taxes 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2019  2018  2019  2018 
Assets 
September 30,
2020
 
December 31,
2019
 
American Southern 
$
471
  
$
995
  
$
3,849
  
$
3,892
  
$
151,865
  
$
141,524
 
Bankers Fidelity 
(1,334
)
 
512
  
(3,828
)
 
(1,762
)
 
221,982
  
224,122
 
Corporate and Other  
(881
)
  
(435
)
  
(2,069
)
  
(3,376
)
  
11,105
   
11,980
 
Income (loss) before income taxes 
$
(1,744
)
 
$
1,072
  
$
(2,048
)
 
$
(1,246
)
Total assets 
$
384,952
  
$
377,626
 

Revenues 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2020  2019  2020  2019 
American Southern 
$
15,649
  
$
14,605
  
$
47,772
  
$
45,580
 
Bankers Fidelity  
30,875
   
32,311
   
88,619
   
97,931
 
Corporate and Other  
(255
)
  
829
   
(975
)
  
2,379
 
Total revenue 
$
46,269
  
$
47,745
  
$
135,416
  
$
145,890
 

Income (Loss) Before Income Taxes 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2020  2019  2020  2019 
American Southern 
$
1,857
  
$
471
  
$
4,822
  
$
3,849
 
Bankers Fidelity  
2,765
   
(1,334
)
  
2,023
   
(3,828
)
Corporate and Other  
(2,189
)
  
(881
)
  
(6,358
)
  
(2,069
)
Income (loss) before income taxes 
$
2,433
  
$
(1,744
)
 
$
487
  
$
(2,048
)

Note 12.
Related Party Transactions

During the nine month period ended September 30, 2019, the Company transferred its remaining fractional interest in an aircraft arrangement to Gray Television, Inc., a related party, for $151.

Note 13.
Subsequent Events

Since September 30, 2020, the COVID-19 pandemic continues to cause material disruption to financial markets and the economy.  As a result of the pandemic, the Company could experience future losses in its investment portfolio as a result of the weakened and volatile markets.  Additionally, the Company can experience increased risk of loss any time unforeseen infectious diseases impact large portions of a population. Specifically, the Company’s life and health business could experience significant loss due to increased claims volume arising from COVID-19. The duration and impact of the COVID-19 pandemic is unknown at this time and it is not possible to reliably estimate the impact on the financial condition, operating results or liquidity of the Company and its operating subsidiaries in future periods.

Item 2.

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

Overview

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, 2019.2020. 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, 20182019 (the “2018“2019 Annual Report”).

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

Recent Events and Outlook

On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic.  In March 2020, the impact of COVID-19 and related actions to attempt to control its spread began to impact our business operations, and we expect that the pandemic, actions that have been or will be taken in response to it and its overall impact on the economy, will continue to have an effect on our business operations and our operating results. See “Expected Impact of COVID-19 on the Company’s Financial Condition and Results of Operations.”

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 20182019 Annual Report. Except as disclosed in Note 2 of Notes to Condensed Consolidated Financial Statements, the Company’s critical accounting policies are consistent with those disclosed in the 20182019 Annual Report.

Overall Corporate Results

The following presents the Company’s revenue, expenses and net income (loss) for the three month and nine month periods ended September 30, 20192020 and the comparable period in 2018:2019:

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020  2019  2020  2019 
 (In thousands)             
Insurance premiums, net 
$
45,005
  
$
42,557
  
$
135,256
  
$
127,604
  
$
44,978
  
$
45,005
  
$
137,027
  
$
135,256
 
Net investment income 
2,187
  
2,215
  
6,834
  
7,111
  
1,828
  
2,187
  
5,717
  
6,834
 
Realized investment gains (losses), net 
(430
)
 
484
  
1,565
  
797
  
183
  
(430
)
 
432
  
1,565
 
Unrealized gains on equity securities, net 
944
  
1,083
  
2,096
  
753
 
Unrealized gains (losses) on equity securities, net 
(731
)
 
944
  
(7,831
)
 
2,096
 
Other income  
39
   
31
   
139
   
88
   
11
   
39
   
71
   
139
 
Total revenue  
47,745
   
46,370
   
145,890
   
136,353
   
46,269
   
47,745
   
135,416
   
145,890
 
Insurance benefits and losses incurred 
34,719
  
33,087
  
104,177
  
98,478
  
29,219
  
34,719
  
89,878
  
104,177
 
Commissions and underwriting expenses 
11,471
  
8,722
  
33,995
  
28,456
  
11,202
  
11,471
  
34,682
  
33,995
 
Interest expense 
533
  
529
  
1,624
  
1,497
  
363
  
533
  
1,253
  
1,624
 
Other expense  
2,766
   
2,960
   
8,142
   
9,168
   
3,052
   
2,766
   
9,116
   
8,142
 
Total benefits and expenses  
49,489
   
45,298
   
147,938
   
137,599
   
43,836
   
49,489
   
134,929
   
147,938
 
Income (loss) before income taxes 
$
(1,744
)
 
$
1,072
  
$
(2,048
)
 
$
(1,246
)
 
$
2,433
  
$
(1,744
)
 
$
487
  
$
(2,048
)
Net income (loss) 
$
(1,392
)
 
$
934
  
$
(1,656
)
 
$
(905
)
 
$
1,876
  
$
(1,392
)
 
$
321
  
$
(1,656
)

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

A reconciliation of net income (loss) to operating lossincome (loss) for the three month and nine month periods ended September 30, 20192020 and the comparable periodsperiod in 20182019 is as follows:

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Reconciliation of Non-GAAP Financial Measure 2019  2018  2019  2018  2020 2019 2020 2019 
 (In thousands)  (In thousands) 
Net income (loss) 
$
(1,392
)
 
$
934
  
$
(1,656
)
 
$
(905
)
 
$
1,876
  
$
(1,392
)
 
$
321
  
$
(1,656
)
Income tax expense (benefit) 
(352
)
 
138
  
(392
)
 
(341
)
 
557
  
(352
)
 
166
  
(392
)
Realized investment (gains) losses, net 
430
  
(484
)
 
(1,565
)
 
(797
)
 
(183
)
 
430
  
(432
)
 
(1,565
)
Unrealized gains on equity securities, net  
(944
)
  
(1,083
)
  
(2,096
)
  
(753
)
Non-GAAP operating loss 
$
(2,258
)
 
$
(495
)
 
$
(5,709
)
 
$
(2,796
)
Unrealized (gains) losses on equity securities, net  
731
   
(944
)
  
7,831
   
(2,096
)
Non-GAAP operating income (loss) 
$
2,981
  
$
(2,258
)
 
$
7,886
  
$
(5,709
)

On a consolidated basis, the Company had net income of $1.9 million, or $0.09 per diluted share, for the three month period ended September 30, 2020, compared to net loss of $1.4 million, or $0.07 per diluted share, for the three month period ended September 30, 2019, compared to2019.  The Company had net income of $0.9$0.3 million, or $0.04$0.00 per diluted share, for the threenine month period ended September 30, 2018.  The Company had2020, compared to net loss of $1.7 million, or $0.10 per diluted share, for the nine month period ended September 30, 2019, compared to net loss of $0.9 million, or $0.06 per diluted share, for the nine month period ended September 30, 2018.  Premium revenue for the three month period ended September 30, 20192019.

Operating income increased $2.4 million, or 5.8%, to $45.0 million from $42.6$5.2 million in the three month period ended September 30, 2018.2020 from the three month period ended September 30, 2019.  For the nine month period ended September 30, 2019,2020, operating income increased $13.6 million over the comparable period in 2019.  The increase in operating income was primarily due to favorable loss experience in the life and health operations, resulting from a significant decrease in the number of incurred claims within the Medicare supplement line of business.  This decrease in the number of incurred claims was primarily attributable to the Company’s individual policy holders being subject to varying degrees of shelter in place orders instituted throughout the United States during 2020 as a result of COVID-19. For the three month period ended September 30, 2020, premium decreased slightly from the comparable period in 2019. For the nine month period ended September 30, 2020, premium revenue increased $7.7$1.8 million, or 6.0%1.3%, to $135.3$137.0 million from $127.6$135.3 million in the comparable period in 2018.2019. The increase in premium revenue was primarily attributable to an increase in Medicare supplement business in the life and health operations, coupled with an increase in the automobile physical damage line of business in the property and casualty operations. Operating loss increased $1.8 million in the three month period ended September 30, 2019 from the three month period ended September 30, 2018.  For the nine month period ended September 30, 2019, the operating loss increased $2.9 million over the comparable period in 2018.  The increase in operating loss was primarily due to unfavorable loss experience in the life and health operations.

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

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, 20192020 and the comparable periods in 2018:2019:

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020 2019 2020 2019 
 (Dollars in thousands)  (Dollars in thousands) 
Gross written premiums 
$
9,953
  
$
9,250
  
$
50,228
  
$
44,592
  
$
11,574
  
$
9,953
  
$
54,512
  
$
50,228
 
Ceded premiums  
(1,403
)
  
(1,238
)
  
(4,091
)
  
(3,669
)
  
(1,519
)
  
(1,403
)
  
(4,364
)
  
(4,091
)
Net written premiums 
$
8,550
  
$
8,012
  
$
46,137
  
$
40,923
  
$
10,055
  
$
8,550
  
$
50,148
  
$
46,137
 
Net earned premiums 
$
14,475
  
$
13,050
  
$
43,035
  
$
39,299
  
$
14,770
  
$
14,475
  
$
45,516
  
$
43,035
 
Net loss and loss adjustment expenses 
9,440
  
10,672
  
28,346
  
28,544
 
Underwriting expenses  
4,696
   
2,331
   
13,386
   
9,737
 
Insurance benefits and losses incurred 
9,131
  
9,440
  
28,686
  
28,346
 
Commissions and underwriting expenses  
4,662
   
4,696
   
14,264
   
13,386
 
Underwriting income 
$
339
  
$
47
  
$
1,303
  
$
1,018
  
$
977
  
$
339
  
$
2,566
  
$
1,303
 
Loss ratio 
65.2
%
 
81.8
%
 
65.9
%
 
72.6
%
 
61.8
%
 
65.2
%
 
63.0
%
 
65.9
%
Expense ratio  
32.4
   
17.9
   
31.1
   
24.8
   
31.6
   
32.4
   
31.3
   
31.1
 
Combined ratio  
97.6
%
  
99.7
%
  
97.0
%
  
97.4
%
  
93.4
%
  
97.6
%
  
94.3
%
  
97.0
%

Gross written premiums at American Southern increased $0.7$1.6 million, or 7.6%16.3%, during the three month period ended September 30, 20192020 and $5.6$4.3 million, or 12.6%8.5%, during the nine month period ended September 30, 2019,2020, from the comparable periods in 2018.2019. The increase in gross written premiums was primarily attributable to an increase in premiums written in the automobile physical damage line of business due to increased writings from certain agencies and a new agency that started in the second half of 2018. Partially offsetting the increase in gross written premiums was a decline in premiums written in the surety line of business2019, as a result ofwell as increased competition.writings from certain existing agencies.

Ceded premiums increased $0.2$0.1 million, or 13.3%8.3%, during the three month period ended September 30, 20192020 and $0.4$0.3 million, or 11.5%6.7%, during the nine month period ended September 30, 2019,2020, from the comparable periods in 2018. The2019. American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally increase or decrease as earned premiums increase or decrease.  Also contributing to the increase in ceded premiums in 20192020 was due primarily to an increase in earned premiums in certain accounts within the automobile physical damage and general liability lines of business, which are subject to reinsurance.

The following presents American Southern’s net earned premiums by line of business for the three month and nine month periods ended September 30, 20192020 and the comparable periods in 2018:2019:

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020 2019 2020 2019 
 (In thousands)  (In thousands) 
Automobile liability 
$
7,585
  
$
6,878
  
$
22,422
  
$
21,123
  
$
6,804
  
$
7,585
  
$
22,167
  
$
22,422
 
Automobile physical damage 
3,597
  
3,013
  
10,998
  
8,365
  
4,499
  
3,597
  
13,519
  
10,998
 
General liability 
884
  
678
  
2,487
  
2,131
  
1,008
  
884
  
2,747
  
2,487
 
Surety 
1,552
  
1,729
  
4,847
  
5,441
  
1,417
  
1,552
  
4,463
  
4,847
 
Other lines  
857
   
752
   
2,281
   
2,239
   
1,042
   
857
   
2,620
   
2,281
 
Total 
$
14,475
  
$
13,050
  
$
43,035
  
$
39,299
  
$
14,770
  
$
14,475
  
$
45,516
  
$
43,035
 

Net earned premiums increased $1.4$0.3 million, or 10.9%2.0%, during the three month period ended September 30, 2019,2020, and increased $3.7$2.5 million, or 9.5%5.8%, during the nine month period ended September 30, 2020, over the comparable periods in 2018.2019. The increase in net earned premiums was primarily attributable to an increase in automobile physical damage coverage resulting from additional writings from athe new agency as previously mentioned. Premiums are earned ratably over their respective policy terms, and therefore premiums earned in the current year are related to policies written during both the current year and immediately preceding year.

The performance of an insurance company is often measured by its combined ratio. The combined ratio represents the percentage of losses, loss adjustment expenses and other expenses that are incurred for each dollar of premium earned by the Company.company. A combined ratio of under 100% represents an underwriting profit while a combined ratio of over 100% indicates an underwriting loss. The combined ratio is divided into two components, the loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) and the expense ratio (the ratio of expenses incurred to premiums earned).

-24-
Net lossInsurance benefits and loss adjustment expenseslosses incurred at American Southern decreased $1.2$0.3 million, or 11.5%3.3%, during the three month period ended September 30, 2019,2020, and $0.2increased $0.3 million, or 0.7%1.2%, during the nine month period ended September 30, 2019,2020, over the comparable periods in 2018.2019. As a percentage of net earned premiums, net loss and loss adjustment expenses were 61.8% in the three month period ended September 30, 2020, compared to 65.2% in the three month period ended September 30, 2019, compared to 81.8% in the three month period ended September 30, 2018.2019.  For the nine month period ended September 30, 2019,2020, this ratio decreased to 65.9%63.0% from 72.6%65.9% in the comparable period in 2018.2019. The decrease in the loss ratio during the three month period and nine month periods ended September 30, 20192020 was primarily due to more favorable loss experience as a result of a declinedecrease in the severity of lossesclaims in the suretyautomobile liability line of business.  Also contributing toPartially offsetting the decrease in the loss ratio during the three month and nine month periods ended September 30, 20192020 was a lower amount of claimsless favorable loss experience in the automobile physical damage line of business.business due to an increase in frequency of claims from the new agency.

UnderwritingCommissions and underwriting expenses increased $2.4 million, or 101.5%,decreased slightly during the three month period ended September 30, 2019,2020, and $3.6increased $0.9 million, or 37.5%6.6%, during the nine month period ended September 30, 2019,2020, over the comparable periods in 2018.2019. As a percentage of net earned premiums, underwriting expenses were 31.6% in the three month period ended September 30, 2020, compared to 32.4% in the three month period ended September 30, 2019, compared to 17.9% in the three month period ended September 30, 2018.2019. For the nine month period ended September 30, 2019,2020, this ratio increased to 31.1%31.3% from 24.8%31.1% in the comparable period in 2018.2019.  The decrease in the expense ratio during the three month period ended September 30, 2020 was primarily attributable to an increase in earned premiums coupled with a slight decrease in commissions and underwriting expenses. The increase in the expense ratio during the three month and nine month periodsperiod ended September 30, 20192020 was primarily due to American Southern’s use of a variable commission structure with certain agents, which compensates the participating agents in relation to the loss ratios of the business they write. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease.  During the three month and nine month periods ended September 30, 2019, variable commissions at American Southern increased $2.0 million and $2.6 million, respectively, from the comparable periods in 2018 due to more favorable loss experience in the surety line of business.  Also contributing to the increase in the expense ratio were increases in fixed commissions and various underwriting 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, 20192020 and the comparable periods in 2018:2019:

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 2019  2018  2019  2018  2020 2019 2020 2019 
 (Dollars in thousands)  (Dollars in thousands) 
Medicare supplement 
$
44,810
  
$
41,123
  
$
133,680
  
$
120,550
  
$
43,573
  
$
44,810
  
$
131,675
  
$
133,680
 
Other health products 
1,953
  
2,139
  
5,839
  
5,729
  
2,385
  
1,953
  
6,880
  
5,839
 
Life insurance  
2,075
   
2,306
   
6,371
   
6,879
   
2,256
   
2,075
   
7,070
   
6,371
 
Gross earned premiums 
48,838
  
45,568
  
145,890
  
133,158
  
48,214
  
48,838
  
145,625
  
145,890
 
Ceded premiums  
(18,308
)
  
(16,061
)
  
(53,669
)
  
(44,853
)
  
(18,006
)
  
(18,308
)
  
(54,114
)
  
(53,669
)
Net earned premiums  
30,530
   
29,507
   
92,221
   
88,305
   
30,208
   
30,530
   
91,511
   
92,221
 
Insurance benefits and losses 
25,279
  
22,415
  
75,831
  
69,934
 
Underwriting expenses  
8,365
   
8,270
   
25,927
   
24,779
 
Insurance benefits and losses incurred 
20,088
  
25,279
  
61,192
  
75,831
 
Commissions and underwriting expenses  
8,021
   
8,365
   
25,403
   
25,927
 
Total expenses  
33,644
   
30,685
   
101,758
   
94,713
   
28,109
   
33,644
   
86,595
   
101,758
 
Underwriting loss 
$
(3,114
)
 
$
(1,178
)
 
$
(9,537
)
 
$
(6,408
)
Underwriting income (loss) 
$
2,099
  
$
(3,114
)
 
$
4,916
  
$
(9,537
)
Loss ratio 
82.8
%
 
76.0
%
 
82.2
%
 
79.2
%
 
66.5
%
 
82.8
%
 
66.9
%
 
82.2
%
Expense ratio  
27.4
   
28.0
   
28.1
   
28.1
   
26.6
   
27.4
   
27.8
   
28.1
 
Combined ratio  
110.2
%
  
104.0
%
  
110.3
%
  
107.3
%
  
93.1
%
  
110.2
%
  
94.7
%
  
110.3
%

Net earned premium revenue at Bankers Fidelity increased $1.0decreased $0.3 million, or 3.5%1.1%, during the three month period ended September 30, 2019,2020, and $3.9$0.7 million, or 4.4%0.8%, during the nine month period ended September 30, 2019, over2020, from the comparable periods in 2018.2019. Gross earned premiums from the Medicare supplement line of business increased $3.7decreased $1.2 million, or 9.0%2.8%, during the three month period ended September 30, 2019,2020, and $13.1$2.0 million, or 10.9%1.5%, during the nine month period ended September 30, 2019,2020, due primarily to successful executionnon-renewals exceeding the level of new business generating strategies with both new and existing agents.writings. Other health product premiums decreasedincreased $0.4 million, or 22.1%, during the three month period ended September 30, 2020, and $1.0 million, or 17.8%, during the nine month period ended September 30, 2020, over the comparable periods in 2019, primarily as a result of new sales of the company’s group health products. Gross earned premiums from the life insurance line of business increased $0.2 million, or 8.7%, during the three month period ended September 30, 2019,2020, and increased $0.1$0.7 million, or 1.9%11.0%, during the nine month period ended September 30, 2019, from2020 over the comparable periods in 2018. The2019 due to an increase in other health product premiums during the nine month period ended September 30, 2019 was primarily a result of new sales ofgroup life products premium. Partially offsetting the company’s hospital indemnity and group health products. Grossincrease in gross earned premiums from the life insurance line was a decrease in individual life products premium, resulting from the redemption and settlement of businessexisting individual life policy obligations exceeding the level of new individual life sales.  Premiums ceded decreased $0.2$0.3 million, or 10.0%1.6%, during the three month period ended September 30, 2019,2020 and $0.5increased $0.4 million, or 7.4%0.8%, during the nine month period ended September 30, 2019 from2020, over the comparable periods in 2018 due to the redemption and settlement of existing policy obligations exceeding the level of new sales activity.  Premiums2019.  The decrease in ceded increased $2.2 million, or 14.0%, duringpremiums for the three month period ended September 30, 2019 and $8.8 million, or 19.7%, during2020 was due to non-renewals exceeding the level of new business writings, as previously discussed. The increase in ceded premiums for the nine month period ended September 30, 2019, over the comparable periods in 2018.  The increase in ceded premiums for the three month and nine month periods ended September 30, 20192020 was due to an increase in Medicare supplement premiums subject to reinsurance.

BenefitsInsurance benefits and losses increased $2.9incurred decreased $5.2 million, or 12.8%20.5%, during the three month period ended September 30, 2019,2020, and $5.9$14.6 million, or 8.4%19.3%, during the nine month period ended September 30, 2019, over2020, from the comparable periods in 2018.2019.  As a percentage of net earned premiums, benefits and losses were 66.5% in the three month period ended September 30, 2020, compared to 82.8% in the three month period ended September 30, 2019, compared to 76.0% in the three month period ended September 30, 2018.2019.  For the nine month period ended September 30, 2019,2020, this ratio increaseddecreased to 82.2%66.9% from 79.2%82.2% in the comparable period in 2018.2019.  The increasedecrease in the loss ratio for the three month and nine month periods ended September 30, 20192020 was primarily attributabledue to unfavorable loss experience in the Medicare supplement linea significantly lower number of business.  Throughout 2018 and continuing into the nine month period ended September 30, 2019, Bankers Fidelity experienced a higher than expected level of claims incurred in the Medicare supplement line of business which had an unfavorable effect ondue to the Company’s individual policy holders being subject to varying degrees of shelter in place orders instituted throughout the United States during 2020 as a result of COVID-19. Also contributing to the decrease in the loss patterns and increasedratio was an improvement in rate adequacy in the resultant loss ratio.Medicare supplement line of business as a result of implementation of rate increases on existing business.

UnderwritingCommissions and underwriting expenses increased $0.1decreased $0.3 million, or 1.1%4.1%, during the three month period ended September 30, 2019,2020, and $1.1$0.5 million, or 4.6%2.0%, during the nine month period ended September 30, 2019,2020, over the comparable periods in 2018.2019.  As a percentage of net earned premiums, underwriting expenses were 26.6% in the three month period ended September 30, 2020, compared to 27.4% in the three month period ended September 30, 2019, compared to 28.0% in the three month period ended September 30, 2018.2019.  For the nine month period ended September 30, 2019,2020, this ratio remained unchangeddecreased to 27.8% from 28.1% in the comparable period in 2018 at 28.1%.2019. The slight changedecrease in the expense ratio for the three month periodand nine month periods ended September 30, 20192020 was primarily due to a slight improvementdecrease in commission expenses as a percentageagent incentive costs and realization of net earned premiums.costs saving initiatives, predominantly related to postage costs.

NET INVESTMENT INCOME AND REALIZED GAINS (LOSSES)Net Investment Income and Realized Gains (Losses)

Investment income decreased slightly$0.4 million, or 16.4%, during the three month period ended September 30, 2019,2020, and $0.3$1.1 million, or 3.9%16.3%, during the nine month period ended September 30, 2019,2020, over the comparable periods in 2018.2019. The decrease in investment income was primarily attributable to net losses in the Company’s other invested assets.

The Company had net realized investment gains of $0.2 million during the ninethree month period ended September 30, 2019 was primarily attributable2020, compared to a decrease in the equity in earnings from investments in real estate partnerships of $0.2 million over the comparable period in 2018.

The Company had net realized investment losses of $0.4 million during the three month period ended September 30, 2019, compared to2019.  The Company had net realized investment gains of $0.5$0.4 million during the threenine month period ended September 30, 2018.  The Company had2020, compared to net realized investment gains of $1.6 million during the nine month period ended September 30, 2019, compared to net realized investment gains of $0.8 million during the nine month period ended September 30, 2018. During the three month period ended September 30, 2019, management engaged a new investment advisor to manage the Company’s investment portfolio.  In conjunction with such engagement, management reevaluated the Company’s investment allocations and as a result of the rebalancing of the portfolio, certain securities were sold at a realized loss.2019.  The net realized investment gains during the three month and nine month periodperiods ended September 30, 20192020 resulted primarily from the disposition of certainseveral of the Company’s investments in equity and fixed maturities.maturity securities. Management continually evaluates the Company’s investment portfolio and makes adjustments for impairments and/or divests investments as may be determined to be appropriate.

UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIESUnrealized Gains (Losses) on Equity Securities

On January 1, 2018 the Company adopted ASU No. 2016-01, which requires, among other things, investmentsInvestments in equity securities to beare measured at fair value at the end of the reporting period, with any changes in fair value reported in net income. As a result ofincome during the adoption of ASU No. 2016-01, theperiod, with certain exceptions. The Company recognized net unrealized gainslosses on equity securities still held of $1.0$0.7 million during the three month period ended September 30, 20192020 and unrealized gains on equity securities still held of $1.1$0.9 million during the three month period ended September 30, 2018.2019.  The Company recognized net unrealized losses on equity securities of $7.8 million during the nine month period ended September 30, 2020 and unrealized gains on equity securities still held of $2.1 million during the nine month period ended September 30, 2019 and unrealized gains on equity securities still held of $0.8 million during the nine month period ended September 30, 2018.2019.  Changes in unrealized gains on equity securities for the applicable periods are primarily the result of fluctuations in the market valuesvalue of certain of the Company’s equity investments.securities.

INTEREST EXPENSEInterest Expense

Interest expense remained relatively consistentdecreased $0.2 million, or 31.9%, during the three month period ended September 30, 2019,2020, and increased $0.1$0.4 million, or 8.5%22.8%, during the nine month period ended September 30, 2019, over2020, from the comparable periods in 2018.2019. Changes in interest expense were primarily due to changesa decline in the London Interbank Offered Rate (“LIBOR”), as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) are directly related to LIBOR.

OTHER EXPENSES

Other expenses (commissions, underwriting expenses,Liquidity and other expenses) increased $2.6 million, or 21.9%, during the three month period ended September 30, 2019, and $4.5 million, or 12.0%, during the nine month period ended September 30, 2019, from the comparable periods in 2018. The increase in other expenses was primarily attributable to a $2.0 million and $2.6 million increase in the three month and nine month periods ended September 30, 2019, respectively, in the variable commission accrual in the property and casualty operations.  Also contributing to the increase in other expenses were increased costs associated with the growth of the Medicare supplement line of business. On a consolidated basis, as a percentage of earned premiums, other expenses increased to 31.6% in the three month period ended September 30, 2019 from 27.5% in the three month period ended September 30, 2018.  For the nine month period ended September 30, 2019, this ratio increased to 31.2% from 29.5% in the comparable period in 2018. The increase in the expense ratio during the three month and nine month periods ended September 30, 2019 was primarily attributable to the increase costs associated with the growth in Medicare supplement line of business and variable commissions, as discussed previously.

LIQUIDITY AND CAPITAL RESOURCESCapital Resources

The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and surplus levels, and meeting debt service requirements. Current and expected patterns of claim frequency and severity may change from period to period but generally are expected to continue within historical ranges. The Company’s primary sources of cash are written premiums, investment income and proceeds from the sale and maturity of its invested assets. The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts and reinsurance collections will be adequate to fund the payment of claims and operating expenses as needed.

Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the subsidiaries. The principal cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be authorized and approved by the Company’s board of directors from time to time. At September 30, 2019,2020, the Parent had approximately $16.7$4.6 million of unrestricted cash and investments.

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The Parent’s insurance subsidiaries reported astatutory net income of $8.5 million for the nine month period ended September 30, 2020, compared to statutory net loss of $4.2 million for the nine month period ended September 30, 2019, compared to statutory net loss of $1.0 million for the nine month period ended September 30, 2018.2019. Statutory results are impacted by the recognition of all costs of acquiring business. In periods in which the Company’s first year premiums increase, statutory results are generally lower than results determined under GAAP. Statutory results for the Company’s property and casualty operations may differ from the Company’s results of operations under GAAP due to the deferral of acquisition costs for financial reporting purposes. The Company’s life and health operations’ statutory results may differ from GAAP results primarily due to the deferral of acquisition costs for financial reporting purposes, as well as the use of different reserving methods.

Over 90% of the invested assets of the Parent’s insurance subsidiaries are invested in marketable securities that can be converted into cash, if required; however, the use of such assets by the Company is limited by state insurance regulations. Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At September 30, 2019,2020, American Southern had $42.4$46.4 million of statutory capital and surplus and Bankers Fidelity had $24.1$35.7 million of statutory capital and surplus. In 2019,2020, dividend payments by the Parent’s insurance subsidiaries in excess of $4.3$4.6 million would require prior approval. Through September 30, 2019,2020, the Parent received dividends of $3.6$2.7 million from its subsidiaries.

The Parent provides certain administrative and other services to each of its insurance subsidiaries. The amounts charged to and paid by the subsidiaries include reimbursements for various shared services and other expenses incurred directly on behalf of the subsidiaries by the Parent. In addition, there is in place a formal tax-sharing agreement between the Parent and its insurance subsidiaries. As a result of the Parent’s tax loss, it is anticipated that the tax-sharing agreement will continue to provide the Parent with additional funds from profitable subsidiaries to assist in meeting its cash flow obligations.

The Company has two statutory trusts which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trusts and investing the gross proceeds of the trust preferred securities in Junior Subordinated Debentures. The outstanding $18.0 million and $15.7 million of Junior Subordinated Debentures mature on December 4, 2032 and May 15, 2033, respectively, are callable quarterly, in whole or in part, only at the option of the Company, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to 4.10%. At September 30, 2019,2020, the effective interest rate was 6.57%4.32%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust’s obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities. As of September 30, 2019,2020, the Company has not made such an election.

The Company intends to pay its obligations under the Junior Subordinated Debentures using existing cash balances, dividend and tax-sharing payments from the operating subsidiaries, or from potential future financing arrangements.

At September 30, 2019,2020, the Company had 55,000 shares of Series D preferred stock (“Series D Preferred Stock”) outstanding. All of the shares of Series D Preferred Stock are held by an affiliate of the Company’s controlling shareholder. The outstanding shares of Series D Preferred Stock have a stated value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at the option of the board of directors of the Company) and are cumulative. In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,378,000 shares of the Company’s common stock, subject to certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval; and are redeemable solely at the Company’s option. The Series D Preferred Stock is not currently convertible. At September 30, 2019,2020, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.3 million.

During 2020, Bankers Fidelity Life Insurance Company (“BFLIC”) became a member of the Federal Home Loan Bank of Atlanta (“FHLB”), for the primary purpose of enhancing financial flexibility. As a member, BFLIC can obtain access to low-cost funding and also receive dividends on FHLB stock. The membership arrangement established initial credit availability of five percent of statutory admitted assets, or approximately $8 million. Additional FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB.  BFLIC would be required to post acceptable forms of collateral for any borrowings it makes from the FHLB.  To date, BFLIC has not made any borrowings from the FHLB.
Cash and cash equivalents increaseddecreased from $12.6$12.9 million at December 31, 20182019 to $36.0$8.9 million at September 30, 2019.2020. The increasedecrease in cash and cash equivalents during the nine month period ended September 30, 20192020 was primarily attributable to $31.5a $2.8 million decrease resulting from purchases of netsecurities exceeding investment sales and maturity of securities exceeding purchases of securities, partially offset byin addition to net cash used in operating activities of $7.6$0.9 million.

The Company believes that existing cash balances as well as the dividends, fees, and tax-sharing payments it expects to receive from its subsidiaries and, if needed, additional borrowings from financial institutions, will enable the Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current recommendations by regulatory authorities, which, if implemented, would have a material adverse effect on the Company’s liquidity, capital resources or operations.

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OFF-BALANCE SHEET ARRANGEMENTSCOVID-19 on the Company’s Financial Condition and Results of Operations

The duration and impact of the COVID-19 pandemic is unknown at this time and it is not possible for us to reliably estimate the impact on the financial condition, operating results or liquidity of the Company disclosedand its off-balance sheet arrangementsoperating subsidiaries in future periods.  However, we do not currently expect a significant decline in liquidity or operating results as a result of the disruption caused by the ongoing COVID-19 pandemic.  To date, the most significant impact of COVID-19 on the Company’s financial position has been volatility in the 2018 Annual Report.  Asfair value of September 30, 2019, there have been no material changesthe Company’s fixed maturity and equity investments due to these off-balance sheet arrangements outsidedisruption in the ordinary course of business.financial markets.

CONTRACTUAL OBLIGATIONSWe expect that earned premiums could be adversely impacted by a weakened economy leading to a slowdown in new sales and reduced retention of insureds.  Additionally, a number of states have issued bulletins that either encourage or require premium leniency such as extension of grace periods or moratoriums on cancellation of policies for non-payment.  The Company does not expect a significant reduction or delay in payments and continues to monitor state required actions as they develop.

For the Company’s property and casualty operations, the majority of premium revenue is derived from automobile liability and automobile physical damage lines of business written on a multi-year contract basis with state and local governments.  Although we cannot predict with certainty at this time, we do not expect a significant level of cancellations or non-renewals of our property and casualty contracts in the short term but recognize that a prolonged economic slowdown could adversely affect future results.  However, it is expected that certain automobile programs may request partial premium refunds as a result of a decline in usage, which the Company will continue to evaluate.

Benefits and losses in our property and casualty operations could be adversely impacted as a result of disruption caused by the COVID-19 pandemic.  However, due to the nature of our primary product lines, the impact is not currently expected to be material.  Additionally, we expect to see a reduction in frequency and severity of claims in the automobile lines of business as fewer miles are driven and less people are on the roads.  As a smaller reporting company,result, we do not currently expect a material adverse effect on operating results or liquidity in the property and casualty operations.

The majority of premium revenue in our life and health operations are derived from the senior market segment of the population, or those individuals age sixty-five and up, who maintain Medicare supplement and to a lesser extent, whole life insurance policies with the Company.  We expect that earned premiums could be adversely impacted by the rise in unemployment and economic slowdown related to the COVID-19 pandemic and individual, business and government responses thereto, which could lead to a decline in new sales and reduced retention of insureds.  As a result, we currently anticipate that the life and health operations may experience a marginal decline in earned premiums although the actual impact cannot be predicted with certainty at this time.

Unforeseen infectious diseases that impact large portions of a population can have an adverse impact on mortality and morbidity, and resultant benefits and losses incurred by the Company’s life and health operations.  Accordingly, the Company does anticipate incurring higher costs, potentially similar to prior influenza seasons, as it relates to life insurance claims.  However, with much of the country sheltering in place over an extended period, the Company has elected to complyexperienced lower utilization of certain accident and health benefits, particularly in the Medicare supplement line of business.  As a result, and although the actual impact cannot be predicted with certain scaled disclosure reporting obligations,certainty at this time, the Company does not expect significant adverse development in total benefits and therefore is not providing the table of contractual obligations required by Item 303 of Regulation S-K.losses incurred in its life and health operations.

In addition to the information set forth in this report, you should carefully consider the discussions of the COVID-19 pandemic and related economic developments presented in our Annual Report on Form 10-K for the year ended December 31, 2019, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 in other reports we file with the SEC from time to time, all of which could materially affect our business, financial condition or future results.

ItemItem 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the intentional acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and may not be detected. An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains and references certain information that constitutes forward-looking statements as that term is defined in the federal securities laws. Statements, to the extent they are not statements of historical facts, should be considered forward-looking statements, and are subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s current assessments of various risks and uncertainties, as well as assumptions made in accordance with the “safe harbor” provisions of the federal securities laws. The Company’s actual results could differ materially from the results anticipated in these forward-looking statements as a result of such risks and uncertainties, including those identified in filings made by the Company from time to time with the Securities and Exchange Commission. In addition, other risks and uncertainties not known by us, or that we currently determine to not be material, may materially adversely affect our financial condition, results of operations or cash flows. The Company undertakes no obligation to update any forward-looking statement as a result of subsequent developments, changes in underlying assumptions or facts, or otherwise.

PART II. OTHER INFORMATION

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

On October 31, 2016, the Board of Directors of the Company approved a plan that allows for the repurchase of up to 750,000 shares of the Company’s common stock (the “Repurchase Plan”) on the open market or in privately negotiated transactions, as determined by an authorized officer of the Company. Any such repurchases couldcan be made from time to time in accordance with applicable securities laws and other requirements. The Company suspended the Repurchase Plan in May 2019 in connection with ending the relationship with the registered broker under the Repurchase Plan.  The Company expects to evaluate the implementation of a replacement plan in the future.

Other than pursuant to the Repurchase Plan, no purchases of common stock of the Company were made by or on behalf of the Company during the periods described below.

The table below sets forth information regarding repurchases by the Company of shares of its common stock on a monthly basis during the three month period ended September 30, 2019.2020.

Period 
Total Number
of Shares
Purchased
  
Average
Price Paid
per Share
  
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
  
Maximum Number
Number of
Shares that
May Yet be
Purchased
Under the Plans
Plans or
Programs
 
July 1 – July 31, 20192020  
-—
  
$
-—
   
-—
   
325,129
 
August 1 – August 31, 20192020  
-—
   
-—
   
-—
   
325,129
 
September 1 – September 30, 20192020  
-—
   
-—
   
-—
   
325,129
 
Total  
-—
  
$
-—
   
-—
     

ItemItem 6. Exhibits

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.INS101. INS
XBRL Instance Document.
  
101.SCH101. SCH
XBRL Taxonomy Extension Schema.
  
101.CAL101. CAL
XBRL Taxonomy Extension Calculation Linkbase.
  
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
  
101.LAB
XBRL Taxonomy Extension Label Linkbase.
  
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.

SIGNATURESSIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


ATLANTIC AMERICAN CORPORATION

(Registrant)




Date: November 12, 201910, 2020
By:
/s/ J. Ross Franklin



J. Ross Franklin


Vice President and Chief Financial Officer


(Principal Financial and Accounting Officer)


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