ATLANTIC AMERICAN CORP

Previous wording

AND ANALYSIS OF FINANCIAL CONDITION

Current wording

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

Previous wording

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, 2024. 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, 2023 (the “2023 Annual Report”).

Current wording

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 three month period ended March 31, 2025. 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, 2024 (the “2024 Annual Report”).

Previous wording

The following presents the Company’s revenue, expenses and net income (loss) for the three month and nine month periods ended September 30, 2024 and the comparable periods in 2023:

Current wording

The following presents the Company’s revenue, expenses and net income (loss) for the three month period ended March 31, 2025 and the comparable period in 2024:

Previous wording

A reconciliation of net income (loss) to operating income (loss) for the three month and nine month periods ended September 30, 2024 and the comparable periods in 2023 is as follows:

Current wording

A reconciliation of net income (loss) to operating income (loss) for the three month period ended March 31, 2025 and the comparable period in 2024 is as follows:

Previous wording

On a consolidated basis, the Company had net loss of $2.0 million, or $(0.10) per diluted share, for the three month period ended September 30, 2024, compared to net income of $1.8 million, or $0.08 per diluted share, for the three month period ended September 30, 2023. The Company had net loss of $4.7 million, or $(0.24) per diluted share, for the nine month period ended September 30, 2024, compared to net income of $2.1 million, or $0.09 per diluted share, for the nine month period ended September 30, 2023. The increase in net loss for the three month and nine month periods ended September 30, 2024 was primarily the result of unfavorable loss experience in the life and health operations due to an increase in incurred losses in the group life and Medicare supplement lines of business, as well as in the property and casualty operations due to the frequency and severity of claims in the automobile liability line of business, from the comparable periods in 2023.

Current wording

On a consolidated basis, the Company had net income of $0.8 million, or $0.03 per diluted share, for the three month period ended March 31, 2025, compared to net loss of $2.0 million, or $(0.10) per diluted share, for the three month period ended March 31, 2024. The increase in net income for the first quarter of 2025 was primarily the result of an increase in premium revenue in the life and health operations coupled with favorable loss experience in the life and health operations.

Previous wording

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month and nine month periods ended September 30, 2024 and the comparable periods in 2023:

Current wording

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month period ended March 31, 2025 and the comparable period in 2024:

Previous wording

Gross written premiums at American Southern decreased $2.3 million, or 21.4%, during the three month period ended September 30, 2024 and decreased $4.9 million, or 8.3%, during the nine month period ended September 30, 2024, from the comparable periods in 2023. The decrease in gross written premiums during the three month and nine month periods ended September 30, 2024 was primarily attributable to the decrease in premiums written in the automobile liability line of business due to the non-renewal of a program, as well as a decrease in premiums written in the automobile physical damage line of business due to a decline in demand within the trucking industry. Also contributing to the decrease in gross written premiums was a decrease in premiums written in the surety line of business due to construction slowdowns in certain regions.

Current wording

Gross written premiums at American Southern increased $0.9 million, or 10.2%, during the three month period ended March 31, 2025 from the comparable period in 2024. The increase in gross written premiums was primarily attributable to the increase in premiums written in inland marine within the other lines of business due to a new program written by an existing agency. Also contributing to the increase in gross written premiums was an increase in the automobile physical damage line of business resulting from increased writings from existing agencies. Partially offsetting the increase in gross written premiums was a decrease in premiums written in the automobile liability line of business resulting from retrospective premium adjustments.

Previous wording

Ceded premiums decreased $0.1 million, or 4.4%, during the three month period ended September 30, 2024 and decreased $0.1 million, or 1.9%, during the nine month period ended September 30, 2024, from the comparable periods in 2023. American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally fluctuate as earned premiums increase or decrease or retentions levels change.

Current wording

Ceded premiums increased $0.1 million, or 9.1%, during the three month period ended March 31, 2025 from the comparable period in 2024. American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally fluctuate as earned premiums increase or decrease or retention levels change.

Previous wording

The following presents American Southern’s net earned premiums by line of business for the three month and nine month periods ended September 30, 2024 and the comparable periods in 2023:

Current wording

The following presents American Southern’s net earned premiums by line of business for the three month period ended March 31, 2025 and the comparable period in 2024:

Previous wording

Net earned premiums decreased $0.4 million, or 2.2%, during the three month period ended September 30, 2024, and decreased slightly during the nine month period ended September 30, 2024, over the comparable periods in 2023. The decrease in net earned premiums during the three month and nine month periods ended September 30, 2024 was primarily attributable to a decrease in earned premiums in the automobile physical damage line of business due to a decline in demand within the trucking industry 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.

Current wording

Net earned premiums increased $0.5 million, or 2.5%, during the three month period ended March 31, 2025 over the comparable period in 2024. The increase in net earned premiums was primarily attributable to an increase in earned premiums in inland marine within the other lines of business and the automobile physical damage line of business. Partially offsetting the increase in net earned premiums was a decrease in earned premiums in the automobile liability line of business resulting from the nonrenewal of one program and retrospective premiums adjustments. 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.

Previous wording

Insurance benefits and losses incurred at American Southern increased $2.1 million, or 17.7%, during the three month period ended September 30, 2024, and increased $2.9 million, or 7.7%, during the nine month period ended September 30, 2024, over the comparable periods in 2023. As a percentage of earned premiums, insurance benefits and losses incurred were 86.2% in the three month period ended September 30, 2024, compared to 71.7% in the three month period ended September 30, 2023. For the nine month period ended September 30, 2024, this ratio increased to 79.5% from 73.7% in the comparable period in 2023. The increase in the loss ratio during the three month and nine month periods ended September 30, 2024 was mainly due to an increase in the frequency and severity of claims in the automobile liability line of business. Partially offsetting the increase in the loss ratio was a decrease in the general liability line of business due to favorable reserve development, as a well as a decrease in loss adjustment expenses related to a decline in claims costs.

Current wording

Insurance benefits and losses incurred at American Southern increased $1.8 million, or 13.9%, during the three month period ended March 31, 2025 over the comparable period in 2024. As a percentage of earned premiums, insurance benefits and losses incurred were 79.6% in the three month period ended March 31, 2025, compared to 71.7% in the three month period ended March 31, 2024. The increase in the loss ratio during the three month period ended March 31, 2025 was primarily due to an increase in losses in the automobile physical damage and other lines of business. Also contributing to the increase in the loss ratio was an increase in loss adjustment expenses related to an increase in claims costs. Partially offsetting the increase was a decrease in the frequency of claims in the automobile liability line of business.

Previous wording

Commissions and underwriting expenses decreased $0.5 million, or 11.7%, during the three month period ended September 30, 2024, and $1.0 million, or 7.7% during the nine month period ended September 30, 2024, over the comparable periods in 2023. As a percentage of earned premiums, underwriting expenses were 23.6% in the three month period ended September 30, 2024, compared to 26.2% in the three month period ended September 30, 2023. For the nine month period ended September 30, 2024, this ratio decreased to 23.1% from 25.0% in the comparable period in 2023. The decrease in the expense ratio during the three month and nine month periods ended September 30, 2024 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, 2024, variable commissions at American Southern decreased by $0.3 million and $0.9 million, respectively, from the comparable periods in 2023 due to an unfavorable loss experience from accounts subject to variable commissions.

Current wording

Commissions and underwriting expenses decreased $0.4 million, or 8.8%, during the three month period ended March 31, 2025, over the comparable period in 2024. As a percentage of earned premiums, underwriting expenses were 22.6% in the three month period ended March 31, 2025, compared to 25.4% in the three month period ended March 31, 2024. The decrease in the expense ratio during the three month period ended March 31, 2025 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 period ended March 31, 2025, variable commissions at American Southern decreased by $0.5 million from the comparable period in 2024 due to an unfavorable loss experience from accounts subject to variable commissions.

Previous wording

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month and nine month periods ended September 30, 2024 and the comparable periods in 2023:

Current wording

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month period ended March 31, 2025 and the comparable period in 2024:

Previous wording

Net Investment Income and Realized Gains

Current wording

Net Investment Income and Realized Gains (Losses)

Previous wording

Investments in equity securities are measured at fair value at the end of the reporting period, with any changes in fair value reported in net income during the period. The Company recognized net unrealized losses on equity securities of $1.7 million during the three month period ended September 30, 2024 and unrealized losses on equity securities of $1.5 million during the three month period ended September 30, 2023. The Company recognized net unrealized losses on equity securities of $1.6 million during the nine month period ended September 30, 2024 and unrealized losses on equity securities of $3.4 million during the nine month period ended September 30, 2023. Changes in unrealized losses on equity securities for the applicable periods are the result of fluctuations in the market value of the Company’s equity securities.

Current wording

Investments in equity securities are measured at fair value at the end of the reporting period, with any changes in fair value reported in net income during the period. The Company recognized net unrealized gains on equity securities of $0.8 million during the three month period ended March 31, 2025 and unrealized losses on equity securities of $0.1 million during the three month period ended March 31, 2024. Changes in unrealized gains (losses) on equity securities for the applicable periods are primarily the result of fluctuations in the market value of certain of the Company’s equity securities.

Previous wording

Interest expense increased slightly during the three month period ended September 30, 2024, and $0.2 million, or 7.6%, during the nine month period ended September 30, 2024, from the comparable periods in 2023. Changes in interest expense were primarily due to changes in the Secured Overnight Financing Rate (“SOFR”) published by CME Group Benchmark Administration Limited, as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) and the revolving credit facility utilize SOFR as the reference rate.

Current wording

Interest expense decreased $0.1 million, or 9.5%, during the three month period ended March 31, 2025, from the comparable period in 2024. Changes in interest expense were primarily due to changes in the Secured Overnight Financing Rate (“SOFR”) published by CME Group Benchmark Administration Limited, as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) and the revolving credit facility utilize SOFR as the reference rate.

Previous wording

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, 2024, the Parent had approximately $7.4 million of unrestricted cash and investments.

Current wording

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 March 31, 2025, the Parent had approximately $3.5 million of unrestricted cash and investments.

Previous wording

The Parent’s insurance subsidiaries reported statutory net income of $2.0 million for the nine month period ended September 30, 2024, compared to statutory net income of $8.9 million for the nine month period ended September 30, 2023. 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.

Current wording

The Parent’s insurance subsidiaries reported statutory net income of $4.3 million for the three month period ended March 31, 2025, compared to statutory net income of $1.6 million for the three month period ended March 31, 2024. 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.

Previous wording

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, 2024, American Southern had $50.4 million of statutory capital and surplus and Bankers Fidelity had $31.0 million of statutory capital and surplus. In 2024, dividend payments by the Parent’s insurance subsidiaries in excess of $8.8 million would require prior approval. Through September 30, 2024, the Parent received dividends of $8.1 million from its subsidiaries.

Current wording

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 March 31, 2025, American Southern had $47.6 million of statutory capital and surplus and Bankers Fidelity had $33.5 million of statutory capital and surplus. In 2025, dividend payments by the Parent’s insurance subsidiaries in excess of $6.3 million would require prior approval. Through March 31, 2025, the Parent received dividends of $2.1 million from its subsidiaries.

Previous wording

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 3-month CME Term SOFR plus applicable tenor spread of 0.26161% plus an applicable margin. The margin ranges from 4.00% to 4.10%. At September 30, 2024, the effective interest rate was 9.39%. 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, 2024, the Company has not made such an election.

Current wording

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 3-month CME Term SOFR plus applicable tenor spread of 0.26161% plus an applicable margin. The margin ranges from 4.00% to 4.10%. At March 31, 2025, the effective interest rate was 8.64%. 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 March 31, 2025, the Company has not made such an election.

Previous wording

At September 30, 2024, 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, 2024, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.3 million.

Current wording

At March 31, 2025, 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 March 31, 2025, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.1 million.

Previous wording

Bankers Fidelity Life Insurance Company (''BFLIC") is 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 provides for credit availability of five percent of statutory admitted assets, or approximately $8.2 million, as of September 30, 2024. Additional FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB. As of September 30, 2024, BFLIC has pledged bonds having an amortized cost of $9.3 million to the FHLB. BFLIC may be required to post additional acceptable forms of collateral for any borrowings that it makes in the future from the FHLB. As of September 30, 2024, BFLIC does not have any outstanding borrowings from the FHLB.

Current wording

Bankers Fidelity Life Insurance Company (‘‘BFLIC”) is 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 provides for credit availability of five percent of statutory admitted assets, or approximately $8.4 million, as of March 31, 2025. Additional FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB. As of March 31, 2025, BFLIC has pledged bonds having an amortized cost of $9.1 million to the FHLB. BFLIC may be required to post additional acceptable forms of collateral for any borrowings that it makes in the future from the FHLB. As of March 31, 2025, BFLIC does not have any outstanding borrowings from the FHLB.

Previous wording

The Credit Agreement requires the Company to comply with certain covenants, including a debt to capital ratio that restricts the Company from incurring consolidated indebtedness that exceeds 35% of the Company’s consolidated capitalization at any time and maintaining a minimum consolidated net worth, as previously mentioned. The Credit Agreement also contains customary representations and warranties and events of default. Events of default include, among others, (a) the failure by the Company to pay any amounts owed under the Credit Agreement when due, (b) the failure to perform and not timely remedy certain covenants, (c) a change in control of the Company and (d) the occurrence of bankruptcy or insolvency events. Upon an event of default, the Lender may, among other things, declare all obligations under the Credit Agreement immediately due and payable and terminate the revolving commitments. As of September 30, 2024 and December 31, 2023, the Company had outstanding borrowings of $4.0 and $3.0 million, respectively, under the Credit Agreement.

Current wording

The Credit Agreement requires the Company to comply with certain covenants, including a debt to capital ratio that restricts the Company from incurring consolidated indebtedness that exceeds 35% of the Company’s consolidated capitalization at any time and maintaining a minimum consolidated net worth, as previously mentioned. The Credit Agreement also contains customary representations and warranties and events of default. Events of default include, among others, (a) the failure by the Company to pay any amounts owed under the Credit Agreement when due, (b) the failure to perform and not timely remedy certain covenants, (c) a change in control of the Company and (d) the occurrence of bankruptcy or insolvency events. Upon an event of default, the Lender may, among other things, declare all obligations under the Credit Agreement immediately due and payable and terminate the revolving commitments. As of March 31, 2025 and December 31, 2024, the Company had outstanding borrowings, including accrued interest of $4.0 million in each of the respective periods, under the Credit Agreement.

Previous wording

Cash and cash equivalents decreased from $28.3 million at December 31, 2023 to $23.0 million at September 30, 2024. The decrease in cash and cash equivalents during the nine month period ended September 30, 2024 was primarily attributable to net cash used in operating activities of $4.8 million. Also contributing to the decrease in cash and cash equivalents was net cash used in investing activities of $1.0 million primarily as a result of investment purchases exceeding investment sales and maturity of securities. Partially offsetting the decrease in cash and cash equivalents was net cash provided by financing activities of $0.6 million primarily as a result of proceeds from bank financing.

Current wording

Cash and cash equivalents increased from $35.6 million at December 31, 2024 to $35.9 million at March 31, 2025. The increase in cash and cash equivalents during the three month period ended March 31, 2025 was primarily attributable to net cash provided by investing activities of $1.1 million primarily as a result of investment sales and maturity of securities exceeding investment purchases. Partially offsetting the increase in cash and cash equivalents was net cash used in operating activities of $0.7 million.