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

FORM 10-Q


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

         For the quarterly period ended June 30, 2013
OR

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

Commission File Number 0-3722

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

Georgia
58-1027114
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
4370 Peachtree Road, N.E.,
30319
Atlanta, Georgia
(Zip Code)
(Address of principal executive offices)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ   No ¨

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

Large accelerated filer ¨  Accelerated filer ¨  Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company þ

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

The total number of shares of the registrant's Common Stock, $1 par value, outstanding on August 5, 2013, was 21,309,560.
 


ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS
 
Part I.    Financial Information
Page No.
 
 
Item 1.
 
 
2
 
 
 
3
 
 
 
4
 
 
 
5
 
 
 
6
 
 
 
7
 
 
Item 2.
18
 
 
Item 4.
25
 
Part II.    Other Information
 
 
 
Item 2.
26
 
 
 
Item 6.
26
 
 
27



PART I.  FINANCIAL INFORMATION
 
Item 1.    Financial Statements

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

ASSETS
 
 
 
Unaudited
   
 
 
 
June 30,
   
December 31,
 
 
 
2013
   
2012
 
Cash and cash equivalents
 
$
47,097
   
$
18,951
 
Investments:
               
Fixed maturities (cost: $177,918 and $201,986)
   
184,750
     
230,508
 
Common and non-redeemable preferred stocks (cost: $9,495 and $10,477)
   
13,772
     
12,205
 
Other invested assets (cost: $641 and $565)
   
641
     
565
 
Policy loans
   
2,295
     
2,338
 
Real estate
   
38
     
38
 
Investment in unconsolidated trusts
   
1,238
     
1,238
 
Total investments
   
202,734
     
246,892
 
Receivables:
               
Reinsurance
   
17,934
     
18,768
 
Insurance premiums and other (net of allowance for doubtful accounts: $352 and $379)
   
22,435
     
6,330
 
Deferred acquisition costs
   
27,436
     
26,133
 
Other assets
   
1,149
     
975
 
Goodwill
   
2,128
     
2,128
 
Total assets
 
$
320,913
   
$
320,177
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Insurance reserves and policyholder funds:
               
Future policy benefits
 
$
68,289
   
$
66,932
 
Unearned premiums
   
36,451
     
22,637
 
Losses and claims
   
62,518
     
62,873
 
Other policy liabilities
   
1,503
     
2,116
 
Total insurance reserves and policyholder funds
   
168,761
     
154,558
 
Accounts payable and accrued expenses
   
11,558
     
11,481
 
Deferred income taxes, net
   
609
     
7,164
 
Junior subordinated debenture obligations
   
41,238
     
41,238
 
Total liabilities
   
222,166
     
214,441
 
 
               
Commitments and contingencies (Note 8)
               
Shareholders’ equity:
               
Preferred stock, $1 par, 4,000,000 shares authorized; Series D preferred, shares issued and outstanding: 65,000 and 70,000; redemption value: $6,500 and $7,000
   
65
     
70
 
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 22,400,894; shares outstanding: 21,336,276 and 21,216,542
   
22,401
     
22,401
 
Additional paid-in capital
   
57,088
     
57,180
 
Retained earnings
   
14,834
     
8,621
 
Accumulated other comprehensive income
   
7,221
     
19,571
 
Unearned stock grant compensation
   
(649
)
   
-
 
Treasury stock, at cost: 1,064,618 and 1,184,352 shares
   
(2,213
)
   
(2,107
)
Total shareholders’ equity
   
98,747
     
105,736
 
Total liabilities and shareholders’ equity
 
$
320,913
   
$
320,177
 

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

-2-

ATLANTIC AMERICAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands, except per share data)
 
 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Revenue:
 
   
   
   
 
Insurance premiums
 
$
36,373
   
$
31,592
   
$
69,392
   
$
62,273
 
Investment income
   
2,774
     
2,855
     
5,679
     
5,738
 
Realized investment gains, net
   
5,454
     
470
     
6,132
     
1,428
 
Other income
   
47
     
36
     
95
     
65
 
Total revenue
   
44,648
     
34,953
     
81,298
     
69,504
 
 
                               
Benefits and expenses:
                               
Insurance benefits and losses incurred
   
24,999
     
23,095
     
48,361
     
45,767
 
Commissions and underwriting expenses
   
10,402
     
7,970
     
19,685
     
15,003
 
Interest expense
   
438
     
658
     
1,015
     
1,315
 
Other expense
   
2,746
     
2,376
     
5,163
     
4,845
 
Total benefits and expenses
   
38,585
     
34,099
     
74,224
     
66,930
 
Income before income taxes
   
6,063
     
854
     
7,074
     
2,574
 
Income tax expense
   
103
     
73
     
192
     
136
 
Net income
   
5,960
     
781
     
6,882
     
2,438
 
Preferred stock dividends
   
(119
)
   
(127
)
   
(246
)
   
(254
)
Net income applicable to common shareholders
 
$
5,841
   
$
654
   
$
6,636
   
$
2,184
 
 
                               
Earnings per common share (basic)
 
$
.27
   
$
.03
   
$
.31
   
$
.10
 
Earnings per common share (diluted)
 
$
.26
   
$
.03
   
$
.30
   
$
.10
 

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

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

 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Net income
 
$
5,960
   
$
781
   
$
6,882
   
$
2,438
 
Other comprehensive income (loss):
                               
Available-for-sale securities:
                               
Gross unrealized holding gain (loss) arising in the period
   
(10,763
)
   
7,921
     
(13,009
)
   
6,475
 
Related income tax effect
   
3,767
     
(2,772
)
   
4,553
     
(2,266
)
Less: reclassification adjustment for net realized gains included in net income (1)
   
(5,454
)
   
(470
)
   
(6,132
)
   
(1,428
)
Related income tax effect (2)
   
1,909
     
164
     
2,146
     
500
 
Net effect on other comprehensive income (loss)
   
(10,541
)
   
4,843
     
(12,442
)
   
3,281
 
Derivative financial instrument:
                               
Fair value adjustment to derivative financial instrument
   
-
     
193
     
141
     
346
 
Related income tax effect
   
-
     
(67
)
   
(49
)
   
(121
)
Net effect on other comprehensive income (loss)
   
-
     
126
     
92
     
225
 
Total other comprehensive income (loss), net of tax
   
(10,541
)
   
4,969
     
(12,350
)
   
3,506
 
Total comprehensive income (loss)
 
$
(4,581
)
 
$
5,750
   
$
(5,468
)
 
$
5,944
 

  (1) Realized gains on available-for-sale securities recognized in realized investment gains, net on the accompanying condensed consolidated statements of operations.
  (2) Income tax effect on reclassification adjustment for net realized gains included in income tax expense on the accompanying condensed consolidated statements of operations.
 
The accompanying notes are an integral part of these consolidated financial statements.
-4-

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

 
 
Six Months Ended June 30, 2013
 
Preferred
Stock
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Unearned
Stock Grant
Compensation
   
Treasury
Stock
   
Total
 
Balance, December 31, 2012
 
$
70
   
$
22,401
   
$
57,180
   
$
8,621
   
$
19,571
   
$
-
   
$
(2,107
)
 
$
105,736
 
Net income
   
-
     
-
     
-
     
6,882
     
-
     
-
     
-
     
6,882
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
-
     
(12,350
)
   
-
     
-
     
(12,350
)
Preferred stock redeemed
   
(5
)
   
-
     
(495
)
   
-
     
-
     
-
     
-
     
(500
)
Dividends on common stock
   
-
     
-
     
-
     
(423
)
   
-
     
-
     
-
     
(423
)
Dividends accrued on preferred stock
   
-
     
-
     
-
     
(246
)
   
-
     
-
     
-
     
(246
)
Restricted stock grants
   
-
     
-
     
393
     
-
     
-
     
(704
)
   
311
     
-
 
Amortization of unearned compensation
   
-
     
-
     
-
     
-
     
-
     
55
     
-
     
55
 
Purchase of shares for treasury
   
-
     
-
     
-
     
-
     
-
     
-
     
(520
)
   
(520
)
Issuance of shares under stock plans
   
-
     
-
     
10
     
-
     
-
     
-
     
103
     
113
 
Balance, June 30, 2013
 
$
65
   
$
22,401
   
$
57,088
   
$
14,834
   
$
7,221
   
$
(649
)
 
$
(2,213
)
 
$
98,747
 
 
                                                               
Six Months Ended June 30, 2012
                                                               
Balance, December 31, 2011
 
$
70
   
$
22,401
   
$
57,136
   
$
6,179
   
$
12,244
   
$
-
   
$
(1,753
)
 
$
96,277
 
Net income
   
-
     
-
     
-
     
2,438
     
-
     
-
     
-
     
2,438
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
3,506
     
-
     
-
     
3,506
 
Dividends on common stock
   
-
     
-
     
-
     
(426
)
   
-
     
-
     
-
     
(426
)
Dividends accrued on preferred stock
   
-
     
-
     
-
     
(254
)
   
-
     
-
     
-
     
(254
)
Purchase of shares for treasury
   
-
     
-
     
-
     
-
     
-
     
-
     
(49
)
   
(49
)
Issuance of shares under stock plans
   
-
     
-
     
22
     
-
     
-
     
-
     
78
     
100
 
Balance, June 30, 2012
 
$
70
   
$
22,401
   
$
57,158
   
$
7,937
   
$
15,750
   
$
-
   
$
(1,724
)
 
$
101,592
 

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

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

 
 
Six Months Ended
June 30,
 
 
 
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
 
Net income
 
$
6,882
   
$
2,438
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Amortization of deferred acquisition costs
   
5,272
     
5,490
 
Acquisition costs deferred
   
(6,575
)
   
(6,680
)
Realized investment gains
   
(6,132
)
   
(1,428
)
Increase in insurance reserves
   
14,203
     
2,078
 
Compensation expense related to share awards
   
55
     
-
 
Depreciation and amortization
   
297
     
220
 
Deferred income tax expense
   
95
     
18
 
(Increase) decrease in receivables, net
   
(15,264
)
   
1,945
 
Decrease in other liabilities
   
(27
)
   
(3,235
)
Other, net
   
(54
)
   
(144
)
Net cash (used in) provided by operating activities
   
(1,248
)
   
702
 
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from investments sold, called or matured
   
68,910
     
32,849
 
Investments purchased
   
(37,953
)
   
(31,947
)
Additions to property and equipment
   
(233
)
   
(148
)
Net cash provided by investing activities
   
30,724
     
754
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Redemption of Series D preferred stock
   
(500
)
   
-
 
Payment of dividends on Series D preferred stock
   
-
     
(508
)
Payment of dividends on common stock
   
(423
)
   
(426
)
Proceeds from shares issued under stock plans
   
113
     
100
 
Purchase of shares for treasury
   
(520
)
   
(49
)
Net cash used in financing activities
   
(1,330
)
   
(883
)
 
               
Net increase in cash and cash equivalents
   
28,146
     
573
 
Cash and cash equivalents at beginning of period
   
18,951
     
21,285
 
Cash and cash equivalents at end of period
 
$
47,097
   
$
21,858
 
 
               
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
 
$
1,079
   
$
1,314
 
Cash paid for income taxes
 
$
314
   
$
80
 
 
The accompanying notes are an integral part of these consolidated financial statements.

-6-

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

Note 1.   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Atlantic American Corporation (the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”).  All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  The unaudited condensed consolidated financial statements included herein and these related notes should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  The Company’s results of operations for the three month and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any other future period.

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

Note 2.  Recently Issued Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The main objective of ASU 2013-02 is to enhance disclosures for reclassification adjustments including changes in accumulated other comprehensive income (“AOCI”) balances by component and significant items reclassified out of AOCI. ASU 2013-02 does not change the requirements for reporting net income or other comprehensive income in financial statements. However, the ASU requires an entity to provide enhanced disclosures to present separately by component reclassifications out of AOCI. In addition, an entity is also required to provide a tabular disclosure of the effect of items reclassified out of AOCI on the respective line items of net income but only if the item reclassified is required under GAAP to be reclassified to net income in its entirety. For other reclassification items that are not required under GAAP to be reclassified directly to net income in their entirety, the new disclosure only requires a cross-reference to other disclosures required under GAAP for those items.  The Company adopted ASU 2013-02 on January 1, 2013.  Since ASU 2013-02 was a disclosure only update, its adoption did not have a material impact on the Company’s financial condition or results of operations.  See Condensed Consolidated Statements of Comprehensive Income and Note 11 for expanded disclosures.
-7-

Note 3.  Segment Information

The Company’s primary operating subsidiaries, American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”) and Bankers Fidelity Life Insurance Company (“Bankers Fidelity”) operate in two principal business units, each focusing on specific products.  American Southern operates in the property and casualty insurance market, while Bankers Fidelity operates in the life and health insurance market.  Each business unit is managed independently and is evaluated on its individual performance.  The following sets forth the revenue and income before income taxes for each business unit for the three month and six month periods ended June 30, 2013 and 2012.

Revenues
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
American Southern
 
$
14,747
   
$
10,887
   
$
25,237
   
$
22,151
 
Bankers Fidelity
   
29,123
     
23,857
     
55,061
     
46,938
 
Corporate and Other
   
778
     
209
     
1,000
     
415
 
Total revenue
 
$
44,648
   
$
34,953
   
$
81,298
   
$
69,504
 

Income Before Income Taxes
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
American Southern
 
$
3,177
   
$
1,045
   
$
4,619
   
$
1,760
 
Bankers Fidelity
   
3,687
     
1,159
     
4,724
     
3,775
 
Corporate and Other
   
(801
)
   
(1,350
)
   
(2,269
)
   
(2,961
)
Income before income taxes
 
$
6,063
   
$
854
   
$
7,074
   
$
2,574
 

Note 4.  Credit Arrangements

Junior Subordinated Debentures

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

The financial structure of each of Atlantic American Statutory Trust I and II as of June 30, 2013 was as follows:

 
 
Atlantic American
Statutory Trust I
   
Atlantic American
Statutory Trust II
 
JUNIOR SUBORDINATED DEBENTURES (1) (2)
 
   
 
Principal amount owed
 
$
18,042
   
$
23,196
 
Balance June 30, 2013
   
18,042
     
23,196
 
Balance December 31, 2012
   
18,042
     
23,196
 
Coupon rate
 
LIBOR + 4.00%
   
LIBOR + 4.10%
 
Interest payable
 
Quarterly
   
Quarterly
 
Maturity date
 
December 4, 2032
   
May 15, 2033
 
Redeemable by issuer
 
Yes
   
Yes
 
TRUST PREFERRED SECURITIES
               
Issuance date
 
December 4, 2002
   
May 15, 2003
 
Securities issued
   
17,500
     
22,500
 
Liquidation preference per security
 
$
1
   
$
1
 
Liquidation value
   
17,500
     
22,500
 
Coupon rate
 
LIBOR + 4.00%
   
LIBOR + 4.10%
 
Distribution payable
 
Quarterly
   
Quarterly
 
Distribution guaranteed by (3)
 
Atlantic American Corporation
   
Atlantic American Corporation
 

-8-


(1) For each of the respective debentures, the Company has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures’ respective maturity dates.  During any such period, interest will continue to accrue and the Company may not declare or pay any cash dividends or distributions on, or purchase, the Company’s common stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank equally with or junior to the Junior Subordinated Debentures.  The Company has the right at any time to dissolve each of the trusts and cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Preferred Securities.
(2) The Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all senior debt of the Parent and are effectively subordinated to all existing and future liabilities of its subsidiaries.
(3) The Parent has guaranteed, on a subordinated basis, all of the obligations under the Trust Preferred Securities, including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation.

Note 5.  Derivative Financial Instruments

The Company had a zero cost interest rate collar with Wells Fargo Bank, National Association, which terminated on March 4, 2013, the stated maturity date, by its terms. There were no balances outstanding under the zero cost interest rate collar at that time.

Note 6.  Earnings Per Common Share

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

 
 
Three Months Ended
June 30, 2013
 
 
 
Income
   
Shares
(In thousands)
   
Per Share
Amount
 
Basic Earnings Per Common Share:
 
   
   
 
Net income
 
$
5,960
     
21,268
   
 
Less preferred stock dividends
   
(119
)
         
 
Net income applicable to common shareholders
   
5,841
     
21,268
   
$
.27
 
Diluted Earnings Per Common Share:
                       
Effect of Series D preferred stock
   
119
     
1,629
         
Net income applicable to common shareholders
 
$
5,960
     
22,897
   
$
.26
 

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

-9-

 
 
Six Months Ended
June 30, 2013
 
 
 
Income
   
Shares
(In thousands)
   
Per Share
Amount
 
Basic Earnings Per Common Share:
 
   
   
 
Net income
 
$
6,882
     
21,225
   
 
Less preferred stock dividends
   
(246
)
         
 
Net income applicable to common shareholders
   
6,636
     
21,225
   
$
.31
 
Diluted Earnings Per Common Share:
                       
Effect of dilutive stock options
           
38
         
Effect of Series D preferred stock
   
246
     
1,629
         
Net income applicable to common shareholders
 
$
6,882
     
22,892
   
$
.30
 

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

The assumed conversion of the Company’s Series D Preferred Stock was excluded from the earnings per common share calculation for the three month and six month periods ended June 30, 2012 since its impact would have been antidilutive.

Note 7.  Income Taxes

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

 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Federal income tax provision at statutory rate of 35%
 
$
2,122
   
$
299
   
$
2,476
   
$
901
 
Dividends received deduction
   
(41
)
   
(38
)
   
(78
)
   
(82
)
Small life insurance company deduction
   
(78
)
   
(32
)
   
(78
)
   
(237
)
Other permanent differences
   
9
     
8
     
18
     
16
 
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets
   
(1,909
)
   
(164
)
   
(2,146
)
   
(462
)
Income tax expense
 
$
103
   
$
73
   
$
192
   
$
136
 

-10-

The components of income tax expense were:
 
 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Current - Federal
 
$
95
   
$
22
   
$
97
   
$
118
 
Deferred - Federal
   
1,917
     
215
     
2,241
     
480
 
Change in deferred tax asset valuation allowance
   
(1,909
)
   
(164
)
   
(2,146
)
   
(462
)
Total
 
$
103
   
$
73
   
$
192
   
$
136
 

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and six month periods ended June 30, 2013 and 2012 resulted from the dividends received deduction (“DRD”), the small life insurance company deduction (“SLD”) and the change in deferred tax asset valuation allowance.  The current estimated DRD is adjusted as underlying factors change and can vary from the estimates based on, but not limited to, actual distributions from investments as well as the amount of the Company’s taxable income.   The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”).  The SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3,000 and is ultimately phased out at $15,000.  The change in deferred tax asset valuation allowance was due to the unanticipated utilization of certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation allowance reserve.

Note 8.  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.
-11-

Note 9.  Investments

The following tables set forth the carrying value, gross unrealized gains, gross unrealized losses and amortized cost of the Company’s investments, aggregated by type and industry, as of June 30, 2013 and December 31, 2012.
 
Investments were comprised of the following:
 
 
 
June 30, 2013
 
 
 
 
Carrying
Value
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
Losses
   
 
Amortized
Cost
 
Fixed maturities:
 
   
   
   
 
Bonds:
 
   
   
   
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
13,659
   
$
1,093
   
$
52
   
$
12,618
 
Obligations of states and political subdivisions
   
11,363
     
1,079
     
-
     
10,284
 
Corporate securities:
                               
Utilities and telecom
   
17,468
     
1,889
     
103
     
15,682
 
Financial services
   
42,645
     
1,894
     
416
     
41,167
 
Other business – diversified
   
54,397
     
1,868
     
1,387
     
53,916
 
Other consumer – diversified
   
42,832
     
2,089
     
1,120
     
41,863
 
Total corporate securities
   
157,342
     
7,740
     
3,026
     
152,628
 
Redeemable preferred stocks:
                               
Financial services
   
2,194
     
2
     
4
     
2,196
 
Other consumer – diversified
   
192
     
-
     
-
     
192
 
Total redeemable preferred stocks
   
2,386
     
2
     
4
     
2,388
 
Total fixed maturities
   
184,750
     
9,914
     
3,082
     
177,918
 
Equity securities:
                               
Common and non-redeemable preferred stocks:
                               
Utilities and telecom
   
1,510
     
546
     
-
     
964
 
Financial services
   
7,228
     
517
     
96
     
6,807
 
Other business – diversified
   
169
     
122
     
-
     
47
 
Other consumer – diversified
   
4,865
     
3,188
     
-
     
1,677
 
Total equity securities
   
13,772
     
4,373
     
96
     
9,495
 
Other invested assets
   
641
     
-
     
-
     
641
 
Policy loans
   
2,295
     
-
     
-
     
2,295
 
Real estate
   
38
     
-
     
-
     
38
 
Investments in unconsolidated trusts
   
1,238
     
-
     
-
     
1,238
 
Total investments
 
$
202,734
   
$
14,287
   
$
3,178
   
$
191,625
 

-12-

 
 
December 31, 2012
 
 
 
 
Carrying
Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Amortized
Cost
 
Fixed maturities:
 
   
   
   
 
Bonds:
 
   
   
   
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
27,512
   
$
4,618
   
$
-
   
$
22,894
 
Obligations of states and political subdivisions
   
17,761
     
2,514
     
-
     
15,247
 
Corporate securities:
                               
Utilities and telecom
   
17,921
     
3,128
     
-
     
14,793
 
Financial services
   
43,695
     
3,957
     
415
     
40,153
 
Other business – diversified
   
66,741
     
7,172
     
12
     
59,581
 
Other consumer – diversified
   
52,910
     
7,665
     
120
     
45,365
 
Total corporate securities
   
181,267
     
21,922
     
547
     
159,892
 
Redeemable preferred stocks:
                               
Financial services
   
3,775
     
18
     
3
     
3,760
 
Other consumer – diversified
   
193
     
-
     
-
     
193
 
Total redeemable preferred stocks
   
3,968
     
18
     
3
     
3,953
 
Total fixed maturities
   
230,508
     
29,072
     
550
     
201,986
 
Equity securities:
                               
Common and non-redeemable preferred stocks:
                               
Utilities and telecom
   
1,298
     
334
     
-
     
964
 
Financial services
   
8,607
     
857
     
39
     
7,789
 
Other business – diversified
   
134
     
87
     
-
     
47
 
Other consumer – diversified
   
2,166
     
489
     
-
     
1,677
 
Total equity securities
   
12,205
     
1,767
     
39
     
10,477
 
Other invested assets
   
565
     
-
     
-
     
565
 
Policy loans
   
2,338
     
-
     
-
     
2,338
 
Real estate
   
38
     
-
     
-
     
38
 
Investments in unconsolidated trusts
   
1,238
     
-
     
-
     
1,238
 
Total investments
 
$
246,892
   
$
30,839
   
$
589
   
$
216,642
 


The amortized cost and carrying value of the Company’s investments in fixed maturities at June 30, 2013 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.

 
 
June 30, 2013
 
 
 
Carrying
Value
   
Amortized
Cost
 
Due in one year or less
 
$
-
   
$
-
 
Due after one year through five years
   
8,892
     
8,241
 
Due after five years through ten years
   
52,685
     
51,519
 
Due after ten years
   
122,054
     
117,164
 
Varying maturities
   
1,119
     
994
 
Totals
 
$
184,750
   
$
177,918
 

-13-

The following table sets forth the carrying value, amortized cost, and net unrealized gains of the Company’s investments, aggregated by industry, as of June 30, 2013 and December 31, 2012.

 
 
June 30, 2013
   
December 31, 2012
 
 
 
Carrying
Value
   
Amortized
Cost
   
Unrealized
Gains
   
Carrying
Value
   
Amortized
Cost
   
Unrealized
Gains
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
13,659
   
$
12,618
   
$
1,041
   
$
27,512
   
$
22,894
   
$
4,618
 
Obligations of states and political subdivisions
   
11,363
     
10,284
     
1,079
     
17,761
     
15,247
     
2,514
 
Utilities and telecom
   
18,978
     
16,646
     
2,332
     
19,219
     
15,757
     
3,462
 
Financial services
   
52,067
     
50,170
     
1,897
     
56,077
     
51,702
     
4,375
 
Other business – diversified
   
54,566
     
53,963
     
603
     
66,875
     
59,628
     
7,247
 
Other consumer – diversified
   
47,889
     
43,732
     
4,157
     
55,269
     
47,235
     
8,034
 
Other investments
   
4,212
     
4,212
     
-
     
4,179
     
4,179
     
-
 
Investments
 
$
202,734
   
$
191,625
   
$
11,109
   
$
246,892
   
$
216,642
   
$
30,250
 

The following tables present the Company’s unrealized loss aging for securities by type and length of time the security was in a continuous unrealized loss position as of June 30, 2013 and December 31, 2012.

 
 
June 30, 2013
 
 
 
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
 
$
3,229
   
$
52
   
$
-
   
$
-
   
$
3,229
   
$
52
 
Corporate securities
   
52,021
     
2,953
     
1,927
     
73
     
53,948
     
3,026
 
Redeemable preferred stocks
   
1,142
     
4
     
-
     
-
     
1,142
     
4
 
Common and non-redeemable preferred stocks
   
2,945
     
71
     
975
     
25
     
3,920
     
96
 
Total temporarily impaired securities
 
$
59,337
   
$
3,080
   
$
2,902
   
$
98
   
$
62,239
   
$
3,178
 

-14-

 
 
December 31, 2012
 
 
 
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Corporate securities
 
$
8,806
   
$
147
   
$
1,600
   
$
400
   
$
10,406
   
$
547
 
Redeemable preferred stocks
   
1,216
     
3
     
-
     
-
     
1,216
     
3
 
Common and non-redeemable preferred stocks
   
3,494
     
39
     
-
     
-
     
3,494
     
39
 
Total temporarily impaired securities
 
$
13,516
   
$
189
   
$
1,600
   
$
400
   
$
15,116
   
$
589
 

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

As of June 30, 2013, securities in an unrealized loss position primarily included certain of the Company’s investments in fixed maturities within the other diversified business, other diversified consumer and financial services sectors. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, including those described above, the Company has deemed these securities to be temporarily impaired as of June 30, 2013.

The following describes the fair value hierarchy and provides information as to the extent to which the Company uses fair value to measure the value of its financial instruments and information about the inputs used to value those financial instruments. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad levels.

Level 1 Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. The Company’s financial instruments valued using Level 1 criteria include cash equivalents and exchange traded common stocks.

Level 2 Observable inputs, other than quoted prices included in Level 1, for an asset or liability or prices for similar assets or liabilities. The Company’s financial instruments valued using Level 2 criteria include substantially all of its fixed maturities, which consist of U.S. Treasury securities and U.S. Government securities, obligations of states and political subdivisions, and certain corporate fixed maturities, as well as its non-redeemable preferred stocks. In determining fair value measurements using Level 2 criteria, the Company utilizes various external pricing sources.

Level 3 Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk).  Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. The Company’s financial instruments valued using Level 3 criteria consist of a limited number of fixed maturities. As of June 30, 2013 and December 31, 2012, the value of the Company’s fixed maturities valued using Level 3 criteria was $2,034 and $2,124. The use of different criteria or assumptions regarding data may have yielded materially different valuations.
 
-15-

As of June 30, 2013, financial instruments carried at fair value were measured on a recurring basis as summarized below:

 
 
Quoted Prices
in Active
Markets
for Identical
Assets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
   
 
 
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Assets:
 
   
   
   
 
Fixed maturities
 
$
-
   
$
182,716
   
$
2,034
   
$
184,750
 
Equity securities
   
6,793
     
6,979
     
-
     
13,772
 
Cash equivalents
   
45,438
     
-
     
-
     
45,438
 
Total
 
$
52,231
   
$
189,695
   
$
2,034
   
$
243,960
 

As of December 31, 2012, financial instruments carried at fair value were measured on a recurring basis as summarized below:

 
 
Quoted Prices
in Active
Markets
for Identical
Assets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
   
 
 
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Assets:
 
   
   
   
 
Fixed maturities
 
$
-
   
$
228,384
   
$
2,124
   
$
230,508
 
Equity securities
   
3,805
     
8,400
     
-
     
12,205
 
Cash equivalents
   
15,326
     
-
     
-
     
15,326
 
Total
 
$
19,131
   
$
236,784
   
$
2,124
   
$
258,039
 
Liabilities:
                               
Derivative financial instrument
 
$
-
   
$
-
   
$
141
   
$
141
 

The following is a roll-forward of the financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month and six month periods ended June 30, 2013.

 
 
Fixed
Maturities
   
Derivative
(Liability)
 
Balance, December 31, 2012
 
$
2,124
   
$
(141
)
Total unrealized gains (losses) included in other comprehensive income
   
(32
)
   
141
 
Balance, March 31, 2013
   
2,092
     
-
 
Total unrealized losses included in other comprehensive income
   
(58
)
   
-
 
Balance, June 30, 2013
 
$
2,034
   
$
-
 

The Company’s fixed maturities valued using Level 3 inputs consist solely of issuances of pooled debt obligations of multiple, smaller financial services companies. They are not actively traded and valuation techniques used to measure fair value are based on future estimated cash flows (based on current cash flows) discounted at reasonable estimated rates of interest.  There are no assumed prepayments and/or default probability assumptions as a majority of these instruments contain certain U.S. government agency strips to support repayment of the principal.  Other qualitative and quantitative information received from the original underwriter of the pooled offerings is also considered, as applicable.  The Company’s derivative financial instrument was an interest rate collar which terminated on March 4, 2013, the stated maturity date, by its terms.
-16-

Note 10.  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.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts which the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of the Company’s financial instruments as of June 30, 2013 and December 31, 2012.

 
 
   
June 30, 2013
   
December 31, 2012
 
 
 
Level in Fair
Value
Hierarchy (1)
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
Assets:
 
   
   
   
   
 
Cash and cash equivalents
 
Level 1
   
$
47,097
   
$
47,097
   
$
18,951
   
$
18,951
 
Fixed maturities
   
(1)
   
184,750
     
184,750
     
230,508
     
230,508
 
Equity securities
   
(1)
   
13,772
     
13,772
     
12,205
     
12,205
 
Other invested assets
 
Level 3
     
641
     
641
     
565
     
565
 
Policy loans
 
Level 2
     
2,295
     
2,295
     
2,338
     
2,338
 
Real estate
 
Level 2
     
38
     
38
     
38
     
38
 
Investment in unconsolidated trusts
 
Level 2
     
1,238
     
1,238
     
1,238
     
1,238
 
 
Liabilities:
                                       
Junior subordinated debentures
 
Level 2
     
41,238
     
41,238
     
41,238
     
41,238
 
Derivative financial instrument
 
Level 3
     
-
     
-
     
141
     
141
 

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

The fair value estimates as of June 30, 2013 and December 31, 2012 were based on pertinent information available to management as of the respective dates.  Although management is not aware of any factors that would significantly affect the estimated fair value amounts, current estimates of fair value may differ significantly from amounts that might ultimately be realized in a market exchange on any subsequent date.

Note 11.  Accumulated Other Comprehensive Income

The following table sets forth the balance of each component of accumulated other comprehensive income as of June 30, 2013 and December 31, 2012, and the changes in the balance of each component thereof during the six month period ended June 30, 2013, net of taxes.

 
 
Unrealized
Gains on
Available-for-
Sale Securities
   
Derivative
Financial
Instrument
   
Total
 
Balance, December 31, 2012
 
$
19,663
   
$
(92
)
 
$
19,571
 
Other comprehensive income (loss) before reclassifications
   
(8,456
)
   
92
     
(8,364
)
Amounts reclassified from accumulated other comprehensive income
   
(3,986
)
   
-
     
(3,986
)
Net current-period other comprehensive income (loss)
   
(12,442
)
   
92
     
(12,350
)
Balance, June 30, 2013
 
$
7,221
   
$
-
   
$
7,221
 

Note 12.  Subsequent Event

Subsequent to June 30, 2013, the Company purchased an additional $3,938 of Gray Television, Inc., a related party, Class A common stock.

-17-

Item 2.

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

The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”) as of and for the three month and six month periods ended June 30, 2013. 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, 2012.

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures.   Actual results could differ significantly from those estimates.  The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company’s critical accounting policies and the resultant estimates considered most significant by management are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. During the six month period ended June 30, 2013, there were no changes to the critical accounting policies or related estimates from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Recently Issued Accounting Standards

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

Overall Corporate Results

The following presents the Company’s revenue, expenses and net income for the three month and six month periods ended June 30, 2013 and the comparable periods in 2012:

 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
(In thousands)
 
Insurance premiums
 
$
36,373
   
$
31,592
   
$
69,392
   
$
62,273
 
Investment income
   
2,774
     
2,855
     
5,679
     
5,738
 
Realized investment gains, net
   
5,454
     
470
     
6,132
     
1,428
 
Other income
   
47
     
36
     
95
     
65
 
Total revenue
   
44,648
     
34,953
     
81,298
     
69,504
 
Insurance benefits and losses incurred
   
24,999
     
23,095
     
48,361
     
45,767
 
Commissions and underwriting expenses
   
10,402
     
7,970
     
19,685
     
15,003
 
Other expense
   
2,746
     
2,376
     
5,163
     
4,845
 
Interest expense
   
438
     
658
     
1,015
     
1,315
 
Total benefits and expenses
   
38,585
     
34,099
     
74,224
     
66,930
 
Income before income taxes
 
$
6,063
   
$
854
   
$
7,074
   
$
2,574
 
Net income
 
$
5,960
   
$
781
   
$
6,882
   
$
2,438
 

-18-

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

A reconciliation of net income to operating income for the three month and six month periods ended June 30, 2013 and the comparable periods in 2012 is as follows:

 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
Reconciliation of Net Income to non-GAAP Measurement
 
2013
   
2012
   
2013
   
2012
 
 
 
(In thousands)
 
Net income
 
$
5,960
   
$
781
   
$
6,882
   
$
2,438
 
Income tax expense
   
103
     
73
     
192
     
136
 
Realized investment gains, net
   
(5,454
)
   
(470
)
   
(6,132
)
   
(1,428
)
Operating income
 
$
609
   
$
384
   
$
942
   
$
1,146
 

On a consolidated basis, the Company had net income of $6.0 million, or $0.26 per diluted share, for the three month period ended June 30, 2013, compared to net income of $0.8 million, or $0.03 per diluted share, for the three month period ended June 30, 2012.  The Company had net income of $6.9 million, or $0.30 per diluted share, for the six month period ended June 30, 2013, compared to net income of $2.4 million, or $0.10 per diluted share, for the six month period ended June 30, 2012.  The increase in net income for the three month and six month periods ended June 30, 2013 was primarily due to an increase in realized investment gains.  Premium revenue for the three month period ended June 30, 2013 increased $4.8 million, or 15.1%, to $36.4 million.  For the six month period ended June 30, 2013, premium revenue increased $7.1 million, or 11.4%, to $69.4 million.  The increase in premium revenue for the three month and six month periods ended June 30, 2013 was primarily due to an increase in Medicare supplement business in the life and health operations; although the property and casualty operations earned premiums increased 17.5% in the three month period ended June 30, 2013 as a result of a significant new contract which incepted during the second quarter of 2013.  Operating income was $0.6 million in the three month period ended June 30, 2013 compared to $0.4 million in the three month period ended June 30, 2012.  The increase in operating income was primarily attributable to a more favorable loss experience in the three month period ended June 30, 2013 in both of the life and health and property and casualty operations.  Operating income decreased to $0.9 million in the six month period ended June 30, 2013 from $1.1 million in the comparable period of 2012.  The decrease in operating income for the six month period ended June 30, 2013 was due primarily to increases in advertising expense for television commercials and social media initiatives as well as development of the worksite distribution channel and product.  Partially offsetting this decrease in operating income was increased profitability in the property and casualty operations due to a decrease in losses in the six month period ended June 30, 2013 as compared to the same period in 2012.
  
A more detailed analysis of the individual operating companies and other corporate activities is provided below.
-19-

American Southern

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2013 and the comparable periods in 2012:

 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
(Dollars in thousands)
 
Gross written premiums
 
$
28,214
   
$
12,030
   
$
37,090
   
$
21,579
 
Ceded premiums
   
(1,950
)
   
(1,904
)
   
(3,847
)
   
(3,819
)
Net written premiums
 
$
26,264
   
$
10,126
   
$
33,243
   
$
17,760
 
Net earned premiums
 
$
11,354
   
$
9,666
   
$
20,281
   
$
19,478
 
Net loss and loss adjustment expenses
   
7,057
     
6,738
     
12,379
     
14,757
 
Underwriting expenses
   
4,512
     
3,106
     
8,238
     
5,635
 
Underwriting loss
 
$
(215
)
 
$
(178
)
 
$
(336
)
 
$
(914
)
Loss ratio
   
62.2
%
   
69.7
%
   
61.0
%
   
75.8
%
Expense ratio
   
39.7
     
32.1
     
40.6
     
28.9
 
Combined ratio
   
101.9
%
   
101.8
%
   
101.6
%
   
104.7
%

Gross written premiums at American Southern increased $16.2 million, or 134.5%, during the three month period ended June 30, 2013, and $15.5 million, or 71.9%, during the six month period ended June 30, 2013, over the comparable periods in 2012.  The increase in gross written premiums for the three month and six month periods ended June 30, 2013 was primarily attributable to an increase in commercial automobile written premiums of which $13.7 million resulted from a new state contract awarded to American Southern in the second quarter of 2013 through a competitive bidding process.

Ceded premiums increased slightly during the three month and six month periods ended June 30, 2013 over the comparable periods in 2012.  The increase in ceded premiums for the three month and six month periods ended June 30, 2013 was primarily due to the increase in related earned premiums.  As American Southern’s ceded premiums are determined as a percentage of earned premiums, an increase in ceded premiums occurs when earned premiums increase.  However, the increase in ceded premiums for the three month and six month periods ended June 30, 2013 was disproportionate to the related earned premiums due to the utilization of a limited stop loss agreement to reinsure the commercial automobile business from the new state contract referenced previously.

The following presents American Southern’s net earned premiums by line of business for the three month and six month periods ended June 30, 2013 and the comparable periods in 2012 (in thousands):

 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
(In thousands)
 
Commercial automobile
 
$
8,135
   
$
6,540
   
$
13,997
   
$
12,860
 
General liability
   
875
     
783
     
1,625
     
1,946
 
Property
   
600
     
556
     
1,199
     
998
 
Surety
   
1,744
     
1,787
     
3,460
     
3,674
 
Total
 
$
11,354
   
$
9,666
   
$
20,281
   
$
19,478
 

Net earned premiums increased $1.7 million, or 17.5%, during the three month period ended June 30, 2013, and $0.8 million, or 4.1%, during the six month period ended June 30, 2013, over the comparable periods in 2012.  The increase in net earned premiums for the three month and six month periods ended June 30, 2013 was primarily attributable to the increase in commercial automobile earned premiums from the new state contract referenced previously.  Partially offsetting the increase in net earned premiums during the six month period ended June 30, 2013 was a decrease in general liability earned premiums resulting from the cancellation of certain general liability programs in 2012 as well as a decline in surety earned premiums.  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.
-20-

Net loss and loss adjustment expenses at American Southern increased $0.3 million, or 4.7%, during the three month period ended June 30, 2013 over the three month period ended June 30, 2012, but decreased $2.4 million, or 16.1%, during the six month period ended June 30, 2013, from the comparable period in 2012.  As a percentage of premiums, net loss and loss adjustment expenses were 62.2% in the three month period ended June 30, 2013, compared to 69.7% in the three month period ended June 30, 2012.  For the six month period ended June 30, 2013, this ratio decreased to 61.0% from 75.8% in the comparable period of 2012.  The decrease in the loss ratio for the three month period ended June 30, 2013 was primarily due to a decrease in losses in the general liability and surety lines of business.  The decrease in the loss ratio for the six month period ended June 30, 2013 was due to more favorable loss experience in all lines of business.  During the six month period ended June 30 2012, American Southern experienced significant increases in the frequency and severity of claims in the commercial automobile, general liability and surety lines of business which did not recur in the comparable 2013 periods.  The improvement in the 2013 quarter and year to date loss ratios was primarily attributable to actions taken in prior periods to better rationalize American Southern’s existing book of business and to strengthen the underwriting guidelines with respect to new and renewal business.

Underwriting expenses increased $1.4 million, or 45.3%, during the three month period ended June 30, 2013, and $2.6 million, or 46.2%, during the six month period ended June 30, 2013, over the comparable periods in 2012.  As a percentage of premiums, underwriting expenses were 39.7% in the three month period ended June 30, 2013, compared to 32.1% in the three month period ended June 30, 2012.  For the six month period ended June 30, 2013, this ratio increased to 40.6% from 28.9% in the comparable period of 2012.  The increase in the expense ratio for the three month and six month periods ended June 30, 2013 was primarily due to American Southern’s variable commission structure, which compensates the company’s agents in relation to the loss ratios of the business they write.  During periods in which the loss ratio 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 six month periods ended June 30, 2013, these commissions at American Southern increased $1.5 million and $2.7 million, respectively, from the comparable periods in 2012 due to the more favorable loss experience.

Bankers Fidelity

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2013 and the comparable periods in 2012:

 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
(Dollars in thousands)
 
Medicare supplement
 
$
20,867
   
$
17,745
   
$
41,064
   
$
34,619
 
Other health products
   
1,165
     
1,116
     
2,310
     
2,234
 
Life insurance
   
2,987
     
3,065
     
5,737
     
5,942
 
Total earned premiums
   
25,019
     
21,926
     
49,111
     
42,795
 
Insurance benefits and losses
   
17,942
     
16,357
     
35,982
     
31,010
 
Underwriting expenses
   
7,494
     
6,339
     
14,355
     
12,152
 
Total expenses
   
25,436
     
22,696
     
50,337
     
43,162
 
Underwriting loss
 
$
(417
)
 
$
(770
)
 
$
(1,226
)
 
$
(367
)
Loss ratio
   
71.7
%
   
74.6
%
   
73.3
%
   
72.5
%
Expense ratio
   
30.0
     
28.9
     
29.2
     
28.4
 
Combined ratio
   
101.7
%
   
103.5
%
   
102.5
%
   
100.9
%

-21-

Premium revenue at Bankers Fidelity increased $3.1 million, or 14.1%, during the three month period ended June 30, 2013, and $6.3 million, or 14.8%, during the six month period ended June 30, 2013, over the comparable periods in 2012.  Premiums from the Medicare supplement line of business increased $3.1 million, or 17.6%, during the three month period ended June 30, 2013, and $6.4 million, or 18.6%, during the six month period ended June 30, 2013, due primarily to an increase in business generated from the company’s existing agents and newly appointed agents, an increase in business in the state of Missouri as a result of favorable pricing compared to competitors, and active management and implementation of rate increases on renewal business, as appropriate.  Other health product premiums increased slightly during the same comparable periods, primarily as a result of new sales of the company’s short-term care products. Premiums from the life insurance line of business decreased $0.1 million, or 2.5%, during the three month period ended June 30, 2013, and $0.2 million, or 3.5%, during the six month period ended June 30, 2013 due to redemption and settlement of existing policy obligations exceeding the level of new sales activity.

Benefits and losses increased $1.6 million, or 9.7%, during the three month period ended June 30, 2013, and $5.0 million, or 16.0%, during the six month period ended June 30, 2013, over the comparable periods in 2012.  As a percentage of premiums, benefits and losses were 71.7% in the three month period ended June 30, 2013, compared to 74.6% in the three month period ended June 30, 2012.  For the six month period ended June 30, 2013, this ratio increased slightly to 73.3% from 72.5% in the comparable period of 2012.  The decrease in the loss ratio for the three month period ended June 30, 2013 was primarily attributable to more favorable loss experience in the Medicare supplement line of business along with rate increases on the Medicare supplement business that helped mitigate the impact of higher medical costs.  The increase in the loss ratio for the six month period ended June 30, 2013 was primarily due to higher claims associated with the continued aging of the life insurance block of business.

Underwriting expenses increased $1.2 million, or 18.2%, during the three month period ended June 30, 2013, and $2.2 million, or 18.1%, during the six month period ended June 30, 2013, over the comparable periods in 2012.  As a percentage of premiums, underwriting expenses were 30.0% in the three month period ended June 30, 2013, compared to 28.9% in the three month period ended June 30, 2012.  For the six month period ended June 30, 2013, this ratio increased to 29.2% from 28.4% in the comparable period of 2012.  The increase in the expense ratio for the three month and six month periods ended June 30, 2013 was primarily attributable to increases in advertising and agency related expenses as well as development of the worksite distribution channel and product.  Advertising expenses in the three month and six month periods ended June 30, 2013 increased $0.2 million and $0.7 million, respectively, over the comparable periods in 2012 and included charges for television commercials and social media initia