SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007

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

Incorporated pursuant to the laws of the State of Georgia

Internal Revenue Service— Employer Identification No.
58-1027114

Address of Principal Executive Offices:
4370 Peachtree Road, N.E., Atlanta, Georgia 30319
(404) 266-5500

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ

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

The total number of shares of the registrant’s Common Stock, $1 par value, outstanding on November 7, 2007, was 21,705,586.

 

 

ATLANTIC AMERICAN CORPORATION

TABLE OF CONTENTS

			Page No.
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets — September 30, 2007 and December 31, 2006			2
Consolidated Statements of Operations — Three months and nine months ended September 30, 2007 and 2006			3
Consolidated Statements of Shareholders’ Equity — Nine months ended September 30, 2007 and 2006			4
Consolidated Statements of Cash Flows — Nine months ended September 30, 2007 and 2006			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risks			23
Item 4. Controls and Procedures			23
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 6. Exhibits			25
Signature			26
EX-31.1 SECTION 302, CERTIFICATION OF THE PEO
EX-31.2 SECTION 302, CERTIFICATION OF THE PFO
EX-32.1 SECTION 906, CERTIFICATION OF THE PEO AND PFO

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ATLANTIC AMERICAN CORPORATION

		Unaudited
		September 30,				December 31,
		2007				2006
ASSETS
Cash and cash equivalents, including short-term investments of $212 and $20,188		$	16,429			$	27,294
Investments:
Fixed maturities (cost: $271,560 and $260,400)			273,062				262,316
Common and non-redeemable preferred stocks (cost: $10,158 and $11,279)			22,854				28,826
Other invested assets (cost: $3,043 and $3,099)			2,900				3,030
Mortgage loans			—				1,378
Policy and student loans			1,949				1,949
Real estate			38				38
Investment in unconsolidated trusts			1,238				1,238
Total investments			302,041				298,775
Receivables:
Reinsurance			58,664				54,493
Other (net of allowance for doubtful accounts: $1,268 and $1,718)			31,993				34,976
Deferred income taxes, net			6,760				5,755
Deferred acquisition costs			22,424				24,418
Other assets			8,737				9,913
Goodwill			3,008				3,008
Total assets		$	450,056			$	458,632
LIABILITIES AND SHAREHOLDERS’ EQUITY
Insurance reserves and policy funds:
Future policy benefits		$	55,151			$	52,019
Unearned premiums			44,140				50,722
Losses and claims			163,469				162,950
Other policy liabilities			1,592				1,816
Total policy liabilities			264,352				267,507
Accounts payable and accrued expenses			38,655				42,949
Bank debt payable			12,750				12,750
Junior subordinated debenture obligations			41,238				41,238
Total liabilities			356,995				364,444
Commitments and contingencies (Note 10)
Shareholders’ equity:
Preferred stock, $1 par, 4,000,000 shares authorized;
Series B preferred, 134,000 shares issued and outstanding; $13,400 redemption value			134				134
Series D preferred, 70,000 shares issued and outstanding; $7,000 redemption value			70				70
Common stock, $1 par, 50,000,000 shares authorized; shares issued: 21,663,223 and 21,484,440; shares outstanding: 21,663,153 and 21,481,413			21,663				21,484
Additional paid-in capital			56,247				55,832
Retained earnings			6,796				4,969
Accumulated other comprehensive income			8,151				11,707
Treasury stock, at cost: 70 and 3,027 shares			—				(8	)
Total shareholders’ equity			93,061				94,188
Total liabilities and shareholders’ equity		$	450,056			$	458,632

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

ATLANTIC AMERICAN CORPORATION

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Revenue:
Insurance premiums		$	33,891			$	37,498			$	102,872			$	116,492
Investment income			4,504				4,481				13,527				13,739
Realized investment gains, net			2,371				1,400				2,388				5,370
Other income			206				196				618				637
Total revenue			40,972				43,575				119,405				136,238
Benefits and expenses:
Insurance benefits and losses incurred			22,954				22,371				67,687				69,806
Commissions and underwriting expenses			11,361				13,297				33,908				43,809
Interest expense			1,049				1,202				3,115				3,393
Other			3,409				3,756				10,335				11,481
Total benefits and expenses			38,773				40,626				115,045				128,489
Income before income tax expense			2,199				2,949				4,360				7,749
Income tax expense			393				212				1,269				1,777
Net income			1,806				2,737				3,091				5,972
Preferred stock dividends			(429	)			(302	)			(1,264	)			(905	)
Net income applicable to common stock		$	1,377			$	2,435			$	1,827			$	5,067
Net income per common share (basic)		$	.06			$	.11			$	.08			$	.24
Net income per common share (diluted)		$	.06			$	.10			$	.08			$	.22

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

ATLANTIC AMERICAN CORPORATION

														Retained
										Additional				Earnings				Accumulated Other
		Preferred				Common				Paid-in				(Accumulated				Comprehensive				Treasury
Nine Months Ended September 30, 2007		Stock				Stock				Capital				Deficit)				Income				Stock				Total
Balance, December 31, 2006		$	204			$	21,484			$	55,832			$	4,969			$	11,707			$	(8	)		$	94,188
Comprehensive income (loss):
Net income															3,091												3,091
Decrease in unrealized investment gains																			(5,339	)							(5,339	)
Fair value adjustment to derivative financial instrument																			(131	)							(131	)
Deferred income tax attributable to other comprehensive income (loss)																			1,914								1,914
Total comprehensive loss																											(465	)
Dividends accrued on preferred stock															(1,264	)											(1,264	)
Common stock issued in lieu of preferred stock dividend payments							103				257																360
Deferred share compensation expense							10				(8	)															2
Restricted stock grants							12				(12	)															—
Amortization of unearned compensation											50																50
Purchase of shares for treasury																							(23	)			(23	)
Issuance of shares for employee benefit plans and stock options							54				128												31				213
Balance, September 30, 2007		$	204			$	21,663			$	56,247			$	6,796			$	8,151			$	—			$	93,061
Nine Months Ended September 30, 2006
Balance, December 31, 2005		$	134			$	21,412			$	48,925			$	(2,780	)		$	12,846			$	(84	)		$	80,453
Comprehensive income:
Net income															5,972												5,972
Decrease in unrealized investment gains																			(651	)							(651	)
Fair value adjustment to derivative financial instrument																			(125	)							(125	)
Deferred income tax attributable to other comprehensive income (loss)																			272								272
Total comprehensive income																											5,468
Issuance of 70,000 shares of preferred stock			70								6,930																7,000
Dividends accrued on preferred stock											(155	)			(750	)											(905	)
Deferred share compensation expense											3																3
Restricted stock grants							22				(22	)															—
Amortization of unearned compensation											50																50
Purchase of shares for treasury																							(21	)			(21	)
Issuance of shares for employee benefit plans and stock options							43				71				(7	)							105				212
Balance, September 30, 2006		$	204			$	21,477			$	55,802			$	2,435			$	12,342			$	—			$	92,260

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

ATLANTIC AMERICAN CORPORATION

		Nine Months Ended
		September 30,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,091			$	5,972
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred acquisition costs			13,326				17,977
Acquisition costs deferred			(11,332	)			(15,026	)
Realized investment gains			(2,388	)			(5,370	)
Decrease in insurance reserves			(3,155	)			(24,387	)
Compensation expense related to share awards			52				53
Depreciation and (accretion) amortization			(185	)			751
Deferred income tax expense			910				1,553
Decrease in receivables, net			783				15,170
Decrease in other liabilities			(5,329	)			(4,902	)
Other, net			962				278
Net cash used in operating activities			(3,265	)			(7,931	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, called or matured			64,124				39,868
Investments purchased			(71,330	)			(60,456	)
Additions to property and equipment			(390	)			(210	)
Net cash used in investing activities			(7,596	)			(20,798	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing			27,000				3,000
Proceeds from the issuance of Series D Preferred Stock			—				7,000
Repayments of debt			(27,000	)			(500	)
Proceeds from the exercise of stock options			19				15
Purchase of treasury shares			(23	)			(21	)
Net cash (used in) provided by financing activities			(4	)			9,494
Net decrease in cash and cash equivalents			(10,865	)			(19,235	)
Cash and cash equivalents at beginning of period			27,294				41,776
Cash and cash equivalents at end of period		$	16,429			$	22,541
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	3,054			$	3,528
Cash paid (received) for income taxes		$	310			$	(267	)

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

ATLANTIC AMERICAN CORPORATION

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, 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 for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The unaudited condensed consolidated financial statements and the related notes thereto included herein should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Operating results for the three month and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Note 2. Impact of Recently Issued Accounting Standards

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115.” This statement permits entities to choose, at specified election dates, to measure eligible items at fair value (i.e. the fair value option). Items eligible for the fair value option include certain recognized financial assets and liabilities, rights and obligations under certain insurance contracts that are not financial instruments, host financial instruments resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument, and certain commitments. Business entities are required to report unrealized gains and losses on items for which the fair value option has been elected in net income. The fair value option: (a) may be applied instrument by instrument, with certain exceptions; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, although early adoption is permitted under certain conditions. The Company does not currently expect to apply the fair value option to any eligible items.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. SFAS No. 157 provides guidance on measuring fair value when required under existing accounting standards and establishes a hierarchy that prioritizes the inputs to valuation techniques. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Adoption of this statement is not expected to have a material impact on the Company’s financial position or results of operations. 

     In July 2006, the FASB issued Financial Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company adopted the provisions of FIN 48 on January 1, 2007 and did not recognize any liability for unrecognized tax benefits or adjust retained earnings. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense and, as of January 1, 2007, the Company had no accrued interest and penalties. 

     In September 2005, the AICPA issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance. An internal replacement is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Modifications that result in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract must be written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company adopted SOP 05-1 on January 1, 2007. Adoption of this statement had no impact on the Company’s financial condition or results of operations. 

Note 3. Segment Information

     The Company has three principal business units, each focusing on a specific geographic region and/or specific products. Each business unit is managed independently and is evaluated on its individual performance. The following summary sets forth the revenue and pre-tax income (loss) for each principal business unit for the three month and nine month periods ended September 30, 2007 and 2006.

     Prior to 2007, the Company reported its segment data in accordance with the operating results of its four primary operating subsidiaries. As previously disclosed, the Company has completed its efforts to conform the information systems, policies and procedures, products, marketing and managerial responsibilities between Association Casualty Insurance Company and Georgia Casualty & Surety Company, two of the Company’s operating subsidiaries, to create a southern “regional” property and casualty operation. Accordingly, effective January 1, 2007, the Company began internally reporting the results and activities of these companies on a combined basis.

     Segment data for prior periods has been restated to conform the prior presentation with that of the current period.

Revenues

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Regional Property and Casualty		$	12,456			$	13,127			$	34,849			$	42,064
American Southern			11,619				14,141				36,058				43,021
Bankers Fidelity			16,494				16,011				47,696				50,159
Corporate and Other			4,620				4,875				13,352				15,714
Adjustments and Eliminations			(4,217	)			(4,579	)			(12,550	)			(14,720	)
Total Revenue		$	40,972			$	43,575			$	119,405			$	136,238

Income (loss) before income taxes

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Regional Property and Casualty		$	(234	)		$	616			$	(268	)		$	1,059
American Southern			2,311				2,794				7,096				8,110
Bankers Fidelity			2,021				1,462				2,604				3,879
Corporate and Other			(1,899	)			(1,923	)			(5,072	)			(5,299	)
Consolidated Results		$	2,199			$	2,949			$	4,360			$	7,749

Note 4. Credit Arrangements

     Bank Debt

     At September 30, 2007, the Company’s $12,750 of bank debt consisted of a reducing revolving credit facility (the “Revolver”) with Wachovia Bank, National Association (“Wachovia”) pursuant to which the Company had the ability to, subject to the terms and conditions thereof, initially borrow or reborrow up to $15,000 (the “Commitment Amount”). In accordance with the terms of the Revolver, the Commitment Amount is incrementally reduced every six months from July 1, 2007. The interest rate on amounts outstanding under the Revolver is, at the option of the Company, equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the London Interbank Offered Rate (“LIBOR”) determined on an interest period of 1-month, 2-months, 3-months or 6-months, plus an Applicable Margin (as defined). The Applicable Margin varies based upon the Company’s leverage ratio (funded debt to total capitalization, each as defined) and ranges from 1.75% to 2.50%. Interest on amounts outstanding is payable quarterly. If not sooner repaid in full, the Revolver requires the Company to repay $500 in principal on December 31, 2007 and each of June 30 and December 31, 2008, $1,000 and $1,500 in principal on June 30 and December 31, 2009, respectively, and $10,500 in principal at maturity on June 30, 2010. The Revolver requires the Company to comply with certain covenants, including, among others, ratios that relate funded debt to both total capitalization and earnings before interest, taxes, depreciation and amortization, as well as the maintenance of minimum levels of tangible net worth. The Company must also comply with limitations on capital expenditures, certain payments, additional debt obligations, equity repurchases and redemptions, as well as minimum risk-based capital levels. Upon the occurrence of an event of default, Wachovia may terminate the Revolver and declare all amounts outstanding due and payable in full. As of September 30, 2007, the Revolver’s effective interest rate was 7.99%.

     Junior Subordinated Debentures

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

     The financial structure of each of Atlantic American Statutory Trust I and II, as of September 30, 2007 was as follows:

		Atlantic American				Atlantic American
		Statutory Trust I				Statutory Trust II
JUNIOR SUBORDINATED DEBENTURES (1) (2)
Principal amount owed		$	18,042			$	23,196
Balance September 30, 2007			18,042				23,196
Balance December 31, 2006			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 on or after		December 4, 2007				May 15, 2008
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

Note 5. Derivative Financial Instruments

     On February 21, 2006, the Company entered into a zero cost rate collar with Wachovia to hedge future interest payments on a portion of the Junior Subordinated Debentures. The notional amount of the collar was $18,042 with an effective date of March 6, 2006. The collar has a LIBOR floor rate of 4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the 4^th of each March, June, September and December through termination on March 4, 2013.

     The estimated fair value and related carrying value of the Company’s rate collar at September 30, 2007 was a liability of approximately $297.

Note 6. Reconciliation of Other Comprehensive Income

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net realized gains on investments included in net income		$	2,371			$	1,400			$	2,388			$	5,370
Other components of comprehensive income (loss):
Net pre-tax unrealized gains (losses) arising during period		$	509			$	7,503			$	(2,951	)		$	4,719
Reclassification adjustment			(2,371	)			(1,400	)			(2,388	)			(5,370	)
Net pre-tax unrealized gains (losses) recognized in other comprehensive income (loss)			(1,862	)			6,103				(5,339	)			(651	)
Fair value adjustment to derivative financial instrument			(345	)			(400	)			(131	)			(125	)
Deferred income tax attributable to other comprehensive income (loss)			772				(1,995	)			1,914				272
Change in accumulated other comprehensive income			(1,435	)			3,708				(3,556	)			(504	)
Accumulated other comprehensive income beginning of period			9,586				8,634				11,707				12,846
Accumulated other comprehensive income end of period		$	8,151			$	12,342			$	8,151			$	12,342

Note 7. Earnings Per Common Share

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

		Three Months Ended
		September 30, 2007
						Shares				Per Share
		Income				(In thousands)				Amount
Basic Earnings Per Common Share:
Net income		$	1,806				21,636
Less preferred stock dividends			(429	)
Net income applicable to common shareholders			1,377				21,636			$	.06
Diluted Earnings Per Common Share:
Effect of dilutive stock options							331
Net income applicable to common shareholders		$	1,377				21,967			$	.06

		Three Months Ended
		September 30, 2006
						Shares				Per Share
		Income				(In thousands)				Amount
Basic Earnings Per Common Share:
Net income		$	2,737				21,440
Less preferred stock dividends			(302	)
Net income applicable to common shareholders			2,435				21,440			$	.11
Diluted Earnings Per Common Share:
Effect of dilutive stock options							314
Effect of Series B and D Preferred Stock			302				5,112
Net income applicable to common shareholders		$	2,737				26,866			$	.10

		Nine Months Ended
		September 30, 2007
						Shares				Per Share
		Income				(In thousands)				Amount
Basic Earnings Per Common Share:
Net income		$	3,091				21,570
Less preferred stock dividends			(1,264	)
Net income applicable to common shareholders			1,827				21,570			$	.08
Diluted Earnings Per Common Share:
Effect of dilutive stock options							397
Net income applicable to common shareholders		$	1,827				21,967			$	.08

		Nine Months Ended
		September 30, 2006
						Shares				Per Share
		Income				(In thousands)				Amount
Basic Earnings Per Common Share:
Net income		$	5,972				21,406
Less preferred stock dividends			(905	)
Net income applicable to common shareholders			5,067				21,406			$	.24
Diluted Earnings Per Common Share:
Effect of dilutive stock options							329
Effect of Series B and D Preferred Stock			905				5,112
Net income applicable to common shareholders		$	5,972				26,847			$	.22

     The assumed conversion of the Company’s Series B and D Preferred Stock was excluded from the earnings per common share calculation for the three month and nine month periods ended September 30, 2007 since their impact was antidilutive. Outstanding stock options of 8,000 for the three month and nine month periods ended September 30, 2006 were excluded from the earnings per common share calculation since their impact was antidilutive.

Note 8. Income Taxes

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Federal income tax provision at statutory rate of 35%		$	770			$	1,032			$	1,526			$	2,712
Tax exempt interest and dividends received deductions			(125	)			(342	)			(339	)			(422	)
Small life insurance company deduction			(315	)			(292	)			(315	)			(292	)
Other permanent differences			6				11				28				31
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets			(84	)			(255	)			218				(321	)
Adjustment for prior years’ estimates to actual			137				54				137				54
State income taxes			4				4				14				15
Income tax expense		$	393			$	212			$	1,269			$	1,777

     The components of the income tax expense were:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Current — Federal		$	324			$	185			$	345			$	209
Current — State			4				4				14				15
Deferred — Federal			65				23				910				1,553
Total		$	393			$	212			$	1,269			$	1,777

     The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and nine month periods ended September 30, 2007 and 2006 resulted from the dividends-received deduction (“DRD”), the small life insurance company deduction (“SLD”) and the change in asset valuation allowance. Also, the provision-to-filed-return adjustments are generally updated at the completion of the third quarter each year and were $137 in the three month and nine month periods ended September 30, 2007 and $54 in the comparable 2006 periods. Included in the 2007 third quarter provision-to-filed-return adjustments of $137 was a $104 charge that resulted from the write off of an unused net operating loss carry forward which expired in 2006.

     The current estimated DRD is adjusted as underlying factors change, including known actual 2007 distributions earned on invested assets. The actual current year DRD can vary from the estimates based on, but not limited to, amounts of distributions from these investments as well as appropriate levels of 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 amount of 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 the asset valuation allowance results from reassessment of the realization of certain net operating loss carry forwards.

Note 9. Employee Retirement Plans

     The following table provides the components of the net periodic benefit cost for all defined benefit pension plans of the Company:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Service cost		$	51			$	50			$	153			$	150
Interest cost			83				78				248				233
Expected return on plan assets			(54	)			(48	)			(162	)			(144	)
Net amortization			28				35				84				104
Net periodic benefit cost		$	108			$	115			$	323			$	343

     The weighted-average assumptions used to determine the net periodic benefit cost were as follows:

		Nine Months Ended
		September 30,
		2007				2006
Discount rate			5.50	%			5.50	%
Expected return on plan assets			7.00	%			7.00	%
Projected annual salary increases			4.50	%			4.50	%

     The Company expects to contribute $184 for all defined benefit pension plans in 2007. During the three month and nine month periods ended September 30, 2007, the Company made a payment of $143 to the pension plans.

Note 10. Commitments and Contingencies

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

Note 11. Related Party Transactions

     The Company has, from time to time, purchased common and preferred shares in Gray Television, Inc. (“Gray Television”) in the ordinary course of investing. Mr. Robinson, the Company’s chairman of the board of directors, is an executive officer, shareholder and a member of the board of directors of Gray Television. Mr. Howell, the Company’s president and chief executive officer, and Mrs. Robinson, a member of the Company’s board of directors, are members of the board of directors and shareholders of Gray Television. On May 22, 2007, Gray Television redeemed the Company’s investment in Gray Television Series C preferred stock at a price of $10,000 per share plus accrued but unpaid dividends thereon. There was no gain or loss on the transaction.

Note 12. Subsequent Event

     On October 5, 2007 the Company sold 269,600 shares of its investment in Wachovia Corporation common stock. The gain recognized on the sale was approximately $11,536.

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, the “Company”) for the three month and nine month periods ended September 30, 2007. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein, as well as with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

     Atlantic American is an insurance holding company whose operations are conducted through various operating insurance companies organized into separate business units: Association Casualty Insurance Company, Association Risk Management General Agency, Inc. and Georgia Casualty & Surety Company (collectively known as “Regional Property and Casualty”); American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”); and Bankers Fidelity Life Insurance Company (“Bankers Fidelity”). Each business unit is managed separately based upon its geographic location or the type of products it offers and is evaluated on its individual performance.

Critical Accounting Policies

     The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and, in management’s belief, conform to general practices within the insurance industry. The following is an explanation of the Company’s accounting policies and the resultant estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions, and actual operating results could differ from management’s initial estimates determined using these policies. Atlantic American does not expect that changes in the estimates determined using these policies will have a material effect on the Company’s financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.

     Unpaid loss and loss adjustment expenses comprised 46% of the Company’s liabilities at September 30, 2007. This obligation includes estimates for: 1) unpaid losses on claims reported prior to September 30, 2007, 2) development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to September 30, 2007 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to September 30, 2007. Quantification of loss estimates for each of these components involves a significant degree of judgment and estimates may vary, materially, from period to period. Estimated unpaid losses on reported claims are developed based on historical experience with similar claims by the Company. Development on reported claims, estimates of unpaid ultimate losses on claims incurred prior to September 30, 2007 but not yet reported, and estimates of unpaid loss adjustment expenses, are developed based on the Company’s historical experience, using actuarial methods to assist in the analysis. The Company’s actuarial staff develops ranges of estimated development on reported and unreported claims as well as loss adjustment expenses using various methods including the paid-loss development method, the reported-loss development method, the paid Bornhuetter-Ferguson method, the reported Bornhuetter-Ferguson method, the Berquist-Sherman method and a frequency-severity method. Any single method used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes affecting the business environment and the Company’s administrative policies. Further, a variety of external factors, such as legislative changes, medical cost inflation, and others may directly or indirectly impact the relative adequacy of liabilities for unpaid losses and loss adjustment expenses. The Company’s approach is to select an estimate of ultimate losses based on comparing results from a variety of reserving methods, as opposed to total reliance on any single method. Unpaid loss and loss adjustment expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used to develop such estimates, the amount of the Company’s recorded liability for unpaid loss and loss adjustment expenses is adjusted. In the event the Company’s actual reported losses in any period are materially in excess of the previously estimated amounts, such losses, to the extent they are not covered by reinsurance coverage, would have a material adverse effect on the Company’s results of operations.

     Future policy benefits comprised 15% of the Company’s total liabilities at September 30, 2007. These liabilities relate primarily to life insurance products and are based upon assumed future investment yields, mortality rates, and withdrawal rates after giving effect to possible risks of adverse deviation. The assumed mortality and withdrawal rates are based upon the Company’s experience. If actual results differ from the initial assumptions, the amount of the Company’s recorded liability could require adjustment.

     Deferred acquisition costs comprised 5% of the Company’s total assets at September 30, 2007. Deferred acquisition costs are commissions, premium taxes, and other costs that vary with and are primarily related to the acquisition of new and renewal business and are generally deferred and amortized. The deferred amounts are recorded as an asset on the balance sheet and amortized to expense in a systematic manner. Traditional life insurance and long-duration health insurance deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the related liability for policy benefit reserves. The deferred acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Deferred policy acquisition costs are expensed when such costs are

deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance). Assessments of recoverability for property and casualty and short-duration health insurance are extremely sensitive to the estimates of a subsequent year’s projected losses related to the unearned premiums. Projected loss estimates for a current block of business for which unearned premiums remain to be earned may vary significantly from the indicated losses incurred in any given previous calendar year.

     Receivables are amounts due from reinsurers, insureds and agents and comprised 20% of the Company’s total assets at September 30, 2007. Insured and agent balances are evaluated periodically for collectibility. Annually, the Company performs an analysis of the credit worthiness of the Company’s reinsurers using various data sources. Failure of reinsurers to meet their obligations due to insolvencies or disputes could result in uncollectible amounts and losses to the Company. Allowances for uncollectible amounts are established, as and when a loss has been determined probable, against the related receivable. Losses are recognized when determined on a specific account basis and a general provision for loss is made based on the Company’s historical experience.

     Cash and investments comprised 71% of the Company’s total assets at September 30, 2007. Substantially all investments are in bonds and common and preferred stocks, which are subject to significant market fluctuations. The Company carries all investments as available for sale and, accordingly, at their estimated fair values. The Company owns certain non-redeemable preferred stocks that do not have quoted values and are carried at estimated fair values as determined by management. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. On occasion, the value of an investment may decline to a value below its amortized purchase price and remain at such value for an extended period of time. When an investment’s indicated fair value has declined below its cost basis for a period of time, primarily due to changes in credit risk, the Company evaluates such investment for other than a temporary impairment. If other than a temporary impairment is deemed to exist, then the Company will write down the amortized cost basis of the investment to its estimated fair value. While such write down does not impact the reported value of the investment in the Company’s balance sheet, it is reflected as a realized investment loss in the Company’s consolidated statements of operations.

     Deferred income taxes comprised approximately 2% of the Company’s total assets at September 30, 2007. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for tax purposes. These deferred income taxes are measured by applying currently enacted tax laws and rates. Valuation allowances are recognized to reduce the deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income and tax planning strategies.

OVERALL CORPORATE RESULTS

     On a consolidated basis, the Company had net income of $1.8 million, or $0.06 per diluted share, during the three month period ended September 30, 2007, compared to net income of $2.7 million, or $0.10 per diluted share, for the three month period ended September 30, 2006. The Company had net income of $3.1 million, or $0.08 per diluted share, for the nine month period ended September 30, 2007, compared to net income of $6.0 million, or $0.22 per diluted share, for the nine month period ended September 30, 2006. Premium revenue for the three month period ended September 30, 2007, decreased $3.6 million, or 9.6%, to $33.9 million. For the nine month period ended September 30, 2007, premium revenue decreased $13.6 million, or 11.7%, to $102.9 million. The decrease in premiums for the three month and nine month periods ended September 30, 2007 was primarily attributable to increased pricing competition on most property and casualty lines, the non-renewal of targeted classes of property business as well as the loss of a significant account. In addition, the Company’s life and health operations continue to experience a premium decline resulting from lower new sales activity and an increased level of product competition, specifically in the Medicare supplement market. The decrease in net income for the three month period ended September 30, 2007 as compared to the three month period ended September 30, 2006 was primarily attributable to adverse development on prior years’ losses in the Regional Property and Casualty operations. The decrease in net income for the nine month period ended September 30, 2007 as compared to the nine month period ended September 30, 2006 was primarily due to a decrease in realized investment gains. During the nine month period ended September 30, 2007, the Company had net realized investment gains of $2.4 million compared to net realized investment gains of $5.4 million in the same period of 2006. Partially offsetting the decrease in net income for the nine month period ended September 30, 2007 was the non-recurrence of a 2006 windstorm assessment related to hurricane Katrina. In April 2006, the Company received an assessment from the Mississippi Windstorm Underwriting Association of approximately $2.2 million which was in addition to a $1.3 million assessment previously received and paid in 2005. The April 2006 assessment ultimately exhausted the Company’s remaining $0.03 million of catastrophe reinsurance related to hurricane Katrina, and the Company expensed the $2.2 million excess amount in the three month period ended June 30, 2006.

     The Company’s property and casualty operations are comprised of Regional Property and Casualty and American Southern. The Company’s life and health operations are comprised of the operations of Bankers Fidelity.

     A more detailed analysis of the individual business units and other corporate activities is provided below.

UNDERWRITING RESULTS

Regional Property and Casualty

     The following is a summary of Regional Property and Casualty’s premiums for the three month and nine month periods ended September 30, 2007 and the comparable periods in 2006 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Gross written premiums		$	12,909			$	13,104			$	37,407			$	40,635
Ceded premiums			(3,421	)			(4,128	)			(10,175	)			(13,125	)
Net written premiums		$	9,488			$	8,976			$	27,232			$	27,510
Net earned premiums		$	9,562			$	10,411			$	28,782			$	33,561

     Regional Property and Casualty’s gross written premiums decreased $0.2 million, or 1.5%, during the three month period ended September 30, 2007, and $3.2 million, or 7.9%, during the nine month period ended September 30, 2007, from the comparable periods in 2006. The decrease in gross written premiums for the three month and nine month periods ended September 30, 2007 was primarily due to a significant increased level of price competition in the marketplace which has resulted in the renewal of expiring policies at rates lower than previously charged for comparable exposures.

     Regional Property and Casualty’s ceded premiums decreased $0.7 million, or 17.1%, during the three month period ended September 30, 2007, and $3.0 million, or 22.5%, during the nine month period ended September 30, 2007, from the comparable periods in 2006. The decrease in ceded premiums for the three month and nine month periods ended September 30, 2007 was primarily attributable to the decline in gross written premiums as well as an overall reduction in reinsurance rates due to changes in the business unit’s risk profile.

     The following presents Regional Property and Casualty’s net earned premiums by line of business for the three month and nine month periods ended September 30, 2007 and the comparable periods in 2006 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Workers’ compensation		$	3,817			$	3,979			$	11,160			$	12,555
General liability			532				651				1,918				2,240
Commercial multi-peril			3,163				3,615				9,454				11,690
Commercial automobile			2,050				2,166				6,250				7,076
Total		$	9,562			$	10,411			$	28,782			$	33,561

     Net earned premiums decreased $0.8 million, or 8.2%, during the three month period ended September 30, 2007, and $4.8 million, or 14.2%, during the nine month period ended September 30, 2007, from the comparable periods in 2006. The decrease in net earned premiums for the three month and nine month periods ended September 30, 2007 was primarily due to the policy renewal pricing issues described previously coupled with lower levels of retained business.

     The following sets forth Regional Property and Casualty’s loss and expense ratios for the three month and nine month periods ended September 30, 2007 and for the comparable periods in 2006:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Loss ratio			93.1	%			64.0	%			78.0	%			61.3	%
Expense ratio			39.6	%			56.1	%			44.0	%			60.8	%
Combined ratio			132.7	%			120.1	%			122.0	%			122.1	%

     The loss ratio for the three month period ended September 30, 2007 increased to 93.1% from 64.0% in the three month period ended September 30, 2006 and to 78.0% in the nine month period ended September 30, 2007 from 61.3% in the comparable period of 2006. The increase in the loss ratio for the three month period ended September 30, 2007 was primarily due to adverse development on prior years’ losses coupled with the decrease in net earned premiums. The increase in the loss ratio for the nine month period ended September 30, 2007 was primarily due to an increase in frequency and severity of claims in the property, general liability and automobile lines of business.

     The expense ratio for the three month period ended September 30, 2007 decreased to 39.6% compared to 56.1% in the three month period ended September 30, 2006 and to 44.0% in the nine month period ended September 30, 2007 from 60.8% in the comparable period of 2006. The decrease in the expense ratio for the three month period ended September 30, 2007 was primarily due to a 30% reinsurance ceding commission for which there was no similar commission in the three month and nine month periods ended September 30, 2006. The decrease in the expense ratio for the nine month period ended September 30, 2007 was primarily attributable to two charges incurred in 2006: a $2.2 million charge related to an assessment from the Mississippi Windstorm Underwriting Association and a $1.0 million increase in the second injury trust fund assessment accrual. Both of these charges were expensed in the second quarter of 2006 but did not recur in the nine month period ended September 30, 2007. Also contributing to the decrease in the 2007 year to date expense ratio was the 30% reinsurance ceding commission discussed previously.

American Southern

     The following is a summary of American Southern’s premiums for the three month and nine month periods ended September 30, 2007 and the comparable periods in 2006 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Gross written premiums		$	12,019			$	14,293			$	33,010			$	39,509
Ceded premiums			(1,723	)			(2,506	)			(5,286	)			(7,195	)
Net written premiums		$	10,296			$	11,787			$	27,724			$	32,314
Net earned premiums		$	10,251			$	12,727			$	31,923			$	38,518

     Gross written premiums at American Southern decreased $2.3 million, or 15.9%, during the three month period ended September 30, 2007, and $6.5 million, or 16.4%, during the nine month period ended September 30, 2007, from the comparable periods in 2006. The decrease in gross written premiums during the three month and nine month periods ended September 30, 2007 was primarily due to the loss of a significant account which had previously resulted in approximately $10.5 million in annualized commercial automobile premiums. For the nine month period ended September 30, 2007 gross written premiums generated by this account were $0.6 million compared to $6.8 million in the same period of 2006, a decrease of $6.2 million. Also contributing to the decrease in gross written premiums during the three month and nine month periods ended September 30, 2007 was the non-renewal of several performance bonds in the surety line of business as well as a reduction in business writings from a previously existing joint venture with Carolina Motor Club, Inc.

     Ceded premiums decreased $0.8 million, or 31.2%, during the three month period ended September 30, 2007, and $1.9 million, or 26.5%, during the nine month period ended September 30, 2007, from the comparable periods in 2006. The decrease in ceded premiums during the three month and nine month periods ended September 30, 2007 was primarily due to the significant decline in gross written premiums.

     The following presents American Southern’s net earned premiums by line of business for the three month and nine month periods ended September 30, 2007 and the comparable periods in 2006 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Commercial automobile		$	4,447			$	6,020			$	14,437			$	17,900
Private passenger auto			—				362				43				1,838
General liability			2,653				2,969				7,998				8,665
Property			877				775				2,260				2,391
Surety			2,274				2,601				7,185				7,724
Total		$	10,251			$	12,727			$	31,923			$	38,518

     Net earned premiums decreased $2.5 million, or 19.5%, during the three month period ended September 30, 2007, and $6.6 million, or 17.1%, during the nine month period ended September 30, 2007, from the comparable periods in 2006 primarily due to the decline in policy writings described above.

     The following sets forth American Southern’s loss and expense ratios for the three month and nine month periods ended September 30, 2007 and for the comparable periods in 2006:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Loss ratio			39.9	%			45.0	%			45.0	%			44.1	%
Expense ratio			50.9	%			44.2	%			45.7	%			46.5	%
Combined ratio			90.8	%			89.2	%			90.7	%			90.6	%

     The loss ratio for the three month period ended September 30, 2007 decreased to 39.9% from 45.0% in the three month period ended September 30, 2006 and increased to 45.0% in the nine month period ended September 30, 2007 from 44.1% in the comparable period of 2006. The decrease in the loss ratio in the three month period ended September 30, 2007 was primarily due to lower claims in the surety and automobile lines of business that resulted from the non-renewal of certain unprofitable accounts described above. Also contributing to the decrease in the loss ratio was favorable development in various general liability claims during the three month period ended September 30, 2007. The increase in the loss ratio in the nine month period ended September 30, 2007 was primarily due to an increase in loss adjustment expenses which resulted from a significant commercial automobile claim as well as the decrease in net earned premiums discussed previously.

     The expense ratio for the three month period ended September 30, 2007 increased to 50.9% compared to 44.2% in the three month period ended September 30, 2006 and decreased to 45.7% for the nine month period ended September 30, 2007 compared to 46.5% in the comparable period of 2006. The increase in the expense ratio in the three month period ended September 30, 2007 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. In periods where the loss ratio decreases, commissions and underwriting expenses will increase and conversely in periods where the loss ratio increases, commissions and underwriting expenses will decrease.

Bankers Fidelity

     The following summarizes Bankers Fidelity’s earned premiums for the three month and nine month periods ended September 30, 2007 and the comparable periods in 2006 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Medicare supplement		$	10,371			$	10,783			$	31,226			$	33,814
Other health			979				750				2,861				2,188
Life			2,728				2,827				8,080				8,411
Total		$	14,078			$	14,360			$	42,167			$	44,413

     Premium revenue at Bankers Fidelity decreased $0.3 million, or 2.0%, during the three month period ended September 30, 2007, and $2.2 million, or 5.1%, during the nine month period ended September 30, 2007, from the comparable periods in 2006. The most significant decrease in premiums was in the Medicare supplement line of business. Premiums from the Medicare supplement line of business decreased $0.4 million, or 3.8%, during the three month period ended September 30, 2007 and $2.6 million, or 7.7%, during the nine month period ended September 30, 2007, due to the continued decline in new business levels and the non-renewal of certain policies that resulted from increased pricing and product competition. Premiums from the life insurance and other health lines of business increased $0.1 million, or 3.6%, during the three month period ended September 30, 2007, and $0.3 million, or 3.2%, during the nine month period ended September 30, 2007, over the comparable periods of 2006 due primarily to an increase in accident & health business with various associations. Premium revenue from the association accident & health line of business increased $0.6 million during the nine month period ended September 30, 2007 over the comparable period in 2006.

     The following summarizes Bankers Fidelity’s operating expenses for the three month and nine month periods ended September 30, 2007 and the comparable periods in 2006 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Benefits and losses		$	9,960			$	9,984			$	30,851			$	32,215
Commission and other expenses			4,514				4,565				14,241				14,066
Total expenses		$	14,474			$	14,549			$	45,092			$	46,281