Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

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") for the years ended December 31, 2025 and 2024. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. Operating results achieved in any historical period are not necessarily indicative of results to be expected in any future period.

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") in the property and casualty insurance industry, and Bankers Fidelity Life Insurance Company, Bankers Fidelity Assurance Company and Atlantic Capital Life Assurance Company (together known as "Bankers Fidelity") in the life and health insurance industry. Each operating company is managed separately, offers different products and is evaluated on its individual performance.

Revision of Previously Issued Financial Statements

In connection with the preparation of the Company's consolidated financial statements for the year ended December 31, 2025, management identified errors relating to the recognition of due-premium receivables and related premium revenue within the Company's group whole life and group accident and health business.

Management evaluated the errors in accordance with ASC Topic 250, Accounting Changes and Error Corrections, and SEC Staff Accounting Bulletins No. 99, Materiality, and No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. Management considered the errors under both the rollover and iron-curtain methods and evaluated relevant quantitative and qualitative factors, both individually and in the aggregate with other identified misstatements.

Based on this evaluation, management concluded that the errors were not material, individually or in the aggregate, to any of the Company's previously issued annual or interim financial statements.

Management further concluded that correcting the cumulative errors entirely in the consolidated statement of operations for the year ended December 31, 2025 would materially misstate the Company's 2025 results of operations. Accordingly, the Company has revised the 2024 financial information presented in this Annual Report on Form 10-K to reflect the correction of the errors in the appropriate prior periods.

The revisions did not change management's conclusion that the Company's previously issued annual or interim financial statements were fairly presented, in all material respects, in accordance with accounting principles generally accepted in the United States. The Company has not amended its previously filed Annual Report on Form 10-K for the year ended December 31, 2024. All 2024 amounts presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflect the revised amounts unless otherwise indicated.

Nature of the Errors

Management identified deficiencies in the design and operating effectiveness of controls over the recording and reconciliation of premium receivables and the application of premium payments held in suspense within the Company's group whole life and group accident and health business.

The Company did not design and maintain effective controls to timely and accurately reconcile enrollment, billing and cash receipt information at the individual policyholder level and to resolve differences among third-party enrollment data, the policy administration system and the general ledger.

As a result, the Company did not maintain controls operating at a sufficient level of precision to determine whether recorded premium receivables were valid, whether amounts held in suspense should be applied to individual policyholders or otherwise recognized, and whether the related amounts were recorded in the appropriate period and were appropriately classified in the consolidated financial statements. As a result, the Company has revised its previously reported 2024 financial information to remove the affected receivables and premium revenue.

Effect of the Corrections

The revisions to the Company's consolidated financial statements as of and for the year ended December 31, 2024 principally resulted in:

● a $5.580 million reduction in insurance premiums and other receivables;

● a $1.172 million increase in deferred income taxes, net;

● a $2.923 million reduction in accounts payable and accrued expenses;

● a $1.485 million reduction in retained earnings;

● a $0.351 million reduction in 2024 insurance premiums, net and income (loss) before income taxes; and

● a $0.277 million increase in 2024 net loss

The revisions did not affect the Company's cash and cash equivalents or total net cash provided by operating activities for the year ended December 31, 2024. The revisions affected certain components of the reconciliation of net income to net cash provided by operating activities but did not affect total net cash provided by operating activities.

The foregoing summary is not intended to present all effects of the revisions. See Note 1, Revision of Previously Issued Financial Statements, to the consolidated financial statements for a reconciliation of the amounts previously reported to the amounts as revised.

Adoption of LDTI

Certain amounts as of and for the year ended December 31, 2024 within this Form 10-K have been restated to conform with the current year accounting and presentation as a result of the Company's required adoption of Accounting Standards Update No. 2018-12, Financial Services-Insurance (Topic 944)-Targeted Improvements to the Accounting for Long Duration Contracts. Refer to Note 1 of Notes to Consolidated Financial Statements for more information regarding the Company's adoption of LDTI and the related impact to the consolidated financial statements.

Critical Accounting Estimates

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America ("GAAP") 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 significantly from management's 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.

Investments comprised 62% of the Company's total assets at December 31, 2025. Substantially all of the Company's investments are in bonds and common and preferred stocks, the values of which are subject to market fluctuations, which could be significant. The Company carries all fixed maturity securities, which includes bonds and redeemable preferred stocks, as available for sale, and equity securities, which includes common and non-redeemable preferred stocks, at their estimated fair values.

The Company determines the fair values of certain financial instruments based on the fair value hierarchy established in Financial Accounting Standard Board ("FASB") Accounting Standards Codification ("ASC") 820-10-20, Fair Value Measurements and Disclosures ("ASC 820-10-20"). The fair values of fixed maturity securities and equity securities are largely determined by nationally quoted market prices, when available, or independent broker quotations. See Note 2 and Note 3 of Notes to Consolidated Financial Statements with respect to assets and liabilities carried at fair value and information about the inputs used to value those financial instruments, by hierarchy level, in accordance with ASC 820-10-20.

For fixed maturity available-for-sale securities in an unrealized loss position, a credit loss is recognized in earnings within realized investment gains (losses) when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the reduction of amortized cost and the loss recognized in earnings is the entire difference between the security's amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized as a credit loss by establishing an Allowance for Credit Losses ("ACL") with a corresponding charge to earnings in realized investment gains (losses). However, the ACL is limited by the amount that the fair value is less than the amortized cost. This limitation is known as the "fair value floor." If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of the decline in value related to other-than-credit factors ("noncredit loss") is recorded in OCI.

Future policy benefits represented approximately 27% of total liabilities at December 31, 2025, compared to 28% at December 31, 2024. The LFPB is established under ASC Topic 944 Financial Services-Insurance for products classified as Long-Duration. The Company's products that are so classified include Individual and group life insurance policies, Medicare Supplement policies, and other guaranteed renewable accident and health policies.

Effective January 1, 2025, the Company adopted Accounting Standards Update ("ASU") No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, as subsequently amended by ASU Nos. 2019-09, 2020-11 and 2022-05. The Company applied LDTI using the modified retrospective transition method as of January 1, 2024 (the "Transition Date") to its whole life, Medicare Supplement and certain guaranteed-renewable accident and health insurance products.

Under LDTI, the LFPB reflects the present value of estimated future policyholder benefits and claim settlement expenses less the present value of estimated net policyholder premiums. These estimates are based on actuarial assumptions for mortality, voluntary policyholder terminations, and claims under accident and health policies. These assumptions are developed based on an evaluation of recent experience and the then-current legal, economic, and operating environment that is conducted at least annually. Changes in the LFPB that are attributable to changes in these assumptions are recognized in earnings. Historical experience is updated each quarter through retrospective unlocking to reflect actual cash flows, and changes in the LFPB that are caused by differences between actual and expected experience are also recognized in earnings.

Under LDTI, the discount rate assumption consists of a locked in rate and a current rate. The current rate is derived from a yield curve of upper medium grade fixed income securities obtained from Bloomberg, reflecting yields across maturities ranging from one month to fifty years and based on single A rated corporate securities. For policies issued after January 1, 2024 ("the Transition Date"), the locked in rate equals the current rate in effect during the quarter of issuance, while for policies issued prior to the Transition Date, the locked in rate represents the historical expected investment yield at policy issuance. The current discount rate is updated quarterly, with changes recognized in OCI.

In addition to the normal policy activity, the year-over-year change in the liability and related AOCI balances is driven by updates to actuarial assumptions, differences between actual and expected experience, and changes in discount rates, and remains sensitive to changes in these assumptions.

For the purposes of calculating the NPR and the LFPB, insurance contracts are grouped into cohorts that do not span more than one issue year. Medicare Supplement cohorts are determined by legal entity and issue year, life insurance cohorts are established separately for individual and group policies (with further distinction for limited-pay versus other individual life products), and other accident and health products are grouped by issue year.

The NPR is the ratio of the present value of expected future benefits and related claim expenses to the present value of expected future gross premiums. The NPR used to accrue the LFPB in each period is determined by using the historical and present value of expected future benefits and claim settlement expenses for the cohort divided by the historical and present value of expected future gross premiums for the cohort. For contracts in force at the Transition Date, the NPR reflects the applicable carrying amount under the Company's modified retrospective transition method. For contracts issued after the Transition Date, the NPR is established based on expected benefits, related expenses and gross premiums as of the applicable contract issue date.

At each reporting date, actual experience is incorporated into the calculation, and the NPR is recalculated using actual experience and current assumptions about future cash flows. The NPR is capped at 100%. If the calculated NPR for a cohort exceeds 100%, the Company increases the LFPB by the amount necessary to reduce the NPR to 100% and recognizes the resulting loss immediately in earnings. The LFPB for an individual cohort may not be less than zero. Changes in discount rates do not affect the NPR and are recognized separately in OCI.

The liability for unpaid claims and claim adjustment expenses was $113.8 million at December 31, 2025, or approximately 36% of the Company's total liabilities. The related reinsurance recoverable was $19.3 million, resulting in a net liability of $94.5 million. The liability is a critical accounting estimate because the ultimate amount and timing of claim payments cannot be known with certainty until claims are resolved. Relatively small changes in estimates of ultimate losses may materially affect the recorded liability and the benefits and losses recognized in the period of revision.

The Company accrues liabilities for unpaid claims and claim adjustment expenses when insured events occur. The balance includes obligations under short-duration contracts, principally property and casualty insurance products and group accident and health products, and claims that have been incurred under long-duration products, principally individual life, group whole life, Medicare Supplement and certain guaranteed-renewable individual accident and health products. For long-duration contracts, expected future benefit payments are incorporated into the liability for future policy benefits before the related insured event occurs; amounts payable for insured events that have occurred are accrued as unpaid claims. The Company separately presents the liability for unpaid claims and the liability for future policy benefits in the Consolidated Balance Sheets. Insurance liabilities are recorded gross of reinsurance, and related reinsurance recoverables are reported separately. The use of reinsurance does not relieve the Company of its obligations to policyholders.

The liability includes (i) case reserves for claims that have been reported but not fully paid, (ii) expected development on reported claims, (iii) incurred-but-not-reported claims, and (iv) allocated and unallocated claim adjustment expenses. Case reserves are established using claim adjusters' evaluations and information available about individual claims. Estimates for future claim development, incurred-but-not-reported claims and claim adjustment expenses are developed using actuarial analyses of the Company's historical experience and other relevant information.

The Company's actuaries estimate ultimate losses and claim adjustment expenses by significant product line and accident year using multiple methods, including paid-loss development, reported-loss development, paid Bornhuetter-Ferguson and reported Bornhuetter-Ferguson methods. The loss-development methods use historical paid or reported claim-development patterns to project ultimate losses. The Bornhuetter-Ferguson methods combine emerging claim experience with an independently selected expected loss ratio. No single method is determinative. The relative weight assigned to each method varies based on the credibility and maturity of the available data, the characteristics of the product line and current claim trends. Management selects its best estimate after evaluating the resulting range of actuarial estimates.

Significant assumptions and judgments include expected loss ratios; claim reporting, development and payment patterns; claim frequency and severity; medical cost inflation and utilization; general and social inflation; litigation and settlement trends; legislative and regulatory changes; large-loss activity; policy terms and benefit structures; changes in business and product mix; and changes in underwriting, claims administration and reserving practices. These factors can affect product lines and accident years differently, and changes in one factor may not be offset by changes in another.

The estimates are reviewed each reporting period using actual claim emergence, claim payments and current information. When experience differs from prior assumptions, or when changes in methods or assumptions are warranted, the estimated ultimate losses and claim adjustment expenses are revised. The effect of a revision is recognized in benefits and losses in the period in which the change in estimate is made. Significant changes in reserving methodologies and assumptions, if any, are described in the notes to the consolidated financial statements.

See Note 1, Summary of Significant Accounting Policies; Note 8, Other Insurance Reserves and Policyholder Funds; and Note 9, Reinsurance, in the Notes to Consolidated Financial Statements for additional information about the Company's reserve policies, claims-development experience and reinsurance arrangements.

Deferred acquisition costs ("DAC"), which comprised approximately 10% of total assets at December 31, 2025, represent commissions, premium taxes and other incremental direct costs of successfully acquiring insurance contracts that would not have been incurred absent such transactions.

DAC associated with long-duration contracts is grouped on a basis consistent with the related insurance contracts and amortized on a constant-level basis over the expected term of those contracts. The expected remaining term is calculated based on assumptions of expected mortality, lapses, and other contract terminations that are consistent with the assumptions used to measure the related liability for future policy benefits. These assumptions are reviewed at least annually and are updated as warranted whenever experience changes significantly. Actual contract terminations are reflected in the amortization calculation when they occur.

DAC associated with short-duration contracts is amortized over the related coverage period in proportion to premium revenue recognized. The Company evaluates the recoverability of short-duration DAC when indications exist that expected claims, claim adjustment expenses, maintenance costs and other related expenses may exceed anticipated premium revenue. If a premium deficiency exists, DAC is reduced to the extent necessary, and an additional liability is recognized for any remaining deficiency.

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 asset to the amount that is deemed more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income and tax planning strategies.

Refer to Note 1 of Notes to Consolidated Financial Statements for details regarding the Company's significant accounting policies.

Overall Corporate Results

Management also considers and evaluates performance by analyzing the non-GAAP measure operating income or loss, and believes it is a useful metric for investors, potential investors, securities analysts and others because it isolates the "core" operating results of the Company before considering certain items that are either beyond the control of management (such as income tax expense, which is 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 or unrealized investment gains or losses, which are not a part of the Company's primary operations and are, to a limited extent, subject to discretion in terms of timing of realization).

A reconciliation of net income (loss), the most directly comparable GAAP measure, to operating income (loss) is as follows:

On a consolidated basis, the Company had net income of $6.0 million, or $0.28 per diluted share, in 2025, compared to net loss of $1.4 million, or $(0.09) per diluted share, in 2024. The increase in net income was primarily due to an increase in net earned premiums in the property and casualty operations due to a rate increase upon renewal of a program within the automobile liability line of business, as well as increases in earned premiums in the inland marine cargo and automobile physical damage lines of business that were due to increased premium writings. Also contributing to the increase in net income was the Company's recognition of net unrealized gains on equity securities of $4.5 million and net unrealized losses of $1.5 million during the years ended December 2025 and 2024, respectively. Another contributing factor to the increase in net income was an increase in the net earned premiums for the Medicare Supplement line of business due to new sales within the life and health operations. Partially offsetting this increase was a decrease in net earned premiums in the group life and group accident and health lines of business, as well as increases in the insurance benefits and losses incurred and the future policy benefit remeasurement gain, within the life and health operations. Also partially offsetting the increase in net income was an increase in insurance benefits and losses incurred in the property and casualty operations, primarily due to increased losses in the automobile physical damage and inland marine lines of business.

Total revenue was $210.4 million in 2025 as compared to $188.41 million in 2024. Premium revenue increased to $196.1 million in 2025 from $178.6 million in 2024. The increase in premium revenue was primarily attributable to an increase in earned premiums in the automobile liability line of business due to a rate increase upon renewal of a program within the property and casualty operations. Also contributing to the increase in premium revenue was an increase in the net earned premiums in the Medicare Supplement line of business due to new sales within the life and health operations. Partially offsetting the increase in premium revenue was a decrease in net earned premiums in the group life and group accident and health lines of business within the life and health operations, as previously mentioned.

Operating income was $3.7 million in 2025 as compared to operating loss of $1.3 million in 2024. The increase in operating income was primarily due to an increase in net earned premiums in the property and casualty operations, as well as increases in earned premiums in the inland marine cargo and automobile physical damage lines of business, as discussed above. Also contributing to the increase in operating income was an increase in the net earned premiums in the Medicare Supplement line of business due to new sales within the life and health operations, as previously mentioned.

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

UNDERWRITING RESULTS

American Southern

The following table summarizes, for the periods indicated, American Southern's premiums, losses, expenses and underwriting ratios:

Gross written premiums at American Southern increased $22.9 million, or 31.1%, during 2025 as compared to 2024. The increase in gross written premiums was primarily attributable to an increase in premiums written in the automobile liability line of business due to the renewal of a program that received a substantial rate increase. Also contributing to the increase in gross written premiums were increases in inland marine cargo due to a new program written by an existing agent, as well as an increase in premiums written in the automobile physical damage line of business resulting from an increase in writings from existing agents.

Ceded premiums increased $0.2 million, or 3.1%, during 2025 as compared to 2024. American Southern's ceded premiums are typically determined as a percentage of earned premiums and generally increase or decrease as earned premiums increase or decrease or retentions levels change. The increase in ceded premiums was primarily attributable to an increase in catastrophic exposures from increased writings of automobile physical damage and inland marine cargo.

The following table summarizes, for the periods indicated, American Southern's net earned premiums by line of business:

Net earned premiums increased $16.8 million, or 24.8% , during 2025 as compared to 2024. The increase in net earned premiums was primarily attributable to a rate increase upon renewal of a program within the automobile liability line of business, as well as increases in earned premiums in the inland marine cargo and automobile physical damage lines of business that were due to increased premium writings, as previously mentioned. Premiums are earned ratably over their respective policy terms, and therefore premiums earned in the current year are related to policies written both in the current year and the immediately preceding year.

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

Insurance benefits incurred at American Southern increased $9.5 million, or 17.0%, during 2025 as compared to 2024. As a percentage of premiums, insurance benefits and losses incurred were 77.2% in 2025 as compared to 82.4% in 2024. The decrease in the loss ratio was mainly due to premium growth in automobile liability and physical damage, as well as inland marine cargo that exceeded the increase in insurance benefits and losses incurred.

Commissions and underwriting expenses increased $2.9 million, or 18.9%, during 2025 as compared to 2024. As a percentage of premiums, these expenses were 21.9% in 2025 as compared to 23.0% in 2024. The decrease in the expense ratio was primarily due to American Southern's use of a variable commission structure with certain agents, which compensates the participating agents in relation to the loss ratios of the business they write. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease. In 2025, variable commissions at American Southern increased $1.2 million as compared to 2024 due to a favorable loss experience from accounts subject to variable commissions. Also contributing to the decrease in the expense ratio were rate increases in various lines of business.

Bankers Fidelity

The following summarizes, for the periods indicated, Bankers Fidelity's premiums, losses and expenses:

Gross earned premiums at Bankers Fidelity increased $15.7 million, or 9.6%, during 2025 as compared to 2024. The increase in gross earned premiums was primarily attributable to the increase in gross earned premiums from the Medicare Supplement line of business due primarily to the level of new business writings exceeding non-renewals. This increase was partially offset by a decline in the group life and group accident and health lines of business, primarily due to lower policy sales.

Ceded premiums increased $15.0 million, or 28.2%, during 2025 as compared to 2024. The increase in ceded premiums was due to an increase in Medicare Supplement premiums subject to reinsurance.

The following table summarizes, for the periods indicated, Bankers Fidelity's net earned premiums by line of business:

Net earned premium revenue at Bankers Fidelity increased $0.7 million, or 0.7%, during 2025 as compared to 2024. The increase in net earned premiums was primarily due to net earned premiums in the Medicare Supplement line of business, primarily attributable to new sales, as previously discussed, and an increase in net earned premiums in the other individual health line of business due to new business growth. Partially offsetting these increase was a decline in earned premiums in the group life and group accident and health lines of business, as previously mentioned.

Insurance benefits incurred increased $4.0 million, or 5.8%, during 2025 as compared to 2024. Future policy benefit remeasurement gain arises as a result of updating assumptions in the net premium ratio (sometimes referred to as unlocking) and updating expected cash flow with actual cash flow, as of the beginning of the current reporting period. The future policy benefit remeasurement gain was $4.8 million in 2025 and $2.3 million in 2024. As a percentage of premiums, benefits and losses, which included insurance benefits and future policy benefits remeasurement gain, were 61.4% in 2025 as compared to 59.3% in 2024. The increase in the loss ratio was primarily attributable to higher insurance benefits incurred in the group life line of business in conjunction with lower earned premiums, partially offset by lower short-term care benefits incurred and improved loss experience in the Medicare Supplement line of business.

Commissions and underwriting expenses decreased $0.8 million, or 1.8%, during 2025 as compared to 2024. As a percentage of earned premiums, these expenses were 37.7% in 2025 as compared to 37.9% in 2024. The decrease in the expense ratio was primarily attributable to lower underwriting expenses during the year. This decrease was partially offset by higher commission expenses associated with growth in the Medicare Supplement line business, as a result of the level of new business writings exceeding non-renewals, as previously mentioned.

Net Investment Income and Realized Gains (Losses)

Investment income increased $0.5 million, or 4.9%, in 2025 as compared to 2024. The increase in investment income was primarily attributable to an increase in income from equity securities in our investment portfolio.

The Company had net realized investment losses of $0.5 million in 2025 as compared to net realized investment gains of $1.2 million in 2024. The net realized investment losses in 2025 were mainly due to losses of $0.7 million, resulting primarily from an impairment of a security in the Company's investments in fixed maturity securities. The net realized investment gains in 2024 were mainly due to gains of $1.2 million from the sale of the Company's interest in a certain limited liability company as well as gains from the sale of a number of the Company's investments in fixed maturity securities. Management continually evaluates the Company's investment portfolio and, as may be determined to be appropriate, makes adjustments for impairments and/or will divest investments. See Note 2 of Notes to Consolidated Financial Statements.

Unrealized Gains (Losses) on Equity Securities, Net

Investments in equity securities are measured at fair value at the end of the reporting period, with any changes in fair value reported in net income during the period. The Company recognized net unrealized gains on equity securities of $4.5 million and net unrealized losses of $1.5 million during the years ended December 2025 and 2024, respectively. Changes in unrealized losses on equity securities for the applicable periods are primarily the result of fluctuations in the market value of certain of the Company's equity securities.

Interest Expense

Interest expense decreased $0.3 million, or 9.9%, in 2025 as compared to 2024. Changes in interest expense were primarily due to changes in the Secured Overnight Financing Rate ("SOFR") published by CME Group Benchmark Administration Limited, as the interest rates on the Company's outstanding junior subordinated deferrable interest debentures ("Junior Subordinated Debentures") and the revolving credit facility utilize SOFR as the reference rate.

Income Taxes

The Company has adopted ASU 2023-09 - Improvements to Income Tax Disclosures which requires the Company to disaggregate state income tax expense, net of the federal income tax effect.

The primary difference between the effective tax rate and the federal statutory income tax rate for 2025 resulted from a permanent difference related to meals and entertainment. Another contributing factor to the differences between the effective tax rate and the federal statutory income tax rate was a permanent difference related to dividends-received deduction ("DRD"). The current estimated DRD is adjusted as underlying factors change and can vary from estimates based on, but not limited to, actual distributions from investments as well as the amount of the Company's taxable income.

The primary difference between the effective tax rate and the federal statutory income tax rate for 2024 resulted from a permanent difference related to meals and entertainment. Also contributing to differences between the effective tax rate and the federal statutory income tax rate was the adjustment for prior years' estimates to actual that are generally updated at the completion of the third quarter of each fiscal year and were $35 in the year ended December 31, 2024. Another contributing factor to the differences between the effective tax rate and the federal statutory income tax rate was a permanent difference related to the DRD.

Liquidity and Capital Resources

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

Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments from the subsidiaries, as described below. The principal cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be authorized and approved by the Company's board of directors from time to time. At December 31, 2025, the Parent had approximately $4.1 million of unrestricted cash and investments.

Dividend payments to a parent corporation by its wholly-owned insurance subsidiaries are subject to annual limitations and are restricted to 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At December 31, 2025, the Parent's insurance subsidiaries had an aggregate statutory surplus of $83.1 million. Dividends were paid to Atlantic American by its subsidiaries totaling $8.4 million and $9.0 million in 2025 and 2024, respectively.

The Parent provides certain administrative, purchasing and other services to each of its subsidiaries. The amount charged to and paid by the subsidiaries for these services was $8.7 million and $9.4 million in 2025 and 2024, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $1.3 million and $4.4 million were paid to the Parent under the tax sharing agreement in 2025 and 2024, respectively.

The Company has two statutory trusts which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trusts and investing the gross proceeds of the trust preferred securities in Junior Subordinated Debentures. The outstanding $18.0 million and $15.7 million of Junior Subordinated Debentures mature on December 4, 2032 and May 15, 2033, respectively, are callable quarterly, in whole or in part, only at the option of the Company, and have an interest rate of 3-month CME Term SOFR plus applicable tenor spread of 0.26161% plus an applicable margin. The margin ranges from 4.00% to 4.10%. At December 31, 2025, the effective interest rate was 8.13%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust's obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities. The Company has not made such an election.

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

At December 31, 2025, the Company had 55,000 shares of Series D preferred stock ("Series D Preferred Stock") outstanding. All of the shares of Series D Preferred Stock are held by an affiliate of the Company's controlling shareholder. The outstanding shares of Series D Preferred Stock have a redemption value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company's common stock at the option of the board of directors of the Company) and are cumulative. In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,378,000 shares of the Company's common stock, subject to certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval; and are redeemable solely at the Company's option. The Series D Preferred Stock is not currently convertible. The Company had accrued, but unpaid, dividends on the Series D Preferred Stock of $17.7 thousand at December 31, 2025 and 2024. During each of 2025 and 2024, the Company paid Series D Preferred Stock dividends of $0.4 million.

Bankers Fidelity Life Insurance Company (''BFLIC") is a member of the Federal Home Loan Bank of Atlanta ("FHLB"), for the primary purpose of enhancing financial flexibility. As a member, BFLIC can obtain access to low-cost funding and also receive dividends on FHLB stock. The membership arrangement provides for credit availability of fifteen percent of statutory admitted assets, or approximately $27.3 million, as of December 31, 2025. Additional FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB. As of December 31, 2025, BFLIC has pledged bonds having an amortized cost of $8.9 million to the FHLB. BFLIC may be required to post additional acceptable forms of collateral for any borrowings that it makes in the future from the FHLB. As of December 31, 2025, BFLIC does not have any outstanding borrowings from the FHLB.

On May 12, 2021, the Company entered into a revolving credit agreement ("Revolving Credit Agreement") with Truist Bank as the lender (the "Lender"). The Revolving Credit Agreement provides for an unsecured $10.0 million revolving credit facility that originally matured on April 12, 2024. On March 22, 2024, the Company entered into a First Amendment (the "Amendment") to its Revolving Credit Agreement (as amended, the "Credit Agreement") with the Lender. The Amendment, among other things, (a) updates the interest rate provisions to memorialize that the Company pays interest on the unpaid principal balance of outstanding revolving loans at the Adjusted Term SOFR rate (as defined in the Credit Agreement), plus 2.00%, (b) extends the maturity date of the revolving credit facility to March 22, 2027, (c) requires the monthly payment of an unused commitment fee of 0.2% of the unused facility amount, and (d) requires that the Company maintain a consolidated net worth of not less than $64.2 million. On May 27, 2026, July 31, 2026, October 9, 2026 and October 15, 2026, the Company and the Lender entered into amendments to the Credit Agreement, each of which had the effect of extending the then-applicable deadlines by which the Company must deliver to the Lender (i) the Company's audited consolidated financial statements for the year ended December 31, 2025, (ii) the Company's interim consolidated financial statements for the quarters ended March 31, 2026, June 30, 2026 and September 30, 2026, and (iii) related certificates of the Company's compliance with financial covenants under the Credit Agreement and certain other matters. The Fifth Amendment to the Revolving Credit Agreement, dated October 15, 2026, also amended the minimum AM Best financial strength rating that must be maintained by American Southern Insurance Company to be no lower than "A-" and waived related defaults under the Credit Agreement occurring prior to such amendment. Except as modified by these amendments, the existing terms of the original Credit Agreement remain in effect.

The Credit Agreement requires the Company to comply with certain covenants, including a debt to capital ratio that restricts the Company from incurring consolidated indebtedness that exceeds 35% of the Company's consolidated capitalization at any time and maintaining a minimum consolidated net worth, as previously mentioned. The Credit Agreement also contains customary representations and warranties and events of default. Events of default include, among others, (a) the failure by the Company to pay any amounts owed under the Credit Agreement when due, (b) the failure to perform and not timely remedy certain covenants, (c) a change in control of the Company and (d) the occurrence of bankruptcy or insolvency events. Upon an event of default, the Lender may, among other things, declare all obligations under the Credit Agreement immediately due and payable and terminate the revolving commitments. As of December 31, 2025 and 2024, the Company had outstanding borrowings of $5.0 million and $4.0 million under the Credit Agreement.

Cash and cash equivalents increased from $35.6 million at December 31, 2024 to $43.6 million at December 31, 2025. The increase in cash and cash equivalents during 2025 was primarily attributable to net cash provided by operating activities of $32.9 million. Partially offsetting the increase in cash and cash equivalents was net cash used in investing activities of $25.0 million primarily as a result of investment purchases exceeding investment sales and maturity of securities.

The Company believes that existing cash balances as well as the dividends, fees, and tax-sharing payments it expects to receive from its subsidiaries and, if needed, additional borrowings from financial institutions, will enable the Company to meet its liquidity requirements for the next 12 months and thereafter for the foreseeable future. Management is not aware of any current recommendations by regulatory authorities, which, if implemented, would have a material adverse effect on the Company's liquidity, capital resources or operations.

New Accounting Pronouncements

See "Recently Issued Accounting Standards" in Note 1 of Notes to Consolidated Financial Statements.

Impact of Inflation

Insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such losses and expenses, are known. Consequently, in establishing its premiums, the Company attempts to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by the Company. Inflation also affects the rate of investment return on the Company's investment portfolio with a corresponding effect on investment income.