Executive Summary / Key Takeaways

• Profitability Rebound: Atlantic American Corporation (AAME) delivered a significant turnaround in the first half of 2025, reporting net income of $4.1 million, or $0.19 per diluted share, compared to a net loss of $2.7 million in the prior year period, driven by robust premium growth and favorable loss experience in its life and health segment.
• Dual-Segment Strength: The company's specialized approach across property & casualty (American Southern) and life & health (Bankers Fidelity) is proving effective, with both segments contributing to premium revenue increases, particularly in inland marine, Medicare supplement, and group accident and health lines.
• Operational Modernization & Risk Mitigation: AAME is actively investing in cloud-based software for core operations and developing an internal system to verify actuarial values, directly addressing a previously identified material weakness in internal controls. This technological push is crucial for enhancing efficiency and financial reporting reliability.
• Niche Competitive Edge: AAME leverages its established independent agent network and specialized regulatory licenses to maintain a competitive moat in specific markets, such as commercial automobile insurance for government entities and surety bonds, differentiating it from larger, more diversified insurers.
• Outlook Hinges on Execution: While recent performance is strong, sustained success depends on the full implementation of its technology roadmap, effective management of investment portfolio risks, and continued favorable loss experience, particularly as new accounting standards (ASU 2018-12) are adopted.

A Legacy of Specialization Meets Modernization

Atlantic American Corporation, established in 1937 in Atlanta, Georgia, has built a enduring presence in the insurance sector through a focused strategy. The company operates as an insurance holding entity, conducting its core business through two distinct segments: American Southern, specializing in property and casualty (P&C) insurance, and Bankers Fidelity, dedicated to life and health (L&H) insurance. This dual-segment structure, refined over decades, underpins AAME's overarching strategy to target "well-defined geographic, demographic and/or product niches within the insurance marketplace."

This niche specialization is a foundational strength, allowing AAME to carve out unique competitive advantages. In the P&C market, American Southern provides commercial automobile coverage for state and local government fleets, general liability, inland marine, and surety bonds for construction and school bus contracts. These offerings often involve complex underwriting and specialized relationships, creating a barrier to entry for broader market players. Bankers Fidelity, on the other hand, focuses on individual and group whole life, Medicare supplement, and various accident and health products, including cancer and critical illness policies. This targeted approach enables AAME to develop deep expertise and strong relationships within its chosen segments.

The competitive landscape for AAME is characterized by a mix of large, diversified insurers and smaller, regional specialists. Major players like Aflac Incorporated (AFL) dominate the supplemental health space, while Prudential Financial, Inc. (PRU) is a giant in life and retirement, and Allstate Corporation (ALL) is a household name in property and casualty. AAME's niche focus, particularly in government-focused P&C and specialized L&H products, allows it to avoid direct, head-on competition with these behemoths across all lines. For instance, AAME's expertise in surety bonds for infrastructure projects exploits gaps in offerings from more generalized insurers. Its established network of independent agents further translates into stronger customer loyalty and recurring revenue in regional markets, potentially yielding superior margins in these specialized areas.

However, AAME's smaller scale presents certain vulnerabilities. It faces challenges from larger competitors' superior technological capabilities and broader distribution networks. While AAME's agent network is a strength, it could be less resilient to shifts in customer behavior towards digital platforms compared to companies like ALL, which are heavily investing in digital innovation and customer service. The broader industry is experiencing trends such as the increasing demand for infrastructure (e.g., driven by AI data centers and utility investments), which could create opportunities for AAME's property insurance and surety bond segments, but also necessitate increased investment to keep pace.

Technological Advancement and Operational Resilience

A critical aspect of AAME's current strategy involves significant investment in technological differentiation and operational resilience. In March 2021, the company initiated a hosting arrangement with a third-party vendor for a cloud-based software-as-a-service (SaaS) suite. This core technology streamlines policy, billing, claim, and customer management services, modernizing the company's operational infrastructure. The arrangement was renewed in March 2024 for an additional five years, underscoring AAME's commitment to this digital transformation.

The tangible benefits of this technology are multifaceted. It is designed to improve the timeliness of recognizing changes in future policy benefit liabilities, simplify the amortization of deferred acquisition costs, and enhance the effectiveness of required disclosures. These improvements are not merely administrative; they directly contribute to more accurate financial reporting and operational efficiency, which are crucial for an insurance enterprise. The company expects this software to be "substantially ready for its intended use in the second half of 2025," signaling an imminent operational uplift.

Beyond this core SaaS implementation, AAME is actively developing an internal system to perform independent calculations of actuarial values. This initiative directly addresses a material weakness in internal control over financial reporting, initially identified in the company's 2023 Annual Report. This weakness stemmed from ineffective controls in reviewing insurance reserves and deferred acquisition costs within the life and health segment, which could hinder the timely detection of material misstatements. The internal system's stated goal is to "verify that the product parameters and actuarial assumptions are properly reflected in the reported values."

As of June 2025, the whole life, individual life, and Medicare Supplement products have been implemented on this new system, with extensions to other product lines expected to be operational by September 30, 2025. While management noted "unforeseen complexities inherent in the actuarial software systems" have required additional effort, the successful deployment of this system is paramount. For investors, this technological roadmap is a significant catalyst, promising enhanced financial reporting reliability, reduced operational risk, and a stronger foundation for future growth. It directly contributes to AAME's competitive moat by ensuring greater data integrity and operational precision, which can translate into more accurate pricing and better risk management.

Financial Performance: A Resurgent First Half of 2025

AAME's financial performance in the first half of 2025 reflects a compelling turnaround, particularly when contrasted with the challenges of the prior year. For the three months ended June 30, 2025, the company reported net income of $3.3 million, or $0.15 per diluted share, a stark improvement from a net loss of ($0.7) million, or ($0.04) per diluted share, in the comparable 2024 period. This positive momentum extended to the six-month period, with net income reaching $4.1 million, or $0.19 per diluted share, compared to a net loss of ($2.7) million, or ($0.14) per diluted share, in the first half of 2024. This resurgence was primarily fueled by robust premium revenue growth and favorable loss experience. Consolidated premium revenue increased by 11.5% to $50.1 million in Q2 2025 and by 8.4% to $97.1 million for the first six months of 2025. Operating income also saw a substantial increase, rising by $2.7 million in Q2 2025 and $5.4 million in H1 2025 over the comparable periods in 2024.

Segmental Contributions:

• American Southern (Property & Casualty): This segment demonstrated impressive top-line growth, with gross written premiums surging by 43.3% in Q2 2025 and 37.0% in H1 2025. This was driven by a program renewal with a rate increase in automobile liability, a new program in inland marine, and increased writings in automobile physical damage. Net earned premiums rose by 20.5% in Q2 and 11.4% in H1. While the loss ratio improved in Q2 (75.7% vs. 81.1%), it increased slightly for H1 (77.5% vs. 76.3%) due to higher losses in automobile physical damage and inland marine. The expense ratio increased due to a variable commission structure that rewards agents for favorable loss experience. The combined ratio stood at 101.0% in Q2 and 101.5% in H1, indicating a slight underwriting loss but an improvement in the quarter.
• Bankers Fidelity (Life & Health): This segment was a significant driver of the overall profit turnaround. Gross earned premiums increased by 7.9% in Q2 and 7.5% in H1, primarily due to new business writings exceeding non-renewals in Medicare supplement and new sales in group accident and health. Net earned premiums grew by 5.7% in Q2 and 6.4% in H1. Crucially, the loss ratio significantly improved, decreasing to 60.8% in Q2 (from 64.0%) and 60.7% in H1 (from 67.8%), mainly due to lower utilization within the Medicare supplement line. The expense ratio also improved, falling to 33.1% in Q2 (from 38.0%) and 35.3% in H1 (from 38.4%), reflecting premium growth coupled with lower variable expenses. This led to a strong underwriting profit, with combined ratios of 93.9% in Q2 and 96.0% in H1.

Beyond premiums, net investment income increased in Q2 2025, primarily from higher equity in earnings from limited partnerships. Significant net unrealized gains on equity securities also contributed to net income, reflecting favorable market conditions. Interest expense decreased due to changes in the Secured Overnight Financing Rate (SOFR), which impacts the company's junior subordinated debentures and revolving credit facility.

Liquidity and Capital Management

AAME maintains a prudent approach to liquidity and capital management. Cash and cash equivalents increased to $46.4 million at June 30, 2025, from $35.6 million at December 31, 2024. This increase was primarily driven by $8.6 million in net cash provided by operating activities and $2.7 million from investing activities, as investment sales and maturities outpaced purchases. The parent company had approximately $4.4 million in unrestricted cash and investments.

The company's primary cash needs include claims payments, operating expenses, maintaining adequate statutory capital, and debt service. Management believes its invested assets are sufficient to cover policy liabilities, and future cash inflows from premiums and investments will fund operations. Dividend payments from insurance subsidiaries to the parent are subject to regulatory limitations, with amounts exceeding $6.3 million in 2025 requiring prior approval. Through June 30, 2025, the parent received $4.2 million in dividends. A tax-sharing agreement with profitable subsidiaries also provides additional funds to the parent.

AAME manages its debt obligations, including $33.7 million in junior subordinated debentures maturing in 2032 and 2033, which are callable at the company's option and bear SOFR-based interest. The company has the right to defer interest payments but has not exercised this option. Additionally, a $10 million unsecured revolving credit facility with Truist Bank was extended to March 2027, requiring the company to maintain a consolidated net worth of at least $64.2 million and a debt-to-capital ratio not exceeding 35%. As of June 30, 2025, the company had $4.0 million outstanding under this facility, well within its capacity and covenants.

Risks and Forward Outlook

While AAME's recent performance has been strong, investors must consider several key risks and forward-looking factors. The most prominent is the ongoing remediation of the material weakness in internal control over financial reporting. Although management believes no material misstatements have occurred, the full development and implementation of the independent actuarial verification system by September 30, 2025, is critical for long-term financial reporting integrity and investor confidence. The "unforeseen complexities" encountered in this process highlight the challenges of modernizing legacy systems.

The adoption of ASU No. 2018-12, "Targeted Improvements to the Accounting for Long-Duration Contracts," is expected to have a material impact on AAME's consolidated financial statements, particularly affecting its Life, Medicare supplement, and certain individual Accident and Health products. This accounting change will alter how liabilities for future policy benefits and deferred acquisition costs are recognized and measured, requiring close monitoring by investors.

General industry risks, such as macroeconomic conditions, unexpected developments in healthcare or insurance, financial market disruptions, and the incidence of catastrophes, remain pertinent. Stronger competitive activity, adverse judicial or legislative developments, and cybersecurity matters also pose ongoing threats. However, management is not aware of any current regulatory recommendations that would materially adversely affect the company's liquidity, capital resources, or operations.

AAME's outlook is cautiously optimistic, underpinned by its successful niche strategy and ongoing operational enhancements. The continued growth in premium revenue, particularly in the high-performing Medicare supplement and inland marine lines, suggests the company's targeted approach is resonating in the market. The full operationalization of its cloud-based software and the successful remediation of the internal control weakness are key milestones that could further enhance efficiency, reduce risk, and solidify AAME's competitive position.

Conclusion

Atlantic American Corporation is demonstrating a compelling narrative of resurgence, driven by its deeply embedded strategy of niche specialization and a proactive commitment to operational and technological modernization. The strong financial performance in the first half of 2025, marked by a significant return to profitability and robust premium growth across both its property & casualty and life & health segments, underscores the effectiveness of its focused business model. The ongoing efforts to enhance internal controls through advanced actuarial systems are not just about compliance; they represent a fundamental strengthening of the company's operational backbone, crucial for sustained long-term value creation.

While the competitive landscape remains dynamic and the full impact of new accounting standards is yet to be realized, AAME's differentiated market positioning, coupled with its strategic investments in technology, positions it to capitalize on its specialized expertise. Investors should closely monitor the completion of its technology roadmap and the continued favorable trends in its core insurance lines. AAME's journey from a challenging 2024 to a profitable 2025 highlights its resilience and potential for continued growth within its carefully cultivated market segments.