Atlantic American Corp: Form 10-Q for the period ended Jun 30, 2025

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview

The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”) as of and for the three month and six month periods ended June 30, 2025. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere herein, as well as with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 (the “2024 Annual Report”).

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates. The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company’s critical accounting policies and the resultant estimates considered most significant by management are disclosed in the 2024 Annual Report. Except as disclosed in Note 1 of Notes to Condensed Consolidated Financial Statements, the Company’s critical accounting policies are consistent with those disclosed in the 2024 Annual Report.

Overall Corporate Results

The following presents the Company’s revenue, expenses and net income (loss) for the three month and six month periods ended June 30, 2025 and the comparable periods in 2024:

(In thousands)

In addition to measures of operating performance determined in accordance with GAAP, management also considers and evaluates performance by analyzing the non-GAAP measure operating income (loss). We define operating income (loss) as net income (loss) excluding: (i) income tax expense (benefit); (ii) realized investment (gains) losses, net; and (iii) unrealized (gains) losses on equity securities, net. Management believes operating income (loss) 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 taxes, which are subject to timing, regulatory and rate changes depending on the timing of the associated revenues and expenses) or are not expected to regularly impact the Company’s operational results (such as any realized and unrealized investment gains, 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) to operating income (loss) for the three month and six month periods ended June 30, 2025 and the comparable periods in 2024 is as follows:

(In thousands)

On a consolidated basis, the Company had net income of $3.3 million, or $0.15 per diluted share, for the three month period ended June 30, 2025, compared to net loss of $0.7 million, or $(0.04) per diluted share, for the three month period ended June 30, 2024. The Company had net income of $4.1 million, or $0.19 per diluted share, for the six month period ended June 30, 2025, compared to net loss of $2.7 million, or $(0.14) per diluted share, for the six month period ended June 30, 2024. The increase in net income for the three month and six month periods ended June 30, 2025 was primarily the result of increases in premium revenue within the inland marine line of business in the property and casualty operations, as well as increases in the Medicare supplement and group accident and health lines of business within the life and health operations. Also contributing to the increase in net income was an increase in unrealized gains on equity securities during the three month and six month periods ended June 30, 2025. Also contributing to the increase in net income for the three month and six month periods ended June 30, 2025 was favorable development in the Medicare supplement line of business in the life and health operations.

For the three month period ended June 30, 2025, premium revenue increased $5.2 million, or 11.5%, to $50.1 million from $45.0 million in the comparable period in 2024. For the six month period ended June 30, 2025, premium revenue increased $7.5 million, or 8.4%, to $97.1 million from $89.5 million in the comparable period in 2024. The increase in premium revenue during the three month and six month periods ended June 30, 2025 was primarily attributable to increases in premium revenue in the inland marine line of business, as well as the automobile physical damage line of business, due to increases in premium writings in the property and casualty operations. Also contributing to the increase in premium revenue was increases in the Medicare supplement and group accident and health lines of business due to new sales within the life and health operations.

Operating income increased $2.7 million in the three month period ended June 30, 2025 from the three month period ended June 30, 2024. For the six month period ended June 30, 2025, operating income increased $5.4 million from the comparable period in 2024. The increase in operating income for the three month and six month periods ended June 30, 2025 was primarily the result of increases in premium revenue within the inland marine line of business in the property and casualty operations, as well as increases in the Medicare supplement and group accident and health lines of business within the life and health operations, as previously mentioned.

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

American Southern

The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2025 and the comparable periods in 2024:

(Dollars in thousands)

22

Gross written premiums at American Southern increased $15.8 million, or 43.3%, during the three month period ended June 30, 2025 and $16.7 million, or 37.0%, during the six month period ended June 30, 2025, from the comparable periods in 2024. The increase in gross written premiums during the three month and six month periods ended June 30, 2025 was primarily attributable to an increase in premiums written in the automobile liability line of business due to the renewal of a program, which included a rate increase. Also contributing to the increase in gross written premiums were increases in premiums written in the inland marine line of business due to a new program written by an existing agency, 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 remained constant during the three month period ended June 30, 2025 and increased $0.1 million, or 4.0%, during the six month period ended June 30, 2025, from the comparable periods in 2024. American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally fluctuate as earned premiums subject to reinsurance increase or decrease or retentions levels change.

The following presents American Southern’s net earned premiums by line of business for the three month and six month periods ended June 30, 2025 and the comparable periods in 2024:

(In thousands)

Net earned premiums increased $3.6 million, or 20.5%, during the three month period ended June 30, 2025, and $4.1 million, or 11.4%, during the six month period ended June 30, 2025, over the comparable periods in 2024. The increase in net earned premiums during the three month period ended June 30, 2025 was mainly due to increases in earned premiums in the inland marine line of business, as well as the earning out of premium within the automobile liability line of business. The increase in net earned premiums during the six month period ended June 30, 2025 was primarily attributable to increases in earned premiums in the inland marine line of business, as well as the automobile physical damage line of business, due to increases in 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 during both the current year and immediately preceding year.

The performance of an 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 and losses incurred at American Southern increased $1.8 million, or 12.5%, during the three month period ended June 30, 2025, and $3.6 million, or 13.2%, during the six month period ended June 30, 2025, over the comparable periods in 2024. As a percentage of earned premiums, insurance benefits and losses incurred were 75.7% in the three month period ended June 30, 2025, compared to 81.1% in the three month period ended June 30, 2024. For the six month period ended June 30, 2025, this ratio increased to 77.5% from 76.3% in the comparable period in 2024. The decrease in the loss ratio during the three month period ended June 30, 2025 was due to an increase in premium growth exceeding the increase in insurance benefits and losses incurred. The increase in the loss ratio during the six month period ended June 30, 2025 was mainly due to an increase in losses within the automobile physical damage line of business and the inland marine line of business.

Commissions and underwriting expenses increased $1.8 million, or 50.7%, during the three month period ended June 30, 2025, and $1.4 million, or 17.3% during the six month period ended June 30, 2025, over the comparable periods in 2024. As a percentage of earned premiums, underwriting expenses were 25.3% in the three month period ended June 30, 2025, compared to 20.2% in the three month period ended June 30, 2024. For the six month period ended June 30, 2025, this ratio increased to 24.0% from 22.8% in the comparable period in 2024. The increase in the expense ratio during the three month and six month periods ended June 30, 2025 was primarily due to American Southern’s use of a variable commission structure with certain agents, which compensates the participating agents in relation to the loss ratios of the business they write. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease. During the three month and six month periods ended June 30, 2025, variable commissions at American Southern increased by $1.2 million and $0.7 million, respectively, from the comparable periods in 2024 due to favorable loss experience from accounts subject to variable commissions.

Bankers Fidelity

The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month and six month periods ended June 30, 2025 and the comparable periods in 2024:

(Dollars in thousands)

Gross earned premiums increased $3.2 million, or 7.9%, during the three month period ended June 30, 2025, and $6.1 million, or 7.5%, during the six month period ended June 30, 2025, from the comparable periods in 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, partially offset by lapses within the same line of business. Also contributing to the increase in gross earned premiums was an increase in gross earned premiums in the group accident and health line of business, resulting from new business sales.

Ceded premiums increased $1.7 million, or 12.7%, during the three month period ended June 30, 2025, and $2.6 million, or 9.9%, during the six month period ended June 30, 2025, from the comparable periods in 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:

(In thousands)

Net earned premium increased $1.6 million, or 5.7%, during the three month period ended June 30, 2025, and $3.5 million, or 6.4%, during the six month period ended June 30, 2025, over the comparable periods in 2024. The increase in net earned premiums was primarily attributable to increases in the Medicare supplement and group accident and health lines of business due to new sales as previously mentioned. Also contributing to the increase in net earned premiums was an increase in the other individual accident and health line of business due to new business growth.

Insurance benefits and losses incurred increased $0.1 million, or 0.3%, during the three month period ended June 30, 2025, and decreased $1.7 million, or 4.7%, during the six month period ended June 30, 2025, from the comparable periods in 2024. As a percentage of earned premiums, benefits and losses were 60.8% in the three month period ended June 30, 2025, compared to 64.0% in the three month period ended June 30, 2024. For the six month period ended June 30, 2025, this ratio decreased to 60.7% from 67.8% in the comparable period in 2024. The decrease in the loss ratio for the three month and six month periods ended June 30, 2025 was primarily due to lower utilization within the Medicare supplement line of business.

Commissions and underwriting expenses decreased $0.8 million, or 8.1%, during the three month period ended June 30, 2025, and $0.4 million, or 2.1%, during the six month period ended June 30, 2025, over the comparable periods in 2024. As a percentage of earned premiums, underwriting expenses were 33.1% in the three month period ended June 30, 2025, compared to 38.0% in the three month period ended June 30, 2024. For the six month period ended June 30, 2025, this ratio decreased to 35.3% from 38.4% in the comparable period in 2024. The decrease in the expense ratio for the three month and six month periods ended June 30, 2025 was mainly due to growth in premiums coupled with a decline in underwriting expenses, primarily from lower variable expenses related to the group lines of business.

Net Investment Income and Realized Gains

Investment income increased $0.1 million, or 4.1%, during the three month period ended June 30, 2025, and remained constant during the six month period ended June 30, 2025, over the comparable periods in 2024. The increase in investment income in the three month period ended June 30, 2025, from the comparable periods in 2024, was primarily attributable to an increase in the equity in earnings from investments in the Company’s limited partnerships and limited liability companies.

The Company had net realized investment gains of less than $0.1 million during each of the three month and six month periods ended June 30, 2025, compared to net realized investment gains of less than $0.1 million during each of the three month and six month periods ended June 30, 2024. The net realized investment gains during the three month and six month periods ended June 30, 2025 was due to the sale and redemption of several of the Company’s investments in fixed maturity securities. The net realized investment gains during the three month and six month periods ended June 30, 2024 resulted primarily from the redemption of several of the Company’s investments in fixed maturity securities. Management continually evaluates the Company’s investment portfolio and makes adjustments for credit losses and/or divests investments as may be determined to be appropriate.

Unrealized Gains on Equity Securities

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 $2.6 million during the three month period ended June 30, 2025 and unrealized gains on equity securities of $0.2 million during the three month period ended June 30, 2024. The Company recognized net unrealized gains on equity securities of $3.4 million during the six month period ended June 30, 2025 and unrealized gains on equity securities of $0.1 million during the six month period ended June 30, 2024. Changes in unrealized gains on equity securities for the applicable periods are the result of fluctuations in the market value of the Company’s equity securities.

Interest Expense

Interest expense decreased $0.1 million, or 10.8%, during the three month period ended June 30, 2025, and $0.2 million, or 10.2%, during the six month period ended June 30, 2025, from the comparable periods in 2024. Changes in interest expense were primarily due to changes in the Secured Overnight Financing Rate (“SOFR”) published by CME Group Benchmark Administration Limited, as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) and the revolving credit facility utilize SOFR as the reference rate.

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. 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, as described below, from the subsidiaries. The principal cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be authorized and approved by the Company’s board of directors from time to time. At June 30, 2025, the Parent had approximately $4.4 million of unrestricted cash and investments.

The Parent’s insurance subsidiaries reported statutory net income of $4.7 million for the six month period ended June 30, 2025, compared to statutory net loss of $0.4 million for the six month period ended June 30, 2024. Statutory results are impacted by the recognition of all costs of acquiring business. In periods in which the Company’s first year premiums increase, statutory results are generally lower than results determined under GAAP. Statutory results for the Company’s property and casualty operations may differ from the Company’s results of operations under GAAP due to the deferral of acquisition costs for financial reporting purposes. The Company’s life and health operations’ statutory results may differ from GAAP results primarily due to the deferral of acquisition costs for financial reporting purposes, as well as the use of different reserving methods.

Over 90% of the invested assets of the Parent’s insurance subsidiaries are invested in marketable securities that can be converted into cash, if required; however, the use of such assets by the Company is limited by state insurance regulations. Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At June 30, 2025, American Southern had $47.2 million of statutory capital and surplus and Bankers Fidelity had $34.6 million of statutory capital and surplus. In 2025, dividend payments by the Parent’s insurance subsidiaries in excess of $6.3 million would require prior approval. Through June 30, 2025, the Parent received dividends of $4.2 million from its subsidiaries.

The Parent provides certain administrative and other services to each of its insurance subsidiaries. The amounts charged to and paid by the subsidiaries include reimbursements for various shared services and other expenses incurred directly on behalf of the subsidiaries by the Parent. In addition, there is in place a formal tax-sharing agreement between the Parent and its insurance subsidiaries. As a result of the Parent’s tax loss, it is anticipated that the tax-sharing agreement will continue to provide the Parent with additional funds from profitable subsidiaries to assist in meeting its cash flow obligations.

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 June 30, 2025, the effective interest rate was 8.64%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust’s obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities. As of June 30, 2025, 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 June 30, 2025, the Company had 55,000 shares of Series D preferred stock (“Series D Preferred Stock”) outstanding. All of the shares of Series D Preferred Stock are held by an affiliate of the Company’s controlling shareholder. The outstanding shares of Series D Preferred Stock have a stated value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at the option of the board of directors of the Company) and are cumulative. In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,378,000 shares of the Company’s common stock, subject to certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval; and are redeemable solely at the Company’s option. The Series D Preferred Stock is not currently convertible. At June 30, 2025, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.2 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 five percent of statutory admitted assets, or approximately $8.8 million, as of June 30, 2025. Additional FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB. As of June 30, 2025, BFLIC has pledged bonds having an amortized cost of $9.0 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 June 30, 2025, BFLIC does not have any outstanding borrowings from the FHLB.

On May 12, 2021, the Company entered into a 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. Except as modified by the Amendment, 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 June 30, 2025 and December 31, 2024, the Company had outstanding borrowings, including accrued interest of $4.0 million in each of the respective periods, under the Credit Agreement.

Cash and cash equivalents increased from $35.6 million at December 31, 2024 to $46.4 million at June 30, 2025. The increase in cash and cash equivalents during the six month period ended June 30, 2025 was primarily attributable to net cash provided by operating activities of $8.6 million. Also contributing to the increase in cash and cash equivalents was net cash provided by investing activities of $2.7 million primarily as a result of investment sales and maturity of securities exceeding investment purchases.

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, borrowings under its credit facilities or additional borrowings from financial institutions, will enable the Company to meet its liquidity requirements 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.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures were not effective as of that date due to the previously identified and unremediated material weakness in internal control over financial reporting described below.

Remediation of Material Weakness in Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting system has been designed to provide reasonable assurance regarding the reliability and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management recognizes that there are inherent limitations in the effectiveness of any internal control system. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Furthermore, the application of any evaluations of effectiveness on future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As initially disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, we have previously identified certain deficiencies in internal control that we believe rise to the level of a material weakness. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, management determined that the design of the controls surrounding the process of reviewing insurance reserves and deferred acquisition costs within the Company’s life and health segment was not effective. This deficiency in design did not enable the timely detection of anomalies in these values at the level of precision necessary to detect misstated values that may be material.

Notwithstanding these deficiencies, management believes that, because of the actions taken by management in identifying, and the efforts that the Company has been taking to address and correct, these deficiencies prior to the completion and filing of relevant periodic reports, and the effective operation of other internal controls over financial reporting, the material weakness did not result in any identified material misstatements to our financial statements. Similarly, there were no changes to any of our historical financial statements.

The Company’s remediation efforts of the previously identified material weakness, which began in the quarter ended March 31, 2024, remained ongoing though the quarter ended June 30, 2025, and through the date hereof. The Company has made significant progress in its remediation efforts, and during the quarter ended June 30, 2025, management conducted a systematic review of the components of underwriting income for the Company’s Life and Medicare Supplement products. This review included independent calculations of actuarial values for these products using a comprehensive process that had been developed, tested, and implemented during the quarter ended December 31, 2024 for Life products, and implemented during the quarter ended June 20, 2025 for the Medicare Supplement product. Based on this review, management did not identify any material misstatement in the Company’s financial statements.

In furtherance of the remediation efforts, the Company has continued the development of a system to perform calculations independently of the actuarial models. This system is intended to verify that the product parameters and actuarial assumptions are properly reflected in the reported values. The Company’s whole life product has been implemented on the system, which was used to validate the actuarial values for this product as of December 31,2024. Implementation of the Company’s individual life products and its Medicare Supplement product was completed during the quarter ended June 30, 2025. The Company currently expects that extensions of this system to accommodate the other product lines the Company offers will be operational by September 30, 2025. Full development and implementation of this system has required more time than previously anticipated due to unforeseen complexities inherent in the actuarial software systems used to calculate and report the actuarial values. These complexities have required additional effort to understand and to replicate in this system, and to complete the remediation process.

Changes in Internal Control Over Financial Reporting

Other than the remediation efforts described above, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

No system of controls, no matter how well designed and implemented, can provide absolute assurance that the objectives of the system of controls are met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and any instances of fraud within a company have been detected.