UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-Q
For the quarterly period ended
March 31, 2020
OR
Commission File Number
0-3722
ATLANTIC
AMERICAN CORPORATION
(Exact name of registrant as specified in its
charter)
4370 Peachtree Road, N.E.,
Atlanta, Georgia
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30319
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(Address of
principal executive offices)
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(Zip
Code)
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(404)
266-5500
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☑ No
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated
filer ☐ Non-accelerated filer ☐ (Do
not check if a smaller reporting company) Smaller reporting
company ☑ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The total number of shares of the registrant’s Common Stock,
$1 par value, outstanding on March 31, 2020 was
20,438,366.
ATLANTIC
AMERICAN CORPORATION
Part
I. Financial
Information
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Item 2.
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Item 4.
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Part II.
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Other Information
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Item 2.
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Item 6.
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PART I.
FINANCIAL INFORMATION
Item 1. Financial
Statements
ATLANTIC
AMERICAN CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollars in
thousands, except per share data)
ASSETS
The accompanying notes are an
integral part of these consolidated financial statements.
ATLANTIC
AMERICAN CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited;
Dollars in thousands, except per share data)
The accompanying notes are an
integral part of these consolidated financial statements.
ATLANTIC
AMERICAN CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(Unaudited;
Dollars in thousands)
The accompanying notes are an
integral part of these consolidated financial statements.
ATLANTIC
AMERICAN CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
(Unaudited;
Dollars in thousands)
The accompanying notes are an
integral part of these consolidated financial statements.
ATLANTIC
AMERICAN CORPORATION
CONDENSED
CONSOLIDATED
STATEMENTS OF
CASH FLOWS
(Unaudited;
Dollars in thousands)
The accompanying notes are an
integral part of these consolidated financial statements.
ATLANTIC
AMERICAN CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited;
Dollars in thousands, except per share amounts)
The accompanying unaudited
condensed consolidated financial statements include the accounts of
Atlantic American Corporation (the “Parent”) and its subsidiaries
(collectively with the Parent, the “Company”). The Parent’s primary
operating subsidiaries, American Southern Insurance Company and
American Safety Insurance Company (together known as “American
Southern”) and Bankers Fidelity Life Insurance Company and Bankers
Fidelity Assurance Company (together known as “Bankers Fidelity”),
operate in two principal business units. American Southern operates
in the property and casualty insurance market, while Bankers
Fidelity operates in the life and health insurance market. All
significant intercompany accounts and transactions have been
eliminated in consolidation. The accompanying financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for
interim financial information and with the instructions to Form
10-Q and Article 8 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by GAAP for
audited annual financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The unaudited condensed consolidated financial statements included
herein and these related notes should be read in conjunction with
the Company’s consolidated financial statements, and the notes
thereto, included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2019 (the “2019 Annual Report”). The
Company’s financial condition and results of operations and cash
flows as of and for the three month period ended March 31, 2020 are
not necessarily indicative of the financial condition or results of
operations and cash flows that may be expected for the year ending
December 31, 2020 or for any other future period.
The Company’s significant
accounting policies have not changed materially from those set out
in the 2019 Annual Report, except as noted below for the adoption
of new accounting standards.
The preparation of financial
statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amount of assets
and liabilities, disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ materially from those estimates.
On March 11, 2020, the World Health
Organization declared the Novel Coronavirus (“COVID-19”) outbreak a
global pandemic. The impact of COVID-19 and related actions to
attempt to control its spread began to impact the Company’s
business operations in March 2020, and we expect that the pandemic,
actions that have been or will be taken in response to it and its
overall impact on the economy, will continue to have an effect on
our business operations and our operating results. The Company’s
insurance subsidiaries may experience difficulties collecting
premiums from some policyholders, and policyholders with financial
difficulties may decide not to renew insurance policies with the
Company. Although it cannot be predicted with certainty at
this time, the Company’s insurance subsidiaries do not expect a
direct material impact from the outbreak of COVID-19 in terms of
increased claims and losses, but that may change as more
information becomes available. In addition, economic
uncertainty related to COVID-19 has led to a decline in the
investment markets, and may continue to create increased
volatility. The impact of COVID-19 on the economy and on the
Company is evolving and its future effects are uncertain. The
Company is closely monitoring the effects and risks of COVID-19 to
assess its impact on the Company's business, financial condition,
results of operations, liquidity and capital position.
On March 27, 2020, Congress passed
the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”), which is intended to provide fast and direct economic
assistance for American workers and families, small businesses, and
to preserve jobs in American industries. The CARES Act includes,
among other things, provisions relating to payroll tax credits and
deferrals, net operating loss carryback periods, alternative
minimum tax credits and technical corrections to tax depreciation
methods for qualified improvement property. The Company does not
qualify as a small business under the CARES Act and therefore did
not apply for any of the government loan programs; however, the
Company intends to monitor and assess the availability of resources
and other benefits that might be available to the Company under the
CARES Act and through other programs.
Adoption of New Accounting Standards
Fair Value Measurement – Changes to the
Disclosure Requirements for Fair Value Measurement. In
August 2018, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2018-13, Fair Value
Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”).
This guidance removes the following disclosure requirements from
Topic 820: (1) the amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy, (2) the policy for
timing of transfers between levels, and (3) the valuation processes
for Level 3 fair value measurements. This disclosure also
includes the changes in unrealized gains and losses for the period
included in other comprehensive income for recurring Level 3 fair
value measurements held at the end of the reporting period and the
range and weighted average of significant unobservable inputs used
to develop Level 3 fair value measurements. The Company
adopted ASU 2018-13 as of January 1, 2020. The adoption of this ASU
did not have an impact on the Company’s consolidated financial
statements.
Goodwill. In January 2017, the
FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment (“ASU
2017-04”). ASU 2017-04 is intended to simplify the evaluation
of goodwill. The updated guidance requires recognition and
measurement of goodwill impairment based on the excess of the
carrying value of the reporting unit compared to its estimated fair
value, with the amount of the impairment not to exceed the carrying
value of the reporting unit’s goodwill. Under the prior accounting
guidance, if the reporting unit’s carrying value exceeds its
estimated fair value, the Company allocates the fair value of the
reporting unit to all of the assets and liabilities of the
reporting unit to determine an implied goodwill value. An
impairment loss is then recognized for the excess, if any, of the
carrying value of the reporting unit’s goodwill compared to the
implied goodwill value. The Company adopted ASU 2017-04
as of January 1, 2020. The adoption of this ASU did not have an
impact on the Company’s consolidated financial statements.
Future
Adoption of New Accounting Standards
Reference Rate Reform. In March 2020,
the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial
Reporting (“ASU 2020-04”). This guidance provides optional
expedients and exceptions for applying GAAP to investments,
derivatives, or other transactions that reference the London
Interbank Offered Rate (LIBOR) or another reference rate expected
to be discontinued because of reference rate reform. Along with the
optional expedients, the amendments include a general principle
that permits an entity to consider contract modifications due to
reference reform to be an event that does not require contract
re-measurement at the modification date or reassessment of a
previous accounting determination. Additionally, a company may make
a one-time election to sell, transfer, or both sell and transfer
debt securities classified as held to maturity that reference a
rate affected by reference rate reform and that were classified as
held to maturity before January 1, 2020. This standard may be
elected over time through December 31, 2022 as reference rate
reform activities occur. The Company is currently assessing the
effect of adopting this guidance on the financial condition and
results of operations.
Investments – Equity Securities. In
January 2020, the FASB issued ASU No. 2020-01 (“ASU 2020-01”)
Investments-Equity Securities (Topic 321), Investments-Equity
Method and Joint Ventures (Topic 323), and Derivatives and Hedging
(Topic 815) Clarifying the Interactions between Topic 321, Topic
323, and Topic 815. This update, among others, clarifies the
interaction of the accounting for equity securities under Topic 321
and investments under the equity method of accounting in Topic 323
when there is a change in level of ownership or degree of
influence. ASU 2020-01 is effective for the Company beginning with
the first quarter of 2021 and will be applied prospectively. Early
adoption is permitted. This guidance will not have a material
impact on the Company’s consolidated financial statements.
For information regarding
accounting standards that the Company has not yet adopted, see the
“Recently Issued Accounting Standards - Future Adoption of New
Accounting Standards” section of Note 1 of Notes to Consolidated
Financial Statements in the 2019 Annual Report.
The following tables set forth the
estimated fair value, gross unrealized gains, gross unrealized
losses and cost or amortized cost of the Company’s investments in
fixed maturities and equity securities, aggregated by type and
industry, as of March 31, 2020 and December 31, 2019.
Fixed maturities were comprised of
the following:
Bonds having an amortized cost of
$10,444 and $10,669 and included in the tables above were on
deposit with insurance regulatory authorities as of March 31, 2020
and December 31, 2019, respectively, in accordance with statutory
requirements.
Equity securities were comprised of
the following:
The carrying value and amortized
cost of the Company’s investments in fixed maturities at March 31,
2020 and December 31, 2019 by contractual maturity were as follows.
Actual maturities may differ from contractual maturities because
issuers may call or prepay obligations with or without call or
prepayment penalties.
The following tables present the
Company’s unrealized loss aging for securities by type and length
of time the security was in a continuous unrealized loss position
as of March 31, 2020 and December 31, 2019.
The evaluation for an other than
temporary impairment (“OTTI”) is a quantitative and qualitative
process, which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments
are other than temporary. Potential risks and uncertainties
include, among other things, changes in general economic
conditions, an issuer’s financial condition or near term recovery
prospects and the effects of changes in interest rates. In
evaluating a potential impairment, the Company considers, among
other factors, management’s intent and ability to hold the
securities until price recovery, the nature of the investment and
the expectation of prospects for the issuer and its industry, the
status of an issuer’s continued satisfaction of its obligations in
accordance with their contractual terms, and management’s
expectation as to the issuer’s ability and intent to continue to do
so, as well as ratings actions that may affect the issuer’s credit
status.
There were no OTTI charges recorded
during the three month periods ended March 31, 2020 and 2019.
As of March 31, 2020 and December
31, 2019, there were sixty-nine and thirty securities,
respectively, in an unrealized loss position which primarily
included certain of the Company’s investments in fixed maturities
within the financial services, other diversified business and other
diversified consumer sectors. The increase in the number and value
of securities in an unrealized loss position during the three month
period ended March 31, 2020, was primarily attributable to the
volatility and weakening of the financial markets as a result of
the COVID-19 pandemic. The Company does not currently intend
to sell nor does it expect to be required to sell any of the
securities in an unrealized loss position. Based upon the Company’s
expected continuation of receipt of contractually required
principal and interest payments and its intent and ability to
retain the securities until price recovery, as well as the
Company’s evaluation of other relevant factors, including those
described above, the Company has deemed these securities to be
temporarily impaired as of March 31, 2020.
The following table is a summary of
realized investment gains (losses) for the three month periods
ended March 31, 2020 and 2019.
The following table presents the
portion of unrealized gains (losses) related to equity securities
still held for the three month periods ended March 31, 2020 and
2019.
Variable Interest Entities
The Company holds passive interests
in a number of entities that are considered to be variable interest
entities (“VIEs”) under GAAP guidance. The Company’s VIE interests
principally consist of interests in limited partnerships and
limited liability companies formed for the purpose of achieving
diversified equity returns. The Company’s VIE interests, carried as
a part of other invested assets, totaled $9,775 and $9,960 as of
March 31, 2020 and December 31, 2019, respectively. The Company’s
VIE interests, carried as a part of investment in unconsolidated
trusts, totaled $1,238 as of March 31, 2020 and December 31,
2019.
The Company does not have power
over the activities that most significantly impact the economic
performance of these VIEs and thus is not the primary beneficiary.
Therefore, the Company has not consolidated these VIEs. The
Company’s involvement with each VIE is limited to its direct
ownership interest in the VIE. The Company has no arrangements with
any of the VIEs to provide other financial support to or on behalf
of the VIE. The Company’s maximum loss exposure relative to these
investments was limited to the carrying value of the Company’s
investment in the VIEs, which amount to $11,013 and $11,198, as of
March 31, 2020 and December 31, 2019, respectively. As of March 31,
2020 and December 31, 2019, the Company has outstanding commitments
totaling $1,997, whereby the Company is committed to fund these
investments and may be called by the partnership during the
commitment period to fund the purchase of new investments and
partnership expenses.
The estimated fair values have been
determined by the Company using available market information from
various market sources and appropriate valuation methodologies as
of the respective dates. However, considerable judgment is
necessary to interpret market data and to develop the estimates of
fair value. Although management is not aware of any factors
that would significantly affect the estimated fair value amounts,
the estimates presented herein are not necessarily indicative of
the amounts which the Company could realize in a current market
exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
The following describes the fair
value hierarchy and provides information as to the extent to which
the Company uses fair value to measure the value of its financial
instruments and information about the inputs used to value those
financial instruments. The fair value hierarchy prioritizes the
inputs in the valuation techniques used to measure fair value into
three broad levels.
As of March 31, 2020, financial
instruments carried at fair value were measured on a recurring
basis as summarized below:
As of December 31, 2019, financial
instruments carried at fair value were measured on a recurring
basis as summarized below:
The Company does not have any fixed
maturities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) as of March 31, 2020 and
December 31, 2019.
The following table sets forth the
carrying amount, estimated fair value and level within the fair
value hierarchy of the Company’s financial instruments as of March
31, 2020 and December 31, 2019.
The roll-forward of liabilities for
unpaid losses, claims and loss adjustment expenses for the three
months ended March 31, 2020 and 2019 is as follows:
Following is a reconciliation of
total incurred losses to total insurance benefits and losses
incurred:
The Company has two unconsolidated
Connecticut statutory business trusts, which exist for the
exclusive purposes of: (i) issuing trust preferred securities
(“Trust Preferred Securities”) representing undivided beneficial
interests in the assets of the trusts; (ii) investing the gross
proceeds of the Trust Preferred Securities in junior subordinated
deferrable interest debentures (“Junior Subordinated Debentures”)
of Atlantic American; and (iii) engaging in those activities
necessary or incidental thereto.
The financial structure of each of
Atlantic American Statutory Trust I and II as of March 31, 2020 was
as follows:
A reconciliation of the numerator
and denominator used in the earnings (loss) per common share
calculations is as follows:
The assumed conversion of the
Company’s Series D preferred stock was excluded from the diluted
loss per common share calculation for the three month period ended
March 31, 2020, since its impact would have been
antidilutive.
A reconciliation of the differences
between income taxes computed at the federal statutory income tax
rate and income tax expense (benefit) is as follows:
The components of income tax
expense (benefit) were:
In addition, the Company determined
there were no significant tax implications as a result of the CARES
Act.
The Company has identified two
operating lease agreements, each for the use of office space in the
ordinary course of business.
The first lease renews annually on an automatic basis and
based on original assumptions, management is reasonably certain to
exercise the renewal option for an additional eight years from the
January 1, 2019 effective date of the new lease guidance. The
original term of the second lease was ten years and amended in
January 2017 to provide for an additional seven years, with a
termination date on September 30, 2026. The rate used in
determining the present value of lease payments is based upon an
estimate of the Company’s incremental secured borrowing rate
commensurate with the term of the underlying lease.
These leases are accounted for as
operating leases, whereby lease expense is recognized on a
straight-line basis over the term of the lease. Lease expense
reported for the three months ended March 31, 2020 and March 31,
2019 was $254.
Additional information regarding
the Company’s real estate operating leases is as follows:
The following table presents maturities and present value of
the Company’s lease liabilities:
As of March 31, 2020, the Company has no operating leases that
have not yet commenced.
From time to time, the Company is,
and expects to continue to be, involved in various claims and
lawsuits incidental to and in the ordinary course of its
businesses. In the opinion of management, any such known claims are
not expected to have a material effect on the financial condition
or results of operations of the Company.
The Parent’s primary insurance
subsidiaries, American Southern and Bankers Fidelity, operate in
two principal business units, each focusing on specific products.
American Southern operates in the property and casualty insurance
market, while Bankers Fidelity operates in the life and health
insurance market. Each business unit is managed independently and
is evaluated on its individual performance. The following sets
forth the assets, revenue and income (loss) before income taxes for
each business unit as of and for the periods ended 2020 and
2019.
Since March 31, 2020, the COVID-19
pandemic continues to cause material disruption to financial
markets and the economy. As a result of the pandemic, the
Company could experience future losses in its investment portfolio
as a result of the weakened and volatile markets.
Additionally, the Company can experience increased risk of loss any
time unforeseen infectious diseases impact large portions of a
population. Specifically, the Company’s life and health business
could experience significant loss due to increased claims volume
arising from COVID-19. The duration and impact of the COVID-19
pandemic is unknown at this time and it is not possible to reliably
estimate the impact on the financial condition, operating results
or liquidity of the Company and its operating subsidiaries in
future periods.
Item 2.
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 period ended March 31,
2020. 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, 2019 (the “2019 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 and Bankers
Fidelity Assurance Company (together known as “Bankers Fidelity”).
Each operating company is managed separately, offers different
products and is evaluated on its individual performance.
Recent Events and Outlook
On March 11, 2020, the World Health
Organization designated COVID-19 as a global pandemic. In
March 2020, the impact of COVID-19 and related actions to attempt
to control its spread began to impact our business operations, and
we expect that the pandemic, actions that have been or will be
taken in response to it and its overall impact on the economy, will
continue to have an effect on our business operations and our
operating results. See “Expected Impact of COVID-19 on the
Company’s Financial Condition and Results of Operations.”
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 2019 Annual
Report. Except as disclosed in Note 2 of Notes to Condensed
Consolidated Financial Statements, the Company’s critical
accounting policies are consistent with those disclosed in the 2019
Annual Report.
Overall Corporate Results
The following presents the
Company’s revenue, expenses and net income (loss) for the three
month period ended March 31, 2020 and the comparable period in
2019:
Management also considers and
evaluates performance by analyzing the non-GAAP measure operating
income (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 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 loss for the three month period ended March 31,
2020 and the comparable period in 2019 is as follows:
On a consolidated basis, the
Company had a net loss of $8.1 million, or $0.40 per diluted share,
for the three month period ended March 31, 2020, compared to net
income of $4.2 million, or $0.19 per diluted share, for the three
month period ended March 31, 2019. Premium revenue for the three
month period ended March 31, 2020 increased $0.8 million, or 1.7%,
to $45.6 million. The increase in premium revenue was primarily
attributable to an increase in the automobile physical damage line
of business in the property and casualty operations. Operating loss
decreased $0.6 million in the three month period ended March 31,
2020 over the comparable period of 2019. The decrease in operating
loss was primarily due to favorable loss experience in the life and
health operations.
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 period ended March 31, 2020 and the comparable
period in 2019:
Gross written premiums at American
Southern increased $1.9 million, or 25.0%, during the three month
period ended March 31, 2020 from the comparable period in 2019. The
increase in gross written premiums was primarily attributable to an
increase in premiums written in the automobile physical damage line
of business due to a new agency that started in the second half of
2019 and increased writings from certain existing agencies.
Ceded premiums increased slightly
during the three month period ended March 31, 2020 from the
comparable period in 2019 due primarily to an increase in earned
premiums in certain accounts within the automobile physical damage
and general liability lines of business, which are subject to
reinsurance.
The following presents American
Southern’s net earned premiums by line of business for the three
month period ended March 31, 2020 and the comparable period in
2019:
Net earned premiums increased $1.1
million, or 8.1%, during the three month period ended March 31,
2020 from the comparable period in 2019. The increase in net earned
premiums was primarily attributable to an increase in automobile
physical damage coverage resulting from the addition of an
automobile account 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).
Net loss and loss adjustment
expenses at American Southern increased $0.5 million, or 5.4%,
during the three month period ended March 31, 2020 from the
comparable period in 2019. As a percentage of earned premiums, net
loss and loss adjustment expenses were 63.9% in the three month
period ended March 31, 2020, compared to 65.5% in the three month
period ended March 31, 2019. The decrease in the loss ratio was
primarily due to a decrease in the severity of claims in the
automobile liability line of business during the three month period
ended March 31, 2020. Partially offsetting the decrease in the loss
ratio during the three month period ended March 31, 2020 was less
favorable loss experience in the automobile physical damage line of
business due to an increase in frequency of claims from the new
agency.
Commissions and underwriting
expenses increased $0.6 million, or 14.3%, during the three month
period ended March 31, 2020 from the comparable period in 2019. As
a percentage of earned premiums, underwriting expenses were 32.3%
in the three month period ended March 31, 2020, compared to 30.5%
in the three month period ended March 31, 2019. The increase 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. During the three month period ended March 31, 2020,
variable commissions at American Southern increased $0.1 million
from the comparable period in 2019 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 period ended March 31, 2020 and the
comparable period in 2019:
Net earned premium revenue at
Bankers Fidelity decreased $0.3 million, or 1.1%, during the three
month period ended March 31, 2020 over the comparable period in
2019. Gross earned premiums from the Medicare supplement line of
business decreased slightly during the three month period ended
March 31, 2020, due primarily to non-renewals exceeding the level
of new business writings. Other health product premiums increased
$0.2 million, or 9.7%, during the same comparable period, primarily
as a result of new sales of the company’s group health products.
Gross earned premiums from the life insurance line of business
increased $0.1 million, or 5.4%, during the three month period
ended March 31, 2020 from the comparable period in 2019 due to an
increase in the group life products premium. Partially offsetting
the increase in gross earned premiums from the life insurance line
was a decrease in individual life products premium, resulting from
the redemption and settlement of existing individual life policy
obligations exceeding the level of new individual life sales.
Premiums ceded increased $0.6 million, or 3.7%, during the three
month period ended March 31, 2020 over the comparable period in
2019. The increase in ceded premiums for the three month period
ended March 31, 2020 was due to an increase in Medicare supplement
premiums subject to reinsurance.
Benefits and losses decreased $2.2
million, or 8.4%, during the three month period ended March 31,
2020 over the comparable period in 2019. As a percentage of earned
premiums, benefits and losses were 78.5% in the three month period
ended March 31, 2020, compared to 84.8% in the three month period
ended March 31, 2019. The decrease in the loss ratio for the three
month period ended March 31, 2020 over the comparable period in
2019, was primarily attributable to favorable loss experience in
the Medicare supplement line of business.
Commissions and
underwriting expenses increased $1.0 million, or 11.6%, during the
three month period ended March 31, 2020 from the comparable period
in 2019. As a percentage of earned premiums, underwriting expenses
were 31.4% in the three month period ended March 31, 2020, compared
to 27.8% in the three month period ended March 31, 2019. The
increase in the expense ratio for the three month period ended
March 31, 2020 was primarily due to the amortization of deferred
acquisition costs (“DAC”) exceeding the level of additions to
DAC. The increase in the net amortization of DAC during 2020
is primarily due to non-renewals exceeding the level of new
business writings in the Medicare supplement line of business, as
previously mentioned. Also contributing to the increase in
the expense ratio was an increase in expenses related to servicing
the Medicare supplement line of business.
Net Investment Income and Realized
Gains
Investment income decreased $0.3
million, or 12.6%, during the three month period ended March 31,
2020 over the comparable period in 2019. The decrease in investment
income during the three month period ended March 31, 2020 was
primarily attributable to a decrease in the equity in earnings from
investments in real estate partnerships of $0.2 million over the
comparable period in 2019.
The Company had net realized
investment gains of $0.2 million during the three month period
ended March 31, 2020, compared to net realized investment gains of
$1.4 million in the three month period ended March 31, 2019. The
net realized investment gains in the three month period ended March
31, 2020 resulted from the disposition of several of the Company’s
investments in fixed maturities. The net realized investment gains
in the three month period ended March 31, 2019 resulted primarily
from the disposition of several of the Company’s investments in
equity securities. Management continually evaluates the Company’s
investment portfolio and makes adjustments for impairments and/or
divests investments as may be determined to be appropriate.
Unrealized Gains (Losses) 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,
with certain exceptions. The Company recognized net unrealized
losses on equity securities still held of $8.5 million during the
three month period ended March 31, 2020 and unrealized gains on
equity securities still held of $6.5 million during the three month
period ended March 31, 2019. Changes in unrealized gains on
equity securities for the applicable periods are primarily the
result of fluctuations in the market values of the Company’s equity
investments. The increase in the number and value of
securities in an unrealized loss position during the three month
period ended March 31, 2020, was primarily attributable to the
volatility and weakening of the financial markets as a result
of COVID-19.
Interest Expense
Interest expense decreased $0.1
million, or 12.8%, during the three month period ended March 31,
2020 over the comparable period in 2019. Changes in interest
expense were primarily due to changes in the London Interbank
Offered Rate (“LIBOR”), as the interest rates on the Company’s
outstanding junior subordinated deferrable interest debentures
(“Junior Subordinated Debentures”) are directly related to
LIBOR.
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 March 31, 2020, the Parent had approximately
$4.5 million of unrestricted cash and investments.
The Parent’s insurance subsidiaries
reported a statutory net income of $0.2 million for the three month
period ended March 31, 2020, compared to statutory net loss of $0.7
million for the three month period ended March 31, 2019. 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 March 31, 2020, American
Southern had $42.0 million of statutory surplus and Bankers
Fidelity had $27.5 million of statutory surplus. In 2020, dividend
payments by the Parent’s insurance subsidiaries in excess of $4.6
million would require prior approval. Through March 31, 2020, the
Parent received dividends of $0.9 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 three-month
LIBOR plus an applicable margin. The margin ranges from 4.00% to
4.10%. At March 31, 2020, the effective interest rate was 5.56%.
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 March 31, 2020, 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 potential future financing
arrangements.
At March 31, 2020, 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 March 31, 2020, the Company had accrued but unpaid dividends on
the Series D Preferred Stock totaling $0.1 million.
Cash and cash equivalents decreased
from $12.9 million at December 31, 2019 to $8.3 million at March
31, 2020. The decrease in cash and cash equivalents during the
three month period ended March 31, 2020 was primarily attributable
to net cash used in operating activities of $10.5 million,
partially offset by a $6.0 million increase resulting from
investment sales and maturity of securities exceeding purchases 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
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.
Expected Impact of COVID-19 on the
Company’s Financial Condition and Results of Operations
The duration and impact of the
COVID-19 pandemic is unknown at this time and it is not possible
for us to reliably estimate the impact on the financial condition,
operating results or liquidity of the Company and its operating
subsidiaries in future periods. However, we do not currently
expect a significant decline in liquidity or operating results as a
result of the disruption caused by the ongoing COVID-19
pandemic. To date, the most significant impact of COVID-19 on
the Company’s financial position is a decline in fair value of the
Company’s fixed maturity and equity investments due to the weakened
and volatile financial markets. At this time, the Company
believes the decline in market values are temporary in
nature.
We expect that earned premiums
could be adversely impacted by a weakened economy leading to a
slowdown in new sales and reduced retention of insureds.
Additionally, a number of states have issued bulletins that either
encourage or require premium leniency such as extension of grace
periods or moratoriums on cancellation of policies for
non-payment. The Company does not expect a significant
reduction or delay in payments and continues to monitor state
required actions as they develop.
For the Company’s property and
casualty operations, the majority of premium revenue is derived
from automobile liability and automobile physical damage lines of
business written on a multi-year contract basis with state and
local governments. Although we cannot predict with certainty
at this time, we do not expect a significant level of cancellations
or non-renewals of our property and casualty contracts in the short
term but recognize that a prolonged economic slowdown could
adversely affect future results.
Benefits and losses in our property
and casualty operations could be adversely impacted as a result of
disruption caused by the COVID-19 pandemic. However, due to
the nature of our primary product lines, the impact is not
currently expected to be material. Additionally, we expect to
see a reduction in frequency and severity of claims in the
automobile lines of business as fewer miles are driven and less
people are on the roads. As a result, we do not currently
expect a material adverse effect on operating results or liquidity
in the property and casualty operations.
The majority of premium revenue in
our life and health operations are derived from the senior market
segment of the population, or those individuals age sixty-five and
up, who maintain Medicare supplement and to a lesser extent, whole
life insurance policies with the Company. We expect that
earned premiums could be adversely impacted by the rise in
unemployment and economic slowdown, which could lead to a decline
in new sales and reduced retention of insureds. As a result,
we currently anticipate that the life and health operations may
experience a marginal decline in earned premiums although the
actual impact cannot be predicted with certainty at this
time.
Unforeseen infectious diseases that
impact large portions of a population can have an adverse impact on
mortality and morbidity, and resultant benefits and losses incurred
by the Company’s life and health operations. Accordingly, the
Company does anticipate incurring higher costs, potentially similar
to prior influenza seasons, as it relates to life insurance
claims. However, with much of the country sheltering in place
over an extended period, the Company expects a decrease in
non-medically necessary services being performed with many of the
services deferred until a later date when these procedures are
allowed to take place. Additionally, the Company expects
there will be some routine medical services that are deferred
indefinitely. As a result, and although the actual impact
cannot be predicted with certainty at this time, the Company does
not expect significant adverse development in total benefits and
losses incurred in its life and health operations.
Item 4. 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 SEC’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. Management necessarily applies its
judgment in assessing the costs and benefits of such controls and
procedures, which, by their nature, can provide only reasonable
assurance regarding management’s control objectives. The Company’s
management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and
procedures can prevent all possible errors or fraud. A control
system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. There are inherent limitations in all
control systems, including the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple errors or mistakes. Additionally, controls can be
circumvented by the intentional acts of one or more persons. The
design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and, while our
disclosure controls and procedures are designed to be effective
under circumstances where they should reasonably be expected to
operate effectively, there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Because of the inherent limitations in any control
system, misstatements due to possible errors or fraud may occur and
may not be detected. 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 our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act) as of the end of the period covered
by this report. Based on that evaluation, our management, including
the Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective as of
the end of the period covered by this report.
There have been no changes in our
internal control over financial reporting that occurred during the
period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This report
contains and references certain information that constitutes
forward-looking statements as that term is defined in the federal
securities laws. Statements, to the extent they are not statements
of historical facts, should be considered forward-looking
statements, and are subject to various risks and uncertainties.
Such forward-looking statements are made based upon management’s
current assessments of various risks and uncertainties, as well as
assumptions made in accordance with the “safe harbor” provisions of
the federal securities laws. The Company’s actual results could
differ materially from the results anticipated in these
forward-looking statements as a result of such risks and
uncertainties, including those identified in filings made by the
Company from time to time with the Securities and Exchange
Commission. In addition, other risks and uncertainties not known by
us, or that we currently determine to not be material, may
materially adversely affect our financial condition, results of
operations or cash flows. The Company undertakes no obligation to
update any forward-looking statement as a result of subsequent
developments, changes in underlying assumptions or facts, or
otherwise.
PART II. OTHER
INFORMATION
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
On October 31, 2016, the Board of
Directors of the Company approved a plan that allows for the
repurchase of up to 750,000 shares of the Company’s common stock
(the “Repurchase Plan”) on the open market or in privately
negotiated transactions, as determined by an authorized officer of
the Company. Any such repurchases can be made from time to time in
accordance with applicable securities laws and other
requirements.
Other than pursuant to the
Repurchase Plan, no purchases of common stock of the Company were
made by or on behalf of the Company during the periods described
below.
The table below sets forth
information regarding repurchases by the Company of shares of its
common stock on a monthly basis during the three month period ended
March 31, 2020.
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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