The following tables provide a roll-forward of the Company’s financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month and nine month
periods ended September 30, 2019 and 2018.
The Company’s fixed maturities valued using Level 3 inputs consist solely of issuances of pooled debt obligations of multiple, smaller financial services companies that are not actively traded. There are no
assumed prepayments and/or default probability assumptions as a majority of these instruments contain certain U.S. government agency strips to support repayment of the principal. Other qualitative and quantitative information received from
the original underwriter of the pooled offerings is also considered, as applicable.
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 September 30, 2019 and December 31, 2018.
There have not been any transfers between Level 1, Level 2 and Level 3 during the periods presented in these condensed consolidated financial statements.
Following is a reconciliation of total incurred losses to total insurance benefits and losses incurred for the nine months ended September 30, 2019 and 2018:
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 September 30, 2019 was as follows:
The assumed conversion of the Company’s Series D preferred stock was excluded from the earnings (loss) per common share calculation for all periods presented since its impact would have been antidilutive.
The Company has 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 nine months ended September 30, 2019
was $761. See the “Adoption of New Accounting Standards – Leases” section of Note 2 of Notes to Condensed Consolidated Financial Statements for additional information regarding the accounting for
leases.
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 September 30, 2019, 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. Substantially all revenue other than in the
corporate and other segment is from external sources. The following sets forth the assets, revenue and income (loss) before income taxes for each business unit as of and for the periods ended 2019 and 2018.
During the nine month period ended September 30, 2019, the Company transferred its remaining fractional interest in an aircraft arrangement to Gray Television, Inc., a related party, for $151.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries
(collectively with the Parent, the “Company”) as of and for the three month and nine month periods ended September 30, 2019. This discussion should be read in conjunction with the unaudited 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, 2018 (the “2018 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.
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 2018 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 2018 Annual Report.
Overall Corporate Results
The following presents the Company’s revenue, expenses and net income (loss) for the three month and nine month periods ended September 30, 2019 and the comparable period in 2018:
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 and nine month periods ended September 30, 2019 and the comparable periods in 2018 is as follows:
On a consolidated basis, the Company had net loss of $1.4 million, or $0.07 per diluted share, for the three month period ended September 30, 2019, compared to net income of $0.9 million, or $0.04 per diluted
share, for the three month period ended September 30, 2018. The Company had net loss of $1.7 million, or $0.10 per diluted share, for the nine month period ended September 30, 2019, compared to net loss of $0.9 million, or $0.06 per
diluted share, for the nine month period ended September 30, 2018. Premium revenue for the three month period ended September 30, 2019 increased $2.4 million, or 5.8%, to $45.0 million from $42.6 million in the three month period ended
September 30, 2018. For the nine month period ended September 30, 2019, premium revenue increased $7.7 million, or 6.0%, to $135.3 million from $127.6 million in the comparable period in 2018. The increase in premium revenue was primarily
attributable to an increase in Medicare supplement business in the life and health operations, coupled with an increase in the automobile physical damage line of business in the property and casualty operations. Operating loss increased
$1.8 million in the three month period ended September 30, 2019 from the three month period ended September 30, 2018. For the nine month period ended September 30, 2019, the operating loss increased $2.9 million over the comparable period
in 2018. The increase in operating loss was primarily due to unfavorable 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 and nine month periods ended September 30, 2019 and the comparable periods in 2018:
Gross written premiums at American Southern increased $0.7 million, or 7.6%, during the three month period ended September 30, 2019 and $5.6 million, or 12.6%, during the nine month period ended September 30,
2019, from the comparable periods in 2018. 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 increased writings from certain
agencies and a new agency that started in the second half of 2018. Partially offsetting the increase in gross written premiums was a decline in premiums written in the surety line of business as a result of increased competition.
Ceded premiums increased $0.2 million, or 13.3%, during the three month period ended September 30, 2019 and $0.4 million, or 11.5%, during the nine month period ended September 30, 2019, from the comparable
periods in 2018. The increase in ceded premiums in 2019 was 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 and nine month periods ended September 30, 2019 and the comparable periods in 2018:
Net earned premiums increased $1.4 million, or 10.9%, during the three month period ended September 30, 2019, and increased $3.7 million, or 9.5%, during the nine month period ended September 30, over the
comparable periods in 2018. The increase in net earned premiums was primarily attributable to an increase in automobile physical damage coverage resulting from additional writings from a new agency 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 decreased $1.2 million, or 11.5%, during the three month period ended September 30, 2019, and $0.2 million, or 0.7%, during the nine month period ended
September 30, 2019, over the comparable periods in 2018. As a percentage of net earned premiums, net loss and loss adjustment expenses were 65.2% in the three month period ended September 30, 2019, compared to 81.8% in the three month
period ended September 30, 2018. For the nine month period ended September 30, 2019, this ratio decreased to 65.9% from 72.6% in the comparable period in 2018. The decrease in the loss ratio during the three month and nine month periods
ended September 30, 2019 was primarily due to more favorable loss experience as a result of a decline in the severity of losses in the surety line of business. Also contributing to the decrease in the loss ratio during the three month and
nine month periods ended September 30, 2019 was a lower amount of claims in the automobile physical damage line of business.
Underwriting expenses increased $2.4 million, or 101.5%, during the three month period ended September 30, 2019, and $3.6 million, or 37.5%, during the nine month period ended September 30, 2019, over the
comparable periods in 2018. As a percentage of net earned premiums, underwriting expenses were 32.4% in the three month period ended September 30, 2019, compared to 17.9% in the three month period ended September 30, 2018. For the nine
month period ended September 30, 2019, this ratio increased to 31.1% from 24.8% in the comparable period in 2018. The increase in the expense ratio during the three month and nine month periods ended September 30, 2019 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 nine month periods
ended September 30, 2019, variable commissions at American Southern increased $2.0 million and $2.6 million, respectively, from the comparable periods in 2018 due to more favorable loss experience in the surety line of business. Also
contributing to the increase in the expense ratio were increases in fixed commissions and various underwriting expenses.
Bankers Fidelity
The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month and nine month periods ended September 30, 2019 and the comparable periods in 2018:
Net earned premium revenue at Bankers Fidelity increased $1.0 million, or 3.5%, during the three month period ended September 30, 2019, and $3.9 million, or 4.4%, during the nine month period ended September
30, 2019, over the comparable periods in 2018. Gross earned premiums from the Medicare supplement line of business increased $3.7 million, or 9.0%, during the three month period ended September 30, 2019, and $13.1 million, or 10.9%, during
the nine month period ended September 30, 2019, due primarily to successful execution of new business generating strategies with both new and existing agents. Other health product premiums decreased $0.2 million, or 8.7%, during the three
month period ended September 30, 2019, and increased $0.1 million, or 1.9%, during the nine month period ended September 30, 2019, from the comparable periods in 2018. The increase in other health product premiums during the nine month
period ended September 30, 2019 was primarily a result of new sales of the company’s hospital indemnity and group health products. Gross earned premiums from the life insurance line of business decreased $0.2 million, or 10.0%, during the
three month period ended September 30, 2019, and $0.5 million, or 7.4%, during the nine month period ended September 30, 2019 from the comparable periods in 2018 due to the redemption and settlement of existing policy obligations exceeding
the level of new sales activity. Premiums ceded increased $2.2 million, or 14.0%, during the three month period ended September 30, 2019 and $8.8 million, or 19.7%, during the nine month period ended September 30, 2019, over the comparable
periods in 2018. The increase in ceded premiums for the three month and nine month periods ended September 30, 2019 was due to an increase in Medicare supplement premiums subject to reinsurance.
Benefits and losses increased $2.9 million, or 12.8%, during the three month period ended September 30, 2019, and $5.9 million, or 8.4%, during the nine month period ended September 30, 2019, over the
comparable periods in 2018. As a percentage of net earned premiums, benefits and losses were 82.8% in the three month period ended September 30, 2019, compared to 76.0% in the three month period ended September 30, 2018. For the nine
month period ended September 30, 2019, this ratio increased to 82.2% from 79.2% in the comparable period in 2018. The increase in the loss ratio for the three month and nine month periods ended September 30, 2019 was primarily attributable
to unfavorable loss experience in the Medicare supplement line of business. Throughout 2018 and continuing into the nine month period ended September 30, 2019, Bankers Fidelity experienced a higher than expected level of claims in the
Medicare supplement line of business which had an unfavorable effect on the Company’s loss patterns and increased the resultant loss ratio.
Underwriting expenses increased $0.1 million, or 1.1%, during the three month period ended September 30, 2019, and $1.1 million, or 4.6%, during the nine month period ended September 30, 2019, over the
comparable periods in 2018. As a percentage of net earned premiums, underwriting expenses were 27.4% in the three month period ended September 30, 2019, compared to 28.0% in the three month period ended September 30, 2018. For the nine
month period ended September 30, 2019, this ratio remained unchanged from the comparable period in 2018 at 28.1%. The slight change in the expense ratio for the three month period ended September 30, 2019 was primarily due to a slight
improvement in commission expenses as a percentage of net earned premiums.
NET INVESTMENT INCOME AND REALIZED GAINS (LOSSES)
Investment income decreased slightly during the three month period ended September 30, 2019, and $0.3 million, or 3.9%, during the nine month period ended September 30, 2019, over the comparable periods in
2018. The decrease in investment income during the nine month period ended September 30, 2019 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 2018.
The Company had net realized investment losses of $0.4 million during the three month period ended September 30, 2019, compared to net realized investment gains of $0.5 million during the three month period
ended September 30, 2018. The Company had net realized investment gains of $1.6 million during the nine month period ended September 30, 2019, compared to net realized investment gains of $0.8 million during the nine month period ended
September 30, 2018. During the three month period ended September 30, 2019, management engaged a new investment advisor to manage the Company’s investment portfolio. In conjunction with such engagement, management reevaluated the Company’s
investment allocations and as a result of the rebalancing of the portfolio, certain securities were sold at a realized loss. The net realized investment gains during the nine month period ended September 30, 2019 resulted from the
disposition of certain of the Company’s investments in equity and fixed maturities. 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
On January 1, 2018 the Company adopted ASU No. 2016-01, which requires, among other things, investments in equity securities to be measured at fair value at the end of the reporting period, with any changes in
fair value reported in net income. As a result of the adoption of ASU No. 2016-01, the Company recognized net unrealized gains on equity securities still held of $1.0 million during the three month period ended September 30, 2019 and
unrealized gains on equity securities still held of $1.1 million during the three month period ended September 30, 2018. The Company recognized net unrealized gains on equity securities still held of $2.1 million during the nine month
period ended September 30, 2019 and unrealized gains on equity securities still held of $0.8 million during the nine month period ended September 30, 2018. 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.
INTEREST EXPENSE
Interest expense remained relatively consistent during the three month period ended September 30, 2019, and increased $0.1 million, or 8.5%, during the nine month period ended September 30, 2019, over the
comparable periods in 2018. 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.
OTHER EXPENSES
Other expenses (commissions, underwriting expenses, and other expenses) increased $2.6 million, or 21.9%, during the three month period ended September 30, 2019, and $4.5 million, or 12.0%, during the nine
month period ended September 30, 2019, from the comparable periods in 2018. The increase in other expenses was primarily attributable to a $2.0 million and $2.6 million increase in the three month and nine month periods ended September 30,
2019, respectively, in the variable commission accrual in the property and casualty operations. Also contributing to the increase in other expenses were increased costs associated with the growth of the Medicare supplement line of
business. On a consolidated basis, as a percentage of earned premiums, other expenses increased to 31.6% in the three month period ended September 30, 2019 from 27.5% in the three month period ended September 30, 2018. For the nine month
period ended September 30, 2019, this ratio increased to 31.2% from 29.5% in the comparable period in 2018. The increase in the expense ratio during the three month and nine month periods ended September 30, 2019 was primarily attributable
to the increase costs associated with the growth in Medicare supplement line of business and variable commissions, as discussed previously.
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
September 30, 2019, the Parent had approximately $16.7 million of unrestricted cash and investments.
The Parent’s insurance subsidiaries reported a statutory net loss of $4.2 million for the nine month period ended September 30, 2019, compared to statutory net loss of $1.0 million for the nine month period
ended September 30, 2018. 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 September 30, 2019, American Southern had $42.4 million of statutory surplus and Bankers Fidelity had $24.1 million of statutory surplus. In 2019, dividend
payments by the Parent’s insurance subsidiaries in excess of $4.3 million would require prior approval. Through September 30, 2019, the Parent received dividends of $3.6 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 September 30, 2019, the effective interest rate was
6.57%. 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 September 30, 2019, 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 September 30, 2019, 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 September 30, 2019, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.3 million.
Cash and cash equivalents increased from $12.6 million at December 31, 2018 to $36.0 million at September 30, 2019. The increase in cash and cash equivalents during the nine month period ended September 30,
2019 was primarily attributable to $31.5 million of net investment sales and maturity of securities exceeding purchases of securities, partially offset by net cash used in operating activities of $7.6 million.
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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company disclosed its off-balance sheet arrangements in the 2018 Annual Report. As of September 30, 2019, there have been no material changes to these off-balance sheet arrangements outside the ordinary
course of business.
CONTRACTUAL OBLIGATIONS
As a smaller reporting company, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore is not providing the table of contractual obligations required by Item 303
of Regulation S-K.