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, 2021. 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, 2020 (the “2020 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 2020 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 2020 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, 2021 and the comparable periods in 2020:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums, net
|
|
$
|
45,133
|
|
|
$
|
46,499
|
|
|
$
|
91,223
|
|
|
$
|
92,049
|
|
Net investment income
|
|
|
2,266
|
|
|
|
1,850
|
|
|
|
4,379
|
|
|
|
3,889
|
|
Realized investment gains, net
|
|
|
50
|
|
|
|
—
|
|
|
|
171
|
|
|
|
249
|
|
Unrealized gains (losses) on equity securities, net
|
|
|
4,003
|
|
|
|
1,355
|
|
|
|
4,747
|
|
|
|
(7,100
|
)
|
Other income
|
|
|
5
|
|
|
|
33
|
|
|
|
12
|
|
|
|
60
|
|
Total revenue
|
|
|
51,457
|
|
|
|
49,737
|
|
|
|
100,532
|
|
|
|
89,147
|
|
Insurance benefits and losses incurred
|
|
|
31,703
|
|
|
|
27,076
|
|
|
|
64,975
|
|
|
|
60,659
|
|
Commissions and underwriting expenses
|
|
|
12,179
|
|
|
|
10,854
|
|
|
|
24,743
|
|
|
|
23,480
|
|
Interest expense
|
|
|
347
|
|
|
|
414
|
|
|
|
693
|
|
|
|
890
|
|
Other expense
|
|
|
3,474
|
|
|
|
3,112
|
|
|
|
6,914
|
|
|
|
6,064
|
|
Total benefits and expenses
|
|
|
47,703
|
|
|
|
41,456
|
|
|
|
97,325
|
|
|
|
91,093
|
|
Income (loss) before income taxes
|
|
$
|
3,754
|
|
|
$
|
8,281
|
|
|
$
|
3,207
|
|
|
$
|
(1,946
|
)
|
Net income (loss)
|
|
$
|
2,962
|
|
|
$
|
6,532
|
|
|
$
|
2,531
|
|
|
$
|
(1,555
|
)
|
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 income (loss) for the three month and six month periods ended June 30, 2021 and the comparable periods in 2020 is as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
Reconciliation of Non-GAAP Financial Measure
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
2,962
|
|
|
$
|
6,532
|
|
|
$
|
2,531
|
|
|
$
|
(1,555
|
)
|
Income tax expense (benefit)
|
|
|
792
|
|
|
|
1,749
|
|
|
|
676
|
|
|
|
(391
|
)
|
Realized investment gains, net
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
(171
|
)
|
|
|
(249
|
)
|
Unrealized (gains) losses on equity securities, net
|
|
|
(4,003
|
)
|
|
|
(1,355
|
)
|
|
|
(4,747
|
)
|
|
|
7,100
|
|
Non-GAAP operating income (loss)
|
|
$
|
(299
|
)
|
|
$
|
6,926
|
|
|
$
|
(1,711
|
)
|
|
$
|
4,905
|
|
On a consolidated basis, the Company had net income of $3.0 million, or $0.14 per diluted share, for the three month period ended June 30, 2021, compared to net income of $6.5 million, or $0.30 per
diluted share, for the three month period ended June 30, 2020. The Company had net income of $2.5 million, or $0.11 per diluted share, for the six month period ended June 30, 2021, compared to net loss of $1.6 million, or $0.09 per diluted share,
for the six month period ended June 30, 2020. For the three month period ended June 30, 2021, premium revenue decreased $1.4 million, or 2.9%, to $45.1 million from $46.5 million in the comparable period in 2020. For the six month period ended
June 30, 2021, premium revenue decreased $0.8 million, or 0.9%, to $91.2 million from $92.0 million in the comparable period in 2020. The decrease in premium revenue was primarily attributable to a decrease in the Medicare supplement line of
business in the life and health operations.
Operating income decreased $7.2 million in the three month period ended June 30, 2021 from the three month period ended June 30, 2020. For the six month period ended June 30, 2021, operating income decreased $6.6
million from the comparable period in 2020. The decrease in operating income was primarily due to less favorable loss experience in the life and health operations, resulting from a significant increase in the number of incurred claims within the
Medicare supplement line of business. During 2021, utilization of Medicare supplement insurance benefits has increased, returning to historical averages relative to the exceptionally low utilization experienced after the onset of the COVID-19
pandemic when many policyholders were sheltered in place.
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, 2021 and the comparable periods in 2020:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Gross written premiums
|
|
$
|
33,053
|
|
|
$
|
33,320
|
|
|
$
|
44,515
|
|
|
$
|
42,938
|
|
Ceded premiums
|
|
|
(1,565
|
)
|
|
|
(1,451
|
)
|
|
|
(3,249
|
)
|
|
|
(2,845
|
)
|
Net written premiums
|
|
$
|
31,488
|
|
|
$
|
31,869
|
|
|
$
|
41,266
|
|
|
$
|
40,093
|
|
Net earned premiums
|
|
$
|
16,362
|
|
|
$
|
15,824
|
|
|
$
|
32,977
|
|
|
$
|
30,746
|
|
Insurance benefits and losses incurred
|
|
|
10,157
|
|
|
|
10,021
|
|
|
|
21,906
|
|
|
|
19,555
|
|
Commissions and underwriting expenses
|
|
|
5,293
|
|
|
|
4,788
|
|
|
|
9,579
|
|
|
|
9,602
|
|
Underwriting income
|
|
$
|
912
|
|
|
$
|
1,015
|
|
|
$
|
1,492
|
|
|
$
|
1,589
|
|
Loss ratio
|
|
|
62.1
|
%
|
|
|
63.3
|
%
|
|
|
66.4
|
%
|
|
|
63.6
|
%
|
Expense ratio
|
|
|
32.3
|
|
|
|
30.3
|
|
|
|
29.0
|
|
|
|
31.2
|
|
Combined ratio
|
|
|
94.4
|
%
|
|
|
93.6
|
%
|
|
|
95.4
|
%
|
|
|
94.8
|
%
|
Gross written premiums at American Southern decreased $0.3 million, or 0.8%, during the three month period ended June 30, 2021 and increased $1.6 million, or 3.7%, during the six month period ended
June 30, 2021, from the comparable periods in 2020. The decrease in gross written premiums during the three month period ended June 30, 2021 was primarily due to decreases in the automobile liability line of business resulting from a decline in
gross premiums written within a certain agency, as well as retro premium adjustments. The increase in gross written premiums during the six month period ended June 30, 2021 was primarily attributable to an increase in premiums written in the
automobile physical damage line of business from existing agencies, as well as an increase in gross written premiums in the general liability line of business as a result of a new program that started in the second half of 2020. Partially
offsetting the increase was a decline in premiums written in the automobile liability line of business as previously discussed.
Ceded premiums increased $0.1 million, or 7.9%, during the three month period ended June 30, 2021 and $0.4 million, or 14.2%, during the six month period ended June 30, 2021, from the comparable
periods in 2020. American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally increase or decrease as earned premiums increase or decrease. Also contributing to the increase in ceded premiums in 2021
was an increase in earned premiums and reinsurance rates 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 six month periods ended June 30, 2021 and the comparable periods in 2020:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Automobile liability
|
|
$
|
7,276
|
|
|
$
|
8,223
|
|
|
$
|
15,013
|
|
|
$
|
15,363
|
|
Automobile physical damage
|
|
|
5,483
|
|
|
|
4,472
|
|
|
|
11,017
|
|
|
|
9,020
|
|
General liability
|
|
|
1,424
|
|
|
|
888
|
|
|
|
2,677
|
|
|
|
1,739
|
|
Surety
|
|
|
1,327
|
|
|
|
1,441
|
|
|
|
2,644
|
|
|
|
3,046
|
|
Other lines
|
|
|
852
|
|
|
|
800
|
|
|
|
1,626
|
|
|
|
1,578
|
|
Total
|
|
$
|
16,362
|
|
|
$
|
15,824
|
|
|
$
|
32,977
|
|
|
$
|
30,746
|
|
Net earned premiums increased $0.5 million, or 3.4%, during the three month period ended June 30, 2021, and $2.2 million, or 7.3%, during the six month period ended June 30, 2021, over the
comparable periods in 2020. The increase in net earned premiums was primarily attributable to an increase in automobile physical damage coverage resulting from existing agencies and an increase in general liability as a result of a new program 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 $0.1 million, or 1.4%, during the three month period ended June 30, 2021, and increased $2.4 million, or 12.0%, during the six
month period ended June 30, 2021, over the comparable periods in 2020. As a percentage of earned premiums, insurance benefits and losses incurred were 62.1% in the three month period ended June 30, 2021, compared to 63.3% in the three month period
ended June 30, 2020. For the six month period ended June 30, 2021, this ratio increased to 66.4% from 63.6% in the comparable period in 2020. The decrease in the loss ratio during the three month period ended June 30, 2021 was primarily
attributable to an increase in earned premiums in the general liability line of business. The increase in the loss ratio during the six month period ended June 30, 2021 was mainly due to an increase in the frequency of claims in the automobile
physical damage line of business, as well as in the inland marine segment of the other line of business.
Commissions and underwriting expenses increased $0.5 million, or 10.5%, during the three month period ended June 30, 2021, and remained consistent during the six month period ended June 30, 2021,
over the comparable periods in 2020. As a percentage of earned premiums, underwriting expenses were 32.3% in the three month period ended June 30, 2021, compared to 30.3% in the three month period ended June 30, 2020. For the six month period ended
June 30, 2021, this ratio decreased to 29.0% from 31.2% in the comparable period in 2020. The increase in the expense ratio during the three month period ended June 30, 2021 and the decrease in the expense ratio during the six month period ended
June 30, 2021 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.
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, 2021 and the comparable periods in
2020:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(Dollars in thousands)
|
|
Medicare supplement
|
|
$
|
40,866
|
|
|
$
|
43,787
|
|
|
$
|
81,858
|
|
|
$
|
88,102
|
|
Other health products
|
|
|
2,368
|
|
|
|
2,311
|
|
|
|
4,755
|
|
|
|
4,495
|
|
Life insurance
|
|
|
2,450
|
|
|
|
2,557
|
|
|
|
5,337
|
|
|
|
4,814
|
|
Gross earned premiums
|
|
|
45,684
|
|
|
|
48,655
|
|
|
|
91,950
|
|
|
|
97,411
|
|
Ceded premiums
|
|
|
(16,913
|
)
|
|
|
(17,980
|
)
|
|
|
(33,704
|
)
|
|
|
(36,108
|
)
|
Net earned premiums
|
|
|
28,771
|
|
|
|
30,675
|
|
|
|
58,246
|
|
|
|
61,303
|
|
Insurance benefits and losses incurred
|
|
|
21,546
|
|
|
|
17,055
|
|
|
|
43,069
|
|
|
|
41,104
|
|
Commissions and underwriting expenses
|
|
|
8,756
|
|
|
|
7,778
|
|
|
|
18,640
|
|
|
|
17,382
|
|
Total expenses
|
|
|
30,302
|
|
|
|
24,833
|
|
|
|
61,709
|
|
|
|
58,486
|
|
Underwriting income (loss)
|
|
$
|
(1,531
|
)
|
|
$
|
5,842
|
|
|
$
|
(3,463
|
)
|
|
$
|
2,817
|
|
Loss ratio
|
|
|
74.9
|
%
|
|
|
55.6
|
%
|
|
|
73.9
|
%
|
|
|
67.1
|
%
|
Expense ratio
|
|
|
30.4
|
|
|
|
25.4
|
|
|
|
32.0
|
|
|
|
28.4
|
|
Combined ratio
|
|
|
105.3
|
%
|
|
|
81.0
|
%
|
|
|
105.9
|
%
|
|
|
95.5
|
%
|
Net earned premium revenue at Bankers Fidelity decreased $1.9 million, or 6.2%, during the three month period ended June 30, 2021, and $3.1 million, or 5.0%, during the six month period ended June
30, 2021, from the comparable periods in 2020. Gross earned premiums from the Medicare supplement line of business decreased $2.9 million, or 6.7%, during the three month period ended June 30, 2021, and $6.2 million, or 7.1%, during the six month
period ended June 30, 2021, due primarily to non-renewals exceeding the level of new business writings. Other health product premiums increased $0.1 million, or 2.5%, during the three month period ended June 30, 2021, and $0.3 million, or 5.8%,
during the six month period ended June 30, 2021, over the comparable periods in 2020, primarily as a result of new sales of the company’s group health products. Gross earned premiums from the life insurance line of business decreased $0.1 million,
or 4.2%, during the three month period ended June 30, 2021, due to 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. Gross earned premiums from the life insurance line of business increased $0.5 million, or 10.9%, during the six month period ended June 30, 2021 over the comparable periods in 2020 due to an increase in the group life products premium,
partially offset by a decrease in individual life products premium as previously mentioned. Premiums ceded decreased $1.1 million, or 5.9%, during the three month period ended June 30, 2021 and $2.4 million, or 6.7%, during the six month period
ended June 30, 2021, over the comparable periods in 2020. The decrease in ceded premiums for the three month and six month periods ended June 30, 2021 was due to a decrease in Medicare supplement premiums subject to reinsurance.
Insurance benefits and losses incurred increased $4.5 million, or 26.3%, during the three month period ended June 30, 2021, and $2.0 million, or 4.8%, during the six month period ended June 30,
2021, from the comparable periods in 2020. As a percentage of earned premiums, benefits and losses were 74.9% in the three month period ended June 30, 2021, compared to 55.6% in the three month period ended June 30, 2020. For the six month period
ended June 30, 2021, this ratio increased to 73.9% from 67.1% in the comparable period in 2020. The increase in the loss ratio for the three month and six month periods ended June 30, 2021 was primarily due to an increase in the number of claims
incurred in the Medicare supplement line of business. During 2021, utilization of Medicare supplement insurance benefits has increased, returning to historical averages relative to the exceptionally low utilization experienced after the onset of
the COVID-19 pandemic when many policyholders were sheltered in place.
Commissions and underwriting expenses increased $1.0 million, or 12.6%, during the three month period ended June 30, 2021, and $1.3 million, or 7.2%, during the six month period ended June 30,
2021, over the comparable periods in 2020. As a percentage of earned premiums, underwriting expenses were 30.4% in the three month period ended June 30, 2021, compared to 25.4% in the three month period ended June 30, 2020. For the six month
period ended June 30, 2021, this ratio increased to 32.0% from 28.4% in the comparable period in 2020. The increase in the expense ratio for the three month and six month periods ended June 30, 2021 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 2021 is primarily due to non-renewals exceeding the level of new business writings in the Medicare supplement line of business, as
previously mentioned. Partially offsetting the increase in the expense ratio was a decrease in expenses related to servicing the Medicare supplement line of business.
Net Investment Income and Realized Gains (Losses)
Investment income increased $0.4 million, or 22.5%, during the three month period ended June 30, 2021, and $0.5 million, or 12.6%, during the six month period ended June 30, 2021, over the
comparable periods in 2020. The increase in investment income was attributable to an increase in the equity in earnings from investments in the Company's limited partnerships and limited liability companies of $0.3 million and $0.4 million,
respectively.
The Company had net realized investment gains of $0.1 million during the three month period ended June 30, 2021, compared to no realized investment gains during the three month period ended June
30, 2020. The Company had net realized investment gains of $0.2 million in each of the six month periods ended June 30, 2021 and 2020. The net realized investment gains during the three month and six month periods ended June 30, 2021 resulted
primarily from the disposition of several of the Company’s investments in fixed maturity 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 gains on equity securities of $4.0 million during the three month period ended June 30, 2021 and unrealized gains on equity securities of $1.4 million during the three month period ended June 30, 2020. The Company
recognized net unrealized gains on equity securities of $4.7 million during the six month period ended June 30, 2021 and unrealized losses on equity securities of $7.1 million during the six month period ended June 30, 2020. Changes in unrealized
gains on equity securities for the applicable periods are primarily the result of fluctuations in the market value of certain of the Company’s equity securities.
Interest Expense
Interest expense decreased $0.1 million, or 16.2%, during the three month period ended June 30, 2021, and $0.2 million, or 22.1%, during the six month period ended June 30, 2021, from the
comparable periods in 2020. 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
June 30, 2021, the Parent had approximately $3.9 million of unrestricted cash and investments.
The Parent’s insurance subsidiaries reported statutory net income of $1.5 million for the six month period ended June 30, 2021, compared to statutory net income of $4.7 million for the six month
period ended June 30, 2020. 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, 2021, American Southern had $50.0 million of statutory capital and surplus and Bankers Fidelity had $41.7 million of statutory capital and surplus. In 2021,
dividend payments by the Parent’s insurance subsidiaries in excess of $9.6 million would require prior approval. Through June 30, 2021, the Parent received dividends of $5.4 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 June 30, 2021, the effective interest rate was 4.20%.
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, 2021,
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, 2021, 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, 2021, 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 established initial credit availability of five percent of statutory admitted assets, or approximately $8 million. Additional FHLB stock
purchases may be required based upon the amount of funds borrowed from the FHLB. BFLIC would be required to post acceptable forms of collateral for any borrowings it makes from the FHLB. As of June 30, 2021, BFLIC does not have any outstanding
borrowings from the FHLB.
See Note 6 of the Notes to Condensed Consolidated Financial Statements for a discussion of the Company’s available credit
under its new revolving credit facility.
Cash and cash equivalents decreased from $19.3 million at December 31, 2020 to $9.5 million at June 30, 2021. The decrease in cash and cash equivalents during the six month period ended June 30,
2021 was primarily attributable to net cash used in operating activities of $13.9 million. Partially offsetting the cash used in operating activities was net cash provided by investing activities of $4.5 million 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.
Expected Impact of COVID-19 on the Company’s Financial Condition and Results of Operations
The duration and ultimate impact of the COVID-19 pandemic remains 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 has been volatility in the fair value of the Company’s fixed maturity and equity investments due to disruption in the financial markets.
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. However, the Company expects the aforementioned decline in usage to be temporary in nature.
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. 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 an economic slowdown related to the COVID-19 pandemic and individual, business and government
responses thereto, 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, due to the Company's individual policyholders being subject to
various degrees of shelter in place orders, the Company has experienced lower utilization of certain accident and health benefits, particularly in the Medicare supplement line of business. As a result, and although the ultimate 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.
In addition to the information set forth in this report, you should carefully consider the discussions of the COVID-19 pandemic and related economic developments presented in our Annual Report on
Form 10-K for the year ended December 31, 2020, and in other reports we file with the SEC from time to time, all of which could materially affect our business, financial condition or future results.