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 six month periods ended June 30, 2018. 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, 2017 (the “2017 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 Company’s 2017 Annual Report. Except as disclosed in Note 2, the Company’s critical accounting policies are consistent with those disclosed in the Company’s 2017 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, 2018 and the comparable periods in 2017:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Insurance premiums
|
|
$
|
42,845
|
|
|
$
|
40,120
|
|
|
$
|
85,047
|
|
|
$
|
80,902
|
|
Investment income
|
|
|
2,537
|
|
|
|
2,085
|
|
|
|
4,896
|
|
|
|
4,244
|
|
Realized investment gains (losses), net
|
|
|
(57
|
)
|
|
|
1,396
|
|
|
|
313
|
|
|
|
2,279
|
|
Unrealized gains (losses) on equity securities, net
|
|
|
4,089
|
|
|
|
-
|
|
|
|
(330
|
)
|
|
|
-
|
|
Other income
|
|
|
29
|
|
|
|
31
|
|
|
|
57
|
|
|
|
66
|
|
Total revenue
|
|
|
49,443
|
|
|
|
43,632
|
|
|
|
89,983
|
|
|
|
87,491
|
|
Insurance benefits and losses incurred
|
|
|
32,219
|
|
|
|
27,032
|
|
|
|
65,391
|
|
|
|
57,029
|
|
Commissions and underwriting expenses
|
|
|
9,715
|
|
|
|
11,010
|
|
|
|
19,734
|
|
|
|
21,624
|
|
Other expense
|
|
|
2,970
|
|
|
|
2,981
|
|
|
|
6,208
|
|
|
|
6,167
|
|
Interest expense
|
|
|
506
|
|
|
|
424
|
|
|
|
968
|
|
|
|
833
|
|
Total benefits and expenses
|
|
|
45,410
|
|
|
|
41,447
|
|
|
|
92,301
|
|
|
|
85,653
|
|
Income (loss) before income taxes
|
|
$
|
4,033
|
|
|
$
|
2,185
|
|
|
$
|
(2,318
|
)
|
|
$
|
1,838
|
|
Net income (loss)
|
|
$
|
3,185
|
|
|
$
|
1,460
|
|
|
$
|
(1,839
|
)
|
|
$
|
1,239
|
|
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 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, 2018 and the comparable period in 2017 is as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
Reconciliation of Non-GAAP Financial Measure
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
3,185
|
|
|
$
|
1,460
|
|
|
$
|
(1,839
|
)
|
|
$
|
1,239
|
|
Income tax expense (benefit)
|
|
|
848
|
|
|
|
725
|
|
|
|
(479
|
)
|
|
|
599
|
|
Realized investment (gains) losses, net
|
|
|
57
|
|
|
|
(1,396
|
)
|
|
|
(313
|
)
|
|
|
(2,279
|
)
|
Unrealized (gains) losses on equity securities, net
|
|
|
(4,089
|
)
|
|
|
-
|
|
|
|
330
|
|
|
|
-
|
|
Operating income (loss)
|
|
$
|
1
|
|
|
$
|
789
|
|
|
$
|
(2,301
|
)
|
|
$
|
(441
|
)
|
On a consolidated basis, the Company had net income of $3.2 million, or $0.15 per diluted share, for the three month period ended June 30, 2018, compared to net income of $1.5 million, or $0.07 per diluted share, for the three month period ended June 30, 2017. The Company had a net loss of $1.8 million, or $0.10 per diluted share, for the six month period ended June 30, 2018, compared to net income of $1.2 million, or $0.05 per diluted share, for the six month period ended June 30, 2017. Premium revenue for the three month period ended June 30, 2018 increased $2.7 million, or 6.8%, to $42.8 million from $40.1 million in the three month period ended June 30, 2017. For the six month period ended June 30, 2018, premium revenue increased $4.1 million, or 5.1%, to $85.0 million from $80.9 million in the comparable 2017 period. The increase in premium revenue for the three month and six month periods ended June 30, 2018 was primarily attributable to an increase in Medicare supplement business in the life and health operations. Operating income decreased $0.8 million in the three month period ended June 30, 2018 from the three month period ended June 30, 2017. For the six month period ended June 30, 2018, the operating loss increased $1.9 million over the comparable period in 2017. The change in operating income (loss) during the three month and six month periods ended June 30, 2018 was primarily due to unfavorable loss experience in both the property and casualty and the life and health operations. Partially offsetting the increase in operating loss for the three month and six month periods ended June 30, 2018 was an increase in investment income attributable to an increase in the equity in earnings from investments in real estate partnerships during the three month and six month periods ended June 30, 2018 of $0.4 million and $0.6 million, respectively, over the comparable periods of 2017.
A more detailed analysis of the individual operating companies 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, 2018 and the comparable periods in 2017:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Gross written premiums
|
|
$
|
28,501
|
|
|
$
|
29,688
|
|
|
$
|
35,342
|
|
|
$
|
36,985
|
|
Ceded premiums
|
|
|
(1,228
|
)
|
|
|
(1,205
|
)
|
|
|
(2,431
|
)
|
|
|
(2,354
|
)
|
Net written premiums
|
|
$
|
27,273
|
|
|
$
|
28,483
|
|
|
$
|
32,911
|
|
|
$
|
34,631
|
|
Net earned premiums
|
|
$
|
13,542
|
|
|
$
|
13,131
|
|
|
$
|
26,249
|
|
|
$
|
26,222
|
|
Net loss and loss adjustment expenses
|
|
|
8,695
|
|
|
|
7,932
|
|
|
|
17,872
|
|
|
|
16,216
|
|
Underwriting expenses
|
|
|
4,019
|
|
|
|
4,191
|
|
|
|
7,406
|
|
|
|
8,058
|
|
Underwriting income
|
|
$
|
828
|
|
|
$
|
1,008
|
|
|
$
|
971
|
|
|
$
|
1,948
|
|
Loss ratio
|
|
|
64.2
|
%
|
|
|
60.4
|
%
|
|
|
68.1
|
%
|
|
|
61.8
|
%
|
Expense ratio
|
|
|
29.7
|
|
|
|
31.9
|
|
|
|
28.2
|
|
|
|
30.7
|
|
Combined ratio
|
|
|
93.9
|
%
|
|
|
92.3
|
%
|
|
|
96.3
|
%
|
|
|
92.5
|
%
|
Gross written premiums at American Southern decreased $1.2 million, or 4.0%, during the three month period ended June 30, 2018, and $1.6 million, or 4.4%, during the six month period ended June 30, 2018, from the comparable periods in 2017. The decrease in gross written premiums for the three month and six month periods ended June 30, 2018 was primarily attributable to a decline in premiums written in the surety line of business as a result of increased competition. Also contributing to the decrease in gross written premiums for the six month period ended June 30, 2018 was the non-renewal of one agency during the first quarter.
Ceded premiums increased slightly during the three month period ended June 30, 2018 and $0.1 million, or 3.3%, during the six month period ended June 30, 2018, over the comparable periods in 2017 due primarily to an increase in earned premiums in certain accounts within the automobile liability and automobile physical damage lines of business, which are subject to reinsurance. Also contributing to the increase was a slight reinsurance rate increase in the automobile liability line of business.
The following presents American Southern’s net earned premiums by line of business for the three month and six month periods ended June 30, 2018 and the comparable periods in 2017 (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Automobile liability
|
|
$
|
7,380
|
|
|
$
|
6,804
|
|
|
$
|
14,245
|
|
|
$
|
14,132
|
|
Automobile physical damage
|
|
|
2,897
|
|
|
|
2,629
|
|
|
|
5,352
|
|
|
|
4,873
|
|
General liability
|
|
|
715
|
|
|
|
736
|
|
|
|
1,453
|
|
|
|
1,466
|
|
Surety
|
|
|
1,778
|
|
|
|
2,241
|
|
|
|
3,712
|
|
|
|
4,327
|
|
Other lines
|
|
|
772
|
|
|
|
721
|
|
|
|
1,487
|
|
|
|
1,424
|
|
Total
|
|
$
|
13,542
|
|
|
$
|
13,131
|
|
|
$
|
26,249
|
|
|
$
|
26,222
|
|
Net earned premiums increased $0.4 million, or 3.1%, during the three month period ended June 30, 2018, and increased slightly during the six month period ended June 30, 2018, over the comparable periods in 2017. The increase in net earned premiums for the three month and six month periods ended June 30, 2018 was primarily attributable to increases in the automobile liability and automobile physical damage lines of businesses. Partially offsetting this variance was a decline in premiums written in the surety line of business, as discussed above. 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 $0.8 million, or 9.6%, during the three month period ended June 30, 2018, and $1.7 million, or 10.2%, during the six month period ended June 30, 2018, over the comparable periods in 2017. As a percentage of earned premiums, net loss and loss adjustment expenses were 64.2% in the three month period ended June 30, 2018, compared to 60.4% in the three month period ended June 30, 2017. For the six month period ended June 30, 2018, this ratio increased to 68.1% from 61.8% in the comparable period of 2017. The increase in the loss ratio was primarily due to an increase in the frequency and severity of claims in the automobile liability and automobile physical damage lines of business during the three month and six month periods ended June 30, 2018. Partially offsetting the increase in the loss ratio during the three month and six month periods ended June 30, 2018 was more favorable loss experience in the general liability line of business.
Underwriting expenses decreased $0.2 million, or 4.1%, during the three month period ended June 30, 2018 from the three month period ended June 30, 2017, and $0.7 million, or 8.1%, during the six month period ended June 30, 2018, from the comparable period in 2017. As a percentage of earned premiums, underwriting expenses were 29.7% in the three month period ended June 30, 2018, compared to 31.9% in the three month period ended June 30, 2017. For the six month period ended June 30, 2018, this ratio decreased to 28.2% from 30.7% in the comparable period of 2017. The change in the expense ratio for the three month and six month periods ended June 30, 2018 was primarily due to American Southern’s use of a variable commission structure with certain agents, which compensates the participating agents in relation to the loss ratios of the business they write. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease. During the three month and six month periods ended June 30, 2018, variable commissions at American Southern decreased $0.1 million and $0.4 million, respectively, from the comparable periods in 2017 due to less favorable loss experience from accounts subject to variable commissions. Also contributing to the decrease in variable commissions was a decline in premiums written in the surety line of business during the three month period ended June 30, 2018.
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, 2018 and the comparable periods in 2017:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Medicare supplement
|
|
$
|
25,313
|
|
|
$
|
22,794
|
|
|
$
|
50,669
|
|
|
$
|
46,645
|
|
Other health products
|
|
|
1,745
|
|
|
|
1,644
|
|
|
|
3,591
|
|
|
|
3,108
|
|
Life insurance
|
|
|
2,245
|
|
|
|
2,551
|
|
|
|
4,538
|
|
|
|
4,927
|
|
Total earned premiums
|
|
|
29,303
|
|
|
|
26,989
|
|
|
|
58,798
|
|
|
|
54,680
|
|
Insurance benefits and losses
|
|
|
23,524
|
|
|
|
19,100
|
|
|
|
47,519
|
|
|
|
40,813
|
|
Underwriting expenses
|
|
|
7,857
|
|
|
|
8,837
|
|
|
|
16,509
|
|
|
|
17,495
|
|
Total expenses
|
|
|
31,381
|
|
|
|
27,937
|
|
|
|
64,028
|
|
|
|
58,308
|
|
Underwriting loss
|
|
$
|
(2,078
|
)
|
|
$
|
(948
|
)
|
|
$
|
(5,230
|
)
|
|
$
|
(3,628
|
)
|
Loss ratio
|
|
|
80.3
|
%
|
|
|
70.8
|
%
|
|
|
80.8
|
%
|
|
|
74.6
|
%
|
Expense ratio
|
|
|
26.8
|
|
|
|
32.7
|
|
|
|
28.1
|
|
|
|
32.0
|
|
Combined ratio
|
|
|
107.1
|
%
|
|
|
103.5
|
%
|
|
|
108.9
|
%
|
|
|
106.6
|
%
|
Premium revenue at Bankers Fidelity increased $2.3 million, or 8.6%, during the three month period ended June 30, 2018, and $4.1 million, or 7.5%, during the six month period ended June 30, 2018, over the comparable periods in 2017. Premiums from the Medicare supplement line of business increased $2.5 million, or 11.1%, during the three month period ended June 30, 2018, and $4.0 million, or 8.6%, during the six month period ended June 30, 2018, due primarily to successful execution of new business generating strategies with both new and existing agents. Other health product premiums increased $0.1 million and $0.5 million, respectively, during the same comparable periods, primarily as a result of new sales of the company’s hospital indemnity, disability income and group health products. Premiums from the life insurance line of business decreased $0.3 million, or 12.0%, during the three month period ended June 30, 2018, and $0.4 million, or 7.9%, during the six month period ended June 30, 2018 from the comparable 2017 periods due to the redemption and settlement of existing policy obligations exceeding the level of new sales activity. Premiums ceded during the three month periods ended June 30, 2018 and 2017 were approximately $15.0 million and $7.2 million, respectively. For the six month periods ended June 30, 2018 and 2017, premiums ceded were approximately $28.8 million and $11.1 million, respectively. The increase in ceded premiums for the three month and six month periods ended June 30, 2018 was due to a significant increase in Medicare supplement gross earned premiums subject to the reinsurance agreement.
Benefits and losses increased $4.4 million, or 23.2%, during the three month period ended June 30, 2018, and $6.7 million, or 16.4%, during the six month period ended June 30, 2018, over the comparable periods in 2017. As a percentage of earned premiums, benefits and losses were 80.3% in the three month period ended June 30, 2018, compared to 70.8% in the three month period ended June 30, 2017. For the six month period ended June 30, 2018, this ratio increased to 80.8% from 74.6% in the comparable period of 2017. The increase in the loss ratio for the three month and six month periods ended June 30, 2018 was primarily attributable to unfavorable loss experience in the Medicare supplement line of business. Throughout 2017 and continuing into the six month period ended June 30, 2018, 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 decreased $1.0 million, or 11.1%, during the three month period ended June 30, 2018 and $1.0 million, or 5.6%, during the six month period ended June 30, 2018, from the comparable periods in 2017. As a percentage of earned premiums, underwriting expenses were 26.8% in the three month period ended June 30, 2018, compared to 32.7% in the three month period ended June 30, 2017. For the six month period ended June 30, 2018, this ratio decreased to 28.1% from 32.0% in the comparable period of 2017. The decrease in the expense ratio for the three month and six month periods ended June 30, 2018 was primarily due to the increase in earned premiums coupled with a relatively consistent level of fixed general and administrative expenses. Also contributing to the decrease in the expense ratio was a reinsurance expense-reimbursement allowance associated with the reinsurance agreement, which reimbursed the company for a portion of its indirect underwriting expenses.
INVESTMENT INCOME AND REALIZED GAINS
Investment income increased $0.5 million, or 21.7%, during the three month period ended June 30, 2018, and $0.7 million, or 15.4%, during the six month period ended June 30, 2018, over the comparable periods in 2017. The increase in investment income was primarily attributable to an increase in the equity in earnings from investments in real estate partnerships during the three month and six month periods ended June 30, 2018 of $0.4 million and $0.6 million, respectively, over the comparable periods of 2017.
The Company had net realized investment losses of $0.1 million during the three month period ended June 30, 2018, compared to net realized investment gains of $1.4 million in the three month period ended June 30, 2017. The Company had net realized investment gains of $0.3 million during the six month period ended June 30, 2018, compared to net realized investment gains of $2.3 million in the six month period ended June 30, 2017. The net realized investment losses in the three month period ended June 30, 2018 resulted from the disposition of certain of the Company’s investments in fixed maturities in the financial services sector. The net realized investment gains in the six month period ended June 30, 2018 resulted from the disposition of several of the Company’s investments in fixed maturities. The net realized investment gains in the three month and six month periods ended June 30, 2017 were primarily attributable to gains from the sale of certain equity securities and a number of the Company’s investments in fixed maturities. Management continually evaluates the Company’s investment portfolio and, as may be determined to be appropriate, makes adjustments for impairments and/or will divest investments.
UNREALIZED LOSSES ON EQUITY SECURITIES
As described in Note 2 of the Condensed Consolidated Financial Statements, 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 during the period, with certain exceptions. As a result of the adoption of ASU No. 2016-01, the Company recognized net unrealized gains on equity securities still held of $4.1 million during the three month period ended June 30, 2018 and unrealized losses on equity securities still held of $0.3 million during the six month period ended June 30, 2018. In accordance with then-applicable accounting guidance, the Company recognized changes in the fair value of equity securities then held through other comprehensive income during the three month and six month periods ended June 30, 2017.
INTEREST EXPENSE
Interest expense increased $0.1 million, or 19.3%, during the three month period ended June 30, 2018, and $0.1 million, or 16.2%, during the six month period ended June 30, 2018, over the comparable periods in 2017. The increase in interest expense for the three month and six month periods ended June 30, 2018 was due to an increase 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) decreased $1.3 million, or 9.3%, during the three month period ended June 30, 2018, and $1.8 million, or 6.7%, during the six month period ended June 30, 2018, from the comparable periods in 2017. The decrease in other expenses for the three month and six month periods ended June 30, 2018 was primarily attributable to a reinsurance expense-reimbursement allowance associated with the reinsurance agreement in the life and health operations, which reimbursed a portion of the Company’s indirect underwriting expenses. Also contributing to the decrease in other expenses for the three month and six month periods ended June 30, 2018 was a decrease of $0.1 million and $0.4 million, respectively, in the variable commission accrual in the property and casualty operations. On a consolidated basis, as a percentage of earned premiums, other expenses decreased to 29.6% in the three month period ended June 30, 2018 from 34.9% in the three month period ended June 30, 2017. For the six month period ended June 30, 2018, this ratio decreased to 30.5% from 34.4% in the comparable period of 2017. The decrease in the expense ratio for the three month and six month periods ended June 30, 2018 was primarily attributable to the increase in earned premiums coupled with a lower level of general and administrative expenses and the decrease in the variable commission accrual.
INCOME TAXES
The primary difference between the effective tax rate and the federal statutory income tax rate for the three month and six month periods ended June 30, 2018 resulted from the dividends-received deduction (“DRD”). The current estimated DRD is adjusted as underlying factors change and can vary from estimates based on, but not limited to, actual distributions from investments as well as the amount of the Company’s taxable income.
The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and six month periods ended June 30, 2017 resulted from the DRD in addition to the small life insurance company deduction (“SLD”), which was subsequently repealed by tax reform enacted on December 22, 2017. Under the then-applicable tax rules, the SLD varied in amount and was determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”). The SLD for any taxable year was reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeded $3.0 million and was ultimately phased out at $15.0 million.
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, 2018, the Parent had approximately $17.7 million of unrestricted cash and investments.
The Parent’s insurance subsidiaries reported statutory net loss of $1.0 million for the six month period ended June 30, 2018 compared to statutory net income of $0.5 million for the six month period ended June 30, 2017. 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, 2018, American Southern had $43.9 million of statutory surplus and Bankers Fidelity had $31.7 million of statutory surplus. In 2018, dividend payments by the Parent’s insurance subsidiaries in excess of $4.8 million would require prior approval. Through June 30, 2018, the Parent received dividends of $2.4 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, 2018, the effective interest rate was 6.39%. 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. 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 June 30, 2018, 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, 2018, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.2 million.
Cash and cash equivalents decreased from $24.5 million at December 31, 2017 to $7.5 million at June 30, 2018. The decrease in cash and cash equivalents during the six month period ended June 30, 2018 was primarily attributable to net cash used in operating activities of $6.4 million, a $9.5 million decrease resulting from investment purchases exceeding the sale and maturity of securities and the purchase of shares for treasury for $0.6 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.