As of December 31, 2018, financial instruments carried at fair value were measured on a recurring basis as summarized below:
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 period ended March 31, 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 period ended March 31, 2019 and the
comparable period in 2018:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Insurance premiums
|
|
$
|
44,782
|
|
|
$
|
42,202
|
|
Net investment income
|
|
|
2,334
|
|
|
|
2,359
|
|
Realized investment gains, net
|
|
|
1,385
|
|
|
|
370
|
|
Unrealized gains (losses) on equity securities, net
|
|
|
6,489
|
|
|
|
(4,419
|
)
|
Other income
|
|
|
28
|
|
|
|
28
|
|
Total revenue
|
|
|
55,018
|
|
|
|
40,540
|
|
Insurance benefits and losses incurred
|
|
|
35,307
|
|
|
|
33,172
|
|
Commissions and underwriting expenses
|
|
|
11,015
|
|
|
|
10,019
|
|
Interest expense
|
|
|
546
|
|
|
|
462
|
|
Other expense
|
|
|
2,865
|
|
|
|
3,238
|
|
Total benefits and expenses
|
|
|
49,733
|
|
|
|
46,891
|
|
Income (loss) before income taxes
|
|
$
|
5,285
|
|
|
$
|
(6,351
|
)
|
Net income (loss)
|
|
$
|
4,162
|
|
|
$
|
(5,024
|
)
|
Management also considers and evaluates performance by analyzing the non-GAAP measure operating income (loss), and believes it is a
useful metric for investors, potential investors, securities analysts and others because it isolates the “core” operating results of the Company before considering certain items that are either beyond the control of management (such as taxes,
which are subject to timing, regulatory and rate changes depending on the timing of the associated revenues and expenses) or are not expected to regularly impact the Company’s operational results (such as any realized and unrealized investment
gains, which are not a part of the Company’s primary operations and are, to a limited extent, subject to discretion in terms of timing of realization).
A reconciliation of net income (loss) to operating loss for the three month period ended March 31, 2019 and the comparable period in 2018
is as follows:
|
|
Three Months Ended
March 31,
|
|
Reconciliation of Non-GAAP Financial Measure
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
4,162
|
|
|
$
|
(5,024
|
)
|
Income tax benefit (expense)
|
|
|
1,123
|
|
|
|
(1,327
|
)
|
Realized investment gains, net
|
|
|
(1,385
|
)
|
|
|
(370
|
)
|
Unrealized gains (losses) on equity securities, net
|
|
|
(6,489
|
)
|
|
|
4,419
|
|
Non-GAAP operating loss
|
|
$
|
(2,589
|
)
|
|
$
|
(2,302
|
)
|
On a consolidated basis, the Company had net income of $4.2 million, or $0.19 per diluted share, for the three month period ended March
31, 2019, compared to a net loss of $5.0 million, or a loss of $0.25 per diluted share, for the three month period ended March 31, 2018. Premium revenue for the three month period ended March 31, 2019 increased $2.6 million, or 6.1%, to $44.8
million. The increase in premium revenue was primarily attributable
to an increase in Medicare supplement business in the life and health operations. Operating loss increased
$0.3 million in the three month period ended March 31, 2019 over the comparable period of 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 period ended March
31, 2019 and the comparable period in 2018:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
Gross written premiums
|
|
$
|
7,694
|
|
|
$
|
6,841
|
|
Ceded premiums
|
|
|
(1,375
|
)
|
|
|
(1,203
|
)
|
Net written premiums
|
|
$
|
6,319
|
|
|
$
|
5,638
|
|
Net earned premiums
|
|
$
|
13,806
|
|
|
$
|
12,707
|
|
Net loss and loss adjustment expenses
|
|
|
9,043
|
|
|
|
9,177
|
|
Underwriting expenses
|
|
|
4,210
|
|
|
|
3,387
|
|
Underwriting income
|
|
$
|
553
|
|
|
$
|
143
|
|
Loss ratio
|
|
|
65.5
|
%
|
|
|
72.2
|
%
|
Expense ratio
|
|
|
30.5
|
|
|
|
26.7
|
|
Combined ratio
|
|
|
96.0
|
%
|
|
|
98.9
|
%
|
Gross written premiums at American Southern increased $0.9 million, or 12.5%, during the three month period ended March 31, 2019 from the
comparable period 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 14.3%, during the three month period ended March 31, 2019 from the comparable period in 2018
due primarily to an increase in earned premiums in certain accounts within the automobile physical damage and general liability lines of business, which are subject to reinsurance.
The following presents American Southern’s net earned premiums by line of business for the three month period ended March 31, 2019 and
the comparable period in 2018:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Automobile liability
|
|
$
|
7,024
|
|
|
$
|
6,865
|
|
Automobile physical damage
|
|
|
3,602
|
|
|
|
2,455
|
|
General liability
|
|
|
784
|
|
|
|
738
|
|
Surety
|
|
|
1,687
|
|
|
|
1,934
|
|
Other lines
|
|
|
709
|
|
|
|
715
|
|
Total
|
|
$
|
13,806
|
|
|
$
|
12,707
|
|
Net earned premiums increased $1.1 million, or 8.6%, during the three month period ended March 31, 2019 from the comparable period in
2018. The increase in net earned premiums was primarily attributable to an increase in automobile physical damage coverage resulting from the addition of an automobile account as previously mentioned. Premiums are earned ratably over their
respective policy terms, and therefore premiums earned in the current year are related to policies written during both the current year and immediately preceding year.
The performance of an insurance company is often measured by its combined ratio. The combined ratio represents the percentage of losses,
loss adjustment expenses and other expenses that are incurred for each dollar of premium earned by the company. A combined ratio of under 100% represents an underwriting profit while a combined ratio of over 100% indicates an underwriting loss.
The combined ratio is divided into two components, the loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) and the expense ratio (the ratio of expenses incurred to premiums earned).
Net loss and loss adjustment expenses at American Southern decreased $0.1 million, or 1.5%, during the three month period ended March 31,
2019 from the comparable period in 2018. As a percentage of earned premiums, net loss and loss adjustment expenses were 65.5% in the three month period ended March 31, 2019, compared to 72.2% in the three month period ended March 31, 2018. The
decrease in the loss ratio was primarily due to a decrease in the number of claims in the general liability line of business during the three month period ended March 31, 2019. Partially offsetting the decrease in the loss ratio during the three
month period ended March 31, 2019 was less favorable loss experience in the automobile liability line of business.
Underwriting expenses increased $0.8 million, or 24.3%, during the three month period ended March 31, 2019 from the comparable period in
2018. As a percentage of earned premiums, underwriting expenses were 30.5% in the three month period ended March 31, 2019, compared to 26.7% in the three month period ended March 31, 2018. The increase in the expense ratio was primarily due to
American Southern’s use of a variable commission structure with certain agents, which compensates the participating agents in relation to the loss ratios of the business they write. During the three month period ended March 31, 2019, variable
commissions at American Southern increased $0.5 million from the comparable period in 2018 due to favorable loss experience from accounts subject to variable commissions.
Bankers Fidelity
The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month period ended
March 31, 2019 and the comparable period in 2018:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Medicare supplement
|
|
$
|
44,329
|
|
|
$
|
39,164
|
|
Other health products
|
|
|
1,990
|
|
|
|
1,846
|
|
Life insurance
|
|
|
2,142
|
|
|
|
2,301
|
|
Gross earned premiums
|
|
|
48,461
|
|
|
|
43,311
|
|
Ceded premiums
|
|
|
(17,485
|
)
|
|
|
(13,816
|
)
|
Net earned premiums
|
|
|
30,976
|
|
|
|
29,495
|
|
Insurance benefits and losses
|
|
|
26,264
|
|
|
|
23,995
|
|
Underwriting expenses
|
|
|
8,608
|
|
|
|
8,652
|
|
Total expenses
|
|
|
34,872
|
|
|
|
32,647
|
|
Underwriting loss
|
|
$
|
(3,896
|
)
|
|
$
|
(3,152
|
)
|
Loss ratio
|
|
|
84.8
|
%
|
|
|
81.4
|
%
|
Expense ratio
|
|
|
27.8
|
|
|
|
29.3
|
|
Combined ratio
|
|
|
112.6
|
%
|
|
|
110.7
|
%
|
Net earned premium revenue at Bankers Fidelity increased $1.5 million, or 5.0%, during the three month period ended March 31, 2019 over
the comparable period in 2018. Gross earned premiums from the Medicare supplement line of business increased $5.2 million, or 13.2%, during the three month period ended March 31, 2019, due primarily to successful execution of new business
generating strategies with both new and existing agents. Other health product premiums increased $0.1 million, or 7.8%, during the same comparable period, primarily as 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 6.9%, during the three month period ended March 31, 2019 from the comparable period in 2018 due to the redemption and settlement of existing
policy obligations exceeding the level of new sales activity. Premiums ceded increased $3.7 million, or 26.6%, during the three month period ended March 31, 2019 over the comparable period in 2018. The increase in ceded premiums for the three
month period ended March 31, 2019 was due to a significant increase in Medicare supplement premiums subject to reinsurance.
Benefits and losses increased $2.3 million, or 9.5%, during the three month period ended March 31, 2019 over the comparable period in
2018. As a percentage of earned premiums, benefits and losses were 84.8% in the three month period ended March 31, 2019, compared to 81.4% in the three month period ended March 31, 2018. The increase in the loss ratio for the three month period
ended March 31, 2019 was primarily attributable to unfavorable loss experience in the Medicare supplement line of business. Throughout 2018 and continuing into the three month period ended March 31, 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 decreased slightly during the three month period ended March 31, 2019 from the comparable period in 2018. As a
percentage of earned premiums, underwriting expenses were 27.8% in the three month period ended March 31, 2019, compared to 29.3% in the three month period ended March 31, 2018. The decrease in the expense ratio for the three month period ended
March 31, 2019 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 reinsurance, which reimbursed the Company for a portion of its indirect underwriting expenses.
NET INVESTMENT INCOME AND REALIZED GAINS
Investment income decreased slightly during the three month period ended March 31, 2019 from the comparable period in 2018. The decrease
in investment income was primarily attributable to a slight loss from the equity in earnings from investments in real estate partnerships during the three month period ended March 31, 2019 that did not occur in the comparable 2018 period.
The Company had net realized investment gains of $1.4 million during the three month period ended March 31, 2019, compared to net
realized investment gains of $0.4 million in the three month period ended March 31, 2018. The net realized investment gains in the three month periods ended March 31, 2019 resulted primarily from the disposition of several of the Company’s
investments in equity securities. The net realized investment gains in the three month periods ended March 31, 2018 resulted from the disposition of several of the Company’s investments in 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 $6.5
million during the three month period ended March 31, 2019 and unrealized losses on equity securities still held of $4.4 million during the three month period ended March 31, 2018.
INTEREST EXPENSE
Interest expense increased $0.1 million, or 18.2%, during the three month period ended March 31, 2019 from the comparable period in
2018. The increase in interest expense 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) increased $0.6 million, or 4.7%, during the three month period
ended March 31, 2019 from the comparable period in 2018. The increase in other expenses was primarily attributable to a $0.5 million increase 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 31.0% in the three month period ended March 31, 2019 from 31.4% in the three month period ended March 31, 2018. The decrease in the expense ratio was primarily attributable to the
increase in earned premiums coupled with a lower level of general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and
surplus levels, and meeting debt service requirements. Current and expected patterns of claim frequency and severity may change from period to period but generally are expected to continue within historical ranges. The Company’s primary sources
of cash are written premiums, investment income and proceeds from the sale and maturity of its invested assets. The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities
and that cash inflows from investment earnings, future premium receipts and reinsurance collections will be adequate to fund the payment of claims and operating expenses as needed.
Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the
subsidiaries. The principal cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be
authorized and approved by the Company’s board of directors from time to time. At March 31, 2019, the Parent had approximately $19.9 million of unrestricted cash and investments.
The Parent’s insurance subsidiaries reported a statutory net loss of $0.7 million for the three month period ended March 31, 2019,
compared to statutory net loss of $0.5 million for the three month period ended March 31, 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 March 31, 2019, American Southern had $41.8 million of statutory surplus and Bankers Fidelity
had $30.7 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 March 31, 2019, the Parent received dividends of $1.2 million from its
subsidiaries.
The Parent provides certain administrative and other services to each of its insurance subsidiaries. The amounts charged to and paid by
the subsidiaries include reimbursements for various shared services and other expenses incurred directly on behalf of the subsidiaries by the Parent. In addition, there is in place a formal tax-sharing agreement between the Parent and its
insurance subsidiaries. As a result of the Parent’s tax loss, it is anticipated that the tax-sharing agreement will continue to provide the Parent with additional funds from profitable subsidiaries to assist in meeting its cash flow obligations.
The Company has two statutory trusts which exist for the exclusive purpose of issuing trust preferred securities representing
undivided beneficial interests in the assets of the trusts and investing the gross proceeds of the trust preferred securities in Junior Subordinated Debentures. The outstanding $18.0 million and $15.7 million of Junior Subordinated Debentures
mature on December 4, 2032 and May 15, 2033, respectively, are callable quarterly, in whole or in part, only at the option of the Company, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to
4.10%. At March 31, 2019, the effective interest rate was 6.71%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust’s
obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of
distribution payments on the related trust preferred securities. As of March 31, 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 March 31, 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 March 31, 2019, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling
$0.1 million.
Cash and cash equivalents decreased from $12.6 million at December 31, 2018 to $8.6 million at March 31, 2019. The decrease in
cash and cash equivalents during the three month period ended March 31, 2019 was primarily attributable to net cash used in operating activities of $6.9 million, partially offset by a $3.0 million increase resulting from investment sales and
maturity of securities exceeding purchases of securities.
The Company believes that existing cash balances as well as the dividends, fees, and tax-sharing payments it expects to receive
from its subsidiaries and, if needed, additional borrowings from financial institutions, will enable the Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current recommendations by regulatory
authorities, which, if implemented, would have a material adverse effect on the Company’s liquidity, capital resources or operations.