The assumed conversion of the Company’s Series D preferred stock was excluded from the diluted loss per common share calculation for the three month period ended March 31, 2020, since its impact would have been
antidilutive.
In addition, the Company determined there were no significant tax implications as a result of the CARES Act.
The Company has identified two operating lease agreements, each for the use of office space in the ordinary course of business.
The first lease renews annually on an automatic basis and based on original assumptions, management is reasonably certain to exercise the renewal option for an additional eight years from the January 1, 2019 effective date of the new lease
guidance. The original term of the second lease was ten years and amended in January 2017 to provide for an additional seven years, with a termination date on September 30, 2026. The rate used in determining the present value of lease payments is
based upon an estimate of the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.
These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease. Lease expense reported for the three months ended March 31, 2020 and March 31,
2019 was $254.
Additional information regarding the Company’s real estate operating leases is as follows:
The following table presents maturities and present value of the Company’s lease liabilities:
As of March 31, 2020, the Company has no operating leases that have not yet commenced.
From time to time, the Company is, and expects to continue to be, involved in various claims and lawsuits incidental to and in the ordinary course of its businesses. In the opinion of management, any such known claims
are not expected to have a material effect on the financial condition or results of operations of the Company.
The Parent’s primary insurance subsidiaries, American Southern and Bankers Fidelity, operate in two principal business units, each focusing on specific products. American Southern operates in the property and casualty
insurance market, while Bankers Fidelity operates in the life and health insurance market. Each business unit is managed independently and is evaluated on its individual performance. The following sets forth the assets, revenue and income (loss)
before income taxes for each business unit as of and for the periods ended 2020 and 2019.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with
the Parent, the “Company”) as of and for the three month period ended March 31, 2020. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere herein, as well as
with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”).
Atlantic American is an insurance holding company whose operations are conducted primarily through its insurance subsidiaries: American Southern Insurance Company and American Safety Insurance Company (together known as
“American Southern”) and Bankers Fidelity Life Insurance Company and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”). Each operating company is managed separately, offers different products and is evaluated on its individual
performance.
Recent Events and Outlook
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. In March 2020, the impact of COVID-19 and related actions to attempt to control its spread began to impact our business
operations, and we expect that the pandemic, actions that have been or will be taken in response to it and its overall impact on the economy, will continue to have an effect on our business operations and our operating results. See “Expected Impact
of COVID-19 on the Company’s Financial Condition and Results of Operations.”
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ significantly from those estimates. The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The
Company’s critical accounting policies and the resultant estimates considered most significant by management are disclosed in the 2019 Annual Report. Except as disclosed in Note 2 of Notes to Condensed Consolidated Financial Statements, the Company’s
critical accounting policies are consistent with those disclosed in the 2019 Annual Report.
Overall Corporate Results
The following presents the Company’s revenue, expenses and net income (loss) for the three month period ended March 31, 2020 and the comparable period in 2019:
Management also considers and evaluates performance by analyzing the non-GAAP measure operating income (loss), and believes it is a useful metric for investors, potential investors, securities analysts and others because
it isolates the “core” operating results of the Company before considering certain items that are either beyond the control of management (such as taxes, which are subject to timing, regulatory and rate changes depending on the timing of the
associated revenues and expenses) or are not expected to regularly impact the Company’s operational results (such as any realized and unrealized investment gains, which are not a part of the Company’s primary operations and are, to a limited extent,
subject to discretion in terms of timing of realization).
A reconciliation of net income (loss) to operating loss for the three month period ended March 31, 2020 and the comparable period in 2019 is as follows:
On a consolidated basis, the Company had a net loss of $8.1 million, or $0.40 per diluted share, for the three month period ended March 31, 2020, compared to net income of $4.2 million, or $0.19 per diluted share, for
the three month period ended March 31, 2019. Premium revenue for the three month period ended March 31, 2020 increased $0.8 million, or 1.7%, to $45.6 million. The increase in premium revenue was primarily attributable to an increase in the
automobile physical damage line of business in the property and casualty operations. Operating loss decreased $0.6 million in the three month period ended March 31, 2020 over the comparable period of 2019. The decrease in operating loss was primarily
due to favorable loss experience in the life and health operations.
A more detailed analysis of the individual operating segments and other corporate activities follows.
American Southern
The following summarizes American Southern’s premiums, losses, expenses and underwriting ratios for the three month period ended March 31, 2020 and the comparable period in 2019:
Gross written premiums at American Southern increased $1.9 million, or 25.0%, during the three month period ended March 31, 2020 from the comparable period in 2019. The increase in gross written premiums was primarily
attributable to an increase in premiums written in the automobile physical damage line of business due to a new agency that started in the second half of 2019 and increased writings from certain existing agencies.
Ceded premiums increased slightly during the three month period ended March 31, 2020 from the comparable period in 2019 due primarily to an increase in earned premiums in certain accounts within the automobile physical
damage and general liability lines of business, which are subject to reinsurance.
The following presents American Southern’s net earned premiums by line of business for the three month period ended March 31, 2020 and the comparable period in 2019:
Net earned premiums increased $1.1 million, or 8.1%, during the three month period ended March 31, 2020 from the comparable period in 2019. The increase in net earned premiums was primarily attributable to an increase in
automobile physical damage coverage resulting from the addition of an automobile account as previously mentioned. Premiums are earned ratably over their respective policy terms, and therefore premiums earned in the current year are related to
policies written during both the current year and immediately preceding year.
The performance of an insurance company is often measured by its combined ratio. The combined ratio represents the percentage of losses, loss adjustment expenses and other expenses that are incurred for each dollar of
premium earned by the company. A combined ratio of under 100% represents an underwriting profit while a combined ratio of over 100% indicates an underwriting loss. The combined ratio is divided into two components, the loss ratio (the ratio of losses
and loss adjustment expenses incurred to premiums earned) and the expense ratio (the ratio of expenses incurred to premiums earned).
Net loss and loss adjustment expenses at American Southern increased $0.5 million, or 5.4%, during the three month period ended March 31, 2020 from the comparable period in 2019. As a percentage of earned premiums, net
loss and loss adjustment expenses were 63.9% in the three month period ended March 31, 2020, compared to 65.5% in the three month period ended March 31, 2019. The decrease in the loss ratio was primarily due to a decrease in the severity of claims in
the automobile liability line of business during the three month period ended March 31, 2020. Partially offsetting the decrease in the loss ratio during the three month period ended March 31, 2020 was less favorable loss experience in the automobile
physical damage line of business due to an increase in frequency of claims from the new agency.
Commissions and underwriting expenses increased $0.6 million, or 14.3%, during the three month period ended March 31, 2020 from the comparable period in 2019. As a percentage of earned premiums, underwriting expenses
were 32.3% in the three month period ended March 31, 2020, compared to 30.5% in the three month period ended March 31, 2019. The increase in the expense ratio was primarily due to American Southern’s use of a variable commission structure with
certain agents, which compensates the participating agents in relation to the loss ratios of the business they write. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely,
during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease. During the three month period ended March 31, 2020, variable commissions at American Southern increased $0.1 million from the comparable
period in 2019 due to favorable loss experience from accounts subject to variable commissions.
Bankers Fidelity
The following summarizes Bankers Fidelity’s earned premiums, losses, expenses and underwriting ratios for the three month period ended March 31, 2020 and the comparable period in 2019:
Net earned premium revenue at Bankers Fidelity decreased $0.3 million, or 1.1%, during the three month period ended March 31, 2020 over the comparable period in 2019. Gross earned premiums from the Medicare supplement
line of business decreased slightly during the three month period ended March 31, 2020, due primarily to non-renewals exceeding the level of new business writings. Other health product premiums increased $0.2 million, or 9.7%, during the same
comparable period, primarily as a result of new sales of the company’s group health products. Gross earned premiums from the life insurance line of business increased $0.1 million, or 5.4%, during the three month period ended March 31, 2020 from the
comparable period in 2019 due to an increase in the group life products premium. Partially offsetting the increase in gross earned premiums from the life insurance line was a decrease in individual life products premium, resulting from the redemption
and settlement of existing individual life policy obligations exceeding the level of new individual life sales. Premiums ceded increased $0.6 million, or 3.7%, during the three month period ended March 31, 2020 over the comparable period in 2019. The
increase in ceded premiums for the three month period ended March 31, 2020 was due to an increase in Medicare supplement premiums subject to reinsurance.
Benefits and losses decreased $2.2 million, or 8.4%, during the three month period ended March 31, 2020 over the comparable period in 2019. As a percentage of earned premiums, benefits and losses were 78.5% in the three
month period ended March 31, 2020, compared to 84.8% in the three month period ended March 31, 2019. The decrease in the loss ratio for the three month period ended March 31, 2020 over the comparable period in 2019, was primarily attributable to
favorable loss experience in the Medicare supplement line of business.
Commissions and underwriting expenses increased $1.0 million, or 11.6%, during the three month period ended March 31, 2020 from the comparable period in 2019. As a percentage of earned premiums,
underwriting expenses were 31.4% in the three month period ended March 31, 2020, compared to 27.8% in the three month period ended March 31, 2019. The increase in the expense ratio for the three month period ended March 31, 2020 was primarily due
to the amortization of deferred acquisition costs (“DAC”) exceeding the level of additions to DAC. The increase in the net amortization of DAC during 2020 is primarily due to non-renewals exceeding the level of new business writings in the
Medicare supplement line of business, as previously mentioned. Also contributing to the increase in the expense ratio was an increase in expenses related to servicing the Medicare supplement line of business.
Net Investment Income and Realized Gains
Investment income decreased $0.3 million, or 12.6%, during the three month period ended March 31, 2020 over the comparable period in 2019. The decrease in investment income during the three month period ended March 31,
2020 was primarily attributable to a decrease in the equity in earnings from investments in real estate partnerships of $0.2 million over the comparable period in 2019.
The Company had net realized investment gains of $0.2 million during the three month period ended March 31, 2020, compared to net realized investment gains of $1.4 million in the three month period ended March 31, 2019.
The net realized investment gains in the three month period ended March 31, 2020 resulted from the disposition of several of the Company’s investments in fixed maturities. The net realized investment gains in the three month period ended March 31,
2019 resulted primarily from the disposition of several of the Company’s investments in equity securities. Management continually evaluates the Company’s investment portfolio and makes adjustments for impairments and/or divests investments as may be
determined to be appropriate.
Unrealized Gains (Losses) on Equity Securities
Investments in equity securities are measured at fair value at the end of the reporting period, with any changes in fair value reported in net income during the period, with certain exceptions. The Company recognized net
unrealized losses on equity securities still held of $8.5 million during the three month period ended March 31, 2020 and unrealized gains on equity securities still held of $6.5 million during the three month period ended March 31, 2019. Changes in
unrealized gains on equity securities for the applicable periods are primarily the result of fluctuations in the market values of the Company’s equity investments. The increase in the number and value of securities in an unrealized loss position
during the three month period ended March 31, 2020, was primarily attributable to the volatility and weakening of the financial markets as a result of COVID-19.
Interest Expense
Interest expense decreased $0.1 million, or 12.8%, during the three month period ended March 31, 2020 over the comparable period in 2019. Changes in interest expense were primarily due to changes in the London Interbank
Offered Rate (“LIBOR”), as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) are directly related to LIBOR.
Liquidity and Capital Resources
The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and surplus levels, and meeting debt service requirements. Current and expected patterns
of claim frequency and severity may change from period to period but generally are expected to continue within historical ranges. The Company’s primary sources of cash are written premiums, investment income and proceeds from the sale and maturity of
its invested assets. The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts and reinsurance
collections will be adequate to fund the payment of claims and operating expenses as needed.
Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the subsidiaries. The principal cash needs of the Parent are for the payment of operating expenses,
the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be authorized and approved by the Company’s board of directors from time to time. At March 31, 2020, the Parent
had approximately $4.5 million of unrestricted cash and investments.
The Parent’s insurance subsidiaries reported a statutory net income of $0.2 million for the three month period ended March 31, 2020, compared to statutory net loss of $0.7 million for the three month period ended March
31, 2019. Statutory results are impacted by the recognition of all costs of acquiring business. In periods in which the Company’s first year premiums increase, statutory results are generally lower than results determined under GAAP. Statutory
results for the Company’s property and casualty operations may differ from the Company’s results of operations under GAAP due to the deferral of acquisition costs for financial reporting purposes. The Company’s life and health operations’ statutory
results may differ from GAAP results primarily due to the deferral of acquisition costs for financial reporting purposes, as well as the use of different reserving methods.
Over 90% of the invested assets of the Parent’s insurance subsidiaries are invested in marketable securities that can be converted into cash, if required; however, the use of such assets by the Company is limited by
state insurance regulations. Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to 10% of statutory surplus or statutory earnings before recognizing realized
investment gains of the individual insurance subsidiaries. At March 31, 2020, American Southern had $42.0 million of statutory surplus and Bankers Fidelity had $27.5 million of statutory surplus. In 2020, dividend payments by the Parent’s insurance
subsidiaries in excess of $4.6 million would require prior approval. Through March 31, 2020, the Parent received dividends of $0.9 million from its subsidiaries.
The Parent provides certain administrative and other services to each of its insurance subsidiaries. The amounts charged to and paid by the subsidiaries include reimbursements for various shared services and other
expenses incurred directly on behalf of the subsidiaries by the Parent. In addition, there is in place a formal tax-sharing agreement between the Parent and its insurance subsidiaries. As a result of the Parent’s tax loss, it is anticipated that the
tax-sharing agreement will continue to provide the Parent with additional funds from profitable subsidiaries to assist in meeting its cash flow obligations.
The Company has two statutory trusts which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trusts and investing the gross proceeds of
the trust preferred securities in Junior Subordinated Debentures. The outstanding $18.0 million and $15.7 million of Junior Subordinated Debentures mature on December 4, 2032 and May 15, 2033, respectively, are callable quarterly, in whole or in
part, only at the option of the Company, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to 4.10%. At March 31, 2020, the effective interest rate was 5.56%. The obligations of the Company with
respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust’s obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the
Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities. As of March 31, 2020, the Company has not made such an
election.
The Company intends to pay its obligations under the Junior Subordinated Debentures using existing cash balances, dividend and tax-sharing payments from the operating subsidiaries, or from potential future financing
arrangements.
At March 31, 2020, the Company had 55,000 shares of Series D preferred stock (“Series D Preferred Stock”) outstanding. All of the shares of Series D Preferred Stock are held by an affiliate of the Company’s controlling
shareholder. The outstanding shares of Series D Preferred Stock have a stated value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at the option of the board of
directors of the Company) and are cumulative. In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,378,000 shares of the Company’s common stock, subject to certain adjustments
and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval; and are redeemable solely at the Company’s option. The Series D Preferred
Stock is not currently convertible. At March 31, 2020, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.1 million.
Cash and cash equivalents decreased from $12.9 million at December 31, 2019 to $8.3 million at March 31, 2020. The decrease in cash and cash equivalents during the three month period ended March 31, 2020 was primarily
attributable to net cash used in operating activities of $10.5 million, partially offset by a $6.0 million increase resulting from investment sales and maturity of securities exceeding purchases of securities.
The Company believes that existing cash balances as well as the dividends, fees, and tax-sharing payments it expects to receive from its subsidiaries and, if needed, additional borrowings from financial institutions,
will enable the Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current recommendations by regulatory authorities, which, if implemented, would have a material adverse effect on the Company’s
liquidity, capital resources or operations.
Expected Impact of COVID-19 on the Company’s Financial Condition and Results of Operations
The duration and impact of the COVID-19 pandemic is unknown at this time and it is not possible for us to reliably estimate the impact on the financial condition, operating results or liquidity of the Company and its
operating subsidiaries in future periods. However, we do not currently expect a significant decline in liquidity or operating results as a result of the disruption caused by the ongoing COVID-19 pandemic. To date, the most significant impact of
COVID-19 on the Company’s financial position is a decline in fair value of the Company’s fixed maturity and equity investments due to the weakened and volatile financial markets. At this time, the Company believes the decline in market values are
temporary in nature.
We expect that earned premiums could be adversely impacted by a weakened economy leading to a slowdown in new sales and reduced retention of insureds. Additionally, a number of states have issued bulletins that either
encourage or require premium leniency such as extension of grace periods or moratoriums on cancellation of policies for non-payment. The Company does not expect a significant reduction or delay in payments and continues to monitor state required
actions as they develop.
For the Company’s property and casualty operations, the majority of premium revenue is derived from automobile liability and automobile physical damage lines of business written on a multi-year contract basis with state
and local governments. Although we cannot predict with certainty at this time, we do not expect a significant level of cancellations or non-renewals of our property and casualty contracts in the short term but recognize that a prolonged economic
slowdown could adversely affect future results.
Benefits and losses in our property and casualty operations could be adversely impacted as a result of disruption caused by the COVID-19 pandemic. However, due to the nature of our primary product lines, the impact is
not currently expected to be material. Additionally, we expect to see a reduction in frequency and severity of claims in the automobile lines of business as fewer miles are driven and less people are on the roads. As a result, we do not currently
expect a material adverse effect on operating results or liquidity in the property and casualty operations.
The majority of premium revenue in our life and health operations are derived from the senior market segment of the population, or those individuals age sixty-five and up, who maintain Medicare supplement and to a lesser
extent, whole life insurance policies with the Company. We expect that earned premiums could be adversely impacted by the rise in unemployment and economic slowdown, which could lead to a decline in new sales and reduced retention of insureds. As a
result, we currently anticipate that the life and health operations may experience a marginal decline in earned premiums although the actual impact cannot be predicted with certainty at this time.
Unforeseen infectious diseases that impact large portions of a population can have an adverse impact on mortality and morbidity, and resultant benefits and losses incurred by the Company’s life and health operations.
Accordingly, the Company does anticipate incurring higher costs, potentially similar to prior influenza seasons, as it relates to life insurance claims. However, with much of the country sheltering in place over an extended period, the Company
expects a decrease in non-medically necessary services being performed with many of the services deferred until a later date when these procedures are allowed to take place. Additionally, the Company expects there will be some routine medical
services that are deferred indefinitely. As a result, and although the actual impact cannot be predicted with certainty at this time, the Company does not expect significant adverse development in total benefits and losses incurred in its life and
health operations.