The Company believes that its current properties are in good condition, and are sufficient for the operations of its business.
As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations, and therefore do not have to provide the information required by this Item.
Unpaid loss and loss adjustment expenses comprised 29% of the Company’s total liabilities at December 31, 2016. This liability includes estimates for: 1) unpaid losses on claims reported prior to December 31, 2016, 2) future development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to December 31, 2016 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to December 31, 2016. Quantification of loss estimates for each of these components
involves a significant degree of judgment and estimates may vary, materially, from period to period. Estimated unpaid losses on reported claims are developed based on historical experience with similar claims by the Company. Development on reported claims, estimates of unpaid ultimate losses on claims incurred prior to December 31, 2016 but not yet reported, and estimates of unpaid loss adjustment expenses are developed based on the Company’s historical experience, using actuarial methods to assist in the analysis. The Company’s actuaries develop ranges of estimated development on reported and unreported claims as well as loss adjustment expenses using various methods, including the paid-loss development method, the reported-loss development method, the paid Bornhuetter-Ferguson method and the reported Bornhuetter-Ferguson method. Any single method used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes affecting the business environment and the Company’s administrative policies. Further, external factors, such as legislative changes, medical cost inflation, and others may directly or indirectly impact the relative adequacy of liabilities for unpaid losses and loss adjustment expenses. The Company’s approach is to select an estimate of ultimate losses based on comparing results of a variety of reserving methods, as opposed to total reliance on any single method. Unpaid loss and loss adjustment expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used to develop such estimates, the amount of the Company’s recorded liability for unpaid loss and loss adjustment expenses is adjusted. In the event the Company’s actual reported losses in any period are materially in excess of the previously estimated amounts, such losses, to the extent reinsurance coverage does not exist, could have a material adverse effect on the Company’s results of operations.
Future policy benefits comprised 35% of the Company’s total liabilities at December 31, 2016. These liabilities relate primarily to life insurance products and are based upon assumed future investment yields, mortality rates, and withdrawal rates after giving effect to possible risks of adverse deviation. The assumed mortality and withdrawal rates are based upon the Company’s experience. If actual results differ from the initial assumptions, the amount of the Company’s recorded liability could require adjustment.
Deferred acquisition costs comprised 9% of the Company’s total assets at December 31, 2016. Deferred acquisition costs are commissions, premium taxes, and other costs that vary with and are primarily related to the acquisition of new and renewal business and are generally deferred and amortized. The deferred amounts are recorded as an asset on the balance sheet and amortized to expense in a systematic manner. Traditional life insurance and long-duration health insurance deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the related liability for policy benefit reserves. Deferred acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance). Assessments of recoverability for property and casualty and short-duration health insurance are extremely sensitive to the estimates of a subsequent year’s projected losses related to the unearned premiums. Projected loss estimates for a current block of business for which unearned premiums remain to be earned may vary significantly from the indicated losses incurred in any previous calendar year.
Receivables are amounts due from reinsurers, insureds and agents, and any sales of investment securities not yet settled, and comprised 8% of the Company’s total assets at December 31, 2016. Insured and agent balances are evaluated periodically for collectibility. Annually, the Company performs an analysis of the creditworthiness of the reinsurers with whom the Company contracts using various data sources. Failure of reinsurers to meet their obligations due to insolvencies, disputes or otherwise could result in uncollectible amounts and losses to the Company. Allowances for uncollectible amounts are established, as and when a loss has been determined probable, against the related receivable. Losses are recognized by the Company when determined on a specific account basis and a general provision for loss is made based on the Company’s historical experience.
Cash and investments comprised 81% of the Company’s total assets at December 31, 2016. Substantially all of the Company’s investments are in bonds and common and preferred stocks, the values of which are subject to significant market fluctuations. The Company carries all fixed maturities, which includes bonds and redeemable preferred stocks, and equity securities, which includes common and non-redeemable preferred stocks, as available for sale and, accordingly, at their estimated fair values. The Company owns certain fixed maturities that do not have publicly quoted values, but had an estimated fair value as determined by management of $1.3 million at
December 31, 2016. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility than the value of securities with publicly quoted market values. On occasion, the value of an investment may decline to a value below its amortized purchase price and remain at such value for an extended period of time. When an investment’s indicated fair value has declined below its cost basis for a period of time, the Company evaluates such investment for an other than temporary impairment. The evaluation for an other than temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. Potential risks and uncertainties include, among other things, changes in general economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. In evaluating a potential impairment, the Company considers, among other factors, management’s intent and ability to hold the securities until price recovery, the nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit status. If an other than temporary impairment is deemed to exist, then the Company will write down the amortized cost basis of the investment to its estimated fair value. While any such write down does not impact the reported value of the investment in the Company’s balance sheet, it is reflected as a realized investment loss in the Company’s consolidated statements of operations in the period incurred.
The Company determines the fair values of certain financial instruments based on the fair value hierarchy established in Accounting Standards Codification (“ASC”) 820-10-20, Fair Value Measurements and Disclosures (“ASC 820-10-20”). The fair values of fixed maturities and equity securities are largely determined by either independent methods prescribed by the National Association of Insurance Commissioners, which do not differ materially from nationally quoted market prices, when available, or independent broker quotations. See Note 2 and Note 14 of Notes to Consolidated Financial Statements with respect to assets and liabilities carried at fair value and information about the inputs used to value those financial instruments, by hierarchy level, in accordance with ASC 820-10-20.
On a consolidated basis, the Company had net income of $2.6 million, or $0.11 per diluted share, in 2016, compared to $4.4 million, or $0.19 per diluted share, in 2015. Operating income increased slightly in 2016 as compared to 2015. The increase in operating income was primarily attributable to increased profitability in the property and casualty operations as well as a decrease in legal and consulting fees of $1.3 million. Offsetting the increase in operating income were higher expenses in the life and health operations associated with the increased level of new business.
Total revenue was $166.1 million in 2016 as compared to $165.9 million in 2015. Premium revenue increased to $153.5 million in 2016 from $150.9 million in 2015. The increase in premium revenue was primarily due to an increase in Medicare supplement business in the life and health operations. Also included in total revenue were net realized investment gains of $2.6 million in 2016 compared to net realized investment gains of $4.9 million in 2015. The magnitude of realized investment gains and losses in any year is a function of the timing of trades of investments relative to the markets themselves as well as the recognition of any other than temporary impairments on investments.
Gross written premiums at American Southern decreased $4.4 million, or 7.3%, during 2016 as compared to 2015. The decrease in gross written premiums was primarily attributable to the cancellation of an agency in the fourth quarter of 2015, a decrease in business from another agency which moved certain business because of geographical coverage limitation imposed by the company and the loss of business due to the inability to obtain adequate pricing relative to the risks. The largest decrease in gross written premiums was in the automobile physical damage line of business. In 2016, automobile physical damage written premiums decreased $4.0 million and property and surety written premiums decreased $2.9 million as compared to 2015. Partially offsetting the decreases in gross written premiums in these lines of business was an increase of $2.6 million in automobile liability business due primarily to premium rate increases on renewal business and a new automobile program. In both 2016 and 2015, American Southern’s five principal states in terms of written premiums were Alabama, Florida, Georgia, South Carolina, and Tennessee, which accounted for approximately 80% and 72% of total written premiums for 2016 and 2015, respectively.
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
Underwriting expenses decreased $1.4 million, or 7.7%, during 2016 as compared to 2015. As a percentage of premiums, underwriting expenses were 30.6% in 2016 compared to 32.7% in 2015. The decrease 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. In 2016, variable commissions at American Southern decreased $1.2 million as compared to 2015 due to decreased premiums, decreased variable commission program participation and unfavorable loss experience from certain accounts subject to variable commissions.
Contingent commissions, if contractually applicable, are ultimately payable to participating agents based on the underlying profitability of a particular insurance contract or a group of insurance contracts, and are periodically evaluated and accrued as earned. In 2016, approximately 52% of American Southern’s earned premium provides for contractual commission arrangements which compensate the company’s agents in relation to the loss ratios of the business they write, compared to 60% in 2015. By structuring its business in this manner, American Southern provides its agents with an economic incentive to place profitable business with American Southern. In periods in which loss reserves reflect favorable development from prior years’ reserves, there is generally a highly correlated increase in commission expense also related to the prior year business. Accordingly, favorable loss development from prior years, while anticipated to continue in future periods, is not an indicator of significant additional profitability in the current year.
Underwriting expenses increased $3.0 million, or 9.0%, during 2016 as compared to 2015. As a percentage of earned premiums, these expenses were 35.9% in 2016 compared to 34.0% in 2015. The increase in the expense ratio was primarily due to increases in compensation expenses including higher utilization of temporary staffing, increased printing costs associated with the new business activity as well as an increase in agency related expenses.
Investment income decreased $0.2 million, or 2.0%, in 2016 as compared to 2015. The decrease in investment income was primarily attributable to a decrease in the average yield on the Company’s investments in fixed maturities.
Other expenses (commissions, underwriting expenses, and other expenses) increased $0.4 million, or 0.6%, in 2016 as compared to 2015. The increase in other expenses was primarily attributable to an increase in commissions, underwriting costs and other agency related expenses in the life and health operations associated with the increased level of new business. Partially offsetting the increase in other expenses was the $1.2 million decrease in variable commission accruals at American Southern due to decreased premiums, decreased variable commission program participation and unfavorable loss experience from certain accounts subject to variable commissions. American Southern’s variable commission structure compensates the participating agents in relation to the loss ratios of the business they write. Additionally, legal and consulting fees decreased $1.3 million during 2016. As a percentage of earned premiums, other expenses were 37.7% in 2016 as compared with 38.1% in 2015. The slight decrease in the expense ratio was primarily due to the increase in earned premiums coupled with the decrease in legal and consulting fees.
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 December 31, 2016, the Parent’s insurance subsidiaries had an aggregate statutory surplus of $74.9 million. Dividends were paid to Atlantic American by its subsidiaries totaling $5.5 million and $6.8 million in 2016 and 2015, respectively.
The Parent provides certain administrative, purchasing and other services to each of its subsidiaries. The amount charged to and paid by the subsidiaries for these services was $7.4 million in each of 2016 and 2015. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $2.8 million and $2.4 million were paid to the Parent under the tax sharing agreement in 2016 and 2015, respectively. 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 December 31, 2016, the effective interest rate was 4.98%. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Atlantic American Corporation at December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
At December 31, 2016, the Parent owned four insurance subsidiaries, Bankers Fidelity Life Insurance Company and its wholly-owned subsidiary, Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”), and American Southern Insurance Company and its wholly-owned subsidiary, American Safety Insurance Company (together known as “American Southern”), in addition to one non-insurance subsidiary, xCalibre Risk Services, Inc. The Parent has issued a guarantee of all liabilities of Bankers Fidelity.
Life insurance premiums are recognized as revenue when due; accident and health insurance premiums are recognized as revenue over the premium paying period and property and casualty insurance premiums are recognized as revenue over the period of the contract in proportion to the amount of insurance protection provided. Losses, benefits and expenses are accrued as incurred and are associated with premiums as they are earned so as to result in recognition of profits over the lives of the contracts. For traditional life insurance and long-duration health insurance, this association is accomplished by the provision of a future policy benefits reserve and the deferral and subsequent amortization of the costs of acquiring business, which are referred to as “deferred policy acquisition costs” (principally commissions, premium taxes, and other incremental direct costs of issuing policies). Deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the policy benefits reserve. The Company provides for insurance benefits and losses on accident, health, and property-casualty claims based upon estimates of projected ultimate losses. Deferred policy acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Contingent commissions, if contractually applicable, are ultimately payable to agents based on the underlying profitability of a particular insurance contract or a group of insurance contracts, and are periodically evaluated and accrued as earned. In periods in which revisions are made to the estimated loss reserves related to the particular insurance contract or group of insurance contracts subject to such commissions, corresponding adjustments are also made to the related accruals. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance).
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The issues addressed in ASU 2016-15 are: 1) debt prepayment or debt extinguishment costs, 2) settlement of zero-coupon debt instruments, 3) contingent consideration payments made after a business combination, 4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions and 8) separately identifiable cash flows and application of the predominance principle. The amendments in ASU 2016-15 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company does not expect the adoption of this ASU to have an impact on its consolidated statements of cash flows.
impact of the adoption will depend on the excess tax benefits or deficiencies realized on vesting or settlement of awards resulting from the difference between the market value of awards at vesting or settlement and the grant date fair value recognized through compensation expense. Such amounts have historically not been significant.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Under ASU 2016-02, lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Under the new guidance, lessees with operating leases will be required to recognize a liability for the present value of future minimum lease payments with a corresponding asset for the right of use of the property. Under existing guidance, future minimum lease payments on operating leases are commitments that are not recognized as liabilities on the balance sheet. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 and requires a modified retrospective adoption, with early adoption permitted. The Company does not expect the adoption of ASU 2016-02 to have a material impact on its consolidated financial statements; however, it is expected that assets and liabilities will increase based on the present value of remaining lease payments for the minor number of leases which will be in place at the adoption date.
In May 2015, the FASB issued ASU No. 2015-09, Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts (“ASU 2015-09”). The main objective of ASU 2015-09 is to enhance disclosures about the liability for unpaid claims and claim adjustment expenses, specifically the development of claims, the frequency and severity of claims, and expanded disclosures about reserves that are discounted. ASU 2015-09 also requires insurance entities, such as the Company, to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and effects on the financial statements. The amendments in ASU 2015-09 are effective for annual reporting periods beginning after December 15, 2015, and interim reporting periods within annual reporting periods beginning after December 15, 2016. The Company adopted ASU 2015-09 effective January 1, 2016. Since ASU 2015-09 was a disclosure only update, its adoption did not have a material impact on the Company’s consolidated financial statements. See Note 3 for enhanced disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 as modified provides guidance for recognizing revenue. The guidance excludes insurance contracts and financial instruments. Revenue is to be recognized when, or as, goods or services are
Bonds having an amortized cost of $11,435 and $11,259 and included in the tables above were on deposit with insurance regulatory authorities at December 31, 2016 and 2015, respectively, in accordance with statutory requirements.
Level 2 Observable inputs, other than quoted prices included in Level 1, for an asset or liability or prices for similar assets or liabilities. The Company’s financial instruments valued using Level 2 criteria include significantly all of its fixed maturities, which consist of U.S. Treasury securities and U.S. Government securities, obligations of states and political subdivisions, and certain corporate fixed maturities, as well as its non-redeemable preferred stocks. In determining fair value measurements of its fixed maturities and non-redeemable preferred stocks using Level 2 criteria, the Company utilizes data from outside sources, including nationally recognized pricing services and broker/dealers. Prices for the majority of the Company’s Level 2 fixed maturities and non-redeemable preferred stocks were determined using unadjusted prices received from pricing services that utilize a matrix pricing concept, which is a mathematical technique used widely in the industry to value debt securities based on various relationships to other benchmark quoted prices.
As of December 31, 2015, financial instruments carried at fair value were measured on a recurring basis as summarized below:
The following is a roll-forward of the Company’s financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2015 to December 31, 2016.
The carrying value and amortized cost of the Company’s investments in fixed maturities at December 31, 2016 and 2015 by contractual maturity were as follows. Actual maturities may differ from contractual maturities because issuers may call or prepay obligations with or without call or prepayment penalties.
The Company’s bond portfolio included 88% investment grade securities, as defined by the NAIC, at December 31, 2016.
Annualized premiums for accident and health insurance policies were $95,956 and $87,480 at December 31, 2016 and 2015, respectively.
The information about incurred and paid claims development for the years ended December 31, 2007 to 2016 is presented as supplementary information.
Because of the inherent uncertainties in establishing both case and IBNR reserves, ultimate loss experience may prove better or worse than indicated by the combined claim reserves. Adjustments to claim reserves are reflected in the period recognized and could increase or decrease earnings for the period.
Components of reinsurance recoverables at December 31, 2016 and 2015 were as follows:
taxable income. The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”). The SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3,000 and is ultimately phased out at $15,000.
The financial structure of each of Atlantic American Statutory Trust I and II, as of December 31, 2016 and 2015, was as follows:
(3) On August 4, 2014, the Company acquired $7,500 of the Junior Subordinated Debentures.
The Company’s rental expense, including common area charges, for operating leases was $1,277 and $1,261 in 2016 and 2015, respectively. The Company’s future minimum base lease obligations under non-cancelable operating leases are as follows:
On May 1, 2012, the Company’s shareholders approved the 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan authorizes the grant of up to 2,000,000 stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units and other awards for the purpose of providing the Company’s non-employee directors, consultants, officers and other employees incentives and rewards for superior performance. In 2016, a total of 180,000 restricted shares, with an estimated fair value of $741, were issued under the 2012 Plan. In 2015, a total of 48,300 restricted shares, with an estimated fair value of $178, were issued under the 2012 Plan. The estimated fair value of the restricted shares issued under the 2012 Plan for 2016 and 2015 was based on the common stock price at date of grant. Vesting of restricted shares generally occurs after a one to three year period. There were no stock options granted or outstanding under the 2012 Plan in 2016 or 2015. Shares available for future grants at December 31, 2016 and 2015 were 1,423,200 and 1,603,200, respectively.
The Company had 55,000 shares of Series D preferred stock (“Series D Preferred Stock”) outstanding at December 31, 2016 and 2015, respectively. 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. The Company had accrued, but unpaid, dividends, on the Series D Preferred Stock of $18 at December 31, 2016 and 2015. During each of 2016 and 2015, the Company paid Series D Preferred Stock dividends of $399.
The assumed conversion of the Company’s Series D Preferred Stock was excluded from the earnings per common share calculation for 2016 and 2015 since its impact would have been antidilutive.
In the normal course of business the Company has engaged in transactions with entities affiliated with the controlling shareholder of the Company. These transactions include the leasing of office space as well as certain investing and financing activities. At December 31, 2016, two members of the Company’s board of directors, including our chairman, president and chief executive officer, were considered to be affiliates of the majority shareholder, who is also a member of the Company’s board of directors.
During 2016, the Company paid approximately $215 to a digital marketing services organization, which is an affiliate of Gray. Services purchased primarily include assistance with website marketing initiatives on behalf of the Company’s life and health operations.
The following table sets forth the carrying amount, estimated fair value and level within the fair value hierarchy of the Company’s financial instruments as of December 31, 2016 and 2015.
The following table sets forth the balance of the only component of accumulated other comprehensive income as of December 31, 2016 and 2015, and the changes in the balance of that component during 2016.