Receivables are amounts due from reinsurers, insureds and agents, and any sales of investment securities not yet settled, and comprised 12% of the Company’s total assets at December 31, 2019. 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 75% of the Company’s total assets at December 31, 2019. 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. On occasion, the value of a fixed maturity investment may decline to a value below its amortized purchase price and remain at such value for an extended period of time. When a fixed maturity 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 net income or other comprehensive income, depending upon the nature of the loss, in the period incurred.
Total revenue was $198.2 million in 2019 as compared to $185.6 million in 2018. Premium revenue increased to $181.9 million in 2019 from $172.9 million in 2018. The increase in premium revenue was primarily due to an increase in the automobile physical damage and automobile liability lines of business within the property and casualty operations. Also contributing to the increase in premium revenue was an increase in the Medicare supplement line of business in the life and health operations.
Gross written premiums at American Southern increased $6.4 million, or 10.7%, during 2019 as compared to 2018. The increase in gross written premiums was primarily attributable to an increase in premiums written in the automobile physical damage and automobile liability lines of business due to increased writings from certain agencies and additional writings from a new agency relationship that began in the second half of 2018. Also contributing to the increase in gross written premiums was an increase in premiums written in the general liability line of business and rate increases on certain programs. 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.
Net earned premiums increased $4.9 million, or 9.1%, during 2019 as compared to 2018. The increase in net earned premiums was primarily attributable to an increase in automobile physical damage coverage resulting from additional writings from the new agency relationship mentioned previously. Also contributing to the increase in net earned premiums was an increase in premiums earned in the automobile liability line of business due to rate increases in various programs. 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.
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).
Commissions and underwriting expenses increased $2.4 million, or 16.0%, during 2019 as compared to 2018. As a percentage of premiums, these expenses were 29.2% in 2019 as compared to 27.4% in 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. In 2019, variable commissions at American Southern increased $1.6 million as compared to 2018 due to improved loss ratios 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 2019, approximately 44% 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 47% in 2018. 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.
Commissions and underwriting expenses increased $3.3 million, or 10.2%, during 2019 as compared to 2018. As a percentage of earned premiums, these expenses were 28.9% in 2019 as compared to 27.1% in 2018. The increase in the expense ratio was primarily due to a decrease in the net amount of deferred acquisition costs (“DAC”) for the years ending 2019 versus 2018. The decrease in the net change in DAC during 2019 is primarily due to a lower volume of new business sales in the Medicare supplement line of business. Also contributing to the increase in the expense ratio was an increase in expenses related to servicing the Medicare supplement line of business.
The Company had net realized investment gains of $1.6 million in 2019 as compared to net realized investment gains of $5.2 million in 2018. The net realized investment gains in 2019 resulted from the disposition of certain of the Company’s investments in equity and fixed maturities. The net realized investment gains in 2018 were primarily attributable to gains of $5.8 million from the sale of property held within the Company’s
As described in Note 1 of Notes to 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 $5.5 million and unrealized losses on equity securities still held of $2.2 million during the years ended December 31, 2019 and 2018, respectively.
Interest expense increased $0.1 million, or 4.6%, in 2019 as compared to 2018 due to an increase in the average London Interbank Offered Rate (“LIBOR”) during the years ending 2019 and 2018, respectively, as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) are directly related to LIBOR.
The primary differences between the effective tax rate and the federal statutory income tax rate for 2019 resulted from permanent differences related to meals & entertainment and vested stock grants. Also contributing to differences between the effective tax rate and the federal statutory income tax rate was 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.
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 December 31, 2019, the Parent had approximately $5.3 million of unrestricted cash and investments.
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, 2019, the Parent’s insurance subsidiaries had an aggregate statutory surplus of $81.4 million. Dividends were paid to Atlantic American by its subsidiaries totaling $4.8 million in each of the years ended in 2019 and 2018.
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, 2019, the effective interest rate was 5.96%. 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.
Cash and cash equivalents increased from $12.6 million at December 31, 2018 to $12.9 million at December 31, 2019. The increase in cash and cash equivalents during 2019 was primarily attributable to $3.1 million of net investment sales and maturity of securities exceeding purchases of securities. Partially offsetting the increase in cash and cash equivalents was the net cash used operations of $1.8 million during 2019. Also partially offsetting the increase were dividends paid on the Company’s common stock and Series D Preferred Stock of $0.8 million, and the net acquisition of treasury stock for $0.2 million.
We have audited the accompanying consolidated balance sheets of Atlantic American Corporation (the “Company”) and subsidiaries as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2019 and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
At December 31, 2019, 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.
(“ASU 2016-01”). ASU 2016-01 provides updated guidance for the recognition and measurement of financial instruments. The guidance requires investments in equity securities to be measured at fair value with any changes in valuation reported in net income except for investments that are consolidated or are accounted for under the equity method of accounting. The guidance also requires a deferred tax asset resulting from net unrealized losses on available-for-sale (“AFS”) fixed maturities that are recognized in AOCI to be evaluated for recoverability in combination with the Company’s other deferred tax assets. Under previous guidance, the Company measured investments in equity securities at fair value with any changes in fair value reported in other comprehensive income. The Company adopted ASU 2016-01 as of January 1, 2018. The adoption of this guidance resulted in the recognition of $9,825 of net after tax unrealized gains on equity securities as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased AOCI by the same amount. The Company elected to report changes in the fair value of equity securities in a separate line item on the Company’s consolidated statements of operations. At December 31, 2017, equity securities were classified as AFS in the Company’s consolidated balance sheets. However, upon adoption, the updated guidance eliminated the AFS balance sheet classification for equity securities.
Revenue from Contracts with Customers. 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 which excludes insurance contracts and financial instruments. Revenue is to be recognized when, or as, goods or services are transferred to customers in an amount that reflects the consideration that an entity is expected to be entitled in exchange for those goods or services. The Company adopted ASU No. 2014-09 as of January 1, 2018. For the year ended December 31, 2019, approximately $190, or approximately one-tenth of 1% of the Company's total revenues, were within the scope of this updated guidance. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.
Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This guidance removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers
Accounting for Long-Duration Contracts. In August 2018, the FASB issued ASU No. 2018-12, Financial Services -Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (“ASU 2018-12”). This guidance (1) improves the timeliness of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows, (2) simplifies and improves the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, (3) simplifies the amortization of deferred acquisition costs, and (4) improves the effectiveness of the required disclosures. ASU 2018-12 is effective for interim and annual reporting periods beginning after December 15, 2023, although earlier adoption is permitted. The Company has not yet determined the method or timing for adoption or estimated the impact on the Company’s consolidated financial statements.
Bonds having an amortized cost of $10,669 and $10,452 and included in the tables above were on deposit with insurance regulatory authorities at December 31, 2019 and 2018, respectively, in accordance with statutory requirements.
The carrying value and amortized cost of the Company’s investments in fixed maturities at December 31, 2019 and 2018 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.
There were no OTTI charges recorded during the year ended December 31, 2019. During the year ended December 31, 2018, the Company recorded OTTI charges related to certain fixed maturity securities of $1,525 as a charge to net income due to management’s intention to sell such securities.
The Company’s bond portfolio included 98% investment grade securities, as defined by the NAIC, at December 31, 2019.
The Company does not have power over the activities that most significantly impact the economic performance of these VIEs and thus is not the primary beneficiary. Therefore, the Company has not consolidated these VIEs. The Company’s involvement with each VIE is limited to its direct ownership interest in the VIE. The Company has no arrangements with any of the VIEs to provide other financial support to or on behalf of the VIE. The Company’s maximum loss exposure relative to these investments was limited to the carrying value of the Company’s investment in the VIEs, which amount to $11,198 and $8,662, at December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the Company has outstanding commitments totaling $1,997 and $0, respectively, whereby the Company is committed to fund these investments and may be called by such VIEs during the commitment period to fund the purchase of new investments and partnership expenses.
obligations of multiple, smaller financial services companies. They are not actively traded and valuation techniques used to measure fair value are based on future estimated cash flows discounted at reasonable estimated rates of interest. Other qualitative and quantitative information received from the original underwriter of the pooled offerings is also considered, as applicable.
As of December 31, 2019, 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 fixed maturities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2018 to December 31, 2019.
The Company’s fixed maturities valued using Level 3 inputs consist solely of issuances of pooled debt obligations of multiple, smaller financial services companies that are not actively traded. There are no assumed prepayments and/or default probability assumptions as a majority of these instruments contain certain U.S. government agency strips to support repayment of the principal. Other qualitative and quantitative information received from the original underwriter of the pooled offerings is also considered, as applicable. Transfer out of Level 3 were the result of valuing those securites using Level 2 criteria.
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, 2019 and 2018.
The following table presents the Company’s reserves for life, accident and health, and property and casualty losses, claims and loss adjustment expenses at December 31, 2019 and 2018.
(1) The group life in force amounts increased significantly during 2019. However, the impact on future policy benefits is not significant.
(1) Prior years’ development was primarily the result of better than expected development on prior years loss and claim reserves for certain lines of business in American Southern, somewhat offset by unfavorable development on prior years loss and claim reserves for the Medicare Supplement line of business in Bankers Fidelity.
For the property and casualty lines of business, the number of claims presented above equals the number of occurrences by type of claim reported to the Company. The number of claims reported during a given year corresponds to the number of claims records opened during the year. Frequency information is maintained on a cumulative basis by accident year by line of business. For automobile claims, a claim count is separately maintained for bodily injury, property damage and physical damage claims. The Company has consistently monitored claim frequency on this basis, and believes this provides more meaningful information than using claimant count which can change over the course of settling a claim.
In addition to case reserves, IBNR reserves are established to provide for claims which have not been reported to the Company as of the reporting date as well as potential adverse development on known case reserves. IBNR reserve estimates are derived through a number of analytical techniques. Actuarial data is
Components of reinsurance receivables at December 31, 2019 and 2018 were as follows:
A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and the income tax benefit is as follows:
The primary differences between the effective tax rate and the federal statutory income tax rate for 2019 resulted from permanent differences related to meals & entertainment and vested stock grants. Also contributing to differences between the effective tax rate and the federal statutory income tax rate was 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 Company has two unconsolidated Connecticut statutory business trusts, which exist for the exclusive purposes of: (i) issuing trust preferred securities (“Trust Preferred Securities”) representing undivided beneficial interests in the assets of the trusts; (ii) investing the gross proceeds of the Trust Preferred Securities in junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of Atlantic American; and (iii) engaging in those activities necessary or incidental thereto. At December 31, 2019, the effective interest rate was 5.96%.
(2) The Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all senior debt of the Parent and are effectively subordinated to all existing and future liabilities of its subsidiaries.
The Company has 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.
The Company initiated an employees’ savings plan (the “Plan”) qualified under Section 401(k) of the Internal Revenue Code in May 1995. The Plan covers substantially all of the Company’s employees. Effective January 1, 2009, the Company modified the Plan such that the Plan would operate on a safe harbor basis. Under the Plan, employees may defer up to 50% of their compensation, not to exceed the annual deferral limit. The Company’s total matching contribution for 2019 and 2018 was $230 and $233, respectively, and consisted of a contribution equal to 35% of up to the first 6% of each participant’s contributions. In addition to the matching contribution, the Company also provided a 3% safe harbor non-elective contribution in 2019 and 2018 of $524 and $491, respectively. All contributions were made in cash. Participants are 100% vested in their own contributions and the vested percentage attributable to certain employer contributions is based on a five year graded schedule.
A reconciliation of the numerator and denominator of the loss per common share calculations is as follows:
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, 2019, two members of the Company’s board of directors, including the Company’s chairman, president and chief executive officer, were considered to be affiliates of the majority shareholder.
The Company leases approximately 49,586 square feet of office and covered garage space from one such controlled entity. During the years ended December 31, 2019 and 2018, the Company paid $908 and $781, respectively, under this lease.
Certain financing for the Company has also been provided by this entity in the form of an investment in the Series D Preferred Stock (See Note 11). During the years ended December 31, 2019 and 2018, the Company paid this entity $399 in dividends on the Series D Preferred Stock.
On January 30, 2020, the World Health Organization declared that the recent coronavirus disease 2019 (“COVID-19”) outbreak was a global health emergency. On March 11, 2020, the World Health Organization raised the COVID-19 outbreak to “pandemic” status. The Company can experience increased risk of loss any time unforeseen infectious diseases impact large portions of a population. Specifically, the Company’s Life and Health business could experience significant loss due to increased claims volume arising from COVID-19. As a result of a pandemic, the Company could also experience losses in its investment portfolio as a result of volatile markets. Due to the recentness of these events, the Company is unable to estimate the amount of losses at this time. However, the Company anticipates that the losses from these events will adversely impact first quarter 2020 financial statements and potentially beyond.