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”) for the years ended December 31, 2012 and 2011. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.
Unpaid loss and loss adjustment expenses comprised 29% of the Company’s total liabilities at December 31, 2012. This liability includes estimates for: 1) unpaid losses on claims reported prior to December 31, 2012, 2) future development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to December 31, 2012 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to December 31, 2012. 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, 2012 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, a variety of 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 31% of the Company’s total liabilities at December 31, 2012. 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.
Net losses and loss adjustment expenses at American Southern increased $3.1 million, or 12.9%, during 2012 as compared to 2011. As a percentage of premiums, net losses and loss adjustment expenses were 73.0% in 2012 compared to 64.6% in 2011. The increase in the loss ratio during 2012 was primarily attributable to increases in the frequency and severity of claims in the commercial automobile line of business and higher claims in the general liability line of business. Partially offsetting the increase in the loss ratio was more favorable loss development in the surety line of business in 2012 as compared to 2011.
Underwriting expenses decreased $1.6 million, or 11.3% during 2012 as compared to 2011. As a percentage of premiums, underwriting expenses were 32.7% in 2012 compared to 36.8% in 2011. The decrease in the expense ratio was primarily due to American Southern’s variable commission structure, which compensates the company’s agents in relation to the loss ratios of the business they write. During periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease, and conversely, during periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase. In 2012, these commission accruals at American Southern decreased $1.9 million as compared to 2011 due to increased loss experience.
Underwriting expenses increased $5.0 million, or 24.1%, during 2012 as compared to 2011. The increase in underwriting expenses during 2012 was primarily attributable to increased commission and underwriting costs associated with the increased level of premiums earned as well as increases in advertising and agency related expenses. Advertising expenses increased $0.5 million in 2012 as compared to 2011and included charges for television commercials, social media campaigns, and branding initiatives. As a percentage of earned premiums, these expenses were 28.9% in 2012 compared to 29.7% in 2011. The decrease in the expense ratio was primarily due to the increase in earned premiums coupled with a relatively consistent level of overall fixed general and administrative expenses.
The Company had net realized investment gains of $1.4 million in 2012 compared to net realized investment gains of $27,000 in 2011. The net realized investment gains in 2012 were primarily due to the sale of several of the Company’s investments in fixed maturities. The net realized investment gains in 2011 resulted from the disposition of several of the Company’s investments in fixed maturities and a $0.3 million gain from the sale of an outparcel of land held within one of the Company’s real estate partnership investments. Partially offsetting the 2011 realized investment gains was an other than temporary impairment charge of $1.2 million related to certain of the Company’s investments in certain bonds and equity securities. Management continually evaluates the Company’s investment portfolio and, as may be determined to be appropriate, makes adjustments for impairments and/or will divest investments. See Note 2 of Notes to Consolidated Financial Statements.
Interest expense increased slightly in 2012 as compared to 2011. Interest expense on the Company’s bank debt and outstanding trusted preferred obligations is directly related to the average London Interbank Offered Rate (“LIBOR”), which likewise has remained relatively unchanged over the past two years. The Company’s revolving credit facility with Wells Fargo Bank, National Association (“Wells Fargo”) expired on August 31, 2012, the stated maturity date, by its terms. See Note 6 of Notes to Consolidated Financial Statements.
Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At December 31, 2012, the Parent’s insurance subsidiaries had an aggregate statutory surplus of $70.0 million. Dividends were paid to Atlantic American by its subsidiaries totaling $7.4 million and $6.5 million in 2012 and 2011, respectively.
The Parent provides certain administrative, purchasing and other services to each of its subsidiaries. The amounts charged to and paid by the subsidiaries for these services were $5.6 million and $5.1 million in 2012 and 2011, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $2.1 million and $1.6 million were paid to the Parent under the tax sharing agreements in 2012 and 2011, respectively. As a result of the Parent’s tax loss carryforwards, which totaled approximately $4.5 million at December 31, 2012, it is anticipated that the tax sharing agreements will continue to provide the Parent with additional funds to assist in meeting its cash flow obligations.
The Company’s revolving credit facility (the “Credit Agreement”) with Wells Fargo expired on August 31, 2012, the stated maturity date, by its terms. There were no balances outstanding under the Credit Agreement at that time. The Company has not entered into any replacement credit facility, but expects that it will evaluate the need to enter into any such facility when, as and if necessary in the future.
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 deferrable interest debentures (“Junior Subordinated Debentures”). The outstanding $18.0 million and $23.2 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, 2012, the effective interest rate was 4.37%. 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.
At December 31, 2012, the Company had 70,000 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 1,754,000 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. As of December 31, 2012 and 2011, the Company had accrued, but unpaid, dividends, on the Series D Preferred Stock of $22,556 and $0.5 million, respectively. During 2012, the Company paid $1.0 million in Series D Preferred Stock dividends. The 2011 Series D Preferred Stock dividend of $0.5 million was paid in January 2012.
Cash and cash equivalents decreased from $21.3 million at December 31, 2011 to $19.0 million at December 31, 2012. The decrease in cash and cash equivalents during 2012 was primarily due to an increased level of investing exceeding normal sales and maturities. Also contributing to the decrease were cash dividends paid on the Company’s Series D Preferred Stock and common stock of $1.0 million and $1.5 million, respectively, as well as the purchase of shares for treasury for $0.6 million. Partially offsetting the decrease was the net cash provided by operations during 2012. Net cash provided by operating activities was $6.1 million in 2012 compared to $9.1 million in 2011. Cash and cash equivalents at December 31, 2012 of $19.0 million are believed to be sufficient to meet the Company’s near-term needs.
As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations, and therefore do not have to provide the table of contractual obligations required by this Item.
We have audited the accompanying consolidated balance sheets of Atlantic American Corporation and subsidiaries (the “Company”) as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years ended. In connection with our audits of the financial statements, we have also audited Schedules II, III, IV and VI. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Atlantic American Corporation and subsidiaries at December 31, 2012 and 2011, and the results of their operations, comprehensive income and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) which, as to insurance companies, differ from the statutory accounting practices prescribed or permitted by regulatory authorities. These financial statements include the accounts of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. Operating results achieved in any historical period are not necessarily indicative of results to be expected in any future period.
The Company’s investments in both fixed maturities, which include bonds and redeemable preferred stocks, and equity securities, which include common and non-redeemable preferred stocks, are classified as “available-for-sale” and, accordingly, are carried at fair value with the after-tax difference from amortized cost, as adjusted if applicable, reflected in shareholders’ equity as a component of accumulated other comprehensive income or loss. The fair values for fixed maturities and equity securities are largely determined by either independent methods prescribed by the National Association of Insurance Commissioners (“NAIC”), which do not differ materially from publicly quoted market prices, when available, or independent broker quotations. The Company owns certain fixed maturities that do not have publicly quoted market values, but had an estimated fair value as determined by management of $2,124 at December 31, 2012. 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. Policy loans and real estate are carried at historical cost. Other invested assets are comprised of investments in limited partnerships, limited liability companies, and real estate joint ventures, and are accounted for using the equity method. If the value of a common stock, preferred stock, other invested asset, or publicly traded bond declines below its cost or amortized cost, if applicable, and the decline is considered to be other than temporary, a realized loss is recorded to reduce the carrying value of the investment to its estimated fair value, which becomes the new cost basis. 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 these 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. Premiums and discounts related to investments are amortized or accreted over the life of the related investment as an adjustment to yield using the effective interest method. Dividends and interest income are recognized when earned or declared. The cost of securities sold is based on specific identification. Unrealized gains (losses) in the value of invested assets are accounted for as a direct increase (decrease) in accumulated other comprehensive income in shareholders’ equity, net of deferred tax and, accordingly, have no effect on net income.
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The main objective of ASU 2013-02 is to enhance disclosures for reclassification adjustments including changes in accumulated other comprehensive income (“AOCI”) balances by component and significant items reclassified out of AOCI. ASU 2013-02 would not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the ASU would require an entity to provide enhanced disclosures to present separately by component reclassifications out of AOCI. In addition, an entity would be required to provide a tabular disclosure of the effect of items reclassified out of AOCI on the respective line items of net income but only if the item reclassified is required under GAAP to be reclassified to net income in its entirety. For other reclassification items that are not required under GAAP to be reclassified directly to net income in their entirety, the new disclosure would only require a cross-reference to other disclosures currently required under GAAP for those items. ASU 2013-02 is effective for interim and annual periods beginning after December 15, 2012. The Company currently does not have items that are reclassified out of AOCI in their entirety directly to net income but does currently have certain reclassifications that would require cross-referencing to other disclosures. Since ASU 2013-02 is a disclosure only update, the Company does not expect its adoption to have a material impact on the Company’s financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires all nonowner changes in stockholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. If an entity elects the single continuous statement method of presentation, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two separate statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income is then required to immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. Regardless of the presentation an entity chooses, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. ASU 2011-05 was to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (“ASU 2011-12”). The amendments in ASU 2011-12 were made to allow the FASB time to evaluate whether to present on the face of the financial statements the effects of reclassifications out of AOCI on the components of net income and other comprehensive income for all periods presented. The Company adopted all the requirements in ASU 2011-05 not affected by ASU 2011-12 on January 1, 2012. Since ASU 2011-05 was a disclosure only update, its adoption did not have a material impact on the Company’s financial condition or results of operations. See Consolidated Statements of Comprehensive Income.
In October 2010, the FASB issued ASU No. 2010-26, Financial Services - Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”) which specifies which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. In accordance with ASU 2010-26, incremental direct costs of contract acquisition are required to be capitalized. Advertising costs are required to be included in deferred acquisition costs only if the capitalization criteria in the direct-response advertising guidance in Subtopic 340-20, Other Assets and Deferred Costs - Capitalized Advertising Costs, are met. All other acquisition related costs, including costs incurred by the insurer in soliciting potential customers, market research, training, administration, unsuccessful acquisition or renewal efforts, and product development, are required to be expensed as incurred. If the initial application of ASU 2010-26 resulted in the capitalization of acquisition costs that had not been capitalized previously, the entity may elect not to capitalize those types of costs. ASU 2010-26 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. ASU 2010-26 was required to be applied prospectively upon adoption; although retrospective application to all prior periods presented upon the date of adoption was also permitted. The Company adopted ASU 2010-26 on January 1, 2012 on a prospective basis. Adoption of ASU 2010-26 did not have a material impact on the Company’s financial condition or results of operations.
The following tables set forth the carrying value, gross unrealized gains, gross unrealized losses and amortized cost of the Company’s investments, aggregated by type and industry, as of December 31, 2012 and December 31, 2011.
Bonds having an amortized cost of $7,170 and $6,107 were on deposit with insurance regulatory authorities at December 31, 2012 and 2011, respectively, in accordance with statutory requirements.
The following table sets forth the carrying value, amortized cost, and net unrealized gains or losses of the Company’s investments aggregated by industry as of December 31, 2012 and 2011.
The following is a summary of investment impairments the Company recorded due to other than temporary declines in values for the years ended December 31, 2012 and 2011.
As of December 31, 2012, securities in an unrealized loss position primarily included certain of the Company’s investments in fixed maturities within the financial services sector. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, including those described above, the Company has deemed these securities to be temporarily impaired as of December 31, 2012.
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 using Level 2 criteria, the Company utilizes various external pricing sources.
Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). The Company’s financial instruments valued using Level 3 criteria consisted of a limited number of fixed maturities and a zero cost interest rate collar. Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. As of December 31, 2012, the value of the Company’s fixed maturities valued using Level 3 criteria was $2,124 and the value of the zero cost interest rate collar was a liability of $141 (See Note 15). The use of different criteria or assumptions regarding data may have yielded materially different valuations.
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, 2011 to December 31, 2012.
The Company’s fixed maturities valued using Level 3 inputs consist solely of issuances of pooled debt 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 (based on current cash flows) discounted at reasonable estimated rates of interest. 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. As the derivative financial instrument is an interest rate collar, changes in valuation are more closely correlated with changes in interest rates and contract maturity date and, accordingly, values are estimated using projected cash flows at current interest rates discounted at a reasonably estimated rate of interest. At December 31, 2012, the value of the derivative financial instrument was determined based on the difference between the contractual interest rate of 4.77% and the current 3-month London Interbank Offered Rate (“LIBOR”) of 0.31%. Fair value quotations are also obtained and considered, as applicable, from the contractual counterparty.
The amortized cost and carrying value of fixed maturities at December 31, 2012 and 2011 by contractual maturity were as follows. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Annualized premiums for accident and health insurance policies were $83,038 and $68,783 at December 31, 2012 and 2011, respectively.
In accordance with general practice in the insurance industry, portions of the life, property and casualty insurance written by the Company are reinsured; however, the Company remains liable with respect to reinsurance ceded should any reinsurer be unable or unwilling to meet its obligations. Approximately 99% of the Company’s reinsurance receivables were due from two reinsurers as of December 31, 2012. Reinsurance receivables of $5,898 were due from Swiss Reinsurance Corporation, rated “AA-” by Standard & Poor’s and “A+” (Superior) by A.M. Best and $12,754 were due from General Reinsurance Corporation, rated “AA+” by Standard & Poor’s and “A++” (Superior) by A.M. Best. Allowances for uncollectible amounts are established against reinsurance receivables, if appropriate.
The primary differences between the effective tax rate and the federal statutory income tax rate resulted from the dividends-received deduction (“DRD”), the small life insurance company deduction (“SLD”) and the change in deferred tax asset valuation allowance. The current estimated DRD is adjusted as underlying factors change and can vary from the estimates based on, but not limited to, actual distributions from these investments as well as the amount of the Company’s 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 change in deferred tax asset valuation allowance was primarily due to the unanticipated utilization of certain capital loss carryforward benefits that had been previously reserved.
The Company’s revolving credit facility (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”) expired on August 31, 2012, the stated maturity date, by its terms. There were no balances outstanding under the Credit Agreement at that time. The Company has not entered into any replacement credit facility, but expects that it will evaluate the need to enter into any such facility when, as and if necessary in the future.
The financial structure of each of Atlantic American Statutory Trust I and II, as of December 31, 2012 and 2011, was as follows:
On February 21, 2006, the Company entered into a zero cost interest rate collar with Wells Fargo to hedge future interest payments on a portion of the Junior Subordinated Debentures. The notional amount of the collar was $18,042 with an effective date of March 6, 2006. The collar has a LIBOR floor of 4.77% and a LIBOR cap of 5.85% and adjusted quarterly on the 4th of each March, June, September and December through its termination date of March 4, 2013. The Company began making payments to Wells Fargo under the zero cost interest rate collar on June 4, 2008. As a result of interest rates remaining below the LIBOR floor of 4.77% through 2012, these payments to Wells Fargo continued through the maturity date.
From time to time, the Company is, and expects that it will be, involved in various claims and lawsuits incidental to and in the ordinary course of its business. In the opinion of management, any such known claims are not expected to have a material adverse effect on the business or financial condition of the Company.
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 2012 and 2011 was $153 and $157, respectively, and consisted of a contribution equal to 50% of up to the first 4% of each participant’s contributions. In addition to the matching contribution, the Company also provided a 3% safe harbor non-elective contribution in 2012 and 2011 of $302 and $280, respectively. The employer match and contribution were made in cash.
The assumed conversion of the Company’s Series D Preferred Stock was excluded from the earnings per common share calculation for all periods presented since its impact would have been antidilutive.
In the normal course of business the Company has engaged in transactions with J. Mack Robinson, the majority shareholder of the Company, and his affiliates, including entities controlled by Mr. Robinson and his wife, a member of the Company’s board of directors (the “Board”), for their benefit and the benefit of their children, including Robin R. Howell, a member of the Board and the wife of Hilton H. Howell, Jr., our president, chief executive officer and a member of the Board. These transactions include the leasing of office space as well as certain investing and financing activities.
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 10).
See Note 2 for a description of the fair value hierarchy as well as a disclosure of levels for classes of these financial assets.
The fair value estimates as of December 31, 2012 and 2011 were based on pertinent information available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, current estimates of fair value may differ significantly from amounts that might ultimately be realized in a market exchange on any subsequent date.
As the Company’s only derivative financial instrument at December 31, 2012 was an interest rate collar, changes in valuation are more closely correlated with changes in interest rates and contract maturity date and, accordingly, values are estimated using projected cash flows at current interest rates discounted at a reasonably estimated rate of interest. Fair value quotations are also obtained and considered, as applicable, from the contractual counterparty.
On July 1, 2011, the Company acquired a block of Medicare supplement business from American Community Mutual Insurance Company (“ACMIC”). The net settlement amount for the transaction of $150 was paid by ACMIC to the Company. The purchase was not significant to the financial position or results of operations of the Company in 2012 or 2011. In connection with the transaction the following assets and liabilities were acquired: