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, 2014 and 2013. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.
Atlantic American is an insurance holding company whose operations are conducted primarily through its insurance subsidiaries: American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”) in the property and casualty insurance industry, and Bankers Fidelity Life Insurance Company and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”) in the life and health insurance industry. Each operating company is managed separately, offers different products and is evaluated on its individual performance.
Unpaid loss and loss adjustment expenses comprised 31% of the Company’s total liabilities at December 31, 2014. This liability includes estimates for: 1) unpaid losses on claims reported prior to December 31, 2014, 2) future development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to December 31, 2014 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to December 31, 2014. Quantification of loss estimates for each of these components involves a significant
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, 2014. 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, 2014. 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 investments 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 $2.2 million at December 31, 2014. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price
On a consolidated basis, the Company had net income of $4.4 million, or $0.19 per diluted share, in 2014, compared to net income of $11.0 million, or $0.48 per diluted share, in 2013. The decrease in net income during 2014 was primarily due to a decrease in realized investment gains. In 2014, realized investments gains decreased by $7.2 million as the Company sold several higher yielding, longer-term investments in 2013 in order to shorten the average maturity of its investment portfolio. Operating income was $2.6 million in 2014 compared to $2.5 million in 2013. The slight increase in operating income during 2014 was primarily attributable to increased profitability in the property and casualty operations as well as lower interest expense due to both the expiration in March 2013 of an interest rate collar and the decrease in August 2014 of the outstanding balance of the Company’s Junior Subordinated Debentures. Partially offsetting the increase in operating income were increases in agency and underwriting related expenses, including increased hiring to support worksite product and distribution initiatives as well as the amortization of unearned compensation from stock awards. Further, investment income also decreased due not only to the sale of the higher yielding, longer-term investments in 2013 discussed previously but also the reinvestment of such proceeds at lower interest rates.
Total revenue was $166.3 million in 2014 as compared to $165.4 million in 2013. Premium revenue increased to $153.5 million in 2014 from $145.6 million in 2013. The increase in premium revenue was primarily attributable to an increase in commercial automobile earned premiums in the property and casualty operations resulting from a significant state contract which incepted in 2013. Also included in total revenue were net realized investment gains of $1.6 million in 2014 compared to net realized investment gains of $8.7 million in 2013. 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.
Total expenses were $161.4 million in 2014 as compared to $154.2 million in 2013. As a percentage of premiums, insurance benefits and losses incurred and commissions and underwriting expenses were 95.8% and 96.8% in 2014 and 2013, respectively.
Net earned premiums increased $6.8 million, or 14.8%, during 2014 as compared to 2013. The increase in net earned premiums was primarily attributable to the increase in commercial automobile earned premiums from
The following summarizes, for the periods indicated, Bankers Fidelity’s premiums, losses and expenses:
Premium revenue at Bankers Fidelity increased $1.1 million, or 1.1%, during 2014 as compared to 2013. Premiums from the Medicare supplement line of business increased $1.2 million, or 1.5%, in 2014 as compared to 2013, due primarily to the implementation of rate increases on renewal business, as appropriate. Other health product premiums increased $0.1 million, or 1.9%, during 2014 as compared to 2013, primarily as a result of new sales of the company’s short-term care products. Premiums from the life insurance line of business decreased $0.3 million, or 2.3%, in 2014 from 2013 due to the redemption and settlement of existing policy obligations exceeding the level of new sales activity. In 2014, the company’s five principal states in terms of premium revenue were Georgia, Indiana, Ohio, Pennsylvania, and Tennessee, which accounted for approximately 44% of total premiums for 2014. The company’s five principal states in terms of premium revenue in 2013 were Georgia, Missouri, Indiana, Ohio and Pennsylvania, and accounted for approximately 46% of the total premiums in that period.
Investment income decreased $0.4 million, or 4.1%, in 2014 as compared to 2013. The decrease in investment income was primarily attributable to sales during 2013 of a number of the Company’s higher yielding, longer-term fixed maturities due to management’s decision to shorten the average maturity of the portfolio. The Company generally has not been able to reinvest the proceeds from such sales at equivalent interest rates.
Interest expense decreased $0.3 million, or 15.3%, in 2014 as compared to 2013. The decrease in interest expense was primarily due to the termination of the Company’s zero cost interest rate collar with Wells Fargo Bank, National Association (“Wells Fargo”) on March 4, 2013, the stated maturity date, by its terms. The interest rate collar had a London Interbank Offered Rate (“LIBOR”) floor of 4.77%. As a result of interest rates remaining below the LIBOR floor, the Company was making payments to Wells Fargo under the interest rate collar through the maturity date. Also contributing to the decrease in interest expense was a decrease in the outstanding amount of Junior Subordinated Debentures. On August 4, 2014, the Company acquired $7.5 million of principal amount Junior Subordinated Debentures, which decreased the outstanding balance to $33.7 million and resulted in prospectively lower interest expense.
The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and surplus levels, and meeting debt service requirements. Current and expected patterns of claim frequency and severity may change from period to period but generally are expected to
Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the subsidiaries. The 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, 2014, the Parent had approximately $19.7 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, 2014, the Parent’s insurance subsidiaries had an aggregate statutory surplus of $73.0 million. Dividends were paid to Atlantic American by its subsidiaries totaling $6.5 million and $6.6 million in 2014 and 2013, 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 $7.5 million and $6.3 million in 2014 and 2013, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $4.7 million and $2.6 million were paid to the Parent under the tax sharing agreements in 2014 and 2013, respectively. As a result of the Parent’s tax loss, 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.
Cash and cash equivalents decreased from $33.1 million at December 31, 2013 to $16.4 million at December 31, 2014. The decrease in cash and cash equivalents during 2014 was primarily attributable to an
We have audited the accompanying consolidated balance sheets of Atlantic American Corporation as of December 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years then ended. In connection with our audits of the financial statements, we have also audited Schedules II, III, IV and VI. These financial statements 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 at December 31, 2014 and 2013, 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.
Intangibles consist of goodwill and other indefinite-lived intangibles. Goodwill represents the excess of cost over the fair value of net assets acquired and is not amortized. Other indefinite-lived intangibles represent the value of licenses acquired in the 2013 acquisition of BFAC (Note 16) and are not amortized. The Company periodically reviews its goodwill and other indefinite-lived intangibles to determine if any adverse conditions exist that could indicate impairment. Conditions that could trigger impairment include, but are not limited to, a significant change in business climate that could affect the value of the related asset, an adverse action, or an assessment by a regulator. No impairment of the Company’s recorded intangibles was identified during the periods presented.
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 $2,214 at December 31, 2014. 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 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. 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.
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant estimates and assumptions are used in developing and evaluating deferred income taxes, deferred acquisition costs, insurance reserves, investments, and commitments and contingencies, among others, and actual results could differ materially from management’s estimates.
The following table sets forth the carrying value, amortized cost, and net unrealized gains (losses) of the Company’s investments aggregated by industry as of December 31, 2014 and 2013.
During the years ended December 31, 2014 and 2013, the Company recorded impairments related to the following investments.
As of December 31, 2014, securities in an unrealized loss position primarily included certain of the Company’s investments in fixed maturities within the other diversified business, other diversified consumer and financial services sectors. Securities in an unrealized loss position reported in the other diversified business sector included gross unrealized losses of $1,416 related to investments in fixed maturities in the oil and gas industry. 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, 2014.
As of December 31, 2013, financial instruments carried at fair value were measured on a recurring basis as summarized below:
The Company’s bond portfolio included 83% investment grade securities, as defined by the NAIC, at December 31, 2014.
Annualized premiums for accident and health insurance policies were $88,956 and $91,359 at December 31, 2014 and 2013, respectively.
life, accident and health future policy benefits are generally: (i) 2.5% to 5.5% for issues prior to 1977, (ii) 7% graded to 5.5% for 1977 through 1979 issues, (iii) 9% for 1980 through 1987 issues, (iv) 5% to 7% for 1988 through 2009 issues, (v) 4% for 2010 through 2012 issues, and (vi) 3.5% for 2013 to 2014 issues.
As of December 31, 2014, the Company had regular federal net operating loss carryforwards (“NOLs”) of approximately $58 expiring in 2032. Currently, the Company believes that deferred income tax benefits relating to the NOLs will be realized. However, expected realization of the NOLs is assessed periodically based on the Company’s then current and anticipated results of operations, and amounts could increase or decrease if estimates of future taxable income change.
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 2014, a total of 148,500 restricted shares, with an estimated fair value of $559, were issued to officers under the 2012 Plan. In 2013, a total of 200,000 restricted shares, with an estimated fair value of $704, were issued to officers and directors under the 2012 Plan. The estimated fair value of the restricted shares issued under the 2012 Plan for 2014 and 2013 was based on the common stock price at date of grant.
common stock of the Company. Under the Agent Stock Purchase Plan, payment for shares of common stock of the Company is made by either deduction from an agent’s commission payment or a direct cash payment. Stock purchases are made at the end of each calendar quarter at the then current market value.
incurred, while they are deferred and amortized over the estimated life of the policies under GAAP; (iii) the provision that is made for deferred income taxes is different than under GAAP; (iv) the timing of establishing certain reserves is different than under GAAP; and (v) certain valuation allowances attributable to certain investments are different.
Certain members of the Company’s management and board of directors are shareholders and on the board of directors of Gray Television, Inc. (“Gray”). As of December 31, 2014 and 2013, the Company owned 880,272 shares of Gray Class A common stock and 106,000 shares of Gray common stock. The aggregate carrying value of these investments in Gray at December 31, 2014 and 2013 was $9,242 and $12,942, respectively.
The following table sets forth the balance of each component of accumulated other comprehensive income as of December 31, 2014 and 2013, and the changes in the balance of each component thereof during 2014.