Deferred acquisition costs comprised 9% of the Company’s total assets at December 31, 2015. 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.
A reconciliation of net income to operating income is as follows:
Total revenue was $165.9 million in 2015 as compared to $166.3 million in 2014. Premium revenue decreased to $150.9 million in 2015 from $153.5 million in 2014. The decrease in premium revenue was primarily attributable to a decrease in Medicare supplement business in the life and health operations resulting from a decline in both first year and renewal premiums. Also included in total revenue were net realized investment gains of $4.9 million in 2015 compared to net realized investment gains of $1.6 million in 2014. 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 $160.2 million in 2015 as compared to $161.4 million in 2014. As a percentage of premiums, insurance benefits and losses incurred and commissions and underwriting expenses were 95.8% in both 2015 and 2014.
Gross written premiums at American Southern increased $4.4 million, or 7.8%, during 2015 as compared to 2014. The increase in gross written premiums was primarily attributable to an increase of $2.3 million in automobile physical damage written premiums resulting from two programs as well as an increase in surety business of $2.5 million from an existing agency. Also contributing to the increase in gross written premiums was a $0.7 million increase from a new private passenger automobile liability program which began in 2015. Offsetting the increases in gross written premiums in 2015 was a decrease of $1.0 million in the commercial automobile liability line of business due primarily to the cancellation of an agency in 2014. In 2015, American Southern’s five principal states in terms of written premiums were Alabama, Florida, Georgia, South Carolina, and Tennessee, which accounted for approximately 72% of total written premiums for 2015. American Southern’s five principal states in terms of written premiums in 2014 were Alabama, Florida, Georgia, South Carolina, and Texas, which then accounted for approximately 70% of the total written premiums.
Net losses and loss adjustment expenses at American Southern decreased $3.1 million, or 8.2%, during 2015 as compared to 2014. As a percentage of premiums, net losses and loss adjustment expenses were 64.3% in 2015 compared to 72.5% in 2014. The decrease in the loss ratio was due to more favorable loss experience in the automobile and surety lines of business and was primarily attributable to actions taken in prior years to better rationalize American Southern’s book of business and to strengthen guidelines with respect to new and renewal business.
In establishing reserves, American Southern initially reserves for losses at the higher end of the reasonable range if no other value within the range is determined to be more probable. Selection of such an initial loss estimate is an attempt by management to give recognition that initial claims information received generally is not conclusive with respect to legal liability, is generally not comprehensive with respect to magnitude of loss and generally, based on historical experience, will develop more adversely as time passes and more information becomes available. However, as a result, American Southern generally experiences reserve redundancies when analyzing the development of prior year losses in a current period. At December 31, 2015, the range of estimates developed in connection with the loss reserves for American Southern indicated that reserves could be as much as 16.0% lower or as much as 6.3% higher. Development from prior years’ reserves has historically reduced the current year loss ratio; however, such reduction in the current year loss ratio is generally offset by the reserves established in the current year for current period losses. American Southern’s estimated net reserve redundancies for the years ended December 31, 2015 and 2014 were less than $0.1 million and $0.2 million, respectively. To the extent reserve redundancies vary between years, there is an incremental impact on the results of operations of American Southern and the Company. The indicated redundancy in 2015 was $0.1 million less than that in 2014. After considering the impact on contingent commissions and other related accruals, the $0.1 million decrease in the redundancy resulted in a decrease in income from operations before tax of approximately $0.1 million in 2015 as compared to 2014. Management believes that such differences will continue in future periods but is unable to determine if or when incremental redundancies will increase or decrease, until the underlying losses are ultimately settled.
Benefits and losses decreased $1.7 million, or 2.5%, during 2015 as compared to 2014. As a percentage of premiums, benefits and losses were 68.8% in 2015 compared to 67.5% in 2014. The increase in the loss ratio was primarily attributable to the company’s initiative to moderate price increases in Medicare supplement product offerings in certain competitive markets.
Underwriting expenses decreased $1.1 million, or 3.2%, during 2015 as compared to 2014. As a percentage of earned premiums, these expenses were 34.0% in 2015 compared to 33.6% in 2014. The slight increase in the expense ratio was primarily due to earned premiums decreasing at a higher rate than the decrease in underwriting expenses.
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, 2015 and 2014, 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.
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 $2,237 at December 31, 2015. 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.
leaseback transactions. 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. 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 is currently evaluating the impact on our consolidated financial statements upon the adoption of this guidance.
As of December 31, 2015, there were ninety-seven securities in an unrealized loss position which primarily included certain of the Company’s investments in fixed maturities within the other diversified business, other diversified consumer, utilities and telecom and financial services sectors. Securities in an unrealized loss position reported in the other diversified business sector included gross unrealized losses of $4,250 related to investments in fixed maturities of thirteen different issuers, all related to the oil and gas industry. The oil and gas investee companies represent a diversified group of businesses which include, among others, refiners, pipeline owners and operators, deep water offshore rig owners and operators, all of which are in continuing stages of rationalizing their current investments, future capital expenditures and assessing capital and liquidity requirements. The companies are continuing to assess and revise short-term, intermediate and long-term business plans in response to the current trends in oil and gas markets. While these companies have generally experienced credit downgrades or may be currently under review, the Company believes that many of the downgrades are in response to external market forces and not necessarily specific credit events of any obligor which would currently indicate that an other than temporary impairment need be recorded. All of the investees have continued to make regular interest payments on their debt when and as due and the Company continues to perform in-depth analysis of the financial disclosures of each of the investees on a regular basis. 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, 2015.
Level 3 Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. The Company’s financial instruments valued using Level 3 criteria consist of a limited number of fixed maturities. As of December 31, 2015 and 2014, the value of the Company’s fixed maturities valued using Level 3 criteria was $2,237 and $2,214, respectively. The use of different criteria or assumptions regarding data may have yielded materially different valuations.
As of December 31, 2014, financial instruments carried at fair value were measured on a recurring basis as summarized below:
The amortized cost and carrying value of fixed maturities at December 31, 2015 and 2014 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 82% investment grade securities, as defined by the NAIC, at December 31, 2015.
Prior years’ development was primarily the result of better than expected development on prior years IBNR reserves for certain lines of business.
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, 2015. Reinsurance receivables of $300 were due from Swiss Reinsurance Corporation, rated “AA-” by Standard & Poor’s and “A+” (Superior) by A.M. Best and $11,339 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 financial structure of each of Atlantic American Statutory Trust I and II, as of December 31, 2015 and 2014, was as follows:
(4) The Parent has guaranteed, on a subordinated basis, all of the obligations under the Trust Preferred Securities, including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation.
From time to time, the Company is, and expects to continue to be, involved in various claims and lawsuits incidental to and in the ordinary course of its business. In the opinion of management, any such known claims are not expected to have a material effect on the financial condition or results of operations of the Company.
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 2015, a total of 48,300 restricted shares, with an estimated fair value of $178, were issued under the 2012 Plan. In 2014, a total of 148,500 restricted shares, with an estimated fair value of $559, were issued under the 2012 Plan. The estimated fair value of the restricted shares issued under the 2012 Plan for 2015 and 2014 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 outstanding under the 2012 Plan in 2015 or 2014. Shares available for future grants at December 31, 2015 and 2014 were 1,603,200 and 1,651,500, respectively.
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 2015 and 2014 was $212 and $186, respectively, and consisted of a contribution equal to 35% of up to the first 6% of each participant’s contributions for 2015 and 50% of up to the first 4% of each participant’s contributions for 2014. In addition to the matching contribution, the Company also provided a 3% safe harbor non-elective contribution in 2015 and 2014 of $416 and $391, respectively. All contributions were made in cash.
The Company had 55,000 shares of Series D preferred stock (“Series D Preferred Stock”) outstanding at December 31, 2015 and 2014, respectively. All of the shares of Series D Preferred Stock are held by an affiliate
Under the insurance code of the state in which each insurance subsidiary is domiciled, dividend payments to the Parent by its insurance subsidiaries are subject to certain limitations without the prior approval of the applicable state’s Insurance Commissioner. The Parent received dividends of $6,750 and $6,468 in 2015 and 2014, respectively, from its subsidiaries. In 2016, dividend payments to the Parent by the insurance subsidiaries in excess of $6,095 would require prior approval.
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, 2015, 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.
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, 2015 and 2014, the Company paid $875 and $852, 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 9). During the years ended December 31, 2015 and 2014, the Company paid this entity $399 and $471, respectively, in dividends on the Series D Preferred Stock. During 2014, the Company redeemed $1,000 of the Series D Preferred Stock.
The carrying amount is determined in accordance with methods prescribed by the NAIC, which do not differ materially from publicly quoted market prices. Certain fixed maturities do not have publicly quoted values and 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 discounted at a reasonably estimated rate of interest. Other qualitative and quantitative information received from the original underwriter of the pooled offerings is also considered, as applicable.