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Item 7. Management’s Discussion and Analysis

2022-03-25 compared with 2021-03-23 · 253 added, 241 removed, 168 unchanged (75% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2020 and 2019.

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, 2021 and 2020.

This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.

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judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies.

Atlantic American does not expect that changes in the estimates determined using these policies will have a

material effect on the Company’s financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.

Cash and investments comprised 74% of the Company’s total assets at December 31, 2020.

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

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.

Atlantic American does not expect that changes in the estimates determined using these policies will have

a material effect on the Company’s financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.

Cash and investments comprised 77% of the

Company’s total assets at December 31, 2021.

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.

The Company determines the fair values of certain financial instruments based on the fair value hierarchy established in Accounting Standards Codification (“ASC”) 820-10-20, Fair Value Measurements and Disclosures (“ASC 820-10-20”).

The fair values of fixed maturities and equity securities are largely determined by nationally quoted market prices, when available, or independent broker quotations.

Note 2 and Note 3 of Notes to Consolidated Financial Statements with respect to assets and liabilities carried at fair value and information about the inputs used to value those financial instruments, by hierarchy level, in accordance with ASC

Future policy benefits comprised 35% of the Company’s total liabilities at December 31, 2020.

These liabilities relate primarily to life insurance products

and are based upon assumed future investment yields, mortality rates, withdrawal rates and expenses after giving effect to possible risks of adverse deviation.

The assumed mortality and withdrawal rates are based upon the Company’s experience

modified as necessary to reflect anticipated trends and are generally established at contract inception.

If actual results differ from the initial assumptions, the amount of the Company’s recorded liability could require adjustment.

Unpaid loss and loss adjustment expenses comprised 30% of the Company’s total liabilities at December 31, 2020.

The fair values of fixed maturities and equity securities are largely determined by nationally quoted market prices, when available, or independent

broker quotations.

See Note 2 and Note 3 of Notes to Consolidated Financial Statements with respect to assets and liabilities carried at fair value and information about the inputs used to value those financial instruments, by hierarchy level, in

accordance with ASC 820-10-20.

Future policy benefits comprised 33% of the

Company’s total liabilities at December 31, 2021.

These liabilities relate primarily to life insurance products and are based upon assumed future investment yields, mortality rates, and lapse rates after giving effect to possible risks of adverse

The assumed mortality and lapse rates are based upon the Company’s experience modified as necessary to reflect anticipated trends and are generally established at contract inception.

If actual results differ from the initial

assumptions, the amount of the Company’s recorded liability could require adjustment.

Unpaid loss and loss adjustment expenses

comprised 33% of the Company’s total liabilities at December 31, 2021.

This liability includes estimates for:

unpaid losses on claims reported prior to December 31, 2020, 2) future development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to December 31, 2020 but not yet reported and 4) unpaid loss adjustment expenses for

reported and unreported claims incurred prior to December 31, 2020.

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, 2020 but not yet reported, and

estimates of unpaid loss adjustment expenses are developed based on the Company’s historical experience, using actuarial methods to assist in the analysis.

The Company’s actuaries develop ranges of estimated development on reported and unreported

claims as well as loss adjustment expenses using various methods, including the paid-loss development method, the reported-loss development method, the paid Bornhuetter-Ferguson method and the reported Bornhuetter-Ferguson method.

Any single method

used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes affecting the business environment and the Company’s administrative policies.

Further, external factors, such as legislative changes, medical

cost inflation, and others may directly or indirectly impact the relative adequacy of liabilities for unpaid losses and loss adjustment expenses.

The Company’s approach is to select an estimate of ultimate losses based on comparing results of a

variety of reserving methods, as opposed to total reliance on any single method.

Unpaid loss and loss adjustment expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used

to develop such estimates, the amount of the Company’s recorded liability for unpaid loss and loss adjustment expenses is adjusted.

In the event the Company’s actual reported losses in any period are materially in excess of the previously estimated

amounts, such losses, to the extent reinsurance coverage does not exist, could have a material adverse effect on the Company’s results of operations.

Receivables are amounts due from reinsurers, insureds and agents, and any sales of investment securities not yet settled, and comprised 14% of the Company’s

total assets at December 31, 2020.

1) unpaid losses on claims reported prior to December 31, 2021, 2) future development on those reported claims, 3) unpaid ultimate

losses on claims incurred prior to December 31, 2021 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to December 31, 2021.

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, 2021 but not yet reported, and estimates of unpaid loss adjustment expenses are developed based on the Company’s historical experience, using actuarial

methods to assist in the analysis.

The Company’s actuaries develop ranges of estimated development on reported and unreported claims as well as loss adjustment expenses using various methods, including the paid-loss development method, the

reported-loss development method, the paid Bornhuetter-Ferguson method and the reported Bornhuetter-Ferguson method.

Any single method used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes

affecting the business environment and the Company’s administrative policies.

Further, external factors, such as legislative changes, medical cost inflation, and others may directly or indirectly impact the relative adequacy of liabilities for

unpaid losses and loss adjustment expenses.

The Company’s approach is to select an estimate of ultimate losses based on comparing results of a variety of reserving methods, as opposed to total reliance on any single method.

Unpaid loss and loss

adjustment expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used to develop such estimates, the amount of the Company’s recorded liability for unpaid loss and loss

adjustment expenses is adjusted.

In the event the Company’s actual reported losses in any period are materially in excess of the previously estimated amounts, such losses, to the extent reinsurance coverage does not exist, could have a material

adverse effect on the Company’s results of operations.

Receivables are amounts due from reinsurers,

insureds and agents, and any sales of investment securities not yet settled, and comprised 11% of the Company’s total assets at December 31, 2021.

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

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.

Deferred acquisition costs comprised 10% of the Company’s total assets at December 31, 2020.

Deferred acquisition costs are commissions, premium taxes, and

other incremental direct costs of contract acquisition that results directly from and are essential to the contract transaction(s) and would not have been incurred by the Company had the contract transaction(s) not occurred.

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.

Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the

amounts that are recognized for tax purposes.

These deferred income taxes are measured by applying currently enacted tax laws and rates.

Valuation allowances are recognized to reduce the deferred tax asset to the amount that is deemed more likely

than not to be realized.

In assessing the likelihood of realization, management considers estimates of future taxable income and tax planning strategies.

Share-based transactions include employee and director share-based compensation awards .

The Company determines a

grant date fair value based on the price of our publicly-traded common stock and recognize the related compensation expense, adjusted for actual forfeitures, in the consolidated statement of operations on a straight-line basis over the requisite

service period for the entire award.

For non-employee share-based compensation awards, the Company recognizes the impact during the period of performance, and the fair value of the award is measured as of the date performance is complete, which is

the vesting date.

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.

Deferred acquisition costs comprised 10% of

the Company’s total assets at December 31, 2021.

Deferred acquisition costs are commissions, premium taxes, and other incremental direct costs of contract acquisition that results directly from and are essential to the contract transaction(s) and

would not have been incurred by the Company had the contract transaction(s) not occurred.

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

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.

Deferred income taxes reflect the effect of

temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for tax purposes.

These deferred income taxes are measured by applying currently enacted tax laws and

Valuation allowances are recognized to reduce the deferred tax asset to the amount that is deemed more likely than not to be realized.

In assessing the likelihood of realization, management considers estimates of future taxable income and

tax planning strategies.

Share-based transactions include employee and

director share-based compensation awards .

The Company determines a grant date fair value based on the price of our publicly-traded common stock and recognize the related compensation expense, adjusted for

actual forfeitures, in the consolidated statement of operations on a straight-line basis over the requisite service period for the entire award.

For non-employee share-based compensation awards, the Company recognizes the impact during the period

of performance, and the fair value of the award is measured as of the date performance is complete, which is the vesting date.

Refer to Note 1 of Notes to Consolidated Financial Statements for details regarding the Company’s significant accounting policies.

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Total revenue

Income (loss) before income taxes

Income before income taxes

Property and Casualty:

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Corporate and Other

Income (loss) before income taxes

Net income (loss)

Income before income taxes

Management also considers and evaluates performance by analyzing the non-GAAP measure operating income or loss, and believes it is a useful metric for investors, potential investors, securities

analysts and others because it isolates the “core” operating results of the Company before considering certain items that are either beyond the control of management (such as income tax expense, which is subject to timing, regulatory and rate changes

depending on the timing of the associated revenues and expenses) or are not expected to regularly impact the Company’s operational results (such as any realized or unrealized investment gains or losses, which are not a part of the Company’s primary

operations and are, to a limited extent, subject to discretion in terms of timing of realization).

A reconciliation of net income (loss) to operating income (loss) is as follows:

changes depending on the timing of the associated revenues and expenses) or are not expected to regularly impact the Company’s operational results (such as any realized or unrealized investment gains or losses, which are not a part of the Company’s

primary operations and are, to a limited extent, subject to discretion in terms of timing of realization).

A reconciliation of net income, the most directly comparable GAAP measure, to operating income (loss) is as follows:

Year Ended December 31,

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Reconciliation of Non-GAAP Financial Measure

Net income (loss)

Income tax expense (benefit)

Income tax expense

Realized investment gains, net

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Non-GAAP operating income (loss)

On a consolidated basis, the Company had net income of $12.2 million, or $0.56 per diluted share, in 2020, compared to net loss of $0.4 million, or $0.04 per diluted share, in 2019.

Operating income

was $11.5 million in 2020 as compared to an operating loss of $7.5 million in 2019.

The increase in operating income was primarily due to favorable loss experience in the life and health operations, resulting from a significant decrease in the number

of incurred claims within the Medicare supplement line of business.

This decrease in the number of incurred claims was primarily attributable to the Company’s individual policy holders being subject to varying degrees of shelter in place orders

instituted throughout the United States during 2020 as a result of COVID-19.

On a consolidated basis, the Company had net income of $4.3 million, or $0.19 per diluted share, in 2021, compared to net income of $12.2 million, or $0.56 per diluted share, in 2020.

loss was $1.5 million in 2021 as compared to operating income of $11.5 million in 2020.

The decrease in operating income was primarily due to less favorable loss experience in the life and health operations, resulting from a significant increase in

the number of claims incurred in the Medicare supplement line of business.

This increase in the number of incurred claims was primarily attributable to the increase in utilization of Medicare supplement insurance benefits, returning to historical

averages relative to the exceptionally low utilization experienced after the onset of the COVID-19 pandemic when many policyholders were sheltered in place.

Total revenue was $199.6 million in 2021 as compared to $195.3 million in 2020.

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The increase in premium revenue was

primarily due to an increase in the automobile physical damage line of business within the property and casualty operations in addition to life and other health lines in the life and health operations.

Partially offsetting the increase in premium

revenue was a decrease in the Medicare supplement line of business in the life and health operations.

primarily due to an increase in the automobile physical damage line of business within the property and casualty operations.

Partially offsetting the increase in premium revenue was a decrease in the Medicare supplement line of business in the

life and health operations.

A more detailed analysis of the operating companies and other corporate activities follows.

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The increase in gross written premiums was primarily attributable to an increase in

premiums written in the automobile physical damage line of business due to a new agency that started in the second half of 2019, as well as increased writings from certain existing agencies.

Also contributing to the increase in gross written premiums

was an increase in premiums written in the general liability line of business related to new and existing programs.

Partially offsetting the increase in gross written premiums was a decline in premiums written in the automobile liability line of

business primarily attributable to the cancellation of certain programs and a return of premium to one account as a result of a decline of usage due to the impact of the COVID-19 pandemic.

premiums written in the automobile physical damage line of business from existing agencies, as well as an increase in gross written premiums in the general liability line of business as a result of a new program that started in the second half of

Ceded premiums increased $0.6 million, or 10.5%, during 2021 as compared to 2020.

American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally increase

or decrease as earned premiums increase or decrease.

Also contributing to the increase in ceded premiums was an increase in earned premiums in certain accounts within the automobile physical damage and general liability lines of business, which are

subject to reinsurance.

American Southern’s ceded premiums are typically determined as a percentage of earned premiums and generally

increase or decrease as earned premiums increase or decrease.

Contributing to the increase in ceded premiums was an increase in earned premiums in certain accounts within the automobile physical damage and general liability lines of business,

which are subject to reinsurance.

Also contributing to the ceded premium increase was a rate increase on catastrophe reinsurance.

The following table summarizes, for the periods indicated, American Southern’s net earned premiums by line of business:

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The increase in net earned premiums was primarily attributable to an increase in automobile physical damage

coverage resulting from the new agency as previously mentioned.

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.

coverage resulting from existing agencies and an increase in general liability as a result of a new program as previously mentioned.

Partially offsetting the increase in net earned premiums was a decrease in the surety line of business primarily

attributable to marketplace competition, as well as a decrease in the other lines of business resulting from the termination of a program.

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.

The performance of an insurance company is often measured by its combined ratio.

The combined ratio represents the percentage of losses, loss adjustment expenses and other expenses that are incurred

for each dollar of premium earned by the company.

The combined ratio represents the percentage of losses, loss adjustment expenses and other expenses that are

incurred for each dollar 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).

Insurance benefits and losses incurred at American Southern decreased $0.2 million, or 0.5%, during 2020 as compared to 2019.

As a percentage of premiums, insurance benefits and losses incurred were

63.1% in 2020 as compared to 67.4% in 2019.

The decrease in the loss ratio was primarily due to a decline in the number and severity of claims in the automobile liability line of business as a result of the impact of the COVID-19 pandemic.

offsetting the decrease in the loss ratio was less favorable loss experience in the automobile physical damage line of business due to an increase in frequency of claims from the new agency.

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).

Insurance benefits and losses incurred at American Southern increased $5.1 million, or 12.9%, during 2021 as compared to 2020.

As a percentage of premiums, insurance benefits and losses incurred

were 65.4% in 2021 as compared to 63.1% in 2020.

The increase in the loss ratio was primarily due to less favorable loss experience in the automobile physical damage line of business due to an increase in frequency of claims resulting from both

inclement weather throughout the year and an increase in the number of insureds in 2021.

Also contributing to the increase in the loss ratio was an increase in the number of claims within the surety line of business.

Commissions and underwriting expenses increased $0.7 million, or 3.8%, during 2021 as compared to 2020.

As a percentage of premiums, these expenses were 29.6% in 2021 as compared to 31.1% in 2020.

The increase in the expense ratio was primarily due to an increase in fixed costs related to new business related to the new agency as previously mentioned.

Also contributing to the increase in the expense ratio is 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.

During periods in which the loss ratio decreases, commissions and underwriting expenses will

generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease.

In 2020, variable commissions at American Southern increased $0.1 million as compared to 2019 due to

improved loss ratios from certain accounts subject to variable commissions.

The decrease in the expense ratio was primarily due to the increase in earned premiums.

Partially offsetting the decrease in expense ratio was 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.

During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio

increases, commissions and underwriting expenses will generally decrease.

In 2021, variable commissions at American Southern increased $0.6 million as compared to 2020 due to improved loss ratios from certain accounts subject to variable

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.

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 the current period.

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 the current period.

At December 31, 2021, the range of estimates developed in connection with the loss reserves for American Southern indicated that reserves could be as much as 12.2% lower or as much as 3.1% higher.

Development from

prior years’ reserves has historically reduced the current year loss ratio;

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.

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.

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.

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 2020, approximately 47% 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 44% in 2019.

In each of 2021 and 2020, approximately 47% 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.

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.

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.

Bankers Fidelity

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Other health product premiums increased $1.1 million, or 12.4%, during 2021 as compared to 2020, primarily as a result of new

sales of the company’s group health products.

Gross earned premiums from the life insurance line of business increased $0.8 million, or 9.9%, in 2020 from 2019 due to an increase in the group life products premium.

Partially offsetting the increase

in gross earned premiums from the life insurance line was a decrease in individual life products premium, resulting from the redemption and settlement of existing individual life policy obligations exceeding the level of new individual life sales.

Premiums ceded decreased $0.3 million, or 0.5%, in 2020 from 2019.

The decrease in ceded premiums was due to a decrease in Medicare supplement premiums subject to the reinsurance agreement.

Insurance benefits and losses incurred decreased $19.1 million, or 19.2%, during 2020 as compared to 2019.

sales of the company’s group health and individual cancer products.

Gross earned premiums from the life insurance line of business increased $1.3 million, or 13.6%, in 2021 from 2020 due to an increase in the group life product premiums.

offsetting this increase was a decline in individual life products premium, resulting from the redemption and settlement of existing individual life policy obligations exceeding the level of new individual life sales.

Premiums ceded decreased $4.8

million, or 6.6%, in 2021 from 2020.

The decrease in ceded premiums was due to a decrease in Medicare supplement premiums subject to reinsurance.

Insurance benefits and losses incurred increased $6.7 million, or 8.3%, during 2021 as compared to 2020.

As a percentage of premiums, benefits and losses were 75.1% in 2021 as compared to 66.5% in

The decrease in the loss ratio was primarily due to a significantly lower number of claims incurred in the Medicare supplement line of business due to the Company’s individual policy holders being subject to varying degrees of shelter in place

orders instituted throughout the United States during 2020 as a result of COVID-19.

Also contributing to the decrease in the loss ratio was an improvement in rate adequacy in the Medicare supplement line of business as a result of implementation of

rate increases on existing business.

Commissions and underwriting expenses decreased $1.4 million, or 3.9%, during 2020 as compared to 2019.

The increase in the loss ratio was primarily due to an increase in the number of claims incurred in the Medicare supplement line of business.

During 2021, utilization of Medicare supplement insurance benefits increased, returning to

historical averages relative to the exceptionally low utilization experienced after the onset of the COVID-19 pandemic when many policyholders were sheltered in place.

Also contributing to the increase in the loss ratio was an increase in both the

group and individual life lines of business.

Commissions and underwriting expenses increased $0.5 million, or 1.6%, during 2021 as compared to 2020.

As a percentage of earned premiums, these expenses were 29.9% in 2021 as compared to 28.2% in

The decrease in the expense ratio was primarily due to a decrease in agent incentive costs and realization of costs saving initiatives, predominantly related to postage costs.

Also contributing to the decrease in the expense ratio was a

decrease in expenses related to servicing the Medicare supplement line of business.

The increase in the expense ratio was primarily due to the amortization of deferred acquisition costs (“DAC”) exceeding the level of additions to DAC.

The increase in the net amortization of DAC during 2021 is primarily due to non-renewals

exceeding the level of new business writings in the Medicare supplement line of business, as previously mentioned.

Also contributing to the increase in the expense ratio was an increase in expenses related to servicing the Medicare supplement line

Net Investment Income and Realized Gains

Investment income decreased $1.2 million, or 13.8%, in 2020 as compared to 2019.

The decrease in investment income was primarily attributable to a decrease in the equity in earnings from investments

in the Company’s limited partnerships and limited liability companies of $0.9 million.

Investment income increased $0.8 million, or 10.1%, in 2021 as compared to 2020.

The increase in investment income was primarily attributable to an increase in the equity in earnings from

investments in the Company’s limited partnerships and limited liability companies of $0.7 million.

The Company had net realized investment gains of $4.9 million in 2021 as compared to net realized investment gains of $7.4 million in 2020.

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The net realized investment gains in

2019 resulted from the disposition of certain of the Company’s investments in equity and fixed maturities.

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.

2020 were primarily attributable to gains of $6.9 million from the sale of the Company’s interest in a certain limited liability company as well as gains from the sale of a number of the Company’s investments in fixed maturities.

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.

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The Company recognized net

unrealized losses on equity securities of $3.4 million and unrealized gains of $5.5 million during the years ended December 2020 and 2019, respectively.

Changes in unrealized gains on equity securities for the applicable periods are primarily the

result of fluctuations in the market value of certain of the Company’s equity securities.

unrealized gains on equity securities of $1.9 million and unrealized losses on equity securities of $3.4 million during the years ended December 2021 and 2020, respectively.

Changes in unrealized gains on equity securities for the applicable

periods are primarily the result of fluctuations in the market value of certain of the Company’s equity securities.

Interest Expense

Interest expense decreased $0.5 million, or 24.4%, in 2020 as compared to 2019 due to a decrease in the average London Interbank Offered Rate (“LIBOR”) during the years ending 2020 and 2019,

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 2020 resulted from permanent differences related to meals & entertainment and vested stock

Also contributing to differences between the effective tax rate and the federal statutory income tax rate were provision-to-filed return adjustments that are generally updated at the completion of the third quarter of each fiscal year and

were $0.02 million in the year ended December 31, 2020.

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

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.

Interest expense decreased $0.2 million, or 13.9%, in 2021 as compared to 2020.

Changes in interest expense were primarily due to changes in the London Interbank Offered Rate (“LIBOR”), as the

interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) are directly related to LIBOR.

The Company is preparing for the expected discontinuation of LIBOR by identifying,

assessing and monitoring risks associated with LIBOR transition.

Preparation includes taking steps to update operational processes to support alternative reference rates and models, as well as evaluating legacy contracts for any changes that may be

required, including the determination of applicable fallbacks.

The primary differences between the effective tax rate and the federal statutory income tax rate for 2021 resulted from the adjustment for prior years’ estimates to actual that are generally

updated at the completion of the third quarter of each fiscal year and were $0.09 million in the year ended December 31, 2021.

Also contributing to differences between the effective tax rate and the federal statutory income tax rate were permanent

differences related to meals and entertainment and vested stock and club dues.

Another contributing factor 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 primary differences between the effective tax rate and the federal statutory income tax rate for 2020 resulted from permanent differences related to meals and entertainment and vested stock and

Also contributing to differences between the effective tax rate and the federal statutory income tax rate were adjustment for prior years’ estimates to actual that are generally updated at the completion of the third quarter of each

fiscal year and were $0.02 million in the year ended December 31, 2020.

Liquidity and Capital Resources

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the sale and maturity of its invested assets.

The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts

and reinsurance collections will be adequate to fund the payment of claims and operating expenses as needed.

The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium

receipts and reinsurance collections will be adequate to fund the payment of claims and operating expenses as needed.

Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the subsidiaries.

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2021 and 2020, respectively.

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 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, 2021, the effective interest rate was

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.

The Company intends to pay its obligations under the Junior Subordinated Debentures using existing cash balances, dividend and tax-sharing payments from the operating subsidiaries, or from potential

future financing arrangements.

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.

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.

has not made such an election.

The Company intends to pay its obligations under the Junior Subordinated Debentures using existing cash balances, dividend and tax-sharing payments from the operating subsidiaries, or from existing

or potential future financing arrangements.

At December 31, 2021, the Company had 55,000 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.

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 redemption value of $100 per share;

accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at the

option of the board of directors of the Company) and are cumulative.

In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,378,000 shares of the Company’s common stock, subject to

certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval;

and are redeemable solely at the Company’s option.

Series D Preferred Stock is not currently convertible.

accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at

the option of the board of directors of the Company) and are cumulative.

In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,378,000 shares of the Company’s common stock,

subject to certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval;

and are redeemable solely at the Company’s

The Series D Preferred Stock is not currently convertible.

The Company had accrued, but unpaid, dividends on the Series D Preferred Stock of $17,722 at December 31, 2021 and 2020.

During each of 2020 and 2019, the Company paid Series D Preferred Stock

dividends of $0.4 million.

During 2020, Bankers Fidelity Life Insurance Company (‘‘BFLIC”) became a member of the Federal Home Loan Bank of Atlanta (“FHLB”), for the primary purpose of enhancing financial flexibility.

member, BFLIC can obtain access to low-cost funding and also receive dividends on FHLB stock.

During each of 2021 and 2020, the Company paid Series D

Preferred Stock dividends of $0.4 million.

Bankers Fidelity Life Insurance Company (“BFLIC”) is a member of the Federal Home Loan Bank of Atlanta (“FHLB”), for the primary purpose of enhancing financial flexibility.

As a member, BFLIC can

obtain access to low-cost funding and also receive dividends on FHLB stock.

The membership arrangement established initial credit availability of five percent of statutory admitted assets, or approximately $8 million.

FHLB stock purchases may be required based upon the amount of funds borrowed from the FHLB.

BFLIC would be required to post acceptable forms of collateral for any borrowings it makes from the FHLB.

As of December 31, 2020, BFLIC had bonds with an

amortized cost of $2.0 million pledged as collateral to FHLB.

To date, BFLIC has not made any borrowings from the FHLB.

Additional FHLB stock

purchases may be required based upon the amount of funds borrowed from the FHLB.

As of December 31, 2021, BFLIC has pledged bonds having an amortized cost of $5.4 million to the FHLB.

BFLIC may be required to post additional acceptable forms of

collateral for any borrowings that it makes in the future from the FHLB.

As of 2021, BFLIC does not have any outstanding borrowings from the FHLB.

On May 12, 2021, the Company entered into a Revolving Credit Agreement (the “Credit Agreement”) with Truist Bank as the lender (the “Lender”).

The Credit Agreement

provides for an unsecured $10 million revolving credit facility that matures on April 12, 2024.

Under the Credit Agreement, the Company will pay interest on the unpaid principal balance of outstanding revolving loans at the LIBOR Rate (as defined

in the Credit Agreement) plus 2.00%, subject to a LIBOR floor rate of 1.00%.

The Credit Agreement requires the Company to comply with certain covenants, including a debt to capital ratio that restricts the Company from incurring consolidated

indebtedness that exceeds 35% of the Company’s consolidated capitalization at any time.

The Credit Agreement also contains customary representations and warranties and events of default.

Events of default include, among others, (a) the failure by

the Company to pay any amounts owed under the Credit Agreement when due, (b) the failure to perform and not timely remedy certain covenants, (c) a change in control of the Company and (d) the occurrence of bankruptcy or insolvency events.

event of default, the Lender may, among other things, declare all obligations under the Credit Agreement immediately due and payable and terminate the revolving commitments.

As of December 31 2021, the Company does not have any outstanding

borrowings under the Credit Agreement.

Cash and cash equivalents increased from $19.3 million at December 31, 2020 to $24.8 million at December 31, 2021.

The increase in cash and cash equivalents during 2021 was primarily attributable

to an increase in net cash provided by operating activities of $9.0 million.

Partially offsetting the increase was $1.8 million in net investment purchases of securities exceeding sales and maturity of securities.

Also partially offsetting the

increase were dividends paid on the Company’s Series D Preferred Stock of $0.4 million.

to an increase in cash provided by investing activities of $5.4 million as a result of investment sales and maturity of securities exceeding investment purchases.

Also contributing to the increase in cash was net cash provided by operating

activities of $1.1 million.

Partially offsetting the increase were dividends paid on common stock of $0.4 million and dividends paid on the Company’s Series D Preferred Stock of $0.4 million.

The Company believes that existing cash balances as well as the dividends, fees, and tax-sharing payments it expects to receive from its subsidiaries and, if needed, additional borrowings from

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Expected Impact of COVID-19 on the Company’s Financial Condition and Results of Operations

The duration and ultimate impact of the COVID-19 pandemic is unknown at this time and it is not possible for us to reliably estimate the impact on the financial condition, operating results or

The duration and ultimate impact of the COVID-19 pandemic remains unknown at this time and it is not possible for us to reliably estimate the impact on the financial condition, operating results or

liquidity of the Company and its operating subsidiaries in future periods.

However, we do not currently expect a significant decline in liquidity or operating results as a result of the disruption caused by the ongoing COVID-19 pandemic.

the most significant impact of COVID-19 on the Company’s financial position has been volatility in the fair value of the Company’s fixed maturity and equity investments due to disruption in the financial markets, as well as a reduction in the

frequency of medical claims.

We expect that earned premiums could be adversely impacted by a weakened economy leading to a slowdown in new sales and reduced retention of insureds.

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The Company does not expect a significant reduction or delay in payments and continues to

monitor state required actions as they develop.

monitor state requirements as they develop.

For the Company’s property and casualty operations, the majority of premium revenue is derived from automobile liability and automobile physical damage lines of business written on a multi-year

contract basis with state and local governments.

Although we cannot predict with any certainty at this time, we do not expect a significant level of cancellations or non-renewals of our property and casualty contracts in the short term but recognize

that a prolonged economic slowdown could adversely affect future results.

During 2020, a certain automobile program was granted a partial premium refund as a result of a decline in usage.

However, the Company expects the aforementioned decline in

usage to be temporary in nature.

Although we cannot predict with any certainty at this time, we do not expect a significant level of cancellations or non-renewals of our property and casualty contracts in the short term but

recognize that a prolonged economic slowdown could adversely affect future results.

However, the Company expects the aforementioned decline in usage to be temporary in nature.

Benefits and losses in our property and casualty operations could be adversely impacted as a result of disruption caused by the COVID-19 pandemic.

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supplement and to a lesser extent, whole life insurance policies with the Company.

We expect that earned premiums could be adversely impacted by the rise in unemployment and economic slowdown related to the COVID-19 pandemic and individual, business

and government responses thereto, which could lead to a decline in new sales and reduced retention of insureds.

As a result, we currently anticipate that the life and health operations may experience a marginal decline in earned premiums although

the actual impact cannot be predicted with certainty at this time.

We expect that earned premiums could be adversely impacted by an economic slowdown related to the COVID-19 pandemic and individual, business and government

responses thereto, which could lead to a decline in new sales and reduced retention of insureds.

As a result, we currently anticipate that the life and health operations may experience a marginal decline in earned premiums although the actual

impact cannot be predicted with certainty at this time.

Unforeseen infectious diseases that impact large portions of a population can have an adverse impact on mortality and morbidity, and resultant benefits and losses incurred by the Company’s life and

health operations.

Accordingly, the Company does anticipate incurring higher costs, potentially similar to prior influenza seasons, as it relates to life insurance claims.

However, with much of the country sheltering in place over an extended

period, the Company has experienced lower utilization of certain accident and health benefits, particularly in the Medicare supplement line of business.

As a result, and although the actual impact cannot be predicted with certainty at this time, the

Company does not expect significant adverse development in total benefits and losses incurred in its life and health operations.

In addition to the information set forth in this report, you should carefully consider the discussions of the COVID-19 pandemic and related economic developments presented in our Annual Report on

Form 10-K for the year ended 2019, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and in other reports we file with the SEC from time to time, all of which could materially affect our

business, financial condition or future results.

Accordingly, the Company could incur higher costs, potentially similar to prior influenza seasons, as it relates to life insurance claims.

During 2020, the Company’s individual policyholders were subject to various degrees of

shelter in place orders.

As a result, the Company experienced lower utilization of certain accident and health benefits, particularly in the Medicare supplement line of business.

However, during 2021, utilization of policyholder benefits have

returned to historical averages.

As a result, and although the ultimate impact cannot be predicted with certainty at this time, the Company does not expect significant adverse development in total benefits and losses incurred in its life and health

New Accounting Pronouncements

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If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by the Company.

Inflation also affects the

rate of investment return on the Company’s investment portfolio with a corresponding effect on investment income.

Inflation also affects

the rate of investment return on the Company’s investment portfolio with a corresponding effect on investment income.

To date, inflation has not had a material effect on the Company’s results of operations in any of the periods presented.

Off-Balance Sheet Arrangements

In the normal course of business, the Company has structured borrowings that, in accordance with accounting principles generally accepted in the United States of America, are recorded on the

Company’s balance sheet at an amount that differs from the ultimate contractual obligation.

See Note 8 of Notes to Consolidated Financial Statements.

Contractual Obligations

As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations, and therefore are not providing the table of contractual obligations required by this

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis