Item 7. Management’s Discussion and Analysis
Item 7.
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, 2021 and 2020. 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.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and, in management’s belief, conform to
general practices within the insurance industry. The following is an explanation of the Company’s accounting policies and the resultant estimates considered most significant by management. These accounting policies inherently require significant
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 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. 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
deviation. 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.
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Unpaid loss and loss adjustment expenses
comprised 33% of the Company’s total liabilities at December 31, 2021. This liability includes estimates for: 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 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
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.
Refer to Note 1 of Notes to Consolidated Financial Statements for details regarding the Company’s significant accounting policies.
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Overall Corporate Results
Year Ended December 31,
2021
2020
(In thousands)
Revenue
Property and Casualty:
American Southern
$
73,868
$
69,179
Life and Health:
Bankers Fidelity
125,702
127,144
Corporate and Other
(16
)
(975
)
Total revenue
$
199,554
$
195,348
Income before income taxes
Property and Casualty:
American Southern
$
9,292
$
10,436
Life and Health:
Bankers Fidelity
3,726
12,430
Corporate and Other
(7,716
)
(7,363
)
Income before income taxes
$
5,302
$
15,503
Net income
$
4,281
$
12,169
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, the most directly comparable GAAP measure, to operating income (loss) is as follows:
Year Ended December 31,
2021
2020
(In thousands)
Reconciliation of Non-GAAP Financial Measure
Net income
$
4,281
$
12,169
Income tax expense
1,021
3,334
Realized investment gains, net
(4,903
)
(7,420
)
Unrealized (gains) losses on equity securities, net
(1,894
)
3,431
Non-GAAP operating income (loss)
$
(1,495
)
$
11,514
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. Operating
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. Premium revenue increased to $184.2 million in 2021 from $183.5 million in 2020. 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. 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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UNDERWRITING RESULTS
American Southern
The following table summarizes, for the periods indicated, American Southern’s premiums, losses, expenses and underwriting ratios:
Year Ended December 31,
2021
2020
(Dollars in thousands)
Gross written premiums
$
75,914
$
70,256
Ceded premiums
(6,511
)
(5,890
)
Net written premiums
$
69,403
$
64,366
Net earned premiums
$
67,982
$
62,372
Insurance benefits and losses incurred
44,433
39,339
Commissions and underwriting expenses
20,143
19,404
Underwriting income
$
3,406
$
3,629
Loss ratio
65.4
%
63.1
%
Expense ratio
29.6
31.1
Combined ratio
95.0
%
94.2
%
Gross written premiums at American Southern increased $5.7 million, or 8.1%, during 2021 as compared to 2020. The increase in gross written premiums was primarily attributable to an increase in
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
2020.
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. 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:
Year Ended December 31,
2021
2020
(In thousands)
Automobile liability
$
30,453
$
30,312
Automobile physical damage
22,917
18,730
General liability
5,637
3,891
Surety
5,620
5,857
Other lines
3,355
3,582
Total
$
67,982
$
62,372
Net earned premiums increased $5.6 million, or 9.0%, during 2021 as compared to 2020. The increase in net earned premiums was primarily attributable to an increase in automobile physical damage
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. 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 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.
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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 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
commissions.
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 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; 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.
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 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.
Bankers Fidelity
The following summarizes, for the periods indicated, Bankers Fidelity’s premiums, losses and expenses:
Year Ended December 31,
2021
2020
(Dollars in thousands)
Medicare supplement
$
162,400
$
174,525
Other health products
10,364
9,218
Life insurance
10,624
9,348
Gross earned premiums
183,388
193,091
Ceded premiums
(67,154
)
(71,924
)
Net earned premiums
116,234
121,167
Insurance benefits and losses incurred
87,261
80,537
Commissions and underwriting expenses
34,715
34,177
Total expenses
121,976
114,714
Underwriting income (loss)
$
(5,742
)
$
6,453
Loss ratio
75.1
%
66.5
%
Expense ratio
29.9
28.2
Combined ratio
105.0
%
94.7
%
Net earned premium revenue at Bankers Fidelity decreased $4.9 million, or 4.1%, during 2021 as compared to 2020. Gross earned premiums from the Medicare supplement line of business decreased $12.1
million, or 6.9%, in 2021 as compared to 2020, due primarily to non-renewals exceeding the level of new business writings. 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 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. Partially
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.
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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
2020. 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
2020. 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
of business.
Net Investment Income and Realized Gains
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. The net realized investment gains in 2021 were primarily
attributable to gains of $4.3 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. The net realized investment gains in
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. Management
continually evaluates the Company’s investment portfolio and, as may be determined to be appropriate, makes adjustments for impairments and/or will divest investments. See Note 2 of Notes to Consolidated Financial Statements.
Unrealized Gains (Losses) on Equity Securities, Net
Investments in equity securities are measured at fair value at the end of the reporting period, with any changes in fair value reported in net income during the period. The Company recognized net
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 $0.2 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.
Income Taxes
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
club dues. 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.
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Liquidity and Capital Resources
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 continue within historical ranges. The Company’s primary sources of cash are written premiums, investment income and proceeds from
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.
Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the subsidiaries. The principal cash needs of the Parent are for the payment
of operating expenses, the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be authorized and approved by the Company’s board of directors from time to time. At
December 31, 2021, the Parent had approximately $4.5 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, 2021, the Parent’s insurance subsidiaries had an aggregate statutory surplus of $91.3 million. Dividends were paid to Atlantic American by its
subsidiaries totaling $8.4 million and $3.9 million in 2021 and 2020, respectively.
The Parent provides certain administrative, purchasing and other services to each of its subsidiaries. The amount charged to and paid by the subsidiaries for these services was $7.4 million and
$6.7 million in 2021 and 2020, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $6.7 million and $1.8 million were paid to the Parent under the tax sharing agreement in
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 margin ranges from 4.00% to 4.10%. At December 31, 2021, the effective interest rate was
4.22%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust’s obligations with respect to the trust preferred securities. Subject to
certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities. The Company
has not made such an election.
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. 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. 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 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. 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. Upon an
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.
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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 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
financial institutions, will enable the Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current recommendations by regulatory authorities, which, if implemented, would have a material adverse
effect on the Company’s liquidity, capital resources or operations.
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 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. To date,
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.
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. Additionally, a number of states have issued
bulletins that either encourage or require premium leniency such as extension of grace periods or moratoriums on cancellation of policies for non-payment. The Company does not expect a significant reduction or delay in payments and continues to
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. 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. However, due to the nature of our primary product
lines, the impact is not currently expected to be material. As a result, we do not currently expect a material adverse effect on operating results or liquidity in the property and casualty operations.
The majority of premium revenue in our life and health operations are derived from the senior market segment of the population, or those individuals age sixty-five and up, who maintain Medicare
supplement and to a lesser extent, whole life insurance policies with the Company. 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 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
operations.
New Accounting Pronouncements
See “Recently Issued Accounting Standards” in Note 1 of Notes to Consolidated Financial Statements.
Impact of Inflation
Insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such losses and expenses, are known. Consequently, in
establishing its premiums, the Company attempts to anticipate the potential impact of inflation. 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. To date, inflation has not had a material effect on the Company’s results of operations in any of the periods presented.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations, and therefore are not providing the information required by this Item.
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