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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-06-30 · 247 added, 252 removed, 141 unchanged (78% of the section changed)

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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, Bankers Fidelity Assurance Company and Atlantic Capital Life Assurance Company (together known as “Bankers

Fidelity”) in the life and health insurance industry.

“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.

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 70% of the Company’s total assets at December 31, 2022.

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, as available for sale, and equity securities, which

includes common and non-redeemable preferred stocks, at their estimated fair values.

Due to market and other considerations, 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.

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.

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

70% of the Company’s total assets at December 31, 2023.

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, as available for sale, and equity securities, which includes common and non-redeemable preferred stocks, at their estimated fair values.

Prior to January 1, 2023, the Company applied other than temporary impairment (“OTTI”) guidance for securities in an unrealized loss position.

An OTTI was recognized in earnings within realized

investment gains (losses) when it was anticipated that the amortized cost would not be recovered.

(i) the Company had the intent to sell the security, or (ii) it was more likely than not that the Company would be required to sell the

security before recovery, the reduction of amortized cost and the OTTI recognized in earnings was the entire difference between the security’s amortized cost and estimated fair value.

If neither of these conditions existed, the difference between

the amortized cost of the security and the present value of projected future cash flows expected to be collected was recognized as a reduction of amortized cost and an OTTI in earnings.

If the estimated fair value was less than the present value

of projected future cash flows expected to be collected, this portion of the decline in value related to other-than-credit factors was recorded in OCI.

On January 1, 2023, the Company adopted accounting standards update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (“ASU

2016-13”), using a modified retrospective approach.

Under ASU 2016-13, for securities in an unrealized loss position, a credit loss is recognized in earnings within realized investment gains (losses) when it is anticipated that the amortized cost

will not be recovered.

(i) the Company has the intent to sell the security;

or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the reduction of amortized cost and the loss

recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value.

If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected

future cash flows expected to be collected is recognized as a credit loss by establishing an ACL with a corresponding charge to earnings in realized investment gains (losses).

However, the ACL is limited by the amount that the fair value is less

than the amortized cost.

This limitation is known as the “fair value floor.” If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of the decline in value related to

other-than-credit factors (“noncredit loss”) is recorded in OCI.

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”).

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accordance with ASC 820-10-20.

Future policy benefits comprised 32% of the Company’s total liabilities at December 31, 2022.

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.

Future policy benefits

comprised 34% of the Company’s total liabilities at December 31, 2023.

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.

Unpaid loss and loss adjustment expenses comprised 32% of the Company’s total liabilities at December 31, 2023.

This liability includes estimates for:

unpaid losses on claims reported prior to December 31, 2022, (2) future development on those reported claims, (3) unpaid ultimate losses on claims incurred prior to December 31, 2022 but not yet reported and (4) unpaid loss adjustment expenses for

reported and unreported claims incurred prior to December 31, 2022.

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, 2022 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, 2022.

(1) unpaid losses on claims reported prior to December 31, 2023, (2) future development on those reported claims, (3) unpaid

ultimate losses on claims incurred prior to December 31, 2023 but not yet reported and (4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to December 31, 2023.

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, 2023 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 12% of the Company’s total assets at December 31, 2023.

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 12% of the Company’s total assets at December 31, 2022.

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 12% of the Company’s total assets at December 31, 2023.

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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Total revenue

Income before income taxes

Income (loss) before income taxes

Property and Casualty:

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Corporate and Other

Income before income taxes

Income (loss) before income taxes

Net income (loss)

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:

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 is as follows:

Year Ended December 31,

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Reconciliation of Non-GAAP Financial Measure

Income tax expense

Net income (loss)

Income tax expense (benefit)

Realized investment gains, net

Unrealized (gains) losses on equity securities, net

Non-GAAP operating income (loss)

On a consolidated basis, the Company had net income of $1.5 million, or $0.06 per diluted share, in 2022, compared to net income of $4.3 million, or $0.19 per diluted share, in 2021.

in net income was primarily due to a decrease in unrealized gains on equity securities of $9.5 million.

Partially offsetting this decrease was a decrease in the insurance benefits and losses incurred of $8.2 million.

Operating income was $9.6

million in 2022 as compared to operating loss of $1.5 million in 2021.

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

claims incurred in the Medicare supplement line of business.

Partially offsetting the increase in operating income was a less favorable loss experience in the property and casualty operations due to severity of losses reported from programs within

the automobile liability line of business.

Unrealized losses on equity securities, net

Non-GAAP operating income

On a consolidated basis, the Company had net loss of $0.2 million, or $0.03 per diluted share, in 2023, compared to net income of $1.5 million, or $0.06 per diluted share, in 2022.

in net income was primarily due to a decrease in earned premiums, as well as an increase in losses and expenses as a percentage of premiums.

Also contributing to the decrease in net income is an increase in debt service costs due to rising

interest rates.

Partially offsetting this decrease was a decline in unrealized losses on equity securities.

Total revenue was $186.8 million in 2023 as compared to $187.9 million in 2022.

Premium revenue increased to $185.4 million in 2022 from $184.2 million in 2021.

The increase in premium revenue was

primarily attributable to an increase in life insurance premiums within the life and health operations.

Also contributing to the increase in premium revenue were business writings and price increases in certain programs within the automobile

liability 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.

Premium revenue decreased to $178.8 million in 2023 from $185.4 million in 2022.

The decrease in premium revenue

was primarily attributable to a decrease in Medicare supplement insurance premiums within the life and health operations.

Also contributing to the decrease in premium revenue was a decrease in earned premiums in the automobile physical damage

line of business due to a reduction in the number of programs.

Partially offsetting the decrease in premium revenue was an increase in earned premiums in the automobile liability line of business due mainly to rate increases and a retrospective

premium adjustment in a governmental program.

Operating income was $1.5 million in 2023 as compared to $9.6 million in 2022.

The decrease in operating income was primarily due to a decline in premium revenue and an increase in losses and

expenses as a percentage of premiums, as discussed above.

Partially offsetting the decline in operating income was more favorable loss experience in the life and health operations, resulting from improved rate adequacy and a decrease in the

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

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

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Combined ratio

Gross written premiums at American Southern increased $3.3 million, or 4.4%, during 2022 as compared to 2021.

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

premiums written in the automobile liability line of business, resulting from new business writings and price increases in certain programs.

Partially offsetting the increase in gross written premiums was a decrease in premiums written in the

automobile physical damage line of business due to a reduction in the number of agencies, as well as a decrease in premiums written in the general liability line of business due to reduced premiums from existing agencies.

Ceded premiums increased slightly during 2022 as compared to 2021.

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.

Gross written premiums at American Southern decreased $1.7 million, or 2.1%, during 2023 as compared to 2022.

The decrease in gross written premiums was primarily attributable to the decrease in

premiums written in the automobile physical damage line of business due to a reduction in the number of agencies.

Partially offsetting the decrease in gross written premiums was an increase in premiums written in the automobile liability line of

business resulting from new business, rate increases, and retrospective premium adjustments.

Ceded premiums decreased $0.6 million, or 9.9%, during 2023 as compared to 2022.

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.

The decrease in ceded premiums was primarily attributable to the decrease in earned premiums in the automobile physical damage line of business, as well as decreased ceding rates due

to increased retention.

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

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General liability

Net earned premiums increased $2.3 million, or 3.4%, during 2022 as compared to 2021.

The increase in net earned premiums was primarily attributable to an increase in business writings and price

increases in certain programs within the automobile liability line of business as previously mentioned.

Partially offsetting the increase in net earned premiums was a decrease in earned premiums in the automobile physical damage line of business

due to a reduction in the number of existing agencies.

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 $2.7 million, or 6.2%, during 2022 as compared to 2021.

As a percentage of premiums, insurance benefits and losses incurred

were 67.1% in 2022 as compared to 65.4% in 2021.

The increase in the loss ratio was mainly due to severity of losses reported from programs within the automobile liability line of business.

Partially offsetting this increase was a decrease in

the frequency of claims in the automobile physical damage line of business.

Commissions and underwriting expenses remained constant during 2022 as compared to 2021.

Net earned premiums decreased $1.8 million, or 2.6%, during 2023 as compared to 2022.

The decrease in net earned premiums was primarily attributable to a decrease in earned premiums in the

automobile physical damage line of business due to a reduction in the number of agencies as previously mentioned.

Also contributing to the decrease was a decline in earned premiums in the inland marine line of business resulting from reduced

cargo production.

Partially offsetting the decrease in net earned premiums was an increase in earned premiums in the automobile liability line of business due mainly to rate increases and a retrospective premium adjustment in a governmental

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 a property and casualty 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

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 incurred at American Southern increased $3.8 million, or 8.1%, during 2023 as compared to 2022.

As a percentage of premiums, insurance benefits and losses incurred were 74.5%

in 2023 as compared to 67.1% in 2022.

The increase in the loss ratio was mainly due to overall inflation on claims and increased severity of losses reported from certain governmental programs within the automobile liability line of business.

contributing to the increase in the loss ratio were increased losses in the general liability line of business from artisan contractor business.

Partially offsetting the increase in the loss ratio was a decrease in losses related to the

automobile physical damage line of business due to a decrease in exposure.

Commissions and underwriting expenses decreased $3.4 million, or 16.9%, during 2023 as compared to 2022.

As a percentage of premiums, these expenses were 24.5% in 2023 as compared to 28.7% in

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 2022, variable commissions at American Southern increased $0.7 million as compared to 2021 due to improved loss ratios from certain accounts subject to variable commissions.

In establishing reserves, American Southern initially reserves for losses based on management’s best estimate within a reasonable range.

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.

December 31, 2022, the range of estimates developed in connection with the loss reserves for American Southern indicated that reserves could be as much as 12.1% lower or as much as 12.2% 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 2022 and 2021, approximately 38% 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.

The decrease in the expense ratio was primarily due to the decrease in fixed and variable commissions.

Fixed commissions decreased as a result of the decline in written premiums during 2023.

Also contributing to 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 2023, variable commissions at American Southern

decreased $1.4 million as compared to 2022 due to an increase in loss ratios from certain accounts subject to variable commissions.

Bankers Fidelity

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Total expenses

Underwriting income (loss)

Underwriting income

Expense ratio

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Gross earned premiums from the Medicare supplement line of business decreased

million, or 8.4%, in 2022 as compared to 2021, due primarily to non-renewals exceeding the level of new business writings.

Other health product premiums increased $2.0 million, or 19.5%, during 2022 as compared to 2021, 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 $5.2 million, or 49.4%, in 2022 from 2021 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 $5.3

million, or 7.9%, in 2022 from 2021.

$15.4 million, or 10.4 %, in 2023 as compared to 2022, due primarily to non-renewals exceeding the level of new business writings as the existing block of business has incurred rate increases.

Other health product premiums increased $2.0 million,

or 16.0%, during 2023 as compared to 2022, 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 $2.8 million, or 17.6%, in 2023

from 2022 due to an increase in the group life product premiums.

Partially offsetting this increase 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 $5.8 million, or 9.5%, in 2023 from 2022.

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

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As a percentage of premiums, benefits and losses were 64.8% in 2023 as compared to 66.2%

The decrease in the loss ratio was primarily due to improved rate adequacy and a decrease in the number of claims incurred in the Medicare supplement line of business.

Also contributing to the decrease in loss ratio was a decrease in both

the group and individual lines of business.

These decreases were marginally offset by increased loss ratios on the group accident and health lines of business.

Commissions and underwriting expenses decreased $0.8 million, or 2.3%, during 2022 as compared to 2021.

As a percentage of earned premiums, these expenses were 29.5% in 2022 as compared to 29.9% in

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

The increase in additions to DAC was primarily related to the growth in sales of the group lines of

business, primarily group life.

Offsetting the DAC benefit were increased commissions related to the aforementioned growth in group sales coupled with increased servicing costs related to our growing group lines of business.

The decrease in the loss ratio was primarily due to improved rate adequacy and a decrease in the number of incurred claims within the Medicare supplement line of business.

Also contributing to the decrease in loss ratio was an

improvement in the other health lines profitability.

These decreases were offset by higher incurred claims on our life lines of business.

Commissions and underwriting expenses increased $4.1 million, or 12.0%, during 2023 as compared to 2022.

As a percentage of earned premiums, these expenses were 34.4% in 2023 as compared to 29.5%

The increase in the expense ratio was primarily due to an increase in administrative costs related to growth in the group and individual health lines of business, coupled with increased Medicare supplement servicing costs.

Net Investment Income and Realized Gains

Investment income increased $0.1 million, or 1.3%, in 2023 as compared to 2022.

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 $0.5 million.

Also contributing to the increase in investment income was prepayment income of $0.3 million related to the redemption of certain fixed maturities.

The increase in investment income was primarily attributable to an increase in investment income related to fixed

maturities and equity securities.

Partially offsetting this increase was a decrease in the equity in earnings from investments in the Company's limited partnerships and limited liability companies of $0.6 million.

The Company had net realized investment gains of $0.1 million in 2023 as compared to net realized investment gains of $0.03 million in 2022.

The net realized investment gains in 2022 were primarily

attributable to gains from the sale of fixed maturities.

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 2023 and 2022

were primarily attributable to gains from the sale of 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

See Note 2 of Notes to Consolidated Financial Statements.

Unrealized Gains (Losses) on Equity Securities, Net

Unrealized 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 losses on equity securities of $7.6 million and unrealized gains on equity securities of $1.9 million during the years ended December 2022 and 2021, 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 losses on equity securities of $2.2 million and $7.6 million during the years ended December 2023 and 2022, 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 increased $1.3 million, or 67.5%, in 2023 as compared to 2022.

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”) and the revolving credit facility 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 difference between the effective tax rate and the federal statutory income tax rate for 2022 resulted from a permanent difference related to penalties and fines incurred of $0.1

Changes in interest expense were primarily due to changes in the Term Secured Overnight Financing Rate (“SOFR”)

published by CME Group Benchmark Administration Limited (“CME”), as the interest rates on the Company’s outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) and the revolving credit facility are

directly related to SOFR.

As expected, discontinuation of London Interbank Offered Rate (“LIBOR”) occurred on June 30, 2023 and affected the rates used in the Company’s credit arrangements after that date.

Congress enacted the Adjustable

Interest Rate LIBOR Act (the "LIBOR Act") to address LIBOR’s cessation and the Board of Governors of the Federal Reserve System issued regulations, 12 C.F.R.

Part 253, “Regulations Implementing the Adjustable Interest Rate LIBOR Act (Regulation

ZZ),” which relate to the LIBOR transition.

The primary difference between the effective tax rate and the federal statutory income tax rate for 2023 resulted from the adjustment for prior years’ estimates to actual of $0.3 million in the

year ended December 31, 2023, which included the return to provision adjustment that is generally updated at the completion of the third quarter of each fiscal year and an adjustment for partnership valuation.

Also contributing to the differences

between the effective tax rate and the federal statutory income tax rate was a permanent difference related to meals and entertainment.

The primary differences between the effective tax rate and the federal statutory income tax rate for 2022 resulted from a permanent difference related to penalties and fines incurred of $0.1

Also contributing to differences between the effective tax rate and the federal statutory income tax rate were 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 $0.1 million in the year ended December 31, 2022.

Other contributing factors to the differences between the effective tax rate and the federal statutory income tax rate were permanent differences related to meals and

entertainment and 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 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 $0.1 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 DRD.

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

differences related to meals and entertainment and 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.

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.

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, as well as borrowings from time to time under our revolving credit facility.

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.

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, as well as borrowings from time to time under our revolving credit facility.

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.

December 31, 2022, the Parent had approximately $5.0 million of unrestricted cash and investments.

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

At December 31, 2023, the Parent had approximately $4.7 million of unrestricted cash and investments.

Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to 10% of statutory surplus or statutory earnings before

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In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries.

A net total of $3.9 million and $6.7 million were paid to the Parent under the tax sharing agreement in

2022 and 2021, respectively.

A net total of $4.0 million and $3.9 million were paid to the Parent under the tax sharing agreement

in 2023 and 2022, 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

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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.

callable quarterly, in whole or in part, only at the option of the Company, and have an interest rate of 3-month CME Term SOFR plus applicable tenor spread of 0.26161 percent plus an applicable margin.

The margin ranges from 4.00% to 4.10%.

At December 31, 2022, the effective interest rate was

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.

December 31, 2023, the effective interest rate was 9.69%.

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, 2023, the Company had 55,000 shares of Series D preferred stock (“Series D Preferred Stock”) outstanding.

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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

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 $17.7 thousand at December 31, 2023 and 2022.

During each of 2022 and 2021, the Company paid Series

D Preferred Stock dividends of $0.4 million.

During each of 2023 and 2022, 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.

As a member, BFLIC

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

The membership arrangement provides for credit availability of five percent of statutory admitted assets, or approximately $8.0 million, as of December 31, 2023.

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

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

As of December 31, 2023, BFLIC has pledged bonds having an amortized cost of $9.6 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.

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 December 31, 2023, BFLIC does not have any outstanding borrowings from the FHLB.

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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.

Under the Credit Agreement, the Company paid interest on the unpaid principal balance of outstanding revolving loans at 1-month SOFR plus a spread adjustment of 0.11448% plus

2.00%, subject to a SOFR 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, 2022, the Company had outstanding borrowings of $2.0 million under the Credit

Cash and cash equivalents increased from $24.8 million at December 31, 2021 to $28.9 million at December 31, 2022.

The increase in cash and cash equivalents during 2022 was primarily attributable

to an increase in net cash provided by operating activities of $6.5 million.

Also contributing to the increase in cash and cash equivalents were proceeds from the revolving credit facility of $2.0 million.

Partially offsetting the increase in cash

and cash equivalents was net cash used in investing activities of $3.4 million primarily as a result of investment purchases exceeding investment sales and maturity of securities.

Also 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.

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, 2023, the Company had outstanding borrowings of $3.0 million under the

Credit Agreement.

Cash and cash equivalents decreased from $28.9 million at December 31, 2022 to $28.3 million at December 31, 2023.

The decrease in cash and cash equivalents during 2023 was primarily attributable

to a decrease in net cash used in investing activities of $3.4 million primarily as a result of investment purchases exceeding investment sales and maturity of securities.

Partially offsetting the decrease in cash and cash equivalents was an

increase in net cash provided by operating activities of $2.6 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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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.

During 2023, inflation was a factor in increased loss experience within the Company’s automobile liability line of business.

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