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, 2023 and 2022. 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, Bankers Fidelity Assurance Company and Atlantic Capital Life 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
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. When either: (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. When either: (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”). 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 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.
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Unpaid loss and loss adjustment expenses comprised 32% of the Company’s total liabilities at December 31, 2023. This liability includes estimates for: (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, 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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Overall Corporate Results
Year Ended December 31,
2023
2022
(In thousands)
Revenue
Property and Casualty:
American Southern
$
72,846
$
73,949
Life and Health:
Bankers Fidelity
114,199
114,015
Corporate and Other
(252
)
(113
)
Total revenue
$
186,793
$
187,851
Income (loss) before income taxes
Property and Casualty:
American Southern
$
5,085
$
6,613
Life and Health:
Bankers Fidelity
4,722
3,812
Corporate and Other
(10,372
)
(8,329
)
Income (loss) before income taxes
$
(565
)
$
2,096
Net income (loss)
$
(171
)
$
1,525
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 is as follows:
Year Ended December 31,
2023
2022
(In thousands)
Reconciliation of Non-GAAP Financial Measure
Net income (loss)
$
(171
)
$
1,525
Income tax expense (benefit)
(394
)
571
Realized investment gains, net
(70
)
(30
)
Unrealized losses on equity securities, net
2,177
7,562
Non-GAAP operating income
$
1,542
$
9,628
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. The decrease
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 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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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,
2023
2022
(Dollars in thousands)
Gross written premiums
$
77,567
$
79,218
Ceded premiums
(5,902
)
(6,547
)
Net written premiums
$
71,665
$
72,671
Net earned premiums
$
68,443
$
70,276
Insurance benefits and losses incurred
51,015
47,175
Commissions and underwriting expenses
16,746
20,161
Underwriting income
$
682
$
2,940
Loss ratio
74.5
%
67.1
%
Expense ratio
24.5
28.7
Combined ratio
99.0
%
95.8
%
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:
Year Ended December 31,
2023
2022
(In thousands)
Automobile liability
$
38,821
$
33,981
Automobile physical damage
15,046
21,069
General liability
5,758
5,871
Surety
6,303
6,039
Other lines
2,515
3,316
Total
$
68,443
$
70,276
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
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 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
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).
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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. Also
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
2022. 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
The following summarizes, for the periods indicated, Bankers Fidelity’s premiums, losses and expenses:
Year Ended December 31,
2023
2022
(Dollars in thousands)
Medicare supplement
$
133,343
$
148,747
Other health products
14,373
12,389
Life insurance
18,659
15,867
Gross earned premiums
166,375
177,003
Ceded premiums
(55,993
)
(61,839
)
Net earned premiums
110,382
115,164
Insurance benefits and losses incurred
71,485
76,281
Commissions and underwriting expenses
37,992
33,922
Total expenses
109,477
110,203
Underwriting income
$
905
$
4,961
Loss ratio
64.8
%
66.2
%
Expense ratio
34.4
29.5
Combined ratio
99.2
%
95.7
%
Net earned premium revenue at Bankers Fidelity decreased $4.8 million, or 4.2%, during 2023 as compared to 2022. Gross earned premiums from the Medicare supplement line of business decreased
$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.
Insurance benefits and losses incurred decreased $4.8 million, or 6.3%, during 2023 as compared to 2022. As a percentage of premiums, benefits and losses were 64.8% in 2023 as compared to 66.2%
in 2022. 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%
in 2022. 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.
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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 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 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
investments. See Note 2 of Notes to Consolidated Financial Statements.
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 $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 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. The U.S. 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.
Income Taxes
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
million. 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.
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, 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. At December 31, 2023, the Parent had approximately $4.7 million of unrestricted cash and investments.
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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, 2023, the Parent’s insurance subsidiaries had an aggregate statutory surplus of $90.1 million. Dividends were paid to Atlantic American by its
subsidiaries totaling $8.4 million and $7.2 million in 2023 and 2022, 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 $8.7 million and
$7.6 million in 2023 and 2022, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. 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
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 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, 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. 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 $17.7 thousand at December 31, 2023 and 2022. 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. The membership arrangement provides for credit availability of five percent of statutory admitted assets, or approximately $8.0 million, as of December 31, 2023.
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. As of December 31, 2023, 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 $10.0
million revolving credit facility that matures on April 12, 2024. 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, 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.
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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 next 12 months and thereafter 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.
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. During 2023, inflation was a factor in increased loss experience within the Company’s automobile liability line of business.
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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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.