Atlantic American(AAME) - 2019 Q4 - Annual Report

Part I Business The company is a holding entity for two primary insurance segments, American Southern (P&C) and Bankers Fidelity (Life & Health) The Company Overview The company operates through two main segments, American Southern (P&C) and Bankers Fidelity (Life & Health), with distinct product lines - The company operates as a holding company with two distinct insurance segments: American Southern (Property and Casualty) and Bankers Fidelity (Life and Health), which are managed separately[5] American Southern Net Earned Premiums by Product Line (in thousands) | Product Line | 2019 | 2018 | | :--- | :--- | :--- | | Automobile liability | $30,649 | $28,840 | | Automobile physical damage | $15,309 | $11,922 | | General liability | $3,309 | $2,920 | | Surety | $6,319 | $7,170 | | Other lines | $3,094 | $2,955 | | Total | $58,680 | $53,807 | Bankers Fidelity Net Earned Premiums by Product Line (in thousands) | Product Line | 2019 | 2018 | | :--- | :--- | :--- | | Life insurance | $8,427 | $8,921 | | Medicare supplement | $107,001 | $102,658 | | Other accident and health | $7,817 | $7,545 | | Total | $123,245 | $119,124 | Marketing The company utilizes independent agents and direct solicitation for its P&C and life & health insurance products - American Southern utilizes a dual marketing approach, leveraging both independent agents and direct solicitation for governmental accounts[10][12] - Bankers Fidelity's distribution relies on a network of 5,783 licensed independent agents across three channels, with its marketing strategy centered on diversification, differentiation, quality, retention, and profitability[13] Underwriting and Claims Both segments employ distinct underwriting approaches and prioritize prompt, efficient claims processing services - American Southern's underwriting relies on agent expertise and risk management inspections, with periodic reviews to take corrective action if results are below expectations[14] - Bankers Fidelity uses a simplified issue approach for underwriting, reviewing applications based on health questions, medical claims data, and prescription reports[15] - The Company prioritizes efficient claims services, with American Southern using in-house staff and independent adjusters, while Bankers Fidelity facilitates claims through its website and a dedicated customer service group[16][17][18] Reserves The company's reserves are primarily for P&C losses, with a practice of reserving at the higher end of a reasonable range - At year-end 2019, P&C operations accounted for 64% of reserves, while life and health operations accounted for 36%[19] - The Company's general practice for P&C operations is to set reserves at the higher end of the determined reasonable range if no other value is more probable[19][23] - The December 31, 2019 actuarial review indicated a potential variability in reserves ranging from 8.5% lower to 4.2% higher than the recorded amount[22] Reinsurance Reinsurance is used to mitigate liability on individual risks and protect against catastrophic losses across both segments - American Southern's reinsurance treaties cover excess losses with retentions varying from $100,000 to $200,000 for liability lines and a $5.7 million limit excess of $300,000 for property catastrophe[26][27] - Bankers Fidelity retains a maximum of $100,000 on any single life insurance policy and cedes 50% of new Medicare supplement premium up to a $15.0 million annualized premium retention[28] Competition and Ratings The company competes in a crowded market by focusing on niche areas and maintains 'Excellent' ratings from A.M. Best - American Southern Insurance Company and American Safety Insurance Company are both rated 'A' (Excellent) by A.M. Best[33] - Bankers Fidelity Life Insurance Company and Bankers Fidelity Assurance Company are both rated 'A-' (Excellent) by A.M. Best[33] Regulation The company's insurance subsidiaries are subject to extensive state regulation and exceeded all required capital levels in 2019 - For 2019, Bankers Fidelity Life had two IRIS ratios outside the usual range, and Bankers Fidelity Assurance had three, primarily due to declines in net income and surplus; management does not expect regulatory action[37] - At December 31, 2019, all of the Company's insurance subsidiaries' Risk-Based Capital (RBC) levels exceeded the required regulatory levels[38] Investments Investment income is a key earnings driver, with a portfolio heavily weighted towards fixed maturities managed by a third party Investment Portfolio Composition as of Dec 31 (in thousands) | Investment Type | 2019 Amount | 2019 Percent | 2018 Amount | 2018 Percent | | :--- | :--- | :--- | :--- | :--- | | Fixed maturities | $232,472 | 86.6% | $210,386 | 87.0% | | Common and non-redeemable preferred stocks | $22,922 | 8.5% | $20,758 | 8.6% | | Policy loans | $2,007 | 0.7% | $2,085 | 0.9% | | Other invested assets | $9,960 | 3.7% | $7,424 | 3.0% | | Other | $1,238 | 0.5% | $1,276 | 0.5% | | Total investments | $268,637 | 100.0% | $241,929 | 100.0% | Investment Portfolio Results (in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Average invested assets | $253,467 | $252,480 | | Net investment income | $8,979 | $9,549 | | Average yield on investments | 3.5% | 3.8% | | Net realized investment gains | $1,574 | $5,154 | Executive Officers The company is led by long-tenured executives serving as CEO and CFO - Hilton H. Howell, Jr. is the Chairman of the Board, President & CEO[49] - J. Ross Franklin is the Vice President, CFO and Corporate Secretary[49] Risk Factors As a smaller reporting company, the company has elected not to provide detailed risk factor disclosures - The company, as a smaller reporting company, has opted out of providing detailed risk factors in this filing[54] Properties The company and its subsidiary lease their principal office spaces in Atlanta, Georgia - The Company leases its main office space from an affiliate, Delta Life Insurance Company[54] Legal Proceedings Ongoing legal matters are part of the ordinary course of business and are not expected to have a material financial impact - Ongoing legal proceedings are considered part of the ordinary course of business and are not expected to have a material financial impact[55] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, and a share repurchase plan remains active - The company's common stock is traded on the Nasdaq Global Market under the symbol AAME[56] - A share repurchase plan approved in 2016 allows for the repurchase of up to 750,000 shares; as of December 31, 2019, 325,129 shares may still be purchased under this plan[57][59] Management's Discussion and Analysis of Financial Condition and Results of Operations The company's consolidated net loss narrowed in 2019, driven by improved P&C underwriting results offset by losses in life and health Results of Operations Consolidated net loss improved in 2019 due to higher premium revenue, though the Life & Health segment reported a pre-tax loss Consolidated Financial Summary (in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total Revenue | $198,179 | $185,553 | | Loss before income taxes | $(407) | $(971) | | Net Loss | $(386) | $(704) | Income (Loss) Before Income Taxes by Segment (in thousands) | Segment | 2019 | 2018 | | :--- | :--- | :--- | | American Southern (P&C) | $5,729 | $5,661 | | Bankers Fidelity (Life & Health) | $(3,646) | $896 | | Corporate and Other | $(2,490) | $(7,528) | | Total | $(407) | $(971) | Underwriting Results The P&C segment's underwriting improved while the Life & Health segment's results deteriorated due to higher claims American Southern (P&C) Underwriting Ratios | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Loss Ratio | 67.4% | 72.2% | | Expense Ratio | 29.2% | 27.4% | | Combined Ratio | 96.6% | 99.6% | Bankers Fidelity (Life & Health) Underwriting Ratios | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Loss Ratio | 80.9% | 78.8% | | Expense Ratio | 28.9% | 27.1% | | Combined Ratio | 109.8% | 105.9% | Liquidity and Capital Resources The company maintains sufficient liquidity through premiums and investment income, with the parent relying on subsidiary dividends - The Parent company's cash flow depends on dividends and fees from its insurance subsidiaries; dividends paid to the Parent totaled $4.8 million in both 2019 and 2018[80] - The Company has two series of Junior Subordinated Debentures outstanding with a combined net balance of $33.7 million, maturing in 2032 and 2033[82][187] - Cash and cash equivalents increased slightly to $12.9 million at the end of 2019 from $12.6 million at the end of 2018[82] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and related notes for fiscal years 2019 and 2018 Consolidated Financial Statements The company's financial statements show increased assets and equity in 2019 despite a net loss for the year Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Investments | $268,637 | $241,929 | | Total Assets | $377,626 | $344,274 | | Total Liabilities | $259,232 | $242,902 | | Total Shareholders' Equity | $118,394 | $101,372 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Insurance premiums, net | $181,925 | $172,931 | | Total Revenue | $198,179 | $185,553 | | Total benefits and expenses | $198,586 | $186,524 | | Net Loss | $(386) | $(704) | | Loss per common share | $(0.04) | $(0.05) | Notes to Consolidated Financial Statements The notes detail accounting policies, financial instrument breakdowns, and highlight the potential future impact of COVID-19 - The company adopted new lease accounting standards (ASU 2016-02) on January 1, 2019, resulting in the recognition of a right-of-use asset and lease liability of $6.1 million[120] - As of December 31, 2019, 99.7% of the company's reinsurance recoverables ($32.0 million) were due from a single reinsurer, General Re Corporation, which is highly rated[180] - A subsequent event note discloses that the COVID-19 outbreak is expected to adversely impact the company's financial statements for the first quarter of 2020 and potentially beyond[211] Controls and Procedures Management concluded that the company's disclosure controls and internal controls over financial reporting were effective - Management concluded that both disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2019[212] Part III Directors, Executive Officers, Compensation, Security Ownership, and Accountant Fees Required disclosures for directors, officers, and governance are incorporated by reference from the upcoming proxy statement - Most of the information for Part III (Items 10-14) is incorporated by reference from the company's forthcoming 2020 proxy statement[214] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, supplementary schedules, and exhibits filed as part of the annual report - This section includes supplementary financial schedules such as Condensed Financial Information of Registrant (Parent Company Only), Supplementary Insurance Information, Reinsurance Information, and Supplemental Information Concerning Property-Casualty Insurance Operations[217][221][228][232][234] - Exhibits filed with the report include the company's Restated Articles of Incorporation, Bylaws, a description of common stock, various agreements, and certifications from the CEO and CFO[217][218]