MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains and references certain information that constitutes
forward-looking statements as that term is defined in the federal securities
laws. Statements, to the extent they are not statements of historical facts, are
considered forward-looking statements, and are subject to various risks and
uncertainties. Such forward-looking statements are made based upon management's
current assessments of various risks and uncertainties, as well as assumptions
made in accordance with the "safe harbor" provisions of the federal securities
laws. The Company's actual results could differ materially from the results
expressed in or implied by these forward-looking statements as a result of such
risks and uncertainties, including those identified in filings made by the
Company from time to time with the
addition, other risks and uncertainties not known by us, or that we currently
determine to not be material, may materially adversely affect our financial
condition, results of operations or cash flows. The Company undertakes no
obligation to update any forward-looking statement as a result of subsequent
developments, changes in underlying assumptions or facts, or otherwise, except
as may be required by law.
Overview
The following is management's discussion and analysis of the financial condition
and results of operations of
or the "Parent") and its subsidiaries (collectively with the Parent, the
"Company") as of and for the three month and nine month periods ended
30, 2021
condensed consolidated financial statements and notes thereto included elsewhere
herein, as well as with the audited consolidated financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended
31, 2020
primarily through its insurance subsidiaries:
Company
Southern") and
Assurance Company
is managed separately, offers different products and is evaluated on its
individual performance.
Recent Events and Outlook
On
pandemic. In
to control its spread began to impact our business operations, and we expect
that the pandemic, actions that have been or will be taken in response to it and
its overall impact on the economy, will continue to have an effect on our
business operations and our operating results. See "Expected Impact of COVID-19
on the Company's Financial Condition and Results of Operations."
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in
to make estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ significantly from those estimates. The
Company has identified certain estimates that involve a higher degree of
judgment and are subject to a significant degree of variability. The Company's
critical accounting policies and the resultant estimates considered most
significant by management are disclosed in the 2020 Annual Report. Except as
disclosed in Note 2 of Notes to Condensed Consolidated Financial Statements, the
Company's critical accounting policies are consistent with those disclosed in
the 2020 Annual Report.
18
--------------------------------------------------------------------------------
Table of Contents Overall Corporate Results The following presents the Company's revenue, expenses and net income (loss) for the three month and nine month periods endedSeptember 30, 2021 and the comparable periods in 2020: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Insurance premiums, net$ 46,092 $ 44,978 $ 137,315 $ 137,027 Net investment income 2,137 1,828 6,516 5,717 Realized investment gains, net 349 183 520 432 Unrealized gains (losses) on equity securities, net 711 (731 ) 5,458 (7,831 ) Other income 1 11 13 71 Total revenue 49,290 46,269 149,822 135,416
Insurance benefits and losses incurred 35,045 29,219 100,020 89,878
Commissions and underwriting expenses 11,927 11,202 36,670 34,682
Interest expense
347 363 1,040 1,253 Other expense 3,264 3,052 10,178 9,116 Total benefits and expenses 50,583 43,836 147,908 134,929
Income (loss) before income taxes
Net income (loss)
$ (915 ) $ 1,876 $ 1,616 $ 321
Management also considers and evaluates performance by analyzing the non-GAAP
measure operating income (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 taxes, which are
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 and unrealized investment
gains, which are not a part of the Company's primary operations and are, to a
limited extent, subject to discretion in terms of timing of realization).
A reconciliation of net income (loss) to operating income (loss) for the three
month and nine month periods ended
in 2020 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Reconciliation of Non-GAAP Financial
Measure 2021 2020 2021 2020
(In thousands)
Net income (loss) $ (915 ) $ 1,876 $ 1,616 $ 321
Income tax expense (benefit) (378 ) 557 298 166
Realized investment gains, net (349 ) (183 ) (520 ) (432 )
Unrealized (gains) losses on equity
securities, net (711 ) 731 (5,458 ) 7,831
Non-GAAP operating income (loss) $ (2,353 ) $ 2,981 $ (4,064 ) $ 7,886
On a consolidated basis, the Company had net loss of
diluted share, for the three month period ended
net income of
period ended
compared to net income of
month period ended
million
period ended
0.2%, to
The increase in premium revenue was primarily attributable to an increase in
automobile physical damage coverage resulting from existing agencies and an
increase in general liability as a result of a new program in the property and
casualty operations. Partially offsetting this increase was a decrease in the
Medicare supplement line of business in the life and health operations.
Operating income decreased
the nine month period ended
million
was primarily due to less favorable loss experience in the life and health
operations, resulting from a significant increase in the number of incurred
claims within the Medicare supplement line of business. During 2021,
utilization of Medicare supplement insurance benefits has increased, returning
to historical averages relative to the exceptionally low utilization experienced
after the onset of the COVID-19 pandemic when many policyholders were sheltered
in place.
19
--------------------------------------------------------------------------------
Table of Contents
A more detailed analysis of the individual operating segments and other
corporate activities follows.
American Southern
The following summarizes American Southern's premiums, losses, expenses and
underwriting ratios for the three month and nine month periods ended
30, 2021
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars in thousands)
Gross written premiums $ 13,945 $ 11,574 $ 58,460 $ 54,512
Ceded premiums (1,625 ) (1,519 ) (4,874 ) (4,364 )
Net written premiums $ 12,320 $ 10,055 $ 53,586 $ 50,148
Net earned premiums $ 17,320 $ 14,770 $ 50,297 $ 45,516
Insurance benefits and losses incurred 11,651 9,131 33,557 28,686
Commissions and underwriting expenses 4,873 4,662 14,452 14,264
Underwriting income $ 796 $ 977 $ 2,288 $ 2,566
Loss ratio 67.3 % 61.8 % 66.7 % 63.0 %
Expense ratio 28.1 31.6 28.7 31.3
Combined ratio 95.4 % 93.4 % 95.4 % 94.3 %
Gross written premiums at American Southern increased
during the three month period ended
7.2%, during the nine month period ended
periods in 2020. The increase in gross written premiums during the three month
and nine month periods ended
increase in premiums written in the automobile physical damage line of business
from existing agencies, as well as an increase in gross written premiums in the
general liability line of business as a result of a new program that started in
the second half of 2020. Partially offsetting the increase during the nine
month period ended
automobile liability line of business resulting from a decline in gross premiums
written within a certain program, as well as retro premium adjustments.
Ceded premiums increased
ended
period ended
Southern's ceded premiums are typically determined as a percentage of earned
premiums and generally increase or decrease as earned premiums increase or
decrease. Also contributing to the increase in ceded premiums in 2021 was an
increase in earned premiums and reinsurance rates in certain accounts within the
automobile physical damage and general liability lines of business, which are
subject to reinsurance.
The following presents American Southern's net earned premiums by line of
business for the three month and nine month periods ended
the comparable periods in 2020:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In thousands)
Automobile liability $ 7,616 $ 6,804 $ 22,629 $ 22,167
Automobile physical damage 5,992 4,499 17,009 13,519
General liability 1,463 1,008 4,140 2,747
Surety 1,404 1,417 4,048 4,463
Other lines 845 1,042 2,471 2,620
Total $ 17,320 $ 14,770 $ 50,297 $ 45,516
Net earned premiums increased
period ended
month period ended
increase in net earned premiums was primarily attributable to an increase in
automobile physical damage coverage resulting from existing agencies and an
increase in general liability as a result of a new program as previously
mentioned. 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).
20
--------------------------------------------------------------------------------
Table of
Insurance
million
increased
30, 2021
premiums, insurance benefits and losses incurred were 67.3% in the three month
period ended
ended
this ratio increased to 66.7% from 63.0% in the comparable period in 2020. The
increase in the loss ratio during the three month and nine month periods ended
the automobile physical damage line of business, as well as increased costs
related to the auto liability line of business.
Commissions and underwriting expenses increased
the three month period ended
1.3% during the nine month period ended
periods in 2020. As a percentage of earned premiums, underwriting expenses were
28.1% in the three month period ended
the three month period ended
period in 2020. The decrease in the expense ratio during the three month and
nine month periods ended
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.
Bankers Fidelity
The following summarizes Bankers Fidelity's earned premiums, losses, expenses
and underwriting ratios for the three month and nine month periods ended
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars in thousands)
Medicare supplement $ 40,372 $ 43,573 $ 122,230 $ 131,675
Other health products 2,777 2,385 7,532 6,880
Life insurance 2,378 2,256 7,715 7,070
Gross earned premiums 45,527 48,214 137,477 145,625
Ceded premiums (16,755 ) (18,006 ) (50,459 ) (54,114 )
Net earned premiums 28,772 30,208 87,018 91,511
Insurance benefits and losses incurred 23,394 20,088 66,463 61,192
Commissions and underwriting expenses 8,936 8,021 27,576 25,403
Total expenses
32,330 28,109 94,039 86,595 Underwriting income (loss)$ (3,558 ) $ 2,099 $ (7,021 ) $ 4,916 Loss ratio 81.3 % 66.5 % 76.4 % 66.9 % Expense ratio 31.1 26.6 31.7 27.8 Combined ratio 112.4 % 93.1 % 108.1 % 94.7 %
Net earned premium revenue at Bankers Fidelity decreased
during the three month period ended
4.9%, during the nine month period ended
periods in 2020. Gross earned premiums from the Medicare supplement line of
business decreased
ended
new business writings. Other health product premiums increased
16.4%, during the three month period ended
or 9.5%, during the nine month period ended
comparable periods in 2020, primarily as a result of new sales of the company's
group health and individual cancer products. Gross earned premiums from the
life insurance line of business increased
three month period ended
9.1%, during the nine month period ended
periods in 2020, primarily due to an increase in the group life product
premiums. Partially offsetting this increase was a decline in individual life
products premium, resulting from the redemption and settlement of existing
individual life policy obligations exceeding the level of new individual life
sales. Premiums ceded decreased
period ended
period ended
month and nine month periods ended
Medicare supplement premiums subject to reinsurance.
21
--------------------------------------------------------------------------------
Table of
Insurance
the three month period ended
during the nine month period ended
periods in 2020. As a percentage of earned premiums, benefits and losses were
81.3% in the three month period ended
the three month period ended
ended
comparable period in 2020. The increase in the loss ratio for the three month
and nine month periods ended
in the number of claims incurred in the Medicare supplement line of business.
During 2021, utilization of Medicare supplement insurance benefits has
increased, returning to historical averages relative to the exceptionally low
utilization experienced after the onset of the COVID-19 pandemic when many
policyholders were sheltered in place.
Commissions and underwriting expenses increased
the three month period ended
during the nine month period ended
periods in 2020. As a percentage of earned premiums, underwriting expenses were
31.1% in the three month period ended
the three month period ended
ended
comparable period in 2020. The increase in the expense ratio for the three month
and nine month periods ended
amortization of deferred acquisition costs ("DAC") exceeding the level of
additions to DAC. The increase in the net amortization of DAC during 2021 is
primarily due to non-renewals exceeding the level of new business writings in
the Medicare supplement line of business, as previously mentioned.
Net Investment Income and Realized Gains
Investment income increased
period ended
month period ended
increase in investment income was attributable to an increase in the equity in
earnings from investments in the Company's limited partnerships and limited
liability companies of
The Company had net realized investment gains of
month period ended
of
net realized investment gains of
month period ended
the three month and nine month periods ended
primarily from the disposition of several of the Company's investments in fixed
maturity securities. The net realized investment gains during the three month
and nine month periods ended
several of the Company's investments in fixed maturity and equity securities.
Management continually evaluates the Company's investment portfolio and makes
adjustments for impairments and/or divests investments as may be determined to
be appropriate.
Unrealized Gains (Losses) on
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, with certain exceptions. The Company recognized net unrealized gains
on equity securities of
during the three month period ended
net unrealized gains on equity securities of
period ended
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 remained relatively consistent during the three month period
ended
month period ended
Changes in interest expense were primarily due to changes in the London
Interbank Offered Rate ("LIBOR"), as the interest rates on the Company's
outstanding junior subordinated deferrable interest debentures ("Junior
Subordinated Debentures") are directly related to LIBOR.
Liquidity and Capital Resources
The primary cash needs of the Company are for the payment of claims and
operating expenses, maintaining adequate statutory capital and surplus levels,
and meeting debt service requirements. Current and expected patterns of claim
frequency and severity may change from period to period but generally are
expected to continue within historical ranges. The Company's primary sources of
cash are written premiums, investment income and proceeds from the sale and
maturity of its invested assets. The Company believes that, within each
operating company, total invested assets will be sufficient to satisfy all
policy liabilities and that cash inflows from investment earnings, future
premium receipts and reinsurance collections will be adequate to fund the
payment of claims and operating expenses as needed.
Cash flows at the Parent are derived from dividends, management fees, and
tax-sharing payments, as described below, from the subsidiaries. The principal
cash needs of the Parent are for the payment of operating expenses, the
acquisition of capital assets and debt service requirements, as well as the
repurchase of shares and payments of any dividends as may be authorized and
approved by the Company's board of directors from time to time. At
2021
investments.
22
--------------------------------------------------------------------------------
Table of Contents
The Parent's insurance subsidiaries reported statutory net income of
million
statutory net income of
30, 2020
acquiring business. In periods in which the Company's first year premiums
increase, statutory results are generally lower than results determined under
GAAP. Statutory results for the Company's property and casualty operations may
differ from the Company's results of operations under GAAP due to the deferral
of acquisition costs for financial reporting purposes. The Company's life and
health operations' statutory results may differ from GAAP results primarily due
to the deferral of acquisition costs for financial reporting purposes, as well
as the use of different reserving methods.
Over 90% of the invested assets of the Parent's insurance subsidiaries are
invested in marketable securities that can be converted into cash, if required;
however, the use of such assets by the Company is limited by state insurance
regulations. 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
2021
Bankers Fidelity had
dividend payments by the Parent's insurance subsidiaries in excess of
million
received dividends of
The Parent provides certain administrative and other services to each of its
insurance subsidiaries. The amounts charged to and paid by the subsidiaries
include reimbursements for various shared services and other expenses incurred
directly on behalf of the subsidiaries by the Parent. In addition, there is in
place a formal tax-sharing agreement between the Parent and its insurance
subsidiaries. As a result of the Parent's tax loss, it is anticipated that the
tax-sharing agreement will continue to provide the Parent with additional funds
from profitable subsidiaries to assist in meeting its cash flow obligations.
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
million
4, 2032
part, only at the option of the Company, and have an interest rate of
three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to
4.10%. At
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. As
of
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
("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 stated
value of
(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. At
30, 2021
Stock totaling
Home Loan Bank of Atlanta
financial flexibility. As a member, BFLIC can obtain access to low-cost funding
and also receive dividends on FHLB stock. The membership arrangement established
initial credit availability of five percent of statutory admitted assets, or
approximately
upon the amount of funds borrowed from the FHLB. BFLIC would be required to
post acceptable forms of collateral for any borrowings it makes from the FHLB.
As of
the FHLB.
See Note 6 of the Notes to Condensed Consolidated Financial Statements for a
discussion of the Company's available credit under its new revolving credit
facility.
Cash and cash equivalents decreased from
during the nine month period ended
to net cash used in operating activities of
the cash used in operating activities was net cash provided by investing
activities of
securities exceeding investment purchases.
23
--------------------------------------------------------------------------------
Table of Contents
and tax-sharing payments it expects to receive from its subsidiaries and, if
needed, borrowings under its credit facilities or additional borrowings from
financial institutions, will enable the Company to meet its liquidity
requirements for the foreseeable future. Management is not aware of any current
recommendations by regulatory authorities, which, if implemented, would have a
material adverse effect on the Company's liquidity, capital resources or
operations.
Expected Impact of COVID-19 on the Company's Financial Condition and Results of
Operations
The duration and ultimate impact of the COVID-19 pandemic remains unknown at
this time and it is not possible for us to reliably estimate the impact on the
financial condition, operating results or liquidity of the Company and its
operating subsidiaries in future periods. However, we do not currently expect a
significant decline in liquidity or operating results as a result of the
disruption caused by the ongoing COVID-19 pandemic. To date, the most
significant impact of COVID-19 on the Company's financial position has been
volatility in the fair value of the Company's fixed maturity and equity
investments due to disruption in the financial markets.
We expect that earned premiums could be adversely impacted by a weakened economy
leading to a slowdown in new sales and reduced retention of insureds.
Additionally, a number of states have issued bulletins that either encourage or
require premium leniency such as extension of grace periods or moratoriums on
cancellation of policies for non-payment. The Company does not expect a
significant reduction or delay in payments and continues to monitor state
requirements as they develop.
For the Company's property and casualty operations, the majority of premium
revenue is derived from automobile liability and automobile physical damage
lines of business written on a multi-year contract basis with state and local
governments. Although we cannot predict with any certainty at this time, we do
not expect a significant level of cancellations or non-renewals of our property
and casualty contracts in the short term but recognize that a prolonged economic
slowdown could adversely affect future results. However, the Company expects
the aforementioned decline in usage to be temporary in nature.
Benefits and losses in our property and casualty operations could be adversely
impacted as a result of disruption caused by the COVID-19 pandemic. However,
due to the nature of our primary product lines, the impact is not currently
expected to be material. As a result, we do not currently expect a material
adverse effect on operating results or liquidity in the property and casualty
operations.
The majority of premium revenue in our life and health operations are derived
from the senior market segment of the population, or those individuals age
sixty-five and up,
whole life insurance policies with the Company. We expect that earned premiums
could be adversely impacted by an economic slowdown related to the COVID-19
pandemic and individual, business and government responses thereto, which could
lead to a decline in new sales and reduced retention of insureds. As a result,
we currently anticipate that the life and health operations may experience a
marginal decline in earned premiums although the actual impact cannot be
predicted with certainty at this time.
Unforeseen infectious diseases that impact large portions of a population can
have an adverse impact on mortality and morbidity, and resultant benefits and
losses incurred by the Company's life and health operations. Accordingly, the
Company does anticipate incurring higher costs, potentially similar to prior
influenza seasons, as it relates to life insurance claims. During 2020, the
Company's individual policyholders were subject to various degrees of shelter in
place orders. As a result, the Company experienced lower utilization of certain
accident and health benefits, particularly in the Medicare supplement line of
business. However, during 2021, utilization of policyholder benefits have
returned to historical averages. As a result, and although the ultimate impact
cannot be predicted with certainty at this time, the Company does not expect
significant adverse development in total benefits and losses incurred in its
life and health operations.
In addition to the information set forth in this report, you should carefully
consider the discussions of the COVID-19 pandemic and related economic
developments presented in our Annual Report on Form 10-K for the year ended
all of which could materially affect our business, financial condition or future
results.
24
--------------------------------------------------------------------------------
Table of Contents
Judge again denies bond for prominent attorney Alex Murdaugh
Judge dismisses Paramount lawsuit over Medicaid contract [The Blade, Toledo, Ohio]
Advisor News
- Wealth planning vs. estate planning: Honoring your client’s wishes
- What to discuss during the first retirement planning meeting
- Inflation, competing priorities and uncertainty erode retirement security
- As health premiums rise, 1 in 8 workers cut retirement savings
- CT governor’s candidates claims: What’s true, and what’s misleading
More Advisor NewsAnnuity News
- National Life Group expands annuity portfolio
- AM Best to Join Life/Annuity Insurance-Focused Panel Discussion at Capitol Forum Event
- USAA Earns No. 1 Ranking in JD Power Individual Annuity Study for the Third Consecutive Year
- How flexible annuities fit today’s retirement portfolios
- Foresters Financial appoints Tom Ross as chief distribution officer for U.S. annuity sales
More Annuity NewsHealth/Employee Benefits News
- Pennsylvania Health Plans Must Cover Colon Cancer Screening at 45
- In Miami-Dade court, health insurer fights an order to cover $48,500 cancer drug
- Fed judge blocks Medicaid work requirement rule
- Health insurers leave millions unpaid for mental health crisis care in California
- Commissioner places Mending Health in conservatorship
More Health/Employee Benefits NewsLife Insurance News
- AM Best Affirms Credit Ratings of Insignia Life S.A. de C.V.
- FINANCIAL FRAUD
- Security Benefit Announces Planned Dividend Rate Reset for Series B Preferred Stock
- Palmetto Heritage and Atlantic Coast Life Announce Discussions Regarding Potential Acquisition
- Jury finds insurance company acted in bad faith, awards Nebraska woman $11.3M
More Life Insurance News