MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 three month period ended
discussion should be read in conjunction with the unaudited 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
(the "2021 Annual Report").
primarily through its insurance subsidiaries:
Company
Southern") and
Assurance Company
is managed separately, offers different products and is evaluated on its
individual performance.
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 2021 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 2021 Annual Report.
Overall Corporate Results
The following presents the Company's revenue, expenses and net income (loss) for
the three month period ended
Three Months Ended
March 31,
2022 2021
(In thousands)
Insurance premiums, net $ 47,081 $ 46,090
Net investment income 2,340 2,113
Realized investment gains (losses), net (10 ) 121
Unrealized gains on equity securities, net 2,193 744
Other income
4 7 Total revenue 51,608 49,075 Insurance benefits and losses incurred 31,169 33,272 Commissions and underwriting expenses 12,836 12,564 Interest expense 354 346 Other expense 3,453 3,440 Total benefits and expenses 47,812 49,622 Income (loss) before income taxes$ 3,796 $ (547 ) Net income (loss)$ 2,842 $ (431 )
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).
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A reconciliation of net income (loss) to operating income (loss) for the three
month period ended
follows:
Three Months Ended
March 31 ,
Reconciliation of Non-GAAP Financial Measure 2022 2021
(In thousands)
Net income (loss) $ 2,842 $ (431 )
Income tax expense (benefit) 954 (116 )
Realized investment (gains) losses, net 10 (121 )
Unrealized gains on equity securities, net (2,193 ) (744 )
Non-GAAP operating income (loss)
$ 1,613 $ (1,412 )
On a consolidated basis, the Company had net income of
per diluted share, for the three month period ended
net loss of
ended
31, 2022
the three month period ended
was primarily attributable to an increase in the automobile physical damage line
of business in the property and casualty operations. Also contributing to this
increase in premium revenue was an increase in the life insurance premiums in
the life and health operations.
Operating income increased
31, 2022
operating income was primarily due to favorable loss experience in the property
and casualty operations due to a decrease in the frequency and severity of
claims within the automobile physical damage line of business. Also contributing
to the increase in operating income was favorable loss experience in the life
and health operations, primarily as a result of an increase in earned premium
within the group lines of business.
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 period ended
comparable period in 2021:
Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Gross written premiums $ 11,558 $ 11,462
Ceded premiums (1,617 ) (1,684 )
Net written premiums $ 9,941 $ 9,778
Net earned premiums $ 17,343 $ 16,615
Insurance benefits and losses incurred 10,478 11,749
Commissions and underwriting expenses
5,943 4,286 Underwriting income $ 922$ 580 Loss ratio 60.4 % 70.7 % Expense ratio 34.3 25.8 Combined ratio 94.7 % 96.5 %
Gross written premiums at American Southern increased
during the three month period ended
2021. The increase in gross written premiums was primarily attributable to an
increase in premiums written in the automobile physical damage line of business
from existing agencies, as well as increases in the surety line of business.
Partially offsetting the increase in gross written premiums was a decrease in
premiums written in the auto liability line of business and retro premium
adjustments.
Ceded premiums decreased
ended
premiums in 2022 was primarily due to a decrease in ceding rates for two large
programs in the auto liability line of business.
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The following presents American Southern's net earned premiums by line of business for the three month period endedMarch 31, 2022 and the comparable period in 2021: Three Months Ended March 31, 2022 2021 (In thousands) Automobile liability$ 7,625 $ 7,737 Automobile physical damage 6,023 5,534 General liability 1,429 1,253 Surety 1,465 1,317 Other lines 801 774 Total$ 17,343 $ 16,615
Net earned premiums increased
period ended
net earned premiums was primarily attributable to an increase in automobile
physical damage coverage resulting from existing agencies 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).
Insurance benefits and losses incurred at American Southern decreased
million
comparable period in 2021. As a percentage of earned premiums, insurance
benefits and losses incurred were 60.4% in the three month period ended
31, 2022
decrease in the loss ratio during the three month period ended
was primarily due to a decrease in the frequency and severity of claims in the
automobile physical damage line of business, as well as in the inland marine
segment of the other line of business.
Commissions and underwriting expenses increased
the three month period ended
As a percentage of earned premiums, underwriting expenses were 34.3% in the
three month period ended
period ended
month period ended
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. During the three month period ended
commissions at American Southern increased by
period in 2021 due to more favorable loss experience from accounts subject to
variable commissions.
Bankers Fidelity
The following summarizes Bankers Fidelity's earned premiums, losses, expenses
and underwriting ratios for the three month period ended
comparable period in 2021:
Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Medicare supplement $ 37,971 $ 40,992
Other health products 2,973 2,387
Life insurance 4,517 2,887
Gross earned premiums 45,461 46,266
Ceded premiums (15,723 ) (16,791 )
Net earned premiums 29,738 29,475
Insurance benefits and losses incurred 20,691 21,523
Commissions and underwriting expenses
8,746 9,885 Total expenses 29,437 31,408 Underwriting income (loss)$ 301 $ (1,933 ) Loss ratio 69.6 % 73.0 % Expense ratio 29.4 33.5 Combined ratio 99.0 % 106.5 % 20
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Net earned premium revenue at Bankers Fidelity increased
during the three month period ended
in 2021. Gross earned premiums from the Medicare supplement line of business
decreased
2022
writings. Other health product premiums increased
the three month period ended
primarily as a result of new sales of the company's group health products. Gross
earned premiums from the life insurance line of business increased
or 56.5%, during the three month period ended
period in 2021 due to an increase in the group life products premium. Partially
offsetting the increase in gross earned premiums from the life insurance line
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
million
comparable period in 2021. The decrease in ceded premiums for the three month
period ended
premiums subject to reinsurance.
Insurance benefits and losses incurred decreased
the three month period ended
2021. As a percentage of earned premiums, insurance benefits and losses
incurred were 69.6% in the three month period ended
73.0% in the three month period ended
ratio for the three month period ended
decrease in the number of incurred claims within the Medicare supplement line of
business.
Commissions and underwriting expenses decreased
the three month period ended
2021. As a percentage of earned premiums, underwriting expenses were 29.4% in
the three month period ended
month period ended
three month period ended
additions to deferred acquisition costs ("DAC") exceeding the amortization of
DAC.
Net Investment Income and Realized Gains
Investment income increased
period ended
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 losses of
month period ended
realized investment losses during the three month period ended
resulted primarily from the redemption of the Company's investment in a fixed
maturity. The net realized investment gains during the three month period ended
Company's investments in fixed maturities. 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 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. The Company recognized net unrealized gains on equity securities of
gains on equity securities of
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 slightly during the three month period ended
31, 2022
primarily due to changes in the London Interbank Offered Rate ("LIBOR"), as the
interest rates on the Company's outstanding junior subordinated deferrable
interest debentures ("Junior Subordinated Debentures") are directly related to
LIBOR. The Company is preparing for the expected discontinuation of LIBOR by
identifying, assessing and monitoring risks associated with LIBOR transition.
Preparation includes taking steps to update operational processes to support
alternative reference rates and models, as well as evaluating legacy contracts
for any changes that may be required, including the determination of applicable
fallbacks.
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Liquidity and Capital Resources
The primary cash needs of the Company are for the payment of claims and
operating expenses, maintaining adequate statutory capital and surplus levels,
and meeting debt service requirements. Current and expected patterns of claim
frequency and severity may change from period to period but generally are
expected to continue within historical ranges. The Company's primary sources of
cash are written premiums, investment income and proceeds from the sale and
maturity of its invested assets. The Company believes that, within each
operating company, total invested assets will be sufficient to satisfy all
policy liabilities and that cash inflows from investment earnings, future
premium receipts and reinsurance collections will be adequate to fund the
payment of claims and operating expenses as needed.
Cash flows at the Parent are derived from dividends, management fees, and
tax-sharing payments, as described below, from the subsidiaries. The principal
cash needs of the Parent are for the payment of operating expenses, the
acquisition of capital assets and debt service requirements, as well as the
repurchase of shares and payments of any dividends as may be authorized and
approved by the Company's board of directors from time to time. At
2022
investments.
The Parent's insurance subsidiaries reported statutory net income of
million
net income of
Statutory results are impacted by the recognition of all costs of 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
American Southern had
Fidelity had
payments by the Parent's insurance subsidiaries in excess of
require prior approval. Through
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
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
2022
Stock totaling
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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 provides
for credit availability of five percent of statutory admitted assets, or
approximately
purchases may be required based upon the amount of funds borrowed from the
FHLB. As of
forms of collateral for any borrowings that it makes in the future from the
FHLB. As of 2022, BFLIC does not have any outstanding borrowings from the FHLB.
On
"Credit Agreement") with
Agreement provides for an unsecured
matures on
interest on the unpaid principal balance of outstanding revolving loans at the
LIBOR Rate (as defined in the Credit Agreement) plus 2.00%, subject to a LIBOR
floor rate of 1.00%.
The Credit Agreement requires the Company to comply with certain covenants,
including a debt to capital ratio that restricts the Company from incurring
consolidated indebtedness that exceeds 35% of the Company's consolidated
capitalization at any time. The Credit Agreement also contains customary
representations and warranties and events of default. Events of default include,
among others, (a) the failure by the Company to pay any amounts owed under the
Credit Agreement when due, (b) the failure to perform and not timely remedy
certain covenants, (c) a change in control of the Company and (d) the occurrence
of bankruptcy or insolvency events. Upon an event of default, the Lender may,
among other things, declare all obligations under the Credit Agreement
immediately due and payable and terminate the revolving commitments. As of
Credit Agreement.
Cash and cash equivalents decreased from
during the three month period ended
net cash used in operating activities of
decrease in cash and cash equivalents was net cash used in investing activities
of
and maturity of securities.
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, 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.
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