Atlantic American Corporation (NASDAQ: AAME) — FY2022 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2022, compared with FY2021; it does not provide standalone fourth-quarter results. Atlantic American is an insurance holding company operating through property and casualty insurer American Southern and life and health insurer Bankers Fidelity.
The report was filed June 30, 2023, after delays caused by implementation and review of a new Medicare Supplement actuarial valuation system. The 2022 Form 10-K and first-quarter 2023 Form 10-Q were filed concurrently. Management stated that the review resulted in no changes to historical financial statements.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $187.9 million | $199.6 million |
| Net premiums | $185.4 million | $184.2 million |
| Net investment income | $9.9 million | $8.5 million |
| Income before taxes | $2.1 million | $5.3 million |
| Net income | $1.5 million | $4.3 million |
| Net income per diluted common share | $0.06 | $0.19 |
| Net cash provided by operating activities | $6.5 million | $1.1 million |
Revenue fell 5.9%, principally reflecting lower investment-related gains and Bankers Fidelity revenue; net premiums edged up 0.7%. Net income declined largely because equity securities produced a $7.6 million unrealized loss in 2022 versus a $1.9 million gain in 2021, and realized investment gains fell to $0.03 million from $4.9 million. Management’s non-GAAP operating income was $9.6 million, compared with an operating loss of $1.5 million in 2021; this measure excludes income taxes and realized and unrealized investment gains or losses.
Segment underwriting: American Southern’s underwriting income was $2.9 million versus $3.4 million; its combined ratio worsened to 95.8% from 95.0%, as automobile liability severity increased. Bankers Fidelity returned to underwriting income of $5.0 million from a $5.7 million loss; its combined ratio improved to 95.7% from 105.0%, mainly due to fewer Medicare Supplement claims and improved rate adequacy.
Financial position, liquidity and debt
- At year-end, cash and cash equivalents were $28.9 million, up from $24.8 million; total assets were $367.1 million versus $402.3 million, and shareholders’ equity was $102.2 million versus $141.3 million.
- Total investments fell to $228.7 million from $283.4 million. Available-for-sale fixed maturities had a $28.0 million difference between amortized cost ($236.8 million) and fair value ($208.7 million), primarily reflecting market declines amid rising interest rates. The company recorded $39.8 million of after-tax other comprehensive loss, largely from fixed-maturity securities; it reported no other-than-temporary impairment charges.
- Insurance reserves and policyholder funds totaled $202.7 million, including $87.5 million for losses and claims and $85.6 million for future policy benefits. Prior-year loss development reduced incurred losses by $4.2 million in 2022.
- Debt included $2.0 million outstanding under a $10 million revolving facility and $33.7 million in junior subordinated debentures. The debentures bear floating rates tied to LIBOR plus 4.00%–4.10%; their effective rate was 8.73%. The revolver matures April 2024 and includes a 35% debt-to-capital covenant. Interest expense rose 40.7% to $2.0 million.
- Parent unrestricted cash and investments were approximately $5.0 million. Insurance subsidiaries had $89.7 million of statutory surplus; their dividends to the Parent are subject to regulatory limits. The company reported that subsidiary assets and expected cash flows should fund policy liabilities and that available resources should meet liquidity needs for the next 12 months and foreseeable future.
Material changes, outlook and risks
- American Southern net earned premiums grew 3.4%, with automobile liability growth and price increases partly offset by lower automobile physical damage premiums. Bankers Fidelity net earned premiums decreased 0.9%; Medicare Supplement gross earned premiums declined 8.4% as non-renewals exceeded new writings, while group life and other health products grew.
- Management provided no specific earnings or premium guidance. It cited improved life and health claims experience and investment-income growth, while noting less favorable automobile liability loss severity. Its liquidity outlook depends partly on subsidiary dividends, fees and tax-sharing payments.
- Control weakness and reporting delay: Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2022 because controls over development, testing and implementation of Medicare Supplement actuarial models were deficient, and management review controls lacked sufficient precision. Remediation actions included enhanced model documentation and testing, data reconciliations, additional review controls and added actuarial staff. The auditor did not attest to internal control effectiveness. The financial statement audit expressed an unqualified opinion and identified the actuarial system conversion and insurance reserve valuations as critical audit matters.
- Insurance reserve estimates involve material judgment; management’s actuarial range for reserves overall indicated potential outcomes approximately 10% below or above the recorded estimate. Actual adverse development could materially affect results. American Southern’s automobile liability severity, Medicare Supplement claims and policy persistence are key operating sensitivities.
- Approximately 99.7% of reinsurance recoverables were due from General Re Corporation. The reinsurer had strong reported ratings, but Atlantic American remains liable to policyholders if a reinsurer fails to pay.
- Interest rates affect both the investment portfolio and floating-rate debt. The company was preparing for LIBOR transition. Other disclosed risks include insurance competition, regulatory changes, catastrophe and claim volatility, reinsurance availability, investment-market movements and cybersecurity. Ordinary-course litigation was not expected to materially affect financial condition; a regulatory consent-order penalty was recorded in March 2022.
- Related-party matters include office leasing from an entity controlled by the controlling shareholder’s family and Series D preferred stock held by an affiliate. The company is controlled by the Robinson/Howell interests; the filing reported Harriett J. Robinson beneficially owning 74.57% of common stock as of June 2023.
Important facts for investors to verify
- Progress and sustained effectiveness of the actuarial-model control remediation, and whether subsequent reports identify further deficiencies or restatements.
- Subsequent Medicare Supplement claims, persistency, new sales and reserve development, including the effects of the new valuation system.
- Fixed-maturity portfolio recovery, realized/unrealized investment results, and any changes in statutory capital or subsidiary dividend capacity.
- Floating-rate debt costs, covenant compliance, LIBOR replacement terms and repayment or refinancing plans before the revolver maturity.
- Reinsurance recoverable concentration and collectibility, and the terms and adequacy of reinsurance protection.
- Related-party transactions, controlling shareholder influence, Series D preferred-stock rights and common-dividend decisions. The filing reported no annual common dividend declared and paid during 2023 pending filing of this report.