Atlantic American Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Insurance holding company operating through American Southern (property and casualty) and Bankers Fidelity (life and health). This unaudited report covers the three and six months ended June 30, 2021; comparisons are with the same 2020 periods. Dollar amounts below are in millions unless noted.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $51.5 | $49.7 | $100.5 | $89.1 |
| Net insurance premiums | $45.1 | $46.5 | $91.2 | $92.0 |
| Net investment income | $2.3 | $1.9 | $4.4 | $3.9 |
| Net income (loss) | $3.0 | $6.5 | $2.5 | $(1.6) |
| Net income (loss) applicable to common shareholders | $2.9 | $6.4 | $2.3 | $(1.8) |
| Diluted earnings (loss) per common share | $0.14 | $0.30 | $0.11 | $(0.09) |
Q2 operating income, a company-defined non-GAAP measure excluding taxes and realized and unrealized investment gains or losses, was a loss of $0.3 million, versus income of $6.9 million a year earlier. For the first half it was a loss of $1.7 million, versus income of $4.9 million. Equity-security unrealized gains were $4.0 million in Q2 and $4.7 million for the first half of 2021; the first half of 2020 included $7.1 million of unrealized losses. These market-value changes materially affected reported comparisons.
Profitability and segments. Q2 consolidated pretax income was $3.8 million, down from $8.3 million; first-half pretax income was $3.2 million, compared with a $1.9 million loss. American Southern’s underwriting income was $0.9 million in Q2 and $1.5 million in the first half; its combined ratios were 94.4% and 95.4%, respectively. Bankers Fidelity recorded underwriting losses of $1.5 million in Q2 and $3.5 million in the first half; its combined ratios were 105.3% and 105.9%.
Cash flow and financial position. First-half operating cash flow was $(13.9) million, versus $0.6 million generated in 2020, principally reflecting a $14.7 million increase in receivables. Investing activities provided $4.5 million and financing activities used $0.4 million, including $0.4 million of common dividends. Cash and cash equivalents fell to $9.5 million from $19.3 million at year-end 2020. At June 30, total assets were $404.5 million, total liabilities $262.1 million and shareholders’ equity $142.4 million.
Debt included $33.7 million of junior subordinated debenture obligations, net, with a reported effective interest rate of 4.20%. In May 2021, the company established an unsecured $10 million revolving facility maturing April 12, 2024; there were no borrowings at quarter-end. The facility has a 35% debt-to-capital covenant. The Parent reported approximately $3.9 million of unrestricted cash and investments; use of insurance-subsidiary assets and dividends is subject to regulatory restrictions. Insurance-subsidiary statutory capital and surplus was $50.0 million at American Southern and $41.7 million at Bankers Fidelity.
Material changes versus prior periods
- Q2 premiums declined 2.9% year over year; first-half premiums declined 0.9%. Bankers Fidelity’s Medicare supplement premiums fell as non-renewals exceeded new business.
- Bankers Fidelity’s claims increased substantially: the Q2 loss ratio rose to 74.9% from 55.6%, driven by Medicare supplement utilization returning toward historical levels after unusually low pandemic-period use. The first-half loss ratio increased to 73.9% from 67.1%.
- American Southern’s net earned premiums rose 3.4% in Q2 and 7.3% for the first half, supported by automobile physical damage and a new general liability program. Its first-half loss ratio worsened to 66.4% from 63.6%.
- First-half prior-year loss development was unfavorable by $0.6 million, principally in Bankers Fidelity Medicare supplement, compared with favorable development of $2.3 million in 2020.
- Fixed-maturity fair value was $257.8 million versus $254.1 million at year-end, while accumulated other comprehensive income fell to $20.3 million from $25.0 million. Management attributed more securities in unrealized-loss positions to rising interest rates; the losses were considered temporary, with no other-than-temporary impairment charges recorded.
Outlook, risks and contingencies
- Management said it expects available cash, subsidiary dividends, fees and tax-sharing payments, and potential borrowing to meet foreseeable liquidity needs. It did not provide quantified earnings or revenue guidance.
- Management stated it did not currently expect a significant COVID-19-related decline in liquidity or operating results, but emphasized that the pandemic’s duration and effects remain uncertain. Risks include weaker sales or policy retention, premium-payment leniency, investment-market volatility, and changes in claims and benefit utilization.
- Medicare supplement claim utilization has risen from pandemic-era lows; continued claims and persistency trends are important to Bankers Fidelity’s results. Its Medicare supplement business also faces non-renewals exceeding new writings and higher deferred acquisition cost amortization.
- Fixed-maturity portfolio values may be affected by interest rates and issuer credit conditions; equity-security fair-value movements flow through earnings. The company reported $0.4 million of unrealized losses on fixed maturities, all in positions held for less than 12 months, and said it did not intend or expect to be required to sell those securities.
- Ordinary-course claims and lawsuits were disclosed; management did not expect known matters to materially affect financial condition or results. The company also had $2.0 million of unfunded investment commitments to partnerships and LLCs. It reported no outstanding FHLB borrowings and no borrowings under its new revolver.
- Disclosure controls and procedures were assessed as effective at quarter-end; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Medicare supplement claims and non-renewals stabilize, and the resulting impact on Bankers Fidelity’s underwriting results.
- How much reported earnings continue to depend on volatile equity-security gains or losses; compare GAAP net income with the company’s non-GAAP operating income measure.
- Operating cash flow, receivables and cash balances, alongside restrictions on upstreaming insurance-subsidiary funds.
- Fixed-maturity valuation and sensitivity to interest rates, credit deterioration, or any need to sell securities before recovery.
- Compliance with the revolving-credit covenant, servicing of floating-rate junior subordinated debentures, and the status of subsidiary statutory capital and dividend capacity.