Atlantic American Corporation — Q3 2020 Form 10-Q
Business context and reporting period
Atlantic American is an insurance holding company operating through American Southern (property and casualty) and Bankers Fidelity (life and health). This unaudited filing covers the three and nine months ended September 30, 2020, compared with the same 2019 periods; balance-sheet comparisons are to December 31, 2019. Amounts below are in millions unless otherwise noted.
Financial performance and position
- Third quarter: Revenue was $46.3 million, down 3.1% year over year. Net income was $1.9 million, or $0.09 per diluted share, versus a $1.4 million loss, or $0.07 loss per share, in Q3 2019. Non-GAAP operating income was $3.0 million versus a $2.3 million loss.
- Nine months: Revenue was $135.4 million, down 7.2%. Net income was $0.3 million (less than $0.01 per common share) versus a $1.7 million loss. Non-GAAP operating income was $7.9 million versus a $5.7 million loss. Management’s operating-income measure excludes income taxes and realized and unrealized investment gains or losses.
- Revenue mix and investment results: Nine-month net premiums rose 1.3% to $137.0 million, while net investment income fell 16.3% to $5.7 million. The company recorded $7.8 million of unrealized equity-security losses, versus $2.1 million of gains a year earlier; realized investment gains were $0.4 million, down from $1.6 million.
- Insurance performance: American Southern’s nine-month underwriting income was $2.6 million, with a 94.3% combined ratio versus 97.0% in 2019. Bankers Fidelity recorded $4.9 million of underwriting income versus a $9.5 million loss, and its combined ratio improved to 94.7% from 110.3%. The filing attributes the improvement chiefly to fewer Medicare supplement claims during pandemic-related shelter-in-place periods, along with rate increases.
- Cash flow and liquidity: Operating activities used $0.9 million in the first nine months, compared with $7.6 million used in 2019. Investing activities used $3.0 million, versus $31.5 million provided in 2019; financing activities used $0.1 million. Cash declined to $8.9 million from $12.9 million at year-end. Total investments were $274.7 million; total assets were $385.0 million and shareholders’ equity was $128.0 million.
- Debt and obligations: Junior subordinated debentures, net, were $33.7 million. The obligations bear floating rates of LIBOR plus 4.00%–4.10%; the reported effective rate was 4.32%. Insurance reserves and policyholder funds totaled $201.1 million. The company had $5.2 million of operating lease liabilities and $0.3 million of accrued, unpaid Series D preferred dividends.
Material changes versus the prior comparable period
- Quarterly results turned profitable, principally reflecting lower insurance benefits and losses; nine-month results also improved, despite lower total revenue.
- Bankers Fidelity’s results benefited from a sharp fall in Medicare supplement claims. Its net earned premiums declined 0.8% for the nine months, partly reflecting non-renewals exceeding new writings.
- American Southern’s nine-month net earned premiums increased 5.8%, led by automobile physical damage. Its loss ratio improved, while its expense ratio edged higher.
- Unrealized losses on equity securities materially weakened reported investment results for the nine months. In contrast, fixed-maturity securities had $9.3 million of after-tax other comprehensive income, contributing to accumulated other comprehensive income rising to $19.8 million from $10.5 million at year-end.
- Cash fell by $4.0 million, mainly as investment purchases exceeded sales and maturities and operating cash flow was negative. The company reported $4.6 million of unrestricted cash and investments at the Parent.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said it could not reliably estimate the pandemic’s future effects, but did not then expect a significant decline in liquidity or operating results from COVID-19.
- Management warned that economic weakness could reduce new sales and policy retention, and that policyholder payment leniency could affect premiums. Certain automobile programs could seek partial premium refunds. The filing also notes potential life and health claims increases from COVID-19, while reporting lower utilization of some accident and health benefits to date.
- COVID-19-related market volatility affected investment fair values. Management said the company did not intend, and did not expect to be required, to sell fixed maturities in unrealized loss positions; no other-than-temporary impairment charges were recorded in the periods presented.
- Prior-year loss development was favorable by $2.7 million in the first nine months of 2020, primarily from Medicare supplement reserves. This reserve development and pandemic-related lower claims are important contributors to results and may not persist.
- The Parent depends on subsidiary dividends, service fees and tax-sharing payments. Subsidiary dividends are subject to regulatory limits; amounts above $4.6 million in 2020 required prior approval, and $2.7 million had been received through September 30. BFLIC had approximately $8 million of initial FHLB credit availability but had not borrowed.
- Ordinary-course claims and lawsuits were not expected by management to materially affect financial condition or results. The company also reported $2.0 million of unfunded investment commitments to partnerships.
Important facts for investors to verify
- Whether Medicare supplement claims return toward historical levels after pandemic-related utilization reductions, and how that affects Bankers Fidelity’s underwriting profitability.
- Whether premium retention, new sales, automobile refunds, or COVID-19 claims change materially in subsequent periods.
- Subsequent performance and valuation of equity and fixed-maturity investments, including any impairment charges or realized losses.
- Parent-level liquidity, subsidiary dividend capacity and regulatory restrictions, alongside the cash needs of the holding company.
- Floating-rate debenture costs and the company’s ability to meet debt service and cumulative preferred dividends.