Atlantic American Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparative periods ended June 30, 2018. Amounts below are in millions of dollars unless stated otherwise. Atlantic American is an insurance holding company with property and casualty operations (American Southern) and life and health operations (Bankers Fidelity).
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net insurance premiums | $45.5 | $42.8 | $90.3 | $85.0 |
| Total revenue | $43.1 | $49.4 | $98.1 | $90.0 |
| Net income (loss) | $(4.4) | $3.2 | $(0.3) | $(1.8) |
| Net income (loss) applicable to common shareholders | $(4.5) | $3.1 | $(0.5) | $(2.0) |
| Basic and diluted EPS | $(0.22) | $0.15 | $(0.02) | $(0.10) |
| Non-GAAP operating income (loss) | $(0.9) | $0.0 | $(3.5) | $(2.3) |
Q2 revenue fell 12.8%, despite premium growth, mainly because equity securities produced a $5.3 million unrealized loss, versus a $4.1 million gain in Q2 2018. For the first half, revenue rose 9.1%; premium growth was partly offset by lower investment income. Management’s non-GAAP operating loss excludes income taxes and realized and unrealized investment gains or losses; it worsened in both comparison periods, primarily because of unfavorable life and health claims experience.
Q2 premiums increased 6.1% year over year; first-half premiums also increased 6.1%. Management attributed growth mainly to Medicare supplement business and automobile physical damage. Benefits and losses increased to $34.2 million in Q2 and $69.5 million in the first half. Commissions and underwriting expenses rose to $11.5 million and $22.5 million, respectively. Net investment income declined 8.8% in Q2 and 5.1% in the first half.
Segments and underwriting
- American Southern: First-half net earned premiums increased 8.8% to $28.6 million, and underwriting income was $1.0 million, about unchanged. The combined ratio was 96.6% versus 96.3%. Q2 combined ratio worsened to 97.2% from 93.9%, reflecting less favorable losses in auto liability, auto physical damage and general liability. Growth was led by automobile physical damage; surety premiums declined amid competition.
- Bankers Fidelity: First-half net earned premiums increased 4.9% to $61.7 million, but underwriting loss widened to $6.4 million from $5.2 million. The combined ratio rose to 110.4% from 108.9%; Q2 was 108.3% versus 107.1%. Management cited persistently higher-than-expected Medicare supplement claims, increased reinsurance cessions, and costs of servicing the growing Medicare supplement business.
Cash, balance sheet and debt
- Cash and cash equivalents were $11.5 million at June 30, down from $12.6 million at year-end. First-half operating cash flow was negative $7.2 million, versus negative $6.4 million in 2018; investing activities provided $6.5 million, while financing used $0.5 million.
- Total assets were $371.7 million versus $344.3 million at December 31, 2018; shareholders’ equity was $112.8 million versus $101.4 million. Accumulated other comprehensive income improved to $4.7 million from a $7.5 million loss, primarily reflecting gains on available-for-sale fixed maturities.
- Investments totaled $254.4 million, including $223.3 million of fixed maturities and $20.5 million of equity securities. The company recorded no other-than-temporary impairment charges and said it did not intend, or expect to be required, to sell securities in unrealized loss positions.
- Junior subordinated debentures, net, were $33.7 million, with floating rates of LIBOR plus 4.00% or 4.10%; the effective rate was 6.57%. Interest expense was $1.1 million for the first half. The debt is unsecured, subordinated, and matures in 2032 and 2033.
- Management reported approximately $15.0 million of unrestricted cash and investments at the Parent. Insurance-subsidiary statutory surplus was $42.0 million at American Southern and $28.0 million at Bankers Fidelity. Subsidiary dividends above $4.3 million in 2019 require prior approval; $2.4 million had been received through June 30. Management said it expects available cash, subsidiary dividends, fees and tax-sharing payments, and potential additional borrowing to meet foreseeable liquidity needs. Insurance investment assets are subject to regulatory restrictions.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key operating risks include continued elevated Medicare supplement claims, loss experience and reserve estimates, and competition in surety. Investment results are exposed to market-value fluctuations; floating-rate debentures expose interest costs to LIBOR changes.
- The company had $4.9 million of unfunded commitments to variable-interest entities at June 30, 2019, compared with none at year-end. Its maximum loss exposure on those investments was limited to their $8.6 million carrying value.
- Ordinary-course claims and lawsuits were not expected by management to materially affect financial condition or results. No material changes to off-balance-sheet arrangements were reported.
- Adopting the new lease standard resulted in recognition of a $6.1 million right-of-use asset and lease liability at adoption; management said the adoption did not materially affect results or liquidity. A related-party transfer of the company’s remaining fractional aircraft interest generated $151,000.
- The common-stock repurchase plan was suspended in May 2019 after the company ended its relationship with the plan’s broker. Management expected to evaluate a replacement plan. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Whether Medicare supplement claims and Bankers Fidelity’s combined ratio improve, and whether the elevated claims persist.
- How much of the quarterly loss reflects temporary equity-market volatility versus underlying insurance operations; reconcile GAAP results with management’s non-GAAP operating measure.
- Cash generation, Parent liquidity, and the availability of regulated subsidiary dividends and tax-sharing payments.
- Exposure to LIBOR-linked debt costs and the terms and funding timing of the $4.9 million VIE commitments.
- Investment portfolio credit quality, unrealized losses, and the assumptions supporting management’s conclusion that impaired securities are temporary.