Business context and reporting period
Atlantic American Corporation filed this Form 10-Q for the quarter and nine months ended September 30, 2018. Its insurance operations are conducted through American Southern, which focuses on property and casualty insurance, and Bankers Fidelity, which focuses on life and health insurance. Dollar amounts below are in millions unless otherwise indicated.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $46.4 | $44.8 | $136.4 | $132.3 |
| Net income (loss) | $0.9 | $0.7 | $(0.9) | $2.0 |
| Net income (loss) attributable to common shareholders | $0.8 | $0.6 | $(1.2) | $1.7 |
| Basic and diluted EPS | $0.04 | $0.03 | $(0.06) | $0.08 |
| Operating income (loss), company-defined non-GAAP | $(0.5) | $0.1 | $(2.8) | $(0.3) |
- Revenue: Insurance premiums were $42.6 million in Q3 and $127.6 million for nine months, up 1.1% and 3.7%, respectively, year over year. Net investment income was $7.1 million for nine months; realized investment gains were $0.8 million.
- Cash flow: Operating cash flow was negative $5.1 million for nine months, compared with negative $1.1 million in 2017. Investing cash flow was negative $8.3 million and financing cash flow negative $1.1 million. Cash declined to $10.0 million from $24.5 million at year-end 2017.
- Balance sheet and liquidity: Total assets were $339.5 million and shareholders’ equity $102.1 million at September 30. Investments totaled $245.0 million. Management reported $18.9 million of unrestricted cash and investments at the Parent and said it expects available resources and subsidiary payments to meet foreseeable liquidity needs. Insurance-subsidiary assets are subject to state regulatory restrictions.
- Debt: Junior subordinated debentures, net, were $33.7 million, unchanged from year-end. They bear floating rates of three-month LIBOR plus 4.00%–4.10%; the effective rate was 6.37%. Interest expense rose 17.6% for the nine-month period, primarily due to higher LIBOR.
- Investment marks: Fixed maturities had $11.0 million of gross unrealized losses at September 30, versus $3.9 million at December 31, 2017. Management attributed the increase mainly to rising interest rates and considered the declines temporary.
Material changes and operating trends
- Higher Medicare supplement business drove premium growth at Bankers Fidelity. Nine-month net earned premiums there rose 6.7%, but its underwriting loss widened to $6.4 million from $4.8 million, and its combined ratio increased to 107.3% from 105.8%. Management cited persistently higher-than-expected Medicare supplement claims.
- American Southern’s nine-month net earned premiums declined 2.4%; underwriting income fell to $1.0 million from $2.8 million. Its combined ratio rose to 97.4% from 93.0%, reflecting higher auto claim frequency and severity, partly offset by lower underwriting expenses.
- Across the company, insurance benefits and losses increased to $98.5 million for nine months from $87.4 million. Lower expense ratios partly offset adverse loss experience. The company reported a nine-month pretax loss of $1.2 million, compared with pretax income of $2.5 million in 2017.
- The company adopted accounting guidance requiring equity-security fair-value changes in earnings. It recorded $0.8 million of unrealized equity gains for the first nine months; comparisons with 2017 are affected by the prior presentation of those changes in other comprehensive income. Adoption also resulted in a $9.8 million opening retained-earnings adjustment.
- Other comprehensive loss was $8.8 million for nine months, substantially reflecting declines in available-for-sale fixed-maturity values. Total shareholders’ equity fell to $102.1 million from $113.0 million at year-end.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management stated that it believes existing cash, expected subsidiary dividends, fees and tax-sharing payments, and potential additional borrowing will support liquidity needs for the foreseeable future.
- Key operating risks include adverse claims frequency and severity, particularly in auto lines and Medicare supplement; changes in interest rates and investment valuations; and reinsurance-related exposure and recoverability. The company said it did not intend, and did not expect to be required, to sell fixed maturities in an unrealized-loss position.
- Subsidiary dividends are limited by insurance regulation. In 2018, distributions exceeding $4.8 million required prior approval; the Parent had received $3.6 million through September 30.
- The company reported ordinary-course claims and lawsuits and said known matters were not expected to materially affect financial condition or results. It may defer debenture interest for up to 20 consecutive quarters, subject to restrictions including limits on common-stock dividends and repurchases; it had not elected to defer payments.
- Management concluded disclosure controls and procedures were effective as of period-end and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated Medicare supplement claims and auto losses persist, and how they affect loss ratios, underwriting results and reserves.
- How much of premium growth is retained after the substantial increase in ceded Medicare supplement premiums, and the terms and performance of the related reinsurance arrangement.
- Whether operating cash flow and Parent liquidity remain adequate given the cash decline, regulatory limits on subsidiary dividends, and floating-rate debt costs.
- Whether unrealized fixed-maturity losses remain temporary and whether the portfolio’s interest-rate and credit exposures change.
- The effect of the equity-security accounting change and fair-value gains on reported earnings versus underlying operating performance; operating income is a company-defined non-GAAP measure.