Atlantic American Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Atlantic American is an insurance holding company operating property and casualty insurance through American Southern and life and health insurance through Bankers Fidelity. Financial amounts below are in millions unless noted.
Financial results and condition
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $41.75 | $40.95 |
| Insurance premiums | $38.46 | $37.39 |
| Income before tax | $1.38 | $1.01 |
| Net income | $0.90 | $0.69 |
| Net income attributable to common shareholders; diluted EPS | $0.80; $0.04 | $0.59; $0.03 |
| Operating income (company-defined non-GAAP) | $0.62 | $0.06 |
| Net cash used in operating activities | $(6.96) | $(4.24) |
| Cash and cash equivalents at period end | $10.78 | $15.62 at Dec. 31, 2015 |
| Total assets; shareholders’ equity | $300.13; $103.82 | $314.60; $102.49 at Dec. 31, 2015 |
| Junior subordinated debentures, net carrying amount | $33.74 | $33.74 at Dec. 31, 2015 |
Insurance benefits and losses were $24.83 million; commissions and underwriting expenses were $11.83 million. Investment income was $2.51 million and realized investment gains were $0.75 million. The filing does not state a consolidated profit margin; calculated net margin was approximately 2.2%, versus 1.7% in Q1 2015.
Material changes and operating performance
- Premium revenue rose 2.9%, primarily from Medicare supplement, automobile liability and surety business. Total revenue increased 1.9%.
- American Southern’s net earned premiums increased 3.5% to $13.73 million; underwriting income rose to $1.15 million from $0.34 million. Its combined ratio improved to 91.7% from 97.4%, reflecting a lower loss ratio, including a $0.5 million surety loss recovery. Gross written premiums fell 23.9%, mainly because of lower automobile physical damage writings, an agency cancellation and a returned automobile liability premium.
- Bankers Fidelity’s earned premiums rose 2.5% to $24.73 million, but its underwriting loss widened to $1.11 million from $0.76 million. Its combined ratio increased to 104.5% from 103.1%, as higher underwriting expenses more than offset a modest improvement in the loss ratio.
- Operating income improved mainly due to better property and casualty loss experience and $0.6 million lower legal and consulting fees. Lower investment income and weaker life and health profitability partly offset those gains. Realized gains included a $0.6 million gain on a property sale within a real estate partnership investment.
- Operating cash outflow increased year over year, primarily reflecting claims settlements and a $14.2 million decrease in insurance reserves. Investing activities provided $2.27 million, as investment sale and maturity proceeds exceeded purchases. Cash declined $4.84 million during the quarter.
Liquidity, debt, outlook and risks
- Management said it expects subsidiary dividends, fees and tax-sharing payments, existing cash and, if needed, additional borrowings to meet liquidity needs for the foreseeable future. The Parent reported approximately $20.4 million of unrestricted cash and investments; insurance-subsidiary assets are subject to regulatory restrictions.
- Insurance-subsidiary statutory surplus was $38.1 million at American Southern and $35.3 million at Bankers Fidelity. Subsidiary dividends above $6.1 million in 2016 require prior regulatory approval. The subsidiaries reported statutory net income of $3.3 million, compared with $2.6 million a year earlier.
- Debentures bear floating rates of three-month LIBOR plus 4.00%–4.10%; the effective rate was 4.68% at quarter end. They mature in 2032 and 2033. The company had not elected to defer interest payments.
- Fixed maturities had $8.06 million of gross unrealized losses at quarter end, including $3.86 million associated with 12 oil-and-gas-industry issuers. Management considered the securities temporarily impaired, citing continued interest payments and its intent and ability to hold them; it said it did not intend, or expect to be required, to sell them. Further credit deterioration or inability to hold could change that assessment.
- Management identified ordinary-course claims and lawsuits but did not expect known matters to materially affect financial condition or results. No earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties.
- The company repurchased 38,646 shares during the quarter for approximately $0.17 million; 162,637 shares remained authorized for repurchase at March 31, 2016. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the favorable property and casualty loss experience, including the surety recovery, is repeatable, and how lower gross written premiums may affect future earned premiums.
- Whether Bankers Fidelity can contain underwriting expenses and improve its combined ratio, particularly in light of higher compensation and temporary staffing costs.
- Developments in oil-and-gas-related bond credit quality, unrealized losses, and management’s impairment and hold assessments.
- The drivers of operating cash outflows and reserve reductions, and whether cash and permitted subsidiary distributions remain sufficient for claims, debt service and parent-company needs.
- Exposure to floating-rate debt, dividend restrictions, and the terms and potential dilution associated with Series D preferred stock; it was not currently convertible.