Atlantic American Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts below are in millions of dollars unless otherwise noted. The company is an insurance holding company operating in property and casualty insurance through American Southern and life and health insurance through Bankers Fidelity.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $44.8 | $41.6 | $85.7 | $82.7 |
| Insurance premiums | $38.1 | $38.5 | $75.5 | $76.9 |
| Net income | $3.3 | $0.9 | $4.0 | $1.7 |
| Net income per diluted common share | $0.15 | $0.04 | $0.18 | $0.07 |
| Operating income, non-GAAP | $0.041 | $0.501 | $0.100 | $1.386 |
| Net cash used in operating activities | Not separately reported for quarter | $(1.9) | $(0.5) |
Revenue and net income increased, but the earnings improvement primarily reflected realized investment gains: $4.1 million in Q2 and $5.1 million year to date, versus $0.5 million and $0.6 million in the comparable 2014 periods. Gains included $3.2 million from selling property held in two real estate partnership investments, plus fixed-maturity sales. Excluding realized gains and income taxes, the company’s non-GAAP operating income declined. Investment income also decreased 4.0% in Q2 and 2.0% year to date, primarily due to lower average fixed-maturity yields.
Premiums fell 0.9% in Q2 and 1.8% year to date. Management attributed the decline mainly to lower first-year and renewal Medicare supplement premiums at Bankers Fidelity. American Southern’s net earned premiums rose 9.1% in Q2 and 5.4% year to date, supported by auto physical damage, property and surety business.
Underwriting, balance sheet and liquidity
- American Southern: Underwriting income was $0.3 million in Q2 and $0.6 million year to date, compared with losses of $0.1 million and $0.2 million in 2014. Combined ratios improved to 98.2% and 97.8%, respectively, from 100.7% and 100.8%. Lower loss ratios were partly offset by higher commissions and underwriting expenses.
- Bankers Fidelity: Underwriting losses were $0.9 million in Q2 and $1.7 million year to date, versus losses of $0.6 million and $0.4 million. Combined ratios worsened to 103.8% and 103.5%, from 102.5% and 100.8%; management cited less favorable Medicare supplement loss experience and product repricing.
- Cash and assets: Cash and equivalents were $32.9 million at June 30, up from $16.4 million at year-end. Total assets were $327.2 million, versus $317.0 million; total investments were $226.8 million, versus $240.3 million. Operating cash flow was negative $1.9 million; investment sales and maturities exceeded purchases by $19.2 million.
- Capital and debt: Shareholders’ equity was $105.5 million, versus $104.2 million at year-end. Junior subordinated debentures, net, were $33.7 million, unchanged from year-end; interest rates float at three-month LIBOR plus 4.00%–4.10%, with a reported effective rate of 4.33%. The debt matures in 2032 and 2033. Interest expense declined following the 2014 purchase of $7.5 million of debentures.
- Insurance obligations and parent liquidity: Insurance reserves and policyholder funds totaled $169.6 million, up from $164.1 million. The parent reported approximately $21.2 million of unrestricted cash and investments. Subsidiary dividends are subject to state limits; distributions above $7.6 million in 2015 require prior approval, and $3.2 million had been received through June 30. Management said available cash and expected subsidiary dividends, fees and tax-sharing payments should meet foreseeable liquidity needs.
Outlook, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results. Key sensitivities include claim frequency and severity, insurance-reserve estimates, investment yields and valuations, and the ability to sustain premium production. More than 90% of subsidiary invested assets are marketable, but their use is restricted by insurance regulation. The company reported $5.2 million of securities in unrealized loss positions and judged them temporarily impaired, citing its intent and ability to hold them and expectation of contractual payments. Management said ordinary-course claims and lawsuits were not expected to materially affect results. The company may defer debenture interest, subject to restrictions, but had not elected to do so. Disclosure controls were reported effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported earnings depends on realized investment gains, including the property-sale gain, and whether such gains recur.
- Whether Bankers Fidelity can stabilize Medicare supplement premiums and loss experience, and whether repricing improves underwriting results.
- Whether American Southern’s improved loss ratios can offset higher variable commissions and underwriting expenses.
- Reserve adequacy, investment-portfolio credit and interest-rate exposure, and the potential effects of unrealized losses.
- Parent-company liquidity, subsidiary dividend restrictions, and servicing of floating-rate subordinated debt.