Atlantic American Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. Dollars are in millions except per-share data. Atlantic American is an insurance holding company operating principally through property and casualty insurer American Southern and life and health insurer Bankers Fidelity.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $40.949 | $41.160 |
| Insurance premiums | $37.386 | $38.418 |
| Investment income | $2.597 | $2.598 |
| Net realized investment gains | $0.951 | $0.108 |
| Income before taxes | $1.010 | $0.993 |
| Net income | $0.691 | $0.820 |
| Net income applicable to common shareholders | $0.592 | $0.702 |
| Basic and diluted EPS | $0.03 | $0.03 |
| Operating income (company-defined non-GAAP) | $0.059 | $0.885 |
| Net cash used in operating activities | $4.241 | $4.326 |
At March 31, 2015, total assets were $313.185 million, total liabilities $205.728 million and shareholders’ equity $107.457 million. Cash and cash equivalents were $19.695 million, compared with $16.375 million at year-end 2014; total investments were $238.171 million, versus $240.285 million. The filing reports $21.3 million of unrestricted cash and investments at the Parent.
Junior subordinated debentures, net, were $33.738 million, unchanged from year-end. They carry floating rates of three-month LIBOR plus 4.00% or 4.10%, with an effective rate of 4.3% at quarter-end and maturities in 2032 and 2033. Interest expense was $0.349 million, down from $0.429 million.
Cash from investing activities was $7.644 million, principally because proceeds from investment sales and maturities exceeded purchases. The company used $4.241 million in operating cash and $0.083 million in financing cash. Total comprehensive income was $3.791 million, including $3.100 million of after-tax other comprehensive income, primarily reflecting unrealized investment gains.
Changes and operating results
- Premium revenue declined 2.7%, primarily because Bankers Fidelity’s Medicare supplement first-year and renewal premiums fell. Net income declined to $0.691 million from $0.820 million; EPS remained $0.03.
- Company-defined operating income fell to $0.059 million from $0.885 million. Management attributed the decline to weaker life and health loss experience, lower premiums and $0.7 million more in legal and consulting fees. Higher American Southern profitability and lower interest expense partly offset these pressures.
- American Southern: Net earned premiums rose 1.8% to $13.263 million. Its combined ratio improved to 97.4% from 100.9% (below 100% indicates an underwriting profit), as the loss ratio fell to 64.0% from 77.5%. The expense ratio increased to 33.4% from 23.4%, largely reflecting variable commissions tied to improved loss experience. Underwriting income was $0.339 million, versus an underwriting loss of $0.118 million.
- Bankers Fidelity: Earned premiums fell 5.0% to $24.123 million, mainly from Medicare supplement and life insurance declines. Its combined ratio worsened to 103.1% from 99.2%, and underwriting results shifted to a $0.757 million loss from $0.201 million of income. Management cited higher Medicare supplement losses and a prior-year benefit from reduced medical utilization during unusually severe winter weather.
- Other expenses increased, including higher American Southern commission accruals and legal and consulting fees; lower life and health agency expenses and incentive compensation partly offset the increases.
Liquidity, outlook and risks
Management said subsidiary invested assets, future premiums, investment earnings and reinsurance collections are expected to fund claims and expenses, and that Parent cash balances and expected subsidiary dividends, fees and tax-sharing payments should meet liquidity needs for the foreseeable future. More than 90% of subsidiary invested assets are marketable securities, but their use is subject to state insurance regulation. In 2015, subsidiary dividends above $7.6 million require prior regulatory approval.
The company said it believes its existing resources and, if needed, additional financial-institution borrowings will support liquidity. It had not elected to defer debenture interest payments. The filing provides no quantitative earnings or revenue guidance; first-quarter results are not necessarily indicative of full-year results.
- Investment valuation and impairment judgments are subject to market, interest-rate, issuer-credit and recovery risks. At quarter-end, fixed maturities had $2.328 million of gross unrealized losses; $1.088 million related to oil and gas investments. Management considered the affected securities temporarily impaired and said it did not intend to sell them or expect to be required to sell them.
- Insurance claims, loss experience, premium levels, reinsurance recoveries and reserve estimates can affect results. Management reported ordinary-course claims and lawsuits but did not expect known matters to materially affect financial condition or results.
- Floating-rate debt exposes the company to interest-rate changes. Debenture interest deferral would restrict common dividends, repurchases and certain debt payments while interest accrues.
- The company repurchased 23,301 shares during the quarter for an average $4.05 per share; 411,350 shares remained available under the repurchase plan at March 31.
Management reported that disclosure controls were effective at period-end and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the decline in Medicare supplement premiums and the 103.1% Bankers Fidelity combined ratio persist or improve.
- Whether American Southern’s improved loss experience continues, and how variable commissions affect its expense ratio and underwriting profitability.
- The nature and potential duration of the higher legal and consulting costs, and their impact on non-GAAP operating income.
- Subsidiary statutory capital, dividend capacity and regulatory limits, as well as the Parent’s dependence on subsidiary distributions and tax-sharing payments.
- Investment portfolio credit and interest-rate exposure, including the oil and gas unrealized losses and the assumptions underlying impairment assessments.
- Floating-rate debenture costs, liquidity needs and the company’s ability to service debt while maintaining insurance subsidiary capital.