Atlantic American Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Amounts are in thousands of dollars except per-share data. Atlantic American is an insurance holding company operating property and casualty insurer American Southern and life and health insurer Bankers Fidelity.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $36,650 | $34,551 |
| Insurance premiums | $33,019 | $30,681 |
| Income before taxes | $1,011 | $1,720 |
| Net income | $922 | $1,657 |
| Net income applicable to common shareholders | $795 | $1,530 |
| Diluted earnings per common share | $0.04 | $0.07 |
| Operating income, company-defined non-GAAP measure | $333 | $762 |
| Net cash used in operating activities | $(2,833) | $(724) |
Investment income was $2,905 versus $2,883; realized investment gains were $678 versus $958. Interest expense was $577 versus $657. The filing does not present a consolidated profit-margin measure. American Southern’s combined ratio improved to 101.4% from 107.5%, while Bankers Fidelity’s worsened to 103.4% from 98.1%.
Financial position and liquidity
At March 31, 2013, total assets were $313,548, total liabilities $209,521, and shareholders’ equity $104,027. Cash and cash equivalents were $18,777, and total investments were $241,540. The company reported $41,238 of junior subordinated debentures, with variable rates of three-month LIBOR plus 4.00% and 4.10%, and maturities in 2032 and 2033. The effective interest rate was 4.4%.
Cash declined by $174 during the quarter. Investing activities provided $2,931, mainly because securities sales and maturities exceeded purchases; financing activities used $272 for treasury-share purchases. Management reported approximately $27.9 million of unrestricted cash and investments at the Parent and stated that existing resources, subsidiary dividends, fees and tax-sharing payments, and potentially additional borrowing should meet foreseeable liquidity needs. Insurance-subsidiary assets are subject to state regulatory restrictions; subsidiary dividends above $9.6 million in 2013 require prior approval.
Material changes and management commentary
- Revenue rose 6.1%, primarily from Medicare supplement premium growth at Bankers Fidelity. Net income fell 44%, and operating income fell from $762 to $333.
- Bankers Fidelity premiums increased 15.4%, but underwriting shifted from $403 of income to an $809 loss. Management attributed higher claims primarily to unusually concentrated first-quarter Medicare Part B deductible reimbursements, and cited continued rate increases to help offset medical-cost growth.
- American Southern net earned premiums declined 9.0%, following the cancellation of agencies and programs with unfavorable loss experience. Its loss ratio improved substantially, but underwriting expenses rose with variable agent commissions; its underwriting loss narrowed to $121 from $736.
- Management cited higher advertising costs, including television commercials and social media initiatives, as well as higher commissions and agency expenses. Consolidated realized investment gains also declined.
- Other comprehensive loss was $1,809, largely reflecting unrealized losses on available-for-sale securities. The company said it did not intend or expect to be required to sell securities in unrealized-loss positions and considered them temporarily impaired.
Outlook, risks, contingencies, and unusual items
The filing provides no numerical earnings or revenue guidance. Management said first-quarter results are not necessarily indicative of full-year results and expressed confidence in liquidity for the foreseeable future. Key exposures include insurance claim frequency and severity, Medicare supplement claims and medical costs, investment-market and issuer-credit changes, and estimates used in reserving, impairment, and fair-value measurements. More than 90% of insurance-subsidiary invested assets were marketable securities, but their use is limited by insurance regulations. The company’s interest-rate collar matured and terminated on March 4, 2013; no balance remained.
Management said known ordinary-course claims and lawsuits were not expected to materially affect financial condition or results. The company reported effective disclosure controls at period-end and no material change in internal control over financial reporting. It repurchased 80,968 common shares during the quarter for approximately $272 under a plan authorizing up to 750,000 shares; 663,137 shares remained available at quarter-end.
Investor facts to verify
- Whether Medicare supplement claims and the elevated first-quarter deductible reimbursements normalize, and whether rate increases offset claim-cost trends.
- Whether American Southern sustains improved loss experience while managing higher variable commissions and reduced premium volume.
- Whether operating cash flow improves and Parent liquidity remains adequate given regulated subsidiary dividends and debt service.
- Investment portfolio valuation, unrealized-loss duration, interest-rate and credit exposure, and the assumptions supporting temporary-impairment conclusions.
- How share repurchases, common dividends, and cumulative Series D preferred dividends affect available capital and liquidity.