Atlantic American Corporation — Q3 2012 Form 10-Q
Business context and period: Insurance holding company reporting for the quarter and nine months ended September 30, 2012. American Southern writes property and casualty insurance; Bankers Fidelity writes life and health insurance. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $35.3 | $30.8 | $104.8 | $87.9 |
| Net income | $1.1 | $1.7 | $3.5 | $2.4 |
| Net income applicable to common shareholders | $1.0 | $1.6 | $3.1 | $2.0 |
| Diluted EPS | $0.04 | $0.07 | $0.15 | $0.09 |
| Income before taxes | $1.0 | $1.8 | $3.5 | $2.7 |
- Revenue and earnings: Insurance premiums rose 19.0% in Q3 to $32.4 million and 20.1% year to date to $94.7 million, principally from Medicare supplement growth. Investment income increased 8.6% in Q3 and 8.9% year to date. Q3 net income declined mainly because the prior-year quarter included $0.9 million of realized investment gains; 2012 Q3 had none. Nine-month earnings improved with higher premiums, investment income, and realized gains.
- Segments: Nine-month revenue was $32.6 million at American Southern and $71.5 million at Bankers Fidelity. Pretax income was $2.0 million and $6.0 million, respectively. American Southern’s nine-month combined ratio worsened to 106.2% from 100.9%, reflecting higher commercial auto and general liability claims. Bankers Fidelity premiums grew 30.0% year over year; its benefits-to-premiums ratio improved to 71.2% from 72.1%.
- Cash flow and liquidity: Nine-month operating cash flow was $1.7 million, versus a $0.02 million use in 2011. Cash declined from $21.3 million at year-end 2011 to $19.1 million, largely because investment purchases exceeded proceeds, alongside dividends and share repurchases. Management reported $28.4 million of unrestricted cash and investments at the Parent and expects available funding sources to meet liquidity needs for the foreseeable future. Insurance-subsidiary assets are subject to state restrictions.
- Balance sheet and debt: Total assets were $319.5 million and shareholders’ equity $106.4 million at September 30, compared with $302.1 million and $96.3 million at December 31, 2011. Insurance reserves and policyholder funds totaled $151.7 million. Junior subordinated debentures totaled $41.2 million, with a stated rate of three-month LIBOR plus 4.00%–4.10%; effective interest rate was 4.48%. The revolving credit facility expired August 31, 2012 with no balance outstanding, and no replacement facility had been arranged.
- Investment and comprehensive income: Total investments were $245.9 million. Nine-month net realized investment gains were $1.4 million. Net unrealized investment gains contributed to $7.9 million of nine-month other comprehensive income; total comprehensive income was $11.4 million.
Material changes, outlook, and risks
- Bankers Fidelity’s Medicare supplement growth was attributed to core producers, new Missouri business, and renewal rate increases. Management said rate increases helped offset medical cost pressures.
- American Southern’s nine-month loss ratio rose to 73.6% from 62.7%; management cited more frequent and severe commercial auto claims and higher general liability claims. Its Q3 combined ratio was 109.5%, versus 105.0% a year earlier.
- The company has not provided quantified earnings guidance. Management stated it expects current cash and investments, subsidiary dividends, fees, and tax-sharing payments to support liquidity for the foreseeable future. Subsidiary dividends are regulated; distributions above $7.8 million in 2012 require prior approval.
- The interest-rate collar on $18.0 million of debentures runs through March 4, 2013. With LIBOR below its 4.77% floor, the company continued making payments under the collar. Its September 30 fair-value liability was $0.3 million.
- Management disclosed a prior material weakness in investment impairment controls related to the determination that certain equity impairment should have been recorded in 2010 rather than 2011, requiring restatement. Remediation steps were implemented; management concluded disclosure controls were effective at September 30, 2012. Ordinary-course claims and lawsuits were not expected by management to materially affect results or financial condition.
- After quarter-end, on October 30, the board replaced the prior repurchase plan with authorization to repurchase up to 750,000 shares. The company bought 185,095 shares during Q3 under the prior plan.
Important facts for investors to verify
- Whether American Southern’s adverse year-to-date claims experience continues and how it affects combined ratios and profitability.
- Whether Bankers Fidelity can sustain Medicare supplement growth and renewal pricing while managing medical costs, commissions, and advertising expense.
- Parent liquidity and access to subsidiary dividends after the revolving credit facility expired, including any replacement financing plans.
- Progress and effectiveness of remediation for the investment impairment control weakness, and the assumptions underlying investment valuations and impairment assessments.
- Future cash costs and exposure associated with the LIBOR-linked debentures and the collar’s March 2013 termination.