Business context and reporting period
Atlantic American Corporation is an insurance holding company operating through property-and-casualty insurer American Southern and life-and-health insurer Bankers Fidelity. This Form 10-K covers the fiscal year ended December 31, 2012, with 2011 as the comparable period; it is not a standalone fourth-quarter report.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $139.8 million | $118.3 million |
| Insurance premiums | $126.7 million | $107.5 million |
| Income before taxes | $5.1 million | $3.3 million |
| Net income | $4.4 million | $3.3 million |
| Diluted earnings per common share | $0.18 | $0.12 |
| Net cash from operating activities | $6.1 million | $9.1 million |
- Investment income was $11.5 million, versus $10.6 million. Net realized investment gains were $1.4 million, versus $27,000.
- Consolidated insurance benefits and losses plus commissions and underwriting expenses equaled 96.5% of premiums, compared with 96.0% in 2011.
- American Southern’s combined ratio rose to 105.7% from 101.4%, indicating an underwriting loss in both years; its loss ratio increased to 73.0% from 64.6%. Bankers Fidelity’s combined ratio improved to 98.9% from 100.3%, producing underwriting income of $1.0 million versus a $0.2 million loss.
- Bankers Fidelity premiums grew 27.6% to $89.3 million, primarily from Medicare supplement business. American Southern net earned premiums were nearly unchanged at $37.5 million.
- At year-end, total assets were $320.2 million, investments $246.9 million, cash and cash equivalents $19.0 million, total liabilities $214.4 million, and shareholders’ equity $105.7 million. Insurance reserves and policyholder funds totaled $154.6 million.
- Debt payable was $41.2 million, consisting of junior subordinated debentures. The $41.2 million revolving credit facility expired in August 2012 with no balance outstanding; no replacement facility had been obtained.
- Parent unrestricted cash and investments were $27.4 million. Insurance subsidiaries had aggregate statutory surplus of $70.0 million and exceeded regulatory RBC levels; both were within the NAIC usual range for all 13 financial ratios.
Material changes, outlook, and risks
- Revenue growth chiefly reflected Medicare supplement premiums. Net income also benefited from higher investment income and the absence of the $1.2 million investment impairment charge recorded in 2011.
- American Southern’s commercial-auto and general-liability claims worsened, driving up its loss ratio. The company cited frequency and severity increases in commercial auto and higher general-liability claims. It cancelled two agencies due to unfavorable loss experience and strengthened surety underwriting guidelines.
- Bankers Fidelity reported improved Medicare supplement loss experience and continued rate increases to address medical-cost trends. Management said it would assess new underwriting programs to help offset lost writings, but provided no quantified earnings or revenue guidance.
- Reserves for losses and claims were $62.9 million, including reinsurance recoverables of $18.7 million. Management’s estimated reserve range indicated reserves could be 13.1% lower or 13.7% higher; management cautioned that revisions could materially affect future results.
- Reinsurance recoverables were highly concentrated: approximately 99% were due from two reinsurers. The company remains responsible for ceded obligations if reinsurers fail to pay.
- The portfolio was predominantly fixed maturities, with 98% of bonds investment grade by NAIC definition. Portfolio fair values and investment income remain exposed to market, interest-rate, and credit risks; $2.1 million of fixed maturities used Level 3 valuation inputs.
- Parent liquidity depends in part on subsidiary dividends, fees, and tax-sharing payments. Insurance-subsidiary dividends are subject to statutory limits and regulatory approval thresholds. The parent’s $41.2 million debentures bear floating-rate interest; a related interest-rate collar was scheduled to terminate March 4, 2013.
- Ordinary-course litigation was not expected by management to materially affect financial condition, though results in a particular period could be material. Other disclosed risks include reserve-estimation uncertainty, competition, catastrophes, regulation, and reinsurance availability and collectibility.
- Shareholders received $0.02 per share in annual common dividends and a $0.05 special dividend in 2012. The board declared a $0.02 annual dividend for 2013. The company also repurchased 5,895 shares under its replacement repurchase plan during November and December.
Important facts for investors to verify
- Whether Medicare supplement premium growth and rate increases remain profitable, and how concentrated earnings are in that line.
- Whether American Southern’s commercial-auto and general-liability claims trends stabilize, and how reserve development affects reported results.
- The adequacy and sensitivity of loss reserves, including the assumptions behind management’s stated reserve range.
- Collectibility and concentration of reinsurance recoverables, and the impact of any reinsurer deterioration.
- Parent liquidity and cash available for debt service, given the expired credit facility and reliance on regulated subsidiary distributions.
- Investment portfolio credit quality, unrealized gains and losses, and valuation of securities without public market quotations.
- Related-party matters, including office rent paid to an entity controlled by the controlling shareholder’s family and Series D preferred stock held by an affiliate.
The independent auditor issued an unqualified opinion on the consolidated financial statements. The auditor did not attest to internal control over financial reporting; management reported that controls were effective at year-end.