Business Context and Reporting Period
Company: Atlantic American Corporation (Smaller Reporting Company)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: An insurance holding company operating primarily through two subsidiaries: American Southern (Property & Casualty) and Bankers Fidelity (Life & Health). The Company completed the sale of its regional P&C operations (Association Casualty and Georgia Casualty) in March 2008, which are reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenue | $51,319 | $51,472 |
| Net Income (Loss) | $268 | $(957) |
| Net Income Applicable to Common Stock | $14 | $(1,814) |
| Income from Continuing Operations | $268 | $1,209 |
| Investment Income | $5,443 | $5,668 |
| Realized Investment Gains (Losses) | $(13) | $26 |
| Cash and Cash Equivalents (End of Period) | $28,988 | $50,228 |
| Total Assets | $258,867 | $266,609 |
| Total Liabilities | $181,404 | $191,195 |
| Shareholders' Equity | $77,463 | $75,414 |
Debt & Liquidity:
- Junior Subordinated Debentures: $41,238 outstanding (fixed rate based on LIBOR + margin).
- Revolving Credit Facility: $12,000 commitment available; $0 outstanding balance.
- Operating Cash Flow: Net cash used in operating activities was $5,509 for the six months ended June 30, 2009.
Material Changes vs. Prior Period
- Profitability: Net income applicable to common stock improved from a loss of $1.8 million in the prior year to a profit of $14,000. This improvement is largely due to the absence of a $2.2 million loss from discontinued operations recorded in the prior year.
- Continuing Operations: Income from continuing operations decreased from $1.2 million to $0.3 million. This decline was driven by large automobile claims in the P&C segment and a $0.4 million non-recurring charge for the termination of the Supplemental Executive Retirement Plan (SERP).
- Premiums: Total insurance premiums increased slightly by 0.7% to $45.7 million, driven by growth in life and health lines, partially offset by softening in P&C markets.
- Investment Portfolio: Net pre-tax unrealized losses on investments decreased by $2.2 million compared to year-end 2008, primarily due to a recovery in the fair value of financial services securities.
- Cash Position: Cash and short-term investments decreased by $8.3 million, attributed to net investing activities, the $2.8 million SERP distribution, and a $1.8 million settlement related to the prior sale of discontinued operations.
Outlook, Risks, and Management Commentary
- Segment Performance:
- American Southern (P&C): Combined ratio worsened to 100.5% (YTD) due to large commercial auto claims. Expense ratio improved due to variable commission structures tied to loss ratios.
- Bankers Fidelity (Life/Health): Premiums grew 2.1% YTD due to successful marketing and new agent recruitment. Expense ratios increased due to higher advertising and agency costs.
- Investment Risks: Significant unrealized losses remain in fixed maturities and equities, particularly in financial services and media sectors, driven by macroeconomic conditions. The Company asserts intent to hold these securities to recovery.
- Liquidity: Management believes current cash, investment income, and the $12 million credit facility are sufficient to meet obligations. Statutory surplus for subsidiaries remains healthy ($37.4M for American Southern; $30.8M for Bankers Fidelity).
- Accounting Changes: The Company adopted several new FASB standards (SFAS 165, FSP FAS 115-2, FSP FAS 107-1) effective for the period, though none had a material impact on financial condition.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the impact of the large commercial auto claims on future loss ratios and reserve adequacy for American Southern.
- Investment Impairments: Monitor the $12.1 million in gross unrealized losses, specifically in financial services and media sectors, for potential other-than-temporary impairment charges.
- Debt Covenants: Confirm continued compliance with the Credit Agreement covenants regarding leverage ratios and tangible net worth.
- Discontinued Operations Settlement: Review the finality of the $1.8 million settlement with Columbia Mutual regarding the 2008 sale of regional P&C operations.
- Preferred Stock Dividends: Note the $0.3 million in accrued but unpaid dividends on Series D Preferred Stock held by an affiliate of the Chairman Emeritus.