AAME

Business Context and Reporting Period

Company: Atlantic American Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: An insurance holding company operating primarily through two subsidiaries: American Southern (Property and Casualty) and Bankers Fidelity (Life and Health).
Key Event: In March 2008, the Company sold its regional property and casualty operations (Association Casualty and Georgia Casualty) to Columbia Mutual Insurance Company. These operations are now reported as discontinued operations.

Key Financial Metrics

Debt and Liquidity:

• Bank Debt: $0 outstanding as of June 30, 2008 (repaid $12.75 million in April 2008).
• Junior Subordinated Debentures: $41.238 million outstanding.
• Preferred Stock Dividends: $857,000 accrued for the six-month period.
• Operating Cash Flow: Net cash used in operating activities was $9.4 million (including discontinued operations).

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 8.2% year-over-year. Insurance premiums dropped 8.8% due to softening property and casualty markets and competition in Medicare supplement lines.
• Profitability Shift: While income from continuing operations increased by 16.8% ($1.209 million vs. $1.035 million), the Company reported a consolidated net loss of $0.957 million due to a $2.166 million loss from discontinued operations (sale of regional P&C business).
• Balance Sheet Contraction: Total assets decreased significantly from $458.3 million to $281.1 million, primarily due to the removal of discontinued operation assets ($196.2 million) from the balance sheet.
• Investment Portfolio: Unrealized losses on investments increased by $8.0 million in other comprehensive loss, driven by credit risk concerns regarding GMAC, GM, and MBIA securities.
• Expense Ratios: American Southern's combined ratio improved to 93.0% (from 90.7% in 2007) due to a lower loss ratio (40.7% vs 47.5%), though the expense ratio increased to 52.3% due to variable commission structures.

Outlook, Risks, and Management Commentary

• Market Risks: The Company faces significant interest rate and market risk. Investment values in financial entities (GMAC, MBIA) have declined due to liquidity and credit uncertainties in the financial markets. Management does not currently believe these impairments are "other than temporary."
• Liquidity: Cash and short-term investments increased to $50.2 million, bolstered by proceeds from the sale of discontinued operations. The Company repaid its revolving credit facility in April 2008.
• Dividend Obligations: Significant accrued but unpaid dividends exist on Series B Preferred Stock ($15.1 million) and Series D Preferred Stock ($0.3 million).
• Future Expenses: Management anticipates further rationalization of fixed expenses in the remainder of 2008 following the divestiture of regional operations.
• Reserving Risks: Unpaid loss and loss adjustment expenses (25% of total liabilities) and future policy benefits (28% of total liabilities) rely on significant actuarial assumptions regarding mortality, withdrawal rates, and claim severity.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the final tax implications and any remaining liabilities associated with the sale of Association Casualty and Georgia Casualty.
• Investment Impairments: Monitor the credit status of GMAC, GM, and MBIA holdings to assess if unrealized losses will convert to realized write-downs.
• Preferred Stock Dividends: Review the Company's ability to service the $15.4 million in accrued preferred dividends and the impact on common shareholder distributions.
• Loss Reserve Adequacy: Assess the stability of loss ratios in the Property and Casualty segment, particularly given the variable commission structure that increases expenses when loss ratios improve.
• Debt Covenants: Confirm compliance with covenants related to the Junior Subordinated Debentures and the revolving credit facility, specifically regarding tangible net worth and risk-based capital levels.