AAME

Business Context and Reporting Period

Company: Atlantic American Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Atlantic American is an insurance holding company operating through four principal subsidiaries: American Southern, Association Casualty, Georgia Casualty, and Bankers Fidelity. The company focuses on regional property and casualty insurance as well as life and health insurance products.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 8.1% to $136.2 million for the nine months ended September 30, 2006, compared to $148.2 million in the prior year. Insurance premiums dropped 13.7% to $116.5 million, driven by increased competition, non-renewal of targeted property classes, and reassessment of coastal exposures.
• Profitability Improvement: Despite lower premiums, Net Income increased significantly to $6.0 million (from $1.0 million in 2005). This was primarily due to a surge in realized investment gains ($5.4 million in 2006 vs. $0.2 million in 2005) and favorable loss experience compared to the prior year, which was impacted by Hurricanes Dennis, Katrina, and Rita.
• Segment Performance:
  • American Southern: Reported a combined ratio of 90.6% (improved from 93.3% in 2005) due to favorable loss experience in general liability.
  • Association Casualty: Combined ratio improved to 98.5% from 105.4%, aided by the termination of a quota share reinsurance agreement and favorable loss development.
  • Georgia Casualty: Reported a combined ratio of 144.5% (improved from 126.3% in 2005) but remained unprofitable due to a significant decrease in premiums and a $1.8 million windstorm assessment charge.
  • Bankers Fidelity: Premiums declined 11.2% due to lower sales in Medicare supplement and life lines.
• Cash Flow: Net cash used in operating activities increased to $7.9 million (from $1.0 million used in 2005), attributed to lower premiums and higher claim payments. Cash and short-term investments decreased from $41.8 million to $22.5 million, partly due to a strategic shift to higher-yielding fixed maturity securities.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • Hurricane Assessment: The company incurred a $1.8 million expense in the second quarter of 2006 related to a Mississippi Windstorm Underwriting Association assessment for Hurricane Katrina, which exhausted available reinsurance.
  • Investment Gains: Significant realized gains were generated from the sale of Wachovia Corporation equity securities and automotive sector bonds (GM and Ford).
• Capital Resources: The company issued 70,000 shares of Series D Preferred Stock to an affiliate of the Chairman for $7.0 million. Total borrowings stood at $54.0 million, consisting of term loans and junior subordinated debentures.
• Risks and Contingencies:
  • Reserving Uncertainty: Unpaid loss and loss adjustment expenses comprise 45% of liabilities. Estimates are subject to significant judgment and external factors like medical inflation and legislative changes.
  • Investment Risk: Investments comprise 72% of assets. The company is exposed to interest rate and market risk, particularly regarding fixed maturities and non-redeemable preferred stocks.
  • Reinsurance Risk: Failure of reinsurers to meet obligations could result in uncollectible amounts.
• Outlook: Management expects to meet liquidity requirements through subsidiary dividends, tax-sharing payments, and potential refinancing of term loans maturing in 2007 and 2008. No specific forward-looking financial guidance was provided in this filing.

Investor Verification Checklist

• Premium Volume Trends: Verify the sustainability of the 13.7% decline in premiums and the impact of the strategic withdrawal from coastal property exposures.
• Investment Portfolio Composition: Review the shift from short-term investments to fixed maturities and the concentration risk in specific sectors (e.g., automotive, Wachovia).
• Loss Reserve Adequacy: Assess the stability of loss reserves given the 45% liability concentration and the historical volatility of loss ratios in the Georgia Casualty segment.
• Debt Covenants and Maturities: Confirm compliance with debt covenants (funded debt to capitalization, tangible net worth) and the refinancing plan for the $12.75 million in bank debt maturing in 2007 and 2008.
• Related Party Transactions: Review the terms and impact of the Series D Preferred Stock issuance to an affiliate of the Chairman and the sale of Gray Television shares.