AAME

Atlantic American Corp. 10-Q Summary (Period Ended June 30, 2004)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, and the six months ended June 30, 2004. Atlantic American Corporation 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 Growth: Insurance premiums increased 13.5% ($5.1 million) for the quarter and 8.8% ($6.8 million) for the six months compared to 2003. This growth was driven by new program business at American Southern and premium growth at Georgia Casualty.
• Profitability: Net income for the quarter decreased slightly to $1.1 million from $1.2 million in 2003, primarily due to a significant drop in realized investment gains ($0.1 million in 2004 vs. $1.3 million in 2003). However, net income for the six months increased to $2.6 million from $1.9 million in 2003, driven by better operating performance in the Casualty Division.
• Underwriting Performance:
  • American Southern: Loss ratio improved to 51.6% (Q2) and 52.5% (6M) from 58.4% and 64.6% respectively in 2003, aided by the loss of a high-loss account in the prior year.
  • Association Casualty: Loss ratio improved to 71.8% (Q2) and 65.7% (6M) from 82.4% and 86.2% in 2003 due to re-underwriting of workers' compensation business.
  • Georgia Casualty: Loss ratio improved to 63.1% (Q2) and 66.1% (6M) from 66.7% and 68.9% in 2003.
• Cash Flow: Net cash used in operating activities was $5.1 million for the six months ended June 30, 2004, compared to $4.8 million provided in the same period in 2003. The shift was largely due to the collection of $7.6 million from a reinsurance contract termination in 2003 that did not recur in 2004.

Outlook, Risks, and Contingencies

• Debt Obligations: Total borrowings of $56.2 million consist of a $15.0 million Term Loan with Wachovia Bank and $41.2 million in junior subordinated debentures. A $2.0 million principal payment on the Term Loan was made on July 1, 2004, reducing the balance to $13.0 million.
• Interest Rate Swap: A $15.0 million interest rate swap matured on June 30, 2004. Management expects a reduction in interest expense of approximately $0.3 million for the remainder of 2004 due to the swap's expiration.
• Reinsurance Dispute: Georgia Casualty has a dispute with reinsurer PMA Capital Insurance Company regarding $1.7 million in receivables. PMA Re has ceased reimbursing certain claims. The company has requested arbitration and does not currently believe an allowance for uncollectible amounts is necessary, though an adverse resolution could impact results.
• Preferred Stock: The company redeemed 5,000 shares of Series C Preferred Stock ($0.5 million) in Q1 2004. Series B Preferred Stock dividends accrued but unpaid totaled $10.3 million as of June 30, 2004.
• Investment Impairment: The company recorded a $0.2 million realized loss related to an impairment charge on a common stock investment during the first six months of 2004.

Investor Verification Checklist

• Verify the status and potential outcome of the $1.7 million reinsurance dispute with PMA Capital Insurance Company.
• Monitor the impact of the expired interest rate swap on future interest expense and cash flow.
• Review the sustainability of premium growth at American Southern following the loss of its largest account in 2003.
• Assess the adequacy of loss reserves given the significant judgment involved in estimating unpaid losses (42% of total liabilities).
• Confirm the company's ability to meet debt covenants and service obligations, particularly the Term Loan repayments scheduled through 2008.