Atlantic American Corporation — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, with comparison to 2020. Atlantic American is an insurance holding company operating through property-and-casualty insurer American Southern and life-and-health insurer Bankers Fidelity. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $199.6 million | $195.3 million |
| Net insurance premiums | $184.2 million | $183.5 million |
| Income before taxes | $5.3 million | $15.5 million |
| Net income | $4.3 million | $12.2 million |
| Net income per diluted common share | $0.19 | $0.56 |
| Non-GAAP operating income (loss) | $(1.5) million | $11.5 million |
| Net cash provided by operating activities | $1.1 million | $9.0 million |
| Cash and cash equivalents, at year-end | $24.8 million | $19.3 million |
| Total investments, at year-end | $283.4 million | $279.3 million |
| Total assets, at year-end | $402.3 million | $405.2 million |
| Shareholders’ equity, at year-end | $141.3 million | $145.1 million |
Net investment income was $8.5 million, up from $7.7 million. Realized investment gains were $4.9 million versus $7.4 million; 2021 included a $4.3 million gain on sale of an investment in a limited liability company. The company also recorded $1.9 million of unrealized equity-security gains, compared with $3.4 million of unrealized losses in 2020. Conversely, other comprehensive income included a $7.3 million after-tax loss, primarily reflecting lower unrealized gains on available-for-sale bonds.
Underwriting: American Southern reported underwriting income of $3.4 million (2020: $3.6 million); its combined ratio rose to 95.0% from 94.2%, remaining below 100%. Bankers Fidelity reported an underwriting loss of $5.7 million (2020: $6.5 million income); its combined ratio deteriorated to 105.0% from 94.7%. The company does not present a consolidated gross margin measure.
Cash flow and liquidity: Cash increased by $5.4 million, with $5.3 million of net cash from investing activities, primarily as investment sales and maturities exceeded purchases. Parent-company unrestricted cash and investments were approximately $4.5 million. The company said it expects subsidiary dividends, fees and tax-sharing payments, existing cash and, if needed, borrowing capacity to meet foreseeable liquidity needs.
Debt and capital: Net junior subordinated debenture obligations were $33.7 million, with a 4.22% effective rate at year-end and maturities in 2032 and 2033. The company had no borrowing outstanding under its $10 million unsecured revolving facility, which matures in April 2024 and includes a debt-to-capital covenant. Insurance subsidiaries reported aggregate statutory surplus of $91.3 million; management stated their risk-based capital exceeded required levels.
Material changes versus 2020
- Revenue increased 2.2%, but net income declined about 65%; non-GAAP operating results shifted from $11.5 million of income to a $1.5 million loss.
- Management attributed the operating deterioration principally to higher Medicare supplement claims as policyholder use of benefits returned toward historical levels after unusually low utilization during the pandemic. Bankers Fidelity’s loss ratio increased to 75.1% from 66.5% and its expense ratio rose to 29.9% from 28.2%.
- Bankers Fidelity net earned premiums declined 4.1%, primarily because Medicare supplement non-renewals exceeded new writings. American Southern net earned premiums increased 9.0%, led by automobile physical damage and a new general liability program; its loss ratio worsened to 65.4% from 63.1%.
- Cash from operations decreased to $1.1 million from $9.0 million. The company also reported a $7.3 million after-tax decline in other comprehensive income, compared with $14.5 million of other comprehensive income in 2020.
Outlook, risks and unusual items
- Outlook: The filing gives no quantified earnings or revenue guidance. Management said it did not expect a significant near-term adverse effect from COVID-19 on liquidity or operating results, while noting uncertainty, possible premium pressure from economic weakness, and risks to life-and-health claims and sales. It stated benefit utilization had returned toward historical averages.
- Reserves: Management’s actuarial range for aggregate reserves indicated they could be as much as 9.8% lower or 3.5% higher than recorded. The independent auditor identified claim reserves ($85.6 million) and future policy benefit reserves ($87.3 million) as critical audit matters due to estimation judgment. Reserve revisions could materially affect future-period results.
- Regulatory contingency: In November 2021, a state regulator notified the company of alleged violations involving certain insurance sales; possible action includes fines. Management was discussing resolution and could not predict the outcome.
- Reinsurance concentration: Approximately 99.6% of reinsurance recoverables were due from General Re Corporation. The filing reports that reinsurers’ failure to meet obligations could leave the company liable for ceded exposures.
- Investment and interest-rate risk: The portfolio was predominantly fixed maturities, with 99% of bonds rated investment grade under NAIC definitions. Unrealized fixed-maturity losses increased during 2021 amid rising interest rates. Junior debenture rates reference LIBOR; the company was preparing for the benchmark’s discontinuation.
- Regulatory indicators: Bankers Fidelity subsidiaries had IRIS ratios outside usual ranges, primarily associated with operating losses and other capital measures. Management did not anticipate regulatory action. The insurer subsidiaries stated they met minimum capital requirements.
- Other items: The board declared a $0.02-per-share annual common dividend in March 2022. Series D preferred stock, held by an affiliate of the controlling shareholder, carries cumulative annual dividends of $7.25 per share and a $100 redemption value per share. The filing also discloses an office lease with an entity controlled by an affiliate.
The financial statements received an unmodified GAAP audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- How Medicare supplement claim frequency, policy retention and new sales developed after 2021, and whether Bankers Fidelity returned to underwriting profitability.
- The status and potential financial impact of the state sales-practices matter, including any fines, remediation or changes to distribution controls.
- Subsequent development of claim and policy-benefit reserves, including the assumptions behind actuarial ranges and the auditor’s identified critical audit matters.
- General Re’s continuing ability to pay recoverables and any changes in reinsurance terms, collateral or counterparty concentration.
- Parent-company liquidity and capacity to service debt and pay dividends, including subsidiary dividend restrictions, revolving-facility covenants and the LIBOR transition for floating-rate debt.