Business context and reporting period
Atlantic American Corporation filed this unaudited Form 10-Q for the three months ended March 31, 2019. Its insurance operations comprise American Southern, focused on property and casualty, and Bankers Fidelity, focused on life and health. Amounts below are in thousands of dollars except per-share data and ratios.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / prior period |
|---|---|---|
| Total revenue | $55,018 | $40,540 |
| Net premiums | $44,782 | $42,202 |
| Net investment income | $2,334 | $2,359 |
| Net realized investment gains | $1,385 | $370 |
| Unrealized equity-security gains (losses) | $6,489 | $(4,419) |
| Insurance benefits and losses | $35,307 | $33,172 |
| Income (loss) before taxes | $5,285 | $(6,351) |
| Net income (loss) | $4,162 | $(5,024) |
| Net income (loss) attributable to common shareholders | $4,063 | $(5,123) |
| Diluted EPS | $0.19 | $(0.25) |
| Non-GAAP operating loss | $(2,589) | $(2,302) |
The earnings swing primarily reflects the shift in unrealized equity-security results, alongside higher realized gains. Premium revenue rose 6.1%, principally on Medicare supplement growth. Management’s non-GAAP operating loss excludes taxes and realized and unrealized investment gains; it worsened by approximately $0.3 million year over year.
At March 31, 2019, total assets were $354,244, liabilities $242,757, and shareholders’ equity $111,487. Cash and cash equivalents were $8,614, down from $12,630 at year-end 2018; total investments were $253,745, up from $241,929. Operating cash flow was negative $6,946, partially offset by $2,986 of investing cash inflow. The filing reports $19.9 million of unrestricted cash and investments at the Parent, distinct from consolidated cash.
Junior subordinated debentures had a net carrying amount of $33,738. They bear variable rates of LIBOR plus 4.00% and 4.10%; the effective rate was 6.71% at quarter-end. The Parent said it had not elected to defer interest payments. Insurance subsidiary assets are subject to regulatory restrictions; more than $4.3 million of 2019 subsidiary dividends would require prior approval.
Material changes versus the prior comparable period
- American Southern net earned premiums increased 8.6% to $13,806; underwriting income was $553 versus $143, and the combined ratio improved to 96.0% from 98.9%. Higher automobile physical damage writings contributed to premium growth; higher variable commissions partly offset the improved loss ratio.
- Bankers Fidelity net earned premiums increased 5.0% to $30,976, driven by Medicare supplement growth. Its underwriting loss widened to $3,896 from $3,152, and its combined ratio rose to 112.6% from 110.7%, mainly due to unfavorable Medicare supplement claims experience.
- Consolidated insurance benefits and losses increased about 6.4%. Medicare supplement prior-year development was unfavorable by $974, compared with $3,343 unfavorable in Q1 2018; the filing attributes the earlier-period experience primarily to elevated influenza-related morbidity.
- Fixed-maturity unrealized losses declined to $5,644 from $11,851 at year-end 2018. Management attributed the improvement mainly to market-price appreciation in the interest-rate environment and said it did not intend, nor expect to be required, to sell securities in unrealized-loss positions.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management said existing cash, expected subsidiary dividends, fees and tax-sharing payments, and potential additional borrowing should meet liquidity needs for the foreseeable future. It also stated that subsidiary invested assets and expected premium receipts, investment earnings and reinsurance collections are expected to support policy liabilities and operating needs.
- Management identified persistently higher-than-expected Medicare supplement claims as a source of unfavorable loss experience. Reserve estimates depend on assumptions and may differ from actual claims.
- Insurance subsidiary dividends are restricted by statutory limits. The subsidiaries reported a combined statutory net loss of $0.7 million for the quarter.
- Variable-rate debenture interest exposes the Company to LIBOR changes; interest expense rose 18.2% year over year.
- The Company adopted lease accounting on January 1, 2019, recording a right-of-use asset and lease liability of $6,088 at adoption. At quarter-end, the lease liability was $5,958; management said adoption did not materially affect results or liquidity.
- The Company disclosed $4,900 of commitments to fund investments in certain variable-interest entities, compared with none at year-end 2018. Its maximum loss exposure for existing VIE investments was limited to their $8,731 carrying value.
- Management said ordinary-course claims and lawsuits were not expected to materially affect financial condition or results. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- How much of reported earnings depends on equity-security fair-value movements and realized investment gains, versus underwriting and other recurring operations.
- Whether Medicare supplement claims and reserve development improve, and how growth in that business affects loss ratios, reinsurance costs and profitability.
- The source and timing of liquidity for the Parent, including subsidiary dividend restrictions, operating cash use and debt-service requirements.
- The portfolio’s exposure to interest-rate and credit-market changes, including securities with prolonged unrealized losses and the variable-rate debentures.
- The timing and potential funding calls on the $4.9 million VIE investment commitments.