Atlantic American Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; comparisons are with FY 2017. This is an annual filing, not a standalone fourth-quarter report. Atlantic American is an insurance holding company operating through property and casualty insurer American Southern and life and health insurer Bankers Fidelity.
Financial performance and position
| Metric | FY 2018 / year-end | FY 2017 / prior year-end |
|---|---|---|
| Total revenue | $185.6 million | $181.1 million |
| Net premiums | $172.9 million | $163.3 million |
| Net income (loss) | $(0.7) million; $(0.05) per common share | $4.5 million; $0.20 per common share |
| Non-GAAP operating income (loss) | $(3.9) million | $(3.8) million |
| Net cash from operations | $4.5 million | $12.2 million |
| Cash and cash equivalents | $12.6 million | $24.5 million |
| Total assets / shareholders’ equity | $344.3 million / $101.4 million | $343.2 million / $113.0 million |
| Junior subordinated debentures, net | $33.7 million; effective rate 6.72% | $33.7 million |
FY 2018 revenue included $9.5 million of net investment income, $5.2 million of realized investment gains, and $2.2 million of unrealized equity-security losses. The company reported a $1.0 million pretax loss. Cash declined mainly because investment purchases exceeded proceeds from sales and maturities; operating cash flow also fell year over year.
Operating segments
- American Southern (property and casualty): Net earned premiums were $53.8 million, nearly unchanged from 2017. Underwriting income fell to $0.2 million from $2.7 million. The combined ratio increased to 99.6% from 94.9%, reflecting higher auto claim frequency and severity; lower underwriting expenses partly offset the loss increase.
- Bankers Fidelity (life and health): Net earned premiums rose 8.6% to $119.1 million, driven by Medicare supplement growth. Underwriting loss narrowed to $7.0 million from $8.1 million, but the combined ratio remained above break-even at 105.9%. Management cited higher-than-expected Medicare supplement claims and an increased loss ratio.
Material changes and notable items
- Net income moved from a 2017 profit to a 2018 loss; management attributed the operating loss chiefly to unfavorable claims experience in both insurance operations.
- Medicare supplement gross earned premiums grew 30.1%, while premiums ceded by Bankers Fidelity increased substantially under its reinsurance arrangement.
- Net investment income increased 12.4%. Realized investment gains declined to $5.2 million from $9.2 million; gains in both years included sales of property held through real estate partnerships.
- Adoption of ASU 2016-01 moved changes in equity-security fair value into net income; the company recorded $2.2 million of net unrealized equity losses in 2018. Fixed-maturity unrealized losses also reduced other comprehensive income, and shareholders’ equity declined.
- Insurance reserves and policyholder funds rose to $189.0 million from $173.6 million. Management’s total reserve range indicated recorded reserves could be as much as 6.6% lower or 10.2% higher; reserve revisions could materially affect future results.
Liquidity, capital, risks, and outlook
- The parent reported approximately $17.3 million of unrestricted cash and investments. It depends on subsidiary dividends, service fees, and tax-sharing payments to meet its obligations. Subsidiary dividends above approximately $4.3 million in 2019 require regulatory approval.
- Insurance subsidiaries had aggregate statutory surplus of $77.7 million and exceeded required risk-based capital levels. Bankers Fidelity had two NAIC IRIS ratios outside the usual range, primarily associated with lower net income and surplus changes; management did not anticipate regulatory action.
- Approximately 96% of reinsurance recoverables were due from General Re Life Corporation, which the filing says was rated AA+ by S&P and A++ by A.M. Best. The company remains liable to policyholders if a reinsurer fails to perform.
- Variable-rate debentures are tied to three-month LIBOR; higher rates increased interest expense. The debt matures in 2032 and 2033 and is unsecured and subordinated.
- Risks discussed include claim severity and reserve-estimation uncertainty, Medicare supplement claims, reinsurance availability and counterparty performance, investment-market and interest-rate changes, competition, regulation, catastrophes, and cybersecurity. Ordinary-course litigation was not expected to materially affect financial condition, though an individual period’s results could be affected.
- No specific financial guidance or quantified outlook is provided. The board declared a $0.02-per-share annual common dividend in March 2019; future dividends remain discretionary. The company repurchased 47,692 shares in the fourth quarter under its existing plan.
- The 2018 financial statements received an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to attest to internal control.
Key facts for investors to verify
- Whether the elevated Medicare supplement claims and loss ratio persist, and how they affect Bankers Fidelity’s underwriting and statutory results.
- How American Southern’s auto claim frequency and severity evolve, and whether its near-break-even combined ratio improves.
- The adequacy and subsequent development of reserves, particularly given the disclosed range of estimates and differing prior-year development by segment.
- Reinsurance recoverable concentration, collectability, and the terms and economics of the expanded Medicare supplement cessions.
- Parent-level liquidity and access to subsidiary dividends, including regulatory limits, alongside variable-rate debt-service costs.
- The impact of investment valuation changes, realized gains, and related-party arrangements on earnings, comprehensive income, and equity.