Atlantic American Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the same 2015 periods unless noted. Amounts are in thousands of dollars except per-share data. Atlantic American is an insurance holding company operating property and casualty business through American Southern and life and health business through Bankers Fidelity.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $41,854 | $44,772 | $83,601 | $85,721 |
| Insurance premiums | $39,122 | $38,104 | $77,580 | $75,490 |
| Income before tax | $357 | $4,189 | $1,733 | $5,199 |
| Net income | $241 | $3,345 | $1,139 | $4,036 |
| Net income applicable to common shareholders | $141 | $3,245 | $940 | $3,837 |
| Diluted EPS | $0.01 | $0.15 | $0.05 | $0.18 |
| Operating income (non-GAAP) | $225 | $41 | $849 | $100 |
At June 30, 2016, total assets were $320.3 million, total liabilities $212.2 million and shareholders’ equity $108.0 million. Cash and cash equivalents were $14.0 million, versus $15.6 million at December 31, 2015; total investments were $238.5 million. The parent reported approximately $20.3 million of unrestricted cash and investments.
For the first six months, operating cash flow was negative $8.0 million, investing cash flow provided $7.2 million and financing activities used $0.8 million. The resulting decrease in cash was $1.7 million. Junior subordinated debentures, net, were $33.7 million; their interest rate floats with three-month LIBOR plus 4.00%–4.10% (4.71% effective at June 30). The company reported no elected deferral of interest payments.
Material changes and segment results
- Premium revenue grew 2.7% in Q2 and 2.8% for the six months, primarily from Medicare supplement business. Total revenue and net income fell because realized investment gains were much lower than in 2015. Net realized gains were $0.1 million in Q2 and $0.9 million for the six months, compared with $4.1 million and $5.1 million, respectively.
- Management’s non-GAAP operating income increased to $0.2 million in Q2 and $0.8 million for the six months, from $0.04 million and $0.1 million. Management attributed the improvement mainly to more favorable property and casualty loss experience; lower legal and consulting fees also helped the six-month result. Lower life and health profitability partly offset these gains.
- American Southern: Six-month underwriting income increased to $2.0 million from $0.6 million, and the combined ratio improved to 92.8% from 97.8%. Gross written premiums declined 5.9% for the six months, chiefly because of lower automobile physical damage, property and surety writings. Favorable loss experience and a surety loss recovery supported results.
- Bankers Fidelity: Six-month earned premiums rose 4.1%, led by Medicare supplement growth, but underwriting loss widened to $2.7 million from $1.7 million. The six-month combined ratio increased to 105.4% from 103.5%, reflecting higher underwriting expenses; Q2 loss experience in Medicare supplement was also less favorable.
- Other comprehensive income was $5.1 million for the six months, largely from unrealized investment gains; accumulated other comprehensive income rose to $9.7 million from $4.6 million at year-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it expects existing cash, subsidiary dividends and fees, tax-sharing payments and, if needed, additional borrowing to meet liquidity requirements for the foreseeable future. Management believes subsidiary invested assets and expected cash inflows will support policy liabilities and operating needs.
- Insurance subsidiary dividends are subject to statutory limits. Payments exceeding $6.1 million in 2016 would require prior approval; the parent had received $2.8 million through June 30. Insurance subsidiary statutory surplus was $39.9 million at American Southern and $34.2 million at Bankers Fidelity.
- The investment portfolio included $4.8 million of gross unrealized losses on fixed maturities at June 30, including $2.3 million related to ten oil-and-gas issuers. Management classified the securities as temporarily impaired, citing expected contractual payments and its intent and ability to hold them until recovery; it said it continues to monitor the issuers.
- Ordinary-course claims and lawsuits were disclosed; management did not expect known matters to materially affect financial condition or results. The company also identified estimates, investment valuations, claim experience, interest rates and other risks as uncertainties; actual results may differ from expectations.
- The Series D preferred stock, held by an affiliate of the controlling shareholder, carries cumulative annual dividends of $7.25 per share; $0.2 million was accrued but unpaid at quarter-end. It was not currently convertible.
- Management reported disclosure controls and procedures were effective at period-end and no material change in internal control over financial reporting occurred during the period.
Important facts for investors to verify
- Whether premium growth, particularly Medicare supplement, can be sustained while Bankers Fidelity improves its above-100% combined ratio and expense trends.
- Whether American Southern’s improved loss results and combined ratio persist, given lower written premiums in certain lines and the reported surety recovery.
- The quality and recoverability of unrealized-loss securities, especially the oil-and-gas holdings, and any changes in management’s ability or intent to hold them.
- Parent-level liquidity, subsidiary dividend restrictions, and the capacity to service floating-rate debentures as LIBOR and cash needs change.
- The filing reports negative operating cash flow for the first half; investors should review subsequent cash flows and receivables, which increased during the period.
- Realized investment gains materially affected comparisons with 2015; assess underlying operating performance separately from gains and other non-GAAP adjustments.