Atlantic American Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. Although the request metadata identifies 2022 Q3, the filing itself is for 2023 Q1. Amounts below are in millions of dollars unless stated otherwise.
Business context and financial results
Atlantic American is an insurance holding company operating through American Southern (property and casualty) and Bankers Fidelity (life and health).
- Revenue was $46.3 million, down 10.3% year over year. Net premiums were $46.1 million, down 2.1%; net investment income rose 8.6% to $2.5 million.
- Net loss was $1.4 million, or $(0.08) per common share, versus net income of $2.8 million, or $0.13 per share. The swing was driven principally by a $2.4 million unrealized loss on equity securities in 2023, compared with a $2.2 million gain in 2022.
- Non-GAAP operating income was $0.6 million versus $1.6 million. Management attributes the decline primarily to unfavorable property-and-casualty claims experience.
- Insurance benefits and losses were $30.5 million; commissions and underwriting expenses were $12.9 million. Consolidated margins are not presented as a single ratio in the filing.
Segments and material changes
- American Southern: Net earned premiums were $17.2 million, nearly flat year over year. Underwriting income fell to $0.4 million from $0.9 million. The combined ratio increased to 97.9% from 94.7%, reflecting a higher loss ratio (73.6% versus 60.4%) despite a lower expense ratio (24.3% versus 34.3%). Management cited more frequent and severe auto-liability claims and higher surety losses. Gross written premiums declined 18.4%, largely due to fewer agencies in auto physical damage.
- Bankers Fidelity: Net earned premiums were $28.9 million, down 2.9%, mainly due to Medicare Supplement non-renewals exceeding new writings. Underwriting income increased to $0.4 million from $0.3 million; the combined ratio improved slightly to 98.7% from 99.0%. A lower loss ratio (61.6% versus 69.6%) was partly offset by higher administrative and servicing expenses.
- Prior-year claims development was favorable by $0.6 million in Q1 2023, versus $1.5 million in Q1 2022.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow was negative $11.6 million, compared with negative $8.0 million. Investing cash flow was negative $4.7 million; financing provided $1.0 million, principally from revolver borrowings. Cash declined to $13.5 million from $28.9 million at year-end 2022.
- At March 31, 2023, total assets were $353.6 million, total liabilities $249.2 million and shareholders’ equity $104.4 million. Investments totaled $235.7 million.
- Debt comprised $3.0 million outstanding on a $10.0 million revolving facility and $33.7 million of junior subordinated debentures. The revolver matures April 2024 and includes a covenant limiting consolidated debt to 35% of capitalization. Debentures carry floating LIBOR-based rates; the effective rate was 8.97% at quarter-end. The company is preparing for LIBOR transition.
- Management said it expects cash, subsidiary dividends, fees, tax-sharing payments and available borrowing to meet foreseeable liquidity needs. The parent had approximately $3.8 million of unrestricted cash and investments. Subsidiary assets are subject to insurance-regulatory restrictions; more than $8.7 million of subsidiary dividends in 2023 would require prior approval.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management says first-quarter results are not necessarily indicative of full-year results.
- The 10-Q was filed late, concurrently with the 2022 Form 10-K on June 30, 2023. The delay followed implementation of a new Medicare Supplement actuarial valuation system and review of related valuation procedures and balances. The company stated that historical financial statements were not changed.
- Management concluded disclosure controls were not effective at March 31, 2023 because of a material weakness in controls over actuarial model development, testing, implementation and review. Remediation steps included enhanced documentation and testing, improved data reconciliations, additional independent review, and additional actuarial staff. Management reported no identified material misstatement.
- Fixed maturities had $24.4 million of gross unrealized losses at quarter-end, primarily attributed to interest rates and credit spreads; the company reported no credit-loss allowance on those securities and said it did not intend, and was not more likely than not required, to sell them before recovery.
- Other items to monitor include $5.9 million of unfunded commitments to investment entities, the company’s reinsurance collection exposure, and $0.3 million of accrued unpaid Series D preferred dividends. Management said ordinary-course litigation was not expected to materially affect results; a previously disclosed regulatory matter was settled and its penalty recorded in 2022.
Important facts for investors to verify
- Confirm the actuarial-system remediation is operating effectively and whether the material weakness has been fully remediated.
- Track Medicare Supplement policy retention and new business, auto-liability and surety claim frequency and severity, and segment combined ratios.
- Assess cash burn, parent-company liquidity, subsidiary dividend capacity, revolver availability and compliance with the debt covenant.
- Review interest-rate and credit-spread sensitivity of the fixed-maturity portfolio, equity-security volatility, and reinsurance recoverability.
- Check subsequent filings for updated guidance, LIBOR-transition terms, and any changes to the reported financial statements or controls conclusions.