Atlantic American Corporation — Q3 2016 Form 10-Q
Business context and reporting period
Atlantic American is an insurance holding company with property and casualty operations (American Southern) and life and health operations (Bankers Fidelity). This unaudited report covers the three and nine months ended September 30, 2016; financial amounts below are in millions of dollars unless noted. Comparisons are with the corresponding 2015 periods, or December 31, 2015 for balance-sheet figures.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $42.4 | $40.4 | $126.0 | $126.1 |
| Insurance premiums | $39.4 | $37.9 | $117.0 | $113.3 |
| Net income | $0.15 | $0.24 | $1.29 | $4.27 |
| Net income attributable to common shareholders | $0.05 | $0.14 | $0.99 | $3.98 |
| Basic and diluted EPS | $0.00 | $0.01 | $0.05 | $0.19 |
| Operating income (non-GAAP) | $(0.21) | $0.36 | $0.64 | $0.46 |
For Q3, premiums increased 4.2%, but total revenue rose 5.2%, partly reflecting realized investment gains of $0.53 million versus $0.01 million a year earlier. For nine months, premiums increased 3.2%, while total revenue was essentially flat because realized investment gains fell to $1.41 million from $5.11 million. Management attributed the quarterly earnings decline mainly to less favorable loss experience in both insurance operations; the nine-month net income decline mainly reflected lower realized gains. Nine-month operating income improved modestly, largely on stronger property and casualty results and lower legal and consulting costs.
Segment results: American Southern reported nine-month revenue of $43.7 million and pretax income of $6.0 million, compared with $45.3 million and $5.2 million in 2015. Its combined ratio improved to 93.6% from 97.2%. Bankers Fidelity reported revenue of $81.9 million and pretax income of $1.1 million, versus $80.3 million and $5.4 million; its combined ratio worsened to 105.5% from 103.9%, indicating an underwriting loss. Its Medicare supplement business drove premium growth, alongside higher benefits and expenses.
At September 30, total assets were $321.5 million, total investments $249.0 million, cash and cash equivalents $11.9 million, and shareholders’ equity $109.0 million. Cash declined from $15.6 million at year-end 2015. Nine-month operating cash flow was negative $2.3 million; investing cash flow was negative $0.6 million and financing cash flow negative $0.9 million. Insurance reserves and policyholder funds totaled $161.6 million. Junior subordinated debentures, net, were $33.7 million; their stated principal amounts were $18.0 million and $23.2 million, offset by $7.5 million of debt held by the Company.
Investment income was $7.5 million for nine months, nearly unchanged year over year. Nine-month insurance benefits and losses were $78.7 million, and commissions and underwriting expenses were $34.3 million. The filing does not present a consolidated gross or operating margin measure; segment combined ratios provide underwriting performance context.
Material changes, outlook, and risks
- American Southern’s nine-month gross written premiums fell 8.1%, chiefly following an agency cancellation, reduced business from another agency, and inadequate pricing relative to risk. Its auto physical damage and property/surety writings declined, while auto liability writings increased.
- Bankers Fidelity’s nine-month premiums grew 6.3%, primarily from Medicare supplement sales through new and existing producers. However, less favorable Medicare supplement loss experience and higher underwriting costs increased its underwriting loss to $4.2 million from $2.8 million.
- Management said it expects cash balances, subsidiary dividends, fees and tax-sharing payments, and, if needed, additional borrowing to meet liquidity needs for the foreseeable future. The Parent reported approximately $20.9 million of unrestricted cash and investments; this is distinct from consolidated cash of $11.9 million. Insurance-subsidiary dividends are subject to regulatory limits; over $6.1 million in 2016 would require prior approval, and the Parent had received $4.1 million through September 30.
- Debentures bear floating rates of three-month LIBOR plus 4.00% or 4.10%; the effective rate was 4.88%. Management noted interest expense rose with LIBOR. Interest may be deferred for up to 20 consecutive quarters, but doing so would restrict common dividends and certain debt payments. No deferral had been elected.
- Available-for-sale securities generated nine-month other comprehensive income of $5.9 million, lifting accumulated other comprehensive income to $10.5 million. The Company reported $3.5 million of gross unrealized losses on temporarily impaired securities, including $1.7 million related to eight oil-and-gas issuers. Management said it did not intend, and did not expect to be required, to sell these securities and considered the declines temporary.
- Management reported ordinary-course claims and lawsuits were not expected to materially affect financial condition or results. It gave no specific earnings or revenue guidance. Forward-looking results remain subject to the risks described in the Company’s SEC filings.
- Controls and procedures were assessed as effective at period-end, with no material change in internal control over financial reporting reported. The filing also disclosed $0.215 million paid to a related-party digital marketing services organization during the nine-month period.
Important facts for investors to verify
- Whether Bankers Fidelity’s Medicare supplement growth can improve underwriting results given its above-100% combined ratio and weaker loss experience.
- Whether American Southern can sustain its improved combined ratio while addressing reduced writings and the stated pricing and agency challenges.
- The investment portfolio’s exposure to oil-and-gas and other credit risks, and whether the reported unrealized losses remain temporary.
- Parent-level liquidity, future subsidiary dividend capacity under statutory restrictions, and the cost of floating-rate debentures as LIBOR changes.
- The sustainability of earnings excluding realized investment gains: Q3 2016 operating income was a loss, despite positive GAAP net income.
- The effect of future accounting standards, particularly the required 2018 change for equity securities; the filing notes $5.5 million of net unrealized equity gains in accumulated other comprehensive income at September 30, 2016.