Atlantic American Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts below are in millions unless noted. Atlantic American is an insurance holding company operating property and casualty businesses through American Southern and life and health businesses through Bankers Fidelity.
Financial results and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $41.6 | $44.6 | $82.7 | $81.3 |
| Insurance premiums | $38.5 | $36.4 | $76.9 | $69.4 |
| Net income | $0.9 | $6.0 | $1.7 | $6.9 |
| Net income attributable to common shareholders | $0.8 | $5.8 | $1.5 | $6.6 |
| Diluted EPS | $0.04 | $0.26 | $0.07 | $0.30 |
| Operating income (company-defined non-GAAP) | $0.5 | $0.6 | $1.4 | $0.9 |
| Operating cash flow | Not separately provided for Q2 | $(0.5) | $(1.2) |
At June 30, cash and cash equivalents were $27.8 million, down from $33.1 million at year-end 2013. Total assets were $336.8 million, total liabilities $230.2 million, and shareholders’ equity $106.6 million. Investments totaled $241.1 million, including $214.3 million in fixed maturities. The company reported $41.2 million of junior subordinated debentures, bearing interest at three-month LIBOR plus 4.00%–4.10% (effective rate 4.3%); these are unsecured and subordinate to senior parent debt and subsidiary liabilities.
For the six months, investing activities used $2.9 million and financing activities used $1.9 million, including $1.5 million for treasury-share purchases and $0.4 million in common dividends. Parent unrestricted cash and investments were approximately $26.3 million. Management said existing resources and expected subsidiary dividends, fees and tax-sharing payments should meet foreseeable liquidity needs; insurance-subsidiary dividends are subject to statutory limits.
Changes versus prior periods
- Premiums rose 5.7% in Q2 and 10.8% year to date, principally due to commercial auto earned premiums from a state contract begun in Q2 2013.
- Net income fell sharply versus 2013, chiefly because realized investment gains declined to $0.5 million from $5.5 million in Q2 and to $0.6 million from $6.1 million year to date. Investment income also declined 6.3% in Q2 and 8.5% year to date, following 2013 sales of higher-yielding, longer-term investments.
- Year-to-date operating income increased to $1.4 million from $0.9 million, mainly from improved life and health loss experience. Q2 operating income edged down to $0.5 million from $0.6 million.
- American Southern’s combined ratio improved to 100.7% in Q2 and 100.8% year to date, from 101.9% and 101.6%, respectively. Its loss ratio worsened, however, to 74.1% and 75.8%, while lower variable commissions reduced its expense ratio.
- Bankers Fidelity’s combined ratio was 102.5% in Q2 versus 101.7%, and improved to 100.8% year to date versus 102.5%. Lower loss ratios were partly offset by higher underwriting expenses.
- Accumulated other comprehensive income increased to $12.1 million from $6.2 million at year-end, reflecting after-tax unrealized gains on available-for-sale securities. Treasury shares increased by 352,034 shares during the six months.
Outlook, commentary, and risks
- No specific earnings or revenue guidance is provided. Management cautions interim results are not necessarily indicative of full-year results and states that forward-looking statements are subject to risks and uncertainties.
- American Southern’s commercial auto written premiums declined after it canceled an agency due to unfavorable loss experience. Losses rose in commercial auto under the state contract, as anticipated, and claims also increased in general liability and surety.
- Bankers Fidelity cited Medicare supplement rate increases and more favorable claims experience; it is also incurring higher agency, underwriting, and worksite-product development costs. Consolidated six-month expenses included $0.5 million of increased compensation and severance accruals.
- Investments carry valuation, interest-rate, credit, and impairment risks. At June 30, securities with unrealized losses had $1.5 million of aggregate unrealized losses; management considered them temporarily impaired and said it did not intend, or expect to be required, to sell them before recovery.
- On August 4, 2014, the company agreed to acquire $7.5 million of Trust Preferred Securities issued by its Statutory Trust II for $6.75 million plus accrued interest, upon settlement.
- The company may defer debenture interest for up to 20 consecutive quarters, but has not done so; such a deferral would restrict common dividends and certain debt payments. Ordinary-course claims and lawsuits are disclosed, with management not expecting known claims to materially affect results or financial condition.
- Disclosure controls were assessed as effective at period-end; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether commercial auto contract losses and the agency cancellation affect subsequent-period premiums, loss ratios, and underwriting profitability.
- Whether the decline in investment income and realized gains continues, and how portfolio duration, interest rates, and unrealized losses evolve.
- Whether Bankers Fidelity’s worksite-product spending and higher expenses produce sustainable growth and improved underwriting results.
- Current parent-company liquidity, subsidiary dividend capacity under statutory restrictions, and the terms and settlement of the Trust II securities purchase.
- The level and development of insurance reserves, including claims experience in commercial auto, general liability, and surety.