Atlantic American Corporation: Q1 2014 Form 10-Q
Business context and period. Insurance holding company reporting the three months ended March 31, 2014, compared with Q1 2013. Its principal businesses are American Southern (property and casualty) and Bankers Fidelity (life and health). Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $41.16 | $36.65; up 12.3% |
| Insurance premiums | $38.42 | $33.02; up 16.4% |
| Investment income | $2.60 | $2.91 |
| Realized investment gains, net | $0.11 | $0.68 |
| Income before taxes | $0.99 | $1.01 |
| Net income | $0.82 | $0.92 |
| Net income applicable to common shareholders; diluted EPS | $0.70; $0.03 | $0.80; $0.04 |
| Operating income, company-defined non-GAAP measure | $0.89 | $0.33 |
| Net cash used in operating activities | $(4.33) | $(2.83) |
| Cash and cash equivalents, at quarter end | $27.18 | $33.10 at Dec. 31, 2013 |
| Total assets; shareholders’ equity, at quarter end | $311.94; $101.86 | $319.38; $100.93 at Dec. 31, 2013 |
| Junior subordinated debentures | $41.24 | Unchanged from Dec. 31, 2013 |
The company reported no standalone gross-profit or consolidated margin measure. Key underwriting ratios were: American Southern combined ratio 100.9% (101.4% in Q1 2013), with a $0.12 underwriting loss; Bankers Fidelity combined ratio 99.2% (103.4%), with $0.20 underwriting income. Insurance reserves and policyholder funds totaled $157.78 million at March 31, 2014.
Material changes and management commentary
- Higher premiums reflected growth in commercial automobile earned premiums tied mainly to a significant state contract that began in Q2 2013, along with Bankers Fidelity Medicare supplement renewal rate increases.
- At American Southern, net earned premiums rose 45.9% to $13.03 million, but losses increased 89.7% to $10.10 million; management attributed the higher loss ratio partly to the state-contract business and higher general liability and surety claims. Gross written premiums fell 16.8%, including after cancellation of an agency over unfavorable loss experience.
- Bankers Fidelity premiums rose 5.4% to $25.39 million. Benefits and losses declined 7.3%, with management citing more favorable Medicare supplement experience. Underwriting expenses rose 23.3%, including agency, compensation and worksite-product development costs.
- Net income declined as investment income and realized gains fell. Management said operating income improved on premium growth and better life and health loss experience, partly offset by lower investment income after sales of higher-yielding, longer-term securities.
- Cash declined by $5.92 million. The principal cash uses included $4.33 million of operating cash outflow, $1.67 million of property and equipment additions, and $0.31 million of share repurchases. Investing activities used $1.30 million, versus providing $2.93 million in Q1 2013.
Liquidity, debt, risks and outlook
- Management said existing cash, subsidiary dividends, fees and tax-sharing payments, and potential additional borrowing should meet liquidity needs for the foreseeable future. The Parent reported approximately $26.2 million of unrestricted cash and investments.
- The $41.24 million of junior subordinated debentures bears interest at three-month LIBOR plus 4.00% or 4.10%, with an effective rate of 4.3% at quarter end, and matures in 2032 and 2033. The company had not elected to defer interest payments.
- Subsidiary dividends are subject to insurance regulation; distributions exceeding $7.1 million in 2014 require prior approval. The subsidiaries reported statutory net income of $2.7 million for Q1 2014, versus $2.0 million a year earlier.
- The company reported $3.16 million of gross unrealized investment losses at March 31, 2014, down from $5.81 million at year-end. Management considered the securities temporarily impaired and said it did not intend, and did not expect to be required, to sell them before price recovery.
- Management identified ordinary-course claims and lawsuits but did not expect known claims to materially affect financial condition or results. It provided no specific earnings or revenue guidance and cautioned that quarterly results are not necessarily indicative of full-year results.
- Disclosure controls were assessed as effective at quarter end; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the state-contract commercial automobile business can sustain premiums without further deterioration in claims and loss experience.
- Whether Bankers Fidelity’s improved claims experience persists, and how higher underwriting and worksite-product development expenses affect results.
- The drivers and sustainability of negative operating cash flow, cash balances, planned capital spending and parent-company liquidity.
- Investment portfolio credit, interest-rate and valuation risks, including unrealized losses and Level 3 valuations; also monitor the effect of lower-yielding reinvestments on investment income.
- Availability of subsidiary dividends, regulatory limits, and the cost and refinancing implications of floating-rate subordinated debt.
- Share-repurchase pace: 77,547 shares were repurchased in Q1 for approximately $0.31 million, with 295,338 shares remaining under the plan at March 31, 2014.