Atlantic American Corporation — Q3 2022 Form 10-Q
Business and period: Insurance holding company with property and casualty operations through American Southern and life and health operations through Bankers Fidelity. This unaudited report covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $46.3 | $49.3 | $142.6 | $149.8 |
| Net premiums | $46.4 | $46.1 | $140.5 | $137.3 |
| Net investment income | $2.6 | $2.1 | $7.5 | $6.5 |
| Net income (loss) | $(0.7) | $(0.9) | $0.5 | $1.6 |
| Net income (loss) applicable to common shareholders | $(0.8) | $(1.0) | $0.2 | $1.3 |
| Basic and diluted EPS | $(0.04) | $(0.05) | $0.01 | $0.06 |
| Non-GAAP operating income (loss) | $1.7 | $(2.4) | $6.2 | $(4.1) |
Operating income is a company-defined non-GAAP measure that excludes income taxes and realized and unrealized investment gains or losses. Q3 improvement primarily reflected better life and health loss experience; year-to-date GAAP net income declined mainly because equity-security marks swung from gains to losses.
Segments, margins and material changes
- American Southern: Nine-month net earned premiums rose 6.9% to $53.8 million, but underwriting income fell to $1.9 million from $2.3 million. Its combined ratio increased to 96.5% from 95.4% (Q3: 94.4% versus 95.4%). Higher automobile liability loss severity pressured the loss ratio; the combined ratio remained below 100%, indicating an underwriting profit.
- Bankers Fidelity: Nine-month net earned premiums were nearly flat at $86.8 million, while underwriting income improved to $2.8 million from a $7.0 million loss. Its combined ratio improved to 96.8% from 108.1% (Q3: 99.1% versus 112.4%), mainly on lower Medicare supplement claims and improved rate adequacy. Medicare supplement premiums continued to decline as non-renewals exceeded new writings; group life and other health premiums grew.
- Investments and comprehensive loss: Equity-security results were a $2.8 million loss in Q3 and a $5.5 million loss year to date, versus gains of $0.7 million and $5.5 million in 2021. Rising interest rates drove $43.1 million of nine-month after-tax other comprehensive loss on available-for-sale fixed maturities. Accumulated other comprehensive income/loss moved from $17.7 million at year-end 2021 to a $25.4 million loss at September 30, 2022; shareholders’ equity declined from $141.3 million to $97.9 million.
Cash flow, debt and liquidity
- Cash and cash equivalents were $21.9 million at September 30, 2022, down from $24.8 million at December 31, 2021. Nine-month operating cash flow was negative $2.2 million; investing cash flow was negative $1.1 million; financing cash flow was positive $0.5 million.
- Debt included $1.0 million drawn on a $10 million revolving facility due April 2024 and $33.7 million of junior subordinated debentures, net. The debentures mature in 2032 and 2033 and bear LIBOR-linked rates; their effective rate was 7.07% at quarter-end. Interest expense rose to $1.3 million for the first nine months from $1.0 million.
- Parent unrestricted cash and investments were approximately $3.8 million. Insurance-subsidiary capital and surplus totaled $53.0 million at American Southern and $35.3 million at Bankers Fidelity. Subsidiary dividends are subject to statutory limits; the parent had received $4.5 million through September 30. Management believes available cash, subsidiary dividends and fees, tax-sharing payments and potential borrowing capacity will meet foreseeable liquidity needs.
Outlook, risks and unusual items
- The filing gives no quantified earnings or revenue guidance. Management cited favorable life and health claims experience and premium growth in selected auto liability, group life and other health products, alongside Medicare supplement runoff and auto liability loss severity.
- The company says it does not intend or expect to be required to sell fixed maturities in unrealized-loss positions and recorded no other-than-temporary impairment charges in the periods presented. It attributed the increase in loss-position securities primarily to rising interest rates. These marks nevertheless materially reduced reported equity.
- Variable interest rates on the revolver and subordinated debentures expose interest expense to rate changes. The company is preparing for LIBOR discontinuation and assessing contract fallbacks.
- A state regulatory matter concerning alleged insurance-sales violations was settled by consent order; the related penalty was recorded in March 2022. Management said ordinary-course litigation was not expected to materially affect financial condition or results.
- A new wholly owned life and health insurer received Georgia authorization on October 14, 2022, after quarter-end; management expects to seek authority in other states and anticipates operations may begin during 2023.
- Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting during the period.
Key facts for investors to verify
- Whether the improved Bankers Fidelity claims trend and underwriting results persist, and whether Medicare supplement attrition stabilizes.
- Whether American Southern’s auto liability loss severity and combined ratio worsen or improve.
- The duration and recoverability of fixed-maturity unrealized losses, equity-market sensitivity, and any effect on statutory capital or permitted subsidiary dividends.
- Liquidity at the parent, availability of subsidiary cash upstreaming, compliance with the revolver’s debt-to-capital covenant, and exposure to LIBOR transition and higher rates.
- Implementation costs and timing for the new insurance subsidiary and cloud software platform; the filing expects the software to be ready for use in 2023.