Atlantic American Corporation — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020, with 2019 comparisons. Atlantic American is an insurance holding company operating through property and casualty insurer American Southern and life and health insurer Bankers Fidelity. Its principal products include commercial and government auto, surety, Medicare supplement, life, and supplemental health coverage. The figures below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $195.3 | $198.2 |
| Net premiums earned | $183.5 | $181.9 |
| Net investment income | $7.7 | $9.0 |
| Net realized investment gains | $7.4 | $1.6 |
| Net income (loss) | $12.2 | $(0.4) |
| Diluted earnings (loss) per share | $0.56 | $(0.04) |
| Non-GAAP operating income (loss) | $11.5 | $(7.5) |
| Cash and cash equivalents at year-end | $19.3 | $12.9 |
| Total assets | $405.2 | $377.6 |
| Total shareholders’ equity | $145.1 | $118.4 |
- Underwriting: American Southern earned $3.6 million of underwriting income, versus $2.0 million; its combined ratio improved to 94.2% from 96.6%. Bankers Fidelity earned $6.5 million, compared with a $12.0 million underwriting loss; its combined ratio improved to 94.7% from 109.8%.
- Cash flow: Operating activities provided $9.0 million, versus using $1.8 million in 2019. Investing activities used $2.1 million; financing activities used $0.5 million. The filing attributes the cash increase primarily to stronger operating cash flow.
- Investments: Total investments were $279.3 million, up from $268.6 million. The average portfolio yield declined to 3.1% from 3.5%. Fixed maturities were 97% investment grade by NAIC classification.
- Debt and liquidity: Junior subordinated debentures were carried at $33.7 million, with a 4.28% effective rate at year-end; rates are based on three-month LIBOR plus a margin and maturities are in 2032 and 2033. The Parent reported approximately $4.7 million of unrestricted cash and investments. Insurance-subsidiary statutory surplus totaled $92.5 million; subsidiary dividends above approximately $9.6 million in 2021 require prior regulatory approval. Bankers Fidelity established approximately $8 million of FHLB credit availability and had no borrowings at year-end.
Material changes versus 2019
- Net income improved by $12.6 million and operating income by $19.0 million, principally reflecting lower life and health claims and improved Bankers Fidelity underwriting.
- Bankers Fidelity’s benefits and losses fell $19.1 million. Management attributed the reduction mainly to fewer Medicare supplement claims during COVID-19 shelter-in-place restrictions, as well as improved rate adequacy from rate increases.
- American Southern premiums grew, primarily from automobile physical damage business associated with a new agency. Its loss ratio improved, while its expense ratio rose with higher fixed costs and variable commissions.
- Total revenue declined despite higher premiums, as lower investment income and a swing from equity-security unrealized gains to losses partly offset higher realized gains. The 2020 realized gains included $6.9 million from selling an interest in a limited liability company.
- Shareholders’ equity increased, including a $14.5 million after-tax increase in accumulated other comprehensive income, largely related to unrealized gains on available-for-sale fixed maturities.
Outlook, risks, contingencies, and unusual items
- Management said it did not then expect a significant COVID-19-driven decline in liquidity or operating results, but could not reliably estimate the pandemic’s future effects. It cited potential weaker sales and retention, market volatility, and higher life claims; reduced medical utilization had lowered Medicare supplement claims in 2020.
- Insurance reserves are a key estimation risk. Management’s year-end actuarial range indicated total reserves could be as much as 10.9% lower or 2.0% higher than recorded. The auditor identified claim reserves and future policy benefit reserves as critical audit matters. Reserve revisions could materially affect future results.
- Approximately 99.6% of reinsurance recoverables were due from one reinsurer, General Re Corporation. The reinsurer was rated AA+ by S&P and A++ by A.M. Best; the company nevertheless remains liable to policyholders if a reinsurer fails to pay.
- Ordinary-course litigation was not expected by management to materially affect financial condition, although litigation results could affect a particular period. The filing does not quantify potential outcomes.
- Series D preferred stock carries cumulative annual dividends of $7.25 per share, with 55,000 shares outstanding and held by an affiliate of the controlling shareholder. The company also disclosed related-party office leasing and common ownership/director connections involving Gray Television.
- The board declared a $0.02-per-share common dividend on March 23, 2021. Future dividends remain discretionary and dependent on financial condition, capital needs, earnings, and regulatory and contractual restrictions.
- The financial statements received an unqualified independent audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation because the company is a smaller reporting company.
Important facts for investors to verify
- Whether earnings and underwriting performance remain strong when Medicare supplement claim frequency normalizes after pandemic-related reductions.
- How much of 2020 profitability depended on the $6.9 million investment disposal gain and other investment-market effects, and how portfolio income performs as yields change.
- Subsequent reserve development, especially in Medicare supplement and long-tail general liability claims, relative to the disclosed actuarial ranges.
- Concentration, collectibility, and terms of reinsurance recoverables, and the effect of any changes in reinsurer credit quality or coverage.
- Parent-company liquidity and ability to service LIBOR-linked debentures, pay preferred dividends, and receive subsidiary distributions subject to insurance regulation.
- COVID-19’s subsequent effects on claims, premiums, investment values, and the company’s stated expectations; the filing provides no quantified forecast.