Atlantic American Corporation — Q3 2019 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2019; comparative results are for Q3 and the first nine months of 2018. Atlantic American is an insurance holding company operating through American Southern (property and casualty) and Bankers Fidelity (life and health). Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $47.7 | $46.4 | $145.9 | $136.4 |
| Net income (loss) | ($1.4) | $0.9 | ($1.7) | ($0.9) |
| Net income (loss) applicable to common shareholders | ($1.5) | $0.8 | ($2.0) | ($1.2) |
| Basic and diluted EPS | ($0.07) | $0.04 | ($0.10) | ($0.06) |
| Non-GAAP operating loss | ($2.3) | ($0.5) | ($5.7) | ($2.8) |
- Net premiums were $45.0 million in Q3, up 5.8%, and $135.3 million for nine months, up 6.0%. Net investment income declined to $2.2 million in Q3 and $6.8 million for nine months.
- Q3 benefits and losses were $34.7 million; commissions and underwriting expenses were $11.5 million. For nine months, these were $104.2 million and $34.0 million, respectively. The filing reports no consolidated profit margin.
- Operating cash flow was negative $7.6 million for the nine months, compared with negative $5.1 million in 2018. Investing activities provided $31.5 million, mainly as sales and maturities exceeded purchases; financing used $0.5 million. Cash rose to $36.0 million from $12.6 million at year-end.
- At September 30, total assets were $383.3 million, total liabilities $266.9 million, and shareholders’ equity $116.4 million. Insurance reserves and policyholder funds totaled $198.3 million.
- Net junior subordinated debentures were $33.7 million, with reported effective interest rate of 6.57%; rates float at three-month LIBOR plus 4.00%–4.10%, and maturities are in 2032 and 2033. The debt is unsecured and subordinated. Interest deferral is permitted, but none had been elected.
Material changes and segment performance
- Revenue increased year over year, but Q3 shifted from profit to loss and the nine-month loss widened. Management attributed the larger operating loss primarily to unfavorable loss experience in life and health operations.
- American Southern’s combined ratio improved to 97.6% in Q3 and 97.0% for nine months, from 99.7% and 97.4%. Lower loss ratios—linked to improved surety severity and fewer auto physical-damage claims—were partly offset by higher commissions and underwriting expenses, including variable commissions.
- Bankers Fidelity’s combined ratio worsened to 110.2% in Q3 and 110.3% for nine months, from 104.0% and 107.3%. Medicare supplement claims were higher than expected; its loss ratio rose to 82.8% in Q3 and 82.2% year to date. Medicare supplement premium growth supported higher revenue.
- Q3 realized investment results were a $0.4 million loss versus a $0.5 million gain in 2018. Management said portfolio rebalancing after engaging a new investment advisor led to securities being sold at a loss. Nine-month realized gains were $1.6 million versus $0.8 million.
- Unrealized gains on equity securities recognized in earnings were $0.9 million in Q3 and $2.1 million for nine months. Fixed-maturity unrealized gains lifted accumulated other comprehensive income to $9.8 million from a $7.5 million loss at December 2018.
Outlook, liquidity, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said existing cash, expected subsidiary dividends, service fees and tax-sharing payments, and potential additional borrowing should meet liquidity needs for the foreseeable future.
- The Parent reported $16.7 million of unrestricted cash and investments. Insurance-subsidiary assets are subject to state regulatory restrictions; dividends above $4.3 million in 2019 required prior approval, and $3.6 million had been received through September 30. Subsidiaries reported statutory net losses of $4.2 million for nine months, versus $1.0 million in 2018.
- Investment portfolio values and earnings are exposed to market, interest-rate and issuer-credit changes. The company reported no other-than-temporary impairment charges; it stated it did not intend or expect to be required to sell securities in unrealized-loss positions. Unrealized losses had fallen to $0.4 million from $11.9 million at December 2018.
- The company had $4.9 million of unfunded investment commitments to variable-interest entities, which may be called during the commitment period. Management said ordinary-course claims and lawsuits were not expected to materially affect financial condition or results.
- Adoption of lease accounting in January 2019 added a $6.1 million right-of-use asset and lease liability; management reported no material effect on results or liquidity. The company also transferred its remaining fractional aircraft interest to related party Gray Television for $151,000.
- Series D preferred stock is held by an affiliate of the controlling shareholder; $0.3 million of dividends were accrued and unpaid at quarter-end. The common-stock repurchase plan was suspended in May 2019; no shares were repurchased in Q3.
Most important facts for investors to verify
- Whether Medicare supplement claim frequency and severity improve, and whether Bankers Fidelity’s combined ratio moves below 100%.
- Whether premium growth and American Southern’s improved loss experience can offset higher commissions, underwriting costs, and reinsurance premiums.
- The source and sustainability of liquidity, including operating cash use, restrictions on subsidiary dividends, statutory capital, and the $4.9 million investment commitment.
- Investment portfolio performance and realized losses from rebalancing, along with exposure to interest-rate, credit and market-value changes.
- Debt-service sensitivity to LIBOR and the terms and consequences of any potential interest deferral; also review preferred-stock dividends and related-party arrangements.