Atlantic American Corporation — Q1 2018 Form 10-Q
Business context and period: For the three months ended March 31, 2018. The insurance holding company operates through American Southern (property and casualty) and Bankers Fidelity (life and health). Figures are unaudited; dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Insurance premiums | $42.2 | $40.8; up 3.5% |
| Total revenue | $40.5 | $43.9; down 7.6% |
| Investment income | $2.4 | $2.2 |
| Net realized investment gains | $0.4 | $0.9 |
| Unrealized equity-security losses | $(4.4) | None reported |
| Insurance benefits and losses | $33.2 | $30.0 |
| Loss before tax | $(6.4) | $(0.3) |
| Net loss | $(5.0) | $(0.2) |
| Net loss applicable to common shareholders | $(5.1), or $(0.25) per share | $(0.3), or $(0.02) per share |
| Operating loss (company-defined non-GAAP) | $(2.3) | $(1.2) |
Premium growth was driven mainly by Medicare supplement business. The reported revenue decline and larger net loss were significantly affected by adoption of new accounting guidance requiring equity-security fair-value changes in earnings; the company recorded a $4.4 million unrealized loss in Q1 2018. Excluding taxes and realized investment gains or losses, and adding back that unrealized loss, the company’s non-GAAP operating loss widened year over year.
Underwriting: American Southern’s underwriting income was $0.1 million versus $0.9 million; its combined ratio rose to 98.9% from 92.8%, reflecting higher claim frequency and severity in auto and surety. Bankers Fidelity’s underwriting loss widened to $3.2 million from $2.7 million; its combined ratio increased to 110.7% from 109.7%. Higher Medicare supplement claims, including unfavorable prior-year development primarily associated with elevated winter influenza morbidity, weighed on results. Companywide, benefits and losses increased 10.6% while premiums increased 3.5%.
Financial position, cash flow and debt
- At March 31, 2018, total assets were $325.8 million, down from $343.2 million at year-end 2017; shareholders’ equity was $101.7 million, down from $113.0 million. The decline in equity included $5.6 million of quarterly other comprehensive loss, largely reflecting lower values for available-for-sale fixed maturities.
- Consolidated cash and cash equivalents were $8.4 million, versus $24.5 million at December 31, 2017. Operating cash use was $6.9 million; investing cash use was $9.1 million; financing cash use was $0.2 million. Investment purchases exceeded sales and maturities.
- Management reported approximately $16.0 million of unrestricted cash and investments at the Parent. This is distinct from consolidated cash; the filing does not provide a directly comparable breakdown of the Parent amount.
- Junior subordinated debenture obligations, net, were $33.7 million, unchanged from year-end. The floating-rate debt is tied to three-month LIBOR plus 4.00%–4.10%; the effective rate was 5.98% at quarter-end. Interest expense was $0.5 million, up slightly year over year.
- Insurance reserves and policyholder funds totaled $173.0 million. The company said subsidiary invested assets and expected premium receipts, investment earnings, and reinsurance collections should fund policy liabilities and operating needs, subject to insurance-regulatory restrictions.
Material changes, outlook and risks
- American Southern premiums and underwriting income declined; increased auto and surety claims raised its loss ratio. Management cited increased competition in surety and termination of an auto account, among other premium factors.
- Bankers Fidelity premiums grew 6.5%, led by Medicare supplement and other health products, but claims growth exceeded premium growth. Management said higher-than-expected Medicare supplement claims persisted through Q1.
- Adoption of ASU 2016-01 changed equity-security fair-value movements from other comprehensive income to net income. Its January 1, 2018 transition adjustment increased retained earnings and decreased accumulated other comprehensive income by $9.8 million. Adoption of ASU 2018-02 also reclassified $2.1 million of tax effects from accumulated other comprehensive income to retained earnings. These were accounting presentation changes, not quarterly operating cash flows.
- Management said existing cash, expected subsidiary dividends, fees and tax-sharing payments, and potential additional borrowing should meet liquidity needs for the foreseeable future. Subsidiary dividends are subject to statutory limits; payments above $4.8 million in 2018 would require prior approval. The Parent had received $1.2 million in subsidiary dividends through March 31.
- The company reported no specific earnings guidance. It cautioned that quarterly results are not necessarily indicative of full-year results and that actual outcomes may differ from forward-looking statements. Key exposures include claim frequency and severity, reserve estimates, reinsurance collections, interest rates and investment valuations. Management deemed fixed-maturity unrealized losses temporary and said it did not intend or expect to need to sell those securities before recovery.
- Ordinary-course claims and lawsuits were not expected by management to materially affect financial condition or results. Disclosure controls were deemed effective; no materially affecting change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Medicare supplement claims and the unfavorable loss experience in both insurance units persist, and how they affect loss ratios and reserve development.
- The sustainability and composition of premium growth, including reinsurance ceded premiums and the effect of surety competition and auto account changes.
- Investment portfolio valuation and credit exposure: fixed maturities had $8.6 million of gross unrealized losses at quarter-end, compared with $3.9 million at year-end; management classified them as temporary.
- Parent-level liquidity versus consolidated cash, the timing and regulatory availability of subsidiary dividends, and the company’s capacity to service floating-rate debentures.
- The effect of equity-security accounting changes when comparing reported earnings and comprehensive income with prior periods.