Business context and reporting period
Atlantic American Corporation is an insurance holding company reporting for the quarter and nine months ended September 30, 2017. American Southern operates in property and casualty insurance; Bankers Fidelity operates in life and health insurance. Figures below are in U.S. dollars; financial statement amounts are generally shown in millions.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $44.8m | $42.4m | $132.3m | $126.0m |
| Insurance premiums | $42.1m | $39.4m | $123.0m | $117.0m |
| Net income | $0.75m | $0.15m | $1.99m | $1.29m |
| Net income attributable to common shareholders | $0.65m | $0.05m | $1.69m | $0.99m |
| Basic and diluted EPS | $0.03 | $0.00 | $0.08 | $0.05 |
| Operating income (loss), non-GAAP | $0.09m | $(0.21)m | $(0.35)m | $0.64m |
For the nine months, insurance benefits and losses increased to $87.4m from $78.7m; commissions and underwriting expenses declined to $31.8m from $34.3m. Investment income fell to $6.4m from $7.5m, while net realized investment gains rose to $2.8m from $1.4m. The quarter’s income tax benefit was $0.12m; nine-month tax expense was $0.48m.
At September 30, 2017, total assets were $334.3m, investments $252.1m, and shareholders’ equity $109.5m. Consolidated cash and cash equivalents were $9.5m, down from $13.3m at year-end 2016. Insurance reserves and policyholder funds totaled $175.2m. Junior subordinated debentures, net, were $33.7m; their rates float with LIBOR plus 4.00%–4.10% (effective rate 5.37%).
Nine-month cash flow was $(1.1)m from operations, $(1.7)m from investing, and $(0.9)m from financing, producing a $3.8m decrease in cash. The parent reported approximately $22.0m of unrestricted cash and investments. Insurance subsidiaries’ statutory surplus was $43.0m at American Southern and $29.7m at Bankers Fidelity.
Material changes and management commentary
- Premium revenue grew 6.8% in Q3 and 5.1% year to date, largely from Medicare supplement business. Management attributed higher net income primarily to premium growth and increased realized investment gains; the gains are excluded from management’s non-GAAP operating income measure.
- American Southern’s combined ratio improved to 93.9% in Q3 from 95.1% and to 93.0% year to date from 93.6%. Its loss ratio nevertheless worsened year over year, including higher automobile liability claims and less favorable general liability and surety experience.
- Bankers Fidelity’s premiums increased, led by Medicare supplement growth, but its combined ratio remained above 100%: 104.3% in Q3 and 105.8% year to date. Higher Medicare supplement losses and elevated mortality and morbidity beginning in late 2016 weighed on results.
- Medicare supplement premiums ceded under a reinsurance agreement were approximately $8.6m in Q3 and $19.7m year to date. The agreement also provided an expense-reimbursement allowance.
- Investment income decreased because of lower average fixed-maturity yields and losses from real estate partnership earnings. The company reported $3.8m of gross unrealized losses on fixed maturities, which management considered temporary; it cited intent and ability to hold and expected contractual principal and interest payments.
- The company repurchased 98,097 shares during Q3 under its 750,000-share repurchase plan. Approximately 585,487 shares remained authorized for repurchase at quarter-end.
Outlook, risks and contingencies
The filing provides no quantitative earnings or revenue guidance. Management said existing liquidity, expected subsidiary dividends and tax-sharing payments, and potential additional borrowing should meet liquidity needs for the foreseeable future. It believes subsidiary invested assets and expected inflows are adequate to fund claims and expenses, while noting insurance-company assets are subject to regulatory restrictions. Subsidiary dividends above $5.7m in 2017 required prior approval; the parent had received $3.6m in subsidiary dividends through September.
Key exposures include claims frequency and severity, reserve estimation, unfavorable Medicare supplement loss experience, investment-market and issuer-credit changes, and floating-rate debt costs. The company identified $1.006m of unrealized losses on oil-and-gas issuer securities and noted downgrades or rating reviews among some issuers, but said it did not intend or expect to be required to sell securities in unrealized-loss positions. Ordinary-course claims and lawsuits were not expected by management to materially affect financial condition or results. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether Bankers Fidelity’s elevated claims and loss ratios persist, and how Medicare supplement reinsurance affects earnings and statutory capital.
- Whether reserve development and claims experience at both insurance units support current reserve adequacy.
- The recoverability and valuation of securities in unrealized-loss positions, particularly oil-and-gas exposures, and the sensitivity of investment income to yields.
- Parent-level liquidity, regulatory limits on subsidiary dividends, and interest expense exposure on LIBOR-linked debentures.
- The sustainability of reported earnings given the difference between GAAP net income and nine-month non-GAAP operating loss.