Atlantic American Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in millions of dollars unless noted. The company operates property and casualty insurance through American Southern and life and health insurance through Bankers Fidelity.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $43.6 | $41.9 | $87.5 | $83.6 |
| Insurance premiums | $40.1 | $39.1 | $80.9 | $77.6 |
| Investment income | $2.1 | $2.6 | $4.2 | $5.1 |
| Realized investment gains, net | $1.4 | $0.1 | $2.3 | $0.9 |
| Net income | $1.46 | $0.24 | $1.24 | $1.14 |
| Net income applicable to common shareholders | $1.36 | $0.14 | $1.04 | $0.94 |
| Basic and diluted EPS | $0.07 | $0.01 | $0.05 | $0.05 |
| Operating income (loss), non-GAAP | $0.79 | $0.23 | $(0.44) | $0.85 |
- Q2 revenue rose 4.2%; first-half revenue rose 4.7%. Premium growth was mainly driven by Medicare supplement business.
- Net income improved in Q2 primarily because realized investment gains increased. First-half net income was modestly higher, but non-GAAP operating income fell to a loss, reflecting adverse first-quarter life and health loss experience and lower investment income.
- Q2 insurance benefits and losses were $27.0 million versus $26.9 million; first-half costs rose to $57.0 million from $51.7 million. The filing does not provide a consolidated profit margin measure.
- American Southern’s combined ratio was 92.3% for Q2 and 92.5% for the first half, indicating underwriting profit in both periods. Bankers Fidelity’s ratios were 103.5% and 106.6%, respectively, indicating underwriting losses.
Financial position, cash flow and debt
- At June 30, total assets were $332.7 million, compared with $318.6 million at year-end 2016. Total investments were $240.7 million; cash and cash equivalents were $12.6 million, down from $13.3 million.
- First-half operating cash flow was negative $5.8 million, an improvement from negative $8.0 million a year earlier. Investing activities provided $5.7 million; financing activities used $0.6 million.
- Total liabilities were $225.2 million and shareholders’ equity was $107.5 million. Insurance reserves and policyholder funds totaled $176.8 million.
- Junior subordinated debentures, net, were $33.7 million. They carry floating rates of LIBOR plus 4.00% and 4.10%, with an effective rate of 5.25% at June 30, and mature in 2032 and 2033. Interest expense increased with LIBOR.
- Management reported $18.5 million of unrestricted cash and investments at the Parent. Insurance-subsidiary statutory surplus was $42.5 million at American Southern and $30.1 million at Bankers Fidelity. More than $5.7 million of subsidiary dividends in 2017 would require prior regulatory approval; $2.4 million had been received through June 30.
Material changes and management commentary
- Premiums at Bankers Fidelity increased 9.2% year over year for the first half, primarily from Medicare supplement sales. American Southern gross written premiums increased, but net earned premiums declined 4.6% in both Q2 and the first half.
- Bankers Fidelity experienced elevated mortality and morbidity beginning late in 2016 and through Q1 2017, worsening its first-half loss ratio. Q2 experience was more favorable than the prior-year quarter.
- Investment income declined 18.7% in Q2 and 16.3% in the first half, attributed to lower average fixed-maturity yields and losses from real estate partnership investments. Realized gains rose, primarily from sales of an equity security and fixed maturities.
- Management stated that subsidiary invested assets, expected premium and investment cash flows, reinsurance collections, and Parent cash resources should meet liquidity needs for the foreseeable future. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- At June 30, 61 securities were in unrealized loss positions, with $3.9 million of gross unrealized losses. Management classified these as temporary impairments and said it did not intend, or expect to be required, to sell them before recovery. Some losses involved oil and gas issuers with credit downgrades or rating reviews.
- Insurance claims and reserve estimates involve uncertainty. First-half prior-year development included favorable $1.1 million for property and casualty, but adverse $0.6 million for Medicare supplement claims.
- Insurance-subsidiary assets are subject to state regulation, limiting their availability to the Parent. Debenture interest is floating-rate; the company may defer interest for up to 20 consecutive quarters, but had not elected to do so.
- The company reported ordinary-course claims and lawsuits, which management did not expect to materially affect financial condition or results. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
- The company repurchased 22,407 common shares during Q2 at an average $3.85 per share under its 750,000-share repurchase authorization.
Important facts for investors to verify
- Whether Medicare supplement growth can be sustained while claims experience and Bankers Fidelity’s combined ratio improve.
- How much of reported earnings depends on realized investment gains, and whether lower investment yields continue to pressure recurring income.
- The development of insurance reserves, especially Medicare supplement claims and the company’s sizable insurance liabilities.
- Liquidity at the Parent, the regulatory limits on subsidiary dividends, and the effect of LIBOR changes on debt service.
- The credit quality and recoverability of securities in unrealized loss positions, including oil and gas exposures.