Atlantic American Corporation — Q2 2013 Form 10-Q
Business and period. Insurance holding company reporting unaudited results for the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. American Southern writes property and casualty insurance; Bankers Fidelity writes life and health insurance. Amounts below are in millions of dollars unless stated otherwise.
Financial results
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Total revenue | $44.6 | $35.0 | $81.3 | $69.5 |
| Insurance premiums | $36.4 | $31.6 | $69.4 | $62.3 |
| Realized investment gains, net | $5.5 | $0.5 | $6.1 | $1.4 |
| Net income | $6.0 | $0.8 | $6.9 | $2.4 |
| Net income applicable to common shareholders | $5.8 | $0.7 | $6.6 | $2.2 |
| Diluted EPS | $0.26 | $0.03 | $0.30 | $0.10 |
| Non-GAAP operating income | $0.6 | $0.4 | $0.9 | $1.1 |
Revenue rose 27.7% in Q2 and 17.0% in H1. Premium growth reflected higher Medicare supplement business and a new commercial auto state contract. Management attributed the substantial net income increase primarily to realized investment gains; excluding those gains and income taxes, operating income increased in Q2 but declined year to date.
- Underwriting: American Southern’s combined ratio was 101.9% in Q2 and 101.6% for H1, versus 101.8% and 104.7%, respectively. Improved loss experience was partly offset by higher commissions and expenses. Bankers Fidelity’s combined ratio was 101.7% in Q2 and 102.5% for H1, versus 103.5% and 100.9%; its H1 loss ratio increased with higher claims in the aging life block.
- Cash flow: H1 operating cash flow was negative $1.2 million, versus positive $0.7 million in 2012. Investing activities provided $30.7 million, mainly because sales and maturities of investments exceeded purchases. Cash increased to $47.1 million from $19.0 million at year-end.
- Balance sheet and liquidity: At June 30, total assets were $320.9 million, total liabilities $222.2 million, and shareholders’ equity $98.7 million. Parent unrestricted cash and investments were approximately $27.4 million. Management said cash, subsidiary dividends and fees, tax-sharing payments, and potential borrowing should meet foreseeable liquidity needs; insurance-subsidiary dividends are subject to regulatory limits.
- Debt: Junior subordinated debentures totaled $41.2 million, with maturities in 2032 and 2033 and floating rates of LIBOR plus 4.00% or 4.10% (effective rate 4.3% at June 30). The company may defer interest subject to restrictions but had not done so. The interest-rate collar matured in March 2013.
Material changes, outlook and risks
- American Southern gross written premiums increased sharply, including $13.7 million from a new state contract awarded in Q2; a limited stop-loss agreement reinsures that contract’s commercial auto business. Higher premiums do not yet translate fully into earned premiums.
- Investment income declined slightly as the company sold long-term fixed maturities amid rising long-term interest rates and could not reinvest proceeds at equivalent yields. The sales generated gains but reduced fixed-maturity holdings. AOCI declined from $19.6 million at year-end to $7.2 million, primarily reflecting investment-security valuation changes; Q2 comprehensive income was negative $4.6 million despite positive net income.
- Income tax expense was unusually low ($0.2 million for H1), including a valuation-allowance reduction associated with use of capital-loss carryforwards previously reserved. The reported earnings therefore include a tax effect that may not recur at the same level.
- Management provided no quantitative earnings or revenue guidance. It stated that results may vary and are not necessarily indicative of full-year results. Management considered known ordinary-course claims and lawsuits not expected to materially affect results or financial condition. Securities in unrealized-loss positions were considered temporarily impaired; the company said it did not intend or expect to need to sell them before recovery.
- Subsequent to quarter-end, the company bought an additional $3.938 million of Gray Television, Inc. Class A common stock, identified as a related-party investment. During Q2, it also redeemed $0.5 million of Series D preferred stock; 65,000 shares remained outstanding.
Important facts for investors to verify
- How much earnings growth is sustainable apart from realized investment gains and the tax valuation-allowance benefit.
- The new state contract’s earned-premium development, stop-loss protection, and claims experience.
- Whether underwriting ratios can improve given combined ratios above 100% in both operating units and the higher H1 life-insurance claims.
- The investment portfolio’s exposure to interest-rate and credit risk, including unrealized losses, reduced yields, and any subsequent asset sales.
- Parent-level liquidity after regulatory restrictions on subsidiary dividends, debt-service needs, share repurchases, and the additional related-party Gray Television investment.