Atlantic American Corporation — Q2 2012 Form 10-Q
Business context and reporting period. This insurance holding company reports results for the three and six months ended June 30, 2012, compared with the same periods in 2011. Its principal businesses are American Southern (property and casualty) and Bankers Fidelity (life and health). Unless otherwise noted, dollar amounts below are in millions.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $34.953 | $29.073 | $69.504 | $57.128 |
| Insurance premiums | $31.592 | $26.197 | $62.273 | $51.619 |
| Investment income | $2.855 | $2.691 | $5.738 | $5.260 |
| Realized investment gains, net | $0.470 | $0.070 | $1.428 | $0.071 |
| Income before taxes | $0.854 | $0.332 | $2.574 | $0.960 |
| Net income | $0.781 | $0.192 | $2.438 | $0.661 |
| Net income applicable to common shareholders | $0.654 | $0.065 | $2.184 | $0.407 |
| Basic and diluted EPS | $0.03 | — | $0.10 | $0.02 |
Management attributed improved earnings primarily to higher premiums, investment income and realized gains, alongside relatively steady fixed general and administrative expenses. Six-month operating income before taxes and realized investment gains was $1.1 million, versus $0.9 million in 2011.
Segments, underwriting and margins
- Bankers Fidelity: Six-month revenue was $46.938 million, versus $35.293 million; pretax income was $3.775 million, versus $1.433 million. Medicare supplement premiums rose to $34.619 million from $24.764 million, reflecting core producer growth, new Missouri business and renewal rate increases. Benefits and losses were 72.5% of premiums for the first half, compared with 73.2%.
- American Southern: Six-month revenue was $22.151 million, versus $21.482 million; pretax income was $1.760 million, versus $2.517 million. Its first-half combined ratio rose to 104.7% from 99.0%, as the loss ratio increased to 75.8% from 57.9% amid higher claim frequency and severity. The lower expense ratio, 28.9% versus 41.1%, partly reflected lower variable commissions related to unfavorable losses.
- Consolidated other expenses as a percentage of earned premiums fell to 31.9% for the first half from 38.8%. Management said this reflected premium growth, relatively stable fixed expenses and reduced American Southern commission accruals.
Financial position, cash flow and debt
- At June 30, 2012, total assets were $308.727 million, total liabilities $207.135 million, and shareholders’ equity $101.592 million. Cash and cash equivalents were $21.858 million; total investments were $236.344 million.
- Six-month operating cash flow was $0.702 million, compared with cash used of $1.043 million in 2011. Cash increased $0.573 million from year-end 2011. Investing activities provided $0.754 million; financing activities used $0.883 million, including preferred and common dividends.
- Junior subordinated debentures totaled $41.238 million, with maturities in 2032 and 2033 and floating rates of LIBOR plus 4.00% or 4.10%. The company had no borrowings under its $5 million revolving facility during the first half and reported covenant compliance.
- The revolving facility was scheduled to terminate August 31, 2012. Management said it believed it could enter a replacement facility on substantially similar terms, but had no current plans to renew or replace it and gave no assurance financing would be available on acceptable terms.
- Management reported $25.8 million of unrestricted cash and investments at the Parent. Insurance-subsidiary dividends are subject to statutory limits; payments exceeding $7.8 million in 2012 would require prior approval. The subsidiaries reported statutory surplus of $37.7 million at American Southern and $33.1 million at Bankers Fidelity.
Material changes, outlook and risks
- Premium growth was concentrated in Bankers Fidelity’s Medicare supplement business. Management noted that life and health growth and profitability were partly offset by unfavorable property and casualty loss experience.
- First-half realized investment gains increased substantially, primarily from sales of fixed-maturity investments. Available-for-sale investments had $24.760 million of net unrealized gains at June 30, compared with $19.713 million at December 31, 2011. Management considered securities in unrealized loss positions temporarily impaired and said it did not intend, or expect to be required, to sell them before recovery.
- The company continued payments under an interest-rate collar covering $18.042 million of debentures because LIBOR remained below the 4.77% floor. The collar, which expires March 4, 2013, had a $0.530 million fair-value liability at June 30.
- Management stated that subsidiary investment assets and expected investment earnings, premiums and reinsurance collections should support claims and expenses, and that Parent liquidity sources should be sufficient for the foreseeable future. The filing provides no earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Ordinary-course claims and lawsuits were not expected by management to materially affect financial condition or results. Forward-looking statements are subject to risks described in the company’s other SEC filings.
- A prior restatement concerning the timing of an other-than-temporary impairment on equity securities led management to identify a material weakness in investment impairment controls. Management reported remediation steps, including more robust quarterly reviews and stricter policies, and concluded disclosure controls were effective at June 30, 2012. No other material changes in internal control were reported.
Important facts for investors to verify
- Whether P&C claim frequency and severity improve, and whether American Southern’s combined ratio returns below 100%.
- Whether Medicare supplement premium growth and favorable loss experience at Bankers Fidelity persist, including the effects of rate increases and new business.
- Whether the revolving credit facility was renewed or replaced after its August 2012 termination, and on what terms.
- How much future earnings depend on realized investment gains, and whether unrealized losses or investment valuations change materially.
- Progress in remediating the investment impairment control weakness and the adequacy of insurance reserves and subsidiary statutory capital.