Atlantic American Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; compared with the same 2010 periods. The company is an insurance holding company operating through property and casualty insurer American Southern and life and health insurer Bankers Fidelity. Amounts below are in millions unless noted.
Financial results
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Total revenue | $29.1 | $27.1 | $57.1 | $53.1 |
| Insurance premiums | $26.2 | $24.4 | $51.6 | $47.7 |
| Net income | $0.192 | $0.076 | $0.661 | $0.493 |
| Net income applicable to common shareholders | $0.065 | $(0.051) | $0.407 | $0.239 |
| EPS, basic and diluted | Reported as $0.00 | Reported as $0.00 loss | $0.02 | $0.01 |
- For H1 2011, operating cash flow was $(1.0), versus $0.5 provided in H1 2010. Investing activities used $2.1, compared with $26.6 provided in the prior-year period; financing activities used $0.5, including common dividends. Cash and cash equivalents declined $3.7 to $24.7.
- At June 30, total assets were $274.9, total liabilities $190.7, and shareholders’ equity $84.2. Investments totaled $201.1. Policy liabilities were $137.4.
- Debt included $41.2 of junior subordinated debentures; effective interest rate was 4.31%. Interest expense was $1.3 for H1. No borrowings were outstanding on the $5.0 revolving credit facility during H1.
- American Southern’s H1 combined ratio improved to 99.0% from 102.3% (loss ratio 57.9%; expense ratio 41.1%). Bankers Fidelity’s benefits-and-losses ratio was 73.2%, versus 73.6%.
Changes and management commentary
- H1 revenue rose 7.7%, while net income rose 34.1%. Management attributed improved earnings mainly to premium growth, higher investment income and realized gains, with relatively consistent fixed expenses.
- Premium growth was driven largely by Medicare supplement and commercial automobile business. H1 Medicare supplement premiums at Bankers Fidelity increased 8.6%; American Southern net earned premiums increased 13.8%, led by commercial automobile.
- American Southern gross written premiums declined, partly reflecting a state-contract policy-term change and continued weakness in general liability associated with the construction industry. Bankers Fidelity life premiums declined as policy redemptions and settlements exceeded new sales.
- Other expenses increased, including higher compensation accruals and profit-sharing commissions tied to improved performance and more favorable loss experience. The 2010 comparable period included a nonrecurring $0.3 charge related to termination and settlement of a defined benefit plan.
- Investment income increased modestly. Net realized investment gains were $0.071 in H1 2011, versus $0.013 in H1 2010. Net unrealized investment gains contributed to improved accumulated other comprehensive loss, which narrowed to $0.520 from $2.107 at year-end 2010.
Liquidity, outlook and risks
- Management said subsidiary invested assets, premium receipts, investment earnings and reinsurance collections should fund policy liabilities and operating needs. The Parent reported approximately $25.0 of unrestricted cash and investments at June 30.
- The $5.0 Wells Fargo revolving facility was extended on July 1, 2011 only through August 31, 2011. The company was negotiating a further extension or replacement facility; management expected to obtain one on substantially similar terms but gave no assurance of availability or acceptable terms.
- Insurance-subsidiary dividends are subject to statutory limits. In 2011, distributions above $6.8 require prior regulatory approval. At June 30, statutory surplus was $39.0 at American Southern and $32.3 at Bankers Fidelity.
- The $41.2 debentures bear floating LIBOR-based rates and are subordinated; the company may defer interest, subject to restrictions. The interest-rate collar covering $18.0 of notional principal continued to require payments while LIBOR remained below its 4.77% floor; its June 30 fair-value liability was $1.288 and it runs through March 2013.
- Investments in unrealized-loss positions totaled $5.416 of losses; these included $2.025 of unrealized losses on related-party Gray Television securities. Management classified the securities as temporarily impaired and said it did not intend to sell or expect to be required to sell them.
- Key estimation risks include insurance loss and claim reserves, future policy benefits, deferred acquisition costs, reinsurance collectibility and investment valuations. Ordinary-course claims and lawsuits were not expected by management to materially affect the company. No formal earnings guidance was provided.
Important facts for investors to verify
- Whether the revolving credit facility was extended or replaced after its August 31, 2011 expiration, and on what terms.
- Whether insurance premium growth and American Southern’s sub-100% combined ratio persisted, particularly given general liability weakness and changing commercial automobile experience.
- Development in claims reserves, Medicare supplement claims, and the recoverability of deferred acquisition costs.
- Credit quality and valuation of the investment portfolio, including Gray Television exposure and securities with prolonged unrealized losses.
- Parent liquidity and access to subsidiary dividends, given statutory distribution restrictions, debt service and the continued collar payments.