AAME

Atlantic American Corp. 10-Q Summary (Period Ended June 30, 2010)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Atlantic American Corporation, a smaller reporting company and insurance holding company. The report covers the three and six-month periods ended June 30, 2010. Operations are conducted primarily through two subsidiaries: American Southern (property and casualty insurance) and Bankers Fidelity (life and health insurance).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased to $53.1 million for the six months ended June 30, 2010, compared to $51.3 million in the prior year period. Insurance premiums rose 4.4% to $47.7 million, driven by growth in life and health operations.
• Profitability: Net income applicable to common stockholders improved significantly to $239,000 from $14,000 in the same period of 2009. This improvement was primarily due to a decrease in compensation accruals.
• Segment Performance:
  • American Southern (P&C): Net earned premiums decreased 5.5% due to weakness in the construction industry affecting general liability and surety lines. The combined ratio was 102.3% (unfavorable) compared to 100.5% in 2009, driven by large surety claims.
  • Bankers Fidelity (Life/Health): Earned premiums increased 10.7% to $30.9 million due to successful marketing and new agent recruitment. The loss ratio improved to 73.6% from 74.6% year-to-date.
• Investment Portfolio: Net pre-tax unrealized gains on investments recognized in other comprehensive income increased by $9.8 million compared to unrealized losses of $6.8 million at year-end 2009. This was driven by the recovery in U.S. Government agency bonds and utility/telecom securities.

Outlook, Risks, and Unusual Items

• Unusual Items: The Company incurred a non-recurring charge of $319,000 related to the termination and settlement of its qualified pension plan in May 2010.
• Debt and Liquidity: The Company amended its credit agreement with Wells Fargo, extending the term to June 30, 2011, with a $5 million revolving facility available (no balance outstanding). Junior subordinated debentures totaling $41.2 million remain outstanding with an effective interest rate of 4.54%.
• Investment Risks: Significant unrealized losses remain in the financial services and media sectors, including related-party investments in Gray Television, Inc. Management asserts intent to hold these securities until price recovery and deems them temporarily impaired.
• Derivatives: The Company maintains a zero-cost interest rate collar on a portion of its junior subordinated debentures. Due to LIBOR rates remaining below the collar floor, the Company continues to make payments on this instrument, resulting in a fair value liability of approximately $1.7 million.
• Guidance: The filing does not provide specific numerical guidance for future periods. Management states that operating results for the interim period are not necessarily indicative of future results.

Investor Verification Checklist

• Verify the sustainability of the premium growth in the Bankers Fidelity segment versus the decline in American Southern's general liability and surety lines.
• Monitor the status of unrealized losses in the media sector (specifically Gray Television, Inc.) and the potential for other-than-temporary impairment charges.
• Review the impact of the variable commission structure at American Southern on future expense ratios as loss ratios fluctuate.
• Confirm the Company's ability to meet debt service requirements on the $41.2 million in junior subordinated debentures and the ongoing costs associated with the interest rate collar.
• Assess the adequacy of loss reserves given the volatility in the construction industry affecting the P&C segment.