AAME

Atlantic American Corp. 10-Q Summary (Period Ended Sept 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 nine-month periods ended September 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

• Profitability Turnaround: The Company reported a net income of $1.0 million for the nine months ended Sept 30, 2010, compared to a net loss of $1.8 million in the same period in 2009. The 2009 loss was significantly impacted by a $1.8 million increase in the deferred tax asset valuation allowance.
• Revenue Growth: Total revenue increased to $80.2 million (2010) from $76.9 million (2009). Insurance premiums rose 5.6% to $72.3 million, driven by new business in the life and health segment and commercial automobile growth in the P&C segment.
• Investment Income Decline: Investment income decreased 8.7% to $7.4 million due to declining yields. Many higher-yielding securities were called by issuers and could not be reinvested at equivalent rates.
• Liquidity Improvement: Cash and cash equivalents increased significantly from $20.1 million at year-end 2009 to $64.9 million at Sept 30, 2010, primarily due to proceeds from called securities exceeding investment purchases.
• Segment Performance:
  • American Southern (P&C): Net earned premiums decreased slightly year-to-date due to declines in general liability and surety lines, though the loss ratio improved in Q3.
  • Bankers Fidelity (Life/Health): Earned premiums increased 10.4% year-to-date, driven by successful marketing and growth in Medicare supplement and life insurance lines.

Outlook, Risks, and Unusual Items

• Unusual Items: The Company incurred a non-recurring charge of $0.3 million in the nine-month period related to the termination and settlement of its qualified pension plan. In 2009, a similar charge of $0.4 million was recorded for the termination of a supplemental executive retirement plan (SERP).
• Investment Risks: The Company holds securities with unrealized losses, primarily in the financial services and media sectors (including related-party investments in Gray Television). Management asserts intent and ability to hold these until recovery and deems them temporarily impaired.
• Debt and Liquidity: The Company has a $5.0 million revolving credit facility with Wells Fargo, which had no outstanding balance as of Sept 30, 2010. The facility expires June 30, 2011. The Company also has $41.2 million in junior subordinated debentures with interest rates tied to LIBOR.
• Accounting Changes: The Company plans to adopt ASU 2010-26 regarding the accounting for costs associated with acquiring insurance contracts effective January 1, 2012, with no expected material impact.

Investor Verification Checklist

• Deferred Tax Assets: Verify the sustainability of the reversal of the deferred tax asset valuation allowance that drove the 2009 loss, ensuring future capital gains are sufficient to utilize carryforwards.
• Investment Portfolio Quality: Review the specific composition of the $4.2 million in gross unrealized losses, particularly the concentration in media and financial services sectors, to assess credit risk.
• Reinvestment Risk: Monitor the impact of the low-interest-rate environment on future investment income yields as called securities are reinvested.
• Debt Covenants: Confirm continued compliance with the Wells Fargo credit agreement covenants, specifically regarding tangible net worth and funded debt ratios.
• Segment Mix: Track the shift in premium mix between the growing life/health segment and the declining general liability/surety lines to understand long-term profitability trends.