Business Context and Reporting Period
Company: Atlantic American Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: An insurance holding company operating primarily through two subsidiaries: American Southern (property and casualty) and Bankers Fidelity (life and health). The company completed the sale of its regional property and casualty operations (Association Casualty and Georgia Casualty) in March 2008, which are reported as discontinued operations.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $25.6 million | $25.9 million |
| Insurance Premiums | $22.8 million | $23.0 million |
| Net Income (Loss) | $0.3 million | ($1.7 million) |
| Income from Continuing Ops | $0.3 million | $0.4 million |
| EPS (Basic & Diluted) | $0.01 | ($0.10) |
| Cash and Cash Equivalents | $23.9 million | $69.4 million |
| Total Assets | $251.2 million | $266.6 million |
| Total Liabilities | $179.4 million | $191.2 million |
| Shareholders' Equity | $71.9 million | $75.4 million |
| Junior Subordinated Debt | $41.2 million | $41.2 million |
Material Changes vs. Prior Period
- Profitability: The company reported a net income of $0.3 million in Q1 2009, a significant improvement from the net loss of $1.7 million in Q1 2008. The prior year loss was driven by a $2.2 million loss from discontinued operations, which did not recur in 2009.
- Revenue: Total revenue decreased slightly by 1.1% ($0.3 million). Insurance premiums declined 1.0% due to softening property and casualty markets and competition in Medicare supplements.
- Loss Ratios: American Southern's loss ratio increased to 48.2% from 38.1% in the prior year, primarily due to several large commercial automobile claims. Conversely, the expense ratio decreased to 48.0% from 52.8% due to variable commission structures tied to loss performance.
- Investments: Unrealized investment losses increased by $5.7 million in Q1 2009, driven by macroeconomic factors and declines in financial services holdings. Total investments decreased in carrying value.
- Liquidity: Cash and cash equivalents decreased by $13.4 million ($37.3 million to $23.9 million) due to net investing activities exceeding sales and maturities, and a $1.8 million settlement payment related to the 2008 sale of discontinued operations.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that the financial markets remain impacted by macroeconomic factors, specifically affecting the valuation of fixed maturity and equity securities. Investments in General Motors and GMAC securities exceeded 10% of shareholders' equity and suffered significant unrealized losses.
- Interest Rates: Interest expense decreased 22.2% due to lower LIBOR rates. The company maintains a zero-cost interest rate collar to hedge a portion of its junior subordinated debentures.
- Liquidity Position: Management believes current cash, short-term investments ($18.8 million at the Parent level), and a $13.0 million revolving credit facility (currently unutilized) are sufficient to meet obligations. Statutory surplus for subsidiaries remains adequate ($34.8 million for American Southern; $28.5 million for Bankers Fidelity).
- Accounting Standards: The company plans to adopt new FASB Staff Positions regarding fair value measurements and other-than-temporary impairments effective June 30, 2009, though no material impact is currently expected.
- Stock Repurchases: The company repurchased 8,492 shares of common stock during the quarter under its authorized plan.
Investor Verification Checklist
- Investment Portfolio Quality: Verify the extent of unrealized losses in financial services and automotive sectors (specifically GM/GMAC) and management's assessment of "other-than-temporary" impairments.
- Loss Reserve Adequacy: Review the impact of the increased loss ratio (48.2%) in the property and casualty segment and the adequacy of reserves for large automobile claims.
- Liquidity Constraints: Confirm the availability of the $13.0 million credit facility and the ability of subsidiaries to pay dividends to the Parent given statutory restrictions.
- Discontinued Operations: Ensure understanding that Q1 2008 results included a significant loss from the sale of regional operations, making year-over-year comparisons of net income less indicative of ongoing operational trends.
- Debt Covenants: Monitor compliance with debt covenants related to funded debt ratios and tangible net worth, particularly given the decline in investment values.