AAME

Atlantic American Corp. 10-Q Summary (Period Ended Sept 30, 2008)

Business Context and Reporting Period

Atlantic American Corporation is an insurance holding company operating primarily through two subsidiaries: American Southern (Property and Casualty) and Bankers Fidelity (Life and Health). This report covers the quarterly period ended September 30, 2008. A significant structural change occurred in March 2008 when the Company sold its regional property and casualty operations (Association Casualty and Georgia Casualty) to Columbia Mutual Insurance Company. These operations are now reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: The Company reported a net loss of $0.2 million for the quarter and $1.1 million for the nine-month period, compared to net income of $1.8 million and $3.1 million, respectively, in the prior year periods. The nine-month loss was primarily driven by a $2.2 million loss from discontinued operations.
• Revenue: Total revenue decreased 10.2% for the quarter and 8.8% for the nine-month period compared to 2007. Insurance premiums declined due to softening P&C markets and competition in life/health lines.
• Investment Performance: The Company recorded a $0.4 million realized loss in the quarter due to an "other than temporary impairment" on Wachovia Corporation equity securities. Net unrealized investment losses increased significantly, contributing to a decline in Accumulated Other Comprehensive Loss to $(12.8) million.
• Debt: The Company repaid its entire $3.8 million bank debt balance to Wachovia in April 2008. As of September 30, 2008, no bank debt was outstanding.
• Segment Performance: American Southern's combined ratio worsened to 101.1% for the quarter (up from 90.8% in 2007) due to higher loss ratios in general liability and surety lines. Bankers Fidelity saw a slight decline in premiums but maintained stable expense ratios.

Guidance, Outlook, and Risks

• Subsequent Events: On October 28, 2008, the Company redeemed all Series B Preferred Stock ($13.4 million) and paid $1.7 million in dividends. Holders agreed to discharge the Company from the remaining $13.8 million of accrued but unpaid dividends, which will be recorded as an increase to paid-in capital in Q4 2008.
• Liquidity: Cash and short-term investments increased to $41.1 million, bolstered by proceeds from the sale of discontinued operations. The Company maintains a $13.5 million revolving credit facility (unused) and $41.2 million in junior subordinated debentures.
• Risks: Significant exposure to market risk, particularly regarding investments in General Motors and GMAC securities, which held a carrying value of $4.6 million against a cost basis of $10.2 million. The Company also faces risks related to the adequacy of loss reserves and the realization of deferred tax assets.
• Outlook: Management anticipates further rationalization of fixed expenses following the sale of regional operations. No specific forward-looking financial guidance was provided in this filing.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the $2.2 million loss from discontinued operations obscures the performance of continuing operations.
• Investment Impairments: Review the valuation of GM/GMAC holdings and Wachovia securities for potential further "other than temporary" impairments.
• Preferred Stock Resolution: Confirm the accounting treatment of the $13.8 million dividend discharge in the Q4 2008 filing.
• Loss Reserve Adequacy: Assess the stability of the loss ratio in the American Southern segment, particularly in the surety line, given the construction industry downturn.
• Debt Covenants: Monitor compliance with the Credit Agreement covenants, specifically tangible net worth and leverage ratios, following the preferred stock redemption.