AAME

Business Context and Reporting Period

Company: Atlantic American Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: An insurance holding company operating through three principal business units: Regional Property and Casualty, American Southern, and Bankers Fidelity (Life and Health). The company focuses on specific geographic regions and product lines, managing each unit independently.

Key Financial Metrics

Debt & Liquidity: Total borrowings were $54.0 million, consisting of $12.8 million in bank debt (revolving credit facility) and $41.2 million in junior subordinated debentures. Net cash used in operating activities was $6.9 million.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 18.7% year-over-year, driven primarily by a 13.0% drop in insurance premiums. This was attributed to increased pricing competition, non-renewal of targeted property classes, and the loss of a significant account in the commercial automobile line.
• Profitability Drop: Net income fell 75.6% to $0.9 million. The primary driver was a sharp decline in realized investment gains, which dropped from $4.0 million in Q1 2006 to $0.02 million in Q1 2007. The 2006 gains were largely due to specific asset sales (GM bonds, Wachovia equity, real estate) that did not recur in 2007.
• Underwriting Performance:
  • Regional P&C: Combined ratio improved slightly to 111.7% from 113.8%, though the loss ratio increased to 69.9% due to large claims. Expense ratio improved to 41.8% due to reinsurance ceding commissions.
  • American Southern: Combined ratio improved to 90.7% from 92.4%, driven by favorable loss experience in commercial auto.
  • Bankers Fidelity: Premiums declined 8.1% due to lower new sales and competition in the Medicare supplement market.
• Cash Flow: Cash and short-term investments decreased from $27.3 million to $14.0 million, primarily due to lower premiums and net investing outflows.

Outlook, Risks, and Management Commentary

• Market Risks: The company is exposed to interest rate and market risks affecting investment fair values and cash flows. No material changes to market risks were reported since December 31, 2006.
• Debt Covenants: The company must maintain minimum tangible net worth and risk-based capital levels. The revolving credit facility commitment amount is set to reduce incrementally starting July 1, 2007.
• Preferred Stock Dividends: As of March 31, 2007, the company had accrued but unpaid dividends of $13.6 million on Series B Preferred Stock and $0.1 million on Series D Preferred Stock.
• Reserving Uncertainty: Unpaid loss and loss adjustment expenses comprise 47% of liabilities. Management notes that actual losses could materially differ from estimates due to legislative changes, medical cost inflation, and claim severity.
• Liquidity: Management believes dividends from subsidiaries and potential borrowings will meet liquidity requirements. Statutory surplus levels across subsidiaries remain adequate.

Investor Verification Checklist

• Investment Portfolio: Verify the composition of the investment portfolio and the sustainability of investment income without reliance on one-time realized gains.
• Premium Trends: Assess the long-term impact of the loss of the significant commercial automobile account and continued pricing competition on future revenue.
• Debt Servicing: Review the ability to service $54 million in debt, particularly given the reduction in the revolving credit facility commitment and the deferral rights on junior subordinated debentures.
• Loss Reserves: Monitor the adequacy of loss reserves, especially given the increase in the loss ratio for the Regional P&C segment due to large claims.
• Preferred Dividends: Confirm the company's strategy for addressing the $13.7 million in accrued but unpaid preferred stock dividends.