AAME

Business Context and Reporting Period

Company: Atlantic American Corporation (Georgia)

Reporting Period: Fiscal Year Ended December 31, 2005

Business Overview: Atlantic American is an insurance holding company operating through four primary subsidiaries: American Southern, Association Casualty, and Georgia Casualty (Property & Casualty), and Bankers Fidelity (Life & Health). The company focuses on well-defined geographic and product niches, primarily in the Southern United States. The Parent company relies on dividends and fees from subsidiaries for cash flow.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss vs. Profit: The company reported a net loss of $3.2 million in 2005 compared to net income of $5.0 million in 2004. This reversal was primarily driven by a non-cash impairment charge of $10.7 million related to fixed maturity investments in the automotive sector (General Motors, GMAC, and Ford).
• Investment Performance: Realized investment losses of $10.5 million in 2005 contrasted with gains of $2.2 million in 2004. Net investment income increased slightly to $16.5 million due to a higher average yield (5.59% vs 5.39%) and asset base.
• Underwriting Results:
  • American Southern: Maintained profitability with a combined ratio of 93.6% (improved from 94.2%). Growth in surety and general liability lines offset losses in commercial auto.
  • Georgia Casualty: Reported an underwriting loss with a combined ratio of 123.9% (improved from 128.4%). Losses were driven by increased frequency and severity of claims (fires, fatalities, tornadoes) and hurricane-related expenses, though hurricane losses were lower than in 2004.
  • Association Casualty: Reported an underwriting loss with a combined ratio of 101.5% (improved from 102.2%). Premiums declined due to the termination of a quota share reinsurance agreement with Georgia Casualty.
  • Bankers Fidelity: Reported a slight underwriting loss with a combined ratio of 100.2% (improved from 100.1%). Medicare supplement premiums grew, while life insurance premiums declined.
• Debt Reduction: Total debt decreased to $51.5 million from $53.2 million, with $1.8 million repaid on the Term Loan during 2005.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The $10.7 million impairment charge on automotive sector bonds was the most significant unusual item. Additionally, the company incurred $2.3 million in net hurricane-related expenses (Dennis, Katrina, Rita, Wilma) in 2005, compared to $3.8 million in 2004.
• Outlook & Strategy: Management is conforming systems between Association Casualty and Georgia Casualty to create a regional P&C operation. Bankers Fidelity plans to initiate new life insurance programs in 2006 to diversify its business. The company expects to adopt SFAS 123R (Share-Based Payment) in Q1 2006, though no material impact is currently expected.
• Risks:
  • Catastrophic Events: Significant exposure to hurricanes in the Southern U.S. (Georgia, Mississippi, Texas). Coastal underwriting guidelines have been revised to reduce exposure.
  • Reinsurance: Dependence on reinsurers to pay claims; failure of reinsurers could result in losses.
  • Interest Rates: Investment portfolio performance is sensitive to interest rate fluctuations and credit risk (as evidenced by the automotive impairment).
  • Regulatory: Subject to state insurance regulations regarding capital, surplus, and dividend restrictions.

Investor Verification Checklist

• Investment Portfolio Quality: Verify the current status and valuation of remaining automotive sector holdings and other fixed maturities to assess further impairment risk.
• Loss Reserve Adequacy: Review the development of loss reserves, particularly for long-tail lines (workers' compensation, general liability) and the impact of recent catastrophic events on future estimates.
• Reinsurance Recoverables: Confirm the collectibility of reinsurance receivables, which totaled $57.4 million, and the financial strength of key reinsurers.
• Debt Covenants: Verify compliance with debt covenants, specifically the funded debt to EBITDA ratio, noting the amendments made to exclude the automotive impairment charge.
• Dividend Restrictions: Assess the ability of subsidiaries to pay dividends to the Parent, which are restricted to the greater of 10% of statutory surplus or statutory net income.