AAME

Business Context and Reporting Period

Company: Atlantic American Corporation (Insurance Holding Company)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2004
Operations: The Company operates through four principal subsidiaries: American Southern, Association Casualty, Georgia Casualty, and Bankers Fidelity. Operations are divided into a Casualty Division and a Life and Health Division.

Key Financial Metrics

Debt Composition: $15.0 million bank term loan and $41.2 million junior subordinated debentures.
Liquidity: Cash and short-term investments decreased to $23.7 million from $34.2 million at year-end 2003.

Material Changes vs. Prior Period

• Profitability: Net income more than doubled to $1.5 million, driven by improved underwriting performance in the Casualty Division and $0.7 million in realized investment gains.
• Premium Growth: Insurance premiums increased 4.3% to $41.4 million, primarily due to new program business at American Southern and rate increases in the Medicare supplement line at Bankers Fidelity.
• Underwriting Ratios:
  • American Southern: Loss ratio improved significantly to 53.5% (from 69.9%) due to the expiration of a large, lossy account in 2003. Expense ratio rose to 44.2% due to agent commission structures tied to loss ratios.
  • Association Casualty: Loss ratio improved to 59.5% (from 89.8%) following re-underwriting of workers' compensation. Combined ratio improved to 104.9% (from 128.9%).
  • Georgia Casualty: Combined ratio worsened to 107.2% (from 98.9%) primarily due to a reduction in the quota share cession rate (30% to 15%), which reduced ceding commissions.
• Cash Flow: Operating cash flow turned negative ($8.2 million used) compared to positive in 2003. This was largely due to the absence of a $7.6 million collection from a reinsurance contract termination that occurred in Q1 2003.
• Investments: Realized gains of $0.7 million were recorded, partially offset by a $0.1 million impairment charge on a common stock investment.

Outlook, Risks, and Contingencies

• Reinsurance Dispute: PMA Capital Insurance Company ("PMA Re"), a reinsurer for Georgia Casualty, has downgraded and is delaying claims payments while reviewing agreements. Management believes there is no contractual basis for the delay but notes that continued delays could require material provisions for uncollectible amounts.
• Debt Service: The Company has significant debt obligations, including a $15.0 million term loan with principal payments due starting July 2004. The Company intends to repay obligations using dividends and tax-sharing payments from subsidiaries.
• Preferred Stock: The Company redeemed $0.5 million of Series C Preferred Stock. Series B Preferred Stock dividends totaling $10.0 million were accrued but unpaid as of March 31, 2004.
• Market Risks: The Company is exposed to interest rate risk and equity price fluctuations. Over 90% of investment assets are marketable securities.
• Forward-Looking Statements: Management notes that results are not necessarily indicative of future performance and are subject to risks including legislative changes, medical inflation, and reinsurer solvency.

Investor Verification Checklist

• PMA Re Status: Verify the resolution of the payment delay by PMA Re and the potential impact on Georgia Casualty's receivables and reserves.
• Debt Covenants: Confirm compliance with leverage ratios and other covenants on the $15.0 million Wachovia term loan and junior subordinated debentures.
• Preferred Dividends: Monitor the $10.0 million accrued but unpaid dividends on Series B Preferred Stock and the Company's ability to service this obligation.
• Underwriting Sustainability: Assess whether the improved loss ratios at American Southern and Association Casualty are sustainable or driven by one-time factors (e.g., loss of a specific large account).
• Cash Flow Trends: Evaluate the Company's liquidity position given the shift from positive to negative operating cash flow and the reduction in cash balances.