AAME

Business Context and Reporting Period

Company: Atlantic American Corp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: The Company operates through four principal insurance subsidiaries: American Southern, Association Casualty, Georgia Casualty (Casualty Division), and Bankers Fidelity (Life and Health Division). Operations focus on commercial lines, workers' compensation, and Medicare supplement products.

Key Financial Metrics

Note: All financial figures are in thousands except per share data.

Material Changes vs. Prior Period

• Accounting Change Impact: The net loss of $13.4 million for the six months ended June 30, 2002, was primarily driven by a non-cash cumulative effect of a change in accounting principle (SFAS No. 142) resulting in a goodwill impairment charge of $15.8 million in the casualty division. Excluding this charge, pre-tax operating income increased 90.9% to $3.6 million.
• Premium Growth: Insurance premiums increased 5.1% year-over-year to $75.5 million, driven by rate increases and market expansion.
• Investment Income Decline: Investment income decreased 8.8% to $6.9 million due to lower interest rates and the reinvestment of proceeds from redeemed callable securities at lower yields.
• Debt Restructuring: On April 2, 2002, the Company consolidated a $30 million revolving credit facility and $25 million in variable rate demand bonds into a single $44 million term loan maturing in 2004.
• Cash Flow: Net cash used by operating activities was $1.3 million, compared to $2.8 million provided by operating activities in the prior year, largely due to increased paid expenses and changes in reinsurance funds.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management expects to remain in compliance with debt covenants for the remainder of 2002. The Company anticipates meeting liquidity requirements through subsidiary dividends, tax-sharing payments, and potential refinancing of the term loan at maturity.
• Underwriting Trends:
  • American Southern: Gross written premiums increased 3.9% year-to-date. Loss ratio increased slightly to 72.8%.
  • Association Casualty: Gross written premiums decreased 24.1% due to the non-renewal of non-profitable classes. However, the loss ratio improved significantly to 70.7% from 86.7%.
  • Georgia Casualty: Gross written premiums increased 36.5%. Loss ratio improved to 66.4%.
  • Bankers Fidelity: Premiums increased 8.9%, driven by Medicare supplement growth and rate increases.
• Material Contingency: A subsidiary, American Southern, is involved in litigation regarding a contract renewal that accounts for approximately 10% of the Company's annualized premium revenue. An unfavorable outcome could have a material adverse effect on operations.
• Market Risks: The Company is exposed to interest rate risk affecting investment yields and fair values, as well as equity price risk. No material changes in market risk were reported since December 31, 2001.

Investor Verification Checklist

• Goodwill Impairment: Verify the sustainability of operations excluding the $15.8 million non-cash goodwill charge.
• Contract Litigation: Monitor the status of the American Southern contract dispute representing ~10% of annualized premiums.
• Debt Covenants: Confirm continued compliance with the new term loan covenants regarding funded debt to total capitalization and interest coverage.
• Reinsurance Receivables: Assess the collectibility of reinsurance receivables, which comprise 13% of total assets.
• Preferred Stock Dividends: Note the accrued but unpaid dividends on Series B Preferred Stock totaling $7.8 million as of June 30, 2002.