AAME

Business Context and Reporting Period

Company: Atlantic American Corporation (Georgia)

Filing Type: Form 10-K (Annual Report)

Period Ended: December 31, 2003

Business Overview: Atlantic American is an insurance holding company operating through four principal subsidiaries in specialty markets: American Southern (fleet and personal auto), Association Casualty (Texas-based commercial lines), Georgia Casualty (Southeastern commercial lines), and Bankers Fidelity (Life and Health, focusing on senior markets). The company's strategy involves focusing on well-defined geographic and product niches with autonomous underwriting functions.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Reversal: The company returned to profitability in 2003 with net income of $6.8 million, compared to a net loss of $12.2 million in 2002. The 2002 loss was primarily driven by a non-cash charge of $15.8 million related to the adoption of SFAS No. 142 (Goodwill impairment).
• Revenue Growth: Total revenue increased slightly by 0.8% to $171.6 million. This was driven by a 11.5% increase in investment income and stable premium revenue, despite the loss of a major contract at American Southern.
• Underwriting Performance:
  • American Southern: Achieved a combined ratio of 92.0% (profitable), down from 94.5% in 2002, due to improved loss ratios following the termination of a large, loss-prone account.
  • Association Casualty: Improved combined ratio to 114.9% from 118.0%, though still operating at an underwriting loss.
  • Georgia Casualty: Improved combined ratio to 106.1% from 111.9%.
  • Bankers Fidelity: Continued profitable operations with a combined ratio of 100.6% (benefits and expenses vs. premiums).
• Debt Structure: Total debt increased to $56.2 million. The company issued $41.2 million in junior subordinated debentures (trust preferred securities) in 2003, using proceeds to pay down a term loan, which reduced the bank loan balance to $15.0 million.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes the 2003 improvement to better operating performance across all subsidiaries and favorable tax benefits (reduction in valuation allowance and recognition of alternative minimum tax credits). The company continues to focus on disciplined underwriting and rate increases to mitigate adverse loss development.
• Key Risks:
  • Reserve Adequacy: Unpaid loss and loss adjustment expenses comprise 42% of liabilities. Estimates are subject to significant judgment, and adverse development on prior years' losses (specifically 1999 and 2000 for Georgia Casualty) impacted results.
  • Reinsurance Concentration: Approximately 90% of reinsurance receivables were due from four reinsurers. A.M. Best downgraded PMA Capital Insurance Company (PMA Re) to "B++" in late 2003, and PMA Re announced an exit from the reinsurance business, creating uncertainty regarding future recoveries.
  • Interest Rate Risk: The company is exposed to interest rate fluctuations affecting investment income and the fair value of its fixed maturity portfolio. A 100 basis point increase in LIBOR would increase interest expense by approximately $0.4 million.
  • Regulatory Assessments: The company faces increasing assessments for state guaranty funds and second injury trust funds, which impacted expenses in prior years.
• Dividends: The company does not anticipate paying cash dividends on common stock in the foreseeable future, electing to retain earnings for business growth.

Investor Verification Checklist

• Reinsurance Exposure: Verify the current status of PMA Re and the collectibility of the $10.6 million receivable due from them following their rating downgrade and exit announcement.
• Loss Reserve Development: Review the "Loss and Claim Reserves" table (Note 3) to assess the trend of prior-year loss development, particularly for Georgia Casualty and Association Casualty.
• Debt Covenants: Confirm compliance with debt covenants related to funded debt to capitalization ratios and minimum risk-based capital levels, especially given the recent debt restructuring.
• Goodwill Impairment: Note that the 2002 loss included a one-time $15.8 million goodwill impairment; verify that no further impairments are indicated in the current period.
• Preferred Stock Obligations: Review the accrued but unpaid dividends on Series B Preferred Stock ($9.6 million) and the redemption status of Series C Preferred Stock.