AAME

Business Context and Reporting Period

Company: Atlantic American Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 1999
Business Overview: The Company operates through three primary insurance subsidiaries: Georgia Casualty & Surety Company, American Southern Insurance Company (including American Safety), and Bankers Fidelity Life Insurance Company. The Company also provides administrative services and operates Self-Insurance Administrators, Inc.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income decreased 63.8% in Q2 1999 compared to Q2 1998 ($0.65M vs $1.80M). Year-to-date net income fell 38.1% ($2.10M vs $3.40M).
• Revenue Growth: Total revenue increased 7.5% in Q2 and 5.3% YTD, driven primarily by a 6.6% increase in insurance premiums for the quarter.
• Losses and Claims: Insurance benefits and losses incurred rose 18.8% in Q2 and 11.7% YTD. This was largely due to adverse results from two specific underwriting programs at Georgia Casualty (short-haul truckers and poultry houses) and an abnormally high number of life claims at Bankers Fidelity.
• Segment Performance:
  • Georgia Casualty: Premiums declined 14.0% YTD due to the termination of the two underwriting programs. Loss ratio increased to 78.5% YTD.
  • American Southern: Premiums increased 9.9% in Q2, driven by a new joint venture with Carolina's Auto Club. Loss ratio increased to 72.4% YTD.
  • Bankers Fidelity: Premiums increased 17.7% YTD. Losses increased 28.8% YTD due to volume and high life claims.
• Investment Portfolio: The Company shifted funds from short-term investments to longer-term bonds, increasing the bond portfolio by approximately $10.0 million. Realized investment gains increased to $1.48M YTD from $0.91M in the prior year.

Guidance, Outlook, Risks, and Unusual Items

• Management Actions: Georgia Casualty has ceased writing new business in the two underperforming programs and is eliminating insureds failing loss control standards. Management expects it will take several quarters to run off this business.
• Debt Restructuring: On June 24, 1999, the Company issued $25.0 million in Taxable Variable Rate Demand Bonds (maturing 2009) to replace an existing bank facility. The effective cost is LIBOR plus 180 basis points.
• Subsequent Acquisition: On July 1, 1999, the Company acquired Association Casualty Insurance Company and Association Risk Management General Agency, Inc. for $32.5 million (cash and stock), funded partly by a new $30.0 million revolving credit facility.
• Year 2000 Compliance: The Company has spent less than $75,000 in the first half of 1999 on Y2K remediation and estimates less than $100,000 for the remainder of the year. Management believes systems are compliant but notes uncertainty regarding third-party vendors.
• Liquidity: Cash and short-term investments decreased to $23.7M from $32.4M at year-end 1998. The Company maintains a $39.0M tax loss carryforward but has a full valuation allowance against it due to uncertainty of realization.
• Preferred Stock: $3.0 million in dividends on Series B Preferred Stock were accrued but unpaid as of June 30, 1999.

Investor Verification Checklist

• Run-off Timeline: Verify the duration and cost impact of running off the terminated Georgia Casualty underwriting programs.
• Life Claims Trend: Confirm if the "abnormally high" life claims at Bankers Fidelity have returned to historical levels in subsequent quarters.
• Acquisition Integration: Assess the financial impact and integration progress of the July 1, 1999 acquisition of Association Casualty.
• Debt Servicing: Monitor the impact of the new variable rate debt structure on interest expense as LIBOR fluctuates.
• Dividend Policy: Review the status of the $3.0 million accrued but unpaid preferred stock dividends and the Company's ability to pay them.