Atlantic American Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Dollar amounts below are in millions unless stated otherwise. Atlantic American is an insurance holding company operating through American Southern (property and casualty) and Bankers Fidelity (life and health).
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net premiums | $47.1 | $45.1 | $94.1 | $91.2 |
| Total revenue | $44.7 | $51.5 | $96.3 | $100.5 |
| Net income (loss) | $(1.7) | $3.0 | $1.2 | $2.5 |
| Net income (loss) applicable to common shareholders | $(1.8) | $2.9 | $1.0 | $2.3 |
| Diluted earnings (loss) per share | $(0.09) | $0.14 | $0.05 | $0.11 |
| Non-GAAP operating income (loss) | $2.8 | $(0.3) | $4.4 | $(1.7) |
Q2's GAAP loss reflected a $4.9 million unrealized loss on equity securities, compared with a $4.0 million gain a year earlier. First-half equity-security marks were a $2.7 million loss versus a $4.7 million gain. Net investment income increased 11.2% to $4.9 million in the first half; realized investment results were a $0.1 million loss versus a $0.2 million gain.
First-half operating cash flow was negative $4.4 million, compared with negative $13.9 million in 2021. Investing cash flow was negative $5.0 million, while financing cash flow was positive $0.6 million, including $1.0 million drawn on the revolving facility. Cash declined to $15.9 million from $24.8 million at year-end 2021. Total assets were $379.3 million and shareholders’ equity $109.1 million at June 30, 2022.
Investments totaled $243.9 million, including $219.3 million of available-for-sale fixed maturities and $16.5 million of equity securities. Fixed-maturity fair value was down from $261.0 million at year-end; accumulated other comprehensive income moved from $17.7 million to a loss of $15.1 million, reflecting substantial interest-rate-related valuation declines. The company reported $20.6 million of gross unrealized losses on fixed maturities and no other-than-temporary impairment charges.
Insurance reserves and policyholder funds totaled $211.9 million. Debt included $1.0 million outstanding under a $10 million revolving facility and $33.7 million of junior subordinated debentures, net. The debentures’ effective interest rate was 5.56%; the revolver matures in April 2024 and has a debt-to-capital covenant. Parent unrestricted cash and investments were approximately $4.4 million; insurance-subsidiary assets are subject to regulatory limits on use and distributions.
Changes versus comparable periods
- Premium revenue rose 4.3% in Q2 and 3.2% in the first half, led by automobile lines and growth in life premiums. Medicare supplement premiums declined.
- American Southern’s first-half net earned premiums rose 9.5%, but its combined ratio worsened to 97.6% from 95.4%; Q2’s ratio was 100.2% versus 94.4%, as automobile liability loss severity increased.
- Bankers Fidelity’s first-half net earned premiums were nearly flat, while its combined ratio improved to 95.7% from 105.9%. Improved Medicare supplement and group-line loss experience and lower expense ratios contributed to the improvement.
- Management-reported non-GAAP operating income improved by $3.1 million for Q2 and $6.1 million for the first half, primarily due to more favorable life and health loss experience. This measure excludes income taxes and realized and unrealized investment gains or losses.
- Prior-year reserve development was favorable by $3.2 million in the first half of 2022, versus unfavorable development of $0.6 million in 2021.
Outlook, risks, contingencies and notable items
The filing provides no quantified earnings or revenue guidance. Management said it expects cash balances, subsidiary dividends, fees and tax-sharing payments, and available borrowing sources to meet liquidity needs for the foreseeable future. It also stated that subsidiary invested assets and expected cash inflows should be sufficient for policy liabilities and operating needs, while noting that insurance assets are regulated.
Key exposures include claims frequency and severity, reserve-estimation uncertainty, investment-market and interest-rate movements, and the transition away from LIBOR. Rising rates contributed to losses on fixed maturities; 227 securities were in an unrealized loss position at June 30, compared with 61 at year-end. Management said it did not intend, and did not expect to be required, to sell those securities before recovery. The company also had $5.9 million of unfunded investment commitments to VIE-related investments.
The company agreed to a consent order concerning alleged violations relating to certain insurance policy sales; the associated penalty was recorded in March 2022, but the filing text does not provide a clear amount. Management does not expect known ordinary-course litigation to materially affect financial condition or results. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether American Southern’s elevated automobile liability loss severity and Q2 combined ratio above 100% persist.
- Whether Bankers Fidelity’s improved loss experience offsets continued Medicare supplement policy attrition.
- How interest-rate and equity-market movements affect investment values, accumulated other comprehensive income, capital, and reported earnings; assess the company’s ability to hold impaired fixed maturities.
- Cash generation and parent-level liquidity, including restricted access to insurance-subsidiary assets, dividend capacity, and the $1.0 million revolver borrowing and covenant headroom.
- The final cost and any continuing obligations arising from the regulatory consent order, and the timing and funding of the $5.9 million investment commitments.