Atlantic American Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparative periods ended September 30, 2020. Amounts are in millions of dollars except per-share data and ratios. Atlantic American is an insurance holding company operating through property and casualty insurer American Southern and life and health insurer Bankers Fidelity.
Financial results and condition
- Q3 revenue and earnings: Revenue was $49.3 million, up 6.5% year over year. Net loss was $0.9 million, or $(0.05) per diluted share, versus net income of $1.9 million, or $0.09 per diluted share. The pre-tax loss was $1.3 million; the quarter included a $0.4 million income tax benefit.
- Nine-month results: Revenue was $149.8 million, up 10.6%. Net income was $1.6 million, or $0.06 per diluted share, compared with $0.3 million and approximately breakeven per share in 2020. Net income included $5.5 million of unrealized gains on equity securities, versus $7.8 million of unrealized losses in the prior-year period.
- Core operating measure: The company’s non-GAAP operating loss, which excludes taxes and realized and unrealized investment gains or losses, was $2.4 million in Q3 versus operating income of $3.0 million; for nine months it was a $4.1 million loss versus $7.9 million of income.
- Premiums and underwriting: Consolidated net insurance premiums were $46.1 million in Q3, up 2.5%, and $137.3 million for nine months, up 0.2%. American Southern’s combined ratio was 95.4% for both Q3 and nine months (93.4% and 94.3% in 2020). Bankers Fidelity’s combined ratio rose to 112.4% in Q3 and 108.1% for nine months (93.1% and 94.7% in 2020), reflecting increased claims and expenses.
- Cash flow: Operating activities used $9.6 million in the first nine months, compared with $0.9 million used in 2020. Investing activities provided $5.1 million; financing activities used $0.6 million. Cash declined to $14.3 million from $19.3 million at year-end 2020.
- Balance sheet and liquidity: Total assets were $404.1 million and shareholders’ equity was $140.0 million at September 30, versus $405.2 million and $145.1 million at year-end. Insurance reserves and policyholder funds were $205.8 million, including $87.2 million of losses and claims. Parent-level unrestricted cash and investments were approximately $3.7 million.
- Debt and available credit: Junior subordinated debentures, net, were $33.7 million, with maturities in 2032 and 2033 and a variable LIBOR-based rate. No borrowing was outstanding under the new $10 million revolving credit facility, which matures in April 2024. The facility includes a maximum debt-to-capital ratio covenant of 35%.
- Investments: Fixed maturities had a fair value of $257.0 million and equity securities $22.7 million. Accumulated other comprehensive income fell to $19.0 million from $25.0 million, mainly reflecting fixed-maturity valuation changes. No other-than-temporary impairment charges were recorded.
Material changes and management commentary
- Management attributed weaker operating performance primarily to higher Medicare supplement claims at Bankers Fidelity as utilization returned toward historical levels after unusually low use during the pandemic. Medicare supplement premiums also declined as policy non-renewals exceeded new business.
- American Southern premiums grew, particularly in automobile physical damage and general liability, but its loss ratio worsened because of increased auto physical-damage claim frequency and higher auto-liability costs.
- Management reported that nine-month subsidiary statutory net income fell to $0.8 million from $8.5 million. It stated that subsidiary dividends, fees and tax-sharing payments, existing cash, and available financing should meet liquidity needs for the foreseeable future. Insurance-subsidiary dividends are subject to statutory restrictions; payments above $9.6 million in 2021 required prior approval, and $6.9 million had been received through September 30.
- The company provided no quantified earnings or revenue guidance. It said COVID-19’s future effects remain uncertain, but did not then expect a significant decline in liquidity or operating results from pandemic disruption. It warned that economic weakness could reduce new sales and retention, and that market volatility had affected investment values.
Risks, contingencies, and unusual items
- Insurance reserve estimates are subject to uncertainty. Nine-month prior-year reserve development was unfavorable by $0.7 million, primarily due to Medicare supplement claims, partly offset by favorable property and casualty development; the prior-year period had $2.7 million of favorable development.
- Rising interest rates contributed to more fixed-maturity securities being in unrealized loss positions: 30 securities at September 30, 2021 versus 20 at year-end 2020. Management considered these losses temporary and said it did not intend or expect to be required to sell the securities.
- COVID-19 may affect premium collection, renewals, claims, and investment markets. Management noted the duration and ultimate effects could not be reliably estimated.
- The company is involved in ordinary-course claims and lawsuits; management did not expect known matters to materially affect financial condition or results. It also had $2.0 million of investment funding commitments associated with unconsolidated entities.
- The Series D preferred stock, held by an affiliate of the controlling shareholder, accrues cumulative dividends; $0.3 million was accrued but unpaid at September 30. The preferred stock was not then convertible.
Important facts for investors to verify
- Whether elevated Medicare supplement claims and the 108.1% nine-month Bankers Fidelity combined ratio persist, and whether premium retention improves.
- Whether American Southern’s growth can offset increased auto claims and costs while maintaining underwriting profitability.
- How much reported earnings depend on equity-security fair-value changes, and how investment marks respond to interest rates and market conditions.
- Whether operating cash use, parent-level liquidity, statutory capital, and restricted subsidiary dividend capacity remain adequate.
- The terms and LIBOR exposure of the subordinated debentures, the new revolver covenant headroom, and the funding demands of investment commitments.