Atlantic American Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in millions of dollars unless stated otherwise. Atlantic American is an insurance holding company operating property and casualty insurance through American Southern and life and health insurance through Bankers Fidelity.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / prior period |
|---|---|---|
| Total revenue | $39.4 | $55.0 |
| Net premiums | $45.6 | $44.8 |
| Net investment income | $2.0 | $2.3 |
| Realized investment gains | $0.2 | $1.4 |
| Unrealized equity-security gains (losses) | $(8.5) | $6.5 |
| Income (loss) before tax | $(10.2) | $5.3 |
| Net income (loss) | $(8.1) | $4.2 |
| Net income (loss) applicable to common shareholders | $(8.2); $(0.40) per diluted share | $4.1; $0.19 per diluted share |
| Operating loss, company-defined non-GAAP | $(2.0) | $(2.6) |
| Net cash used in operating activities | $(10.5) | $(6.9) |
| Cash and cash equivalents | $8.3 | $12.9 at Dec. 31, 2019 |
| Total assets / total shareholders’ equity | $347.9 / $101.5 | $377.6 / $118.4 at Dec. 31, 2019 |
| Junior subordinated debentures, net | $33.7 | $33.7 at Dec. 31, 2019 |
The filing does not present a consolidated gross margin. American Southern reported a 96.2% combined ratio (96.0% in Q1 2019), indicating underwriting income; Bankers Fidelity’s ratio was 109.9% (112.6% in Q1 2019), indicating an underwriting loss. Consolidated loss includes substantial market-value effects on equity investments. The company’s non-GAAP operating loss excludes taxes and realized and unrealized investment gains or losses.
Material changes and operating drivers
- Total revenue fell 28.4%, largely because equity securities swung from $6.5 million of unrealized gains to $8.5 million of unrealized losses, and realized gains declined. Net premiums increased 1.7%.
- American Southern net earned premiums rose 8.1% to $14.9 million, primarily from automobile physical damage business. Underwriting income was $0.6 million; its loss ratio improved to 63.9%, while its expense ratio rose to 32.3%.
- Bankers Fidelity net earned premiums declined 1.1% to $30.6 million. Benefits and losses decreased 8.4%, mainly reflecting favorable Medicare supplement loss experience; the expense ratio increased to 31.4%, partly because DAC amortization exceeded additions. Its underwriting loss narrowed to $3.0 million.
- Bankers Fidelity reported a $8.8 million pretax loss versus a $0.5 million loss in Q1 2019. The filing’s segment results show the change was concentrated in this unit and corporate and other activities.
- Shareholders’ equity decreased $16.9 million from year-end, reflecting the net loss and $8.8 million of after-tax other comprehensive losses, principally unrealized losses on available-for-sale fixed maturities. Total investments declined to $241.2 million from $268.6 million.
Liquidity, debt, risks and outlook
- Operating cash outflow was $10.5 million, partially offset by $6.0 million of net cash from investment sales and maturities exceeding purchases. Management attributed the cash decline primarily to operating cash use.
- The parent had approximately $4.5 million of unrestricted cash and investments. Insurance subsidiaries had statutory surplus of $42.0 million at American Southern and $27.5 million at Bankers Fidelity. Subsidiary dividends are subject to regulatory limits; more than $4.6 million of 2020 dividends would require prior approval. The parent received $0.9 million in subsidiary dividends through March 31.
- Debt consists of $33.7 million of junior subordinated debentures, with maturities in 2032 and 2033 and floating rates of LIBOR plus 4.00%–4.10%; the reported effective rate was 5.56%. The company had not elected to defer interest. The instruments permit deferral subject to restrictions, including limits on common dividends and certain debt payments.
- COVID-19 affected operations and markets in March. Management said it could not reliably estimate future effects, did not then expect a significant decline in liquidity or operating results, and considered market-value declines temporary. It identified possible weaker premium sales and retention, investment losses and, particularly for life and health, higher claims; subsequent pandemic effects could be material and uncertain.
- At March 31, fixed maturities had $8.1 million of gross unrealized losses, versus $0.3 million at year-end. The company reported no other-than-temporary impairment charges and said it did not intend or expect to need to sell securities in unrealized-loss positions.
- The filing provides no numerical earnings or revenue guidance. Management said it believed existing cash, expected subsidiary dividends and tax-sharing payments, and potential additional borrowing would meet liquidity needs for the foreseeable future.
- Ordinary-course claims and lawsuits were not expected by management to materially affect financial condition or results. The company also disclosed $2.0 million of unfunded investment commitments and $5.5 million of operating lease liabilities.
Important facts for investors to verify
- Whether subsequent COVID-19 impacts on investment valuations, premium collections and renewals, and life and health claims differ materially from management’s Q1 expectations.
- Whether the reported fixed-maturity losses remain temporary, and how much of the portfolio’s valuation decline is exposed to credit deterioration or forced sales.
- Whether Bankers Fidelity can sustain favorable claims experience and address Medicare supplement non-renewals and elevated acquisition expense.
- How operating cash use, parent unrestricted liquidity, statutory capital, and regulatory limits on subsidiary dividends evolve.
- The effect of LIBOR-linked debt and any benchmark transition on interest expense and debt servicing.