Atlantic American Corporation — Q2 2018 Form 10-Q
Business context and reporting period
Insurance holding company with two principal businesses: American Southern (property and casualty) and Bankers Fidelity (life and health). This filing covers the quarter and six months ended June 30, 2018; financial amounts below are in millions of dollars unless noted.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Insurance premiums | $42.8 | $40.1 | $85.0 | $80.9 |
| Total revenue | $49.4 | $43.6 | $90.0 | $87.5 |
| Net income (loss) | $3.2 | $1.5 | $(1.8) | $1.2 |
| Net income (loss) applicable to common shareholders | $3.1 | $1.4 | $(2.0) | $1.0 |
| Basic and diluted EPS | $0.15 | $0.07 | $(0.10) | $0.05 |
| Operating income (loss), company-defined non-GAAP | $0.001 | $0.789 | $(2.301) | $(0.441) |
Q2 revenue included a $4.1 million unrealized gain on equity securities; the six-month period included a $0.3 million unrealized loss. Excluding realized investment gains or losses, unrealized equity gains or losses, and income taxes, operating results weakened: management attributed this mainly to unfavorable claims experience in both business units. Investment income increased 21.7% in Q2 and 15.4% year to date, largely reflecting real-estate partnership earnings.
- American Southern: Q2 net earned premiums were $13.5 million, up 3.1%; underwriting income was $0.8 million versus $1.0 million. Its combined ratio rose to 93.9% from 92.3% (below 100% indicates underwriting profit). Year-to-date combined ratio was 96.3% versus 92.5%. Higher auto claim frequency and severity drove loss-ratio deterioration; written premiums declined, principally from surety competition and, year to date, a non-renewed agency.
- Bankers Fidelity: Q2 earned premiums were $29.3 million, up 8.6%, primarily from Medicare supplement growth. Underwriting loss widened to $2.1 million from $0.9 million, and the combined ratio rose to 107.1% from 103.5%. Year-to-date combined ratio was 108.9% versus 106.6%, reflecting higher-than-expected Medicare supplement claims. Reinsurance expense reimbursement and premium growth helped lower the expense ratio.
Financial position, cash flow and debt
- At June 30, total assets were $341.7 million, total liabilities $240.0 million and shareholders’ equity $101.7 million, compared with $343.2 million, $230.3 million and $113.0 million, respectively, at December 31, 2017. Equity declined in part because of $8.5 million of after-tax other comprehensive loss, mainly reflecting fixed-maturity valuation declines.
- Consolidated cash and cash equivalents fell to $7.5 million from $24.5 million. Six-month operating cash use was $6.4 million; investing cash use was $9.7 million; financing cash use was $0.9 million. Investment purchases exceeded sales and maturities by about $9.5 million. The company paid $0.4 million in common dividends and repurchased $0.6 million of stock.
- Parent-level unrestricted cash and investments were approximately $17.7 million. Insurance-subsidiary assets are subject to regulatory limits; more than 90% of their invested assets were marketable securities, but their use is constrained by state rules.
- Junior subordinated debentures, net, were $33.7 million, with maturities in 2032 and 2033 and floating coupons of LIBOR plus 4.00% and 4.10%. Their effective rate was 6.39% at June 30; interest expense increased as LIBOR rose. The company had not elected to defer interest payments.
- Insurance reserves and policyholder funds increased to $191.4 million from $173.6 million. Fixed maturities had $11.0 million of gross unrealized losses at June 30 versus $3.9 million at year-end; management attributed the increase primarily to rising interest rates and classified the securities as temporarily impaired.
Changes, outlook, risks and unusual items
- Premiums rose 6.8% in Q2 and 5.1% year to date, chiefly from Medicare supplement growth. Benefits and losses increased faster than premiums, contributing to weaker operating results.
- Effective January 1, 2018, new equity-security accounting rules moved fair-value changes into net income. The company recorded a $9.8 million after-tax cumulative-effect increase to retained earnings at adoption. This accounting change makes reported earnings more exposed to equity-market movements and affects comparability with 2017.
- Management said existing cash, expected subsidiary dividends, fees and tax-sharing payments, and potential additional borrowings should meet liquidity needs for the foreseeable future. It expects subsidiary invested assets and cash inflows to support policy liabilities and operating needs. No specific earnings or revenue guidance was provided.
- Subsidiary statutory results were a $1.0 million loss for the first half, versus $0.5 million income in 2017. The parent received $2.4 million of subsidiary dividends; 2018 subsidiary dividends exceeding $4.8 million require prior regulatory approval.
- The company is subject to ordinary-course claims and lawsuits; management did not expect known matters to materially affect financial condition or results. Other principal risks include claims frequency and severity, reserve-estimation uncertainty, reinsurance recoverability, investment-market and interest-rate movements, and limits on transferring subsidiary capital. Forward-looking statements are subject to risks and actual results may differ materially.
- Disclosure controls were judged effective at period end; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Medicare supplement claims experience improves and whether premium growth can translate into underwriting profitability.
- Auto claims trends, surety competition, and the sustainability of American Southern’s underwriting results.
- How much of the first-half net loss reflects core underwriting and operations versus investment valuation changes and other non-core items.
- Liquidity at the parent versus consolidated cash, subsidiary dividend restrictions, and the cash required for claims, debt service and repurchases.
- Fixed-maturity unrealized losses, interest-rate and credit exposure, and the assumptions supporting the temporary-impairment conclusion.
- Floating-rate debenture costs, statutory capital levels, and the effect of reinsurance arrangements on claims and expenses.