Atlantic American Corporation — Q1 2017 Form 10-Q
Business and period: Insurance holding company with property-and-casualty operations through American Southern and life-and-health operations through Bankers Fidelity. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Amounts below are in millions of dollars unless otherwise stated.
Financial results and position
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Total revenue | $43.86 | $41.75, up 5.1% |
| Insurance premiums | $40.78 | $38.46, up 6.0% |
| Investment income | $2.16 | $2.51, down 13.9% |
| Net realized investment gains | $0.88 | $0.75 |
| Benefits and losses incurred | $30.00 | $24.83 |
| Net income (loss) | $(0.22) | $0.90 |
| Net income (loss) applicable to common shareholders | $(0.32); $(0.02) per share | $0.80; $0.04 per share |
| Operating income (loss), company-defined non-GAAP | $(1.23) | $0.62 |
| Net cash used in operating activities | $(6.15) | $(6.96) |
Balance sheet at March 31, 2017: Total assets were $312.9 million, total investments $244.4 million, cash and cash equivalents $10.7 million, total liabilities $205.9 million, and shareholders’ equity $107.0 million. Junior subordinated debentures were $33.7 million, with floating-rate coupons tied to LIBOR; the reported effective rate was 5.12%. The filing reports $21.8 million of unrestricted cash and investments at the Parent, distinct from consolidated cash.
Cash flow and liquidity: Cash declined $2.6 million during the quarter. Investing activities provided $3.7 million, as sales and maturities exceeded purchases; financing activities used $0.1 million, including treasury-share repurchases. Management said existing cash, subsidiary dividends, fees and tax-sharing payments, and potential additional borrowing should meet liquidity needs for the foreseeable future. Insurance subsidiary investments are subject to state regulatory restrictions.
Margins and segments: American Southern reported $14.3 million of revenue and $2.15 million of pretax income, versus $14.8 million and $2.23 million. Its combined ratio was 92.8%, compared with 91.7% (below 100% indicates underwriting profit). Bankers Fidelity reported $29.5 million of revenue and a pretax loss of $0.84 million, versus $26.8 million and pretax income of $1.00 million. Its combined ratio rose to 109.7% from 104.5%, indicating underwriting losses in both periods.
Material changes and management commentary
- Premium growth was driven chiefly by Bankers Fidelity Medicare supplement business. Medicare supplement earned premiums increased 14.1%; the company ceded approximately $3.9 million of those premiums under a reinsurance agreement entered into in Q4 2016.
- Consolidated earnings deteriorated despite higher revenue. Management attributed the decline in operating income primarily to adverse life-and-health loss experience and lower investment income, including a $0.2 million loss from equity in earnings of real estate partnerships.
- Bankers Fidelity benefits and losses increased 28.4%; its loss ratio rose to 78.4% from 68.4%. Management cited increased mortality and morbidity beginning in late 2016 and continuing through the quarter, particularly in Medicare supplement.
- American Southern net earned premiums declined 4.6%, but underwriting income remained positive at $0.94 million. Its loss ratio worsened to 63.3% from 57.7%, partly because prior-year surety recoveries and favorable general-liability experience did not recur; lower expenses partly offset the increase.
- Investment income fell as fixed-maturity yields declined and real-estate partnership results weakened. Realized gains were $0.88 million, primarily from fixed-maturity sales. Total net unrealized investment gains were $12.3 million at quarter-end, up from $9.0 million at year-end.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management stated that Q1 results are not necessarily indicative of full-year results and expressed confidence in liquidity for the foreseeable future.
- Investment risks include interest-rate and issuer-credit changes. At March 31, 71 securities were in unrealized-loss positions, with $5.21 million of gross unrealized losses; $2.53 million related to securities in loss positions for at least 12 months. The company considered these losses temporary and said it did not intend, or expect to be required, to sell the securities before recovery. Some losses involved oil-and-gas issuers, including credit downgrades or reviews.
- Prior-year reserve development included $0.52 million of favorable development for property-and-casualty products, but $0.24 million of unfavorable development for Medicare supplement and $0.65 million for other life-and-health products. The latter was attributed primarily to poor morbidity and mortality, including elevated influenza activity.
- The $33.7 million of debentures carry LIBOR-based rates and are unsecured and subordinated. The company may defer interest payments under specified terms, but had not elected to do so. Subsidiary dividends are subject to statutory limits; dividends exceeding $5.7 million in 2017 would require prior approval. The Parent received $1.2 million in subsidiary dividends through March 31.
- Management said ordinary-course claims and lawsuits were not expected to materially affect financial condition or results. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Bankers Fidelity’s elevated mortality and morbidity and Medicare supplement loss ratio persist, and how they affect underwriting results and reserves.
- Whether the reinsurance arrangement continues to support Medicare supplement growth and statutory capital while limiting expenses and risk as intended.
- The quality and recoverability of unpaid-loss reserves, reinsurance recoverables, and the temporarily impaired investment portfolio, particularly oil-and-gas exposures.
- Parent-level liquidity, statutory limits on subsidiary dividends, and the cost and servicing of LIBOR-linked subordinated debt.
- The sustainability of investment income and the extent to which results depend on realized investment gains, which management excludes from its non-GAAP operating-income measure.