AAME

Atlantic American Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2009)

Business Context and Reporting Period

Atlantic American Corporation is a holding company operating through two primary insurance subsidiaries: American Southern Insurance Company (Property and Casualty) and Bankers Fidelity Life Insurance Company (Life and Health). The Company focuses on well-defined specialty markets, including commercial automobile, general liability, surety bonds, Medicare supplement, and small face-amount life insurance. The reporting period covers the fiscal year ended December 31, 2009. The Company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Improvement: The net loss narrowed significantly from $3.9 million in 2008 to $1.2 million in 2009. This improvement was primarily driven by the absence of a $4.0 million realized investment loss (impairment charge) recorded in 2008 and the absence of a $3.4 million loss from discontinued operations (sale of regional P&C units) in 2009.
• Deferred Tax Impact: The 2009 net loss was largely attributable to a $2.0 million increase in the deferred tax asset valuation allowance due to a reassessment of the realizability of capital loss carryforwards.
• Revenue Growth: Total revenue increased 3.0% to $102.7 million. Premium revenue remained relatively flat at $91.5 million, with growth in Life and Health premiums offsetting a decline in Property and Casualty premiums.
• Underwriting Performance: American Southern's combined ratio worsened to 100.3% (from 95.6%) due to several large commercial automobile claims, resulting in an underwriting loss of $90,000 compared to a profit of $1.6 million in 2008. Bankers Fidelity reported an underwriting loss of $2.9 million, an increase from $2.3 million in 2008, driven by higher medical costs.
• Investment Income: Net investment income decreased 9.5% to $10.6 million due to called securities that could not be reinvested at equivalent rates and lower yields on short-term investments.

Guidance, Outlook, and Risks

• Outlook: Management does not provide specific forward-looking financial guidance. The Company expects to meet liquidity needs through dividends and tax-sharing payments from subsidiaries, existing cash balances, and its revolving credit facility (which had no outstanding balance in 2009).
• Dividend Policy: The Company does not anticipate paying cash dividends on common stock in the foreseeable future, preferring to retain earnings for business growth.
• Key Risks:
  • Reserve Adequacy: Significant judgment is required in estimating loss reserves. Revisions could materially affect financial results. The range of estimates for P&C reserves indicated potential variances of up to 20.7% lower or 7.3% higher.
  • Investment Volatility: The portfolio is subject to market fluctuations. The Company holds significant unrealized losses in fixed maturity and equity securities, primarily in financial services and media sectors.
  • Reinsurance Counterparty Risk: Approximately 88% of reinsurance receivables were due from a single reinsurer (Swiss Re).
  • Regulatory Capital: Subsidiaries must maintain minimum risk-based capital levels and statutory surplus to operate and pay dividends.
• Unusual Items: A $0.4 million non-recurring charge was recorded in 2009 for the termination of a supplemental executive retirement plan (SERP). In 2008, a $0.7 million discretionary bonus and a $0.3 million goodwill impairment were recorded.

Investor Verification Checklist

• Deferred Tax Valuation Allowance: Verify the assumptions regarding the realizability of capital loss carryforwards that led to the $2.0 million increase in the valuation allowance.
• Loss Reserve Development: Review the $6.7 million favorable loss development (redundancy) in 2009 for American Southern and assess the sustainability of this trend given the increased loss ratio.
• Investment Portfolio Quality: Examine the composition of the $9.9 million in gross unrealized losses, specifically the exposure to financial services and media sectors, and the intent to hold these securities to recovery.
• Liquidity Constraints: Confirm the ability of subsidiaries to pay dividends to the Parent, noting the statutory limitations (greater of 10% of surplus or net income) and the Parent's reliance on these funds for debt service.
• Reinsurance Concentration: Assess the risk exposure related to the concentration of reinsurance receivables with Swiss Re.