Business Context and Reporting Period
Company: Atlantic American Corporation
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Business Overview: An insurance holding company operating through three principal business units: Regional Property and Casualty, American Southern, and Bankers Fidelity (Life and Health). The company focuses on specific geographic regions and product lines, managing each unit independently.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|
| Total Revenue | $40,972 | $119,405 | $136,238 |
| Insurance Premiums | $33,891 | $102,872 | $116,492 |
| Net Income | $1,806 | $3,091 | $5,972 |
| Net Income Applicable to Common Stock | $1,377 | $1,827 | $5,067 |
| Diluted EPS | $0.06 | $0.08 | $0.22 |
| Cash and Cash Equivalents | $16,429 (Sep 30, 2007) | $27,294 (Dec 31, 2006) | |
| Total Assets | $450,056 (Sep 30, 2007) | $458,632 (Dec 31, 2006) | |
| Total Liabilities | $356,995 (Sep 30, 2007) | $364,444 (Dec 31, 2006) | |
| Bank Debt Payable | $12,750 | $12,750 | |
| Junior Subordinated Debentures | $41,238 | $41,238 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 6.0% for the three months and 12.4% for the nine months ended September 30, 2007, compared to the prior year. Insurance premiums dropped 9.6% (quarterly) and 11.7% (year-to-date), driven by increased pricing competition, non-renewal of targeted property classes, and the loss of a significant commercial automobile account at American Southern.
- Profitability Decrease: Net income applicable to common stock fell 43.4% for the quarter and 63.9% for the nine-month period. The nine-month decline was primarily due to a reduction in realized investment gains ($2.4 million in 2007 vs. $5.4 million in 2006) and adverse loss development in the Regional Property and Casualty segment.
- Underwriting Performance:
- Regional Property and Casualty: Combined ratio worsened to 132.7% (quarterly) and 122.0% (nine-month) due to adverse development on prior years' losses and increased claim frequency/severity.
- American Southern: Maintained a profitable combined ratio of 90.8% (quarterly) and 90.7% (nine-month), despite premium declines.
- Bankers Fidelity: Experienced a slight premium decline (2.0% quarterly) due to competition in the Medicare supplement market.
- Cash Flow: Net cash used in operating activities was $3.3 million for the nine months ended September 30, 2007, an improvement from the $7.9 million used in the prior year period. However, cash and short-term investments decreased from $27.3 million to $16.4 million due to lower premiums and increased investment purchases.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management notes that operating results for the interim periods are not necessarily indicative of full-year results. The company expects to meet liquidity requirements through subsidiary dividends, tax-sharing payments, and potential refinancing of the revolving credit facility maturing in 2010.
- Unusual Items:
- Subsequent Event: On October 5, 2007, the company sold 269,600 shares of Wachovia Corporation common stock, recognizing a gain of approximately $11.5 million.
- Non-Recurrence of Charges: The 2006 results included a $2.2 million windstorm assessment (Hurricane Katrina) and a $1.0 million second injury trust fund accrual, which did not recur in 2007, partially offsetting the decline in net income.
- Risks and Contingencies:
- Loss Reserves: Unpaid loss and loss adjustment expenses comprise 46% of total liabilities. Estimates involve significant judgment and could vary materially.
- Investment Risk: Investments comprise 71% of total assets. The company is exposed to interest rate and market risks, particularly regarding fixed maturities and equity securities.
- Debt Covenants: The company must maintain specific leverage ratios and tangible net worth levels under its credit agreement with Wachovia Bank.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the assumptions used for unpaid loss reserves, particularly given the adverse development noted in the Regional Property and Casualty segment.
- Premium Volume Trends: Monitor the impact of the lost significant commercial automobile account and pricing competition on future premium growth.
- Investment Portfolio: Review the composition of the investment portfolio and the impact of the recent $11.5 million gain on Wachovia stock on future earnings stability.
- Debt Maturity: Assess the company's ability to refinance the $12.75 million bank debt maturing in 2010 and the $41.2 million junior subordinated debentures.
- Preferred Stock Dividends: Note the accrued but unpaid dividends on Series B Preferred Stock totaling $14.2 million as of September 30, 2007.