Atlantic American Corporation — Q3 2023 Form 10-Q
Business context and period. The insurance holding company operates through American Southern (property and casualty) and Bankers Fidelity (life and health). This unaudited filing covers the three and nine months ended September 30, 2023, compared with the same 2022 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Revenue: Q3 total revenue was $44.6 million, down 3.8%; nine-month revenue was $140.0 million, down 1.8%. Net premiums were $43.7 million in Q3 and $135.9 million for nine months, down 5.7% and 3.3%, respectively.
- Profit: Q3 net income was $1.8 million versus a $0.7 million loss; income applicable to common shareholders was $1.7 million, or $0.08 per diluted share, versus a $0.8 million loss, or $(0.04) per share. Nine-month net income was $2.1 million versus $0.5 million; common-shareholder income was $1.8 million, or $0.09 per diluted share, versus $0.2 million, or $0.01 per share.
- Operating income (non-GAAP): $3.6 million in Q3 versus $1.7 million; $5.8 million for nine months versus $6.2 million. The filing defines this measure as net income excluding income taxes and realized and unrealized investment gains or losses.
- Cash flow: Nine-month operating cash flow was negative $3.5 million, investing cash flow negative $2.0 million, and financing cash flow positive $0.6 million. Cash declined $4.9 million to $23.9 million.
- Margins and underwriting: American Southern’s combined ratio was 97.9% in Q3 and 98.7% for nine months, versus 94.4% and 96.5%. Bankers Fidelity’s was 87.4% and 93.7%, versus 99.1% and 96.8%. Below 100% represents underwriting profit.
- Balance sheet and debt: Total assets were $361.6 million and shareholders’ equity $98.7 million at September 30. Revolver borrowings were $3.0 million under a $10 million facility maturing April 2024; junior subordinated debentures, net, were $33.7 million, due in 2032 and 2033. Their effective rate was 9.70%. Total liabilities were $262.9 million.
- Liquidity: Parent unrestricted cash and investments were approximately $4.8 million. Insurance subsidiaries reported statutory capital and surplus of $53.4 million (American Southern) and $37.4 million (Bankers Fidelity). The company reported $5.4 million of subsidiary dividends received through September 30; additional 2023 subsidiary dividends above $8.7 million require prior approval.
Changes versus prior comparable periods
- Management attributed improved Q3 and nine-month net income mainly to better life-and-health loss experience and smaller unrealized equity-security losses. The nine-month improvement was partly offset by increased actuarial-system and administrative costs; nine-month non-GAAP operating income decreased $0.3 million.
- Bankers Fidelity’s Medicare supplement earned premiums declined 10.4% in Q3 and 10.0% for nine months, primarily as non-renewals exceeded new business. Improved Medicare supplement rate adequacy and fewer incurred claims lowered its loss ratio.
- American Southern’s gross written premiums fell 12.4% in Q3 and 8.2% for nine months, primarily due to fewer agencies and lower automobile physical damage business. Its loss ratio worsened, reflecting increased frequency and severity in automobile and general liability claims.
- Investment income decreased 12.0% in Q3 and 1.1% for nine months. Interest expense increased 62.5% and 86.4%, respectively, mainly due to higher SOFR-linked rates after the LIBOR transition.
- Fixed-maturity unrealized losses were $34.6 million at September 30, versus $28.8 million at year-end 2022; accumulated other comprehensive loss widened to $27.0 million from $22.1 million. Management attributed fixed-maturity declines primarily to market rates and credit spreads, reported no credit-loss allowance on these securities, and said it did not intend or expect to be required to sell them before recovery.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management believes cash, expected subsidiary dividends and tax-sharing payments, and available financing will meet liquidity needs for the foreseeable future; it also expects subsidiary assets and cash inflows to support policy liabilities and operating needs.
- Management cited automobile liability inflation-related unfavorable prior-year loss development of $2.7 million for nine months in 2023, compared with $3.5 million of favorable development in 2022, primarily in Medicare supplement and surety.
- The $10 million revolving facility has a debt-to-capital covenant limiting consolidated indebtedness to 35% of consolidated capitalization. Insurance-subsidiary assets are subject to regulatory restrictions, and dividend capacity is limited. Debenture interest rates are SOFR-based; the company may defer interest subject to restrictions, but had not elected to do so.
- Ordinary-course litigation and regulatory inquiries were reported; management does not expect known matters to materially affect financial condition or results. Forward-looking statements remain subject to risks described in the company’s 2022 annual report and subsequent filings.
- The company adopted CECL on January 1, 2023, recording a $0.1 million after-tax reduction to opening retained earnings. A previously disclosed material weakness involving Medicare supplement actuarial-model controls was reported remediated after testing during Q3; disclosure controls were deemed effective at quarter-end.
- A cloud-based policy and claims system had $4.2 million of capitalized implementation costs; management expects it to be substantially ready in the first half of 2024. No amortization had yet been recorded.
Investor verification priorities
- Track Medicare supplement retention and new sales, other health and life growth, and whether administrative and actuarial-system costs moderate.
- Monitor American Southern’s automobile and general liability claim severity, loss ratios, agency count, and combined ratio.
- Verify operating cash generation, parent-level liquidity, subsidiary dividend capacity, and compliance with the revolving-credit covenant.
- Assess exposure to higher SOFR-linked debt costs and the substantial unrealized fixed-maturity losses, including any changes in credit quality or intent/ability to hold securities.
- Follow the actuarial-control remediation and the timing, implementation costs, and expected benefits of the new software system.
- Review the terms and cumulative dividends of Series D preferred stock, held by an affiliate of the controlling shareholder, and the company’s ability to fund debt service and dividends.