Atlantic American Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are with the year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report. Atlantic American is an insurance holding company operating property and casualty insurer American Southern and life and health insurer Bankers Fidelity. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $186.8 | $187.9 |
| Net premiums | $178.8 | $185.4 |
| Net investment income | $10.1 | $9.9 |
| Income (loss) before income taxes | $(0.6) | $2.1 |
| Net income (loss) | $(0.2) | $1.5 |
| Net income (loss) applicable to common shareholders | $(0.6) | $1.1 |
| Diluted earnings (loss) per common share | $(0.03) | $0.06 |
| Operating income, non-GAAP | $1.5 | $9.6 |
| Net cash provided by operating activities | $2.6 | $6.5 |
Revenue declined modestly, but lower premiums and increased expenses drove the company from net income to a net loss. The smaller 2023 net loss versus the prior-year equity-market loss helped reported results: unrealized losses on equity securities were $2.2 million, compared with $7.6 million in 2022. Higher interest expense, which rose 67.5% to $3.3 million, partly offset that benefit. Management’s non-GAAP operating income excludes income taxes and investment gains or losses; it fell sharply year over year.
Insurance operations and margins
- American Southern (property and casualty): Net earned premiums were $68.4 million, down 2.6%. Underwriting income was $0.7 million versus $2.9 million. The combined ratio deteriorated to 99.0% from 95.8% (below 100% indicates underwriting profit); the loss ratio rose to 74.5% from 67.1%, while the expense ratio improved to 24.5% from 28.7%. Management cited inflation and higher loss severity in certain governmental auto programs, and increased general liability losses from artisan contractor business.
- Bankers Fidelity (life and health): Net earned premiums were $110.4 million, down 4.2%. Underwriting income fell to $0.9 million from $5.0 million. Its combined ratio increased to 99.2% from 95.7%; the loss ratio improved to 64.8% from 66.2%, but the expense ratio increased to 34.4% from 29.5%. Lower Medicare supplement claims and improved rate adequacy helped claims performance; higher administrative and servicing costs weighed on expenses.
Financial position, liquidity and capital
- Total assets were $381.3 million and shareholders’ equity was $107.3 million at year-end, compared with $367.1 million and $102.2 million, respectively, a year earlier. Accumulated other comprehensive loss improved to $16.1 million from $22.1 million, primarily reflecting a recovery in unrealized values of available-for-sale fixed maturities.
- Cash and cash equivalents were $28.3 million, down from $28.9 million. Operating cash flow was $2.6 million; investing activities used $3.4 million; financing activities provided $0.2 million.
- Investments totaled $237.1 million, including $218.2 million of fixed maturities. The fixed-maturity portfolio had $21.7 million of gross unrealized losses at year-end; the company reported no credit-loss allowance on available-for-sale fixed maturities. Management attributed most bond unrealized losses to market interest rates and credit spreads and said it did not intend, and was not more likely than not required, to sell the affected securities before recovery.
- Debt comprised $3.0 million outstanding on a $10 million revolving facility and $33.7 million of junior subordinated debentures. The debentures’ effective rate was 9.69% at year-end. The revolver’s original maturity was April 12, 2024; a March 22, 2024 amendment extended maturity to March 22, 2027 and added a minimum consolidated net-worth covenant of $64.2 million.
- Insurance subsidiaries had aggregate statutory surplus of $90.1 million, and management reported RBC levels above regulatory requirements. The Parent had approximately $4.7 million of unrestricted cash and investments. Insurance-subsidiary dividends to the Parent are subject to regulatory limits; distributions above approximately $8.8 million in 2024 require prior approval.
Material changes, outlook and risks
- Premium revenue decreased 3.6%, primarily because of Medicare supplement premium declines and reduced automobile physical-damage business. Automobile liability rate increases and a retrospective governmental-program adjustment partly offset the decline.
- Prior-year claims development was unfavorable by $1.4 million in 2023, primarily from inflation-related automobile liability development; 2022 had favorable development of $4.2 million. Gross losses and claims reserves were $87.5 million. Management’s actuarial range indicated reserves could be 16.9% lower or 18.3% higher than recorded; revisions could materially affect future results.
- Reinsurance recoverables were $21.1 million, with approximately 99.7% due from one reinsurer, General Re Corporation, rated AA+ by S&P and A++ by A.M. Best. The company remains liable to policyholders if reinsurers do not perform.
- Management said existing balances, expected subsidiary dividends, fees and tax-sharing payments, and potential borrowing should meet liquidity needs for the foreseeable future. No earnings or premium guidance is provided. The board declared an annual common dividend of $0.02 per share in April 2024; future dividends remain discretionary.
- Control weakness: Management concluded disclosure controls and internal control over financial reporting were not effective at December 31, 2023 because controls reviewing life and health insurance reserves and deferred acquisition costs were not sufficiently designed. Management reported no resulting identified material misstatement and began remediation in Q1 2024, including enhanced product-level reviews and analytical reports expected to be operational by September 30, 2024. The auditor did not attest to internal control effectiveness.
- Other risks and unusual items: A third-party medical-network service provider reported a cybersecurity incident in February 2024, disrupting services; the company reported no detected breach of its systems and moved to another provider. Ordinary-course litigation and regulatory matters were not expected by management to materially affect financial condition, though results in a particular period could be affected. State regulation, claims inflation, reserve uncertainty, investment-market movements, reinsurance performance and the company’s ability to remediate the control weakness remain relevant risks.
Important facts for investors to verify
- Whether the life and health reserve and deferred-acquisition-cost control remediation is completed on schedule, and whether subsequent filings report effective controls.
- Trends in Medicare supplement premiums, policy persistency, claims experience and Bankers Fidelity’s expense ratio.
- Automobile liability claim severity, inflation-related reserve development and American Southern’s combined ratio.
- Reinsurer concentration, collectibility of recoverables and changes in the reserve estimate range.
- Interest expense, the amended revolver’s covenant headroom and the ability of subsidiaries to distribute cash to the Parent.
- Whether the reported third-party cybersecurity incident has further effects, and whether the 2024 dividend and liquidity outlook remain supported by operating results.