Atlantic American Corporation — Q2 2023 Form 10-Q
Business context and reporting period. Atlantic American is an insurance holding company with property and casualty operations (American Southern) and life and health operations (Bankers Fidelity). This unaudited filing covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in millions unless otherwise indicated.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $49.2 | $44.7 | $95.5 | $96.3 |
| Net premiums | $46.1 | $47.1 | $92.2 | $94.1 |
| Net investment income | $2.6 | $2.5 | $5.1 | $4.9 |
| Income (loss) before tax | $2.2 | $(2.1) | $0.4 | $1.7 |
| Net income (loss) | $1.7 | $(1.7) | $0.3 | $1.2 |
| Net income (loss) attributable to common shareholders | $1.6 | $(1.8) | $0.1 | $1.0 |
| Diluted earnings (loss) per common share | $0.08 | $(0.09) | $0.00 | $0.05 |
Q2 net income improved year over year, primarily reflecting a $5.4 million favorable swing in equity-security valuation results and better life and health loss experience. For the first half, management-reported non-GAAP operating income was $2.2 million versus $4.4 million a year earlier; Q2 operating income was $1.7 million versus $2.8 million. The company defines this measure by excluding taxes and realized and unrealized investment gains or losses.
- Segment underwriting: American Southern’s combined ratio was 100.3% in Q2 (underwriting loss of $0.05 million) and 99.1% for the half (underwriting income of $0.3 million). Bankers Fidelity’s ratios were 94.6% and 96.7%, respectively, with underwriting income of $1.5 million in Q2 and $1.9 million for the half.
- Cash flow: First-half operating cash flow was negative $4.9 million, investing cash flow negative $0.7 million, and financing cash flow positive $1.0 million. Cash and cash equivalents fell $4.6 million to $24.2 million.
- Balance sheet and debt: Total assets were $373.0 million and shareholders’ equity $103.5 million at June 30, 2023. Total liabilities were $269.5 million. Debt included $3.0 million drawn on a $10.0 million revolving facility and $33.7 million of net junior subordinated debentures.
- Investments and liquidity: Total investments were $228.0 million. Available-for-sale fixed maturities had $208.5 million fair value against $235.0 million amortized cost, including $27.3 million of gross unrealized losses; the company reported no credit-loss allowance on these securities. Management said subsidiary invested assets and expected premiums, investment earnings and reinsurance collections should support policy liabilities and operating needs, and identified liquidity for the foreseeable future from cash, subsidiary distributions, tax-sharing payments and potential borrowing. Parent unrestricted cash and investments were approximately $5.3 million.
Material changes versus prior periods
- First-half net premiums declined 2.1%. American Southern premiums fell mainly because of lower automobile physical-damage business following a reduction in agencies; automobile liability premiums increased. Bankers Fidelity Medicare supplement premiums fell as non-renewals exceeded new sales, partly offset by growth in group health and life products.
- American Southern’s first-half loss ratio rose to 74.7% from 67.9%, mainly due to greater frequency and severity in automobile liability and surety claims. Bankers Fidelity’s loss ratio improved to 58.9% from 67.9%, principally on Medicare supplement experience, while its expense ratio increased to 37.8% from 27.8% due to group-line administrative and Medicare supplement servicing costs.
- First-half commissions and underwriting expenses rose to $25.8 million from $23.1 million; interest expense doubled to $1.6 million from $0.8 million. Management attributed lower first-half operating income partly to costs associated with a new actuarial valuation system and higher administrative costs as group business grew.
- Accumulated other comprehensive loss improved to $21.0 million from $22.1 million at year-end, but fixed-maturity unrealized losses remained substantial. Management attributed most fixed-maturity losses to market interest rates and credit spreads, and stated it did not intend, and was not more likely than not required, to sell the securities before recovery.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and stated that forward-looking outcomes are subject to risks described in the company’s 2022 Form 10-K and subsequent filings.
- LIBOR ceased on June 30, 2023. Junior subordinated debentures transition to three-month CME Term SOFR plus a 0.26161% tenor spread; the revolving credit facility’s replacement benchmark is Term SOFR. The revolver matures April 12, 2024 and includes a covenant limiting consolidated indebtedness to 35% of consolidated capitalization. Junior-debenture rates were 9.45% at June 30; interest costs may change with benchmark rates.
- The company identified a material weakness in controls over development, testing and implementation of actuarial models for Medicare supplement valuations, and concluded disclosure controls were not effective at quarter-end. Remediation included enhanced model documentation and testing, better data reconciliations, additional review controls and additional actuarial staff. Management said no material misstatements were identified in previously issued statements.
- Management said known ordinary-course litigation and regulatory matters were not expected to have a material effect. Insurance subsidiaries’ dividends are subject to statutory limits; more than $8.7 million of subsidiary dividends in 2023 would require prior approval. There were $4.5 million of unfunded investment commitments at June 30.
- The company adopted the CECL credit-loss standard on January 1, 2023, recording a $0.1 million after-tax reduction to opening retained earnings. The board declared an annual common dividend of $0.02 per share on August 8, payable to shareholders of record August 22, 2023.
Important facts for investors to verify
- Whether the actuarial-model control remediation is effective and the material weakness is resolved, and whether it causes further reporting delays or expense.
- Whether American Southern’s automobile liability and surety claim trends persist, and whether Bankers Fidelity can manage rising group-business and servicing expenses while Medicare supplement premiums contract.
- How SOFR-based borrowing costs affect interest expense and compliance with the revolver’s debt-to-capital covenant; confirm available revolver capacity and refinancing plans before the April 2024 maturity.
- Whether fixed-maturity unrealized losses, equity-market movements and the company’s limited parent-level unrestricted liquidity affect capital, statutory dividend capacity or cash generation.
- Whether first-half operating cash outflow and the $4.5 million of investment commitments change management’s liquidity assessment or access to subsidiary funds.