Business context and reporting period
Atlantic American Corporation is an insurance holding company operating through American Southern (property and casualty) and Bankers Fidelity (life and health). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Insurance premiums, net | $46.5 | $45.5 | $92.0 | $90.3 |
| Total revenue | $49.7 | $43.1 | $89.1 | $98.1 |
| Income (loss) before tax | $8.3 | $(5.6) | $(1.9) | $(0.3) |
| Net income (loss) | $6.5 | $(4.4) | $(1.6) | $(0.3) |
| Net income (loss) applicable to common shareholders | $6.4 | $(4.5) | $(1.8) | $(0.5) |
| Diluted earnings (loss) per share | $0.30 | $(0.22) | $(0.09) | $(0.02) |
| Non-GAAP operating income (loss) | $6.9 | $(0.9) | $4.9 | $(3.5) |
Q2’s return to profitability reflected lower insurance benefits and losses, notably fewer Medicare supplement claims, and a less adverse equity-market effect than in Q2 2019. For the first half, revenue and GAAP results were affected by $7.1 million of unrealized equity-security losses, compared with $1.2 million of unrealized gains in the prior-year period. Net investment income declined 20% in Q2 and 16% in the first half year over year.
Segment underwriting
- American Southern: Q2 net earned premiums were $15.8 million and underwriting income was $1.0 million; combined ratio was 93.6%, versus 97.2%. First-half underwriting income was $1.6 million and combined ratio was 94.8%, versus 96.6%. Premium growth was led by automobile physical damage.
- Bankers Fidelity: Q2 net earned premiums were $30.7 million and underwriting income was $5.8 million, versus an underwriting loss of $2.5 million; combined ratio was 81.0%, versus 108.3%. First-half underwriting income was $2.8 million and combined ratio was 95.5%, versus 110.4%. The improvement principally reflected fewer Medicare supplement claims.
Financial position, cash flow and debt
At June 30, 2020, cash and cash equivalents were $16.4 million, total investments $266.9 million, total assets $385.7 million, and shareholders’ equity $123.9 million. Cash rose $3.5 million from year-end 2019. First-half operating cash flow was $0.6 million, investing cash flow was $2.9 million, and financing cash flow was negative $0.005 million. Investment sale and maturity proceeds exceeded purchases by approximately $3.1 million.
Total liabilities were $261.8 million, including $33.7 million of junior subordinated debentures and $204.7 million of insurance reserves and policyholder funds. The debentures have floating rates of LIBOR plus 4.00% to 4.10%, mature in 2032 and 2033, and had a 4.42% effective rate at quarter-end. More than 90% of subsidiary invested assets are marketable securities, but their use is subject to insurance regulation. The parent reported $5.2 million of unrestricted cash and investments; subsidiary statutory surplus was $42.9 million at American Southern and $32.2 million at Bankers Fidelity. The parent received $1.8 million in subsidiary dividends through June 30.
Fixed-maturity fair value was $236.2 million, with $23.6 million of gross unrealized gains and $1.5 million of gross unrealized losses. Equity securities were valued at $16.0 million, down from $22.9 million at year-end. The company recorded no other-than-temporary impairment charges.
Changes, outlook and risks
- Management attributed first-half operating income improvement of $8.4 million year over year mainly to favorable life and health loss experience. Shelter-in-place measures reduced Medicare supplement claims in Q2; management cautioned that this effect may not persist.
- COVID-19’s duration and financial effects remain uncertain. Management said it could not reliably estimate future effects and identified risks including reduced premium sales or retention, collection delays, volatile investment values, and increased life and health claims. It did not then expect a significant overall decline in liquidity or operating results, but noted that later COVID-related claims could be significant.
- Management expects possible pressure on life and health premiums from economic weakness and acknowledged potential mortality-related costs, while noting deferred medical services could offset some claims. It expected no material near-term COVID impact on property and casualty claims, partly because fewer miles driven could reduce auto claims.
- No numerical earnings or revenue guidance was provided. Management said existing cash, subsidiary dividends and fees, tax-sharing payments and, if needed, additional borrowing were expected to meet liquidity needs for the foreseeable future.
- Prior-year reserve development was favorable by $2.3 million, primarily in Bankers Fidelity’s Medicare supplement reserves. Known ordinary-course claims and lawsuits were not expected by management to materially affect results or financial condition.
Important facts for investors to verify
- Whether Medicare supplement claim frequency rebounds as deferred care resumes, and how that affects Bankers Fidelity’s loss ratio.
- Future COVID-19 impacts on claims, policy renewals, premium collections, and investment markets.
- Equity-security valuation changes and investment income, which materially influenced reported revenue and earnings.
- Insurance-subsidiary statutory capital, dividend restrictions, and the parent’s access to subsidiary cash.
- Floating-rate debt exposure, LIBOR transition implications, and the ability to service the $33.7 million carrying amount of subordinated debentures.