Atlantic American Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. The company is an insurance holding company operating through property-and-casualty insurer American Southern and life-and-health insurer Bankers Fidelity. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $40.36 | $42.66 | $126.08 | $125.40 |
| Net income | $0.24 | $1.45 | $4.27 | $3.15 |
| Net income attributable to common shareholders | $0.14 | $1.33 | $3.98 | $2.80 |
| Basic and diluted EPS | $0.01 | $0.06 | $0.19 | $0.13 |
| Operating income, non-GAAP | $0.36 | $(0.01) | $0.46 | $1.38 |
Quarterly revenue and earnings declined; nine-month net income improved, mainly because realized investment gains rose to $5.1 million from $1.4 million. Nine-month operating income declined despite higher GAAP net income. Management’s non-GAAP operating income excludes income taxes, realized investment gains and the 2014 debt-repurchase gain.
- Premiums: $37.9 million in Q3, down 1.2%; $113.3 million for nine months, down 1.6%. The principal pressure was lower Medicare supplement first-year and renewal premiums.
- Investment results: Investment income fell 8.3% in Q3 and 4.2% year to date, primarily due to lower average fixed-maturity yields. Nine-month realized gains included a $3.2 million gain from selling property held in real estate partnerships. The 2014 comparison also included a $0.75 million gain on repurchased debt.
- Insurance underwriting: American Southern’s combined ratio improved to 96.0% for Q3 and 97.2% year to date, producing underwriting income of $0.6 million and $1.2 million, respectively. Bankers Fidelity remained loss-making on underwriting: combined ratios were 104.6% for Q3 and 103.9% year to date, versus 102.8% and 101.5% in 2014.
- Expenses and margins: Consolidated benefits and expenses were $39.99 million against $40.36 million of Q3 revenue; pretax income was $0.37 million. Commissions and underwriting expenses rose, including higher American Southern commissions associated with more favorable loss experience. Legal and consulting fees also increased year to date.
Financial position, cash flow and capital
- At September 30, total assets were $317.2 million, total liabilities $214.0 million and shareholders’ equity $103.2 million. Cash and cash equivalents were $14.6 million, down from $16.4 million at year-end 2014; total investments were $237.6 million.
- Nine-month operating cash flow was negative $1.37 million, compared with negative $1.77 million in 2014. Investing activities provided $0.36 million; financing activities used $0.74 million. Cash declined by $1.74 million to $14.64 million.
- Net junior subordinated debentures were $33.74 million, unchanged from year-end. The obligations bear floating rates of LIBOR plus 4.00% or 4.10%; the reported effective rate was 4.38%. The company may defer interest, but stated it had not elected to do so.
- The Parent reported approximately $22.7 million of unrestricted cash and investments. Insurance subsidiary statutory surplus was $38.4 million at American Southern and $35.7 million at Bankers Fidelity. Subsidiary dividends are subject to statutory limits; more than $7.6 million of 2015 dividends would require prior approval, and the Parent had received $4.9 million through September 30.
- Unrealized investment losses increased: fixed maturities had $7.6 million of gross unrealized losses at quarter-end, including $2.6 million related to oil-and-gas issuers. Management classified the securities as temporarily impaired, stating it did not intend or expect to need to sell them. No investment impairments were recorded in 2015.
Material changes, outlook and risks
- American Southern’s written and earned premiums grew, driven by automobile physical damage, surety and other programs. Its loss ratio improved, while its expense ratio rose, partly reflecting variable agent commissions.
- Bankers Fidelity’s premiums contracted, mainly in Medicare supplement. Management cited a competitive pricing initiative as a factor in the higher year-to-date loss ratio; increased agent lead spending contributed to expense pressure.
- Management said it expects cash balances, subsidiary dividends, fees and tax-sharing payments—and, if needed, additional borrowing—to meet liquidity needs for the foreseeable future. It also believes subsidiary invested assets and expected cash inflows will support policy liabilities and claims. No quantified earnings or revenue guidance was provided.
- Ordinary-course claims and lawsuits are disclosed; management did not expect known matters to materially affect financial condition or results. Actual results remain subject to insurance claims experience, investment values and yields, and management estimates. The filing states disclosure controls were effective and there were no material changes in internal control over financial reporting.
- The company repurchased 45,170 shares during Q3 at an average $3.75 per share under its repurchase plan; 341,393 shares remained authorized for repurchase at quarter-end.
Investor verification checklist
- Track Medicare supplement premium trends and Bankers Fidelity’s underwriting ratio, especially the effects of pricing and agent-acquisition spending.
- Assess whether American Southern’s premium growth and improved loss experience can continue without further deterioration in its expense ratio.
- Separate recurring underwriting performance from realized investment gains; verify the nature and repeatability of the real-estate and securities gains.
- Review the oil-and-gas-related unrealized losses, fixed-maturity valuation assumptions and potential sensitivity to credit or interest-rate changes.
- Monitor negative operating cash flow, Parent liquidity, statutory limits on subsidiary dividends and the floating-rate subordinated debt obligations.