ATLANTIC AMERICAN CORP annual report, FY2011

Atlantic American Corporation — FY2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011; comparisons are against restated FY2010 results. This is an annual filing, not a standalone fourth-quarter report. The company is an insurance holding company operating through property-and-casualty insurer American Southern and life-and-health insurer Bankers Fidelity.

Financial performance

  • Revenue: $118.3 million, up 10.7% from $106.9 million. Premium revenue rose to $107.5 million from $97.6 million, led by Medicare supplement and commercial auto; investment income was $10.6 million.
  • Profit: Net income was $3.29 million ($0.12 diluted EPS), versus restated $0.99 million ($0.02 diluted EPS). Income before tax was $3.32 million versus $0.62 million. Net income attributable to common shareholders was $2.78 million after $0.51 million of preferred dividends.
  • Underwriting and margins: The consolidated ratio of benefits/losses plus commissions and underwriting expenses to premiums improved to 96.0% from 97.3%. American Southern reported a $0.51 million underwriting loss and a 101.4% combined ratio, versus $0.03 million underwriting income and a 99.9% combined ratio. Bankers Fidelity’s underwriting loss narrowed to $0.22 million from $2.67 million.
  • Cash flow: Operating cash flow was $9.13 million, up from $4.90 million. Cash and cash equivalents fell to $21.29 million from $28.33 million, principally as investment purchases exceeded proceeds and the company repurchased shares. Investing activities used $14.12 million.
  • Investments: Total investments were $229.8 million, up from $184.6 million; fixed maturities were $217.3 million. Net investment income increased to $10.41 million from $9.58 million; average portfolio yield was 4.6% versus 4.4%. The bond portfolio was 97% investment grade by NAIC classification.
  • Balance sheet and liquidity: Total assets were $302.1 million; shareholders’ equity was $96.3 million. Insurance reserves and policyholder funds totaled $147.2 million, including $58.0 million of losses and claims. The parent reported $26.7 million of unrestricted cash and investments. The $5.0 million revolving facility had no amount outstanding at year-end and expires August 31, 2012.
  • Debt: $41.24 million of junior subordinated debentures remained outstanding, with floating rates of LIBOR plus 4.00% and 4.10%, and maturities in 2032 and 2033. The effective rate was 4.54% at year-end. The company also had a $0.88 million interest-rate-collar liability.

Changes versus FY2010

  • Revenue increased, and net income rose to $3.29 million from restated $0.99 million. The improvement reflected higher premiums and investment income, alongside lower realized investment losses.
  • American Southern premiums grew, but higher commercial-auto claim frequency and severity pushed its loss ratio to 64.6% from 60.7% and its combined ratio above 100%. Favorable prior-year loss development was $3.1 million, down from $5.4 million.
  • Bankers Fidelity premiums grew 11.6%, mainly from Medicare supplement business; its loss ratio improved to 70.6% from 72.8% and its expense ratio to 29.7% from 31.4%.
  • Unrealized investment gains increased accumulated other comprehensive income to $12.24 million from a $0.60 million loss; this is separate from net income and reflects market-value changes.

Outlook, risks and unusual items

  • Outlook: Management gave no quantified earnings or revenue guidance. It said it expected to offset business lost after cancelling agencies that together produced about $6.8 million in annualized commercial-auto business. Management described available parent liquidity and subsidiary cash flows as sufficient for foreseeable needs, subject to insurance dividend limits and other conditions.
  • Restatement: The company restated FY2010 to recognize a $2.312 million other-than-temporary impairment on equity securities in 2010 rather than 2011. Restated 2010 net income was $0.99 million rather than $2.49 million; diluted EPS was $0.02 rather than $0.09. The auditor’s report notes the restatement.
  • Controls: Management concluded disclosure controls were not effective at December 31, 2011 because of a material weakness in the timing and recognition of investment impairments. Remediation included stronger quarterly impairment reviews and stricter policies; management said remediation was not yet fully established. The smaller-reporting-company exemption meant there was no auditor attestation on internal controls.
  • Reserving uncertainty: Management’s actuarial range for consolidated loss reserves extended from 15.4% below to 10.9% above recorded reserves. Changes in estimates could materially affect future results. Prior-year favorable development supported reported underwriting results.
  • Other risks and items: Reinsurer performance and concentration, claims severity and inflation, interest rates and investment valuations, competition, regulation, and catastrophic losses are identified risks. About 99% of reinsurance receivables were due from two reinsurers. A $1.75 million privately negotiated share repurchase was completed in November 2011. Series D preferred dividends are cumulative; $0.53 million was accrued at year-end and the 2011 dividend was paid in January 2012. Ordinary-course litigation was not expected to materially affect financial condition, although period results could be affected.

Key facts investors should verify

  • Review the FY2010 restatement and impairment judgments, including the stated material weakness and progress in remediation.
  • Track American Southern’s commercial-auto claims, the cancelled agency production, and whether new business offsets the cancellations.
  • Assess reserve development and sensitivity, particularly the reliance on favorable prior-year development and the disclosed reserve range.
  • Monitor investment portfolio credit and valuation risk, including long-dated fixed maturities, unrealized gains, and impairment charges.
  • Confirm parent liquidity, permitted subsidiary dividends, the revolving facility’s renewal or replacement after August 2012, and debt-service costs.
  • Check subsequent results and any formal guidance; this filing provides no quantified forward forecast.