Atlantic American Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 27, 2015. The filing provides annual comparisons with 2013, not standalone fourth-quarter results. Atlantic American is an insurance holding company operating through property-and-casualty insurer American Southern and life-and-health insurer Bankers Fidelity.
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $166.3 million | $165.4 million |
| Insurance premiums | $153.5 million | $145.6 million |
| Net income | $4.4 million | $11.0 million |
| Diluted EPS | $0.19 | $0.48 |
| Operating income (company-defined non-GAAP) | $2.6 million | $2.5 million |
| Net cash from operating activities | $4.5 million | $13.0 million |
| Cash and cash equivalents at year-end | $16.4 million | $33.1 million |
| Total investments at year-end | $240.3 million | $229.0 million |
| Total assets / shareholders’ equity | $317.0 million / $104.2 million | $319.4 million / $100.9 million |
| Junior subordinated debentures, net | $33.7 million | $41.2 million |
- American Southern earned $52.7 million in premiums and reported a 99.9% combined ratio, versus 101.0% in 2013; underwriting income was approximately $0.03 million, compared with a $0.46 million underwriting loss.
- Bankers Fidelity earned $100.8 million in premiums and reported a 101.1% combined ratio, versus 101.0%; its underwriting loss was $1.1 million.
- Net investment income was $9.8 million, down from $10.3 million; net realized investment gains were $1.6 million, down from $8.7 million. Average investment yield declined to 4.0% from 4.3%.
- Insurance benefits and losses plus commissions and underwriting expenses were 95.8% of premiums, versus 96.8% in 2013, as reported by management.
Material changes and management commentary
- Premium revenue increased 5.4%, principally from commercial automobile business associated with a significant state contract that began in 2013. American Southern’s net earned premiums rose 14.8%; however, gross written premiums declined 3.7%, including an $11.0 million reduction in commercial auto writings after an agency was canceled for unfavorable loss experience.
- Net income fell mainly because realized investment gains declined by $7.2 million. The company had sold higher-yielding, longer-term investments in 2013 to shorten portfolio maturities and reinvested proceeds at lower yields.
- American Southern’s loss ratio increased to 72.5% from 65.9%, reflecting anticipated higher losses on the state contract and increased losses in other lines. Its expense ratio improved to 27.4% from 35.1%, partly because agent commissions vary with loss experience.
- Bankers Fidelity’s benefits and losses decreased, improving its loss ratio to 67.5% from 70.3%; its expense ratio rose to 33.6% from 30.7%, primarily due to hiring and other costs for worksite-product and distribution initiatives.
- Operating income was nearly flat. Management attributed the modest increase to better property-and-casualty profitability and lower interest expense, partly offset by lower investment income and higher agency, underwriting, and compensation-related expenses.
Liquidity, debt, capital, and other notable items
- Consolidated cash declined $16.7 million during 2014. Operating cash flow was $4.5 million; investing activities used $9.6 million and financing activities used $11.6 million. Uses included $4.1 million of property and equipment additions, $6.8 million paid to acquire debentures, $2.6 million of share repurchases, preferred-stock redemptions, and dividends.
- The Parent reported approximately $19.7 million in unrestricted cash and investments at year-end. Its cash needs rely substantially on subsidiary dividends, fees, and tax-sharing payments. Subsidiaries paid $6.5 million in dividends in 2014; payments above $7.64 million in 2015 would require regulatory approval.
- In August 2014, the company acquired $7.5 million principal amount of its junior subordinated debentures for $6.75 million, recognizing a $0.75 million gain. Remaining debentures had an effective interest rate of 4.29% at year-end and mature in 2032 and 2033.
- Insurance subsidiaries had aggregate statutory surplus of $73.0 million and exceeded regulatory risk-based capital levels. American Southern was rated A (Excellent) and Bankers Fidelity A- (Excellent) by A.M. Best. Both reported within the NAIC usual range for all 13 financial ratios.
- Reserves for losses and claims were $66.6 million, including $14.3 million recoverable from reinsurers. Prior-year reserve development was favorable by $0.5 million overall; property-and-casualty favorable development was $0.2 million, versus $2.5 million in 2013. Management’s reserve range indicated estimates could be 12.5% lower or 10.7% higher than recorded reserves; revisions may materially affect future results.
- Approximately 99% of reinsurance receivables were due from two reinsurers. The filing identifies reinsurer creditworthiness and collection as risks, although the named counterparties had high ratings.
- The company paid $0.02 per share in annual and $0.02 per share in special common dividends during 2014; the board declared another $0.02 annual dividend in March 2015. It repurchased 687,964 shares during 2014 across the full year and had 434,651 shares remaining under the repurchase authorization at December 31.
- The filing reports ordinary-course litigation and says known claims are not expected to materially affect financial condition or results, while acknowledging litigation results could affect a particular period. No specific material legal contingency is quantified.
Outlook, risks, and controls
The filing gives no quantitative earnings or premium guidance. Management said existing cash, expected subsidiary distributions and, if needed, additional borrowing should meet liquidity needs for the foreseeable future. It expects current claim frequency and severity patterns generally to remain within historical ranges, but provides no assurance of future performance. Principal disclosed risks include reserve-estimation uncertainty, claim severity and catastrophe exposure, reinsurer performance and availability, investment-market and interest-rate changes, competition, regulation, litigation and emerging coverage issues, distribution-channel access, guaranty-fund assessments, and cybersecurity. Management reported effective disclosure controls and internal control over financial reporting as of year-end; the independent auditor issued an unqualified opinion on the financial statements but did not attest to internal control.
Investor verification priorities
- Review the state-contract loss experience, subsequent claims development, and the effect of the canceled agency on American Southern’s written and earned premiums.
- Assess the adequacy and sensitivity of loss reserves, especially long-tail general-liability estimates and the reduced favorable development compared with 2013.
- Verify the quality, concentration, maturity profile, and interest-rate sensitivity of the investment portfolio, including the disclosed unrealized losses and 2014 impairment.
- Reconcile the significant decline in cash with parent-company liquidity needs, subsidiary dividend limits, debt service, planned capital spending, and share repurchases.
- Review Bankers Fidelity’s expense growth and whether worksite-product and distribution initiatives produce sufficient new business and profitability.
- Consider the related-party preferred stock, office lease, and other affiliate arrangements, along with potential dilution if Series D preferred stock becomes convertible.