Business Context and Reporting Period
Company: Atlantic American Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: An insurance holding company operating primarily through two subsidiaries: American Southern (property and casualty) and Bankers Fidelity (life and health). The company completed the sale of its regional property and casualty operations in March 2008, which are now reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|
| Total Revenue | $25.5 million | $76.9 million | $77.1 million |
| Net Loss | $(2.1) million | $(1.8) million | $(1.1) million |
| Net Loss Applicable to Common Stock | $(2.2) million | $(2.2) million | $(2.4) million |
| Loss Per Share (Diluted) | $(0.10) | $(0.10) | $(0.11) |
| Cash and Cash Equivalents | $29.5 million (Sep 30, 2009) | $29.5 million (Sep 30, 2009) | $41.1 million (Sep 30, 2008) |
| Total Investments | $188.3 million | $188.3 million | $173.1 million (Dec 31, 2008) |
| Total Liabilities | $183.4 million | $183.4 million | $191.2 million (Dec 31, 2008) |
| Shareholders' Equity | $79.8 million | $79.8 million | $75.4 million (Dec 31, 2008) |
Material Changes vs. Prior Period
- Net Loss Drivers: The net loss for the three and nine months ended September 30, 2009, was primarily driven by a $1.8 million increase in the deferred tax asset valuation allowance. This adjustment resulted from a reassessment of the realization of capital loss carryforward benefits, as the company does not anticipate sufficient future capital gains to offset these losses.
- Operating Income: Income from continuing operations before taxes was $0.2 million for the three months ended September 30, 2009, compared to a loss of $0.1 million in the same period in 2008. For the nine-month period, income before taxes decreased to $0.4 million from $1.7 million in 2008.
- Revenue Trends: Insurance premiums remained relatively flat, decreasing slightly by 0.2% in the quarter but increasing 0.4% for the nine-month period compared to 2008. Investment income decreased 13.2% in the quarter and 7.3% for the nine months, largely due to called securities that could not be reinvested at equivalent rates.
- Segment Performance:
- American Southern (P&C): Gross written premiums decreased 23.1% in the quarter and 8.6% for the nine months due to a weak construction industry and loss of an agent. The combined ratio was 100.5% for both the quarter and nine-month period, driven by large commercial automobile claims.
- Bankers Fidelity (Life/Health): Earned premiums increased 4.4% in the quarter and 2.9% for the nine months due to successful marketing. However, the loss ratio increased to 75.1% (quarter) and 74.8% (nine months) compared to 72.0% and 73.4% in 2008, respectively, due to the absence of favorable loss development seen in the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Tax Provision: A significant non-cash charge of $1.8 million related to the deferred tax asset valuation allowance impacted the bottom line.
- SERP Termination: A non-recurring charge of $0.4 million was recorded for the termination and settlement of the Supplemental Executive Retirement Plan (SERP).
- Discontinued Operations: The 2008 comparative period included a $2.2 million loss from discontinued operations related to the sale of regional P&C businesses, which is not present in 2009.
- Investment Risks: The company holds significant investments in fixed maturities and equities. As of September 30, 2009, securities in an unrealized loss position totaled $76.7 million, primarily in financial services and media sectors. The company asserts it does not intend to sell these securities and expects recovery.
- Subsequent Events: In November 2009, the company determined to sell all holdings of General Motors (GM) and GMAC securities. While the market value exceeded amortized cost at the time of evaluation, the company expects to record a loss on the sale for tax purposes, which may require further adjustments to the deferred tax asset valuation allowance in the fourth quarter.
- Liquidity: The company maintains a $12.0 million revolving credit facility (reduced from $15.0 million) with no outstanding balance as of September 30, 2009. Management believes current cash, investment income, and subsidiary dividends are sufficient to meet obligations.
Key Facts for Investor Verification
- Deferred Tax Asset Valuation: Verify the sustainability of the $1.8 million valuation allowance charge and the company's assessment of future capital gains needed to realize tax assets.
- Investment Portfolio Quality: Review the composition of the $76.7 million in unrealized losses, specifically the exposure to financial services and media sectors, and the potential for "other-than-temporary" impairments.
- GM/GMAC Sale Impact: Monitor the fourth-quarter financials for the actual realized loss on the sale of GM/GMAC securities and any resulting additional tax provision adjustments.
- Underwriting Performance: Track the combined ratio of American Southern, which is currently at 100.5%, to ensure large claims do not become a recurring trend.
- Debt Covenants: Confirm continued compliance with the credit agreement covenants, particularly regarding tangible net worth and leverage ratios, given the recent net losses.