Atlantic American Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. The company is an insurance holding company operating principally 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 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $43.2 | $35.3 | $124.5 | $104.8 |
| Insurance premiums | $38.4 | $32.4 | $107.8 | $94.7 |
| Net income | $2.7 | $1.1 | $9.6 | $3.5 |
| Net income applicable to common shareholders | $2.6 | $1.0 | $9.2 | $3.1 |
| Diluted EPS | $0.12 | $0.04 | $0.42 | $0.15 |
| Operating income, non-GAAP | $0.4 | $1.0 | $1.3 | $2.1 |
- Premiums rose 18.5% in Q3 and 13.9% year to date. Management attributed growth mainly to Medicare supplement business and a new commercial auto state contract.
- Net income increased largely because of realized investment gains: $2.3 million in Q3 and $8.4 million year to date, versus zero and $1.4 million in the comparable 2012 periods. Excluding realized gains and income taxes, reported operating income declined year over year.
- Investment income decreased to $2.5 million in Q3 and $8.2 million year to date, down 12.0% and 4.7%, respectively. Interest expense fell to $0.4 million and $1.5 million, respectively, following the March 2013 expiry of the interest-rate collar.
- Underwriting: American Southern’s combined ratio was 99.6% in Q3 and 100.8% year to date, versus 109.5% and 106.2%. Bankers Fidelity’s was 101.3% and 102.1%, versus 97.2% and 99.6%. A ratio below 100% indicates underwriting profit.
- Total comprehensive income was a loss of $1.3 million in Q3 and $6.8 million year to date, reflecting after-tax other comprehensive losses of $4.0 million and $16.4 million, primarily from available-for-sale investment valuations.
Financial position, cash flow and debt
- At September 30, 2013, total assets were $317.7 million, total liabilities $220.7 million and shareholders’ equity $97.0 million. At December 31, 2012, they were $320.2 million, $214.4 million and $105.7 million, respectively. Equity fell principally as accumulated other comprehensive income declined from $19.6 million to $3.2 million.
- Cash and cash equivalents increased to $37.3 million from $19.0 million. Nine-month operating cash flow was $7.6 million, investing cash flow was $12.4 million and financing cash outflow was $1.7 million. Investing cash flow benefited from securities sales and maturities exceeding purchases.
- Total investments were $214.2 million, down from $246.9 million at year-end. Fixed maturities declined to $193.0 million from $230.5 million. The company reported $5.1 million of gross unrealized losses on securities at quarter-end, compared with $0.6 million at year-end, and characterized the affected securities as temporarily impaired.
- Junior subordinated debentures remained $41.2 million: $18.0 million and $23.2 million, with rates of three-month LIBOR plus 4.00% and 4.10%, and maturities in 2032 and 2033. The reported effective interest rate was 4.3%. The company had not elected to defer interest payments.
- Insurance reserves and policyholder funds totaled $167.2 million, up from $154.6 million. Parent unrestricted cash and investments were approximately $28.9 million. Insurance-subsidiary assets are subject to state regulatory restrictions; dividends above $9.6 million in 2013 required prior approval.
Changes, outlook and risks
- Management cited higher Medicare supplement losses, advertising and agency costs, and spending to develop a worksite distribution channel and products as factors reducing operating income. Medicare supplement benefits and losses rose faster than premiums, and Bankers Fidelity underwriting results turned to a loss.
- American Southern’s nine-month underwriting improvement reflected more favorable loss experience and prior underwriting actions; its Q3 loss ratio increased slightly, including commercial auto losses and unfavorable surety development. Growth in commercial auto included a state contract awarded in Q2, with separate reinsurance terms.
- Sales of longer-term fixed maturities generated realized gains but reduced investment income and the portfolio’s long-dated holdings. Management said reinvestment proceeds did not earn equivalent rates; fixed maturities due after ten years fell to $86.4 million from $181.6 million at year-end.
- Management believed existing cash, subsidiary dividends and other intercompany payments, and potential additional borrowings would meet foreseeable liquidity needs. The filing provides no numerical earnings or revenue guidance.
- Ordinary-course claims and lawsuits were not expected by management to materially affect financial condition or results. Forward-looking statements remain subject to risks described in the company’s other SEC filings. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
- Other notable items: the company redeemed $0.5 million of Series D preferred stock during the period; $0.4 million of preferred dividends remained accrued and unpaid. It repurchased 88,165 common shares in Q3 for an average $3.94 per share, with 509,211 shares remaining under the repurchase authorization at quarter-end.
Key facts for investors to verify
- How much of reported earnings growth is repeatable operating performance versus realized investment gains, and whether the non-GAAP operating-income reconciliation is understood.
- Whether Medicare supplement loss trends, premium rate actions and planned distribution/product spending improve Bankers Fidelity underwriting results.
- The durability and reinsurance economics of the new commercial auto contract, including subsequent claims experience and its effect on American Southern’s combined ratio.
- Investment portfolio valuation and reinvestment risks, including unrealized losses, interest-rate exposure and the effect of asset sales on future investment income.
- Parent-level liquidity and access to regulated subsidiary dividends, alongside debt service, preferred dividends and share repurchases.