Atlantic American Corporation — Q1 2022 Form 10-Q
Business and period: Insurance holding company reporting the three months ended March 31, 2022, compared with Q1 2021. American Southern operates in property and casualty insurance; Bankers Fidelity operates in life and health insurance. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Total revenue | $51.6 | $49.1 |
| Net premiums | $47.1 | $46.1 |
| Net investment income | $2.34 | $2.11 |
| Net income (loss) | $2.84 | $(0.43) |
| Net income (loss) applicable to common shareholders; diluted EPS | $2.74; $0.13 | $(0.53); $(0.03) |
| Non-GAAP operating income (loss) | $1.61 | $(1.41) |
| Net cash used in operating activities | $(8.01) | $(6.04) |
| Cash and cash equivalents, at quarter-end | $15.61 | $24.75 at Dec. 31, 2021 |
| Total assets / shareholders’ equity, at quarter-end | $375.0 / $126.4 | $402.3 / $141.3 at Dec. 31, 2021 |
Total benefits and expenses were $47.8 million, versus $49.6 million a year earlier. Insurance benefits and losses fell to $31.2 million from $33.3 million. The company reported total comprehensive loss of $14.4 million, principally reflecting a $17.2 million after-tax loss on available-for-sale fixed maturities recorded in other comprehensive income.
At March 31, 2022, liabilities included $33.7 million of net junior subordinated debentures; there were no borrowings under the $10 million revolving credit facility. The company also reported $4.2 million of operating lease liabilities. Parent unrestricted cash and investments were approximately $3.5 million. Subsidiary statutory capital and surplus was $53.4 million at American Southern and $38.5 million at Bankers Fidelity.
Changes and segment results
- Revenue rose 5.2%; net premiums increased 2.2%. The company moved from a net loss to net income, while operating income improved by approximately $3.0 million.
- American Southern’s underwriting income was $0.92 million versus $0.58 million; its combined ratio improved to 94.7% from 96.5%. The loss ratio improved, but the expense ratio rose to 34.3% from 25.8%, partly because variable commissions increased with favorable loss experience.
- Bankers Fidelity moved to underwriting income of $0.30 million from a $1.93 million loss; its combined ratio improved to 99.0% from 106.5%. Medicare supplement earned premiums declined, partly offset by growth in group health and life products.
- Cash fell $9.14 million during the quarter, mainly reflecting operating cash use and net investment purchases. Investment portfolio fair value declined to $264.9 million from $283.4 million at year-end.
Outlook, risks, and unusual items
The filing provides no numerical earnings or revenue guidance. Management says existing cash, expected subsidiary dividends, fees and tax-sharing payments, and available borrowing capacity should meet liquidity needs for the foreseeable future. Management also expects subsidiary investments and related inflows to support policy claims and operating costs, subject to insurance regulation.
- Rising interest rates drove a sharp increase in fixed-maturity unrealized losses: $5.64 million at quarter-end versus $0.72 million at year-end, with 141 securities in loss positions versus 61. The company classified the losses as temporary, reported no other-than-temporary impairment charges, and said it did not intend or expect to need to sell the securities.
- Loss experience, reserve estimates, reinsurance recoveries, investment valuations and interest-rate movements remain important uncertainties. Prior-year reserve development was favorable by $1.52 million in Q1 2022, compared with unfavorable development of $0.48 million in Q1 2021.
- The company is assessing the transition from LIBOR. Its junior subordinated debentures bear LIBOR-based rates, with a stated effective rate of 4.57% at March 31, 2022; the company reported no interest-payment deferral.
- A state regulator had alleged violations involving certain policy sales. After quarter-end, the company agreed to a consent-order settlement including a penalty, which was recorded as a liability at March 31. The filing text does not provide a clear value for the penalty. Management said known ordinary-course litigation was not expected to materially affect results or financial condition.
- Unfunded commitments to certain investment partnerships were $12.78 million at March 31, up from $2.00 million at year-end; funding may be called during the commitment period. The company’s stated maximum loss exposure on existing VIE interests was $1.66 million.
Key facts for investors to verify
- Whether the regulatory settlement penalty and any related compliance costs are fully reflected in the reported liability and future results.
- Whether favorable claims experience and underwriting improvements persist, especially given American Southern’s higher expense ratio and Bankers Fidelity’s Medicare supplement premium contraction.
- How interest-rate changes affect fixed-maturity values, capital, investment income, and the company’s ability to hold securities until recovery.
- Cash generation and parent-level liquidity, including the timing and regulatory availability of subsidiary dividends and tax-sharing payments.
- Funding calls against the $12.78 million partnership commitments, and the costs and terms of LIBOR transition for the floating-rate debentures.