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Atlantic American Corp. Reports Operating Results (10-Q)

May 14, 2009 | About:
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Atlantic American Corp. (AAME) filed Quarterly Report for the period ended 2009-03-31.

Atlantic American Corporation is a holding company that operates through its subsidiaries in well-defined specialty markets of the life health property and casualty insurance industries. Atlantic American Corp. has a market cap of $14.9 million; its shares were traded at around $0.68 with a P/E ratio of 6.8 and P/S ratio of 0.2. Atlantic American Corp. had an annual average earning growth of 10.9% over the past 5 years.

Highlight of Business Operations:

On a consolidated basis, the Company had net income of $0.3 million, or $0.01 per diluted share, for the three month period ended March 31, 2009, compared to a net loss of $1.7 million, or $0.10 per diluted share, for the three month period ended March 31, 2008. Income from continuing operations was $0.3 million in the three month period ended March 31, 2009, compared to $0.4 million in the three month period ended March 31, 2008. The net loss in the three month period ended March 31, 2008 was due to the $2.2 million loss from discontinued operations. Premium revenue for the three month period ended March 31, 2009 decreased $0.2 million, or 1.0%, to $22.8 million from $23.0 million in the comparable period of 2008. The decrease in premiums in the three month period ended March 31, 2009 was primarily attributable to continued softening in the property and casualty markets combined with the market competition in the Medicare supplement line of business. Income before tax from continuing operations decreased $0.4 million, or 57.4%, in the three month period ended March 31, 2009, from the comparable period in 2008. The decrease in income before tax from continuing operations was primarily due to several large automobile claims incurred in the Companys property and casualty operations during the three month period ended March 31, 2009. These losses were partially offset by a reduction in the accrual for profit sharing commissions and the related agent contracts.

Other expenses (commissions, underwriting expenses, and other expenses) decreased $0.6 million, or 6.1%, during the three month period ended March 31, 2009 from the comparable period in 2008. The decrease in other expenses for the three month period ended March 31, 2009 was primarily attributable to the reduction in profit sharing commissions at American Southern. During the three month period ended March 31, 2009, profit sharing commissions at American Southern decreased $0.5 million from the three month period ended March 31, 2008 due primarily to higher loss ratios. The majority of American Southerns business is structured in a way that agents are rewarded or penalized based upon the loss ratios of the business they submit to the company. In periods where the loss ratio increases, commissions and underwriting expenses will decrease and conversely in periods where the loss ratio decreases, commissions and underwriting expenses will increase. Also contributing to the decrease in other expenses was a $0.3 million goodwill impairment charge taken in the three month period ended March 31, 2008 which did not recur in the three month period ended March 31, 2009. On a consolidated basis, as a percentage of earned premiums, other expenses decreased to 42.6% in the three month period ended March 31, 2009 from 44.9% in the three month period ended March 31, 2008. The decrease in the expense ratio for the three month period ended March 31, 2009 was primarily due to the reduction in profit sharing commissions and the goodwill impairment charge discussed previously.

The Parents insurance subsidiaries reported statutory net income of $1.9 million for the three month period ended March 31, 2009 compared to statutory net income of $2.5 million for the three month period ended March 31, 2008. Statutory results are impacted by the recognition of all costs of acquiring business. In a scenario in which the Company is growing, statutory results are generally lower than results determined under generally accepted accounting principles (GAAP). The Parents insurance subsidiaries reported GAAP net income of $1.8 million for the three month period ended March 31, 2009, compared to $2.0 million for the three month period ended March 31, 2008. The reasons for the decrease in GAAP net income in the three month period ended March 31, 2009 are discussed above under Results of Operations. Statutory results for the Companys property and casualty operations differ from the Companys results of operations under GAAP due to the deferral of acquisition costs for financial reporting purposes. The Companys life and health operations statutory results differ from GAAP results primarily due to the deferral of acquisition costs for financial reporting purposes, as well as the use of different reserving methods.

At March 31, 2009, the Company had 70,000 shares of Series D Preferred Stock (Series D Preferred Stock) outstanding. All of the shares of Series D Preferred Stock are held by an affiliate of the Companys Chairman Emeritus. The outstanding shares of Series D Preferred Stock have a stated value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Companys common stock at the option of the board of directors of the Company) and are cumulative. In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,754,000 shares of the Companys common stock, subject to certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval; and are redeemable solely at the Companys option. The Series D Preferred Stock is not currently convertible. At March 31, 2009, the Company had accrued, but unpaid, dividends on the Series D Preferred Stock totaling $0.1 million.

Net cash used in operating activities was $6.1 million in the three month period ended March 31, 2009, compared to $7.7 million in the three month period ended March 31, 2008. Cash and short-term investments decreased from $37.3 million at December 31, 2008 to $23.9 million at March 31, 2009. The decrease in cash and short-term investments during the three month period ended March 31, 2009 was primarily due to an increased level of investing exceeding normal sales and maturities. Also contributing to the decrease in cash and short-term investments during the three month period ended March 31, 2009 was a final settlement of $1.8 million with Columbia Mutual Insurance Company relating to a valuation matter with respect to certain loss reserves in connection with the 2008 sale of the Companys regional property and casualty operations.

Due to the nature of the Companys business it is exposed to both interest rate and market risk. Changes in interest rates, which have historically represented the largest market risk factor affecting the Company, may result in changes in the fair market value of the Companys investments, cash flows and interest income and expense. The Company is also subject to risk from changes in equity prices. During the three month period ended March 31, 2009, the Companys investments in fixed maturities, non-redeemable preferred stocks and common stocks decreased as a result of numerous macroeconomic factors which impacted significantly all of the United States financial markets. In addition, as of March 31, 2009, the carrying value of the Companys investments in the fixed maturity securities of General Motors and General Motors Acceptance Corporation decreased from the value as of December 31, 2008 primarily as a result of changes in the credit risk of the issuers as well as the overall liquidity and credit uncertainties in the financial markets. The carrying amount of these fixed maturity investments at March 31, 2009 was $4.4 million with an adjusted cost basis of $8.1 million.

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