Add
AAME to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| AAME > SEC Filings for AAME > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
The following is management's discussion and analysis of the financial condition and results of operations of Atlantic American Corporation ("Atlantic American" or the "Parent") and its subsidiaries (collectively, the "Company") for the three month and six month periods ended June 30, 2008. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein, as well as with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007.
Atlantic American is an insurance holding company whose operations are conducted primarily through its insurance subsidiaries: American Southern Insurance Company and American Safety Insurance Company (together known as "American Southern") in the property and casualty insurance market and Bankers Fidelity Life Insurance Company ("Bankers Fidelity") in the life and health insurance market. Each operating company is managed separately, offers different products and is evaluated on its individual performance.
In March 2008, the Company closed on the sale of its regional property and casualty operations, Association Casualty Insurance Company and Association Risk Management General Agency, Inc. (together known as "Association Casualty") and Georgia Casualty & Surety Company ("Georgia Casualty") to Columbia Mutual Insurance Company. In accordance with generally accepted accounting principles, the consolidated financial statements included in this quarterly report reflect the assets, liabilities and operating results of the regional property and casualty operations as discontinued operations. Accordingly, unless otherwise noted, amounts and analyses contained herein reflect the continuing operations of the Company and exclude the regional property and casualty operations. References to income and loss from operations are identified as continuing operations or discontinued operations, while references to net income or net loss reflect the consolidated net results of both continuing and discontinued operations.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and, in management's belief, conform to general practices within the insurance industry. The following is an explanation of the Company's accounting policies and the resultant estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management's initial estimates determined using these policies. Atlantic American does not expect that changes in the estimates determined using these policies will have a material effect on the Company's financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.
Unpaid loss and loss adjustment expenses comprised 25% of the Company's total liabilities at June 30, 2008. This obligation includes estimates for: 1) unpaid losses on claims reported prior to June 30, 2008, 2) development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to June 30, 2008 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to June 30, 2008. Quantification of loss estimates for each of these components involves a significant degree of judgment and estimates may vary, materially, from period to period. Estimated unpaid losses on reported claims are developed based on historical experience with similar claims by the Company. Development on reported claims, estimates of unpaid ultimate losses on claims incurred prior to June 30, 2008 but not yet reported, and estimates of unpaid loss adjustment expenses, are developed based on the Company's historical experience, using actuarial methods to assist in the analysis. The Company's actuarial staff develops ranges of estimated development on reported and unreported claims as well as loss adjustment expenses using various methods including the paid-loss development method, the reported-loss development method, the paid Bornhuetter-Ferguson method and the reported Bornhuetter-Ferguson method. Any single method used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes affecting the business environment and the Company's administrative policies. Further, a variety of external factors, such as legislative changes, medical cost inflation, and others may directly or indirectly impact the relative adequacy of liabilities for unpaid losses and loss adjustment expenses. The Company's approach is to select an estimate of ultimate losses based on comparing results of a variety of reserving methods, as opposed to total reliance on any single method. Unpaid loss and loss adjustment expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used to develop such estimates, the amount of the Company's recorded liability for unpaid loss and loss adjustment expenses is adjusted. In the event the Company's actual reported losses in any period are materially in excess of the previous estimated amounts, such losses, to the extent reinsurance coverage does not exist, would have a material adverse effect on the Company's results of operations.
Future policy benefitscomprised 28% of the Company's total liabilities at June 30, 2008. These liabilities relate primarily to life insurance products and are based upon assumed future investment yields, mortality rates, and withdrawal rates after giving effect to possible risks of adverse deviation. The assumed mortality and withdrawal rates are based upon the Company's experience. If actual results differ from the initial assumptions, the amount of the Company's recorded liability could require adjustment.
Deferred acquisition costscomprised 7% of the Company's total assets at June 30, 2008. Deferred acquisition costs are commissions, premium taxes, and other costs that vary with and are primarily related to the acquisition of new and renewal business and are generally deferred and amortized. The deferred amounts are recorded as an asset on the balance sheet and amortized to expense in a systematic manner. Traditional life insurance and long-duration health insurance deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the related liability for policy benefit reserves. The deferred acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance). Assessments of recoverability for property and casualty and short-duration health insurance are extremely sensitive to the estimates of a subsequent year's projected losses related to the unearned premiums. Projected loss estimates for a current block of business for which unearned premiums remain to be earned may vary significantly from the indicated losses incurred in any given previous calendar year.
Receivables are amounts due from reinsurers, insureds and agents and comprised 7% of the Company's total assets at June 30, 2008. Insured and agent balances are evaluated periodically for collectibility. Annually, the Company performs an analysis of the credit worthiness of the Company's reinsurers using various data sources. Failure of reinsurers to meet their obligations due to insolvencies or disputes could result in uncollectible amounts and losses to the Company. Allowances for uncollectible amounts are established, as and when a loss has been determined probable, against the related receivable. Losses are recognized when determined on a specific account basis and a general provision for loss is made based on the Company's historical experience.
Cash and investmentscomprised 82% of the Company's total assets at June 30, 2008. Substantially all investments are in bonds and common and preferred stocks, the values of which are subject to significant market fluctuations. The Company carries all investments as available for sale and, accordingly, at their estimated fair values. The Company owns certain non-redeemable preferred stocks that do not have quoted values and are carried at estimated fair values as determined by management. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. On occasion, the value of an investment may decline to a value below its amortized purchase price and remain at such value for an extended period of time. When an investment's indicated fair value has declined below its cost basis for a period of time, primarily due to changes in credit risk, the Company evaluates such investment for other than a temporary impairment. If other than a temporary impairment is deemed to exist, then the Company will write down the amortized cost basis of the investment to its estimated fair value. While such write down does not impact the reported value of the investment in the Company's balance sheet, it is reflected as a realized investment loss in the Company's consolidated statements of operations.
Deferred income taxescomprised approximately 3% of the Company's total assets at June 30, 2008. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for tax purposes. These deferred income taxes are measured by applying currently enacted tax laws and rates. Valuation allowances are recognized to reduce the deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income and tax planning strategies.
OVERALL CORPORATE RESULTS
On a consolidated basis, the Company had net income of $0.8 million, or $0.02 per diluted share, for the three month period ended June 30, 2008, compared to net income of $0.4 million, or $0.01 per diluted share, for the three month period ended June 30, 2007. Income from continuing operations was $0.8 million in the three month period ended June 30, 2008, compared to income from continuing operations of $0.6 million in the three month period ended June 30, 2007. The Company had a net loss of $1.0 million, or $0.08 per diluted share, for the six month period ended June 30, 2008, compared to net income of $1.3 million, or $0.02 per diluted share, for the six month period ended June 30, 2007. The net loss in the six month period ended June 30, 2008 was due to the loss from discontinued operations. The loss related to discontinued operations was $2.2 million in the six month period ended June 30, 2008 as compared to income from discontinued operations of $0.3 million in the six month period ended June 30, 2007. Premium revenue for the three month period ended June 30, 2008 decreased $2.3 million, or 9.3%, to $22.4 million. For the six month period ended June 30, 2008, premium revenue decreased $4.4 million, or 8.8%, to $45.4 million. The decrease in premiums in the three month and six month periods ended June 30, 2008 was primarily attributable to continued softening in the property and casualty markets combined with significant product competition in the Company's life and health operations, specifically in the Medicare supplement line of business. Income before tax from continuing operations decreased $0.2 million, or 17.9%, during the three month period ended June 30, 2008, and $0.4 million, or 18.4%, during the six month period ended June 30, 2008, from the comparable periods in 2007, primarily due to fixed expenses decreasing at a slower rate than premium revenues. In addition, during the first quarter of 2008, the Company incurred a $0.3 million goodwill impairment charge which decreased income before tax from continuing operations in the six month period ended June 30, 2008.
The Company's property and casualty operations are comprised of American Southern and the Company's life and health operations consist of the operations of Bankers Fidelity.
A more detailed analysis of the individual operating entities and other corporate activities is provided below.
American Southern
The following is a summary of American Southern's premiums for the three
month and six month periods ended June 30, 2008 and the comparable periods in
2007 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
2008 2007 2008 2007
---------------- --------------- ---------------- --------------
Gross written premiums $ 13,718 $ 12,656 $ 22,506 $ 20,991
Ceded premiums (1,586) (1,798) (3,053) (3,563)
---------------- --------------- ---------------- --------------
Net written premiums $ 12,132 $ 10,858 $ 19,453 $ 17,428
---------------- --------------- ---------------- --------------
Net earned premiums $ 8,790 $ 10,710 $ 18,056 $ 21,672
---------------- --------------- ---------------- --------------
|
Gross written premiums at American Southern increased $1.1 million, or 8.4%, during the three month period ended June 30, 2008, and $1.5 million, or 7.2%, during the six month period ended June 30, 2008, over the comparable periods in 2007. The increase in gross written premiums during the three month and six month periods ended June 30, 2008 was primarily due to a significant increase in commercial automobile business generated by a newly appointed agency. Also contributing to the increase in gross written premiums during the six month period ended June 30, 2008 were increased business writings in the surety line of business. Partially offsetting these increases in gross written premiums were decreases in both the general liability and property lines of business due to the weak construction economy, particularly in the state of Florida.
Ceded premiums decreased $0.2 million, or 11.8%, during the three month period ended June 30, 2008, and $0.5 million, or 14.3%, during the six month period ended June 30, 2008, from the comparable periods in 2007. The decrease in ceded premiums during the three month and six month periods ended June 30, 2008 was primarily due to the significant decline in earned premiums. As American Southern's premiums are determined and ceded as a percentage of earned premiums, a decrease in ceded premiums occurs when earned premiums decrease.
The following presents American Southern's net earned premiums by line of business for the three month and six month periods ended June 30, 2008 and the comparable periods in 2007 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------
2008 2007 2008 2007
------------- -------------- ------------ -----------
Commercial automobile $ 4,108 $ 4,991 $ 8,369 $ 9,990
Private passenger auto - 1 - 43
General liability 2,037 2,693 4,247 5,345
Property 608 655 1,203 1,383
Surety 2,037 2,370 4,237 4,911
------------- -------------- ------------ -----------
Total $ 8,790 $ 10,710 $ 18,056 $ 21,672
------------- -------------- ------------ -----------
|
Net earned premiums decreased $1.9 million, or 17.9%, during the three month period ended June 30, 2008, and $3.6 million, or 16.7%, during the six month period ended June 30, 2008, from the comparable periods in 2007, primarily due to the decline in policy writings in 2007. During 2007, American Southern experienced a significant decrease in gross written premiums, which was primarily attributable to the loss of a program marketed through a certain general agent. Prior to 2007, this program produced approximately $10 million in annualized gross written premiums, substantially all of which were earned through and including in 2007.
The following sets forth American Southern's loss and expense ratios for the three month and six month periods ended June 30, 2008 and for the comparable periods in 2007:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2008 2007 2008 2007
--------- --------- -------- --------
Loss ratio 43.4% 49.2% 40.7% 47.5%
Expense ratio 51.9% 41.5% 52.3% 43.2%
--------- --------- -------- --------
Combined ratio 95.3% 90.7% 93.0% 90.7%
--------- --------- -------- --------
|
The loss ratio for the three month period ended June 30, 2008 decreased to 43.4% from 49.2% in the three month period ended June 30, 2007 and to 40.7% in the six month period ended June 30, 2008 from 47.5% in the comparable period of 2007. The decrease in the loss ratio for the three month and six month periods ended June 30, 2008 was primarily attributable to lower claims in the commercial automobile line of business and favorable loss experience in the property lines of business.
The expense ratio for the three month period ended June 30, 2008 increased to 51.9% from 41.5% in the three month period ended June 30, 2007 and to 52.3% in the six month period ended June 30, 2008 from 43.2% in the comparable period of 2007. The increase in the expense ratio in the three month and six month periods ended June 30, 2008 was primarily due to American Southern's variable commission structure, which compensates the company's agents in relation to the loss ratios of the business they write. In periods where the loss ratio decreases, commissions and underwriting expenses will increase and conversely in periods where the loss ratio increases, commissions and underwriting expenses will decrease. Also contributing to the increase in the expense ratio was a relatively consistent level of fixed expenses coupled with a decrease in premium revenues.
Bankers Fidelity
The following summarizes Bankers Fidelity's earned premiums for the three
month and six month periods ended June 30, 2008 and the comparable periods in
2007 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------- ------------ ------------
Medicare supplement $ 10,164 $ 10,273 $ 20,535 $ 20,855
Other health 854 978 1,719 1,882
Life 2,559 2,712 5,089 5,352
------------ ------------- ------------ ------------
Total $ 13,577 $ 13,963 $ 27,343 $ 28,089
------------ ------------- ------------ ------------
|
Premium revenue at Bankers Fidelity decreased $0.4 million, or 2.8%, during the three month period ended June 30, 2008, and $0.7 million, or 2.7%, during the six month period ended June 30, 2008, from the comparable periods in 2007. Premiums from the Medicare supplement and other health lines of business decreased $0.2 million, or 2.1%, during the three month period ended June 30, 2008 and $0.5 million, or 2.1%, during the six month period ended June 30, 2008, due to the non-renewal of certain policies that resulted from increased pricing and product competition. Premiums from the life insurance line of business decreased $0.2 million, or 5.6%, during the three month period ended June 30, 2008, and $0.3 million, or 4.9%, during the six month period ended June 30, 2008, from the comparable periods in 2007, due to the redemption and settlement of existing policies exceeding the level of new sales activity.
The following summarizes Bankers Fidelity's operating expenses for the three month and six month periods ended June 30, 2008 and the comparable periods in 2007 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2008 2007 2008 2007
-------------- -------------- -------------- --------------
Benefits and losses $ 9,863 $ 10,517 $ 20,248 $ 20,891
Commission and other
expenses 3,884 4,737 8,282 9,727
-------------- -------------- -------------- --------------
Total expenses $ 13,747 $ 15,254 $ 28,530 $ 30,618
-------------- -------------- -------------- --------------
|
Benefits and losses decreased $0.7 million, or 6.2%, during the three month period ended June 30, 2008, and $0.6 million, or 3.1%, during the six month period ended June 30, 2008, from the comparable periods in 2007. As a percentage of premiums, benefits and losses were 72.6% for the three month period ended June 30, 2008 and 74.1% for the six month period ended June 30, 2008 compared to 75.3% for the three month period ended June 30, 2007 and 74.4% for the six month period ended June 30, 2007. The decrease in the loss ratio for the three month and six month periods ended June 30, 2008 was primarily due to favorable loss experience in the Medicare supplement line of business. Rate increases implemented by the company on the Medicare supplement line of business have helped to mitigate the impact of higher medical costs.
Commissions and other expenses decreased $0.9 million, or 18.0%, during the three month period ended June 30, 2008, and $1.4 million, or 14.9%, during the six month period ended June 30, 2008, from the comparable periods in 2007. The decrease in commissions and other expenses for the three month and six month periods ended June 30, 2008 was primarily due to certain reductions in compensation, which were effective October 1, 2007, as well as decreases in advertising and agency related expenses. As a percentage of premiums, these expenses were 28.6% for the three month period ended June 30, 2008 and 30.3% for the six month period ended June 30, 2008 compared to 33.9% for the three month period ended June 30, 2007 and 34.6% for the six month period ended June 30, 2007.
INVESTMENT INCOME AND REALIZED GAINS
Investment income increased slightly during the three month period ended June 30, 2008 over the three month period ended June 30, 2007, and decreased $0.2 million, or 3.3%, during the six month period ended June 30, 2008, from the comparable period in 2007. The increase in investment income for the three month period ended June 30, 2008 was primarily attributable to an increased level of invested assets which resulted from the Company investing the proceeds received from the sale of its regional property and casualty operations. The decrease in investment income for the six month period ended June 30, 2008 was primarily due to a large number of called securities, the proceeds of which the Company was not able to reinvest at equivalent market rates.
The Company had net realized investment gains of $26,000 during the six month period ended June 30, 2008, compared to net realized investment losses of $3,000 in the six month period ended June 30, 2007. Management continually evaluates the Company's investment portfolio and, as needed, makes adjustments for impairments and/or will divest investments. (See Item 3 for a discussion about market risks).
INTEREST EXPENSE
Interest expense decreased $0.2 million, or 23.3%, during the three month period ended June 30, 2008, and $0.3 million, or 16.7%, during the six month period ended June 30, 2008, from the comparable periods in 2007. The decrease in interest expense for the three month and six month periods ended June 30, 2008 was primarily due to a decrease in the London Interbank Offered Rate ("LIBOR"), which occurred in the latter half of 2007 and into 2008. The interest rates on the Company's trust preferred obligations and the outstanding bank debt are based on LIBOR. In addition, on April 1, 2008, the Company repaid the outstanding balance of $3.8 million to Wachovia Bank, National Association ("Wachovia") under the Company's credit agreement, which decreased interest expense by reducing the Company's average debt level during the three month period ended June 30, 2008.
OTHER EXPENSES
Other expenses (commissions, underwriting expenses, and other expenses) increased $0.4 million, or 4.1%, during the three month period ended June 30, 2008 over the three month period ended June 30, 2007, and decreased $0.2 million, or 1.2%, during the six month period ended June 30, 2008, from the comparable period in 2007. The increase in other expenses for the three month period ended June 30, 2008 was primarily due to increased legal fees as well as the reversal of a management bonus accrual in the three month period ended June 30, 2007. The decrease in other expenses for the six month period ended June 30, 2008 was primarily attributable to certain reductions in compensation, which were effective October 1, 2007, the elimination of certain corporate positions and other cost reduction initiatives which were implemented in the fourth quarter of 2007. Partially offsetting this decrease in other expenses was a $0.3 million goodwill impairment charge taken in the three month period ended March 31, 2008, coupled with the increased legal fees described above. On a consolidated basis, as a percentage of earned premiums, other expenses increased . . .
|
|