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AAME > SEC Filings for AAME > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for ATLANTIC AMERICAN CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ATLANTIC AMERICAN CORP


14-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 with the Parent, the "Company") as of and for the three month period ended March 31, 2013. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere herein, as well as with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

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") and Bankers Fidelity Life Insurance Company ("Bankers Fidelity"). Each operating company is managed separately, offers different products and is evaluated on its individual performance.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates. The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company's critical accounting policies and the resultant estimates considered most significant by management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. During the three month period ended March 31, 2013, there were no changes to the critical accounting policies or related estimates from those disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards applicable to the Company, see Note 2 of the accompanying notes to the unaudited condensed consolidated financial statements.

Overall Corporate Results

The following presents the Company's revenue, expenses and net income for the
three month period ended March 31, 2013 and the comparable period in 2012:

                                           Three Months Ended
                                                March 31,
                                            2013          2012
                                             (In thousands)
Insurance premiums                       $   33,019     $ 30,681
Investment income                             2,905        2,883
Realized investment gains, net                  678          958
Other income                                     48           29
Total revenue                                36,650       34,551
Insurance benefits and losses incurred       23,362       22,672
Commissions and underwriting expenses         9,283        7,033
Other expense                                 2,417        2,469
Interest expense                                577          657
Total benefits and expenses                  35,639       32,831
Income before income taxes               $    1,011     $  1,720
Net income                               $      922     $  1,657

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Management evaluates operating income and believes it is a useful metric for investors, potential investors, securities analysts and others because it isolates the "core" results of the Company before considering certain items that are either beyond the control of management (such as taxes, which are subject to timing, regulatory and rate changes depending on the timing of the associated revenues and expenses) or are not expected to regularly impact the Company's operational results (such as any realized investment gains, which are not a part of the Company's primary operations and are, to an extent, subject to discretion in terms of timing of realization).

A reconciliation of net income to operating income for the three month period ended March 31, 2013 and the comparable period in 2012 is as follows:

                                                         Three Months Ended
                                                              March 31,
Reconciliation of Net Income to non-GAAP Measurement     2013           2012
                                                           (In thousands)
Net income                                             $     922       $ 1,657
Income tax expense                                            89            63
Realized investment gains, net                              (678 )        (958 )
Operating income                                       $     333       $   762

On a consolidated basis, the Company had net income of $0.9 million, or $0.04 per diluted share, for the three month period ended March 31, 2013, compared to net income of $1.7 million, or $0.07 per diluted share, for the three month period ended March 31, 2012. The decrease in net income during the three month period ended March 31, 2013 was primarily attributable to increased losses in the life and health operations, increases in advertising expense for television commercials and social media initiatives as well as a decrease in realized investment gains. Operating income decreased to $0.3 million in the three month period ended March 31, 2013 from $0.8 million in the comparable period of 2012. Premium revenue for the three month period ended March 31, 2013 increased $2.3 million, or 7.6%, to $33.0 million. The increase in premium revenue was primarily due to an increase in Medicare supplement business in the life and health operations. While premiums in the property and casualty operations decreased, profitability increased due to a more favorable loss experience in the three month period ended March 31, 2013 as compared to the same period in 2012.

A more detailed analysis of the individual operating companies and other corporate activities is provided below.

American Southern

The following summarizes American Southern's premiums, losses, expenses and
underwriting ratios for the three month period ended March 31, 2013 and the
comparable period in 2012:

                                            Three Months Ended
                                                 March 31,
                                            2013             2012
                                          (Dollars in thousands)
Gross written premiums                  $       8,876      $  9,549
Ceded premiums                                 (1,897 )      (1,915 )
Net written premiums                    $       6,979      $  7,634
Net earned premiums                     $       8,927      $  9,812
Net loss and loss adjustment expenses           5,322         8,019
Underwriting expenses                           3,726         2,529
Underwriting loss                       $        (121 )    $   (736 )
Loss ratio                                       59.6 %        81.7 %
Expense ratio                                    41.8          25.8
Combined ratio                                  101.4 %       107.5 %

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Gross written premiums at American Southern decreased $0.7 million, or 7.0%, during the three month period ended March 31, 2013 from the comparable period in 2012. The decrease in gross written premiums was primarily attributable to a decrease of $1.5 million in commercial automobile written premiums resulting from the cancellation by the company of two agencies and a trucking liability program in 2012 due to unfavorable loss experience. Partially offsetting the decrease in gross written premiums was an increase of $0.8 million in commercial automobile business written by an existing agency attributable to new business and rate increases on renewal business.

Ceded premiums decreased slightly during the three month period ended March 31, 2013 from the comparable period in 2012. The decrease in ceded premiums was primarily due to the decrease in related earned premiums. As American Southern's ceded premiums are determined 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 period ended March 31, 2013 and the comparable period in 2012 (in thousands):

                          Three Months Ended
                               March 31,
                           2013          2012
                            (In thousands)
Commercial automobile   $    5,862      $ 6,320
General liability              750        1,163
Property                       599          442
Surety                       1,716        1,887
Total                   $    8,927      $ 9,812

Net earned premiums decreased $0.9 million, or 9.0%, during the three month period ended March 31, 2013 from the comparable period in 2012. The decrease in net earned premiums was primarily attributable to the decline in commercial automobile and general liability earned premiums resulting from the cancellation by the company of two agencies and a trucking liability program as discussed previously as well as the cancellation of certain general liability programs in 2012. Premiums are earned ratably over their respective policy terms, and therefore premiums earned in the current year are related to policies written during both the current year and immediately preceding year.

Net loss and loss adjustment expenses at American Southern decreased $2.7 million, or 33.6%, during the three month period ended March 31, 2013 from the comparable period in 2012. As a percentage of premiums, net loss and loss adjustment expenses were 59.6% in the three month period ended March 31, 2013, compared to 81.7% in the three month period ended March 31, 2012. The decrease in the loss ratio was primarily due to more favorable loss experience in all lines of business during the three month period ended March 31, 2013 as compared to the same period of 2012. During the three month period ended March 31 2012, American Southern experienced significant increases in the frequency and severity of claims in the commercial automobile, general liability and surety lines of business which did not recur in the comparable 2013 period. The improvement in the current year loss ratio was primarily attributable to the rationalization of American Southern's book of business and strengthening of the underwriting guidelines with respect to such business.

Underwriting expenses increased $1.2 million, or 47.3%, during the three month period ended March 31, 2013 over the comparable period in 2012. As a percentage of premiums, underwriting expenses were 41.8% in the three month period ended March 31, 2013, compared to 25.8% in the three month period ended March 31, 2012. The increase in the expense ratio 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. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease. During the three month period ended March 31, 2013, these commissions at American Southern increased $1.2 million from the comparable period in 2012 due to the more favorable loss experience.

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Bankers Fidelity

The following summarizes Bankers Fidelity's earned premiums, losses, expenses
and underwriting ratios for the three month period ended March 31, 2013 and the
comparable period in 2012:

                                    Three Months Ended
                                         March 31,
                                    2013             2012
                                  (Dollars in thousands)
Medicare supplement             $      20,197      $ 16,874
Other health products                   1,145         1,118
Life insurance                          2,750         2,877
Total earned premiums                  24,092        20,869
Insurance benefits and losses          18,040        14,653
Underwriting expenses                   6,861         5,813
Total expenses                         24,901        20,466
Underwriting income (loss)      $        (809 )    $    403
Loss ratio                               74.9 %        70.2 %
Expense ratio                            28.5          27.9
Combined ratio                          103.4 %        98.1 %

Premium revenue at Bankers Fidelity increased $3.2 million, or 15.4%, during the three month period ended March 31, 2013 over the comparable period in 2012. Premiums from the Medicare supplement line of business increased $3.3 million, or 19.7%, during the three month period ended March 31, 2013, due primarily to an increase in business generated from the company's core producers and newly appointed general agents, an increase in business issued in the state of Missouri as a result of favorable pricing compared to competitors, and active management and implementation of rate increases on renewal business, as appropriate. Other health product premiums increased slightly during the same comparable period, primarily as a result of new sales of the company's short-term care products. Premiums from the life insurance line of business decreased $0.1 million, or 4.4%, during the three month period ended March 31, 2013 due to redemption and settlement of existing policy obligations exceeding the level of new sales activity.

Benefits and losses increased $3.4 million, or 23.1%, during the three month period ended March 31, 2013 over the comparable period in 2012. As a percentage of premiums, benefits and losses were 74.9% in the three month period ended March 31, 2013, compared to 70.2% in the three month period ended March 31, 2012. The increase in the loss ratio was primarily attributable to unfavorable loss experience in the Medicare supplement line of business during the three month period ended March 31, 2013 as compared to the same period in 2012. During the three month period ended March 31, 2013, Bankers Fidelity experienced an increase in losses in the Medicare supplement line of business resulting from a disproportionate number of first quarter deductible reimbursements. As the company's Medicare supplement product generally reimburses the annual Part B deductible of an insured, annual deductible reimbursements are generally incurred disproportionately at the beginning of a calendar year as opposed to the end of a calendar year. Such trends were even more pronounced in the first quarter of 2013. Bankers Fidelity continues to implement rate increases on its Medicare supplement business to help mitigate the impact of higher medical costs.

Underwriting expenses increased $1.0 million, or 18.0%, during the three month period ended March 31, 2013 over the comparable period in 2012. As a percentage of premiums, underwriting expenses were 28.5% in the three month period ended March 31, 2013, compared to 27.9% in the three month period ended March 31, 2012. The increase in the expense ratio was primarily attributable to increases in advertising and agency related expenses. Advertising expenses increased $0.5 million in the three month period ended March 31, 2013 over the comparable period in 2012 and included charges for television commercials and social media initiatives.

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INVESTMENT INCOME AND REALIZED GAINS

Investment income increased slightly during the three month period ended March 31, 2013 over the comparable period in 2012. The increase in investment income was primarily attributable to a higher average balance of fixed maturities held by the Company in the three month period ended March 31, 2013 as compared to the same period of 2012.

The Company had net realized investment gains of $0.7 million during the three month period ended March 31, 2013, compared to net realized investment gains of $1.0 million in the three month period ended March 31, 2012. The net realized investment gains in the three month periods ended March 31, 2013 and 2012 resulted from the disposition of several of the Company's investments in fixed maturities. Management continually evaluates the Company's investment portfolio and, as may be determined to be appropriate, makes adjustments for impairments and/or will divest investments.

INTEREST EXPENSE

Interest expense decreased $0.1 million, or 12.2%, during the three month period ended March 31, 2013 from the comparable period in 2012 due primarily to the termination of the Company's zero cost interest rate collar with Wells Fargo Bank, National Association ("Wells Fargo") on March 4, 2013, the stated maturity date, by its terms. The interest rate collar had a London Interbank Offered Rate ("LIBOR") floor of 4.77%. As a result of interest rates remaining below the LIBOR floor, the Company was required to make payments to Wells Fargo under the interest rate collar for all periods presented, through the maturity date.

OTHER EXPENSES

Other expenses (commissions, underwriting expenses, and other expenses) increased $2.2 million, or 23.1%, during the three month period ended March 31, 2013 over the comparable period in 2012. The increase in other expenses was primarily attributable to increased commission accruals at American Southern due to recent favorable loss experience. During the three month period ended March 31, 2013, these commissions at American Southern increased $1.2 million over the comparable period in 2012. The majority of American Southern's business is structured in a way that agents are compensated based upon the loss ratios of the business they place with the company. During periods in which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases, commissions and underwriting expenses will generally decrease. Also contributing to the increase in other expenses was an increase in commission and underwriting costs in the life and health operations associated with the higher volume of business as well as increases in advertising and agency related expenses. On a consolidated basis, as a percentage of earned premiums, other expenses increased to 35.4% in the three month period ended March 31, 2013 from 31.0% in the three month period ended March 31, 2012. The increase in the expense ratio was primarily attributable to the increase in commission accruals and advertising expenses discussed previously.

INCOME TAXES

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month period ended March 31, 2013 resulted from the dividends received deduction ("DRD") and the change in deferred tax asset valuation allowance. The current estimated DRD is adjusted as underlying factors change and can vary from the estimates based on, but not limited to, actual distributions from investments as well as the amount of the Company's taxable income. The change in deferred tax asset valuation allowance was due to the unanticipated utilization of certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation allowance reserve. The primary differences between the effective tax rate and the federal statutory income tax rate for the three month period ended March 31, 2012 resulted from the DRD, the small life insurance company deduction ("SLD") and the change in deferred tax asset valuation allowance. The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income ("LICTI"). The SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3.0 million and is ultimately phased out at $15.0 million. The change in deferred tax asset valuation allowance was also due to the utilization of certain capital loss carryforward benefits.

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LIQUIDITY AND CAPITAL RESOURCES

The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and surplus levels, and meeting debt service requirements. Current and expected patterns of claim frequency and severity may change from period to period but generally are expected to continue within historical ranges. The Company's primary sources of cash are written premiums, investment income and proceeds from the sale and maturity of its invested assets. The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts and reinsurance collections will be adequate to fund the payment of claims and expenses as needed.

Cash flows at the Parent are derived from dividends, management fees, and tax-sharing payments, as described below, from the subsidiaries. The cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements, as well as the repurchase of shares and payments of any dividends as may be authorized and approved by the Company's board of directors from time to time. At March 31, 2013, the Parent had approximately $27.9 million of unrestricted cash and investments.

The Parent's insurance subsidiaries reported statutory net income of $2.0 million for the three month period ended March 31, 2013 compared to statutory net income of nil for the three month period ended March 31, 2012. 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 GAAP. Statutory results for the Company's property and casualty operations may differ from the Company's results of operations under GAAP due to the deferral of acquisition costs for financial reporting purposes. The Company's life and health operations' statutory results may 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.

Over 90% of the invested assets of the Parent's insurance subsidiaries are invested in marketable securities that can be converted into cash, if required; however, the use of such assets by the Company is limited by state insurance regulations. Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At March 31, 2013, American Southern had $37.5 million of statutory surplus and Bankers Fidelity had $34.2 million of statutory surplus. In 2013, dividend payments by the Parent's insurance subsidiaries in excess of $9.6 million would require prior approval.

The Parent provides certain administrative and other services to each of its insurance subsidiaries. The amounts charged to and paid by the subsidiaries include reimbursements for various shared services and other expenses incurred directly on behalf of the subsidiaries by the Parent. In addition, there is in place a formal tax-sharing agreement between the Parent and its insurance subsidiaries. It is anticipated that this agreement will provide the Parent with additional funds from profitable subsidiaries due to the subsidiaries' use of the Parent's tax loss carryforwards, which totaled approximately $4.7 million at March 31, 2013.

The Company has two statutory trusts which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trusts and investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures ("Junior Subordinated Debentures"). The outstanding $18.0 million and $23.2 million of Junior Subordinated Debentures mature on December 4, 2032 and May 15, 2033, respectively, are callable quarterly, in whole or in part, only at the option of the Company, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to 4.10%. At March 31, 2013, the effective interest rate was 4.4%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust's obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities. The Company has not made such an election.

The Company intends to pay its obligations under the Junior Subordinated Debentures using existing cash balances, dividend and tax-sharing payments from the operating subsidiaries, or from potential future financing arrangements.

The Company had a zero cost interest rate collar with Wells Fargo, which terminated on March 4, 2013, the stated maturity date, by its terms. There were no balances outstanding under the zero cost interest rate collar at that time.

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At March 31, 2013, 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 Company's controlling shareholder. 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 Company's 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 Company's 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 Company's option. The Series D Preferred Stock is not currently convertible. At March 31, 2013, the Company had accrued but unpaid dividends on the Series D Preferred Stock totaling $0.1 million.

Cash and cash equivalents decreased from $19.0 million at December 31, 2012 to $18.8 million at March 31, 2013. The decrease in cash and cash equivalents during the three month period ended March 31, 2013 was primarily attributable to net cash used in operating activities of $2.8 million and the purchase of shares for treasury for $0.3 million. Partially offsetting the decrease was net cash provided by investing activities of $2.9 million resulting from the sale and . . .

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