Atlantic American(AAME) - 2020 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements The company presents its unaudited condensed consolidated financial statements for the periods ended June 30, 2020 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (Dollars in thousands) | Item | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :------------------ | | ASSETS | | | | Total Assets | $385,737 | $377,626 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total Liabilities | $261,843 | $259,232 | | Total Shareholders' Equity | $123,894 | $118,394 | Condensed Consolidated Statements Of Operations Condensed Consolidated Statements of Operations Highlights (Dollars in thousands, except per share data) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Revenue | $49,737 | $43,127 | $89,147 | $98,145 | | Total Benefits and Expenses | $41,456 | $48,716 | $91,093 | $98,449 | | Income (loss) before income taxes | $8,281 | $(5,589) | $(1,946) | $(304) | | Net income (loss) | $6,532 | $(4,426) | $(1,555) | $(264) | | Net income (loss) applicable to common shareholders | $6,432 | $(4,526) | $(1,754) | $(463) | | Earnings (loss) per common share (basic) | $0.31 | $(0.22) | $(0.09) | $(0.02) | | Earnings (loss) per common share (diluted) | $0.30 | $(0.22) | $(0.09) | $(0.02) | - For the three months ended June 30, 2020, the company reported a net income of $6,532 thousand, a significant improvement from a net loss of $4,426 thousand in the prior year period[8] - However, for the six months ended June 30, 2020, the company reported a net loss of $1,555 thousand, an increase from a net loss of $264 thousand in the prior year period[8] Condensed Consolidated Statements Of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income Highlights (Dollars in thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $6,532 | $(4,426) | $(1,555) | $(264) | | Total other comprehensive income, net of tax | $15,797 | $5,809 | $7,005 | $12,262 | | Total comprehensive income | $22,329 | $1,383 | $5,450 | $11,998 | - Total comprehensive income significantly increased to $22,329 thousand for the three months ended June 30, 2020, from $1,383 thousand in the prior year, primarily driven by a substantial increase in other comprehensive income, net of tax[9] Condensed Consolidated Statements Of Shareholders' Equity Condensed Consolidated Statements of Shareholders' Equity Highlights (Dollars in thousands) | Item | June 30, 2020 | June 30, 2019 | | :------------------------------------- | :------------ | :------------ | | Total shareholders' equity (end of period) | $123,894 | $112,770 | | Retained earnings (end of period) | $34,266 | $36,342 | | Accumulated other comprehensive income (loss) (end of period) | $17,464 | $4,727 | - Total shareholders' equity increased to $123,894 thousand as of June 30, 2020, from $112,770 thousand as of June 30, 2019, primarily due to a significant increase in accumulated other comprehensive income[11] Condensed Consolidated Statements Of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (Dollars in thousands) | Item | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $558 | $(7,219) | | Net cash provided by investing activities | $2,908 | $6,547 | | Net cash used in financing activities | $(5) | $(508) | | Net increase (decrease) in cash and cash equivalents | $3,461 | $(1,180) | | Cash and cash equivalents at end of period | $16,354 | $11,450 | - The company experienced a significant turnaround in operating cash flows, moving from a net cash outflow of $7,219 thousand in the first six months of 2019 to a net cash inflow of $558 thousand in the same period of 2020[14] - This contributed to a net increase in cash and cash equivalents of $3,461 thousand, compared to a decrease of $1,180 thousand in the prior year[14] Notes to Condensed Consolidated Financial Statements Note 1. Basis of Presentation - The Company operates in two principal business units: American Southern (property and casualty insurance) and Bankers Fidelity (life and health insurance)[16] - The COVID-19 pandemic began impacting business operations in March 2020, leading to potential difficulties in premium collection and policy renewals, and increased volatility in investment markets[19] - The Company does not qualify as a small business under the CARES Act and did not apply for government loan programs, but is assessing other potential benefits[20] Note 2. Recently Issued Accounting Standards - The Company adopted ASU 2018-13 (Fair Value Measurement) and ASU 2017-04 (Goodwill Impairment) as of January 1, 2020, with no material impact on consolidated financial statements[21][22] - The Company is currently assessing the effect of ASU 2020-04 (Reference Rate Reform) on its financial condition and results of operations, which provides optional expedients for transactions referencing LIBOR[23] - ASU 2020-01 (Investments – Equity Securities) is effective for the Company beginning Q1 2021 and is not expected to have a material impact[24] Note 3. Investments Fixed Maturities and Equity Securities (Dollars in thousands) | Investment Type | June 30, 2020 Fair Value | Dec 31, 2019 Fair Value | | :------------------------------------------ | :----------------------- | :---------------------- | | Total Fixed Maturities | $236,187 | $232,472 | | Total Equity Securities | $15,965 | $22,922 | | Total VIE Interests (Other invested assets + unconsolidated trusts) | $12,692 | $11,198 | - The decrease in securities in an unrealized loss position during the six months ended June 30, 2020, was primarily due to improved market values from a declining interest rate environment[35] Realized Investment Gains, Net (Dollars in thousands) | Period | Fixed Maturities | Equity Securities | Total | | :-------------------------------- | :--------------- | :---------------- | :---- | | Three Months Ended June 30, 2020 | $0 | $0 | $0 | | Three Months Ended June 30, 2019 | $610 | $0 | $610 | | Six Months Ended June 30, 2020 | $249 | $0 | $249 | | Six Months Ended June 30, 2019 | $882 | $1,113 | $1,995 | Unrealized Gains (Losses) on Equity Securities, Net (Dollars in thousands) | Period | Net Unrealized Gains (Losses) | | :-------------------------------- | :---------------------------- | | Three Months Ended June 30, 2020 | $1,355 | | Three Months Ended June 30, 2019 | $(5,337) | | Six Months Ended June 30, 2020 | $(7,100) | | Six Months Ended June 30, 2019 | $1,152 | Note 4. Fair Values of Financial Instruments - The Company categorizes financial instruments into a three-level fair value hierarchy based on the observability of inputs: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[43][44][45][46] Financial Instruments Carried at Fair Value (Dollars in thousands) | Item | Level 1 (June 30, 2020) | Level 2 (June 30, 2020) | Level 3 (June 30, 2020) | Total (June 30, 2020) | | :---------------- | :---------------------- | :---------------------- | :---------------------- | :-------------------- | | Fixed maturities | $250 | $235,937 | $0 | $236,187 | | Equity securities | $15,822 | $0 | $143 | $15,965 | | Cash equivalents | $8,429 | $0 | $0 | $8,429 | | Total | $24,501 | $235,937 | $143 | $260,581 | | Item | Level 1 (Dec 31, 2019) | Level 2 (Dec 31, 2019) | Level 3 (Dec 31, 2019) | Total (Dec 31, 2019) | | :---------------- | :---------------------- | :---------------------- | :---------------------- | :-------------------- | | Fixed maturities | $0 | $232,472 | $0 | $232,472 | | Equity securities | $22,922 | $0 | $0 | $22,922 | | Cash equivalents | $7,173 | $0 | $0 | $7,173 | | Total | $30,095 | $232,472 | $0 | $262,567 | Note 5. Liabilities for Unpaid Losses, Claims and Loss Adjustment Expenses Roll-forward of Liabilities for Unpaid Losses, Claims and Loss Adjustment Expenses (Dollars in thousands) | Item | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------------------------------------------------------- | :----------------------------- | :----------------------------- | | Beginning liabilities for unpaid losses, claims and loss adjustment expenses, gross | $81,448 | $72,612 | | Total incurred | $59,960 | $68,260 | | Total paid | $63,498 | $67,451 | | Ending liabilities for unpaid losses, claims and loss adjustment expenses, gross | $76,498 | $75,155 | - Prior accident year development for the six months ended June 30, 2020, showed a favorable development of $(2,302) thousand, primarily due to the Medicare supplement line of business in Bankers Fidelity[53][54] Note 6. Junior Subordinated Debentures Junior Subordinated Debentures (Dollars in thousands) | Item | Atlantic American Statutory Trust I | Atlantic American Statutory Trust II | | :---------------------------------- | :---------------------------------- | :----------------------------------- | | Principal amount owed June 30, 2020 | $18,042 | $23,196 | | Less: Treasury debt | — | $(7,500) | | Net balance June 30, 2020 | $18,042 | $15,696 | | Coupon rate | LIBOR + 4.00% Quarterly | LIBOR + 4.10% Quarterly | | Maturity date | December 4, 2032 | May 15, 2033 | - The Company has the right to defer interest payments on Junior Subordinated Debentures for up to 20 consecutive quarters, during which it cannot pay common stock dividends or repurchase junior debt[57] Note 7. Earnings (Loss) Per Common Share Earnings (Loss) Per Common Share Reconciliation (Dollars in thousands, except per share data) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) applicable to common shareholders | $6,432 | $(4,526) | $(1,754) | $(463) | | Weighted Average Shares (in thousands) | 20,440 | 20,146 | 20,455 | 20,152 | | Basic Earnings (Loss) Per Common Share | $0.31 | $(0.22) | $(0.09) | $(0.02) | | Diluted Earnings (Loss) Per Common Share | $0.30 | $(0.22) | $(0.09) | $(0.02) | - The assumed conversion of Series D preferred stock was excluded from EPS calculation for all periods except the three months ended June 30, 2020, as its impact would have been antidilutive[65] Note 8. Income Taxes Income Tax Expense (Benefit) Reconciliation (Dollars in thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Federal income tax provision at statutory rate of 21% | $1,739 | $(1,174) | $(409) | $(64) | | Income tax expense (benefit) | $1,749 | $(1,163) | $(391) | $(40) | - The Company determined there were no significant tax implications as a result of the CARES Act[67] Note 9. Leases - The Company has two operating lease agreements for office space, accounted for on a straight-line basis[68] - Lease expense for the six months ended June 30, 2020 and 2019 was $507 thousand[69] Operating Lease Information (Dollars in thousands) | Item | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------------------------------------------------------------------------------------------------------------------------- | :----------------------------- | :----------------------------- | | Cash payments included in the measurement of lease liabilities reported in operating cash flows | $475 | $450 | | Right-of-use assets included in other assets on the condensed consolidated balance sheet | $5,159 | $5,785 | | Weighted average discount rate | 6.8% | 6.8% | | Weighted average remaining lease term in years | 6.4 years | 7.4 years | Note 10. Commitments and Contingencies - Management believes that any known claims and lawsuits incidental to the ordinary course of business are not expected to have a material effect on the Company's financial condition or results of operations[73] Note 11. Segment Information - The Company operates two primary business units: American Southern (property and casualty insurance) and Bankers Fidelity (life and health insurance), each managed and evaluated independently[76] Segment Revenue (Dollars in thousands) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | American Southern | $16,896 | $15,740 | $32,123 | $30,975 | | Bankers Fidelity | $32,871 | $31,244 | $57,744 | $65,620 | | Corporate and Other | $(30) | $(3,857) | $(720) | $1,550 | | Total Revenue | $49,737 | $43,127 | $89,147 | $98,145 | Segment Income (Loss) Before Income Taxes (Dollars in thousands) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | American Southern | $2,087 | $1,396 | $2,965 | $3,378 | | Bankers Fidelity | $8,039 | $(1,998) | $(742) | $(2,494) | | Corporate and Other | $(1,845) | $(4,987) | $(4,169) | $(1,188) | | Total Income (Loss) Before Income Taxes | $8,281 | $(5,589) | $(1,946) | $(304) | Note 12. Related Party Transactions - During the six months ended June 30, 2019, the Company transferred its remaining fractional interest in an aircraft arrangement to Gray Television, Inc, a related party, for $151 thousand[79] Note 13. Subsequent Events - The COVID-19 pandemic continues to cause material disruption, potentially leading to future investment portfolio losses and increased claims volume, though the full impact remains uncertain[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operating results, including segment performance and COVID-19 impacts Overview - Atlantic American Corporation is an insurance holding company operating through American Southern (property and casualty) and Bankers Fidelity (life and health) subsidiaries[83] - The COVID-19 pandemic began impacting business operations in March 2020, and its effects on operations and results are expected to continue[84] Critical Accounting Policies - The Company's critical accounting policies are consistent with those disclosed in the 2019 Annual Report, except for changes noted in Note 2 regarding new accounting standards[85] Overall Corporate Results Overall Corporate Results (Dollars in thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Revenue | $49,737 | $43,127 | $89,147 | $98,145 | | Total Benefits and Expenses | $41,456 | $48,716 | $91,093 | $98,449 | | Income (loss) before income taxes | $8,281 | $(5,589) | $(1,946) | $(304) | | Net income (loss) | $6,532 | $(4,426) | $(1,555) | $(264) | Reconciliation of Non-GAAP Operating Income (Loss) (Dollars in thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $6,532 | $(4,426) | $(1,555) | $(264) | | Income tax expense (benefit) | $1,749 | $(1,163) | $(391) | $(40) | | Realized investment gains, net | $0 | $(610) | $(249) | $(1,995) | | Unrealized (gains) losses on equity securities, net | $(1,355) | $5,337 | $7,100 | $(1,152) | | Non-GAAP operating income (loss) | $6,926 | $(862) | $4,905 | $(3,451) | - Net income for Q2 2020 was $6.5 million ($0.30 diluted EPS), a significant improvement from a net loss of $4.4 million ($0.22 diluted EPS) in the prior year[88] - For the six months ended June 30, 2020, net loss increased to $1.6 million ($0.09 diluted EPS) from $0.3 million ($0.02 diluted EPS) in the prior year[88] - Premium revenue increased by 2.3% for the three months and 2.0% for the six months ended June 30, 2020, primarily due to growth in the automobile physical damage line of business[88] - Operating income increased by $7.8 million for the three-month period and $8.4 million for the six-month period, mainly due to favorable loss experience in life and health operations[89] American Southern Segment Analysis American Southern Underwriting Performance (Dollars in thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross written premiums | $33,320 | $32,581 | $42,938 | $40,275 | | Net earned premiums | $15,824 | $14,754 | $30,746 | $28,560 | | Underwriting income | $1,015 | $411 | $1,589 | $964 | | Loss ratio | 63.3% | 66.8% | 63.6% | 66.2% | | Expense ratio | 30.3% | 30.4% | 31.2% | 30.4% | | Combined ratio | 93.6% | 97.2% | 94.8% | 96.6% | - Gross written premiums increased by 2.3% for the three-month period and 6.6% for the six-month period, driven by growth in automobile physical damage[92] - Net earned premiums increased by 7.3% for the three-month period and 7.7% for the six-month period[94] - The loss ratio decreased to 63.3% (3-month) and 63.6% (6-month) in 2020, mainly due to decreased severity of automobile liability claims[96] - The combined ratio improved to 93.6% (3-month) and 94.8% (6-month) in 2020, indicating improved underwriting profitability[91] Bankers Fidelity Segment Analysis Bankers Fidelity Underwriting Performance (Dollars in thousands) | Item | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross earned premiums | $48,655 | $48,591 | $97,411 | $97,052 | | Net earned premiums | $30,675 | $30,715 | $61,303 | $61,691 | | Underwriting income (loss) | $5,842 | $(2,527) | $2,817 | $(6,423) | | Loss ratio | 55.6% | 79.1% | 67.1% | 81.9% | | Expense ratio | 25.4% | 29.2% | 28.4% | 28.5% | | Combined ratio | 81.0% | 108.3% | 95.5% | 110.4% | - Net earned premium revenue remained relatively consistent for the three-month period and decreased by 0.6% for the six-month period[98] - Benefits and losses decreased significantly, leading to a substantial drop in the loss ratio to 55.6% (3-month) and 67.1% (6-month) due to fewer Medicare supplement claims during COVID-19[99] - Commissions and underwriting expenses decreased, with the expense ratio decreasing to 25.4% (3-month) and 28.4% (6-month)[100] - The combined ratio improved dramatically to 81.0% (3-month) and 95.5% (6-month) in 2020, reflecting strong underwriting profitability[98] Net Investment Income and Realized Gains - Investment income decreased by 20.0% ($0.5 million) for the three-month period and 16.3% ($0.8 million) for the six-month period[101] - The Company had no net realized investment gains for the three months ended June 30, 2020, and $0.2 million for the six months ended June 30, 2020[102] Unrealized Gains (Losses) on Equity Securities - The Company recognized net unrealized gains of $1.4 million on equity securities for Q2 2020 but net unrealized losses of $7.1 million for the six months ended June 30, 2020, due to market value changes[103] Interest Expense - Interest expense decreased by 24.0% for the three-month period and 18.4% for the six-month period, mainly due to changes in LIBOR[104] Liquidity and Capital Resources - The Company believes invested assets and cash inflows will be sufficient to meet its primary cash needs[105] - As of June 30, 2020, the Parent company had $5.2 million in unrestricted cash and investments[106] - Insurance subsidiaries reported statutory net income of $4.7 million for the six months ended June 30, 2020, a significant improvement from a statutory net loss of $1.7 million in the prior year[107] - Dividend payments from insurance subsidiaries are limited by state regulations; the Parent received $1.8 million in dividends through June 30, 2020[108] - Cash and cash equivalents increased from $12.9 million to $16.4 million in the first six months of 2020[113] Expected Impact of COVID-19 on the Company's Financial Condition and Results of Operations - The duration and impact of COVID-19 are unknown, but the Company does not currently expect a significant decline in liquidity or operating results[115] - Earned premiums could be adversely impacted by a weakened economy, leading to slower new sales and reduced retention[116] - Property and casualty operations are not expected to see material adverse effects on benefits and losses[117][118] - Life and health operations may experience a marginal decline in earned premiums, with higher life insurance claims expected to be offset by a decrease in non-medically necessary services[119][120] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and procedures and notes no material changes in internal controls - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020[123] - There have been no material changes in internal control over financial reporting during the period covered by the report[124] - The report contains forward-looking statements subject to various risks and uncertainties, and the Company undertakes no obligation to update them[125] Part II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details its common stock repurchase plan, with 325,129 shares remaining available for repurchase - The Board of Directors approved a plan on October 31, 2016, to repurchase up to 750,000 shares of common stock[126] Common Stock Repurchases (Three Months Ended June 30, 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | | :------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | April 1 – April 30, 2020 | - | $ - | - | 325,129 | | May 1 – May 31, 2020 | - | - | - | 325,129 | | June 1 – June 30, 2020 | - | - | - | 325,129 | | Total | - | $ - | - | | Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including Sarbanes-Oxley certifications and XBRL documents - Exhibits include certifications (31.1, 31.2, 32.1) and XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[129] Signatures The report is duly signed on behalf of the company by its Vice President and Chief Financial Officer - The report was signed by J. Ross Franklin, Vice President and Chief Financial Officer, on August 11, 2020[131][132]