FORM 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-3722
ATLANTIC AMERICAN
CORPORATION
(Exact name of registrant as
specified in its charter)
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Georgia
(State or other jurisdiction
of
incorporation or organization)
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58-1027114
(I.R.S. employer
identification no.)
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4370 Peachtree Road, N.E.,
Atlanta, Georgia
(Address of principal
executive offices)
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30319
(Zip code)
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(Registrants
telephone number, including area code)
(404)
266-5500
Securities
registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common
Stock, $1.00 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large Accelerated Filer o
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Accelerated Filer o
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Non-Accelerated Filer o
(Do not check if a smaller reporting company)
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Smaller Reporting Company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting and nonvoting common stock
held by non-affiliates of the registrant as of June 30,
2008, the last business day of the registrants most
recently completed second fiscal quarter, was $7,615,880. On
March 16, 2009 there were 22,323,595 shares of the
registrants common stock, par value $1.00 per share,
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
1. Portions of the registrants Proxy Statement for
the 2009 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days of the
registrants fiscal year end, have been incorporated by
reference in Items 10, 11, 12, 13 and 14 of Part III
of this
Form 10-K.
PART I
The
Company
Atlantic American Corporation, a Georgia corporation
incorporated in 1968 (the Parent or
Company), is a holding company that operates through
its subsidiaries in well-defined specialty markets within the
life and health and property and casualty insurance industries.
Atlantic Americans principal operating subsidiaries are
American Southern Insurance Company and American Safety
Insurance Company (together known as American
Southern) and Bankers Fidelity Life Insurance Company
(Bankers Fidelity). Each of American Southern and
Bankers Fidelity is managed separately based upon the geographic
location or the type of products offered and is evaluated on its
individual performance. The Companys strategy is to focus
on well-defined geographic, demographic
and/or
product niches within the insurance market place. Each of
American Southern and Bankers Fidelity operates with relative
autonomy, which structure is designed to allow for quick
reaction to market opportunities.
The Parent has no significant business operations of its own and
relies on fees, dividends and other distributions from its
operating subsidiaries as the principal source of cash flow to
meet its obligations. Additional information regarding the cash
flow and liquidity needs of the Parent can be found in the
Liquidity and Capital Resources section of Managements
Discussion and Analysis of Financial Condition and Results of
Operations below.
In December 2007, the Company entered into an agreement for the
sale of its regional property and casualty
operations, comprised of Association Casualty Insurance Company
and Association Risk Management General Agency, Inc.
(collectively known as Association Casualty) and
Georgia Casualty & Surety Company (Georgia
Casualty), to Columbia Mutual Insurance Company
(Columbia). The Company completed this sale on
March 31, 2008. Accordingly, the assets, liabilities and
results of operations of these regional property and casualty
operations have been reflected by the Company as discontinued
operations.
Property
and Casualty Operations
American Southern comprises the Companys property and
casualty operations and its primary product lines are as follows:
Business Automobile Insurance policies provide
bodily injury
and/or
property damage liability coverage, uninsured motorist coverage
and physical damage coverage for commercial accounts.
General Liability Insurance policies cover bodily
injury and property damage liability for both premises and
completed operations exposures for general classes of business.
Property Insurance policies provide for payment of
losses on personal property caused by fire or other multiple
perils.
Surety Bonds are contracts under which one party,
the insurance company issuing the surety bond, guarantees to a
third party that the primary party will fulfill an obligation in
accordance with a contractual agreement. This obligation may
involve meeting a contractual commitment, paying a debt or
performing certain duties.
American Southern provides tailored business automobile
insurance coverage, on a multi-year contract basis, to state
governments, local municipalities and other large motor pools
and fleets (block accounts) that can be specifically
rated and underwritten. The size of the block accounts insured
by American Southern are such that individual class experience
generally can be determined, which allows for customized policy
terms and rates. American Southern is licensed to do business in
30 states and the District of Columbia. While the majority
of American Southerns premiums are derived from its
automobile lines of business, American Southern also offers
personal property, inland marine and general liability
coverages. Additionally, American Southern directly provides
surety bond coverage for school bus transportation and
subdivision construction, as well as performance and payment
bonds.
2
The following table summarizes, for the periods indicated, the
allocation of American Southerns net earned premiums from
each of its principal product lines:
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Year Ended December 31,
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2008
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2007
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2006
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2005
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2004
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(In thousands)
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Automobile liability
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$
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10,904
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$
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10,936
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$
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16,163
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$
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16,723
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$
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18,944
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Automobile physical damage
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6,628
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8,105
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9,698
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11,002
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11,187
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General liability
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7,996
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10,349
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11,394
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11,767
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10,102
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Property
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2,374
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3,005
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3,187
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3,692
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3,862
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Surety
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8,356
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9,180
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10,218
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8,263
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3,967
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Total
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$
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36,258
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$
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41,575
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$
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50,660
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$
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51,447
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$
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48,062
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Life
and Health Operations
Bankers Fidelity comprises the life and health operations of the
Company and offers a variety of life and supplemental health
products with a focus on the senior markets. Products offered by
Bankers Fidelity include ordinary and term life insurance,
Medicare supplement and other accident and health insurance
products. Health business, primarily Medicare supplement
insurance, accounted for 81.2% of Bankers Fidelitys net
earned premiums in 2008 while life insurance, including both
whole and term life insurance policies, accounted for the
balance. In terms of the number of policies written in 2008,
59.3% were health insurance policies and 40.7% were life
insurance policies.
The following table summarizes, for the periods indicated, the
allocation of Bankers Fidelitys net earned premiums from
each of its principal product lines followed by a brief
description of the principal products:
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Year Ended December 31,
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2008
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2007
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2006
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2005
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2004
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(In thousands)
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Life insurance
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$
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10,357
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$
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10,615
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$
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10,960
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$
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11,600
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$
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12,934
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Medicare supplement
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41,402
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41,786
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44,919
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51,414
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49,575
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Other accident and health
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3,364
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3,848
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3,041
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2,890
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2,933
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Total health insurance
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44,766
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45,634
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47,960
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54,304
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52,508
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Total
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$
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55,123
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$
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56,249
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$
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58,920
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$
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65,904
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$
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65,442
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Life Insurance products include non-participating
individual term and whole life insurance policies with a variety
of riders and options. Policy premiums are dependent upon a
number of factors, including selected riders or options.
Medicare Supplement Insurance includes 8 of the 12
standardized Medicare supplement policies created under the
Omnibus Budget Reconciliation Act of 1990 (OBRA
1990), which are designed to provide insurance coverage
for certain expenses not covered by the Medicare program,
including copayments and deductibles.
Other Accident and Health Insurance coverages
include several policies providing for the payment of benefits
in connection with the treatment of diagnosed cancer, as well as
a number of other policies providing nursing facility care,
accident expense, hospital/surgical and disability coverages.
Marketing
Property
and Casualty Operations
A portion of American Southerns business is marketed
through a small number of specialized, experienced independent
agents. American Southerns agent selection process is
actively managed by internal marketing personnel with active
oversight from management. Senior management carefully reviews
all new
3
programs prior to implementation. Most of American
Southerns agents are paid an up-front commission with the
potential for additional commissions by participating in a
profit sharing arrangement that is directly linked to the
profitability of the business generated. American Southern also
solicits business from governmental entities. As an experienced
writer for certain governmental programs, the company actively
pursues this market on a direct basis. Much of this business is
priced by means of competitive bid situations and there can be
no assurance that the company can obtain or retain such business
at the time of a specific contract renewal.
Life
and Health Operations
Bankers Fidelity markets its policies through commissioned,
independent agents. In general, Bankers Fidelity enters
contractual arrangements with various general agents responsible
for marketing and other activities, who also, in turn, appoint
independent agents. The standard agreements set forth the
commission arrangements and are terminable by either party upon
notice. General agents receive an override commission on sales
made by agents appointed by them. Management believes utilizing
experienced agents, as well as independent general agents who
recruit and train their own agents, is cost effective. All
independent agents are compensated solely on a commission basis.
Using independent agents also enables Bankers Fidelity to expand
or contract its sales force without incurring significant
additional expense.
Bankers Fidelity has implemented a selective agent qualification
process and had 1,704 licensed agents as of December 31,
2008. The agents concentrate their sales activities in either
the accident and health or life insurance product lines. During
2008, approximately 501 agents wrote policies on behalf of
Bankers Fidelity.
Bankers Fidelity utilizes multiple distribution sales channels
including agency business, which is centered around a lead
generation plan that rewards qualified agents with leads in
accordance with monthly production goals. In addition, a
protected territory is established for each qualified agent,
which entitles them to all leads produced within that territory.
The territories are zip code or county based and encompass
sufficient geographic territory designed to produce a minimum
senior population of 25,000. Bankers Fidelity also recruits at a
general agent level as well as at a managing general agent level
in an effort to use more than one distribution channel to lower
expenses.
The Company believes these lead generation systems solve an
agents most important dilemma
prospecting and allows Bankers Fidelity to build
long-term relationships with agents who can view Bankers
Fidelity as their primary company. In addition, management
believes that Bankers Fidelitys product line is less
sensitive to competitor pricing and commissions because of the
perceived value of the protected territory and the lead
generation plan. In protected geographical areas, production per
agent compares favorably to unprotected areas served by the
general brokerage division.
Products of Bankers Fidelity compete directly with products
offered by other insurance companies, and agents may represent
several insurance companies. Bankers Fidelity, in an effort to
further motivate agents to market its products, offers the
following agency services: a unique lead system, competitive
products and commission structures, efficient claims service,
prompt payment of commissions that immediately vest, simplified
policy issue procedures, periodic sales incentive programs and,
as described above, protected sales territories determined based
on specific counties
and/or zip
codes.
Underwriting
Property
and Casualty Operations
American Southern specializes in underwriting various risks that
are sufficiently large enough to establish separate class
experience, relying upon the underwriting expertise of its
agents.
During the course of the policy life, extensive use is made of
risk management representatives to assist commercial
underwriters in identifying and correcting potential loss
exposures and to pre-inspect a majority of the new underwritten
accounts. The results of each insured are reviewed on a
stand-alone basis periodically. When the results are below
expectations, management takes appropriate corrective action
which may include
4
adjusting rates, reviewing underwriting standards, adjusting
commissions paid to agents,
and/or
altering or declining to renew accounts at expiration.
Life
and Health Operations
Bankers Fidelity issues a variety of products for both life and
health insurance markets, with a focus on senior life products
typically with small face amounts of between $3,000 and $30,000,
and Medicare supplement insurance. The majority of its products
are Yes or No applications that are
underwritten on a non-medical basis. Bankers Fidelity offers
products to all age groups; however, its primary focus is the
senior market. For life products other than the senior market,
Bankers Fidelity may require medical information such as medical
examinations subject to age and face amount based on published
guidelines. Approximately 95% of the net premiums earned for
both life and health insurance sold during 2008 were derived
from insurance written below Bankers Fidelitys medical
limits. For the senior market, Bankers Fidelity issues products
primarily on an accept-or-reject basis with face amounts up to
$30,000 for preferred rates, up to $25,000 for standard rates
and up to $20,000 for modified graded rates. Bankers Fidelity
retains a maximum amount of $50,000 with respect to any
individual life policy (see Reinsurance).
Applications for insurance are reviewed to determine the face
amount, age, and medical history. Depending upon information
obtained from the insured, the Medical Information Bureau
(M.I.B.) report, paramedical testing,
and/or
medical records, additional testing may be ordered. If deemed
necessary, Bankers Fidelity may use investigative services to
supplement and substantiate information. For certain limited
coverages, Bankers Fidelity has adopted simplified policy issue
procedures by which an application containing a variety of
Yes/No health related questions is submitted. For these plans, a
M.I.B. report is ordered, however, paramedical testing and
medical records are not ordered in most cases. All applications
by individuals age 60 and older are also verified by
telephone interview.
Policyholder
and Claims Services
The Company believes that prompt, efficient policyholder and
claims services are essential to its continued success in
marketing its insurance products (see Competition).
Additionally, the Company believes that its insureds are
particularly sensitive to claims processing time and to the
accessibility of qualified staff to answer inquiries.
Accordingly, the Companys policyholder and claims services
seek to offer expeditious disposition of service requests by
providing toll-free access for all customers,
24-hour
claim reporting services, and direct computer links with some of
its largest accounts. The Company also utilizes a
state-of-the-art automatic call distribution system to ensure
that inbound calls to customer service support groups are
processed efficiently. Operational data generated from this
system allows management to further refine ongoing client
service programs and service representative training modules.
The Company supports a Customer Awareness Program as the basis
for its customer service philosophy. All personnel are required
to attend customer service classes. Customer service hours of
operation have been expanded in all service areas to serve
customers and agents in all domestic time zones.
Property
and Casualty Operations
American Southern controls its claims costs by utilizing an
in-house staff of claims supervisors to investigate, verify,
negotiate and settle claims. Upon notification of an occurrence
purportedly giving rise to a claim, a claim file is established.
The claims department then conducts a preliminary investigation,
determines whether an insurable event has occurred and, if so,
updates the file for the findings and any required reserve
adjustments. Frequently, independent adjusters and appraisers
are utilized to service claims which require
on-site
inspections.
Life
and Health Operations
Insureds may obtain claim forms by calling the claims department
customer service group or through Bankers Fidelitys
website. To shorten claim processing time, a letter detailing
all supporting documents that are required to complete a claim
for a particular policy is sent to the customer along with the
correct claim
5
form. With respect to life policies, the claim is entered into
Bankers Fidelitys claims system when the proper
documentation is received. Properly documented claims are
generally paid within three to nine business days of receipt.
With regard to Medicare supplement policies, the claim is either
directly billed to Bankers Fidelity by the provider or sent
electronically through a Medicare clearing house.
Reserves
The following table sets forth information concerning the
Companys reserves for losses and claims and reserves for
loss adjustment expenses (LAE) for the periods
indicated:
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2008
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2007
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2006
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(In thousands)
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Balance at January 1
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$
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51,704
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$
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55,291
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$
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53,817
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Less: Reinsurance recoverables
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(13,004
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(12,266
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(12,829
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Net balance at January 1
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38,700
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43,025
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40,988
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Incurred related to:
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Current year
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62,569
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65,274
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73,167
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Prior years(1)
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(8,723
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(11,517
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(9,926
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Total incurred
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53,846
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53,757
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63,241
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Paid related to:
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Current year
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40,249
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41,687
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46,355
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Prior years
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14,668
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16,395
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14,849
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Total paid
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54,917
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58,082
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61,204
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Net balance at December 31
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37,629
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38,700
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43,025
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Plus: Reinsurance recoverables
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14,870
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13,004
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12,266
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Balance at December 31
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$
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52,499
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$
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51,704
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$
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55,291
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(1) |
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Favorable loss development from property and casualty operations
for the years ended December 31, 2008, 2007 and 2006 was
$8.0 million, $8.6 million and $6.7 million,
respectively. See Note 4 of Notes to Consolidated Financial
Statements. |
Reserves are set by line of business within each of the
subsidiaries. At December 31, 2008, approximately 86% of
the reserves related to property and casualty losses and
approximately 14% related to life and health losses. The
Companys property and casualty operations incur losses
which may take extended periods of time to evaluate and settle.
Issues with respect to legal liability, actual loss
quantification, legal discovery and ultimate subrogation, among
other factors, may influence the initial and subsequent
estimates of loss. In the property and casualty operations, the
Companys general practice is to reserve at the upper end
of the determined reasonable range of loss if no other value
within the range is determined to be more probable. The
Companys life and health subsidiary generally incurs
losses which are more readily quantified. Medical claims
received are recorded in case reserves based on contractual
terms using the submitted billing as a basis for determination.
Life claims are recorded based on contract value at the time of
notification to the Company; although policy reserves related to
such contracts have been previously established. Individual case
reserves are established by a claims processor on each
individual claim and are periodically reviewed and adjusted as
new information becomes known during the course of handling a
claim. Regular internal periodic reviews are also performed by
management to ensure that loss reserves are established and
revised timely relative to the receipt of new or additional
information. Lines of business for which loss data (e.g. paid
losses and case reserves) emerge over a long period of time are
referred to as long-tail lines of business. Lines of business
for which loss data emerge more quickly are referred to as
short-tail lines of business. The Companys long-tail line
of business generally includes general liability while the
short-tail lines of business generally include property and
automobile coverages.
6
The Companys actuaries regularly review reserves for both
current and prior accident years using the most current claims
data. These regular reviews incorporate a variety of actuarial
methods (discussed below in Critical Accounting Policies) and
judgments and involve a disciplined analysis. For most lines of
business, certain actuarial methods and specific assumptions are
deemed more appropriate based on the current circumstances
affecting that line of business. These selections incorporate
input from claims personnel and operating management on reported
loss cost trends and other factors that could affect the reserve
estimates.
For long-tail lines of business, the emergence of paid losses
and case reserves is less credible in the early periods, and
accordingly may not be indicative of ultimate losses. For these
lines, methods which incorporate a development pattern
assumption are given less weight in calculating incurred but not
reported (IBNR) reserves for the early periods of
loss emergence because such a low percentage of ultimate losses
are reported in that time frame. Accordingly, for any given
accident year, the rate at which losses on long-tail lines of
business emerge in the early periods is generally not as
reliable an indication of the ultimate losses as it would be for
shorter-tail lines of business. The estimation of reserves for
these lines of business in the early periods of loss emergence
is therefore largely influenced by statistical analyses and
application of prior accident years loss ratios after
considering changes to earned pricing, loss costs, mix of
business, ceded reinsurance and other factors that are expected
to affect the estimated ultimate losses. For later periods of
loss emergence, methods which incorporate a development pattern
assumption are given more weight in estimating ultimate losses.
For short-tail lines of business, the emergence of paid loss and
case reserves is more credible in the early periods and likely
indicative of ultimate losses. The method used to set reserves
for these lines is based upon utilization of a historical
development pattern for reported losses. IBNR reserves for the
current year are set as the difference between the estimated
fully developed ultimate losses for each year, less the
established, related case reserves and cumulative related
payments. IBNR reserves for prior accident years are similarly
determined, again relying on an indicated, historical
development pattern for reported losses.
Based on the results of regular reserve estimate reviews, the
Company determines the appropriate reserve adjustment, if any,
to record. If necessary, recorded reserve estimates are changed
after consideration of numerous factors, including, but not
limited to, the magnitude of the difference between the
actuarial indication and the recorded reserves, improvement or
deterioration of actuarial indication in the period, the
maturity of the accident year, trends observed over the recent
past and the level of volatility within a particular line of
business. In general, changes are made more quickly to recognize
changes in estimates to ultimate losses in mature accident years
and less volatile lines of business.
Estimating case reserves and ultimate losses involves various
considerations which differ according to the line of business.
In addition, changes in state legislative and regulatory
environments may impact loss estimates. General liability claims
may have a long pattern of loss emergence. Given the broad
nature of potential general liability coverages, investigative
time periods may be extended and coverage questions may exist.
Such uncertainties create greater imprecision in estimating
required levels of loss reserves. The property and automobile
lines of business generally have less variable reserve estimates
than other lines. This is largely due to the coverages having
relatively shorter periods of loss emergence. Estimates,
however, can still vary due to a number of factors, including
interpretations of frequency and severity trends. Severity
trends can be impacted by changes in internal claim handling and
reserving practices in addition to changes in the external
environment. These changes in claim practices increase the
uncertainty in the interpretation of case reserve data, which
increases the uncertainty in recorded reserve levels.
7
Components of the Companys reserves for losses and claims
by product line at December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Business automobile
|
|
$
|
10,195
|
|
|
$
|
9,805
|
|
|
$
|
20,000
|
|
Personal automobile/physical damage
|
|
|
966
|
|
|
|
559
|
|
|
|
1,525
|
|
General & other liability
|
|
|
4,846
|
|
|
|
10,102
|
|
|
|
14,948
|
|
Other lines (including life)
|
|
|
2,755
|
|
|
|
5,469
|
|
|
|
8,224
|
|
Medicare supplement
|
|
|
208
|
|
|
|
5,342
|
|
|
|
5,550
|
|
Unallocated loss adjustment reserves
|
|
|
|
|
|
|
2,252
|
|
|
|
2,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and claims
|
|
$
|
18,970
|
|
|
$
|
33,529
|
|
|
$
|
52,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to record reserves for losses and
claims in amounts which approximate actuarial best estimates of
ultimate values. Actuarial best estimates do not necessarily
represent the midpoint value determined using the various
actuarial methods; however, such estimates will fall between the
estimated low and high end reserve values. The range of
estimates developed in connection with the December 31,
2008 review indicated that reserves could be as much as 19.6%
lower or as much as 5.3% higher. In the opinion of management,
recorded reserves represent the best estimate of outstanding
losses, although significant judgments are made in the
derivation of reserve estimates and revisions to such estimates
will be made in future periods. Any such revisions could be
material, and may materially adversely affect the Companys
financial condition and results of operations.
Property
and Casualty Operations
American Southern maintains loss reserves representing estimates
of amounts necessary for payment of losses and LAE and are not
discounted. IBNR reserves are also maintained for future
development. These loss reserves are estimates, based on known
facts and circumstances at a given point in time, of amounts the
insurer expects to pay on incurred claims. All balances are
reviewed periodically by the Companys actuary. Reserves
for LAE are intended to cover the ultimate costs of settling
claims, including investigation and defense of lawsuits
resulting from such claims. Loss reserves for reported claims
are based on a
case-by-case
evaluation of the type of claim involved, the circumstances
surrounding the claim, and the policy provisions relating to the
type of loss along with anticipated future development. The LAE
for claims reported and claims not reported is based on
historical statistical data and anticipated future development.
Inflation and other factors which may affect claim payments are
implicitly reflected in the reserving process through analysis
and consideration of cost trends and reviews of historical
reserve results.
American Southern establishes reserves for claims based upon:
(a) managements estimate of ultimate liability and
claims adjusters evaluations for unpaid claims reported
prior to the close of the accounting period, (b) estimates
of IBNR claims based on past experience, and (c) estimates
of LAE. If no value is determined to be more probable in
estimating a loss after considering all factors, the
Companys general practice is to reserve at the upper end
of the determined reasonable range of loss. The estimated
liability is periodically reviewed and updated, and changes to
the estimated liability are recorded in the statement of
operations in the year in which such changes become known.
The following table sets forth the development of reserves for
unpaid losses and claims determined using generally accepted
accounting principles of American Southerns insurance
lines from 1998 through 2008. Specifically excluded from the
table are the life and health divisions claims reserves,
which are included in the consolidated loss and claims reserves.
The top line of the table represents the estimated cumulative
amount of losses and LAE for claims arising in all prior years
that were unpaid at the balance sheet date for each of the
indicated periods, including an estimate of IBNR losses at the
applicable date. The amounts represent initial reserve estimates
at the respective balance sheet dates for the current and all
prior years. The next portion of the table shows the cumulative
amounts paid with respect to claims in each succeeding year. The
8
lower portion of the table shows the re-estimated amounts of
previously recorded reserves based on experience as of the end
of each succeeding year.
The reserve estimates are modified as more information becomes
known about the frequency and severity of claims for individual
years. The cumulative redundancy or deficiency for
each year represents the aggregate change in such years
estimates through the end of 2008. Futhermore, the amount of the
redundancy or deficiency for any year represents the cumulative
amount of the changes from initial reserve estimates for such
year. Operations for any year may be affected, favorably or
unfavorably, by the amount of the change in the estimate for
such years; however, because such analysis is based on the
reserves for unpaid losses and claims, before consideration of
reinsurance, the total indicated redundancies
and/or
deficiencies may not ultimately be reflected in the
Companys net income. Further, conditions and trends that
have affected development of the reserves in the past may not
necessarily occur in the future and there could be future events
or actions that would impact future development which have not
existed in the past. Accordingly, it is impossible to accurately
predict future redundancies or deficiencies based on the data in
the following table.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
|
(In thousands)
|
|
|
Reserve for Losses and LAE
|
|
$
|
44,928
|
|
|
$
|
43,994
|
|
|
$
|
45,655
|
|
|
$
|
43,593
|
|
|
$
|
42,310
|
|
|
$
|
39,042
|
|
|
$
|
44,428
|
|
|
$
|
46,242
|
|
|
$
|
48,350
|
|
|
$
|
48,764
|
|
|
$
|
46,972
|
|
Cumulative paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
|
|
|
|
11,630
|
|
|
|
18,010
|
|
|
|
14,254
|
|
|
|
16,521
|
|
|
|
13,772
|
|
|
|
15,825
|
|
|
|
18,093
|
|
|
|
20,682
|
|
|
|
18,267
|
|
|
|
14,643
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
24,793
|
|
|
|
23,967
|
|
|
|
24,217
|
|
|
|
22,202
|
|
|
|
23,933
|
|
|
|
26,194
|
|
|
|
31,687
|
|
|
|
30,143
|
|
|
|
25,802
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,235
|
|
|
|
28,775
|
|
|
|
26,673
|
|
|
|
28,487
|
|
|
|
31,257
|
|
|
|
35,865
|
|
|
|
37,938
|
|
|
|
31,491
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,019
|
|
|
|
28,645
|
|
|
|
31,398
|
|
|
|
33,683
|
|
|
|
37,223
|
|
|
|
39,972
|
|
|
|
34,987
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,257
|
|
|
|
32,820
|
|
|
|
35,134
|
|
|
|
38,616
|
|
|
|
40,816
|
|
|
|
36,064
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,238
|
|
|
|
35,610
|
|
|
|
39,166
|
|
|
|
42,006
|
|
|
|
36,464
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,814
|
|
|
|
39,538
|
|
|
|
42,079
|
|
|
|
37,528
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,603
|
|
|
|
42,352
|
|
|
|
37,595
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,375
|
|
|
|
37,868
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,891
|
|
Ultimate losses and LAE reestimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
44,928
|
|
|
|
43,994
|
|
|
|
45,655
|
|
|
|
43,593
|
|
|
|
42,310
|
|
|
|
39,042
|
|
|
|
44,428
|
|
|
|
46,242
|
|
|
|
48,350
|
|
|
|
48,764
|
|
|
|
46,972
|
|
One year later
|
|
|
|
|
|
|
33,663
|
|
|
|
35,590
|
|
|
|
34,897
|
|
|
|
37,280
|
|
|
|
35,706
|
|
|
|
42,235
|
|
|
|
39,628
|
|
|
|
46,778
|
|
|
|
45,866
|
|
|
|
41,834
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
34,163
|
|
|
|
32,929
|
|
|
|
34,108
|
|
|
|
34,779
|
|
|
|
40,099
|
|
|
|
40,249
|
|
|
|
43,104
|
|
|
|
46,065
|
|
|
|
40,502
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,560
|
|
|
|
33,338
|
|
|
|
31,710
|
|
|
|
39,260
|
|
|
|
38,877
|
|
|
|
42,208
|
|
|
|
44,800
|
|
|
|
41,175
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,370
|
|
|
|
31,224
|
|
|
|
37,163
|
|
|
|
39,339
|
|
|
|
41,503
|
|
|
|
43,792
|
|
|
|
40,295
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,049
|
|
|
|
37,133
|
|
|
|
39,067
|
|
|
|
41,490
|
|
|
|
43,775
|
|
|
|
39,621
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,914
|
|
|
|
39,484
|
|
|
|
41,600
|
|
|
|
43,674
|
|
|
|
39,518
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,331
|
|
|
|
41,822
|
|
|
|
43,738
|
|
|
|
39,453
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,652
|
|
|
|
43,884
|
|
|
|
39,524
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,762
|
|
|
|
39,710
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,651
|
|
Cumulative redundancy (deficiency)
|
|
|
|
|
|
$
|
10,331
|
|
|
$
|
11,492
|
|
|
$
|
12,033
|
|
|
$
|
8,940
|
|
|
$
|
7,993
|
|
|
$
|
7,514
|
|
|
$
|
6,911
|
|
|
$
|
6,698
|
|
|
$
|
5,002
|
|
|
$
|
7,321
|
|
|
|
|
|
|
|
|
23.5
|
%
|
|
|
25.2
|
%
|
|
|
27.6
|
%
|
|
|
21.1
|
%
|
|
|
20.5
|
%
|
|
|
16.9
|
%
|
|
|
14.9
|
%
|
|
|
13.9
|
%
|
|
|
10.3
|
%
|
|
|
15.6
|
%
|
Note: Because this analysis is based on reserves for unpaid
losses and claims, before consideration of reinsurance, the
total indicated redundancies
and/or
deficiencies may not ultimately be reflected in the
Companys net income.
10
Life
and Health Operations
Bankers Fidelity establishes liabilities for future policy
benefits to meet projected future obligations under outstanding
policies. These reserves are calculated to satisfy policy and
contract obligations as they mature. The amount of reserves for
insurance policies is calculated using assumptions for interest
rates, mortality and morbidity rates, expenses, and withdrawals.
Reserves are adjusted periodically based on published actuarial
tables with modification to reflect actual experience. See
Note 4 of Notes to Consolidated Financial Statements.
Reinsurance
The Companys insurance subsidiaries may purchase
reinsurance from unaffiliated insurers and reinsurers to reduce
their potential liability on individual risks and to protect
against catastrophic losses. In a reinsurance transaction, an
insurance company transfers, or cedes, a portion or
all of its exposure on insurance policies to a reinsurer. The
reinsurer assumes the exposure in return for a portion of the
premiums. The ceding of insurance does not legally discharge the
insurer from primary liability for the full amount of policies
written by it, and the ceding company will incur a loss if the
reinsurer fails to meet its obligations under the reinsurance
agreement.
Property
and Casualty Operations
American Southerns basic reinsurance treaties generally
cover all claims in excess of $150,000 per occurrence. Limits
per occurrence within the reinsurance treaties are as follows:
Fire, inland marine, commercial automobile physical
damage $125,000 excess of $50,000 retention; and
automobile liability and general liability excess
coverage of $2.0 million less retentions that may vary from
$100,000 to $150,000 depending on the account. American Southern
maintains a property catastrophe treaty with a $6.6 million
limit excess of $400,000 retention. American Southern also
issues individual surety bonds with face amounts generally up to
$1.5 million, and limited to $5.0 million per account,
that are not reinsured.
Life
and Health Operations
Bankers Fidelity has entered into reinsurance contracts ceding
the excess of its retention to several primary reinsurers.
Maximum retention by Bankers Fidelity on any one individual in
the case of life insurance policies is $50,000. At
December 31, 2008, $32.3 million of the
$280.9 million of life insurance in force at Bankers
Fidelity was reinsured, generally under yearly renewable term
agreements. Certain prior year reinsurance agreements remain in
force although they no longer provide reinsurance for new
business.
Competition
Competition is based on many factors including premiums charged,
terms and conditions of coverage, service provided, financial
ratings assigned by independent rating agencies, claims
services, reputation, perceived financial strength and the
experience of the organization in the line of business being
written.
Property
and Casualty Operations
The businesses in which American Southern engages are highly
competitive. The principal areas of competition are pricing and
service. Many competing property and casualty companies, which
have been in business longer than American Southern, offer more
diversified lines of insurance and have substantially greater
financial resources. Management believes, however, that the
policies it sells are competitive with those providing similar
benefits offered by other insurers doing business in the states
in which American Southern operates. American Southern attempts
to develop strong relationships with its existing agents and,
consequently, is generally privy to new programs with existing
agents.
11
Life
and Health Operations
The life and health insurance business also remains highly
competitive and includes a large number of insurance companies,
many of which have substantially greater financial resources
than Bankers Fidelity or the Company. Bankers Fidelity focuses
on four core products in the senior market: Medicare supplement,
hospital indemnity, small face amount life insurance and
short-term nursing home coverage. Bankers Fidelity believes that
its primary competitors in this market are Mutual of Omaha,
United World, Blue Cross / Blue Shield, United
Commercial Travelers and Woodman of the World. Bankers Fidelity
competes with these as well as other insurers on the basis of
premium rates, policy benefits and service to policyholders.
Bankers Fidelity also competes with other insurers to attract
and retain the allegiance of its independent agents through
commission arrangements, accessibility and marketing assistance,
lead programs, reputation, and market expertise. In order to
better compete, Bankers Fidelity utilizes a proprietary lead
generation program to attract and retain independent agents.
Bankers Fidelity actively seeks niche markets through long-term
relationships with a select number of independent marketing
organizations including worksite marketing, credit union
business and association endorsements. Bankers Fidelity has a
track record of successfully competing in its chosen markets by
establishing relationships with independent agents and providing
proprietary marketing initiatives as well as providing
outstanding service to policyholders. Bankers Fidelity believes
that it competes effectively on the bases of policy benefits,
services and market expertise.
Ratings
Ratings of insurance companies are not designed for investors
and do not constitute recommendations to buy, sell, or hold any
security. Ratings are important measures within the insurance
industry, and improved ratings should have a favorable impact on
the ability of a company to compete in the marketplace.
Each year A.M. Best Company, Inc.
(A.M. Best) publishes Bests Insurance
Reports, which includes assessments and ratings of all insurance
companies. A.M. Bests ratings, which may be revised
quarterly, fall into fifteen categories ranging from A++
(Superior) to F (in liquidation). A.M. Bests ratings
are based on a detailed analysis of the statutory financial
condition and operations of an insurance company compared to the
industry in general.
American Southern. American Southern and its
wholly-owned subsidiary, American Safety Insurance Company, are
each, as of the date of this report, rated A
(Excellent) by A.M. Best.
Bankers Fidelity. Bankers Fidelity is, as of
the date of this report, rated B++ (Very Good) by
A.M. Best.
Regulation
In common with all domestic insurance companies, the
Companys insurance subsidiaries are subject to regulation
and supervision in the jurisdictions in which they do business.
Statutes typically delegate regulatory, supervisory, and
administrative powers to state insurance commissioners. The
method of such regulation varies, but regulation relates
generally to the licensing of insurers and their agents, the
nature of and limitations on investments, approval of policy
forms, reserve requirements, the standards of solvency to be met
and maintained, deposits of securities for the benefit of
policyholders, and periodic examinations of insurers and trade
practices, among other things. The Companys products
generally are subject to rate regulation by state insurance
commissions, which require that certain minimum loss ratios be
maintained. Certain states also have insurance holding company
laws which require registration and periodic reporting by
insurance companies controlled by other corporations licensed to
transact business within their respective jurisdictions. The
Companys insurance subsidiaries are subject to such
legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Such laws
vary from state to state, but typically require periodic
disclosure concerning the corporation which controls the
registered insurers and all subsidiaries of such corporations,
as well as prior notice to, or approval by, the state insurance
commissioners of intercorporate transfers of assets (including
payments of dividends by the insurance subsidiaries in excess of
specified amounts) within the holding company system.
12
Most states require that rate schedules and other information be
filed with the states insurance regulatory authority,
either directly or through a rating organization with which the
insurer is affiliated. The regulatory authority may disapprove a
rate filing if it determines that the rates are inadequate,
excessive, or discriminatory. The Company has historically
experienced no significant regulatory resistance to its
applications for rate adjustments; however, the Company cannot
provide any assurance that it will not receive any objections to
its applications in the future.
A state may require that acceptable securities be deposited for
the protection either of policyholders located in those states
or of all policyholders. As of December 31, 2008,
securities with an amortized cost of $9.1 million were on
deposit either directly with various state authorities or with
third parties pursuant to various custodial agreements on behalf
of the Companys insurance subsidiaries.
Virtually all of the states in which the Companys
insurance subsidiaries are licensed to transact business require
participation in their respective guaranty funds designed to
cover claims against insolvent insurers. Insurers authorized to
transact business in these jurisdictions are generally subject
to assessments of up to 4% of annual direct premiums written in
that jurisdiction to pay such claims, if any. The likelihood and
amount of any future assessments cannot be estimated until an
insolvency has occurred.
NAIC
Ratios
The National Association of Insurance Commissioners (the
NAIC) was established to, among other things,
provide guidelines to assess the financial strength of insurance
companies for state regulatory purposes. The NAIC conducts
annual reviews of the financial data of insurance companies
primarily through the application of 13 financial ratios
prepared on a statutory basis. The annual statements are
submitted to state insurance departments to assist them in
monitoring insurance companies in their state and to set forth a
desirable range in which companies should fall in each such
ratio.
The NAIC suggests that insurance companies which fall outside of
the usual range in four or more financial ratios are
those most likely to require analysis by state regulators.
However, according to the NAIC, it may not be unusual for a
financially sound company to have several ratios outside the
usual range, and in normal years the NAIC expects
15% of the companies it tests to be outside the
usual range in four or more categories.
For the year ended December 31, 2008, American Southern was
within the NAIC usual range for all 13 financial
ratios. Bankers Fidelity was outside the usual range
on two ratios: the net change in capital and surplus and the
gross change in capital and surplus. The change in capital and
surplus variance, on both a gross and net basis, was primarily
due to realized investment losses of approximately
$2.3 million on certain bonds, preferred and common stocks
which decreased the companys surplus during 2008.
Risk-Based
Capital
Risk-based capital (RBC) is used by rating agencies
and regulators as an early warning tool to identify weakly
capitalized companies for the purpose of initiating further
regulatory action. The RBC calculation determines the amount of
adjusted capital needed by a company to avoid regulatory action.
Authorized Control
Level Risk-Based
Capital (ACL) is calculated, and if a
companys adjusted capital is 200% or lower than ACL, it is
subject to regulatory action. At December 31, 2008, the
Companys insurance subsidiaries exceeded the RBC
regulatory levels.
13
Investments
Investment income represents a significant portion of the
Companys total income. Insurance company investments are
subject to state insurance laws and regulations which limit the
concentration and types of investments. The following table
provides information on the Companys investments as of the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and authorities
|
|
$
|
120,572
|
|
|
|
62.0
|
%
|
|
$
|
127,073
|
|
|
|
63.1
|
%
|
|
$
|
117,127
|
|
|
|
55.9
|
%
|
States, municipalities and political subdivisions
|
|
|
409
|
|
|
|
0.2
|
|
|
|
412
|
|
|
|
0.2
|
|
|
|
414
|
|
|
|
0.2
|
|
Public utilities
|
|
|
9,050
|
|
|
|
4.7
|
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
0.0
|
|
All other corporate bonds
|
|
|
25,605
|
|
|
|
13.2
|
|
|
|
29,628
|
|
|
|
14.7
|
|
|
|
33,792
|
|
|
|
16.2
|
|
Redeemable preferred stock
|
|
|
7,361
|
|
|
|
3.8
|
|
|
|
10,714
|
|
|
|
5.3
|
|
|
|
12,949
|
|
|
|
6.2
|
|
Certificates of deposit
|
|
|
100
|
|
|
|
0.0
|
|
|
|
100
|
|
|
|
0.0
|
|
|
|
100
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities(1)
|
|
|
163,097
|
|
|
|
83.9
|
|
|
|
167,927
|
|
|
|
83.3
|
|
|
|
164,382
|
|
|
|
78.5
|
|
Common and non-redeemable preferred stocks(2)
|
|
|
5,291
|
|
|
|
2.7
|
|
|
|
5,335
|
|
|
|
2.7
|
|
|
|
22,476
|
|
|
|
10.7
|
|
Mortgage, policy and student loans(3)
|
|
|
2,019
|
|
|
|
1.0
|
|
|
|
1,958
|
|
|
|
1.0
|
|
|
|
3,328
|
|
|
|
1.6
|
|
Other invested assets(4)
|
|
|
1,433
|
|
|
|
0.7
|
|
|
|
1,563
|
|
|
|
0.8
|
|
|
|
1,735
|
|
|
|
0.8
|
|
Real estate
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
Investments in unconsolidated trusts
|
|
|
1,238
|
|
|
|
0.7
|
|
|
|
1,238
|
|
|
|
0.6
|
|
|
|
1,238
|
|
|
|
0.6
|
|
Short-term investments(5)
|
|
|
21,339
|
|
|
|
11.0
|
|
|
|
23,432
|
|
|
|
11.6
|
|
|
|
16,191
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
194,455
|
|
|
|
100.0
|
%
|
|
$
|
201,491
|
|
|
|
100.0
|
%
|
|
$
|
209,388
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturity securities are carried on the balance sheet at
estimated fair value. Certain fixed maturity securities do not
have publicly quoted prices, and are carried at estimated fair
value as determined by management. Total cost of fixed maturity
securities was $171.3 million as of December 31, 2008,
$168.7 million as of December 31, 2007, and
$163.1 million as of December 31, 2006. |
|
(2) |
|
Equity securities are carried on the balance sheet at estimated
fair value. Total cost of equity securities was
$8.8 million as of December 31, 2008,
$5.4 million as of December 31, 2007, and
$7.5 million as of December 31, 2006. |
|
(3) |
|
Mortgage, policy and student loans are valued at historical cost. |
|
(4) |
|
Investments in other invested assets are accounted for using the
equity method. Total cost of other invested assets was
$1.4 million as of December 31, 2008,
$1.6 million as of December 31, 2007, and
$1.8 million as of December 31, 2006. |
|
(5) |
|
Short-term investments are valued at cost, which approximates
market value at the measurement date. |
Estimated fair values are determined as discussed in Note 1
of Notes to Consolidated Financial Statements.
14
Results of the Companys investment portfolio for periods
shown were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Average investments(1)
|
|
$
|
201,372
|
|
|
$
|
199,614
|
|
|
$
|
199,236
|
|
Net investment income
|
|
|
11,688
|
|
|
|
11,603
|
|
|
|
11,822
|
|
Average yield on investments
|
|
|
5.80
|
%
|
|
|
5.81
|
%
|
|
|
5.93
|
%
|
Realized investment gains (losses), net(2)
|
|
|
(3,995
|
)
|
|
|
12,627
|
|
|
|
3,084
|
|
|
|
|
(1) |
|
Calculated as the average of the balances at the beginning of
the year and at the end of each of the succeeding four quarters. |
|
(2) |
|
Includes a $4.0 million impairment charge in 2008 primarily
related to the write-down in the value of certain bonds,
preferred and common stocks. See Note 3 of Notes to
Consolidated Financial Statements. |
Managements investment strategy is an increased investment
in short and medium maturity bonds and to a lesser extent in
common and preferred stocks.
Employees
The Company and its subsidiaries employed 125 people at
December 31, 2008. Of the 125 people employed at
December 31, 2008, 123 were full-time.
Financial
Information by Industry Segment
Each of American Southern and Bankers Fidelity operate with
relative autonomy and each company is evaluated on its
individual performance. American Southern operates in the
Property and Casualty insurance market, while Bankers Fidelity
operates in the Life and Health insurance market. Each segment
derives revenue from the collection of premiums, as well as from
investment income. Substantially all revenue other than that in
the corporate and other segment is from external sources. See
Note 15 of Notes to Consolidated Financial Statements.
Available
Information
The Company files annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
amendments to those reports and other information with the
Securities and Exchange Commission (the SEC). The
public can read and obtain copies of those materials by visiting
the SECs Public Reference Room at 100 F Street,
NE, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website that contains reports, proxy and
information statements and other information regarding issuers
like Atlantic American that file electronically with the SEC.
The address of the SECs web site is
http://www.sec.gov.
In addition, as soon as reasonably practicable after such
materials are filed with or furnished to the SEC by the Company,
the Company makes copies available to the public, free of
charge, on or through its web site at
http://www.atlam.com.
Neither the Companys website, nor the information
appearing on the website, is included, incorporated into, or a
part of, this report.
15
Executive
Officers of the Registrant
The table below and the information following the table set
forth, for each executive officer of the Company as of
March 1, 2009, his name, age, positions with the Company
and business experience for the past five years, as well as any
prior service with the Company (based upon information supplied
by each of them).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director or
|
Name
|
|
Age
|
|
Positions with the Company
|
|
Officer Since
|
|
J. Mack Robinson
|
|
|
85
|
|
|
Chairman Emeritus
|
|
|
1974
|
|
Hilton H. Howell, Jr.
|
|
|
46
|
|
|
Chairman of the Board, President & CEO
|
|
|
1992
|
|
John G. Sample, Jr.
|
|
|
52
|
|
|
Senior Vice President & CFO
|
|
|
2002
|
|
Officers are elected annually and serve at the discretion of the
Board of Directors.
Mr. Robinson has served as a Director since 1974,
served as Chairman of the Board from 1974 until
February 24, 2009 and served as President and Chief
Executive Officer of the Company from September 1988 to May
1995. Effective February 24, 2009, Mr. Robinson
resigned his position as Chairman of the Board and assumed the
role of Chairman Emeritus. Mr. Robinson is also a director
of Gray Television, Inc.
Mr. Howell has been President and Chief Executive
Officer of the Company since May 1995, and prior thereto served
as Executive Vice President of the Company from October 1992 to
May 1995. He has been a Director of the Company since October
1992 and effective February 24, 2009, assumed the title of
Chairman of the Board of Directors. Mr. Howell is the
son-in-law
of Mr. Robinson. He is also a director of Triple Crown
Media, Inc. and Gray Television, Inc.
Mr. Sample has served as Senior Vice President and
Chief Financial Officer of the Company since July 2002. He also
serves as a Director of Bankers Fidelity. Prior to joining the
Company in July 2002, he had been a partner of Arthur Andersen
LLP since 1990. Mr. Sample is also a director of
1st Franklin Financial Corporation.
Forward-Looking
Statements
Certain of the statements contained herein are forward-looking
statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and include estimates and
assumptions related to, among other things, economic,
competitive and legislative developments. The forward-looking
statements are subject to changes and uncertainties which are,
in many instances, beyond the Companys control and have
been made based upon managements current expectations and
beliefs concerning future developments and their potential
effect upon the Company. There can be no assurance that future
developments will be in accordance with managements
expectations or that the effect of future developments on the
Company will be those anticipated by management. Actual results
could differ materially from those expected by the Company,
depending on the outcome of various factors. These factors
include, among others, those discussed in the Risk
Factors section which follows and: further deterioration
in general economic conditions; continued disruption to the
financial markets; unanticipated increases in the rate, number
and amounts of claims outstanding; the possible occurrence of
terrorist attacks; the level of performance of reinsurance
companies under reinsurance contracts and the availability,
pricing and adequacy of reinsurance to protect the Company
against losses; changes in the stock markets, interest rates or
other financial markets, including the potential effect on the
Companys statutory capital levels; the uncertain effect on
the Company of regulatory and market-driven changes in practices
relating to the payment of incentive compensation to brokers,
agents and other producers; the incidence and severity of
catastrophes, both natural and man-made; stronger than
anticipated competitive activity; unfavorable judicial or
legislative developments; the potential effect of regulatory
developments, including those which could increase the
Companys business costs and required capital levels; the
Companys ability to distribute its products through
distribution channels, both current and future; the uncertain
effect of emerging claim and coverage issues; and the effect of
assessments and other surcharges for guaranty funds and other
mandatory pooling arrangements.
16
Many of such factors are beyond the Companys ability to
control or predict. As a result, the Companys actual
financial condition, results of operations and stock price could
differ materially from those expressed in any forward-looking
statements made by the Company. Undue reliance should not be
placed upon forward-looking statements contained herein. The
Company does not intend to publicly update any forward-looking
statements that may be made from time to time by, or on behalf
of, the Company.
There are numerous factors, many beyond our control, which could
have a significant or material adverse effect on our business,
financial condition, operating results or liquidity. Any factor
discussed below or elsewhere in this report could by itself or,
together with one or more other factors, cause results to differ
significantly from our expectations. Further, there may be
significant additional risks which management has not considered
which could have a significant or material adverse effect on the
business, financial condition, operating results or liquidity of
the Company.
The
financial markets and global economies are undergoing a period
of significant volatility.
Markets in the United States and elsewhere have experienced
extreme volatility and disruption for more than twelve months,
due largely to the stresses affecting the global banking system,
which accelerated significantly in the second half of 2008. The
United States has entered a severe recession that is likely to
persist well into and perhaps even beyond 2009, despite past and
expected governmental intervention in the economy. These
circumstances have exerted significant downward pressure on
prices of equity securities and many other investment asset
classes and have resulted in substantially increased market
volatility, severe constrained credit and capital markets,
particularly for financial institutions, and an overall loss of
investor confidence. Economic conditions have continued to
deteriorate in early 2009. Like other insurance companies, which
face significant financial markets risk in their operations, the
Company has been adversely affected by these conditions.
We
operate in a highly competitive environment.
The life and health and property and casualty insurance
businesses are highly competitive. We compete with large
national insurance companies, locally-based specialty carriers
and alternative risk transfer entities whose activities are, in
some cases, directed to limited markets. Competitors include
companies that have substantially greater resources than we do,
as well as mutual companies and similar companies not subject to
the expenses and limitations imposed on publicly-held companies.
Competition is based on many factors including premiums charged,
terms and conditions of coverage, service provided, financial
ratings assigned by independent rating agencies, claims
services, reputation, perceived financial strength and the
experience of the organization in the line of business being
written. Increased competition could adversely affect our
ability to attract and retain business at current premium levels
and reduce the profits that would otherwise arise from
operations.
We
operate in a highly regulated environment.
Our insurance businesses are subject to extensive regulations by
state insurance authorities in each state in which they operate.
Regulation is intended for the benefit of the policyholders
rather than shareholders. In addition to limiting the amount of
dividend and other payments that can be made to us by our
insurance subsidiaries, regulatory authorities have broad
administrative and supervisory authority relating to: licensing
requirements, trade practices, capital and surplus requirements,
investment practices and rates charged to our customers.
Regulatory authorities may also impose conditions on terms of
business or rate increases that we may desire to implement, with
a goal to enhance our operating results. In addition, we may
incur significant costs in complying with regulatory requests,
initiatives
and/or
requirements. Regulatory authorities generally also regulate
insurance holding companies in a variety of matters such as
placing limits on acquisitions, changes of control and the terms
of any affiliate transactions.
17
Our
revenues may fluctuate with insurance market conditions for
similar products.
We derive a significant portion of our insurance premium revenue
from Medicare supplement and relatively large commercial
property and casualty insurance policies. While we have in the
recent past been partially successful in implementing premium
increases which typically help improve our operating results, we
believe that competition from alternative government sponsored
products and pricing decisions from larger insurers will, at
least in the short term, result in more moderate pricing
increases, if not decreases in certain situations. Should our
competitors become less disciplined in their pricing, or more
permissive in their terms, we may lose customers who base their
purchasing decisions primarily on price, due to the fact that
our policy is to price coverage commensurate with the underlying
risk. We cannot predict whether, when or how market conditions
will change, or the manner in which, or the extent to which any
such changes may adversely impact the results of our operations.
The
insurance industry is highly cyclical.
The results of companies in the insurance industry historically
have been subject to significant fluctuations due to
competition, economic conditions, interest rates and other
factors. In particular, companies in the property and casualty
insurance segment of the industry historically have experienced
pricing and profitability cycles. With respect to these cycles,
the factors having the greatest impact include intense price
competition, less restrictive underwriting standards, aggressive
marketing and increased advertising, which have resulted in
higher industry-wide combined loss and expense ratios. As a
result of our participation in the property and casualty
business, our financial condition and results of operations are
subject to this cyclicality.
Our
revenues and profitability may fluctuate with interest rates and
investment results.
We generally rely on the positive performance of our investment
portfolio to offset insurance losses and to contribute to our
profitability. As our investment portfolio is primarily
comprised of interest-earning assets, prevailing economic
conditions, particularly changes in market interest rates, may
significantly affect our operating results. Changes in interest
rates also can affect the value of our interest-earning assets,
which are principally comprised of fixed rate investment
securities. Generally, the values of fixed-rate investment
securities fluctuate inversely with changes in interest rates.
Interest rate fluctuations could adversely affect our
shareholders equity, income
and/or cash
flows. Further, to the extent fixed rate investment securities
consist of investments in other than government or government
agency securities, changing credit risk profiles may
significantly affect our operating results. The Company
generally carries investment securities at fair value for
purposes of financial statement reporting; however, if the value
of an investment security declines below its cost or amortized
cost, and the decline is considered to be other than temporary,
a realized loss is recorded to reduce the carrying value of the
investment to its estimated fair value. Realized losses are
reflected as a reduction in investment results and revenues and
could adversely impact our results of operations.
Changes
in the value of our investment portfolio may have a material
impact on our operating results.
We derive a significant portion of our net earnings from our
invested assets. As a result, our operating results depend in
part on the performance of our investment portfolio. As of the
year ended December 31, 2008, the fair value of our
investment portfolio was $173.1 million and net investment
income derived from these assets was $11.7 million. We also
incurred net realized losses of $4.0 million in 2008. Our
investment portfolio is subject to various risks, including:
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|
|
|
|
credit risk, which is the risk that our invested assets will
decrease in value due to unfavorable changes in the financial
prospects or a downgrade in the credit rating of an entity in
which we have invested;
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|
|
interest rate risk, which is the risk that the value of our
invested assets or our investment income, may decrease due to
changes in interest rates;
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|
equity price risk, which is the risk that we will incur economic
loss due to a decline in equity prices;
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|
duration risk, which is the risk that our invested assets may
not adequately match the duration of our insurance liabilities;
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18
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|
|
industry sector concentration risk, which is the risk that our
invested assets are concentrated in a small number of investment
sectors; and
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|
general economic conditions that may negatively impact the
volume or income stream from our invested amounts or require
that we recognize losses on certain investments.
|
If the Companys investment portfolio is not appropriately
matched with the respective insurance liabilites, we may be
forced to liquidate investments prior to their maturity at a
significant loss in order to cover these liabilities. This might
occur, for instance, in the event of a large or unexpected claim
or series of claims. Large investment losses could significantly
decrease our asset base, thereby affecting our ability to
underwrite new business.
Our
operating results may be affected if incurred losses differ from
our loss reserve estimates.
Varying periods of time often elapse between the occurrence of
an insured loss, the reporting of the loss by the insured and
the ultimate settlement of that loss. The financial statement
recognition of unpaid incurred losses is made through a
provision for incurred losses with corresponding loss reserves
established. The loss reserves represent the estimate of amounts
needed to pay incurred losses and related loss adjustment
expense as of the balance sheet date. The process of estimating
loss reserves is a complex undertaking and involves significant
variables and judgments. Consideration is given to numerous
factors including, but not limited to: historical data; trends
in claim frequency and severity; changes in operations; emerging
economic, social, regulatory and legal trends and inflation.
Further, estimating loss reserves assumes that past experience,
adjusted for the effect of current developments and anticipated
trends, is an appropriate, but not always necessarily accurate,
basis for predicting future settlements. There is no precise
method for evaluating the impact of any specific factor on the
adequacy of loss reserves, and ultimate settlements will differ
from initial and regularly updated estimates. To the extent loss
reserves prove to be inadequate in the future, increases in loss
reserves would be necessitated with a corresponding charge to
earnings in the period the reserves are increased, which could
have a material adverse impact on our financial condition and
results of operations.
Rapidly
changing benefit costs could have a material impact on our
operations.
A significant portion of the Companys insurance policies
provide coverage for some portion of medical benefits
and/or
repair/replacement of damaged property such as buildings and
automobiles. Historical inflationary increases in those costs
are considered when developing premium rates; however, on
occasion, future cost increases exceed those initially
estimated. In the medical field, scientific breakthroughs
and/or new
technology can result in unanticipated increasing medical costs.
In property repair/replacement, a significant geographically
concentrated demand for labor and supplies, particularly as a
result of catastrophic disasters, may result in significantly
increased costs. Rapidly changing costs of settling claims in
excess of those originally anticipated, due to scientific
breakthrough, new technology
and/or
catastrophic events could have a material adverse impact on our
results of operations.
If
market conditions cause reinsurance to be more costly or
unavailable, we may be required to assume increased risk or
reduce the level of our underwriting commitments.
As part of our enterprise risk management strategy, we purchase
reinsurance for significant amounts of risk underwritten by our
insurance company subsidiaries. Market conditions beyond our
control determine the availability and cost of the reinsurance,
which may affect the level of our business and profitability. We
may be unable to maintain current reinsurance coverage or to
obtain other reinsurance coverage in adequate amounts and at
comparable rates in the future. If we are unable to renew our
expiring coverage or to obtain new reinsurance coverage, either
our net exposure to risk would increase, or if we were unwilling
to assume additional risk, we would have to reduce the amount of
our underwritten risk.
19
We
cannot guarantee that our reinsurers will pay in a timely
fashion, if at all, and, as a result, we could experience
losses.
We transfer some of our risks to reinsurance companies in
exchange for part of the premium we receive in connection with
the risk. Although reinsurance makes the reinsurer liable to us
to the extent the risk is transferred, it does not relieve us of
our liability to our policyholders. If reinsurers fail to pay us
or fail to pay on a timely basis, our financial results would be
adversely affected.
The
guaranty fund assessments that we are required to pay to state
guaranty associations may increase and our results of operations
and financial condition could suffer as a result.
A majority of the states in which we operate have separate
insurance guaranty fund laws which require certain admitted
insurance companies doing business within their respective
jurisdictions to be a member of their guaranty associations.
These associations are organized to pay covered claims, as
defined, under insurance policies issued by insolvent insurance
companies. Most guaranty association laws enable the
associations to make assessments against member insurers to
obtain funds to pay covered claims after a member insurer
becomes insolvent. These associations levy assessments, up to
prescribed limits, on all member insurers in a particular state
on the basis of the proportionate share of the premiums written
by member insurers in the covered lines of business in that
state. Maximum assessments permitted by law in any one year are
generally subject to 4% of annual premiums written by a member
in that state. Some states permit member insurers to recover
assessments paid through surcharges on policyholders or through
full or partial premium tax offsets, while other states permit
recovery of assessments through the rate filing process. Our
policy is to accrue an estimated annual assessment based on the
most recent prior years experience. There is a significant
degree of uncertainty in estimating the liabilities relating to
an insolvent insurer due to inadequate financial data with
respect to the estate of the insolvent company as supplied by
the guaranty funds.
The
unpredictability of court decisions could have a material impact
on our operations.
From time to time we are party to legal proceedings that may
arise from disputes over our insurance coverage. The financial
position of our insurance subsidiaries may be affected by court
decisions that expand insurance coverage beyond the intention of
the insurer at the time it originally issued an insurance
policy. In addition, a significant jury award, or series of
awards, against one or more of our insureds could require us to
pay large sums of money in excess of our reserve amounts.
The
passage of tort reform or other legislation, and the subsequent
review of such laws by the courts, could have a material impact
on our operations.
Tort reforms generally restrict the ability of a plaintiff to
recover damages by, among other limitations, eliminating certain
claims that may be heard in a court, limiting the amount or
types of damages, changing statutes of limitations or the period
of time to make a claim, and limited venue or court selection. A
number of states in which we do business have enacted, or are
considering, tort reform legislation. Proposed federal tort
reform legislation has failed to win Congressional approval to
date. While the effects of tort reform would appear to be
beneficial to our business generally, there can be no assurance
that such reforms will be effective or ultimately upheld by the
courts in the various states. Further, if tort reforms are
effective, it could effectively increase the level of
competition for us in the markets in which we compete. In
addition, there can be no assurance that the benefits of tort
reform will not be accompanied by legislation or regulatory
actions that may be detrimental to our business. Furthermore,
insurance regulators might require premium rate limitations and
expanded coverage requirements as well as other requirements in
anticipation of the expected benefits of tort reform which may
or may not be actually realized.
20
Catastrophic
events could have a material adverse effect on our business,
consolidated operating results, financial condition and/or
liquidity.
The Companys primary objective in managing risk is to
obtain diversification in the types and locations of business
written. In the property and casualty operations, evaluations
are made with respect to the probable maximum loss
that may result from natural catastrophic events. There are
however, catastrophic events which may occur, the effects of
which cannot be reasonably estimated. In various Asian and
European countries there have been confirmed cases of Avian
Influenza. Individuals, primarily in Asia, have contracted the
Avian Influenza and although there are no cases which have been
reported in the United States, should such influenza or similar
influenzas reach the United States and begin spreading via human
transmission, the impact on our life and health subsidiary is
undeterminable. The Company does not insure
high-profile individuals
and/or
locations and believes the risk of loss from future catastrophic
terrorist activities is remote. Each of these or other
catastrophic events, individually
and/or
collectively could ultimately however have a material adverse
effect on our business, consolidated operating results,
financial condition
and/or
liquidity.
If we
are unable to maintain favorable financial strength ratings, it
may be more difficult for us to write new business or renew our
existing business.
Our principal operating subsidiaries hold favorable financial
strength ratings from A.M. Best, an independent insurance
rating agency. Financial strength ratings are used by our agents
and customers as an important means of assessing the financial
strength and quality of various insurers. If our financial
position, or that of any of our individual subsidiaries, were to
deteriorate, we may not maintain our existing financial strength
ratings from the rating agency. A downgrade or withdrawal of any
such rating could limit or prevent us from writing
and/or
renewing desirable business which would materially adversely
impact our financial condition and results of operations.
Our
business could be adversely affected by the loss of independent
agents.
We depend in part on the services of independent agents and
brokers in the marketing of our insurance products. We face
competition from other insurance companies for the services and
allegiance of independent agents and brokers. These agents and
brokers may choose to direct business to competing insurance
companies or may direct less desirable risks to us.
Our
business could be adversely affected by the loss of one or more
key employees.
We are heavily dependent upon our senior management and the loss
of services of any of our senior executives could adversely
affect our business. Our success has been, and will continue to
be, dependent on our ability to retain the services of existing
key employees and to attract and retain additional qualified
personnel in the future. The loss of the services of key
employees or senior management, or the inability to identify,
hire and retain other highly qualified personnel in the future,
could adversely affect the quality and profitability of our
business operations.
We are
a holding company and are dependent on dividends and other
payments from our operating subsidiaries, which are subject to
dividend restrictions.
We are a holding company whose principal source of funds is cash
dividends and other permitted payments from operating
subsidiaries. If our subsidiaries are unable to make payments to
us, or are able to pay only limited amounts, we may be unable to
make payments on our indebtedness. The payment of dividends by
these operating subsidiaries is subject to restrictions set
forth in the insurance laws and regulations of their respective
states of domicile.
A
majority of our common stock is held directly and indirectly by
one family.
The Chairman Emeritus of our Company and his family, directly
and indirectly, own slightly less than 2/3 of the
outstanding common stock of the Company. Accordingly, on
significantly all matters requiring a majority or greater
shareholder vote, our Chairman Emeritus and his family
effectively control the vote. Such ownership
21
effectively precludes any other shareholder from acquiring any
number of shares in an attempt to exercise any degree of control
over the Company. Further, as a result of the significant
ownership, the level of float of the Companys stock on the
NASDAQ market is minimal.
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|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Leased Properties. The Company leases space
for its principal offices and for some of its insurance
operations in an office building located in Atlanta, Georgia,
from Delta Life Insurance Company under a lease which continues
until either party provides written notice of cancellation at
least twelve months in advance of the actual termination date.
The lease, which incepted on November 1, 2007, provides for
rent adjustments on every fifth anniversary of the term
commencement date. On March 31, 2008, this lease was
amended. As a result, the Companys leased space was
reduced by 15,903 square feet. Under the current terms of
the lease, the Company occupies approximately 49,586 square
feet of office space. Delta Life Insurance Company, the owner of
the building, is controlled by J. Mack Robinson, Chairman
Emeritus and the largest shareholder of the Company. The terms
of the lease are believed by Company management to be comparable
to terms which could be obtained by the Company from unrelated
parties for comparable rental property.
American Southern leases space for its office in a building
located in Atlanta, Georgia. The lease term expires
January 31, 2010. Under the terms of the lease, American
Southern occupies approximately 17,014 square feet.
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|
Item 3.
|
Legal
Proceedings
|
From time to time, the Company and its subsidiaries are involved
in various claims and lawsuits arising in the ordinary course of
business, both as a liability insurer defending third-party
claims brought against insureds and as an insurer defending
coverage claims brought against it. The Company accounts for
such exposures through the establishment of loss and loss
adjustment expense reserves. Subject to the uncertainties
inherent in litigation, management expects that the ultimate
liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for probable
losses and costs of defense, will not be material to the
Companys consolidated financial condition, although the
results of such litigation could be material to the consolidated
results of operations for any given period.
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|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
On October 28, 2008, the Company and Delta Life Insurance
Company, holder of all of the issued and outstanding shares of
Series D Preferred Stock of the Company, an affiliate of J.
Mack Robinson, our Chairman Emeritus, entered into a letter
agreement pursuant to which, among other things, Delta Life
Insurance Company (i) consented to the Companys
redemption of its Series B Preferred Stock, and
(ii) waived any right it had, as a holder of Series D
Preferred Stock, in connection with such redemption.
22
PART II
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Item 5.
|
Market
for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
|
The Companys common stock is quoted on the Nasdaq Global
Market (Symbol: AAME). As of March 16, 2009, there were
4,068 shareholders of record. The following table sets
forth, for the periods indicated, the high and low sales prices
of the Companys common stock as reported on the Nasdaq
Global Market.
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Year Ended December 31,
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High
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Low
|
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2008
|
|
|
|
|
|
|
|
|
1st quarter
|
|
$
|
1.75
|
|
|
$
|
1.23
|
|
2nd quarter
|
|
|
3.00
|
|
|
|
1.31
|
|
3rd quarter
|
|
|
1.73
|
|
|
|
1.04
|
|
4th quarter
|
|
|
1.35
|
|
|
|
0.52
|
|
2007
|
|
|
|
|
|
|
|
|
1st quarter
|
|
$
|
4.04
|
|
|
$
|
2.90
|
|
2nd quarter
|
|
|
5.44
|
|
|
|
3.46
|
|
3rd quarter
|
|
|
4.15
|
|
|
|
2.40
|
|
4th quarter
|
|
|
2.96
|
|
|
|
1.11
|
|
The Company has not paid dividends to its common shareholders
since the fourth quarter of 1988. The Company has elected to
retain its earnings to grow its business and does not anticipate
paying cash dividends on its common stock in the foreseeable
future. Payment of dividends in the future will be at the
discretion of the Companys Board of Directors and will
depend upon the financial condition, capital requirements,
earnings of the Company, any restrictions contained in any
agreements by which the Company is bound, as well as other
factors as the Board of Directors may deem relevant. The
Companys primary sources of cash for the payment of
dividends are dividends from its subsidiaries. Under the
insurance codes of the state of jurisdiction under which each
insurance subsidiary operates, dividend payments to the Company
by its insurance subsidiaries, without the prior approval of the
Insurance Commissioner of the applicable state, are limited to
the greater of 10% of statutory surplus or statutory net income
of such subsidiary before recognizing realized investment gains.
At December 31, 2008, American Southern had
$36.4 million of statutory surplus and Bankers Fidelity had
$29.9 million of statutory surplus.
23
Equity
Compensation Plan Information
The following table sets forth, as of December 31, 2008,
the number of securities to be issued upon exercise of
outstanding options, warrants and rights, the weighted average
exercise price of such securities and the number of securities
remaining available for future issuance under the Companys
equity compensation plans:
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|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
Number of
|
|
|
|
|
|
for future issuance
|
|
|
|
securities to be
|
|
|
|
|
|
under equity
|
|
|
|
issued upon
|
|
|
Weighted-Average
|
|
|
compensation plans
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
(excluding
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
securities
|
|
|
|
options, warrants
|
|
|
options, warrants
|
|
|
reflected in the
|
|
Plan Category
|
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and rights
|
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|
and rights
|
|
|
first column)
|
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|
Equity compensation plans approved by security holders
|
|
|
543,500
|
|
|
$
|
1.44
|
|
|
|
2,531,406
|
|
Equity compensation plans not approved by security holders(1)
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|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
Total
|
|
|
543,500
|
|
|
$
|
1.44
|
|
|
|
2,531,406
|
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|
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(1) |
|
All the Companys equity compensation plans have been
approved by the Companys shareholders. |
Issuer
Purchases of Equity Securities
On May 2, 1995, the Board of Directors of the Company
approved an initial plan that allowed for the repurchase of
shares of the Companys common stock (the Repurchase
Plan). As amended since its original adoption, the
Repurchase Plan currently allows for repurchases of up to an
aggregate of 2.0 million shares of the Companys
common stock on the open market or in privately negotiated
transactions, as determined by an authorized officer of the
Company. Such purchases can be made from time to time in
accordance with applicable securities laws and other
requirements.
Other than pursuant to the Repurchase Plan, no purchases of
common stock of the Company were made by or on behalf of the
Company during the periods described below.
The table below sets forth information regarding repurchases by
the Company of shares of its common stock on a monthly basis
during the three month period ended December 31, 2008.
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|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
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|
|
Number of
|
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Maximum
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Purchased as
|
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|
Shares that
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|
|
|
|
|
|
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|
Part of
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May Yet be
|
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|
Total
|
|
|
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
Number of
|
|
|
Average
|
|
|
Announced
|
|
|
Under the
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Plans or
|
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|
Plans or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
October 1 October 31, 2008
|
|
|
13,704
|
|
|
$
|
1.20
|
|
|
|
13,704
|
|
|
|
522,539
|
|
November 1 November 30, 2008
|
|
|
3,812
|
|
|
|
1.01
|
|
|
|
3,812
|
|
|
|
518,727
|
|
December 1 December 31, 2008
|
|
|
6,346
|
|
|
|
1.04
|
|
|
|
6,346
|
|
|
|
512,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,862
|
|
|
$
|
1.13
|
|
|
|
23,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Stock
Performance Graph
The graph below compares the cumulative total return to
shareholders on the Companys common stock for the period
from December 31, 2003 through December 31, 2008, with
(i) the Russell 2000 Index and (ii) the SNL Insurance
Index. In future years, the Company is replacing the Nasdaq
Insurance Index and the previously selected peer group of
insurance companies (the Insurance Peer Group) with
the SNL Insurance Index primarily as a result of the sale of its
regional property and casualty operations in March 2008 which
decreased the size of the Company. The Company believes that a
comparison to the SNL Insurance Index is more meaningful to
investors. For comparative purposes, the total return to
shareholders for the period from December 31, 2003 through
December 31, 2008 for both the Nasdaq Insurance Index and
the Insurance Peer Group have been included in the accompanying
performance graph.
Total
Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
Index
|
|
|
12/31/03
|
|
|
|
12/31/04
|
|
|
|
12/31/05
|
|
|
|
12/31/06
|
|
|
|
12/31/07
|
|
|
|
12/31/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlantic American Corporation
|
|
|
|
100.00
|
|
|
|
|
103.33
|
|
|
|
|
90.00
|
|
|
|
|
98.67
|
|
|
|
|
46.67
|
|
|
|
|
24.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell 2000 Index
|
|
|
|
100.00
|
|
|
|
|
118.33
|
|
|
|
|
123.72
|
|
|
|
|
146.44
|
|
|
|
|
144.15
|
|
|
|
|
95.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SNL Insurance Index
|
|
|
|
100.00
|
|
|
|
|
115.43
|
|
|
|
|
135.02
|
|
|
|
|
148.40
|
|
|
|
|
149.33
|
|
|
|
|
79.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
NASDAQ Insurance Index
|
|
|
|
100.00
|
|
|
|
|
119.78
|
|
|
|
|
130.87
|
|
|
|
|
146.72
|
|
|
|
|
145.55
|
|
|
|
|
128.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Peer Group*
|
|
|
|
100.00
|
|
|
|
|
144.82
|
|
|
|
|
192.67
|
|
|
|
|
259.21
|
|
|
|
|
296.81
|
|
|
|
|
225.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Insurance Peer Group includes: American Safety Insurance
Holdings Ltd. (ASI), Donegal Group Inc. (DGICA), National
Security Group, Inc.(NSEC), Meadowbrook Insurance Group, Inc.
(MIG), Horace Mann Educators Corp.(HMN), Unico American Corp.
(UNAM) and Covanta Holding Corp. (CVA).
|
The foregoing graph is not, and shall not be deemed to be, filed
as part of the Companys annual report on
form 10-K.
Such graph does not constitute soliciting material and should
not be deemed filed or incorporated by reference into any filing
of the Company under the Securities Act of 1933, or the
Securities Exchange Act of 1934, except to the extent
specifically incorporated therein by the Company.
25
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Insurance premiums
|
|
$
|
91,381
|
|
|
$
|
97,824
|
|
|
$
|
109,580
|
|
|
$
|
117,351
|
|
|
$
|
113,504
|
|
Investment income
|
|
|
11,814
|
|
|
|
11,722
|
|
|
|
11,926
|
|
|
|
10,828
|
|
|
|
10,071
|
|
Other income
|
|
|
531
|
|
|
|
799
|
|
|
|
768
|
|
|
|
1,105
|
|
|
|
1,049
|
|
Realized investment gains (losses), net(1)
|
|
|
(3,995
|
)
|
|
|
12,627
|
|
|
|
3,084
|
|
|
|
(7,303
|
)
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
99,731
|
|
|
|
122,972
|
|
|
|
125,358
|
|
|
|
121,981
|
|
|
|
125,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
|
56,830
|
|
|
|
58,701
|
|
|
|
65,460
|
|
|
|
71,201
|
|
|
|
70,622
|
|
Other expenses
|
|
|
43,893
|
|
|
|
45,173
|
|
|
|
50,274
|
|
|
|
51,394
|
|
|
|
47,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
100,723
|
|
|
|
103,874
|
|
|
|
115,734
|
|
|
|
122,595
|
|
|
|
118,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(992
|
)
|
|
|
19,098
|
|
|
|
9,624
|
|
|
|
(614
|
)
|
|
|
7,690
|
|
Income tax expense (benefit)
|
|
|
(526
|
)
|
|
|
7,513
|
|
|
|
2,458
|
|
|
|
(1,746
|
)
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(466
|
)
|
|
|
11,585
|
|
|
|
7,166
|
|
|
|
1,132
|
|
|
|
7,839
|
|
Income (loss) from discontinued operations, net of tax(2)
|
|
|
(3,417
|
)
|
|
|
(4,333
|
)
|
|
|
1,770
|
|
|
|
(4,307
|
)
|
|
|
(2,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,883
|
)
|
|
$
|
7,252
|
|
|
$
|
8,936
|
|
|
$
|
(3,175
|
)
|
|
$
|
5,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(.09
|
)
|
|
$
|
.46
|
|
|
$
|
.27
|
|
|
$
|
|
|
|
$
|
.31
|
|
Income (loss) from discontinued operations
|
|
|
(.16
|
)
|
|
|
(.20
|
)
|
|
|
.09
|
|
|
|
(.21
|
)
|
|
|
(.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(.25
|
)
|
|
$
|
.26
|
|
|
$
|
.36
|
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(.09
|
)
|
|
$
|
.45
|
|
|
$
|
.27
|
|
|
$
|
|
|
|
$
|
.31
|
|
Income (loss) from discontinued operations
|
|
|
(.16
|
)
|
|
|
(.20
|
)
|
|
|
.06
|
|
|
|
(.21
|
)
|
|
|
(.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(.25
|
)
|
|
$
|
.25
|
|
|
$
|
.33
|
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible book value per common share(3)
|
|
$
|
2.97
|
|
|
$
|
2.98
|
|
|
$
|
3.30
|
|
|
$
|
3.00
|
|
|
$
|
3.42
|
|
Common shares outstanding
|
|
|
22,332
|
|
|
|
21,817
|
|
|
|
21,481
|
|
|
|
21,383
|
|
|
|
21,213
|
|
Total assets
|
|
$
|
266,609
|
|
|
$
|
458,254
|
|
|
$
|
459,152
|
|
|
$
|
461,366
|
|
|
$
|
471,274
|
|
Total long-term debt
|
|
$
|
41,238
|
|
|
$
|
52,988
|
|
|
$
|
52,988
|
|
|
$
|
49,738
|
|
|
$
|
51,488
|
|
Total debt
|
|
$
|
41,238
|
|
|
$
|
53,988
|
|
|
$
|
53,988
|
|
|
$
|
51,488
|
|
|
$
|
53,238
|
|
Total shareholders equity
|
|
$
|
75,414
|
|
|
$
|
87,794
|
|
|
$
|
94,188
|
|
|
$
|
80,453
|
|
|
$
|
88,960
|
|
|
|
|
(1) |
|
Includes a $4,014 impairment charge in 2008 primarily related to
the write-down in the value of certain bonds, preferred and
common stocks. Includes a $12,896 realized gain in 2007 from the
disposition of the Companys investment in equity
securities of Wachovia Corporation. Includes a $7,198 impairment
charge in 2005 for automotive sector fixed maturity investments.
See Note 3 of Notes to Consolidated Financial Statements. |
|
(2) |
|
See Note 2 of Notes to Consolidated Financial Statements. |
|
(3) |
|
Excludes goodwill. |
26
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following is managements 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 each of the three years in the period
ended December 31, 2008. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto included elsewhere herein.
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.
In December 2007, the Company entered into an agreement for 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. The
Company completed this sale on March 31, 2008. In
accordance with generally accepted accounting principles, the
consolidated financial statements 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 managements belief,
conform to general practices within the insurance industry. The
following is an explanation of the Companys 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 managements
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 Companys financial condition or liquidity, although
changes could have a material effect on its consolidated results
of operations.
Unpaid loss and loss adjustment expenses comprised 27% of
the Companys total liabilities at December 31, 2008.
This obligation includes estimates for: 1) unpaid losses on
claims reported prior to December 31, 2008,
2) development on those reported claims, 3) unpaid
ultimate losses on claims incurred prior to December 31,
2008 but not yet reported and 4) unpaid loss adjustment
expenses for reported and unreported claims incurred prior to
December 31, 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 December 31,
2008 but not yet reported, and estimates of unpaid loss
adjustment expenses, are developed based on the Companys
historical experience, using actuarial methods to assist in the
analysis. The Companys actuary 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 Companys 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 Companys 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
27
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
Companys recorded liability for unpaid loss and loss
adjustment expenses is adjusted. In the event the Companys
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 Companys results of operations.
Future policy benefits comprised 30% of the
Companys total liabilities at December 31, 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 Companys experience. If actual
results differ from the initial assumptions, the amount of the
Companys recorded liability could require adjustment.
Deferred acquisition costs comprised 7% of the
Companys total assets at December 31, 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
years 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 8% of the Companys total assets at
December 31, 2008. Insured and agent balances are evaluated
periodically for collectibility. Annually, the Company performs
an analysis of the credit worthiness of the Companys
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 Companys historical experience.
Cash and investments comprised 79% of the Companys
total assets at December 31, 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 has
certain fixed maturity securities that do not have publicly
quoted values with an estimated fair value as determined by
management of $1.9 million at December 31, 2008. 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 investments indicated
fair value has declined below its cost basis for a period of
time, the Company evaluates such investment for other than a
temporary impairment. The evaluation for other than temporary
impairments is a quantitative and qualitative process, which is
subject to risks and uncertainties in the determination of
whether declines in the fair value of investments are other than
temporary. The risks and uncertainties include changes in
general economic conditions, an issuers financial
condition or near term recovery prospects and the effects of
changes in interest rates. In evaluating impairment, the Company
considers, among other factors, the intent and ability to hold
these securities, the nature of the investment and the prospects
for the issuer and its industry, the issuers continued
satisfaction of the investment obligations in accordance with
their contractual terms, and managements expectation that
they will continue to do so, as well as rating actions that
affect the issuers credit status. If other than a
temporary impairment is deemed to exist, then the Company will
write down the
28
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 Companys balance sheet, it is
reflected as a realized investment loss in the Companys
consolidated statements of operations. As a result of the
Companys review of its investment portfolio, impairment
charges of $4.0 million related to the write-down in the
value of certain bonds, preferred and common stocks were
recorded during 2008. See Note 3 of Notes to Consolidated
Financial Statements.
Effective January 1, 2008, on a prospective basis, the
Company determined the fair values of certain financial
instruments based on the fair market hierarchy established in
Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value under
accounting principles generally accepted in the
United States, and enhances disclosures about fair value
measurements. Fair value is defined as the exchange price at
which an asset could be sold or a liability settled in the
principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the
measurement date. SFAS 157 provides guidance on measuring
fair value when required under existing accounting standards and
establishes a hierarchy that prioritizes the inputs to valuation
techniques. The first level of such hierarchy determines fair
value at the quoted price (unadjusted) in active markets for
identical assets (Level 1). The second level determines
fair value using valuation methodology including quoted prices
for similar assets and liabilities in active markets and other
inputs that are observable for the asset or liability, either
directly or indirectly for substantially similar terms
(Level 2). The third level for determining fair value
utilizes inputs to valuation methodology which are unobservable
for the asset or liability (Level 3). Such values
inherently involve a greater degree of judgment and uncertainty
and therefore ultimately greater price volatility. A financial
assets or liabilitys classification within the
hierarchy is determined based on the lowest level input that is
significant to the fair value measurement. The fair values for
fixed maturity and equity securities are largely determined by
either independent methods prescribed by the National
Association of Insurance Commissioners (NAIC), which
do not differ materially from nationally quoted market prices,
when available, or independent broker quotations.
The Companys Level 1 instruments consist of
short-term investments.
The Companys Level 2 instruments include most of its
fixed maturity securities, which consist of U.S. Treasury
securities and U.S. government securities, municipal bonds,
and certain corporate fixed maturity securities as well as its
common and non-redeemable preferred stocks.
The Companys Level 3 instruments include certain
fixed maturity securities and a zero cost rate collar. Fair
value is based on criteria that use assumptions or other data
that are not readily observable from objective sources. As of
December 31, 2008, the Companys fixed maturity
securities valued using Level 3 criteria totaled
$1.9 million and the zero cost rate collar was a liability
of $2.1 million. See Note 16 of Notes to Consolidated
Financial Statements.
Deferred income taxes comprised approximately 4% of the
Companys total assets at December 31, 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 deemed more likely than not to be realized. In assessing the
likelihood of realization, management considers estimates of
future taxable income and tax planning strategies.
Refer to Note 1 of Notes to Consolidated Financial
Statements for details regarding the Companys
significant accounting policies.
29
Overall
Corporate Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
American Southern
|
|
$
|
40,466
|
|
|
$
|
47,046
|
|
|
$
|
56,593
|
|
Life and Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
|
58,805
|
|
|
|
74,658
|
|
|
|
67,443
|
|
Corporate and Other
|
|
|
460
|
|
|
|
1,268
|
|
|
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
99,731
|
|
|
$
|
122,972
|
|
|
$
|
125,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
American Southern
|
|
$
|
5,817
|
|
|
$
|
9,462
|
|
|
$
|
10,625
|
|
Life and Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
|
1,431
|
|
|
|
16,105
|
|
|
|
6,754
|
|
Corporate and Other
|
|
|
(8,240
|
)
|
|
|
(6,469
|
)
|
|
|
(7,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(992
|
)
|
|
$
|
19,098
|
|
|
$
|
9,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(3,417
|
)
|
|
$
|
(4,333
|
)
|
|
$
|
1,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,883
|
)
|
|
$
|
7,252
|
|
|
$
|
8,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a consolidated basis, the Company had a net loss of
$3.9 million, or $0.25 per diluted share, in 2008, compared
to net income of $7.3 million, or $0.25 per diluted share,
in 2007 and $8.9 million, or $0.33 per diluted share, in
2006. Loss from continuing operations was $0.5 million in
2008, compared with income from continuing operations of
$11.6 million in 2007 and $7.2 million in 2006; while
the loss from discontinued operations was $3.4 million in
2008, compared to loss from discontinued operations of
$4.3 million in 2007 and income from discontinued
operations of $1.8 million in 2006. The loss from
continuing operations before income taxes was $1.0 million
in 2008, compared to income from continuing operations before
income taxes of $19.1 million in 2007 and $9.6 million
in 2006. The loss from continuing operations in 2008 was
primarily due to a $4.0 million realized loss related to
the write-down in the value of certain bonds, preferred and
common stocks due to an other than temporary impairment. The
Company had net realized investment losses of $4.0 million
in 2008, compared to net realized investment gains of
$12.6 million in 2007 and $3.1 million in 2006. In
2007, the Company disposed of a significant holding in Wachovia
Corporation which resulted in realized investment gains totaling
$12.9 million. Such variations between years in realized
investment gains and losses significantly influence the reported
income (loss) from continuing operations before income taxes.
Income from continuing operations before income taxes and
realized investment gains and losses was $3.0 million in
2008 and was $6.5 million in both 2007 and 2006. The
magnitude of realized investment gains and losses in any year
are a function of the timing of trades of investments relative
to the markets themselves as well as the recognition of any
impairments on investments.
Total revenue was $99.7 million in 2008 as compared to
$123.0 million in 2007 and $125.4 million in 2006.
Insurance premiums decreased to $91.4 million in 2008 from
$97.8 million in 2007 and $109.6 million in 2006. The
continued softening in the property and casualty markets
combined with the significant market competition in the Medicare
supplement and Medicare advantage markets have resulted in
declining premiums in both of the Companys business
segments between years; although premium levels at the end of
2008 appeared to be stabilizing. Premium declines were not as
evident in the change in total revenue during 2007 due to the
magnitude of the change in realized investment gains in 2007.
30
Total expenses have decreased consistent with the related
premium decreases; although not directly proportionate.
Insurance benefits and losses and commissions and underwriting
expenses as a percentage of premiums were 95.9%, 93.4% and 93.0%
in 2008, 2007 and 2006, respectively.
The Companys property and casualty operations are
comprised of American Southern and the Companys life and
health operations consist of Bankers Fidelity.
A more detailed analysis of the operating companies and other
corporate activities is provided below.
Underwriting
Results
American
Southern
The following table summarizes, for the periods indicated,
American Southerns premiums, losses, expenses and
underwriting ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Gross written premiums
|
|
$
|
43,129
|
|
|
$
|
42,351
|
|
|
$
|
55,539
|
|
Ceded premiums
|
|
|
(6,250
|
)
|
|
|
(6,379
|
)
|
|
|
(9,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$
|
36,879
|
|
|
$
|
35,972
|
|
|
$
|
46,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
36,258
|
|
|
$
|
41,575
|
|
|
$
|
50,660
|
|
Net losses and loss adjustment expenses
|
|
|
16,746
|
|
|
|
18,399
|
|
|
|
23,440
|
|
Underwriting expenses
|
|
|
17,903
|
|
|
|
19,185
|
|
|
|
22,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
$
|
1,609
|
|
|
$
|
3,991
|
|
|
$
|
4,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
46.2
|
%
|
|
|
44.3
|
%
|
|
|
46.3
|
%
|
Expense ratio
|
|
|
49.4
|
|
|
|
46.1
|
|
|
|
44.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
95.6
|
%
|
|
|
90.4
|
%
|
|
|
90.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums at American Southern increased
$0.8 million, or 1.8%, during 2008 as compared to 2007. The
increase in gross written premiums was primarily attributable to
a significant increase in commercial automobile business
generated by a newly appointed agency. Partially offsetting this
increase in gross written premiums were decreases in both the
general liability and property lines of business due to the weak
construction industry, particularly in the state of Florida.
Ceded premiums decreased $0.1 million, or 2.0%, during 2008
as compared to 2007. The decrease in ceded premiums was
primarily due to the decline in the related earned premiums. As
American Southerns premiums are determined and ceded as a
percentage of earned premiums, a decrease in ceded premiums
occurs when earned premiums decrease.
Gross written premiums at American Southern decreased
$13.2 million, or 23.7%, during 2007 as compared to 2006.
The decrease in gross written premiums was primarily
attributable to the loss of one program marketed through a
general agent which prior to 2007 had annualized gross written
premiums exceeding $10.0 million per annum. Loss of the
program resulted from a larger competitor offering a broader
coverage on a national basis to the insured.
Ceded premiums decreased $2.9 million, or 31.1%, during
2007 as compared to 2006. The decrease in ceded premiums was
primarily due to the decline in the related earned premiums.
31
The following table summarizes, for the periods indicated,
American Southerns earned premiums by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Automobile liability
|
|
$
|
10,904
|
|
|
$
|
10,936
|
|
|
$
|
16,163
|
|
Automobile physical damage
|
|
|
6,628
|
|
|
|
8,105
|
|
|
|
9,698
|
|
General liability
|
|
|
7,996
|
|
|
|
10,349
|
|
|
|
11,394
|
|
Property
|
|
|
2,374
|
|
|
|
3,005
|
|
|
|
3,187
|
|
Surety
|
|
|
8,356
|
|
|
|
9,180
|
|
|
|
10,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premium
|
|
$
|
36,258
|
|
|
$
|
41,575
|
|
|
$
|
50,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums decreased $5.3 million, or 12.8%,
during 2008 as compared to 2007 and $9.1 million, or 17.9%,
during 2007 as compared to 2006. The decrease in net earned
premiums during 2008 was 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 2007.
The decrease in net earned premiums during 2007 was primarily
attributable to the cancellation of American Southerns
joint venture with AAA Carolinas to market automobile insurance
to club members, which was terminated on October 1, 2005.
Although the joint venture with AAA Carolinas was terminated in
2005, a portion of the gross written premiums related thereto
were earned in 2006. Gross written premiums are earned ratably
over the respective policy terms, and therefore premiums earned
in the current year are related to policies written during both
the current and prior year. In 2008, American Southerns
five key states in terms of premium revenue, Alabama, Florida,
Georgia, Indiana, and Ohio, were relatively consistent with
those in 2007 and accounted for approximately 63% of total
earned premiums for 2008.
The performance of an insurance company is often measured by its
combined ratio. The combined ratio represents the percentage of
losses, loss adjustment expenses and other expenses that are
incurred for each dollar of premium earned by the company. A
combined ratio of under 100% represents an underwriting profit
while a combined ratio of over 100% indicates an underwriting
loss. The combined ratio is divided into two components, the
loss ratio (the ratio of losses and loss adjustment expenses
incurred to premiums earned) and the expense ratio (the ratio of
expenses incurred to premiums earned). The combined ratio for
American Southern increased to 95.6% in 2008 from a combined
ratio of 90.4% in 2007. The loss ratio increased to 46.2% in
2008 from 44.3% in 2007. The overall increase in the loss ratio
was primarily attributable to higher incurred losses in the
surety line of business due to problems in the construction
industry which did not occur in 2007. The expense ratio
increased to 49.4% in 2008 from 46.1% in 2007. The increase in
the expense ratio was primarily due to a relatively consistent
level of fixed expenses coupled with a decrease in premium
revenues. The combined ratio for American Southern decreased to
90.4% in 2007 from 90.7% in 2006. The single largest component
of the decrease was the decreased loss ratio which decreased to
44.3% in 2007 from 46.3% in 2006. The decrease in the loss ratio
was primarily attributable to the loss and cancellation of
several commercial programs. The expense ratio increased to
46.1% in 2007 from 44.4% in 2006 due primarily to slightly
higher profit margins on the business with variable commissions.
In establishing reserves, American Southern initially reserves
for losses at the upper end of the reasonable range if no other
value within the range is determined to be more probable.
Selection of such an initial loss pick is an attempt by
management to give recognition that initial claims information
received generally is not conclusive with respect to legal
liability, is generally not comprehensive with respect to
magnitude of loss and generally, based on historical experience,
will develop more adversely as time and information evolves.
However, as a result, American Southern generally experiences
reserve redundancies when analyzing the development of prior
year losses in a current period. At December 31, 2008, the
range of estimates developed in connection with the loss
reserves for American Southern indicated that reserves could be
as much as 22.1% lower or as much as 5.4% higher. Development
from prior years reserves has historically reduced the
current
32
year loss ratio; however, such reduction in the current year
loss ratio is generally offset by the reserves established in
the current year for current period losses. American
Southerns reserve redundancies for the years ended
December 31, 2008, 2007 and 2006 were $8.0 million,
$8.6 million and $6.7 million, respectively. To the
extent reserve redundancies vary between years, there is an
incremental impact on the results of operations from American
Southern and the Company. The indicated redundancy in 2008 was
$0.6 million less than that in 2007. After considering the
impact on contingent commissions and other related accruals, the
$0.6 million decline in the redundancy resulted in a
decline in income from operations before tax of approximately
$0.4 million in 2008 as compared to 2007. Conversely, the
indicated redundancy in 2007 was $1.9 million greater than
that in 2006; and after considering the impact of contingent
commissions and other related accruals, the $1.9 million
increase in the indicated redundancy resulted in an increase in
income from operations before tax of approximately
$1.1 million in 2007 as compared to 2006. Management
believes that such differences will continue in future periods
but is unable to determine if or when incremental redundancies
will increase or decrease, until the underlying losses are
ultimately settled.
Contingent commissions, if contractually applicable, are
ultimately payable to agents based on the underlying
profitability of a particular insurance contract or a group of
insurance contracts, and are periodically evaluated and accrued
as earned. Approximately 88% of American Southerns
business provides for contractual commission arrangements which
compensate the companys agents in relation to the loss
ratios of the business they write. By structuring its business
in this manner, American Southern provides its agents with an
economic incentive to place profitable business with American
Southern. In periods when loss reserves reflect favorable
development from prior years reserves, there is generally
a highly correlated increase in commission expense also related
to the prior year business. Accordingly, favorable loss
development from prior years, while anticipated to continue in
future periods, is not an indicator of significant additional
profitability in the current year.
Bankers
Fidelity
The following summarizes, for the periods indicated, Bankers
Fidelitys premiums, losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Medicare supplement
|
|
$
|
41,402
|
|
|
$
|
41,786
|
|
|
$
|
44,919
|
|
Other health products
|
|
|
3,364
|
|
|
|
3,848
|
|
|
|
3,041
|
|
Life insurance
|
|
|
10,357
|
|
|
|
10,615
|
|
|
|
10,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premiums
|
|
|
55,123
|
|
|
|
56,249
|
|
|
|
58,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses
|
|
|
40,084
|
|
|
|
40,302
|
|
|
|
42,020
|
|
Underwriting expenses
|
|
|
17,290
|
|
|
|
18,251
|
|
|
|
18,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
57,374
|
|
|
|
58,553
|
|
|
|
60,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss
|
|
$
|
(2,251
|
)
|
|
$
|
(2,304
|
)
|
|
$
|
(1,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue at Bankers Fidelity decreased $1.1 million,
or 2.0%, during 2008 as compared to 2007. Premiums from the
Medicare supplement line of business decreased
$0.4 million, or 1.0%, in 2008 from 2007 and accounted for
75% of total 2008 earned premiums. In 2008, the companys
five key states in terms of premium revenue, Georgia, Indiana,
Ohio, Pennsylvania, and Utah, were consistent with those in 2007
and accounted for approximately 55% of total earned premiums for
2008. The general decline in Medicare supplement premiums has
resulted primarily from the increase in competition not only
from traditional insurance company competitors but also the
federal government as it provides incentives directly and
indirectly to seniors to exit traditional Medicare programs and
choose instead Medicare Advantage and other similar plans which
result in much different economics to the insured. Premiums from
the life insurance line of business decreased $0.3 million,
or 2.4%, during 2008 compared to 2007 due to the redemption and
settlement of existing policies exceeding the level of new sales
activity. The other health products premiums decreased to
$3.4 million in 2008 from $3.8 million in 2007, or
12.6%, primarily as a result of decreased
33
business activities with group associations. Premiums from group
associations decreased $0.7 million, or 88.0%, during 2008
as compared to 2007 due to a decline in first year premiums and
the non-renewal of existing policies.
Premium revenue at Bankers Fidelity decreased $2.7 million,
or 4.5%, during 2007 as compared to 2006. The most significant
decrease in premiums was in the Medicare supplement line of
business, where premiums decreased $3.1 million, or 7.0%,
due to the continued decline in new business levels and
non-renewal of certain policies that resulted from increased
competition, as discussed previously. In 2007, the
companys key five states collectively accounted for
approximately 55% of total earned premiums. The Medicare
supplement line of business in these states decreased
approximately $2.4 million as compared to 2006. Premiums
from the life insurance line of business decreased
$0.3 million, or 3.1%, during 2007 due to a continued
decline in sales related activities. The other health products
premiums increased to $3.8 million in 2007 from
$3.0 million in 2006, or 26.5%, primarily as a result of
increased business activities with group
associations. In 2007, Bankers Fidelity began
targeting group associations for additional sources
of new business.
Benefits and losses decreased slightly during 2008 as compared
to 2007 and $1.7 million, or 4.1%, during 2007 as compared
to 2006. As a percentage of earned premiums, benefits and losses
were 72.7% in 2008 compared to 71.6% in 2007 and 71.3% in 2006.
The increasing loss ratio between years was primarily due to the
continued aging of the life business. In the years ended
December 31, 2008, 2007 and 2006, favorable loss
development, primarily from adjustments to the prior years
IBNR reserves, was $0.7 million, $2.9 million and
$3.2 million, respectively. Bankers Fidelitys
Medicare supplement premium revenue peaked in 2005 and has
continued to decline through 2008. With the introduction of
Medicare Advantage and other competitive products, discussed
previously, Medicare supplement revenues declined 1.0% in the
year ended December 31, 2008 as compared to 2007. For the
years ended December 31, 2007 and 2006, Medicare supplement
premiums declined 7.0% and 12.6%, respectively, from the
comparable prior years. Such premium revenue declines disrupted
historical patterns on which determinations of IBNR reserve
adequacy had been based. A primary consideration in reserve
adequacy during this period was the significant potential for
adverse selection. Even though premium revenues declined,
because of offsetting rate increases, the decline in policy
count was greater than indicated. Accordingly, until historical
experience could be further developed in a declining business
environment, indicated excess reserves as a result of favorable
development were recognized at the low end of the reasonable
range of indicated redundancy. Premium declines on a monthly
basis have since moderated and management does not believe that
redundancies of such magnitude will continue in future years as
evidenced in the 2008 development.
Underwriting expenses decreased $1.0 million, or 5.3%,
during 2008 as compared to 2007, and decreased
$0.4 million, or 2.2%, during 2007 as compared to 2006. The
decrease in underwriting expenses during 2008 was primarily due
to decreases in advertising and agency related expenses. The
decrease in underwriting expenses during 2007 was directly
related to the decline in premium revenues. As a percentage of
earned premiums, these expenses were 31.4% in 2008 compared to
32.4% in 2007 and 31.7% in 2006. The increase in the expense
ratio during 2007 was primarily due to increased costs on
marketing initiatives related to product diversification
initiatives.
The indicated underwriting loss of $2.3 million in 2008 and
2007 and $1.8 million in 2006 is prior to considering
investment income which is a significant component in evaluating
profitability; particularly in the life insurance business.
Increased marketing efforts have resulted in underwriting
expenses declining at a slower rate than the related premiums
and thus increasing the indicated underwriting loss.
Investment
Income and Realized Gains
Investment income of $11.8 million increased slightly in
2008 as compared to 2007. The increase in investment income
during 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. Partially offsetting the increase in
investment income was a large number of called securities, the
proceeds of which the Company was not able to reinvest at
equivalent market rates.
34
Investment income of $11.7 million decreased
$0.2 million, or 1.7%, during 2007 as compared to 2006. The
decrease in investment income during 2007 was primarily due to a
large number of called securities in the second half of the
year, the proceeds of which were reinvested at lower rates.
The Company had net realized investment losses of
$4.0 million in 2008 and net realized investment gains of
$12.6 million in 2007 and $3.1 million in 2006. The
net realized investment losses in 2008 were due to impairment
charges related to the write-down in the value of certain bonds,
preferred and common stocks. The significant net realized
investment gains in 2007 were primarily the result of the
disposition of the investment in equity securities of Wachovia
Corporation which resulted in a realized investment gain of
$12.9 million. The net realized investment gains in 2006
were primarily due to the sale of a portion of the
Companys automotive sector investments (bonds of General
Motors, GMAC and Ford), a portion of the Companys
investment in equity securities of Wachovia Corporation, and the
sale of a real estate partnership interest, all of which
resulted in realized investment gains totaling
$3.1 million. During the years ended December 31, 2008
and 2007, the Company recorded investment impairments due to
other than temporary declines in values, which reduced reported
realized investment gains, related to the following investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Corporate securities
|
|
$
|
932
|
|
|
$
|
123
|
|
|
$
|
|
|
Redeemable preferred stocks
|
|
$
|
2,342
|
|
|
$
|
|
|
|
$
|
|
|
Common and non-redeemable preferred stocks
|
|
$
|
666
|
|
|
$
|
|
|
|
$
|
|
|
Other invested assets
|
|
$
|
74
|
|
|
$
|
123
|
|
|
$
|
|
|
While the impairments did not impact the carrying value of the
investments, they resulted in realized losses of
$4.0 million in 2008 and $0.2 million in 2007.
Management continually evaluates the Companys investment
portfolio and, as needed, makes adjustments for impairments
and/or will
divest investments. See Note 3 of Notes to Consolidated
Financial Statements.
Interest
Expense
Interest expense of $3.3 million decreased
$0.9 million, or 20.7%, during 2008 as compared to 2007.
The decrease in interest expense during 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 Companys interest expense related to
its borrowings, including the trust preferred obligations and
its outstanding bank debt, is based on LIBOR. In addition, the
Company repaid the outstanding balance of $12.8 million
under the Companys credit agreement (the Credit
Agreement) with Wachovia Bank, National Association
(Wachovia), which decreased interest expense by
reducing the Companys average outstanding debt level
during 2008.
Interest expense of $4.2 million decreased
$0.4 million, or 9.7%, during 2007 as compared to 2006. The
decrease in interest expense during 2007 was due to active
management of the revolving nature of amounts outstanding under
the Credit Agreement. During each quarter, using excess funds,
the Company repaid a substantial portion of its bank borrowings.
At each quarter end, the Company would then reborrow funds under
the Credit Agreement such that borrowed amounts were consistent
at each quarter end. Such periodic bank borrowings and
repayments resulted in a reduction in interest expense by
reducing the average debt level outstanding during 2007 as
compared to 2006.
Other
Expenses
Other expenses (commissions, underwriting expenses, and other
expenses) decreased $0.4 million, or 1.0%, in 2008 as
compared to 2007. The decrease in other expenses during 2008 was
primarily attributable to targeted reductions in compensation,
which were effective beginning 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 the decrease in other
expenses were $0.7 million in discretionary bonus payments
to certain officers of the Company in connection with the
completion of the sale of the regional property and casualty
operations, $0.8 million in incremental additional
compensation accruals for recognition of 2008 management
performance and a $0.3 million goodwill impairment charge,
all of which were expensed in
35
2008. As a percentage of earned premiums, other expenses were
44.4% in 2008 as compared with 41.9% in 2007. The increase in
the expense ratio was primarily due to the bonus compensation
accruals and the goodwill impairment charge discussed previously
coupled with a decrease in premium revenues.
Other expenses decreased $4.7 million, or 10.2%, in 2007 as
compared to 2006. The decrease in premium revenue that occurred
in 2007 resulted in a corresponding decrease in the related
commissions and underwriting expenses. As a percentage of earned
premiums, other expenses were 41.9% in 2007 as compared with
41.7% in 2006. The increase in other expenses as a percentage of
earned premiums resulted from the increased marketing costs
incurred in connection with continuing to diversify and grow the
book of business. Offsetting some of the increased marketing
costs were cost reduction initiatives implemented in the fourth
quarter of 2007.
Income
Taxes
The primary differences between the effective tax rate and the
federal statutory income tax rate result from the
dividends-received deduction (DRD), the small life
insurance company deduction (SLD) and the change in
asset valuation allowance. The current year DRD is adjusted as
underlying factors change, including known actual 2008
distributions earned on invested assets. The actual current DRD
can vary from the estimates based on, but not limited to,
amounts of distributions from these investments as well as
appropriate levels of taxable income. The SLD varies in amount
and is determined at a rate of 60 percent of the tentative
life insurance company taxable income (LICTI). The
amount of 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 the asset valuation
allowance primarily results from a periodic assessment of the
realization of certain loss carry forward benefits.
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
Companys primary sources of cash are written premiums,
investment income and the sale and maturity of its invested
assets. The Company believes that, within each business unit,
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 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.
At December 31, 2008, the Parent had approximately
$21.0 million of cash and short-term investments. Net cash
used in operating activities by the Parent was less than
$1.0 million in both 2008 and 2007; accordingly, the
Company believes that given traditional funding sources of the
Parent combined with current cash and short-term investments,
the current liquidity issues being faced by certain other
companies as a result of the current economic conditions and
funding constraints should not be an issue for the Company
and/or the
Parent for the foreseeable future.
Dividend payments to the Parent by its 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 December 31, 2008, the
Parents insurance subsidiaries had statutory surplus of
$66.3 million.
The Parent provides certain administrative, purchasing and other
services to each of its subsidiaries. The amounts charged to and
paid by the subsidiaries were $4.7 million,
$5.0 million, and $4.9 million in 2008, 2007, and
2006, respectively. In addition, the Parent has a formal
tax-sharing agreement with each of its insurance subsidiaries. A
net total of $7.8 million, $3.6 million and
$4.1 million was paid to the Parent under the tax sharing
agreements in 2008, 2007, and 2006, respectively. Dividends were
paid to Atlantic American by its subsidiaries totaling
$5.5 million in 2008, $5.6 million in 2007, and
$7.8 million in 2006. As a result of
36
the Parents tax loss carryforwards, which totaled
approximately $6.0 million at December 31, 2008, it is
anticipated that the tax sharing agreements will continue to
provide the Parent with additional funds sufficient to meet its
cash flow obligations.
In addition to these internal funding sources, the Company
maintains its revolving credit facility under the Credit
Agreement pursuant to which the Company was able to, subject to
the terms and conditions thereof, initially borrow or reborrow
up to $15.0 million (the Commitment Amount). In
accordance with the terms of the Credit Agreement, the
Commitment Amount is incrementally reduced every six months and
was equal to $13.0 million at December 31, 2008. The
interest rate on amounts outstanding under the Credit Agreement
is, at the option of the Company, equivalent to either
(a) the base rate (which equals the higher of the Prime
Rate or 0.5% above the Federal Funds Rate, each as defined) or
(b) the LIBOR determined on an interest period of
1-month,
2-months,
3-months or
6-months,
plus an Applicable Margin (as defined). The Applicable Margin
varies based upon the Companys leverage ratio (funded debt
to total capitalization, each as defined) and ranges from 1.75%
to 2.50%. Interest on amounts outstanding is payable quarterly.
The Credit Agreement requires the Company to comply with certain
covenants, including, among others, ratios that relate funded
debt to both total capitalization and earnings before interest,
taxes, depreciation and amortization, as well as the maintenance
of minimum levels of tangible net worth. The Company must also
comply with limitations on capital expenditures, certain
payments, additional debt obligations, equity repurchases and
certain redemptions, as well as minimum risk-based capital
levels. Upon the occurrence of an event of default, Wachovia may
terminate the Credit Agreement and declare all amounts
outstanding due and payable in full. During the first half of
2008, the Company repaid the outstanding balance of
$12.8 million to Wachovia and since then has not reborrowed
any amounts under this Credit Agreement.
Effective October 28, 2008, the Credit Agreement was
amended to allow the Company to redeem all the outstanding
shares of the Companys Series B Preferred Stock, par
value $1.00 per share (Series B Preferred
Stock) for $13.4 million, and to allow the Company to
pay a dividend in connection therewith, as described below. This
transaction was completed on October 28, 2008.
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
$41.2 million of Junior Subordinated Debentures have a
maturity of thirty years from their original date of issuance,
are callable, in whole or in part, only at the option of the
Company five years after their respective dates of issue and
quarterly thereafter, and have an interest rate of three-month
LIBOR plus an applicable margin. The margin ranges from 4.00% to
4.10%. At December 31, 2008, the effective interest rate
was 6.23%. 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 trusts
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 intends to pay its obligations under the Credit
Agreement, if any, and the Junior Subordinated Debentures using
dividend and tax sharing payments from the operating
subsidiaries, or from potential future financing arrangements.
In addition, the Company believes that, if necessary, at
maturity, the Credit Agreement could be refinanced, although
there can be no assurance of the terms or conditions of such a
refinancing, or its availability.
During 2006, the Company entered into a zero cost rate collar
with Wachovia to hedge future interest payments on a portion of
the Junior Subordinated Debentures. The notional amount of the
collar was $18.0 million with an effective date of
March 6, 2006. The collar has a LIBOR floor rate of 4.77%
and a LIBOR cap rate of 5.85% and adjusts quarterly on the
4th of each March, June, September and December through
termination on March 4, 2013. The Company began making
payments to Wachovia under the zero cost rate collar on
June 4, 2008. While the Company is exposed to counterparty
risk should Wachovia fail to perform, the recent decrease in
interest rates, coupled with the current macroeconomic outlook
would indicate
37
that the Companys current exposure is minimal. The
estimated fair value and related carrying value of the
Companys rate collar at December 31, 2008 was a
liability of approximately $2.1 million.
At December 31, 2007, the Company had 134,000 shares
of Series B Preferred Stock outstanding, having a stated
value of $100 per share. All of the shares of Series B
Preferred Stock were held by Mr Robinson, the Companys
Chairman Emeritus, and his affiliates (the Holders).
Annual dividends on the Series B Preferred Stock were $9.00
per share and were cumulative. Dividends accrued whether or not
declared by the Companys board of directors. As of
December 31, 2007, the Company had accrued but unpaid
dividends on the Series B Preferred Stock of
$14.5 million. On October 28, 2008, the Company
redeemed all of the issued and outstanding shares of
Series B Preferred Stock at the stated value of $100 per
share, for an aggregate payment of $13.4 million. In
connection therewith, the Company also paid $1.7 million in
dividends to the Holders of the Series B Preferred Stock in
satisfaction of a portion of the accrued but unpaid dividends on
the Series B Preferred Stock through the date of
redemption. The Holders of the Series B Preferred Stock
agreed to discharge the Company from any obligation to pay the
remaining $13.8 million of accrued but unpaid dividends on
the Series B Preferred Stock and to release the Company
from any further obligations thereunder. As a result, the
reversal of the $13.8 million of accrued but unpaid
dividends on the Series B Preferred Stock was recorded as a
capital contribution during the fourth quarter of 2008.
At December 31, 2008, 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. During 2008 and 2007, the Company
issued common stock in lieu of Series D Preferred Stock
dividend payments of $0.5 million and $0.6 million,
respectively. As of December 31, 2008, the Company had
accrued but unpaid dividends on the Series D Preferred
Stock of $.02 million.
Net cash used in operating activities totaled $2.7 million
in 2008 compared to net cash provided by operating activities of
$5.6 million and $6.8 million in 2007 and 2006,
respectively. Cash and short-term investments increased to
$37.3 million at December 31, 2008 from
$36.9 million at December 31, 2007. The increase in
cash and short-term investments during 2008 was primarily due to
the cash received from the sale of the Companys regional
property and casualty operations, Association Casualty and
Georgia Casualty, to Columbia Mutual Insurance Company discussed
previously. Partially offsetting the increase in cash and
short-term investments during 2008 were tax sharing payments of
$3.1 million to the Companys regional property and
casualty operations in connection with such sale, federal income
tax payments of $2.2 million, as well as an increased level
of investment purchasing activity exceeding normal sales and
maturities. The Company also redeemed all the outstanding shares
of its Series B Preferred Stock for $13.4 million and
paid a $1.7 million dividend in connection therewith. In
addition, the Company repaid $12.8 million of bank debt to
Wachovia. Cash and short-term investments at December 31,
2008 of $37.3 million are believed to be sufficient to meet
the Companys near-term needs.
The Company believes that the cash flows it receives from its
subsidiaries and, if needed, additional borrowings from banks
and affiliates of the Company will enable the Company to meet
its liquidity requirements for the foreseeable future.
Management is not aware of any current recommendations by
regulatory authorities which, if implemented, would have a
material adverse effect on the Companys liquidity, capital
resources or operations.
New
Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board
(FASB) issued SFAS No. 163,
Accounting for Financial Guarantee Insurance
Contracts an interpretation of FASB Statement
No. 60 (SFAS 163).
38
The scope of SFAS 163 is limited to financial guarantee
insurance (and reinsurance) contracts issued by enterprises that
are included within the scope of SFAS 60 and that are not
accounted for as derivative instruments. SFAS 163 excludes
from its scope insurance contracts that are similar to financial
guarantee insurance such as mortgage guaranty insurance and
credit insurance on trade receivables. SFAS 163 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods
within those fiscal years, except for certain disclosures about
the insurance enterprises risk-management activities.
Except for certain disclosures, earlier application is not
permitted. The Company does not have financial guarantee
insurance products, and, accordingly does not expect the
issuance of SFAS 163 to have an effect on the
Companys financial condition or results of operations.
In May 2008, the FASB issued Statement of Financial Accounting
Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of generally accepted accounting principles and provides
a framework, or hierarchy, for selecting the principles to be
used in preparing financial statements for non-governmental
entities in conformity with GAAP. Adoption of this statement did
not have a material impact on the Companys financial
condition or results of operations.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161), an amendment of
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 161 amends
and expands disclosures about an entitys derivative and
hedging activities with the intent of providing users of
financial statements with an enhanced understanding of
a) how and why an entity uses derivative instruments,
b) how derivative instruments and related hedged items are
accounted for under FASB Statement No. 133 and its related
interpretations, and c) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with
early application encouraged. SFAS 161 encourages, but does
not require, comparative disclosures. The Company expects to
adopt SFAS 161 on January 1, 2009, and does not expect
the adoption to have a material impact on the Companys
financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). This statement replaces
SFAS No. 141, Business Combinations and
establishes the principles and requirements for how the acquirer
in a business combination: (a) measures and recognizes the
identifiable assets acquired, liabilities assumed, and any
noncontrolling interests in the acquired entity,
(b) measures and recognizes positive goodwill acquired or a
gain from bargain purchase (negative goodwill), and
(c) determines the disclosure information that is
decision-useful to users of financial statements in evaluating
the nature and financial effects of the business combination.
SFAS 141(R) further requires all transaction costs for an
acquisition to be expensed as incurred rather than capitalized,
and changes the measurement date to the date an acquisition
closes. In December 2007, the FASB also issued
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements
(SFAS 160). This statement amends Accounting
Research Bulletin No. 51, Consolidated Financial
Statements (ARB 51). Noncontrolling interest
refers to the minority interest portion of the equity of a
subsidiary that is not attributable directly or indirectly to a
parent. SFAS 160 establishes accounting and reporting
standards that require for-profit entities that prepare
consolidated financial statements to (a) present
noncontrolling interests as a component of equity, separate from
the parents equity, (b) separately present the amount
of consolidated net income attributable to noncontrolling
interests in the income statement, (c) consistently account
for changes in a parents ownership interests in a
subsidiary in which the parent entity has a controlling
financial interest as equity transactions, (d) require an
entity to measure at fair value its remaining interest in a
subsidiary that is deconsolidated, and (e) require an
entity to provide sufficient disclosures that identify and
clearly distinguish between interests of the parent and
interests of noncontrolling owners. Both SFAS 141(R) and
SFAS 160 are effective for fiscal years beginning on or
after December 15, 2008 with earlier adoption prohibited.
The Company does not believe that the adoption of either of the
standards will have a material impact on the Companys
financial condition and results of operations; although if
future acquisitions are made, the prospective accounting will
differ from that in the past.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). This statement
39
permits entities to choose, at specified election dates, to
measure eligible items at fair value (i.e. the fair value
option). Items eligible for the fair value option include
certain recognized financial assets and liabilities, rights and
obligations under certain insurance contracts that are not
financial instruments, host financial instruments resulting from
the separation of an embedded nonfinancial derivative instrument
from a nonfinancial hybrid instrument, and certain commitments.
Business entities are required to report unrealized gains and
losses on items for which the fair value option has been elected
in net income. The fair value option: (a) may be applied
instrument by instrument, with certain exceptions; (b) is
irrevocable (unless a new election date occurs); and (c) is
applied only to entire instruments and not to portions of
instruments. SFAS 159 was effective as of the beginning of
an entitys first fiscal year that begins after
November 15, 2007, although early adoption was permitted
under certain conditions. The Company adopted SFAS 159 on
January 1, 2008 and did not elect the fair value option for
any eligible items. Adoption of this statement did not have a
material impact on the Companys financial condition or
results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value under accounting principles generally
accepted in the United States, and enhances disclosures about
fair value measurements. Fair value is defined as the exchange
price at which an asset could be sold or a liability settled in
the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants
on the measurement date. SFAS 157 provides guidance on
measuring fair value when required under existing accounting
standards and establishes a hierarchy that prioritizes the
inputs to valuation techniques. The first level of such
hierarchy determines fair value at the quoted price (unadjusted)
in active markets for identical assets (Level 1). The
second level determines fair value using valuation methodology
including quoted prices for similar assets and liabilities in
active markets and other inputs that are observable for the
asset or liability, either directly or indirectly for
substantially similar terms (Level 2). The third level for
determining fair value utilizes inputs to valuation methodology
which are unobservable for the asset or liability
(Level 3). Such values inherently involve a greater degree
of judgment and uncertainty and therefore ultimately greater
price volatility. A financial assets or liabilitys
classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company adopted
SFAS 157 on January 1, 2008. Adoption of this
statement did not have a material impact on the Companys
financial condition or results of operations.
The fair values for fixed maturity and equity securities are
largely determined by either independent methods prescribed by
the NAIC, which do not differ materially from nationally quoted
market prices, when available, or independent broker quotations.
The Companys Level 1 instruments consist of
short-term investments.
The Companys Level 2 instruments include most of its
fixed maturity securities, which consist of U.S. Treasury
securities and U.S. government securities, municipal bonds,
and certain corporate fixed maturity securities as well as its
common and non-redeemable preferred stocks.
The Companys Level 3 instruments include certain
fixed maturity securities and a zero cost rate collar. Fair
value is based on criteria that use assumptions or other data
that are not readily observable from objective sources. As of
December 31, 2008, the Companys fixed maturity
securities valued using Level 3 criteria totaled
$1.9 million and the zero cost rate collar was a liability
of $2.1 million. See Note 16 of Notes to Consolidated
Financial Statements.
40
Assets measured at fair value, as of December 31, 2008, on
a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Fixed maturity securities
|
|
$
|
|
|
|
$
|
161,168
|
|
|
$
|
1,929
|
|
|
$
|
163,097
|
|
Equity securities
|
|
|
|
|
|
|
5,291
|
|
|
|
|
|
|
|
5,291
|
|
Short-term investments
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,339
|
|
|
$
|
166,459
|
|
|
$
|
1,929
|
|
|
$
|
189,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of
Inflation
Insurance premiums are established before the amount of losses
and loss adjustment expenses, or the extent to which inflation
may affect such losses and expenses, are known. Consequently,
the Company attempts, in establishing its premiums, to
anticipate the potential impact of inflation. If, for
competitive reasons, premiums cannot be increased to anticipate
inflation, this cost would be absorbed by the Company. Inflation
also affects the rate of investment return on the Companys
investment portfolio with a corresponding effect on investment
income.
Off-Balance
Sheet Arrangements
In the normal course of business, the Company has structured
borrowings that, in accordance with accounting principles
generally accepted in the United States of America, are recorded
on the Companys balance sheet at an amount that differs
from the ultimate contractual obligation. See Note 7 of
Notes to Consolidated Financial Statements.
Contractual
Obligations
The following table discloses the amounts of payments due under
specified contractual obligations, aggregated by category of
contractual obligation, for specified time periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Junior Subordinated Debentures
|
|
$
|
41,238
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
41,238
|
|
Interest payable(1)
|
|
|
71,032
|
|
|
|
2,941
|
|
|
|
5,881
|
|
|
|
5,881
|
|
|
|
56,329
|
|
Operating leases
|
|
|
900
|
|
|
|
867
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
Purchase commitments(2)
|
|
|
8,094
|
|
|
|
8,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and claims(3)
|
|
|
52,499
|
|
|
|
26,309
|
|
|
|
17,709
|
|
|
|
5,281
|
|
|
|
3,200
|
|
Future policy benefits(4)
|
|
|
56,827
|
|
|
|
8,521
|
|
|
|
16,308
|
|
|
|
15,194
|
|
|
|
16,804
|
|
Unearned premiums(5)
|
|
|
9,849
|
|
|
|
5,517
|
|
|
|
2,913
|
|
|
|
896
|
|
|
|
523
|
|
Other policy liabilities
|
|
|
1,906
|
|
|
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
242,345
|
|
|
$
|
54,155
|
|
|
$
|
42,844
|
|
|
$
|
27,252
|
|
|
$
|
118,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest payable is based on interest rates as of
December 31, 2008 and assumes that all debt remains
outstanding until its stated contractual maturity. The interest
on Junior Subordinated Debentures is at various rates of
interest. |
|
(2) |
|
Represents balances due for goods and/or services which have
been contractually committed as of December 31, 2008. To
the extent contracts provide for early termination with notice
but without penalty, only the amounts contractually due during
the notice period have been included. |
41
|
|
|
(3) |
|
Losses and claims include case reserves for reported claims and
reserves for claims IBNR. While payments due on claim reserves
are considered contractual obligations because they relate to
insurance policies issued by the Company, the ultimate amount to
be paid to settle both case reserves and IBNR reserves is an
estimate, subject to significant uncertainty. The actual amount
to be paid is not determined until the Company reaches a
settlement with any applicable claimant. Final claim settlements
may vary significantly from the present estimates, particularly
since many claims will not be settled until well into the
future. In estimating the timing of future payments by year, the
Company has assumed that its historical payment patterns will
continue. However, the actual timing of future payments will
likely vary materially from these estimates due to, among other
things, changes in claim reporting and payment patterns and
large unanticipated settlements. Amounts reflected do not
include reinsurance amounts which may also be recoverable based
on the level of ultimate sustained loss. |
|
(4) |
|
Future policy benefits relate to life insurance policies on
which the Company is not currently making payments and will not
make future payments unless and until the occurrence of an
insurable event, such as a death or disability, or the
occurrence of a payment triggering event, such as a surrender of
a policy. Occurrence of any of these events is outside the
control of the Company and the payment estimates are based on
significant uncertainties such as mortality, morbidity,
expenses, persistency, investment returns, inflation and the
timing of payments. For regulatory purposes, the Company does
perform cash flow modeling of such liabilities, which is the
basis for the indicated disclosure; however, due to the
significance of the assumptions used, the amount presented could
materially differ from actual results. |
|
(5) |
|
Unearned premiums represent potential future revenue for the
Company; however, under certain circumstances, such premiums may
be refundable with cancellation of the underlying policy.
Significantly all unearned premiums will be earned within the
following twelve month period as the related future insurance
protection is provided. Significantly all costs related to such
unearned premiums have already been incurred and paid and are
included in deferred acquisition costs; however, future losses
related to the unearned premiums have not been recorded. The
contractual obligations related to unearned premiums reflected
in the table represent the average loss ratio applied to the
year end unearned premium balances, with loss payments projected
in comparable proportions to the year end loss and claims
reserves. Projecting future losses is subject to significant
uncertainties and the projected payments will most likely vary
materially from these estimates as a result of differences in
future severity, frequency and other anticipated and
unanticipated factors. Amounts reflected do not take into
account reinsurance amounts which may be recoverable based on
the level of ultimate sustained loss. |
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate and Market Risk
Due to the nature of the Companys business, it is exposed
to both interest rate and market risk. Changes in interest
rates, which represent a significant risk factor affecting the
Company, may result in changes in the fair value of the
Companys investments, cash flows and interest income and
expense. To manage this risk, the Company generally invests in
U.S. Government agency fixed maturity securities and
monitors its level of investment in securities that are directly
linked to loans or mortgages.
The table below summarizes the estimated fair values that might
result from changes in interest rates applicable to the
Companys fixed maturity portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+200bp
|
|
|
+100bp
|
|
|
Fair value
|
|
|
−100bp
|
|
|
−200bp
|
|
|
|
(In thousands)
|
|
|
December 31, 2008
|
|
$
|
143,082
|
|
|
$
|
152,414
|
|
|
$
|
163,097
|
|
|
$
|
175,121
|
|
|
$
|
188,977
|
|
December 31, 2007
|
|
$
|
148,943
|
|
|
$
|
157,692
|
|
|
$
|
167,927
|
|
|
$
|
178,626
|
|
|
$
|
191,200
|
|
42
The Company is also subject to risk from changes in equity
prices. The table below summarizes the effect that a change in
equity prices would have on the value of the Companys
equity portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+20%
|
|
|
+10%
|
|
|
Fair Value
|
|
|
−10%
|
|
|
−20%
|
|
|
|
(In thousands)
|
|
|
December 31, 2008 Total equity holdings
|
|
$
|
6,349
|
|
|
$
|
5,820
|
|
|
$
|
5,291
|
|
|
$
|
4,762
|
|
|
$
|
4,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 Total equity holdings
|
|
$
|
6,402
|
|
|
$
|
5,869
|
|
|
$
|
5,335
|
|
|
$
|
4,802
|
|
|
$
|
4,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The interest rate on the Companys debt is variable and
based on LIBOR. The table below summarizes the effect that
changes in interest rates would have on the Companys
interest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
Interest Expense
|
|
|
|
+200bp
|
|
|
+100bp
|
|
|
Debt
|
|
|
−100bp
|
|
|
−200bp
|
|
|
|
(In thousands)
|
|
|
December 31, 2008
|
|
$
|
800
|
|
|
$
|
400
|
|
|
$
|
41,238
|
|
|
$
|
(400
|
)
|
|
$
|
(800
|
)
|
December 31, 2007
|
|
$
|
1,055
|
|
|
$
|
528
|
|
|
$
|
53,988
|
|
|
$
|
(528
|
)
|
|
$
|
(1,055
|
)
|
On February 21, 2006, the Company entered into a zero cost
rate collar with Wachovia to hedge future interest payments on a
portion of the Junior Subordinated Debentures. The notional
amount of the collar was $18.0 million with an effective
date of March 6, 2006. The collar has a LIBOR floor rate of
4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the
4th of each March, June, September and December through
termination on March 4, 2013. The Company began making
payments to Wachovia under the zero cost rate collar on
June 4, 2008. While the Company is exposed to counterparty
risk should Wachovia fail to perform, the recent decrease in
interest rates, coupled with the current macroeconomic outlook
would indicate that the Companys current exposure is
minimal.
43
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
ATLANTIC AMERICAN CORPORATION
|
|
|
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
44
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Atlantic American Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of
Atlantic American Corporation and subsidiaries (the
Company) as of December 31, 2008 and 2007, and
the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. We have also
audited schedules II, III, IV and VI as of and for each of
the three years in the period ended December 31, 2008.
These consolidated financial statements and financial statement
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Atlantic American Corporation and subsidiaries at
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
BDO SEIDMAN LLP
Atlanta, Georgia
March 30, 2009
45
ATLANTIC
AMERICAN CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
ASSETS
|
Cash and cash equivalents, including short-term investments of
$21,339 and $23,432 in 2008 and 2007, respectively
|
|
$
|
37,321
|
|
|
$
|
36,909
|
|
Investments
|
|
|
173,116
|
|
|
|
178,059
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
14,870
|
|
|
|
13,004
|
|
Other, net of allowance for doubtful accounts of $676 and $728
in 2008 and 2007, respectively
|
|
|
7,789
|
|
|
|
6,912
|
|
Deferred income taxes, net
|
|
|
10,577
|
|
|
|
3,929
|
|
Deferred acquisition costs
|
|
|
19,160
|
|
|
|
18,830
|
|
Other assets
|
|
|
1,648
|
|
|
|
2,069
|
|
Goodwill
|
|
|
2,128
|
|
|
|
2,388
|
|
Assets of discontinued operations (Note 2)
|
|
|
|
|
|
|
196,154
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
266,609
|
|
|
$
|
458,254
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Insurance reserves and policyholder funds
|
|
$
|
130,774
|
|
|
$
|
128,078
|
|
Accounts payable and accrued expenses
|
|
|
19,183
|
|
|
|
36,047
|
|
Debt payable
|
|
|
41,238
|
|
|
|
53,988
|
|
Liabilities of discontinued operations (Note 2)
|
|
|
|
|
|
|
152,347
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
191,195
|
|
|
|
370,460
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par, 4,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series B preferred, 134,000 shares issued and
outstanding in 2007; $13,400 redemption value in 2007
(Note 11)
|
|
|
|
|
|
|
134
|
|
Series D preferred, 70,000 shares issued and
outstanding; $7,000 redemption value
|
|
|
70
|
|
|
|
70
|
|
Common stock, $1 par, 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
22,373,900 shares issued in 2008 and
21,816,999 shares issued in 2007 and 22,332,087 shares
outstanding in 2008 and 21,816,999 shares outstanding in
2007
|
|
|
22,374
|
|
|
|
21,817
|
|
Additional paid-in capital
|
|
|
57,107
|
|
|
|
56,414
|
|
Retained earnings
|
|
|
5,119
|
|
|
|
10,530
|
|
Accumulated other comprehensive loss
|
|
|
(9,200
|
)
|
|
|
(1,171
|
)
|
Treasury stock, at cost, 41,813 shares in 2008
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
75,414
|
|
|
|
87,794
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
266,609
|
|
|
$
|
458,254
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
ATLANTIC
AMERICAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except
|
|
|
|
per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
91,381
|
|
|
$
|
97,824
|
|
|
$
|
109,580
|
|
Investment income
|
|
|
11,814
|
|
|
|
11,722
|
|
|
|
11,926
|
|
Realized investment gains (losses), net
|
|
|
(3,995
|
)
|
|
|
12,627
|
|
|
|
3,084
|
|
Other income
|
|
|
531
|
|
|
|
799
|
|
|
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
99,731
|
|
|
|
122,972
|
|
|
|
125,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
|
56,830
|
|
|
|
58,701
|
|
|
|
65,460
|
|
Commissions and underwriting expenses
|
|
|
30,816
|
|
|
|
32,663
|
|
|
|
36,404
|
|
Interest expense
|
|
|
3,298
|
|
|
|
4,160
|
|
|
|
4,605
|
|
Other
|
|
|
9,779
|
|
|
|
8,350
|
|
|
|
9,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
100,723
|
|
|
|
103,874
|
|
|
|
115,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes
|
|
|
(992
|
)
|
|
|
19,098
|
|
|
|
9,624
|
|
Income tax expense (benefit)
|
|
|
(526
|
)
|
|
|
7,513
|
|
|
|
2,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(466
|
)
|
|
|
11,585
|
|
|
|
7,166
|
|
Income (loss) from discontinued operations, net of tax
(Note 2)
|
|
|
(3,417
|
)
|
|
|
(4,333
|
)
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(3,883
|
)
|
|
|
7,252
|
|
|
|
8,936
|
|
Preferred stock dividends
|
|
|
(1,528
|
)
|
|
|
(1,691
|
)
|
|
|
(1,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
|
$
|
(5,411
|
)
|
|
$
|
5,561
|
|
|
$
|
7,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(.09
|
)
|
|
$
|
.46
|
|
|
$
|
.27
|
|
Income (loss) from discontinued operations
|
|
|
(.16
|
)
|
|
|
(.20
|
)
|
|
|
.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
(.25
|
)
|
|
$
|
.26
|
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(.09
|
)
|
|
$
|
.45
|
|
|
$
|
.27
|
|
Income (loss) from discontinued operations
|
|
|
(.16
|
)
|
|
|
(.20
|
)
|
|
|
.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
(.25
|
)
|
|
$
|
.25
|
|
|
$
|
.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Income
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit)
|
|
|
(Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2005
|
|
$
|
134
|
|
|
$
|
21,412
|
|
|
$
|
48,925
|
|
|
$
|
(2,780
|
)
|
|
$
|
12,846
|
|
|
$
|
(84
|
)
|
|
$
|
80,453
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,936
|
|
|
|
|
|
|
|
|
|
|
|
8,936
|
|
Decrease in unrealized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(660
|
)
|
|
|
|
|
|
|
(660
|
)
|
Fair value adjustment to derivative financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
(165
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
216
|
|
Deferred income tax attributable to other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
|
|
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,540
|
|
Minimum pension liability adjustment due to adoption of
SFAS 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(743
|
)
|
|
|
|
|
|
|
(743
|
)
|
Issuance of 70,000 shares of preferred stock
|
|
|
70
|
|
|
|
|
|
|
|
6,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Dividends accrued on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(155
|
)
|
|
|
(1,178
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,333
|
)
|
Deferred share compensation expense
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Restricted stock grants
|
|
|
|
|
|
|
22
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
Acquisition of 25,774 shares for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70
|
)
|
|
|
(70
|
)
|
Issuance of 102,009 shares for employee benefit plans and
stock options
|
|
|
|
|
|
|
50
|
|
|
|
84
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
146
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
204
|
|
|
|
21,484
|
|
|
|
55,832
|
|
|
|
4,969
|
|
|
|
11,707
|
|
|
|
(8
|
)
|
|
|
94,188
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,252
|
|
|
|
|
|
|
|
|
|
|
|
7,252
|
|
Decrease in unrealized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,549
|
)
|
|
|
|
|
|
|
(19,549
|
)
|
Fair value adjustment to derivative financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(575
|
)
|
|
|
|
|
|
|
(575
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312
|
|
|
|
|
|
|
|
312
|
|
Deferred income tax attributable to other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,934
|
|
|
|
|
|
|
|
6,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,626
|
)
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,691
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,691
|
)
|
Common stock issued in lieu of preferred stock dividend payments
|
|
|
|
|
|
|
227
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613
|
|
Deferred share compensation expense
|
|
|
|
|
|
|
10
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Restricted stock grants
|
|
|
|
|
|
|
12
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
Acquisition of 5,655 shares for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
Issuance of 102,239 shares for employee benefit plans and
stock options
|
|
|
|
|
|
|
84
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
204
|
|
|
|
21,817
|
|
|
|
56,414
|
|
|
|
10,530
|
|
|
|
(1,171
|
)
|
|
|
|
|
|
|
87,794
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,883
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,883
|
)
|
Increase in unrealized investment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,538
|
)
|
|
|
|
|
|
|
(11,538
|
)
|
Fair value adjustment to derivative financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,345
|
)
|
|
|
|
|
|
|
(1,345
|
)
|
Minimum pension liability adjustment (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
531
|
|
|
|
|
|
|
|
531
|
|
Deferred income tax attributable to other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,323
|
|
|
|
|
|
|
|
4,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,912
|
)
|
Preferred stock redeemed (Note 11)
|
|
|
(134
|
)
|
|
|
|
|
|
|
(13,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,400
|
)
|
Capital contribution (Note 11)
|
|
|
|
|
|
|
|
|
|
|
13,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,795
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,528
|
)
|
Common stock issued in lieu of preferred stock dividend payments
|
|
|
|
|
|
|
417
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
508
|
|
Restricted stock grants
|
|
|
|
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
Acquisition of 41,813 shares for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
(56
|
)
|
Issuance of 111,106 shares for employee benefit plans and
stock options
|
|
|
|
|
|
|
111
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
70
|
|
|
$
|
22,374
|
|
|
$
|
57,107
|
|
|
$
|
5,119
|
|
|
$
|
(9,200
|
)
|
|
$
|
(56
|
)
|
|
$
|
75,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
ATLANTIC
AMERICAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,883
|
)
|
|
$
|
7,252
|
|
|
$
|
8,936
|
|
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred acquisition costs
|
|
|
9,914
|
|
|
|
11,119
|
|
|
|
13,697
|
|
Acquisition costs deferred
|
|
|
(10,244
|
)
|
|
|
(9,731
|
)
|
|
|
(11,764
|
)
|
Realized investment losses (gains), net
|
|
|
3,995
|
|
|
|
(12,627
|
)
|
|
|
(3,084
|
)
|
Increase (decrease) in insurance reserves and policyholder funds
|
|
|
2,696
|
|
|
|
(6,238
|
)
|
|
|
(3,497
|
)
|
Loss (income) from discontinued operations, net
|
|
|
3,417
|
|
|
|
4,333
|
|
|
|
(1,770
|
)
|
Compensation expense related to share awards
|
|
|
66
|
|
|
|
68
|
|
|
|
70
|
|
Depreciation and amortization
|
|
|
318
|
|
|
|
108
|
|
|
|
871
|
|
Deferred income tax (benefit) expense
|
|
|
(2,537
|
)
|
|
|
3,711
|
|
|
|
981
|
|
Goodwill impairment
|
|
|
260
|
|
|
|
620
|
|
|
|
|
|
(Increase) decrease in receivables, net
|
|
|
(2,359
|
)
|
|
|
5,067
|
|
|
|
778
|
|
(Decrease) increase in other liabilities
|
|
|
(1,229
|
)
|
|
|
1,507
|
|
|
|
1,429
|
|
Other, net
|
|
|
(3,139
|
)
|
|
|
425
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in ) provided by continuing operations
|
|
|
(2,725
|
)
|
|
|
5,614
|
|
|
|
6,794
|
|
Net cash used in discontinued operations
|
|
|
(3,424
|
)
|
|
|
(5,629
|
)
|
|
|
(6,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(6,149
|
)
|
|
|
(15
|
)
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from investments sold
|
|
|
606
|
|
|
|
22,538
|
|
|
|
18,384
|
|
Proceeds from investments matured, called or redeemed
|
|
|
75,835
|
|
|
|
69,653
|
|
|
|
24,827
|
|
Investments purchased
|
|
|
(88,669
|
)
|
|
|
(78,988
|
)
|
|
|
(59,683
|
)
|
Net proceeds from sale of insurance subsidiaries
|
|
|
43,392
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(150
|
)
|
|
|
(446
|
)
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operations
|
|
|
31,014
|
|
|
|
12,757
|
|
|
|
(16,758
|
)
|
Net cash (used in) provided by discontinued operations (net of
$35,501 of cash transferred in 2008)
|
|
|
(11,996
|
)
|
|
|
12,301
|
|
|
|
(7,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
19,018
|
|
|
|
25,058
|
|
|
|
(24,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series D Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Redemption of Series B Preferred Stock
|
|
|
(13,400
|
)
|
|
|
|
|
|
|
|
|
Payment of dividends on Series B Preferred Stock
|
|
|
(1,675
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
19
|
|
|
|
16
|
|
Purchase of treasury shares
|
|
|
(56
|
)
|
|
|
(23
|
)
|
|
|
(70
|
)
|
Proceeds from bank financing
|
|
|
|
|
|
|
36,000
|
|
|
|
15,750
|
|
Repayments of debt
|
|
|
(12,750
|
)
|
|
|
(36,000
|
)
|
|
|
(13,250
|
)
|
Financing of discontinued operations
|
|
|
4
|
|
|
|
936
|
|
|
|
(6,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by continuing operations
|
|
|
(27,877
|
)
|
|
|
932
|
|
|
|
2,886
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(4
|
)
|
|
|
(936
|
)
|
|
|
6,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(27,881
|
)
|
|
|
(4
|
)
|
|
|
9,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(15,012
|
)
|
|
|
25,039
|
|
|
|
(14,482
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
36,909
|
|
|
|
17,606
|
|
|
|
24,684
|
|
Discontinued operations
|
|
|
15,424
|
|
|
|
9,688
|
|
|
|
17,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
52,333
|
|
|
|
27,294
|
|
|
|
41,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
37,321
|
|
|
|
36,909
|
|
|
|
17,606
|
|
Discontinued operations
|
|
|
|
|
|
|
15,424
|
|
|
|
9,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,321
|
|
|
$
|
52,333
|
|
|
$
|
27,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,393
|
|
|
$
|
4,195
|
|
|
$
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
2,150
|
|
|
$
|
460
|
|
|
$
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received for income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
|
|
Note 1.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP)
which, as to insurance companies, differ from the statutory
accounting practices prescribed or permitted by regulatory
authorities. These financial statements include the accounts of
Atlantic American Corporation (Atlantic American or
the Parent) and its subsidiaries (collectively, the
Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
At December 31, 2008, the Parent owned three insurance
subsidiaries, Bankers Fidelity Life Insurance Company
(Bankers Fidelity), American Southern Insurance
Company and its wholly-owned subsidiary, American Safety
Insurance Company (together known as American
Southern), in addition to one non-insurance subsidiary,
Self-Insurance Administrators, Inc. (SIA, Inc.). On
December 26, 2007, the Company entered into a stock
purchase agreement providing for the sale of all the outstanding
shares of stock of 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
(Columbia). The Company completed this sale on
March 31, 2008. Accordingly, the assets, liabilities, and
results of operations of Association Casualty and Georgia
Casualty have been reflected by the Company as discontinued
operations. See Note 2.
Premium
Revenue and Cost Recognition
Life insurance premiums are recognized as revenues when due;
accident and health premiums are recognized over the premium
paying period and property and casualty insurance premiums are
recognized as revenue over the period of the contract in
proportion to the amount of insurance protection provided.
Benefits and expenses are accrued as incurred and are associated
with premiums as they are earned so as to result in recognition
of profits over the lives of the contracts. For traditional life
insurance and long-duration health insurance, this association
is accomplished by the provision of a future policy benefits
reserve and the deferral and subsequent amortization of the
costs of acquiring business, deferred policy acquisition
costs (principally commissions, premium taxes, and other
expenses of issuing policies). 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 policy benefits reserve. The Company provides for
insurance benefits and losses on accident, health, and
property-casualty claims based upon estimates of projected
ultimate losses. The deferred policy acquisition costs for
property and casualty insurance and short-duration health
insurance are amortized over the effective period of the related
insurance policies. Contingent commissions, if contractually
applicable, are ultimately payable to agents based on the
underlying profitability of a particular insurance contract or a
group of insurance contracts, and are periodically evaluated and
accrued as earned. In periods in which revisions are made to the
estimated loss reserves related to the particular insurance
contract or group of insurance contracts subject to such
commissions, corresponding adjustments are also made to the
related accruals. 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).
Goodwill
Goodwill represents the excess of cost over the fair value of
net assets acquired and is not amortized. The Company
periodically reviews its goodwill to determine if any adverse
conditions exist that could indicate impairment. Conditions that
could trigger impairment include, but are not limited to, a
significant change in business climate that could affect the
value of the related asset, an adverse action, or an assessment
by a
50
regulator. During 2008 and 2007, impairment charges of $260 and
$620, respectively, were recognized. No impairment of the
Companys recorded goodwill was identified during 2006.
Investments
The Companys investments in both fixed maturity
securities, which include bonds and redeemable preferred stocks,
and equity securities, which include common and non-redeemable
preferred stocks, are classified as
available-for-sale and, accordingly, are carried at
fair value with the after-tax difference from amortized cost, as
adjusted if applicable, reflected in shareholders equity
as a component of accumulated other comprehensive income. The
fair values for fixed maturity and equity securities are largely
determined by either independent methods prescribed by the
National Association of Insurance Commissioners
(NAIC), which do not differ materially from publicly
quoted market prices, when available, or independent broker
quotations. The Company has certain fixed maturity securities
that do not have publicly quoted market values with an estimated
fair value as determined by management of $1,929 at
December 31, 2008. Such values inherently involve a greater
degree of judgment and uncertainty and therefore ultimately
greater price volatility. Mortgage loans, policy and student
loans, and real estate are carried at historical cost. Other
invested assets are comprised of investments in limited
partnerships, limited liability companies, and real estate joint
ventures and accounted for using the equity method. If the value
of a common stock, preferred stock, other invested asset, or
publicly traded bond declines below its cost or amortized cost,
if applicable, and the decline is considered to be other than
temporary, a realized loss is recorded to reduce the carrying
value of the investment to its estimated fair value, which
becomes the new cost basis. The evaluation for other than
temporary impairments is a quantitative and qualitative process,
which is subject to risks and uncertainties in the determination
of whether declines in the fair value of investments are other
than temporary. The risks and uncertainties include changes in
general economic conditions, an issuers financial
condition or near term recovery prospects and the effects of
changes in interest rates. In evaluating impairment, the Company
considers, among other factors, the intent and ability to hold
these securities, the nature of the investment and the prospects
for the issuer and its industry, the issuers continued
satisfaction of the investment obligations in accordance with
their contractual terms, and managements expectation that
they will continue to do so, as well as rating actions that
affect the issuers credit status. Premiums and discounts
related to investments are amortized or accreted over the life
of the related investment as an adjustment to yield using the
effective interest method. Dividends and interest income are
recognized when earned or declared. The cost of securities sold
is based on specific identification. Unrealized gains (losses)
in the value of invested assets are accounted for as a direct
increase (decrease) in accumulated other comprehensive income in
shareholders equity, net of deferred tax and, accordingly,
have no effect on net income.
Income
Taxes
Deferred income taxes represent the expected future tax
consequences when the reported amounts of assets and liabilities
are recovered or paid. They arise from differences between the
financial reporting and tax basis of assets and liabilities and
are adjusted for changes in tax laws and tax rates as those
changes are enacted. The provision for income taxes represents
the total amount of income taxes due related to the current
year, plus the change in deferred taxes during the year. A
valuation allowance is recognized if, based on managements
assessment of the relevant facts, it is more likely than not
that some portion of the deferred tax asset will not be realized.
Earnings
Per Common Share
Basic earnings per common share are based on the weighted
average number of common shares outstanding during each period.
Diluted earnings per common share are based on the weighted
average number of common shares outstanding during each period,
plus common shares calculated including stock options and share
awards outstanding using the treasury stock method and assumed
conversion of the Series B and Series D Preferred
Stock, if dilutive. Unless otherwise indicated, earnings per
common share amounts are presented on a diluted basis.
51
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash on hand and
investments in short-term, highly liquid securities which have
original maturities of three months or less from date of
purchase.
Impact
of Recently Issued Accounting Standards
In May 2008, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) SFAS No. 163,
Accounting for Financial Guarantee Insurance
Contracts an interpretation of FASB Statement
No. 60 (SFAS 163). The scope of
SFAS 163 is limited to financial guarantee insurance (and
reinsurance) contracts issued by enterprises that are included
within the scope of SFAS 60 and that are not accounted for
as derivative instruments. SFAS 163 excludes from its scope
insurance contracts that are similar to financial guarantee
insurance such as mortgage guaranty insurance and credit
insurance on trade receivables. SFAS 163 is effective for
financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those
fiscal years, except for certain disclosures about the insurance
enterprises risk-management activities. Except for certain
disclosures, earlier application is not permitted. The Company
does not have financial guarantee insurance products, and,
accordingly does not expect the issuance of SFAS 163 to
have an effect on the Companys financial condition or
results of operations.
In May 2008, the FASB issued Statement of Financial Accounting
Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of generally accepted accounting principles and provides
a framework, or hierarchy, for selecting the principles to be
used in preparing financial statements for non-governmental
entities in conformity with GAAP. Adoption of this statement did
not have a material impact on the Companys financial
condition or results of operations.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161), an amendment of
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 161 amends
and expands disclosures about an entitys derivative and
hedging activities with the intent of providing users of
financial statements with an enhanced understanding of
a) how and why an entity uses derivative instruments,
b) how derivative instruments and related hedged items are
accounted for under FASB Statement No. 133 and its related
interpretations, and c) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with
early application encouraged. SFAS 161 encourages, but does
not require, comparative disclosures. The Company expects to
adopt SFAS 161 on January 1, 2009, and does not expect
the adoption to have a material impact on the Companys
financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). This statement replaces
SFAS No. 141, Business Combinations and
establishes the principles and requirements for how the acquirer
in a business combination: (a) measures and recognizes the
identifiable assets acquired, liabilities assumed, and any
noncontrolling interests in the acquired entity,
(b) measures and recognizes positive goodwill acquired or a
gain from bargain purchase (negative goodwill), and
(c) determines the disclosure information that is
decision-useful to users of financial statements in evaluating
the nature and financial effects of the business combination.
SFAS 141(R) further requires all transaction costs for an
acquisition to be expensed as incurred rather than capitalized,
and changes the measurement date to the date an acquisition
closes. In December 2007, the FASB also issued
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements
(SFAS 160). This statement amends Accounting
Research Bulletin No. 51, Consolidated Financial
Statements (ARB 51). Noncontrolling interest
refers to the minority interest portion of the equity of a
subsidiary that is not attributable directly or indirectly to a
parent. SFAS 160 establishes accounting and reporting
standards that require for-profit entities that prepare
consolidated financial statements to (a) present
noncontrolling interests as a component of equity, separate from
the parents equity, (b) separately present the amount
of consolidated net income attributable to noncontrolling
interests in the income statement, (c) consistently account
for changes in a parents ownership interests in a
subsidiary in which the parent entity has a controlling
financial interest as equity transactions,
52
(d) require an entity to measure at fair value its
remaining interest in a subsidiary that is deconsolidated, and
(e) require an entity to provide sufficient disclosures
that identify and clearly distinguish between interests of the
parent and interests of noncontrolling owners. Both
SFAS 141(R) and SFAS 160 are effective for fiscal
years beginning on or after December 15, 2008 with earlier
adoption prohibited. The Company does not believe that the
adoption of either of the standards will have a material impact
on the Companys financial condition or results of
operations; although if future acquisitions are made, the
prospective accounting will differ from that in the past.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS 159). This statement
permits entities to choose, at specified election dates, to
measure eligible items at fair value (i.e. the fair value
option). Items eligible for the fair value option include
certain recognized financial assets and liabilities, rights and
obligations under certain insurance contracts that are not
financial instruments, host financial instruments resulting from
the separation of an embedded nonfinancial derivative instrument
from a nonfinancial hybrid instrument, and certain commitments.
Business entities are required to report unrealized gains and
losses on items for which the fair value option has been elected
in net income. The fair value option: (a) may be applied
instrument by instrument, with certain exceptions; (b) is
irrevocable (unless a new election date occurs); and (c) is
applied only to entire instruments and not to portions of
instruments. SFAS 159 was effective as of the beginning of
an entitys first fiscal year that begins after
November 15, 2007, although early adoption was permitted
under certain conditions. The Company adopted SFAS 159 on
January 1, 2008 and did not elect the fair value option for
any eligible items. Adoption of this statement did not have a
material impact on the Companys financial condition or
results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value under accounting principles generally
accepted in the United States, and enhances disclosures about
fair value measurements. Fair value is defined as the exchange
price at which an asset could be sold or a liability settled in
the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants
on the measurement date. SFAS 157 provides guidance on
measuring fair value when required under existing accounting
standards and establishes a hierarchy that prioritizes the
inputs to valuation techniques. The first level of such
hierarchy determines fair value at the quoted price (unadjusted)
in active markets for identical assets (Level 1). The
second level determines fair value using valuation methodology
including quoted prices for similar assets and liabilities in
active markets and other inputs that are observable for the
asset or liability, either directly or indirectly for
substantially similar terms (Level 2). The third level for
determining fair value utilizes inputs to valuation methodology
which are unobservable for the asset or liability
(Level 3). Such values inherently involve a greater degree
of judgment and uncertainty and therefore ultimately greater
price volatility. A financial assets or liabilitys
classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company adopted
SFAS 157 on January 1, 2008. Adoption of this
statement did not have a material impact on the Companys
financial condition or results of operations.
The fair values for fixed maturity and equity securities are
largely determined by either independent methods prescribed by
the National Association of Insurance Commissioners
(NAIC), which do not differ materially from
nationally quoted market prices, when available, or independent
broker quotations.
The Companys Level 1 instruments consist of
short-term investments.
The Companys Level 2 instruments include most of its
fixed maturity securities, which consist of U.S. Treasury
securities and U.S. government securities, municipal bonds,
and certain corporate fixed maturity securities as well as its
common and non-redeemable preferred stocks.
The Companys Level 3 instruments include certain
fixed maturity securities and a zero cost rate collar. Fair
value is based on criteria that use assumptions or other data
that are not readily observable from objective sources. As of
December 31, 2008, the Companys fixed maturity
securities valued using Level 3 criteria totaled $1,929 and
the zero cost rate collar was a liability of $2,085. See
Note 16.
53
Assets measured at fair value, as of December 31, 2008, on
a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Fixed maturity securities
|
|
$
|
|
|
|
$
|
161,168
|
|
|
$
|
1,929
|
|
|
$
|
163,097
|
|
Equity securities
|
|
|
|
|
|
|
5,291
|
|
|
|
|
|
|
|
5,291
|
|
Short-term investments
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,339
|
|
|
$
|
166,459
|
|
|
$
|
1,929
|
|
|
$
|
189,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of
Estimates in the Preparation of Financial
Statements
The preparation of financial statements and related disclosures
in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and
expenses during the reporting period. Significant estimates and
assumptions are used in developing and evaluating deferred
income taxes, deferred acquisition costs, insurance reserves,
investments (Note 16), pension benefits, commitments and
contingencies, among others, and actual results could differ
from managements estimates.
|
|
Note 2.
|
Discontinued
Operations
|
On December 26, 2007, the Company entered into a stock
purchase agreement providing for the sale of all the outstanding
shares of stock of Association Casualty and Georgia Casualty to
Columbia. On March 31, 2008, the Company completed the sale
of shares to Columbia in exchange for approximately $43,000 in
cash. Accordingly, the consolidated financial statements reflect
the assets, liabilities, and operating results of Georgia
Casualty and Association Casualty as discontinued operations. In
connection with the closing, the Company and Columbia had agreed
to thereafter finalize a valuation matter with respect to
certain loss reserves related to the discontinued operations.
Effective March 17, 2009, the Company and Columbia entered
into a final agreement with respect to all valuation matters,
and the Company agreed to make a payment to Columbia of $1,750;
$500 of such liability had been recorded as of the closing and
the additional $1,250 was recorded as additional loss from
discontinued operations effective December 31, 2008.
54
The following table provides operating results from the
discontinued operations of Georgia Casualty and Association
Casualty for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
8,789
|
|
|
$
|
37,031
|
|
|
$
|
44,125
|
|
Investment income
|
|
|
1,400
|
|
|
|
6,343
|
|
|
|
6,397
|
|
Realized investment gains, net
|
|
|
8
|
|
|
|
3,225
|
|
|
|
3,607
|
|
Other income
|
|
|
11
|
|
|
|
26
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
10,208
|
|
|
|
46,625
|
|
|
|
54,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
|
8,657
|
|
|
|
34,107
|
|
|
|
26,472
|
|
Commissions and underwriting expenses
|
|
|
3,800
|
|
|
|
16,951
|
|
|
|
25,584
|
|
Other
|
|
|
|
|
|
|
3,109
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
12,457
|
|
|
|
54,167
|
|
|
|
52,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before taxes
|
|
|
(2,249
|
)
|
|
|
(7,542
|
)
|
|
|
1,665
|
|
Income tax benefit
|
|
|
(815
|
)
|
|
|
(3,209
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(1,434
|
)
|
|
|
(4,333
|
)
|
|
|
1,770
|
|
Loss from sale of discontinued operations, net of tax of $415
|
|
|
(1,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
(3,417
|
)
|
|
$
|
(4,333
|
)
|
|
$
|
1,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides condensed information about the
assets and liabilities of the discontinued operations of Georgia
Casualty and Association Casualty and as aggregated in the
consolidated balance sheet:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Assets of Discontinued Operations:
|
|
|
|
|
Cash and cash equivalents, including short-term investments of
$10,585
|
|
$
|
15,424
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
Fixed maturities (cost: $91,216)
|
|
|
91,088
|
|
Common and non-redeemable preferred stocks (cost: $2,406)
|
|
|
3,139
|
|
Other invested assets (cost: $47)
|
|
|
47
|
|
|
|
|
|
|
Total investments
|
|
|
94,274
|
|
|
|
|
|
|
Receivables:
|
|
|
|
|
Reinsurance
|
|
|
54,391
|
|
Other
|
|
|
17,570
|
|
Deferred acquisition costs
|
|
|
3,486
|
|
Other assets
|
|
|
11,009
|
|
|
|
|
|
|
Total assets
|
|
$
|
196,154
|
|
|
|
|
|
|
Liabilities of Discontinued Operations:
|
|
|
|
|
Unearned premiums
|
|
$
|
22,065
|
|
Losses and claims
|
|
|
122,418
|
|
Accounts payable and accrued expenses
|
|
|
7,864
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
152,347
|
|
|
|
|
|
|
55
Investments were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Cost
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government
agencies and authorities
|
|
$
|
120,572
|
|
|
$
|
1,386
|
|
|
$
|
123
|
|
|
$
|
119,309
|
|
Obligations of states and political subdivisions
|
|
|
409
|
|
|
|
10
|
|
|
|
|
|
|
|
399
|
|
Corporate securities
|
|
|
34,755
|
|
|
|
41
|
|
|
|
7,128
|
|
|
|
41,842
|
|
Redeemable preferred stocks
|
|
|
7,361
|
|
|
|
27
|
|
|
|
2,381
|
|
|
|
9,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
163,097
|
|
|
|
1,464
|
|
|
|
9,632
|
|
|
|
171,265
|
|
Common and non-redeemable preferred stocks
|
|
|
5,291
|
|
|
|
588
|
|
|
|
4,113
|
|
|
|
8,816
|
|
Other invested assets (fair value of $1,433)
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
1,433
|
|
Policy and student loans
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
2,019
|
|
Real estate
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Investments in unconsolidated trusts
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
173,116
|
|
|
|
2,052
|
|
|
|
13,745
|
|
|
|
184,809
|
|
Short-term investments
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
194,455
|
|
|
$
|
2,052
|
|
|
$
|
13,745
|
|
|
$
|
206,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Cost
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government
agencies and authorities
|
|
$
|
127,070
|
|
|
$
|
994
|
|
|
$
|
67
|
|
|
$
|
126,143
|
|
Obligations of states and political subdivisions
|
|
|
412
|
|
|
|
14
|
|
|
|
|
|
|
|
398
|
|
Corporate securities
|
|
|
29,728
|
|
|
|
314
|
|
|
|
832
|
|
|
|
30,246
|
|
Mortgage-backed securities (government guaranteed)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Redeemable preferred stocks
|
|
|
10,714
|
|
|
|
264
|
|
|
|
1,416
|
|
|
|
11,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
167,927
|
|
|
|
1,586
|
|
|
|
2,315
|
|
|
|
168,656
|
|
Common and non-redeemable preferred stocks
|
|
|
5,335
|
|
|
|
590
|
|
|
|
621
|
|
|
|
5,366
|
|
Other invested assets (fair value of $1,563)
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
|
1,563
|
|
Policy and student loans
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
1,958
|
|
Real estate
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Investments in unconsolidated trusts
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
178,059
|
|
|
|
2,176
|
|
|
|
2,936
|
|
|
|
178,819
|
|
Short-term investments
|
|
|
23,432
|
|
|
|
|
|
|
|
|
|
|
|
23,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
201,491
|
|
|
$
|
2,176
|
|
|
$
|
2,936
|
|
|
$
|
202,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds having an amortized cost of $9,052 and $10,553 were on
deposit with insurance regulatory authorities at
December 31, 2008 and 2007, respectively, in accordance
with statutory requirements.
56
Securities with unrealized losses at December 31, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury securities and obligations of U.S. Government
agencies and authorities
|
|
$
|
27,184
|
|
|
$
|
123
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,184
|
|
|
$
|
123
|
|
Corporate securities
|
|
|
22,423
|
|
|
|
3,792
|
|
|
|
5,708
|
|
|
|
3,336
|
|
|
|
28,131
|
|
|
|
7,128
|
|
Redeemable preferred stocks
|
|
|
2,224
|
|
|
|
276
|
|
|
|
3,196
|
|
|
|
2,105
|
|
|
|
5,420
|
|
|
|
2,381
|
|
Common and non-redeemable preferred stocks
|
|
|
267
|
|
|
|
2,930
|
|
|
|
2,100
|
|
|
|
1,183
|
|
|
|
2,367
|
|
|
|
4,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities
|
|
$
|
52,098
|
|
|
$
|
7,121
|
|
|
$
|
11,004
|
|
|
$
|
6,624
|
|
|
$
|
63,102
|
|
|
$
|
13,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury securities and obligations of U.S. Government
agencies and authorities
|
|
$
|
8,189
|
|
|
$
|
40
|
|
|
$
|
4,241
|
|
|
$
|
27
|
|
|
$
|
12,430
|
|
|
$
|
67
|
|
Corporate securities
|
|
|
9,801
|
|
|
|
425
|
|
|
|
5,918
|
|
|
|
407
|
|
|
|
15,719
|
|
|
|
832
|
|
Redeemable preferred stocks
|
|
|
4,465
|
|
|
|
657
|
|
|
|
2,751
|
|
|
|
759
|
|
|
|
7,216
|
|
|
|
1,416
|
|
Common and non-redeemable preferred stocks
|
|
|
1,980
|
|
|
|
303
|
|
|
|
928
|
|
|
|
318
|
|
|
|
2,908
|
|
|
|
621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities
|
|
$
|
24,435
|
|
|
$
|
1,425
|
|
|
$
|
13,838
|
|
|
$
|
1,511
|
|
|
$
|
38,273
|
|
|
$
|
2,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market changes in interest rates and credit spreads result in
changes in the fair values of investments and are accumulated
and reported as unrealized gains and losses. The carrying value
of the Companys investments in fixed maturity securities,
non-redeemable preferred stocks and common stocks decreased
during 2008 as a result of numerous macroeconomic factors which
impacted significantly all of the United States markets. The
majority of the unrealized losses at December 31, 2008
resulted from holdings in financial entities which have been
impacted by the markets and the related liquidity in the
markets. The following table sets forth the carrying value,
amortized cost, and net unrealized gains or losses of the
Companys investments aggregated by industry type as of
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
U.S. Treasury and Government Agencies
|
|
$
|
120,572
|
|
|
$
|
119,309
|
|
|
$
|
1,263
|
|
Utilities and Telecom
|
|
|
19,785
|
|
|
|
20,983
|
|
|
|
(1,198
|
)
|
Financial Services
|
|
|
21,607
|
|
|
|
28,586
|
|
|
|
(6,979
|
)
|
Diversified Services
|
|
|
3,542
|
|
|
|
3,787
|
|
|
|
(245
|
)
|
Automotive
|
|
|
222
|
|
|
|
222
|
|
|
|
|
|
Media(1)
|
|
|
1,959
|
|
|
|
6,502
|
|
|
|
(4,543
|
)
|
Other
|
|
|
701
|
|
|
|
692
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
168,388
|
|
|
$
|
180,081
|
|
|
$
|
(11,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Media includes related party investments in Gray Television,
Inc. and Triple Crown Media, Inc. which had an aggregate
carrying value of $268 and an amortized cost basis of $3,198 at
December 31, 2008. See Note 14. |
57
During the years ended December 31, 2008, 2007, and 2006,
the Company recorded impairments related to the following
investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Corporate securities
|
|
$
|
932
|
|
|
$
|
123
|
|
|
$
|
|
|
Redeemable preferred stocks
|
|
$
|
2,342
|
|
|
$
|
|
|
|
$
|
|
|
Common and non-redeemable preferred stocks
|
|
$
|
666
|
|
|
$
|
|
|
|
$
|
|
|
Other invested assets
|
|
$
|
74
|
|
|
$
|
123
|
|
|
$
|
|
|
As part of the Companys quarterly investment review, the
Company has reviewed its investment portfolio and concluded that
there were no additional investments with other than temporary
impairments as of December 31, 2008 or 2007. The evaluation
for other than temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties
in the determination of whether declines in the fair value of
investments are other than temporary. The risks and
uncertainties include changes in general economic conditions, an
issuers financial condition or near term recovery
prospects and the effects of changes in interest rates. As a
result of issuers continued satisfaction of the investment
obligations in accordance with their contractual terms, if
applicable, and managements expectation that they will
continue to do so, also if applicable, managements intent
and ability to hold these securities, as well as the evaluation
of the fundamentals of the issuers financial condition and
other objective evidence, the Company believes that the
unrealized losses on investments at December 31, 2008 and
2007 were temporary.
The amortized cost and carrying value of fixed maturities and
short-term investments at December 31, 2008 and 2007 by
contractual maturity were as follows. Actual maturities may
differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
23,451
|
|
|
$
|
23,404
|
|
|
$
|
43,069
|
|
|
$
|
43,031
|
|
Due after one year through five years
|
|
|
13,572
|
|
|
|
14,028
|
|
|
|
14,389
|
|
|
|
14,084
|
|
Due after five years through ten years
|
|
|
13,687
|
|
|
|
14,909
|
|
|
|
13,832
|
|
|
|
13,832
|
|
Due after ten years
|
|
|
133,726
|
|
|
|
140,263
|
|
|
|
120,066
|
|
|
|
121,138
|
|
Varying maturities
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
184,436
|
|
|
$
|
192,604
|
|
|
$
|
191,359
|
|
|
$
|
192,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income was earned from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fixed maturities
|
|
$
|
10,146
|
|
|
$
|
9,384
|
|
|
$
|
9,922
|
|
Common and non-redeemable preferred stocks
|
|
|
356
|
|
|
|
767
|
|
|
|
948
|
|
Mortgage loans
|
|
|
|
|
|
|
79
|
|
|
|
184
|
|
Short-term investments
|
|
|
1,132
|
|
|
|
1,297
|
|
|
|
671
|
|
Other
|
|
|
180
|
|
|
|
195
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
$
|
11,814
|
|
|
$
|
11,722
|
|
|
$
|
11,926
|
|
Less investment expenses
|
|
|
(126
|
)
|
|
|
(119
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
11,688
|
|
|
$
|
11,603
|
|
|
$
|
11,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
A summary of realized investment gains (losses) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Fixed
|
|
|
Other Invested
|
|
|
|
|
|
|
Stocks
|
|
|
Maturities
|
|
|
Assets
|
|
|
Total
|
|
|
Gains
|
|
$
|
|
|
|
$
|
27
|
|
|
$
|
|
|
|
$
|
27
|
|
Losses
|
|
|
(666
|
)
|
|
|
(3,282
|
)
|
|
|
(74
|
)
|
|
|
(4,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net
|
|
$
|
(666
|
)
|
|
$
|
(3,255
|
)
|
|
$
|
(74
|
)
|
|
$
|
(3,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Fixed
|
|
|
Other Invested
|
|
|
|
|
|
|
Stocks
|
|
|
Maturities
|
|
|
Assets
|
|
|
Total
|
|
|
Gains
|
|
$
|
12,905
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
12,926
|
|
Losses
|
|
|
|
|
|
|
(176
|
)
|
|
|
(123
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net
|
|
$
|
12,905
|
|
|
$
|
(155
|
)
|
|
$
|
(123
|
)
|
|
$
|
12,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Fixed
|
|
|
Other Invested
|
|
|
|
|
|
|
Stocks
|
|
|
Maturities
|
|
|
Assets
|
|
|
Total
|
|
|
Gains
|
|
$
|
1,738
|
|
|
$
|
1,201
|
|
|
$
|
654
|
|
|
$
|
3,593
|
|
Losses
|
|
|
|
|
|
|
(509
|
)
|
|
|
|
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net
|
|
$
|
1,738
|
|
|
$
|
692
|
|
|
$
|
654
|
|
|
$
|
3,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Common and non-redeemable preferred stocks
|
|
$
|
|
|
|
$
|
16,635
|
|
|
$
|
1,666
|
|
Fixed maturities
|
|
|
491
|
|
|
|
5,753
|
|
|
|
15,510
|
|
Student loans
|
|
|
|
|
|
|
|
|
|
|
128
|
|
Other investments
|
|
|
115
|
|
|
|
150
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total proceeds
|
|
$
|
606
|
|
|
$
|
22,538
|
|
|
$
|
18,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investments in fixed maturity securites of
General Motors and fixed maturity securities and non-redeemable
preferred stock of General Motors Acceptance Corporation
exceeded 10% of shareholders equity at December 31,
2008. The carrying value of these investments at
December 31, 2008 was $5,731 with an adjusted cost basis of
$8,028.
The Companys bond portfolio included 96% investment grade
securities at December 31, 2008 as defined by the NAIC.
59
|
|
Note 4.
|
Insurance
Reserves and Policyholder Funds
|
The following table presents the Companys reserves for
life, accident, health and property and casualty losses as well
as loss adjustment expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Insurance
|
|
|
|
|
|
|
|
|
|
In Force
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Future policy benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
|
|
$
|
45,276
|
|
|
$
|
44,187
|
|
|
$
|
242,412
|
|
|
$
|
228,780
|
|
Mass market
|
|
|
4,228
|
|
|
|
4,586
|
|
|
|
6,167
|
|
|
|
6,985
|
|
Individual annuities
|
|
|
285
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,789
|
|
|
|
49,070
|
|
|
$
|
248,579
|
|
|
$
|
235,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health insurance policies
|
|
|
7,038
|
|
|
|
6,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,827
|
|
|
|
55,548
|
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
|
19,542
|
|
|
|
18,948
|
|
|
|
|
|
|
|
|
|
Losses, claims and loss adjustment expenses
|
|
|
52,499
|
|
|
|
51,704
|
|
|
|
|
|
|
|
|
|
Other policy liabilities
|
|
|
1,906
|
|
|
|
1,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance reserves and policyholder funds
|
|
$
|
130,774
|
|
|
$
|
128,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized premiums for accident and health insurance policies
were $46,077 and $45,913 at December 31, 2008 and 2007,
respectively.
Future
Policy Benefits
Liabilities for life insurance future policy benefits are based
upon assumed future investment yields, mortality rates, and
withdrawal rates after giving effect to possible risks of
unexpected claim experience. The assumed mortality and
withdrawal rates are based upon the Companys experience.
The interest rates assumed for life, accident and health are
generally: (i) 2.5% to 5.5% for issues prior to 1977,
(ii) 7% graded to 5.5% for 1977 through 1979 issues,
(iii) 9% for 1980 through 1987 issues, and (iv) 5% to
7% for 1988 and later issues.
Loss
and Claim Reserves
Loss and claim reserves represent estimates of projected
ultimate losses and are based upon: (a) managements
estimate of ultimate liability and claim adjusters
evaluations for unpaid claims reported prior to the close of the
accounting period, (b) estimates of incurred but not
reported (IBNR) claims based on past experience, and
(c) estimates of loss adjustment expenses. The estimated
liability is periodically reviewed by management and updated
with changes to the estimated liability recorded in the
statement of operations in the year in which such changes are
known.
60
Activity in the liability for unpaid loss and claim reserves is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance at January 1
|
|
$
|
51,704
|
|
|
$
|
55,291
|
|
|
$
|
53,817
|
|
Less: Reinsurance recoverables
|
|
|
(13,004
|
)
|
|
|
(12,266
|
)
|
|
|
(12,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at January 1
|
|
|
38,700
|
|
|
|
43,025
|
|
|
|
40,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
62,569
|
|
|
|
65,274
|
|
|
|
73,167
|
|
Prior years
|
|
|
(8,723
|
)
|
|
|
(11,517
|
)
|
|
|
(9,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
53,846
|
|
|
|
53,757
|
|
|
|
63,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
40,249
|
|
|
|
41,687
|
|
|
|
46,355
|
|
Prior years
|
|
|
14,668
|
|
|
|
16,395
|
|
|
|
14,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
54,917
|
|
|
|
58,082
|
|
|
|
61,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at December 31
|
|
|
37,629
|
|
|
|
38,700
|
|
|
|
43,025
|
|
Plus: Reinsurance recoverables
|
|
|
14,870
|
|
|
|
13,004
|
|
|
|
12,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
52,499
|
|
|
$
|
51,704
|
|
|
$
|
55,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years development was primarily the result of better
than expected development on prior years IBNR reserves for
Medicare supplement as well as certain lines of business within
American Southern.
Following is a reconciliation of total incurred claims to total
insurance benefits and losses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total incurred claims
|
|
$
|
53,846
|
|
|
$
|
53,757
|
|
|
$
|
63,241
|
|
Cash surrender value and matured endowments
|
|
|
1,570
|
|
|
|
1,413
|
|
|
|
1,666
|
|
Benefit reserve changes
|
|
|
1,414
|
|
|
|
3,531
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance benefits and losses incurred
|
|
$
|
56,830
|
|
|
$
|
58,701
|
|
|
$
|
65,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with general practice in the insurance industry,
portions of the life, property and casualty insurance written by
the Company are reinsured; however, the Company remains liable
with respect to reinsurance ceded should any reinsurer be unable
to meet its obligations. Approximately 99% of the Companys
reinsurance receivables were due from one reinsurer as of
December 31, 2008. Reinsurance receivables of $14,718 were
due from Swiss Reinsurance Corporation, rated A+
(Strong) by Standard & Poors and A+
(Superior) by A.M. Best. Allowances for uncollectible
amounts are established against reinsurance receivables, if
appropriate.
61
The following table reconciles premiums written to premiums
earned and summarizes the components of insurance benefits and
losses incurred.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Direct premiums written
|
|
$
|
95,467
|
|
|
$
|
96,424
|
|
|
$
|
111,087
|
|
Plus premiums assumed
|
|
|
2,858
|
|
|
|
2,364
|
|
|
|
2,929
|
|
Less premiums ceded
|
|
|
(6,350
|
)
|
|
|
(6,729
|
)
|
|
|
(9,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
91,975
|
|
|
|
92,059
|
|
|
|
104,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unearned premiums
|
|
|
(594
|
)
|
|
|
6,242
|
|
|
|
5,006
|
|
Change in unearned premiums ceded
|
|
|
|
|
|
|
(477
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unearned premiums
|
|
|
(594
|
)
|
|
|
5,765
|
|
|
|
4,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
91,381
|
|
|
$
|
97,824
|
|
|
$
|
109,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for benefits and losses incurred
|
|
$
|
60,786
|
|
|
$
|
66,641
|
|
|
$
|
70,217
|
|
Reinsurance loss recoveries
|
|
|
(3,956
|
)
|
|
|
(7,940
|
)
|
|
|
(4,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
$
|
56,830
|
|
|
$
|
58,701
|
|
|
$
|
65,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of reinsurance receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Receivable on unpaid losses
|
|
$
|
14,870
|
|
|
$
|
12,929
|
|
Receivable on paid losses
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,870
|
|
|
$
|
13,004
|
|
|
|
|
|
|
|
|
|
|
Total income taxes were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Tax expense (benefit) on income or loss from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(526
|
)
|
|
$
|
7,513
|
|
|
$
|
2,458
|
|
Discontinued operations
|
|
|
(1,230
|
)
|
|
|
(3,209
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit) on income or loss
|
|
|
(1,756
|
)
|
|
|
4,304
|
|
|
|
2,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) on components of shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investment securities
|
|
|
(4,038
|
)
|
|
|
(6,842
|
)
|
|
|
(231
|
)
|
Fair value adjustment to derivative financial instrument
|
|
|
(471
|
)
|
|
|
(201
|
)
|
|
|
(58
|
)
|
Minimum pension liability adjustment
|
|
|
186
|
|
|
|
109
|
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax benefit on shareholders equity
|
|
|
(4,323
|
)
|
|
|
(6,934
|
)
|
|
|
(614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit)
|
|
$
|
(6,079
|
)
|
|
$
|
(2,630
|
)
|
|
$
|
1,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
A reconciliation of the differences between income taxes
computed at the federal statutory income tax rate and the income
tax expense (benefit) from continuing operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal income tax provision at statutory rate of 35%
|
|
$
|
(347
|
)
|
|
$
|
6,684
|
|
|
$
|
3,368
|
|
Tax exempt interest and dividends received deductions
|
|
|
(207
|
)
|
|
|
(282
|
)
|
|
|
(401
|
)
|
Small life deduction
|
|
|
(350
|
)
|
|
|
(55
|
)
|
|
|
(579
|
)
|
Non-deductible goodwill
|
|
|
91
|
|
|
|
217
|
|
|
|
|
|
Loss carryforward from sale of subsidiaries
|
|
|
(5,155
|
)
|
|
|
|
|
|
|
|
|
Intercompany fees(1)
|
|
|
1
|
|
|
|
363
|
|
|
|
504
|
|
Other permanent differences
|
|
|
39
|
|
|
|
38
|
|
|
|
46
|
|
Change in asset valuation allowance due to change in judgment
relating to realizability of deferred tax assets
|
|
|
5,155
|
|
|
|
333
|
|
|
|
(569
|
)
|
Adjustment for prior years estimates to actual
|
|
|
247
|
|
|
|
205
|
|
|
|
80
|
|
State income taxes
|
|
|
|
|
|
|
10
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(526
|
)
|
|
$
|
7,513
|
|
|
$
|
2,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Intercompany fees from discontinued operations eliminated in
consolidated tax return. |
A reconciliation of the differences between income taxes
computed at the federal statutory income tax rate and the income
tax benefit from discontinued operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal income tax provision at statutory rate of 35%
|
|
$
|
(1,626
|
)
|
|
$
|
(2,640
|
)
|
|
$
|
583
|
|
Tax exempt interest and dividends received deductions
|
|
|
(41
|
)
|
|
|
(147
|
)
|
|
|
(170
|
)
|
Intercompany fees(1)
|
|
|
(1
|
)
|
|
|
(363
|
)
|
|
|
(504
|
)
|
Other permanent differences
|
|
|
438
|
|
|
|
9
|
|
|
|
4
|
|
Adjustment for prior years estimates to actual
|
|
|
|
|
|
|
(68
|
)
|
|
|
(26
|
)
|
State income taxes
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(1,230
|
)
|
|
$
|
(3,209
|
)
|
|
$
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Intercompany fees from discontinued operations eliminated in
consolidated tax return. |
The primary differences between the effective tax rate and the
federal statutory income tax rate result from the
dividends-received deduction (DRD), the small life
insurance company deduction (SLD) and the change in
asset valuation allowance. The current year DRD is adjusted as
underlying factors change, including known actual 2008
distributions earned on invested assets. The actual current DRD
can vary from the estimates based on, but not limited to,
amounts of distributions from these investments as well as
appropriate levels of taxable income. The SLD varies in amount
and is determined at a rate of 60 percent of the tentative
life insurance company taxable income (LICTI). The
amount of 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 $3,000 and is ultimately phased out at
$15,000. The change in the asset valuation allowance primarily
results from a periodic assessment of the realization of certain
loss carry forward benefits.
63
Deferred tax liabilities and assets at December 31, 2008
and 2007 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
$
|
(2,856
|
)
|
|
$
|
(2,564
|
)
|
Deferred and uncollected premiums
|
|
|
(704
|
)
|
|
|
(672
|
)
|
Other
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(3,585
|
)
|
|
|
(3,236
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
2,105
|
|
|
|
1,263
|
|
Loss carryforward from sale of subsidiaries
|
|
|
5,155
|
|
|
|
|
|
Insurance reserves
|
|
|
2,918
|
|
|
|
2,819
|
|
Impaired assets
|
|
|
3,302
|
|
|
|
1,333
|
|
Alternative minimum tax credit
|
|
|
55
|
|
|
|
|
|
Net unrealized investment losses
|
|
|
4,093
|
|
|
|
266
|
|
Bad debts and other
|
|
|
1,689
|
|
|
|
1,484
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
19,317
|
|
|
|
7,165
|
|
|
|
|
|
|
|
|
|
|
Asset valuation allowance
|
|
|
(5,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
10,577
|
|
|
$
|
3,929
|
|
|
|
|
|
|
|
|
|
|
The components of the income tax expense (benefit) from
continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current Federal
|
|
$
|
2,011
|
|
|
$
|
3,792
|
|
|
$
|
1,468
|
|
Current State
|
|
|
|
|
|
|
10
|
|
|
|
9
|
|
Deferred Federal
|
|
|
(2,537
|
)
|
|
|
3,711
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(526
|
)
|
|
$
|
7,513
|
|
|
$
|
2,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the income tax benefit from discontinued
operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current Federal
|
|
$
|
(1,577
|
)
|
|
$
|
(1,662
|
)
|
|
$
|
(1,089
|
)
|
Current State
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Deferred Federal
|
|
|
347
|
|
|
|
(1,547
|
)
|
|
|
976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,230
|
)
|
|
$
|
(3,209
|
)
|
|
$
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Company had regular federal net
operating loss carryforwards (NOLs) of approximately
$6,014 expiring generally between 2010 and 2025. Currently, the
Company believes deferred income tax benefits relating to the
NOLs will be realized. However, realization of the NOLs will be
assessed periodically based on the Companys current and
anticipated results of operations, and amounts could increase or
decrease in the near term if estimates of future taxable income
change.
On March 31, 2008, the Company completed the sale of its
regional property and casualty operations to Columbia, which
resulted in an estimated loss carryforward benefit of
approximately $5,155. Since the Companys ability to
generate taxable income and utilize available tax planning
strategies in the near term is dependent upon various factors,
many of which are beyond managements control, management
believes that this loss carryforward may not be realized.
Accordingly, as of December 31, 2008, a valuation allowance
of $5,155 was established to reduce this deferred tax benefit to
zero. The Company will prospectively periodically assess the
potential realization of this deferred tax benefit.
The Company has formal tax-sharing agreements, and files a
consolidated income tax return, with its subsidiaries.
64
|
|
Note 7.
|
Credit
Arrangements
|
Bank
Debt
At December 31, 2008, the Company had a reducing revolving
credit facility (the Credit Agreement) with Wachovia
Bank, National Association (Wachovia) pursuant to
which the Company was able to, subject to the terms and
conditions thereof, initially borrow or reborrow up to $15,000
(the Commitment Amount). In accordance with the
terms of the Credit Agreement, the Commitment Amount is
incrementally reduced every six months and was equal to $13,000
at December 31, 2008. The interest rate on amounts
outstanding under the Credit Agreement is, at the option of the
Company, equivalent to either (a) the base rate (which
equals the higher of the Prime Rate or 0.5% above the Federal
Funds Rate, each as defined) or (b) the London Interbank
Offered Rate (LIBOR) determined on an interest
period of
1-month,
2-months,
3-months or
6-months,
plus an Applicable Margin (as defined). The Applicable Margin
varies based upon the Companys leverage ratio (funded debt
to total capitalization, each as defined) and ranges from 1.75%
to 2.50%. Interest on amounts outstanding is payable quarterly.
The Credit Agreement requires the Company to comply with certain
covenants, including, among others, ratios that relate funded
debt to both total capitalization and earnings before interest,
taxes, depreciation and amortization, as well as the maintenance
of minimum levels of tangible net worth. The Company must also
comply with limitations on capital expenditures, certain
payments, additional debt obligations, equity repurchases and
certain redemptions, as well as minimum risk-based capital
levels. Upon the occurrence of an event of default, Wachovia may
terminate the Credit Agreement and declare all amounts
outstanding due and payable in full. During the first half of
2008, the Company repaid the outstanding balance of $12,750 to
Wachovia and since then has not reborrowed any amounts under
this Credit Agreement.
Effective October 28, 2008, the Credit Agreement was
amended to allow the Company to redeem all the outstanding
shares of the Companys Series B Preferred Stock, par
value $1.00 per share (Series B Preferred
Stock) for $13,400, and to allow the Company to pay a
dividend in connection therewith of $1,675. This redemption, and
the related dividend payment, was completed on October 28,
2008. See Note 11.
Junior
Subordinated Debentures
The Company has two unconsolidated Connecticut statutory
business trusts, which exist for the exclusive purposes of:
(i) issuing trust preferred securities
(Trust Preferred Securities) representing
undivided beneficial interests in the assets of the trusts;
(ii) investing the gross proceeds of the
Trust Preferred Securities in junior subordinated
deferrable interest debentures (Junior Subordinated
Debentures) of Atlantic American; and (iii) engaging
in only those activities necessary or incidental thereto.
65
The financial structure of each of Atlantic American Statutory
Trust I and II, as of December 31, 2008 and 2007, was
as follows:
|
|
|
|
|
|
|
|
|
|
|
Atlantic American
|
|
|
Atlantic American
|
|
|
|
Statutory Trust I
|
|
|
Statutory Trust II
|
|
|
JUNIOR SUBORDINATED DEBENTURES(1)(2)
|
|
|
|
|
|
|
|
|
Principal amount owed
|
|
$
|
18,042
|
|
|
$
|
23,196
|
|
Balance December 31, 2008
|
|
|
18,042
|
|
|
|
23,196
|
|
Balance December 31, 2007
|
|
|
18,042
|
|
|
|
23,196
|
|
Coupon rate
|
|
|
LIBOR + 4.00
|
%
|
|
|
LIBOR + 4.10
|
%
|
Interest payable
|
|
|
Quarterly
|
|
|
|
Quarterly
|
|
Maturity date
|
|
|
December 4, 2032
|
|
|
|
May 15, 2033
|
|
Redeemable by issuer on or after
|
|
|
December 4, 2007
|
|
|
|
May 15, 2008
|
|
TRUST PREFERRED SECURITIES
|
|
|
|
|
|
|
|
|
Issuance date
|
|
|
|
|
|
|
|
|
Securities issued
|
|
|
December 4, 2002
17,500
|
|
|
|
May 15, 2003
22,500
|
|
Liquidation preference per security
|
|
$
|
1
|
|
|
$
|
1
|
|
Liquidation value
|
|
|
17,500
|
|
|
|
22,500
|
|
Coupon rate
|
|
|
LIBOR + 4.00
|
%
|
|
|
LIBOR + 4.10
|
%
|
Distribution payable
|
|
|
Quarterly
|
|
|
|
Quarterly
|
|
Distribution guaranteed by(3)
|
|
|
Atlantic American
Corporation
|
|
|
|
Atlantic American
Corporation
|
|
|
|
|
(1) |
|
For each of the respective debentures, the Company has the right
at any time, and from time to time, to defer payments of
interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters up to the debentures
respective maturity dates. During any such period, interest will
continue to accrue and the Company may not declare or pay any
cash dividends or distributions on, or purchase, the
Companys common stock nor make any principal, interest or
premium payments on or repurchase any debt securities that rank
equally with or junior to the Junior Subordinated Debentures.
The Company has the right at any time to dissolve each of the
trusts and cause the Junior Subordinated Debentures to be
distributed to the holders of the Trust Preferred Securities. |
|
(2) |
|
The Junior Subordinated Debentures are unsecured and rank junior
and subordinate in right of payment to all senior debt of the
Parent and are effectively subordinated to all existing and
future liabilities of its subsidiaries. |
|
(3) |
|
The Parent has guaranteed, on a subordinated basis, all of the
obligations under the Trust Preferred Securities, including
payment of the redemption price and any accumulated and unpaid
distributions to the extent of available funds and upon
dissolution, winding up or liquidation. |
|
|
Note 8.
|
Derivative
Financial Instruments
|
On February 21, 2006, the Company entered into a zero cost
rate collar with Wachovia to hedge future interest payments on a
portion of the Junior Subordinated Debentures. The notional
amount of the collar was $18,042 with an effective date of
March 6, 2006. The collar has a LIBOR floor rate of 4.77%
and a LIBOR cap rate of 5.85% and adjusts quarterly on the
4th of each March, June, September and December through
termination on March 4, 2013. The Company began making
payments to Wachovia under the zero cost rate collar on
June 4, 2008. While the Company is exposed to counterparty
risk should Wachovia fail to perform, the recent decrease in
interest rates, coupled with the current macroeconomic outlook
would indicate that the Companys current exposure is
minimal.
The estimated fair value and related carrying value of the
Companys rate collar at December 31, 2008 was a
liability of approximately $2,085.
66
|
|
Note 9.
|
Commitments
and Contingencies
|
Litigation
From time to time, the Company is involved in various claims and
lawsuits incidental to and in the ordinary course of its
businesses. In the opinion of management, any such known claims
are not expected to have a material effect on the business or
financial condition of the Company.
Operating
Lease Commitments
The Companys rental expense, including common area
charges, for operating leases was $1,253, $1,268, and $1,276 in
2008, 2007, and 2006, respectively. The Companys future
minimum base lease obligations under non-cancelable operating
leases are as follows:
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
2009
|
|
$
|
867
|
|
|
|
|
|
2010
|
|
|
33
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Employee
Benefit Plans
|
Stock
Options
In accordance with the Companys 1992 Incentive Plan, the
Board of Directors was authorized to grant up to 1,800,000 stock
options or share awards. The Board of Directors may grant:
(a) incentive stock options within the meaning of
Section 422 of the Internal Revenue Code;
(b) non-qualified stock options; (c) performance
units; (d) awards of restricted shares of the
Companys common stock and other stock unit awards;
(e) deferred shares of common stock; or (f) all or any
combination of the foregoing to officers and key employees.
Stock options granted under this plan expire five or ten years
from the date of grant, as specified in an award agreement.
Vesting occurs at 50% upon issuance of an option, and the
remaining portion vests in 25% increments in each of the
following two years. In accordance with the Companys
1996 Director Stock Option Plan, a maximum of 200,000 stock
options were authorized to be granted, which fully vest six
months after the grant date. In accordance with the
Companys 2002 Incentive Plan (the 2002 Plan),
the Board of Directors was authorized to grant up to 2,000,000
stock options or share awards. Subject to adjustment as provided
in the 2002 Plan, the Board of Directors is authorized to grant:
(a) incentive stock options; (b) non-qualified stock
options; (c) stock appreciation rights; (d) restricted
shares; (e) deferred shares; and (f) performance
shares
and/or
performance units. Further, the Board may authorize the granting
to non-employee directors of stock options
and/or
restricted shares. A total of 28,688, 12,397 and 21,923
restricted shares were issued to the Companys Board of
Directors under the 2002 Plan in 2008, 2007 and 2006,
respectively. As of December 31, 2008, an aggregate of
twenty-two employees, officers and directors held options under
the three plans.
67
A summary of the status of the Companys stock options at
December 31, 2008, 2007 and 2006, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Shares
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Options outstanding, beginning of year
|
|
|
624,000
|
|
|
$
|
1.42
|
|
|
|
636,500
|
|
|
$
|
1.43
|
|
|
|
649,500
|
|
|
$
|
1.44
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
(7,000
|
)
|
|
|
2.68
|
|
|
|
(9,500
|
)
|
|
|
1.70
|
|
Options canceled or expired
|
|
|
(80,500
|
)
|
|
|
1.28
|
|
|
|
(5,500
|
)
|
|
|
1.63
|
|
|
|
(3,500
|
)
|
|
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of year
|
|
|
543,500
|
|
|
|
1.44
|
|
|
|
624,000
|
|
|
|
1.42
|
|
|
|
636,500
|
|
|
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
543,500
|
|
|
|
1.44
|
|
|
|
624,000
|
|
|
|
1.42
|
|
|
|
636,500
|
|
|
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for future grant
|
|
|
2,531,406
|
|
|
|
|
|
|
|
2,479,594
|
|
|
|
|
|
|
|
2,486,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data on options outstanding and exercisable at December 31,
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
Remaining Life
|
|
|
Weighted Average
|
|
Range of Exercise Price
|
|
Options
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
$1.00 to $1.50
|
|
|
307,500
|
|
|
|
2.78
|
|
|
$
|
1.25
|
|
$1.51 to $2.00
|
|
|
236,000
|
|
|
|
4.16
|
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
543,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of options granted is determined on the date of
grant using the Black-Scholes option pricing model, which
requires the input of subjective assumptions, including the
expected volatility of the stock price. No options were granted
in 2008, 2007 or 2006.
401(k)
Plan
The Company initiated an employees savings plan qualified
under Section 401(k) of the Internal Revenue Code in May
1995. The plan covers substantially all of the Companys
employees, except employees of American Southern. Under the
plan, employees generally may elect to contribute up to 16% of
their compensation to the plan. The Company generally makes a
matching contribution on behalf of each employee in an amount
equal to 50% of the first 6% of such contributions. The
Companys matching contribution is in Company common stock
and had a value of approximately $147, $136, and $135 in 2008,
2007, and 2006, respectively. During 2007, an additional
matching contribution was made by the Company to the plan in an
amount equal to 50% of the first 6% of an employees
contribution to the plan. The additional contribution in 2007
was in cash and was $141. Effective January 1, 2009, the
Company initiated a safe harbor employees savings plan
qualified under Section 401(k) of the Internal Revenue
Code. The plan will cover all of the Companys employees.
Under the plan, employees may defer up to 50% of their
compensation, not to exceed the statutory maximum allowed
contribution. The Company will make a matching contribution on
behalf of each employee in an amount equal to 100% of the first
4% of such contributions.
Defined
Benefit Pension Plans
The Company has both a funded and unfunded noncontributory
defined benefit pension plan covering the employees of American
Southern. The plans provide defined benefits based on years of
service and average salary. The Companys general funding
policy has been to contribute annually the maximum amount that
can be deducted for income tax purposes. Effective May 31,
2008, the Company decided to freeze all benefits
68
related to the qualified pension plan, as well as the
supplemental executive retirement plan (SERP). The
Company intends to terminate the qualified plan pending
governmental approval. Upon approval, the Company will
distribute the accumulated benefits to its participating
employees. The Company intends to terminate the SERP on
May 19, 2009 and distribute the accumulated benefits to
those employees participating in the SERP. The measurement date
for these plans was December 31 of each year.
Obligation
and Funded Status
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year
|
|
$
|
6,103
|
|
|
$
|
6,190
|
|
Service cost
|
|
|
185
|
|
|
|
204
|
|
Interest cost
|
|
|
338
|
|
|
|
330
|
|
Plan curtailment
|
|
|
(1,005
|
)
|
|
|
|
|
Actuarial loss
|
|
|
(112
|
)
|
|
|
(316
|
)
|
Gross benefits paid
|
|
|
(991
|
)
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at end of year
|
|
|
4,518
|
|
|
|
6,103
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
3,164
|
|
|
|
3,154
|
|
Employer contributions
|
|
|
132
|
|
|
|
215
|
|
Actual return on plan assets
|
|
|
(166
|
)
|
|
|
100
|
|
Gross benefits paid
|
|
|
(991
|
)
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
2,139
|
|
|
|
3,164
|
|
|
|
|
|
|
|
|
|
|
Funded Status of Plan
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
|
(2,379
|
)
|
|
|
(2,939
|
)
|
Unrecognized net actuarial loss
|
|
|
375
|
|
|
|
1,322
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
(7
|
)
|
Additional minimum liability
|
|
|
(375
|
)
|
|
|
(1,315
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized in accrued liabilities at end of year
|
|
$
|
(2,379
|
)
|
|
$
|
(2,939
|
)
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit plans
at December 31, 2008 and 2007 was $4,518 and $5,117,
respectively.
The weighted-average assumptions used to determine the benefit
obligation at December 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Discount rate to determine the projected benefit obligation
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Projected annual salary increases
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
Included in the above is one plan which is unfunded. The
projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for this plan were $2,262, $2,262, and
$0, respectively, as of December 31, 2008 and $2,017,
$1,681, and $0, respectively, as of December 31, 2007.
69
Components
of Net Periodic Benefit Cost
Net periodic pension cost for the Companys qualified and
non-qualified defined benefit plans for the years ended
December 31, 2008, 2007 and 2006 included the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
185
|
|
|
$
|
204
|
|
|
$
|
237
|
|
Interest cost
|
|
|
338
|
|
|
|
330
|
|
|
|
314
|
|
Expected return on plan assets
|
|
|
(217
|
)
|
|
|
(216
|
)
|
|
|
(193
|
)
|
Net amortization
|
|
|
80
|
|
|
|
112
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
386
|
|
|
$
|
430
|
|
|
$
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average assumptions used to determine the net
periodic benefit cost for the years ended December 31,
2008, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate to determine the net periodic benefit cost
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
Expected long-term rate of return on plan assets used to
determine net periodic pension cost
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
Projected annual salary increases
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
At December 31, 2008, the qualified defined benefit plan
assets (the Plan Assets) were invested in the
Evergreen Treasury Money Market Fund (the Evergreen
Fund). During 2008, the Plan Assets were liquidated from
the AIM Basic Balanced Fund (the AIM Fund) and the
proceeds from the sale were invested in the Evergreen Fund. The
shift from the AIM Fund to the Evergreen Fund was due to the
Companys decision to freeze all pension benefits. The
Evergreen Fund invests 100% of its assets in U.S. Treasury
securities. The Companys investment strategy with respect
to pension assets is to invest the assets in accordance with
ERISA and fiduciary standards. Currently, the Companys
primary investment objective is to preserve the Plan Assets
pending government approval to terminate the qualified defined
benefit plan and distribute accumulated assets to its employees.
The Evergreen Fund does not include any equity securities of the
Company in its portfolio at any time.
In 2007 and 2006, the qualified defined benefit plan assets were
invested in the AIM Fund, the prospectus for which indicated an
average annual return of approximately 7% since its inception;
accordingly, a 7.00% rate of return was used to calculate the
periodic benefit cost. The AIM Fund normally invested at least
65% of its assets in equity securities and at least 30% of its
assets in fixed income securities that were investment grade at
the time of purchase. The remaining assets of the AIM Fund were
allocated to other investments at the fund managers
discretion, based upon current business, economic and market
conditions.
Expected
Cash Flows and Payments
The Company expects to pay $4,518 of accumulated benefit
obligations in connection with the termination of the defined
benefit plans in 2009.
At December 31, 2007, the Company had 134,000 shares
of Series B Preferred Stock outstanding, having a stated
value of $100 per share. All of the shares of Series B
Preferred Stock were held by Mr Robinson, the Companys
Chairman Emeritus and his affiliates (the Holders).
Annual dividends on the Series B Preferred Stock were $9.00
per share and were cumulative. Dividends accrued whether or not
declared by the Board of Directors. As of December 31,
2007, the Company had accrued but unpaid dividends on the
Series B Preferred Stock of $14,472. On October 28,
2008, the Company redeemed all of the issued and outstanding
shares of Series B Preferred Stock at the stated value of
$100 per share, for an aggregate payment of $13,400. In
connection therewith, the Company also paid $1,675 in dividends
to the Holders of the Series B Preferred Stock in
satisfaction of a portion of the accrued but unpaid dividends on
the Series B Preferred Stock through
70
the date of redemption. The Holders of the Series B
Preferred Stock agreed to discharge the Company from any
obligation to pay the remaining $13,795 of accrued but unpaid
dividends on the Series B Preferred Stock and to release
the Company from any further obligations thereunder. As a
result, the reversal of the $13,795 of accrued but unpaid
dividends on the Series B Preferred Stock was recorded as a
capital contribution during the fourth quarter of 2008.
Also on October 28, 2008, the Company entered into an
amendment to its Credit Agreement to allow it to complete the
foregoing transactions. See Note 7.
The Company had 70,000 shares of Series D Preferred
Stock (Series D Preferred Stock) outstanding at
December 31, 2008 and 2007. 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.
During 2008 and 2007, the Company issued common stock in lieu of
Series D Preferred Stock dividend payments of $508 and
$613, respectively. As of December 31, 2008, the Company
had accrued but unpaid dividends on the Series D Preferred
Stock of $23.
|
|
Note 12.
|
Earnings
Per Common Share
|
A reconciliation of the numerator and denominator of the
earnings per common share calculations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic and Diluted Loss Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before preferred stock dividends
|
|
$
|
(466
|
)
|
|
|
21,874
|
|
|
|
|
|
Less preferred stock dividends
|
|
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations applicable to common shareholders
|
|
$
|
(1,994
|
)
|
|
|
21,874
|
|
|
$
|
(.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before preferred stock
dividends
|
|
$
|
11,585
|
|
|
|
21,606
|
|
|
|
|
|
Less preferred stock dividends
|
|
|
(1,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common
shareholders
|
|
|
9,894
|
|
|
|
21,606
|
|
|
$
|
.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common
shareholders
|
|
$
|
9,894
|
|
|
|
21,952
|
|
|
$
|
.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before preferred stock
dividends
|
|
$
|
7,166
|
|
|
|
21,419
|
|
|
|
|
|
Less preferred stock dividends
|
|
|
(1,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common
shareholders
|
|
|
5,833
|
|
|
|
21,419
|
|
|
$
|
.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
330
|
|
|
|
|
|
Effect of Series B and D Preferred Stock
|
|
|
1,333
|
|
|
|
5,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common
shareholders
|
|
$
|
7,166
|
|
|
|
26,861
|
|
|
$
|
.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumed conversion of the Series B and Series D
Preferred Stock was excluded from the earnings per common share
calculation for 2008 and 2007 since their impact was
antidilutive. In 2008, all outstanding stock options were
excluded from the earnings per common share calculation since
their impact was antidilutive.
|
|
Note 13.
|
Statutory
Reporting
|
The assets, liabilities and results of operations have been
reported on the basis of GAAP, which varies from statutory
accounting practices (SAP) prescribed or permitted
by insurance regulatory authorities. The principal differences
between SAP and GAAP are that under SAP: (i) certain assets
that are non-admitted assets are eliminated from the balance
sheet; (ii) acquisition costs for policies are expensed as
incurred, while they are deferred and amortized over the
estimated life of the policies under GAAP; (iii) the
provision that is made for deferred income taxes is different
than under GAAP; (iv) the timing of establishing certain
reserves is different than under GAAP; and (v) valuation
allowances are established against investments.
The amount of statutory net income and surplus
(shareholders equity) from continuing operations for the
Parents insurance subsidiaries for the years ended
December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Life and Health, net income
|
|
$
|
1,269
|
|
|
$
|
11,961
|
|
|
$
|
3,173
|
|
Property and Casualty, net income
|
|
|
4,472
|
|
|
|
8,466
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory net income
|
|
$
|
5,741
|
|
|
$
|
20,427
|
|
|
$
|
9,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and Health, surplus
|
|
$
|
29,876
|
|
|
$
|
33,810
|
|
|
$
|
34,467
|
|
Property and Casualty, surplus
|
|
|
36,439
|
|
|
|
38,213
|
|
|
|
34,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory surplus
|
|
$
|
66,315
|
|
|
$
|
72,023
|
|
|
$
|
69,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the insurance code of the state of jurisdiction under
which each insurance subsidiary operates, dividend payments to
the Parent by its insurance subsidiaries are subject to certain
limitations without the prior approval of the applicable
states Insurance Commissioner. The Parent received
dividends of $5,496, $5,576 and $7,786 in 2008, 2007, and 2006,
respectively, from its subsidiaries. In 2008, dividend payments
by insurance subsidiaries in excess of $8,175 would require
prior approval.
72
|
|
Note 14.
|
Related
Party and Other Transactions
|
In the normal course of business the Company has engaged in
transactions with its Chairman Emeritus and his affiliates from
time to time. These transactions include the leasing of office
space as well as certain investing and financing activities.
The Company leases approximately 49,586 square feet of
office and covered garage space from an entity which is an
affiliate of the Company and its Chairman Emeritus. On
March 31, 2008, this lease was amended. As a result, the
Companys leased space was reduced from 65,489 square
feet to 49,586 square feet. During the years ended
December 31, 2008, 2007, and 2006, the Company paid $909,
$1,066 and $1,069, respectively, under this lease.
Certain financing for the Company has been provided by
affiliates of the Companys Chairman Emeritus, in the form
of investments in the Series B and the Series D
Preferred Stock (See Note 11).
In accordance with terms of the stock purchase agreement with
Columbia, certain investments held by the discontinued
operations were required to be disposed of at any time prior to
the completion of the sale. On March 11, 2008, the Parent
acquired 166,354 shares of Gray Television, Inc.
(Gray) Class A common stock, 56,000 shares
of Gray common stock, 11,177 shares of Triple Crown Media,
Inc. (Triple Crown) common stock, and
1,180 shares of Triple Crown Series A preferred stock
held by the discontinued operations at their quoted or estimated
market values for an aggregate purchase price of $1,994.
Effective November 30, 2007, an investment in a real estate
joint venture was sold by Georgia Casualty to an affiliate of
the Companys Chairman Emeritus. In connection with the
sale, management obtained an independent appraisal of the
underlying real estate assets.
Certain members of the Companys management are
shareholders and on the Board of Directors of Triple Crown and
Gray. At December 31, 2008, the Company owned
40,553 shares of Triple Crown common stock,
2,360 shares of Triple Crown Series A preferred stock,
388,060 shares of Gray Class A common stock and
106,000 shares of Gray common stock. At December 31,
2007, the Company (including its discontinued operations) owned
54,732 shares of Triple Crown common stock,
2,360 shares of Triple Crown Series A preferred stock,
388,060 shares of Gray Class A common stock and
106,000 shares of Gray common stock. The aggregate carrying
value of these investments in Triple Crown and Gray at
December 31, 2008 was $0 and $268, respectively. The
aggregate carrying value of these investments in Triple Crown
and Gray at December 31, 2007 was $1,642 and $4,149,
respectively.
73
|
|
Note 15.
|
Segment
Information
|
The Parents primary insurance subsidiaries operate with
relative autonomy and each company is evaluated based on its
individual performance. American Southern operates in the
Property and Casualty insurance market, while Bankers Fidelity
operates in the Life and Health insurance market. All segments
derive revenue from the collection of premiums, as well as from
investment income. Substantially all revenue other than that in
the corporate and other segment is from external sources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
|
|
|
Bankers
|
|
|
Corporate
|
|
|
Adjustments
|
|
|
|
|
|
|
Southern
|
|
|
Fidelity
|
|
|
& Other
|
|
|
& Eliminations
|
|
|
Consolidated
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
36,258
|
|
|
$
|
55,123
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
91,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
|
16,746
|
|
|
|
40,084
|
|
|
|
|
|
|
|
|
|
|
|
56,830
|
|
Expenses deferred
|
|
|
(8,419
|
)
|
|
|
(1,825
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,244
|
)
|
Amortization and depreciation expense
|
|
|
8,397
|
|
|
|
1,835
|
|
|
|
|
|
|
|
|
|
|
|
10,232
|
|
Other expenses
|
|
|
17,925
|
|
|
|
17,280
|
|
|
|
16,304
|
|
|
|
(7,604
|
)
|
|
|
43,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
34,649
|
|
|
|
57,374
|
|
|
|
16,304
|
|
|
|
(7,604
|
)
|
|
|
100,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss)
|
|
|
1,609
|
|
|
|
(2,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, including net realized losses
|
|
|
4,201
|
|
|
|
3,639
|
|
|
|
2,884
|
|
|
|
(2,905
|
)
|
|
|
7,819
|
|
Other income
|
|
|
7
|
|
|
|
43
|
|
|
|
5,180
|
|
|
|
(4,699
|
)
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
5,817
|
|
|
$
|
1,431
|
|
|
$
|
(8,240
|
)
|
|
$
|
|
|
|
$
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
40,466
|
|
|
$
|
58,805
|
|
|
$
|
8,064
|
|
|
$
|
(7,604
|
)
|
|
$
|
99,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,350
|
|
|
$
|
778
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
112,547
|
|
|
$
|
118,674
|
|
|
$
|
119,423
|
|
|
$
|
(84,035
|
)
|
|
$
|
266,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
|
|
|
Bankers
|
|
|
Corporate
|
|
|
Discontinued
|
|
|
Adjustments
|
|
|
|
|
|
|
Southern
|
|
|
Fidelity
|
|
|
& Other
|
|
|
Operations
|
|
|
& Eliminations
|
|
|
Consolidated
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
41,575
|
|
|
$
|
56,249
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
97,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
|
18,399
|
|
|
|
40,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,701
|
|
Expenses deferred
|
|
|
(8,398
|
)
|
|
|
(1,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,731
|
)
|
Amortization and depreciation expense
|
|
|
9,460
|
|
|
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,227
|
|
Other expenses
|
|
|
18,123
|
|
|
|
17,817
|
|
|
|
16,515
|
|
|
|
|
|
|
|
(8,778
|
)
|
|
|
43,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
37,584
|
|
|
|
58,553
|
|
|
|
16,515
|
|
|
|
|
|
|
|
(8,778
|
)
|
|
|
103,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss)
|
|
|
3,991
|
|
|
|
(2,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, including net realized gains
|
|
|
5,450
|
|
|
|
18,351
|
|
|
|
4,372
|
|
|
|
|
|
|
|
(3,824
|
)
|
|
|
24,349
|
|
Other income
|
|
|
21
|
|
|
|
58
|
|
|
|
5,674
|
|
|
|
|
|
|
|
(4,954
|
)
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
9,462
|
|
|
$
|
16,105
|
|
|
$
|
(6,469
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
19,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
47,046
|
|
|
$
|
74,658
|
|
|
$
|
10,046
|
|
|
|
|
|
|
$
|
(8,778
|
)
|
|
$
|
122,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,350
|
|
|
$
|
778
|
|
|
$
|
260
|
|
|
|
|
|
|
$
|
|
|
|
$
|
2,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
116,473
|
|
|
$
|
129,968
|
|
|
$
|
110,465
|
|
|
$
|
196,154
|
|
|
$
|
(94,806
|
)
|
|
$
|
458,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
|
|
|
Bankers
|
|
|
Corporate
|
|
|
Discontinued
|
|
|
Adjustments
|
|
|
|
|
|
|
Southern
|
|
|
Fidelity
|
|
|
& Other
|
|
|
Operations
|
|
|
& Eliminations
|
|
|
Consolidated
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
50,660
|
|
|
$
|
58,920
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
109,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
|
23,440
|
|
|
|
42,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,460
|
|
Expenses deferred
|
|
|
(11,087
|
)
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,764
|
)
|
Amortization and depreciation expense
|
|
|
12,523
|
|
|
|
2,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,568
|
|
Other expenses
|
|
|
21,092
|
|
|
|
17,301
|
|
|
|
17,710
|
|
|
|
|
|
|
|
(8,633
|
)
|
|
|
47,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
45,968
|
|
|
|
60,689
|
|
|
|
17,710
|
|
|
|
|
|
|
|
(8,633
|
)
|
|
|
115,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss)
|
|
|
4,692
|
|
|
|
(1,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, including net realized gains
|
|
|
5,914
|
|
|
|
8,450
|
|
|
|
4,341
|
|
|
|
|
|
|
|
(3,695
|
)
|
|
|
15,010
|
|
Other income
|
|
|
19
|
|
|
|
73
|
|
|
|
5,614
|
|
|
|
|
|
|
|
(4,938
|
)
|
|
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
10,625
|
|
|
$
|
6,754
|
|
|
$
|
(7,755
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
9,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
56,593
|
|
|
$
|
67,443
|
|
|
$
|
9,955
|
|
|
|
|
|
|
$
|
(8,633
|
)
|
|
$
|
125,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,350
|
|
|
$
|
778
|
|
|
$
|
880
|
|
|
|
|
|
|
$
|
|
|
|
$
|
3,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
122,292
|
|
|
$
|
128,246
|
|
|
$
|
113,837
|
|
|
$
|
194,248
|
|
|
$
|
(99,471
|
)
|
|
$
|
459,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16.
|
Disclosures
About Fair Value of Financial Instruments
|
The estimated fair value amounts have been determined by the
Company using available market information from various market
sources and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data and
to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts which the Company could realize in a current market
exchange. The use of different market assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including short-term investments
|
|
$
|
37,321
|
|
|
$
|
37,321
|
|
|
$
|
36,909
|
|
|
$
|
36,909
|
|
Fixed maturities
|
|
|
163,097
|
|
|
|
163,097
|
|
|
|
167,927
|
|
|
|
167,927
|
|
Common and non-redeemable preferred stocks
|
|
|
5,291
|
|
|
|
5,291
|
|
|
|
5,335
|
|
|
|
5,335
|
|
Policy and student loans
|
|
|
2,019
|
|
|
|
2,019
|
|
|
|
1,958
|
|
|
|
1,958
|
|
Other invested assets
|
|
|
1,433
|
|
|
|
1,433
|
|
|
|
1,563
|
|
|
|
1,563
|
|
Real estate
|
|
|
38
|
|
|
|
38
|
|
|
|
38
|
|
|
|
38
|
|
Investments in unconsolidated trusts
|
|
|
1,238
|
|
|
|
1,238
|
|
|
|
1,238
|
|
|
|
1,238
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt payable to bank
|
|
|
|
|
|
|
|
|
|
|
12,750
|
|
|
|
12,750
|
|
Junior Subordinated Debentures
|
|
|
41,238
|
|
|
|
41,238
|
|
|
|
41,238
|
|
|
|
41,238
|
|
The fair value estimates as of December 31, 2008 and 2007
were based on pertinent information available to management as
of the respective dates. Although management is not aware of any
factors that would significantly affect the estimated fair value
amounts, current estimates of fair value may differ
significantly from amounts that might ultimately be realized.
75
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturity
|
|
|
Derivative
|
|
|
|
Securities
|
|
|
(Liability)
|
|
|
Balance, January 1, 2008
|
|
$
|
3,000
|
|
|
$
|
(740
|
)
|
Total unrealized losses included in other comprehensive loss
|
|
|
(1,071
|
)
|
|
|
(1,345
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
1,929
|
|
|
$
|
(2,085
|
)
|
|
|
|
|
|
|
|
|
|
The Companys Level 3 fixed maturity securities are
comprised solely of issuances of pooled debt obligations of
multiple, smaller financial services companies. They are not
actively traded and valuation techniques used to measure fair
value are based on future estimated cash flows discounted at an
appropriate rate of interest. Other qualitative and quantitative
information received from the original underwriter of the pooled
offering is also considered, as applicable. As the derivative is
an interest rate collar, changes in valuation are more closely
correlated with changes in interest rates and accordingly values
are estimated using projected cash flows at current interest
rates discounted at an appropriate rate of interest. Fair value
quotations are also obtained from the single counterparty to the
transaction.
In accordance with the provisions of SFAS 142,
Goodwill and Other Intangible Assets, goodwill with
a carrying amount of $3,008 was written down to its implied fair
value of $2,388 at December 31, 2007 resulting in an
impairment charge of $620, which was included in earnings for
the year ended December 31, 2007. Goodwill was further
written down to its implied fair value of $2,128 at
December 31, 2008 resulting in an impairment charge of
$260, which was included in earnings for the year ended
December 31, 2008.
The following describes the methods and assumptions used by the
Company in estimating fair values:
Cash
and Cash Equivalents, including Short-term
Investments
The carrying amount approximates fair value due to the
short-term nature of the instruments.
Fixed
Maturities, Common and Non-Redeemable Preferred Stocks and
Publicly Traded Other Invested Assets
The carrying amount is determined in accordance with methods
prescribed by the NAIC, which do not differ materially from
publicly quoted market prices. Certain fixed maturity securities
that do not have publicly quoted values are carried at estimated
fair value as determined by management.
Non-publicly
Traded Invested Assets
The fair value of investments in certain limited partnerships
which are included in other invested assets on the consolidated
balance sheet, were determined by officers of those limited
partnerships.
Debt
Payable and Junior Subordinated Debentures
The fair value is estimated based on the quoted market prices
for the same or similar issues or on the current rates offered
for debt having the same or similar returns and remaining
maturities.
76
|
|
Note 17.
|
Reconciliation
of Other Comprehensive Income (Loss)
|
The Companys comprehensive income (loss) consists of net
income (loss), unrealized gains and losses on securities
available for sale, fair value adjustments from the ownership of
a derivative financial instrument and minimum additional pension
liability, net of applicable income taxes. Other than net income
(loss), the other components of comprehensive income (loss) for
the years ended December 31, 2008, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net realized gains (losses) on investment securities included in
income (loss) from continuing operations
|
|
$
|
(3,995
|
)
|
|
$
|
12,627
|
|
|
$
|
3,084
|
|
Net realized gains (losses) on investment securities included in
income (loss) from discontinued operations
|
|
|
8
|
|
|
|
3,225
|
|
|
|
3,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains (losses) on investment securities
included in net income (loss)
|
|
$
|
(3,987
|
)
|
|
$
|
15,852
|
|
|
$
|
6,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other components of comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pre-tax unrealized gains (losses) on investment securities
arising during year
|
|
$
|
(15,525
|
)
|
|
$
|
(3,697
|
)
|
|
$
|
6,031
|
|
Reclassification adjustment for net realized (gains) losses on
investment securities
|
|
|
3,987
|
|
|
|
(15,852
|
)
|
|
|
(6,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pre-tax unrealized losses on investment securities
recognized in other comprehensive income (loss)
|
|
|
(11,538
|
)
|
|
|
(19,549
|
)
|
|
|
(660
|
)
|
Fair value adjustment to derivative financial instrument
|
|
|
(1,345
|
)
|
|
|
(575
|
)
|
|
|
(165
|
)
|
Minimum pension liability adjustment
|
|
|
531
|
|
|
|
312
|
|
|
|
(928
|
)
|
Deferred income tax attributable to other comprehensive income
(loss)
|
|
|
4,323
|
|
|
|
6,934
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,029
|
)
|
|
$
|
(12,878
|
)
|
|
$
|
(1,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Note 18.
|
Quarterly
Financial Information (Unaudited)
|
The following table sets forth a summary of the quarterly
unaudited results of operations for the two years in the period
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Revenue
|
|
$
|
25,903
|
|
|
$
|
25,569
|
|
|
$
|
25,616
|
|
|
$
|
22,643
|
(1)
|
|
$
|
28,287
|
|
|
$
|
27,753
|
|
|
$
|
28,516
|
|
|
$
|
38,416
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
721
|
|
|
$
|
1,070
|
|
|
$
|
(64
|
)
|
|
$
|
(2,719
|
)(1)
|
|
$
|
891
|
|
|
$
|
1,305
|
|
|
$
|
2,432
|
|
|
$
|
14,470
|
(3)
|
Income tax expense (benefit)
|
|
|
297
|
|
|
|
285
|
|
|
|
102
|
|
|
|
(1,210
|
)
|
|
|
475
|
|
|
|
686
|
|
|
|
656
|
|
|
|
5,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
424
|
|
|
|
785
|
|
|
|
(166
|
)
|
|
|
(1,509
|
)
|
|
|
416
|
|
|
|
619
|
|
|
|
1,776
|
|
|
|
8,774
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(2,166
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,251
|
)(2)
|
|
|
435
|
|
|
|
(185
|
)
|
|
|
30
|
|
|
|
(4,613
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,742
|
)
|
|
$
|
785
|
|
|
$
|
(166
|
)
|
|
$
|
(2,760
|
)
|
|
$
|
851
|
|
|
$
|
434
|
|
|
$
|
1,806
|
|
|
$
|
4,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
|
|
|
$
|
.02
|
|
|
$
|
(.03
|
)
|
|
$
|
(.08
|
)
|
|
$
|
|
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
$
|
.38
|
|
Income (loss) from discontinued operations
|
|
|
(.10
|
)
|
|
|
|
|
|
|
|
|
|
|
(.06
|
)
|
|
|
.02
|
|
|
|
(.01
|
)
|
|
|
|
|
|
|
(.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
(.10
|
)
|
|
$
|
.02
|
|
|
$
|
(.03
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
.02
|
|
|
$
|
|
|
|
$
|
.06
|
|
|
$
|
.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
|
|
|
$
|
.02
|
|
|
$
|
(.03
|
)
|
|
$
|
(.08
|
)
|
|
$
|
|
|
|
$
|
.01
|
|
|
$
|
.06
|
|
|
$
|
.32
|
|
Income (loss) from discontinued operations
|
|
|
(.10
|
)
|
|
|
|
|
|
|
|
|
|
|
(.06
|
)
|
|
|
.02
|
|
|
|
(.01
|
)
|
|
|
|
|
|
|
(.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
(.10
|
)
|
|
$
|
.02
|
|
|
$
|
(.03
|
)
|
|
$
|
(.14
|
)
|
|
$
|
.02
|
|
|
$
|
|
|
|
$
|
.06
|
|
|
$
|
.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a $3.6 million impairment charge primarily related
to the write-down in the value of certain bonds, preferred and
common stocks in the fourth quarter of 2008. See Note 3. |
|
(2) |
|
Results from a charge related to disputed items and a subsequent
mutual settlement. See Note 2. |
|
(3) |
|
Includes a $12.9 million realized gain from the disposition
of the Companys investment in equity securities of
Wachovia Corporation in the fourth quarter of 2007. |
|
(4) |
|
Includes a $3.3 million pre-tax adjustment to adjust the
carrying value of the discontinued operations to their estimated
fair value. |
78
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls
and Procedures
|
As of the end of the period covered by this report, an
evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934). Based on that evaluation,
our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and
procedures were effective as of that date.
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company. An internal control system over
financial reporting has been designed to provide reasonable
assurance regarding the reliability and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Management recognizes
that there are inherent limitations in the effectiveness of any
internal control system. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2008 based upon the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated Framework.
Based on this evaluation, management believes that internal
control over financial reporting as such term is defined in
Exchange Act
Rule 13a-15(f)
was effective as of December 31, 2008.
There have been no changes in our internal control over
financial reporting that occurred during the fourth quarter of
2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
This Annual Report does not include an attestation report of the
Companys independent registered public accounting firm
regarding internal control over financial reporting.
Managements report was not subject to attestation by the
Companys independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only
managements report on this Annual Report.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
With the exception of certain information relating to the
Executive Officers of the Company, which is provided in
Part I hereof, the information relating to securities
authorized for issuance under equity compensation plans, which
is included in Part II, Item 5 hereof, and the
information relating to the Companys Code of Ethics, which
is included below, all information required by Part III
(Items 10, 11, 12, 13 and 14) is incorporated by
reference to the sections entitled Election of
Directors, Security Ownership of Certain Beneficial
Owners and Management, Section 16(a) Beneficial
Ownership Reporting Compliance, Executive
Compensation, Certain Relationships and Related
Transactions, and Director Independence and
Ratification of Independent Registered Public Accounting
Firm to be contained in the Companys definitive
proxy statement in connection with the Companys Annual
Meeting of Shareholders to be held on May 5, 2009, to be
filed with the SEC within 120 days of the Companys
fiscal year end.
79
The Company has adopted a Code of Ethics that applies to its
principal executive officer, principal financial officer,
principal accounting officer or controller, or any persons
performing similar functions, as well as its directors and other
employees. A copy of this Code of Ethics has been filed as an
exhibit to the Companys annual report on
Form 10-K
for the year ended December 31, 2003 and is incorporated
herein by this reference.
PART IV
|
|
Item 15.
|
Exhibits and
Financial Statement Schedules
|
(a) List of documents filed as part of this report:
1. Financial Statements:
See Index to Financial Statements contained in Item 8
hereof.
2. Financial Statement Schedules:
Schedule II Condensed financial information of
Registrant
Schedule III Supplementary insurance
information for the three years ended December 31, 2008
Schedule IV Reinsurance for the three years
ended December 31, 2008
Schedule VI Supplemental information concerning
property-casualty insurance operations for the three years ended
December 31, 2008
Schedules other than those listed above are omitted as they are
not required or are not applicable, or the required information
is shown in the financial statements or notes thereto. Columns
omitted from schedules filed have been omitted because the
information is not applicable.
3. Exhibits*:
|
|
|
|
|
|
|
|
|
|
3
|
.1
|
|
|
|
Restated Articles of Incorporation of the registrant, as amended.
|
|
|
|
3
|
.2
|
|
|
|
Bylaws of the registrant, as amended.
|
|
|
|
10
|
.01
|
|
|
|
Management Agreement between registrant and Georgia
Casualty & Surety Company dated April 1, 1983
[incorporated by reference to Exhibit 10.16 to the
registrants
Form 10-K
for the year ended December 31, 1986].
|
|
|
|
10
|
.02
|
|
|
|
Management Agreement between the registrant and Atlantic
American Life Insurance Company and Bankers Fidelity Life
Insurance Company dated July 1, 1993 [incorporated by
reference to Exhibit 10.41 to the registrants
Form 10-Q
for the quarter ended September 30, 1993].
|
|
|
|
10
|
.03
|
|
|
|
Tax allocation agreement dated January 28, 1994, between
registrant and registrants subsidiaries [incorporated by
reference to Exhibit 10.44 to the registrants
Form 10-K
for the year ended December 31, 1993].
|
|
|
|
10
|
.04**
|
|
|
|
Atlantic American Corporation 1992 Incentive Plan [incorporated
by reference to Exhibit 4 to the registrants
Form S-8
filed on November 1, 1999].
|
|
|
|
10
|
.05**
|
|
|
|
Atlantic American Corporation 1996 Director Stock Option
Plan [incorporated by reference to Exhibit 4 to the
registrants
Form S-8
filed on November 1, 1999].
|
|
|
|
10
|
.06**
|
|
|
|
Atlantic American Corporation 2002 Stock Incentive Plan
[incorporated by reference to Exhibit 4.1 to the
registrants
Form S-8
filed on August 2, 2002].
|
|
|
|
10
|
.07**
|
|
|
|
Summary Terms of Consulting Arrangement between Atlantic
American Corporation and Samuel E. Hudgins, entered into in June
2002 [incorporated by reference to Exhibit 10.23 to the
registrants
Form 10-K
for the year ended December 31, 2002].
|
|
|
|
10
|
.08
|
|
|
|
Credit Agreement, dated as of December 22, 2006 between
Atlantic American Corporation and Wachovia Bank, National
Association [incorporated by reference to Exhibit 10.1 to
the registrants
Form 8-K
dated December 22, 2006].
|
|
|
80
|
|
|
|
|
|
|
|
|
|
10
|
.09
|
|
|
|
First Amendment to Credit Agreement and Pledge Agreement, dated
as of December 22, 2006 between Atlantic American
Corporation and Wachovia Bank, National Association
[incorporated by reference to Exhibit 10.1 to the
registrants
Form 10-Q
for the quarter ended March 31, 2008].
|
|
|
|
10
|
.10
|
|
|
|
Stock Purchase Agreement, dated as of December 26, 2007
between Atlantic American Corporation and Columbia Mutual
Insurance Company [incorporated by reference to
Exhibit 10.09 to the registrants
Form 10-K
for the year ended December 31, 2007].
|
|
|
|
10
|
.11
|
|
|
|
First Amendment to Stock Purchase Agreement, dated as of
March 17, 2009, between Atlantic American Corporation and
Columbia Mutual Insurance Company.
|
|
|
|
10
|
.12
|
|
|
|
Lease Agreement between Georgia Casualty & Surety
Company, Bankers Fidelity Life Insurance Company, Atlantic
American Corporation and Delta Life Insurance Company dated as
of November 1, 2007 [incorporated by reference to
Exhibit 10.10 to the registrants
Form 10-K
for the year ended December 31, 2007].
|
|
|
|
10
|
.13
|
|
|
|
First Amendment to Lease Agreement between Georgia
Casualty & Surety Company, Bankers Fidelity Life
Insurance Company, Atlantic American Corporation and Delta Life
Insurance Company dated as of March 31, 2008 [incorporated
by reference to Exhibit 10.2 to the registrants
Form 10-Q
for the quarter ended March 31, 2008].
|
|
|
|
10
|
.14
|
|
|
|
Second Amendment to Credit Agreement between registrant and
Wachovia Bank, National Association dated as of October 28,
2008 [incorporated by reference to Exhibit 10.1 to the
registrants
Form 8-K
dated October 31, 2008].
|
|
|
|
10
|
.15
|
|
|
|
Form of Redemption Letter Agreement entered into by
registrant and each holder of Series B Preferred Stock
[incorporated by reference to Exhibit 10.2 to the
registrants
Form 8-K
dated October 31, 2008].
|
|
|
|
14
|
.1
|
|
|
|
Code of Ethics [incorporated by reference to Exhibit 14.1
to the registrants
Form 10-K
for the year ended December 31, 2003].
|
|
|
|
21
|
.1
|
|
|
|
Subsidiaries of the registrant.
|
|
|
|
23
|
.1
|
|
|
|
Consent of BDO Seidman LLP, Independent Registered Public
Accounting Firm.
|
|
|
|
31
|
.1
|
|
|
|
Certification of the Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31
|
.2
|
|
|
|
Certification of the Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32
|
.1
|
|
|
|
Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
* |
|
The registrant agrees to furnish to the Commission upon request
a copy of any instruments defining the rights of securityholders
of the registrant that may be omitted from filing in accordance
with the Commissions rules and regulations. |
|
** |
|
Management contract, compensatory plan or arrangement required
to be filed pursuant to, Part IV, Item 15(c) of
Form 10-K
and Item 601 of
Regulation S-K. |
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) ATLANTIC AMERICAN CORPORATION
|
|
|
|
By:
|
/s/ John
G. Sample, Jr.
|
John G. Sample, Jr.
Senior Vice President and Chief Financial Officer
Date: March 31, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ J.
Mack Robinson
J.
Mack Robinson
|
|
Chairman Emeritus
|
|
March 31, 2009
|
|
|
|
|
|
/s/ Hilton
H. Howell, Jr.
Hilton
H. Howell, Jr.
|
|
President, Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
|
|
March 31, 2009
|
|
|
|
|
|
/s/ John
G. Sample, Jr.
John
G. Sample, Jr.
|
|
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
March 31, 2009
|
|
|
|
|
|
/s/ Edward
E. Elson
Edward
E. ElsON
|
|
Director
|
|
March 31, 2009
|
|
|
|
|
|
/s/ Samuel
E. Hudgins
Samuel
E. Hudgins
|
|
Director
|
|
March 31, 2009
|
|
|
|
|
|
/s/ D.
Raymond Riddle
D.
Raymond Riddle
|
|
Director
|
|
March 31, 2009
|
|
|
|
|
|
/s/ Harriett
J. Robinson
Harriett
J. Robinson
|
|
Director
|
|
March 31, 2009
|
|
|
|
|
|
/s/ Scott
G. Thompson
Scott
G. Thompson
|
|
Director
|
|
March 31, 2009
|
|
|
|
|
|
/s/ Mark
C. West
Mark
C. West
|
|
Director
|
|
March 31, 2009
|
82
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ William
H. Whaley, M.D.
William
H. Whaley, M.D.
|
|
Director
|
|
March 31, 2009
|
|
|
|
|
|
/s/ Dom
H. Wyant
Dom
H. Wyant
|
|
Director
|
|
March 31, 2009
|
|
|
|
|
|
/s/ Harold
K. Fischer
Harold
K. Fischer
|
|
Director
|
|
March 31, 2009
|
83
SCHEDULE II
Page 1 of 3
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC
AMERICAN CORPORATION
(Parent Company Only)
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and short-term investments
|
|
$
|
20,966
|
|
|
$
|
9,220
|
|
Investment in subsidiaries
|
|
|
84,035
|
|
|
|
94,654
|
|
Investments in unconsolidated trusts
|
|
|
1,238
|
|
|
|
1,238
|
|
Deferred tax asset, net
|
|
|
9,917
|
|
|
|
3,268
|
|
Income taxes receivable from subsidiaries
|
|
|
3,264
|
|
|
|
4,888
|
|
Other assets
|
|
|
2,699
|
|
|
|
1,380
|
|
Net investment in discontinued operations
|
|
|
|
|
|
|
43,807
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
122,119
|
|
|
$
|
158,455
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Other payables
|
|
$
|
5,467
|
|
|
$
|
16,673
|
|
Debt payable to bank
|
|
|
|
|
|
|
12,750
|
|
Junior subordinated debentures
|
|
|
41,238
|
|
|
|
41,238
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
46,705
|
|
|
|
70,661
|
|
Shareholders equity
|
|
|
75,414
|
|
|
|
87,794
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
122,119
|
|
|
$
|
158,455
|
|
|
|
|
|
|
|
|
|
|
II-1
SCHEDULE II
Page 2 of 3
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC
AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income from subsidiaries
|
|
$
|
4,699
|
|
|
$
|
4,954
|
|
|
$
|
4,939
|
|
Distributed earnings from subsidiaries
|
|
|
5,496
|
|
|
|
5,576
|
|
|
|
7,786
|
|
Other
|
|
|
212
|
|
|
|
656
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
10,407
|
|
|
|
11,186
|
|
|
|
13,470
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
9,104
|
|
|
|
7,429
|
|
|
|
8,989
|
|
INTEREST EXPENSE
|
|
|
3,298
|
|
|
|
4,160
|
|
|
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,995
|
)
|
|
|
(403
|
)
|
|
|
(124
|
)
|
INCOME TAX BENEFIT(1)
|
|
|
2,692
|
|
|
|
526
|
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
697
|
|
|
|
123
|
|
|
|
873
|
|
EQUITY IN UNDISTRIBUTED EARNINGS (LOSSES) OF CONTINUING
OPERATIONS, NET
|
|
|
(1,163
|
)
|
|
|
11,462
|
|
|
|
6,293
|
|
EQUITY IN EARNINGS (LOSSES) OF DISCONTINUED OPERATIONS, NET
|
|
|
(3,417
|
)
|
|
|
(4,333
|
)
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(3,883
|
)
|
|
$
|
7,252
|
|
|
$
|
8,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under the terms of its tax-sharing agreement with its
subsidiaries, income tax provisions for the individual companies
are computed on a separate company basis. Accordingly, the
Companys income tax benefit results from the utilization
of the parent company separate return loss to reduce the
consolidated taxable income of the Company and its subsidiaries. |
II-2
SCHEDULE II
Page 3 of 3
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC
AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,883
|
)
|
|
$
|
7,252
|
|
|
$
|
8,936
|
|
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment losses (gains)
|
|
|
622
|
|
|
|
(533
|
)
|
|
|
(439
|
)
|
Depreciation and amortization
|
|
|
308
|
|
|
|
702
|
|
|
|
692
|
|
Compensation expense related to share awards
|
|
|
66
|
|
|
|
68
|
|
|
|
70
|
|
Equity in undistributed (earnings) losses of continuing
operations
|
|
|
1,163
|
|
|
|
(11,462
|
)
|
|
|
(6,293
|
)
|
Equity in (earnings) losses of discontinued operations
|
|
|
3,417
|
|
|
|
4,333
|
|
|
|
(1,770
|
)
|
Decrease (increase) in intercompany taxes
|
|
|
1,624
|
|
|
|
(3,502
|
)
|
|
|
1,696
|
|
Deferred income tax (benefit) expense
|
|
|
(2,537
|
)
|
|
|
3,711
|
|
|
|
981
|
|
Increase (decrease) in other liabilities
|
|
|
2,139
|
|
|
|
(1,607
|
)
|
|
|
291
|
|
Other, net
|
|
|
(2,977
|
)
|
|
|
249
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in ) provided by operating activities
|
|
|
(58
|
)
|
|
|
(789
|
)
|
|
|
4,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from investments sold
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Investments purchased
|
|
|
(3,532
|
)
|
|
|
|
|
|
|
|
|
Net proceeds from sale of insurance subsidiaries
|
|
|
43,392
|
|
|
|
|
|
|
|
|
|
Capital contribution to subsidiaries
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(85
|
)
|
|
|
(411
|
)
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
39,681
|
|
|
|
(411
|
)
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series D Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Redemption of Series B Preferred Stock
|
|
|
(13,400
|
)
|
|
|
|
|
|
|
|
|
Payment of dividends on Series B Preferred Stock
|
|
|
(1,675
|
)
|
|
|
|
|
|
|
|
|
Purchase of treasury shares
|
|
|
(56
|
)
|
|
|
(23
|
)
|
|
|
(70
|
)
|
Proceeds from bank financing
|
|
|
|
|
|
|
36,000
|
|
|
|
15,750
|
|
Repayments of debt
|
|
|
(12,750
|
)
|
|
|
(36,000
|
)
|
|
|
(13,250
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
19
|
|
|
|
16
|
|
Financing of discontinued operations
|
|
|
4
|
|
|
|
1,036
|
|
|
|
(6,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(27,877
|
)
|
|
|
1,032
|
|
|
|
2,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
11,746
|
|
|
|
(168
|
)
|
|
|
7,040
|
|
Cash at beginning of year
|
|
|
9,220
|
|
|
|
9,388
|
|
|
|
2,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
20,966
|
|
|
$
|
9,220
|
|
|
$
|
9,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,393
|
|
|
$
|
4,195
|
|
|
$
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (received) paid for income taxes
|
|
$
|
2,150
|
|
|
$
|
450
|
|
|
$
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-3
SCHEDULE III
Page 1 of 2
ATLANTIC
AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY
INSURANCE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, Losses,
|
|
|
|
|
|
Other Policy
|
|
|
|
Deferred
|
|
|
Claims and Loss
|
|
|
Unearned
|
|
|
Claims and
|
|
Segment
|
|
Acquisition Costs
|
|
|
Reserves
|
|
|
Premiums
|
|
|
Benefits Payable
|
|
|
|
(In thousands)
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
15,793
|
|
|
$
|
64,398
|
|
|
$
|
3,305
|
|
|
$
|
1,906
|
|
American Southern
|
|
|
3,367
|
|
|
|
44,928
|
|
|
|
16,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,160
|
|
|
$
|
109,326
|
(1)
|
|
$
|
19,542
|
|
|
$
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
15,644
|
|
|
$
|
63,258
|
|
|
$
|
3,332
|
|
|
$
|
1,878
|
|
American Southern
|
|
|
3,186
|
|
|
|
43,994
|
|
|
|
15,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,830
|
|
|
$
|
107,252
|
(2)
|
|
$
|
18,948
|
|
|
$
|
1,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
16,024
|
|
|
$
|
61,655
|
|
|
$
|
3,494
|
|
|
$
|
1,816
|
|
American Southern
|
|
|
4,194
|
|
|
|
45,655
|
|
|
|
21,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,218
|
|
|
$
|
107,310
|
(3)
|
|
$
|
25,190
|
|
|
$
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes future policy benefits of $56,827 and losses and claims
of $52,499. |
|
(2) |
|
Includes future policy benefits of $55,548 and losses and claims
of $51,704. |
|
(3) |
|
Includes future policy benefits of $52,019 and losses and claims
of $55,291. |
III-1
SCHEDULE III
Page 2 of 2
ATLANTIC
AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY
INSURANCE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Claims, Losses
|
|
|
of Deferred
|
|
|
Other
|
|
|
Casualty
|
|
|
|
Premium
|
|
|
Investment
|
|
|
and Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premiums
|
|
Segment
|
|
Revenue
|
|
|
Income
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
|
(In thousands)
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
55,123
|
|
|
$
|
5,810
|
|
|
$
|
40,084
|
|
|
$
|
1,676
|
|
|
$
|
15,614
|
|
|
$
|
|
|
American Southern
|
|
|
36,258
|
|
|
|
5,277
|
|
|
|
16,746
|
|
|
|
8,238
|
|
|
|
9,665
|
|
|
|
36,879
|
|
Other
|
|
|
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
8,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,381
|
|
|
$
|
11,688
|
|
|
$
|
56,830
|
|
|
$
|
9,914
|
|
|
$
|
33,979
|
|
|
$
|
36,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
56,249
|
|
|
$
|
6,091
|
|
|
$
|
40,302
|
|
|
$
|
1,713
|
|
|
$
|
16,538
|
|
|
$
|
|
|
American Southern
|
|
|
41,575
|
|
|
|
5,497
|
|
|
|
18,399
|
|
|
|
9,406
|
|
|
|
9,779
|
|
|
|
35,972
|
|
Other
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
7,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,824
|
|
|
$
|
11,603
|
|
|
$
|
58,701
|
|
|
$
|
11,119
|
|
|
$
|
34,054
|
|
|
$
|
35,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
58,920
|
|
|
$
|
6,097
|
|
|
$
|
42,020
|
|
|
$
|
1,610
|
|
|
$
|
17,059
|
|
|
$
|
|
|
American Southern
|
|
|
50,660
|
|
|
|
5,516
|
|
|
|
23,440
|
|
|
|
12,087
|
|
|
|
10,441
|
|
|
|
46,274
|
|
Other
|
|
|
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
9,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,580
|
|
|
$
|
11,822
|
|
|
$
|
65,460
|
|
|
$
|
13,697
|
|
|
$
|
36,577
|
|
|
$
|
46,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
III-2
SCHEDULE IV
ATLANTIC
AMERICAN CORPORATION AND SUBSIDIARIES
REINSURANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded To
|
|
|
Assumed
|
|
|
|
|
|
Percentage of
|
|
|
|
Direct
|
|
|
Other
|
|
|
From Other
|
|
|
Net
|
|
|
Amount Assumed
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amounts
|
|
|
To Net
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
280,909
|
|
|
$
|
(32,330
|
)
|
|
$
|
|
|
|
$
|
248,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
54,998
|
|
|
$
|
(100
|
)
|
|
$
|
225
|
|
|
$
|
55,123
|
|
|
|
0.4
|
%
|
American Southern
|
|
|
39,481
|
|
|
|
(6,250
|
)
|
|
|
3,027
|
|
|
|
36,258
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
94,479
|
|
|
$
|
(6,350
|
)
|
|
$
|
3,252
|
|
|
$
|
91,381
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
272,308
|
|
|
$
|
(36,543
|
)
|
|
$
|
|
|
|
$
|
235,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
56,340
|
|
|
$
|
(350
|
)
|
|
$
|
259
|
|
|
$
|
56,249
|
|
|
|
0.5
|
%
|
American Southern
|
|
|
45,624
|
|
|
|
(6,856
|
)
|
|
|
2,807
|
|
|
|
41,575
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
101,964
|
|
|
$
|
(7,206
|
)
|
|
$
|
3,066
|
|
|
$
|
97,824
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
269,306
|
|
|
$
|
(37,238
|
)
|
|
$
|
|
|
|
$
|
232,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
$
|
58,692
|
|
|
$
|
(73
|
)
|
|
$
|
301
|
|
|
$
|
58,920
|
|
|
|
0.5
|
%
|
American Southern
|
|
|
57,369
|
|
|
|
(9,369
|
)
|
|
|
2,660
|
|
|
|
50,660
|
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums
|
|
$
|
116,061
|
|
|
$
|
(9,442
|
)
|
|
$
|
2,961
|
|
|
$
|
109,580
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IV-1
SCHEDULE VI
ATLANTIC
AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL
INFORMATION CONCERNING
PROPERTY-CASUALTY
INSURANCE OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expenses
|
|
|
Amortization
|
|
|
Paid Claims
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Incurred Related To
|
|
|
of Deferred
|
|
|
and Claim
|
|
|
|
|
|
|
Policy
|
|
|
|
|
|
Unearned
|
|
|
Earned
|
|
|
Investment
|
|
|
Current
|
|
|
Prior
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Premiums
|
|
Year Ended
|
|
Acquisition
|
|
|
Reserves
|
|
|
Premium
|
|
|
Premium
|
|
|
Income
|
|
|
Year
|
|
|
Years
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
|
(In thousands)
|
|
|
December 31, 2008
|
|
$
|
3,367
|
|
|
$
|
44,928
|
|
|
$
|
16,237
|
|
|
$
|
36,258
|
|
|
$
|
5,277
|
|
|
$
|
24,740
|
|
|
$
|
(7,994
|
)
|
|
$
|
8,238
|
|
|
$
|
17,753
|
|
|
$
|
36,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
3,186
|
|
|
$
|
43,994
|
|
|
$
|
15,616
|
|
|
$
|
41,575
|
|
|
$
|
5,497
|
|
|
$
|
27,009
|
|
|
$
|
(8,610
|
)
|
|
$
|
9,406
|
|
|
$
|
20,723
|
|
|
$
|
35,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
4,194
|
|
|
$
|
45,655
|
|
|
$
|
21,696
|
|
|
$
|
50,660
|
|
|
$
|
5,516
|
|
|
$
|
30,174
|
|
|
$
|
(6,734
|
)
|
|
$
|
12,087
|
|
|
$
|
20,815
|
|
|
$
|
46,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VI-1