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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
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or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-3722
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ATLANTIC AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1027114
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4370 Peachtree Road, N.E.,
Atlanta, Georgia 30319
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(Address of principal executive offices) (Zip code)
(Registrant's 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)
8% Convertible Subordinated Notes
(Title of class)
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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 X . No .
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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 registrant's 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. |X|
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The aggregate market value of common stock held by non-affiliates of the
registrant as of March 8, 1996, was $39,609,000. On March 8, 1996 there were
18,679,797 shares of the registrant's common stock, par value $1.00 per share,
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Annual Report to Shareholders for the year ended
December 31, 1995 - Parts I, II and IV.
2. Portions of registrant's Proxy Statement for the Annual Meeting of
Shareholders, to be held on May 7, 1996, have been incorporated in Items 10,
11, 12 and 13 of Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I Page
Item 1. Business................................................. 3
Insurance Operations.................................. 4
Glossary of Selected Insurance Terms............... 4
Background......................................... 6
Life Companies..................................... 6
Georgia Casualty................................... 12
American Southern.................................. 13
Marketing.......................................... 14
Underwriting....................................... 15
Operating Results.................................. 17
Premiums to Surplus Ratio.......................... 18
NAIC Ratios........................................ 18
Risk Based Capital................................. 18
Policyholder Services and Claims................... 19
Reserves........................................... 20
Reinsurance........................................ 23
Competition........................................ 24
Rating............................................. 24
Regulation......................................... 25
Investments........................................ 27
Employees.......................................... 28
Services Provided to Subsidiaries.................... 28
Financial Information by Industry Segment............ 28
Executive Officers of the Registrant................. 29
Item 2. Properties............................................... 30
Item 3. Legal Proceedings........................................ 30
Item 4. Submission of Matters to a Vote of Security Holders...... 30
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters........................... 31
Item 6. Selected Financial Data.................................. 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................. 32
Item 8. Financial Statements and Supplementary Data.............. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................. 32
PART III
Item 10. Directors and Executive Officers of the Registrant....... 33
Item 11. Executive Compensation................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 33
Item 13. Certain Relationships and Related Transactions........... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.............................................. 33
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PART I
ITEM 1. BUSINESS
The Company
Atlantic American Corporation (the "Company" or the "Parent") is a Georgia
holding company which is engaged primarily in the insurance business through the
following subsidiaries: Atlantic American Life Insurance Company ("Atlantic
American Life"), Bankers Fidelity Life Insurance Company ("Bankers Fidelity
Life") (jointly, the "Life Companies"), American Southern Insurance Company and
its wholly owned subsidiary American Safety Insurance Company (collectively,
"American Southern") and Georgia Casualty & Surety Company ("Georgia Casualty").
The Company was incorporated as a Georgia corporation in 1968 and during
that year acquired Georgia Casualty, which was incorporated in 1947. In 1970 the
Company acquired Atlantic American Life, which was incorporated in Georgia in
1946, and, in 1976, Bankers Fidelity Life, a Georgia corporation incorporated in
1955. In 1991, the Company acquired substantially all of the stock of Leath
Furniture, Inc. ("Leath"), an Atlanta-based furniture retailer which operates
full-line, full-service retail furniture stores throughout the Midwest, Alabama
and Florida. On February 21, 1996 the Company announced its intent to sell its
approximately 88% interest in Leath and has reflected Leath as discontinued
operations in its 1995 financial statements. On December 31, 1995 the Company
acquired American Southern.
As used herein, unless the context otherwise requires, the term "Company"
means the Parent holding company and its consolidated subsidiaries, Atlantic
American Life, American Southern, Bankers Fidelity Life, and Georgia Casualty.
American Southern and Atlantic American Life are 100%-owned subsidiaries;
Georgia Casualty is a 99.9%-owned subsidiary. The Company presently owns
approximately 93% of Bankers Fidelity Life. However, on January 5, 1996, the
Company entered into an agreement pursuant to which the Company will acquire the
remaining publicly held interest in Bankers Fidelity Life that it does not
already own. The transaction will be completed through the merger of a newly
formed subsidiary of the Company into Bankers Fidelity Life, with Bankers
Fidelity Life being the surviving corporation in the merger. As a result of the
merger, the public shareholders of Bankers Fidelity Life will receive $6.25 in
cash per share, and their shares in Bankers Fidelity Life will be cancelled.
Following the consummation of the merger, which is scheduled to occur on April
1, 1996, Bankers Fidelity Life will be a 100%-owned subsidiary of the Company.
The balance sheet of American Southern has been consolidated at December 31,
1995; however, the results of operations have not been included nor discussed in
the following document except as it relates to the balance sheet.
The executive offices for the Company and each of its subsidiaries, with the
exception of American Southern, are located at 4370 Peachtree Road, N.E.,
Atlanta, Georgia 30319. American Southern is located at 3175 Northside Parkway,
Building 400, 8th Floor, Atlanta, Georgia 30327.
-3-
INSURANCE OPERATIONS
Glossary of Selected Insurance Terms
Combined Ratio................. The sum of the expense ratio and the
loss ratio. A combined ratio under 100%
indicates an underwriting profit and a
combined ratio over 100% indicates an
underwriting loss.
Deferred Acquisition Costs..... A portion of costs associated with the
acquisition of business, including
agents' and brokers' commissions and
marketing expenses that are deferred.
Earned Premium................. The portion of premium that is due or
received applicable to the current year.
Expense Ratio.................. The ratio of underwriting expenses to
premiums earned.
Lapse Ratio.................... For a specific group of insurance
policies, the ratio of (i) the dollar
amount of gross written premiums
in-force at the beginning of a period
(before reinsurance ceded, if any) less
gross written premiums in-force at the
end of the period over (ii) the dollar
amount of gross written premiums
in-force at the beginning of the period
(before reinsurance ceded, if any).
Loss Adjustment Expenses ("LAE") The estimated expenses of settling claims,
including legal and other fees and
expenses.
Loss Ratio..................... The ratio of net incurred losses and
loss adjustment expenses to net
premiums written. Incurred losses
include an estimated provision for
claims which have been incurred but not
reported to the insurer ("IBNR").
NAIC Ratios.................... The NAIC was established to 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 reports
are submitted to state insurance
departments to assist them in
monitoring insurance companies in their
states, and set forth a desirable range
in which companies should fall in each
such ratio.
Net Premiums Written........... Premiums retained by an insurer,
including assumed premiums and after
deducting premiums on business
reinsured with others.
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Reinsurance.................... A procedure whereby an original insurer
remits or "cedes" a portion of the
premium to a reinsurer as payment to
the reinsurer for assuming a portion of
the related risk.
Risk Based Capital............. Risk Based Capital ("RBC") is a new
method of measuring the amount of
capital appropriate for a company to
support its overall business operation
with respect to its size and risk
profile. There are four major risks
that are used to measure RBC. They
are: 1) Asset Risk - which measures the
quality of a company's investment. 2)
Insurance Risk - involves the pricing
and exposure of a company's insurance.
3) Interest Rate Risk - vulnerability
of a company to changes in interest
rates. 4) Business Risk -
vulnerability of the company to
external events.
Statutory Accounting Practices. Recording transactions and preparing
financial statements in accordance with
the rules and procedures prescribed or
permitted by regulatory authorities.
The principal differences between
statutory accounting practices ("SAP")
and generally accepted accounting
principles ("GAAP"), the method by
which the Company generally reports its
financial results, are that under
statutory accounting (i) certain assets
that are nonadmitted assets are
eliminated from the balance sheet; (ii)
acquisition costs are expensed as
incurred, while they are deferred and
amortized over the estimated life of
the policies under GAAP; (iii) no
provision is made for deferred income
taxes; (iv) the factors utilized in
establishing certain reserves is
different than under GAAP; (v) certain
notes are considered surplus rather
than debt; (vi) valuation allowances
are established against investments,
and (vii) goodwill is limited to 10% of
an insurer's surplus, subject to a 10
year amortization period.
Statutory Capital and Surplus.. The sum remaining after all liabilities
are subtracted from all assets applying
statutory accounting practices. An
insurance company must maintain minimum
levels of statutory capital and surplus
under state insurance regulations in
order to provide financial protection
to policyholders in the event the
company suffers unexpected or
catastrophic losses.
Underwriting................... The process whereby an insurer reviews
applications submitted for insurance
coverage and determines whether it will
accept all or part of the coverage
being requested and what the applicable
premiums should be.
Underwriting Expenses.......... The aggregate of the amortization of
deferred acquisition costs and general
and administrative expenses
attributable to insurance operations.
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Background
Through its insurance subsidiaries, the Company offers life, accident and
health insurance ("A&H"), which includes Medicare supplement and other medical
care policies, as well as property and casualty insurance. In 1995, accident and
health (including Medicare supplement) and life insurance accounted for 57.8% of
the Company's total net earned premiums, and property and casualty insurance
accounted for 42.2% of such premiums. Medicare supplement insurance accounted
for 27.4% of the Company's total earned premiums in 1995. The insurance
subsidiaries, excluding American Southern, are licensed to do business in a
total of 25 states, although 85.1% of the Company's earned premiums in 1995 were
derived from the states of Florida, Georgia, Indiana, Mississippi, Missouri,
Tennessee, Texas and West Virginia. American Southern is licensed to do business
in an additional 4 states.
Accident and health insurance lines, which are offered through the Life
Companies, include Medicare supplement, cancer, hospital indemnity, short-term
nursing home care, accident expense, and disability insurance. The Life
Companies also offer ordinary whole life and term-life insurance policies. The
Company's life, accident and health insurance is sold by approximately 2,600
independent agents primarily in the Southeast. Property and casualty insurance
lines, which are offered through Georgia Casualty and American Southern, include
workers' compensation, automobile insurance, and to a lesser extent, business
automobile, general liability and property coverage. The Georgia Casualty lines
are sold through a total of 66 independent agents primarily in the states of
Mississippi and Georgia. The American Southern lines are sold through a total of
164 independent agents primarily in the Southeast and Midwest.
Life Companies
Atlantic American Life and Bankers Fidelity Life are legal reserve stock
life insurance companies which engage in sales of accident and health insurance,
as well as ordinary, term, and group life insurance. The Life Companies offer
nonparticipating individual life insurance policies having a number of available
riders, including double indemnity, waiver or reduction of premium, reducing or
increasing term, intensive care, annuity, family term, payor death benefits,
waiver of skilled nursing home benefit and a terminal illness payout rider. The
accident and health insurance lines include Medicare supplement insurance, as
well as cancer, accident expense, disability income, hospital/surgical insurance
and short-term care (under one year). The Company is still receiving premiums
from the discontinued lines of medical surgical and convalescent care.
In addition, the Life Companies write a small amount of special risk
accident and health insurance policies. Substantially all of the accident and
health policies offer guaranteed renewals in that the policies are automatically
renewable at the option of the policyholder, although the Life Companies have
the right, on a state-by-state basis, to adjust premium rates on each class of
policies. See "Regulation." The insured may elect to pay premiums monthly,
quarterly, semi-annually or annually. Policies lapse if premiums become more
than 45 days overdue.
Prior to 1983, the Life Companies primarily wrote life insurance. In May,
1983, the Life Companies introduced a Medicare supplement policy in order to add
additional product lines. The Life Companies had determined that they were not
well positioned to achieve significant growth in sales of life insurance. For
the next five years the Life Companies focused the majority of their resources
on marketing Medicare supplement insurance. As legislative changes reduced the
attractiveness of writing Medicare supplement insurance, the Life Companies
placed a greater emphasis on offering other products. This resulted in a steady
decrease in Medicare supplement sales. Beginning in 1986, the Life Companies
began broadening their product base to include various supplemental health
products. In September, 1986, the Life Companies introduced a convalescent-care
policy that provided for payment of benefits for confinement in a licensed
nursing facility following a minimum 3 day hospital stay. The Life Companies
discontinued the sale of the convalescent-care
-6-
policy in 1992, when states required companies to eliminate the minimum 3 day
hospital stay. The Life Companies' experience indicated that the minimum 3 day
hospital stay was a key to prohibiting excessive use or over-utilization based
on medical necessity. Net premiums for that product peaked at $5.1 million in
1988, but having discontinued the sale of new policies for that product, earned
premiums have declined to $1.2 million in 1995. In 1987, the Life Companies
introduced an individual disability income product. The policy provides
disability income benefits in periods of one and two years and offers an
optional daily hospital indemnity rider. In January, 1988, the Life Companies
introduced an accident expense policy which provides for payment of benefits at
predetermined rates for accidental injury or death. Accident Expense premium in
1988 was $500,000 and had increased to $2.1 million in 1990 but has decreased to
$790,000 in 1995. Also in 1988, the Life Companies introduced a new cancer
benefit policy that provides for a lump-sum cash payment upon diagnosis of
cancer. Premium for that product was $3.4 million in 1988, but has decreased to
$2.2 million in 1995.
In 1990, the Life Companies began updating the life product portfolio. The
Life Companies implemented several new life products to penetrate niche markets
where these products would have greater appeal and where less competition
exists. In 1991, the companies introduced the "Debt Management Program",
designed to allow insureds to accumulate funds for the future repayment of
college tuition debt. The program's major components consist of a 10-Pay Whole
Life Policy with an Annuity Rider. This program updated the outdated "Student
Loan Program", which had begun in 1986. The Life Companies also introduced a new
life product for the senior market to enhance a portfolio of products that are
sold exclusively in that market. The senior market life product's portfolio was
revised in 1993 with the introduction of the "Senior Security Life" program. The
revised program is comprised of whole life with both standard and preferred
underwriting and joint whole life providing replacement of lost social security
income. In 1995, new policy riders providing for waiver of premium for skilled
nursing facility confinement and acceleration of benefits, up to 25% of original
face amount, for terminal illness were added. These enhancements have allowed
the Life Companies to remain on the cutting edge of senior market sales. The
life products have preferred and standard rates for males and females. Sales in
this market have increased in 1995, and the Life Companies expect to see
significant growth in 1996 and 1997. In 1995, the Life Companies designed two
new level term products for the individual and payroll market, which are
intended to replace the old level term product. One product is a standard level
term policy, renewable and convertible; the other provides the option to
purchase an additional face amount at the current rate for their original issue
age, during the second to ninth policy years, in addition to the standard
renewable and convertible level term policy benefits. The Life Companies have
seen increased sales in other life products that are being sold along with the
new senior life products. Renewed emphasis on life sales has produced an
increase in life sales for 1992 through 1995. The Life Companies also started
updating their current supplemental health products in 1993.
The Life Companies introduced four new or updated health products in 1994.
The first product introduced was a short-term care product that provides nursing
home coverage for 90, 180, 270 or 360 days. This product enhances the senior
citizen portfolio and was designed to target the individuals who cannot afford
long-term care insurance. The second product introduced was a new cancer product
to be sold on an individual basis and in the payroll market. The benefits were
designed to be flexible in order to be able to adjust benefits for the market
need. The third product introduced was an enhanced hospital indemnity product.
This product was also designed to be sold on an individual basis and in the
payroll market. This product was designed to be flexible so benefits could be
adjusted depending on the market need. The fourth product introduced in 1994 was
a dual disability product. This product provides disability benefits if the
insured becomes disabled before age 65 and benefits for nursing facility
coverage after age 65. The Life Companies believe this is the first product
introduced with these benefits. This product is marketed on an individual and
payroll basis. These products continue the Life Companies' plans for a more
diversified portfolio and assist in competing in niche markets. They also allow
greater expansion of sales in the list bill (billing for more than one insured)
and payroll
-7-
deduction markets. In order to increase product revenues, the Life Companies
will continue to place emphasis on the entire line of products and not rely on
any one individual product. In 1995, the Companies introduced a new list bill
product which will pay a limited doctor benefit for a limited amount of time
plus a flat $500 or $1,000 for deductibles and copayments. This product is for
the list bill and payroll deduction market and has been designed to enhance
the existing small group voluntary products area. Also in 1995, Bankers Fidelity
Life introduced a low premium Medicare product to be sold jointly with our
senior citizen life products.
The following table sets forth annual premium information regarding the
Life Companies' policies offered as of January 1, 1996:
Range of Premium
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Medicare Supplement.......................... $300 to $ 2,220
Short-Term Care (1).......................... $ 9 to $ 399
Other Accident and Health Policies........... $ 7 to $ 1,440
Ordinary Life (2)............................ $ 3 to $ 372
The insured may elect to pay premiums monthly, quarterly, semiannually or
annually. Policies lapse if premiums become more than 45 days overdue.
The following table summarizes, for the periods indicated, the allocation
of the Life Companies' net premiums earned for each of its principal product
lines and is followed by a summary of the various policies offered.
Year Ended December 31,
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1995 1994 1993 1992 1991
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(in thousands)
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Medicare Supplement........$ 11,882 $ 13,347 $ 15,052 $ 17,212 $ 19,547
Convalescent Care/Short-
Term Care ............... 1,191 1,385 1,628 2,064 2,570
Medical Surgical........... 211 289 389 565 861
Cancer .................... 2,221 2,457 2,726 3,033 3,419
Hospital Indemnity......... 337 414 508 592 798
Accident Expense........... 790 892 992 1,210 1,405
Disability................. 142 155 154 139 100
-------- -------- -------- -------- --------
Total Accident
and Health............. 16,774 18,939 21,449 24,815 28,700
-------- -------- -------- -------- --------
Ordinary Life.............. 7,037 6,716 5,130 4,362 3,519
Mass Market Life........... 1,260 1,395 1,541 1,769 1,890
-------- -------- -------- -------- --------
Total Life............... 8,297 8,111 6,671 6,131 5,409
-------- -------- -------- -------- --------
Total Accident and
Health and Life $ 25,071 $ 27,050 $ 28,120 $ 30,946 $ 34,109
======== ======== ======== ======== ========
Medicare Supplement. The Company currently markets 7 of the 10
standardized Medicare supplement policies created under the Omnibus Budget
Reconciliation Act of 1990, known as "OBRA 1990" (P.L. 101-508). The Company's
existing Medicare supplement policies written before November 6, 1991 ("pre-OBRA
1990 policies") are not subject to the standardized Medicare Supplement policy
provisions of OBRA 1990.
The Company's pre-OBRA 1990 policies consist of 4 complete supplements to
Part A, and 16 alternative supplements to Part B have been grandfathered. The 16
alternative Part B supplements are essentially differentiated on the basis of
their deductible amounts ($0, $100 or $200) and on the basis of the percentage
of benefits which apply to Medicare approved charges (20%, 70%, 80% or 100%).
The Company believes that the range of benefits under its pre-OBRA 1990 Part B
supplements exceeds those of the typical Part B supplements that were available
before November 6, 1991.
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(1) Per $10 daily benefit.
(2) Per thousand of face amount.
-8-
While a charge must be approved by Medicare before any benefit is paid,
the amount of the benefit is based upon the Medicare allowable charge.
Approximately 87% of the Company's Medicare Supplement business which was
in-force on December 31, 1995, provided more than the minimum 20% coinsurance
coverage. Until 1991, such policies were more difficult to rate and incorporated
more risk for the Company because physicians and other providers could increase
their charges while Medicare did not provide a parallel increase in Medicare
allowable charges. The Company would then pay the difference between the actual
physician charges and the amount reimbursed by Medicare, not to exceed the
policy limits. Uncontrolled increases in physician or provider charges would
adversely affect the Company's underwriting results. Benefits based on maximum
coverage also result in the Company's absorbing reductions in Medicare physician
payments, such as reductions under the Gramm-Rudman-Hollings Act, P.L. 99-177.
These increased benefit costs were offset by implementing timely rate increases.
OBRA 1990 provides for limits on doctors' and other providers' charges, with
maximum caps. These caps have limited increases in charges by doctors and other
providers which would be payable by the Company under Medicare supplement
policies.
Under OBRA 1990, physicians and other providers now have legal caps on
certain charges. Capped physician charges are now having a more stabilizing
effect on Medicare costs. This, in turn, has allowed the Company to price its
products more effectively. Although OBRA 1990 will not halt medical inflation in
general, it will limit the uncontrolled amount of increases in provider charges.
The ultimate effect from the imposed caps beginning January 1, 1991, has been to
lower loss ratios and improve persistency. This in turn has had a stabilizing
effect on Medicare supplement rates in general. Fewer and lower overall rate
increases have been necessary in order to manage and maintain the Life
Companies' Medicare supplement blocks of business.
Under OBRA 1990, a company can only offer Medicare supplement policies
which conform to one of the 10 standardized policies established by the Federal
Government. The Company markets 7 of these plans, including the required core
policy with basic benefits. The 3 plans not marketed by the Company provide
prescription drug benefits.
OBRA 1990 also mandated certain other provisions that significantly
changed the Company's operation:
(1) mandated federal certification of policies through each state;
(2) prohibition of the sale of duplicate coverages;
(3) a mandated loss ratio on individual policies with premium credits
and/or rebates if the standard is not met; and,
(4) a prohibition against denying or limiting coverage on the basis of an
applicant's health condition during the first 6 months in which an
applicant is eligible for Medicare.
Controlled provider caps have reduced the amount physicians can charge,
which has had a direct bearing on the Life Companies' claim experience. Because
of this, in 1994 and 1995 the Life Companies have had limited rate increases.
The Life Companies also introduced area factors that will reduce rates in
various geographic areas.
The technical corrections amendment (HR 5252 Social Security Act of 1994),
passed in April 1995 and made effective April 28, 1995, gave states with yearly
legislative sessions until April 1996 to adopt the amendment and until 1997 for
those states with alternating year legislative sessions to adopt the provisions
of the new act.
The act covered items (2) and (4) above, mandated by OBRA 1990. Item (2)
was clarified to mean duplication of coverage from any other Medicare supplement
policy. Item (4) above was amended to cover Medicare beneficiaries under the age
of 65.
-9-
Convalescent Care (Long-Term Care). The Life Companies discontinued the
sale of this product in 1992 as each state had passed legislation eliminating
the required minimum 3 day hospital stay. It was the Company's experience that
the minimum 3 day hospital stay was the key to prohibiting excessive use or over
utilization based on medical necessity.
Cancer, Cancer PLUS and New Cancer. The Life Companies offer several
policies providing for payment of benefits in connection with the treatment of
diagnosed cancer. The traditional cancer policies provide for fixed dollar
payments pursuant to a scheduled benefit chart and provide benefits on an
individual, joint or family basis. The Cancer PLUS policy, introduced in 1988,
includes a lump-sum payment upon diagnosis of internal cancer. In late 1994 a
higher limit cancer policy, Cancer Care Solution, was introduced to complement
the existing cancer portfolio and to improve benefits to this market. A modified
version of Cancer Care Solution is also used in the payroll market.
Hospital/Surgical. In 1992, the Life Companies introduced a new limited
benefit hospital/surgical indemnity policy. It is intended for the market where
consumers have difficulty in affording major medical coverage. Due to this
product's moderate cost, it is considered to have the potential to penetrate
effectively this market. During 1992 through 1994, the Federal Government was
offering subsidies to lower income persons for the purpose of buying health
insurance. This was also at a time when state and federal governments,
as well as the insurance industry itself, were concerned about the lack of
affordable health-care products. This policy was designed to qualify for the
government subsidy and be affordable. In 1994 the government subsidy was
eliminated, so this product was updated to be more flexible by giving options on
benefits such as daily hospital confinement and making other benefits optional
instead of mandatory to meet the needs of the insuring public. Each benefit is
subject to a maximum which was designed to protect the Company against excessive
claims. This product is also used in the payroll market.
Medical Indemnity. In 1995, the Life Companies designed and filed a new
Medical Indemnity product. The policy provides an indemnity for visits to a
physician's office or emergency room and a benefit for a routine physical
examination once a year for each insured person. The benefits are available in a
variety of pre-set levels. Optional benefits are available to provide a lump-sum
benefit and/or daily indemnity for hospital confinement. This voluntary health
product, intended for both the individual and payroll market, fills the gaps in
coverage, such as deductibles and co-payments, left by more comprehensive
medical policies.
Accident Expense. In January, 1988, the Company introduced an accident
expense policy which provides death or dismemberment benefits due to an
accidental injury. In addition, the policy offers compensation for lost wages,
hospital indemnity and emergency medical service within certain prescribed
limits. Policyholders can elect full or half coverage. Past revisions to the
benefits available under this policy and premium increases implemented in 1991
and 1992, have made this product profitable. Management believes that this
product line will continue to grow as traditional health policies become more
expensive and consumers seek supplemental policies as a replacement for
expensive health insurance. The Company will continue to place greater emphasis
on these policies, as well as expand the product line. This product is also used
in the payroll market.
-10-
Short-Term Care (Nursing Home Coverage With Benefits Less Than One Year).
In the first quarter of 1994, the Life Companies developed a Short-Term Care
product. This product serves that part of the market that cannot afford to buy
the higher priced mandated coverage of long-term care products. When long-term
care mandates have been fully implemented, it would appear that even if Congress
makes the premium tax deductible, it would not reduce long-term care rates so
that it would be affordable to more than the minority of the available market.
Statistics show that approximately 75% of nursing home stays are for less than
one year. But even if there is a longer confinement, Short-Term Care coverage
will give time to plan how to afford a long-term confinement with existing
family assets. More states are realizing that Medicaid, which pays approximately
50% of present nursing home care, is the fastest growing part of the state
budget. It is likely that there will be future spending cuts on Medicaid, which
will reduce long-term care coverage and increase the need for private coverage,
in which short-term care coverage will be an alternative affordable product.
This product would cover nursing home stays of which, at present, approximately
75% are less than one year.
Ordinary Life. The Life Companies offer various whole life insurance
policies. The cost of a whole life policy is averaged over the policyholder's
expected lifetime, costing more than comparable term insurance when the
policyholder is younger but less as the policyholder grows older. A whole life
policy combines protection with a savings plan that gradually increases in
amount over time. The policyholder may borrow against the cash value or use it
as collateral for a loan. Policy loans typically are at a rate of interest lower
than rates available from other lending sources. The policyholder may also
choose to surrender the policy and receive the cash value rather than continuing
the insurance protection. The Life Companies expanded their product line by
offering a preferred product and have continued to monitor experience and update
the application as needed. These revisions and updates have resulted in
increased sales.
Term Life Insurance. The Life Companies offer several term policies,
including an annual renewable term, a 5, 10, and 20-year level, a decreasing
term policy, and a 10, 15, and 30-year mortgage term at amortized interest
rates. In 1995, the Life Companies developed two 10-year term products. One
product was developed for individuals who are interested in a low premium
product. The second product allows the insured to purchase additional insurance
at their original issue age.
Disability Products. Since 1987 the Life Companies have offered a one and
two year disability product with benefits up to $1,000 of monthly income
beginning after 30 days of continuous disability. Policies are available on a
list bill and/or payroll deduction, as well as on an individual basis. During
1994, a new type of disability product was designed with larger benefits and for
utilization in the payroll market. The Dual Disability product transforms at 65
to the Short-Term Care product at reduced rates. Disability products cover both
sickness and accident. The Dual Disability has benefits that range from 6 months
to age 65 with additional benefit periods including 1 year, 2 years, and 5 years
with elimination periods of 30, 60, 90, 180, and 360 days. Dual Disability is
also offered through the payroll market.
Group Term Life. New term products will also be used with group underwriting
with the payroll deduction program, including yearly renewable term and 10-year
term.
Mass Market Life. Prior to 1984, the Company actively marketed, through
extensive newspaper and radio advertising, guaranteed issue life policies to
persons aged 40 through 80, subject to maximum policy limits paying from $20,100
at age 40 to $3,420 at age 80. The Company presently receives approximately $1.2
million of annualized premiums from existing policyholders who subscribed to the
mass marketed life policies.
-11-
Georgia Casualty
Georgia Casualty is a commercial insurance company engaged in the sale of
most commercial lines of insurance. Georgia Casualty focuses much of its efforts
on the Workers' Compensation insurance line. However, as part of a
diversification plan, significant premium volume is written in other commercial
areas. As part of Georgia Casualty's diversification efforts, the company has
altered the industries it targets to provide coverages. Specifically, Georgia
Casualty now has a significant book of business in manufacturing industries
where the cause of loss can more easily be identified and thus corrected.
Georgia Casualty also provides a significant volume of coverage for service
industry accounts and for artisan contractors. Georgia Casualty has continued
to discontinue issuing policies in high risk industries and in certain
geographic areas where the regulatory environment is less favorable to casualty
insurers. In particular, the Company ceased issuing new policies to customers in
the wood products industry in 1991 and is very selective in renewing any
accounts in that industry -- focusing only on those customers with stringent
safety and loss control standards. Although Georgia Casualty writes many
monoline accounts, the Company makes every effort to provide each insured with a
full range of coverages, including Workers' Compensation, Business Automobile
Coverage, General Liability and Property Coverage. In addition, Georgia Casualty
also provides a Commercial Umbrella policy for limits up to $5,000,000.
Georgia Casualty's rates are determined in accordance with the factors
promulgated by the National Council on Compensation Insurance and by the
Insurance Services Office. In most cases, these are loss cost rates which are
then modified by Georgia Casualty to reflect its own experience and cost factors
in order to produce a final rate.
The following table summarizes, for the periods indicated, the allocation of
Georgia Casualty's net premiums earned for each of its principal product lines
and is followed by a summary of the various policies offered.
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
--------------
Workers' $14,954 $11,958 $9,890 $ 8,640 $14,998
Compensation.......
Business 1,436 1,054 953 974 1,691
Automobile.........
General 1,025 1,065 1,180 1,842 2,742
Liability...........
Property............ 887 574 801 362 186
------- ------- ------- ------- -------
Total Casualty.. $18,302 $14,651 $12,824 $11,818 $19,617
======= ======= ======= ======= =======
Workers' Compensation. Georgia Casualty offers workers' compensation insurance
policies to provide disability and medical benefits to insured workers for
injuries sustained in the course of their employment. All other lines of
business primarily are written in connection with workers' compensation.
Business Automobile. Georgia Casualty offers a business automobile policy which
provides for bodily injury or property damage liability coverage, uninsured
motorists coverage and physical damage coverage.
General Liability. Georgia Casualty offers general liability policies covering
bodily injury and property damage liability for both premises and completed
operations exposures for general classes of business.
Property. Georgia Casualty offers property insurance policies for payment of
losses to real and personal property caused by fire and other perils.
Georgia Casualty has concentrated its efforts in those states and industries
which Management believes offer the greatest opportunity for profit.
Specifically, Georgia Casualty is concentrating its efforts for new business in
the states of Georgia and
-12-
Mississippi. The workers' compensation line has in prior years been subject
to large assessments for the Residual Market Reinsurance Pool in most states.
This has been particularly true in the states of Alabama and Florida, where
Georgia Casualty elected to discontinue all workers' compensation exposures. The
last voluntary market policies in these two states expired in 1992.
During 1992, Georgia Casualty entered into agreements with the states of
Florida, South Carolina, Tennessee and Texas to limit writings to a specified
amount or voluntarily discontinue writing. At the end of 1993, the company
elected to discontinue writing any business in the state of Alabama effective
March 1, 1994, due to the legal environment in Alabama.
American Southern
American Southern is a multiple-line property and casualty company primarily
engaged in the sales of automobile insurance. American Southern specializes in
the handling of block accounts such as states and municipalities, which are
sufficiently large enough to establish separate class experience.
American Southern is licensed in 18 states in the Southeast and Midwest to
write all forms of property and casualty insurance except workers' compensation.
It is authorized to write business on a surplus line basis in an additional
seven states. During the past 5 years, American Southern has historically
derived at least 85% of its premium revenue from auto liability and auto
physical damage coverage.
Because of competitive factors, American Southern has reduced its writings of
automobile physical damage business and increased its writings of auto liability
insurance.
-13-
Marketing
Life Companies. The Life Companies' policies are marketed by commissioned,
independent agents. In general, the Life Companies enter into contractual
arrangements with general agents who, in turn, contract with independent agents.
The standard agreements set forth the commission arrangements and are terminable
by either party upon thirty days notice. General agents receive an override
commission on sales made by agents associated with them.
The Life Companies believe utilizing direct writing experienced agents, as
well as independent general agents who recruit and train their own agents, is
more cost effective. All independent agents are compensated on a "commission
basis", which the Life Companies administer. Another benefit of using
independent agents is the Life Companies ability to expand its sales force at
any time without significant additional expense.
The number of independent agents has varied from approximately 2,700 in 1983
to approximately 12,000 in 1987 and approximately 2,600 presently. A more
selective agent selection process was begun in 1988. During 1993, emphasis was
placed on recruiting more independent agents who would write life insurance and
other lines of business directly with the Life Companies. The agents concentrate
their sales activities in either the accident and health or life insurance
product lines. A majority of the agents concentrated on marketing supplemental
health insurance policies prior to 1993. Beginning in 1993, an emphasis was
placed on the marketing of the new expanded senior citizen life product
portfolio and as a result, the senior citizen life product sales were a large
part of the sales increase for the Life Companies. During 1995, a total of 1,046
agents wrote policies on behalf of the Life Companies, and 23% of those agents
accounted for 80% of the Life Companies' annualized first year premium.
Products of the Life Companies compete directly with products offered by
other insurance companies, as agents may represent several insurance companies.
The Life Companies endeavor to motivate their agents to market their products by
offering the following agency services: a unique lead system, competitive
products and commission structures, efficient claims service, prompt payment of
commissions, simplified policy issue procedures, and annual sales incentive
programs, as well as in some cases protected counties and/or zip codes. From
1990 through 1995, several new marketing programs such as education and
retirement funding, packaged marketing and payroll deduction were implemented to
promote updated policies offered by the Life Companies. Management believes that
by better meeting the needs of the insureds, those products will produce greater
premium growth from life insurance sales. Additionally, the Life Companies have
a combined staff of 16 employees whose primary function is to facilitate the
activities of the agents and to act as liaisons between the agents and the Life
Companies.
A distribution sales system was implemented with the introduction of the Life
Companies' Senior Security Series whole life plans. This distribution system
for the senior security product line is centered around a lead generation plan
which rewards qualified agents with direct mail leads in accordance with monthly
production requirements. In addition, a protected territory is established for
each qualified agent which entitles him to all leads produced within that
territory. The territories are zip-code or county based and include enough
territory to produce a minimum senior populace of 12,000. To allow for the
expense of lead generation, commissions were lowered on the Life Companies'
senior citizen life plans. In addition, the Life Companies' recruit at a general
agent level rather than a managing general agent level in an effort to reduce
commission expenses further. The Life Companies' domicile state of Georgia was
used as a test market for this new distribution and lead generation system. The
results have been above expectations. Distribution has now been expanded to ten
additional states.
This system solves an agent's most important dilemma, prospecting, and allows
the Company the opportunity to build a long-term relationship with individual
producers who view the Life Companies as their primary company. In addition, the
Life Companies' product line is
-14-
less sensitive to competitor pricing and commissions because of the
perceived value of the protected area and the lead generation plan. The Company
believes life sales will be increased through this distribution channel because
of the need for the agent to place all of his business with the Company in order
to obtain the maximum number of leads. Through this distribution channel,
production per agent contracted has increased substantially when compared to the
Life Companies' general brokerage division.
Georgia Casualty. Georgia Casualty's marketing efforts are directed by two
marketing representatives for the states of Georgia and Mississippi. A marketing
representative handles the marketing in the state of Mississippi. The two
marketing representatives assist agents in the sale and distribution of Georgia
Casualty's insurance products. Marketing efforts are complemented by the entire
underwriting staff which is available to assist the agents in the presentation
of all insurance products and services.
Georgia Casualty operates through a field force totaling 66 independent
agencies. Each agency is a party to a standard agency contract that sets forth
the commission structure and can be terminated by either party upon thirty days
notice. Georgia Casualty also offers a profit-sharing arrangement to its highest
performing agents that allows the agents to earn an additional commission if
specific performance and premium growth goals are achieved. Currently, 49
agencies participate in the bonus arrangement.
American Southern. American Southern specializes in the handling of block
accounts such as states and municipalities which are sufficiently large enough
to establish separate class experience. All of American Southern's business is
marketed through independent agents. The premium on some of the larger accounts
is adjusted based on each account's loss ratio. American Southern's auto
physical damage business consists primarily of long-haul physical damage
insurance produced by agents specializing in insurance for truckers. These
accounts are subject to retrospective commission agreements which provide that a
portion of the commission paid to the agent is determined by the profitability
of the business produced.
Underwriting
Life Companies. The Life Companies issue life insurance policies with face
amounts of no less than $1,000. Life policies other than the Senior Citizen
Market Life products are issued without medical examinations, subject to maximum
policy limits ranging from $100,000 for persons under age 31 years of age to
$25,000 for persons under age 51. Medical examinations are required in
connection with the issuance of life insurance policies in excess of these
limits and for any amount on policies issued to customers over age 50.
Approximately 95% of the net premiums earned for life insurance sold during 1995
were derived from life insurance written below the Life Companies' medical
limits. For the senior market, the Life Companies issue special life products
on an accept-or-reject basis with a face amount from $15,000 at age 45 to a face
amount of $2,000 at age 85. The Life Companies retain a maximum amount of
$50,000 with respect to an individual life. See "Reinsurance."
The Life Companies establish collective underwriting practices. Applications
for insurance are reviewed to determine any additional information required to
make an underwriting decision, depending on the amount of insurance applied for
and the applicant's age and medical history. Such additional information may
include the Medical Information Bureau Report, medical examinations, statements
from doctors who have treated the applicant in the past and, where indicated,
special medical tests. If deemed necessary, the Life Companies will use
investigative services to supplement and substantiate information. For certain
limited coverages, the Life Companies have adopted simplified policy issue
procedures by which the applicant submits a short application for coverage
typically containing only a few health related questions instead of a
presentation of the applicant's complete medical history. At present,
approximately 20% to 30% of the senior citizen life applicants are canvassed by
telephone through age 79 on the standard product and up to age 75 on the
preferred. For ages 80 and above, 100% of the standard applicants are canvassed.
All
-15-
telephone canvassing is handled by the underwriting department. Applications not
meeting the underwriting criteria are then declined or additional information
requested.
Georgia Casualty. During recent years, Georgia Casualty made the decision to
concentrate its underwriting efforts in only those states with reasonable
probability of profit. That decision appears to be showing very positive
results. Also, the company has developed a team approach to underwriting with
respect to both new submissions and renewal policies. The new submission team
generally includes: (1) agents; (2) underwriting staff; (3) Loss Control staff;
and (4) the Claims Department, on occasion. By getting active input from each of
these teams regarding submissions, the Company has improved its selectivity.
Georgia Casualty also carries the team approach to Renewal Reviews. All accounts
are reviewed by a group including Underwriting, Loss Control, Accounting, and
Claims personnel. Each individual with first-hand information regarding an
account is invited to share their information with the group. The results of
these changes can be seen in the change in underwriting profit.
During the course of the policy year, extensive use is made of Loss Control
Representatives to assist Underwriters with information in identifying and
correcting potential loss exposures. The results of each product line are
reviewed on a stand-alone basis. When the results are below expectations,
management attempts to take corrective action on that line. The action may
include raising rates, reviewing underwriting standards, altering or declining
to renew accounts at expiration, and/or terminating agencies with an
unprofitable book of business.
Until September 30, 1991, Georgia Casualty was a member of the National
Workers' Compensation Reinsurance Pool, which is a national reinsurance fund for
policies allocated to insurers under various states' workers' compensation
assigned risk laws for companies that cannot otherwise obtain coverage. Losses
sustained by the pool are allocated to the members participating therein. In
September 1991, Georgia Casualty was asked to collateralize that liability to
the pool. Georgia Casualty chose not to collateralize that liability and
withdrew from the pool.
On December 30, 1994, Georgia Casualty reached an agreement with the
National Council on Compensation Insurance, Inc.,(NCCI) to settle the workers'
compensation liabilities with the workers' compensation pool. The results of
this settlement were a release of $13.7 million in workers' compensation pool
reserves from the balance sheet and a one-time reduction of $4.8 million in the
loss provision in the statement of operations. The credit received in 1994
represents the income effect for accident years 1991 and prior. There was no
impact on earnings in 1995 from this settlement with NCCI in 1994.
Georgia Casualty has been a Direct Assignment carrier in Georgia receiving
the assignment of direct workers' compensation policies from the state of
Georgia rather than participating in the assigned risk pool since September
1991. Georgia Casualty has 957 direct assignment workers' compensation policies
in force with a total net earned premium of $4.0 million in 1995. The loss
experience on the Direct Assignment business is significantly better than the
loss experience on the policies that the Company was assigned through the
National Workers' Compensation Reinsurance Pool.
-16-
Operating Results
The following table sets forth on a statutory basis the incurred losses and
loss ratios for the Company's Accident & Health insurance lines and the incurred
loss and expense ratios and combined ratios for the Company's casualty business
(excluding American Southern) during the past five years.
Year Ended December 31,
---------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollars in thousands)
----------------------
Accident and Health Insurance
MEDICARE SUPPLEMENT:
Incurred losses............... $ 6,688 $ 7,582 $ 8,284 $10,403 $11,297
Loss ratio.................... 57.6% 57.8% 56.6% 61.8% 59.8%
CONVALESCENT CARE:
Incurred losses............... $ 1,393 $ 1,486 $ 1,861 $ 2,404 $ 1,965
Loss ratio.................... 121.0% 110.3% 121.3% 124.8% 2.4%
MEDICAL SURGICAL:
Incurred losses............... $ 148 $ 170 $ 279 $ 408 $ 565
Loss ratio.................... 78.8% 61.4% 84.2% 81.0% 75.2%
CANCER:
Incurred losses............... $ 714 $ 885 $ 1,035 $ 1,218 $ 1,431
Loss ratio.................... 32.9% 37.0% 39.1% 41.4% 42.8%
HOSPITAL INDEMNITY:
Incurred losses............... $ 171 $ 206 $ 215 $ 266 $ 608
Loss ratio.................... 52.9% 51.4% 65.8% 48.5% 79.6%
ACCIDENT EXPENSE:
Incurred losses............... $ 173 $ 526 $ 622 $ 1,204 $ 712
Loss ratio.................... 21.9% 58.9% 62.7% 99.7% 51.5%
DISABILITY INCOME:
Incurred losses............... $ 72 $ 84 $ 90 $ 39 $ 15
Loss ratio.................... 50.7% 53.2% 58.5% 26.2% 15.7%
TOTAL ACCIDENT AND HEALTH:
Incurred losses............... $ 9,359 $10,939 $12,386 $15,942 $16,593
Loss ratio.................... 57.2% 58.9% 59.6% 66.1% 60.1%
Property and Casualty
WORKERS' COMPENSATION:
Incurred losses............... $12,152 $ 4,884 $ 8,709 $13,606 $18,205
Loss ratio.................... 81.3% 41.7% 88.6% 145.9% 137.2%
BUSINESS AUTOMOBILE:
Incurred losses............... $ 1,373 $ 737 $ 250 $ 576 $ 385
Loss ratio.................... 95.6% 70.0% 26.2% 59.1% 37.0%
GENERAL LIABILITY:
Incurred losses............... $(1,177)(1)$ 1,431 $ 1,015 $ 1,054 $ 2,110
Loss ratio.................... - 134.5% 86.0% 57.2% 90.2%
PROPERTY:
Incurred losses............... $ 573 $ 275 $ 227 $ 359 $ 83
Loss ratio.................... 64.6% 47.2% 33.4% 134.8% 198.9%
TOTAL PROPERTY AND CASUALTY:
Incurred losses............... $12,921 $ 7,327 $10,201 $14,595 $20,783
Loss ratio.................... 70.6% 50.9% 79.5% 123.5% 121.6%
Expense ratio................. 30.6% 29.8% 33.1% 32.3% 29.7%
Combined ratio................ 102.4% 114.0% 112.6% 155.8% 151.3%
-----------------------
(1) Includes adjustment to reallocate reserves to workers' compensation.
See "Reserves" for analysis of loss development and reserves.
-17-
Premiums to Surplus Ratio
The following table shows, for the periods indicated, the statutory ratios of
net premiums earned to statutory capital and surplus for Georgia Casualty.
Guidelines established by the NAIC provide that this ratio for property and
casualty companies should not be greater than 300%. See "NAIC Ratios."
Year ended December 31,
---------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollars in thousands)
----------------------
Georgia Casualty
Net premiums earned............ $18,302 $14,651 $12,824 $11,818 $19,617
Statutory capital and
surplus...................... $11,687 $ 9,663 $ 5,740 $ 5,293 $ 5,545
Premiums to surplus ratio...... 157% 152% 223% 223% 354%
NAIC Ratios
The NAIC was established to 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
reports are submitted to state insurance departments to assist them in
monitoring insurance companies in their states 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 of the 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.
Life Companies. For the year ended December 31, 1995, Atlantic American Life
was within the NAIC "usual" range in all 13 financial ratios. For the year ended
December 31, 1995, Bankers Fidelity Life was outside the NAIC "usual" range for
one ratio -- change in premium.
Georgia Casualty. For the year ended December 31, 1995, Georgia Casualty was
outside the NAIC "usual" range for one ratio -- the estimated current reserve
deficiency to surplus.
American Southern. For the year ended December 31, 1995, American
Southern was within the NAIC "usual" range in all 13 financial ratios.
Risk-Based Capital
Risk-Based Capital ("RBC") is a method of measuring the amount of capital
appropriate for a company to support its overall business operation in light
of its size and risk profile. RBC is used by rating agencies and regulators as
an early warning tool to identify possibly weakly capitalized companies for the
purpose of initiating further regulatory action.
The RBC calculation determines the amount of Adjusted Capital that is
required by a company to avoid regulatory action. An amount titled "Authorized
Control Level Risk-Based Capital" ("ACL") is calculated. If a company's Adjusted
Capital is 200% or lower than the ACL, they will be subject to regulatory
action. At December 31, 1995, all of the Company's insurance subsidiaries
exceeded the regulatory levels for required RBC.
-18-
Policyholder Services and Claims
The Company believes that prompt, efficient policyholder services are
essential to its continued success in marketing its insurance products. See
"Competition." Additionally, the Company believes that persons, to whom the
Company markets its insurance products, are particularly sensitive to the time
required to process claims and the accessibility of insurers to answer
inquiries. Accordingly, the Company's policyholder and claims services include
expeditious disposition of service requests with toll-free telephone lines to
its home office for all customers.
During 1994 and 1995, several of the Company's plans for faster, better
service were implemented. The Company purchased an AS400 client server system as
the key element to have all departments on-line with the client database. The
Company commenced implementation and training for the new system in April 1994
and expects it to become fully operational by the first quarter of 1996. This
new system will allow data to be readily available to all departments and will
improve the turnaround time in all areas of service.
In 1995, a Customer Awareness Program was implemented company-wide and at all
levels of personnel. It was mandatory that all levels of personnel attend these
meetings and receive the classes on customer service. The program has become the
basis for the Company's philosophy for servicing its customers. Expanded hours
in all service areas began in the first quarter of 1995 to serve the customers
and agents in other time zones.
Life Companies. At the same time the new system is being implemented, several
other changes are taking place within the Life Companies. A new department was
established in the second quarter of 1994 to ensure that agents receive prompt
service. This allows the marketing team to concentrate on building production
and achieving the Life Companies' production goals. The claims department for
the Life Companies consists of approximately 17 people located at the Company's
home office in Atlanta. Claim forms are provided to all insureds with their
accident and health policies. With respect to life policies, when the proper
documentation is received, the claim is entered into the Life Companies' claims
system. The computerized claims system has been enhanced to enable the Life
Companies to pay all properly documented claims within three to nine business
days of receipt. A properly documented Medicare supplement claim includes an
Explanation of Medicare Benefits form provided to the insured by the Federal
Government. During 1995, the Life Companies paid approximately 99,000 claims
aggregating $13.1 million, of which approximately 94,000 claims aggregating $7.1
million were for Medicare supplement insurance. The total amount of claims paid
represented approximately 52.9% of total accident and health and life written
premium revenue and Medicare supplement claims paid represented 28.6% of total
accident and health and life earned premium revenue. The Life Companies
continually monitor their claims backlog and endeavor to implement appropriate
corrective action to maintain an average of a five-day payment period.
Georgia Casualty. In 1995, Georgia Casualty completed the implementation
of a new property-casualty software package to improve efficiency and
productivity. This new system should enable the company to reduce under-
writing expenses in 1996, although no impact of this upgrade was recog-
nized for 1995. Efficiency and productivity should improve with the new
computer system which should lower the combined ratio in 1996.
Additionally, the company has positioned itself to provide strong customer
service to its policyholders. The claims department of Georgia Casualty consists
of 16 people located at the home office in Atlanta. Georgia Casualty controls
its claims costs by utilizing an in-house staff of adjusters to investigate,
verify, negotiate and settle claims. Upon notification of an occurrence
purportedly giving rise to a claim, the claims department makes a preliminary
investigationto determine whether an insurable event has occurred and, if so,
records the claim. This process usually occurs within 10 days of notification
of the claim. Where
-19-
appropriate, the company utilizes independent adjusters and appraisers to
service those claims which require on-site inspections. Georgia Casualty
believes that its prompt claims service provides a favorable basis for
competition.
In 1994, Georgia Casualty implemented a new loss prevention and
rehabilitation service called Early Injury Management. This program should prove
to be a sound strategy in reducing insurance claim costs for the employers and
insurance company and providing better medical treatment for the injured
employee. The Claims Department was increased by two case managers with the
responsibility of the administration of the program.
American Southern. American Southern controls its claims costs by utilizing
its in-house staff of claim supervisors to investigate, verify, negotiate and
settle claims. Upon notification of an occurrence reportedly giving rise to a
claim, the claims department makes a preliminary investigation, initially
determines whether an insurable event has occurred and, if so, records the
claim. American Southern frequently chooses to utilize independent adjusters and
appraisers to service those claims which require on-site inspections.
Reserves
The following table sets forth information concerning the Company's losses
and claims and LAE reserves for the periods indicated.
1995 1994
---- ----
Balance at January 1................... $40,730 $54,762
Less: Reinsurance recoverables......... (12,334) (11,063)
-------- -------
Net balance at January 1........... 28,396 43,699
-------- -------
Incurred related to:...................
Current year....................... 17,017 22,900
Prior years........................ 5,364 (3,289)
-------- -------
Total incurred................. 22,381 19,611
-------- -------
Paid related to:
Current year....................... 13,743 14,548
Prior years........................ 8,398 20,366
-------- -------
Total paid..................... 22,141 34,914
-------- -------
Reserves acquired due to
acquisition, net.................... 28,411 -
-------- -------
Net balance at December 31......... 57,047 28,396
Plus: Reinsurance recoverables........ 11,893 12,334
Reinsurance recoverables
acquired due to acquisition... 10,574 -
-------- -------
Balance at December 31................. $79,514 $40,730
======== =======
Life Companies. The Life Companies establish reserves for future policy
benefits to meet future obligations under outstanding policies. These reserves
are calculated to meet 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 some
modification to reflect actual experience. See Note 3 of Notes to Consolidated
Financial Statements for the year ended December 31, 1995.
Georgia Casualty. Georgia Casualty maintains reserves representing estimates
of amounts needed for the payment of losses and LAE. The company also maintains
IBNR reserves and bulk reserves for future developments. Loss reserves are
estimates at a given point in time of amounts that the insurer expects to pay
on incurred claims, based on known facts and circumstances. Reserves for LAE are
intended to cover the ultimate costs of settling claims, including investigation
and defense of lawsuits resulting from such claims. The amount of loss reserves
for reported claims is 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. 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 of cost trends
and reviews of historical reserve results, although it is difficult to measure
the effect of any one of these considerations on the ultimate accuracy of
reserve estimates. Loss and LAE reserves are annually reviewed by qualified
independent actuaries.
Georgia Casualty provides for insurance benefits on casualty claims based
upon: (a) Management's 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 claims based on past
experience, and (c) estimates of loss adjustment expenses. The estimated
liability is continually reviewed and updated, and changes to the estimated
liability are recorded in the statement of operations in the year in which such
changes are known. Some of the major assumptions about anticipated loss
emergence patterns have changed in the last few years.
-20-
The following table sets forth the development of balance sheet reserves for
unpaid losses and LAE for Georgia Casualty and American Southern's insurance
lines ("long-tail" lines) for 1985 through 1995. This table does not present
development data on an accident or policy year basis. The top line of the table
represents the estimated amount of losses and LAE for claims arising in all
prior years that were unpaid at the balance sheet date, including an estimate of
losses that have been incurred but not yet reported. 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 lower portion of the
table shows the reestimated amount of the previously recorded reserve 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
deficiency" for each year represents the aggregate change in such year's
estimates through the end of 1995. In evaluating this information, it should be
noted that the amount of the deficiency for any year represents the cumulative
amount of the changes from initial reserve estimates for such year. Operations
for any one year are only affected, favorably or unfavorably, by the amount of
the change in the estimate for such year. Conditions and trends that have
affected development of the statutory reserves in the past may not necessarily
occur in the future. Accordingly, it is not appropriate to predict future
redundancies or deficiencies based on the data in this table.
-21-
Year ended December 31,
---------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserve for losses
and LAE $53,320 $50,154 $48,031 $48,485 $50,808 $52,668 $47,819(1) $39,036 $35,770 $28,848 $19,275
Cumulative paid as of:
One year later..... 16,548 18,106 18,827 22,060 22,837 21,321 21,592 20,812 16,948 17,736
Two years later.... 25,914 27,731 32,560 35,278 33,507 32,352 32,975 27,743 26,190
Three years later.. 36,786 38,046 40,768 40,891 39,832 39,168 34,657 31,789
Four years later... 41,872 44,267 43,745 43,713 43,249 38,163 35,689
Five years later... 47,204 46,183 45,767 46,004 40,938 37,889
Six years later.... 48,056 47,880 47,727 42,412 40,129
Seven years later.. 49,674 49,671 43,750 41,307
Eight years later.. 50,987 45,284 42,218
Nine years later... 46,202 43,250
Ten years laters... 43,873
Ultimate losses and
LAE reestimated as of:
End of Year........ $53,320 $27,766 $26,599 $29,154 $32,428 $33,338 $32,756(1) $27,313 $27,253 $21,437 $13,683
One year later..... 46,249 47,021 46,756 53,700 53,316 53,212 47,314 40,990 33,083 32,311
Two years later.... 44,043 45,999 52,670 55,919 54,438 53,998 49,569 39,413 35,950
Three years later.. 48,446 53,040 55,865 56,064 55,313 55,752 46,596 39,360
Four years later... 52,326 56,514 55,707 56,255 55,511 51,852 45,619
Five years later... 56,648 56,579 56,403 56,408 51,184 50,077
Six years later.... 56,984 57,446 56,868 51,694 49,183
Seven years later.. 58,142 57,901 52,089 49,528
Eight years later.. 58,626 52,972 49,725
Nine years later... 53,339 50,267
Ten years later.... 50,529
Cumulative
deficiency......... $ 3,905 $ 3,988 $ 39 $(1,518)$(3,980) $(9,165) $(19,106)$(22,856)$(24,491)$(31,254)
<FN>
- -----------------------------------
(1) Restated due to adjustment of $4.7 million for elimination of structured annuities changed to reinsurance in 1990.
</FN>
-22-
Reinsurance
The insurance subsidiaries purchase reinsurance from unaffiliated insurers and
reinsurers in order to reduce 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 written by
it to another insurer. 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 must pay a loss if the reinsurer fails to meet its
obligations under the reinsurance agreement. American Southern is currently the
only subsidiary of the Company that assumes reinsurance from other insurance
companies.
Life Companies. The Life Companies have entered into reinsurance contracts
ceding the excess of their retention to several primary reinsurers. Maximum
retention by the Life Companies on any one individual in the case of life
insurance policies is $50,000. At December 31, 1995, the Life Companies had
reinsured $10.0 million of the $230.0 million of life insurance then in force,
generally under yearly renewable term agreements. Two companies accounted for
the $10.0 million of reinsurance: Munich American Reassurance Company ($7.0
million) and Optimum Reinsurance ($3.0 million). Certain reinsurance agreements
no longer active for new business nonetheless remain in-force to cover any
claims on a run-off basis.
Georgia Casualty. Effective January 1, 1996, Georgia Casualty has
strengthened and improved its reinsurance program. There are currently in place
treaties which apply to all casualty lines of business. This includes Workers'
Compensation, General Liability, Commercial Automobile Liability, and Umbrella
Liability. Georgia Casualty's basic treaties cover all casualty claims in excess
of $200,000 up to $5.0 million. These basic treaties are supplemented with
additional per person treaties to $5.0 million per person, and additional
catastrophe treaties for Workers' Compensation to a maximum of $50.0 million for
any one occurrence.
The property lines of coverage are protected with an excess of loss treaty,
which affords recovery for property losses in excess of $100,000 up to a maximum
of $2.0 million. Facultative arrangements are in place for property accounts
with limits in excess of $2.0 million per risk.
Of the $11.9 million of reinsurance recoverable on unpaid losses by Georgia
Casualty at December 31, 1995, First Colony Life Insurance Company accounted for
$4.2 million, Lloyds of London and other London based companies accounted for
$1.2 million, and Pennsylvania Manufacturer's Associated Insurance Company
accounted for $2.8 million. A number of reinsurance companies, both domestic and
foreign, account for the balance.
American Southern. The limits of risks retained by American Southern vary
by type of policy and insured, and amounts in excess of such limits are
reinsured. The largest net amount insured in any one risk is $100,000.
Reinsurance is maintained as follows: for fire, inland marine, and commercial
automobile physical damage, recovery of losses over $30,000 up to $100,000. Net
retentions for third party losses are generally over $30,000 up to $100,000.
Catastrophe coverage (all lines except third party liability) is for 95% of
$6,600,000 over $400,000.
American Southern acts as a reinsurer with respect to all of the risks
associated with certain automobile policies issued by a state administrative
agency naming the state and various local governmental entities as insureds.
Premiums written from such policies constituted between 38% and 35% of American
Southern's gross premiums written in 1995 through 1992. The management of
American Southern believes that its relationship with such
-23-
agency is good; however, the loss of such agency as a customer could have a
material adverse effect on the business or financial condition of the company.
Competition
Life Companies. The life insurance business is highly competitive and
includes a large number of insurance companies, many of which have substantially
greater financial resources and larger experienced staffs than the Companies.
The Life Companies believe that the primary competitors are the Blue Cross/Blue
Shield companies, AARP, the Prudential Insurance Company of America, Pioneer
Life Insurance Company of Illinois, AFLAC, American Travellers, Kanawha Life,
American Heritage, Bankers Life and Casualty Company and United American
Insurance Corporation, and Standard Life of Oklahoma. The Life Companies compete
with other insurers on the basis of premium rates, policy benefits and service
to policyholders. The Life Companies also compete with other insurers to attract
and retain the allegiance of its independent agents through commission
arrangements, accessibility and marketing assistance, lead programs and market
expertise. The Life Companies believe they compete effectively on the basis of
policy benefits and services and market expertise. The final implementation of
the AS 400 computer networking system should greatly improve the Company's
ability to service its customers and thereby improve its ability to compete.
Georgia Casualty. The property and casualty insurance business is
highly competitive in all lines. Georgia Casualty's competition can be placed
in four categories: 1) companies with better A.M. Best ratings; 2) alternative
Workers' Compensation markets; 3) self-insured funds; and 4) insurance
companies that actively solicit Workers' Compensation accounts. Georgia
Casualty's efforts are being directed in three general categories where
Georgia Casualty has a reasonable chance of controlling exposures and accidents:
1) manufacturing; 2) artisan contractors; and 3) service industries. Georgia
Casualty's key to being competitive in these areas is writing Workers'
Compensation coverages as part of the total insurance package, a loyal
network of agents and development of new agents in key territories, and pro-
viding loss control and claims management services to insureds. Georgia
Casualty believes that it will continue to be competitive in the marketplace
based on its current strategies and services.
American Southern. All of 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 have available more diversified lines of
insurance and have substantially greater financial resources. The management of
American Southern believes, however, that the policies which it sells are
competitive with those providing similar benefits offered by other insurers
doing business in the states where American Southern operates. American Southern
is a niche property and casualty insurance company which specializes in state
and municipal automobile insurance.
Rating
Each year A.M. Best Company, Inc., publishes Best's Insurance Reports
("Best's") which includes assessments and ratings of all insurance companies.
Best's ratings, which may be revised quarterly, fall into fifteen categories
ranging from A++ (Superior) to F (in liquidation). Best's ratings are based on
an analysis of the financial condition and operations of an insurance company as
they relate to the industry in general. These ratings are not designed for
investors and do not constitute recommendations to buy, sell or hold any
security. Ratings are important in the insurance industry and improved ratings
should have a favorable impact on the ability of the companies to compete in the
marketplace.
-24-
Life Companies. Both of the Life Companies were given upgrades by A.M. Best
in both 1993 and 1994, after giving consideration to extraordinary improvements
in financial strength and other items. Bankers Fidelity Life and Atlantic
American Life obtained ratings of "B-" (Good) in 1994, which they continue to
maintain. Management believes the Life Companies will be able to obtain a higher
rating from A.M. Best when final review is completed in 1996. However, there can
be no assurance that this will happen.
Georgia Casualty. In early 1996, Georgia Casualty was assigned a Best's
Rating of B- (good). There were significant improvements in Georgia Casualty's
statutory earnings and a major improvement in its surplus position in 1995.
These conditions, combined with a decrease in the combined ratio of the company,
should put Georgia Casualty in a position to obtain an improvement in its rating
in 1996. Management believes Georgia Casualty will be able to obtain a higher
rating from A.M. Best when final review is completed in 1996. However, there can
be no assurance that this will happen.
American Southern. American Southern and its wholly-owned subsidiary,
American Safety Insurance Company, are each currently rated "A-" by A.M. Best.
These ratings were assigned in early 1996 and were based on statutory results
through 1995. American Southern and its wholly-owned subsidiary previously had
ratings of "A+ (Superior)" but were down-graded due to the Company's
acquisition of American Southern.
Regulation
In common with all domestic insurance companies, the Company's insurance
subsidiaries are subject to regulation and supervision in the jurisdictions in
which they do business under statutes which typically delegate regulatory,
supervisory and administrative powers to state insurance commissions. 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 which
must be met and maintained, deposits of securities for the benefit of
policyholders, and periodic examinations of insurers and trade practices, among
other things. The Company's accident and health coverages 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 Company's 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
commission of intercorporate transfers of assets (including payments of
dividends in excess of specified amounts by the insurance subsidiaries) within
the holding company system.
Most states require that rate schedules and other information be filed with
the state's 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 unfairly discriminatory. The Company has historically experienced
no significant regulatory resistance to its applications for rate increases.
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, 1995, $13.6 million of securities were on
deposit either directly with various state authorities
-25-
or with third parties pursuant to various custodial agreements, on behalf of
the Life Companies and Casualty Companies.
Virtually all of the states in which the Company's 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 occurrence and amount of such assessments have
increased in recent years. The likelihood and amount of any future assessments
cannot be estimated until after an insolvency has occurred. For the last five
years, the amount incurred by the Company has not been material.
-26-
Investments
Investment income represents a significant portion of the Company's total
income. Insurance company investments are subject to state insurance laws and
regulations which limit the concentration and types of investments. The
following table (which includes information on American Southern only for 1995)
provides information on the Company's investments as of the dates indicated.
December 31,
----------------------------------------------------
1995 1994 1993
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
----------------------
Fixed maturities:
Bonds:
U.S. Government,
agencies and
authorities.......... $ 71,549 39.6% $ 29,017 29.3% $ 17,859 16.9%
States, municipalities
and political
subdivisions......... 21,947 12.2 3,465 3.5 2,985 2.8
Public utilities...... 4,110 2.3 3,780 3.8 4,192 4.0
Convertibles and bonds
with warrants
attached............. 1,188 .7 1,088 1.1 1,343 1.3
All other corp. bonds. 12,829 7.1 12,680 12.8 15,219 14.4
Certificates of
Deposits............ 1,690 .9 1,445 1.6 1,445 1.4
-------- ---- -------- ---- -------- ----
Total fixed
maturities(1)... 113,313 62.8 51,475 52.1 43,043 40.8
Common and preferred
stocks (2)............. 42,116 23.3 29,571 29.9 34,391 32.4
Mortgage, policy and
student loans (5)..... 12,642 7.0 14,277 14.4 14,455 13.6
Investments in limited
partnerships (4)....... - - 1,047 1.1 - -
Real estate............. 46 NIL 46 NIL 46 NIL
Short-term investments
(3).................... 12,498 6.9 2,498 2.5 14,000 13.2
-------- ---- -------- ---- -------- ----
Total investments.. $180,615 100.0% $98,914 100.0% $105,935 100.0%
======== ===== ======== ===== ======== =====
----------------------
(1) Fixed maturities are carried on the balance sheet at market value. Total
cost of fixed maturities was $112.9 million as of December 31, 1995,
$52.9 million as of December 31, 1994 and $41.8 million at December 31,
1993.
(2) Equity securities are valued at market. Total cost of equity
securities was $26.9 million as of December 31, 1995, $22.4 million at
December 31, 1994 and $24.9 million at December 31, 1993.
(3) Short-term investments are valued at cost, which approximates market
value.
(4) Investments in limited partnerships are valued at cost.
(5) Mortgage loans and policy and student loans are valued at cost.
-27-
Results of the investment portfolio for periods shown were as follows:
Year Ended December 31,
-----------------------------
1995 1994 1993
---- ---- ----
(Dollars in thousands)
----------------------
Average investments(1)............. $106,645 $106,549 $110,745
Net investment income.............. 6,142 6,163 5,703
Average yield on investments....... 5.7% 5.8% 5.1%
Realized investment gains, net..... $ 1,731 $ 870 $ 744
(1) Calculated as the average of the balances at the beginning of the year
and at the end of each of the four segment quarters. The calculation for 1995
does not include American Southern's investment portfolio.
Management's strategy on investments is an increased investment in short and
medium maturity bonds and common and convertible preferred stocks.
Employees
The Company and its subsidiaries (including American Southern) at December
31, 1995 employed 176 people.
Services Provided to Subsidiaries
The Parent provides investment, data processing, personnel, administrative,
insurance and accounting services to all of its insurance subsidiaries, except
American Southern. In addition, all furniture, fixtures and most equipment is
owned by the Parent Company and leased to the insurance subsidiaries, except
American Southern. Investment services include continuous yield analysis of the
subsidiaries' investment portfolios. Data processing services include
utilization of hardware and software and support systems to process and
adjudicate claims and maintain historical data for all policies written by any
of the insurance subsidiaries. Personnel services consist of hiring, training
and administering benefit programs for approximately 140 employees. Insurance
services entail billing for group plan and general insurance. Administrative and
accounting services entail supplying adequate facilities, accounting, tax,
auditing and cost control records, systems and procedures appropriate to the
insurance subsidiaries' operations.
The Parent has management fee arrangements with all of its insurance
subsidiaries, except American Southern regarding investment services and the
salaries of certain management personnel. The total of such management fees and
service charges billed to the insurance subsidiaries amounted to $5.6 million in
1995, $5.4 million in 1994 and $4.9 million in 1993. While management believes
the fees and charges are fair and reasonable, there can be no assurance that
regulatory authorities will not object to the amount of the fees and charges.
Financial Information By Industry Segments
Financial information concerning the Company and its consolidated
subsidiaries by industry segment for the three years ended December 31, 1995, is
set forth on page 36 of the 1995 Annual Report to Shareholders and such
information by industry segment is incorporated herein by reference.
-28-
Executive Officers of the Registrant
The table below and the information following the table sets forth for each
executive officer of the Company as of December 31, 1995 (based upon information
supplied by each of them) his name, age, positions with the Company, principal
occupation and business experience for the past five years and prior service
with the Company.
Director or
Name Age Position with the Company Officer Since
---- --- ------------------------- -------------
J. Mack Robinson 72 Chairman of the Board 1974
Hilton H. Howell, Jr. 34 Director, President & CEO 1992
John W. Hancock 58 Senior Vice President and Treasurer 1989
Eugene Choate 59 President of Atlantic American 1987
Life and Bankers Fidelity Life
Ronald D. Phillips 51 President and CEO of Leath 1991
Officers are elected annually and serve at the discretion of the Board of
Directors.
Mr. Robinson served as President of the Company from September 1988 until May
1995 and has served as a director and Chairman of the Board since 1974. He has
been Chairman of the Board of Atlantic American Life since 1988, Chairman of the
Board of Bankers Fidelity Life since 1986, Chairman of the Board and President
of Georgia Casualty since 1988 and Chairman of the Board of Leath since April
1991. In addition, Mr. Robinson is Chairman of the Board of Bull Run
Corporation, a Director of Gray Communications Systems, Inc., the General
Partner of Gulf Capital Services, Ltd., and the Chairman and President of Delta
Life Insurance Company and Delta Fire & Casualty Insurance Company.
Mr. Howell has been a Director of the Company since October 1992 and
President and CEO since May 1995. He served as Executive Vice President
of the Company from October 1992 until May 1995. In addition, Mr. Howell
has been Executive Vice President and General Counsel of Delta Life
Insurance Company since November 1991 and Vice President and Secretary of Bull
Run Corporation since November 1994. Prior thereto, he was an attorney with
Liddell, Sapp, Zivley, Hill and LaBoon from October 1989 to October 1991. Mr.
Howell is the son-in-law of Mr. Robinson. He is also a Director of Bankers
Fidelity Life, Bull Run Corporation and Gray Communications, Inc.
Mr. Hancock has served as Senior Vice President and Treasurer of the Company
and each of the Life Companies since November 1993, prior thereto served as Vice
President and Treasurer of the Company and each of the Life Companies since
April 1989, and prior thereto served as Controller of the Life Companies since
March 1988. Prior to joining the Company in 1988, he was Vice President of
Finance with National Consultants, Inc.
Mr. Choate has been President of Atlantic American Life since September
1987 and President of Bankers Fidelity Life since May 1988. Prior thereto, he
was Atlantic Coast Regional Manager for Reserve Life Insurance Company from
March 1981 to September 1987.
Mr. Phillips has been President of Leath since 1988. Prior to joining
Leath, Mr. Phillips served as Executive Vice President of Rhodes, Inc.
-29-
ITEM 2. PROPERTIES
Insurance
Owned Properties. The Company owns two parcels of unimproved property,
consisting of approximately 7 acres located in Fulton and Washington Counties,
Georgia. At December 31, 1995, the aggregate book value of such properties was
approximately $46,000.
Leased Properties. The Company (with the exception of American Southern)
leases space for its principal offices in an office building located at 4370
Peachtree Road, N.E., Atlanta, Georgia, from Delta Life Insurance Company and
its affiliates, under leases which expire at various times from May 31, 2002 to
July 31, 2005. Under the terms of the leases, the Company occupies approximately
65,500 square feet of office space at an annual base rental plus a pro rata
share of all real estate taxes, general maintenance, and service expenses and
insurance costs with respect to the office building. Pursuant to such leases,
the Company's aggregate annual rental in 1995 (including its pro rata expenses)
amounted to approximately $14.65 per square foot or $960,000. Delta Life
Insurance Company, the owner of the building, is controlled by J. Mack Robinson,
Chairman of the Board of Directors and principal shareholder of the Company. The
terms of the leases are believed by management of the Company 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 offices at a building located at 3715
Northside Parkway, Building 400, 8th Floor, Atlanta, Georgia. The lease term
expires January 31, 2000. Under the terms of the lease, American Southern
occupies approximately 16,985 square feet.
ITEM 3. LEGAL PROCEEDINGS
Litigation
The Company and its subsidiaries are involved in various claims and lawsuits
incidental to and in the ordinary course of their businesses. In the opinion of
management, such claims will not have a material effect on the business or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders during
the quarter ended December 31, 1995.
-30-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is traded in the over-the-counter market and quoted
on the NASDAQ National Market (Symbol: AAME). As of March 8, 1996, there were
4,879 shareholders of record. The following table sets forth for the periods
indicated the high and low sale prices of the Company's Common Stock as reported
on the NASDAQ National Market.
Year Ending December 31, High Low
------------------------ ---- ---
1995
1st quarter............................ $2 3/4 $2
2nd quarter............................ 2 1/2 2
3rd quarter............................ 2 7/8 1 7/8
4th quarter............................ 3 2 1/8
1994
1st quarter............................ 2 5/8 1 3/4
2nd quarter............................ 2 7/16 1 7/8
3rd quarter............................ 2 1/4 1 7/8
4th quarter............................ 2 1/4 1 3/4
The Company has not paid dividends since the fourth quarter of 1988. Payment
of dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon the financial condition, capital requirements and
earnings of the Company, as well as other factors as the Board of Directors may
deem relevant. The Company's primary sources of cash for the payment of
dividends are dividends from its subsidiaries which are engaged in the insurance
business. Under the Insurance Code of the State of Georgia, dividend payments to
the Parent Company by its insurance subsidiaries are limited to the accumulated
statutory earnings of the insurance subsidiaries without the prior approval of
the Insurance Commissioner. The Company's insurance subsidiaries had the
following accumulated statutory earnings and/or (deficits) as of December 1995:
Georgia Casualty - $6.3 million, American Southern - $17.0 million, Atlantic
American Life - ($1.3 million), Bankers Fidelity Life - $6.1 million. The
Company does not anticipate paying cash dividends on the Common Stock for the
foreseeable future.
-31-
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of Atlantic American Corporation and subsidiaries
for the five years ended December 31, 1995, is set forth on page 9 of the 1995
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of Atlantic American Corporation and subsidiaries are set forth on
pages 10 to 14 of the 1995 Annual Report to Shareholders and such discussion and
analysis are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and related notes are
set forth on pages 15 to 37 of the 1995 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-32-
PART III
With the exception of information relating to the Executive Officers of the
Company, which is provided in Part I hereof, all information required by Part
III (Items 10, 11, 12, and 13) is incorporated by reference to the Company's
definitive proxy statement to be delivered in connection with the Company's
annual meeting of shareholders to be held May 7, 1996.
PART IV
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
FINANCIAL STATEMENTS
Page
Reference
---------
Consolidated Balance Sheets as of December 31, 1995 and
December 31, 1994...................................... 15*
Consolidated Statements of Operations for the Three Years
ended December 31, 1995................................ 16*
Consolidated Statements of Shareholders' Equity for the
Three Years ended December 31, 1995.................... 17*
Consolidated Statements of Cash Flows for the Three Years
ended December 31, 1995................................ 18*
Notes to Consolidated Financial Statements................ 19-37*
Report of Independent Public Accountants.................. 39*
* The page references so designated refer to page numbers in the 1995 Annual
Report to Shareholders of Atlantic American Corporation which pages are
incorporated herein by reference. With the exception of the information
specifically incorporated within this Form 10-K, the 1995 Annual Report to
Shareholders of Atlantic American Corporation is not deemed to be filed under
the Securities Exchange Act of 1934.
-33-
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants
II - Condensed financial information of registrant for the three years
ended December 31, 1995
III - Supplementary Insurance Information for the three years ended
December 31, 1995
IV - Reinsurance for the three years ended December 31, 1995
VI - Supplemental Information concerning property-casualty insurance
operations for the three years ended December 31, 1995
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.
EXHIBITS
3.1 - Articles of Incorporation of the registrant [incorporated by
reference to Exhibit 3.1 to the registrant's Form 10-K for the year
ended December 31, 1987].
3.1.1 - Amendment to Articles of Incorporation of registrant [incorporated
by reference to Exhibit 3.1.1 to the registrant's Form 10-K for the
year ended December 31, 1988].
3.1.2 - Amendment to Articles of Incorporation of registrant [incorporated
by reference to Exhibit 3.1.2 to the registrant's Form 10-K for the
year ended December 31, 1991].
3.1.3 - Amendment to Articles of Incorporation of registrant [incorporated
by reference to Exhibit 3.1.3 to the registrant's Form 10-Q for the
second quarter ended June 30, 1995].
3.2 - Bylaws of the registrant [incorporated by reference to Exhibit
3.2 to the registrant's Form 10-K for the year ended December 31,
1993].
4.1 - Indenture between registrant and Wachovia Bank and Trust Company,
N.A., Trustee, dated as of April 1, 1987 relating to the
registrant's 8% Convertible Subordinated Notes due May 15, 1997
[incorporated by reference to Exhibit 4.1 to the registrant's
Form 10-K for the year ended December 31, 1987].
4.2 - Relative Rights and Preferences of the Series A Convertible
Preferred Stock of the registrant [incorporated by reference to
Exhibit 4.2 to the registrant's Form 10-K for the year ended
December 31, 1987].
10.11 - Lease Contract between registrant and Delta Life Insurance Company
dated June 1, 1992 [incorporated by reference to Exhibit 10.11 to
the registrant's Form 10-K for the year ended December 31, 1992].
10.11.1 - First Amendment to Lease Contract between registrant and Delta Life
Insurance Company dated June 1, 1993 [incorporated by reference
to Exhibit 10.11.1 to the registrant's Form 10-Q for the quarter
ended June 30, 1993].
10.11.2 - Second Amendment to Lease Contract between registrant and Delta
Life Insurance Company dated August 1, 1994 [incorporated by
reference to Exhibit 10.11.2 to the registrant's Form 10-Q for the
quarter ended September 30, 1994].
-34-
10.12 - Lease Agreement between Georgia Casualty & Surety Company and
Delta Life Insurance Company dated September 1, 1991 [incorporated
by reference to Exhibit 10.12 to the registrant's Form 10-K for the
year ended December 31, 1992].
10.12.1 - First Amendment to Lease Agreement between Georgia Casualty &
Surety Company and Delta Life Insurance Company dated June 1,1992
[incorporated by reference to Exhibit 10.12.1 to the registrant's
Form 10-K for the year ended December 31, 1992].
10.16 - Management Agreement between registrant and Georgia Casualty &
Surety Company dated April 1, 1983 [incorporated by reference to
Exhibit 10.16 to the registrant's Form 10-K for the year ended
December 31, 1986].
10.17 - Management Services Agreement, dated April 9, 1991, between the
registrant and Leath Furniture, Inc. [incorporated by reference to
Exhibit 10.17 to the registrant's Form 10-K for the year ended
December 31, 1991].
10.17.1 - First Amendment to the Management Services Agreement, dated August
31, 1992, between the registrant and Leath Furniture, Inc.
[incorporated by reference to Exhibit 10.17.1. to the registrant's
Form 10-K for the year ended December 31, 1992].
10.19* - 1987 Stock Option and Stock Appreciation Right Plan dated November
3, 1987 [incorporated by reference to Exhibit 10.19 to the
registrant's Form 10-K for the year ended December 31, 1987].
10.21* - Minutes of Meeting of Board of Directors of registrant held
February 25, 1992 adopting registrant's 1992 Incentive Plan together
with a copy of that plan, as adopted [incorporated by reference to
Exhibit 10.21 to the registrant's Form 10-K for the year ended
December 31, 1991].
10.22 - Investment Agreement, dated April 9, 1991, among the registrant,
Leath Furniture, Inc. and the Purchasers (as defined therein)
[incorporated by reference to Exhibit 10.22 to the registrant's
Form 10-K for the year ended December 31, 1991].
10.23 - Convertible Subordinated Promissory Note, dated April 9, 1991,
issued in the principal amount of $2,000,000 by Leath Furniture,
Inc. in favor of the registrant [incorporated by reference to
Exhibit 10.23 to the registrant's Form 10-K for the year ended
December 31, 1991].
10.24 - Stockholders Agreement, dated April 9, 1991, among the stockholders
of Leath Furniture, Inc. [incorporated by reference to Exhibit 10.24
to the registrant's Form 10-K for the year ended December 31, 1991].
10.25* - Consulting Agreement, dated April 9, 1991, between Samuel E. Hudgins
and Leath Furniture, Inc. [incorporated by reference to Exhibit
10.25 to the registrant's Form 10-K for the year ended December 31,
1991].
10.26 - Purchase and Assignment Agreement, dated May 23, 1991, among Leath
Furniture, Inc., Modernage Furniture, Inc., Wickes Companies, Inc.
and Delta Life Insurance Company [incorporated by reference to
Exhibit 10.26 to the registrant's Form 10-K for the year ended
December 31, 1991].
10.27 - Term Note, dated January 29, 1988, of Leath Furniture, Inc. in favor
of Wickes Companies, Inc. in the principal amount of $3,750,000 and
First Amendment to Term Note, dated May 23, 1991 [incorporated by
reference to Exhibit 10.27 to the registrant's Form 10-K for the
year ended December 31, 1991].
-35-
10.29* - Executive Employment and Non-Competition Agreement, dated April 8,
1991, between Leath Furniture, Inc. and Ronald D. Phillips
[incorporated by reference to Exhibit 10.29 to the registrant's
Form 10-K for the year ended December 31, 1992].
10.30* - Employment Agreement, dated September 8, 1988, between the
registrant and John W. Hancock [incorporated by reference to
exhibit 10.30 to the registrant's Form 10-K for the year ended
December 31, 1992].
10.31* - Employment Agreement dated September 2, 1988, between the
registrant and Eugene Choate [incorporated by reference to Exhibit
10.31 to the registrant's Form 10-K for the year ended December 31,
1992].
10.32 - Loan and Security Agreement dated January 29, 1993, by and between
Gulf Capital Services Ltd., Leath Furniture, Inc. and Modernage
Furniture, Inc. [incorporated by reference to Exhibit 10.32 to the
registrant's Form 10-K for the year ended December 31, 1992].
10.32.1 - First Amendment to Loan and Security Agreement dated December 19,
1994 by and between Gulf Capital Services, Ltd., Leath Furniture,
Inc., and Modernage Furniture, Inc. [incorporated by reference to
Exhibit 10.32.1 to the registrant's Form 10-K for the year ended
December 31, 1994].
10.33 - 8% Promissory notes between registrant and registrant's chairman
and his affiliates [incorporated by reference to Exhibit 10.33 to
the registrant's Form 10-K for the year ended December 31, 1992].
10.33.1 - Amendment to 8% Promissory Notes, dated March 24, 1993, between
registrant and registrant's chairman and his affiliates
[incorporated by reference to Exhibit 10.33.1 to the registrant's
Form 10-K for the year ended December 31, 1992].
10.34 - 9 1/2% Promissory Notes between registrant and registrant's
chairman and his affiliates [incorporated by reference to Exhibit
10.34 to the registrant's Form 10-K for the year ended December 31,
1992].
10.34.1 - Amendment to 9 1/2% Promissory Notes, dated March 24, 1993,
between registrant and registrant's chairman and his affiliates
[incorporated by reference to Exhibit 10.34.1 to the registrant's
Form 10-K for the year ended December 31, 1992].
10.35 - 10% Subordinated notes between registrant and registrant's
affiliates [incorporated by reference to Exhibit 10.35 to the
registrant's Form 10-K for the year ended December 31, 1992].
10.35.1 - Amendment to 10% Subordinated Notes, dated March 24, 1993, between
registrant and registrant's affiliates [incorporated by reference to
Exhibit 10.35.1 to the registrant's Form 10-K for the year ended
December 31, 1992].
10.36 - 9% Promissory notes between Leath Furniture, Inc. and registrant's
chairman and his affiliates [incorporated by reference to Exhibit
10.36 to the registrant's Form 10-K for the year ended December 31,
1992].
10.37 - 10% Promissory notes between Leath Furniture, Inc. and registrant's
chairman and his affiliates [incorporated by reference to Exhibit
10.37 to the registrant's Form 10-K for the year ended December 31,
1992].
10.38 - Loan and Security Agreement dated August 26, 1991, between
registrant's three insurance subsidiaries and Leath Furniture, Inc.
[incorporated by reference to Exhibit 10.38 to the registrant's Form
10-K for the year ended December 31, 1992].
-36-
10.38.1 - First amendment to the amended and reissued mortgage note dated
January 1, 1992 [incorporated by reference to Exhibit 10.38.1 to the
registrant's Form 10-K for the year ended December 31, 1992].
10.39 - Intercreditor Agreement dated August 26, 1991 between Leath
Furniture, Inc., the registrant and the registrant's three insurance
subsidiaries [incorporated by reference to Exhibit 10.39 to the
registrant's Form 10-K for the year ended December 31, 1992].
10.41 - Management Agreement between 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
registrant's Form 10-Q for the quarter ended September 30, 1993].
10.42 - 8% Promissory Notes dated September 29, 1993, between registrant
and registrant's affiliates [incorporated by reference to Exhibit
10.42 in the registrant's Form 10-Q for the quarter ended September
30, 1993].
10.43 - 8% Promissory Notes dated November 3, 1993, between registrant and
registrant's affiliates [incorporated by reference to Exhibit 10.43
to the registrant's Form 10-K for the year ended December 31, 1993].
10.44 - Tax allocation agreement dated January 28, 1994 between
registrant and registrant's subsidiaries [incorporated by reference
to Exhibit 10.44 to the registrant's Form 10-K for the year ended
December 31, 1993].
10.45 - Amendment to the Promissory Notes dated March 23, 1994
[incorporated by reference to Exhibit 10.45 to the registrant's Form
10-K for the year ended December 31, 1993].
10.45.1 - Second Amendment to the Promissory Notes dated March 27, 1995
[incorporated by reference to Exhibit 10.45.1 to the registrant's
Form 10-K for the year ended December 31, 1994].
10.46 - 9% Promissory Note dated December 16, 1994, between registrant and
registrant's affiliate [incorporated by reference to Exhibit 10.46
to the registrant's Form 10-K for the year ended December 31, 1994].
10.47 - 9% Promissory Note dated December 29, 1994, between registrant and
registrant's affiliate [incorporated by reference to Exhibit 10.47
to the registrant's Form 10-K for the year ended December 31, 1994].
10.48 - 9% Promissory Note dated December 30, 1994, between registrant and
registrant's affiliate [incorporated by reference to Exhibit 10.48
to the registrant's Form 10-K for the year ended December 31, 1994].
10.49 - Prime plus 1% Promissory Note dated June 28, 1994, between Leath
Furniture, Inc. and registrant's chairman [incorporated by reference
to Exhibit 10.49 to the registrant's Form 10-K for the year ended
December 31, 1994].
10.50 - Prime plus 1-1/2% Promissory Note dated January 23, 1995, between
Leath Furniture, Inc. and registrant's chairman [incorporated by
reference to Exhibit 10.50 to the registrant's Form 10-K for the
year ended December 31, 1994].
10.51 - 9% Promissory Note dated February 3, 1995, between Leath Furniture,
Inc. and registrant's chairman [incorporated by reference to Exhibit
10.51 to the registrant's Form 10-K for the year ended December 31,
1994].
10.52 - Prime plus 1% Promissory Note dated December 19, 1994, between
registrant and registrant's affiliate [incorporated by reference
to Exhibit 10.52 to the registrant's Form 10-K for the year ended
December 31, 1994].
-37-
10.53 - Certificate of designations of Series A Convertible Preferred Stock
of Leath Furniture, Inc. dated December 16, 1994 [incorporated by
reference to Exhibit 10.53 to the registrant's Form 10-K for the
year ended December 31, 1994].
10.54 - Stock Purchase Agreements by and between registrant and Fuqua
Enterprises, Inc. dated as of October 16, 1995 [incorporated by
reference to Exhibit 2.1 to the registrant's Form 8-K, filed
January 12, 1996].
10.55 - Credit Agreement, dated as of December 29, 1995, between registrant
and Wachovia Bank of Georgia, N.A. [incorporated by reference to
Exhibit 99.1 to the registrant's Form 8-K, filed January 12, 1996].
13.1 - Those portions of the registrant's Annual Report to Shareholders
for year ended December 31, 1995, that are specifically incorporated
by reference herein.
21.1 - Subsidiaries of the registrant.
23.1 - Consent of Independent Public Accountants.
28.1 - Form of General Agent's Contract of Atlantic American Life
Insurance Company [incorporated by reference to Exhibit 28 to the
registrant's Form 10-K for the year ended December 31, 1990].
28.2 - Form of Agent's Contract of Bankers Fidelity Life Insurance
Company [incorporated by reference to Exhibit 28 to the registrant's
Form 10-K for the year ended December 31, 1990].
28.3 - Form of Agency Contract of Georgia Casualty & Surety Company
[incorporated by reference to Exhibit 28 to the registrant's Form
10-K for the year ended December 31, 1990].
P29.1 - Schedule P from American Safety Insurance Company, American
Southern Insurance Company, and Georgia Casualty & Surety Company
annual statements for year ended December 31, 1995.
(b) Reports on Form 8-K. None.
*Management contract, compensatory plan or arrangement required to be filed
pursuant to, Part IV, Item 14(C) of Form 10-K and Item 601 of Regulation S-K.
-38-
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 W. Hancock
Senior Vice President and Treasurer
Date: March 29, 1996
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 Chairman of the Board March 29, 1996
/s/
- ------------------------
HILTON H. HOWELL, JR. President, Chief Executive March 29, 1996
Officer and Director (Principal
Executive Officer)
/s/
- ------------------------
JOHN W. HANCOCK Senior Vice President and March 29, 1996
Treasurer (Principal Financial
Officer)
/s/
- ------------------------
JOHN C. HALL, JR. Controller (Principal Accounting March 29, 1996
Officer)
/s/
- ------------------------
SAMUEL E. HUDGINS Director March 29, 1996
/s/
- ------------------------
D. RAYMOND RIDDLE Director March 29, 1996
/s/
- ------------------------
HARRIETT J. ROBINSON Director March 29, 1996
/s/
- ------------------------
ROBERT H. THARPE Director March 29, 1996
/s/
- ------------------------
SCOTT G. THOMPSON Director March 29, 1996
/s/
- ------------------------
CHARLES B. WEST Director March 29, 1996
/s/
- ------------------------
WILLIAM H. WHALEY, M.D. Director March 29, 1996
/s/
- ------------------------
DOM H. WYANT Director March 29, 1996
-39-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of
Atlantic American Corporation:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of Atlantic American
Corporation, incorporated by reference in this Form 10-K, and have issued
our report thereon dated March 15, 1996. Our audits of the financial
statements were made for the purpose of forming an opinion on those
statements taken as a whole. The financial statement schedules listed in
Item 14 (a) are the responsibility of the Company's management, are
presented for the purpose of complying with the Securities and Exchange
Commission's rules, and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the consolidated financial statements and, in our
opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 15, 1996
-40-
Schedule II
Page 1 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
BALANCE SHEETS
(in thousands)
ASSETS
December 31,
-----------------------
1995 1994
---- ----
Current assets:
Cash and short-term investments $ 24 $ 78
-------- -------
Investment in affiliates:
Investment in insurance subsidiaries 90,551 44,840
Investment in furniture subsidiary (1,965) 8,025
-------- -------
Total investment in affiliated companies 88,586 52,865
-------- -------
Income taxes receivable from subsidiaries 1,435 2,987
Other assets 2,541 1,027
-------- -------
$92,586 $56,957
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to affiliates $ - $ 675
Current portion of long-term debt 13,352 -
Interest payable 527 1,163
Other payables 660 770
-------- -------
Total current liabilities 14,539 2,608
-------- -------
Long-term debt 25,211 4,594
Long-term debt payable to affiliates 6,358 19,733
Shareholders' equity 46,478 30,022
-------- -------
$92,586 $56,957
========= =======
The notes to consolidated financial statements are an integral part of the
condensed balance sheets.
II-1
Schedule II
Page 2 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
REVENUE
Fees, rentals and interest income
from subsidiaries $ 5,968 $ 5,952 $ 6,299
Distributed earnings from subsidiaries 2,864 - 972
Realized investment losses - - (51)
Other 12 2 2
------- ------- -------
Total revenue 8,844 5,954 7,222
GENERAL AND ADMINISTRATIVE EXPENSES 5,762 5,522 4,864
INTEREST EXPENSE 2,251 1,968 2,349
------- ------- -------
831 (1,536) 9
INCOME TAX BENEFIT 34 1,632 989
------- ------- -------
865 96 998
EQUITY IN UNDISTRIBUTED EARNINGS OF CONSOLIDATED
SUBSIDIARIES, NET 2,253 8,053 458
------- ------- -------
Income from continuing operations 3,118 8,149 1,456
(Loss) income from discontinued operations, net (10,094) 1,121 1,543
------- ------- -------
(Loss) income before extraordinary gain and
cumulative effect of change in accounting
principle for income taxes (6,976) 9,270 2,999
Extraordinary gain - 100 897
------- ------- ------
(Loss) income before cumulative effect of change in
accounting principle for income taxes (6,976) 9,370 3,896
------- ------- ------
Cumulative effect of change in accounting principle
for income taxes - - (519)
------- ------- ------
Net (loss) income $(6,976)$ 9,370 $ 3,377
======= ======= =======
The notes to consolidated financial statements are an integral part of these
condensed statements.
II-2
Schedule II
Page 3 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (6,976) $ 9,370 $ 3,377
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Realized investment losses - - 51
Depreciation and amortization 379 292 362
Equity in undistributed earnings
of consolidated subsidiaries (2,253) (88,053) (458)
Loss (income) from discontinued
operations 10,094 (1,121) (1,543)
Benefit from deferred taxes - (1,000) -
Cumulative effect of change in
accounting principle for income
taxes - - 519
Extraordinary gain from extinguishment
on debt - (100) (897)
(Decrease) increase in other
liabilities (746) 812 245
Minority interest (554) 205 342
Other, net 1,790 268 (1,387)
--------- -------- -------
Net cash (used in) provided by
operating activities (1,734) 137 611
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries, net (38) (2,306) 2,027
Acquisition of American Southern
Insurance Company (22,770) -
Additions to property and equipment (1,058) (646) (85)
--------- -------- -------
Net cash (used in) provided by
investing activities (23,866) (2,952) 1,942
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable
to affiliates - 3,175 1,500
Proceeds from issuance of bank
financing 22,642 - -
Preferred stock dividends to
affiliated shareholders (315) (315) (315)
Purchase of treasury shares (174) - -
Retirements of long-term debt and
notes payable to affiliates (675) - (3,905)
Proceeds from exercise of stock options 600 19 -
--------- -------- --------
Net cash provided by (used in)
financing activities 22,078 2,879 (2,720)
--------- -------- --------
Net (decrease) increase in cash (54) 64 (167)
Cash at beginning of year 78 14 181
--------- -------- -------
Cash at end of year $ 24 $ 78 $ 14
========= ======== =======
Supplemental disclosure:
Cash paid for interest $ 2,894 $ 900 $2,224
========= ======== =======
Cash paid for income taxes $ 128 $ 115 $ -
========= ======== =======
Long-term debt, payable to affiliates,
converted to preferred stock $13,400 $ - $ -
========= ======== =======
Debt to seller for purchase of
American Southern Insurance
Company $11,352 $ - $ -
========= ======== =======
The notes to consolidated financial statements are an integral part of these
condensed statements.
II-3
Schedule III
Page 1 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Future Policy
Benefits, Losses, Other Policy
Deferred Claims and Loss Unearned Claims and
Segment Acquisition Costs Reserves Premiums Benefits Payable
------- ----------------- ----------------- -------- ----------------
December 31, 1995(1):
A & H..... $ 3,831 $ 8,907 $ 2,222 $ -
Life...... 8,411 32,219 - 1,905
Casualty.. 2,657 74,693 21,918 1,983
------- -------- ------- -------
$14,899 $115,819 (2) $24,140 $ 3,888
======= ======== ======= =======
December 31, 1994:
A & H..... $ 4,594 $ 11,364 $ 2,629 $ -
Life...... 8,521 31,572 - 1,959
Casualty.. 438 35,435 5,111 225
------- -------- ------- -------
$13,553 $ 78,371 (3) $ 7,740 $ 2,184
======= ======== ======= =======
December 31, 1993:
A & H..... $ 6,011 $ 13,447 $ 3,004 $ -
Life...... 7,655 30,338 - 1,908
Casualty.. - 48,751 3,662 124
------- -------- ------- -------
$13,666 $ 92,536 (4) $ 6,666 $ 2,032
======= ======== ======= =======
<FN>
_________________________
(1)Supplementary insurance information contained above includes amounts related to American Southern for
December 31, 1995.
(2)Includes future policy benefits of $36,305 and losses and claims of $79,514.
(3)Includes future policy benefits of $37,641 and losses and claims of $40,730.
(4)Includes future policy benefits of $37,774 and losses and claims of $54,762.
</FN>
Schedule III
Page 2 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Benefits, Amortization
Investment Claims, Losses of Deferred Other Casualty
Premium Income and Settlement Acquisition Operating Premiums
Segment Revenue (Losses)*(1) Expenses Costs Expenses(1) Written
------- ------- ------------ -------------- ------------ ----------- ---------
December 31, 1995(2):
Life...... $ 8,297 $ 3,941 $ 4,861 $ 1,799 $ 3,546 $ -
Casualty.. 18,302 2,989 12,356 - 6,582 19,074
A & H..... 16,774 1,442 7,472 1,922 7,796 -
Other..... - (75) - - 2,252 -
-------- ------- ------- ------- ------- -------
$ 43,373 $ 8,297 $24,689 $ 3,721 $20,176 $19,074
======== ======= ======= ======= ======= =======
December 31, 1994(2):
Life...... $ 8,111 $ 2,964 $ 5,726 $ 1,387 $ 2,762 $ -
Casualty.. 14,651 2,940 6,513 - 5,198 16,094
A & H..... 18,939 1,523 9,716 1,621 8,026 -
Other..... - 71 - - 1,733 -
-------- ------- ------- ------- ------- -------
$ 41,701 $ 7,498 $21,955 $ 3,008 $17,719 $16,094
======== ======= ======= ======= ======= =======
December 31, 1993(2):
Life...... $ 6,671 $ 2,733 $ 4,688 $ 1,380 $ 2,584 $ -
Casualty.. 12,824 3,077 9,581 - 6,588 12,783
A & H..... 21,449 1,540 11,095 1,854 8,766 -
Other..... - (558) - - 733 -
-------- ------- ------- ------- ------- -------
$ 40,944 $ 6,792 $25,364 $ 3,234 $18,671 $12,783
======== ======= ======= ======= ======= =======
<FN>
* Includes realized investment gains (losses).
(1) Investment income is allocated based on the pro rata percentages of insurance reserves and
policyholders' funds attributable to each segment whereas other operating expenses are
allocated based on premiums collected.
(2) Supplementary insurance information contained above does not include amounts related to
American Southern.
</FN>
Schedule IV
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
REINSURANCE
(in thousands)
Ceded To Assumed
Gross Other From Other Net
Amount Companies Companies Amount
------ --------- ---------- ------
Year ended December 31, 1995:
Life insurance in force........... $254,349 $ 10,003 $ - $244,346
======== ======== ======== ========
Premiums --
Life insurance.................... $ 8,378 $ 81 $ - $ 8,297
Accident and health insurance..... 16,774 - - 16,774
Property and liability insurance.. 21,258 2,956 - 18,302
-------- -------- -------- --------
Total premiums................. $ 46,410 $ 3,037 $ - $ 43,373
======== ======== ======== ========
Year ended December 31, 1994:
Life insurance in force........... $252,997 $ 11,043 $ - $241,954
======== ======== ======== ========
Premiums --
Life insurance.................... $ 8,188 $ 77 $ - $ 8,111
Accident and health insurance..... 18,939 - - 18,939
Property and liability insurance.. 17,035 2,384 - 14,651
-------- -------- -------- --------
Total premiums................. $ 44,162 $ 2,461 $ - $ 41,701
======== ======== ======== ========
Year ended December 31, 1993:
Life insurance in force........... $202,057 $ 10,841 $ - $191,216
======== ======== ======== ========
Premiums --
Life insurance.................... $ 6,757 $ 86 $ - $ 6,671
Accident and health insurance..... 21,449 - - 21,449
Property and liability insurance.. 14,818 1,994 - 12,824
-------- -------- -------- --------
Total premiums................. $ 43,024 $ 2,080 $ - $ 40,944
======== ======== ======== ========
Schedule VI
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
Claims and Claim
Adjustment Expenses
Incurred Related To
-------------------
Paid
Amortization Claims and
Deferred Net Of Deferred Claim Premiums
Policy Unearned Earned Investment Current Prior Acquisition Adjustment Written
Year Ended Acquisition Reserves Premium Premium(2) Income(2) Year(2) Years(2) Costs(2) Expenses(2) (2)
- --------- ----------- -------- -------- ---------- ---------- ------- -------- ------------ ----------- -------
December 31, 1995 $ 2,657(1) $74,693(1) $21,918(1) $18,302 $ 2,989 $ 7,002 $ 5,985 $ - $12,923 $19,074
========= ========= ========= ======= ======= ======= ======== ========= ======= =======
December 31, 1994 $ 438(2) $35,435(2) $ 5,111(2) $14,651 $ 2,940 $10,617 $ (2,661) $ - $21,272 $16,094
========= ========= ========= ======= ======= ======= ======== ========= ======= =======
December 31, 1993 $ - (2) $48,751(2) $ 3,662(2) $12,824 $ 3,077 $ 7,796 $ 1,744 $ - $17,989 $12,783
========== ========= ========= ======= ======= ======= ======== ========= ======= =======
<FN>
(1) Includes Georgia Casualty & Surety and American Southern.
(2) Includes Georgia Casualty & Surety only.
</FN>