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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
For the Fiscal Year Ended December 31, 1996
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or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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
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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 7, 1997, was $17,454,169. On March 7, 1997 there
were 18,691,026 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, 1996 - Parts I, II and IV.
2. Portions of registrant's Proxy Statement for the Annual Meeting of
Shareholders, to be held on May 6, 1997, 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.......................................... 13
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............................................... 29
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
2
PART I
ITEM 1. BUSINESS
The Company
Atlantic American Corporation (the "Company" or the "Parent") is a Georgia
holding company which during 1996 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" and together with American Southern, the "Casualty
Division"). As of January 1, 1997 Atlantic American Life was merged with and
into Bankers Fidelity Life, and the business and operations of the Life
Companies are now consolidated in Bankers Fidelity Life.
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 April 8, 1996, the Company sold its approximately 88% interest
in Leath. Leath is reflected as discontinued operations in the Company's
financial statements for all periods presented. On December 31, 1995, the
Company acquired American Southern, which was incorporated in Georgia in 1936.
As used herein, unless the context otherwise requires, the term "Company"
means the Parent holding company and its consolidated subsidiaries as of
December 31, 1996. On April 1, 1996, the Company completed a merger in which it
acquired the remaining publicly-held interest in Bankers Fidelity Life. Pursuant
to that merger, the public shareholders of Bankers Fidelity Life received $6.25
in cash per share, and their shares of stock in Bankers Fidelity Life were
canceled. On November 26, 1996, the Company completed a merger in which it
acquired the remaining publicly-held interest in Georgia Casualty. Pursuant to
that merger, the public shareholders of Georgia Casualty received $9.00 in cash
per share, and their shares of stock in Georgia Casualty were canceled. As a
result of those two transactions, the Company now owns 100% of each of its
subsidiaries.
The balance sheets of American Southern were consolidated at December 31,
1996 and 1995; however, the results of operations are included and discussed
only as related to 1996.
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..... The 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 earned. 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 statements
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, after
deducting premiums on business
reinsured with others.
4
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 - 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.
5
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 1996, accident and
health (including Medicare supplement) and life insurance accounted for
approximately 30% of the Company's total net earned premiums, and property and
casualty insurance accounted for approximately 70% of such premiums. Medicare
supplement insurance accounted for approximately 13% of the Company's total
earned premiums in 1996. The insurance subsidiaries are licensed to do business
in a total of 28 states, although 87.2% of the Company's earned premiums in 1996
were derived from the states of Florida, Georgia, Indiana, Kentucky,
Mississippi, Missouri, North Carolina, Tennessee, Texas and West Virginia.
Accident and health insurance lines are offered through the Life Companies
and include Medicare supplement, cancer, hospital indemnity, short-term nursing
home care, accident expense, medical indemnity, 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 2,500
independent agents primarily in the Southeast. Property and casualty insurance
lines are offered through Georgia Casualty and American Southern and 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 72 independent agents primarily in the states of
Mississippi and Georgia. The American Southern lines are sold through a total of
175 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 with a number of available
riders and options 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, terminal illness payout rider,
and an additional coverage amount enhancement option not requiring additional
underwriting. The accident and health insurance lines include Medicare
supplement insurance in two classes (standard and preferred) as well as cancer,
accident expense, disability income, hospital/surgical insurance, and short-term
care (under one year). The Company still receives 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 are 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 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
broadened 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
6
three day hospital stay. The Life Companies discontinued the sale of the
convalescent-care policy in 1992, when states required companies to eliminate
the minimum three day hospital stay. The Life Companies' experience indicated
that the minimum three 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; after discontinuing the sale of new policies for
that product, earned premiums have declined to $955,000 in 1996. 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, increased to $2.1 million in 1990, and decreased to $677,000
in 1996. 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 decreased to $2.0 million in 1996.
In 1990, the Life Companies updated the life product portfolio. The Life
Companies implemented several new life products to penetrate niche markets where
these products 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 began 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 with products marketed as the
Senior Security Series. 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. The life products have preferred and standard
rates for males and females. Sales in this market increased in both 1995 and
1996, and the Life Companies expect to see continued growth in 1997 and 1998.
Designed in 1995 and implemented in 1996, the Life Companies marketed two new
level term products identified as Term Ten and Term Ten Plus. Designed to
replace an old existing term product, these products were developed
strategically to generate appeal in the individual payroll markets. The Term Ten
is a standard level term product that is renewable at term and convertible to
any whole life product offered by the companies. Term Ten Plus is also a
standard level term policy that is renewable and convertible and includes an
option that allows policyholders to increase their coverage amount during the
second to the ninth policy years. Premium rates for the additional coverage are
determined by the age of the policyholder at the time coverage originally began,
not at their current age. The Life Companies have seen increased sales in other
life products that are sold in concert with the new senior life products.
Renewed emphasis on life sales produced an increase in life sales over the past
four years. Additionally, the Life Companies began updating their array of
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 enhanced the senior
citizen portfolio and was designed to target 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 cancer product
benefits were strategically designed to be flexible, thus providing individuals
with the ability to tailor their insurance programs to fit their specific needs.
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. As with the cancer product, the hospital indemnity benefits were
strategically designed to be flexible, thus providing individuals with the
ability to tailor their insurance programs to fit their specific needs. 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. The implementation of these
products advances the Life
7
Companies' plans for a more diversified portfolio, thus enabling it to compete
effectively in niche markets. They also allow greater expansion of sales in the
list bill (billing for more than one insured) and payroll deduction markets. 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
and 1996, the Companies developed and introduced a new list bill product which
pays 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 is 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. Sales through 1996 were successful and this product will be introduced
to all other states where the Life Companies operate.
The following table sets forth annual premium information regarding the
Life Companies' policies offered as of January 1, 1997:
Range of Premium
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Medicare Supplement.......................... $300 to $ 2,923
Short-Term Care (1).......................... $ 9 to $ 399
Other Accident and Health Policies........... $ 7 to $ 1,440
Ordinary Life (2)............................ $ 3 to $ 372
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,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
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Ordinary Life..............$ 8,937 $ 7,037 $ 6,716 $ 5,130 $ 4,362
Mass Market Life........... 1,303 1,260 1,395 1,541 1,769
-------- -------- -------- -------- --------
Total Life............... 10,240 8,297 8,111 6,671 6,131
-------- -------- -------- -------- --------
Medicare Supplement........ 11,560 11,882 13,347 15,052 17,212
Convalescent Care/Short-
Term Care ............... 955 1,191 1,385 1,628 2,064
Medical Surgical........... 160 211 289 389 565
Cancer .................... 1,982 2,221 2,457 2,726 3,033
Hospital Indemnity......... 282 337 414 508 592
Accident Expense........... 677 790 892 992 1,210
Disability................. 122 142 155 154 139
-------- -------- -------- -------- --------
Total Accident
and Health............. 15,738 16,774 18,939 21,449 24,815
-------- -------- -------- -------- --------
Total Life and
Accident and Health $ 25,978 $ 25,071 $ 27,050 $ 28,120 $ 30,946
======== ======== ======== ======== ========
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(1) Per $10 daily benefit.
(2) Per thousand of face amount.
8
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 were grandfathered. The 16
alternative Part B supplements are essentially differentiated by their
deductible amounts ($0, $100 or $200) and by 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.
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
54% of the Company's Medicare supplement business in-force on December 31, 1996,
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 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 absorption of 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.
Under OBRA 1990, legal caps were established on physicians' and other
providers' charges. Capped physician charges now have a more stabilizing effect
on Medicare costs. This, in turn, allows the Company to price its products more
effectively. Although OBRA 1990 will not halt medical inflation in general, it
does limit the uncontrolled amount of increases in provider charges. The
ultimate effect from the imposed caps beginning January 1, 1991, is lower loss
ratios and improved persistency. This in turn had a stabilizing effect on
Medicare supplement rates in general. Fewer and lower overall rate increases are
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 ten standardized policies established by the Federal
Government. The Company expects to continue to market seven of these plans,
including the required core policy with basic benefits. The three plans not
marketed by the Company provide prescription drug benefits.
OBRA 1990 also mandated the following provisions that significantly changed
the Company's operation:
(1) 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 six months in which an
applicant is eligible for Medicare.
9
Controlled provider caps reduced the amount physicians can charge, which
has had a direct bearing on the Life Companies' claim experience. As a result,
the Life Companies had limited rate increases in 1994, 1995 and 1996. The Life
Companies also introduced area factors to reduce rates in various geographic
areas.
The technical corrections amendment (HR 5252 Social Security Act of 1994),
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. Item (2) was clarified to mean
duplication of coverage from any other Medicare supplement policy. Item (4) was
amended to cover Medicare beneficiaries under the age of 65.
Convalescent Care (Long-Term Care). The Life Companies discontinued the
sale of this product in 1992 as each state passed legislation eliminating the
required minimum three day hospital stay. It was the Company's experience that
the minimum three 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 potential effective market
penetration. During 1992 through 1994, the Federal Government offered subsidies
to lower income persons for the purpose of buying health insurance. This was
also at a time when state and federal governments and the insurance industry
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 subsidy was eliminated; the product was then updated to be more flexible by
providing 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, 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 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 markets, fills the gaps in
coverage, such as deductibles and copayments, 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 accidental
injury. In addition, the policy offers compensation for lost wages, hospital
indemnity, and emergency medical service within prescribed limits. Policyholders
may elect full or half coverage. Past revisions to the benefits available under
this policy and premium increases implemented in 1991 and 1992 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 are fully implemented, it appears that even a tax deductible
premium would not reduce long-term care rates to a level affordable to more than
a minority of the available market. Statistics show that approximately 75% of
nursing home stays are for less than one year. However, short-term care coverage
allows time to plan for payment of long-term confinement with existing family
assets. More states realize that Medicaid, which pays approximately 50% of
present nursing home care, is the fastest growing part of the state budget.
Future spending cuts on Medicaid are likely; this will reduce long-term care
coverage and increase the need for private coverage. Short-term care coverage
will then be an affordable alternative product.
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 continued to monitor experience and update the
application as needed. These revisions and updates 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 and 1996, 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 with larger benefits was designed for
utilization in the payroll market. The dual disability product transforms at age
65 to the short-term care product at reduced rates. Disability products cover
both sickness and accident. The dual disability benefits range from 6 months to
age 65; additional benefit periods include 1 year, 2 years, and 5 years with
elimination periods of 30, 60, 90, 180, and 360 days.
Group Term Life. New term products will be used with group underwriting in
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 $1.1
million of annualized premiums from existing policyholders who subscribed to the
mass marketed life policies.
11
Georgia Casualty
Georgia Casualty is a property-casualty insurance company engaged in the
sale of specific lines of commercial insurance. Georgia Casualty focuses much of
its marketing efforts on the workers' compensation insurance line. However, as
part of a diversification plan, the company altered the industries it targets;
as a result, significant premium volume is written in other commercial lines.
Specifically, Georgia Casualty now has a significant book of business in
manufacturing industries where the cause of loss is more easily identified and
corrective actions are implemented through loss control programs, safety plans,
drug-free workplaces, re-employment drug testing and various other programs.
Georgia Casualty also provides a significant volume of coverage for service type
industries and artisan contractors. Georgia Casualty no longer issues policies
in high risk industries and in certain geographic areas where the regulatory and
legal environment is less favorable to casualty insurers. In 1996, the company
issued new policies to customers in the wood products industry for the first
time since 1991, doing so only through selected agencies. The company was highly
selective in renewing existing accounts in that industry by focusing only on
insureds with stringent safety and loss control standards. Although Georgia
Casualty writes some monoline accounts, the company makes every effort to
provide each insured with a full range of coverages including workers'
compensation, business automobile, general liability and property insurance
coverage. In addition, Georgia Casualty provides a commercial umbrella policy
for limits up to $5,000,000.
Georgia Casualty's premium 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, loss cost multipliers, which are
modified by Georgia Casualty to reflect its own loss experience, and cost
expense factors are used to produce a final premium 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:
Year Ended December 31,
---------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
--------------
Workers'
Compensation............ $ 13,826 $ 14,954 $ 11,958 $ 9,890 $ 8,640
Business
Automobile.............. 2,550 1,436 1,054 953 974
General
Liability............... 1,152 1,025 1,065 1,180 1,842
Property................... 1,269 887 574 801 362
-------- -------- -------- -------- --------
Total Property-Casualty $ 18,797 $ 18,302 $ 14,651 $ 12,824 $ 11,818
======== ======== ======== ======== ========
Workers' Compensation. Georgia Casualty offers workers' compensation insurance
policies that provide indemnity 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 on real and personal property caused by fire and other multiple perils.
Georgia Casualty concentrated its efforts in those states and industries
which management believes offer the greatest opportunity for return on equity.
Specifically, Georgia
12
Casualty is concentrating its efforts for new business in the states of Georgia
and Mississippi, which offer the greatest opportunity for future growth. In
prior years, the workers' compensation line was subject to large assessments in
most states from the National Council on Compensation Insurance for the Residual
Market Reinsurance Pool. This was particularly true in the states of Alabama,
Louisiana and Florida where Georgia Casualty elected to discontinue writing all
workers' compensation exposures. The last voluntary insurance policies in these
three states expired in 1995.
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. In 1996, this restriction to limit
writings in South Carolina was withdrawn, and Georgia Casualty may now commence
writing business again in that state. 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 the state.
American Southern
American Southern is a multiple-line property and casualty insurance
company primarily engaged in the sale of automobile insurance. American Southern
specializes in block accounts, such as states and municipalities, which are
sufficiently large 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 seven additional
states. During the past five years, American Southern derived at least 85% of
its premium revenue from auto liability and auto physical damage coverage.
However, due to recent competitive declines in physical damage pricing, American
Southern has been focusing on auto liability coverage.
The following table summarizes 1996 premiums by product line:
Year Ended December 31,
-----------------------
1996
----
(in thousands)
--------------
Automobile Physical Damage... $ 4,865
Automobile Liability......... 30,889
General Liability............ 1,947
Property..................... 3,461
Surety....................... 88
--------
Total.................... $ 41,250
========
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
cost effective. All independent agents are compensated on a commission basis,
administered by the Life Companies. Using independent agents also enables the
Life Companies to expand their sales forces at any time without significant
additional expense.
The number of independent agents varied from approximately 2,700 in 1983 to
approximately 12,000 in 1987 and approximately 2,500 presently. This decline is
the result of a more selective agent selection process established in 1988.
During 1993, emphasis was placed on recruiting more independent agents who would
write life insurance and other lines of
13
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, emphasis was placed on marketing the
new expanded senior citizen life product portfolio; as a result, the senior
citizen life product sales were a large part of the sales increase for the Life
Companies. During 1996, a total of 1,105 agents wrote policies on behalf of the
Life Companies, and 22% of those agents accounted for 81% of the Life Companies'
annualized 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, in an endeavor to motivate agents to market their products,
offer the following agency services: a unique lead system, competitive products
and commission structures, efficient claims service, prompt payment of
commissions, simplified policy issue procedures, annual sales incentive
programs, and in some cases protected sales territories consisting of counties
and/or zip codes. From 1990 through 1996, several new marketing programs such as
education and retirement funding, packaged marketing, and payroll deduction were
implemented to promote the sales of updated policies offered by the Life
Companies. Management believes that sales of those products will produce greater
life insurance premium growth because they better meet the needs of the
insureds. 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 is centered around a lead generation plan that 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 them to all leads produced within that territory. The territories are
zip-code or county based and encompass enough physical 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 at 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 were above expectations
and distribution is expanding to include all states in which the Life Companies
are approved.
This distribution system solves an agent's most important dilemma --
prospecting -- and allows the company 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 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 increase through
this distribution channel because of the need for agents to place all of their
business with the company in order to obtain the maximum number of leads.
Through this distribution channel, production per agent contracted 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. These
representatives work with agents in the sale and distribution of Georgia
Casualty's insurance products. Marketing efforts are complemented by the
underwriting, loss control, and audit staffs which are available to assist
agents in the presentation of all insurance products and services to their
insureds.
Georgia Casualty operates through a field force of 72 independent agencies.
Each agency is a party to a standard agency contract that sets forth the
commission structure and other terms 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 agents to earn additional commissions
when specific loss experience and premium
14
growth goals are achieved. Currently, 54 agencies participate in the
profit-sharing arrangement.
American Southern. 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 trucking insurance. 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, excluding Senior Citizen Market
Life products, are issued without medical examinations, subject to maximum
policy limits ranging from $100,000 for persons under age 31 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. Paramedical examinations are
ordered at age 41 for all life applications of $50,000 and above. Approximately
95% of the net premiums earned for life insurance sold during 1996 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 use 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 treated the applicant in the past; and, where indicated, special
medical tests. If deemed necessary, the Life Companies use investigative
services to supplement and substantiate information. For certain limited
coverages, the Life Companies 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 presenting the
applicant's complete medical history. At present, approximately 20% to 30% of
the senior citizen life applications, through age 79 on the standard product and
up to age 75 on the preferred, are verified by telephone. For ages 80 and above,
100% of the standard applicants are verified. All telephone verifications are
made by the underwriting department. Applications not meeting the underwriting
criteria are declined or additional information is requested.
Georgia Casualty. During recent years, Georgia Casualty concentrated its
underwriting efforts only in states with reasonable probability of profit. These
efforts are showing very positive results. Also, the company developed a team
approach to underwriting with respect to both new submissions and renewal
policies. The new submission team generally includes agents, underwriting staff,
loss control staff, the claims staff, and the accounting department. By
receiving active input from each of these departments, the company improved its
underwriting risk. Georgia Casualty also uses the team approach in renewal
reviews. All accounts are reviewed by underwriting, loss control, accounting,
and claims personnel. All individuals with first-hand information regarding an
account are invited to share their information with the group. The results of
these changes are seen in the improvement in underwriting profit.
During the course of the policy year, extensive use is made of loss control
representatives to assist underwriters 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 takes appropriate
corrective action which may
15
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, 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 participating members. In September 1991, Georgia
Casualty was asked to collateralize that liability to the pool but declined 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 workers'
compensation liabilities with the workers' compensation pool. This settlement
released $13.7 million in workers' compensation pool reserves from the balance
sheet and provided a one-time reduction of $4.8 million in the loss provision in
the statement of operations. The credit received in 1994 represented the income
effect for accident years 1991 and prior. The settlement had no impact on
earnings in either 1995 or 1996.
Since September 1991, Georgia Casualty has been a direct assignment carrier
in Georgia and is assigned direct workers' compensation policies from the state
rather than participating in the National Workers' Compensation Reinsurance
Pool. Georgia Casualty has 263 direct assignment workers' compensation policies
in force with a total net earned premium of $2.5 million in 1996. The loss
experience on the direct assignment business is significantly better than the
loss experience on policies that the company was assigned through the National
Workers' Compensation Reinsurance Pool.
American Southern. American Southern specializes in the handling of block
accounts such as states and municipalities which are sufficiently large to
establish separate class experience. All of American Southern's business is
marketed through independent agents. The premium on the larger accounts is
adjusted based on each account's loss ratio. American Southern's auto physical
damage business consists primarily of long haul physical damage insurance
produced by agents specializing in insurance for truckers. These accounts are
subject to retrospective commission agreements which provide that a portion of
the commission paid to the agent is determined by the profitability of the
business produced.
16
Operating Results
The following table sets forth, on a statutory basis, the incurred losses
and loss ratios for the Company's Accident & Health insurance lines and the
incurred loss and expense ratios and combined ratios for the Company's casualty
business during the past five years:
Year Ended December 31,
--------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
----------------------
Accident and Health Insurance
MEDICARE SUPPLEMENT:
Incurred losses...............$ 7,136 $ 6,688 $ 7,582 $ 8,284 $10,403
Loss ratio.................... 61.73% 57.6% 57.8% 56.6% 61.8%
CONVALESCENT CARE:
Incurred losses...............$ 710 $ 1,393 $ 1,486 $ 1,861 $ 2,404
Loss ratio.................... 74.33% 121.0% 110.3% 121.3% 124.8%
MEDICAL SURGICAL:
Incurred losses...............$ 187 $ 148 $ 170 $ 279 $ 408
Loss ratio....................116.59% 78.8% 61.4% 84.2% 81.0%
CANCER:
Incurred losses...............$ 599 $ 714 $ 885 $ 1,035 $ 1,218
Loss ratio.................... 30.20% 32.9% 37.0% 39.1% 41.4%
HOSPITAL INDEMNITY
Incurred losses...............$ 54 $ 171 $ 206 $ 215 $ 266
Loss ratio.................... 41.46% 52.9% 51.4% 65.8% 48.5%
ACCIDENT EXPENSE:
Incurred losses...............$ 165 $ 173 $ 526 $ 622 $ 1,204
Loss ratio.................... 24.40% 21.9% 58.9% 62.7% 99.7%
DISABILITY INCOME:
Incurred losses...............$ 37 $ 72 $ 84 $ 90 $ 39
Loss ratio.................... 30.21% 50.7% 53.2% 58.5% 26.2%
TOTAL ACCIDENT AND HEALTH:
Incurred losses...............$ 8,888 $ 9,359 $10,939 $12,386 $15,942
Loss ratio.................... 57.02% 57.2% 58.9% 59.6% 66.1%
Property and Casualty (1)
WORKERS' COMPENSATION:
Incurred losses...............$ 9,117 $12,152 $ 4,884 $ 8,709 $13,606
Loss ratio.................... 65.95% 81.3% 41.7% 88.6% 145.9%
BUSINESS AUTOMOBILE:
Incurred losses...............$28,088 $ 1,373 $ 737 $ 250 $ 576
Loss ratio.................... 73.38 95.6% 70.0% 26.2% 59.1%
GENERAL LIABILITY:
Incurred losses...............$ 1,618 $(1,177)(2) $ 1,431 $ 1,015 $ 1,054
Loss ratio.................... 50.8% - 134.5% 86.0% 57.2%
PROPERTY:
Incurred losses...............$ 2,215 $ 573 $ 275 $ 227 $ 359
Loss ratio.................... 46.8% 64.6% 47.2% 33.4% 134.8%
TOTAL PROPERTY AND CASUALTY:
Incurred losses...............$41,038 $12,921 $ 7,327 $10,201 $15,595
Loss ratio.................... 68.31% 70.6% 50.9% 79.5% 123.5%
Expense ratio................. 27.49% 30.6% 29.8% 33.1% 32.3%
Combined ratio................ 95.80% 102.4% 114.0% 112.6% 155.8%
-----------------------
(1) Includes American Southern for 1996 only.
(2) 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 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 insurance companies
should not be greater than 300% (see "NAIC Ratios").
Year ended December 31,
---------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
----------------------
Georgia Casualty
Net premiums earned............ $18,797 $18,302 $14,651 $12,824 $11,818
Statutory capital and
surplus...................... $13,616 $11,687 $ 9,663 $ 5,740 $ 5,293
Premiums to surplus ratio...... 138% 157% 152% 223% 223%
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
statements 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 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, 1996, Atlantic American
Life and Bankers Fidelity Life were within the NAIC "usual" range in all 13
financial ratios.
Georgia Casualty. For the year ended December 31, 1996, Georgia Casualty
was outside the NAIC "usual" range for only one ratio - the estimated current
reserve deficiency to surplus ratio.
American Southern. For the year ended December 31, 1996, American Southern
was within the NAIC "usual" range in all 13 financial ratios.
Risk-Based Capital
RBC is used by rating agencies and regulators as an early warning tool to
identify weakly capitalized companies for the purpose of initiating further
regulatory action. The RBC calculation determines the amount of Adjusted Capital
needed by a company to avoid regulatory action. "Authorized Control Level
Risk-Based Capital" ("ACL") is calculated; if a company"s adjusted capital is
200% or lower than ACL, it is subject to regulatory action. At December 31,
1996, all of the Company's insurance subsidiaries exceeded the RBC regulatory
levels.
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 claim
processing time and to the accessibility of insurers to answer inquiries.
Accordingly, the Company's policyholder and claims services include expeditious
disposition of service requests by providing toll-free home office telephone
numbers to all customers. In 1996, the Company augmented its telephone support
system by installing a state-of-the-art automatic call distribution enhancement.
Inbound calls to customer service support groups are now processed more
efficiently. Operational data generated from this system allows management to
further refine ongoing client service programs and service representative
training modules.
During 1995 and 1996, the Company completed the installation of and
conversion to a new AS400 client server system. All department representatives
were trained to perform their respective responsibilities in maintaining and
building the Company's client database. As a result of improved system software
efficiency, the Company significantly increased responsiveness to its clients
and agents.
In 1995, a Customer Awareness Program was implemented company-wide and
became the basis for the Company's customer service philosophy. All personnel
were required to attend customer service classes. Hours were expanded in all
service areas in the first quarter of 1995 to serve customers and agents in
other time zones.
Life Companies. While the computer software system was being implemented,
several other changes were 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 16 people
located at the Company's home office in Atlanta. Insureds obtain claim forms by
calling the claims department customer service group. To shorten claim
processing time, a letter detailing all support documents that are required to
complete a claim for a particular policy is sent to the customer along with the
correct claim form. With respect to life policies, the claim is entered into the
Life Companies' claims system when the proper documentation is received. The
computerized claims system was enhanced to enable the Life Companies to pay all
properly documented claims within three to nine business days of receipt. During
1996, the Life Companies paid approximately 102,000 claims aggregating $14.0
million, of which approximately 97,000 claims aggregating $7.2 million were for
Medicare supplement insurance. The total amount of claims paid represented
approximately 51.5% of total accident and health and life earned premium
revenue, and Medicare supplement claims paid represented 27.6% of total accident
and health and life earned premium revenue. The Life Companies continually
monitor their claims backlog and implement appropriate corrective action to
maintain an average five-day payment period.
Georgia Casualty. In 1996, Georgia Casualty completed implementation of a
new property-casualty software package that should enable the company to
streamline and reduce underwriting expenses in 1997 although no impact of the
new system was recognized in 1996. Efficiency and productivity should improve
with the new computer system, lowering operating expenses and the combined ratio
in 1997. Additionally, the company positioned itself to provide strong customer
service to its policyholders in 1997 by increased staffing in its underwriting
department. 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
19
department conducts a preliminary investigation to determine whether an
insurable event has occurred and, if so, records the claim. This process usually
occurs within 7 days of notification of the claim. Where appropriate, the
company utilizes independent adjusters and appraisers to service 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 Case Management. This program proved to be a
sound strategy in reducing insurance claim costs for the employers and insurance
company and in providing better medical treatment for the injured employee. In
1995 and 1996, the claims department was increased by three case managers who
are responsible for administration of the case management 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 purportedly giving rise to a
claim, the claims department conducts a preliminary investigation, determines
whether an insurable event has occurred and, if so, records the claim. American
Southern frequently utilizes independent adjusters and appraisers to service
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:
1996 1995
---- ----
Balance at January 1............... $79,514 $40,730
Less: Reinsurance recoverables..... (22,467) (12,334)
-------- --------
Net balance at January 1....... 57,047 28,396
-------- --------
Incurred related to:
Current year................... 57,481 17,017
Prior years.................... (4,802) 5,364
-------- --------
Total incurred............. 52,679 22,381
-------- --------
Paid related to:
Current year................... 28,279 13,743
Prior years.................... 24,227 8,398
-------- --------
Total paid................. 52,506 22,141
-------- --------
Reserves acquired due to acquisition,
net.............................. - 28,411
-------- --------
Net balance at December 31......... 57,220 57,047
Plus: Reinsurance recoverables.... 26,854 11,893
Reinsurance recoverables acquired
due to acquisition........ - 10,574
-------- --------
Balance at December 31............. $84,074 $79,514
======== ========
20
Life Companies. The Life Companies establish future policy benefits
reserves to meet future obligations under outstanding policies. These reserves
are calculated to satisfy policy and contract obligations as they mature. The
amount of reserves for insurance policies is calculated using assumptions for
interest rates, mortality and morbidity rates, expenses, and withdrawals.
Reserves are adjusted periodically based on published actuarial tables with some
modification to reflect actual experience (see Note 3 of Notes to Consolidated
Financial Statements for the year ended December 31, 1996).
Casualty Division. The Casualty Division maintains loss reserves
representing estimates of amounts necessary for payment of losses and loss
adjustment expenses (LAE). Loss and LAE reserves are annually reviewed by
qualified independent actuaries. The Casualty Division also maintains incurred
but not reported reserves (INBR) and bulk reserves for future development. These
loss reserves are estimates, based on known facts and circumstances at a given
point in time, of amounts the insurer expects to pay on incurred claims.
Reserves for LAE are intended to cover the ultimate costs of settling claims,
including investigation and defense of lawsuits resulting from such claims. Loss
reserves for reported claims are based on a case-by-case evaluation of the type
of claim involved, the circumstances surrounding the claim, and the policy
provisions relating to the type of loss. 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; however, it is difficult to measure
the effect of any one of these considerations on reserve estimates.
The Casualty Division provides 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.
The following table sets forth the development of balance sheet reserves
for unpaid losses and LAE for the Casualty Division's insurance lines
("long-tail" lines) for 1986 through 1996. 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 amounts of previously recorded reserves based on
experience as of the end of each succeeding year.
The reserve estimates are modified as more information becomes known about
the frequency and severity of claims for individual years. The "cumulative
deficiency" for each year represents the aggregate change in such year's
estimates through the end of 1996. 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 inappropriate to predict future
redundancies or deficiencies based on the data in this table.
21
Year ended December 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserve for losses
and LAE $53,496 $53,320 $50,154 $48,031 $48,485 $50,808 $52,668 $47,819(1) $ 39,036 $ 35,770 $ 28,848
Cumulative paid as of:
One year later..... 17,865 16,548 18,106 18,827 22,060 22,837 21,321 21,592 20,812 16,948
Two years later.... 25,280 25,914 27,731 32,560 35,278 33,507 32,352 32,975 27,743
Three years later.. 31,021 36,786 38,046 40,768 40,891 39,832 39,168 34,657
Four years later... 40,295 41,872 44,267 43,745 43,713 43,249 38,163
Five years later... 44,530 47,204 46,183 45,767 46,004 40,938
Six years later.... 49,000 48,056 47,880 47,727 42,412
Seven years later.. 49,835 49,674 49,671 43,750
Eight years later.. 51,288 50,987 45,284
Nine years later... 52,363 46,202
Ten years later.... 47,433
Ultimate losses and LAE reestimated as of:
End of Year........$53,496 $53,320 $50,154 $48,031 $48,485 $50,808 $52,668 $47,819(1) $ 39,036 $ 35,770 $ 28,848
One year later..... 49,799 46,249 47,021 46,756 53,700 53,676 53,212 47,314 40,990 33,083
Two years later.... 44,850 44,043 45,999 52,670 55,919 54,438 53,998 49,569 39,413
Three years later.. 45,568 48,446 53,040 55,865 56,064 55,313 55,752 46,596
Four years later... 53,064 52,326 56,514 55,707 56,255 55,511 51,852
Five years later... 56,771 56,648 56,579 56,403 56,408 51,184
Six years later.... 60,515 56,984 57,446 56,868 51,694
Seven years later.. 60,641 58,142 57,901 52,089
Eight years later.. 60,791 58,626 52,972
Nine years later... 61,391 53,339
Ten years later.... 55,241
Cumulative
deficiency......... $ 3,521 $ 5,304 $ 2,463 $(4,579) $(5,963) $(7,847) $(12,822) $(21,755) $(25,621) $(26,393)
<FN>
- ---------------------------------
(1)Restated due to adjustment of $4.7 million of structured annuities changed to reinsurance in 1990.
</FN>
22
Reinsurance
The insurance subsidiaries purchase reinsurance from unaffiliated insurers
and reinsurers 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 incurs 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.
Life Companies. The Life Companies 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, 1996, the Life Companies'
reinsured premiums totaled $10.0 million of the $288.0 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 remain in-force to
cover any claims on a run-off basis.
Georgia Casualty. Georgia Casualty continues to strengthen and improve its
reinsurance program. There are currently in place treaties which apply to all
casualty lines of business. Georgia Casualty's basic treaties cover all casualty
claims in excess of $200,000 per person per occurrence, up to $5.0 million.
These basic treaties are supplemented with additional per person treaties up 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 $3.0 million per risk.
Of the $11.8 million of net reinsurance recoverable on unpaid losses by
Georgia Casualty at December 31, 1996, First Colony Life Insurance Company
accounted for $3.6 million, Lloyds of London and other London based companies
accounted for $1.0 million, and Pennsylvania Manufacturer's Associated Insurance
Company accounted for $2.9 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 for all lines except third party liability is for 95% of
$6.6 million 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 32% of American
Southern's gross premiums written in 1992 through 1996. Management believes that
its relationship with such 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.
23
Premiums assumed of $25.8 million include a state contract for premiums of
$15.4 million (17.9% of total earned premiums). The contract had a five- year
term at inception and was renewed for a second five-year term that will expire
January 31, 1998. The company has no assurance that the contract will be renewed
for a third term. However, the company's ten-year experience in servicing this
business provides an advantage that could affect renewal.
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, more experienced staffs than the Life
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, 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, services, and market expertise. The final implementation of the
AS400 computer network system greatly improved the company's ability to service
its customers and thereby improved 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 higher 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
directed in the following three general categories where the company has a
reasonable chance of controlling exposures and claims: 1) manufacturing, 2 )
artisan contractors, and 3) service industries. Georgia Casualty's keys to being
competitive in these areas are writing workers' compensation coverages as part
of the total insurance package, a loyal network of agents and development of new
agents in key territories, offering quality customer service to our agents and
insureds, and providing 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. Management
believes, however, that the policies it sells are competitive with those
providing similar benefits offered by other insurers doing business in the
states where American Southern operates.
Rating
Each year A.M. Best Company, Inc. publishes Best's Insurance Reports
("Best's") which include 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
compared to the industry in general. These ratings are not designed for
investors and do not constitute recommendations to buy, sell, or hold any
24
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.
Life Companies. Both of the Life Companies received upgrades from A.M. Best
in both 1993 and 1994 after giving consideration to improvements in financial
strength and other items. Bankers Fidelity Life and Atlantic American Life
obtained ratings of "B-" (Good) in 1994. In 1996, a B+ rating was attained due
to continued improvements in operations.
Georgia Casualty. In early 1997, Georgia Casualty received a Best's rating
of B+ (Very Good). Georgia Casualty's statutory earnings increased by $567,382,
or 38.7%, in 1996 compared to 1995, which was an outstanding achievement
considering the soft competitive insurance market in 1996. The surplus position
of the company improved significantly in 1996 due to strong earnings and
improvements in market conditions of the equity market. These conditions, along
with a combined ratio of 100.3%, resulted in the improved rating.
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. Statutes 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 discriminatory. The Company has historically experienced no
significant regulatory resistance to its applications for rate increases.
25
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, 1996, $13.6 million of securities were on
deposit either directly with various state authorities 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
increased in recent years. The likelihood and amount of any future assessments
cannot be estimated until an insolvency has occurred. For the last five years,
the amount incurred by the Company was not 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 1996
and 1995) provides information on the Company's investments as of the dates
indicated.
December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
----------------------
Fixed maturities:
Bonds:
U.S. Government, agencies
and authorities.......... $ 73,097 39.7% $ 71,549 39.6% $29,017 29.3%
States, municipalities and
political subdivisions... 3,496 1.9 21,947 12.2 3,465 3.5
Public utilities.......... 1,505 .8 4,110 2.3 3,780 3.8
Convertibles and bonds
with warrants attached... 1,275 .7 1,188 .7 1,088 1.1
All other corp. bonds..... 11,562 6.3 12,829 7.1 12,680 12.8
Certificates of deposit... 375 .2 1,690 .9 1,445 1.6
-------- ----- -------- ----- ------- -----
Total fixed maturities(1) 91,310 49.6 113,313 62.85 1,475 52.1
Common and preferred
stocks (2)................. 37,762 20.5 42,116 23.3 29,571 29.9
Mortgage, policy and
student loans (5)......... 13,367 7.3 12,642 7.0 14,277 14.4
Investments in limited
partnerships (4)........... - - - - 1,047 1.1
Real estate................. 46 NIL 46 NIL 46 NIL
Short-term investments (3).. 41,614 22.6 12,498 6.9 2,498 2.5
-------- ----- -------- ----- ------- -----
Total investments...... $184,099 100.0% $180,615 100.0% $98,914 100.0%
======== ===== ======== ===== ======= =====
----------------------
(1) Fixed maturities are carried on the balance sheet at market value. Total
cost of fixed maturities was $91.6 million as of December 31, 1996, $112.9
million as of December 31, 1995, and $52.9 million at December 31, 1994.
(2) Equity securities are valued at market. Total cost of equity securities was
$19.7 million as of December 31, 1996, $26.9 million at December 31, 1995,
and $22.4 million at December 31, 1994.
(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,
-----------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
----------------------
Average investments(1)................. $180,816 $106,645 $106,549
Net investment income.................. 11,005 6,142 6,163
Average yield on investments........... 6.1% 5.7% 5.8%
Realized investment gains, net......... $ 1,589 $ 1,731 $ 870
(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 calculations for 1995 and
1994 do not include American Southern's investment portfolio.
Management's investment strategy is an increased investment in short and
medium maturity bonds and common and convertible preferred stocks.
Employees
The Company and its subsidiaries at December 31, 1996 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
1996 and 1995 and $5.4 million in 1994. While management believes the fees and
charges are fair and reasonable, there can be no assurance that regulatory
authorities would 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, 1996, is
set forth on page 28 of the 1996 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 set forth for each
executive officer of the Company as of December 31, 1996, (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 73 Chairman of the Board 1974
Hilton H. Howell, Jr. 35 Director, President & CEO 1992
John W. Hancock 59 Senior Vice President and Treasurer 1989
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 Bankers Fidelity Life since 1986 and Chairman
of the Board and President of Georgia Casualty since 1988. 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.; Chairman of the Board of Leath Furniture, LLC; 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. He is also a Director of Bankers Fidelity Life, Georgia
Casualty, Bull Run Corporation, and Gray Communications, Inc. 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.
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. He is also a Director of Bankers Fidelity Life and Georgia
Casualty. Prior to joining the Company in 1988, he was Vice President of Finance
with National Consultants, Inc.
ITEM 2. PROPERTIES
Insurance
Owned Properties. The Company owns two parcels of unimproved property
consisting of approximately seven acres located in Fulton and Washington
Counties, Georgia. At December 31, 1996, 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 current terms of the leases, the Company occupies
approximately 54,637 square feet of office space at an annual base rental plus a
pro rata share of all real estate taxes, general maintenance, service expenses,
and insurance costs with respect to the office building. Pursuant to such
leases, the Company's aggregate annual rental in 1996 (including its pro rata
expenses)
29
amounted to approximately $14.65 per square foot, or $957,000. 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 Company management to be comparable to terms
which could be obtained by the Company from unrelated parties for comparable
rental property.
American Southern leases space for its offices in 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 13,746 square feet. American Southern's annual rental
payments for 1996 were approximately $14.19 per square foot, or $195,000.
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, 1996.
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 7, 1997, there
were 6,730 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
- ------------------------- ---- ---
1996
1st quarter............................ $3 1/4 $2 1/8
2nd quarter............................ 4 2 3/4
3rd quarter............................ 3 5/8 3
4th quarter............................ 3 5/8 3
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
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. 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 31, 1996: Georgia Casualty - $8.5
million, American Southern - $18.4 million, Atlantic American Life - ($1.4
million), Bankers Fidelity Life - $7.0 million. The Company does not anticipate
paying cash dividends on the Common Stock in 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, 1996 is set forth on the inside front
cover of the 1996 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 25 to 30 of the 1996 Annual Report to Shareholders and 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 10 to 24 of the 1996 Annual Report to Shareholders and are
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 6, 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, 1996 and
December 31, 1995...................................... 10*
Consolidated Statements of Operations for the Three Years
ended December 31, 1996................................ 11*
Consolidated Statements of Shareholders' Equity for the
Three Years ended December 31, 1996.................... 12*
Consolidated Statements of Cash Flows for the Three Years
ended December 31, 1996................................ 13*
Notes to Consolidated Financial Statements................ 14-24*
Report of Independent Public Accountants.................. 31*
* The page references so designated refer to page numbers in the 1996
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 1996 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, 1996
III - Supplementary Insurance Information for the three years ended
December 31, 1996
IV - Reinsurance for the three years ended December 31, 1996
VI - Supplemental Information concerning property-casualty insurance
operations for the three years ended December 31, 1996
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 - Restated and Amended Articles of Incorporation of the registrant
[incorporated by reference to Exhibit 3.1 to the registrant's Form
10-Q for the fiscal quarter ended March 31, 1996].
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 pril 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].
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 10Q 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 10Q for the quarter ended
September 30, 1994].
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 egistrant 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].
34
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].
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].
35
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 theregistrant's Form
10-K for the year ended December 31, 1992].
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].
36
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 10.4 5 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 ffiliate [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 d ated 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].
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, 1996, that are specifically incorporated by
reference herein.
21.1 - Subsidiaries of the registrant.
37
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].
29.1.1 - Schedule P from American Safety Insurance Company annual statement
for year ended December 31, 1996 (submitted in paper format under
cover of Form SE).
29.1.2 - Schedule P from American Southern Insurance Company annual statement
for year ended December 31, 1996 (submitted in paper format under
cover of Form SE).
29.1.3 - Schedule P from Georgia Casualty & Surety Company annual statement
for year ended December 31, 1996 (submitted in paper format under
cover of Form SE).
(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 27, 1997
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 27, 1997
/s/
---------------------
HILTON H. HOWELL, JR. President, Chief Executive Officer March 27, 1997
and Director (Principal Executive Officer)
/s/
---------------------
JOHN W. HANCOCK Senior Vice President and Treasurer March 27, 1997
(Principal Financial Officer)
/s/
---------------------
SAMUEL E. HUDGINS Director March 27, 1997
/s/
---------------------
D. RAYMOND RIDDLE Director March 27, 1997
/s/
---------------------
HARRIETT J. ROBINSON Director March 27, 1997
/s/
---------------------
SCOTT G. THOMPSON Director March 27, 1997
/s/
---------------------
CHARLES B. WEST Director March 27, 1997
/s/
---------------------
WILLIAM H. WHALEY, M.D. Director March 27, 1997
/s/
---------------------
DOM H. WYANT Director March 27, 1997
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 14, 1997. 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 14, 1997
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,
--------------------
1996 1995
---- ----
Current assets:
Cash and short-term investments $ 382 $ 24
-------- --------
Investment in affiliates:
Investment in insurance subsidiaries 94,797 90,551
Investment in furniture subsidiary - (1,965)
-------- --------
Total investment in affiliated companies 94,797 88,586
-------- --------
Income taxes receivable from subsidiaries 55 1,435
Other assets 2,278 2,541
-------- --------
$ 97,512 $ 92,586
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to affiliates $ 1,058 $ -
Current portion of long-term debt 8,559 13,352
Interest payable 56 527
Other payables 2,076 660
-------- --------
Total current liabilities 11,749 14,539
-------- --------
Income taxes payable to subsidiaries 633 -
Long-term debt 25,994 25,211
Long-term debt payable to affiliates - 6,358
Shareholders' equity 59,136 46,478
-------- --------
$ 97,512 $ 92,586
======== ========
The notes to consolidated financial statements are an integral part of these
condensed statements.
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,
---------------------------
1996 1995 1994
---- ---- ----
REVENUE
Fees, rentals and interest income
from subsidiaries $ 5,662 $ 5,968 $ 5,952
Distributed earnings from subsidiaries 6,850 2,864 -
Other 94 12 2
------- ------- -------
Total revenue 12,606 8,844 5,954
GENERAL AND ADMINISTRATIVE EXPENSES 6,073 5,555 5,522
INTEREST EXPENSE 3,292 2,458 1,968
------- ------- -------
3,241 831 (1,536)
INCOME TAX PROVISION (BENEFIT) 204 (34) (1,632)
------- ------- -------
3,037 865 96
EQUITY IN UNDISTRIBUTED EARNINGS OF
CONSOLIDATED SUBSIDIARIES, NET 4,574 2,253 8,053
------- ------- -------
Income from continuing operations 7,611 3,118 8,149
(Loss) income from discontinued operations,
net (4,447) (10,094) 1,121
------- ------- -------
Income (loss) before extraordinary gain 3,164 (6,976) 9,270
Extraordinary gain - - 100
------- ------- -------
Net income (loss) $ 3,164 $(6,976) $ 9,370
======= ======= =======
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,
-----------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,164 $ (6,976) $ 9,370
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 452 379 292
Equity in undistributed earnings
of consolidated subsidiaries (4,574) (2,253) (8,053)
Loss (income) from discontinued operations 4,447 10,094 (1,121)
Benefit from deferred taxes - - (1,000)
Change in intercompany taxes 2,013 - -
Extraordinary gain from extinguishment of
debt - - (100)
(Decrease) increase in other liabilities (262) (746) 812
Minority interest - (554) 205
Other, net 2,528 1,790 (268)
------- -------- -------
Net cash provided by operating activities 7,768 1,734 137
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries, net - (38) (2,306)
Proceeds from sale of Leath Furniture, net 3,645 - -
Acquisition of American Southern Insurance
Company - (22,770) -
Additions to property and equipment (1,177) (1,058) (646)
------- -------- -------
Net cash provided (used) by investing
activities 2,468 (23,866) (2,952)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable to
affiliates - - 3,175
Proceeds from issuance of bank financing 11,352 22,642 -
Preferred stock dividends to affiliated
shareholders (315) (315) (315)
Purchase of treasury shares (338) (174) -
Retirements and payments of long-term debt
and notes payable to affiliates (20,662) (675) -
Proceeds from exercise of stock options 85 600 19
------- -------- -------
Net cash (used) provided by financing
activities (9,878) 220,078 2,879
------- -------- -------
Net increase (decrease) in cash 358 (54) 64
Cash at beginning of year 24 78 14
------- -------- -------
Cash at end of year $ 382 $ 24 $ 78
======= ======== =======
Supplemental disclosure:
Cash paid for interest $ 3,763 $ 2,894 $ 900
======= ======== =======
Cash paid for income taxes $ 116 $ 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(1)
(in thousands)
Future
Policy
Benefits,
Losses, Other Poicy
Deferred Claims Claims and
Acquisition and Loss Unearned Benefits
Segment Costs Reserves Premiums Payable
- --------------------------------------------------------------------------------
December 31, 1996:
A & H.......... $ 2,561 $ 6,924 $ 2,135 $ -
Life........... 9,676 33,686 - 1,912
Casualty....... 2,942 79,849 22,965 1,727
- --------------------------------------------------------------------------------
$15,179 $120,459 (2) $25,100 $ 3,639
================================================================================
December 31, 1995:
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 (3) $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 (4) $ 7,740 $ 2,184
================================================================================
_________________________
(1) Supplementary insurance information contained above includes amounts related
to American Southern for December 31, 1995 and 1996.
(2) Includes future policy benefits of $36,385 and losses and claims of $84,074.
(3) Includes future policy benefits of $36,305 and losses and claims of $79,514.
(4) Includes future policy benefits of $37,641 and losses and claims of $40,730.
Schedule III
Page 2 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION(1)
(in thousands)
Benefits, Amortization
Investment Claims,Losses of Deferred Other Casualty
Premium Income and Settlement Acquisition Operating Premiums
Segment Revenue (Losses)*(2) Expenses Costs Expenses(2) Written
- ---------------------------------------------------------------------------------------------------------------
December 31, 1996:
Life........... $ 10,240 $ 4,210 $ 6,446 $ 1,449 $ 4,543 $ -
Casualty....... 60,047 7,377 40,245 5,349 13,039 61,068
A & H.......... 15,738 1,234 7,590 1,386 7,565 -
Other.......... - 225 - - 3,644 -
- ---------------------------------------------------------------------------------------------------------------
$ 86,025 $13,046 $54,281 $ 8,184 $28,791 $61,068
===============================================================================================================
December 31, 1995:
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:
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
===============================================================================================================
<FN>
* Includes realized investment gains (losses).
_________________________
(1) Supplementary insurance information contained above includes amounts related
to American Southern for 1996 only.
(2) 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.
</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, 1996:
Life insurance in force..... $287,963 $ 10,072 $ - $277,891
======== ======== ====== ========
Premiums --
Life insurance.............. $ 10,305 $ 65 $ - $ 10,240
Accident and health
insurance................. 15,738 - - 15,738
Property and casualty
insurance(1).............. 43,317 9,009 25,739 60,047
-- -------- -------- -------- --------
Total premiums........... $ 69,360 $ 9,074 $ 25,739 $ 86,025
======== ======== ======== ========
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 casualty
insurance(1).............. 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 casualty
insurance(1).............. 17,035 2,384 - 14,651
-------- -------- -------- --------
Total premiums........... $ 44,162 $ 2,461 $ - $ 41,701
======== ======== ======== ========
_________________________
(1) Information contained above includes amounts related to American Southern
for 1996 only.
Schedule VI
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
Claims and Claim
Adjustment Expenses
Incurred Related to
--------------------
Amortization Paid Claims
Deferred Net of Deferred and Claim
Policy Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Year Ended Acquisition Reserves Premium Premium Income Year Years Costs Expenses Written
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
1996(1) $ 2,942 $79,849 $22,965 $60,047 $ 7,205 $44,468 $(3,403) $ 5,349 $41,017 $61,068
====================================================================================================================================
December 31,
1995 $ 2,657(1) $74,693(1) $21,918(1) $18,302(2) $ 2,989(2) $ 7,002(2) $ 5,985 $ - $12,923(2) $19,074(2)
====================================================================================================================================
December 31,
1994(2) $ 438 $35,435 $ 5,111 $14,651 $ 2,940 $10,617 $(2,661) $ - $21,272 $16,094
====================================================================================================================================
<FN>
_________________________
(1) Includes Georgia Casualty & Surety and American Southern.
(2) Includes Georgia Casualty only.
</FN>