- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-3722
------------------------
ATLANTIC AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1027114
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4370 Peachtree Road, N.E.,
Atlanta, Georgia 30319
--------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (404) 266-5500
--------------
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of class)
----------------------------------
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
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|
------------------------
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 8, 1999, was $22,090,372. On March 8, 1999 there were
19,101,106 shares of the registrant's common stock, par value $1.00 per share,
outstanding.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Annual Report to Shareholders for the year ended
December 31, 1998 - Parts I, II and IV.
2. Portions of registrant's Proxy Statement for the Annual Meeting of
Shareholders, to be held on May 4, 1999, have been incorporated in Items 10, 11,
12 and 13 of Part III of this Form 10-K.
- --------------------------------------------------------------------------------
1
TABLE OF CONTENTS
PART I Page
Item 1. Business................................................. 3
The Company........................................ 3
Casualty Operations................................ 3
Bankers Fidelity................................... 5
Marketing.......................................... 5
Underwriting....................................... 6
Operating Results.................................. 8
Policyholder and Claims Services................... 9
Reserves........................................... 10
Reinsurance........................................ 12
Competition........................................ 12
Rating............................................. 13
Regulation......................................... 13
NAIC Ratios........................................ 14
Risk-Based Capital................................. 14
Investments........................................ 15
Employees.......................................... 16
Financial Information by Industry Segment............ 16
Executive Officers of the Registrant................. 16
Forward-Looking Statements........................... 17
Item 2. Properties............................................... 17
Item 3. Legal Proceedings........................................ 17
Item 4. Submission of Matters to a Vote of Security Holders...... 17
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters............................ 18
Item 6. Selected Financial Data.................................. 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 18
Item 8. Financial Statements and Supplementary Data.............. 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant....... 19
Item 11. Executive Compensation................................... 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 19
Item 13. Certain Relationships and Related Transactions........... 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 19
2
PART I
ITEM 1. BUSINESS
The Company
Atlantic American Corporation, a Georgia corporation (the "Parent" or
"Company") incorporated in 1968, is a holding company that operates through its
subsidiaries in well-defined specialty markets of the life, health, property and
casualty insurance industries. Atlantic American's principal subsidiaries are
Georgia Casualty & Surety Company ("Georgia Casualty"), incorporated in 1947 and
acquired in 1968, Bankers Fidelity Life Insurance Company ("Bankers"),
incorporated in 1955 and acquired in 1976, and American Southern Insurance
Company and its wholly-owned subsidiary American Safety Insurance Company
(collectively, "American Southern"), incorporated in 1936 and acquired in 1995.
On January 1, 1997, the Company's wholly-owned subsidiary Atlantic American
Life Insurance Company ("Atlantic American Life"), incorporated in 1946 and
acquired in 1968, was merged with and into Bankers. The business and operations
of Atlantic American Life, which were substantially similar to those of Bankers,
have been consolidated into Bankers.
In addition, during 1997, the Company acquired 100% of the outstanding stock
of American Independent Life Insurance Company ("AI"). AI, domiciled in
Pennsylvania, was acquired to complement the operations of Bankers. The
operations of AI were assimilated into the operations of Bankers shortly after
the acquisition and expanded the Company's geographic presence in the life and
health insurance markets by five states. Together, Bankers and AI are referred
to as "Bankers Fidelity".
During 1997, the Company also acquired 100% of the outstanding stock of
Self-Insurance Administrators, Inc. ("SIA"). SIA, domiciled in Georgia, is a
third party administrator that specializes in providing administrative services
to those companies and organizations that choose to self-insure their workers'
compensation risks. The acquisition of SIA provides the Company with an entry
into alternative services in the property and casualty insurance marketplace.
During 1996, the Company sold its majority interest in Leath Furniture, LLC
(f/k/a Leath Furniture, Inc., "Leath"). Leath is reflected as discontinued
operations in the Company's financial statements for 1996.
The Company's strategy is to focus on well-defined niches within various
areas of the insurance marketplace. Each of the Company's subsidiaries operates
with relative autonomy as the Company believes this allows each subsidiary to
best exploit its expertise. However, the Company seeks to develop and expand
cross-marketing and joint-underwriting opportunities as they arise.
Additional information concerning the Company and its subsidiaries may be
found in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of the Company's 1998 Annual Report to Shareholders,
which is incorporated herein by reference.
Casualty Operations
The Company's Casualty Operations are split between into two distinct
operating entities, American Southern and Georgia Casualty. The primary products
offered by the two casualty companies are described below, followed by an
overview of each of the companies.
Workers' Compensation Insurance policies provide indemnity and medical
---------------------------------
benefits to insured workers for injuries sustained in the course of their
employment.
Business Automobile Insurance policies provide for bodily injury or property
-----------------------------
damage liability coverage, uninsured motorists coverage, and physical damage
coverage.
General Liability Insurance policies cover bodily injury and property damage
---------------------------
liability for both premises and completed operations exposures for general
classes of business.
Property Insurance policies provide for payment of losses on real and
-------------------
personal property caused by fire and other multiple perils.
3
American Southern. American Southern provides tailored fleet automobile and
long-haul physical damage insurance coverage, on a multi-year contract basis, to
state governments, local municipalities and other large motor pools and fleets
("block accounts") that can be specifically rated and underwritten. The size of
the block accounts insured by American Southern are such that individual class
experience generally can be determined, which allows for customized policy terms
and rates. American Southern produces business in 18 of the 24 states in the
Southeast and Midwest in which it is authorized to conduct business. While the
majority of American Southern's premiums are derived from auto liability and
auto physical damage, American Southern also provides property, general
liability, and surety coverages.
The following table summarizes, for the periods indicated, the allocation of
American Southern's net earned premiums for each of its principal product lines
since its acquisition by the Company.
Year Ended December 31,
------------------------------
(in thousands)
1998 1997 1996
-------- --------- ---------
Automobile Liability $25,539 $30,909 $30,889
Automobile Physical Damage 2,145 4,508 4,865
General Liability 4,291 3,116 1,947
Property 2,970 3,206 3,461
Surety 57 60 88
-------- --------- ---------
Total $35,002 $41,799 $41,250
======== ========= =========
Georgia Casualty. Georgia Casualty is a property-casualty insurance company
engaged in the sale of commercial lines of insurance, focusing on underwriting
workers' compensation and commercial coverages in the Southeast.
Georgia Casualty writes business for both mainstream business accounts and
for industries that are perceived to be high risk. The company is selective in
its underwriting and focuses on insureds with stringent safety and risk
management standards, or accounts that are willing to implement such standards.
Georgia Casualty has a diversified book of business that includes commercial
lines other than workers' compensation, including business automobile, general
liability, property, commercial umbrella, and a Business Owners Policy ("BOP").
The company can offer a total commercial insurance package to cover the
insurance needs of its customers.
Currently, Georgia Casualty is focusing the majority of its new business
efforts in Georgia, Florida, Tennessee and Mississippi. Management believes
these states offer the greatest opportunity for balanced, profitable growth.
Outside of its core states, at the end of 1998, Georgia Casualty had authority
to operate in South Carolina, North Carolina and Kentucky and the company will
begin writing incidental workers' compensation in some of these states in 1999.
The following table summarizes, for the periods indicated, the allocation of
Georgia Casualty's net earned premiums for each of its principal product lines:
Year Ended December 31,
------------------------------------------------
(in thousands)
1998 1997 1996 1995 1994
------------------------------------------------
Workers' Compensation $14,344 $12,841 $13,826 $14,954 $11,958
Business Automobile 3,750 4,031 2,550 1,436 1,054
General Liability 1,619 1,387 1,152 1,025 1,065
Property 2,100 1,657 1,269 887 574
------------------------------------------------
Total $21,813 $19,916 $18,797 $18,302 $14,651
================================================
4
Bankers Fidelity
Bankers Fidelity, which constitutes the life and health operations of
Atlantic American Corporation, offers a variety of life and supplemental health
products with a focus on the senior and middle income markets. Products offered
by Bankers Fidelity include: ordinary life, Medicare supplement, cancer, and
other supplemental health products. Medicare supplement, offered on both a
standard and preferred basis, accounted for 57.3% of Bankers Fidelity's net
premiums in 1998. Life insurance, including both whole and term life insurance
policies, accounted for 34.1% of Bankers Fidelity's premiums in 1998. Bankers
Fidelity also offers several of its products, both life and supplemental health,
through payroll deduction services.
The following table summarizes, for the periods indicated, the allocation of
Bankers Fidelity's net premiums earned for each of its principal product lines
followed by a brief description of the principal products.
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands)
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Ordinary Life $10,848 $9,437 $8,937 $7,037 $6,716
Mass Market Life 900 1,016 1,303 1,260 1,395
- --------------------------------------------------------------------------------
Total Life 11,748 10,453 10,240 8,297 8,111
- --------------------------------------------------------------------------------
Medicare Supplement 19,743 12,534 11,560 11,882 13,347
Cancer, accident and
other health 2,986 3,980 4,178 4,892 5,592
- --------------------------------------------------------------------------------
Total Accident and Health 22,729 16,514 15,738 16,774 18,939
- --------------------------------------------------------------------------------
Total Life and Accident
and Health $34,477 $26,967 $25,978 $25,071 $27,050
================================================================================
Life Products. Bankers Fidelity offers non-participating individual life
--------------
insurance policies with a number of available riders and options.
Medicare Supplement. Bankers Fidelity currently markets 7 of the 10
---------------------
standardized Medicare supplement policies created under the Omnibus Budget
Reconciliation Act of 1990 ("OBRA 1990") which are designed to provide insurance
coverage for certain expenses not covered by the Medicare program, including
copayments and deductibles.
Cancer, Accident & Other Health Coverages. Bankers Fidelity offers several
-------------------------------------------
policies providing for payment of benefits in connection with the treatment of
diagnosed cancer, as well as a number of other policies including convalescent
care, accident expense, hospital/surgical and disability.
Marketing
Casualty Operations
American Southern. American Southern's business is marketed through a small
number of specialized, experienced independent agents. Most of American
Southern's agents are paid a moderate up-front commission with the potential for
additional commission by participating in a profit sharing arrangement that is
directly linked to the profitability of the business generated. In addition, a
significant portion (approximately 54% of total written premium in 1998) of
American Southern's premiums are assumed from third parties. In arrangements
similar to those with its agents, the premium assumed from these parties is
adjusted based upon the profitability of the assumed business. During 1998,
American Southern formed a 50/50 joint venture, American Auto Club Insurance
Agency, LLC, with the AAA Carolinas to market personal automobile insurance to
the members of the automobile club.
Georgia Casualty. Georgia Casualty is represented by a field force of
approximately 100 independent agents in the sale and distribution of its
insurance products. 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 written notice. Georgia Casualty also offers a
contingent profit-sharing arrangement that allows the most profitable agents to
earn additional commissions when specific loss experience and premium growth
goals are achieved. Marketing efforts, directed by experienced marketing
professionals in each state, are complemented by the underwriting, risk
management, and audit staffs of Georgia Casualty, who are available to assist
5
agents in the presentation of all insurance products and services to their
insureds. Georgia Casualty has also begun marketing programs that include
endorsements from trade organizations and business franchises.
Bankers Fidelity
Bankers Fidelity markets its policies through commissioned, independent
agents. In general, Bankers Fidelity enters 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 written notice. General agents receive an override
commission on sales made by agents contracted by them.
Management believes 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 pure commission basis.
Using independent agents also enables Bankers Fidelity to expand or contract
their sales forces at any time without incurring significant additional expense.
Bankers Fidelity has implemented a selective agent qualification process and
had 2,800 licensed agents in 1998. The agents concentrate their sales activities
in either the accident and health or life insurance product lines. During 1998,
a total of 1,232 agents wrote policies on behalf of Bankers Fidelity, and
approximately 20% of those agents accounted for 80% of Bankers Fidelity's
annualized premium.
Products of Bankers Fidelity compete directly with products offered by other
insurance companies, as agents may represent several insurance companies.
Bankers Fidelity, in an effort to motivate agents to market their products,
offers the following agency services: a unique lead system, competitive products
and commission structures, efficient claims service, prompt payment of
commissions, simplified policy issue procedures, periodic sales incentive
programs and, in some cases, protected sales territories consisting of counties
and/or zip codes. Additionally, Bankers Fidelity has a staff of 19 employees
whose primary function is to facilitate the activities of the agents and to act
as liaisons between the agents and Bankers Fidelity.
The company utilizes a distribution sales system which is centered around a
lead generation plan that rewards qualified agents with leads in accordance with
monthly production goals. In addition, a protected territory is established for
each qualified agent, which entitles them to all leads produced within that
territory. The territories are zip code or county based and encompass enough
physical territory to produce a minimum senior population of 12,000. To allow
for the expense of lead generation, commissions were lowered on Bankers
Fidelity's senior citizen life plans. In addition, Bankers Fidelity recruits at
a general agent level rather than at a managing general agent level in an effort
to reduce commission expenses further.
The Company believes this distribution system solves an agent's most
important dilemma -- prospecting -- and allows Bankers Fidelity to build
long-term relationships with individual producers who view Bankers Fidelity as
their primary company. In addition, management believes that Bankers Fidelity's
product line is less sensitive to competitor pricing and commissions because of
the perceived value of the protected territory and the lead generation plan.
Through this distribution channel, production per agent contracted increased
substantially when compared to Bankers Fidelity's general brokerage division.
Underwriting
Casualty Operations
American Southern specializes in the handling of block accounts such as
states and municipalities that generally are sufficiently large to establish
separate class experience, relying upon the underwriting expertise of its
agents. In contrast, Georgia Casualty underwrites all of its accounts in-house
and has developed a team approach to underwriting with respect to renewal
policies. The renewal review team includes members of the staff from management
and the underwriting, risk management, claims and finance departments. By
receiving active input from each of these departments, the company has improved
its underwriting of the risks it continues to insure. All individuals with
first-hand information regarding an account are invited to share their
information with the team.
During the course of the policy year, extensive use is made of risk
management representatives to assist underwriters in identifying and correcting
potential loss exposures and to pre-inspect the majority of the
new accounts that are underwritten. 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 include raising rates,
reviewing underwriting standards, reducing commissions paid to agents, altering
or declining to renew accounts at expiration, and/or terminating agencies with
an unprofitable book of business.
6
American Southern also acts as a reinsurer with respect to all of the risks
associated with certain automobile policies issued by state administrative
agencies, naming the state and various local governmental entities as insureds.
Premiums written from such policies constituted 54% of American Southern's gross
premiums written in 1998. Premiums assumed of $21.0 million, in 1998 include a
single state contract of $12.6 million. Management believes that its
relationship with all of its agencies is good; however, the loss of any one
agency as a customer could potentially have a material adverse effect on the
business or financial condition of the company.
Georgia Casualty continually evaluates the industries in which it writes
workers' compensation and today has a significant book of business in lines and
industries where the cause of loss is more readily identifiable and corrective
actions can be implemented through risk management programs, safety policies,
drug-free workplaces, pre-employment drug testing and various other risk
reduction programs.
Bankers Fidelity
Bankers Fidelity issues a variety of products including single and multiple
premium life insurance policies with face amounts of not less than $1,000. All
life insurance policies are fully underwritten, but the majority are issued with
limited 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 1998 were derived from life insurance
written below Bankers Fidelity's medical limits. For the senior market, Bankers
Fidelity issues 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. Bankers
Fidelity only retains a maximum amount of $50,000 with respect to any individual
life (see "Reinsurance").
Applications for insurance are reviewed as to the applicant's age and
medical history and depending upon this information, additional information may
be requested including the "Medical Information Bureau Report", medical
examinations, statements from doctors, and, where indicated, special medical
tests. If deemed necessary, Bankers Fidelity uses investigative services to
supplement and substantiate information. For certain limited coverages, Bankers
Fidelity has 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.
7
Operating Results
The following table sets forth, on a statutory basis, the incurred losses
and loss ratios for the Company's Casualty Operations and for Bankers Fidelity
during the past five years.
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
(dollars in thousands)
Casualty Operations (1)
WORKERS' COMPENSATION:
Incurred losses $ 9,175 $ 6,740 $ 6,645 $ 9,733(2) $ 7,243
Loss ratio 64.0% 52.5% 48.1% 65.1% 61.9%
BUSINESS AUTOMOBILE:
Incurred losses $19,819 $27,237 $23,977 $ 1,227 $ 602
Loss ratio 63.1% 69.0% 62.6% 85.5% 57.1%
GENERAL LIABILITY:
Incurred losses $ 1,392 $ 1,428 $ 1,242 $(1,238)(2) $ 1,080
Loss ratio 23.3% 31.3% 38.9% - 101.3%
PROPERTY:
Incurred losses $ 2,457 $ 1,840 $ 1,700 $ 416 $ 244
Loss ratio 48.5% 37.9% 36.0% 47.0% 42.6%
TOTAL CASUALTY:
Incurred losses $32,843 $37,245 $33,564 $10,138 $ 9,169
Loss ratio 57.8% 60.3% 55.9% 55.4% 63.7%
Loss adjustment
expense ratio 12.9% 13.9% 12.4% 15.2% 20.1%
Expense ratio 29.2% 25.3% 27.8% 31.4% 27.8%
Combined ratio 99.9% 99.5% 96.1% 102.0% 111.6%
Bankers Fidelity (3)
MEDICARE SUPPLEMENT:
Incurred losses $13,319 $ 7,820 $ 7,136 $ 6,688 $ 7,582
Loss ratio 67.5% 62.4% 61.7% 57.6% 57.8%
CANCER, ACCIDENT AND
OTHER HEALTH:
Incurred losses $ 795 $ 1,747 $ 1,752 $ 2,671 $ 3,357
Loss ratio 26.6% 43.6% 43.5% 56.1% 61.4%
TOTAL BANKERS FIDELITY:
Incurred losses $14,114 $ 9,567 $ 8,888 $ 9,359 $10,939
Loss ratio 62.1% 58.3% 57.2% 57.2% 58.9%
- -----------------------
(1) Includes American Southern for 1998, 1997 and 1996 only.
(2) Includes adjustment to reallocate reserves to workers' compensation.
(3) Includes American Independent for three months in 1997 and full year
in 1998.
See "Reserves" for analysis of loss development and reserves.
8
Policyholder and Claims Services
The Company believes that prompt, efficient policyholder and claims services
are essential to its continued success in marketing its insurance products (see
"Competition"). Additionally, the Company believes that its insureds are
particularly sensitive to claim processing time and to the accessibility of
qualified staff to answer inquiries. Accordingly, the Company's policyholder and
claims services include expeditious disposition of service requests by providing
toll-free access to all customers, 24-hour claim reporting services, and direct
computer links with some of its largest accounts. The Company also utilizes a
state-of-the-art automatic call distribution system to insure timely response.
Inbound calls to customer service support groups are processed efficiently.
Operational data generated from this system allows management to further refine
ongoing client service programs and service representative training modules.
The Company supports a Customer Awareness Program as the basis for its
customer service philosophy. All personnel are required to attend customer
service classes. Hours have been expanded in all service areas to serve
customers and agents in all time zones.
Casualty Operations
American Southern and Georgia Casualty. American Southern and Georgia
Casualty control their claims costs by utilizing an 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. The companies frequently
utilize independent adjusters and appraisers to service claims which require
on-site inspections.
Bankers Fidelity
Insureds obtain claim forms by calling the claims department customer service
group. To shorten claim processing time, a letter detailing all supporting
documents that are required to complete a claim for a particular policy is sent
to the customer along with the correct claim form. With respect to life
policies, the claim is entered into Bankers Fidelity's claims system when the
proper documentation is received. Properly documented claims are generally paid
within three to nine business days of receipt. During 1998, Bankers Fidelity
paid approximately 179,000 claims aggregating $19.4 million, of which
approximately 174,000 claims aggregating $12.2 million were for Medicare
supplement insurance.
9
Reserves
The following table sets forth information concerning the Company's losses
and claims and loss adjustment expenses ("LAE") reserves for the periods
indicated:
1998 1997
---------- ----------
Balance at January 1 $86,721 $84,074
Less: Reinsurance recoverables (24,006) (26,293)
---------- ----------
Net balance at January 1 62,715 57,781
---------- ----------
Incurred related to:
Current year 63,030 60,252
Prior years (2,606) 21
---------- ----------
Total incurred 60,424 60,273
---------- ----------
Paid related to:
Current year 35,566 33,857
Prior years 23,430 22,246
---------- ----------
Total paid 58,996 56,103
---------- ----------
Reserves acquired due to acquisition - 764
---------- ----------
Net balance at December 31 64,143 62,715
Plus: Reinsurance recoverables 22,625 24,006
---------- ----------
Balance at December 31 $86,768 $86,721
========== ==========
Casualty Operations
Atlantic American Corporation's Casualty Operations maintain loss reserves
representing estimates of amounts necessary for payment of losses and LAE. The
Casualty Operations also maintain incurred but not reported reserves 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. All balances are reviewed annually by
qualified independent actuaries. 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 Operations establish reserves for 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 LAE. 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 become known.
The table on the following page sets forth the development of balance sheet
reserves for unpaid losses and LAE for the Casualty Operations' insurance lines
for 1988 through 1998, including periods prior to the Company's ownership of
American Southern. 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 for each of the indicated periods, 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
redundancy or deficiency" for each year represents the aggregate change in such
year's estimates through the end of 1998. In evaluating this information, it
should be noted that the amount of the redundancy or deficiency for any year
represents the cumulative amount of the changes from initial reserve estimates
for such year. Operations for any 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 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.
10
Year ended December 31,
(in thousands)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
Statutory reserve for $57,548 $56,712 $53,496 $53,320 $50,154 $48,031 $48,485 $50,808 $52,668 $47,819(1) $39,036
losses & LAE
Cumulative paid as of:
One year later 17,650 18,899 17,865 16,548 18,106 18,827 22,060 22,837 21,321 21,592
Two years later 26,387 25,821 25,280 25,914 27,731 32,560 35,278 33,507 32,352
Three years later 29,884 29,273 31,021 36,786 38,046 40,768 40,891 39,832
Four years later 31,180 33,674 40,295 41,872 44,267 43,745 43,713
Five years later 35,196 42,498 44,530 47,204 46,183 45,767
Six years later 43,989 46,523 49,000 48,056 47,880
Seven years later 47,927 50,658 49,835 49,704
Eight years later 51,809 51,100 51,288
Nine years later 52,239 52,424
Ten years later 53,335
Ultimate losses and LAE
reestimated as of:
End of Year 57,548 56,712 53,496 53,320 50,154 48,031 48,485 50,808 52,668 47,819(1) 39,036
One year later 50,013 51,103 49,799 46,249 47,021 46,756 53,700 53,676 53,212 47,314
Two years later 45,838 46,952 44,850 44,043 45,999 52,670 55,919 54,438 53,998
Three years later 43,507 44,138 45,568 48,446 53,040 55,865 56,064 55,313
Four years later 41,914 46,638 53,064 52,326 56,514 55,707 56,255
Five years later 45,094 54,173 56,771 56,648 56,579 56,403
Six years later 53,574 57,898 60,515 56,984 57,446
Seven years later 57,265 61,069 60,641 58,142
Eight years later 60,403 61,327 60,791
Nine years later 60,560 61,362
Ten years later 60,774
Cumulative redundancy $ 6,699 $ 7,658 $ 9,813 $ 8,240 $ 2,937 $(5,089) $(6,457) $(7,735) $(12,741) $(21,738)
(deficiency)
- -----------------------
<FN>
(1) Restated due to adjustment of $4.7 million for elimination of structured
annuities changed to reinsurance in 1990.
</FN>
11
Bankers Fidelity
Bankers Fidelity establishes 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, 1998).
Reinsurance
The insurance subsidiaries purchase reinsurance from unaffiliated insurers
and reinsurers to reduce their liability on individual risks and to protect
against catastrophic losses. In a reinsurance transaction, an insurance company
transfers, or "cedes," a portion or all of its exposure on insurance policies to
a reinsurer. The reinsurer assumes the exposure in return for a portion of the
premiums. The ceding of insurance does not legally discharge the insurer from
primary liability for the full amount of policies written by it, and the ceding
company incurs a loss if the reinsurer fails to meet its obligations under the
reinsurance agreement.
Casualty Operations
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
generally maintained as follows: for fire, inland marine, and commercial
automobile physical damage, recovery of losses over $40,000 up to $130,000. Net
retentions for third party losses are generally over $35,000 up to $100,000.
Catastrophe coverage for all lines except third party liability is for 95% of
$6.6 million over $400,000.
Georgia Casualty. Georgia Casualty's basic treaties cover all claims in
excess of $200,000 per person, per occurrence on casualty losses, and per risk
on property losses, up to $10.0 million per casualty claim and $3.0 million per
property claim. An excess catastrophe treaty provides coverage
up to statutory limits for any one occurrence on workers' compensation. The
property lines of coverage are protected with an excess of loss treaty which
affords recovery for property losses in excess of $250,000 up to a maximum of
$3.0 million. Facultative arrangements are in place for property accounts with
limits in excess of $3.0 million per risk.
Bankers Fidelity
Bankers Fidelity has entered into reinsurance contracts ceding the excess of
their retention to several primary reinsurers. Maximum retention by Bankers
Fidelity on any one individual in the case of life insurance policies is
$50,000. At December 31, 1998, Bankers Fidelity's reinsured annualized premiums
totaled $16.9 million of the $275.6 million of life insurance then in force,
generally under yearly renewable term agreements. Two companies accounted for
all of such reinsurance: Munich American Reassurance Company ($12.3 million) and
Optimum Reinsurance ($4.6 million). Certain reinsurance agreements that are no
longer active for new business remain in force to cover any claims on a run-off
basis.
Competition
Casualty Operations
American Southern. 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.
Georgia Casualty. Georgia Casualty's insurance business is highly
competitive. The 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
monoline workers' compensation accounts. Georgia Casualty's efforts are directed
in the following three general categories where the company has the best
opportunity to control exposures and claims: (1) manufacturing, (2) artisan
contractors, and (3) service industries. Management believes that Georgia
Casualty's keys to being competitive in these areas are maintaining strong
underwriting standards, risk management programs, writing workers' compensation
coverages as part of the total insurance package, maintaining and expanding its
loyal network of agents and development of new agents in key territories. In
addition, Georgia Casualty offers quality customer service to its agents and
insureds, and provides rehabilitation, medical management, and claims management
services to its insureds. Georgia Casualty believes that it will continue to be
competitive in the marketplace based on its current strategies and services.
12
Bankers Fidelity
The life and health insurance business is highly competitive and includes a
large number of insurance companies, many of which have substantially greater
financial resources. Bankers Fidelity believes 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. Bankers Fidelity
competes with other insurers on the basis of premium rates, policy benefits, and
service to policyholders. Bankers Fidelity also competes with other insurers to
attract and retain the allegiance of its independent agents through commission
arrangements, accessibility and marketing assistance, lead programs, and market
expertise. Bankers Fidelity believes that it competes effectively on the basis
of policy benefits, services, and market expertise.
Rating
In 1998, for the first time, Atlantic American Corporation and its
subsidiaries underwent a rating and review process by Standard & Poor's. As a
result of the review, each of the Company's insurance subsidiaries were assigned
a single "A-" counterparty credit and financial strength 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
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.
Casualty Operations
American Southern. American Southern and its wholly-owned subsidiary,
American Safety Insurance Company, are each currently rated "A-" (Excellent) by
A.M. Best.
Georgia Casualty. In early 1998, Georgia Casualty received a Best's
rating of "B++" (Very Good).
Bankers Fidelity
Bankers Fidelity. Bankers Fidelity maintains a Best's rating of "B+"
(Very Good).
American Independent. American Independent is currently rated "C++".
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 products generally are subject to rate regulation by state insurance
commissions, which require that certain minimum loss ratios be maintained.
Certain states also have insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The 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.
13
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, 1998, $14.8 million of securities were on
deposit either directly with various state authorities or with third parties
pursuant to various custodial agreements on behalf of Bankers Fidelity and the
Casualty Operations.
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 has
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.
NAIC Ratios
The National Association of Insurance Commissioners (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.
For the year ended December 31, 1998, American Southern and Bankers Fidelity
were within the NAIC "usual" range for all 13 financial ratios. American
Independent was outside the "usual" range on four ratios: net change in capital
and surplus, net income to total income, surplus relief and change in premium.
In 1998, the Company ceased writing new business through American Independent
and transferred its agency force to Bankers Fidelity. Georgia Casualty was
outside the "usual" range on one ratio: investment yield as a result of Georgia
Casualty's large investment in equity securities.
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,
1998, all of the Company's insurance subsidiaries substantially exceeded the RBC
regulatory levels.
14
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 provides information on the Company's investments as of the
dates indicated.
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Bonds:
U.S. Government agencies
and authorities $ 86,535 43.9% $ 76,701 38.6% $ 73,097 39.7%
States, municipalities and
political subdivisions 1,490 0.8 2,738 1.4 3,496 1.9
Public utilities 1,874 0.9 1,893 1.0 1,505 0.8
Convertibles and bonds
with warrants attached - NIL - NIL 1,275 0.7
All other corporate bonds 9,442 4.8 10,457 5.3 11,562 6.3
Certificates of deposit 2,286 1.2 395 0.2 375 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities(1) 101,627 51.6 92,184 46.5 91,310 49.6
Common and preferred stocks (2) 61,007 30.9 46,876 23.6 37,762 20.5
Mortgage, policy and student loans (3) 8,119 4.1 9,536 4.8 13,367 7.3
Investments in limited partnerships (4) 4,822 2.4 3,941 2.0 - -
Real estate 46 NIL 46 NIL 46 NIL
Short-term investments (5) 21,782 11.0 46,167 23.1 41,614 22.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments $197,403 100.0% $198,750 100.0% $184,099 100.0%
====================================================================================================================================
__________________
<FN>
(1) Fixed maturities are carried on the balance sheet at market value. Total
cost of fixed maturities was $100.6 million as of December 31, 1998,
$91.1 million as of December 31, 1997, and $91.6 million as of December
31, 1996.
(2) Equity securities are valued at market. Total cost of equity securities
was $33.1 million as of December 31, 1998, $18.4 million as of December
31, 1997, and $19.7 million as of December 31, 1996.
(3) Mortgage loans and policy and student loans are valued at historical
cost.
(4) Investments in other invested assets which are traded are valued at
estimated market value; all other partnership interests are carried at
historical cost. Total cost of investments in limited partnerships was
$4.8 million as of December 31, 1998 and $4.0 million as of December 31,
1997.
(5) Short-term investments are valued at cost, which approximates market
value.
</FN>
15
Results of the investment portfolio for periods shown were as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------
Average investments(1) $199,132 $187,408 $180,816
Net investment income $ 11,167 $ 10,916 $ 10,699
Average yield on investments 5.6% 5.8% 5.9%
Realized investment gains, net $ 2,909 $ 1,076 $ 1,589
(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.
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, 1998 employed 180 people.
Financial Information By Industry Segment
Financial information concerning the Company and its consolidated
subsidiaries by industry segment for the three years ended December 31, 1998, is
set forth on pages 22 and 23 of the 1998 Annual Report to Shareholders, and such
information by industry segment is incorporated herein by reference.
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, 1998, (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 75 Chairman of the Board 1974
Hilton H. Howell, Jr. 37 Director, President & CEO 1992
Edward L. Rand, Jr. 32 Vice President and Treasurer 1998
Officers are elected annually and serve at the discretion of the Board of
Directors.
Mr. Robinson has served as Director and Chairman of the Board since 1974
and served as President and Chief Executive Officer of the Company from
September 1988 to May 1995. In addition, Mr. Robinson is a Director of Bull
Run Corporation and Gray Communications Systems, Inc.
Mr. Howell has been President and Chief Executive Officer of the Company
since May 1995, and prior thereto served as Executive Vice President of the
Company from October 1992 to May 1995. He has been a Director of the Company
since October 1992. Mr. Howell is the son-in-law of Mr. Robinson. He is also
a Director of Bull Run Corporation and Gray Communications Systems, Inc.
Mr. Rand has served as Vice President and Treasurer of the Company since
May 1998, prior thereto he served as Vice President and Controller from August
1997 to May 1998. He also serves in the following capacities at subsidiaries of
the Company, Treasurer of Self Insurance Administrators, Inc., Director of
Georgia Casualty, and a Director of Bankers Fidelity Life Insurance Company and
American Independent Life Insurance Company. Prior to joining the Company in
August 1997, he was Vice President and Controller of United Capitol Insurance
Company.
16
Forward-Looking Statements
Certain of the statements and subject matters contained herein that are not
based upon historical or current facts deal with or may be impacted by potential
future circumstances and developments, and should be considered forward-looking
and subject to various risks and uncertainties. Such forward-looking statements
are made based upon management's belief, as well as assumptions made by and
information currently available, to management pursuant to "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements, and the discussion of such subject areas, involve, and therefore are
qualified by, the inherent risks and uncertainties surrounding future
expectations generally, and may materially differ from the Company's actual
future experience involving any one or more of such subject areas. The Company
has attempted to identify, in context, certain of the factors that it currently
believes may cause actual future experience and results to differ from current
expectations. The Company's operations and results also may be subject to the
effect of other risks and uncertainties in addition to the relevant qualifying
factors identified elsewhere herein, including, but not limited to, locality and
seasonality in the industries to which the Company offers its products, the
impact of competitive products and pricing, unanticipated increases in the rate
and number of claims outstanding, volatility in the capital markets that may
have an impact on the Company's investment portfolio, unanticipated developments
in the process of assessing and addressing issues related to the Year 2000
issue, the uncertainty of general economic conditions, and other risks and
uncertainties identified from time to time in the Company's periodic reports
filed with the Securities and Exchange Commission. Many of such factors are
beyond the Company's ability to control or predict. As a result, the Company's
actual financial condition, results of operations and stock price could differ
materially from those expressed in any forward-looking statements made by the
Company. Undue reliance should not be placed upon forward-looking statements
contained herein. The Company does not intend to publicly update any
forward-looking statements that may be made from time to time by, or on behalf
of, the Company.
ITEM 2. PROPERTIES
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, 1998, 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 in Atlanta,
Georgia, from Delta Life Insurance Company, 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 54,000 square feet of office space. Delta
Life Insurance Company, the owner of the building, is controlled by J. Mack
Robinson, Chairman of the Board of Directors and largest 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 in
Atlanta, Georgia. The lease term expires January 31, 2000. Under the terms of
the lease, American Southern occupies approximately 13,700 square feet.
ITEM 3. LEGAL PROCEEDINGS
Litigation
The Company and its subsidiaries are involved in various claims and lawsuits
incidental to and in the ordinary course of their businesses. In the opinion of
management, such claims will not have a material effect on the business or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the quarter ended December 31, 1998.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market and
quoted on the Nasdaq National Market (Symbol: AAME). As of March 8, 1999, there
were 5,040 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
- --------------------------------------------------------------------------------
1998
1st quarter $5 1/2 $4 5/8
2nd quarter 5 1/16 3 7/8
3rd quarter 5 1/4 4
4th quarter 4 15/16 3 5/8
1997
1st quarter $3 3/4 $3 1/16
2nd quarter 3 1/4 2 1/2
3rd quarter 4 1/8 2 1/2
4th quarter 5 1/2 4
The Company has not paid dividends to its common shareholders 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, cumulative
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
principal insurance subsidiaries had the following accumulated statutory
earnings and/or (deficits) as of December 31, 1998: Georgia Casualty - $13.7
million, American Southern - $20.5 million, Bankers Fidelity Life - $17.4
million. The Company has elected to retain its earnings to grow its business and
does not anticipate paying cash dividends on its common stock in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of Atlantic American Corporation and subsidiaries
for the five year period December 31, 1998 is set forth on page 1 of the 1998
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 1998 Annual Report to Shareholders and are incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under that caption "Interest Rate and Market Risk" in
the information incorporated by reference in Item 7 above, is incorporated by
reference herein.
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 1998 Annual Report to Shareholders and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
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 sections
entitled "Election of Directors", "Security Ownership of Management", "Section
16(a) Beneficial Ownership Compliance", "Executive Compensation", and "Certain
Relationships and Related Transactions" contained in the Company's definitive
proxy statement to be delivered in connection with the Company's Annual Meeting
of Shareholders to be held May 4, 1999.
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, 1998 and December 31, 1997 10*
Consolidated Statements of Operations for the
Three Years ended December 31, 1998 11*
Consolidated Statements of Shareholders' Equity
for the Three Years ended December 31, 1998 12*
Consolidated Statements of Cash Flows for the Three
Years ended December 31, 1998 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 1998 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 1998 Annual Report to
Shareholders of Atlantic American Corporation is not deemed to be filed
under the Securities Exchange Act of 1934.
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants
II - Condensed financial information of registrant for the three years
ended December 31, 1998
III - Supplementary Insurance Information for the three years ended
December 31, 1998
IV - Reinsurance for the three years ended December 31, 1998
VI - Supplemental Information concerning property-casualty insurance
operations for the three years ended December 31, 1998
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].
10.01 - 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].
10.02 - 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].
19
10.03 - 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].
10.04 - 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].
10.05 - 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].
10.06 - Management Agreement between registrant and Georgia Casualty &
Surety Company dated April 1, 1983 [incorporated by reference to
Exhibit 10.16 to the registrant's Form 10-K for the year ended
December 31, 1986].
10.07* - 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].
10.08 - 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].
10.09 - Loan and Security Agreement dated August 26, 1991, between
registrant's three insurance subsidiaries and Leath Furniture,
Inc. [incorporated by reference to Exhibit 10.38 to the
registrant's Form 10-K for the year ended December 31, 1992].
10.10 - 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].
10.11 - 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].
10.12 - 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].
10.13 - 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].
10.14 - 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, 1997, that are specifically incorporated
by reference herein.
21.1 - Subsidiaries of the registrant.
23.1 - Consent of Arthur Andersen LLP, 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].
(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.
20
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/
----------------------------------
Edward L. Rand, Jr.
Vice President and Treasurer
Date: March 26, 1999
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 26, 1999
/s/
- -----------------------------
HILTON H. HOWELL, JR. President, Chief Executive
Officer and Director
(Principal Executive Officer) March 26, 1999
/s/
- -----------------------------
EDWARD L. RAND, JR. Vice President and Treasurer March 26, 1999
/s/
- -----------------------------
EDWARD E. ELSON Director March 26, 1999
/s/
- -----------------------------
SAMUEL E. HUDGINS Director March 26, 1999
/s/
- -----------------------------
D. RAYMOND RIDDLE Director March 26, 1999
/s/
- -----------------------------
HARRIETT J. ROBINSON Director March 26, 1999
/s/
- -----------------------------
SCOTT G. THOMPSON Director March 26, 1999
/s/
- -----------------------------
MARK C. WEST Director March 26, 1999
/s/
- -----------------------------
WILLIAM H. WHALEY, M.D. Director March 26, 1999
/s/
- -----------------------------
DOM H. WYANT Director March 26, 1999
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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 26, 1999. 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.
/s/
---------------------------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 26, 1999
22
Schedule II
Page 1 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
BALANCE SHEETS
(in thousands)
ASSETS
December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Current assets:
Cash and short-term investments $ 130 $ 223
Investment in insurance subsidiaries 110,587 107,124
Income taxes receivable from subsidiaries - 137
Other assets 1,884 2,424
- --------------------------------------------------------------------------------
$112,601 $109,908
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,400 $ 1,000
Other payables 4,320 3,125
- --------------------------------------------------------------------------------
Total current liabilities 6,720 4,125
Income taxes payable to subsidiaries 64 -
Long-term debt 23,600 27,600
Shareholders' equity 82,217 78,183
- --------------------------------------------------------------------------------
$112,601 $109,908
================================================================================
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,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
REVENUE
Fees, rentals and interest
income from subsidiaries $ 4,230 $ 3,841 $ 5,662
Distributed earnings from
subsidiaries 7,054 11,209 6,850
Other 1,155 20 94
- --------------------------------------------------------------------------------
Total revenue 12,439 15,070 12,606
GENERAL AND ADMINISTRATIVE EXPENSES 6,407 5,305 6,073
INTEREST EXPENSE 2,146 2,902 3,292
- --------------------------------------------------------------------------------
3,886 6,863 3,241
INCOME TAX BENEFIT (1) 1,703 1,862 2,054
- --------------------------------------------------------------------------------
5,589 8,725 5,295
EQUITY IN UNDISTRIBUTED EARNINGS OF
CONSOLIDATED SUBSIDIARIES, NET 2,969 (692) 2,316
- --------------------------------------------------------------------------------
Income from continuing operations 8,558 8,033 7,611
(Loss) from discontinued
operations, net - - (4,447)
- --------------------------------------------------------------------------------
Net income $ 8,558 $ 8,033 $ 3,164
================================================================================
(1) Under the terms of its tax-sharing agreement with its subsidiaries, income
tax provisions for the individual companies are computed on a separate
company basis. Accordingly, the Company's income tax benefit results from
the utilization of the parent company separate return loss to reduce the
consolidated taxable income of the Company and its subsidiaries.
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,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,558 $ 8,033 $ 3,164
Adjustments to reconcile net income
to net cash provided by operating
activities:
Realized investment gains (1,151) - -
Depreciation and amortization 670 591 452
Equity in undistributed earnings
of consolidated subsidiaries (2,969) 692 (2,316)
Loss from discontinued operations - - 4,447
Change in intercompany taxes 201 (715) (245)
Decrease in other liabilities (11) (157) (262)
Other, net 186 (245) 2,528
- --------------------------------------------------------------------------------
Net cash provided by
operating activities 5,484 8,199 7,768
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Leath
Furniture, net - - 3,645
Additions to property and equipment (305) (536) (1,177)
- --------------------------------------------------------------------------------
Net cash (used in) provided
by investing activities (305) (536) 2,468
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bank financing - 5,617 11,352
Preferred stock dividends to
affiliated shareholders (315) (315) (315)
Purchase of treasury shares (1,447) (558) (338)
Retirements and payments of
long-term debt and notes
payable to affiliates (2,600) (12,628) (20,662)
Redemption of preferred stock (1,000) - -
Proceeds from exercise of stock
options 90 62 85
- --------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (5,272) (7,822) (9,878)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash (93) (159) 358
Cash at beginning of year 223 382 24
- --------------------------------------------------------------------------------
Cash at end of year $ 130 $ 223 $ 382
================================================================================
Supplemental disclosure:
Cash paid for interest $ 2,143 $ 2,958 $ 3,763
================================================================================
Cash paid for income taxes $ 330 $ 85 $ 116
================================================================================
Issuance of stock to acquire SIA, Inc. $ 66 $ 1,212 $ -
================================================================================
The notes to consolidated financial statements are an
integral part of these condensed statements.
II-3
Schedule III
Page 1 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Future Policy
Benefits, Losses Other Policy
Deferred Claims and Loss Unearned Claims and
Segment Acquisition Costs Reserves Premiums Benefits Payable
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1998:
Bankers Fidelity.......... $13,972 $ 44,510 $ 2,874 $ 2,065
American Southern......... 1,378 46,952 11,830 1,629
Georgia Casualty.......... 1,531 34,218 8,267 32
- ------------------------------------------------------------------------------------------------------------------------------------
$16,881 $125,680 (1) $22,971 $ 3,726
====================================================================================================================================
December 31, 1997:
Bankers Fidelity.......... $13,412 $ 44,070 $ 2,631 $ 2,001
American Southern......... 1,748 47,783 12,964 1,962
Georgia Casualty.......... 1,323 34,056 8,817 34
- ------------------------------------------------------------------------------------------------------------------------------------
$16,483 $125,909 (2) $24,412 $ 3,997
====================================================================================================================================
December 31, 1996:
Bankers Fidelity.......... $12,237 $ 40,610 $ 2,135 $ 1,912
American Southern......... 2,131 44,652 16,481 1,693
Georgia Casualty.......... 811 35,197 6,484 34
- ------------------------------------------------------------------------------------------------------------------------------------
$15,179 $120,459 (3) $25,100 $ 3,639
====================================================================================================================================
- ------------------------------------
<FN>
(1) Includes future policy benefits of $38,912 and losses and claims of $86,768.
(2) Includes future policy benefits of $39,188 and losses and claims of $86,721.
(3) Includes future policy benefits of $36,385 and losses and claims of $84,074.
</FN>
Schedule III
Page 2 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Benefits, Amortization
Investment Claims, Losses of Deferred Other Casualty
Premium Income and Settlement Acquisition Operating Premiums
Segment Revenue (Losses)* Expenses Costs Expenses Written
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1998:
Bankers Fidelity.......... $34,477 $ 5,572 $21,494 $ 2,110 $12,895 $ -
American Southern......... 35,002 4,503 23,135 4,748 5,183 33,869
Georgia Casualty.......... 21,813 3,113 16,216 3,737 3,522 21,266
Other..................... - 1,220 - - 4,323 -
- ------------------------------------------------------------------------------------------------------------------------------------
$91,292 $14,408 $60,845 $10,595 $25,923 $55,135
====================================================================================================================================
December 31, 1997:
Bankers Fidelity.......... $26,967 $ 5,175 $15,576 $ 1,944 $10,044 $ -
American Southern......... 41,799 4,353 30,182 4,932 4,997 38,282
Georgia Casualty.......... 19,916 2,811 15,260 2,828 2,988 22,280
Other..................... - (7) - - 4,293 -
- ------------------------------------------------------------------------------------------------------------------------------------
$88,682 $12,332 $61,018 $ 9,704 $22,322 $60,562
====================================================================================================================================
December 31, 1996:
Bankers Fidelity.......... $25,978 $ 5,524 $14,036 $ 2,835 $12,110 $ -
American Southern......... 41,250 4,284 28,586 5,349 5,108 41,561
Georgia Casualty.......... 18,797 2,921 12,482 2,203 4,905 19,507
Other..................... - 11 (823) - 4,465 -
- ------------------------------------------------------------------------------------------------------------------------------------
$86,025 $12,740 $54,281 $10,387 $26,588 $61,068
====================================================================================================================================
<FN>
* Includes realized investment gains (losses).
</FN>
Schedule IV
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
REINSURANCE
(in thousands)
Ceded To Assumed
Direct Other From Other Net
Amount Companies Companies Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Life insurance in force........... $275,557 $(16,941) $ - $258,616
====================================================================================================================================
Premiums --
Bankers Fidelity.................. $ 34,929 $ (2,236) $ 1,784 $ 34,477
American Southern................. 19,306 (5,215) 20,911 35,002
Georgia Casualty.................. 24,625 (3,206) 394 21,813
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums................. $ 78,860 $(10,657) $23,089 $ 91,292
====================================================================================================================================
Year ended December 31, 1997:
Life insurance in force........... $267,749 $(11,767) $ - $255,982
====================================================================================================================================
Premiums --
Bankers Fidelity.................. $ 27,427 $ (460) $ - $ 26,967
American Southern................. 22,471 (6,039) 25,367 41,799
Georgia Casualty.................. 22,884 (2,968) - 19,916
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums................. $ 72,782 $ (9,467) $25,367 $ 88,682
====================================================================================================================================
Year ended December 31, 1996:
Life insurance in force........... $220,927 $(10,072) $ - $210,855
====================================================================================================================================
Premiums --
Bankers Fidelity.................. $ 26,043 $ (65) $ - $ 25,978
American Southern................. 24,462 (5,770) 22,558 41,250
Georgia Casualty.................. 22,011 (3,214) - 18,797
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums................. $ 72,516 $ (9,049) $22,558 $ 86,025
====================================================================================================================================
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, 1998 $ 2,909 $81,170 $20,097 $56,815 $7,616 $47,579 $(7,168) $ 8,485 $39,699 $55,135
======= ======= ======= ======= ====== ======= ======== ======= ======= =======
December 31, 1997 $ 3,071 $81,839 $21,781 $61,715 $7,165 $49,163 $(3,003) $ 7,760 $41,883 $60,562
======= ======= ======= ======= ====== ======= ======== ======= ======= =======
December 31, 1996 $ 2,942 $79,849 $22,965 $60,047 $7,205 $44,468 $(3,403) $ 7,552 $41,017 $61,068
======= ======= ======= ======= ====== ======= ======== ======= ======= =======