Leased Properties. The Company leases space for its principal offices and for some of its insurance operations in an office building located in Atlanta, Georgia, from Delta Life Insurance Company under a lease which continues until either party provides written notice of cancellation at least twelve months in advance of the actual termination date. The lease, which commenced on November 1, 2007, provides for rent adjustments on every fifth anniversary of the commencement date. Under the current terms of the lease, the Company occupies approximately 49,586 square feet of office space. Delta Life Insurance Company, the owner of the building, is controlled by J. Mack Robinson, the majority shareholder of the Company. The terms of the lease are believed by Company management to be comparable to terms which could be obtained by the Company from unrelated parties for comparable rental property.
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we have elected to comply with certain scaled disclosure reporting obligations, and therefore do not have to provide the information required by this Item.
The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”) for the years ended December 31, 2011 and 2010, as restated (See Note 1 of Notes to Consolidated Financial Statements). This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and, in management’s belief, conform to general practices within the insurance industry. The following is an explanation of the Company’s accounting policies and the resultant estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. Atlantic American does not expect that changes in the estimates determined using these policies will have a material effect on the Company’s financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.
Unpaid loss and loss adjustment expenses comprised 28% of the Company’s total liabilities at December 31, 2011. This liability includes estimates for: 1) unpaid losses on claims reported prior to December 31, 2011, 2) future development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to December 31, 2011 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to December 31, 2011. Quantification of loss estimates for each of these components involves a significant degree of judgment and estimates may vary, materially, from period to period. Estimated unpaid losses on reported claims are developed based on historical experience with similar claims by the Company. Development on reported claims, estimates of unpaid ultimate losses on claims incurred prior to December 31, 2011 but not yet reported, and estimates of unpaid loss adjustment expenses are developed based on the Company’s historical experience, using actuarial methods to assist in the analysis. The Company’s actuaries develop ranges of estimated development on reported and unreported claims as well as loss adjustment expenses using various methods, including the paid-loss development method, the reported-loss development method, the paid Bornhuetter-Ferguson method and the reported Bornhuetter-Ferguson method. Any single method used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes affecting the business environment and the Company’s administrative policies. Further, a variety of external factors, such as legislative changes, medical cost inflation, and others may directly or indirectly impact the relative adequacy of liabilities for unpaid losses and loss adjustment expenses. The Company’s approach is to select an estimate of ultimate losses based on comparing results of a variety of reserving methods, as opposed to total reliance on any single method. Unpaid loss and loss adjustment expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used to develop such estimates, the amount of the Company’s recorded liability for unpaid loss and loss adjustment expenses is adjusted. In the event the Company’s actual reported losses in any period are materially in excess of the previously estimated amounts, such losses, to the extent reinsurance coverage does not exist, could have a material adverse effect on the Company’s results of operations.
Future policy benefits comprised 31% of the Company’s total liabilities at December 31, 2011. These liabilities relate primarily to life insurance products and are based upon assumed future investment yields, mortality rates, and withdrawal rates after giving effect to possible risks of adverse deviation. The assumed mortality and withdrawal rates are based upon the Company’s experience. If actual results differ from the initial assumptions, the amount of the Company’s recorded liability could require adjustment.
Receivables are amounts due from reinsurers, insureds and agents, and any sales of investment securities not yet settled, and comprised 8% of the Company’s total assets at December 31, 2011. Insured and agent balances are evaluated periodically for collectibility. Annually, the Company performs an analysis of the creditworthiness of the reinsurers with whom the Company contracts using various data sources. Failure of reinsurers to meet their obligations due to insolvencies, disputes or otherwise could result in uncollectible amounts and losses to the Company. Allowances for uncollectible amounts are established, as and when a loss has been determined probable, against the related receivable. Losses are recognized by the Company when determined on a specific account basis and a general provision for loss is made based on the Company’s historical experience.
Cash and investments comprised 83% of the Company’s total assets at December 31, 2011. Substantially all of the Company’s investments are in bonds and common and preferred stocks, the values of which are subject to significant market fluctuations. The Company carries all investments as available for sale and, accordingly, at their estimated fair values. The Company owns certain fixed maturities that do not have publicly quoted values, but had an estimated fair value as determined by management of $2.0 million at December 31, 2011. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility than the value of securities with publicly quoted market values. On occasion, the value of an investment may decline to a value below its amortized purchase price and remain at such value for an extended period of time. When an investment’s indicated fair value has declined below its cost basis for a period of time, the Company evaluates such investment for an other than temporary impairment. The evaluation for an other than temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. Potential risks and uncertainties include, among other things, changes in general economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. In evaluating a potential impairment, the Company considers, among other factors, management’s intent and ability to hold these securities until price recovery, the nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit status. If an other than temporary impairment is deemed to exist, then the Company will write down the amortized cost basis of the investment to its estimated fair value. While any such write down does not impact the reported value of the investment in the Company’s balance sheet, it is reflected as a realized investment loss in the Company’s consolidated statements of operations.
Total revenue was $118.3 million in 2011 as compared to $106.9 million in 2010. Premium revenue increased to $107.5 million in 2011 from $97.6 million in 2010. The increase in premiums was primarily due to increases in Medicare supplement and commercial automobile business. The increase in investment income was primarily attributable to a higher average balance of fixed maturities held by the Company in 2011 as compared to 2010. Also, included in total revenue were realized investment gains of $27,000 in 2011 compared to realized investment losses of $0.7 million in 2010. The magnitude of realized investment gains and losses in any year is a function of the timing of trades of investments relative to the markets themselves as well as the recognition of any other than temporary impairments on investments.
Total expenses were $115.0 million in 2011 as compared to $106.3 million in 2010. Although total expenses increased, the Company’s overall underwriting results improved in 2011. As a percentage of premiums, insurance benefits and losses incurred and commissions and underwriting expenses were 96.0% and 97.3% in 2011 and 2010, respectively. The decrease in the ratio was primarily due to the increase in premium revenue in the life and health operations partially offset by higher loss ratios in the property and casualty operations.
Gross written premiums at American Southern increased $2.0 million, or 4.6%, during 2011 as compared to 2010. The increase in gross written premiums was primarily attributable to an increase in commercial automobile business generated from several significant agents as well as an increased production of performance bonds in the surety line of business. Partially offsetting the increase in gross written premiums was the decline in the general liability line of business due to the loss of an agency and decreases in artisan programs resulting from continued weakness in the construction industry. During 2011, American Southern experienced higher loss ratios in the commercial automobile line of business as compared to 2010. Due to the unfavorable loss experience in 2011, several agencies were cancelled by American Southern in the first quarter of 2012. These agencies on a combined basis produced approximately $6.8 million in annualized commercial automobile business. In an effort to increase gross written premiums and diversify its business, American Southern continually evaluates new underwriting programs and expects to be able to offset the decrease in business writings from these cancelled agents.
Ceded premiums increased $1.0 million, or 18.0%, during 2011 as compared to 2010. The increase in ceded premiums was primarily due to the increase in the related earned premiums. As American Southern’s premiums are determined and ceded as a percentage of earned premiums, an increase in ceded premiums occurs when earned premiums increase. Also contributing to the increase in ceded premiums was an increase in commercial automobile earned premiums which have higher contractual cession rates than other lines of business as well as increased cession rates resulting from the renewal of the company’s reinsurance agreement in the fourth quarter of 2011.
In establishing reserves, American Southern initially reserves for losses at the higher end of the reasonable range if no other value within the range is determined to be more probable. Selection of such an initial loss estimate is an attempt by management to give recognition that initial claims information received generally is not conclusive with respect to legal liability, is generally not comprehensive with respect to magnitude of loss and generally, based on historical experience, will develop more adversely as time and information develops. However, as a result, American Southern generally experiences reserve redundancies when analyzing the development of prior year losses in a current period. At December 31, 2011, the range of estimates developed in connection with the loss reserves for American Southern indicated that reserves could be as much as 17.2% lower or as much as 12.0% higher. Development from prior years’ reserves has historically reduced the current year loss ratio; however, such reduction in the current year loss ratio is generally offset by the reserves established in the current year for current period losses. American Southern’s estimated net reserve redundancies for the years ended December 31, 2011 and 2010 were $3.1 million and $5.4 million, respectively. To the extent reserve redundancies vary between years, there is an incremental impact on the results of operations from American Southern and the Company. The indicated redundancy in 2011 was $2.3 million less than that in 2010. After considering the impact on contingent commissions and other related accruals, the $2.3 million decline in the redundancy resulted in a decline in income from operations before tax of approximately $1.4 million in 2011 as compared to 2010. Management believes that such differences will continue in future periods but is unable to determine if or when incremental redundancies will increase or decrease, until the underlying losses are ultimately settled.
Contingent commissions, if contractually applicable, are ultimately payable to agents based on the underlying profitability of a particular insurance contract or a group of insurance contracts, and are periodically evaluated and accrued as earned. Approximately 80% of American Southern’s business provides for contractual commission arrangements which compensate the company’s agents in relation to the loss ratios of the business they write. By structuring its business in this manner, American Southern provides its agents with an economic incentive to place profitable business with American Southern. In periods in which loss reserves reflect favorable development from prior years’ reserves, there is generally a highly correlated increase in commission expense also related to the prior year business. Accordingly, favorable loss development from prior years, while anticipated to continue in future periods, is not an indicator of significant additional profitability in the current year.
Premium revenue at Bankers Fidelity increased $7.3 million, or 11.6%, during 2011 as compared to 2010. Premiums from the Medicare supplement line of business increased $7.6 million, or 16.3%, in 2011 as compared to 2010, due primarily to a significant increase in business generated from the company’s core producers, new business issued in the state of Missouri, and rate increases on renewal business. Other health products premiums decreased $0.3 million, or 6.1%, during 2011 as compared to 2010, primarily as a result of decreased business activities with group associations, partially offset by an increase in the sales of short-term care products. Premiums from the life insurance line of business decreased slightly in 2011 from 2010 due to the redemption and settlement of existing policy obligations exceeding the level of new sales activity. In 2011, the company’s five principal states in terms of premium revenue, Georgia, Indiana, Ohio, Pennsylvania, and Utah, were consistent with those in 2010 and accounted for approximately 49% of total premiums for 2011.
The indicated underwriting loss of $0.2 million in 2011 and $2.7 million in 2010 does not take into account investment income, which is a significant component in evaluating profitability; particularly in the life insurance business.
Investment income increased $0.9 million, or 8.7%, in 2011 as compared to 2010. The increase in investment income was primarily attributable to a higher average balance of fixed maturities held by the Company in 2011 as compared to 2010. During 2010, a large number of fixed maturities held by the Company were redeemed by the issuers in accordance with the contractual terms thereof, the proceeds from which were generally reinvested in lower yielding cash equivalents until higher yielding quality replacement investments could be made.
The Company had net realized investment gains of $27,000 in 2011 compared to net realized investment losses of $0.7 million in 2010. The net realized investment gains in 2011 resulted from the disposition of several of the Company’s investments in fixed maturities and a $0.3 million gain from the sale of an outparcel of land held within one of the Company’s real estate partnership investments. Partially offsetting the 2011 realized investment gains was an other than temporary impairment charge of $1.2 million related to certain of the Company’s investments in certain bonds and equity securities. The net realized investment losses in 2010 were primarily attributable to an other than temporary impairment charge of $2.3 million related to certain equity securities, partially offset by the gains on sales of certain fixed maturities and equity securities. Management continually evaluates the Company’s investment portfolio and, as may be determined to be appropriate, makes adjustments for impairments and/or will divest investments. See Note 2 of Notes to Consolidated Financial Statements.
The primary differences between the effective tax rate and the federal statutory income tax rate resulted from the dividends-received deduction (“DRD”), the small life insurance company deduction (“SLD”) and the change in deferred tax asset valuation allowance. The current year estimated DRD is adjusted as underlying factors change and can vary from estimates based on, but not limited to, actual distributions from these investments as well as appropriate levels of taxable income. The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”). The amount of the SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3.0 million and is ultimately phased out at $15.0 million. The change in deferred tax asset valuation allowance was primarily due to the unanticipated utilization of certain capital loss carryforward benefits that had been previously reserved.
The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and surplus levels, and meeting debt service requirements. Current and expected patterns of claim frequency and severity may change from period to period but generally are expected to continue within historical ranges. The Company’s primary sources of cash are written premiums, investment income, proceeds from the sale and maturity of its invested assets and, if necessary, available borrowings under the Credit Agreement (defined below). The Company believes that, within each operating company, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts and reinsurance collections will be adequate to fund the payment of claims and expenses as needed.
The Parent provides certain administrative, purchasing and other services to each of its subsidiaries. The amounts charged to and paid by the subsidiaries for these services were $5.1 million and $5.0 million in 2011 and 2010, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $1.6 million and $1.2 million were paid to the Parent under the tax sharing agreements in 2011 and 2010, respectively. Dividends were paid to Atlantic American by its subsidiaries totaling $6.5 million in each of 2011 and 2010. As a result of the Parent’s tax loss carryforwards, which totaled approximately $4.1 million at December 31, 2011, it is anticipated that the tax sharing agreements will continue to provide the Parent with additional funds to assist in meeting its cash flow obligations.
The Company intends to pay its obligations under the Credit Agreement, if any, and the Junior Subordinated Debentures using existing cash balances, dividend and tax sharing payments from the operating subsidiaries, or from potential future financing arrangements.
Net cash provided by operating activities was $9.1 million in 2011 compared to $4.9 million in 2010. Cash and cash equivalents decreased from $28.3 million at December 31, 2010 to $21.3 million at December 31, 2011. The decrease in cash and cash equivalents during 2011 was primarily due to an increased level of investing exceeding normal sales and maturities. Also contributing to the decrease was the repurchase of the Company’s common stock resulting from a privately negotiated transaction with an individual shareholder. Total consideration for this repurchase was $1.75 million. Cash and cash equivalents at December 31, 2011 of $21.3 million are believed to be sufficient to meet the Company’s near-term needs.
As described in Note 1 to the consolidated financial statements, the Company has restated its 2010 consolidated financial statements to correct an overstatement of net income, retained earnings and accumulated other comprehensive loss.
The Company’s investments in both fixed maturities, which include bonds and redeemable preferred stocks, and equity securities, which include common and non-redeemable preferred stocks, are classified as “available-for-sale” and, accordingly, are carried at fair value with the after-tax difference from amortized cost, as adjusted if applicable, reflected in shareholders’ equity as a component of accumulated other comprehensive income or loss. The fair values for fixed maturities and equity securities are largely determined by either independent methods prescribed by the National Association of Insurance Commissioners (“NAIC”), which do not differ materially from publicly quoted market prices, when available, or independent broker quotations. The Company owns certain fixed maturities that do not have publicly quoted market values, but had an estimated fair value as determined by management of $2,035 at December 31, 2011. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility than the value of securities with publicly quoted market values. Policy loans and real estate are carried at historical cost. Other invested assets are comprised of investments in limited partnerships, limited liability companies, and real estate joint ventures, and are accounted for using the equity method. If the value of a common stock, preferred stock, other invested asset, or publicly traded bond declines below its cost or amortized cost, if applicable, and the decline is considered to be other than temporary, a realized loss is recorded to reduce the carrying value of the investment to its estimated fair value, which becomes the new cost basis. The evaluation for an other than temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. Potential risks and uncertainties include, among other things, changes in general economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. In evaluating a potential impairment, the Company considers, among other factors, management’s intent and ability to hold these securities until price recovery, the nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to continue to do so, as well as rating actions that may affect the issuer’s credit status. Premiums and discounts related to investments are amortized or accreted over the life of the related investment as an adjustment to yield using the effective interest method. Dividends and interest income are recognized when earned or declared. The cost of securities sold is based on specific identification. Unrealized gains (losses) in the value of invested assets are accounted for as a direct increase (decrease) in accumulated other comprehensive income in shareholders’ equity, net of deferred tax and, accordingly, have no effect on net income.
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 is intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Intangibles - Goodwill and Other (Topic 350). Previous guidance under Topic 350 required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount (step one). If the fair value of the reporting unit was less than its carrying value, then the second step of the test was required to be performed to measure the amount of impairment loss. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. The Company adopted ASU 2011-08 in the fourth quarter of 2011. Adoption of ASU 2011-08 did not have a material impact on the Company’s financial condition or results of operations.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). This guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and International Financial Reporting Standards. While many of the amendments to GAAP are not expected to have a significant effect on practice, this guidance changes some fair value measurement principles and disclosure requirements. ASU 2011-04 is to be applied prospectively. For public entities, this guidance is effective during the interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The Company will adopt the amendments in ASU 2011-04 on January 1, 2012 and does not expect the adoption to have a material impact on the Company’s financial condition or results of operations.
The following tables set forth the carrying value, gross unrealized gains, gross unrealized losses and amortized cost of the Company’s investments, aggregated by type and industry, as of December 31, 2011 and December 31, 2010.
Bonds having an amortized cost of $6,107 and $9,557 were on deposit with insurance regulatory authorities at December 31, 2011 and 2010, respectively, in accordance with statutory requirements.
The following table sets forth the carrying value, amortized cost, and net unrealized gains or losses of the Company’s investments aggregated by industry as of December 31, 2011 and 2010.
As of December 31, 2011, securities in an unrealized loss position primarily included certain of the Company’s investments in fixed maturities within the financial services sector. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, including those described above, the Company has deemed these securities to be temporarily impaired as of December 31, 2011.
Observable inputs, other than quoted prices included in Level 1, for an asset or liability or prices for similar assets or liabilities. The Company’s financial instruments valued using Level 2 criteria include significantly all of its fixed maturities, which consist of U.S. Treasury securities and U.S. Government securities, municipal bonds, and certain corporate fixed maturities, as well as its non-redeemable preferred stocks. In determining fair value measurements using Level 2 criteria, the Company utilizes various external pricing sources.
Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). The Company’s financial instruments valued using Level 3 criteria include certain fixed maturities and a zero cost interest rate collar. Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. As of December 31, 2011, the value of the Company’s fixed maturities valued using Level 3 criteria was $2,035 and the value of the zero cost interest rate collar was a liability of $876 (See Note 15). The use of different criteria or assumptions regarding data may have yielded different valuations.
As of December 31, 2010, financial instruments carried at fair value were measured on a recurring basis as summarized below:
Annualized premiums for accident and health insurance policies were $68,783 and $54,026 at December 31, 2011 and 2010, respectively.
The following table reconciles premiums written to premiums earned and summarizes the components of insurance benefits and losses incurred.
Deferred tax liabilities and assets at December 31, 2011 and 2010 were comprised of the following:
At December 31, 2011, the Company had regular federal net operating loss carryforwards (“NOLs”) of approximately $4,082 expiring generally between 2025 and 2029. Currently, the Company believes that deferred income tax benefits relating to the NOLs will be realized. However, realization of the NOLs will be assessed periodically based on the Company’s current and anticipated results of operations, and amounts could increase or decrease in the near term if estimates of future taxable income change.
As of December 31, 2011 and 2010, a valuation allowance of $5,708 and $6,120, respectively, was established against deferred income tax benefits relating primarily to capital loss carryforwards that may not be realized. The Company does not currently anticipate having sufficient future capital gains to offset certain of these capital losses during the applicable carryforward period. However, the Company continues to periodically assess the potential realization of these and all other deferred tax benefits. During 2011, the Company’s valuation allowance decreased by $412. The decrease was primarily due to the unanticipated utilization of certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation allowance reserve.
At December 31, 2011, the Company had a revolving credit facility (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), pursuant to which the Company is able to borrow or reborrow up to $5,000, subject to the terms and conditions thereof. The interest rate on amounts outstanding under the Credit Agreement is, at the option of the Company, equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the London Interbank Offered Rate (“LIBOR”) determined on an interest period of 1-month, 2-months, 3-months or 6-months, plus 2.00%. Interest on amounts outstanding is payable quarterly. The Credit Agreement requires the Company to comply with certain covenants, including, among others, ratios that relate funded debt to both total capitalization and earnings before interest, taxes, depreciation and amortization, as well as the maintenance of minimum levels of tangible net worth. The Company must also comply with limitations on capital expenditures, certain payments, additional debt obligations, equity repurchases and certain redemptions, as well as minimum risk-based capital levels. Upon the occurrence of an event of default, Wells Fargo may terminate the Credit Agreement and declare all amounts outstanding due and payable in full. During 2011, there was no balance outstanding under this Credit Agreement and the Company was in compliance with all financial covenants of the Credit Agreement. The termination date of this Credit Agreement is August 31, 2012.
The financial structure of each of Atlantic American Statutory Trust I and II, as of December 31, 2011 and 2010, was as follows:
On February 21, 2006, the Company entered into a zero cost interest rate collar with Wells Fargo to hedge future interest payments on a portion of the Junior Subordinated Debentures. The notional amount of the collar was $18,042 million with an effective date of March 6, 2006. The collar has a LIBOR floor rate of 4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the 4th of each March, June, September and December through termination on March 4, 2013. The Company began making payments to Wells Fargo under the zero cost interest rate collar on June 4, 2008. As a result of interest rates remaining below the LIBOR floor rate of 4.77% through 2011, these payments to Wells Fargo have continued. While the Company may be exposed to counterparty risk should Wells Fargo fail to perform its obligations under this agreement, based on the current level of interest rates coupled with the current macroeconomic outlook, the Company believes that its current exposure to nonperformance risks is minimal.
The estimated fair value and related carrying value of the Company’s interest rate collar at December 31, 2011 was a liability of approximately $876 with a corresponding decrease in accumulated other comprehensive income in shareholders’ equity, net of deferred tax.
Data on options outstanding and exercisable at December 31, 2011 is as follows:
The fair value of options granted is determined on the date of grant using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected volatility of the stock price. No options were granted in 2011 or 2010.
Prior to May 2010, the Company had a qualified funded noncontributory defined benefit pension plan covering the employees of American Southern and, prior to May 2009, had an unfunded noncontributory defined benefit pension plan (“SERP”). The plans provided defined benefits based on years of service and average salary. Effective May 31, 2008, the Company froze all benefits related to its qualified defined benefit pension plan, as well as its SERP. In May 2009, the Company terminated the SERP and distributed the accumulated benefits to those participating employees. On March 11, 2010, the Company received a determination letter from the Internal Revenue Service approving the termination of the Company’s qualified defined benefit pension plan. In May 2010, the Company distributed the accumulated benefits, as directed, to participating employees, and terminated the qualified defined benefit pension plan. In connection with the May 2010 termination and settlement of the qualified defined benefit pension plan, the Company incurred a 2010 charge of $319.
In the normal course of business the Company has engaged in transactions with J. Mack Robinson, the majority shareholder of the Company and his affiliates from time to time. These transactions include the leasing of office space as well as certain investing and financing activities.
The Company leases approximately 49,586 square feet of office and covered garage space from an entity which is an affiliate of the Company. During the years ended December 31, 2011 and 2010, the Company paid $865 and $849, respectively, under this lease.
As the Company’s only derivative financial instrument is an interest rate collar, changes in valuation are more closely correlated with changes in interest rates and, accordingly, values are estimated using projected cash flows at current interest rates discounted at a reasonably estimated rate of interest. Fair value quotations are also obtained and considered, as applicable, from the counterparty to the transaction.