The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Company”) and its subsidiaries for each of the three years in the period ended December 31, 2002. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.
Atlantic American is an insurance holding company whose operations are conducted through a group of regional insurance companies: American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”); Association Casualty Insurance Company and Association Risk Management General Agency, Inc. (together known as “Association Casualty”); Georgia Casualty & Surety Company (“Georgia Casualty”); and Bankers Fidelity Life Insurance Company (“Bankers Fidelity”). Each operating company is managed separately based upon the geographic location or the type of products it underwrites; although management is in the process of conforming information systems, policies and procedures, products, marketing and other functions between Association Casualty and Georgia Casualty to create a southern “regional” property and casualty operation.
The accounting and reporting policies of Atlantic American Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States 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 results could differ from management’s initial estimates. Atlantic American does not expect that changes in the estimates determined using these policies would have a material affect on the Company’s financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.
Future policy benefits comprise 14% of the Company’s total liabilities at December 31, 2002. These liabilities relate to life insurance products, and are based upon assumed future investment yields, mortality
Deferred acquisition costs comprise 6% of the Company’s total assets at December 31, 2002. Deferred acquisition costs are commissions, premium taxes, and other costs that vary with and are primarily related to the acquisition of new and renewal business and are generally deferred and amortized. The deferred amounts are recorded as an asset on the balance sheet and amortized to income in a systematic manner. Traditional life insurance and long-duration health insurance deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the related liability for policy benefit reserves. The deferred acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance). Assessments of recoverability for property and casualty and short-duration health insurance are extremely sensitive to the estimates of a subsequent year’s projected losses related to the unearned premiums. Projected loss estimates for a current block of business for which unearned premiums remain to be earned may vary significantly from the indicated losses incurred in any given calendar year.
Receivables are amounts due from reinsurers, insureds and agents and comprise 22% of the Company’s total assets at December 31, 2002. Allowances for uncollectible amounts are established, as and when a loss has been determined probable, against the related receivable. Annually, the Company and/or its reinsurance broker perform an analysis of the credit worthiness of the Company’s reinsurers. Failure of reinsurers to meet their obligations due to insolvencies or disputes could result in uncollectible amounts and losses to the Company. Insured and agent balances are evaluated periodically for collectibility. Losses are recognized 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 comprise 69% of the Company’s total assets at December 31, 2002. Significantly all investments are in bonds and common and preferred stocks, which are subject to significant market fluctuations. The Company carries all investments as available for sale and accordingly at their estimated market values. On occasion, the value of an investment may decline to a value below its amortized purchase price and remain for an extended period of time. When an investment’s indicated market value has declined below its cost basis for a period of time, generally, not less than nine months, the Company, evaluates such investment for other than a temporary impairment. If an other than a temporary impairment is deemed to exist, then the Company may write down the amortized cost basis of the investment to a more appropriate value. While 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.
Refer to Note 1 of “Notes to Consolidated Financial Statements” for details regarding all of the Company’s significant accounting policies.
On a consolidated basis the Company had a net loss for 2002 of $12.2 million, or $.63 per diluted share. Net income was $3.6 million ($.10 per diluted share) in 2001 and $3.6 million ($.12 per diluted share) in 2000. The net loss for 2002 was primarily the result of a non-cash charge of $15.8 million to reflect a change in accounting for goodwill. Reducing the reported net loss was a $1.3 million deferred income tax benefit related to a reduction of the Company’s tax net operating loss valuation allowance compared to a similar $0.8 million deferred income tax benefit in 2001 and $0.5 million benefit in 2000. The reduction of the valuation allowance is primarily the result of reassessments as to the realization of certain net operating loss carry forwards. Pre-tax income excluding charges related to accounting for goodwill, decreased from $5.1 million in 2001 to $3.1 million in 2002. The decline in pre-tax income for 2002 was primarily due to adverse development on prior years’ claims as well as a significant increase in the second injury trust fund and insolvency assessments, both in the casualty division.
Gross written premiums at American Southern decreased $2.2 million, or 4.5% during 2001 primarily as a result of the loss of one of its state contracts discussed previously. In addition, the American Auto Club Insurance Agency (the “Agency”) produced lower than expected gross written premiums during 2001. The Agency is a joint venture between American Southern and the AAA of the Carolinas motor club. American Southern holds a 50% interest in the joint venture and underwrites the majority of the standard automobile business written by the Agency. The Agency was formed in 1998 to market personal automobile insurance to members of the auto club. This program, which began writing business in 1999, had gross written premiums of approximately $6.1 million for 2001, a decrease of $1.1 million or 15.3% from 2000.
In addition to the business written through the Agency, American Southern produces much of its business through contracts with various states and municipalities, some of which represent significant amounts of revenue for American Southern. These contracts are periodically subject to competitive renewal quotes and the loss of a significant contract could have a material adverse effect on the business or financial condition of American Southern and of the Company. During 2000, American Southern renewed one of its larger accounts. Although this contract was renewed through a competitive bidding process, one of the parties bidding for this particular contract contested the award of this business to American Southern and filed a claim to nullify the contract. During the fourth quarter of 2000, American Southern received an unfavorable judgment and appealed the ruling. The contract, which accounts for approximately 10% of annualized premium revenue of Atlantic American, remained in effect pending the appeal. On March 4, 2003 the South Carolina Court of Appeals reversed the lower court ruling and remanded the case back to the Procurement Review Panel to determine if American Southern is entitled to vendor preference. The contract subject to dispute contractually terminates on April 30, 2003. While management at this time cannot predict the potential outcome in this case, or quantify the actual impact of any future decisions or determinations, an adverse outcome may have a material adverse affect on the company’s financial position or results of operations. In an effort to increase the number of programs underwritten by American Southern and to insulate it from the loss of any one program, American Southern is continually evaluating new underwriting programs. There can be no assurance, however, that new programs or new accounts will offset lost business resulting from non-renewals of that contract or of other accounts.
The combined ratio for American Southern decreased from 94.8% in 2001 to a combined ratio of 94.5% in 2002. The loss ratio decreased to 66.0% in 2002 from 66.8% in 2001. During 2001, American Southern released approximately $1.4 million of redundant reserves related to certain program business that favorably impacted the loss ratio for 2001. Excluding the impact of the reserve redundancy recognized in 2001, the loss ratio in 2002 improved significantly over 2001 primarily due to lower than anticipated losses on the personal and commercial automobile lines of business. The expense ratio for 2002 increased slightly to 28.5% from 28.0% in 2001. The increase in the expense ratio in 2002 is a direct result of American Southern’s business structure. The majority of American Southern’s business is structured in such a way that the agents are rewarded or penalized based upon the loss ratio of the business they
The combined ratio for Association Casualty increased to 123.5% in 2001 from a combined ratio of 110.4% in 2000. The loss ratio increased to 91.8% in 2001 from 78.5% in 2000. The primary reason for the increase was attributable to adverse development on prior year losses, specifically accident year 2000. Additionally, loss reserves were reviewed and increased to levels deemed more appropriate by management. The expense ratio decreased from 31.9% in 2000 to 31.7% in 2001. The decline in the expense ratio is primarily attributable to the increase in earned premiums and only a moderate increase in fixed expenses.
Ceded premiums at Georgia Casualty increased $2.2 million, or 13.9%, in 2002. The increase in ceded premiums is primarily due to an overall increase in rates charged to reinsure the business as well as the growth experienced by the company. The 40% quota share reinsurance agreement that Georgia Casualty incepted in 2001 for premium growth and surplus protection was reduced to a 30% quota share on January 1, 2002. From this initiative, premiums ceded under the quota share agreement decreased $3.4 million during 2002 also resulting in a lower effective percent of premium ceded to premium written.
In 2001, the combined ratio for Georgia Casualty decreased from 116.0% in 2000 to 103.3%. The loss ratio declined from 77.7% in 2000 to 69.0% in 2001. During 2000, a comprehensive review of all loss reserves and open claims was performed, which resulted in reserve adjustments and consequently, an unusually high loss ratio for 2000. In addition, the decrease was also attributable to the benefits of significant premium rate increases. The expense ratio decreased from 38.3% in 2000 to 34.3% in 2001
Premium revenue at Bankers Fidelity for 2001 increased $7.6 million, or 16.0%, over 2000 results. The most significant increase in premiums arose in the Medicare supplement line of business, which increased 22.3% during 2001. During 2000 and 2001, Bankers Fidelity implemented rate increases on the Medicare supplement product, in some cases up to 30%, which were reflected in the 2001 increases for premium revenues.
Bankers Fidelity has been reasonably successful in controlling operating costs, while continuing to add new business. As a percentage of premiums, commissions and underwriting expenses were 31.0% in 2002 compared to 31.3% in 2001 and 33.1% in 2000.
Investment income for 2002 of $14.0 million decreased $0.3 million, or 2.1%, from 2001. The decrease in investment income during 2002 is primarily attributable to decreased interest rates. During both years, the decline in interest rates resulted in several of the Company’s higher yielding callable fixed income securities being redeemed by the issuers prior to maturity. The proceeds received from the early redemptions of these fixed income securities were reinvested at a lower yield, and as a result, investment income decreased during 2002. In addition, the Company’s equity investment in its joint venture with
Realized investment gains were $0.6 million in 2002, $1.7 million in 2001, and $1.9 million in 2000. Management is continually evaluating the Company’s investment portfolio and will periodically divest appreciated investments as deemed appropriate.
Other expenses (commissions, underwriting expenses, and other expenses) increased $6.5 million, or 13.4%, in 2002, primarily due to a significant increase in acquisition costs related to new business. In addition, the Company experienced an overall increase in operating expenses, specifically in salaries and state assessments both of which increased $1.3 million as compared to 2001. Also contributing to the increase in other expenses was a decrease of $1.4 million in the ceding commission Georgia Casualty is receiving from the quota share contract, which was reduced from a 40% quota share reinsurance agreement to a 30% quota share reinsurance agreement on January 1, 2002. On a consolidated basis, as a percentage of earned premiums, other expenses increased to 35.9% in 2002 from 33.6% in 2001.
Dividend payments to the Company by its insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At December 31, 2002, the Company’s insurance subsidiaries had statutory surplus of $94.7 million.
On December 4, 2002, the Company participated in a pooled private placement offering of trust preferred securities. In that offering, the Company issued to a Connecticut statutory trust, which was created and is controlled by the Company (the “Trust”), approximately $18.0 million in thirty year subordinated debentures, and the Trust sold $17.5 million of trust preferred securities to third party investors. The trust preferred securities have an interest rate equivalent to the three-month LIBOR rate plus 4.00%, which was 5.42% at December 31, 2002; and interest is payable quarterly in arrears. Of the $17.0 million in net proceeds, $12.0 million was used to reduce the balance on the Term Loan and approximately $4.7 million was contributed to certain of the Company’s subsidiaries in the form of capital contributions and settlement of intercompany tax obligations. The trust preferred securities have a maturity of thirty years and are callable, in whole or in part, only at the option of the Company, after five years and then quarterly thereafter. The principal asset of the Trust is $18.0 million of the Parent Company’s subordinated debentures with identical rates of interest and maturities as the trust preferred securities. The obligations of the Parent Company with respect to the issuance of the trust preferred securities represent a full and unconditional guarantee by the Parent Company of the Trusts’ obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Parent Company may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of distribution payment on the related trust preferred securities. In connection with the offering of the trust preferred securities, the Term Loan was modified to provide for the issuance of such securities.
The Company also has outstanding $15.9 million of preferred stock issued to affiliates. The preferred stock accrues a dividend of 9.0% per year, and at December 31, 2002 the Company had accrued but unpaid dividends on the preferred stock totaling $8.4 million.
Net cash provided by operating activities totaled $13.8 million in 2002, $15.8 million in 2001 and $16.7 million in 2000. Cash and short-term investments at December 31, 2002 were $41.6 million and are believed to be more than sufficient to meet the Company’s near-term needs.
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 provides guidance on the financial accounting and reporting for acquired goodwill and other intangible assets. The Company adopted SFAS 142 on January 1, 2002 and accordingly goodwill and indefinite lived intangible assets are no longer amortized but are subject to impairment tests in accordance with the statement. Intangible assets with finite lives continue to be amortized over their useful lives, which is no longer limited to a maximum of forty years. The criteria for recognizing an intangible asset have also been revised. SFAS 142 requires that goodwill be tested for impairment at least annually. The goodwill impairment test requires goodwill to be allocated to reporting units. The fair value of the reporting unit is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, a goodwill impairment may exist. The implied fair value of the goodwill is then compared to the carrying value of the goodwill and an impairment loss is recognized to the extent that the carrying value of the goodwill exceeds the implied fair
value of the goodwill. The impact of adopting SFAS 142 resulted in an impairment loss of $15,816 in the casualty division; and such loss was reflected as a cumulative effect of change in accounting principle in the Company’s 2002 results of operations. The following presents the impact on net income (loss) and net income per share had SFAS 142 been in effect for 2001 and 2000 (dollars in thousands except per share amounts).
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long Lived-Assets to be Disposed of” (“SFAS 121”), and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30 “Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions.” SFAS 144 establishes criteria beyond that previously specified in SFAS 121 to determine when a long-lived asset is to be considered as held for sale and broadens the presentation of discontinued operations. The Company adopted SFAS 144 on January 1, 2002. The adoption did not have a material effect on the Company’s financial condition or results of operations.
compensation and the effect of the method used on reported results. The adoption of SFAS 148 did not have a material effect on the Company’s financial condition or results of operations.
The FASB has also issued FASB Interpretation Nos. 45 and 46, which address Guarantor’s Accounting and Disclosure Requirements for Guarantees and Consolidation of Variable Interest Entities, respectively. The Company believes that the adoption of these Interpretations will not have a material effect on the Company’s financial condition or results of operations.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion the 2002 consolidated financial statements present fairly, in all material respects, the financial position of ATLANTIC AMERICAN CORPORATION and subsidiaries at December 31, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2002 financial statement schedules, when considered in relation to the 2002 basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedules I, II, III, IV and VI listed in Part IV, Item 14 are presented for purposes of complying with the Securities and Exchange Commission’s rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic 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 financial statements taken as a whole.
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ATLANTIC AMERICAN CORPORATION’S FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K.
At December 31, 2002, the Company had five insurance subsidiaries, including Bankers Fidelity Life Insurance Company (“Bankers Fidelity”), American Southern Insurance Company and its wholly-owned subsidiary, American Safety Insurance Company (together known as “American Southern”), Association Casualty Insurance Company and Georgia Casualty & Surety Company (“Georgia Casualty”), in addition to three non-insurance subsidiaries, Association Risk Management General Agency, Inc., Self-Insurance Administrators, Inc. (“SIA, Inc.”) and Atlantic American Statutory Trust I (“Trust”). Association Casualty Insurance Company and Association Risk Management General Agency, Inc. are collectively known as “Association Casualty”.
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 provides guidance on the financial accounting and reporting for acquired goodwill and other intangible assets. The Company adopted SFAS 142 on January 1, 2002 and accordingly goodwill and indefinite lived intangible assets are no longer amortized but are subject to impairment tests in accordance with the statement. Intangible assets with finite lives continue to be amortized over their useful lives, which is no longer limited to a maximum of forty years. The criteria for recognizing an intangible asset have also been revised. SFAS 142 requires that goodwill be tested for impairment at least annually. The goodwill impairment test requires goodwill to be allocated to reporting units. The fair value of the reporting unit is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, a goodwill impairment may exist. The
implied fair value of the goodwill is then compared to the carrying value of the goodwill and an impairment loss is recognized to the extent that the carrying value of the goodwill exceeds the implied fair value of the goodwill. The impact of adopting SFAS 142 resulted in an impairment loss of $15,816 in the casualty division; and such loss was reflected as a cumulative effect of change in accounting principle in the Company’s 2002 results of operations. The following presents the impact on net income (loss) and net income per share had SFAS 142 been in effect for 2001 and 2000.
Basic earnings per common share are based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share are based on the weighted average number of common shares outstanding during each period, plus common shares calculated for stock options and share awards outstanding using the treasury stock method and assumed conversion of the Series B and C Preferred Stock, if dilutive. Unless otherwise indicated, earnings per common share amounts are presented on a diluted basis.
Stock options are reported under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees instead of the fair value approach recommended in Statement No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). Accordingly, no stock-based employee compensation cost is reflected in net income, as all stock options granted have an exercise price equal to the market value of the underlying common stock on the date of grant. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”). SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. If the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation, the Company’s net income (loss) and earnings (loss) per share would have been as follows:
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). This standard provides the financial accounting and reporting for the cost of legal obligations associated with the retirement of tangible long lived assets and is effective for fiscal periods commencing after June 15, 2002. In accordance with SFAS 143, asset retirement obligations will be recorded at fair value in the period they are incurred if a reasonable estimate can be made. The Company believes that the adoption of SFAS 143 will not have a material effect on the Company’s financial condition or results of operations.
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant estimates and assumptions are used in developing and evaluating deferred income taxes, deferred acquisition costs and insurance reserves, among others, and actual results could differ from management’s estimates.
The Company’s investment in the common stock of Wachovia Corporation exceeds 10% of shareholders’ equity at December 31, 2002. The carrying value of this investment at December 31, 2002 was $16,128 with a cost basis of $3,470.
The Company’s bond portfolio included 99% investment grade securities at December 31, 2002 as defined by the National Association of Insurance Commissioners (“NAIC”).
The following table presents the Company’s reserves for life, accident, health and property and casualty losses as well as loss adjustment expenses.
prior to the close of the accounting period, (b) estimates of incurred but not reported claims based on past experience, and (c) estimates of loss adjustment expenses. The estimated liability is continually reviewed by management and updated with changes to the estimated liability recorded in the statement of operations in the year in which such changes are known.
table reconciles premiums written to premiums earned and summarizes the components of insurance benefits and losses incurred.
A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and the (benefit) expense for income taxes is as follows:
At December 31, 2001, the Company’s $44,000 of borrowings consisted of $19,000 outstanding on a revolving credit facility (“the Revolving Credit Facility”) with Wachovia Bank and $25,000 outstanding on Series 1999, Variable Rate Demand Bonds (the “Bonds”). The Revolving Credit Facility provided for borrowings up to $30,000 with an interest rate fixed, at the Company’s option, for a period of one, three, six or twelve months and based upon the London Interbank Offered Rate (“LIBOR”) plus an applicable margin. Interest was payable quarterly and all outstanding principal due on June 30, 2004 with no principal payments required prior to that time. The interest rate at December 31, 2001, including the applicable margin of 2.50%, was 6.35%. The Bonds were issued through a private placement and were due July 1,
On April 2, 2002, in accordance with a December 31, 2001 amendment to the Revolving Credit Facility with Wachovia, the Company consolidated outstanding amounts on its Revolving Credit Facility and the Bonds into a single term loan (“Term Loan”), which will mature on June 30, 2004. The Company must repay the principal of the Term Loan in annual installments in the amount of $2,000 on or before December 31 of 2002 and 2003, together with one final installment at maturity in 2004. The Term Loan requires the Company to maintain certain covenants including, among others, ratios that relate funded debt, as defined, to total capitalization and interest coverage. The Company must also comply with limitations on capital expenditures and additional debt obligations.
On December 4, 2002, the Trust, a Connecticut statutory business trust created by the Company, issued $17,500 of trust preferred securities in a pooled private placement. The trust preferred securities have an interest rate equivalent to the three-month LIBOR rate plus 4.00%, which was 5.42% at December 31, 2002. Of the $16,974 in net proceeds, $12,000 was used to reduce the balance on the Term Loan and approximately $4,700 was contributed to certain of the Company’s subsidiaries in the form of capital contributions and settlement of intercompany tax obligations. The trust preferred securities have a maturity of thirty years and are callable, in whole or in part, only at the option of the Company after five years and quarterly thereafter. The principal asset of the Trust is $18,043 of subordinated debentures issued by the Parent Company with identical rates of interest and maturities as the trust preferred securities. The obligations of the Parent Company with respect to the issuance of the trust preferred securities represent a full and unconditional guarantee by the Parent Company of the Trusts’ obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Parent Company may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of distribution payment on the related trust preferred securities. In connection with the offering of the trust preferred securities, the Term Loan was modified to provide for the issuance of such securities.
On March 21, 2001, the Company entered into a $15,000 notional amount interest rate swap agreement with Wachovia to hedge its interest rate risk on a portion of its outstanding borrowings. The interest rate swap was effective on April 2, 2001 and matures on June 30, 2004. The Company has agreed to pay a fixed rate of 5.1% and receive 3-month LIBOR until maturity. The settlement date and the reset date will occur every 90 days following April 2, 2001 until maturity.
In accordance with the Company’s 1992 Incentive Plan, the Board of Directors may grant up to 1,800,000 stock options or share awards. The Board of Directors may grant: (a) incentive stock options within the meaning of Section 422 of the Internal Revenue Code; (b) non-qualified stock options; (c) performance units; (d) awards of restricted shares of the Company’s common stock and other stock unit awards; (e) deferred shares of common stock; or (f) all or any combination of the foregoing to officers and key employees. Options granted under this plan expire five or ten years from the date of grant. Vesting occurs at 50% upon issuance of an option, and the remaining portion is vested at 25% increments in each of the following two years. In accordance with the Company’s 1996 Director Stock Option Plan, a maximum of 200,000 stock options may be granted that fully vest six months after the grant date. As of December 31, 2002, an aggregate of forty-four employees, officers and directors held options under the two plans. On May 7, 2002, the shareholders approved the Atlantic American Corporation 2002 Incentive Plan (the “2002 Plan”), which provides for the Board of Directors to grant up to an additional 2,000,000 stock options or share awards. Subject to adjustment as provided in the 2002 Plan, the Board of Directors may grant (a) incentive stock options; (b) non-qualified stock options; (c) stock appreciation rights; (d) restricted shares; (e) deferred shares; and (f) performance shares and/or performance units. Further, the Board may authorize the granting to non-employee directors of stock options and/or restricted shares. On July 30, 2002, a total of 29,997 restricted shares were issued to the Company’s Board of Directors under the 2002 Plan.
A summary of the status of the Company’s stock options at December 31, 2002, 2001 and 2000, is as follows:
The following table sets forth the benefit plans’ funded status at December 31, 2002 and 2001:
Included in the above is one plan which is unfunded. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for this plan were $1,005, $794, and $0, respectively, as of December 31, 2002 and $921, $701, and $0, respectively, as of December 31, 2001.
The Company has made mortgage loans to finance properties owned by Leath Furniture, LLC (“Leath”), which is owned by an affiliate of the Chairman. At December 31, 2002 and 2001, the balance of mortgage loans owed by Leath to the Company’s insurance subsidiary was $3,292 and $3,421, respectively. For 2002, 2001, and 2000, interest paid by Leath on the mortgage loans totaled $311, $323, and $333, respectively.
Certain members of management are on the Boards of Directors of Bull Run Corporation (“Bull Run”) and Gray Television, Inc. (“Gray”). At December 31, 2002, the Company owned 1,311,373 common shares of Bull Run and 376,060 shares of Gray Common Stock Class A and 106,000 shares of Gray Common Stock. The Company also owned 350 shares of Gray’s Series C Preferred Stock and 2,000 shares of Bull Run’s Series B Preferred Stock as of December 31, 2002. At December 31, 2001, the Company owned 1,116,667 common shares of Bull Run and 354,060 shares of Gray’s Series A Common Stock and 6,000 shares of Gray’s Series B Common Stock. In addition, the Company owned 350 shares of Gray’s Series A Preferred Stock and 2,000 shares of Bull Run’s Series A Preferred Stock. The Company also held $4,010 in Gray’s 10.65% debentures at December 31, 2001. The aggregate carrying value of Bull Run and Gray investments at December 31, 2002 were $3,219 and $8,990, respectively and at December 31, 2001 were $2,882 and $12,687, respectively.
In 1998, Georgia Casualty began assuming workers’ compensation premiums from Delta Fire & Casualty Insurance Company which is controlled by certain affiliates of the Company. Premiums assumed and commissions paid in 2002 were $1,090 and $128, respectively, and in 2001 were $1,554 and $212, respectively.
The Company’s primary insurance subsidiaries operate with relative autonomy and each company is evaluated based on its individual performance. American Southern, Association Casualty, and Georgia Casualty operate in the Property and Casualty insurance market, while Bankers Fidelity operates in the Life and Health insurance market. All segments derive revenue from the collection of premiums, as well as from investment income. Substantially all revenue other than those in the corporate and other segment
Bonds, Common and Preferred Stocks and Publicly Traded Other Invested Assets
The fair value of investments in certain limited partnerships, which are included in other invested assets on the balance sheet, were determined by officers of those limited partnerships.