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 periods ended December 31, 2001, 2000 and 1999. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.
Unpaid claims and claim adjustment expenses comprise 44% of the Company’s total liabilities at December 31, 2001. This obligation includes estimates for both reported claims not yet paid, and claims incurred but not yet reported. Unpaid claims and claim adjustment expense 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, along with anticipated future development. Inflation and other factors which may affect claims payments are implicitly reflected in the reserving process through analysis of cost trends and reviews of historical reserve results. Estimates of incurred but not reported claims is based on past experience. If actual results differ from these assumptions, the amount of the Company’s recorded liability for unpaid claims and claim adjustment expenses could require adjustment.
Please refer to Note 1 of “Notes to Consolidated Financial Statements” for details regarding all of the Company’s significant accounting policies.
The following table summarizes American Southern’s premiums and underwriting ratios (dollars in thousands):
Gross written premiums at American Southern decreased $2.2 million during 2001 primarily as a result of the loss of one of its state contracts. The loss of this particular contract will result in a reduction in annualized premium revenue of approximately $4.0 million. 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.
Gross written premiums at American Southern increased $3.6 million in 2000 as compared to 1999 principally as a result of business produced by the Agency. The decrease in ceded premiums of $0.9 million during 2000 was primarily due to the Reinsurance Agreement. In 1999, American Southern collected $0.8 million in penalty premiums and remitted them to the reinsurer. As mentioned previously, there were no penalty premiums collected in 2000 which resulted in the decrease in ceded premiums during 2000 as compared to 1999.
In 2001, net earned premiums increased by 5.0% or $1.9 million. The increase in net earned premiums was primarily attributable to the higher gross written premium in 2000.
In addition to the business written through the joint venture, American Southern produces much of its business through contracts with various states and municipalities, some of which represent significant amounts of revenue for the company. 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. 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 accounts.
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 obtain the nullification of the contract. During the fourth quarter of 2000, American Southern received an unfavorable judgment and has appealed the ruling. The contract, which accounts for approximately 10% of annualized premium revenue, is to remain in effect pending appeal. While management at this time cannot predict the potential outcome in this case, or quantify the actual impact of an adverse decision, an adverse outcome may have a material adverse affect on the company’s financial position or results of operations.
The following table summarizes, for the periods indicated, American Southern’s earned premiums by line of business (dollars in thousands):
Excludes the interest expense on an intercompany 	surplus note associated with the acquisition of Association 	Casualty.
Gross written premiums at Association Casualty increased $9.7 million or 38.8% during 2001. During the fourth quarter of 2000, the company began recognizing written premiums on an annualized basis instead of using the installment method resulting in a significant increase in gross written premiums. The impact to earned premiums was not significant. In addition, Association Casualty is aggressively increasing rates on renewal business, in some cases up to 30%. The company has also added premium related to commercial lines other than workers’ compensation such as general liability, property, and other commercial coverage to compliment its existing book of business. While Association Casualty currently writes predominately workers’ compensation insurance in the state of Texas, the company intends to market itself as a complete commercial lines carrier.
In 2000, Association Casualty began increasing the rates it was charging for renewal business and was successful in attracting new business. As a result of these efforts, the company was able to increase gross written premiums. The company also added approximately $0.7 million of written premiums for general liability, property, and business automobile.
The following table summarizes, for the periods indicated, Association Casualty’s earned premiums by line of business (dollars in thousands):
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 can be attributable to adverse development on prior year losses, specifically accident year 2000. Additionally, current year losses were reviewed and increased to levels deemed more appropriate by management. The company continues to be adversely impacted by the liberal interpretation of the workers’ compensation laws in the state of Texas. As the law has matured, factors such as “life time medical” and the “impairment rating” structure have become significant in contributing to the increased medical cost. To help mitigate these costs and achieve an underwriting profit, Association Casualty continues to increase pricing and improve underwriting criteria. 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.
The combined ratio for Association Casualty during 2000 of 110.4% was higher than is desired by management. The higher than expected losses in 2000 were largely due to negative development stemming from second and third surgeries on previously closed claims as well as a continuing rise in medical costs. Expenses as a percentage of earned premiums declined slightly, primarily as a result of the increase in earned premiums and only a moderate increase in fixed expenses.
Gross written premiums at Georgia Casualty increased 16.9% or $5.9 million in 2001. The increase in gross written premiums is mostly attributable to significant rate increases, new business with established agents in addition to the added premiums by new agency appointments. The increase in ceded premiums of $11.8 million during 2001 is the result of a 40% quota share reinsurance agreement that the company put into place in 2001 to allow for premium growth and surplus protection.
During 2000, gross written premiums increased 30.7% or $8.2 million. The increase in premiums in 2000 from 1999 was due to aggressive rate increases on its new and renewal business in addition to the new management team at Georgia Casualty increasing the agency force through its relationships in the insurance industry. The decline in ceded premiums during 2000 compared to 1999 was the result of the discontinuation of the stop-loss reinsurance agreement that the company put into place in 1999.
The following table summarizes, for the periods indicated, Georgia Casualty’s earned premiums by line of business (dollars in thousands):
The combined ratio for Georgia Casualty for 2000 decreased to 116.0% from 126.2% in 1999. The loss ratio declined from 85.2% in 1999 to 77.7% in 2000. The primary reason for the decline was the complete elimination during the latter part of 1999 of two underwriting programs, the performance of which was substandard. In addition, the company benefited in 2000 from the increased premium rates that began during 1999. Also, the mix of business that Georgia Casualty underwrites had changed from one of higher hazards to low and moderate hazards.
The expense ratio decreased from 41.0% in 1999 to 38.3% in 2000. The decline in the expense ratio was primarily attributable to the increase in earned premiums associated with the new growth and only a moderate increase in fixed expenses.
Premium revenue at Bankers Fidelity for 2001 increased 16.0% or $7.6 million over 2000 results. The most significant increase in premiums arose in the Medicare supplement line of business, which increased 22.3% during 2001. Bankers Fidelity has continued to expand its market presence throughout the Southeast, mid-Atlantic Region, especially in Pennsylvania, and in the Western Region. In 2001, the company added additional Medicare supplemental premium for Pennsylvania of approximately $3.3 million. In addition, during 2000 and 2001, Bankers Fidelity implemented rate increases on the Medicare supplement product, in some cases up to 30%, which are reflected in the current year increases for premium revenues.
The increase in both “benefits and losses” and “commissions and other expenses” is primarily attributable to the increase in new business. As a percentage of premiums, benefits and losses were 71.6% in 2001 compared to 70.2% in 2000. The increase is primarily due to continued aging of the life business and higher medical trends than expected for the health business. Additionally, the company continues to implement rate increases on the Medicare supplement line of business to help to mitigate the impact of higher medical costs.
Insurance benefits and losses at Bankers Fidelity increased 18.2% or $5.1 million during 2000. The increase in benefits and losses from 1999 to 2000 was directly attributable to the increase in new business.
The company has been successful in keeping operating costs lower, while continuing to add new business. As a percentage of premiums, commissions and underwriting expenses were 31.3% in 2001 compared to 33.1% in 2000 and 36.6% in 1999.
Investment income increased 22.2% or $2.8 million in 2000 from 1999. The inclusion of the operating results of Association Casualty is responsible for $1.5 million of this increase. The Company also benefited from a significant gain in a real estate partnership discussed previously. This investment generated income of approximately $0.6 million during 2000. The remaining increase in investment income in 2000 as compared to 1999 was the result of the Company shifting securities from short-term to longer-term securities to take advantage of the higher long-term interest rates in the first half of 2000.
Realized investment gains decreased from $1.9 million in 2000 to $1.7 million in 2001. Management is continually evaluating the Company’s investment portfolio and will periodically divest appreciated investments as deemed appropriate.
Interest expense decreased from $4.4 million in 2000 to $3.2 million in 2001. In conjunction with the acquisition of Association Casualty in 1999, the Company entered into a $30.0 million revolving credit facility with Wachovia Bank, N.A. (“Wachovia”). During 2000, and in the first nine months of 2001, the Company paid down $7.0 million on the revolver, leaving $19.0 million outstanding under this facility. This debt, coupled with the $25.0 million in variable rate demand bonds issued during the second quarter of 1999, the proceeds of which were used to pay down the Company’s prior credit facility, bring the total debt to $44.0 million at December 31, 2001, down from $50.0 million at the end of 2000. In addition, the base interest rate in 2001, LIBOR, decreased from prevailing LIBOR rates in 2000. The interest rate on a portion of the revolver and the bonds is variable and is tied to LIBOR. The reduction in debt, along with decreasing interest rates accounts for the decrease in 2001. On March 21, 2001, the Company entered into an interest rate swap agreement for a notional principal amount of $15.0 million with Wachovia to hedge its interest rate risk on a portion of the outstanding borrowings under the revolving credit facility. 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.
Other expenses (commissions, underwriting expenses, and other expenses) increased $3.5 million or 7.6% in 2001. The increase in other expenses is due to the following items: First, beginning in the fourth quarter of 2000, Association Casualty began recognizing written premiums on an annualized basis instead of using the installment method thus increasing commissions and premium taxes in conjunction with written premiums. In 2001, Association Casualty also experienced an increase in overall operating expenses as it sought to diversify into commercial lines of business other than workers’ compensation. In addition, Bankers Fidelity’s commissions have increased significantly as a result of additional new business. Lastly, during 2000, the bad debt reserve was reduced by $0.5 million due to improvements as to the collectibility of certain receivables. Partially offsetting this increase in other expenses was a significant reduction in commission expense American Southern pays on one of its larger accounts in addition to the ceding commission Georgia Casualty is receiving from the quota share contract. On a consolidated basis, as a percentage of earned premiums, other expenses decreased from 34.1% in 2000 to 33.6% in 2001.
The increase in other expenses in 2000 as compared to 1999 was primarily attributable to the inclusion of the operating results of Association Casualty.
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, 2001, the Company’s insurance subsidiaries had statutory surplus of $84.7 million.
The Company provides certain administrative, purchasing and other services for each of its subsidiaries. The amount charged to and paid by the subsidiaries was $8.4 million, $7.6 million, and $6.7 million in 2001, 2000, and 1999, respectively. In addition, the Company has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $1.3 million, $1.0 million and $2.0 million was paid to the Company under the tax sharing agreement in 2001, 2000, and 1999, respectively. Dividends were paid to Atlantic American by one of its subsidiaries totaling $4.6 million in 2001, and $3.6 million in 2000 and 1999. As a result of the Company’s tax loss carryforwards, which totaled approximately $30.0 million at December 31, 2001, it is anticipated that the tax sharing agreement will provide the Company with additional funds with which to meet its cash flow obligations.
The Company is a party to a five-year revolving credit facility (“the Revolving Credit Facility”) with Wachovia that provides for borrowings up to $30.0 million. The interest rate on the borrowings under this facility may be fixed, at the Company’s option, for a period of one, three, six or twelve months and is based upon the London Interbank Offered Rate (“LIBOR”) plus an applicable margin, 2.50% at December 31, 2001. The margin varies based upon the Company’s leverage ratio (debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined under the facility agreements) and ranges from 1.75% to 3.75%. Interest on the Revolving Credit Facility is currently payable quarterly. The Revolving Credit Facility provides for the payment of all of the outstanding principal balance at June 30, 2004 with no required principal payments prior to that time. The interest rate including the applicable margin on this facility at December 31, 2001 and 2000 was 6.35% and 9.12%, respectively.
The Company also has outstanding $25.0 million of Series 1999, Variable Rate Demand Bonds (the “Bonds”) due July 1, 2009 issued through a private placement. The Bonds, which are redeemable at the Company’s option, pay a variable interest rate that approximates 30-day LIBOR. The Bonds are backed by a letter of credit issued by Wachovia Bank, N.A., which is automatically renewable on a monthly basis until thirteen months after such time as Wachovia gives the Company notice of its option not to renew the letter of credit. The Bonds are subject to mandatory redemption upon termination of the letter of credit, if an alternative letter of credit facility is not secured. The Company expects that it would be able to replace the letter of credit facility within the prescribed period if Wachovia should give notice of its intention not to renew the existing facility. The cost of the letter of credit and its associated fees are 2.50% making the effective rate on the Bonds LIBOR plus 2.50% at December 31, 2001. The interest on the Bonds is payable monthly and the letter of credit fees are payable quarterly. The interest rate on the Bonds, along with the related fees, at December 31, 2001 and 2000 was 4.63% and 9.15%, respectively. The Bonds do not require the repayment of any principal prior to maturity, except as provided above.
The Company intends to repay its obligations under the Term Loan using dividend and tax sharing payments from its subsidiaries. In addition, the Company believes that, if necessary, at maturity, the Term Loan can be refinanced with the current lender, although there can be no assurance of the terms or conditions of such a refinancing.
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, 2001 the Company had accrued but
unpaid dividends on the preferred stock totaling $7.2 million. Net cash provided by operating activities totaled $15.8 million in 2001, $16.7 million in 2000 and $5.4 million in 1999. Cash and short-term investments at December 31, 2001 were $68.8 million and are believed to be more than sufficient to meet the Company’s near-term needs.
In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other tangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their remaining useful lives. As of December 31, 2001, the Company had unamortized goodwill of $18.8 million all of which will be subject to the transition provisions of SFAS No. 142. Amortization expense related to goodwill was $0.8 million, $0.8 million, and $0.6 million for the years ended December 31, 2001, 2000, and 1999, respectively. The Company will adopt SFAS No. 142 on January 1, 2002. Goodwill shall be tested for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Any impairment loss that is required to be recognized when adopting SFAS No. 142 will be reflected as a cumulative effect of change in accounting principle during the first quarter of 2002. The impact of adopting SFAS No. 142 on the Company’s financial statements has not yet been determined; however, it could have a material impact on the Company’s results of operations in 2002.
as held for sale. The Company believes that the adoption of SFAS No. 143 and SFAS No. 144 will not have significant impact on the Company’s financial statements.
The accompanying notes are an integral part of these consolidated balance sheets.
At December 31, 2001, 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 (“ACIC”) and Georgia Casualty & Surety Company (“Georgia Casualty”), in addition to two non-risk bearing subsidiaries, Association Risk Management General Agency, Inc. (“ARMGA”) and Self-Insurance Administrators, Inc. (“SIA, Inc.”). ACIC and ARMGA (together known as “Association Casualty”) were acquired on July 1, 1999. The results of operations of Association Casualty are included in the consolidated results of operations since the date of acquisition.
Property and casualty insurance premiums are recognized as revenue ratably over the contract period. The Company provides for insurance benefits and losses on accident, health, and casualty claims based upon estimates of projected ultimate losses.
Goodwill is amortized over a period of fifteen to forty years using the straight-line method. The Company periodically evaluates whether events and circumstances have occurred that indicate that the remaining estimated useful life of goodwill may warrant revision. Should factors indicate that goodwill be evaluated for possible impairment, the Company will compare the recoverability of goodwill to a projection of the acquired companies’ undiscounted cash flow over the estimated remaining life of the goodwill in assessing whether the goodwill is recoverable. (See Impact of Recently Issued Accounting Standards provided below).
All of the Company’s debt and equity securities are classified as available for sale and are carried at market value. Mortgage loans, policy and student 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; those which are publicly traded are carried at estimated market value and those for which the Company has the ability to exercise significant influence (“equity investees”) 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, 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 net realizable value, which becomes the new cost basis. 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.
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 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.
In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). SFAS No. 133 requires the recognition of the fair value of all derivative instruments on the balance sheet and establishes specific accounting methods for hedges. The Company adopted SFAS No. 133 and the corresponding amendments under SFAS No. 138 on January 1, 2001. The adoption did not have a material effect on the Company’s financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other tangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in
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. Actual results could differ from those estimates.
The amortized cost and carrying value of bonds and short-term investments at December 31, 2001 by contractual maturity are as follows. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from the sale of common and preferred stocks, bonds and other investments are as follows:
The Company’s investment in the common stock of Wachovia Corporation exceeds 10% of shareholders’ equity at December 31, 2001. The carrying value of this investment at December 31, 2001 was $14,350 with a cost basis of $3,579. The Company’s bond portfolio included 96% investment grade securities at December 31, 2001 as defined by the National Association of Insurance Commissioners (“NAIC”).
Loss and claim reserves represent estimates of projected ultimate losses and are 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
In accordance with general practice in the insurance industry, portions of the life, property and casualty insurance written by the Company are reinsured; however, the Company remains contingently liable with respect to reinsurance ceded should any reinsurer be unable to meet its obligations. Approximately 93% of the reinsurance receivables are due from three reinsurers as of December 31, 2001. Reinsurance receivables of $24,215 are with General Reinsurance Corporation, rated “AAA” by Standard & Poor’s and “A++” (Superior) by A.M. Best, $2,271 are with First Colony Life Insurance Company, rated “AA” by Standard & Poor’s and “A++” (Superior) by A.M. Best, and $19,099 are with Pennsylvania Manufacturers Association Insurance Company, rated “A-” (Excellent) by A.M. Best. Allowances for uncollectible amounts are established against reinsurance receivables, if appropriate. Premiums assumed of $22,708, $25,439, and $24,903 in 2001, 2000, and 1999 respectively, include a state contract with premiums of $14,054, $17,198, and $15,064. The contract premiums represent 9.7%, 12.9% and 14.0% of net premiums earned for the years ended 2001, 2000, and 1999, respectively. The following
At December 31, 2001, the Company had regular federal net operating loss carryforwards of approximately $30,000 expiring generally between 2002 and 2010. Until the end of 1999, the Company established a full valuation allowance against its net deferred income tax benefits as they were not considered realizable from expected future reversals of existing taxable temporary differences. The Company believed that it was more likely than not that the deferred income tax benefits would not be realized through future taxable income prior to the expiration dates of net operating loss carryforwards. However, with the acquisition of Association Casualty and several years of profitability, in the fourth quarter of 1999 the Company determined that it was more likely than not that a portion of its net deferred income tax benefits relating to net operating loss carryforwards scheduled to expire between 2006 and 2010 would be realized based on future taxable income. Management also can and would implement tax-planning strategies to prevent these carryforwards from expiring.
The Company is a party to a five-year revolving credit facility (“the Revolving Credit Facility”) with Wachovia Bank that provides for borrowings up to $30,000. The interest rate on the borrowings under this facility may be fixed, at the Company’s option, for a period of one, three, six or twelve months and is based upon the London Interbank Offered Rate (“LIBOR”) plus an applicable margin, 2.50% at December 31, 2001. The margin varies based upon the Company’s leverage ratio (debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined under the facility agreements) and ranges from 1.75% to 3.75%. Interest on the Revolving Credit Facility is currently payable quarterly. The Revolving Credit Facility provides for the payment of all of the outstanding principal balance at June 30, 2004 with no required principal payments prior to that time. The interest rate including the applicable margin on this facility at December 31, 2001 and 2000 was 6.35% and 9.12%, respectively.
On July 1, 1999, the Company acquired 100% of the outstanding stock of ACIC and ARMGA for a combined price of $33,052 with $8,483 of the purchase price paid in the form of common stock of the Company and the remaining $24,569 paid in cash obtained from borrowings under the Revolving Credit Facility. The acquisition of ACIC and ARMGA were accounted for using the purchase method of accounting. Accordingly, the Company has allocated the purchase price of the companies based on the fair value of the assets acquired and liabilities assumed and their results of operations are included in the consolidated results of operations since the date of acquisition.
The Company’s rental expense, including common area charges, for operating leases was $1,732, $1,534, and $1,271 in 2001, 2000, and 1999 respectively. The Company’s future minimum lease obligations under non-cancelable operating leases are as follows:
The Company does not recognize compensation for stock options cost since the option price approximates fair value on the date of grant. If compensation cost had been recognized, the Company’s net income and earnings per share would have been as follows:
The Company initiated an employees’ savings plan under Section 401(k) of the Internal Revenue Code in May 1995. The plan covers substantially all of the Company’s employees, except employees of American Southern and Association Casualty. Under the plan, employees generally may elect to contribute up to 16% of their compensation to the plan. The Company makes a matching contribution to each employee in an amount equal to 50% of the first 6% of such contributions. The Company’s matching contribution is in Company stock and with a value of approximately $159, $155, and $133 in 2001, 2000, and 1999, respectively. Association Casualty has a comparable savings plan covering substantially all of its employees.
Net periodic pension cost for American Southern’s qualified and non-qualified defined benefit plans for the years ended December 31, 2001, 2000, and 1999 included the following components:
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 $921, $701, and $0, respectively, as of December 31, 2001 and $905, $653, and $0, respectively, as of December 31, 2000.
The Company has 134,000 shares of Series B Preferred Stock (“Series B Preferred Stock”) outstanding, having a stated value of $100 per share. Annual dividends on the Series B Preferred Stock are $9.00 per share and are cumulative. Dividends accrue whether or not declared by the Board of Directors. The Series B Preferred Stock is not currently convertible, but may become convertible into shares of the Company’s common stock under certain circumstances. In such event, the Series B Preferred Stock would be convertible into an aggregate of approximately 3,358,000 shares of the common stock at a conversion rate of $3.99 per share. The Series B Preferred Stock is redeemable at the option of the Company. As of December 31, 2001 and 2000, the Company had accrued but unpaid dividends on the Series B Preferred Stock of $7,236 and $6,030, respectively. For all periods in which the Company had an accumulated deficit, dividends on the Series B Preferred Stock were accrued out of additional paid in capital.
Outstanding stock options of 712,500, 804,000, and 748,000 were excluded from the earnings per common share calculation in 2001, 2000 and 1999, respectively, since their impact was antidilutive. The assumed conversion of the Series B and Series C Preferred Stock was excluded from the earnings per common share calculation for 2001 and 2000 since its impact was antidilutive.
Under the insurance code of the state of jurisdiction under which each insurance subsidiary operates, dividend payments to the Company by its insurance subsidiaries are subject to certain limitations without the prior approval of the Insurance Commissioner. The Company received dividends of $7,099 and $6,082 in 2001 and 2000, respectively, from its insurance subsidiaries. In 2002, dividend payments by the insurance subsidiaries in excess of $9,835 would require prior approval.
In 1999, the NAIC completed a process to codify statutory accounting practices for certain insurance enterprises (“Codification”). The Company adopted Codification on January 1, 2001. The cumulative effect of this accounting change increased statutory surplus by approximately $1,432. The most significant increase to statutory surplus was the recognition of deferred taxes. Codification did not impact the Company’s financial statements prepared in accordance with GAAP.
Financing for the Company has been provided through affiliates of the Company or its Chairman, in the form of the Series B Preferred Stock and Series C Preferred Stock. (See note 11).
The Company made mortgage loans in 1999 to finance properties owned by its subsidiary at the time, Leath Furniture, LLC (“Leath”), which is now owned by an affiliate of the Chairman. At December 31, 2001 and 2000, the balance of mortgage loans owed by Leath to various of the Company’s insurance subsidiaries was $3,421 and $3,538, respectively. For 2001, 2000, and 1999, interest paid by Leath on the mortgage loans totaled $323, $333, and $352, respectively.
Certain members of management are on the Boards of Directors of Bull Run Corporation (“Bull Run”) and Gray Communications Systems, Inc. (“Gray”). At December 31, 2001 and 2000, the Company owned 1,116,667 and 650,000 common shares of Bull Run, respectively, and 354,060 shares of Gray’s Series A Common Stock and 6,000 shares of Gray’s Series B Common Stock. The Company also owned 350 shares of Gray’s Series A Preferred Stock and 2,000 shares of Bull Run’s Series A Preferred Stock at December 31, 2001. In addition, the Company held $4,010 in Gray’s 10.65% debentures at December 31, 2001 and 2000 that were redeemed in January 2002.
Bonds, Common and Preferred Stocks and 	Publicly Traded Other Invested Assets