Owned Properties. The Company owned two parcels of unimproved property consisting of a total of approximately seven acres located in Fulton and Washington Counties, Georgia. During 2002, the Company disposed of both properties.
Self Insurance Administrators, Inc. (“SIA”) a non-insurance subsidiary of the Company, leases space for its office in a building located in Stone Mountain, Georgia. The lease term expires December 31, 2003. Under the terms of the lease, SIA, Inc. occupies 1,787 square feet.
Unpaid loss and loss adjustment expense comprise 43% of the Company liabilities at December 31, 2002. This obligation includes an estimate for: 1) unpaid losses on claims reported prior to December 31, 2002, 2) future development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to December 31, 2002 but not yet reported to the Company and 4) unpaid claims adjustment expense for reported and unreported claims incurred prior to December 31, 2002. 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. Future development on reported claims, estimates of unpaid ultimate losses incurred prior to December 31, 2002 but not yet reported to the Company, and estimates of unpaid claims adjustment expenses are developed based on the Company’s historical experience using actuarial methods to assist in the analysis. The Company’s actuarial staff develops ranges of estimated future 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, the reported Bornhuetter-Ferguson method, the Berquist-Sherman method and a frequency-severity 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 inflation, and others may directly or indirectly impact the relative adequacy of liabilities for unpaid losses and loss adjustment expense. The Company’s approach is the selection of 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 generally reviewed quarterly for all 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 claims and claim adjustment expenses is adjusted.
Deferred income taxes comprise less than 1% of the Company’s total assets at December 31, 2002. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for tax purposes. These deferred income taxes are measured by applying currently enacted tax laws and rates. Valuation allowances are recognized to reduce the deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income and tax planning strategies.
Gross written premiums at American Southern increased 7.1% or $3.2 million during 2002. The increase in premiums is primarily attributable to significant rate increases, new business generated by established agents as well as premiums provided by new agency appointments. Also, in 2002, American Southern added one new state contract that contributed $1.1 million in written premiums. Offsetting this increase in gross written premiums was the loss of one of its state contracts in July, 2001, which had contributed approximately $2.0 million in written premiums during 2001. The loss of this particular contract resulted in a reduction in annualized premium for 2002 of approximately $4.0 million.
Ceded premiums increased $0.9 million, or 16.0% during 2002. In 2002, American Southern experienced higher reinsurance rates; however, the increase in reinsurance is also due to several factors other than pricing. As American Southern premiums are determined and ceded as a percentage of earned premiums, an increase in ceded premiums occurs when earned premiums increase. Further, included in 2001 was a state contract that accounted for $2.0 million in written premiums during 2001 for which there was no reinsurance. The contract was not renewed in 2002. Accordingly in 2002, there was a higher effective percent of premiums ceded to premiums written than in 2001.
Ceded premiums at American Southern increased $1.3 million, or 28.9%, during 2001. The increase in ceded premiums was due to several factors. First, the pricing charged by reinsurance companies increased approximately 10% over 2000. In addition, American Southern’s premiums are determined and ceded as a percentage of earned premiums as opposed to written premiums, which resulted in an increase in ceded premiums during 2001. Lastly, the company accrued and paid $0.4 million in penalty premiums from a specific reinsurance agreement (the “Reinsurance Agreement”) to the reinsurer. The Reinsurance Agreement is related to certain program business and provides for additional penalty premiums based on
losses. During 2000, there were no penalty premiums accrued by American Southern and, as a result, ceded premiums increased in 2001 over ceded premiums in 2000.
Net earned premiums for 2002 increased $0.9 million or 2.3% over 2001 primarily due to the factors discussed previously. In 2001, net earned premiums increased by 5.0% or 1.9 million. The increase in net earned premiums for 2001 was primarily attributable to higher gross written premium in 2000.
submit. By structuring its business in this manner, American Southern provides its agents with an economic incentive to place profitable business with American Southern. As a result of this arrangement, in periods where losses and the loss ratio decrease, commission and underwriting expenses increase.
Gross written premiums at Association Casualty decreased $7.9 million, or 22.7% during 2002. The primary reasons for this decline were as follows: a cessation of writing accident and health policies in the first quarter of 2002 resulting in a $1.0 million decline in 2002 as compared to 2001; a $3.0 million decline in 2002 as a result of the company’s change late in 2000 and throughout 2001 in recognizing written premiums on an annualized basis instead of the installment method and; an extensive re-underwriting of the workers’ compensation book of business, which even after significant rate increases resulted in a decline in 2002 premiums. Association Casualty continues to increase rates on renewal business (approximately 17% in 2002) in addition to diversifying into commercial lines other than workers’ compensation such as general liability, property and automobile.
Ceded premiums at Association Casualty increased $0.5 million, or 12.8% during 2002. While Association Casualty has historically specialized in workers’ compensation insurance in the state of Texas, it continues its transition to a commercial lines carrier. Association Casualty had net earned premiums in 2002 of $24.2 million, of which 78.2% was workers’ compensation compared to 88.6% during 2001. As Association Casualty diversifies into commercial lines other than workers’ compensation, ceded premiums have increased significantly primarily due to the higher reinsurance costs associated with these new lines of business.
In 2001, gross written premiums at Association Casualty increased $9.7 million, or 38.8%. During the fourth quarter of 2000, Association Casualty 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 aggressively increased
The combined ratio for Association Casualty decreased from 123.5% in 2001 to 118.0% in 2002. The loss ratio decreased from 91.8% in 2001 to 84.2% in 2002. The decrease in the loss ratio is primarily attributable to the benefits of significant premium rate increases in addition to benefits from non-renewing its non-profitable workers’ compensation business as discussed previously. Association Casualty continues to be adversely impacted by the liberal interpretation of the workers’ compensation laws in the state of Texas. As the law has evolved, interpretive changes in the application of “life time medical” and “impairment rating” provisions have resulted in increased medical costs and the need to provide for additional reserves. In 2002, Association Casualty strengthened its liabilities for losses and claims by $2.9 million compared to $1.8 million in 2001. Association Casualty continues to increase pricing and strengthen underwriting criteria to mitigate these, as well as other, costs. The expense ratio increased to 33.8% in 2002 from 31.7% in 2001, primarily as a result of the change in the book of business and the decline in earned premiums.
Gross written premiums at Georgia Casualty increased $11.4 million, or 27.9%, in 2002. The increase in premiums is primarily attributable to rate increases on renewal business of approximately 16% coupled with new business produced by existing agents. The majority of the growth occurred in the package policies, while the workers’ compensation line of business experienced a modest growth.
Gross written premiums at Georgia Casualty increased $5.9 million, or 16.9%, in 2001 as compared to 2000. The increase in gross written premiums was attributable to significant rate increases, new business with established agents in addition to the premiums generated from new agency appointments.
Net earned premiums increased $4.2 million, or 16.3%, during 2002 primarily due to the factors discussed previously. Partially offsetting the increase in net earned premiums for 2002 was an increase in ceded earned premiums under the quota share agreement. While the cession for the quota share has been reduced from 40% in 2001 to 30% in 2002, the bulk of the written premiums ceded under this agreement during 2001 were recognized in 2002. As presented in the table above, Georgia Casualty continues to diversify its book of business into commercial lines other than workers’ compensation, repositioning the company as a one-stop commercial lines carrier. Furthermore, the company is attempting to spread its geographical exposure by reducing it concentration in Georgia and expanding in other key southeastern states such as Tennessee, Kentucky and North Carolina.
Net earned premiums declined $3.0 million, or 10.5%, during 2001 as compared to 2000 primarily due to the quota share reinsurance agreement.
The combined ratio for Georgia Casualty increased to 111.9% in 2002 from 103.3% in 2001. The loss ratio decreased slightly from 69.0% in 2001 to 67.1% in 2002. The decrease in the loss ratio is attributable to rate increases, continued focus on underwriting actions, and strong partnerships within the Georgia Casualty agency force. The expense ratio increased to 44.8% in 2002 from 34.3% in 2001 primarily due to an overall increase in operating expenses resulting from significant business growth in addition to state assessments, specifically second injury trust fund and insolvency assessments. In 2002 the company expensed $2.2 million for such assessments compared to $0.9 million in 2001.
primarily as a result of the ceding commission the company is receiving from the quota share contract put into place during 2001.
Premium revenue at Bankers Fidelity increased $5.3 million, or 9.6%, during 2002. The most significant increase in premium was in the Medicare supplement line of business, which increased $4.0 million, or 10.5%. Bankers Fidelity has continued to expand its market presence throughout the Southeast, the Mid-Atlantic, particularly Pennsylvania, and in the western United States. During 2002, Bankers Fidelity generated additional Medicare supplement premium revenue in the state of Pennsylvania of approximately $1.7 million. In addition, in both 2002 and 2001, rate increases have been implemented in varying amounts by state and type of plan. Significant rate increases in 2001 have resulted in increased revenue and profitability in 2002, thereby requiring smaller rate increases in 2002 than those experienced in 2001. Additionally, the Life insurance line of business increased $1.3 million or 9.4% primarily due to $1.2 million in single premium life sales. Bankers Fidelity, in an agreement with the UFCW Health and Welfare Fund will provide varying amounts of whole life insurance to certain former Cub Food workers.
The increase in both “benefits and losses” and “underwriting expenses” during 2002 and 2001 is primarily attributable to the increase in premiums for those periods. As a percentage of premiums, benefits and losses were 70.0% in 2002 compared to 71.6% in 2001 and 70.2% in 2000. The increase in the loss ratio in 2001 was primarily due to continued aging of the life business and higher medical costs than expected for the health business. Rate increases implemented by the company on the Medicare supplement line of business have helped to mitigate the impact of higher medical costs.
AAA of the Carolinas was reduced by $0.4 million in 2002 to reflect lower than expected premium production and higher expenses compared to a decrease of $0.2 million in the equity investment during 2001.
Investment income for 2001 of $14.3 million decreased $1.2 million, or 7.9%, from 2000. The decrease in investment income was primarily due to decreasing interest rates discussed previously. Also contributing to the decrease in 2001 was a significant gain in a real estate partnership the Company benefited from during 2000. The investment, which is accounted for under the equity method, sold several pieces of property resulting in income of approximately $0.4 million.
In 2002, interest expense decreased $0.7 million to $2.6 million from $3.2 million in 2001. The decrease in interest expense is primarily due to a decline in interest rates. The base interest rate during 2002, which is three-month LIBOR, decreased from prevailing three-month LIBOR rates in 2001. The interest rates on the Company’s debt generally are variable and tied to LIBOR. Additionally, the Company’s average debt levels during 2002 were lower as compared to 2001. The reduction in average debt levels, along with decreasing interest rates, accounts for the decrease in 2002.
Interest expense decreased from $4.4 million in 2000 to $3.2 million in 2001. During 2000, and in the first nine months of 2001, the Company paid down $7.0 million on its $30.0 million revolving credit facility, leaving $19.0 million outstanding under this facility at December 31, 2001. This debt, coupled with the $25.0 million in variable rate demand bonds issued during the second quarter of 1999, brought 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, three-month LIBOR, decreased from prevailing three-month 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 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.
Other expenses (commissions, underwriting expenses, and other expenses) increased $3.5 million or 7.6% in 2001. The increase in other expenses was primarily due to the following factors. 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 reported 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 increased significantly as a result of additional premium from new business. Lastly, during 2000, the bad debt reserve was reduced by $0.5 million due to projected improvements on the collectibility of certain receivables. Partially offsetting this increase in other
expenses was a significant reduction in commission expense American Southern paid 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 major 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. The Company’s primary sources of cash are written premiums, investment income and the sale and maturity of invested assets. The Company believes that, within each subsidiary, total invested assets will be sufficient to satisfy all policy liabilities. Cash flows at the parent company are derived from dividends, management fees, and tax sharing payments from the subsidiaries. The cash needs of the parent company are for the payment of operating expenses, the acquisition of capital assets and debt service requirements.
The Company provides certain administrative, purchasing and other services for each of its subsidiaries. The amount charged to and paid by the subsidiaries was $8.7 million, $8.4 million, and $7.6 million in 2002, 2001, and 2000, respectively. In addition, the Company has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $2.8 million, $1.3 million and $1.0 million was paid to the Company under the tax sharing agreement in 2002, 2001, and 2000, respectively. Dividends were paid to Atlantic American by one of its subsidiaries totaling $5.1 million in 2002, $4.6 million in 2001, and $3.6 million in 2000. As a result of the Company’s tax loss carryforwards, which totaled approximately $21.1 million at December 31, 2002, it is anticipated that the tax sharing agreement will provide the Company with additional funds with which to meet its cash flow obligations.
At December 31, 2001, the Company’s $44.0 million of borrowings consisted of $19.0 million outstanding on a revolving credit facility (“the Revolving Credit Facility”) with Wachovia Bank, N.A. (“Wachovia”) and $25.0 million outstanding of Series 1999, Variable Rate Demand Bonds (the “Bonds”). The Revolving Credit Facility provided for borrowings up to $30.0 million 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 due July 1, 2009, were redeemable at the Company’s option and provided for interest at a variable rate that approximated 30-day LIBOR. The Bonds were backed by a letter of credit issued by Wachovia. The cost of the letter of credit and its associated fees were 2.50%, making the effective rate on the Bonds LIBOR plus 2.5%. The interest on the Bonds was payable monthly and the letter of credit fees were payable quarterly. The effective interest rate on the Bonds, along with the related fees, at December 31, 2001 was 4.63%.
On April 2, 2002, in accordance with a December 31, 2001 amendment to the Revolving Credit Facility with Wachovia, the Company consolidated amounts outstanding on its Revolving Credit Facility and the Bonds into a single term loan (“Term Loan”), which will mature on June 30, 2004. The Company is required to repay the principal of the Term Loan in annual installments in the amount of $2.0 million on or before each of 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 in the loan agreement, to total capitalization and interest coverage. The Company must also comply with limitations on capital expenditures and additional debt obligations.
As of December 31, 2002, the Company had approximately $32.0 million in outstanding borrowings under the Term Loan, which matures on June 30, 2004. The Company intends to pay its obligations under the Term Loan and the trust preferred securities using dividend and tax sharing payments from its subsidiaries, or from potential future financing arrangements. 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.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”). SFAS 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“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
Insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such losses and expenses, are known. Consequently, the Company attempts, in establishing its premiums, to anticipate the potential impact of inflation. If, for competitive reasons premiums cannot be increased to anticipate inflation, this cost would be absorbed by the Company. Inflation also affects the rate of investment return on the Company’s investment portfolio with a corresponding effect on investment income.
We have audited the accompanying consolidated balance sheet of ATLANTIC AMERICAN CORPORATION and subsidiaries (the “Company”) as of December 31, 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. Our audit also included the 2002 financial statement schedules listed in the index at Item 15(a). These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 2002 financial statements and financial statement schedules based on our audit. The financial statements and financial statement schedules of the Company as of December 31, 2001, and for each of the years in the two-year period then ended, before the inclusion of the disclosures discussed in Note 1 to the consolidated financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and stated that such 2001 and 2000 financial statement schedules, when considered in relation to the 2001 and 2000 basic financial statements taken as a whole, fairly state, in all material respects the financial data required to be set forth therein, in their report dated March 25, 2002.
As discussed above, the financial statements of ATLANTIC AMERICAN CORPORATION and subsidiaries as of December 31, 2001 and for each of the years in the two-year period then ended, were audited by other auditors who have ceased operations. As described in Note 1, those financial statements have been revised to include pro forma disclosures required by SFAS No. 142. We audited the transitional SFAS No. 142 disclosures as described in Note 1. Our procedures included proving the arithmetic accuracy of adjusted net income and adjusted net income per common share (basic and diluted) as included within the pro forma disclosures. In our opinion, such adjustments and disclosures are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of the Company other than with respect to such adjustments and disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole.
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. In evaluating impairment, the Company considers, among other factors, the expected holding period, the nature of the investment and the prospects for the company and its industry. 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.
The resulting pro forma compensation cost may not be representative of that to be expected in future years.
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.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (“EITF”) set forth in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The scope of SFAS 146 also includes (1) costs related to terminating a contract that is not a capital lease, (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract and (3) costs to consolidate facilities or relocate employees. SFAS 146 is effective for exit and disposal activities initiated after December 31, 2002. The Company believes that the adoption of SFAS 146 will 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 the results of operations.
Bonds and short-term investments having an amortized cost of $16,166 and $15,925 were on deposit with insurance regulatory authorities at December 31, 2002 and 2001, respectively, in accordance with statutory requirements.
The amortized cost and carrying value of bonds and short-term investments at December 31, 2002 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.
Annualized premiums for accident and health insurance policies were $48,360 and $44,763 at December 31, 2002 and 2001, respectively.
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
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 liable with respect to reinsurance ceded should any reinsurer be unable to meet its obligations. Approximately 91% of the reinsurance receivables are due from four reinsurers as of December 31, 2002. Reinsurance receivables of $18,945 are with General Reinsurance Corporation, rated “AAA” by Standard & Poor’s and “A++” (Superior) by A.M. Best, $2,215 are with First Colony Life Insurance Company, rated “AA” by Standard & Poor’s and “A++” (Superior) by A.M. Best, $17,778 are with Pennsylvania Manufacturers Association Insurance Company, rated “A-” (Excellent) by A.M. Best and $6,328 are with Swiss Reinsurance Corporation, rated “AA” by Standard & Poor’s and “A++” (Superior) by A.M. Best. Allowances for uncollectible amounts are established against reinsurance receivables, if appropriate. Premiums assumed of $20,410, $22,708, and $25,439 in 2002, 2001, and 2000 respectively, include a state contract with premiums of $14,309, $14,054, and $17,198. The contract premiums represent 9.3%, 9.7% and 12.9% of net premiums earned for the years ended 2002, 2001, and 2000, respectively. The following
At December 31, 2002, the Company had regular federal net operating loss carryforwards of approximately $21,000 expiring generally between 2006 and 2019. As of December 31, 2002 and 2001, a valuation allowance of $3,824 and $5,610, respectively, was established against deferred income tax benefits relating primarily to net operating loss carryforwards that may not be realized. In 2002 and 2001, the decrease of $1,249 and $827, respectively, in the valuation allowance is due primarily to the utilization of a portion of these benefits that were previously reserved for. The remaining decrease in 2002 is due to adjustments for prior years’ taxes. Since the Company’s ability to generate taxable income from operations and utilize available tax-planning strategies in the near term is dependent upon various factors, many of which are beyond management’s control, management believes that the remaining deferred income tax benefits relating to the carryforwards may not be realized. However, realization of the remaining deferred income tax benefits 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. The Company has formal tax-sharing agreements and files a consolidated income tax return with its subsidiaries.
2009. They were redeemable at the Company’s option and provided for interest at a variable rate that approximated 30-day LIBOR. The Bonds were backed by a letter of credit issued by Wachovia. The cost of the letter of credit and its associated fees were 2.50% making the effective rate on the Bonds LIBOR plus 2.5%. The interest on the Bonds was payable monthly and the letter of credit fees were payable quarterly. The effective interest rate on the Bonds, along with the related fees, at December 31, 2001 was 4.63%.
The estimated fair value and related carrying value of the Company’s interest rate swap agreement at December 31, 2002 and 2001 was a liability of approximately $914 and $532, respectively.
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, it may have a material impact on the future results of operations of the Company.
The Company’s rental expense, including common area charges, for operating leases was $1,811, $1,732, and $1,534 in 2002, 2001, and 2000 respectively. The Company’s future minimum lease obligations under non-cancelable operating leases are as follows:
Data on options outstanding and exercisable at December 31, 2002 are as follows:
The weighted average fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model and was $1.62, $.95, and $1.63 for grants in 2002, 2001, and 2000, respectively. Fair value determinations were based on expected dividend yields of zero, expected lives of 5 or 10 years, risk free interest rates of 3.92%, 4.49%, and 4.99%, and expected volatility of 69.11%, 64.99%, and 52.77%, for the years ended December 31, 2002, 2001, and 2000, respectively.
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. Under the plan, employees generally may elect to contribute up to 16% of their compensation to the plan. The Company makes a matching contribution on behalf of 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 $219, $159, and $155 in 2002, 2001, and 2000, respectively. In 2002, the Board of Directors approved a discretionary profit sharing contribution of $108 to be made in cash to those employees who participated in the Company’s 401(k) Plan during 2002 and who were employees as of December 31, 2002.
The Company has two defined benefit pension plans covering the employees of American Southern. The Company’s general funding policy is to contribute annually the maximum amount that can be deducted for income tax purposes.
The following assumptions were used to measure the projected benefit obligation for the benefit plans at December 31, 2002, 2001, and 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, 2002 and 2001, the Company had accrued but unpaid dividends on the Series B Preferred Stock of $8,442 and $7,236, 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.
The Company has 25,000 shares of Series C Preferred Stock (“Series C Preferred Stock”) outstanding, having a stated value of $100 per share. Annual dividends are $9.00 per share and are cumulative. The Series C 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 C Preferred Stock would be convertible into an aggregate of approximately 627,000 shares of the common stock at a conversion price of $3.99 per share. The Series C Preferred Stock is redeemable at the option of the Company. The Company paid $225 in dividends to the holders of the Series C Preferred Stock during 2002 and 2001, respectively. For all periods in which the Company had an accumulated deficit, dividends on the Series C Preferred Stock were accrued out of additional paid in capital.
A reconciliation of the numerator and denominator of the earnings per common share calculations are as follows:
Outstanding stock options of 408,500, 712,500, and 804,000 were excluded from the earnings per common share calculation in 2002, 2001, and 2000, respectively, since their impact was antidilutive. The assumed conversions of the Series B and Series C Preferred Stock were also excluded from the earnings per common share calculation for 2002, 2001, and 2000 since their 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 $7,076, $7,099 and $6,082 in 2002, 2001, and 2000, respectively, from its insurance subsidiaries. In 2003, dividend payments by insurance subsidiaries in excess of $11,783 would require prior approval.
The Company leases approximately 65,489 square feet of office and covered garage space from an affiliated company. In the years ended December 31, 2002, 2001, and 2000, the Company paid $987, $961 and $904, respectively, under the leases.
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 10).
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts which the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Other than net income, the other components of comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000 are as follows:
The following table sets forth a summary of the quarterly unaudited results of operations for the two years in the period ended December 31, 2002: