Includes a $4,014 impairment charge in 2008 primarily related to the write-down in the value of certain bonds, preferred and common stocks. Includes a $12,896 realized gain in 2007 from the disposition of the Company’s investment in equity securities of Wachovia Corporation. Includes a $7,198 impairment charge in 2005 for automotive sector fixed maturity investments. See Note 3 of Notes to Consolidated Financial Statements.
The following is management’s discussion and analysis of the financial condition and results of operations of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively, the “Company”) for each of the three years in the period ended December 31, 2008. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.
In December 2007, the Company entered into an agreement for the sale of its regional property and casualty operations, Association Casualty Insurance Company and Association Risk Management General Agency, Inc. (together known as “Association Casualty”) and Georgia Casualty & Surety Company (“Georgia Casualty”) to Columbia Mutual Insurance Company. The Company completed this sale on March 31, 2008. In accordance with generally accepted accounting principles, the consolidated financial statements reflect the assets, liabilities and operating results of the regional property and casualty operations as discontinued operations. Accordingly, unless otherwise noted, amounts and analyses contained herein reflect the continuing operations of the Company and exclude the regional property and casualty operations. References to income and loss from operations are identified as continuing operations or discontinued operations, while references to net income or net loss reflect the consolidated net results of both continuing and discontinued operations.
expenses are reviewed periodically for significant lines of business, and when current results differ from the original assumptions used to develop such estimates, the amount of the Company’s recorded liability for unpaid loss and loss adjustment expenses is adjusted. In the event the Company’s actual reported losses in any period are materially in excess of the previous estimated amounts, such losses, to the extent reinsurance coverage does not exist, would have a material adverse effect on the Company’s results of operations.
Cash and investments comprised 79% of the Company’s total assets at December 31, 2008. Substantially all investments are in bonds and common and preferred stocks, the values of which are subject to significant market fluctuations. The Company carries all investments as available for sale and, accordingly, at their estimated fair values. The Company has certain fixed maturity securities that do not have publicly quoted values with an estimated fair value as determined by management of $1.9 million at December 31, 2008. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. On occasion, the value of an investment may decline to a value below its amortized purchase price and remain at such value for an extended period of time. When an investment’s indicated fair value has declined below its cost basis for a period of time, the Company evaluates such investment for other than a temporary impairment. The evaluation for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. The risks and uncertainties include changes in general economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. In evaluating impairment, the Company considers, among other factors, the intent and ability to hold these securities, the nature of the investment and the prospects for the issuer and its industry, the issuers’ continued satisfaction of the investment obligations in accordance with their contractual terms, and management’s expectation that they will continue to do so, as well as rating actions that affect the issuer’s credit status. If other than a temporary impairment is deemed to exist, then the Company will write down the
Effective January 1, 2008, on a prospective basis, the Company determined the fair values of certain financial instruments based on the fair market hierarchy established in Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price at which an asset could be sold or a liability settled in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 provides guidance on measuring fair value when required under existing accounting standards and establishes a hierarchy that prioritizes the inputs to valuation techniques. The first level of such hierarchy determines fair value at the quoted price (unadjusted) in active markets for identical assets (Level 1). The second level determines fair value using valuation methodology including quoted prices for similar assets and liabilities in active markets and other inputs that are observable for the asset or liability, either directly or indirectly for substantially similar terms (Level 2). The third level for determining fair value utilizes inputs to valuation methodology which are unobservable for the asset or liability (Level 3). Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The fair values for fixed maturity and equity securities are largely determined by either independent methods prescribed by the National Association of Insurance Commissioners (“NAIC”), which do not differ materially from nationally quoted market prices, when available, or independent broker quotations.
Total revenue was $99.7 million in 2008 as compared to $123.0 million in 2007 and $125.4 million in 2006. Insurance premiums decreased to $91.4 million in 2008 from $97.8 million in 2007 and $109.6 million in 2006. The continued softening in the property and casualty markets combined with the significant market competition in the Medicare supplement and Medicare advantage markets have resulted in declining premiums in both of the Company’s business segments between years; although premium levels at the end of 2008 appeared to be stabilizing. Premium declines were not as evident in the change in total revenue during 2007 due to the magnitude of the change in realized investment gains in 2007.
A more detailed analysis of the operating companies and other corporate activities is provided below.
Ceded premiums decreased $2.9 million, or 31.1%, during 2007 as compared to 2006. The decrease in ceded premiums was primarily due to the decline in the related earned premiums.
Net earned premiums decreased $5.3 million, or 12.8%, during 2008 as compared to 2007 and $9.1 million, or 17.9%, during 2007 as compared to 2006. The decrease in net earned premiums during 2008 was primarily due to the decline in policy writings in 2007. During 2007, American Southern experienced a significant decrease in gross written premiums, which was primarily attributable to the loss of a program marketed through a certain general agent. Prior to 2007, this program produced approximately $10 million in annualized gross written premiums, substantially all of which were earned through 2007. The decrease in net earned premiums during 2007 was primarily attributable to the cancellation of American Southern’s joint venture with AAA Carolinas to market automobile insurance to club members, which was terminated on October 1, 2005. Although the joint venture with AAA Carolinas was terminated in 2005, a portion of the gross written premiums related thereto were earned in 2006. Gross written premiums are earned ratably over the respective policy terms, and therefore premiums earned in the current year are related to policies written during both the current and prior year. In 2008, American Southern’s five key states in terms of premium revenue, Alabama, Florida, Georgia, Indiana, and Ohio, were relatively consistent with those in 2007 and accounted for approximately 63% of total earned premiums for 2008.
The performance of an insurance company is often measured by its combined ratio. The combined ratio represents the percentage of losses, loss adjustment expenses and other expenses that are incurred for each dollar of premium earned by the company. A combined ratio of under 100% represents an underwriting profit while a combined ratio of over 100% indicates an underwriting loss. The combined ratio is divided into two components, the loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) and the expense ratio (the ratio of expenses incurred to premiums earned). The combined ratio for American Southern increased to 95.6% in 2008 from a combined ratio of 90.4% in 2007. The loss ratio increased to 46.2% in 2008 from 44.3% in 2007. The overall increase in the loss ratio was primarily attributable to higher incurred losses in the surety line of business due to problems in the construction industry which did not occur in 2007. The expense ratio increased to 49.4% in 2008 from 46.1% in 2007. The increase in the expense ratio was primarily due to a relatively consistent level of fixed expenses coupled with a decrease in premium revenues. The combined ratio for American Southern decreased to 90.4% in 2007 from 90.7% in 2006. The single largest component of the decrease was the decreased loss ratio which decreased to 44.3% in 2007 from 46.3% in 2006. The decrease in the loss ratio was primarily attributable to the loss and cancellation of several commercial programs. The expense ratio increased to 46.1% in 2007 from 44.4% in 2006 due primarily to slightly higher profit margins on the business with variable commissions.
Premium revenue at Bankers Fidelity decreased $1.1 million, or 2.0%, during 2008 as compared to 2007. Premiums from the Medicare supplement line of business decreased $0.4 million, or 1.0%, in 2008 from 2007 and accounted for 75% of total 2008 earned premiums. In 2008, the company’s five key states in terms of premium revenue, Georgia, Indiana, Ohio, Pennsylvania, and Utah, were consistent with those in 2007 and accounted for approximately 55% of total earned premiums for 2008. The general decline in Medicare supplement premiums has resulted primarily from the increase in competition not only from traditional insurance company competitors but also the federal government as it provides incentives directly and indirectly to seniors to exit traditional Medicare programs and choose instead Medicare Advantage and other similar plans which result in much different economics to the insured. Premiums from the life insurance line of business decreased $0.3 million, or 2.4%, during 2008 compared to 2007 due to the redemption and settlement of existing policies exceeding the level of new sales activity. The other health products premiums decreased to $3.4 million in 2008 from $3.8 million in 2007, or 12.6%, primarily as a result of decreased
business activities with group associations. Premiums from group associations decreased $0.7 million, or 88.0%, during 2008 as compared to 2007 due to a decline in first year premiums and the non-renewal of existing policies.
Investment income of $11.8 million increased slightly in 2008 as compared to 2007. The increase in investment income during 2008 was primarily attributable to an increased level of invested assets which resulted from the Company investing the proceeds received from the sale of its regional property and casualty operations. Partially offsetting the increase in investment income was a large number of called securities, the proceeds of which the Company was not able to reinvest at equivalent market rates.
Interest expense of $3.3 million decreased $0.9 million, or 20.7%, during 2008 as compared to 2007. The decrease in interest expense during 2008 was primarily due to a decrease in the London Interbank Offered Rate (“LIBOR”), which occurred in the latter half of 2007 and into 2008. The Company’s interest expense related to its borrowings, including the trust preferred obligations and its outstanding bank debt, is based on LIBOR. In addition, the Company repaid the outstanding balance of $12.8 million under the Company’s credit agreement (the “Credit Agreement”) with Wachovia Bank, National Association (“Wachovia”), which decreased interest expense by reducing the Company’s average outstanding debt level during 2008.
Other expenses (commissions, underwriting expenses, and other expenses) decreased $0.4 million, or 1.0%, in 2008 as compared to 2007. The decrease in other expenses during 2008 was primarily attributable to targeted reductions in compensation, which were effective beginning October 1, 2007, the elimination of certain corporate positions, and other cost reduction initiatives which were implemented in the fourth quarter of 2007. Partially offsetting the decrease in other expenses were $0.7 million in discretionary bonus payments to certain officers of the Company in connection with the completion of the sale of the regional property and casualty operations, $0.8 million in incremental additional compensation accruals for recognition of 2008 management performance and a $0.3 million goodwill impairment charge, all of which were expensed in
2008. As a percentage of earned premiums, other expenses were 44.4% in 2008 as compared with 41.9% in 2007. The increase in the expense ratio was primarily due to the bonus compensation accruals and the goodwill impairment charge discussed previously coupled with a decrease in premium revenues.
Other expenses decreased $4.7 million, or 10.2%, in 2007 as compared to 2006. The decrease in premium revenue that occurred in 2007 resulted in a corresponding decrease in the related commissions and underwriting expenses. As a percentage of earned premiums, other expenses were 41.9% in 2007 as compared with 41.7% in 2006. The increase in other expenses as a percentage of earned premiums resulted from the increased marketing costs incurred in connection with continuing to diversify and grow the book of business. Offsetting some of the increased marketing costs were cost reduction initiatives implemented in the fourth quarter of 2007.
The primary cash needs of the Company are for the payment of claims and operating expenses, maintaining adequate statutory capital and surplus levels, and meeting debt service requirements. Current and expected patterns of claim frequency and severity may change from period to period but generally are expected to continue within historical ranges. The Company’s primary sources of cash are written premiums, investment income and the sale and maturity of its invested assets. The Company believes that, within each business unit, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts and reinsurance collections will be adequate to fund the payment of claims and expenses as needed.
Cash flows at the Parent are derived from dividends, management fees, and tax sharing payments from the subsidiaries. The cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements. At December 31, 2008, the Parent had approximately $21.0 million of cash and short-term investments. Net cash used in operating activities by the Parent was less than $1.0 million in both 2008 and 2007; accordingly, the Company believes that given traditional funding sources of the Parent combined with current cash and short-term investments, the current liquidity issues being faced by certain other companies as a result of the current economic conditions and funding constraints should not be an issue for the Company and/or the Parent for the foreseeable future.
Dividend payments to the Parent 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, 2008, the Parent’s insurance subsidiaries had statutory surplus of $66.3 million.
The Parent provides certain administrative, purchasing and other services to each of its subsidiaries. The amounts charged to and paid by the subsidiaries were $4.7 million, $5.0 million, and $4.9 million in 2008, 2007, and 2006, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $7.8 million, $3.6 million and $4.1 million was paid to the Parent under the tax sharing agreements in 2008, 2007, and 2006, respectively. Dividends were paid to Atlantic American by its subsidiaries totaling $5.5 million in 2008, $5.6 million in 2007, and $7.8 million in 2006. As a result of
the Parent’s tax loss carryforwards, which totaled approximately $6.0 million at December 31, 2008, it is anticipated that the tax sharing agreements will continue to provide the Parent with additional funds sufficient to meet its cash flow obligations.
The Company has two statutory trusts which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial interests in the assets of the trusts and investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”). The outstanding $41.2 million of Junior Subordinated Debentures have a maturity of thirty years from their original date of issuance, are callable, in whole or in part, only at the option of the Company five years after their respective dates of issue and quarterly thereafter, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to 4.10%. At December 31, 2008, the effective interest rate was 6.23%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each trust’s obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer Junior Subordinated Debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities.
The Company intends to pay its obligations under the Credit Agreement, if any, and the Junior Subordinated Debentures using dividend and tax sharing payments from the operating subsidiaries, or from potential future financing arrangements. In addition, the Company believes that, if necessary, at maturity, the Credit Agreement could be refinanced, although there can be no assurance of the terms or conditions of such a refinancing, or its availability.
that the Company’s current exposure is minimal. The estimated fair value and related carrying value of the Company’s rate collar at December 31, 2008 was a liability of approximately $2.1 million.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This statement
permits entities to choose, at specified election dates, to measure eligible items at fair value (i.e. the fair value option). Items eligible for the fair value option include certain recognized financial assets and liabilities, rights and obligations under certain insurance contracts that are not financial instruments, host financial instruments resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument, and certain commitments. Business entities are required to report unrealized gains and losses on items for which the fair value option has been elected in net income. The fair value option: (a) may be applied instrument by instrument, with certain exceptions; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 was effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, although early adoption was permitted under certain conditions. The Company adopted SFAS 159 on January 1, 2008 and did not elect the fair value option for any eligible items. Adoption of this statement did not have a material impact on the Company’s financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price at which an asset could be sold or a liability settled in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 provides guidance on measuring fair value when required under existing accounting standards and establishes a hierarchy that prioritizes the inputs to valuation techniques. The first level of such hierarchy determines fair value at the quoted price (unadjusted) in active markets for identical assets (Level 1). The second level determines fair value using valuation methodology including quoted prices for similar assets and liabilities in active markets and other inputs that are observable for the asset or liability, either directly or indirectly for substantially similar terms (Level 2). The third level for determining fair value utilizes inputs to valuation methodology which are unobservable for the asset or liability (Level 3). Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 157 on January 1, 2008. Adoption of this statement did not have a material impact on the Company’s financial condition or results of operations.
The Company’s Level 2 instruments include most of its fixed maturity securities, which consist of U.S. Treasury securities and U.S. government securities, municipal bonds, and certain corporate fixed maturity securities as well as its common and non-redeemable preferred stocks.
Assets measured at fair value, as of December 31, 2008, on a recurring basis are summarized below:
Interest payable is based on interest rates as of December 31, 2008 and assumes that all debt remains outstanding until its stated contractual maturity. The interest on Junior Subordinated Debentures is at various rates of interest.
Unearned premiums represent potential future revenue for the Company; however, under certain circumstances, such premiums may be refundable with cancellation of the underlying policy. Significantly all unearned premiums will be earned within the following twelve month period as the related future insurance protection is provided. Significantly all costs related to such unearned premiums have already been incurred and paid and are included in deferred acquisition costs; however, future losses related to the unearned premiums have not been recorded. The contractual obligations related to unearned premiums reflected in the table represent the average loss ratio applied to the year end unearned premium balances, with loss payments projected in comparable proportions to the year end loss and claims reserves. Projecting future losses is subject to significant uncertainties and the projected payments will most likely vary materially from these estimates as a result of differences in future severity, frequency and other anticipated and unanticipated factors. Amounts reflected do not take into account reinsurance amounts which may be recoverable based on the level of ultimate sustained loss.
We have audited the accompanying consolidated balance sheets of Atlantic American Corporation and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. We have also audited schedules II, III, IV and VI as of and for each of the three years in the period ended December 31, 2008. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits.
Goodwill represents the excess of cost over the fair value of net assets acquired and is not amortized. The Company periodically reviews its goodwill to determine if any adverse conditions exist that could indicate impairment. Conditions that could trigger impairment include, but are not limited to, a significant change in business climate that could affect the value of the related asset, an adverse action, or an assessment by a
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 including stock options and share awards outstanding using the treasury stock method and assumed conversion of the Series B and Series D Preferred Stock, if dilutive. Unless otherwise indicated, earnings per common share amounts are presented on a diluted basis.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). This statement replaces SFAS No. 141, “Business Combinations” and establishes the principles and requirements for how the acquirer in a business combination: (a) measures and recognizes the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, (b) measures and recognizes positive goodwill acquired or a gain from bargain purchase (negative goodwill), and (c) determines the disclosure information that is decision-useful to users of financial statements in evaluating the nature and financial effects of the business combination. SFAS 141(R) further requires all transaction costs for an acquisition to be expensed as incurred rather than capitalized, and changes the measurement date to the date an acquisition closes. In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). This statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”). Noncontrolling interest refers to the minority interest portion of the equity of a subsidiary that is not attributable directly or indirectly to a parent. SFAS 160 establishes accounting and reporting standards that require for-profit entities that prepare consolidated financial statements to (a) present noncontrolling interests as a component of equity, separate from the parent’s equity, (b) separately present the amount of consolidated net income attributable to noncontrolling interests in the income statement, (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions,
The Company’s Level 3 instruments include certain fixed maturity securities and a zero cost rate collar. Fair value is based on criteria that use assumptions or other data that are not readily observable from objective sources. As of December 31, 2008, the Company’s fixed maturity securities valued using Level 3 criteria totaled $1,929 and the zero cost rate collar was a liability of $2,085. See Note 16.
The following table provides operating results from the discontinued operations of Georgia Casualty and Association Casualty for the years indicated:
Bonds having an amortized cost of $9,052 and $10,553 were on deposit with insurance regulatory authorities at December 31, 2008 and 2007, respectively, in accordance with statutory requirements.
Securities with unrealized losses at December 31, 2008 and 2007 were as follows:
During the years ended December 31, 2008, 2007, and 2006, the Company recorded impairments related to the following investments.
The amortized cost and carrying value of fixed maturities and short-term investments at December 31, 2008 and 2007 by contractual maturity were 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.
The Company’s bond portfolio included 96% investment grade securities at December 31, 2008 as defined by the NAIC.
Annualized premiums for accident and health insurance policies were $46,077 and $45,913 at December 31, 2008 and 2007, 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 prior to the close of the accounting period, (b) estimates of incurred but not reported (“IBNR”) claims based on past experience, and (c) estimates of loss adjustment expenses. The estimated liability is periodically 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.
Following is a reconciliation of total incurred claims to total insurance benefits and losses incurred:
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 99% of the Company’s reinsurance receivables were due from one reinsurer as of December 31, 2008. Reinsurance receivables of $14,718 were due from Swiss Reinsurance Corporation, rated “A+” (Strong) by Standard & Poor’s and “A+” (Superior) by A.M. Best. Allowances for uncollectible amounts are established against reinsurance receivables, if appropriate.
A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and the income tax benefit from discontinued operations was as follows:
At December 31, 2008, the Company had regular federal net operating loss carryforwards (“NOLs”) of approximately $6,014 expiring generally between 2010 and 2025. Currently, the Company believes deferred income tax benefits relating to the NOLs will be realized. However, realization of the NOLs will be assessed periodically based on the Company’s current and anticipated results of operations, and amounts could increase or decrease in the near term if estimates of future taxable income change.
On March 31, 2008, the Company completed the sale of its regional property and casualty operations to Columbia, which resulted in an estimated loss carryforward benefit of approximately $5,155. Since the Company’s ability to generate taxable income 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 this loss carryforward may not be realized. Accordingly, as of December 31, 2008, a valuation allowance of $5,155 was established to reduce this deferred tax benefit to zero. The Company will prospectively periodically assess the potential realization of this deferred tax benefit.
The financial structure of each of Atlantic American Statutory Trust I and II, as of December 31, 2008 and 2007, was as follows:
On February 21, 2006, the Company entered into a zero cost rate collar with Wachovia to hedge future interest payments on a portion of the Junior Subordinated Debentures. The notional amount of the collar was $18,042 with an effective date of March 6, 2006. The collar has a LIBOR floor rate of 4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the 4th of each March, June, September and December through termination on March 4, 2013. The Company began making payments to Wachovia under the zero cost rate collar on June 4, 2008. While the Company is exposed to counterparty risk should Wachovia fail to perform, the recent decrease in interest rates, coupled with the current macroeconomic outlook would indicate that the Company’s current exposure is minimal.
The estimated fair value and related carrying value of the Company’s rate collar at December 31, 2008 was a liability of approximately $2,085.
From time to time, the Company is involved in various claims and lawsuits incidental to and in the ordinary course of its businesses. In the opinion of management, any such known claims are not expected to have a material effect on the business or financial condition of the Company.
A summary of the status of the Company’s stock options at December 31, 2008, 2007 and 2006, is as follows:
Data on options outstanding and exercisable at December 31, 2008 is as follows:
related to the qualified pension plan, as well as the supplemental executive retirement plan (“SERP”). The Company intends to terminate the qualified plan pending governmental approval. Upon approval, the Company will distribute the accumulated benefits to its participating employees. The Company intends to terminate the SERP on May 19, 2009 and distribute the accumulated benefits to those employees participating in the SERP. The measurement date for these plans was December 31 of each year.
The accumulated benefit obligation for all defined benefit plans at December 31, 2008 and 2007 was $4,518 and $5,117, respectively.
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 $2,262, $2,262, and $0, respectively, as of December 31, 2008 and $2,017, $1,681, and $0, respectively, as of December 31, 2007.
At December 31, 2008, the qualified defined benefit plan assets (the “Plan Assets”) were invested in the Evergreen Treasury Money Market Fund (the “Evergreen Fund”). During 2008, the Plan Assets were liquidated from the AIM Basic Balanced Fund (the “AIM Fund”) and the proceeds from the sale were invested in the Evergreen Fund. The shift from the AIM Fund to the Evergreen Fund was due to the Company’s decision to freeze all pension benefits. The Evergreen Fund invests 100% of its assets in U.S. Treasury securities. The Company’s investment strategy with respect to pension assets is to invest the assets in accordance with ERISA and fiduciary standards. Currently, the Company’s primary investment objective is to preserve the Plan Assets pending government approval to terminate the qualified defined benefit plan and distribute accumulated assets to its employees. The Evergreen Fund does not include any equity securities of the Company in its portfolio at any time.
In 2007 and 2006, the qualified defined benefit plan assets were invested in the AIM Fund, the prospectus for which indicated an average annual return of approximately 7% since its inception; accordingly, a 7.00% rate of return was used to calculate the periodic benefit cost. The AIM Fund normally invested at least 65% of its assets in equity securities and at least 30% of its assets in fixed income securities that were investment grade at the time of purchase. The remaining assets of the AIM Fund were allocated to other investments at the fund manager’s discretion, based upon current business, economic and market conditions.
The Company expects to pay $4,518 of accumulated benefit obligations in connection with the termination of the defined benefit plans in 2009.
the date of redemption. The Holders of the Series B Preferred Stock agreed to discharge the Company from any obligation to pay the remaining $13,795 of accrued but unpaid dividends on the Series B Preferred Stock and to release the Company from any further obligations thereunder. As a result, the reversal of the $13,795 of accrued but unpaid dividends on the Series B Preferred Stock was recorded as a capital contribution during the fourth quarter of 2008.
Also on October 28, 2008, the Company entered into an amendment to its Credit Agreement to allow it to complete the foregoing transactions. See Note 7.
The Company had 70,000 shares of Series D Preferred Stock (“Series D Preferred Stock”) outstanding at December 31, 2008 and 2007. All of the shares of Series D Preferred Stock are held by an affiliate of the Company’s Chairman Emeritus. The outstanding shares of Series D Preferred Stock have a stated value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at the option of the board of directors of the Company) and are cumulative. In certain circumstances, the shares of the Series D Preferred Stock may be convertible into an aggregate of approximately 1,754,000 shares of the Company’s common stock, subject to certain adjustments and provided that such adjustments do not result in the Company issuing more than approximately 2,703,000 shares of common stock without obtaining prior shareholder approval; and are redeemable solely at the Company’s option. The Series D Preferred Stock is not currently convertible. During 2008 and 2007, the Company issued common stock in lieu of Series D Preferred Stock dividend payments of $508 and $613, respectively. As of December 31, 2008, the Company had accrued but unpaid dividends on the Series D Preferred Stock of $23.
The amount of statutory net income and surplus (shareholders’ equity) from continuing operations for the Parent’s insurance subsidiaries for the years ended December 31 were as follows:
Certain members of the Company’s management are shareholders and on the Board of Directors of Triple Crown and Gray. At December 31, 2008, the Company owned 40,553 shares of Triple Crown common stock, 2,360 shares of Triple Crown Series A preferred stock, 388,060 shares of Gray Class A common stock and 106,000 shares of Gray common stock. At December 31, 2007, the Company (including its discontinued operations) owned 54,732 shares of Triple Crown common stock, 2,360 shares of Triple Crown Series A preferred stock, 388,060 shares of Gray Class A common stock and 106,000 shares of Gray common stock. The aggregate carrying value of these investments in Triple Crown and Gray at December 31, 2008 was $0 and $268, respectively. The aggregate carrying value of these investments in Triple Crown and Gray at December 31, 2007 was $1,642 and $4,149, respectively.
The Company’s comprehensive income (loss) consists of net income (loss), unrealized gains and losses on securities available for sale, fair value adjustments from the ownership of a derivative financial instrument and minimum additional pension liability, net of applicable income taxes. Other than net income (loss), the other components of comprehensive income (loss) for the years ended December 31, 2008, 2007 and 2006 were as follows: