Leased Properties. The Company leases space for its principal offices and for some of its insurance operations in an office building located in Atlanta, Georgia, from Delta Life Insurance Company under a lease which continues until either party provides written notice of cancellation at least twelve months in advance of the actual termination date. The lease, which commenced on November 1, 2007, provides for rent adjustments
on every fifth anniversary of the commencement date. Under the current terms of the lease, the Company occupies approximately 49,586 square feet of office space. Delta Life Insurance Company, the owner of the building, is controlled by J. Mack Robinson, Chairman Emeritus and the majority shareholder of the Company. The terms of the lease are believed by Company management to be comparable to terms which could be obtained by the Company from unrelated parties for comparable rental property.
American Southern leases space for its office in a building located in Atlanta, Georgia. American Southern entered into a new lease with a commencement date of June 1, 2009. The lease term expires May 31, 2019. Under the terms of the lease, American Southern occupies approximately 17,014 square feet.
Atlantic American is an insurance holding company whose operations are conducted primarily through its insurance subsidiaries: American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”), and Bankers Fidelity Life Insurance Company (“Bankers Fidelity”). Each operating company is managed separately, offers different products and is evaluated on its individual performance.
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. This transaction was completed on March 31, 2008. In
accordance with generally accepted accounting principles, the consolidated financial statements reflect the 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.
computing the related liability for policy benefit reserves. The deferred acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance). Assessments of recoverability for property and casualty and short-duration health insurance are extremely sensitive to the estimates of a subsequent year’s projected losses related to the unearned premiums. Projected loss estimates for a current block of business for which unearned premiums remain to be earned may vary significantly from the indicated losses incurred in any given previous calendar year.
The Company determines the fair values of certain financial instruments based on the fair market hierarchy established in Accounting Standards Codification (“ASC”) 820-10-20, Fair Value Measurements and Disclosures (“ASC 820-10-20”). The fair values for fixed maturity and equity securities are largely determined by either independent methods prescribed by the National Association of Insurance Commissioners, which do not differ materially from nationally quoted market prices, when available, or independent broker quotations. See Note 2 of Notes to Consolidated Financial Statements.
The following tables present assets and liabilities carried at fair value and information about the inputs used to value those financial instruments, by hierarchy level, in accordance with ASC 820-10-20.
As of December 31, 2009, investments which are carried at fair value were measured on a recurring basis as summarized below:
As of December 31, 2008, investments which are carried at fair value were measured on a recurring basis as summarized below:
The Company’s fixed maturity securities valued with Level 3 criteria are comprised solely of issuances of pooled debt obligations of multiple, smaller financial services companies. They are not actively traded and valuation techniques used to measure fair value are based on future estimated cash flows discounted at a reasonably estimated rate of interest. Other qualitative and quantitative information received from the original
underwriter of the pooled offering is also considered, as applicable. As the derivative is an interest rate collar, changes in valuation are more closely correlated with changes in interest rates and accordingly values are estimated using projected cash flows at current interest rates discounted at a reasonably estimated rate of interest. Fair value quotations are also obtained from the single counterparty to the transaction.
Deferred income taxes comprised approximately 2% of the Company’s total assets at December 31, 2009. 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 deemed more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income and tax planning strategies.
On a consolidated basis, the Company had a net loss of $1.2 million, or $0.08 per diluted share, in 2009, compared to a net loss of $3.9 million, or $0.25 per diluted share, in 2008. The net loss in 2009 was primarily attributable to a $2.0 million increase in the Company’s deferred tax asset valuation allowance. The change in the deferred tax asset valuation allowance was due to a reassessment of the future realization of certain capital loss carryforward benefits. The Company does not currently anticipate having sufficient future capital gains to offset these capital losses. The net loss in 2008 was attributable to a $4.0 million realized investment loss related to the write-down in the value of certain bonds, preferred and common stocks due to an other than temporary impairment and a $3.4 million loss from discontinued operations. Income from continuing operations before taxes was $1.4 million in 2009, compared to a loss of $1.0 million in 2008. The increase in income from continuing operations before taxes during 2009 was due to the absence of a comparable $4.0 million impairment charge recorded in 2008 discussed previously. In 2009, other than temporary impairment charges were $0.1 million. Such variations between years in realized investment gains and losses
The Company’s property and casualty operations are comprised of American Southern and the Company’s life and health operations consist of Bankers Fidelity.
Gross written premiums at American Southern decreased $4.1 million, or 9.4%, during 2009 as compared to 2008. The decrease in gross written premiums was primarily attributable to significant decreases in the general liability and surety lines of business which resulted from weakness in the construction industry. Also contributing to the decrease in gross written premiums was the loss of one of the company’s agents who had previously produced approximately $0.7 million in annualized general liability business. Partially offsetting the decrease in gross written premiums was an increase in commercial automobile business marketed through another general agent.
Ceded premiums decreased slightly during 2009 as compared to 2008. The decrease in ceded premiums was primary attributable to the decline in written premiums. Also contributing to the decrease were lower cession rates resulting from a new reinsurance agreement which was enacted in the fourth quarter of 2009. Partially offsetting the 2009 decrease in ceded premiums were higher reinsurance rates from changes in the composition of business. Ceded premiums relative to gross written premiums increased disproportionately due to the higher reinsurance costs associated with the commercial automobile business versus the reinsurance costs in the declining lines of business.
The following table summarizes, for the periods indicated, American Southern’s earned premiums by line of business:
The combined ratio for American Southern increased to 100.3% in 2009 from a combined ratio of 95.6% in 2008. The loss ratio increased to 54.9% in 2009 from 46.2% in 2008. The overall increase in the loss ratio was primarily attributable to several large claims in the commercial automobile line of business. The expense ratio decreased to 45.4% in 2009 from 49.4% in 2008. The decrease in the expense ratio was primarily due to American Southern’s variable commission structure, which compensates the company’s agents in relation to the loss ratios of the business they write. In periods where the loss ratio increases, commissions and underwriting expenses will decrease and conversely in periods where the loss ratio decreases, commissions and underwriting expenses will increase. Partially offsetting the decrease in the 2009 expense ratio was a non-recurring charge of $0.4 million which resulted from the termination and settlement of the company’s SERP.
activities with group associations. In 2009, the company’s five principal states in terms of premium revenue, Georgia, Indiana, Ohio, Pennsylvania, and Utah, were consistent with those in 2008 and accounted for approximately 55% of total premiums for 2009.
Underwriting expenses increased $0.8 million, or 4.9%, during 2009 as compared to 2008. The increase in underwriting expenses during 2009 was primarily attributable to increases in advertising and agency related expenses which resulted from the company’s marketing initiatives. As a percentage of earned premiums, these expenses were 31.7% in 2009 compared to 31.4% in 2008. The increase in the expense ratio during 2009 was primarily due to the reasons discussed previously.
Interest expense decreased $0.5 million, or 16.4%, in 2009 as compared to 2008. The decrease in interest expense during 2009 was due to a decrease in the London Interbank Offered Rate (“LIBOR”), as the interest rates on the Company’s trust preferred obligations and outstanding bank debt are based on LIBOR. In addition, on April 1, 2008, the Company repaid the outstanding balance of $3.8 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 debt level during 2009. Partially offsetting the decrease in interest expense were net settlement payments to Wachovia under the Company’s zero cost interest rate collar due to the LIBOR rates remaining below the contractual floor rate of 4.77%.
Other expenses (commissions, underwriting expenses, and other expenses) decreased $2.8 million, or 6.8%, in 2009 as compared to 2008. The decrease in other expenses during 2009 was primarily attributable to a reduction in profit sharing commissions at American Southern. Profit sharing commissions at American Southern decreased $1.6 million during 2009 due primarily to higher loss ratios. The majority of American Southern’s business is structured in a way that agents are rewarded based upon the loss ratios of the business they submit to the company. In periods where the loss ratio increases, commissions and underwriting expenses will decrease and conversely in periods where the loss ratio decreases, commissions and underwriting expenses will increase. Further, during 2009 American Southern’s commission expense decreased $0.9 million from 2008 solely due to the decline in premiums described above. Also contributing to the decrease in other expenses in 2009 was $0.7 million in discretionary bonus payments to certain officers of the Company in 2008 in connection with the marketing and sale of the regional property and casualty companies and a $0.3 million goodwill impairment charge both of which did not recur in 2009. Partially offsetting the decrease in other expenses in 2009 was a non-recurring charge of $0.4 million, which resulted from the termination and settlement of the Company’s SERP. Also, during 2009 the Company’s life and health operations experienced increases in advertising and agency related expenses due to increases in marketing initiatives. As a percentage of earned premiums, other expenses were 41.4% in 2009 as compared with 44.4% in 2008. The decrease in the expense ratio was primarily due to the reduction in profit sharing commissions and the $0.7 million discretionary bonus discussed previously.
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, 2009, the Parent’s insurance subsidiaries had an aggregate statutory surplus of $70.3 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 $4.9 million and $4.7 million in 2009 and 2008, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $2.3 million and $7.8 million were paid to the Parent under the tax sharing agreements in 2009 and 2008, respectively. Dividends were paid to Atlantic American by its subsidiaries totaling $6.5 million in 2009 and $5.5 million in 2008. As a result of the Parent’s tax loss carryforwards, which totaled approximately $6.3 million at December 31, 2009, it is anticipated that the tax sharing agreements will continue to provide the Parent with additional funds sufficient to meet its cash flow obligations.
In addition to these internal funding sources, the Company maintains its revolving credit facility under the Credit Agreement pursuant to which the Company was able to, subject to the terms and conditions thereof, initially borrow or reborrow up to $15.0 million (the “Commitment Amount”). In accordance with the terms of the Credit Agreement, the Commitment Amount is incrementally reduced every six months and was equal to $10.5 million at December 31, 2009. The interest rate on amounts outstanding under the Credit Agreement is, at the option of the Company, equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the LIBOR determined on an interest period of 1-month, 2-months, 3-months or 6-months, plus an Applicable Margin (as defined). The Applicable Margin varies based upon the Company’s leverage ratio (funded debt to total capitalization, each as defined) and ranges from 1.75% to 2.50%. Interest on amounts outstanding is payable quarterly. The Credit Agreement requires the Company to comply with certain covenants, including, among others, ratios that relate funded debt to both total capitalization and earnings before interest, taxes, depreciation and amortization, as well as the maintenance of minimum levels of tangible net worth. The Company must also comply with limitations on capital expenditures, certain payments, additional debt obligations, equity repurchases and certain redemptions, as well as minimum risk-based capital levels. Upon the occurrence of an event of default, Wachovia may terminate the Credit Agreement and declare all amounts outstanding due and payable in full. During 2009, there was no balance outstanding under this Credit Agreement and the Company was in compliance with all terms of the Credit Agreement. The termination date of this Credit Agreement is June 30, 2010 and the Company currently does not anticipate entering into any future credit agreements. Notwithstanding the foregoing, however, changes in business or general economic conditions could result in the Company determining that it is in the Company’s best interest to enter into such an agreement at any time in the future. In such event, no assurances can be provided that the Company would be able to enter into such an agreement in a timely manner, on acceptable terms, or at all.
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, 2009, the effective interest rate was 4.32%. 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 has not made such an election.
Net cash used in operating activities was $0.8 million in 2009 compared to $2.7 million in 2008. Cash and short-term investments decreased to $20.1 million at December 31, 2009 from $37.3 million at December 31, 2008. The decrease in cash and short-term investments during 2009 was primarily due to an increased level of investing exceeding normal sales and maturities. In addition, during 2009 the Company distributed accumulated benefits of $2.8 million due to the termination of its SERP. Also contributing to the decrease in cash and short-term investments was a final settlement of $1.8 million with Columbia Mutual Insurance Company relating to a valuation matter with respect to certain loss reserves in connection with the 2008 sale of the Company’s regional property and casualty operations. Cash and short-term investments at December 31, 2009 of $20.1 million are believed to be sufficient to meet the Company’s near-term needs.
See “Impact of Recently Issued Accounting Standards” in Note 1 of Notes to Consolidated Financial Statements.
As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we have elected to comply with certain scaled disclosure reporting obligations, and therefore are not required to provide the table of contractual obligations requested by this Item.
Consolidated Statements of Operations for each of the two years in the period ended December 31, 2009
Consolidated Statements of Shareholders’ Equity for each of the two years in the period ended December 31, 2009
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Atlantic American Corporation and subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) which, as to insurance companies, differ from the statutory accounting practices prescribed or permitted by regulatory authorities. These financial statements include the accounts of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.
At December 31, 2009, the Parent owned three insurance subsidiaries, 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”), in addition to two non-insurance subsidiaries, Self-Insurance Administrators, Inc. (“SIA, Inc.”) and xCalibre Risk Services, Inc. (XRS, Inc.). On December 26, 2007, the Company entered into a stock purchase agreement providing for the sale of all the outstanding shares of stock of 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 (“Columbia”). This transaction was completed on March 31, 2008. Accordingly, the assets, liabilities, and results of operations of Association Casualty and Georgia Casualty have been reflected by the Company as discontinued operations. See Note 17.
Life insurance premiums are recognized as revenues when due; accident and health premiums are recognized over the premium paying period and property and casualty insurance premiums are recognized as revenue over the period of the contract in proportion to the amount of insurance protection provided. Benefits and expenses are accrued as incurred and are associated with premiums as they are earned so as to result in recognition of profits over the lives of the contracts. For traditional life insurance and long-duration health insurance, this association is accomplished by the provision of a future policy benefits reserve and the deferral and subsequent amortization of the costs of acquiring business, “deferred policy acquisition costs” (principally commissions, premium taxes, and other expenses of issuing policies). Deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the policy benefits reserve. The Company provides for insurance benefits and losses on accident, health, and property-casualty claims based upon estimates of projected ultimate losses. The deferred policy acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Contingent commissions, if contractually applicable, are ultimately payable to agents based on the underlying profitability of a particular insurance contract or a group of insurance contracts, and are periodically evaluated and accrued as earned. In periods in which revisions are made to the estimated loss reserves related to the particular insurance contract or group of insurance contracts subject to such commissions, corresponding adjustments are also made to the related accruals. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance).
regulator. No impairment of the Company’s recorded goodwill was identified during 2009. During 2008, impairment charges of $260 were recognized.
The Company’s investments in both fixed maturity securities, which include bonds and redeemable preferred stocks, and equity securities, which include common and non-redeemable preferred stocks, are classified as “available-for-sale” and, accordingly, are carried at fair value with the after-tax difference from amortized cost, as adjusted if applicable, reflected in shareholders’ equity as a component of accumulated other comprehensive income. 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 publicly quoted market prices, when available, or independent broker quotations. The Company owns certain fixed maturity securities that do not have publicly quoted market values, but have an estimated fair value as determined by management of $1,779 at December 31, 2009. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. 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, and are accounted for using the equity method. If the value of a common stock, preferred stock, other invested asset, or publicly traded bond declines below its cost or amortized cost, if applicable, and the decline is considered to be other than temporary, a realized loss is recorded to reduce the carrying value of the investment to its estimated fair value, which becomes the new cost basis. The evaluation for 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 until price recovery, the nature of the investment and the prospects for the issuer and its industry, the issuer’s 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. Premiums and discounts related to investments are amortized or accreted over the life of the related investment as an adjustment to yield using the effective interest method. Dividends and interest income are recognized when earned or declared. The cost of securities sold is based on specific identification. Unrealized gains (losses) in the value of invested assets are accounted for as a direct increase (decrease) in accumulated other comprehensive income in shareholders’ equity, net of deferred tax and, accordingly, have no effect on net income.
In August 2009, the FASB issued ASC Update No. 2009-4, Accounting for Redeemable Equity Instruments (“ASU 2009-4”), which is an amendment to ASC 480-10-S99, Distinguishing Liabilities from Equity. ASU 2009-4 was issued to provide guidance in the application of SEC Accounting Series Release No. 268 - Presentation in Financial Statements of Redeemable Preferred Stocks (“ASR 268”) and clarifies that ASR 268 pertains to preferred stocks and other redeemable securities including common stock, derivative instruments, non-controlling interests, securities held by an employee stock ownership plan and share-based payment arrangements with employees. ASU 2009-4 became effective for the Company upon issuance and did not have a material impact on the Company’s financial condition or results of operations.
In June 2009, the FASB issued an amendment to ASC 860 (“ASC 860”). ASC 860 amends the derecognition guidance and eliminates the concept of a qualifying special purpose entity. ASC 860 is effective for fiscal years and interim periods beginning after November 15, 2009. Early adoption of ASC 860 is prohibited. The Company will adopt the amendments to ASC 860 on January 1, 2010 and does not expect the adoption to have a material impact on the Company’s financial condition or results of operations.
statements are issued or are available to be issued. ASC 855-10 is effective for interim and annual financial periods ending after June 15, 2009.
In April 2009, the FASB issued ASC 820-10-65, Transition Related to FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“ASC 820-10-65”). ASC 820-10-65, among other things, clarifies that the measurement objective in determining fair value when the volume and level of activity for an asset or liability have significantly decreased is the price that would be received to sell the asset in an orderly transaction between willing market participants under current market conditions, and not the value in a hypothetical active market. ASC 820-10-65 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. See Note 2, Investments, for expanded disclosures.
In April 2009, the FASB issued ASC 320-10-65, Transition Related to FSP No. FAS 115-2 and No. FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“ASC 320-10-65”). ASC 320-10-65 replaces the existing requirement that in order for an entity to conclude impairment of debt securities is not other-than-temporary, it must have the intent and ability to hold an impaired security for a period sufficient to allow for recovery in value of the investment. To conclude impairment is not other-than-temporary, ASC 320-10-65 requires management to assert that it does not have the intent to sell the security and that it is more likely than not it will not have to sell the security before recovery of its cost basis. ASC 320-10-65 also changes the presentation in the financial statements of non-credit related impairment amounts for instruments within its scope. When the entity asserts it does not have the intent to sell the security and it is more likely than not it will not have to sell the security before recovery of its cost basis, only the credit related impairment losses are to be recorded in earnings; non-credit related losses are to be recorded in accumulated other comprehensive income. ASC 320-10-65 also expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. See Note 2, Investments, for expanded disclosures. ASC 320-10-65 is effective for interim and annual reporting periods ending after June 15, 2009. Adoption of ASC 320-10-65 did not have a material impact on the Company’s financial condition or results of operations.
In March 2008, the FASB issued ASC 815-10-65, Transition and Effective Date Related to FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 (“ASC 815-10-65”). ASC 815-10-65 amends and expands disclosures about an entity’s derivative and hedging activities with the intent of providing users of financial statements with an enhanced understanding of the derivatives, their impact on the Company, and why they are used. ASC 815-10-65 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company adopted ASC 815-10-65 on January 1, 2009 and adoption of this codification did not have a material impact on the Company’s financial condition or results of operations.
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant estimates and assumptions are used in developing and evaluating deferred income taxes, deferred acquisition costs, insurance reserves, investments (Note 15), pension benefits, commitments and contingencies, among others, and actual results could differ from management’s estimates.
The following is a summary of investment impairments the Company recorded due to other than temporary declines in values for the years ended December 31, 2009 and 2008.
As of December 31, 2009, securities in an unrealized loss position were primarily related to the Company’s investments in fixed maturity securities, and common and non-redeemable preferred stocks, most significantly within the financial services and media sectors, which have experienced significant price deterioration and continue to be impacted by current economic conditions. The media sector includes related party investments in Gray Television, Inc. which had unrealized losses of $2,480 as of December 31, 2009 and accounted for the majority of the unrealized loss position in that sector. In addition, the Company holds significant investments in U.S. Government agency bonds which were also in an unrealized loss position as of December 31, 2009. The decrease in the value of the Company’s investments in U.S. Government agency bonds was due solely to interest rate movements. During 2009, net pre-tax unrealized losses on investment securities recognized in other comprehensive loss decreased $4,925 from net pre-tax unrealized losses on investment securities of $11,693 valued as of December 31, 2008. The decline in unrealized losses during 2009 was primarily due to the increase in fair value of the Company’s holdings in certain financial services and media securities. The Company does not intend to sell nor does it expect to be required to sell the securities referenced previously. In addition, the Company asserts its intent and ability to retain the above equity securities until price recovery. Furthermore, based upon the Company’s expected continuation of receipt of contractually required principal and interest payments, the Company has deemed these securities to be temporarily impaired as of December 31, 2009.
Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. 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.
Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). The Company’s Level 3 instruments include certain fixed maturity securities and a zero cost interest rate collar. Fair value is based on
criteria that use assumptions or other data that are not readily observable from objective sources. As of December 31, 2009, the value of the Company’s fixed maturity securities valued using Level 3 criteria was $1,779 and the value of the zero cost interest rate collar was a liability of $1,547 (See Note 7 and Note 15). The use of different criteria of assumptions of data may have yielded different valuations.
The amortized cost and carrying value of fixed maturities and short-term investments at December 31, 2009 and 2008 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 98% investment grade securities at December 31, 2009 as defined by the NAIC.
Prior years’ development was primarily the result of better than expected development on prior years IBNR reserves for certain lines of business within American Southern.
At December 31, 2009, the Company had regular federal net operating loss carryforwards (“NOLs”) of approximately $6,346 expiring generally between 2010 and 2028. Currently, the Company believes that deferred income tax benefits relating to the NOLs will be realized. However, realization of the NOLs will be assessed periodically based on the Company’s current and anticipated results of operations, and amounts could increase or decrease in the near term if estimates of future taxable income change.
At December 31, 2009, the Company had a reducing revolving credit facility (the “Credit Agreement”) with Wachovia Bank, National Association (“Wachovia”) pursuant to which the Company was able to, subject to the terms and conditions thereof, initially borrow or reborrow up to $15,000 (the “Commitment Amount”). In accordance with the terms of the Credit Agreement, the Commitment Amount is incrementally reduced every six months and was equal to $10,500 at December 31, 2009. The interest rate on amounts outstanding under the Credit Agreement is, at the option of the Company, equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the London Interbank Offered Rate (“LIBOR”) determined on an interest period of 1-month, 2-months, 3-months or 6-months, plus an Applicable Margin (as defined). The Applicable Margin varies based upon the Company’s leverage ratio (funded debt to total capitalization, each as defined) and ranges from 1.75% to 2.50%. Interest on amounts outstanding is payable quarterly. The Credit Agreement requires the Company to comply with certain covenants, including, among others, ratios that relate funded debt to both total capitalization and earnings before interest, taxes, depreciation and amortization, as well as the maintenance of minimum levels of tangible net worth. The Company must also comply with limitations on capital expenditures, certain payments, additional debt obligations, equity repurchases and certain redemptions, as well as minimum risk-based capital levels. Upon the occurrence of an event of default, Wachovia may terminate the Credit Agreement and declare all amounts outstanding due and payable in full. During 2009, there was no balance outstanding under this Credit Agreement and the Company was in compliance with all terms of the Credit Agreement. The termination date of this Credit Agreement is June 30, 2010.
The financial structure of each of Atlantic American Statutory Trust I and II, as of December 31, 2009 and 2008, was as follows:
The Parent has guaranteed, on a subordinated basis, all of the obligations under the Trust Preferred Securities, including payment of the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation.
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. As a result of interest rates remaining below the LIBOR floor rate of 4.77%, these payments to Wachovia under the zero cost rate collar continued throughout 2009. While the Company is exposed to counterparty risk should Wachovia fail to perform, based on the current level of interest rates, and coupled with the current macroeconomic outlook, the Company believes that its current counterparty risk exposure is minimal.
The estimated fair value and related carrying value of the Company’s interest rate collar at December 31, 2009 was a liability of approximately $1,547 with a corresponding increase in accumulated other comprehensive loss in shareholders’ equity, net of deferred tax.
The Company has a qualified funded noncontributory defined benefit pension plan covering the employees of American Southern and prior to May 2009 had an unfunded noncontributory defined benefit pension plan (“SERP”). The plans provide defined benefits based on years of service and average salary. Effective May 31, 2008, the Company froze all benefits related to its qualified pension plan, as well as the SERP. In May 2009, the Company terminated the SERP and distributed the accumulated benefits to those participating employees. The Company intends to terminate the qualified pension plan, pending governmental approval. On March 11, 2010, the Company received a determination letter from the Internal Revenue Service approving the termination of the Company’s qualified pension plan. It is anticipated that the Company will distribute the accumulated benefits to participating employees in the first half of 2010. The measurement date for these plans was December 31 of each year.
The weighted-average assumptions used to determine the benefit obligation at December 31, 2009 and 2008 were as follows:
Included above in the 2008 pension disclosure is one plan which was 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.
The weighted-average assumptions used to determine the net periodic benefit cost for the year ended December 31, 2008 were as follows:
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 6.
In the normal course of business the Company has engaged in transactions with its Chairman Emeritus and his affiliates from time to time. These transactions include the leasing of office space as well as certain investing and financing activities.
The Company leases approximately 49,586 square feet of office and covered garage space from an entity which is an affiliate of the Company and its Chairman Emeritus. During the years ended December 31, 2009 and 2008, the Company paid $827 and $909, respectively, under this lease.
Certain financing for the Company has been provided by affiliates of the Company’s Chairman Emeritus, in the form of investments in the Series B and the Series D Preferred Stock (See Note 10).
Certain members of the Company’s management are shareholders and on the Board of Directors of Gray. At December 31, 2009 and 2008, the Company owned 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 Gray at December 31, 2009 and 2008 was $718 and $268, respectively.
The fair value estimates as of December 31, 2009 and 2008 were based on pertinent information available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, current estimates of fair value may differ significantly from amounts that might ultimately be realized.
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, 2009 and 2008 were as follows: