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 leases which expire at various times from July 31, 2005 to May 31, 2012. Under the current terms of the leases, the Company occupies approximately 65,489 square feet of office space. Delta Life Insurance Company, the owner of the building, is controlled by J. Mack Robinson, Chairman of the Board of Directors and the largest shareholder of the Company. The terms of the leases are believed by Company management to be comparable to terms which could be obtained by the Company from unrelated parties for comparable rental property.
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, 2004. Under the terms of the lease, SIA occupies 1,787 square feet.
Atlantic American is an insurance holding company whose operations are conducted through a group of regional insurance companies: American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”); Association Casualty Insurance Company and Association Risk Management General Agency, Inc. (together known as “Association Casualty”); Georgia Casualty & Surety Company (“Georgia Casualty”); and Bankers Fidelity Life Insurance Company (“Bankers Fidelity”). Each operating company is managed separately based upon the geographic location or the type of products offered; although management is conforming information systems, policies and procedures, products, marketing and other functions between Association Casualty and Georgia Casualty to create a southern “regional” property and casualty operation.
Deferred acquisition costs comprised 6% of the Company’s total assets at December 31, 2003. Deferred acquisition costs are commissions, premium taxes, and other costs that vary with and are primarily related to the acquisition of new and renewal business and are generally deferred and amortized. The deferred amounts are recorded as an asset on the balance sheet and amortized to income in a systematic manner. Traditional life insurance and long-duration health insurance deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the related liability for policy benefit reserves. The deferred acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance). Assessments of recoverability for property and casualty and short-duration health insurance are extremely sensitive to the estimates of a subsequent year’s projected losses related to the unearned premiums. Projected loss estimates for a current block of business for which unearned premiums remain to be earned may vary significantly from the indicated losses incurred in any given calendar year.
Receivables are amounts due from reinsurers, insureds and agents and comprised 19% of the Company’s total assets at December 31, 2003. Allowances for uncollectible amounts are established, as and when a loss has been determined probable, against the related receivable. Annually, the Company and/or its reinsurance broker perform an analysis of the credit worthiness of the Company’s reinsurers. Failure of reinsurers to meet their obligations due to insolvencies or disputes could result in uncollectible amounts and losses to the Company. Insured and agent balances are evaluated periodically for collectibility. Losses are recognized when determined on a specific account basis and a general provision for loss is made based on the Company’s historical experience.
Deferred income taxes comprised less than 1% of the Company’s total liabilities at December 31, 2003. 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.
The Company’s casualty operations, referred to as the Casualty Division, are comprised of American Southern, Association Casualty, and Georgia Casualty. The Company’s life and health operations, referred to as the Life and Health Division, are comprised of the operations of Bankers Fidelity.
The following table summarizes, for the periods indicated, American Southern’s premiums, losses and underwriting ratios:
Gross written premiums at American Southern decreased $4.3 million, or 8.9%, during 2003. The decrease in premiums was attributable to the loss of American Southern’s largest account upon its contractual termination on April 30, 2003 partially offset by new business. The lost contract represented annualized premiums of $14.3 million, or approximately 10% of annualized premium revenue for Atlantic American and even though no individual piece of new business is of the same magnitude as the lost contract, American Southern has substantially replaced the written premium with new contracts from a more diversified group of clients.
Gross written premiums at American Southern increased $3.2 million, or 7.1%, during 2002. The increase in premiums was primarily attributable to significant rate increases, new business generated by established agents including one new state contract that contributed $1.1 million in written premiums as well as premiums provided by new agency appointments. Offsetting these increases in gross written
Ceded premiums increased $0.9 million, or 16.0%, during 2002. In 2002, American Southern experienced higher reinsurance rates; however, the increase in reinsurance was 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.
American Southern produces much of its business through contracts with various states and municipalities, some of which represent significant amounts of revenue. These contracts, which last from one to three years, are periodically subject to competitive renewal quotes and the loss of a significant contract could have a material adverse effect on the business or financial condition of American Southern and the Company. In an effort to increase the number of programs underwritten by American Southern and to insulate it from the loss of any one program, American Southern is continually evaluating new underwriting programs. There can be no assurance, however, that new programs or new accounts will offset lost business.
The combined ratio for American Southern decreased from 94.5% in 2002 to a combined ratio of 92.0% in 2003. The loss ratio decreased to 56.2% in 2003 from 66.0% in 2002. The decrease in the loss ratio during 2003 was primarily attributable to the loss of American Southern’s largest account, which expired on April 30, 2003. American Southern’s loss ratio in 2003 improved significantly as it benefited from a substantial reduction in automobile claims related to this account. The expense ratio for 2003 increased to 35.8% from 28.5% in 2002. The increase in the expense ratio in 2003 is a function of American Southern’s contractual arrangements, which compensate the company’s agents in relation to the
The combined ratio for American Southern decreased from 94.8% in 2001 to a combined ratio of 94.5% in 2002. The loss ratio decreased to 66.0% in 2002 from 66.8% in 2001. During 2001, American Southern released approximately $1.4 million of redundant reserves related to certain program business that favorably impacted the loss ratio for 2001. Excluding the impact of the reserve redundancy recognized in 2001, the loss ratio in 2002 improved significantly over 2001 primarily due to lower than anticipated losses on the personal and commercial automobile lines of business. The expense ratio for 2002 increased slightly to 28.5% from 28.0% in 2001. The increase in the expense ratio in 2002 was a direct result of American Southern’s business structure discussed previously.
The following table summarizes, for the periods indicated, Association Casualty’s premiums, losses and underwriting ratios:
Gross written premiums at Association Casualty increased $0.1 million in 2003. The slight increase in gross written premiums was primarily attributable to the continued rationalization of certain business along with implementation of certain minimum account standards. During 2003, approximately $3.9 million in gross written premiums were non-renewed as a result of these initiatives. Association Casualty continues to re-underwrite the workers’ compensation book of business, increase rates on renewal business, and increase business writings for commercial lines other than workers’ compensation such as general liability, property and automobile.
The following table summarizes, for the periods indicated, Association Casualty’s earned premiums by line of business:
Gross written premiums at Georgia Casualty increased $11.4 million, or 27.9%, in 2002. The increase in premiums was 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.
The following table summarizes, for the periods indicated, Georgia Casualty’s earned premiums by line of business:
The combined ratio for Georgia Casualty decreased from 111.9% in 2002 to 106.1% in 2003. The loss ratio decreased from 67.1% in 2002 to 64.9% in 2003. The decrease in the loss ratio was primarily attributable to better experience on Georgia Casualty’s net book of business during 2003 than in 2002. During 2002, Georgia Casualty incurred several large losses. The expense ratio decreased in 2003 to 41.2% from 44.8% in 2002. The decrease in the expense ratio was primarily due to the reversal of the company’s accrued 2002 policyholder dividend payment of $0.4 million due to substandard results for workers’ compensation business in the states of Florida and Georgia during 2003. In 2003 and 2002, Georgia Casualty accrued and expensed $0 and $0.5 million, respectively, for policyholder dividends. The reduction of the 2002 policyholder dividend accrual in 2003 decreased expenses by $0.9 million during 2003 as compared to the same period in 2002.
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 was attributable to rate increases and continued focus on disciplined underwriting. 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.
Premium revenue at Bankers Fidelity increased $2.1 million, or 3.4%, during 2003. The Medicare Supplement line of business increased $3.9 million, or 9.2%, and accounts for 74% of total earned premiums. Bankers Fidelity continues its market expansion throughout the Southeast, Mid-Atlantic, and in the western United States. In 2003, the company’s key states in terms of premium revenue were Georgia, Indiana, Pennsylvania, Utah and West Virginia, which accounted for approximately 60% of total earned premium for 2003. The Medicare Supplement line of business in these states increased approximately $1.5 million in 2003 as compared to the same period in 2002. During 2003, rate increases were implemented in varying amounts by state and plan. Rate increases that were implemented in 2002 resulted in increased revenue and profitability in 2003. During the same time, the life insurance line of business decreased $1.9 million, or 12.2%. During 2002, Bankers Fidelity contracted varying amounts of whole life insurance to certain former Cub Food workers for a single life premium of $1.2 million, which did not occur in 2003. The lack of such a significant contract in 2003 as well as a decline in qualified leads resulted in a lower level of life insurance premiums in 2003 than in 2002.
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%. 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 were implemented in varying amounts by state and type of plan. Significant rate increases in 2001 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.
Investment income for 2003 of $15.6 million increased $1.6 million, or 11.5%, from 2002. The increase in investment income during 2003 was primarily due to a shift from short-term investments to
Interest expense increased $0.6 million, or 21.8%, during 2003 to $3.1 million from $2.6 million in 2002. As of December 31, 2003, total debt increased $6.2 million to $56.2 million, from $50.0 million at December 31, 2002. On December 4, 2002, the Company participated in a pooled private placement offering of trust preferred securities. In that offering, the Company issued to a separate newly created Connecticut statutory trust approximately $18.0 million in thirty year junior subordinated debentures, and the trust sold $17.5 million of trust preferred securities to third party investors. Of the $17.0 million in net proceeds, $12.0 million was used to reduce the principal balance on the Company’s outstanding term loan to $32.0 million from $44.0 million. On May 15, 2003, the Company participated in a second pooled private placement offering of trust preferred securities. In that offering, the Company issued to a separate newly created Connecticut statutory trust approximately $23.2 million in thirty year junior subordinated debentures, and that trust sold $22.5 million of trust preferred securities to third party investors. Of the $21.8 million in net proceeds, $17.0 million was used to reduce the principal balance on the Company’s outstanding term loan to $15.0 million from $32.0 million. Both trust preferred securities issuances, which have a maturity of thirty years from their original date of issuance, have an interest rate equivalent to the London Interbank Offer Rate (“LIBOR”) plus an applicable margin varying from 4.00% to 4.10% and the portion of the term loan that was repaid with the proceeds from the trust preferred issuances had an interest rate equivalent of LIBOR plus 2.50%. The increase in debt level, along with the increased variable rate paid thereon, results in the increase in interest expense for 2003.
In 2002, interest expense decreased $0.7 million to $2.6 million from $3.2 million in 2001. The decrease in interest expense was 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.
Other expenses increased $6.5 million, or 13.4%, in 2002, primarily due to a significant increase in acquisition costs related to new business. In addition, the Company experienced an overall increase in operating expenses, primarily compensation and state assessments both of which increased $1.3 million as compared to 2001. Also contributing to the increase in other expenses was a decrease of $1.4 million in the ceding commission Georgia Casualty was receiving from the quota share contract, which was reduced from a 40% quota share reinsurance agreement to a 30% quota share reinsurance agreement on January 1, 2002. On a consolidated basis, as a percentage of earned premiums, other expenses increased to 35.9% in 2002 from 33.6% in 2001.
comply with certain covenants including, among others, ratios that relate funded debt, as defined, to total capitalization and earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The Company must also comply with limitations on capital expenditures and additional debt obligations. During 2003 and 2002, the Company formed two Connecticut statutory business 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 Debentures of Atlantic American Corporation. 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 after five years 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, 2003 the effective interest rate of the trust preferred securities was 5.24%. The obligations of the Company with respect to the issuance of the trust preferred securities represent a full and unconditional guarantee by the Company 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 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 Term Loan and the Junior Subordinated Debentures 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.
Net cash provided by operating activities totaled $13.9 million in 2003, $13.8 million in 2002 and $15.8 million in 2001. Cash and short-term investments at December 31, 2003 were $34.2 million and are believed to be sufficient to meet the Company’s near-term needs.
The Company believes that the cash flows it receives from its subsidiaries and, if needed, additional borrowings from banks and affiliates of the Company, will enable the Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current recommendations by
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. The statement amended and clarified accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial condition or results of operations.
In December 2003, the FASB issued a revised version of FIN 46 (“FIN 46R”), which incorporated a number of modifications and changes made to FIN 46. FIN 46R replaces the previously issued FIN 46 and, subject to certain special provisions, is effective no later than the end of the first reporting period that ends after December 15, 2003 for entities considered to be special-purpose entities. The Company adopted FIN 46R in the fourth quarter of 2003. The adoption of FIN 46R did not result in the consolidation of any material VIEs but resulted in the deconsolidation of VIEs that issued Mandatorily Redeemable Preferred Securities of Subsidiary Trusts (“trust preferred securities”). The Company is not the primary beneficiary of the VIEs, which issued the trust preferred securities. The Company does not own any of the trust preferred securities, which were issued to unrelated third parties. These trust preferred securities are considered the principal variable interests issued by the VIEs. As a result, the VIEs, which the Company
previously consolidated, are no longer consolidated. The sole assets of the VIEs are Junior Subordinated Debentures issued by the Company with payment terms identical to the trust preferred securities. Previously, the trust preferred securities were reported as debt on the Company’s consolidated balance sheets. At December 31, 2003 and 2002, the impact of deconsolidation was to increase both investment in unconsolidated trusts and debt by $1,238 and $542, respectively.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). Adoption of this statement did not have an impact on the Company’s financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes 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)” (“Issue 94-3”). Adoption of this statement did not have an impact on the Company’s financial condition or results of operations.
In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities” (“SOP 03-3”). SOP 03-3 addresses the accounting for differences between contractual and expected cash flows to be collected from an investment in loans or fixed maturity securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. Adoption of this statement is not expected to have material impact on the Company’s financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). This standard provides the financial accounting and reporting for the cost of legal obligations associated with the retirement of tangible long lived assets. In accordance with SFAS 143, asset retirement obligations will be recorded at fair value in the period they are incurred if a reasonable estimate can be made. The adoption of SFAS 143 did not have a material impact on the Company’s consolidated financial condition or results of operations.
In our opinion, the 2003 and 2002 consolidated financial statements present fairly, in all material respects, the financial position of ATLANTIC AMERICAN CORPORATION and subsidiaries at December 31, 2003 and 2002, 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 2003 and 2002 financial statement schedules, when considered in relation to the basic 2003 and 2002 consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed above, the consolidated financial statements of ATLANTIC AMERICAN CORPORATION and subsidiaries for the year ended December 31, 2001 were audited by other auditors who have ceased operations. As described in Note 1, those consolidated 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 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 consolidated financial statements taken as a whole.
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 as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
At December 31, 2003, the Company had five insurance subsidiaries, including Bankers Fidelity Life Insurance Company (“Bankers Fidelity”), American Southern Insurance Company and its wholly-owned subsidiary, American Safety Insurance Company (together known as “American Southern”), Association Casualty Insurance Company and Georgia Casualty & Surety Company (“Georgia Casualty”), in addition to two non-insurance subsidiaries, Association Risk Management General Agency, Inc., and Self-Insurance Administrators, Inc. (“SIA, Inc.”). Association Casualty Insurance Company and Association Risk Management General Agency, Inc. are collectively known as “Association Casualty”.
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 ratably over the contract period. Benefits and expenses 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 policy benefit reserves. The Company provides for insurance benefits and losses on accident, health, and 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. 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).
The Company’s investments in both fixed maturities, 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 market value with the after-tax difference from amortized cost reflected in stockholders’ equity as a component of accumulated other comprehensive income. The fair market value for fixed maturities 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 or independent broker quotations. With the exception of short-term securities for which amortized cost is predominately used to approximate fair value, security prices are first sought from NAIC pricing services with the remaining unpriced securities submitted to brokers for prices. 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 others 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.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. This statement requires additional detailed disclosures regarding pension plan assets, benefit obligations, cash flows, benefit costs and related information. The Company adopted the new disclosures required as of December 31, 2003. See Note 9.
Effective December 31, 2003, the Company adopted the disclosure requirements of Emerging Issues Task Force (“EITF”) Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. Disclosures are required for unrealized losses on fixed maturity and equity securities classified as either available-for-sale or held-to-maturity. The disclosure requirements include quantitative information regarding the aggregate amount of unrealized losses and the associated fair value of the investments in an unrealized loss position, segregated into time periods for which the investments have been in an unrealized loss position. Certain qualitative disclosures about the unrealized holdings are also required in order to provide additional information that the Company considered in concluding that the unrealized losses were not other than temporary. See Note 2.
Securities with unrealized losses at December 31, 2003 were as follows:
Market changes in interest rates and credit spreads result in changes in the fair values of investments and are accumulated and reported as unrealized gains and losses. The majority of the unrealized losses, $2,065 of the total unrealized losses of $2,262, has been in an unrealized loss position of less than twelve months and is primarily attributable to recent increases in interest yields on comparable investments.
Excluding U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies, the Company held seventeen investments with unrealized losses, four of which existed in excess of twelve months. Of the seventeen investments with unrealized losses, only two (both redeemable preferred stocks) had a fair value less than 90% of the investment’s original amortized cost; and both had an unrealized loss in excess of twelve months. One of the redeemable preferred stocks was issued by a company providing scheduled air transportation of passengers and cargo throughout the U.S. and the world. The other redeemable preferred stock was issued by a company providing parking and related services primarily in the U.S., but also in Europe and Central and South America. Both of these businesses are cyclical and are affected by consumer confidence in the overall economy. The Company continues to monitor these investments but at December 31, 2003 believed the impairments to be temporary.
Annualized premiums for accident and health insurance policies were $52,435 and $48,360 at December 31, 2003 and 2002, 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 claims based on past experience, and (c) estimates of loss adjustment expenses. The estimated liability is continually reviewed by management and updated with changes to the estimated liability recorded in the statement of operations in the year in which such changes are known.
following its third major reinsurance or run-off reserve charge in recent years and the uncertainty of the capital structure and future strategic direction of the company. Consequently, PMA Re decided to exit from the reinsurance business. Management has evaluated the impact of the rating downgrade and PMA Re’s intention to “withdraw from the reinsurance business” and at this time does not have any reason to believe an allowance for uncollectible amounts should be established against the reinsurance receivables due from PMA Re. The Company will continue to monitor the ongoing progress of PMA Re and evaluate various alternatives, if necessary. Premiums assumed of $20,410 and $22,708 in 2002 and 2001 respectively, included a state contract with premiums of $14,309 and $14,054. The contract premiums represented 9.3% and 9.7% of net premiums earned for the years ended 2002 and 2001, respectively. During 2003, the Company prepared a renewal quote for this business; however given the competitive nature of the current insurance market place, the Company was unable to renew this account. The following table reconciles premiums written to premiums earned and summarizes the components of insurance benefits and losses incurred.
At December 31, 2002, the Company’s $32,000 of bank debt with Wachovia Bank, N.A. (“Wachovia”) consisted of a single term loan with an annual installment of $2,000 due on or before December 31, 2003 together with a final payment of $30,000 due on June 30, 2004. In connection with a May 2003 pooled private placement of trust preferred securities, the bank debt was reduced by $17,000 and the $2,000 installment due on or before December 31, 2003 was satisfied. Subsequent thereto and effective June 30, 2003, the Company negotiated and executed an Amended and Restated Credit Agreement relating to the remaining $15,000. The loan matures on June 30, 2008 and requires minimum annual payments as follows: 2004 - $3,000; 2005 - $1,750; 2006 - $1,750; 2007 - $1,750; 2008 - $6,750. The interest rate on the borrowing is LIBOR plus a margin ranging between 1.75% and 2.50%. The applicable margin rate is determined based on the ratio of funded debt to consolidated total capitalization, all as defined. As of December 31, 2003 the stated interest rate on the bank debt was LIBOR + 2.50% or 3.64%. The loan requires the Company to comply with certain covenants including, among others, ratios that relate funded debt to capitalization and interest coverage as well as the maintenance of minimum levels of tangible net worth. The Company also must comply with limitations on capital expenditures, additional debt obligations, equity repurchases and redemptions, as well as minimum risked based capital levels.
The Company has formed two Connecticut statutory business trusts, which exist for the exclusive purposes of: (i) issuing trust preferred securities representing undivided beneficial interests in the assets of the trusts; (ii) investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of Atlantic American Corporation; and (iii) engaging in only those activities necessary or incidental thereto. In accordance with the adoption of FIN 46R, the Company has deconsolidated the trust preferred securities. For further discussion of the adoption of FIN 46R, see Note 1.
The financial structure of Atlantic American Statutory Trust I and II, as of December 31, 2003 and 2002, were as follows:
For each of the respective debentures, the Company has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures’ maturity date. During any such period, interest will continue to accrue and the Company may not declare or pay any cash dividends or distributions on, or purchase, the Company’s common stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank equally with or junior to the Junior Subordinated Debentures. The Company will have the right at any time to dissolve the Trust and cause the Junior Subordinated Debentures to be distributed to the holders of the trust preferred securities.
On March 21, 2001, the Company entered into a $15,000 notional amount interest rate swap agreement with Wachovia to hedge its interest rate risk on a portion of its outstanding borrowings. The interest rate swap was effective on April 2, 2001 and matures on June 30, 2004. The Company has agreed to pay a fixed rate of 5.1% and receive 3-month LIBOR until maturity. The settlement date and the reset date occur every 90 days following April 2, 2001 until maturity.
The estimated fair value and related carrying value of the Company’s interest rate swap agreement at December 31, 2003 and 2002 was a liability of approximately $444 and $914, respectively.
In accordance with the Company’s 1992 Incentive Plan, the Board of Directors may grant up to 1,800,000 stock options or share awards. The Board of Directors may grant: (a) incentive stock options within the meaning of Section 422 of the Internal Revenue Code; (b) non-qualified stock options; (c) performance units; (d) awards of restricted shares of the Company’s common stock and other stock unit awards; (e) deferred shares of common stock; or (f) all or any combination of the foregoing to officers and key employees. Stock options granted under this plan expire five or ten years from the date of grant, as specified in an award agreement. Vesting occurs at 50% upon issuance of an option, and the remaining portion vest in 25% increments in each of the following two years. In accordance with the Company’s 1996 Director Stock Option Plan, a maximum of 200,000 stock options may be granted that fully vest six months after the grant date. In accordance with the Company’s 2002 Incentive Plan (the “2002 Plan”), the Board of Directors may grant up to 2,000,000 stock options or share awards. Subject to adjustment as provided in the 2002 Plan, the Board of Directors may grant: (a) incentive stock options; (b) non-qualified stock options; (c) stock appreciation rights; (d) restricted shares; (e) deferred shares; and (f) performance shares and/or performance units. Further, the Board may authorize the granting to non-employee directors of stock options and/or restricted shares. A total of 41,503 and 29,997 restricted shares were issued to the Company’s Board of Directors under the 2002 Plan in 2003 and 2002, respectively. As of December 31, 2003, an aggregate of forty-six employees, officers and directors held options under the three plans.
A summary of the status of the Company’s stock options at December 31, 2003, 2002 and 2001, is 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 $1.15, $1.62, and $.95 for grants in 2003, 2002, and 2001, respectively. Fair value determinations were based on expected dividend yields of zero, expected lives of 5 or 10 years, risk free interest rates of 4.21%, 3.92%, and 4.49%, and expected volatility of 60.08%, 69.11%, and 64.99%, for the years ended December 31, 2003, 2002, and 2001, respectively.
The accumulated benefit obligation for all defined benefit plans at December 31, 2003 and 2002 was $3,797 and $3,301, 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 $1,086, $891, and $0, respectively, as of December 31, 2003 and $1,005, $794, and $0, respectively, as of December 31, 2002.
Net periodic pension cost for the Company’s qualified and non-qualified defined benefit plans for the years ended December 31, 2003, 2002 and 2001 included the following components:
The Company had 134,000 shares of Series B Preferred Stock (“Series B Preferred Stock”) outstanding at December 31, 2003 and 2002, 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 Company’s 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, 2003 and 2002, the Company had accrued but unpaid dividends on the Series B Preferred Stock of $9,648 and $8,442, respectively. For all periods in which the Company had an accumulated deficit, dividends on the Series B Preferred Stock were accrued from additional paid in capital.
accrued from additional paid in capital. Subsequent to December 31, 2003, the remaining 5,000 shares of Series C Preferred Stock were redeemed at the redemption price of $100 per share, or $500.
Average outstanding options of 335,000 were excluded from the earnings per common share calculation in 2003 and outstanding stock options of 408,500 and 712,500 were excluded from the earnings per common share calculation in 2002 and 2001, 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 2003, 2002, and 2001 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 $5,728, $7,076 and $7,099 in 2003, 2002, and 2001, respectively, from its subsidiaries. In 2004, dividend payments by insurance subsidiaries in excess of $12,536 would require prior approval.
In the normal course of business and, in management’s opinion, at terms comparable to those available from unrelated parties, the Company has engaged in transactions with its Chairman and his affiliates from time to time. These transactions include leasing of office space as well as investing and financing activities. A brief description of each of these follows.
Certain members of management are on the Boards of Directors of Bull Run Corporation (“Bull Run”) and Gray Television, Inc. (“Gray”). At December 31, 2003, the Company owned 184,337 common shares of Bull Run and 376,060 shares of Gray Common Stock Class A and 106,000 shares of Gray Common Stock Class B. The Company also owned 350 shares of Gray’s Series C Preferred Stock and 2,000 shares of Bull Run’s Series D Preferred Stock as of December 31, 2003. At December 31, 2002, the Company owned 131,137 common shares of Bull Run and 376,060 shares of Gray’s Common Stock Class A and 106,000 shares of Gray’s Common Stock Class B. In addition, the Company owned 350 shares of Gray’s Series C Preferred Stock and 2,000 shares of Bull Run’s Series B Preferred Stock. The aggregate carrying value of the investments in Bull Run and Gray at December 31, 2003 were $2,225 and $10,808, respectively and at December 31, 2002 were $3,219 and $8,990, respectively.
In 1998, American Southern formed the American Auto Insurance Agency (the “Agency”) in a joint venture with Carolina Motor Club, Inc. to market personal automobile insurance to the members of the automobile club. American Southern holds a 50% interest in the joint venture and underwrites the majority of the standard automobile business written by the Agency. This program, which began writing business in 1999, had gross written premiums of approximately $8,311, $7,083 and $6,084 in 2003, 2002, and 2001, respectively.
The Company’s primary insurance subsidiaries operate with relative autonomy and each company is evaluated based on its individual performance. American Southern, Association Casualty, and Georgia Casualty operate in the Property and Casualty insurance market, while Bankers Fidelity operates in the Life and Health insurance market. All segments derive revenue from the collection of premiums, as well
The fair value estimates as of December 31, 2003 and 2002 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 fair values are estimated based on quoted market prices for those or similar investments.