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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-3722
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ATLANTIC AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1027114
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4370 Peachtree Road, N.E.,
Atlanta, Georgia 30319
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (404) 266-5500
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of class)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. |_|
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The aggregate market value of common stock held by non-affiliates of the
registrant as of March 8, 1998, was $28,205,853. On March 8, 1998 there were
18,915,027 shares of the registrant's common stock, par value $1.00 per share,
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Annual Report to Shareholders for the year
ended December 31, 1997 - Parts I, II and IV.
2. Portions of registrant's Proxy Statement for the Annual Meeting of
Shareholders, to be held on May 5, 1998, have been incorporated in Items 10, 11,
12 and 13 of Part III of this Form 10-K.
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<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business.................................................. 3
The Company.............................................. 3
Casualty Division...................................... 3
Life and Health Division............................... 5
Marketing.............................................. 5
Underwriting........................................... 6
Operating Results...................................... 8
Policyholder and Claims Services....................... 9
Reserves............................................... 10
Reinsurance............................................ 12
Competition............................................ 12
Rating................................................. 13
Regulation............................................. 13
NAIC Ratios............................................ 14
Risk-Based Capital..................................... 14
Investments............................................ 15
Employees.............................................. 16
Financial Information by Industry Segment................ 16
Executive Officers of the Registrant..................... 16
Forward-Looking Statements............................... 17
Item 2. Properties................................................. 17
Item 3. Legal Proceedings.......................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........ 17
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters.............................. 18
Item 6. Selected Financial Data.................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 19
Item 8. Financial Statements and Supplementary Data................ 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 19
PART III
Item 10. Directors and Executive Officers of the Registrant........ 20
Item 11. Executive Compensation.................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 20
Item 13. Certain Relationships and Related Transactions............ 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 20
2
<PAGE>
PART I
ITEM 1. BUSINESS
The Company
Atlantic American Corporation, a Georgia Corporation (the "Parent" or
"Company") incorporated in 1968, is a holding company that operates through its
subsidiaries in well-defined specialty markets of the life, health, property and
casualty insurance industries. Atlantic American's principal subsidiaries are
Georgia Casualty & Surety Company ("Georgia Casualty"), incorporated in 1947 and
acquired in 1968, Bankers Fidelity Life Insurance Company ("Bankers"),
incorporated in 1955 and acquired in 1976, and American Southern Insurance
Company and its wholly owned subsidiary American Safety Insurance Company
(collectively, "American Southern"), incorporated in 1936 and acquired in 1995.
On January 1, 1997, the Company's wholly-owned subsidiary Atlantic American
Life Insurance Company ("Atlantic American Life"), incorporated in 1946 and
acquired in 1968, was merged with and into Bankers. The business and operations
of Atlantic American Life, which were substantially similar to those of Bankers,
have been consolidated into Bankers.
In addition, during 1997, the Company acquired 100% of the outstanding stock
of American Independent Life Insurance Company ("AI"). AI, domiciled in
Pennsylvania, was acquired to complement the operations of Bankers. The
operations of AI were assimilated into the operations of Bankers shortly after
the acquisition and expanded the Company's geographic presence in the Life and
Health area by five states.
During 1997, the Company also acquired 100% of the outstanding stock of
Self-Insurance Administrators, Inc. ("SIA"). SIA, domiciled in Georgia, is a
third party administrator that specializes in providing administrative services
to those companies and organizations that choose to self-insure their workers'
compensation risks. The acquisition of SIA provides the Company with an entry
into alternative services in the property and casualty insurance marketplace.
During 1996, the Company sold its majority interest in Leath Furniture, LLC
(f/k/a/ Leath Furniture, Inc., "Leath"). Leath is reflected as discontinued
operations in the Company's financial statements for 1996 and 1995.
Together Bankers and AI constitute the "Life and Health Division" and
Georgia Casualty and American Southern constitute the "Casualty Division".
The Company's strategy is to focus on well-defined niches within various
areas of the insurance marketplace. Each of the Company's subsidiaries operates
autonomously as the Company believes this allows each subsidiary to best exploit
its expertise. However, the Company seeks to develop and expand cross-marketing
and joint-underwriting opportunities as they arise.
Additional information concerning the Company and its subsidiaries may be
found in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of the Company's 1997 Annual Report to Shareholders,
which is incorporated herein by reference.
Casualty Division
The Casualty Division is divided into two distinct operating entities,
American Southern and Georgia Casualty. The primary products offered by the
Casualty Division are described below, followed by an overview of both
companies.
Workers' Compensation insurance policies provide indemnity and medical
----------------------
benefits to insured workers for injuries sustained in the course of their
employment.
Business Automobile Insurance policies provide for bodily injury or property
-----------------------------
damage liability coverage, uninsured motorists coverage, and physical damage
coverage.
General Liability Insurance policies cover bodily injury and property damage
---------------------------
liability for both premises and completed operations exposures for general
classes of business.
Property insurance policies provide for payment of losses on real and
--------
personal property caused by fire and other multiple perils.
3
<PAGE>
American Southern. American Southern provides tailored fleet automobile and
long-haul physical damage insurance coverage, on a multi-year contract basis, to
state governments, local municipalities and other large motor pools and fleets
("block accounts") that can be specifically rated and underwritten. The size of
the block accounts insured by American Southern are such that individual class
experience generally can be determined, which allows for customized policy terms
and rates. American Southern produces business in 18 of the 24 states in the
Southeast and Midwest in which it is authorized to conduct business. While the
majority of American Southern's premiums are derived from auto liability and
auto physical damage, American Southern also provides property, general
liability, and surety coverages.
The following table summarizes, for the periods indicated, the allocation of
American Southern's net earned premiums for each of its principal product lines
since its acquisition by the Company.
Year Ended December 31,
-----------------------
(in thousands)
1997 1996
---------- -----------
Automobile Physical Damage $ 4,508 $ 4,865
Automobile Liability 30,909 30,889
General Liability 3,116 1,947
Property 3,206 3,461
Surety 60 88
========== ===========
Total $41,799 $41,250
========== ===========
Georgia Casualty. Georgia Casualty is a property-casualty insurance company
engaged in the sale of commercial lines of insurance, focusing on underwriting
workers' compensation and commercial coverages in the Southeast.
Georgia Casualty writes business for both mainstream business accounts and
for industries that are perceived to be high risk. The company is selective in
its underwriting and focuses on insureds with stringent safety and loss control
standards, or accounts that are willing to implement such standards.
Georgia Casualty has a diversified book of business that includes commercial
lines other than workers' compensation, including business automobile, general
liability, property, commercial umbrella; and, beginning in 1997, a Business
Owners Policy ("BOP") was introduced.
Georgia Casualty concentrates its efforts in those states and industries
which management believes offer the greatest opportunity for profitability.
Currently, Georgia Casualty is focusing the majority of its new business efforts
in Georgia and Mississippi, states which management believes offer the greatest
opportunity for balanced, profitable growth. Outside of its core states, at the
end of 1997, Georgia Casualty had authority to produce business in Florida,
South Carolina, North Carolina and Tennessee and the company intends to begin
writing business in some of these states in 1998.
The following table summarizes, for the periods indicated, the allocation of
Georgia Casualty's net earned premiums for each of its principal product lines:
Year Ended December 31,
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(in thousands)
1997 1996 1995 1994 1993
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Workers' Compensation $12,841 $13,826 $14,954 $11,958 $ 9,890
Business Automobile 4,031 2,550 1,436 1,054 953
General Liability 1,387 1,152 1,025 1,065 1,180
Property 1,657 1,269 887 574 801
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Total Casualty $19,916 $18,797 $18,302 $14,651 $12,824
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4
<PAGE>
Life and Health Division
The Life and Health Division of Atlantic American offers a variety of life
and supplemental health products with a focus on the senior and middle income
markets. Products offered by the Life and Health Division include: ordinary
life, Medicare supplement, cancer, and other supplemental health products.
Medicare supplement, offered on both a standard and preferred basis, accounts
for 46.5% of the Life and Health Division's net premiums. Life insurance,
including both whole and term life insurance policies, accounts for 38.8% of the
Life and Health Division's premiums. The Life and Health Division has begun to
offer several of its products, both life and supplemental health, through
payroll deduction services.
The following table summarizes, for the periods indicated, the allocation of
the Life and Health Division's net premiums earned for each of its principal
product lines followed by a brief description of the principal products.
Year Ended December 31,
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(in thousands)
1997 1996 1995 1994 1993
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Ordinary Life $ 9,437 $ 8,937 $ 7,037 $ 6,716 $ 5,130
Mass Market Life 1,016 1,303 1,260 1,395 1,541
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Total Life 10,453 10,240 8,297 8,111 6,671
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Medicare Supplement 12,534 11,560 11,882 13,347 15,052
Convalescent Care/
Short-Term Care 1,141 955 1,191 1,385 1,628
Medical/Surgical 122 160 211 289 389
Cancer 1,803 1,982 2,221 2,457 2,726
Hospital Indemnity 241 282 337 414 508
Accident Expense 523 677 790 892 992
Disability 150 122 142 155 154
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Total Accident and
Health 16,514 15,738 16,774 18,939 21,449
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Total Life and
Accident and
Health $26,967 $25,978 $25,071 $27,050 $28,120
=======================================================
Medicare Supplement. The Life and Health Division currently markets 7 of the
-------------------
10 standardized Medicare supplement policies created under the Omnibus Budget
Reconciliation Act of 1990 ("OBRA 1990") which are designed to provide insurance
coverage for certain expenses not covered by the Medicare program, including
copayments and deductibles.
Cancer. The Life and Health Division offers several policies providing for
------
payment of benefits in connection with the treatment of diagnosed cancer.
Other Accident & Health Coverages. The Life and Health Division also offers
---------------------------------
a number of other policies including convalescent care, accident expense,
hospital/surgical and disability.
Life Products. The Life and Health Division offers non-participating
--------------
individual life insurance policies with a number of available riders and
options.
Marketing
Casualty Division
American Southern. American Southern's business is marketed through a small
number of specialized, experienced independent agent. Most of American
Southern's agents are paid a moderate up-front commission with the potential for
additional commission by participating in a profit sharing arrangement that is
directly linked to the profitability of the business. In addition, a significant
portion (approximately 54% of total written premium) of American Southern's
premiums are assumed from third parties. In arrangements similar to those with
its agents, the premium assumed from these parties is adjusted based upon the
profitability of the assumed business.
5
<PAGE>
Georgia Casualty. Georgia Casualty is represented by a field force of
approximately 100 independent agents in the sale and distribution of its
insurance products. Each agency is a party to a standard agency contract that
sets forth the commission structure and other terms and can be terminated by
either party upon thirty days written notice. Georgia Casualty also offers a
contingent profit-sharing arrangement that allows the most profitable agents to
earn additional commissions when specific loss experience and premium growth
goals are achieved. Marketing efforts, directed by experienced marketing
professionals in each state, are complemented by the underwriting, loss control,
and audit staffs of Georgia Casualty, who are available to assist agents in the
presentation of all insurance products and services to their insureds.
Life and Health Division
The Life and Health Division markets its policies through commissioned,
independent agents. In general, the Life and Health Division enters contractual
arrangements with general agents who, in turn, contract with independent agents.
The standard agreements set forth the commission arrangements and are terminable
by either party upon thirty days written notice. General agents receive an
override commission on sales made by agents contracted by them.
Management believes utilizing direct writing experienced agents, as well as
independent general agents who recruit and train their own agents, is cost
effective. All independent agents are compensated on a pure commission basis.
Using independent agents also enables the Life and Health Division to expand or
contract their sales forces at any time without incurring significant additional
expense.
The Life and Health Division has implemented a selective agent
qualification process, and had 3,500 licensed agents in 1997. The agents
concentrate their sales activities in either the accident and health or life
insurance product lines. During 1997, a total of 1,170 agents wrote policies on
behalf of the Life and Health Division, and approximately 20% of those agents
accounted for 80% of the Life and Health Division's annualized premium.
Products of the Life and Health Division compete directly with products
offered by other insurance companies, as agents may represent several insurance
companies. The Life and Health Division, in an effort to motivate agents to
market their products, offers the following agency services: a unique lead
system, competitive products and commission structures, efficient claims
service, prompt payment of commissions, simplified policy issue procedures,
periodic sales incentive programs and, in some cases, protected sales
territories consisting of counties and/or zip codes. Additionally, the Life and
Health Division has a staff of 19 employees whose primary function is to
facilitate the activities of the agents and to act as liaisons between the
agents and the Life and Health Division.
The company utilizes a distribution sales system which is centered around a
lead generation plan that rewards qualified agents with leads in accordance with
monthly production goals. In addition, a protected territory is established for
each qualified agent, which entitles them to all leads produced within that
territory. The territories are zip-code or county based and encompass enough
physical territory to produce a minimum senior population of 12,000. To allow
for the expense of lead generation, commissions were lowered on the Life and
Health Division's senior citizen life plans. In addition, the Life and Health
Division recruits at a general agent level rather than at a managing general
agent level in an effort to reduce commission expenses further.
The Company believes this distribution system solves an agent's most
important dilemma -- prospecting -- and allows the Life and Health Division to
build long-term relationships with individual producers who view the Life and
Health Division as their primary company. In addition, management believes that
the Life and Health Division's product line is less sensitive to competitor
pricing and commissions because of the perceived value of the protected
territory and the lead generation plan. Through this distribution channel,
production per agent contracted increased substantially when compared to the
Life and Health Division's general brokerage division.
Underwriting
Casualty Division
American Southern specializes in the handling of block accounts such as
states and municipalities that are generally sufficiently large to establish
separate class experience, relying upon the underwriting expertise of its
agents. In contrast, Georgia underwrites all of its accounts in-house and has
developed a team approach to underwriting with respect to renewal policies. The
renewal review team includes members of the staff from management and the
underwriting, loss control, claims and finance departments. By receiving active
input from each of these departments, the company has improved its underwriting
of the risks it continues to insure. All individuals with first-hand information
regarding an account are invited to share their information with the team.
6
<PAGE>
During the course of the policy year, extensive use is made of loss control
representatives to assist underwriters in identifying and correcting potential
loss exposures. The results of each product line are reviewed on a stand-alone
basis. When the results are below expectations, management takes appropriate
corrective action which may include raising rates, reviewing underwriting
standards, altering or declining to renew accounts at expiration, and/or
terminating agencies with an unprofitable book of business.
American Southern also acts as a reinsurer with respect to all of the risks
associated with certain automobile policies issued by state administrative
agencies, naming the state and various local governmental entities as insureds.
Premiums written from such policies constituted 54% of American Southern's gross
premiums written in 1997. Premiums assumed of $23.7 million include a single
state contract of $15.9 million. Management believes that its relationship with
all of its agencies is good; however, the loss of any one agency as a customer
could potentially have a material adverse effect on the business or financial
condition of the company.
Since September 1991, Georgia Casualty has been a direct assignment carrier
in Georgia and is assigned direct workers' compensation policies rather than
participating in the National Workers' Compensation Reinsurance Pool. Georgia
Casualty had 171 direct assignment workers' compensation policies in force at
December 31, 1997 with a total net earned premium of $0.8 million in 1997. The
total net earned premium Georgia Casualty has been assigned has decreased from
$4.0 in 1995, to $2.5 in 1996, and to $0.8 in 1997.
Georgia Casualty continually evaluates the industries in which it writes
workers' compensation and today has a significant book of business in lines and
industries where the cause of loss is more readily identifiable and corrective
actions can be implemented through loss control programs, safety plans,
drug-free workplaces, re-employment drug testing and various other risk
reduction programs.
Life and Health Division
The Life and Health Division issues single premium life insurance policies
with face amounts of not less than $1,000. All life insurance policies are fully
underwritten, but the majority are issued with limited medical examinations
subject to maximum policy limits ranging from $100,000 for persons under age 31
to $25,000 for persons under age 51. Medical examinations are required in
connection with the issuance of life insurance policies in excess of these
limits and for any amount on policies issued to customers over age 50.
Paramedical examinations are ordered at age 41 for all life applications of
$50,000 and above. Approximately 95% of the net premiums earned for life
insurance sold during 1997 were derived from life insurance written below the
Life and Health Division's medical limits. For the senior market, the Life and
Health Division issue special life products on an accept-or-reject basis with a
face amount from $15,000 at age 45 to a face amount of $2,000 at age 85. The
Life and Health Division only retains a maximum amount of $50,000 with respect
to any individual life (see "Reinsurance").
Applications for insurance are reviewed as to the applicant's age and
medical history and depending upon this information, additional information may
be requested including the "Medical Information Bureau Report", medical
examinations, statements from doctors, and, where indicated, special medical
tests. If deemed necessary, the Life and Health Division uses investigative
services to supplement and substantiate information. For certain limited
coverages, the Life and Health Division has adopted simplified policy issue
procedures by which the applicant submits a short application for coverage,
typically containing only a few health related questions instead of presenting
the applicant's complete medical history. At present, approximately 20% to 30%
of the senior citizen life applications, through age 79 on the standard product
and up to age 75 on the preferred, are verified by telephone. For ages 80 and
above, 100% of the standard applicants are verified. All telephone verifications
are made by the underwriting department. Applications not meeting the
underwriting criteria are declined or additional information is requested.
7
<PAGE>
Operating Results
The following table sets forth, on a statutory basis, the incurred losses
and loss ratios for the Company's Casualty and Life and Health Divisions during
the past five years.
Year Ended December 31
-------------------------------------------------
1997 1996 1995 1994 1993
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(dollars in thousands)
Casualty (1)
WORKERS' COMPENSATION:
Incurred losses $ 6,740 $ 6,645 $ 9,733(2) $ 7,243 $ 5,405
Loss ratio 52.5% 48.1% 65.1% 61.9% 54.7%
BUSINESS AUTOMOBILE:
Incurred losses $27,237 $23,977 $ 1,227 $ 602 $ 183
Loss ratio 69.0% 62.6% 85.5% 57.1% 19.2%
GENERAL LIABILITY:
Incurred losses $ 1,428 $ 1,242 $(1,238)(2) $ 1,080 $ 766
Loss ratio 31.3% 38.9% - 101.3% 64.9%
PROPERTY:
Incurred losses $ 1,840 $ 1,700 $ 416 $ 244 $ 223
Loss ratio 37.9% 36.0% 47.0% 42.6% 27.9%
TOTAL CASUALTY:
Incurred losses $37,245 $33,546 $ 10,138 $ 9,169 $ 6,577
Loss ratio 60.3% 55.9% 55.4% 63.7% 51.3%
Loss adjustment 13.9% 12.4% 15.2% 20.1% 19.2%
expense ratio
Expense ratio 25.3% 27.8% 31.4% 27.8% 43.7%
Combined ratio 99.5% 96.1% 102.0% 111.6% 114.2%
Life and Health
MEDICARE SUPPLEMENT:
Incurred losses $ 7,820 $ 7,136 $ 6,688 $ 7,582 $ 8,284
Loss ratio 63.0% 61.7% 57.6% 57.8% 56.5%
CONVALESCENT CARE:
Incurred losses $ 867 $ 710 $ 1,393 $ 1,486 $ 1,861
Loss ratio 74.2% 74.3% 121.0% 110.3% 121.3%
MEDICAL SURGICAL:
Incurred losses $ 103 $ 187 $ 148 $ 170 $ 279
Loss ratio 84.4% 116.6% 78.8% 61.4% 84.2%
CANCER:
Incurred losses $ 568 $ 599 $ 714 $ 885 $ 1,035
Loss ratio 31.5% 30.2% 32.9% 37.0% 39.1%
HOSPITAL INDEMNITY:
Incurred losses $ 72 $ 54 $ 171 $ 206 $ 215
Loss ratio 30.3% 41.5% 52.9% 51.4% 65.8%
ACCIDENT EXPENSE:
Incurred losses $ 47 $ 165 $ 173 $ 526 $ 622
Loss ratio 9.0% 24.4% 21.9% 58.9% 62.7%
DISABILITY INCOME:
Incurred losses $ 90 $ 37 $ 72 $ 84 $ 90
Loss ratio 60.0% 30.2% 50.7% 53.2% 58.5%
TOTAL LIFE AND HEALTH:
Incurred losses $ 9,567 $ 8,888 $ 9,359 $ 10,939 $12,386
Loss ratio 58.3% 57.2% 57.2% 58.9% 59.6%
- -----------------------
(1) Includes American Southern for 1997 and 1996 only.
(2) Includes adjustment to reallocate reserves to workers' compensation.
See "Reserves" for analysis of loss development and reserves.
8
<PAGE>
Policyholder and Claims Services
The Company believes that prompt, efficient policyholder and claims services
are essential to its continued success in marketing its insurance products (see
"Competition"). Additionally, the Company believes that its insureds are
particularly sensitive to claim processing time and to the accessibility of
qualified staff to answer inquiries. Accordingly, the Company's policyholder and
claims services include expeditious disposition of service requests by providing
toll-free access to all customers, 24-hour claim reporting services, and direct
computer links with some of its largest accounts. The Company also utilizes a
state-of-the-art automatic call distribution system to insure timely response.
Inbound calls to customer service support groups are processed efficiently.
Operational data generated from this system allows management to further refine
ongoing client service programs and service representative training modules.
The Company supports a Customer Awareness Program as the basis for its
customer service philosophy. All personnel are required to attend customer
service classes. Hours have been expanded in all service areas to serve
customers and agents in all time zones.
Casualty Division
American Southern. American Southern controls its claims costs by utilizing
its in-house staff of claim supervisors to investigate, verify, negotiate and
settle claims. Upon notification of an occurrence purportedly giving rise to a
claim, the claims department conducts a preliminary investigation, determines
whether an insurable event has occurred and, if so, records the claim. American
Southern frequently utilizes independent adjusters and appraisers to service
claims which require on-site inspections.
Georgia Casualty. Georgia Casualty controls its claims costs by utilizing an
in-house staff of adjusters to investigate, verify, negotiate and settle claims.
Upon notification of an occurrence purportedly giving rise to a claim, the
claims department conducts a preliminary investigation to determine whether an
insurable event has occurred and, if so, records the claim. This process usually
occurs within 7 days of notification of the claim. Where appropriate, the
company utilizes independent adjusters and appraisers to service claims which
require on-site inspections.
Life and Health Division
Insureds obtain claim forms by calling the claims department customer
service group. To shorten claim processing time, a letter detailing all
supporting documents that are required to complete a claim for a particular
policy is sent to the customer along with the correct claim form. With respect
to life policies, the claim is entered into the Life and Health Division's
claims system when the proper documentation is received. Properly documented
claims are generally paid within three to nine business days of receipt. During
1997, the Life and Health Division paid approximately 118,000 claims aggregating
$14.5 million, of which approximately 113,000 claims aggregating $7.8 million
were for Medicare supplement insurance.
9
<PAGE>
Reserves
The following table sets forth information concerning the Company's losses
and claims and loss adjustment expenses ("LAE") reserves for the periods
indicated:
1997 1996
-------------------------
Balance at January 1 $ 84,074 $ 79,514
Less: Reinsurance recoverables (26,854) (22,467)
-------------------------
Net balance at January 1 57,220 57,047
-------------------------
Incurred related to:
Current year 59,655 57,481
Prior years 21 (4,802)
-------------------------
Total incurred 59,676 52,679
-------------------------
Paid related to:
Current year 33,857 28,279
Prior years 22,246 24,227
-------------------------
Total paid 56,103 52,506
Reserves acquired due to acquisition, net 764 -
-------------------------
Net balance at December 31 61,557 57,220
Plus: Reinsurance recoverables 25,164 26,854
-------------------------
Balance at December 31 $ 86,721 $ 84,074
=========================
Casualty Division
The Casualty Division maintains loss reserves representing estimates of
amounts necessary for payment of losses and LAE. The Casualty Division also
maintains incurred but not reported reserves and bulk reserves for future
development. These loss reserves are estimates, based on known facts and
circumstances at a given point in time, of amounts the insurer expects to pay on
incurred claims. All balances are reviewed annually by qualified independent
actuaries. Reserves for LAE are intended to cover the ultimate costs of settling
claims, including investigation and defense of lawsuits resulting from such
claims. Loss reserves for reported claims are based on a case-by-case evaluation
of the type of claim involved, the circumstances surrounding the claim, and the
policy provisions relating to the type of loss. The LAE for claims reported and
claims not reported is based on historical statistical data and anticipated
future development. Inflation and other factors which may affect claim payments
are implicitly reflected in the reserving process through analysis of cost
trends and reviews of historical reserve results; however, it is difficult to
measure the effect of any one of these considerations on reserve estimates.
The Casualty Division establishes reserves for claims 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 LAE. The estimated liability is continually reviewed and updated,
and changes to the estimated liability are recorded in the statement of
operations in the year in which such changes become known.
The table on the following page sets forth the development of balance sheet
reserves for unpaid losses and LAE for the Casualty Division's insurance lines
for 1987 through 1997, including periods prior to the Company's ownership of
American Southern. The top line of the table represents the estimated amount of
losses and LAE for claims arising in all prior years that were unpaid at the
balance sheet date for each of the indicated periods, including an estimate of
losses that have been incurred but not yet reported. The amounts represent
initial reserve estimates at the respective balance sheet dates for the current
and all prior years. The next portion of the table shows the cumulative amounts
paid with respect to claims in each succeeding year. The lower portion of the
table shows the reestimated amounts of previously recorded reserves based on
experience as of the end of each succeeding year.
The reserve estimates are modified as more information becomes known about
the frequency and severity of claims for individual years. The "cumulative
redundancy or deficiency" for each year represents the aggregate change in such
year's estimates through the end of 1997. In evaluating this information, it
should be noted that the amount of the redundancy or deficiency for any year
represents the cumulative amount of the changes from initial reserve estimates
for such year. Operations for any one year are only affected, favorably or
unfavorably, by the amount of the change in the estimate for such year.
Conditions and trends that have affected development of the reserves in the past
may not necessarily occur in the future. Accordingly, it is inappropriate to
predict future redundancies or deficiencies based on the data in this table.
10
<PAGE>
<TABLE>
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory reserve for losses
and LAE $56,712 $53,496 $53,320 $50,154 $48,031 $48,485 $50,808 $52,668 $ 47,819(1)$39,036 $35,770
Cumulative paid as of:
One year later 18,899 17,865 16,548 18,106 18,827 22,060 22,837 21,321 21,592 20,812
Two years later 25,821 25,280 25,914 27,731 32,560 35,278 33,507 32,352 32,975
Three years later 29,273 31,021 36,786 38,046 40,768 40,891 39,832 39,168
Four years later 33,674 40,295 41,872 44,267 43,745 43,713 43,249
Five years later 42,498 44,530 47,204 46,183 45,767 46,004
Six years later 46,523 49,000 48,056 47,880 47,727
Seven years later 50,658 49,835 49,704 49,671
Eight years later 51,100 51,288 51,617
Nine years later 52,424 52,363
Ten years later 53,293
Ultimate losses and LAE
reestimated as of:
End of Year 56,712 53,496 53,320 50,154 48,031 48,485 50,808 52,668 47,819(1) 39,036 35,770
One year later 51,103 49,799 46,249 47,021 46,756 53,700 53,676 53,212 47,314 40,990
Two years later 46,952 44,850 44,043 45,999 52,670 55,919 54,438 53,998 49,569
Three years later 44,138 45,568 48,446 53,040 55,865 56,064 55,313 55,752
Four years later 46,638 53,064 52,326 56,514 55,707 56,255 55,511
Five years later 54,173 56,771 56,648 56,579 56,403 56,408
Six years later 57,898 60,515 56,984 57,446 56,868
Seven years later 61,069 60,641 58,142 57,901
Eight years later 61,327 60,791 58,626
Nine years later 61,362 61,391
Ten years later 61,759
Cumulative redundancy
(deficiency) $ 2,393 $ 6,368 $ 6,016 $ 1,393 $(5,688) $(7,090) $(8,401)$(13,508) $(22,326)$(25,989)
- -------------------------
<FN>
(1) Restated due to adjustment of $4.7 million for elimination of structured annuities changed to reinsurance in 1990.
</FN>
</TABLE>
11
<PAGE>
Life and Health Division
The Life and Health Division establishes future policy benefits reserves to
meet future obligations under outstanding policies. These reserves are
calculated to satisfy policy and contract obligations as they mature. The amount
of reserves for insurance policies is calculated using assumptions for interest
rates, mortality and morbidity rates, expenses, and withdrawals. Reserves are
adjusted periodically based on published actuarial tables with some modification
to reflect actual experience (see Note 3 of Notes to Consolidated Financial
Statements for the year ended December 31, 1997).
Reinsurance
The insurance subsidiaries purchase reinsurance from unaffiliated insurers
and reinsurers to reduce their liability on individual risks and to protect
against catastrophic losses. In a reinsurance transaction, an insurance company
transfers, or "cedes," a portion or all of its exposure on insurance policies to
a reinsurer. The reinsurer assumes the exposure in return for a portion of the
premiums. The ceding of insurance does not legally discharge the insurer from
primary liability for the full amount of policies written by it, and the ceding
company incurs a loss if the reinsurer fails to meet its obligations under the
reinsurance agreement.
Casualty Division
American Southern. The limits of risks retained by American Southern vary by
type of policy and insured, and amounts in excess of such limits are reinsured.
The largest net amount insured in any one risk is $100,000. Reinsurance is
generally maintained as follows: for fire, inland marine, and commercial
automobile physical damage, recovery of losses over $40,000 up to $130,000. Net
retentions for third party losses are generally over $35,000 up to $100,000.
Catastrophe coverage for all lines except third party liability is for 95% of
$6.6 million over $400,000.
Georgia Casualty. Georgia Casualty's basic treaties cover all claims in
excess of $200,000 per person, per occurrence on casualty losses, and per risk
on property losses, up to $10.0 million per casualty claim and $3.0 million per
property claim. An excess catastrophe treaty provides coverage up to statutory
limits for any one occurrence on workers' compenThe property lines of coverage
are protected with an excess of loss treaty which affords recovery for property
losses in excess of $250,000 up to a maximum of $3.0 million. Facultative
arrangements are in place for property accounts with limits in excess of $3.0
million per risk.
Life and Health Division
The Life and Health Division entered into reinsurance contracts ceding the
excess of their retention to several primary reinsurers. Maximum retention by
the Life and Health Division on any one individual in the case of life insurance
policies is $50,000. At December 31, 1997, the Life and Health Division'
reinsured annualized premiums totaled $11.8 million of the $318.6 million of
life insurance then in force, generally under yearly renewable term agreements.
Two companies accounted for the $11.8 million of reinsurance: Munich American
Reassurance Company ($9.6 million) and Optimum Reinsurance ($2.2 million).
Certain reinsurance agreements no longer active for new business remain in-force
to cover any claims on a run-off basis.
Competition
Casualty Division
American Southern. All of the businesses in which American Southern engages
are highly competitive. The principal areas of competition are pricing and
service. Many competing property and casualty companies which have been in
business longer than American Southern have available more diversified lines of
insurance and have substantially greater financial resources. Management
believes, however, that the policies it sells are competitive with those
providing similar benefits offered by other insurers doing business in the
states where American Southern operates.
Georgia Casualty. All of Georgia Casualty's insurance business is highly
competitive. The competition can be placed in four categories: (1) companies
with higher A.M. Best ratings, (2) alternative workers' compensation markets,
(3) self-insured funds, and (4) insurance companies that actively solicit
monoline workers' compensation accounts. Georgia Casualty's efforts are directed
in the following three general categories where the company has the best
12
<PAGE>
opportunity to control exposures and claims: (1) manufacturing, (2) artisan
contractors, and (3) service industries. Management believes that Georgia
Casualty's keys to being competitive in these areas are maintaining strong
underwriting standards, loss control programs, writing workers' compensation
coverages as part of the total insurance package, maintaining and expanding its
loyal network of agents and development of new agents in key territories. In
addition, Georgia Casualty offers quality customer service to its agents and
insureds, and provides rehabilitation, medical management, and claims management
services to its insureds. Georgia Casualty believes that it will continue to be
competitive in the marketplace based on its current strategies and services.
Life and Health Division
The life and health insurance business is highly competitive and includes a
large number of insurance companies, many of which have substantially greater
financial resources. The Life and Health Division believes that the primary
competitors are the Blue Cross/Blue Shield companies, AARP, the Prudential
Insurance Company of America, Pioneer Life Insurance Company of Illinois, AFLAC,
American Travellers, Kanawha Life, American Heritage, Bankers Life and Casualty
Company, United American Insurance Corporation, and Standard Life of Oklahoma.
The Life and Health Division competes with other insurers on the basis of
premium rates, policy benefits, and service to policyholders. The Life and
Health Division also competes with other insurers to attract and retain the
allegiance of its independent agents through commission arrangements,
accessibility and marketing assistance, lead programs, and market expertise. The
Life and Health Division believes that it competes effectively on the basis of
policy benefits, services, and market expertise.
Rating
Each year A.M. Best Company, Inc. publishes Best's Insurance Reports
("Best's") which include assessments and ratings of all insurance companies.
Best's ratings, which may be revised quarterly, fall into fifteen categories
ranging from A++ (Superior) to F (in liquidation). Best's ratings are based on
an analysis of the financial condition and operations of an insurance company
compared to the industry in general. These ratings are not designed for
investors and do not constitute recommendations to buy, sell, or hold any
security. Ratings are important in the insurance industry, and improved ratings
should have a favorable impact on the ability of the companies to compete in the
marketplace.
Casualty Division
American Southern. American Southern and its wholly-owned subsidiary,
American Safety Insurance Company, are each currently rated "A-" (Excellent) by
A.M. Best.
Georgia Casualty. In early 1997, Georgia Casualty received a Best's rating
of B+ (Very Good).
Life and Health Division
Bankers Fidelity. Bankers Fidelity maintains a Best's rating of B+ (Very
Good).
American Independent. American Independent is currently rated C by A.M.
Best, however, the rating was placed under review with "positive implications"
following its acquisition by Atlantic American and as of the date hereof a new
rating had not been assigned.
Regulation
In common with all domestic insurance companies, the Company's insurance
subsidiaries are subject to regulation and supervision in the jurisdictions in
which they do business. Statutes typically delegate regulatory, supervisory, and
administrative powers to state insurance commissions. The method of such
regulation varies, but regulation relates generally to the licensing of insurers
and their agents, the nature of and limitations on investments, approval of
policy forms, reserve requirements, the standards of solvency which must be met
and maintained, deposits of securities for the benefit of policyholders, and
periodic examinations of insurers and trade practices, among other things. The
Company's products generally are subject to rate regulation by state insurance
commissions, which require that certain minimum loss ratios be maintained.
Certain states also have insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The Company's insurance subsidiaries are subject to such
legislation and are registered as controlled insurers in those jurisdictions in
which such registration is required. Such laws vary from state to state but
typically require periodic disclosure concerning the corporation which controls
the registered insurers and all subsidiaries of such corporations, as well as
prior notice to, or approval by, the state insurance commission of
intercorporate transfers of assets (including payments of dividends in excess of
specified amounts by the insurance subsidiaries) within the holding company
system.
13
<PAGE>
Most states require that rate schedules and other information be filed with
the state's insurance regulatory authority, either directly or through a rating
organization with which the insurer is affiliated. The regulatory authority may
disapprove a rate filing if it determines that the rates are inadequate,
excessive, or discriminatory. The Company has historically experienced no
significant regulatory resistance to its applications for rate increases.
A state may require that acceptable securities be deposited for the
protection either of policyholders located in those states or of all
policyholders. As of December 31, 1997, $15.7 million of securities were on
deposit either directly with various state authorities or with third parties
pursuant to various custodial agreements on behalf of the Life and Health and
the Casualty Divisions.
Virtually all of the states in which the Company's insurance subsidiaries
are licensed to transact business require participation in their respective
guaranty funds designed to cover claims against insolvent insurers. Insurers
authorized to transact business in these jurisdictions are generally subject to
assessments of up to 4% of annual direct premiums written in that jurisdiction
to pay such claims, if any. The occurrence and amount of such assessments has
increased in recent years. The likelihood and amount of any future assessments
cannot be estimated until an insolvency has occurred. For the last five years,
the amount incurred by the Company was not material.
NAIC Ratios
The National Association of Insurance Commissioners (the "NAIC") was
established to provide guidelines to assess the financial strength of insurance
companies for state regulatory purposes. The NAIC conducts annual reviews of the
financial data of insurance companies primarily through the application of 13
financial ratios prepared on a statutory basis. The annual statements are
submitted to state insurance departments to assist them in monitoring insurance
companies in their states and to set forth a desirable range in which companies
should fall in each such ratio.
The NAIC suggests that insurance companies which fall outside of the "usual"
range in four or more financial ratios are those most likely to require analysis
by state regulators. However, according to the NAIC, it may not be unusual for a
financially sound company to have several ratios outside the "usual" range, and
in normal years the NAIC expects 15% of the companies it tests to be outside the
"usual" range in four or more categories.
For the year ended December 31, 1997, American Southern, Georgia Casualty
and Bankers Fidelity were all within the NAIC "usual" range for all 13 financial
ratios. American Independent was outside the "usual" range on three ratios; net
change in capital and surplus, net income to total income and surplus relief.
These variances are a result of activity that took place prior to Atlantic
American's acquisition of American Independent.
Risk-Based Capital
RBC is used by rating agencies and regulators as an early warning tool to
identify weakly capitalized companies for the purpose of initiating further
regulatory action. The RBC calculation determines the amount of Adjusted Capital
needed by a company to avoid regulatory action. "Authorized Control Level
Risk-Based Capital" ("ACL") is calculated; if a company's adjusted capital is
200% or lower than ACL, it is subject to regulatory action. At December 31,
1997, all of the Company's insurance subsidiaries substantially exceeded the RBC
regulatory levels.
14
<PAGE>
Investments
Investment income represents a significant portion of the Company's total
income. Insurance company investments are subject to state insurance laws and
regulations which limit the concentration and types of investments. The
following table provides information on the Company's investments as of the
dates indicated.
<TABLE>
December 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Fixed maturities:
Bonds:
U.S. Government, agencies and
authorities $ 76,701 38.4% $ 73,097 39.7% $ 71,549 39.6%
States, municipalities and
political subdivisions 2,738 1.4 3,496 1.9 21,947 12.2
Public utilities 1,893 1.0 1,505 .8 4,110 2.3
Convertibles and bonds with
warrants attached - NIL 1,275 .7 1,188 .7
All other corp. bonds 10,457 5.5 11,562 6.3 12,829 7.1
Certificates of deposit 395 0.2 375 .2 1,690 .9
--------------------------------------------------------------------
Total fixed maturities(1) 92,184 46.5 91,310 49.6 113,313 62.8
Common and preferred stocks (2) 46,876 23.6 37,762 20.5 42,116 23.3
Mortgage, policy and student loans (3) 9,536 2.1 13,367 7.3 12,642 7.0
Investments in limited partnerships (4) 3,941 2.7 - - - -
Real estate 46 NIL 46 NIL 46 NIL
Short-term investments (5) 46,167 23.1 41,614 22.6 12,498 6.9
--------------------------------------------------------------------
Total investments $198,750 100.0% $184,099 100.0% $180,615 100.0%
====================================================================
<FN>
(1) Fixed maturities are carried on the balance sheet at market value. Total
cost of fixed maturities was $91.1 millio as of December 31, 1997,
$91.6 million as of December 31, 1996, and $112.9 million at December
31, 1995.
(2) Equity securities are valued at market. Total cost of equity ecurities
was $18.4 million as of December 31, 1997, $19.7 million as of December
31, 1996, and $26.9 million at December 31, 1995.
(3) Mortgage loans and policy and student loans are valued at historical
cost.
(4) Investments in traded limited partnerships are valued at estimated
market value; all other partnership interests are carried at historical
cost. Total cost of investments in limited partnerships was $4.0 million
as of December 31, 1997.
(5) Short-term investments are valued at cost, which approximates market
value.
</FN>
</TABLE>
15
<PAGE>
Results of the investment portfolio for periods shown were as follows:
Year Ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
(Dollars in thousands)
Average investments(1) $187,408 $180,816 $106,645
Net investment income 11,117 11,005 6,142
Average yield on investments 5.9% 6.1% 5.7%
Realized investment gains, net $ 1,076 $ 1,589 $ 1,731
(1) Calculated as the average of the balances at the beginning of the year
and at the end of each of the four segment quarters. The calculation for
1995 does not include American Southern's investment portfolio.
Management's investment strategy is an increased investment in short and
medium maturity bonds and common and convertible preferred stocks.
Employees
The Company and its subsidiaries at December 31, 1997 employed 176 people.
Financial Information By Industry Segment
Financial information concerning the Company and its consolidated
subsidiaries by industry segment for the three years ended December 31, 1997, is
set forth on page 21 of the 1997 Annual Report to Shareholders, and such
information by industry segment is incorporated herein by reference.
Executive Officers of the Registrant
The table below and the information following the table set forth for each
executive officer of the Company as of December 31, 1997, (based upon
information supplied by each of them) his name, age, positions with the Company,
principal occupation, and business experience for the past five years and prior
service with the Company.
Director or
Name Age Position with the Company Officer Since
- --------------------------------------------------------------------------------
J. Mack Robinson 74 Chairman of the Board 1974
Hilton H. Howell, Jr. 36 Director, President & CEO 1992
John W. Hancock 60 Senior Vice President and Treasurer 1989
Officers are elected annually and serve at the discretion of the Board of
Directors.
Mr. Robinson has served as Director and Chairman of the Board since 1974
and served as President and Chief Executive Officer of the Company from
September 1988 to May 1995. In addition, Mr. Robinson is also a Director of Bull
Run Corporation and Gray Communications Systems, Inc.
Mr. Howell has been President and Chief Executive Officer of the Company
since May 1995, and prior thereto served as Executive Vice President of the
Company from October 1192 to May 1995. He has been a Director of the Company
since October 1992. Mr. Howell is the son-in-law of Mr. Robinson. He is also a
Director of Bull Run Corporation and Gray Communications Systems, Inc.
Mr. Hancock has served as Senior Vice President and Treasurer of the Company
since November 1993 and Senior Vice President of the Life Companies since August
1997, prior thereto served as Senior Vice President and Treasurer of the Life
Companies since November 1993, prior thereto served as Vice President and
Treasurer of the Company and each of the Life Companies since April 1989, and
prior thereto served as Controller of the Life Companies since March 1988. He is
also a Director of American Independent, Bankers Fidelity Life and Georgia
Casualty. Prior to joining the Company in 1988, he was Vice President of Finance
with National Consultants, Inc.
16
<PAGE>
Forward-Looking Statements
Certain of the statements and subject matters contained herein that are not
based upon historical or current facts deal with or may be impacted by potential
future circumstances and developments, and should be considered forward-looking
and subject to various risks and uncertainties. Such forward-looking statements
are made based upon management's belief, as well as assumptions made by and
information currently available, to management pursuant to "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements, and the discussion of such subject areas, involve, and therefore are
qualified by, the inherent risks and uncertainties surrounding future
expectations generally, and may materially differ from the Company's actual
future experience involving any one or more of such subject areas. The Company
has attempted to identify, in context, certain of the factors that it currently
believes may cause actual future experience and results to differ from current
expectations. The Company's operations and results also may be subject to the
effect of other risks and uncertainties in addition to the relevant qualifying
factors identified elsewhere herein, including, but not limited to, locality and
seasonality in the industries to which the Company offers its products, the
impact of competitive products and pricing, unanticipated increases in the rate
and number of claims outstanding, volatility in the capital markets that may
have an impact on the Company's investment portfolio, the uncertainty of general
economic conditions, and other risks and uncertainties identified from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission. Many of such factors are beyond the Company's ability to control or
predict. As a result, the Company's actual financial condition, results of
operations and stock price could differ materially from those expressed in any
forward-looking statements made by the Company. Undue reliance should not be
placed upon forward-looking statements contained herein. The Company does not
intend to publicly update any forward-looking statements that may be made from
time to time by, or on behalf of, the Company.
ITEM 2. PROPERTIES
Owned Properties. The Company owns two parcels of unimproved property
consisting of approximately seven acres located in Fulton and Washington
Counties, Georgia. At December 31, 1997, the aggregate book value of such
properties was approximately $46,000.
Leased Properties. The Company (with the exception of American Southern)
leases space for its principal offices in an office building located in Atlanta,
Georgia, from Delta Life Insurance Company, under leases which expire at various
times from May 31, 2002 to July 31, 2005. Under the current terms of the leases,
the Company occupies approximately 54,000 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 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.
American Southern leases space for its offices in a building located in
Atlanta, Georgia. The lease term expires January 31, 2000. Under the terms of
the lease, American Southern occupies approximately 13,700 square feet.
ITEM 3. LEGAL PROCEEDINGS
Litigation
The Company and its subsidiaries are involved in various claims and lawsuits
incidental to and in the ordinary course of their businesses. In the opinion of
management, such claims will not have a material effect on the business or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the quarter ended December 31, 1997.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market and
quoted on the Nasdaq National Market (Symbol: AAME). As of March 8, 1998, there
were 6,586 shareholders of record. The following table sets forth for the
periods indicated the high and low sale prices of the Company's common stock as
reported on the Nasdaq National Market.
Year Ending December 31, High Low
- --------------------------------------------------------------------------------
1997
1st quarter $ 3 3/4 $3 1/16
2nd quarter 3 1/4 2 1/2
3rd quarter 4 1/8 2 1/2
4th quarter 5 1/2 4
1996
1st quarter $ 3 1/4 $2 1/8
2nd quarter 4 2 3/4
3rd quarter 3 5/8 3
4th quarter 3 5/8 3
The Company has not paid dividends to its common shareholders since the
fourth quarter of 1988. Payment of dividends in the future will be at the
discretion of the Company's Board of Directors and will depend upon the
financial condition, capital requirements, and earnings of the Company as well
as other factors as the Board of Directors may deem relevant. The Company's
primary sources of cash for the payment of dividends are dividends from its
subsidiaries. Under the Insurance Code of the State of Georgia, cumulative
dividend payments to the Parent Company by its insurance subsidiaries are
limited to the accumulated statutory earnings of the insurance subsidiaries
without the prior approval of the Insurance Commissioner. The Company's
principal insurance subsidiaries had the following accumulated statutory
earnings and/or (deficits) as of December 31, 1997: Georgia Casualty - $13.0
million, American Southern - $19.6 million, Bankers Fidelity Life - $18.0
million. The Company has elected to retain its earnings to grow its business and
does not anticipate paying cash dividends on its common stock in the foreseeable
future.
A total of 278,561 shares of common stock were issued in exchange for 100%
of the outstanding stock of SIA, Inc., which shares were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1993, as amended.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of Atlantic American Corporation and subsidiaries
for the five year period December 31, 1997 is set forth on page 1 of the 1997
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of Atlantic American Corporation and subsidiaries are set forth on
pages 23 to 27 of the 1997 Annual Report to Shareholders and are incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and related notes are
set forth on pages 8 to 22 of the 1997 Annual Report to Shareholders and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE>
PART III
With the exception of information relating to the Executive Officers of the
Company, which is provided in Part I hereof, all information required by Part
III (Items 10, 11, 12, and 13) is incorporated by reference to the sections
entitled "Election of Directors", "Security Ownership of Management", "Section
16(a) Beneficial Ownership Compliance", "Executive Compensation", "Employment
Agreements With Management", and "Certain Relationships and Related
Transactions" contained in the Company's definitive proxy statement to be
delivered in connection with the Company's Annual Meeting of Shareholders to be
held May 5, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
FINANCIAL STATEMENTS
Page
Reference
---------
Consolidated Balance Sheets as of December 31, 1997
and December 31, 1996 8*
Consolidated Statements of Operations for the Three
Years ended December 31, 1997 9*
Consolidated Statements of Shareholders'Equity
for the Three Years ended December 31, 1997 10*
Consolidated Statements of Cash Flows for the Three Years
ended December 31, 1997 11*
Notes to Consolidated Financial Statements 12-22*
Report of Independent Public Accountants 28*
* The page references so designated refer to page numbers in the 1997 Annual
Report to Shareholders of Atlantic American Corporation, which pages are
incorporated herein by reference. With the exception of the information
specifically incorporated within this Form 10-K, the 1997 Annual Report to
Shareholders of Atlantic American Corporation is not deemed to be filed under
the Securities Exchange Act of 1934.
20
<PAGE>
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants
II - Condensed financial information of registrant for the three years
ended December 31, 1997 III - Supplementary Insurance Information
for the three years ended December 31, 1997
IV - Reinsurance for the three years ended December 31, 1997
VI - Supplemental Information concerning property-casualty insurance
operations for the three years ended December 31, 1997
Schedules other than those listed above are omitted as they are
not required or are not applicable, or the required information is
shown in the financial statements or notes thereto. Columns
omitted from schedules filed have been omitted because the
information is not applicable.
EXHIBITS
3.1 - Restated and Amended Articles of Incorporation of the registrant
[incorporated by reference to Exhibit 3.1 to the registrant's Form
10-Q for the fiscal quarter ended March 31, 1996].
3.2 - Bylaws of the registrant [incorporated by reference to Exhibit 3.2
to the registrant's Form 10-K for the year ended December 31,
1993].
4.1 - Indenture between registrant and Wachovia Bank and Trust
Company, N.A., Trustee, dated as of April 1, 1987 relating to the
registrant's 8% Convertible Subordinated Notes due May 15, 1997
[incorporated by reference to Exhibit 4.1 to the registrant's Form
10-K for the year ended December 31, 1987].
10.01 - Lease Contract between registrant and Delta Life Insurance
Company dated June 1, 1992 [incorporated by reference to Exhibit
10.11 to the registrant's Form 10-K for the year ended December
31, 1992].
10.02 - First Amendment to Lease Contract between registrant and Delta
Life Insurance Company dated June 1, 1993 [incorporated by
reference to Exhibit 10.11.1 to the registrant's Form 10Q for the
quarter ended June 30, 1993].
10.03 - Second Amendment to Lease Contract between registrant and Delta
Life Insurance Company dated August 1, 1994 [incorporated by
reference to Exhibit 10.11.2 to the registrant's Form 10Q for the
quarter ended September 30, 1994].
10.04 - Lease Agreement between Georgia Casualty & Surety Company and
Delta Life Insurance Company dated September 1, 1991 [incorporated
by reference to Exhibit 10.12 to the registrant's Form 10-K for
the year ended December 31, 1992].
10.05 - First Amendment to Lease Agreement between Georgia Casualty &
Surety Company and Delta Life Insurance Company dated June 1, 1992
[incorporated by reference to Exhibit 10.12.1 to the registrant's
Form 10-K for the year ended December 31, 1992].
10.06 - Management Agreement between registrant and Georgia Casualty &
Surety Company dated April 1, 1983 [incorporated by reference to
Exhibit 10.16 to the registrant's Form 10-K for the year ended
December 31, 1986].
10.07* - Minutes of Meeting of Board of Directors of registrant held
February 25, 1992 adopting registrant's 1992 Incentive Plan
together with a copy of that plan, as adopted [incorporated by
reference to Exhibit 10.21 to the registrant's Form 10-K for the
year ended December 31, 1991].
10.08* - Employment Agreement, dated September 8, 1988, between the
registrant and John W. Hancock [incorporated by reference to
exhibit 10.30 to the registrant's Form 10-K for the year ended
December 31, 1992].
10.09 - Employment Agreement dated September 2, 1988, between the
registrant and Eugene Choate [incorporated by reference to Exhibit
10.31 to the registrant's Form 10-K for the year ended December
31, 1992].
10.10 - Loan and Security Agreement dated August 26, 1991, between
registrant's three insurance subsidiaries and Leath Furniture,
Inc. [incorporated by reference to Exhibit 10.38 to the
registrant's Form 10-K for the year ended December 31, 1992].
10.11 - First amendment to the amended and reissued mortgage note dated
January 1, 1992, [incorporated by reference to Exhibit 10.38.1 to
the registrant's Form 10-K for the year ended December 31, 1992].
21
<PAGE>
10.12 - Intercreditor Agreement dated August 26, 1991, between Leath
Furniture, Inc., the registrant and the registrant's three
insurance subsidiaries [incorporated by reference to Exhibit 10.39
to the registrant's Form 10-K for the year ended December 31,
1992].
10.13 - Management Agreement between Registrant and Atlantic American Life
Insurance Company and Bankers Fidelity Life Insurance Company
dated July 1, 1993 [incorporated by reference to Exhibit 10.41 to
the registrant's Form 10-Q for the quarter ended September 30,
1993].
10.14 - Tax allocation agreement dated January 28, 1994, between
registrant and registrant's subsidiaries [incorporated by
reference to Exhibit 10.44 to the registrant's Form 10-K for the
year ended December 31, 1993].
10.15 - Stock Purchase Agreements by and between registrant and Fuqua
Enterprises, Inc. dated as of October 16, 1995 [incorporated by
reference to Exhibit 2.1 to the registrant's Form 8-K, filed
January 12, 1996].
10.16 - Credit Agreement, dated as of December 29, 1995, between
registrant and Wachovia Bank of Georgia, N.A. [incorporated by
reference to Exhibit 99.1 to the registrant's Form 8-K, filed
January 12, 1996].
13.1 - Those portions of the registrant's Annual Report to Shareholders
for year ended December 31, 1997, that are specifically
incorporated by reference herein.
21.1 - Subsidiaries of the registrant.
23.1 - Consent of Arthur Andersen, LLP Independent Public Accountants.
28.1 - Form of General Agent's Contract of Atlantic American Life
Insurance Company [incorporated by reference to Exhibit 28 to the
registrant's Form 10-K for the year ended December 31, 1990].
28.2 - Form of Agent's Contract of Bankers Fidelity Life Insurance
Company [incorporated by reference to Exhibit 28 to the
registrant's Form 10-K for the year ended December 31, 1990].
28.3 - Form of Agency Contract of Georgia Casualty & Surety Company
[incorporated by reference to Exhibit 28 to the registrant's Form
10-K for the year ended December 31, 1990].
(b) Reports on Form 8-K. None.
*Management contract, compensatory plan or arrangement required to be filed
pursuant to, Part IV, Item 14(C) of Form 10-K and Item 601 of Regulation S-K.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) ATLANTIC AMERICAN CORPORATION
By: /s/
John W. Hancock
Senior Vice President and Treasurer
Date: March 27, 1998
By: /s/
Edward L. Rand, Jr.
Vice President and Controller
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/
J. MACK ROBINSON Chairman of the Board March 27, 1998
/s/
HILTON H. HOWELL, JR. President, Chief Executive
Officer and Director
(Principal Executive Officer) March 27, 1998
/s/
JOHN W. HANCOCK Senior Vice President and
Treasurer (Principal Financial
Officer) March 27, 1998
/s/
EDWARD L. RAND, JR. Vice President and
Controller March 27, 1998
/s/
SAMUEL E. HUDGINS Director March 27, 1998
/s/
D. RAYMOND RIDDLE Director March 27, 1998
/s/
HARRIETT J. ROBINSON Director March 27, 1998
/s/
SCOTT G. THOMPSON Director March 27, 1998
/s/
MARK C. WEST Director March 27, 1998
/s/
WILLIAM H. WHALEY, M.D. Director March 27, 1998
/s/
DOM H. WYANT Director March 27, 1998
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Atlantic American Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Atlantic American Corporation,
incorporated by reference in this Form 10-K, and have issued our report thereon
dated March 20, 1998. Our audits of the financial statements were made for the
purpose of forming an opinion on those statements taken as a whole. The
financial statement schedules listed in Item 14 (a) are the responsibility of
the Company's management, are presented for the purpose of complying with the
Securities and Exchange Commission's rules, and are not part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 20, 1998
24
<PAGE>
Schedule II
Page 1 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
BALANCE SHEETS
(in thousands)
ASSETS
December 31,
--------------------
1997 1996
--------- ---------
Current assets:
Cash and short-term investments $ 223 $ 382
--------- ---------
Investment in insurance subsidiaries 107,124 94,797
--------- ---------
Income taxes receivable from subsidiaries 137 55
Other assets 2,424 2,278
--------- ---------
$109,908 $ 97,512
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to affiliates $ - $ 1,058
Current portion of long-term debt 1,000 8,559
Interest payable - 56
Other payables 3,125 2,076
--------- ---------
Total current liabilities 4,125 11,749
--------- ---------
Income taxes payable to subsidiaries - 633
Long-term debt 27,600 25,994
Shareholders' equity 78,183 59,136
--------- ---------
$109,908 $ 97,512
========= =========
The notes to consolidated financial statements are an integral part of these
condensed statements.
II-1
<PAGE>
Schedule II
Page 2 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
REVENUE
Fees, rentals and interest income
from subsidiaries $ 3,841 $ 5,662 $ 5,968
Distributed earnings from
subsidiaries 11,209 6,850 2,864
Other 20 94 12
---------- ---------- ---------
Total revenue 15,070 12,606 8,844
GENERAL AND ADMINISTRATIVE EXPENSES 5,305 6,073 5,555
INTEREST EXPENSE 2,902 3,292 2,458
---------- ---------- ---------
6,863 3,241 831
INCOME TAX PROVISION (BENEFIT) (1) (1,862) (2,054) (274)
---------- ---------- ---------
8,725 5,295 1,105
EQUITY IN UNDISTRIBUTED EARNINGS OF
CONSOLIDATED SUBSIDIARIES, NET (692) 2,316 2,013
---------- ---------- ---------
Income from continuing operations 8,033 7,611 3,118
(Loss) from discontinued
operations, net - (4,447) (10,094)
---------- ---------- ---------
Net income (loss) $ 8,033 $ 3,164 $(6,976)
========== ========== =========
(1) Under the terms of its tax-sharing agreement with its subsidiaries, income
tax provisions for the individual companies are computed on a separate
company basis. Accordingly, the Company's income tax benefit results from
the utilization of the parent company separate return loss to reduce the
consolidated taxable income of the Company and its subsidiaries.
The notes to consolidated financial statements are an integral part of these
condensed statements.
II-2
<PAGE>
Schedule II
Page 3 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,033 $ 3,164 $(6,976)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 591 452 379
Equity in undistributed earnings
of consolidated subsidiaries 692 (2,316) (2,013)
Loss from discontinued operations - 4,447 10,094
Change in intercompany taxes (715) (245) -
Decrease in other liabilities (157) (262) (746)
Minority interest - - (554)
Other, net (245) 2,528 1,550
---------- ---------- ---------
Net cash provided by
operating activities 8,199 7,768 1,734
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries, net - - (38)
Proceeds from sale of Leath Furniture, net - 3,645 -
Acquisition of American Southern
Insurance Company - - (22,770)
Additions to property and equipment (536) (1,177) (1,058)
---------- ---------- ---------
Net cash provided (used) by
investing activities (536) 2,468 (23,866)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bank financing 5,617 11,352 22,642
Preferred stock dividends to affiliated (315) (315) (315)
shareholders
Purchase of treasury shares (558) (338) (174)
Retirements and payments of long-term
debt and notes payable to affiliates (12,628) (20,662) (675)
Proceeds from exercise of stock options 62 85 600
---------- ---------- ---------
Net cash (used) provided by
financing activities (7,822) (9,878) 220,078
---------- ---------- ---------
Net increase (decrease) in cash (159) 358 (54)
Cash at beginning of year 382 24 78
---------- ---------- ---------
Cash at end of year $ 223 $ 382 $ 24
========== ========== =========
Supplemental disclosure:
Cash paid for interest $ 2,958 $ 3,763 $ 2,894
========== ========== =========
Cash paid for income taxes $ 85 $ 116 $ 128
========== ========== =========
Long-term debt, payable to affiliates,
converted to preferred stock - - $13,400
========== ========== =========
Debt to seller for purchase of
American Southern Insurance Company - - $11,352
========== ========== =========
Issuance of stock to acquire SIA, Inc. $ 1,212 - -
========== ========== =========
The notes to consolidated financial statements are an integral part of these
condensed statements.
II-3
<PAGE>
Schedule III
Page 1 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
<TABLE>
Future Policy
Benefits, Losses, Other Policy
Deferred Claims and Loss Unearned Claims and
Segment Acquisition Costs Reserves Premiums Benefits Payable
- ------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
December 31, 1997:
A & H..... $ 1,517 $ 6,890 $ 2,631 $ -
Life...... 11,895 37,180 - 2,001
Casualty.. 3,071 81,839 21,781 1,996
-----------------------------------------------------------------
$16,483 $125,909(1) $24,412 $ 3,997
=================================================================
December 31, 1996:
A & H..... $ 2,561 $ 6,924 $ 2,135 $ -
Life...... 9,676 33,686 - 1,912
Casualty.. 2,942 79,849 22,965 1,727
-----------------------------------------------------------------
$15,179 $120,459(2) $25,100 $ 3,639
=================================================================
December 31, 1995:
A & H..... $ 3,831 $ 8,907 $ 2,222 $ -
Life...... 8,411 32,219 - 1,905
Casualty.. 2,657 74,693 21,918 1,983
-----------------------------------------------------------------
$14,899 $115,819(3) $24,140 $ 3,888
=================================================================
_________________________
<FN>
(1)Includes future policy benefits of $39,188 and losses and claims of $86,721.
(2)Includes future policy benefits of $36,385 and losses and claims of $84,074.
(3)Includes future policy benefits of $36,305 and losses and claims of $79,514.
</FN>
</TABLE>
<PAGE>
Schedule III
Page 2 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION(1)
(in thousands)
<TABLE>
Benefits, Amortization
Investment Claims, Losses of Deferred Other Casualty
Premium Income and Settlement Acquisition Operating Premiums
Segment Revenue (Losses)*(2) Expenses Costs Expenses(2) Written
------- ------- ------------ -------------- ------------ ----------- ---------
<S><C> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Life...... $10,453 $ 4,018 $ 7,022 $ 540 $ 3,480 $ -
Casualty.. 61,715 7,363 45,442 7,760 7,986 60,562
A & H..... 16,514 1,157 8,554 1,404 6,564 -
Other..... - (5) - - 4,292 -
---------------------------------------------------------------------------------
$88,682 $12,533 $61,018 $9,704 $22,322 $60,562
=================================================================================
December 31, 1996:
Life...... $10,240 $ 4,210 $ 6,446 $1,449 $ 4,543 $ -
Casualty.......... 60,047 7,377 40,245 5,349 13,039 61,068
A & H..... 15,738 1,234 7,590 1,386 7,565 -
Other..... - 225 - - 3,644 -
---------------------------------------------------------------------------------
$86,025 $13,046 $54,281 $8,184 $28,791 $61,068
=================================================================================
December 31, 1995:
Life...... $ 8,297 $ 3,941 $ 4,861 $1,799 $ 3,546 $ -
Casualty.. 18,302 2,989 12,356 - 6,582 19,074
A & H..... 16,774 1,442 7,472 1,922 7,796 -
Other..... - (75) - - 2,252 -
---------------------------------------------------------------------------------
$43,373 $ 8,297 $24,689 $3,721 $20,176 $19,074
=================================================================================
<FN>
* Includes realized investment gains (losses).
(1) Supplementary insurance information contained above includes amounts related
to American Southern for 1996 and 1997 only.
(2) Investment incom is allocated based on the pro rata percentages of
insurance reserves and policyholders' funds attributable to each segment
whereas other operating expenses are allocated based on premiums collected.
</FN>
</TABLE>
<PAGE>
Schedule IV
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
REINSURANCE
(in thousands)
<TABLE>
Ceded To Assumed
Gross Other From Other Net
Amount Companies Companies Amount
- -----------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
Year ended December 31, 1997:
Life insurance in force........... $318,594 $11,767 $ - $306,827
=======================================================
Premiums --
Life insurance.................... $ 10,540 $ 91 $ - $ 10,449
Accident and health insurance..... 16,518 - - 16,518
Property and casualty insurance(1) 43,721 8,978 26,972 61,715
-------------------------------------------------------
Total premiums................. $ 70,779 $ 9,069 $26,972 $ 88,682
=======================================================
Year ended December 31, 1996:
Life insurance in force........... $277,891 $10,072 $ - $267,819
=======================================================
Premiums --
Life insurance.................... $ 10,305 $ 65 $ - $ 10,240
Accident and health insurance..... 15,738 - - 15,738
Property and casualty insurance(1) 43,317 9,009 25,739 60,047
-------------------------------------------------------
Total premiums................. $ 69,360 $ 9,074 $25,739 $ 86,025
=======================================================
Year ended December 31, 1995:
Life insurance in force........... $254,349 $10,003 $ - $244,346
=======================================================
Premiums --
Life insurance.................... $ 8,378 $ 81 $ - $ 8,297
Accident and health insurance..... 16,774 - - 16,774
Property and casualty insurance(1) 21,258 2,956 - 18,302
--------------------------------------------------------
Total premiums................. $ 46,410 $ 3,037 $ - $ 43,373
========================================================
<FN>
(1) Information contained above includes amounts related to American Southern for 1996 and 1997 only.
</FN>
</TABLE>
<PAGE>
Schedule VI
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
<TABLE>
Claims and Claim
Adjustment Expenses
Incurred Related to
-------------------
Amortization Paid Claims
Deferred Net of Deferred and Claim
Policy Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Yead Ended Acquisition Reserves Premium Premium Income Year Years Costs Expenses Written
---------- ----------- -------- ------- ------- ------ ------- -------- ------- ---------- --------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997(1) $ 3,071 $81,839 $21,781 $61,715 $7,363 $48,562 $(3,003) $ 7,760 $41,883 $60,562
======= ======= ======= ======= ====== ======= ======== ======= =======
December 31, 1996(1) $ 2,942 $79,849 $22,965 $60,047 $7,205 $44,468 $(3,403) $ 5,349 $41,017 $61,068
======= ======= ======= ======= ====== ======= ======== ======= ======= =======
December 31, 1995 $2,657(1) $74,693(1) $21,918(1)$18,302(2)$2,989(2)$7,002(2) $ 5,985(2) $ - $12,923(2) $19,074(2)
======== ========= ======= ======= ====== ====== ======= ======= ======= =======
<FN>
(1) Includes Georgia Casualty & Surety and American Southern.
(2) Includes Georgia Casualty only.
</FN>
</TABLE>
EXHIBIT 13.1
Corporate Profile
Atlantic American Corporation is an insurance holding company involved through
its subsidiary companies in well-defined specialty markets of the life, health,
property and casualty insurance industries.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Data)
Year Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Insurance premiums $88,682 $ 86,025 $ 43,373 $ 41,701 $ 40,944
Investment income 11,457 11,457 6,566 6,628 6,048
Realized investment gains, net 1,076 1,589 1,731 870 744
- --------------------------------------------------------------------------------
Total revenue 101,215 99,071 51,670 49,199 47,736
- --------------------------------------------------------------------------------
Insurance benefits and
losses incurred 61,018 54,281 24,689 21,955 25,364
Other expenses 32,026 36,975 23,897 20,727 21,905
- --------------------------------------------------------------------------------
Total benefits and expenses 93,044 91,256 48,586 42,682 47,269
- --------------------------------------------------------------------------------
8,171 7,815 3,084 6,517 467
Income tax provision (benefit) 138 204 (34) (1,632) (989)
- --------------------------------------------------------------------------------
Income from continuing
operations 8,033 7,611 3,118 8,149 1,456
(Loss) income from discontinued
operations, net - (4,447) (10,094) 1,121 1,543
- --------------------------------------------------------------------------------
Income (loss) before extra-
ordinary gain and cumulative
effect of change in
accounting principle for
income taxes 8,033 3,164 (6,976) 9,270 2,999
Extraordinary gain - - - 100 897
- --------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting
principle, for income taxes 8,033 3,164 (6,976) 9,370 3,896
Cumulative effect of change
in accounting principle,
for income taxes - - - - (519)
Net income (loss) $ 8,033 $ 3,164 $ (6,976) $ 9,370 $ 3,377
================================================================================
Diluted net income (loss) per common share data:
Continuing operations $ .35 $ .32 $ .15 $ .43 $ .06
Discontinued operations - (.23) (.54) .06 .09
Extraordinary gain - - - - .05
Cumulative effect of change
in accounting principle - - - - (.03)
- --------------------------------------------------------------------------------
Net income (loss) $ .35 $ .09 $ (.39) $ .49 $ .17
================================================================================
Diluted weighted average common
shares outstanding 18,842 18,882 18,671 18,511 18,476
Book value per share $ 3.27 $ 2.29 $ 1.61 $ 1.47 $ 1.24
Common shares outstanding 18,907 18,684 18,679 18,414 18,399
Total assets $271,860 $252,994 $245,494 $148,740 $154,822
Total long-term debt $ 27,600 $ 25,994 $31,569 $ 24,327 $ 21,827
Total shareholders' equity $ 78,183 $ 59,136 $ 46,478 $ 30,022 $ 25,806
1
<PAGE>
President's Message
To Our Shareholders:
The past year was a successful and important one for our Company. Atlantic
American completed two small but significant acquisitions, American Independent
Life Insurance Company and SIA, Inc. These acquisitions, coupled with the
continued solid performance of our existing insurance companies, produced a very
exciting and rewarding 1997.
The financial performance of the company was strong. Net income reported
was $8.0 million, or $.35 per share, compared with net income from continuing
operations of $7.6 million, or $.32 per share, in 1996 - representing a 5.5% and
9.4% increase, respectively. The Company's book value per share grew by an
impressive 42.8% from $2.29 per share to $3.27 per share and total shareholders
equity increased by 32.3% to $78.2 million from $59.1 million. Since 1991, the
book value of Atlantic American has appreciated eight-fold. Equally important,
during 1997 our total debt, which was primarily incurred to finance our
acquisition of the American Southern Insurance Companies at year-end 1995,
decreased from $35.6 million to $28.6 million, which represents a total debt to
equity ratio of 36.6% at year-end 1997.
Atlantic American's property and casualty operations, which represent
approximately 70% of both our total revenue and net income, once again produced
excellent results. The American Southern Companies renewed all of their
important accounts during the year and were able to report a very successful
year with continued healthy underwriting profits. The hallmark of American
Southern's success continues to be the strength of its relationships with its
producers and the unquestioned integrity of its senior management. The continued
outstanding financial performance of American Southern proves that the
old-fashioned values of hard work, shooting straight, and standing behind your
word are still key to long-term success in our fast-paced modern world. Roy
Thompson elected to become Chairman Emeritus of American Southern at the end of
1997. Fortunately, Roy will remain an active part of the Company and we will
still be able to draw upon his talents despite the change in title. Calvin Wall
assumed the title of Chairman and CEO, a promotion he richly deserves.
Georgia Casualty, which celebrates its 50th anniversary in 1998, also
produced a very good year. Despite keen pricing competition in most of its
markets and lines of business, our sound underwriting discipline and
professional claims handling produced profitable results in all lines of
business, other than our discontinued short-haul trucking program in
Mississippi. In the fourth quarter, Georgia Casualty expanded into the states of
Florida, Tennessee, Louisiana, North Carolina and South Carolina. In 1998, we
expect to see much growth from these new markets as we feel these neighboring
states offer attractive markets for growth with little new overhead required. As
Georgia Casualty embarks on its next 50 years, we will strive to continue to be
a strong regional company which focuses on the people, products and industries
it knows so well.
SIA, Inc., which was acquired for shares of Atlantic American common stock
in October, specializes in handling the workers' compensation claims of
self-insured companies and public sector entities. The addition of SIA, Inc.,
which continues to be ably run by its founder, Andy Thompson, provides Atlantic
American with an entry into alternative services in the insurance marketplace.
It also complements the primary focus of Georgia Casualty, allowing it to enter
a new line of business by providing stop-loss insurance to some of SIA, Inc.'s
clients.
Our life and health operations, augmented by the recent acquisition of
American Independent, a Pennsylvania domiciled life insurance company, also
produced an admirable year. The assimilation of the American Independent
business into the Bankers Fidelity operation went very smoothly. We were able to
integrate close to $6 million in annualized premium and over 9,000 policyholders
into our operations without adding any new staff. In doing so, we have
eliminated virtually all of American Independent's operating expenses and spread
our own over a larger revenue base. Going forward, we expect this acquisition
will add significantly to our earnings and will serve as a model for similar
acquisitions by Atlantic American.
In terms of our marketing success, our life insurance sales continued their
climb as several new and refined life products were introduced. For the first
time in many years, our supplemental health insurance premiums increased
significantly as our new products won consumer acceptance. Since 1991, our life
insurance premiums have increased more than 85% and our total life insurance in
force has increased over 60% during a time of relatively stagnant life insurance
sales for the industry as a whole. We have also initiated a marketing alliance
between the Bankers Fidelity payroll deduction division and select property and
casualty agents whereby they can introduce our payroll products to their small
business accounts. Our first products from this distribution method were sold
during the fourth quarter of 1997.
2
<PAGE>
We are also extremely pleased that Mark C. West, Chairman and CEO of the
Genoa Companies, joined our Board of Directors in June, replacing his father who
served so ably on our board for 17 years. Atlantic American is truly privileged
to have such longstanding support and guidance from such a fine family. We are
delighted to welcome Mark to the Board of Directors.
The steps we have taken and the fine results achieved this past year have
strengthened our balance sheet and helped to ensure that we have the financial
flexibility to take advantage of opportunities as they present themselves. Many
people share the credit for our excellent year in 1997. The leadership of our
Board of Directors, the hard work of our management team, the dedication of our
employees and the enthusiasm of our agents were critical to producing such a
successful year. As we look to 1998, we are highly confident that Atlantic
American is positioned to compete and win. We are enthusiastic about our future
prospects and greatly appreciate your continued confidence in and support of
Atlantic American.
J. Mack Robinson Hilton H. Howell, Jr.
Chairman President and Chief Executive Officer
3
<PAGE>
OPERATIONS
Atlantic American Corporation operates in both the property and casualty and
life and health segments of the insurance industry. Each of our insurance
subsidiaries has a distinct niche and strong identity in their respective
markets.
The American Southern Insurance Companies
The American Southern Insurance Companies provide tailored fleet automobile and
long haul physical damage insurance coverage, on a multi-year contract basis, to
state governments, local municipalities and other large motor pools and fleets
that can be specifically rated and underwritten. While the majority of American
Southern's premiums come from Florida, Georgia and South Carolina, American
Southern produces business in 18 of the 24 states in which it is licensed.
Acquired by Atlantic American Corporation at the close of 1995, American
Southern continues to be a solid and consistent contributor to Atlantic
American's overall financial results. American Southern generated approximately
47 percent of Atlantic American's 1997 premium revenue and both insurance
companies of the American Southern group rated "A-", or Excellent, by A.M. Best.
A typical American Southern account ranges from two to five years and has a
sizable premium. Consequently, in comparison to Atlantic American's other
subsidiaries, the growth in premiums written by American Southern is less
predictable; however, the underwriting results and profitability of American
Southern have historically been quite consistent and new contracts tend to be
large, the addition of which can be significant.
Despite intensifying competition, American Southern has been very successful in
its ability to maintain and renew virtually all of its long-term contracts.
Throughout its 60 years, American Southern's executives and agents have
instilled confidence in their customers through the quality of their
relationships, developed by providing outstanding service and highly unique
insurance programs. To achieve higher growth rates while maintaining its target
profitability, American Southern has established programs to enhance its
business through alternative, customized coverages and by obtaining licensing
approval in several additional states.
Another objective to grow American Southern is to seek out complementary
acquisitions that can be accretive and add depth to its business. Moreover, by
incrementally expanding its business, American Southern strives to reduce the
risk of exposure that could result from the loss of any single large contract.
Georgia Casualty & Surety Company and SIA, Inc.
Georgia Casualty is celebrating its 50th anniversary in 1998. Focusing on
underwriting workers' compensation and commercial coverages in the Southeast,
Georgia Casualty increased earned premiums by 6 percent in 1997. Georgia
Casualty represented approximately 22 percent of Atlantic American's overall
insurance business and received a rating increase to "B+", or Very Good, from
A.M. Best in early 1997. Another significant achievement in 1997 was the
acquisition of Self-Insurance Administrators, Inc. ("SIA, Inc."), a third party
administrator of workers' compensation plans for self-insured companies and
organizations. The addition of SIA, Inc. has expanded the services Georgia
Casualty offers beyond traditional guaranteed-cost workers' compensation
insurance and various deductible programs to include the alternative of
establishing self-insured workers' compensation programs.
An integral component of the growth of Georgia Casualty has been its personal
approach to business and loss control programs that enable it to identify and
correct potential loss exposures. This process allows Georgia Casualty to adjust
coverages or limits and, in some cases, decline to renew accounts at expiration.
By adhering to its stringent guidelines, Georgia Casualty has maintained
exceptional claim results and higher profitability levels.
Intense competitive pricing throughout the workers' compensation industry has
been an issue impacting margins for all insurers who write this line of
business. Confident in the quality of its services and products, Georgia
Casualty's philosophy is to decline business rather than reduce its pricing to
levels that could ultimately prove unprofitable. By adhering to this strategy,
Georgia Casualty has been able to maintain stable profitability in the workers'
compensation line.
4
<PAGE>
Georgia Casualty is constantly seeking ways in whichit can enhance its services
and ultimately shareholder value. One of several objectives includes increasing
Georgia Casualty's geographic presence by obtaining licensing and product
approval in new states. In the fourth quarter, Georgia Casualty expanded its
operations into the states of Louisiana, North Carolina, South Carolina,
Tennessee and Florida.
Bankers Fidelity and American Independent Life Insurance Companies
Bankers Fidelity Life Insurance Company, and the recently acquired American
Independent Life Insurance Company, specialize in the sale of traditional life
and supplemental health and accident insurance coverages with a focus on the
senior and middle-income markets. Over the years, this business has been a
substantial contributor to Atlantic American and in 1997 contributed
approximately 30 percent of Atlantic American's total premium revenue. At the
close of the year, Bankers Fidelity was rated "B+" by A.M. Best and was licensed
in 33 states, up from 28 in 1996.
In order to expand our existing businesses, this past year we acquired American
Independent. This acquisition expanded our geographic presence by five states,
adding Arizona, Colorado, Delaware, Idaho and Pennsylvania; and it complemented
our product offerings by adding depth in the areas of traditional life,
supplemental health and long-term care insurance. The assimilation of American
Independent into the operations of Bankers Fidelity was effective almost
immediately upon the completion of the transaction, allowing for increased
operating efficiencies in addition to the new business acquired.
Bankers Fidelity, offering a series of value-added products such as Standard,
Preferred and Modified Whole Life and Medicare supplement insurance, focuses on
a well-defined customer base - the senior and middle income markets. Recent
value-added enhancements have been to package and offer our preferred life
products, with no additional application requirements, following the previous
approval of Medicare supplement insurance coverage. Bankers Fidelity has also
introduced several new whole life products and a ten-year level term product, as
well as refinements to our family life series of Cancer Protection, Accident,
Disability Income and Afford-A-Care products.
We have continued to grow our business in the middle income market by offering
payroll deduction programs to manufacturers having 100 or fewer employees.
Products in this series such as supplemental Cancer Care, Accident and Term-Life
have been particularly well received in this market. The Life and Health
Division has also fostered niche opportunities exemplified by its whole life and
annuity products to assist families with college funding.
A significant component to the strength of Bankers Fidelity has been its ability
to offer its products and services through a dedicated agent base of
approximately 3,000 agents coupled with a strong internal support operation.
Bankers Fidelity has built its business based on the confidence, trust and
professionalism of its agents, and by offering a broad scope of quality products
and personal services to its customers. We intend to maintain this culture,
pursue new business in niche markets and seek to maximize our potential through
internal growth and by taking advantage of consolidation opportunities through
carefully selected acquisitions.
5
<PAGE>
DIRECTORS
J. MACK ROBINSON
Chairman
Atlantic American Corporation
HILTON H. HOWELL, JR.
President and Chief Executive Officer
Atlantic American Corporation
SAMUEL E. HUDGINS
Consultant
D. RAYMOND RIDDLE
Retired Chairman and Chief Executive Officer
National Service Industries, Inc.
HARRIETT J. ROBINSON
Director, Delta Life Insurance Company
SCOTT G. THOMPSON
President and Chief Financial Officer
American Southern Insurance Company
MARK C. WEST
Chairman and Chief Executive Officer
Genoa Companies
WILLIAM H. WHALEY, M.D.
William H. Whaley, M.D., P.C., F.A.C.P.
DOM H. WYANT
Retired Partner, Jones, Day, Reavis & Pogue
OFFICERS
J. MACK ROBINSON
Chairman
HILTON H. HOWELL, JR.
President and Chief Executive Officer
JOHN W. HANCOCK
Senior Vice President and Treasurer
EDWARD L. RAND, JR.
Vice President and Controller
CLARK W. BERRYMAN
Vice President, Information Services
MICHAEL J. BRASSER
Vice President, Internal Audit
JANIE L. RYAN
Corporate Secretary
BARBARA B. SNYDER
Assistant Vice President and Director, Human Resources
6
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Share and Per Share Data)
December 31,
ASSETS
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Cash, including short-term investments of
$46,167 and $41,614 $ 51,044 $ 45,499
Investments 152,583 142,485
Receivables:
Reinsurance 25,164 26,854
Other (net of allowance for doubtful accounts:
$916 and $1,151) 17,470 16,301
Deferred acquisition costs 16,483 15,179
Other assets 4,510 4,576
Goodwill 4,606 2,100
- --------------------------------------------------------------------------------
Total assets $271,860 $252,994
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds $154,318 $149,198
Accounts payable and accrued expenses 10,759 9,049
Debt payable 28,600 35,611
- --------------------------------------------------------------------------------
Total liabilities 193,677 193,858
- --------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1 par, 4,000,000 shares authorized:
Series A preferred, 30,000 shares
issued and outstanding, $3,000 redemption value 30 30
Series B preferred, 134,000 shares
issued and outstanding, $13,400 redemption value 134 134
Common stock, $1 par, 30,000,000 shares authorized;
18,920,728 shares issued in 1997 and 18,712,167
shares issued in 1996 and 18,907,267 shares
outstanding in 1997 and 18,684,217 shares
outstanding in 1996 18,921 18,712
Additional paid-in capital 53,316 54,062
Accumulated deficit (23,653) (31,426)
Net unrealized investment gains 29,498 17,713
Treasury stock, at cost, 13,461 shares in 1997
and 27,950 shares in 1996 (63) (89)
Total shareholders' equity 78,183 59,136
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $271,860 $252,994
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Data)
Year Ended December 31,
- --------------------------------------------------------------------------------
Revenue: 1997 1996 1995
- --------------------------------------------------------------------------------
Insurance premiums $ 88,682 $ 86,025 $ 43,373
Investment income 11,457 11,457 6,566
Realized investment gains, net 1,076 1,589 1,731
- --------------------------------------------------------------------------------
Total revenue 101,215 99,071 51,670
- --------------------------------------------------------------------------------
Benefits and expenses:
Insurance benefits and losses incurred 61,018 54,281 24,689
Commissions and underwriting expenses 23,012 26,959 15,249
Interest expense 2,902 3,292 2,458
Other 6,112 6,724 6,190
- --------------------------------------------------------------------------------
Total benefits and expenses 93,044 91,256 48,586
- --------------------------------------------------------------------------------
Income before income tax provision
(benefit) and discontinued operations 8,171 7,815 3,084
Income tax provision (benefit) 138 204 (34)
- --------------------------------------------------------------------------------
Income from continuing operations, net 8,033 7,611 3,118
Loss from discontinued operations, net - (4,447) (10,094)
- --------------------------------------------------------------------------------
Net income (loss) before preferred stock
dividends 8,033 3,164 (6,976)
Preferred stock dividends (1,521) (1,521) (315)
- --------------------------------------------------------------------------------
Net income (loss) applicable to common
stock $ 6,512 $ 1,643 $ (7,291)
================================================================================
Diluted earnings (loss) per common share:
Continuing operations $ .35 $ .32 $ .15
Discontinued operations - (.23) (.54)
- --------------------------------------------------------------------------------
Net income (loss) $ .35 $ .09 $ (.39)
================================================================================
Basic earnings (loss) per common share:
Continuing operations $ .35 $ .33 $ .15
Discontinued operations - (.24) (.54)
- --------------------------------------------------------------------------------
Net income (loss) $ .35 $ .09 $ (.39)
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
(Dollars In Thousands, Except Per Share Data)
Net
Additional Unrealized
Preferred Common Paid-In Accumulated Investment Treasury
Stock(1) Stock Capital Deficit Gains Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 30 $18,414 $33,289 $(27,452) $ 5,741 $ - $30,022
Net loss - - - (6,976) - - (6,976)
Cash dividends paid on preferred stock - - (315) - - - (315)
Purchase of 78,148 shares for treasury - - - - - (174) (174)
Issuance of 343,606 shares for employee
benefit plans and stock options - 298 291 (18) - 102 673
Conversion of debt payable to preferred
stock 134 - 13,266 - - - 13,400
Increase in unrealized investment gains - - - - 9,848 - 9,848
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 164 18,712 46,531 (34,446) 15,589 (72) 46,478
Net income - - - 3,164 - - 3,164
Cash dividends paid on preferred stock - - (315) - - - (315)
Dividends accrued on preferred stock - - (1,206) - - - (1,206)
Purchase of 104,635 shares for treasury - - - - - (338) (338)
Issuance of 109,452 shares for employee
benefit plans and stock options - - 6 (144) - 321 183
Gain on sale of subsidiary - - 9,046 - - - 9,046
Increase in unrealized investment gains - - - - 2,124 - 2,124
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 164 18,712 54,062 (31,426) 17,713 (89) 59,136
Net income - - - 8,033 - - 8,033
Cash dividends paid on preferred stock - - (315) - - - (315)
Dividends accrued on preferred stock - - (1,206) - - - (1,206)
Purchase of 213,089 shares for treasury - - - - - (735) (735)
Issuance of 157,578 shares for employee
benefit plans and stock options - - 3 (260) - 530 273
Issuance of 278,561 shares for acquisition
of Self-Insurance Administrators, Inc. - 209 772 - - 231 1,212
Increase in unrealized investment gains - - - - 11,785 - 11,785
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 164 $18,921 $53,316 $(23,653) $29,498 $ (63) $78,183
====================================================================================================================================
<FN>
(1) Includes Series A and B preferred stock
</FN>
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- --------------------------------------------------------------------------------
(Dollars In Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 8,033 $ 3,164 $(6,976)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Amortization of deferred acquisition costs 9,704 8,184 3,721
Acquisition costs deferred (11,008) (8,464) (2,985)
Realized investment gains (1,076) (1,589) (1,731)
Increase (decrease) in reserves 618 5,352 (1,203)
Loss from discontinued operations, net - 4,447 10,094
Depreciation and amortization 1,121 1,102 547
Minority interest - - 285
Decrease (increase) in receivables, net 1,114 (3,870) 997
Increase (decrease) in other liabilities 13 (694) 177
Other, net 98 811 319
- --------------------------------------------------------------------------------
Net cash provided by continuing operations 8,617 8,443 3,245
- --------------------------------------------------------------------------------
Net cash used by discontinued operations - (5,902) (9,177)
- --------------------------------------------------------------------------------
Net cash provided (used) by operating
activities 8,617 2,541 (5,932)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from investments sold 7,748 44,445 21,027
Proceeds from investments matured, called
or redeemed 52,074 40,868 17,004
Investments purchased (53,544) (54,632) (32,909)
Acquisition of minority interest (101) (846) (1,012)
Additions to property and equipment (733) (1,616) (1,107)
Sale of Leath Furniture, Inc., net - 3,646 -
Acquisition of American Independent, net
of $1,946 acquired (719) - -
Acquisition of SIA, Inc. 25 - -
- --------------------------------------------------------------------------------
Net cash provided (used) by continuing
operations 4,750 31,865 (14,270)
- --------------------------------------------------------------------------------
Net cash used by discontinued operations - (440) (2,551)
- --------------------------------------------------------------------------------
Net cash provided (used) by investing
activities 4,750 31,425 (16,821)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of bank financing 5,617 11,352 22,642
Preferred stock dividends (315) (315) (315)
Proceeds from exercise of stock options 62 85 600
Purchase of treasury shares (558) (338) (174)
Repayments of debt (12,628) (20,662) (675)
- --------------------------------------------------------------------------------
Net cash (used) provided by continuing
operations (7,822) (9,878) 22,078
Net cash provided by discontinued
operations - 6,342 9,345
Net cash (used) provided by financing
activities (7,822) (3,536) 31,423
Net increase in cash and short-term
investments 5,545 30,430 8,670
Cash and cash equivalents at beginning of year:
Continuing operations 45,499 15,069 4,016
Discontinued operations - - 2,383
- --------------------------------------------------------------------------------
Total 45,499 15,069 6,399
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year -
continuing operations 51,044 45,499 15,069
- --------------------------------------------------------------------------------
Total $51,044 $45,499 $15,069
================================================================================
Supplemental cash flow information:
Cash paid for interest $ 2,958 $ 3,763 $ 3,096
================================================================================
Cash paid for income taxes $ 85 $ 116 $ 128
================================================================================
Debt to seller for purchase of American
Southern Insurance Company $ - $ - $11,352
================================================================================
Debt payable converted to preferred stock $ - $ - $13,400
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995 (Dollars in Thousands, Except Per Share Data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). These
financial statements include the accounts of Atlantic American Corporation (the
"Company") and its wholly owned subsidiaries. Leath Furniture, LLC (f/k/a Leath
Furniture, Inc.), previously a majority owned subsidiary, has been reflected as
discontinued operations in the accompanying financial statements (see Note 8)
through the date of its divestiture on April 8, 1996 (see Note 14). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
At December 31, 1997, the Company had five insurance subsidiaries, which
included Bankers Fidelity Life Insurance Company and its wholly owned
subsidiary, American Independent Life Insurance Company ("American
Independent"), collectively termed as the "Life and Health Division", American
Southern Insurance Company and its wholly owned subsidiary, American Safety
Insurance Company (together known as "American Southern"), Georgia Casualty &
Surety Company, and one non-insurance subsidiary, Self-Insurance Administrators,
Inc. ("SIA, Inc."), collectively termed the "Casualty Division". American
Southern was acquired on December 31, 1995, American Independent Life Insurance
Company was acquired on October 1, 1997, and SIA, Inc. was acquired on October
28, 1997 (see Note 7). The results of operations of American Independent and
SIA, Inc. are included from the date of acquisition and are not material to the
overall operations of the Company. Assets and liabilities are not classified, in
accordance with insurance industry practice, and certain prior year amounts have
been reclassified to conform to the 1997 presentation.
Premium Revenue and Cost Recognition
Life insurance premiums are recognized as revenues when due, whereas accident
and health premiums are recognized over the premium paying period. Benefits and
expenses are associated with earned premiums so as to result in recognition of
profits over the lives of the contracts in proportion to premiums earned. 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
(principally commissions, advertising and certain issue expenses). 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 policy
benefit reserves. The deferred policy acquisition costs for property and
casualty 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 the related
unearned premiums and investment income.
Property and casualty insurance premiums are recognized as revenue ratably over
the contract period. The Company provides for insurance benefits and losses on
accident, health, and casualty claims based upon estimates of projected ultimate
losses.
Goodwill
Goodwill resulting from the acquisitions of American Independent, American
Southern, and SIA, Inc. is amortized over a 15 year period using the
straight-line method. The Company periodically evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
goodwill may warrant revision. Should factors indicate that goodwill be
evaluated for possible impairment, the Company will compare the recoverability
of goodwill to a projection of the acquired companies' undiscounted income over
the estimated remaining life of the goodwill in assessing whether the goodwill
is recoverable.
11
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments
All of the Company's debt and equity securities are classified as available for
sale and are carried at market value. Mortgage loans, policy and student loans,
and real estate are carried at historical cost. Traded limited partnership
interests are carried at estimated market value; all other partnership interests
are carried at historical cost. If a decline in the value of a common stock,
preferred stock, limited partnership interest, or publicly traded bond below its
cost or amortized cost 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.
The cost of securities sold is based on specific identification. Unrealized
gains (losses) in the value of bonds and common and preferred stocks, are
accounted for as a direct increase (decrease) in shareholders' equity and,
accordingly, have no effect on net income.
Income Taxes
Deferred income taxes represent the expected future tax consequences when the
reported amounts of assets and liabilities are recovered or paid. They arise
from differences between the financial reporting and tax basis of assets and
liabilities and are adjusted for changes in tax laws and tax rates as those
changes are enacted. The provision for income taxes represents the total amount
of income taxes paid or payable for the current year, plus the change in
deferred taxes during the year.
Net Income (Loss) Per Common Share
Basic earnings per share are based on the weighted average number of common
shares outstanding during each period. Diluted earnings per common share are
based on the weighted average number of common shares outstanding during each
period, plus common shares calculated for stock options outstanding using the
treasury stock method. Unless otherwise indicated, earnings per share are
presented on a restated diluted basis.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments in short-term,
highly liquid securities which have original maturities of three months or less
from date of purchase.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Boards has issued Statements 130, "Reporting
Comprehensive Income ("SFAS 130") and 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes new rules
for the reporting and displaying of comprehensive income. SFAS 130 is effective
for fiscal years beginning after December 15, 1997, and will be adopted by the
Company in the first quarter of 1998. SFAS 131 requires companies to report
segment information based upon a companies operating segments. Operating
segments are revenue components of a company for which separate financial
information is produced and are subject to evaluation by senior management. SFAS
131 is effective for years beginning after December 15, 1997 and need not be
applied to interim financial statements in the initial year. SFAS 131 will be
adopted by the Company in the first quarter of 1998. The Company does not
believe the effect of adoption of either statement will be material to its
financial position or results of operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements 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 the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, although, in the opinion of management, such differences would not be
significant.
12
<PAGE>
NOTE 2. INVESTMENTS
Investments are comprised of the following:
<TABLE>
1997
- ----------------------------------------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Amortized
Value Gains Losses Cost
- ----------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
Bonds:
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $ 75,724 $ 670 $ 136 $75,190
Obligations of states and political subdivisions 2,738 30 - 2,708
Corporate securities 12,745 464 14 12,295
Mortgage-backed securities (government guaranteed) 977 30 3 950
- ----------------------------------------------------------------------------------------------------------
92,184 $ 1,194 $ 153 $91,143
Common and preferred stocks 46,876 $29,561 $1,044 $18,359
Investment in limited partnerships 3,941 - 60 4,001
Mortgage loans (estimated fair value of $4,406) 4,243
Policy and student loans 5,293
Real estate 46
- ----------------------------------------------------------------------------------------------------------
Investments 152,583
Short-term investments 46,167
- ----------------------------------------------------------------------------------------------------------
Total investments $198,750
</TABLE>
<TABLE>
1996
- ----------------------------------------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Amortized
Value Gains Losses Cost
- ----------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
Bonds:
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $ 67,370 $ 275 $ 443 $67,538
Obligations of states and political subdivisions 3,496 86 168 3,578
Corporate securities 14,717 272 272 14,717
Mortgage-backed securities (government guaranteed) 5,727 - 51 5,778
- ----------------------------------------------------------------------------------------------------------
91,310 $ 633 $ 934 $91,611
Common and preferred stocks 37,762 $19,348 $1,334 $19,748
Mortgage loans (estimated fair value of $7,732) 6,812
Policy and student loans 6,555
Real estate 46
- ----------------------------------------------------------------------------------------------------------
Investments 142,485
Short-term investments 41,614
- ----------------------------------------------------------------------------------------------------------
Total investments $184,099
==========================================================================================================
</TABLE>
Bonds having an amortized cost of $15,684 and $13,578 were on deposit with
insurance regulatory authorities at December 31, 1997 and 1996, respectively, in
accordance with statutory requirements.
13
<PAGE>
NOTE 2. INVESTMENTS (CONTINUED)
The amortized cost and carrying value of bonds and short-term investments at
December 31, 1997 by contractual maturity are as follows. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Carrying Amortized
Value Cost
- --------------------------------------------------------------------------------
Due in one year or less $ 59,651 $ 59,711
Due after one year through five years 19,873 19,449
Due after five years through ten years 47,358 46,861
Due after ten years 10,492 10,339
Varying maturities 977 950
- --------------------------------------------------------------------------------
Totals $138,351 $137,310
================================================================================
Investment income was earned from the following sources:
1997 1996 1995
- --------------------------------------------------------------------------------
Bonds $6,906 $6,728 $3,549
Common and preferred stocks 1,373 1,622 1,205
Mortgage loans 554 863 791
CDs and commercial paper 2,130 1,443 548
Other 494 801 473
- --------------------------------------------------------------------------------
Total investment income 11,457 11,457 6,566
Less investment expenses (340) (452) (424)
- --------------------------------------------------------------------------------
Net investment income $11,117 $11,005 $6,142
================================================================================
A summary of realized investment gains (losses) follows:
1997
- --------------------------------------------------------------------------------
Limited
Stocks Bonds Partnership Total
- --------------------------------------------------------------------------------
Gains $1,597 $ 16 $ 2 $1,615
Losses (104) (435) - (539)
- --------------------------------------------------------------------------------
Total realized investment gains
(losses), net $1,493 $(419) $ 2 $1,076
================================================================================
1996
- --------------------------------------------------------------------------------
Limited
Stocks Bonds Partnership Total
- --------------------------------------------------------------------------------
Gains $1,910 $ 73 $ 17 $2,000
Losses (411) - - (411)
- --------------------------------------------------------------------------------
Total realized investment
gains (losses), net $1,499 $ 73 $ 17 $1,589
================================================================================
1995
- --------------------------------------------------------------------------------
Limited
Stocks Bonds Partnership Total
- --------------------------------------------------------------------------------
Gains $1,743 $ 35 $363 $2,141
Losses (73) (9) - (82)
Write-downs (162) (166) - (328)
- --------------------------------------------------------------------------------
Total realized investment
gains (losses), net $1,508 $(140) $363 $1,731
================================================================================
Proceeds from the sale of common and preferred stocks, bonds and other
investments are as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Common and preferred stocks $6,393 $9,734 $10,199
Bonds - 25,335 1,730
Student loans 1,262 6,053 7,278
Other investments 93 3,323 1,820
- --------------------------------------------------------------------------------
Total proceeds $7,748 $44,445 $21,027
================================================================================
The single investment which exceeds 10% of shareholders' equity at December 31,
1997 was a common stock investment in Wachovia Corporation with a carrying value
of $26,215 and a cost basis of $3,388.
The Company's bond portfolio included 99% of investment grade securities at
December 31, 1997 as defined by the NAIC.
14
<PAGE>
NOTE 3. INSURANCE RESERVES AND POLICY FUNDS
The following table presents the Company's reserves for life, accident, health
and casualty losses as well as loss adjustment expenses.
Amount of Insurance
in Force
-------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
Future policy benefits Life insurance policies:
Ordinary $ 26,403 $ 22,451 $301,341 $256,482
Mass market 8,916 9,364 17,253 21,409
Individual annuities 808 856 - -
- --------------------------------------------------------------------------------
36,127 32,671 $318,594 $277,891
===================
Accident and health insurance policies 3,061 3,714
- ------------------------------------------------------------
39,188 36,385
Unearned premiums 24,412 25,100
Losses and claims 86,721 84,074
Other policy liabilities 3,997 3,639
- ------------------------------------------------------------
Total policy liabilities $154,318 $149,198
============================================================
Annualized premiums for accident and health insurance policies were $21,434 and
$15,884 at December 31, 1997 and 1996, respectively.
Future Policy Benefits -
Liabilities for life insurance future policy benefits are based upon assumed
future investment yields, mortality rates and withdrawal rates after giving
effect to possible risks of adverse deviation. The assumed mortality and
withdrawal rates are based upon the Company's experience. The interest rates
assumed for life, accident and health are generally: (i) 2.5% to 5.5% for issues
prior to 1977, (ii) 7% graded to 5.5% for 1977 through 1979 issues, (iii) 9% for
1980 through 1987 issues, and (iv) 7% for 1988 and later issues.
Loss and Claim Reserves -
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 independent consulting
actuaries and updated with changes to the estimated liability recorded in the
statement of operations in the year in which such changes are known.
15
<PAGE>
NOTE 3. INSURANCE RESERVES AND POLICY FUNDS (CONTINUED)
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
1997 1996
- --------------------------------------------------------------------------------
Balance at January 1 $84,074 $79,514
Less: Reinsurance recoverables (26,854) (22,467)
- --------------------------------------------------------------------------------
Net balance at January 1 57,220 57,047
- --------------------------------------------------------------------------------
Incurred related to:
Current year 59,655 57,481
Prior years 21 (4,802)
- --------------------------------------------------------------------------------
Total incurred 59,676 52,679
- --------------------------------------------------------------------------------
Paid related to:
Current year 33,857 28,279
Prior years 22,246 24,227
- --------------------------------------------------------------------------------
Total paid 56,103 52,506
- --------------------------------------------------------------------------------
Reserves acquired due to acquisition 764 -
- --------------------------------------------------------------------------------
Net balance at December 31 61,557 57,220
Plus: Reinsurance recoverables 25,164 26,854
- --------------------------------------------------------------------------------
Balance at December 31 $86,721 $84,074
================================================================================
Following is a reconciliation of total incurred claims to total insurance
benefits and losses incurred:
1997 1996
- --------------------------------------------------------------------------------
Total incurred claims $59,676 $52,679
Cash surrender value and matured endowments 1,263 1,522
Death benefits 79 80
- --------------------------------------------------------------------------------
Total insurance benefits and losses incurred $61,018 $54,281
================================================================================
16
<PAGE>
NOTE 4. REINSURANCE
In accordance with general practice in the insurance industry, portions of the
life, property and casualty insurance written by the Company are reinsured;
however, the Company remains contingently liable with respect to reinsurance
ceded should any reinsurer be unable to meet its obligations. Approximately 74%
of the reinsurance receivables are due from three reinsurers as of December 31,
1997. Reinsurance receivables of $14,300 are with National Reinsurance
Corporation, "A++" (Superior), $2,100 are with First Colony Life Insurance
Company, "A++" (Superior), and $2,300 are with Pennsylvania Manufacturers
Association Insurance Company, "A+" (Superior). In the opinion of management,
the Company's reinsurers are financially stable and allowances for uncollectible
amounts are established against reinsurance receivables, if appropriate.
Premiums assumed of $23,738 and $25,739 in 1997 and 1996, respectively, include
a contract with premiums of $15,900 and $15,400, both 17.9% of net premiums
earned for the years 1997 and 1996, respectively. The following table reconciles
premiums written to premiums earned and summarizes the components of insurance
benefits and losses incurred.
1997 1996 1995
- --------------------------------------------------------------------------------
Premiums written $73,006 $70,295 $46,773
Plus - premiums assumed 23,738 25,739 -
Less - premiums ceded (9,345) (9,074) (3,037)
- --------------------------------------------------------------------------------
Net premiums written 87,399 86,960 43,736
- --------------------------------------------------------------------------------
Change in unearned premiums 1,314 (960) (230)
Change in unearned premiums ceded (31) 25 (133)
- --------------------------------------------------------------------------------
Net change in unearned premiums 1,283 (935) (363)
- --------------------------------------------------------------------------------
Net premiums earned $88,682 $86,025 $43,373
================================================================================
Provision for benefits and
losses incurred $68,043 $58,801 $25,999
Reinsurance loss recoveries (7,025) (4,520) (1,310)
- --------------------------------------------------------------------------------
Insurance benefits and losses incurred $61,018 $54,281 $24,689
================================================================================
17
<PAGE>
NOTE 5. INCOME TAXES
A reconciliation of the differences between income taxes on income before
discontinued operations computed at the federal statutory income tax rate is as
follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Federal income tax provision at statutory
rate of 35% $ 2,860 $ 2,735 $ 1,079
Tax exempt interest and dividends
received deductions (267) (413) (391)
Change in asset valuation allowance -
Utilization of net operating loss (2,585) (2,260) (731)
Alternative minimum tax 130 142 9
- --------------------------------------------------------------------------------
Total provision (benefit) for income taxes $ 138 $ 204 $ (34)
================================================================================
Deferred tax liabilities and assets at December 31, 1997 and 1996 are comprised
of the following:
1997 1996
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs $(3,875) $(3,585)
Net unrealized investment gains (10,325) (6,199)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (14,200) (9,784)
================================================================================
Deferred tax assets:
Net operating loss carryforwards 15,101 17,856
Insurance reserves 8,600 7,702
Bad debts 321 404
- --------------------------------------------------------------------------------
Total deferred tax assets 24,022 25,962
- --------------------------------------------------------------------------------
Asset valuation allowance (9,822) (16,178)
- --------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
================================================================================
18
<PAGE>
NOTE 5. INCOME TAXES (CONTINUED)
The components of the provision (benefit) are:
1997 1996 1995
- --------------------------------------------------------------------------------
Current - Federal $138 $204 $(34)
Deferred - Federal - - -
- --------------------------------------------------------------------------------
Total $138 $204 $(34)
================================================================================
At December 31, 1997, the Company has regular tax loss carryforwards of
approximately $43,147 expiring generally between 2000 and 2009.
The Company has determined, based on its earnings history, that an asset
valuation allowance of $9,822 should be established against its net deferred tax
assets at December 31, 1997. The Company's asset valuation allowance decreased
by $6,356 during 1997, due primarily to the utilization of net loss
carryforwards in the current year from profitable operations and the increase in
unrealized gains on the investment portfolio. Due to the uncertain nature of
their ultimate realization based upon past performance and expiration dates, the
Company has established a full valuation allowance against these carryforward
benefits and recognizes the benefits only as reassessment demonstrates they are
realizable. The Company's ability to generate taxable income from operations is
dependent upon various factors, many of which are beyond management's control.
Accordingly, there can be no assurance that the Company will generate future
taxable income based on historical performance. Therefore, the realization of
the deferred tax assets will be assessed periodically based on the Company's
current and anticipated results of operations. The Company has a formal
tax-sharing agreement with each of its subsidiaries. With the exception of
American Independent, which files a separate federal income tax return, the
Company files a consolidated federal income tax return with its subsidiaries.
19
<PAGE>
NOTE 6. CREDIT ARRANGEMENTS
Debt payable is as follows:
1997 1996
- --------------------------------------------------------------------------------
8% Convertible Subordinated Notes paid May 15, 1997
($1,058 held by affiliates at December 31, 1996) $ - $ 5,617
Note payable to bank due December 31, 2000
Balance at prime rate of interest (1997 8.50%; 1996 8.25%) 28,600 18,642
Balance at prime plus1/2% (1997 9.00%; 1996 8.75%) - 11,352
- --------------------------------------------------------------------------------
Total arrangements $28,600 $35,611
================================================================================
Total arrangements
- ------------------
Due within one year $ 1,000 $ 9,617
================================================================================
Long-term debt $27,600 $25,994
================================================================================
The note payable to bank due December 31, 2000, is payable in quarterly payments
of $1,000 beginning in the fourth quarter of 1998 through 2000 with the balance
due at maturity. Interest is paid quarterly in arrears. The interest rate on the
note payable to bank changes based upon the Company meeting certain financial
criteria. On January 1, 1998, the interest rate on the note payable was
decreased to 8.0% (50 basis points below prime) as a result of the Company
meeting certain financial criteria.
The Company is required to maintain certain financial covenants including, among
others, ratios that relate funded debt to consolidated total capitalization,
cash flow to debt service, and must comply with limitations on capital
expenditures and debt obligations. The Company was in compliance with all of the
convenants associated with the debt payable to bank at December 31, 1997.
Maturities
The Company's principal payments on credit arrangements outstanding at December
31, 1997 are as follows:
Year Amount
- ---------------------------------
1998 $ 1,000
1999 4,000
2000 23,600
---------
$28,600
=========
20
<PAGE>
NOTE 7. ACQUISITIONS
On October 1, 1997, the Company acquired 100% of the outstanding stock of
American Independent for approximately $2,700 in cash. The assets and
liabilities of American Independent are included in the 1997 balance sheet and
the results of operations are included from the date of acquisition. On October
28, 1997, the Company acquired 100% of the outstanding stock of SIA, Inc. for
approximately $1,200 in common stock of the Company. The assets and liabilities
of SIA, Inc. are included in the 1997 balance sheet and the results of
operations are included since the date of acquisition. The acquisitions of
American Independent and SIA, Inc. were both accounted for as purchases and were
not material to the financial position or results of operations of the Company
in 1997. Had both companies been included in the consolidated financial
statements for the earliest year presented, their impact on the consolidated
results of operations would not have been material.
On December 31, 1995, the Company acquired a 100% ownership interest in American
Southern for $34,000 ($22,648 in cash and a note to seller of $11,352).
Accordingly, the assets and liabilities of American Southern were included in
the accompanying 1997 and 1996 balance sheets; however, the results of
operations were only included beginning January 1, 1996. American Southern
operates as a multi-line property and casualty insurance company primarily
engaged in the sale of state and municipality automobile insurance.
The acquisition of American Southern was accounted for as a purchase transaction
and, accordingly, the purchase price was allocated to assets and liabilities
based on their estimated fair values as of the date of acquisition. The excess
of the consideration paid over the estimated fair values of net assets acquired
in the amount of $2,250 was recorded as goodwill and is amortized on a
straight-line basis over 15 years.
The following unaudited pro forma summary combines the consolidated results of
operations of the Company and American Southern as if the acquisition had taken
place at the beginning of 1995 after giving effect to certain adjustments. These
adjustments include adjustments to increase interest expense on funds used by
the Company to purchase American Southern, the amortization of goodwill, a
reduction in American Southern's income tax expense due to the Company's
intercompany tax-sharing agreement and the effect of the conversion of $13,400
in debt into 134,000 shares of Series B Preferred Stock (see Note 11). This pro
forma information is not necessarily indicative of the results of operations
that would have occurred had the acquisition taken place at the beginning of the
period.
1995
- --------------------------------------------------------------------------------
Revenue $ 95,855
================================================================================
Net (loss) income:
Continuing operations $ 6,865
Discontinued operations (10,094)
- --------------------------------------------------------------------------------
Net (loss) income $ (3,229)
================================================================================
Diluted net (loss) income per common share data:
Continuing operations $ .29
Discontinued operations (.54)
- --------------------------------------------------------------------------------
Net (loss) income $ (.25)
================================================================================
21
<PAGE>
In connection with the acquisitions of American Independent and SIA, Inc.
the following assets and liabilities were acquired:
1997
- --------------------------------------------------------------------------------
Cash, short-term investments $ 1,971
Other investments 3,585
Goodwill 2,701
Other assets 732
- --------------------------------------------------------------------------------
Total assets 8,989
- --------------------------------------------------------------------------------
Insurance reserves and policy funds 4,502
Other liabilities 593
- --------------------------------------------------------------------------------
Total liabilities 5,095
- --------------------------------------------------------------------------------
Net assets $ 3,894
================================================================================
22
<PAGE>
NOTE 8. DISCONTINUED OPERATIONS
Subsequent to year end 1995, the Company announced its intent to sell its
approximately 88% interest in Leath Furniture, LLC (f/k/a Leath Furniture,
Inc.), a retail furniture chain. Accordingly, the consolidated financial
statements report separately the operating results of these discontinued
operations. The Company completed the sale of its interest to Gulf Capital
Services, Ltd., a related party, on April 8, 1996. The gain from this
transaction is reflected as a direct credit to additional paid-in capital.
The following results of operations are attributable to discontinued operations:
1996 1995
- --------------------------------------------------------------------------------
Results of Operations:
Net sales $45,502 $113,265
================================================================================
Loss from discontinued operations $(7,885) $ (6,656)
Benefit (provision) for discontinued operations 3,438 (3,438)
- --------------------------------------------------------------------------------
Net loss from discontinued operations $(4,447) $(10,094)
================================================================================
Diluted net loss per share from discontinued operations $ (.23) $ (.54)
================================================================================
23
<PAGE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
Litigation
The Company and its subsidiaries are party to litigation occurring in the normal
course of business. In the opinion of management, such litigation will not have
a material adverse effect on the Company's financial position or results of
operations.
Operating Lease Commitments
The Company's rental expense, including common area charges, for operating
leases was $1,178, $1,222 and $1,013 in 1997, 1996 and 1995, respectively. The
Company's future minimum lease obligations under non-cancelable operating leases
are as follows:
Year Ending December 31,
- --------------------------------------------------------------------------------
1998 $1,053
1999 1,053
2000 800
2001 771
2002 563
Thereafter 1,242
- --------------------------------------------------------------------------------
Total $5,482
================================================================================
24
<PAGE>
NOTE 10. EMPLOYEE BENEFIT PLANS
Stock Options
In 1992, the shareholders approved the Company's adoption of the 1992 Incentive
Plan ("1992 Plan"). The 1992 Plan originally provided for a maximum of 400,000
stock options subject to issuance. The 1992 Plan was amended by the Board of
Directors in 1995, and subsequently ratified at the 1996 Annual Meeting of
Shareholders, to provide for an additional 400,000 stock options. 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; or (e) all or any combination of the foregoing to officers and key
employees. Options granted under these plans expire five years from the date of
grant. Vesting occurs at 50% upon issuance of an option, and the remaining
portion is vested at 25% in each of the following two years. In 1996, the
Company adopted the 1996 Director Stock Option Plan, which provides for a
maximum of 200,000 stock options with full vesting six months after the grant
date. As of December 31, 1997, sixty-six employees, officers and directors were
participants in the Plan.
A summary of the status of the Company's stock option plans at December 31, 1997
and 1996, is as follows:
1997 1996
- --------------------------------------------------------------------------------
Weighted Weighted
Avg. Avg.
Shares Ex. Price Shares Ex. Price
- --------------------------------------------------------------------------------
Options outstanding, beginning of year 625,391 $2.14 430,141 $ 1.74
Options granted 379,500 4.08 276,000 2.47
Options exercised (129,491) 1.30 (76,750) 1.11
Options canceled or expired (5,000) 3.25 (4,000) 1.44
- --------------------------------------------------------------------------------
Options outstanding, end of year 870,400 3.11 625,391 2.14
================================================================================
Options exercisable 624,900 2.89 441,141 1.98
The Company does not recognize compensation cost since the option price
approximates fair value. If compensation cost had been recognized, the Company's
net income (loss) and earnings (loss) per share would have been as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Net income:
As reported $ 8,033 $ 3,164 $ (6,976)
Pro forma 7,793 2,972 (6,989)
Diluted earnings per share:
As reported $ .35 $ .09 $ (.39)
Pro forma .34 .08 (.39)
The resulting pro forma compensation cost may not be representative of that to
be expected in future years.
Of the 870,400 options outstanding at December 31, 1997, 94,900 have exercise
prices of $1.875 with a remaining contractual life of 2.0 years and all are
currently exercisable. 125,000 options have an exercise price of $2.50 with a
remaining contractual life of 2.8 years and all are currently exercisable.
269,000 options have exercise prices between $2.375 and $3.3125 with a weighted
average exercise price of $2.46, a weighted average remaining contractual life
of 3.2 years and 201,750 are currently exercisable. 62,500 options have an
exercise price between $3.00 and $3.25 with a weighted average exercise price of
$3.1375, a weighted average remaining contractual life of 4.1 years and 43,750
are currently exercisable. The remaining 319,000 options have an exercise price
of $4.25 with a remaining contractual life of 4.8 years and 159,500 are
currently exercisable.
25
<PAGE>
NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The weighted average fair value of options granted estimated on the date of
grant using the Black-Scholes option pricing model is $1.83 and $1.11 for grants
in 1997 and 1996, respectively, based on expected dividend yields of zero;
expected lives of 5 years; risk free interest rates of 5.71% and 6.13%; and
expected volatility of 39.97% and 39.80%, for the years ended December 31, 1997
and 1996, respectively.
401(k) Plan
The Company initiated an employees' savings plan under Section 401(k) of the
Internal Revenue Code in May of 1995. The plan covers substantially all the
Company's employees, except employees of American Southern. The Company
previously had a profit sharing plan for its employees which was subsequently
amended and restated to comply with the Section 401(k) provisions. Under the
plan, employees generally may elect to contribute up to 16% of their
compensation to the plan. The Company makes a matching contribution to each
employee in an amount equal to 50% of the first 6% of such contributions. The
Company's matching contribution to the plan has been funded by reissuance of the
Company's treasury stock and was approximately $103, $102, and $72 in 1997, 1996
and 1995, respectively.
Defined Benefit Pension Plans
The Company has two defined benefit pension plans covering the employees of
American Southern. The Company's general funding policy is to contribute
annually the maximum amount that can be deducted for income tax purposes.
Net periodic pension cost for American Southern's qualified and non-qualified
defined benefit plans for the years ended December 31, 1997 and 1996 included
the following components:
1997 1996
- --------------------------------------------------------------------------------
Service costs $102 $103
Interest costs 221 204
Actual return on plan assets (205) (97)
Net amortization and deferral 28 (74)
- --------------------------------------------------------------------------------
$146 $136
================================================================================
The following assumptions were used to measure the projected benefit obligation
for the benefit plans at December 31, 1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
Discount rate to determine the projected
benefit obligation 7.25% 7.75%
Expected long-term rate of return on plan
assets used to determine net periodic pension
cost 8.00% 8.00%
Projected annual salary increases 6.00% 6.00%
The following table sets forth the benefit plans' funded status at December 31,
1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefit obligation $2,219 $1,862
Non-vested benefit obligation 12 7
- --------------------------------------------------------------------------------
Accumulated benefit obligation 2,231 1,869
Effect of projected future compensation levels 1,050 901
- --------------------------------------------------------------------------------
Projected benefit obligation 3,281 2,770
Plan assets at fair value 2,508 2,371
- --------------------------------------------------------------------------------
Projected benefit obligation in excess of plan
assets 773 399
Unrecognized net loss (503) (272)
Unrecognized net transition obligation and
prior service costs (7) (9)
- --------------------------------------------------------------------------------
Accrued pension cost $ 263 $ 118
================================================================================
26
<PAGE>
NOTE 11. PREFERRED STOCK
Annual dividends on the Series A Convertible Preferred Stock ("Series A
Preferred Stock") are $10.50 per share and are cumulative. The Series A
Preferred Stock is convertible into approximately 752,000 shares of the
Company's common stock at a conversion price of $3.99 per share and is
redeemable at the Company's option at $100 per share, plus unpaid dividends.
As part of the American Southern acquisition and effective December 31, 1995,
the Company issued 134,000 shares of Series B Preferred Stock ("Series B
Preferred Stock") having a stated value of $100 per share. Annual dividends to
be paid are $9.00 per share and are cumulative. The Series B Preferred Stock is
not currently convertible, but may become convertible into shares of the
Company's common stock under certain circumstances. In such event, the Series B
Preferred Stock would be convertible into an aggregate of approximately
3,358,000 shares of the common stock at a conversion rate of $3.99 per share.
The Series B Preferred Stock is redeemable at the option of the Company.
27
<PAGE>
NOTE 12. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128") is effective for 1997 and subsequent periods. A reconciliation of the
numerator and denominator of the earnings per common share calculations are as
follows:
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
Income Shares Per Share
Amount
- --------------------------------------------------------------------------------
Basic Earnings Per Common Share
- -------------------------------
Net income $ 8,033 18,667
Less preferred dividends (1,521)
------------ ------------
Net income available to common
shareholders $ 6,512 18,667 $ .35
------------
Diluted Earnings Per Common Share
- ---------------------------------
Effect of dilutive stock options 175
------------ ------------
Net income available to common
shareholders plus assumed conversions $ 6,512 18,842 $ .35
============ ============ ============
For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
Income Shares Per Share
Amount
- --------------------------------------------------------------------------------
Basic Earnings Per Common Share
Net income from continuing operations $ 7,611 18,682
Less preferred dividends (1,521)
------------ ------------
Net income available to common
shareholders from continuing
operations 6,090 18,682 $ .33
Net loss from discontinued operations (4,447) 18,682 (.24)
------------ ------------ ------------
Net income available to common
shareholders 1,643 18,682 $ .09
------------
Diluted Earnings Per Common Share
- ---------------------------------
Effect of dilutive stock options 200
------------ ------------
Net income available to common
shareholders from continuing
operations 6,090 18,882 $ .32
Net loss from discontinued
operations (4,447) 18,882 (.23)
------------ ------------ ------------
Net income available to common
shareholders $ 1,643 18,882 $ .09
============ ============ ============
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
Income Shares Per Share
Amount
- --------------------------------------------------------------------------------
Basic Earnings Per Common Share
- -------------------------------
Net income from continuing operations $ 3,118 18,557
Less preferred dividends (315)
------------ ------------
Net income available to common
shareholders from continuing
operations 2,803 18,557 $ .15
Net loss from discontinued
operations (10,094) 18,557 (.54)
------------ ------------ ------------
Net loss available to common
shareholders $(7,291) 18,557 $(.39)
------------
Diluted Earnings Per Common Share
- ---------------------------------
Effect of dilutive stock options 114
------------ ------------
Net income available to common
shareholders from continuing
operations 2,803 18,671 $ .15
Net loss from discontinued operations (10,094) 18,671 (.54)
------------ ------------ ------------
Net loss available to common
shareholders $(7,291) 18,671 $(.39)
============ ============ ============
28
<PAGE>
NOTE 13. STATUTORY REPORTING
The assets, liabilities and results of operations have been reported on the
basis of GAAP, which varies from statutory accounting practices ("SAP")
prescribed or permitted by insurance regulatory authorities. The principal
differences between SAP and GAAP are that under SAP: (i) certain assets that are
nonadmitted assets are eliminated from the balance sheet; (ii) acquisition costs
for policies are expensed as incurred, while they are deferred and amortized
over the estimated life of the policies under GAAP; (iii) no provision is made
for deferred income taxes; (iv) the timing of establishing certain reserves is
different than under GAAP; and (v) valuation allowances are established against
investments.
The amount of statutory net income and surplus (shareholders' equity) for the
insurance subsidiaries for the years ended December 31 were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Life and Health, net income $ 2,523(2) $1,315 $ 3,021
Property and Casualty, net income 6,694 7,567 1,466(1)
- --------------------------------------------------------------------------------
Total net income $ 9,217 8,882 $ 4,487
================================================================================
Life and Health, surplus $26,517(2) $25,792 $24,724
Property and Casualty, surplus 48,032 42,416 38,995
- --------------------------------------------------------------------------------
Total surplus $74,549 68,208 $63,719
================================================================================
(1) Excludes American Southern which was acquired effective December 31, 1995.
(2) Impact of American Independent was not material.
Under the Insurance Code of the State of Georgia, dividend payments to the
Company by its insurance subsidiaries have certain limitations without the prior
approval of the Insurance Commissioner. The Company received dividends of
$11,209 and $6,850 in 1997 and 1996, respectively, from its insurance
subsidiaries. Approval from the Insurance Commissioner was required and obtained
for a portion of the dividends received in 1997 and 1996. In 1998, dividend
payments by the insurance companies in excess of $8,900 would require prior
approval.
29
<PAGE>
NOTE 14. RELATED PARTY AND OTHER TRANSACTIONS
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. These transactions include
leasing of office space, investing and financing. A brief description of each of
these is discussed below.
The Company leases approximately 54,637 square feet of office and covered garage
space from an affiliated company. In the years ended December 31, 1997, 1996 and
1995, the Company paid $900, $957 and $960, respectively, under the lease.
A majority of the financing of the Company has historically been through
affiliates of the Company or its Chairman, in the form of debt and the Series A
Preferred Stock. Effective December 31, 1995, the Company issued 134,000 shares
of Series B Preferred Stock in exchange for cancellation of approximately
$13,400 in outstanding debt to the Company's Chairman and certain of his
affiliates (see Note 11).
The Company has mortgage loans to finance properties owned by its discontinued
furniture subsidiary. At December 31, 1997 and 1996, the balance of mortgage
loans owed to various of the Company's insurance subsidiaries was $3,921 and
$6,391, respectively. For 1997, 1996 and 1995, interest on the mortgage loans
totaled $521, $688 and $730, respectively.
Certain members of management are on the Board of Directors of Bull Run
Corporation and Gray Communications Systems, Inc. At both December 31, 1997 and
1996, the Company owned 600,000 common shares of Bull Run Corporation and
236,040 common shares of Gray Communications Systems, Inc.
On April 8, 1996, the Company completed the sale of its 88% interest in Leath
Furniture, LLC (f/k/a Leath Furniture, Inc.) to Gulf Capital Services, Ltd., in
exchange for $5.3 million. Gulf Capital is controlled by certain affiliates of
the Company.
Delta Life Insurance Company purchases credit life insurance policies with face
amounts greater than $50 from Bankers Fidelity. Bankers Fidelity receives
premiums for these policies from Delta Life and pays benefits directly to
policyholders. At December 31, 1997 and 1996, the face amount of these policies
was $673 and $416, respectively, and the reserve balance was $11 and $9,
respectively.
30
<PAGE>
NOTE 15. SEGMENT INFORMATION
The following summary sets forth the Company's business segments by revenue,
income (loss) before income tax provision (benefit), and assets. The Company
operates in three segments: Property and Casualty Insurance, Life Insurance, and
Accident and Health Insurance.
<TABLE>
Property Accident Adjustments
and and and
Casualty Life Health Other Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C>
Revenue
1997 $ 69,078 $14,467 $17,675 $ 48 $ (53) $101,215
1996 67,468 14,450 16,972 144 37 99,071
1995 21,532(1) 12,435 18,508 2 (807) 51,670
Income (loss) before income
tax provision (benefit)
1997 7,890 3,425 1,153 (4,297) - 8,171
1996 8,834 2,012 431 (3,588) 126 7,815
1995 2,353(1) 2,033 1,025 (2,419) 92 3,084
Assets
1997 167,993 85,822 13,769 4,276 - 271,860
1996 160,502 74,798 15,884 1,810 - 252,994
1995 150,505 71,532 19,603 3,854 - 245,494
<FN>
(1) Excludes American Southern which was acquired effective December 31, 1995.
</FN>
</TABLE>
31
<PAGE>
NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth a summary of the quarterly unaudited results of
operations for the two years ended December 31, 1997 and 1996:
<TABLE>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $24,691 $24,339 $25,249 $26,936 $24,773 $24,414 $25,681 $24,203
====================================================================================================================================
Income:
Income before income tax
provision, $ 1,978 $ 1,466 $ 2,418 $ 2,309 $ 1,977 $ 1,849 $ 2,169 $ 1,820
Income tax provision (40) (20) (23) (55) - (59) (101) (44)
- ------------------------------------------------------------------------------------------------------------------------------------
Continuing operations 1,938 1,446 2,395 2,254 1,977 1,790 2,068 1,776
Discontinued operations - - - - - (4,447) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,938 $ 1,446 $ 2,395 $ 2,254 $ 1,977 $(2,657) $ 2,068 $ 1,776
====================================================================================================================================
Diluted per common share data:
Continuing operations $ .08 $ .06 $ .11 $ .10 $ .08 $ .08 $ .09 $ .07
Discontinued operations - - - - - (.23) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .08 $ .06 $ .11 $ .10 $ .08 $ (.15) $ .09 $ .07
====================================================================================================================================
</TABLE>
32
<PAGE>
NOTE 17. DISCLOSURES ABOUT FAIR VALUE FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data and to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts which the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. <TABLE>
1997 1996
- --------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
Assets:
Cash and short-term investments $51,044 $51,044 $45,499 $45,499
Bonds 92,184 92,184 91,310 91,310
Common and preferred stocks 46,876 46,876 37,762 37,762
Mortgage loans 4,243 4,406 6,812 7,732
Investments in limited partnerships 3,941 3,941 - -
Insurance premiums receivable 14,074 14,074 13,485 13,485
Liabilities:
Debt - affiliated - - 1,058 952
- non-affiliated 28,600 28,600 34,553 34,097
Accounts payable and accrued liabilities 10,759 10,759 9,049 9,049
</TABLE>
The fair value estimates as of December 31, 1997 and 1996 are 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 following describes the methods and assumptions used by the Company in
estimating fair values:
Cash, Short-term Investments, Investments in Limited Partnerships, Insurance
Premiums Receivable, Accounts Payable, and Accrued Liabilities
The carrying amount approximates fair value.
Bonds, Common and Preferred Stocks
The carrying amount is determined in accordance with methods prescribed by
the National Association of Insurance Commissioners ("NAIC"), which do not
differ materially from nationally quoted market prices. The fair value of
certain municipal bonds is assumed to be equal to amortized cost where
market quotations exist.
Mortgage Loans
The fair values are estimated based on quoted market prices for those or
similar investments.
Debt Payable
The fair value is estimated based on the quoted market prices for the same
or similar issues or on the current rates offered for debt having the same
or similar returns and remaining maturities.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of the financial condition and the results
of operations for the three years ended December 31, 1997, 1996 and 1995
analyzes the results of operations, consolidated financial condition, liquidity
and capital resources of Atlantic American Corporation (the "Company" or "Parent
Company") and its consolidated subsidiaries Bankers Fidelity Life Insurance
Company and American Independent Life Insurance Company (collectively the "Life
and Health Division"), American Southern Insurance Company ("American Southern")
and Georgia Casualty & Surety Company ("Georgia Casualty" and collectively the
"Casualty Division"). Effective January 1, 1997, Atlantic American Life
Insurance Company was merged into Bankers Fidelity Life Insurance Company
("Bankers Fidelity"). The following discussion should be read in conjunction
with the consolidated financial statements and notes thereto.
OVERVIEW
Atlantic American Corporation's net income for 1997 was $8.0 million ($.35 per
share), compared to a net income of $3.2 million ($.09 per share) (net income of
$7.6 million or $.32 per share from continuing operations), in 1996, and a net
loss of $7.0 million ($.39 per share) (net income of $3.1 million or $.15 per
share from continuing operations), in 1995. The increase in earnings from
continuing operations in 1997 was attributable to increased revenues from the
insurance operations. The increase in earnings in 1996 was primarily due to the
inclusion of American Southern's 1996 earnings ($4.3 million).
As discussed below, 1997 represents the first full year not impacted by the
discontinued operations of the Company's previously owned furniture operation.
ACQUISITIONS
On October 1, 1997, the Company acquired American Independent Life Insurance
Company ("American Independent") for approximately $2.7 million in cash.
American Independent specializes in traditional life insurance and supplemental
health insurance, including Medicare supplement. American Independent has been
consolidated in the Company's December 31, 1997 balance sheet. Results of
operations and cash flows are reflected from the date of acquisition.
On October 28, 1997, the Company acquired Self-Insurance Administrators, Inc.
("SIA, Inc.") for approximately $1.2 million in common stock of the Company.
SIA, Inc. specializes in the administration of self-insured workers'
compensation funds and was acquired to complement the Company's existing
workers' compensation book of business. SIA Inc.'s balance sheet has been
consolidated in the Company's December 31, 1997 balance sheet, while the results
of operations and cash flows of SIA, Inc. have been included since the date of
acquisition.
Although the results of both American Independent and SIA, Inc. have been
included since their respective acquisition dates, the net earnings impact of
these acquisitions is not material to the overall financial position or results
of operations of the Company and therefore, have not been individually
discussed. The results of American Independent from the date of acquisition are
included in discussions of the Life and Health Division.
On December 31, 1995, the Company acquired American Southern for aggregate
consideration of $34.0 million. American Southern, a highly rated property and
casualty insurance company specializing in state and municipality automobile
insurance, was acquired to complement the Company's position as a niche
insurance holding company. American Southern's balance sheet has been
consolidated since it was acquired on December 31, 1995, while results of
operations and cash flows are not reflected until 1996 (see Note 7 of the Notes
to Consolidated Financial Statements).
34
<PAGE>
DISCONTINUED OPERATIONS
In early 1996, the Company announced its intent to sell its furniture
operations. The furniture division, which consisted of Leath Furniture, Inc.
("Leath") and its subsidiaries, Modernage Furniture, Inc. and Jefferson Home
Furniture Company, Inc., suffered significant losses in an industry wide
downturn. Management anticipated continued losses in the future and, therefore,
decided to exit the retail furniture business and concentrate on its core
insurance businesses (see Note 8 of the Notes to Consolidated Financial
Statements). The Company completed the sale of its approximately 88% interest in
Leath on April 8, 1996, to Gulf Capital Services, Ltd., a related party (see
Note 14 of the Notes to Consolidated Financial Statements).
Leath's operating losses for 1995 totaled $6.7 million. The Company recorded an
additional charge to earnings of $3.4 million in 1995 for estimated losses to be
incurred prior to disposition, bringing the total loss from discontinued
operations in 1995 to $10.1 million. The losses anticipated prior to disposition
were inadequate, and the Company incurred an additional loss from discontinued
operations of $4.4 million in 1996. Previously separated intersegment revenues
attributable to mortgage loans from the insurance companies to Leath have been
included in investment income of the continuing operations of the insurance
segment.
35
<PAGE>
RESULTS OF CONTINUING OPERATIONS
Revenue
The Company markets insurance through various distribution channels. The
following table summarizes the insurance premiums during each of the three years
ended December 31, 1997, 1996 and 1995 by company and line of business. American
Southern is included for 1997 and 1996.
Net Earned Premium by Company by Line
(in thousands)
<TABLE>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
Amount % of Total Amount % of Total Amount % of Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C>
Life and Health Companies:
Ordinary Life $ 9,437 10.64% $ 8,937 10.39% $ 7,037 16.22%
Mass Market Life 1,016 1.15% 1,303 1.51% 1,260 2.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 10,453 11.79% 10,240 11.90% 8,297 19.13%
- ------------------------------------------------------------------------------------------------------------------------------------
Medicare Supplement 12,534 14.13% 11,560 13.44% 11,882 27.39%
Convalescent Care/Short-Term Care 1,141 1.29% 955 1.11% 1,191 2.75%
Medical Surgical 122 .14% 160 .19% 211 .49%
Cancer 1,803 2.03% 1,982 2.30% 2,221 5.12%
Hospital Indemnity 241 .27% 282 .33% 337 .77%
Accident Expense 523 .59% 677 .79% 790 1.82%
Disability 150 .17% 122 .14% 142 .33%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Accident and Health 16,514 18.62% 15,738 18.30% 16,774 38.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life and Health Companies 26,967 30.41% 25,978 30.20% 25,071 57.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Georgia Casualty:
Workers' Compensation 12,841 14.48% 13,826 16.07% 14,954 34.48%
Business Automobile 4,031 4.55% 2,550 2.96% 1,436 3.31%
General Liability 1,387 1.56% 1,152 1.34% 1,025 2.36%
Property 1,657 1.87% 1,269 1.48% 887 2.05%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Georgia Casualty 19,916 22.46% 18,797 21.85% 18,302 42.20%
- ------------------------------------------------------------------------------------------------------------------------------------
American Southern:
Automobile Physical Damage 4,508 5.08% 4,865 5.66%
Automobile Liability 30,909 34.85% 30,889 35.91%
General Liability 3,116 3.51% 1,947 2.26%
Property 3,206 3.62% 3,461 4.02%
Surety 60 .07% 88 .10%
- ------------------------------------------------------------------------------------------------------------------------------------
Total American Southern 41,799 47.13% 41,250 47.95%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Consolidated $88,682 100.00% $86,025 100.00% $43,373 100.00%
====================================================================================================================================
</TABLE>
36
<PAGE>
Premium revenues increased 3% in 1997 to $88.7 million from $86.0 million in
1996 and $43.4 million in 1995. Inclusion of American Southern's premiums
accounted for 95.1% of the increased premium revenue in 1996, or $41.3 million.
Premiums at American Southern increased 1% in 1997 or $549,000. The general
liability line increased 60% or $1.2 million which was offset by slight declines
in American Southern's other lines of business. Georgia Casualty's premiums
increased 6% over 1996 results to $19.9 million from $18.8 million. Georgia
Casualty experienced a decline of 7% in the workers' compensation line of
business as a result of increasing price competition, which has caused Georgia
Casualty to choose not to underwrite some risks rather than pricing them at
levels the Company believes to be unprofitable. Modest increases were
experienced in Georgia Casualty's other lines of business in 1997. Georgia
Casualty's premiums increased in 1996 to $18.8 million from $18.3 million in
1995. Increases occurred in all lines for Georgia Casualty in 1996 except
workers' compensation, which declined to $13.8 million from $15.0 million in
1995. The decline from 1995 was due to a decrease of $1.6 million in net earned
premiums from direct-assignment workers' compensation policies, over which
Georgia Casualty had no control.
The Life and Health Division's premiums increased by $989,000 in 1997 and
$907,000 in 1996, after decreasing by $2.0 million in 1995. The main reason for
the increase in 1997 was a $974,000 increase in Medicare supplement business.
The increase in 1996 was attributable to a $1.9 million increase in ordinary
life premiums offset by an accident and health premiums decrease of $1.0 million
in 1996. The increase in Medicare supplement business in 1997 was principally
the result of the acquisition of American Independent combined with the
introduction of a new Preferred Medicare supplement product in 1996 that
provides lower commissions and a preferred underwriting classification. In 1996,
for the first time since 1986, annualized premiums for the Life and Health
Division increased from the preceding year to $26.7 million for 1996, compared
to $26.3 million for 1995. This trend continued in 1997 ending the year with
$33.7 million in annualized premium.
Investment income remained flat at $11.5 million in 1997 and 1996, although it
represented an increase from $6.6 million earned in 1995. Investment income
remained unchanged due in part to declines in interest rates and the flattening
of the yield curve. The inclusion of American Southern for the first time in
1996 accounted for $4.3 million of the total increase in 1996. Management has
continued to focus on increasing the Company's investments in short and medium
maturity bonds and government backed securities. The carrying value of funds
available for investment (which include cash, short-term investments, bonds, and
common and preferred stocks) at December 31, 1997, increased approximately $15.6
million from 1996, primarily due to cash provided by operations of $8.6 million
and an increase in unrealized investment gains of $11.8 million offset by a
reduction of $7 million attributable to the payment of debt.
Realized investment gains were down $513,000 in 1997 to $1.1 million compared to
$1.6 million for 1996 and $1.7 million for 1995. The changes in realized
investment gains for these periods were primarily the result of adjustments made
in the investment portfolio to increase the yield on invested assets. In 1997,
fewer opportunities presented themselves for increasing the overall yield on the
investment portfolio and as a result, fewer securities were sold compared to
1996.
Benefits and Expenses
Total insurance benefits and losses increased to $61.0 million in 1997 from
$54.3 million in 1996 and $24.7 million in 1995. Insurance benefits and losses
increased $1.6 million at American Southern in 1997 while Georgia Casualty
experienced a $2.8 million increase over 1996. The increase in benefits and
losses at Georgia Casualty was the result of worse than anticipated claims
frequency in one agent's line of business. The Company discontinued this line of
business in August 1997, and has instituted additional loss control programs and
tightened underwriting standards in the line in an effort to maintain its
underwriting discipline. Insurance benefits and losses in the Life and Health
Division increased $1.5 million which paralleled the increased level of
insurance premiums. In 1996, the Casualty Division's increase is due to
inclusion of American Southern's benefits and losses, accounting for $28.6
million of the increase, offset by a decrease in Georgia Casualty's benefits and
losses of $698,000. The Life and Health Division's 1996 increase is mainly
caused by an increase in reserves and claims resulting from increased life
premiums, whereas in 1995 there was a decrease in reserves due to the
elimination of a block of life insurance business sold through funeral homes.
37
<PAGE>
As a percentage of premium revenue, insurance benefits and losses increased to
68.8% in 1997 from 63.1% in 1996 and 56.9% in 1995. The Life and Health
Division's percentages increased to 57.8% in 1997 from 54.0% in 1996 and 49.1%
in 1995. Georgia Casualty's percentages increased to 77.6% in 1997 from 66.4% in
1996 and 67.5% in 1995. American Southern's percentage increased to 72.2% from
69.3% in 1996, its first year of operations as a subsidiary of the Company.
Commission and underwriting expenses decreased to $23.0 million in 1997 from
$27.0 million in 1996 and $15.2 million in 1995. The overall decline in
commissions and underwriting expenses in 1997 was spread across all segments of
the Company's operations. Commissions and underwriting expenses at American
Southern were down $525,000 from 1996 and the ratio of expense to insurance
premiums ("expense ratio") decreased to 23.3% in 1997 from 24.9% in 1996. At
Georgia Casualty commission and underwriting expenses decreased $1.1 million in
1997. This decrease was attributable to contingent ceding commissions received
under Georgia Casualty's reinsurance agreements. As a result, the expense ratio
at Georgia Casualty decreased to 27.6% from 35.3% in 1996. Commission and
underwriting expenses in the Life and Health Division decreased $3.0 million in
1997, in part as a result of efficiencies achieved following the merger of
Atlantic American Life Insurance Company with Bankers Fidelity and the
acquisition and assimilation of the operations of American Independent. In
addition, the Life and Health Division deferral of acquisition costs increased
in 1997 as a result of its growth of business, deferring costs associated with
that division's lead program and improving lapse rates.
The Company had a net deferral of acquisition costs in 1997 of $1.3 million
compared to a net deferral of $280,000 in 1996 and net amortization of
acquisition costs in 1995 of $736,000. Aside from items previously discussed,
the increase in deferred costs is attributable to an increase in business
produced, particularly in the fourth quarter. The increase in commission and
underwriting expenses in 1996 was attributable to the inclusion of American
Southern which accounted for $10.3 million of the $11.7 million increase.
Interest expense decreased to $2.9 million in 1997 from $3.3 million in 1996 and
$2.5 million in 1995. The decrease in 1997 was due to the reduction of debt in
1997 and 1996. Other expense decreased by $612,000 in 1997 to $6.1 million, and
increased in 1996 by $534,000 and by $786,000 in 1995. The decrease in other
expenses in 1997 is the result of a decrease in legal fees and overall operating
cost reductions for the Parent Company. In 1996 significant legal fees were
incurred relating to the acquisition of the remaining minority interests in
Bankers Fidelity and Georgia Casualty and the sale of Leath. The increase in
1995 other expense was due in part to an increase of $248,000 in the expenses
related to claims of the Company's self-insured employee group medical plan.
The Company's net tax provision of $138,000 and $204,000 in 1997 and 1996,
respectively, was for alternative minimum taxes, while the tax benefit in 1995
consisted of $9,000 of alternative minimum taxes offset by a benefit of $43,000
from overpayments of alternative taxes in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The major cash needs of the Company are for the payment of claims and expenses
as they come due and maintaining adequate statutory capital and surplus to
satisfy state regulatory requirements and meeting debt service requirements of
the Parent. The Company's primary sources of cash are written premiums and
investment income. Cash payments consist of current claim payments to insureds
and operating expenses such as salaries, employee benefits, commissions, taxes,
and shareholder dividends, when earnings warrant such payment. By statute, the
state regulatory authorities establish minimum liquidity standards primarily to
protect policyholders.
The Company's insurance subsidiaries reported a combined statutory profit of
$9.2 million in 1997 compared to $8.9 million in 1996 and $4.5 million in 1995.
The statutory results in 1997 were comprised of a $4.8 million profit at
American Southern, a $1.9 million profit at Georgia Casualty and a $2.5 million
profit in the Life and Health Division. The 1996 statutory results were due to a
profit of $5.6 million from American Southern, $2.0 million from Georgia
Casualty, and $1.3 million from the Life and Health Division. The 1995 statutory
results were due to a profit of $1.5 million from Georgia Casualty and a profit
of $3.0 million in the Life and Health Division.
38
<PAGE>
Statutory results differfrom the results of operations under generally accepted
accounting principles ("GAAP") for the Casualty Division due to the deferral of
acquisition costs. The Life and Health Division's statutory results differ from
GAAP primarily due to deferral of acquisition costs, as well as different
reserving methods.
On April 1, 1996, the Company completed a merger transaction pursuant to which
the Company acquired the remaining publicly-held interest in Bankers Fidelity
that the Company did not own. As a result of the merger, the Company owns 100%
of the equity of Bankers Fidelity, and the public shareholders of Bankers
Fidelity received $6.25 in cash per share, for an aggregate payout of
approximately $1.3 million. The source of funds for the payment of the merger
consideration, together with an estimated $225,000 in related expenses, was
Bankers Fidelity's surplus account.
On November 26, 1996, the Company acquired the remaining publicly-held interest
in Georgia Casualty. The transaction was completed through the merger of a newly
formed wholly-owned subsidiary of the Company into Georgia Casualty, with
Georgia Casualty being the surviving corporation in the merger. As a result of
the transaction, the Company owns 100% of the equity of Georgia Casualty, and
the remaining public shareholders of Georgia Casualty received $9.00 in cash per
share, for an aggregate payout of approximately $20,000.
In connection with the acquisition of American Southern on December 31, 1995,
the Company entered into a Credit Agreement with Wachovia Bank of Georgia, N.A.
The Credit Agreement provides for aggregate borrowings of approximately $34.0
million, of which $22.6 million was immediately drawn on December 31, 1995, to
finance the cash portion of the purchase price. The remaining amount was
borrowed on October 11, 1996 to finance the $11.4 million balance of the
purchase price due on that date. At December 31, 1997, the Company had
outstanding borrowings under the Credit Agreement of $28.6 million, of which
approximately $1.0 million will become due and payable during 1998. The Company
intends to repay its obligations under the Credit Agreement using dividend
payments received from its subsidiaries and through receipts from its
tax-sharing agreement with its subsidiaries.
In connection with entering into the Credit Agreement, the Company converted,
effective December 31, 1995, approximately $13.4 million in outstanding debt to
affiliates into a new series of preferred stock, which accrues dividends at 9%
per year. The Company has accrued but not paid the cumulative dividends on this
preferred stock since its issuance and does not currently intend to pay such
dividends in 1998. At December 31, 1997, the Company had accrued but not paid
dividends on its Series B preferred stock totaling $2.4 million. On May 15,
1997, the Company borrowed an additional $5.6 million under the Credit Agreement
in order to retire a like amount of 8% subordinated notes that became due on
that day.
The Company provides certain administrative and other services to each of its
insurance subsidiaries. The amounts charged to and paid by the subsidiaries
remained constant at $5.6 million in 1997, 1996 and 1995. In addition, the
Company has a formal tax-sharing agreement between the Company and its insurance
subsidiaries, to which American Southern was added when it was acquired in 1996.
A net total of $1.2 million, $3.4 million and $1.4 million were paid to the
Company under the tax-sharing agreement in 1997, 1996 and 1995, respectively. It
is anticipated that this agreement will provide the Company with additional
funds from profitable subsidiaries due to the subsidiaries' use of the Company's
tax loss carryforwards which totaled approximately $43 million at December 31,
1997. Approximately 94% of the invested assets of the insurance subsidiaries are
in marketable securities that can be converted into cash, if required; however,
use of such assets by the Company is limited by state insurance regulations.
Dividend payments to the Company by its insurance subsidiaries, subject to
annual limitations, are restricted to the accumulated statutory earnings of the
individual insurance subsidiaries. At December 31, 1997, Georgia Casualty had
$13.0 million of accumulated statutory earnings, Bankers Fidelity had $18.0
million of accumulated statutory earnings, and American Southern had $19.6
million of accumulated statutory earnings for a total of $50.6 million.
Net cash provided by operating activities totaled $8.6 million in 1997 and $8.4
million in 1996, compared to $3.2 million in 1995. The Company incurred a total
cost of $733,000 in 1997, $1.6 million in 1996, and $1.1 million in 1995 for
additions to property and equipment, which mainly represent leasehold
improvements and additions to new computer systems. Cash and short-term
investments increased to $51.0 million in 1997.
39
<PAGE>
The Company believes that the fees, charges and dividends it receives from its
subsidiaries and, if needed, 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 regulatory
authorities which, if implemented, would have a material adverse effect on the
Company's liquidity, capital resources or operations.
YEAR 2000
Many existing computer systems currently in use were developed using two digits
rather than four digits to specify the year. As a result, many systems will
recognize a date code of "00" as the calendar year 1900 rather than 2000 which
could cause systems to fail or cause erroneous results.
The Company has undertaken projects to ensure that all of its systems will be
compliant with year 2000 issues. Currently, one of the Company's three major
operating systems is fully year 2000 compliant and the process of bringing the
other operating systems into compliance is underway. All operating systems are
expected to be fully compliant by the end of 1998. If the Company fails to bring
its systems into compliance by the year 2000 the Company may, as a result, be
unable to process some business which could potentially have a materially
adverse effect on the financial operations of the Company; however, in the
opinion of management the risk of this occurrence is remote. The cost of
bringing the Company's systems into compliance is not expected to have a
material effect on the results of operations or financial position of the
Company.
DEFERRED TAXES
At December 31, 1997, the Company had a net cumulative deferred tax asset of
zero. The net cumulative deferred tax asset is the result of $24 million of
deferred tax assets, offset by $14.2 million of deferred tax liabilities, and a
$9.8 million valuation allowance. SFAS No. 109 requires that a valuation
allowance be recorded against tax assets which are not likely to be realized.
The Company's carryforwards expire at specific future dates and utilization of
certain carryforwards is limited to specific amounts each year. However, due to
the uncertain nature of their ultimate realization based upon past performance
and expiration dates, the Company has established a full valuation allowance
against these carryforward benefits and recognizes the benefits only as
reassessment demonstrates they are realizable. The Company's ability to generate
taxable income from operations is dependent upon various factors, many of which
are beyond management's control. Accordingly, there can be no assurance that the
Company will generate future taxable income based on historical performance.
Therefore, the realization of the deferred tax assets will be assessed
periodically based on the Company's current and anticipated results of
operations.
IMPACT OF INFLATION
Insurance premiums are established before the amount of losses and loss
adjustment expenses, or the extent to which inflation may affect such losses and
expenses, are known. Consequently, the Company attempts, in establishing its
premiums, to anticipate the potential impact of inflation. If for competitive
reasons premiums cannot be increased to anticipate inflation, this cost would be
absorbed by the Company. Inflation also affects the rate of investment return on
the Company's investment portfolio with a corresponding effect on investment
income.
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Atlantic American Corporation:
We have audited the accompanying consolidated balance sheets of Atlantic
American Corporation (a Georgia corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements (pages 8 through 22) referred to above
present fairly, in all material respects, the financial position of Atlantic
American Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 20, 1998
41
<PAGE>
SUBSIDIARIES
Bankers Fidelity Life Insurance Company
American Independent Life Insurance Company
J. MACK ROBINSON
Chairman
HILTON H. HOWELL, JR.
Vice Chairman
EUGENE CHOATE
President
JOHN W. HANCOCK
Senior Vice President
ROBERT A. RENAUD
Vice President, Secretary and Treasurer
ANTHONY D. CHAPMAN
Vice President and Chief Marketing Officer, Agency Division
ROBERT E. OREAN
Vice President and Actuary
SHARON A. BUSCH
Assistant Vice President, Marketing
DEWEY A. SANDAGE, JR.
Assistant Vice President, Claims
JANIE L. RYAN
Assistant Secretary
GAIL T. ARNOLD
Assistant Secretary
Georgia Casualty & Surety Company
J. MACK ROBINSON
Chairman and President
HILTON H. HOWELL, JR.
Vice Chairman
LINDA S. COOK
Vice President, Secretary and Treasurer
GEORGE G. CLEMENTS
Vice President, Claims
SANDRA W. DOAR
Vice President, Underwriting
JOE F. BERRYHILL
Vice President, Marketing
Mississippi/Louisiana
JACK R. BAKER
Assistant Vice President
JANIE L. RYAN
Assistant Secretary
42
<PAGE>
American Southern Insurance Company
American Safety Insurance Company
ROY S. THOMPSON, JR.
Chairman Emeritus
CALVIN L. WALL
Chairman and Chief Executive Officer
SCOTT G. THOMPSON
President and Chief Financial Officer
THOMAS J. WHITTY
Senior Vice President, Claims
DAVID I. WEEKS
General Vice President
WANDA J. HULSEY
Vice President, Underwriting
BRIAN G. HAURYLAK
Vice President
JOHN R. HUOT
Vice President
GLENDA N. BATES
Treasurer
GAIL A. PARSONS
Secretary and Vice President
FRANK J. CICCONE
Vice President
ERNEST E. GRANT, JR.
Vice President
WILLIAM E. LYNCH
Vice President
BRIAN C. MOSS
Vice President
MICHAEL D. WINSTON
Vice President
TERESA P. GANN
Assistant Secretary
Self-Insurance Administrators, Inc.
HILTON H. HOWELL, JR.
Chairman
ANDY M. THOMPSON
President
EDWARD L. RAND, JR.
Treasurer
JANIE L. RYAN
Secretary
43
<PAGE>
MARKET INFORMATION (UNAUDITED)
The common stock of the Company is traded in the over-the-counter market and is
quoted on the NASDAQ National Market under the symbol "AAME". As of December 31,
1997, the Company had approximately 6,586 stockholders, including beneficial
owners holding shares in nominee or "street" name. The following tables show for
the periods indicated the range of the reported high and low prices of the
common stock on the NASDAQ National Market and the closing price of the stock
and percent of change at December 31. The Company did not declare or pay cash
dividends on its common stock during the year ended December 31, 1997. Since
1988, the Company has retained its earnings to support the growth of its
business.
1997 1996
- --------------------------------------------------------------------------------
High Low High Low
First quarter $3 3/4 $3 1/16 $3 1/4 $2 1/8
Second quarter 3 1/4 2 1/2 4 2 3/4
Third quarter 4 1/8 2 1/2 3 5/8 3
Fourth quarter 5 1/2 4 3 5/8 3
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
December 31, stock price close
per share $ 5 1/16 $3 1/16 $2 5/16 $2 1/4 $1 3/4
Stock price percentage of change
from prior year +65.3% +32.4% +2.8% +28.6% +8%
FORWARD-LOOKING STATEMENTS
This report contains and references certain information that constitutes
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Those statements, to the extent they are not
historical facts, should be considered forward-looking and subject to various
risks and uncertainties. Such forward-looking statements are made based upon
management's assessments of various risks and uncertainties, as well as
assumptions made in accordance with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of such risks and uncertainties, including those
identified in the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1997 and the other filings made by the Company from time to
time with the Securities and Exchange Commission.
44
<PAGE>
SHAREHOLDER INFORMATION
ANNUAL MEETING
Atlantic American's annual meeting of shareholders will be held on Tuesday, May
5, 1998, at 9:00 a.m. in the Peachtree Insurance Center, 4370 Peachtree Road,
N.E., Atlanta, Georgia. Holders of common stock of record at the close of
business on March 8, 1998, are entitled to vote at the meeting, and all parties
interested in Atlantic American are invited to attend. A notice of meeting,
proxy statement and proxy were mailed to shareholders with this annual report.
Independent Accountants
Arthur Andersen LLP
Atlanta, Georgia
Legal Counsel
Jones, Day, Reavis & Pogue
Atlanta, Georgia
Stock Exchange Listing
Symbol: AAME
Traded over-the-counter market
Quoted on the NASDAQ National Market System
Transfer Agent and Registrar
Atlantic American Corporation
Attn: Janie L. Ryan, Corporate Secretary
P. O. Box 190720
Atlanta, Georgia 31119-0720
(800) 241-1439 or (404) 266-5532
Form 10-K and Other Information For investors and others seeking additional data
regarding Atlantic American Corporation or copies of the Corporation's annual
report to the Securities and Exchange Commission (Form 10-K), please contact
Janie L. Ryan Corporate Secretary, (800) 241-1439 or (404) 266-5532. Please
visit our web site at: www.atlam.com.
45
<PAGE>
Atlantic
American
Corporation
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319-3000
Telephone: 404-266-5500
Facsimile: 404-266-5702
Internet: www.atlam.com
46
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State of Incorporation
- --------------------------------------------------------------------------------
American Independent Insurance Company Pennsylvania
American Safety Insurance Company Georgia
American Southern Insurance Company Georgia
Bankers Fidelity Life Insurance Company Georgia
Georgia Casualty & Surety Company Georgia
Self-Insurance Administrators Georgia
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included and incorporated by reference in this Form 10-K into the
Company's previously filed registration statements (33-56866) on Form S-8.
Arthur Andersen, LLP
Atlanta, Georgia
March 20, 1998
<PAGE>
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