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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, 1998
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
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4370 Peachtree Road, N.E.,
Atlanta, Georgia 30319
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (404) 266-5500
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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. |X|
------------------------
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 8, 1999, was $22,090,372. On March 8, 1999 there were
19,101,106 shares of the registrant's common stock, par value $1.00 per share,
outstanding.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Annual Report to Shareholders for the year ended
December 31, 1998 - Parts I, II and IV.
2. Portions of registrant's Proxy Statement for the Annual Meeting of
Shareholders, to be held on May 4, 1999, have been incorporated in Items 10, 11,
12 and 13 of Part III of this Form 10-K.
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1
<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business................................................. 3
The Company........................................ 3
Casualty Operations................................ 3
Bankers Fidelity................................... 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.................................. 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 18
Item 8. Financial Statements and Supplementary Data.............. 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant....... 19
Item 11. Executive Compensation................................... 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 19
Item 13. Certain Relationships and Related Transactions........... 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 19
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 insurance markets by five states. Together, Bankers and AI are referred
to as "Bankers Fidelity".
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.
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
with relative autonomy 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 1998 Annual Report to Shareholders,
which is incorporated herein by reference.
Casualty Operations
The Company's Casualty Operations are split between into two distinct
operating entities, American Southern and Georgia Casualty. The primary products
offered by the two casualty companies are described below, followed by an
overview of each of the 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
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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)
1998 1997 1996
-------- --------- ---------
Automobile Liability $25,539 $30,909 $30,889
Automobile Physical Damage 2,145 4,508 4,865
General Liability 4,291 3,116 1,947
Property 2,970 3,206 3,461
Surety 57 60 88
-------- --------- ---------
Total $35,002 $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 risk
management 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 a Business Owners Policy ("BOP").
The company can offer a total commercial insurance package to cover the
insurance needs of its customers.
Currently, Georgia Casualty is focusing the majority of its new business
efforts in Georgia, Florida, Tennessee and Mississippi. Management believes
these states offer the greatest opportunity for balanced, profitable growth.
Outside of its core states, at the end of 1998, Georgia Casualty had authority
to operate in South Carolina, North Carolina and Kentucky and the company will
begin writing incidental workers' compensation in some of these states in 1999.
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,
------------------------------------------------
(in thousands)
1998 1997 1996 1995 1994
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Workers' Compensation $14,344 $12,841 $13,826 $14,954 $11,958
Business Automobile 3,750 4,031 2,550 1,436 1,054
General Liability 1,619 1,387 1,152 1,025 1,065
Property 2,100 1,657 1,269 887 574
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Total $21,813 $19,916 $18,797 $18,302 $14,651
================================================
4
<PAGE>
Bankers Fidelity
Bankers Fidelity, which constitutes the life and health operations of
Atlantic American Corporation, offers a variety of life and supplemental health
products with a focus on the senior and middle income markets. Products offered
by Bankers Fidelity include: ordinary life, Medicare supplement, cancer, and
other supplemental health products. Medicare supplement, offered on both a
standard and preferred basis, accounted for 57.3% of Bankers Fidelity's net
premiums in 1998. Life insurance, including both whole and term life insurance
policies, accounted for 34.1% of Bankers Fidelity's premiums in 1998. Bankers
Fidelity also offers several of its products, both life and supplemental health,
through payroll deduction services.
The following table summarizes, for the periods indicated, the allocation of
Bankers Fidelity'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)
1998 1997 1996 1995 1994
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Ordinary Life $10,848 $9,437 $8,937 $7,037 $6,716
Mass Market Life 900 1,016 1,303 1,260 1,395
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Total Life 11,748 10,453 10,240 8,297 8,111
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Medicare Supplement 19,743 12,534 11,560 11,882 13,347
Cancer, accident and
other health 2,986 3,980 4,178 4,892 5,592
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Total Accident and Health 22,729 16,514 15,738 16,774 18,939
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Total Life and Accident
and Health $34,477 $26,967 $25,978 $25,071 $27,050
================================================================================
Life Products. Bankers Fidelity offers non-participating individual life
--------------
insurance policies with a number of available riders and options.
Medicare Supplement. Bankers Fidelity 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, Accident & Other Health Coverages. Bankers Fidelity offers several
-------------------------------------------
policies providing for payment of benefits in connection with the treatment of
diagnosed cancer, as well as a number of other policies including convalescent
care, accident expense, hospital/surgical and disability.
Marketing
Casualty Operations
American Southern. American Southern's business is marketed through a small
number of specialized, experienced independent agents. 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 generated. In addition, a
significant portion (approximately 54% of total written premium in 1998) 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. During 1998,
American Southern formed a 50/50 joint venture, American Auto Club Insurance
Agency, LLC, with the AAA Carolinas to market personal automobile insurance to
the members of the automobile club.
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, risk
management, and audit staffs of Georgia Casualty, who are available to assist
5
<PAGE>
agents in the presentation of all insurance products and services to their
insureds. Georgia Casualty has also begun marketing programs that include
endorsements from trade organizations and business franchises.
Bankers Fidelity
Bankers Fidelity markets its policies through commissioned, independent
agents. In general, Bankers Fidelity 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 Bankers Fidelity to expand or contract
their sales forces at any time without incurring significant additional expense.
Bankers Fidelity has implemented a selective agent qualification process and
had 2,800 licensed agents in 1998. The agents concentrate their sales activities
in either the accident and health or life insurance product lines. During 1998,
a total of 1,232 agents wrote policies on behalf of Bankers Fidelity, and
approximately 20% of those agents accounted for 80% of Bankers Fidelity's
annualized premium.
Products of Bankers Fidelity compete directly with products offered by other
insurance companies, as agents may represent several insurance companies.
Bankers Fidelity, 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, Bankers Fidelity 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 Bankers Fidelity.
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 Bankers
Fidelity's senior citizen life plans. In addition, Bankers Fidelity 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 Bankers Fidelity to build
long-term relationships with individual producers who view Bankers Fidelity as
their primary company. In addition, management believes that Bankers Fidelity'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 Bankers Fidelity's general brokerage division.
Underwriting
Casualty Operations
American Southern specializes in the handling of block accounts such as
states and municipalities that generally are sufficiently large to establish
separate class experience, relying upon the underwriting expertise of its
agents. In contrast, Georgia Casualty 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, risk management, 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.
During the course of the policy year, extensive use is made of risk
management representatives to assist underwriters in identifying and correcting
potential loss exposures and to pre-inspect the majority of the
new accounts that are underwritten. 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, reducing commissions paid to agents, altering
or declining to renew accounts at expiration, and/or terminating agencies with
an unprofitable book of business.
6
<PAGE>
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 1998. Premiums assumed of $21.0 million, in 1998 include a
single state contract of $12.6 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.
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 risk management programs, safety policies,
drug-free workplaces, pre-employment drug testing and various other risk
reduction programs.
Bankers Fidelity
Bankers Fidelity issues a variety of products including single and multiple
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 1998 were derived from life insurance
written below Bankers Fidelity's medical limits. For the senior market, Bankers
Fidelity issues 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. Bankers
Fidelity 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, Bankers Fidelity uses investigative services to
supplement and substantiate information. For certain limited coverages, Bankers
Fidelity 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 Operations and for Bankers Fidelity
during the past five years.
Year Ended December 31,
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1998 1997 1996 1995 1994
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(dollars in thousands)
Casualty Operations (1)
WORKERS' COMPENSATION:
Incurred losses $ 9,175 $ 6,740 $ 6,645 $ 9,733(2) $ 7,243
Loss ratio 64.0% 52.5% 48.1% 65.1% 61.9%
BUSINESS AUTOMOBILE:
Incurred losses $19,819 $27,237 $23,977 $ 1,227 $ 602
Loss ratio 63.1% 69.0% 62.6% 85.5% 57.1%
GENERAL LIABILITY:
Incurred losses $ 1,392 $ 1,428 $ 1,242 $(1,238)(2) $ 1,080
Loss ratio 23.3% 31.3% 38.9% - 101.3%
PROPERTY:
Incurred losses $ 2,457 $ 1,840 $ 1,700 $ 416 $ 244
Loss ratio 48.5% 37.9% 36.0% 47.0% 42.6%
TOTAL CASUALTY:
Incurred losses $32,843 $37,245 $33,564 $10,138 $ 9,169
Loss ratio 57.8% 60.3% 55.9% 55.4% 63.7%
Loss adjustment
expense ratio 12.9% 13.9% 12.4% 15.2% 20.1%
Expense ratio 29.2% 25.3% 27.8% 31.4% 27.8%
Combined ratio 99.9% 99.5% 96.1% 102.0% 111.6%
Bankers Fidelity (3)
MEDICARE SUPPLEMENT:
Incurred losses $13,319 $ 7,820 $ 7,136 $ 6,688 $ 7,582
Loss ratio 67.5% 62.4% 61.7% 57.6% 57.8%
CANCER, ACCIDENT AND
OTHER HEALTH:
Incurred losses $ 795 $ 1,747 $ 1,752 $ 2,671 $ 3,357
Loss ratio 26.6% 43.6% 43.5% 56.1% 61.4%
TOTAL BANKERS FIDELITY:
Incurred losses $14,114 $ 9,567 $ 8,888 $ 9,359 $10,939
Loss ratio 62.1% 58.3% 57.2% 57.2% 58.9%
- -----------------------
(1) Includes American Southern for 1998, 1997 and 1996 only.
(2) Includes adjustment to reallocate reserves to workers' compensation.
(3) Includes American Independent for three months in 1997 and full year
in 1998.
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 Operations
American Southern and Georgia Casualty. American Southern and Georgia
Casualty control their claims costs by utilizing an 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. The companies frequently
utilize independent adjusters and appraisers to service claims which require
on-site inspections.
Bankers Fidelity
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 Bankers Fidelity's claims system when the
proper documentation is received. Properly documented claims are generally paid
within three to nine business days of receipt. During 1998, Bankers Fidelity
paid approximately 179,000 claims aggregating $19.4 million, of which
approximately 174,000 claims aggregating $12.2 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:
1998 1997
---------- ----------
Balance at January 1 $86,721 $84,074
Less: Reinsurance recoverables (24,006) (26,293)
---------- ----------
Net balance at January 1 62,715 57,781
---------- ----------
Incurred related to:
Current year 63,030 60,252
Prior years (2,606) 21
---------- ----------
Total incurred 60,424 60,273
---------- ----------
Paid related to:
Current year 35,566 33,857
Prior years 23,430 22,246
---------- ----------
Total paid 58,996 56,103
---------- ----------
Reserves acquired due to acquisition - 764
---------- ----------
Net balance at December 31 64,143 62,715
Plus: Reinsurance recoverables 22,625 24,006
---------- ----------
Balance at December 31 $86,768 $86,721
========== ==========
Casualty Operations
Atlantic American Corporation's Casualty Operations maintain loss reserves
representing estimates of amounts necessary for payment of losses and LAE. The
Casualty Operations also maintain 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 Operations establish 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 Operations' insurance lines
for 1988 through 1998, 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 1998. 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
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<TABLE>
Year ended December 31,
(in thousands)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory reserve for $57,548 $56,712 $53,496 $53,320 $50,154 $48,031 $48,485 $50,808 $52,668 $47,819(1) $39,036
losses & LAE
Cumulative paid as of:
One year later 17,650 18,899 17,865 16,548 18,106 18,827 22,060 22,837 21,321 21,592
Two years later 26,387 25,821 25,280 25,914 27,731 32,560 35,278 33,507 32,352
Three years later 29,884 29,273 31,021 36,786 38,046 40,768 40,891 39,832
Four years later 31,180 33,674 40,295 41,872 44,267 43,745 43,713
Five years later 35,196 42,498 44,530 47,204 46,183 45,767
Six years later 43,989 46,523 49,000 48,056 47,880
Seven years later 47,927 50,658 49,835 49,704
Eight years later 51,809 51,100 51,288
Nine years later 52,239 52,424
Ten years later 53,335
Ultimate losses and LAE
reestimated as of:
End of Year 57,548 56,712 53,496 53,320 50,154 48,031 48,485 50,808 52,668 47,819(1) 39,036
One year later 50,013 51,103 49,799 46,249 47,021 46,756 53,700 53,676 53,212 47,314
Two years later 45,838 46,952 44,850 44,043 45,999 52,670 55,919 54,438 53,998
Three years later 43,507 44,138 45,568 48,446 53,040 55,865 56,064 55,313
Four years later 41,914 46,638 53,064 52,326 56,514 55,707 56,255
Five years later 45,094 54,173 56,771 56,648 56,579 56,403
Six years later 53,574 57,898 60,515 56,984 57,446
Seven years later 57,265 61,069 60,641 58,142
Eight years later 60,403 61,327 60,791
Nine years later 60,560 61,362
Ten years later 60,774
Cumulative redundancy $ 6,699 $ 7,658 $ 9,813 $ 8,240 $ 2,937 $(5,089) $(6,457) $(7,735) $(12,741) $(21,738)
(deficiency)
- -----------------------
<FN>
(1) Restated due to adjustment of $4.7 million for elimination of structured
annuities changed to reinsurance in 1990.
</FN>
</TABLE>
11
<PAGE>
Bankers Fidelity
Bankers Fidelity 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, 1998).
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 Operations
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' compensation. The
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.
Bankers Fidelity
Bankers Fidelity has entered into reinsurance contracts ceding the excess of
their retention to several primary reinsurers. Maximum retention by Bankers
Fidelity on any one individual in the case of life insurance policies is
$50,000. At December 31, 1998, Bankers Fidelity's reinsured annualized premiums
totaled $16.9 million of the $275.6 million of life insurance then in force,
generally under yearly renewable term agreements. Two companies accounted for
all of such reinsurance: Munich American Reassurance Company ($12.3 million) and
Optimum Reinsurance ($4.6 million). Certain reinsurance agreements that are no
longer active for new business remain in force to cover any claims on a run-off
basis.
Competition
Casualty Operations
American Southern. 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. 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
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, risk management 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.
12
<PAGE>
Bankers Fidelity
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. Bankers Fidelity 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. Bankers Fidelity
competes with other insurers on the basis of premium rates, policy benefits, and
service to policyholders. Bankers Fidelity 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. Bankers Fidelity believes that it competes effectively on the basis
of policy benefits, services, and market expertise.
Rating
In 1998, for the first time, Atlantic American Corporation and its
subsidiaries underwent a rating and review process by Standard & Poor's. As a
result of the review, each of the Company's insurance subsidiaries were assigned
a single "A-" counterparty credit and financial strength 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 Operations
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 1998, Georgia Casualty received a Best's
rating of "B++" (Very Good).
Bankers Fidelity
Bankers Fidelity. Bankers Fidelity maintains a Best's rating of "B+"
(Very Good).
American Independent. American Independent is currently rated "C++".
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.
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.
13
<PAGE>
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, 1998, $14.8 million of securities were on
deposit either directly with various state authorities or with third parties
pursuant to various custodial agreements on behalf of Bankers Fidelity and the
Casualty Operations.
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, 1998, American Southern and Bankers Fidelity
were within the NAIC "usual" range for all 13 financial ratios. American
Independent was outside the "usual" range on four ratios: net change in capital
and surplus, net income to total income, surplus relief and change in premium.
In 1998, the Company ceased writing new business through American Independent
and transferred its agency force to Bankers Fidelity. Georgia Casualty was
outside the "usual" range on one ratio: investment yield as a result of Georgia
Casualty's large investment in equity securities.
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,
1998, 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,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds:
U.S. Government agencies
and authorities $ 86,535 43.9% $ 76,701 38.6% $ 73,097 39.7%
States, municipalities and
political subdivisions 1,490 0.8 2,738 1.4 3,496 1.9
Public utilities 1,874 0.9 1,893 1.0 1,505 0.8
Convertibles and bonds
with warrants attached - NIL - NIL 1,275 0.7
All other corporate bonds 9,442 4.8 10,457 5.3 11,562 6.3
Certificates of deposit 2,286 1.2 395 0.2 375 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities(1) 101,627 51.6 92,184 46.5 91,310 49.6
Common and preferred stocks (2) 61,007 30.9 46,876 23.6 37,762 20.5
Mortgage, policy and student loans (3) 8,119 4.1 9,536 4.8 13,367 7.3
Investments in limited partnerships (4) 4,822 2.4 3,941 2.0 - -
Real estate 46 NIL 46 NIL 46 NIL
Short-term investments (5) 21,782 11.0 46,167 23.1 41,614 22.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments $197,403 100.0% $198,750 100.0% $184,099 100.0%
====================================================================================================================================
__________________
<FN>
(1) Fixed maturities are carried on the balance sheet at market value. Total
cost of fixed maturities was $100.6 million as of December 31, 1998,
$91.1 million as of December 31, 1997, and $91.6 million as of December
31, 1996.
(2) Equity securities are valued at market. Total cost of equity securities
was $33.1 million as of December 31, 1998, $18.4 million as of December
31, 1997, and $19.7 million as of December 31, 1996.
(3) Mortgage loans and policy and student loans are valued at historical
cost.
(4) Investments in other invested assets which are traded are valued at
estimated market value; all other partnership interests are carried at
historical cost. Total cost of investments in limited partnerships was
$4.8 million as of December 31, 1998 and $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,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------
Average investments(1) $199,132 $187,408 $180,816
Net investment income $ 11,167 $ 10,916 $ 10,699
Average yield on investments 5.6% 5.8% 5.9%
Realized investment gains, net $ 2,909 $ 1,076 $ 1,589
(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.
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, 1998 employed 180 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, 1998, is
set forth on pages 22 and 23 of the 1998 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, 1998, (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 75 Chairman of the Board 1974
Hilton H. Howell, Jr. 37 Director, President & CEO 1992
Edward L. Rand, Jr. 32 Vice President and Treasurer 1998
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 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 1992 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. Rand has served as Vice President and Treasurer of the Company since
May 1998, prior thereto he served as Vice President and Controller from August
1997 to May 1998. He also serves in the following capacities at subsidiaries of
the Company, Treasurer of Self Insurance Administrators, Inc., Director of
Georgia Casualty, and a Director of Bankers Fidelity Life Insurance Company and
American Independent Life Insurance Company. Prior to joining the Company in
August 1997, he was Vice President and Controller of United Capitol Insurance
Company.
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, unanticipated developments
in the process of assessing and addressing issues related to the Year 2000
issue, 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, 1998, 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, 1998.
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, 1999, there
were 5,040 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
- --------------------------------------------------------------------------------
1998
1st quarter $5 1/2 $4 5/8
2nd quarter 5 1/16 3 7/8
3rd quarter 5 1/4 4
4th quarter 4 15/16 3 5/8
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
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, 1998: Georgia Casualty - $13.7
million, American Southern - $20.5 million, Bankers Fidelity Life - $17.4
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.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of Atlantic American Corporation and subsidiaries
for the five year period December 31, 1998 is set forth on page 1 of the 1998
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 25 to 30 of the 1998 Annual Report to Shareholders and are incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under that caption "Interest Rate and Market Risk" in
the information incorporated by reference in Item 7 above, is incorporated by
reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and related notes are
set forth on pages 10 to 24 of the 1998 Annual Report to Shareholders and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<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", 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 4, 1999.
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, 1998 and December 31, 1997 10*
Consolidated Statements of Operations for the
Three Years ended December 31, 1998 11*
Consolidated Statements of Shareholders' Equity
for the Three Years ended December 31, 1998 12*
Consolidated Statements of Cash Flows for the Three
Years ended December 31, 1998 13*
Notes to Consolidated Financial Statements 14-24*
Report of Independent Public Accountants 31*
* The page references so designated refer to page numbers in the 1998 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 1998 Annual Report to
Shareholders of Atlantic American Corporation is not deemed to be filed
under the Securities Exchange Act of 1934.
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants
II - Condensed financial information of registrant for the three years
ended December 31, 1998
III - Supplementary Insurance Information for the three years ended
December 31, 1998
IV - Reinsurance for the three years ended December 31, 1998
VI - Supplemental Information concerning property-casualty insurance
operations for the three years ended December 31, 1998
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].
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].
19
<PAGE>
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 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].
10.09 - 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].
10.10 - 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].
10.11 - 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].
10.12 - 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].
10.13 - 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].
10.14 - 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.
20
<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/
----------------------------------
Edward L. Rand, Jr.
Vice President and Treasurer
Date: March 26, 1999
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 26, 1999
/s/
- -----------------------------
HILTON H. HOWELL, JR. President, Chief Executive
Officer and Director
(Principal Executive Officer) March 26, 1999
/s/
- -----------------------------
EDWARD L. RAND, JR. Vice President and Treasurer March 26, 1999
/s/
- -----------------------------
EDWARD E. ELSON Director March 26, 1999
/s/
- -----------------------------
SAMUEL E. HUDGINS Director March 26, 1999
/s/
- -----------------------------
D. RAYMOND RIDDLE Director March 26, 1999
/s/
- -----------------------------
HARRIETT J. ROBINSON Director March 26, 1999
/s/
- -----------------------------
SCOTT G. THOMPSON Director March 26, 1999
/s/
- -----------------------------
MARK C. WEST Director March 26, 1999
/s/
- -----------------------------
WILLIAM H. WHALEY, M.D. Director March 26, 1999
/s/
- -----------------------------
DOM H. WYANT Director March 26, 1999
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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 26, 1999. 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.
/s/
---------------------------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 26, 1999
22
<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,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Current assets:
Cash and short-term investments $ 130 $ 223
Investment in insurance subsidiaries 110,587 107,124
Income taxes receivable from subsidiaries - 137
Other assets 1,884 2,424
- --------------------------------------------------------------------------------
$112,601 $109,908
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,400 $ 1,000
Other payables 4,320 3,125
- --------------------------------------------------------------------------------
Total current liabilities 6,720 4,125
Income taxes payable to subsidiaries 64 -
Long-term debt 23,600 27,600
Shareholders' equity 82,217 78,183
- --------------------------------------------------------------------------------
$112,601 $109,908
================================================================================
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,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
REVENUE
Fees, rentals and interest
income from subsidiaries $ 4,230 $ 3,841 $ 5,662
Distributed earnings from
subsidiaries 7,054 11,209 6,850
Other 1,155 20 94
- --------------------------------------------------------------------------------
Total revenue 12,439 15,070 12,606
GENERAL AND ADMINISTRATIVE EXPENSES 6,407 5,305 6,073
INTEREST EXPENSE 2,146 2,902 3,292
- --------------------------------------------------------------------------------
3,886 6,863 3,241
INCOME TAX BENEFIT (1) 1,703 1,862 2,054
- --------------------------------------------------------------------------------
5,589 8,725 5,295
EQUITY IN UNDISTRIBUTED EARNINGS OF
CONSOLIDATED SUBSIDIARIES, NET 2,969 (692) 2,316
- --------------------------------------------------------------------------------
Income from continuing operations 8,558 8,033 7,611
(Loss) from discontinued
operations, net - - (4,447)
- --------------------------------------------------------------------------------
Net income $ 8,558 $ 8,033 $ 3,164
================================================================================
(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,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,558 $ 8,033 $ 3,164
Adjustments to reconcile net income
to net cash provided by operating
activities:
Realized investment gains (1,151) - -
Depreciation and amortization 670 591 452
Equity in undistributed earnings
of consolidated subsidiaries (2,969) 692 (2,316)
Loss from discontinued operations - - 4,447
Change in intercompany taxes 201 (715) (245)
Decrease in other liabilities (11) (157) (262)
Other, net 186 (245) 2,528
- --------------------------------------------------------------------------------
Net cash provided by
operating activities 5,484 8,199 7,768
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Leath
Furniture, net - - 3,645
Additions to property and equipment (305) (536) (1,177)
- --------------------------------------------------------------------------------
Net cash (used in) provided
by investing activities (305) (536) 2,468
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bank financing - 5,617 11,352
Preferred stock dividends to
affiliated shareholders (315) (315) (315)
Purchase of treasury shares (1,447) (558) (338)
Retirements and payments of
long-term debt and notes
payable to affiliates (2,600) (12,628) (20,662)
Redemption of preferred stock (1,000) - -
Proceeds from exercise of stock
options 90 62 85
- --------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (5,272) (7,822) (9,878)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash (93) (159) 358
Cash at beginning of year 223 382 24
- --------------------------------------------------------------------------------
Cash at end of year $ 130 $ 223 $ 382
================================================================================
Supplemental disclosure:
Cash paid for interest $ 2,143 $ 2,958 $ 3,763
================================================================================
Cash paid for income taxes $ 330 $ 85 $ 116
================================================================================
Issuance of stock to acquire SIA, Inc. $ 66 $ 1,212 $ -
================================================================================
The notes to consolidated financial statements are an
integral part of these condensed statements.
II-3
<PAGE>
<TABLE>
Schedule III
Page 1 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
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, 1998:
Bankers Fidelity.......... $13,972 $ 44,510 $ 2,874 $ 2,065
American Southern......... 1,378 46,952 11,830 1,629
Georgia Casualty.......... 1,531 34,218 8,267 32
- ------------------------------------------------------------------------------------------------------------------------------------
$16,881 $125,680 (1) $22,971 $ 3,726
====================================================================================================================================
December 31, 1997:
Bankers Fidelity.......... $13,412 $ 44,070 $ 2,631 $ 2,001
American Southern......... 1,748 47,783 12,964 1,962
Georgia Casualty.......... 1,323 34,056 8,817 34
- ------------------------------------------------------------------------------------------------------------------------------------
$16,483 $125,909 (2) $24,412 $ 3,997
====================================================================================================================================
December 31, 1996:
Bankers Fidelity.......... $12,237 $ 40,610 $ 2,135 $ 1,912
American Southern......... 2,131 44,652 16,481 1,693
Georgia Casualty.......... 811 35,197 6,484 34
- ------------------------------------------------------------------------------------------------------------------------------------
$15,179 $120,459 (3) $25,100 $ 3,639
====================================================================================================================================
- ------------------------------------
<FN>
(1) Includes future policy benefits of $38,912 and losses and claims of $86,768.
(2) Includes future policy benefits of $39,188 and losses and claims of $86,721.
(3) Includes future policy benefits of $36,385 and losses and claims of $84,074.
</FN>
</TABLE>
<PAGE>
<TABLE>
Schedule III
Page 2 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Benefits, Amortization
Investment Claims, Losses of Deferred Other Casualty
Premium Income and Settlement Acquisition Operating Premiums
Segment Revenue (Losses)* Expenses Costs Expenses Written
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Bankers Fidelity.......... $34,477 $ 5,572 $21,494 $ 2,110 $12,895 $ -
American Southern......... 35,002 4,503 23,135 4,748 5,183 33,869
Georgia Casualty.......... 21,813 3,113 16,216 3,737 3,522 21,266
Other..................... - 1,220 - - 4,323 -
- ------------------------------------------------------------------------------------------------------------------------------------
$91,292 $14,408 $60,845 $10,595 $25,923 $55,135
====================================================================================================================================
December 31, 1997:
Bankers Fidelity.......... $26,967 $ 5,175 $15,576 $ 1,944 $10,044 $ -
American Southern......... 41,799 4,353 30,182 4,932 4,997 38,282
Georgia Casualty.......... 19,916 2,811 15,260 2,828 2,988 22,280
Other..................... - (7) - - 4,293 -
- ------------------------------------------------------------------------------------------------------------------------------------
$88,682 $12,332 $61,018 $ 9,704 $22,322 $60,562
====================================================================================================================================
December 31, 1996:
Bankers Fidelity.......... $25,978 $ 5,524 $14,036 $ 2,835 $12,110 $ -
American Southern......... 41,250 4,284 28,586 5,349 5,108 41,561
Georgia Casualty.......... 18,797 2,921 12,482 2,203 4,905 19,507
Other..................... - 11 (823) - 4,465 -
- ------------------------------------------------------------------------------------------------------------------------------------
$86,025 $12,740 $54,281 $10,387 $26,588 $61,068
====================================================================================================================================
<FN>
* Includes realized investment gains (losses).
</FN>
</TABLE>
<PAGE>
<TABLE>
Schedule IV
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
REINSURANCE
(in thousands)
Ceded To Assumed
Direct Other From Other Net
Amount Companies Companies Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life insurance in force........... $275,557 $(16,941) $ - $258,616
====================================================================================================================================
Premiums --
Bankers Fidelity.................. $ 34,929 $ (2,236) $ 1,784 $ 34,477
American Southern................. 19,306 (5,215) 20,911 35,002
Georgia Casualty.................. 24,625 (3,206) 394 21,813
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums................. $ 78,860 $(10,657) $23,089 $ 91,292
====================================================================================================================================
Year ended December 31, 1997:
Life insurance in force........... $267,749 $(11,767) $ - $255,982
====================================================================================================================================
Premiums --
Bankers Fidelity.................. $ 27,427 $ (460) $ - $ 26,967
American Southern................. 22,471 (6,039) 25,367 41,799
Georgia Casualty.................. 22,884 (2,968) - 19,916
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums................. $ 72,782 $ (9,467) $25,367 $ 88,682
====================================================================================================================================
Year ended December 31, 1996:
Life insurance in force........... $220,927 $(10,072) $ - $210,855
====================================================================================================================================
Premiums --
Bankers Fidelity.................. $ 26,043 $ (65) $ - $ 25,978
American Southern................. 24,462 (5,770) 22,558 41,250
Georgia Casualty.................. 22,011 (3,214) - 18,797
- ------------------------------------------------------------------------------------------------------------------------------------
Total premiums................. $ 72,516 $ (9,049) $22,558 $ 86,025
====================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
Schedule VI
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
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
Year 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, 1998 $ 2,909 $81,170 $20,097 $56,815 $7,616 $47,579 $(7,168) $ 8,485 $39,699 $55,135
======= ======= ======= ======= ====== ======= ======== ======= ======= =======
December 31, 1997 $ 3,071 $81,839 $21,781 $61,715 $7,165 $49,163 $(3,003) $ 7,760 $41,883 $60,562
======= ======= ======= ======= ====== ======= ======== ======= ======= =======
December 31, 1996 $ 2,942 $79,849 $22,965 $60,047 $7,205 $44,468 $(3,403) $ 7,552 $41,017 $61,068
======= ======= ======= ======= ====== ======= ======== ======= ======= =======
</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.
FINANCIAL HIGHLIGHTS
(Dollars In Thousands, Except Per Share Data)
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Insurance premiums $ 91,292 $ 88,682 $ 86,025 $ 43,373 $ 41,701
Investment income 11,499 11,256 11,151 6,566 6,628
Other income 366 201 306 - -
Realized investment gains,
net 2,909 1,076 1,589 1,731 870
- --------------------------------------------------------------------------------
Total revenue 106,066 101,215 99,071 51,670 49,199
- --------------------------------------------------------------------------------
Insurance benefits and
losses incurred 60,845 61,018 54,281 24,689 21,955
Other expenses 36,518 32,026 36,975 23,897 20,727
- --------------------------------------------------------------------------------
Total benefits and
expenses 97,363 93,044 91,256 48,586 42,682
- --------------------------------------------------------------------------------
8,703 8,171 7,815 3,084 6,517
Income tax provision
(benefit) 145 138 204 (34) (1,632)
- --------------------------------------------------------------------------------
Income from continuing
operations 8,558 8,033 7,611 3,118 8,149
(Loss) income from
discontinued operations,
net - - (4,447) (10,094) 1,121
- --------------------------------------------------------------------------------
Income (loss) before
extraordinary gain 8,558 8,033 3,164 (6,976) 9,270
Extraordinary gain - - - - 100
- --------------------------------------------------------------------------------
Net income (loss) $ 8,558 $ 8,033 $ 3,164 $ (6,976) $ 9,370
================================================================================
Diluted net income (loss)
per common share:
Continuing operations $ .37 $ .35 $ .32 $ .15 $ .43
Discontinued operations - - (.23) (.54) .06
- --------------------------------------------------------------------------------
Net income (loss) $ .37 $ .35 $ .09 $ (.39) $ .49
- --------------------------------------------------------------------------------
Book value per common
share $ 3.60 $ 3.27 $ 2.29 $ 1.61 $ 1.47
Common shares outstanding 19,120 18,907 18,684 18,679 18,414
Total assets $272,849 $271,860 $252,994 $245,494 $148,740
Total long-term debt $ 23,600 $ 27,600 $ 25,994 $ 31,569 $ 24,327
Total debt $ 26,000 $ 28,600 $ 35,611 $ 44,921 $ 25,002
Total shareholders' equity
before accumulated other
comprehensive income $ 53,431 $ 48,685 $ 41,423 $ 30,889 $ 24,281
Total shareholders' equity
after accumulated other
comprehensive income $ 82,217 $ 78,183 $ 59,136 $ 46,478 $ 30,022
Operating return on
beginning equity * 11.6% 16.8% 19.5% 5.7% 47.9%
* Operating return on equity is calculated using net income from continuing
operations less realized gains and total shareholders equity before accumulated
other comprehensive income.
1
<PAGE>
Letter to the Investors
To Our Shareholders:
This is an exciting time for Atlantic American Corporation and the valuable
portfolio of companies that comprise our diverse and competitive insurance
business. In 1998, new insurance product initiatives, new marketplace niches,
and expanding market penetration combined to provide sound financial results and
further positioned us to take advantage of our industry's consolidation and the
long-term growth opportunities such consolidation provides.
Following up on our 1997 acquisitions of American Independent Life Insurance
Company and Self Insurance Administrators, Inc., we acquired two seasoned blocks
of Medicare supplement business from Commonwealth Life Insurance Company and
Colonial Life & Accident Insurance Company. To Atlantic American, consolidation
is not just about getting bigger, it is about getting better. Our recent
acquisitions, while small, have allowed us to not only spread our expenses, they
have introduced us to new regions of the country where we have not historically
been represented.
Consolidated revenue of $106 million for the year ended December 31, 1998,
represents a five percent increase over 1997 revenues of $101 million. Net
income for the year increased to $8.6 million, or $.37 per diluted share,
compared with net income of $8.0 million, or $.35 per share, in 1997. The
Company's book value per common share rose to $3.60 in 1998, compared to the
$3.27 reported in 1997.
Overall, our consolidated operations produced solid growth in a very
competitive insurance market. New sales in the Company's life and health
division grew 30 percent, with the largest premium increase occurring in our
Medicare supplement insurance business. In terms of actual policies sold, our
various life products were our largest seller, but the larger premium size of
our Medicare supplement products drove the premium increase. Premiums earned in
our property and casualty companies declined slightly due to our efforts to
maintain the proper price for our products in the face of stiff competition.
The financial strength of our portfolio of companies received strong support
2
<PAGE>
in 1998 when Standard & Poor's assigned its single 'A-' ("Strong") counterparty
credit and financial strength rating to the entire Atlantic American Insurance
Group including Bankers Fidelity Life Insurance Company, Georgia Casualty &
Surety Company, American Southern Insurance Company and American Safety
Insurance Company. We are extremely gratified by Standard & Poor's new rating of
our companies and believe it validates the decisions we have made in our efforts
to build our companies into strong regional competitors.
Although the property and casualty market continued to be extremely
competitive in 1998, we remained focused on maintaining the underwriting
discipline underlying our business. We view the fact that we are a regional
company, close to our insureds, close to our agents, and close to our markets,
as a competitive advantage. We try to maintain the local character and flair of
each of our individual companies. As the giants of our industry continue to
focus on volume sales, more and more independent agents are turning to us
because we strive to provide the personalized service they cannot find
elsewhere. We have also found that with our insureds, if we lose an account over
price, it is not long before they return to us for service.
Our efforts to improve our information systems, begun in 1993, have continued
to prove vital to our continued success. Although we are not totally finished,
we are very close to completing the process of bringing our systems into
compliance for Year 2000. The necessary changes to our information systems have
been completed and we are in the process of completing the testing phase.
We are proud to have had the opportunity in July to re-elect The Honorable
Edward E. Elson to our Board of Directors. After serving seven years on our
board, he resigned in 1993 when he was appointed United States Ambassador to the
Kingdom of Denmark, where he served until June 1998. We are excited to have him
with us again. His experience and guidance will be a significant contribution to
Atlantic American in the coming years.
We believe value is created through solid business partnerships. Clearly, we
are committed to building and maintaining strong and successful relationships
with our agents and employees, our policyholders and shareholders. Representing
our commitment toward these relationships and the creation of shareholder value,
we made the decision to redeem our Series A Preferred Stock at the end of last
year, and initiated a stock program to assist odd lot shareholders increase or
sell holdings of fewer than 100 shares. We have also continued our share buyback
program and between January 1, 1998 and December 31, 1998, we acquired
approximately 350,000 shares at a total cost of $1.6 million.
As we remain firmly positioned for future growth, everyone in the Atlantic
American Group of companies is excited about our plans and opportunities. The
management and staff of Atlantic American look forward to the challenges that
lie ahead and thank you for your continued confidence and support.
/s/ /s/
- --------------------------------------------------------------------------------
J. Mack Robinson Hilton H. Howell, Jr.
Chairman President and Chief Executive Officer
3
<PAGE>
AMERICAN SOUTHERN
" American Southern has built a strong reputation for providing quality products
and service."
Picture of the following around a conference room table:
Calvin L. Wall, Chairman and Chief Executive Officer
Edward L. Rand, Jr., Vice President and Treasurer, AAC
Roy S. Thompson, Jr., Chariman Emeritus
Scott G. Thompson, President and Chief Financial Officer
4
<PAGE>
American Southern
Products: Customized Fleet Automobile
Liability and Damage Insurance
Premiums: $35,002,000
Pre-tax Income: $6,682,000
Statutory Surplus: $30,825,000
Employees: 38
In 1998, American Southern and American Safety, together known as "American
Southern" contributed more than 45 percent of Atlantic American's revenue and
profit, primarily offering automobile liability and physical damage insurance to
large commercial policyholders in a broad geographic area. Georgia, Florida and
South Carolina are major markets among the 22 states in which American Southern
produced business in 1998.
American Southern's book of business is comprised of large contracts that are
usually long-term and substantial. Earned premiums for 1998 of $35 million
decreased from $41.8 million in 1997 due to competitive pressures and
discontinuing unprofitable books of business.
Through a consistent drive to establish new product lines and programs, renew
its long-term contracts and seek opportunities that complement existing
operations, American Southern remains strong and is well positioned to achieve
higher growth rates in the future. Both of the insurance companies that comprise
American Southern maintain an `A-` ("Excellent") rating from A.M. Best and an
'A-' ("Strong") rating from Standard & Poor's.
American Southern continues to target key markets and large blocks of
business, including state, county and municipal vehicle pools. In 1998, American
Southern formed a joint venture with AAA Carolinas Motor Club to market personal
automobile insurance to the almost one million members of the Carolinas Motor
Club. The new venture, American Auto Club Insurance Agency, LLC, while providing
a significant benefit to the members of the auto club provides an exciting
growth opportunity for 1999 and beyond. Insuring leased modular facilities, such
as the temporary facilities used for housing and storage at schools,
construction sites and sports venues, in a number of states is another new
program for American Southern that should prove invaluable in helping promote
additional growth.
With 60 years of experience initiating unique insurance plans to meet the
needs of its clients, American Southern has built a strong reputation for
providing quality products and service. By building and maintaining a solid base
of commercial policyholders, American Southern continues to earn the trust and
confidence customers have placed in the entire portfolio of Atlantic American
companies. American Southern's dedication to quality service ensures a strong
foothold in the specialty insurance business for years to come.
5
<PAGE>
GEORGIA CASUALTY & SURETY
"An outstanding relationship with the agent...keeps us in touch with the
marketplace..."
Picture of the following in conference room:
Sandra W. Doar, Vice President, Underwriting
Marc Zierten, Assistant Vice President, Marketing
Geoge G. Clements, Vice President, Claims
Andy Thompson, President, SIA
Jack R. Baker, Vice President, Underwriting
Linda S. Cook, Vice President, Secretary and Treasurer
6
<PAGE>
Georgia Casualty
Products: Workers' Compensation and
Commercial P&C Insurance
Premiums: $21,813,000
Pre-Tax Income: $1,495,000
Statutory Surplus: $18,667,000
Employees: 43
Georgia Casualty, a significant component of Atlantic American's portfolio of
companies, is a leading provider of workers' compensation and commercial
liability insurance, in the southeast. In 1998, earned premiums rose to $22
million, 24 percent of consolidated premiums for the year. Based on strong
operating results and strengthened capitalization, Georgia Casualty, in 1998,
received a 'B++' ("Very Good") rating from A.M. Best - its fifth rating upgrade
in the past four years. In addition, Georgia Casualty received an 'A-'
("Strong") rating from Standard & Poor's in 1998.
Concentrating in Georgia, Mississippi, Louisiana, Florida and Tennessee,
Georgia Casualty markets primarily to manufacturers, commercial contractors and
service industries. The Company continues to focus on expanding its business by
providing a variety of specialized programs. In 1998, the Company launched a
number of creative initiatives to broaden its product base and enhance service
to both our insureds and agents.
Georgia Casualty introduced an innovative Renters' Program, offering fire
protection in Georgia for apartments and condominiums through a unique agency
system. Georgia Casualty also introduced a liability product specifically
designed to meet the needs of homeowners' associations. Another new program
provides various coverages, including workers' compensation, commercial packages
and automobile liability, to franchisees of a national tire dealer in Florida
and Georgia. Georgia Casualty is entering its second year of endorsement by the
Georgia Fruit and Vegetable Growers Association, and we expect continued premium
growth in this program in 1999.
A dedicated electronic data interface system now offers a convenient
toll-free claim reporting system, operating 24-hours a day, seven days a week,
to expedite claim reporting and speed service to our policyholders in time of
need. A new streamlined risk management department offers risk management
evaluations, and policyholders receive personal attention through one-on-one
contact when it comes to risk control and audit services. Georgia Casualty's
team of registered nurse case managers ensures that employees return to work
quickly, eliminating lost time for the insured and reducing workers'
compensation loss costs.
To support agent sales activity, account underwriting has been improved even
more - each agent works with one underwriter on all lines of business. Georgia
Casualty continues to introduce innovative products and programs for the agent,
through niche marketing support and cost sharing on marketing materials. Georgia
Casualty continues to stand out from its competitors by offering exciting
incentive campaigns and a tradition of exceptional conventions along with a
competitive profit sharing program that rewards our most productive and
consistent growth agents.
An outstanding relationship with our agents, coupled with the fact that we
are a regional company operating in a concentrated geographic area, keeps us in
touch with the marketplace, and allows us to identify new market opportunities
and react quickly to agent needs. As Georgia Casualty completes its 50th
anniversary year and prepares to meet the challenges of the future, we are well
positioned for growth and continued profitability.
7
<PAGE>
BANKERS FIDELITY
"Bankers Fidelity was among 155 life insurance companies awarded with charter
member status in the Insurance Marketplace Standards Association."
Picture of the following around desk:
Anthony D. Chapman, Vice President and Chief Marketing Officer,
Agency Division
Robert E. Orean, Vice President and Actuary
Clark W. Berryman, Vice President, Information Services, AAC
Eugene Choate, President
8
<PAGE>
Bankers Fidelity
Products: Medicare Supplement
Senior Life Insurance
Other Supplemental Health
Premiums: $34,477,000
Pre-tax Income: $3,550,000
Statutory Surplus: $25,998,000
Employees: 71
In 1998, Bankers Fidelity continued to improve its position as an industry
leader in the senior market. The Company's core lines of senior life and
Medicare supplement products continue to produce solid revenue growth. Market
penetration continued in 1998 with sizeable increases in both premium revenue
and recruiting of new agents throughout the southeast, mid-atlantic and
midwestern United States. In addition to the strong performance of its core
lines of business, the company expanded specialty market sales in the college
funding division as well as supplemental health products in the family and
payroll deduction markets.
As a result of a focused marketing plan new sales in 1998 increased 30% over
1997. Adding depth and strength to the value of Atlantic American's portfolio of
companies, earned premiums for Bankers Fidelity grew 28% in 1998 to $34.5
million. Licensed in 33 states, and with a 'B+' ("Very Good") rating from A.M.
Best and an 'A-' ("Strong ") rating from Standard & Poor's, Bankers Fidelity is
positioned to expand its product lines utilizing its proven distribution system
in the western United States in 1999.
The Company continued to supplement internal growth in 1998 with the
acquisition of two blocks of Medicare supplement business from Commonwealth
Insurance Company and Colonial Life & Accident Insurance Company. In addition,
Bankers Fidelity divested a portion of its long-term care and home health care
business to Life and Health of America, further focusing the company on growing
and servicing its core lines of business. The purchases, which were accretive to
earnings, coupled with this divestiture increased net annualized premiums by
approximately $700,000.
In 1998, Bankers Fidelity added two new features to its line of senior life
products - a waiver of premium for hospital or nursing facility confinement and
an accelerated death benefit rider for terminal illness. In addition, the
company added an innovative discount prescription drug service, which allows
policyholders to obtain prescription medication at significant savings through a
national network of 35,000 participating pharmacies with no added cost for the
company. Value-added benefits, such as these, help to differentiate Bankers
Fidelity from its competitors.
Key to the company's outstanding growth is its commitment to and
understanding of the independent agency distribution system. The company's
distribution system, implemented in 1993 focuses on developing long-term
relationships with Regional Sales Directors who recruit and manage a strong
network of career oriented agents utilizing a proprietary lead generation
program. The company's commitment to this proven distribution strategy was key
to the successful expansion of operations throughout the mid-atlantic and
midwestern United States in 1998. This same strategy will be used to continue
solid expansion in 1999. The soundness of this strategy is reflected in the
company's double-digit new sales growth over the past five years.
Committed to maintaining the highest of ethical standards in the life
insurance industry, Bankers Fidelity was among 155 life insurance companies
awarded charter member status in the Insurance Marketplace Standards
Association, (IMSA). IMSA is a voluntary membership organization promoting high
standards of market conduct through sales, operations and home office servicing
of life and annuity products. As a key component of the Atlantic American
Insurance Group portfolio of companies, Bankers Fidelity remains committed to
maintaining these standards as well as its tradition of delivering innovative
insurance products through a network of motivated, professional insurance
agents.
9
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Share and Per Share Data)
December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents, including
short-term investments of $24,068
and $46,167 $ 32,385 $ 51,044
Investments 173,335 152,583
Receivables:
Reinsurance 22,772 24,123
Other (net of allowance for
doubtful accounts: $1,377 and $916) 18,912 18,511
Deferred acquisition costs 16,881 16,483
Other assets 4,225 4,510
Goodwill 4,339 4,606
- --------------------------------------------------------------------------------
Total assets $272,849 $271,860
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds $152,377 $154,318
Accounts payable and accrued expenses 12,255 10,759
Debt payable 26,000 28,600
- --------------------------------------------------------------------------------
Total liabilities 190,632 193,677
- --------------------------------------------------------------------------------
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
Series B preferred, 134,000 shares
issued and outstanding, $13,400
redemption value 134 134
Common stock, $1 par, 30,000,000 shares
authorized; 19,405,753 shares issued
in 1998 and 18,920,728 shares issued
in 1997 and 19,119,888 shares
outstanding in 1998 and 18,907,267
shares outstanding in 1997 19,406 18,921
Additional paid-in capital 50,406 53,316
Accumulated deficit (15,213) (23,653)
Accumulated other comprehensive income 28,786 29,498
Treasury stock, at cost, 285,865 shares
in 1998 and 13,461 shares in 1997 (1,302) (63)
- --------------------------------------------------------------------------------
Total shareholders' equity 82,217 78,183
- --------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $272,849 $271,860
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Data)
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Revenue:
Insurance premiums $ 91,292 $ 88,682 $ 86,025
Investment income 11,499 11,256 11,151
Other income 366 201 306
Realized investment gains, net 2,909 1,076 1,589
- --------------------------------------------------------------------------------
Total revenue 106,066 101,215 99,071
- --------------------------------------------------------------------------------
Benefits and expenses:
Insurance benefits and losses incurred 60,845 61,018 54,281
Commissions and underwriting expenses 27,160 23,012 26,959
Interest expense 2,146 2,902 3,292
Other 7,212 6,112 6,724
- --------------------------------------------------------------------------------
Total benefits and expenses 97,363 93,044 91,256
- --------------------------------------------------------------------------------
Income before income tax provision
and discontinued operations 8,703 8,171 7,815
Income tax provision 145 138 204
- --------------------------------------------------------------------------------
Income from continuing operations, net 8,558 8,033 7,611
Loss from discontinued operations, net - - (4,447)
- --------------------------------------------------------------------------------
Net income before preferred stock dividends 8,558 8,033 3,164
Preferred stock dividends (1,521) (1,521) (1,521)
- --------------------------------------------------------------------------------
Net income applicable to common stock $ 7,037 $ 6,512 $ 1,643
================================================================================
Diluted earnings (loss) per common share:
Continuing operations $ .37 $ .35 $ .32
Discontinued operations - - (.23)
- --------------------------------------------------------------------------------
Net income $ .37 $ .35 $ .09
================================================================================
Basic earnings (loss) per common share:
Continuing operations $ .37 $ .35 $ .33
Discontinued operations - - (.24)
- --------------------------------------------------------------------------------
Net income $ .37 $ .35 $ .09
================================================================================
11
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars In Thousands, Except Share and Per Share Data)
<TABLE>
Accumulated
Additional Other
Preferred Common Paid-In Accumulated Comprehensive Treasury
Stock(1) Stock Capital Deficit Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 164 $ 18,712 $ 46,531 $(34,446) $ 15,589 $ (72) $ 46,478
Comprehensive income:
Net income - - - 3,164 - - 3,164
Increase in unrealized
investment gains - - - - 2,124 - 2,124
-------
Total comprehensive income - - - - - - 5,288
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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 164 18,712 54,062 (31,426) 17,713 (89) 59,136
Comprehensive income:
Net income - - - 8,033 - - 8,033
Increase in unrealized
investment gains - - - - 11,785 - 11,785
-------
Total comprehensive income - - - - - - 19,818
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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 164 18,921 53,316 (23,653) 29,498 (63) 78,183
Comprehensive income:
Net income - - - 8,558 - - 8,558
Decrease in unrealized
investment gains - - - - (712) - (712)
-------
Total comprehensive income - - - - - - 7,846
Cash dividends paid on preferred
stock - - (315) - - - (315)
Dividends accrued on preferred
stock - - (1,206) - - - (1,206)
Purchase of 349,879 shares for
treasury - - - - - (1,592) (1,592)
Issuance of 77,475 shares for employee
benefit plans and stock options - - - (118) - 353 235
Preferred stock redeemed including
issuance of 469,760 shares (30) 470 (1,440) - - - (1,000)
Issuance of 15,265 shares for final
consideration of Self-Insurance
Administrators, Inc. - 15 51 - - - 66
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 134 $ 19,406 $ 50,406 $(15,213) $ 28,786 $(1,302) $ 82,217
====================================================================================================================================
<FN>
1) Includes Series A and B preferred stock
</FN>
</TABLE>
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,558 $ 8,033 $ 3,164
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred acquisition costs 10,595 9,704 8,184
Acquisition costs deferred (11,087) (11,008) (8,464)
Realized investment gains (2,909) (1,076) (1,589)
(Decrease) increase in reserves (1,941) 618 5,352
Loss from discontinued operations, net - - 4,447
Depreciation and amortization 1,368 1,121 1,102
Decrease (increase) in receivables, net 950 1,114 (3,870)
Increase (decrease) in other liabilities 291 13 (694)
Other, net (350) 98 811
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 5,475 8,617 8,443
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by discontinued operations - - (5,902)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,475 8,617 2,541
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from investments sold 8,723 7,748 44,445
Proceeds from investments matured, called or redeemed 55,665 52,074 40,868
Investments purchased (82,981) (53,544) (54,632)
Acquisition of minority interest - (101) (846)
Additions to property and equipment (394) (733) (1,616)
Sale of Leath Furniture, Inc., net - - 3,646
Acquisition of American Independent, net of $1,946 acquired (483) (719) -
Acquisition of SIA, Inc. - 25 -
Bulk reinsurance transactions, net 608 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by continuing operations (18,862) 4,750 31,865
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by discontinued operations - - (440)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (18,862) 4,750 31,425
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of bank financing - 5,617 11,352
Preferred stock dividends (315) (315) (315)
Proceeds from exercise of stock options 90 62 85
Purchase of treasury shares (1,447) (558) (338)
Repayments of debt (2,600) (12,628) (20,662)
Redemption of preferred stock (1,000) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing operations (5,272) (7,822) (9,878)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations - - 6,342
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,272) (7,822) (3,536)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (18,659) 5,545 30,430
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 51,044 45,499 15,069
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $32,385 $51,044 $45,499
====================================================================================================================================
Supplemental cash flow information:
Cash paid for interest $ 2,143 $ 2,958 $ 3,763
====================================================================================================================================
Cash paid for income taxes $ 330 $ 85 $ 116
====================================================================================================================================
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1998, the Company had five insurance subsidiaries, including
Bankers Fidelity Life Insurance Company and its wholly-owned subsidiary,
American Independent Life Insurance Company ("American Independent"), together
known as "Bankers Fidelity", American Southern Insurance Company and its
wholly-owned subsidiary, American Safety Insurance Company (together known as
"American Southern"), and Georgia Casualty & Surety Company ("Georgia
Casualty"), in addition to one non-insurance subsidiary, Self-Insurance
Administrators, Inc. ("SIA, Inc."). American Independent 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
their respective dates of acquisition and in 1997 were 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 1998 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 premiums as they are earned so as to result in
recognition of profits over the lives of the contract. This association is
accomplished by the provision of a future policy benefits reserve and the
deferral and subsequent amortization of the costs of acquiring business
"deferred policy acquisition costs" (principally commissions, premium taxes,
advertising and other expenses of issuing policies). 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 insurance and
short-duration health insurance are amortized over the effective period of the
related insurance policies. Deferred policy acquisition costs are expensed when
such costs are deemed not to be recoverable from 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 fifteen 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.
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. Other invested assets are
comprised of investments in limited partnerships, limited liability companies
and real estate joint ventures; those which are publicly traded are carried at
estimated market value, and all others are carried at historical cost. If a
decline in the value of a common stock, preferred stock, other invested asset
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 accumulated other comprehensive
income 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 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
14
<PAGE>
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, and in 1998 include common shares calculated for the
assumed conversion of the Series B Preferred Stock. Unless otherwise indicated,
earnings per share are presented on a 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 Board has issued Statement 133 "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 provides
a comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activity. SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes specific accounting
methods for hedges. Changes in the value of most derivatives and hedges will be
included in earnings in the period of the change. SFAS 133 is effective for
years beginning after June 15, 1999. The Company intends to adopt SFAS 133 on
January 1, 2000. Management does not believe the adoption of SFAS 133 will have
a material effect on the Company's financial condition or results of operations.
During the first quarter of 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use." During the
fourth quarter of 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." Both SOP 98-1 and 97-3 are
effective for fiscal years beginning after December 15, 1998. The Company
adopted SOP 98-1 and 97-3 effective January 1, 1999. Neither SOP is expected to
have a material impact on the Company's 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.
NOTE 2. INVESTMENTS
Investments are comprised of the following:
1998
- --------------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Amortized
Value Gains Losses Cost
- --------------------------------------------------------------------------------
Bonds:
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 85,784 $ 976 $ 188 $ 84,996
Obligations of states and
political subdivisions 2,714 116 - 2,598
Corporate securities 10,092 507 375 9,960
Mortgage-backed securities
(government guaranteed) 751 19 - 732
- --------------------------------------------------------------------------------
99,341 $ 1,618 $ 563 $ 98,286
Common and preferred stocks 61,007 $29,345 $ 1,454 $ 33,116
Other invested assets 4,822 - 160 4,982
Mortgage loans (estimated fair
value of $4,221) 3,851
Policy and student loans 4,268
Real estate 46
- --------------------------------------------
Investments 173,335
Short-term investments 24,068
- --------------------------------------------
Total investments $197,403
============================================
1997
- --------------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Amortized
Value Gains Losses Cost
- --------------------------------------------------------------------------------
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
Other invested assets 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
============================================
Bonds and cash having an amortized cost of $14,836 and $15,684 were on
deposit with insurance regulatory authorities at December 31, 1998 and 1997,
respectively, in accordance with statutory requirements.
15
<PAGE>
NOTE 2. INVESTMENTS (continued)
The amortized cost and carrying value of bonds and short-term investments at
December 31, 1998 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 $ 29,586 $ 29,547
Due after one year through five years 15,765 15,211
Due after five years through ten years 75,708 75,093
Due after ten years 1,599 1,771
Varying maturities 751 732
- --------------------------------------------------------------------------------
Totals $123,409 $122,354
================================================================================
Investment income was earned from the following sources:
1998 1997 1996
- --------------------------------------------------------------------------------
Bonds $ 6,363 $6,906 $6,728
Common and preferred stocks 1,903 1,373 1,622
Mortgage loans 373 554 863
CDs and commercial paper 2,004 2,130 1,443
Other 856 293 495
- --------------------------------------------------------------------------------
Total investment income 11,499 11,256 11,151
Less investment expenses (332) (340) (452)
- --------------------------------------------------------------------------------
Net investment income $11,167 $10,916 $10,699
================================================================================
A summary of realized investment gains (losses) follows:
1998
- --------------------------------------------------------------------------------
Other
Stocks Bonds Invested Assets Total
- --------------------------------------------------------------------------------
Gains $ 3,832 $ 11 $ - $ 3,843
Losses (735) (199) - (934)
- --------------------------------------------------------------------------------
Total realized investment
gains (losses), net $ 3,097 $ (188) $ - $ 2,909
================================================================================
1997
- --------------------------------------------------------------------------------
Other
Stocks Bonds Invested Assets 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
- --------------------------------------------------------------------------------
Other
Stocks Bonds Invested Assets Total
- --------------------------------------------------------------------------------
Gains $ 1,910 $ 73 $ 17 $ 2,000
Losses (411) - - (411)
- --------------------------------------------------------------------------------
Total realized investment
gains, net $ 1,499 $ 73 $ 17 $ 1,589
================================================================================
Proceeds from the sale of common and preferred stocks, bonds and other
investments are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Common and preferred stocks $ 6,999 $ 6,393 $ 9,734
Bonds - - 25,335
Student loans 1,024 1,262 6,053
Other investments 700 93 3,323
- --------------------------------------------------------------------------------
Total proceeds $8,723 $ 7,748 $44,445
================================================================================
The Company's investment in the common stock of Wachovia Corporation exceeds
10% of shareholders' equity at December 31, 1998. The carrying value of this
investment at December 31, 1998 was $26,039 with a cost basis of $3,143.
The Company's bond portfolio included 98% of investment grade securities at
December 31, 1998 as defined by the NAIC.
NOTE 3. INSURANCE RESERVES AND POLICY FUNDS
The following table presents the Company's reserves for life, accident,
health and property and casualty losses as well as loss adjustment expenses.
Amount of Insurance
in Force
- --------------------------------------------------------------------------------
Future policy benefits 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Life insurance policies:
Ordinary $27,340 $26,403 $240,642 $236,543
Mass market 8,532 8,916 17,974 19,439
Individual annuities 711 808 - -
- --------------------------------------------------------------------------------
36,583 36,127 $258,616 $255,982
================================================================================
Accident and health insurance policies 2,329 3,061
- ----------------------------------------------------------
38,912 39,188
Unearned premiums 22,971 24,412
Losses and claims 86,768 86,721
Other policy liabilities 3,726 3,997
==========================================================
Total policy liabilities $152,377 $154,318
==========================================================
Annualized premiums for accident and health insurance policies were $25,793
and $21,434 at December 31, 1998 and 1997, 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
16
<PAGE>
actuaries and updated with changes to the estimated liability recorded in the
statement of operations in the year in which such changes are known.
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
1998 1997
- --------------------------------------------------------------------------------
Balance at January 1 $86,721 $84,074
Less: Reinsurance recoverables (24,006) (26,293)
- --------------------------------------------------------------------------------
Net balance at January 1 62,715 57,781
- --------------------------------------------------------------------------------
Incurred related to:
Current year 63,030 60,252
Prior years (2,606) 21
- --------------------------------------------------------------------------------
Total incurred 60,424 60,273
- --------------------------------------------------------------------------------
Paid related to:
Current year 35,566 33,857
Prior years 23,430 22,246
- --------------------------------------------------------------------------------
Total paid 58,996 56,103
- --------------------------------------------------------------------------------
Reserves acquired due to acquisition - 764
- --------------------------------------------------------------------------------
Net balance at December 31 64,143 62,715
Plus: Reinsurance recoverables 22,625 24,006
- --------------------------------------------------------------------------------
Balance at December 31 $86,768 $86,721
================================================================================
Following is a reconciliation of total incurred claims to total insurance
benefits and losses incurred:
1998 1997
- --------------------------------------------------------------------------------
Total incurred claims $60,424 $60,273
State residual pool refunds and adjustments
to loss portfolio arrangements (1,098) (715)
Cash surrender value and matured endowments 1,438 1,381
Death benefits 81 79
- --------------------------------------------------------------------------------
Total insurance benefits and losses incurred $60,845 $61,018
================================================================================
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 81%
of the reinsurance receivables are due from three reinsurers as of December 31,
1998. Reinsurance receivables of $13,668 are with National Reinsurance
Corporation, rated 'AAA' by Standard & Poor's and 'A++' (Superior) by A.M. Best,
$2,246 are with First Colony Life Insurance Company, rated 'AA' by Standard &
Poor's and 'A++' (Superior) by A.M. Best, and $2,626 are with Pennsylvania
Manufacturers Association Insurance Company, rated 'A+' (Superior) by A.M. Best.
In the opinion of management, the Company's reinsurers are financially stable.
Allowances for uncollectible amounts are established against reinsurance
receivables, if appropriate. Premiums assumed of $23,633, $23,738, $25,739 in
1998, 1997 and 1996, respectively, include a state contract with premiums of
$12,600, $15,900, $15,400. The contract premiums represent 13.8%, 17.9% and
17.9% of net premiums earned for the years ened 1998, 1997 and 1996,
respectively. The following table reconciles premiums written to premiums earned
and summarizes the components of insurance benefits and losses incurred.
1998 1997 1996
- --------------------------------------------------------------------------------
Premiums written $ 76,964 $ 73,006 $ 70,295
Plus - premiums assumed 23,633 23,738 25,739
Less - premiums ceded (10,746) (9,345) (9,074)
- --------------------------------------------------------------------------------
Net premiums written 89,851 87,399 86,960
- --------------------------------------------------------------------------------
Change in unearned premiums 1,352 1,405 (960)
Change in unearned premiums ceded 89 (122) 25
- --------------------------------------------------------------------------------
Net change in unearned premiums 1,441 1,283 (935)
- --------------------------------------------------------------------------------
Net premiums earned $ 91,292 $ 88,682 $ 86,025
================================================================================
Provision for benefits and losses incurred $ 69,478 $ 68,043 $ 58,801
Reinsurance loss recoveries (8,633) (7,025) (4,520)
- --------------------------------------------------------------------------------
Insurance benefits and losses incurred $ 60,845 $ 61,018 $ 54,281
================================================================================
Components of reinsurance receivables are as follows:
1998 1997
- --------------------------------------------------------------------------------
Receivable on losses $22,625 $24,006
Commissions recoverable 147 117
- --------------------------------------------------------------------------------
$22,772 $24,123
================================================================================
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:
1998 1997 1996
- --------------------------------------------------------------------------------
Federal income tax provision at
statutory rate of 35% $ 3,046 $ 2,860 $ 2,735
Tax exempt interest and
dividends received deductions (452) (267) (413)
Change in asset valuation allowance -
utilization of net operating loss (2,594) (2,585) (2,260)
Alternative minimum tax 145 130 142
- --------------------------------------------------------------------------------
Total provision for income taxes $ 145 $ 138 $ 204
================================================================================
Deferred tax liabilities and assets at December 31, 1998 and 1997 are
comprised of the following:
1998 1997
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs $ (3,888) $ (3,875)
Net unrealized investment gains (10,075) (10,325)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (13,963) (14,200)
- --------------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforwards 15,077 17,409
Insurance reserves 3,131 3,515
Bad debts 482 321
- --------------------------------------------------------------------------------
Total deferred tax assets 18,690 21,245
- --------------------------------------------------------------------------------
Asset valuation allowance (4,727) (7,045)
- --------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
================================================================================
17
<PAGE>
NOTE 5. INCOME TAXES (continued)
The components of the provision (benefit) are:
1998 1997 1996
- --------------------------------------------------------------------------------
Current - Federal $145 $138 $204
Deferred - Federal - - -
- --------------------------------------------------------------------------------
Total $145 $138 $204
================================================================================
At December 31, 1998, the Company has regular tax loss carryforwards of
approximately $43,077 expiring generally between 2000 and 2010.
The Company has determined, based on its earnings history, that an asset
valuation allowance of $4,727 should be established against its net deferred tax
assets at December 31, 1998. The Company's asset valuation allowance decreased
by $2,318 during 1998, due primarily to the utilization of NOL carryforwards.
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.
NOTE 6. CREDIT ARRANGEMENTS
Debt payable is as follows:
1998 1997
- --------------------------------------------------------------------------------
Note payable to bank due December 31, 2000:
Balance at prime rate of interest (1997 8.50%) $ - $28,600
Balance at prime less 1/2% (1998 7.25%) 26,000 -
- --------------------------------------------------------------------------------
Total arrangements $26,000 $28,600
================================================================================
Total arrangements
Due within one year $ 2,400 $ 1,000
================================================================================
Long-term debt, due in 2000 $23,600 $27,600
================================================================================
The note payable due December 31, 2000, is payable quarterly with a payment
of $400 due at the beginning of the second quarter of 1999 and $1,000 each
quarter thereafter through 2000 with the balance due at maturity. Payments
required in 1999 have been reduced by $1,600 of prepayments made during 1998.
Interest is paid quarterly in arrears. The interest rate on the note payable to
bank changes based upon 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 and cash flow to debt service. The Company must also comply with
limitations on capital expenditures and debt obligations. The Company was in
compliance with all of the covenants associated with the note payable to bank at
December 31, 1998.
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 $1,278 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.
In connection with the acquisitions of American Independent and SIA, Inc. the
following assets and liabilities were acquired:
Cash, short-term investments $1,971
Other investments 3,585
Goodwill 2,767
Other assets 732
- --------------------------------------------------------------------------------
Total assets 9,055
- --------------------------------------------------------------------------------
Insurance reserves and policy funds 4,502
Other liabilities 593
- --------------------------------------------------------------------------------
Total liabilities 5,095
- --------------------------------------------------------------------------------
Net assets $ 3,960
================================================================================
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 for 1996. The Company completed the sale of its interest to Gulf
18
<PAGE>
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
- --------------------------------------------------------------------------------
Results of Operations:
Net sales $45,502
================================================================================
Loss from discontinued operations $(7,885)
Benefit for discontinued operations 3,438
- --------------------------------------------------------------------------------
Net loss from discontinued operations $(4,447)
================================================================================
Diluted net loss per share from discontinued
operations $ (.23)
================================================================================
NOTE 9. COMMITMENTS AND CONTINGENCIES
Litigation
The Company and its subsidiaries are parties 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 $1,188, $1,178, and $1,222 in 1998, 1997 and 1996, respectively. The
Company's future minimum lease obligations under non-cancelable operating leases
are as follows:
Year Ending December 31,
----------------------------
1999 $ 991
2000 796
2001 771
2002 626
2003 466
Thereafter 776
----------------------------
Total $4,426
============================
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 1992
Plan was amended by the Board of Directors again in 1997, and this amendment was
subsequently ratified at the 1998 Annual Meeting of Shareholders to provide for
an additional 1,000,000 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%
increments 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,
1998, an aggregate of sixty-five employees, officers and directors held options
under the two plans.
A summary of the status of the Company's stock option plans at December 31,
1998 and 1997, is as follows:
1998 1997
- --------------------------------------------------------------------------------
Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------
Options outstanding,
beginning of year 870,400 $ 3.11 625,391 $ 2.14
Options granted 338,000 3.80 379,500 4.08
Options exercised (50,000) 2.24 (129,491) 1.30
Options canceled or
expired (3,500) 3.93 (5,000) 3.25
----------- -----------
Options outstanding,
end of year 1,154,900 3.20 870,400 3.11
=========== ===========
Options exercisable 900,525 3.04 624,900 2.89
The Company does not recognize compensation cost since the option price
approximates fair value at date of grant. If compensation cost had been
recognized, the Company's net income and earnings per share would have been as
follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $ 8,558 $ 8,033 $ 3,164
Pro forma 8,082 7,787 2,972
Diluted earnings per share:
As reported $ .37 $ .35 $ .09
Pro forma .35 .34 .08
The resulting pro forma compensation cost may not be representative of that
to be expected in future years.
19
<PAGE>
NOTE 10. EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
Outstanding Exercisable
----------------------------------------------- ------------------------------
Range of Number of Weighted Average Weighted Average Number of Weighted Average
Exercise Price Options Remaining Life Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C>
$1.50 to $2.00 73,400 0.81 $1.88 73,400 $1.88
$2.00 to $2.50 345,000 2.03 $2.42 345,000 $2.42
$2.50 to $3.00 15,000 3.45 $3.00 12,500 $3.00
$3.00 to $3.50 67,500 3.01 $3.22 63,125 $3.23
$3.50 to $4.00 643,000 4.32 $3.74 400,500 $3.74
$4.00 to $4.50 6,000 4.34 $4.44 6,000 $4.44
$4.50 to $5.00 5,000 4.57 $4.94 - -
------------- -------------
1,154,900 900,525
============= =============
</TABLE>
The weighted average fair value of options granted estimated on the date of
grant using the Black-Scholes option pricing model is $1.67 and $1.97 for grants
in 1998 and 1997, respectively, based on expected dividend yields of zero;
expected lives of 5 years; risk free interest rates of 4.56% and 5.71%; and
expected volatility of 42.61% and 39.97%, for the years ended December 31, 1998
and 1997, 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 is in Company stock and with a value of
approximately $125, $103, and $102, in 1998, 1997, and 1996, respectively.
Defined Benefit Pension Plans
In April 1998, the Financial Accounting Standards Board issued Statement No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"). This statement only modifies the disclosures companies make about
their pension and nonpension benefit plans and does not alter the accounting for
these plans. The provisions of the statement are effective for years beginning
after December 15, 1997. SFAS No. 132 disclosures have been incorporated in this
document.
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, 1998, 1997 and 1996
included the following components:
1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $131 $102 $103
Interest cost 241 221 204
Expected return on plan assets (198) (187) (185)
Net amortization 19 9 14
- --------------------------------------------------------------------------------
$193 $145 $136
================================================================================
The following assumptions were used to measure the projected benefit
obligation for the benefit plans at December 31, 1998, 1997 and 1996:
1998 1997 1996
- --------------------------------------------------------------------------------
Discount rate to determine the projected
benefit obligation 6.75% 7.25% 7.75%
Expected long-term rate of return on plan
assets used to determine net periodic
pension cost 8.00% 8.00% 8.00%
Projected annual salary increases 4.50% 6.00% 6.00%
20
<PAGE>
The following table sets forth the benefit plans' funded status at December
31, 1998 and 1997:
1998 1997
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Net benefit obligation at beginning of year $3,280 $2,770
Service cost 131 102
Interest cost 241 220
Actuarial (gain) loss (132) 256
Gross benefits paid (68) (68)
- --------------------------------------------------------------------------------
Net benefit obligation at end of year $3,452 $3,280
================================================================================
Change in Plan Assets
Fair value of plan assets at beginning of year $2,508 $2,371
Actual return on plan assets 338 205
Gross benefits paid (68) (68)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $2,778 $2,508
================================================================================
Funded Status of Plan
Funded status at end of year $ (674) $ (772)
Unrecognized net actuarial loss 213 503
Unrecognized prior service cost (363) (399)
Unrecognized net transition obligation 368 405
- --------------------------------------------------------------------------------
Net amount recognized at end of year $ (456) $ (263)
================================================================================
Amounts recognized in the statement
of financial position consist of:
Prepaid benefit cost $ 30 $ 117
Accrued benefit cost (486) (379)
Additional minimum liability (29) (58)
- --------------------------------------------------------------------------------
Net amount recognized at end of year $ (485) $ (320)
================================================================================
Included in the above is one plan which is unfunded, the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets for
this plan were $761, $515 and $0 respectively as of December 31, 1998 and $762,
$437, and $0 as of December 31, 1997.
NOTE 11. PREFERRED STOCK
During the fourth quarter of 1998, the Company called for redemption all of
the outstanding shares of its Series A Convertible Preferred Stock ("Series A
Preferred Stock"). Pursuant to the terms of the Series A Preferred Stock, upon
being called for redemption the holders had the option to convert any or all of
such shares into shares of the Company's Common Stock at a specified conversion
rate. As of December 31, 1998, 20,000 shares were converted into 469,760 shares
of common stock at a conversion price of approximately $4.26 per share, and
10,000 shares were redeemed at par for $1,000,000. Annual dividends on the
Series B Preferred Stock ("Series B Preferred Stock") 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.
NOTE 12. EARNINGS PER SHARE
A reconciliation of the numerator and denominator of the earnings per common
share calculations are as follows:
For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
Per Share
Income Shares Amount
- --------------------------------------------------------------------------------
Basic Earnings Per Common Share
- -------------------------------
Net income $ 8,558 18,803
Less preferred dividends (1,521)
- -------------------------------------------------------------------
Net income available to common shareholders 7,037 18,803 $ .37
----------
Diluted Earnings Per Common Share
- ---------------------------------
Effect of dilutive stock options 271
Effect of Series B Preferred Stock 1,206 3,358
- -------------------------------------------------------------------
Net income available to common
shareholders plus assumed conversions $ 8,243 22,432 $ .37
================================================================================
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
Per Share
Income Shares 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
- --------------------------------------------------------------------------------
Per Share
Income Shares 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) (.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) (.23)
- --------------------------------------------------------------------------------
Net income available to common shareholders $ 1,643 18,882 $ .09
================================================================================
21
<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:
1998 1997 1996
- --------------------------------------------------------------------------------
Life and Health, net income $ 1,477 $ 2,523 (1) $ 1,315
Property and Casualty, net income 7,098 6,694 7,567
- --------------------------------------------------------------------------------
Statutory net income $ 8,575 $ 9,217 $ 8,882
================================================================================
Life and Health, surplus $25,998 $26,517 (1) $25,792
Property and Casualty, surplus 49,492 48,032 42,416
- --------------------------------------------------------------------------------
Total surplus $75,490 $74,549 $68,208
================================================================================
(1) 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 are subject to certain limitations without
the prior approval of the Insurance Commissioner. The Company received dividends
of $7,054 and $11,209 in 1998 and 1997, respectively, from its insurance
subsidiaries. Approval from the Insurance Commissioner was required and obtained
for a portion of the dividends received in 1997. In 1999, dividend payments by
the insurance companies in excess of $8,336 would require prior approval.
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 from time to time. 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, 1998,
1997 and 1996, the Company paid $895, $900 and $957, respectively, under the
lease.
A majority of the financing for the Company has historically been provided
through affiliates of the Company or its Chairman, in the form of debt and the
Series A Preferred Stock and Series B Preferred Stock. Effective December 31,
1998, all of the outstanding shares of the Series A Preferred Stock were either
redeemed or converted (see Note 11).
The Company has made mortgage loans to finance properties owned by its former
subsidiary, Leath Furniture, LLC ("Leath"), which is now owned by an affiliate
of the Chairman. At December 31, 1998 and 1997, the balance of mortgage loans
owed by Leath to various of the Company's insurance subsidiaries was $3,845 and
$3,921, respectively. For 1998, 1997 and 1996, interest on the mortgage loans
totaled $373, $521 and $688, respectively.
During 1998, certain of the Company's subsidiaries sold the remaining equity
investments they held in Leath for $285,000 to certain affiliates of the
Company.
Certain members of management are on the Board of Directors of Bull Run
Corporation ("Bull Run") and Gray Communications Systems, Inc. ("Gray"). At
December 31, 1998, the Company owned 620,000 common shares of Bull Run and
354,060 shares of Gray Series A Common Stock and 6,000 shares of Gray Series B
Common Stock. At December 31, 1997 the Company owned 600,000 common shares of
Bull Run and 236,040 common shares of Gray Series A Common Stock. The Company
also held $1.5 million in Gray 10.625% debentures at December 31, 1998 and 1997.
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 ("Delta Life"), which is controlled by certain
affiliates of the 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, 1998 and 1997, the face amount of these policies
was $586 and $673, respectively, and the reserve balance was $8 and $11,
respectively.
In 1998 Georgia Casualty began assuming workers' compensation premiums from
Delta Fire & Casualty Insurance Company which is controlled by certain
affiliates of the Company. Premiums assumed and commissions paid in 1998 were
$456 and $62, respectively.
NOTE 15. SEGMENT INFORMATION
The Company's three insurance subsidiaries operate with relative autonomy
and each company is evaluated based on its individual performance.
22
<PAGE>
NOTE 15. SEGMENT INFORMATION (continued)
<TABLE>
American Georgia Bankers Corporate Adjustments
Southern Casualty Fidelity & Other & Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Insurance Premiums $ 35,002 $ 21,813 $ 34,477 $ - $ - $ 91,292
Investment income,
including realized gains 4,503 3,113 5,572 1,158 62 14,408
Other income 243 44 - 4,230 (4,151) 366
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 39,748 24,970 40,049 5,388 (4,089) 106,066
Insurance benefits and losses 23,135 16,216 21,494 - - 60,845
Expenses deferred (4,378) (3,945) (2,764) - - (11,087)
Amortization expense 5,303 4,142 2,518 - - 11,963
Other expenses 9,006 7,062 15,251 8,412 (4,089) 35,642
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 33,066 23,475 36,499 8,412 (4,089) 97,363
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes $ 6,682 $ 1,495 $ 3,550 $ (3,024) $ - $ 8,703
====================================================================================================================================
Total assets $101,522 $ 65,147 $102,355 $114,412 $(110,587) $272,849
====================================================================================================================================
As of December 31, 1997
Insurance Premiums $ 41,799 $ 19,916 $ 26,967 $ - $ - $ 88,682
Investment income,
including realized gains 4,353 2,811 5,175 47 (54) 12,332
Other income 154 45 - 3,843 (3,841) 201
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 46,306 22,772 32,142 3,890 (3,895) 101,215
Insurance benefits and losses 30,182 15,260 15,576 - - 61,018
Expenses deferred (4,549) (3,342) (3,117) - - (11,008)
Amortization expense 5,405 3,152 2,268 - - 10,825
Other expenses 9,073 6,006 12,837 8,188 (3,895) 32,209
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 40,111 21,076 27,564 8,188 (3,895) 93,044
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes $ 6,195 $ 1,696 $ 4,578 $ (4,298) $ - $ 8,171
====================================================================================================================================
Total assets $102,529 $ 65,464 $ 99,591 $111,388 $(107,112) $271,860
====================================================================================================================================
As of December 31, 1996
Insurance Premiums $ 41,250 $ 18,797 $ 25,978 $ - $ - $ 86,025
Investment income,
including realized gains 4,284 2,921 5,524 100 (89) 12,740
Other income 242 21 - 5,675 (5,632) 306
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 45,776 21,739 31,502 5,775 (5,721) 99,071
Insurance benefits and losses 28,586 12,482 14,036 - (823) 54,281
Expenses deferred (5,397) (2,438) (2,831) - - (10,666)
Amortization expense 3,406 2,624 3,256 - - 9,286
Other expenses 12,448 6,922 14,520 9,363 (4,898) 38,355
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 39,043 19,590 28,981 9,363 (5,721) 91,256
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes $ 6,733 $ 2,149 $ 2,521 $ (3,588) $ - $ 7,815
====================================================================================================================================
Total assets $101,004 $ 59,198 $ 90,130 $ 97,459 $ (94,797) $252,994
====================================================================================================================================
</TABLE>
American Southern and Georgia Casualty operate in the property and casualty
insurance market, while Bankers Fidelity operates in the life and health
insurance market. All segments derive revenue from the collection of premiums,
as well as from investment income. Substantially all revenues other than those
in the corporate and other segment are from external sources.
NOTE 16. DISCLOSURES ABOUT FAIR VALUE OF 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.
1998 1997
- --------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
Assets:
Cash and short-term
investments $32,385 $32,385 $51,044 $51,044
Bonds 99,341 99,341 92,184 92,184
Common and preferred stocks 61,007 61,007 46,876 46,876
Mortgage loans 3,851 4,221 4,243 4,406
Policy and student loans 4,268 4,268 5,293 5,293
Other invested assets 4,822 4,822 3,941 3,941
Liabilities:
Debt 26,000 26,000 28,600 28,600
The fair value estimates as of December 31, 1998 and 1997 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.
23
<PAGE>
NOTE 16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following describes the methods and assumptions used by the Company in
estimating fair values:
Cash, Short-term Investments, Other Non-publicly Traded Invested Assets,
Insurance Premiums Receivable, Accounts Payable, and Accrued Liabilities
The carrying amount approximates fair value due to the short-term nature
of the instruments.
Bonds, Common and Preferred Stocks and Publicly Traded Other Invested Assets
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 do not 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.
NOTE 17. RECONCILIATION OF OTHER COMPREHENSIVE INCOME
Under Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," certain transactions and other economic events that
bypass the income statement must be displayed as other comprehensive income. The
Company's comprehensive income consists of net income and unrealized gains and
losses on securities available for sale, net of income taxes.
Other than net income, the other components of comprehensive income for the
years ended December 31, 1998, 1997 and 1996 are as follows:
December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Gain on sale of securities included
in net income $2,909 $ 1,076 $1,589
================================================================================
Other comprehensive income:
Net unrealized gain arising during year $2,197 $12,861 $3,713
Reclassification adjustment (2,909) (1,076) (1,589)
- --------------------------------------------------------------------------------
Net unrealized (loss) gain recognized in
other comprehensive income $ (712) $11,785 $2,124
================================================================================
NOTE 18. 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, 1998 and 1997:
<TABLE>
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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 $26,512 $26,039 $26,795 $26,720 $24,691 $24,339 $25,249 $26,936
====================================================================================================================================
Income:
Income before income tax
(provision) benefit, $ 1,625 $ 1,905 $ 2,854 $ 2,319 $ 1,978 $ 1,466 $ 2,418 $ 2,309
Income tax (provision) benefit (26) (106) 8 (21) (40) (20) (23) (55)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,599 $ 1,799 $ 2,862 $ 2,298 $ 1,938 $ 1,446 $ 2,395 $ 2,254
====================================================================================================================================
Diluted net income per common
share data: $ .06 $ .08 $ .13 $ .10 $ .08 $ .06 $ .11 $ .10
====================================================================================================================================
</TABLE>
24
<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, 1998, 1997 and 1996
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 "Bankers
Fidelity"), American Southern Insurance Company ("American Southern") and
Georgia Casualty & Surety Company ("Georgia Casualty" ). Effective January 1,
1997, Atlantic American Life Insurance Company was merged into Bankers Fidelity
Life Insurance Company. The following discussion should be read in conjunction
with the consolidated financial statements and notes thereto.
OVERVIEW
Atlantic American Corporation's net income for 1998 was $8.6 million ($.37
per share), compared to a net income of $8.0 million ($.35 per share) in 1997,
and $3.2 million ($.09 per share) (net income of $7.6 million or $.32 per share
from continuing operations) in 1996. The increase in earnings in 1998 was
primarily attributable to an increase in realized gains. The increase in
earnings from continuing operations in 1997 was also driven by an increase in
profitability from insurance operations.
As discussed below, 1997 represents the first full year not impacted by the
discontinued operations of the Company's previously owned retail furniture
operations.
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. Following
the consummation of the acquisition, the operations of American Independent were
consolidated into the operations of Bankers Fidelity Life Insurance Company.
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.
On April 8, 1998, the Company acquired two blocks of Medicare supplement
business from Commonwealth Life Insurance Company and from Colonial Life &
Accident Insurance Company. At the same time, the Company sold a portion of its
long-term care and home health care business to Life and Health of America. Net
proceeds received by the Company from these transactions were approximately
$600,000. The transactions increased annualized premium by approximately
$700,000.
DISCONTINUED OPERATIONS
In early 1996, the Company announced its intent to sell its furniture
operations. The furniture division, which consisted of Leath Furniture, LLC
(f/k/a Leath Furniture, Inc.) and its subsidiaries, Modernage Furniture, Inc.
and Jefferson Home Furniture Company, Inc. (collectively, "Leath"), 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).
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.
25
<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, 1998, 1997 and 1996 by company and line of business.
Net Earned Premium by Company by Line
(in thousands)
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Amount % of Amount % of Amount % of
Total Total Total
- --------------------------------------------------------------------------------
Bankers Fidelity:
Ordinary Life $10,848 11.88% $ 9,437 10.64% $ 8,937 10.39%
Mass Market Life 900 .99% 1,016 1.15% 1,303 1.51%
- --------------------------------------------------------------------------------
Total Life 11,748 12.87% 10,453 11.79% 10,240 11.90%
- --------------------------------------------------------------------------------
Medicare Supplement 19,743 21.63% 12,534 14.13% 11,560 13.44%
Cancer, accident and 2,986 3.27% 3,980 4.49% 4,178 4.86%
other health
- --------------------------------------------------------------------------------
Total Accident and 22,729 24.90% 16,514 18.62% 15,738 18.30%
Health
- --------------------------------------------------------------------------------
Total Bankers 34,477 37.77% 26,967 30.41% 25,978 30.20%
Fidelity
- --------------------------------------------------------------------------------
Georgia Casualty:
Workers' Compensation 14,344 15.71% 12,841 14.48% 13,826 16.07%
Business Automobile 3,750 4.11% 4,031 4.55% 2,550 2.96%
General Liability 1,619 1.77% 1,387 1.56% 1,152 1.34%
Property 2,100 2.30% 1,657 1.87% 1,269 1.48%
- --------------------------------------------------------------------------------
Total Georgia
Casualty 21,813 23.89% 19,916 22.46% 18,797 21.85%
- --------------------------------------------------------------------------------
American Southern:
Automobile Liability 25,539 27.98% 30,909 34.85% 30,889 35.91%
Automobile Physical
Damage 2,145 2.35% 4,508 5.08% 4,865 5.66%
General Liability 4,291 4.70% 3,116 3.51% 1,947 2.26%
Property 2,970 3.25% 3,206 3.62% 3,461 4.02%
Surety 57 .06% 60 .07% 88 .10%
- --------------------------------------------------------------------------------
Total American
Southern 35,002 38.34% 41,799 47.13% 41,250 47.95%
- --------------------------------------------------------------------------------
Total Consolidated $91,292 100.00% $88,682 100.00% $86,025 100.00%
================================================================================
Premium revenue for 1998 was $91.3 million compared to $88.7 million in 1997
and $86.0 million in 1996, a 3% increase in both 1998 and 1997. Premiums at
American Southern declined 16% in 1998 as management decided to exit some
smaller lines of business where profits were below expectations. In addition,
American Southern's premiums were impacted by a decrease in the net rate charged
for one of its large block accounts. Management believes that while this net
rate has declined, as the result of a heightened competitive environment, the
account will continue to be profitable. Georgia Casualty's earned premiums
increased 10% or $1.9 million in 1998. This increase in premium reflects the
impact of an increased marketing effort, particularly in the fourth quarter of
1997, the results of which are now being realized. Premiums from the workers'
compensation line of business, Georgia Casualty's core line, increased 12% in
1998. In 1997, Georgia Casualty's premiums increased 6% over 1996 with a decline
in workers' compensation premiums being offset by modest increases in its other
lines of business.
Earned premium at Bankers Fidelity increased 28% or $7.5 million. The
increase in premium volume is attributable to both the acquisition of American
Independent in the fourth quarter of 1997 and strong internal growth as the
result of an intensified marketing campaign. American Independent contributed
$3.0 million in earned premium in 1998 compared to $1.0 million in the
three-month period following its acquisition in 1997. Bankers Fidelity's
Medicare Supplement line increased 58% in 1998 as competitors whose primary
focus is not on this market began to exit. In addition, premiums from Bankers
Fidelity's life insurance products increased 12% with significant growth
experienced in the sale of ordinary life products. Growth in premiums of 4% in
1997 for Bankers Fidelity was primarily attributable to the Medicare Supplement
26
<PAGE>
line. Annualized premium for Bankers Fidelity increased to $38.0 million from
$33.7 million at the end of 1997 and $26.7 million at the end of 1996.
Investment income increased a modest 2% in 1998, after increasing 1% from
1996 to 1997. Although invested assets (excluding cash and short-term
investments) increased 14% over the course of the year, declining interest rates
and a flat yield curve brought down yields. Management has continued to focus on
investing in short and medium maturity bonds of high quality, in addition to
government-backed securities. In 1998, the Company also increased its holdings
in preferred stocks as management sought additional avenues to increase the
overall yield on the investment portfolio. The carrying value of funds available
for investment (which includes cash, short-term investments, bonds, and common
and preferred stocks) at December 31, 1998 was $192.7 million, an increase over
1997 of $2.6 million, due primarily to cash provided by operations offset by the
repayment of debt and preferred stock. Unrealized investment gains of $28.8
million were 2% below 1997 unrealized investment gains.
Realized investment gains increased $1.8 million in 1998 after decreasing by
$513,000 in 1997. Management is continually evaluating the composition of the
Company's investment portfolio and will periodically divest appreciated
investments as deemed appropriate.
Benefits and Expenses
Total insurance benefits and losses decreased slightly in 1998 after a 12%
increase in 1997. At American Southern, insurance benefits and losses decreased
by $7.0 million, with American Southern recording a loss ratio (the ratio of
insurance benefits and losses to premiums) of 66.1%, down from 72.2% in 1997.
The decline in the loss ratio is attributable to favorable development on past
accident years, which, when coupled with the decline in premium volume, is the
reason for the significant decline in insurance benefits and losses at American
Southern. In 1997 insurance benefits and losses at American Southern increased
$1.6 million, the result of an increase in the loss ratios from 1996 and 1997
from 69.3% to 72.2%. Georgia Casualty experienced a modest increase in insurance
benefits and losses to $16.2 million from $15.3 million in 1998. In 1997,
Georgia Casualty experienced a $2.8 million increase over 1996 and at that time
began a program of tightened underwriting standards and increased risk
management programs. As a result, the loss ratio in 1998 was 74.3%, down from
76.6% in 1997. In 1996, Georgia Casualty recorded a loss ratio of 66.4%. The
increase in the loss ratio from 1996 to 1997 was the result of worse than
anticipated claims frequency in one agent's line of business.
Insurance benefits and losses at Bankers Fidelity increased $5.9 million in
1998 primarily as a result of the increase in insurance premiums. In 1997,
insurance benefits and losses for the Company increased $1.5 million also from
increased premium volume. The loss ratio for Bankers Fidelity increased from
57.8% to 62.3% in 1998 due to a change in the mix of business. In 1998, Bankers
Fidelity had a significant increase in Medicare premiums, which have higher
expected losses than the Company's life business, but also have lower commission
and operating costs.
Commission and underwriting expenses increased 18%, or $4.1 million, in 1998
after a $3.9 million decline in 1997. The 1998 increase is due to the increased
premium volume at Bankers Fidelity and increased profit sharing at American
Southern. Much of American Southern's business is structured such that its
agents commissions are adjusted up or down depending on the loss experience of
their business. If losses decline, commission expenses will increase
accordingly. American Southern's expense ratio (the ratio of commission and
underwriting expenses to insurance premiums) increased from 23.3% in 1997 to
27.9% in 1998, the result of the aforementioned profit sharing structure. In
1996, American Southern reported an expense ratio of 24.9%. Georgia Casualty's
expense ratio increased from 27.7% to 32.3%. In 1997 the expense ratio was
favorably impacted by a contingent ceding commission received under Georgia
Casualty's reinsurance agreements which amounted to $1.0 million compared to
$161,000 in 1998. In 1996, Georgia Casualty's expense ratio was 35.3%.
The expense ratio for Bankers Fidelity decreased from 44.5% in 1997 to 43.5%
in 1998. Commission and underwriting expenses increased $3.0 million due to the
significant increase in premium volume. The decline in expense ratio is
attributable to the change in the mix of business that was previously discussed
and operating efficiencies obtained from the integration of the operations of
American Independent. In 1997, commission and underwriting expenses decreased
$3.0 million, from $14.9 million in 1996, primarily from operating efficiencies
gained from the merger of Atlantic American Life Insurance Company with Bankers
Fidelity.
The Company had a net deferral of acquisition costs of $492,000 in 1998,
compared to a net deferral of $1.3 million in 1997 and a net deferral of
$280,000 in 1996. Aside from the items previously discussed, the increase in
deferred costs is attributable to the increase in business produced at Bankers
Fidelity.
Interest expense in 1998 decreased to $2.1 million from $2.9 million in 1997
and $3.3 million in 1996. The decrease in 1998 was due to a reduction of debt in
1998 and 1997 coupled with a decline in the Company's prime rate based borrowing
rate. As a result of the Company meeting certain financial criteria, the
interest rate under the Company's term note with Wachovia Bank of Georgia, N.A.
27
<PAGE>
("Wachovia") was reduced from the prime rate of interest to 50 basis points
below the prime rate. In addition, prompted by declines in the federal lending
rate, Wachovia decreased its prime lending rate in 1998, resulting in a net
reduction in the Company's interest rate under this facility of 1.25%.
Other operating expenses increased $1.1 million, or 18%, after declining in
1997 by $612,000 and increasing by $534,000 in 1996. The increase in other
operating expenses is attributable to several one-time expenses, including
$300,000 in expenses incurred to bring the Company's computer systems into
compliance with the Year 2000 (see Year 2000 discussions below) and an increase
in general operating expenses. In 1997, the decrease over 1996 general operating
expense was the result of non-recurring legal fees incurred in 1996 relating to
the divestiture of Leath.
The Company's net tax provision of $145,000, $138,000 and $204,000 in 1998,
1997 and 1996 respectively, was primarily for alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
The major cash needs of the Company are for the payment of claims and
expenses as they come due, maintaining adequate statutory capital and surplus to
satisfy state regulatory requirements and 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
$8.6 million in 1998 compared to $9.2 million in 1997 and $8.9 million in 1996.
The statutory results in 1998 were comprised of a $5.0 million profit at
American Southern, a $2.1 million profit at Georgia Casualty and a $1.5 million
profit at Bankers Fidelity. The 1997 statutory results were comprised of a
profit of $4.8 million from American Southern, $1.9 million from Georgia
Casualty, and $2.5 million from Bankers Fidelity. The 1996 statutory results
were comprised of a profit of $5.6 million from American Southern, $2.0 million
from Georgia Casualty and $1.3 million from Bankers Fidelity.
Statutory results differ from the results of operations under generally
accepted accounting principles ("GAAP") for American Southern and Georgia
Casualty due to the deferral of acquisition costs. Bankers Fidelity's statutory
results differ from GAAP primarily due to deferral of acquisition costs, as well
as different reserving methods.
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. At December 31, 1998, the Company had
outstanding borrowings under the Credit Agreement of $26.0 million, of which
approximately $2.4 million will become due and payable during 1999. 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 addition, the Company believes
that the balance due in the year 2000 of $23.6 million can be refinanced with
the current lender if the Company so chooses.
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 1999. At December 31, 1998, the Company had accrued but unpaid
dividends on its Series B Preferred Stock totaling $3.6 million.
On December 31, 1998, the Company retired all of the outstanding shares of
Series A Convertible Preferred Stock ("Series A Stock") which paid an annual
dividend of 10.5%. Shareholders of 20,000 shares of the Series A Stock chose to
elect their conversion option and converted their shares of Series A Stock into
469,760 shares of Atlantic American Corporation common stock at a conversion
price of approximately $4.26 per share. The remaining 10,000 shares were
redeemed at par for $1,000,000.
The Company provides certain administrative and other services to each of its
insurance subsidiaries. The amounts charged to and paid by the subsidiaries in
1998 was $6.5 million and a constant at $5.6 million in 1997 and 1996. In
addition, the Company has a formal tax-sharing agreement with each of its
insurance subsidiaries. A net total of $1.9 million, $1.2 million and $3.4
million were paid to the Company under the tax-sharing agreement in 1998, 1997
and 1996, 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 $42 million at December 31, 1998.
Approximately 93% 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 the insurance subsidiaries are subject to
28
<PAGE>
annual limitations and are restricted to the accumulated statutory earnings of
the individual insurance subsidiaries. At December 31, 1998, Georgia Casualty
had $13.7 million of accumulated statutory earnings, Bankers Fidelity had $17.4
million of accumulated statutory earnings, and American Southern had $20.5
million of accumulated statutory earnings for a total of $51.6 million.
Net cash provided by operating activities totaled $5.5 million in 1998 and
$8.6 million in 1997, compared to $8.4 million in 1996. The Company incurred a
total cost of $394,000 in 1998, $733,000 in 1997 and $1.6 million in 1996 for
additions to property and equipment, which mainly represent leasehold
improvements and additions and enhancements to existing computer systems. Cash
and short-term investments decreased to $32.4 million in 1998 as funds were
shifted from short-term investments into longer-term and higher yielding
investments.
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 and equipment with embedded computer chips
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 in date sensitive systems.
The Company's operating systems, most of which depend on date sensitive data,
are integral to its business. The Company has developed a program to assess the
state of readiness of the Company's internal systems, both computer systems and
those with embedded micro-processors, and those of its vendors and customers,
the remediation measures necessary for those systems to be Year 2000 compliant,
the costs to undertake such measures and to develop appropriate contingency
plans.
The Company's program to assess its internal systems (which include both
hardware and software) is continuing. The Company has identified four critical
operating systems that require the highest level and priority of testing to
ensure that performance is not adversely affected by the Year 2000 issue. At the
end of 1998, the Company had completed all scheduled modifications to its
systems to appropriately address the Year 2000. Initial testing of these systems
has been completed and the Company is currently running on these modified
systems. Additional testing will continue through the first half of 1999. To
date, the Company has been able to remediate its systems through upgrades,
rather than system replacement. The failure of any of those systems as a result
of the Year 2000 issue would inhibit the Company's ability to conduct its
business and process claims, and would likely have a material adverse effect on
the Company's results of operations. The Company is also continuing to test less
critical information systems and systems with embedded micro-processors for
compliance, and expects that phase to be completed by the end of the first
quarter of 1999. As that testing process continues, the Company is developing
contingency plans to enable the Company to fulfill the functions performed by
those systems in the event of failure. The development of contingency plans is
ongoing; however, the Company expects to have in place contingency plans for its
critical operating systems, as well as for less critical systems and vendor
alternatives, by the beginning of the fourth quarter of 1999.
While the Company is taking every precaution to address the Year 2000 issue,
some uncertainty remains. The Company can not control the activities of its
third party vendors, and the Company may have failed to identify and remediate
all of its systems and other such uncertainties. As a result, management cannot
determine whether or not Year 2000 related problems that could arise will have a
material impact on the Company's financial condition or results of operations.
As part of this process, the Company is continuing its process of surveying
its vendors and service providers and customers in order to identify areas in
which Year 2000-related problems with external systems could cause disruptions,
delays or failures that could impact the Company. As the results of these
external surveys are assessed, the Company expects to develop appropriate
contingency plans. While unlikely, it is possible that a major service provider,
such as a utility company, may be unable to provide the Company with its needed
service for a period of time. If such an event were to happen, the Company might
not be able to provide services until the utilities are returned.
During 1998, the Company spent approximately $300,000 to modify existing
systems and applications to address the Year 2000 issue. The Company estimates
that an additional $100,000 will be incurred in 1999. The Company does not
anticipate that the costs of bringing its systems into compliance would have a
material adverse effect on the results of operations or financial condition of
the Company.
DEFERRED TAXES
At December 31, 1998, the Company had a net cumulative deferred tax asset of
zero. The net cumulative deferred tax asset is the result of $18.7 million of
deferred tax assets, offset by $13.9 million of deferred tax liabilities, and
29
<PAGE>
a $4.8 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. Due to the
uncertain nature of the ultimate realization of these carryforwards, the Company
has established a full valuation allowance against them. The Company's ability
to generate taxable income from operations is dependent upon various factors,
many of which are beyond management's control. The Company has taken measures to
ensure the existence of the carryforwards in future periods; however, there can
be no assurance that these measures will ultimately provide successful. The
Company operates in segments of the insurance industry that are extremely
competitive and writes lines of business that are subject to significant losses.
Accordingly, there can be no assurance that the Company will generate future
taxable income based on historical performance. The realization of the deferred
tax assets is 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.
INTEREST RATE AND MARKET RISK
Due to the nature of the Company's business it is exposed to both interest
rate and market risk. Changes in interest rates may result in changes in the
fair value of the Company's investments, cashflows and interest income and
expense. To mitigate this risk, the Company invests in high quality bonds and
avoids investing in securities that are directly linked to loans or mortgages.
A 100 basis point increase in interest rates at December 31, 1998 would
result in a decrease of approximately $375 in the value of the investment
portfolio. A 100 basis reduction in interest rates would not have a material
impact on the Company's results of operations.
The Company is also subject to risk from changes in equity prices. Atlantic
American owned $26.0 million of common stock of Wachovia Corporation at December
31, 1998. A 10% decrease in the share price of the common stock of Wachovia
Corporation would result in a decrease of approximately $2.6 million to
shareholders' equity.
The interest rate on the Company's note payable is tied to the prime rate of
interest. A 100 point basis increase in the prime rate would result in an
additional $260,000 in interest expense.
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 ended
December 31, 1998 and the other filings made by the Company from time to time
with the Securities and Exchange Commission.
30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlantic American Corporation:
We have audited the accompanying consolidated balance sheets of Atlantic
American Corporation (a Georgia corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 10 through 24) referred to
above present fairly, in all material respects, the financial position of
Atlantic American Corporation and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/
---------------------------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 26, 1999
MARKET INFORMATION (UNAUDITED)
The common stock of the Company is quoted on the Nasdaq National Market under
the symbol "AAME". As of December 31, 1998, the Company had approximately 5,040
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.
1998 1997
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First quarter $ 5 1/2 $ 4 5/8 $ 3 3/4 $ 3 1/16
Second quarter 5 1/16 3 7/8 3 1/4 2 1/2
Third quarter 5 1/4 4 4 1/8 2 1/2
Fourth quarter 4 15/16 3 5/8 5 1/2 4
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
December 31, stock price
close per share $ 4 7/8 $5 1/16 $3 1/16 $2 5/16 $2 1/4
Stock price percentage of
change from prior year -3.7% +65.3% +32.4% +2.8% +28.6%
31
<PAGE>
DIRECTORS
J. MACK ROBINSON
Chairman
Atlantic American Corporation
HILTON H. HOWELL, JR.
President and Chief Executive Officer
Atlantic American Corporation
THE HONORABLE EDWARD E. ELSON
Former United States Ambassador
to the Kingdom of Denmark
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
EDWARD L. RAND, JR.
Vice President and Treasurer
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
32
<PAGE>
Tissue Insert in Annual Report:
SUBSIDIARIES
Bankers Fidelity Life Insurance Company
American Independent Life Insurance Company
J. MACK ROBINSON
Chairman
HILTON H. HOWELL, JR.
Vice Chairman
EUGENE CHOATE
President
Georgia Casualty & Surety Company
J. MACK ROBINSON
Chairman and President
HILTON H. HOWELL, JR.
Vice Chairman and
Executive Vice President
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
Self-Insurance Administrators, Inc.
HILTON H. HOWELL, JR.
Chairman
ANDY M. THOMPSON
President
<PAGE>
Inside Page Cover:
SHAREHOLDER INFORMATION
ANNUAL MEETING
Atlantic American's annual meeting of shareholders will be held on Tuesday, May
4, 1999, 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, 1999, 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.
<PAGE>
(Back Cover to Annual Report)
Atlantic
American
Corporation
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319-3000
Telephone: 404-266-5500
Facsimile: 404-266-5702
Internet: www.atlam.com
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State of Incorporation
- --------------------------------------------------------------------------------
American Independent Life 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, Inc. Georgia
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated March 26, 1999 included in
Registration Statement File No. 33-56866.
/s/
- ---------------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 26, 1999
<PAGE>
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