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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
OR
|_| Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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Commission File Number 0-3722
ATLANTIC AMERICAN CORPORATION
Incorporated pursuant to the laws of the State of Georgia
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Internal Revenue Service-- Employer Identification No.
58-1027114
Address of Principal Executive Offices:
4370 Peachtree Road, N.E., Atlanta, Georgia 30319
(404) 266-5500
Indicate by check mark whether 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 |_|
The total number of shares of the registrant's Common Stock, $1 par value,
outstanding on November 10, 2000, was 21,058,617.
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<PAGE>
ATLANTIC AMERICAN CORPORATION
INDEX
Part 1. Financial Information Page No.
--------------------------------- --------
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 2
Consolidated Statements of Operations -
Three months and nine months ended September 30, 2000 3
and 1999
Consolidated Statements of Shareholders' Equity -
Nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About 17
Market Risk
Part II. Other Information
Item 6. Exhibits and reports on Form 8-K 18
Signature 19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited; In thousands, except share and per share data)
September December
30, 31,
2000 1999
----------------------
Cash, including short-term investments
of $10,756 and $22,471 $ 24,194 $ 34,306
-----------------------
Investments:
Bonds (cost: $161,487 and $143,220) 156,694 137,000
Common and preferred stocks (cost:
$32,686 and $31,183) 43,731 48,684
Other invested assets (cost: $6,102 and $4,943) 6,415 5,717
Mortgage loans 3,565 3,645
Policy and student loans 2,793 3,749
Real estate 46 46
------------------------
Total investments 213,244 198,841
------------------------
Receivables:
Reinsurance 41,631 39,287
Other (net of allowance for bad debts: $1,251 and
$1,717) 40,465 28,478
Deferred income taxes, net 5,400 4,299
Deferred acquisition costs 23,579 20,398
Other assets 4,980 5,074
Goodwill 19,497 20,461
------------------------
Total assets $ 372,990 $351,144
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds:
Future policy benefits $ 41,727 $ 40,093
Unearned premiums 47,438 34,293
Losses and claims 132,931 126,556
Other policy liabilities 4,678 4,203
------------------------
Total policy liabilities 226,774 205,145
Accounts payable and accrued expenses 18,349 16,051
Debt payable 50,000 51,000
------------------------
Total liabilities 295,123 272,196
------------------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, $1 par, 4,000,000 shares authorized;
Series B preferred, 134,000 shares issued and
outstanding, $13,400 redemption value 134 134
Common stock, $1 par, 30,000,000 shares authorized;
21,412,138 shares issued in 2000 and 1999 and
21,039,123 outstanding in 2000 and 21,026,786
shares outstanding in 1999 21,412 21,412
Additional paid-in capital 54,773 55,677
Accumulated deficit (1,305) (4,558)
Accumulated other comprehensive income - unrealized 4,267 7,836
investment gains, net
Treasury stock, at cost, 373,015 shares in 2000 and (1,414) (1,553)
385,352 shares in 1999
-----------------------
Total shareholders' equity 77,867 78,948
------------------------
Total liabilities and shareholders' equity $ 372,990 $351,144
========================
The accompanying notes are an integral part of these
consolidated financial statements.
-2-
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
<S> <C> <C> <C> <C>
(Unaudited; In thousands, except per share ------ ------ ----- ----
data) 2000 1999 2000 1999
----- ----- ----- ----
Revenue:
Insurance premiums $34,737 $ 29,587 $99,427 $ 77,300
Investment income 3,642 3,409 11,488 9,143
Realized investment gains, net 15 181 542 1,660
Other income 264 297 937 687
-------------------------------------------
Total revenue 38,658 33,474 112,394 88,790
-------------------------------------------
Benefits and expenses:
Insurance benefits and losses incurred 24,909 21,996 71,480 56,625
Commissions and underwriting expenses 9,375 8,674 27,204 22,092
Interest expense 1,030 928 3,131 1,858
Other 1,897 2,514 6,331 6,705
-------------------------------------------
Total benefits and expenses 37,211 34,112 108,146 87,280
-------------------------------------------
Income (loss) before income tax (benefit) 1,447 (638) 4,248 1,510
expense
Income tax (benefit) expense (48) 49 890 93
-------------------------------------------
Net income (loss) $1,495 $ (687) $3,358 $ 1,417
===========================================
Net income (loss) per common share
(basic and diluted) $ .06 $ (.05) $ .12 $ .03
===========================================
Weighted average common
shares outstanding, basic 21,035 20,893 21,024 19,693
===========================================
Weighted average common shares
outstanding, diluted 21,035 20,893 21,041 20,022
===========================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
<PAGE>
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited; Amounts in thousands)
<TABLE>
Net
Additional Unrealized
Preferred Common Paid-in Accumulated Investment Treasury
Nine Months Ended September 30,2000 Stock Stock Capital Deficit Gains Stock Total
------------------------------ ------ ------- --------- -------- --------- ------- -------
<S><C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ 134 $ 21,412 $ 55,677 $ (4,558) $ 7,836 $ (1,553) $ 78,948
Comprehensive income (loss):
Net income 3,358 3,358
Decrease in unrealized investment gains (5,491) (5,491)
Deferred income tax benefit attributable
to other comprehensive loss 1,922 1,922
-------
Total comprehensive loss (211)
-------
Dividends accrued on preferred stock (904) (904)
Purchase of shares for treasury (76) (76)
Issuance of shares for employee benefit plans
and stock options (105) 215 110
------- --------- ---------- --------- ------- ------- --------
Balance, September 30, 2000 $ 134 $ 21,412 $ 54,773 $ (1,305) $ 4,267 $ (1,414) $ 77,867
======= ========= ========== ======= ======= ======= =======
Nine Months Ended September 30, 1999
------------------------------
Balance, December 31, 1998 $ 134 $ 19,406 $ 50,406 $ (15,213) $ 28,786 $ (1,302) $ 82,217
Comprehensive income (loss):
Net income 1,417 1,417
Decrease in unrealized investment gains (11,454) (11,454)
-------
Total comprehensive loss (10,037)
-------
Stock issued for acquisition of
Association Casualty 2,008 6,477 8,485
Dividends accrued on preferred stock (905) (905)
Purchase of shares for treasury (602) (602)
Issuance of shares for employee
benefit plans and stock options (16) (37) 191 138
------- --------- -------- ------- ------- ------- ---------
Balance, September 30, 1999 $ 134 $ 21,414 $ 55,962 $ (13,833) $ 17,332 $ (1,713) $ 79,296
======= ========= ======== ========= ========= ======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-4-
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
---------------------------
2000 1999
--------------------------
(Unaudited; In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,358 $ 1,417
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred acquisition costs 11,885 8,801
Acquisition costs deferred (15,066) (10,711)
Realized investment gains (542) (1,660)
Increase in insurance reserves 21,629 14,420
Depreciation and amortization 1,270 1,097
Deferred income tax expense 820 -
Increase in receivables, net (14,333) (11,857)
Increase (decrease) in other liabilities 1,859 (13)
Other, net (976) (278)
----------------------------
Net cash provided by operating activities 9,904 1,216
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured 8,382 34,450
Investments purchased (27,065) (50,363)
Additions to property and equipment (274) (547)
Acquisition of American Independent - 197
Acquisition of Association Casualty (93) (18,836)
---------------------------
----------------------------
Net cash used by investing activities (19,050) (35,099)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 110 135
Purchase of treasury shares (76) (602)
Proceeds from bank financing - 50,000
Repayments of debt (1,000) (25,000)
----------------------------
Net cash (used) provided by financing
activities (966) 24,533
----------------------------
Net decrease in cash and cash equivalents (10,112) (9,350)
Cash and cash equivalents at beginning of period 34,306 32,385
----------------------------
Cash and cash equivalents at end of period $24,194 $ 23,035
============================
Supplemental cash flow information:
Cash paid for interest $ 3,141 $ 1,973
============================
Cash (received) paid for income taxes $ (509) $ 131
============================
The accompanying notes are an integral part of
these consolidated financial statements.
-5-
<PAGE>
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; In thousands)
Note 1. Basis of presentation.
-------
The accompanying unaudited condensed consolidated financial statements
include the accounts of Atlantic American Corporation and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The accompanying statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 2000, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
Note 2. 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 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. In June
1999, the Financial Accounting Standards Board ("FASB") issued SFAS 137, which
defers the effective date of SFAS 133 to fiscal years beginning after June 15,
2000. In June 2000 the FASB issued Statement 138 which amends SFAS 133. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective for years beginning after
June 15, 2000. The Company intends to adopt SFAS 133, on January 1, 2001.
Management does not believe the adoption of SFAS 133, as amended, will have a
material effect on the Company's financial condition or results of operations.
Note 3. Segment Information
The Company has four principal insurance subsidiaries that each focus on a
specific geographic region and/or specific products. Each company is managed
independently and is evaluated on its individual performance. The following
summary sets forth each company's revenue and pretax income (loss) for the
quarter and year-to-date periods ended September 30, 2000 and 1999.
Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
2000 1999 2000 1999
---------- ----------- -------- -------
American Southern $ 10,763 $ 11,097 $ 32,013 $ 31,725
Association Casualty 6,311 4,760 16,828 4,760
Georgia Casualty 8,228 5,455 23,494 16,666
Bankers Fidelity 13,285 12,050 39,586 35,055
Corporate and Other 1,264 1,314 4,991 4,235
Adjustments and
eliminations (1,193) (1,202) (4,518) (3,651)
------- ------- ------- -------
Consolidated results $ 38,658 $ 33,474 $ 112,394 $ 88,790
================================================================================
-6-
<PAGE>
Income (loss) before
income tax provision
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
---------- ---------- --------- ----
American Southern $ 1,587 $ 1,822 $ 4,290 $ 4,465
Association Casualty 576 399 555 399
Georgia Casualty (593) (2,261) (78) (2,191)
Bankers Fidelity 1,271 1,153 2,930 2,713
Corporate and Other (1,394) (1,751) (3,449) (3,876)
------- ------- ------- -------
Consolidated results $ 1,447 $ (638) $ 4,248 $ 1,510
================================================================================
Note 4. Credit Arrangements
The Company is a party to a five-year revolving credit facility that provides
for borrowings up to $30,000. The interest rate on the borrowings under the
facility is based upon the London Interbank Offered Rate ("LIBOR") plus an
applicable margin, 2.75% at September 30, 2000. The credit facility
provides for the payment of all of the outstanding principal balance at June 30,
2004 with no required principal payments prior to that time.
The Company also has outstanding $25,000 of Series 1999, Variable Rate Demand
Bonds (the "Bonds") due July 1, 2009. The Bonds, which are redeemable at the
Company's option, pay a variable interest rate that approximates 30-day LIBOR.
The Bonds are backed by a thirteen-month letter of credit issued by Wachovia
Bank, N.A. The cost of the letter of credit and its associated fees are 2.75%,
making the effective rate on the Bonds LIBOR plus 2.75% at September 30, 2000.
The interest on the Bonds is payable monthly and the letter of credit fees are
payable quarterly. The Bonds do not require the repayment of any principal
prior to maturity.
Beginning October 1, 2000, as a result of the Company meeting certain
financial objectives set forth in its credit facility, the margin on the
revolving credit facility has been decreased to 2.50% and the cost of the
letter of credit has been decreased to this same level. The margin on the
revolving credit facility and the cost of the letter of credit can be further
reduced if the Company meets certain additional financial objectives during
2000. The Company is in compliance with all debt covenants at September 30, 2000
and expects to remain in compliance for the remainder of 2000.
Note 5. Reconciliation of Other Comprehensive Loss
-------
September 30,
2000 1999
---------------------
Gain on sale of securities
included in net income $ 542 $ 1,660
========================
Other comprehensive loss:
Net pre-tax unrealized loss
arising during year $ (4,949) $ (9,794)
Reclassification adjustment (542) (1,660)
------------------------
Net pre-tax unrealized loss
recognized in other comprehensive loss (5,491) (11,454)
Deferred income tax benefit attributable to
other comprehensive loss 1,922 -
---------------------------
Net unrealized loss recognized in other
comprehensive loss (3,569) (11,454)
===========================
-7-
<PAGE>
Note 6. Acquisition.
-------
On July 1, 1999, the Company acquired 100% of the outstanding stock of
Association Casualty Insurance Company ("ACIC") and Association Risk Management
General Agency ("ARMGA"), for a combined price of $32,958 with $8,483 of the
purchase price paid in the form of common stock of the Company and the remaining
$24,475 paid in cash obtained from borrowings under the Company's revolving
credit facility. The acquisition of both ACIC and ARMGA were accounted for using
the purchase method of accounting. Accordingly, the Company has allocated the
purchase price of those two companies based on the fair value of the assets
acquired and liabilities assumed, and their results of operations are
included in the consolidated results of operations since the date of
acquisition.
The following summarizes the Company's pro-forma unaudited results of
operations for the nine months ended September 30, 1999, assuming the purchase
of ACIC and ARMGA had been consummated as of January 1, 1999:
Nine months ended
September 30,
1999
--------------
Revenue $ 99,781
Net income 868
Per common share data:
Basic earnings per share 0.00
Diluted earnings per share 0.00
This pro-forma financial information has been prepared for informational
purposes only and is not necessarily indicative of the results of operations had
the transaction been consummated on January 1, 1999, nor is it indicative of
results of operations that may be obtained in the future.
Note 7. Earnings per common share
A reconciliation of the numerator and denominator of the earnings per common
share calculations are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- -------------------
(In thousands, except per
share data) 2000 1999 2000 1999
------------------- ---------------------
Basic Earnings Per Common Share
Net income $ 1,495 $ (687) $ 3,358 $ 1,417
Less preferred stock
dividends (301) (301) (904) (905)
------------------------- ----------------------
Net income (loss)
applicable to
common shareholders $ 1,194 $ (988) $ 2,454 $ 512
========================= ======================
Weighted average common
shares outstanding 21,035 20,893 21,024 19,693
========================= ======================
Net income (loss) per
common share $ .06 $ (.05) $ .12 $ .03
========================= ======================
Diluted Earnings Per Common Share:
Net income (loss) applicable to
common shareholders $ 1,194 $ (988) $ 2,454 $ 512
========================= ======================
Weighted average common
shares outstanding 21,035 20,893 21,024 19,693
Effect of dilutive stock
options - - 17 329
------------------------- ----------------------
Weighted average common shares
outstanding adjusted for
dilutive stock options 21,035 20,893 21,041 20,022
========================= ======================
Net income (loss) per common
share $ .06 $ (.05) $ .12 $ .03
========================= ======================
-8-
<PAGE>
Outstanding stock options of 806,000 and 1,146,000 for the nine months and
quarter ended September 30, 2000 were excluded from the earnings per common
share calculation since their impact was antidilutive. In 1999 outstanding stock
options of 11,000 for the nine months ended September 30, 1999 were excluded
from the earnings per common share calculation since their impact was
antidilutive. For the three months ended September 30, 1999 outstanding stock
options of 342,000 plus 164,000 equivalent shares were excluded from the
earnings per common share calculations since their impact was antidilutive. The
assumed conversion of the Series B Preferred stock was excluded from the
earnings per common share calculation for 2000 and 1999 since its impact was
antidilutive.
Note 8. Commitments and Contigencies
From time to time 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.
Note 9. Prior year Reclassifications
Certain reclassifications have been made to the 1999 balances to conform with
the 2000 presentation.
-9-
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overall Corporate Results
On a consolidated basis, the Company earned $1.5 million, or $0.06 per
diluted share, during the third quarter of 2000 compared to a net loss of
$687,000, or a loss of $0.05 per diluted share, during the third quarter of
1999. Year-to-date net income was $3.4 million or $0.12 per share compared to
net income of $1.4 million or $0.03 per share for the first nine months of 1999.
Pre-tax income increased to $1.5 million during the third quarter of 2000
from a loss of $638,000 for the comparable period in 1999. For the first nine
months of 2000 pre-tax income was $4.3 million compared to $1.5 million in
the first nine months of 1999.
The Company, beginning in the first quarter of 2000, is recognizing a deferred
tax provision as a result of the Company's year-end 1999 reassessment of its
valuation reserve related to the Company's net operating loss carryforwards. In
addition, during the third quarter of the current year results were favorably
impacted by a $537,000 deferred tax benefit related to the reduction of the
Company's valuation allowance. The reduction in the valuation allowance is the
result of the utilization of net operating loss carryforwards that would have
expired in 1987. For a further discussion of the Company's valuation allowance,
refer to note 5 of the Company's consolidated financial statements included in
the Company's 1999 Annual Report on Form 10-K for the year ended December 31,
1999.
A more detailed analysis of the individual operating entities and other
corporate activities is provided below.
UNDERWRITING RESULTS
American Southern
The following is a summary of American Southern's premiums for the third quarter
and first nine months of 2000 and the comparable periods in 1999 (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------- ----------------------------
2000 1999 2000 1999
------------- ----------- ----------------------------
Gross written premiums $ 19,650 $ 8,472 $ 40,922 $ 36,107
Ceded premiums (1,312) (2,103) (3,867) (4,666)
------------- ----------- ----------------------------
Net written premiums $ 18,338 $ 6,369 $ 37,055 $ 31,441
============= =========== ============================
Net earned premiums $ 9,557 $ 9,879 $ 28,241 $ 28,243
============= =========== ============================
Gross written premiums at American Southern increased $11.2 million for the
quarter and $4.8 million for the year to date period. During the first six
months of 2000, American Southern had been recognizing the premium of one of its
larger contracts on a monthly basis instead of recording the entire premium in
the first quarter and offsetting it with unearned premium as was done in 1999.
This contract was renewed, through a competitive bidding process, in early
2000; however, one of the other parties bidding for this particular contract
appealed the award of this business to American Southern and, as a result,
American Southern had been recognizing this premium using a more conservative
measure. The Company is confident at this time that it can defend any appeal.
Therefore, during the third quarter the Company recognized, as written
premium, the remaining premium balance on this contract, which accounts for
the quarter to quarter increase. The increase in gross written premium for the
year to date period is a change in the aforementioned contract that extends
the annual premium through May, whereas in the prior year the contract ran from
February to February.
Net earned premium for the quarter decreased $322,000 and was flat for
the first nine months of 2000. The contract discussed
-10-
<PAGE>
previously, when renewed, was done so at a lower rate than in the previous year.
As a result of this rate reduction earned premium for the quarter declined
slightly in comparison to the previous year. While American Southern renewed
this contract at a lower rate, it is management's opinion that this contract
will remain profitable. This reduction in earned premium is offset partially,
particularly for the year to date period, by the increase in earned premium from
American Southern's joint venture with the AAA of the Carolinas' Motor Club.
This program began writing business during 1999 and as a result did not have
a significant impact on earned premiums in the first half of 1999. Earned
premiums from the joint venture were $815,000 in the third quarter of 2000
compared to $793,000 in the third quarter of 1999. For the year to date
period earned premiums from this program were $2.5 million in 2000 compared to
$1.5 million in 1999.
The following is American Southern's earned premium by line of business for the
third quarter and first nine months of 2000 and the comparable periods in 1999
(in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------- -----------------------
2000 1999 2000 1999
------------- ----------- ----------- -----------
Commercial automobile $ 7,060 7,312 20,587 21,113
Private passenger auto 815 793 2,455 1,471
General liability 836 980 2,627 3,278
Property 828 778 2,526 2,335
Other 18 16 46 46
------------- ----------- ----------- -----------
$ 9,557 9,879 28,241 28,243
============= =========== =========== ===========
American Southern produces much of its business through contracts with various
states and municipalities, some of which represent significant amounts of
revenue for the company. These contracts, which last from one to three years,
are periodically subject to competitive renewal quotes and the loss of a
significant contract could have a material adverse effect on the business or
financial condition of American Southern and the Company. Other than the
contract discussed above, none of American Southern's significant contracts are
currently up for renewal. In an effort to increase the number of programs
underwritten by American Southern and to insulate it from the loss of any one
program, the company is continually evaluating new underwriting programs.
The following is the loss and expense ratios of American Southern for the third
quarter and first nine months of 2000 and for the comparable periods in 1999:
Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------
2000 1999 2000 1999
------------------------ --------------------
Loss ratio 72.8% 66.0% 69.4% 70.2%
Expense ratio* 22.8% 27.3% 28.4% 25.8%
------------------------ --------------------
Combined ratio 95.6% 93.3% 97.8% 96.0%
======================== ====================
*Excludes the amortization of goodwill associated with the acquisition of
American Southern.
The loss ratio for the third quarter was 72.8% compared to 66.0% in the third
quarter of 1999. American Southern was impacted by an abnormally high occurrence
of automobile claims during the first two months of the third quarter. The
decline in the expense ratio for the quarter is a function of American
Southern's profit sharing arrangements that compensate the Company's agents
based upon the profitability of the business they write.
-11-
<PAGE>
Association Casualty
The results of both Association Casualty Insurance Company and Association Risk
Management General Agency (together referred to as "Association Casualty") are
presented for the first nine months of 2000; however, since the Company did not
own these companies during the first half of 1999 year to date comparative
information is not presented for the year to date period.
The following is a summary of Association Casualty's premiums for the third
quarter of 2000 and the comparable quarter in 1999 and the first nine months of
2000 (in thousands):
Three months ended Nine Months ended
September 30, September 30,
----------------------- -----------------
2000 1999 2000
-------------- -------- ----------
Gross written
premiums $ 6,475 $ 4,670 $ 17,239
Ceded premiums (594) (401) (1,620)
-------------- ------------- -----------------
Net written
premiums $ 5,881 $ 4,269 $ 15,619
============== ============= =================
Net earned
premiums $ 5,493 $ 4,077 $ 14,479
============== ============= =================
Association Casualty writes predominately workers' compensation insurance in the
state of Texas (95% of net earned premiums). The Texas' workers compensation
market remains extremely competitive; however, Association Casualty has been
successful in attracting new business and in increasing the rates it is charging
for renewal business. As a result of these efforts, the company has been able to
increase gross written premiums by 39% over the comparable period in 1999.
The following is the loss and expense ratio for Association Casualty for the
third quarter of 2000 and the comparable period in 1999 and the first nine
months of 2000:
Three months ended Nine months ended
September 30, September 30,
---------------- ------------------
2000 1999 2000
------------- ----------- ----------------
Loss ratio 70.6% 74.6% 77.5%
Expense ratio* 28.2% 24.3% 28.5%
------------- ----------- ----------------
Combined ratio 98.8% 98.9% 106.0%
============= =========== ================
*Excludes the amortization of goodwill and interest on an intercompany surplus
note associated with the acquisition of Association Casualty.
Association Casualty continues to be adversely impacted by the liberal
interpretation of workers' compensation laws in the State of Texas. The company
is also seeing an increase in the number of claims that are being reported for
second surgeries. The company has taken action to increase its pricing and the
impact of this action is being seen in increased premiums and a lower loss
ratio.
-12-
<PAGE>
Georgia Casualty
The following is a summary of Georgia Casualty's premiums for the third quarter
and first nine months of 2000 and the comparable periods in 1999 (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
------------------------- --------------------------
Gross written premiums $ 6,407 $ 6,513 $ 27,030 $ 19,579
Ceded premiums (1,021) (1,534) (2,860) (4,404)
------------------------- --------------------------
Net written premiums $ 5,386 $ 4,979 $ 24,170 $ 15,175
========================= ==========================
Net earned premiums $ 7,573 $ 5,014 $ 21,362 $ 14,353
========================= ==========================
Gross written premiums at Georgia Casualty decreased $106,000 during the third
quarter of 2000 and increased $7.5 million or 38.1% during the first nine months
of 2000. The increase in premium for the year to date period is the result of
several factors. First, the company, beginning in the first quarter of 2000,
began evaluating and underwriting insurance for large associations and other
homogenous risks. In addition, the company has been aggressively increasing
premiums on its renewal business and has been pricing new business at rates
higher than those used a year ago. Lastly, the new management team at Georgia
Casualty, through its relationships in the insurance industry, has broadened
the agency force used by the company. During the third quarter, Georgia Casualty
non-renewed a significant portion of its potential renewals. This action served
to offset the premium growth stemming from the aforementioned initiatives and
resulted in a slight decrease in written premium for the quarter. The decline in
ceded premium is the result of the discontinuation of the stop-loss reinsurance
agreement that the company put in place in the first quarter of 1999. Due to the
improved results seen by Georgia Casualty, the protection offered by the stop
loss agreement is, in the opinion of management, no longer necessary.
The following is Georgia Casualty's earned premium by line of business for the
third quarter and first nine months of 2000 and the comparable periods in 1999
(in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
------------------------- --------------------------
Workers' compensation $ 4,281 $ 3,455 $ 12,766 $ 9,671
General Liability 687 328 1,926 924
Commercial multi-peril 1,169 381 2,883 1,139
Commercial automobile 1,374 714 3,591 2,182
Property 62 136 196 437
----------- ----------- ---------- ------------
$ 7,573 $ 5,014 $ 21,362 $ 14,353
========================= ==========================
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<PAGE>
The following is Georgia Casualty's loss and expense ratios for the third
quarter and first nine months of 2000 and the comparable periods in 1999:
Three months ended Nine months ended
September 30, September 31,
------------------------- --------------------------
2000 1999 2000 1999
------------------------- --------------------------
Loss ratio 76.5% 108.7% 72.5% 89.0%
Expense ratio 40.0% 41.7% 37.8% 41.1%
------------------------- --------------------------
Combined ratio 116.5% 150.4% 110.3% 130.1%
========================= ==========================
The loss ratio declined to 76.5% in the third quarter of 2000 from 108.7% in the
third quarter of 1999 and from 89.0% the first nine months of 1999 to 72.5% for
the comparable period in 2000. The primary reason for the decline is the
complete elimination during the latter part of 1999 of two underwriting
programs, the performance of which was substandard. In addition, the company is
seeing the benefits of the increased rates that began in the fourth quarter of
1999. Also, the mix of business that Georgia Casualty underwrites has changed
from one of higher hazards (e.g., logging and habitational contractors) to low
and moderate hazards (e.g., retail and light manufacturing). The expense ratio
for the quarter declined to 40.0% from 41.7%, and to 37.8% from 41.1% for the
year to date period, primarily as a result of the increase in earned premiums
and only a moderate increase in fixed expenses.
Bankers Fidelity
The following summarizes Bankers Fidelity's premiums for the third quarter and
first nine months of 2000 and the comparable periods in 1999 (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------- ----------------------------
2000 1999 2000 1999
------------------------- ----------------------------
Medicare
supplement $ 8,006 $ 6,614 $ 22,998 $ 18,784
Other health 693 787 2,209 2,439
Life 3,415 3,216 10,138 9,404
---------- ----------- ------------- ----------
Total all lines $ 12,114 $ 10,617 $ 35,345 $ 30,627
========== ============= ============= ==========
Premium revenue at Bankers Fidelity increased $1.5 million or 14.1% during the
third quarter of 2000 and $4.7 million or 15.4% for the year to date period. The
most significant increase in premium arose in the Medicare supplement line of
business which increased 21.0% for the quarter and 22.4% for the year. During
1999, Bankers Fidelity expanded its Medicare supplement product into additional
states which, over the course of the year, increased the sales of this product.
The effects of this expansion are now being realized. In addition, during the
fourth quarter of 1999 and first quarter of 2000 Bankers Fidelity implemented
rate increases on this product, in some cases up to 30%. While the full effect
of these rate increases is just now beginning to impact renewal business, it
is reflected in the new business written by the company. In spite of these
rate increases, the renewal rate on this product was in excess of 86% for the
year. Bankers Fidelity is also continuing to see increased sales of its life
products. The major marketing effort at Bankers Fidelity continues to be on
this product line.
-14-
<PAGE>
The following summarizes Bankers Fidelity's operating expenses for the third
quarter and first nine months of 2000 and the comparable periods in 1999 (in
thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------- ----------------------------
2000 1999 2000 1999
------------------------- ----------------------------
Benefits and
losses $ 8,273 $ 6,975 $ 25,181 $ 20,983
Commission and
other Expenses 3,741 3,921 11,476 11,358
------------------------- ----------------------------
Total expenses 12,014 10,896 36,657 32,341
========================= ============================
The increase in both benefits and losses and commission and other expenses is
directly attributable to the increase in premiums. Benefits and losses are up
18.6% for the quarter and 20.0% for the year, slightly out pacing the increase
in premiums. As a percentage of premiums, benefits and losses were 68.3% for the
quarter and 71.2% for the year compared to 65.7% in the third quarter of 1999
and 68.5% for the first nine months of 1999. The increase is primarily
attributable to increased medical costs. The rate increases that Bankers
Fidelity has put in place will ultimately mitigate the increases in medical
costs; however, it will take several quarters before the full effect of the rate
increases is seen.
As a result of an effort to reduce commission costs as well as streamline
expenses, commission and other expenses decreased slightly during the quarter
and are up only slightly year to date. As a percentage of premium, these
expenses were 30.9% for the third quarter of 2000 compared to 36.9% in the third
quarter of 1999. Year to date this ratio improved to 32.5% from 37.1% in 1999.
INVESTMENT INCOME AND REALIZED GAINS
Investment income for the quarter increased 6.8% over the third quarter of 1999
and increased $2.3 million year to date. The addition of Association Casualty
accounted for $1.4 million of the year to date increase. The Company also
benefited from a significant gain in a real estate partnership in which it is
involved. The investment, which is accounted for under the equity method,
generated income of approximately $634,000 during the first nine months of 2000.
To take advantage of the steepening yield curve the company has shifted
securities from short-term to longer-term securities. This also contributed to
the increase in investment income for the quarter.
The Company recognized a $15,000 realized gain for the quarter. Management
continually evaluates the Company's investment portfolio and when opportunities
arise will divest appreciated investments.
INTEREST EXPENSE
Interest expense for the third quarter and first nine months of 2000 increased
significantly compared to 1999. In conjunction with the acquisition of
Association Casualty, the Company entered into a $30.0 million revolving credit
facility with Wachovia Bank, N.A. During the first quarter of 2000, the Company
paid down $1.0 million on the revolver, leaving $25.0 million outstanding under
the facility. This debt, coupled with the $25 million variable rated demand
bonds entered into during the second quarter of 1999, the proceeds of which were
used to pay down the Company's prior credit facility, bring the total debt at
June 30, 2000 to $50.0 million, up from $26.0 million in the first half 1999. In
addition both the base interest rate, LIBOR, and the interest rate margin
increased over the prior year. The interest rate on both the revolver and the
bonds is variable and is tied to 30-day LIBOR.
OTHER EXPENSES AND TAXES
The decline in other expenses for the quarter is primarily attributable to a
reduction in the bad debt reserve due to improvements as to the collectibility
of certain receivables from agents with whom the company conducts business.
-15-
<PAGE>
The Company, beginning in the first quarter of 2000 is recognizing a deferred
tax provision as a result of the Company's year-end 1999 reassessment of its
valuation reserve related to the Company's net operating loss carryforwards. For
a further discussion of the Company's valuation allowance refer to Note 5 of the
Company's consolidated financial statements included in the Company's 1999
Annual Report on Form 10-K for the year ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The major cash needs of the Company are for the payment of claims and expenses
as they come due and the maintenance of adequate statutory capital and surplus
to satisfy state regulatory requirements and meet debt service requirements of
the Company. The Company's primary source of cash is 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 from the subsidiaries, when earnings warrant such
dividend payments. By statute, the state regulatory authorities establish
minimum liquidity standards primarily to protect policyholders.
The Company's insurance subsidiaries reported a combined statutory income of
$3.5 million for the first nine months of 2000 compared to statutory net income
of $3.1 million for the first nine months of 1999. The reasons for the increase
in statutory earnings in the first nine months of 2000 are the same as those
discussed in "Results of Operations" above. Statutory results are further
compounded by the recognition of 100% of the costs of acquiring business. In a
growth environment this can cause statutory results to appear deflated.
Statutory results differ from the results of operations under generally accepted
accounting principles ("GAAP") for the Casualty Division due to the deferral of
acquisition costs. The Life and Health Division's statutory results differ from
GAAP primarily due to deferral of acquisition costs, as well as different
reserving methods.
The Company has one series of preferred stock outstanding, substantially all of
which is held by affiliates of the Company's chairman and principal
shareholders. The outstanding shares of Series B Preferred Stock ("Series B
Stock") have a stated value of $100 per share, accrue annual dividends at a rate
of $9.00 per share, in certain circumstances may be convertible into an
aggregate of approximately 3,358,000 shares of common stock, and are redeemable
at the Company's option. The Series B Stock is not currently convertible. At
September 30, 2000, the Company had accrued, but unpaid dividends on the Series
B Stock totaling $5.7 million.
On June 24, 1999, the Company issued $25.0 million in Taxable Variable Rate
Demand Bonds, Series 1999 (the "Bonds") to replace the Company's existing bank
facility. The Bonds will mature on July 1, 2009 and pay a variable interest rate
that approximates 30-day LIBOR. The Bonds are backed by a Letter of Credit
issued by Wachovia Bank, N.A. The cost of the Letter of Credit and its
associated fees was 275 basis points at September 30, 2000, making the effective
cost of the bonds LIBOR plus 275 basis points. The credit facility that was
replaced by the Bonds was a term loan with an interest rate of prime less 50
basis points and would have matured December 31, 2000.
On July 1, 1999, the Company entered into a $30.0 million revolving credit
facility with Wachovia Bank, N.A. to finance a portion of its acquisition of
Association Casualty. The revolver has a five-year term and requires no
principal payments until maturity. The interest rate on the revolver is 30-day
LIBOR plus 275 basis points at September 30, 2000. The Company paid down $1.0
million on this facility during the first quarter of 2000, reducing the
outstanding balance to $25.0 million.
The Company is required, under both credit facilities, to meet certain debt
covenants including maintaining certain ratios of earnings before interest,
taxes, depreciation and amortization ("EBITDA") to interest, debt to EBITDA and
debt to total capitalization. The Company was in compliance with all of its debt
covenants at September 30, 2000.
The Company provides certain administrative and other services to each of its
insurance subsidiaries. The amounts charged to and paid by the subsidiaries in
the first quarter of 2000 increased slightly over the first quarter of 1999. In
addition, the Company has a formal tax-sharing agreement between the Company and
its insurance subsidiaries. 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 $35 million at September 30, 2000.
-16-
<PAGE>
Over 90% of the investment assets of the insurance subsidiaries are in
marketable securities that can be converted into cash, if required; however, use
of such assets by the Company is limited by state insurance regulations.
Dividend payments to the Company by its insurance subsidiaries are limited to
the accumulated statutory earnings of the individual insurance subsidiaries,
subject to annual limitations. At September 30, 2000, Georgia Casualty had $7.2
million of accumulated statutory earnings, American Southern had $19.2 million
of accumulated statutory earnings, Association Casualty had $14.2 million of
accumulated statutory earnings, and Bankers Fidelity had $14.1 million of
accumulated statutory earnings.
Net cash provided by operating activities was $9.9 million in the first nine
months of 2000 compared to net cash provided by operating activities of $1.2
million in the first nine months of 1999. Cash and short-term investments
decreased from $34.3 million at December 31, 1999, to $24.2 million at September
30, 2000, mainly due to an increase in longer-term investments. Total
investments (excluding short-term investments) increased to $213.2 million due
to the shift from short-term investments.
The Company believes that the dividends, fees, and tax-sharing payments it
receives from its subsidiaries and, if needed, borrowings from banks 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.
Item 3. Quantitative and Qualitative Disclosures about 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, which represent the largest factor
affecting the Company, may result in changes in the fair market value of the
Company's investments, cashflows and interest income and expense. The Company is
also subject to risk from changes in equity prices.
FORWARD-LOOKING STATEMENTS
This report contains and references certain information that constitutes
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Those statements, to the extent they are not
historical facts, should be considered forward-looking and subject to various
risks and uncertainties. Such forward-looking statements are made based upon
management's assessments of various risks and uncertainties, as well as
assumptions made in accordance with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of such risks and uncertainties, including those
identified in the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1999 and the other filings made by the Company from time to
time with the Securities and Exchange Commission.
-17-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) The following exhibits are filed herewith
Exhibit 27- Financial Data Schedule
-18-
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
ATLANTIC AMERICAN CORPORATION
-----------------------------
(Registrant)
Date: November 14, 2000 By: /s/
------------------------- -----------------------------------
Edward L. Rand, Jr.
Vice President and CFO
(Principal Financial and Accounting
Officer)
-19-
