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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-3722
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ATLANTIC AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1027114
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4370 Peachtree Road, N.E.,
Atlanta, Georgia 30319
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (404) 266-5500
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of class)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. |_|
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The aggregate market value of common stock held by non-affiliates of the
registrant as of March 8, 1998, was $28,205,853. On March 8, 1998 there were
18,915,027 shares of the registrant's common stock, par value $1.00 per share,
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Annual Report to Shareholders for the year
ended December 31, 1997 - Parts I, II and IV.
2. Portions of registrant's Proxy Statement for the Annual Meeting of
Shareholders, to be held on May 5, 1998, have been incorporated in Items 10, 11,
12 and 13 of Part III of this Form 10-K.
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TABLE OF CONTENTS
PART I Page
Item 1. Business.................................................. 3
The Company.............................................. 3
Casualty Division...................................... 3
Life and Health Division............................... 5
Marketing.............................................. 5
Underwriting........................................... 6
Operating Results...................................... 8
Policyholder and Claims Services....................... 9
Reserves............................................... 10
Reinsurance............................................ 12
Competition............................................ 12
Rating................................................. 13
Regulation............................................. 13
NAIC Ratios............................................ 14
Risk-Based Capital..................................... 14
Investments............................................ 15
Employees.............................................. 16
Financial Information by Industry Segment................ 16
Executive Officers of the Registrant..................... 16
Forward-Looking Statements............................... 17
Item 2. Properties................................................. 17
Item 3. Legal Proceedings.......................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........ 17
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters.............................. 18
Item 6. Selected Financial Data.................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 19
Item 8. Financial Statements and Supplementary Data................ 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 19
PART III
Item 10. Directors and Executive Officers of the Registrant........ 20
Item 11. Executive Compensation.................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 20
Item 13. Certain Relationships and Related Transactions............ 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 20
2
PART I
ITEM 1. BUSINESS
The Company
Atlantic American Corporation, a Georgia Corporation (the "Parent" or
"Company") incorporated in 1968, is a holding company that operates through its
subsidiaries in well-defined specialty markets of the life, health, property and
casualty insurance industries. Atlantic American's principal subsidiaries are
Georgia Casualty & Surety Company ("Georgia Casualty"), incorporated in 1947 and
acquired in 1968, Bankers Fidelity Life Insurance Company ("Bankers"),
incorporated in 1955 and acquired in 1976, and American Southern Insurance
Company and its wholly owned subsidiary American Safety Insurance Company
(collectively, "American Southern"), incorporated in 1936 and acquired in 1995.
On January 1, 1997, the Company's wholly-owned subsidiary Atlantic American
Life Insurance Company ("Atlantic American Life"), incorporated in 1946 and
acquired in 1968, was merged with and into Bankers. The business and operations
of Atlantic American Life, which were substantially similar to those of Bankers,
have been consolidated into Bankers.
In addition, during 1997, the Company acquired 100% of the outstanding stock
of American Independent Life Insurance Company ("AI"). AI, domiciled in
Pennsylvania, was acquired to complement the operations of Bankers. The
operations of AI were assimilated into the operations of Bankers shortly after
the acquisition and expanded the Company's geographic presence in the Life and
Health area by five states.
During 1997, the Company also acquired 100% of the outstanding stock of
Self-Insurance Administrators, Inc. ("SIA"). SIA, domiciled in Georgia, is a
third party administrator that specializes in providing administrative services
to those companies and organizations that choose to self-insure their workers'
compensation risks. The acquisition of SIA provides the Company with an entry
into alternative services in the property and casualty insurance marketplace.
During 1996, the Company sold its majority interest in Leath Furniture, LLC
(f/k/a/ Leath Furniture, Inc., "Leath"). Leath is reflected as discontinued
operations in the Company's financial statements for 1996 and 1995.
Together Bankers and AI constitute the "Life and Health Division" and
Georgia Casualty and American Southern constitute the "Casualty Division".
The Company's strategy is to focus on well-defined niches within various
areas of the insurance marketplace. Each of the Company's subsidiaries operates
autonomously as the Company believes this allows each subsidiary to best exploit
its expertise. However, the Company seeks to develop and expand cross-marketing
and joint-underwriting opportunities as they arise.
Additional information concerning the Company and its subsidiaries may be
found in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of the Company's 1997 Annual Report to Shareholders,
which is incorporated herein by reference.
Casualty Division
The Casualty Division is divided into two distinct operating entities,
American Southern and Georgia Casualty. The primary products offered by the
Casualty Division are described below, followed by an overview of both
companies.
Workers' Compensation insurance policies provide indemnity and medical
----------------------
benefits to insured workers for injuries sustained in the course of their
employment.
Business Automobile Insurance policies provide for bodily injury or property
-----------------------------
damage liability coverage, uninsured motorists coverage, and physical damage
coverage.
General Liability Insurance policies cover bodily injury and property damage
---------------------------
liability for both premises and completed operations exposures for general
classes of business.
Property insurance policies provide for payment of losses on real and
--------
personal property caused by fire and other multiple perils.
3
American Southern. American Southern provides tailored fleet automobile and
long-haul physical damage insurance coverage, on a multi-year contract basis, to
state governments, local municipalities and other large motor pools and fleets
("block accounts") that can be specifically rated and underwritten. The size of
the block accounts insured by American Southern are such that individual class
experience generally can be determined, which allows for customized policy terms
and rates. American Southern produces business in 18 of the 24 states in the
Southeast and Midwest in which it is authorized to conduct business. While the
majority of American Southern's premiums are derived from auto liability and
auto physical damage, American Southern also provides property, general
liability, and surety coverages.
The following table summarizes, for the periods indicated, the allocation of
American Southern's net earned premiums for each of its principal product lines
since its acquisition by the Company.
Year Ended December 31,
-----------------------
(in thousands)
1997 1996
---------- -----------
Automobile Physical Damage $ 4,508 $ 4,865
Automobile Liability 30,909 30,889
General Liability 3,116 1,947
Property 3,206 3,461
Surety 60 88
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Total $41,799 $41,250
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Georgia Casualty. Georgia Casualty is a property-casualty insurance company
engaged in the sale of commercial lines of insurance, focusing on underwriting
workers' compensation and commercial coverages in the Southeast.
Georgia Casualty writes business for both mainstream business accounts and
for industries that are perceived to be high risk. The company is selective in
its underwriting and focuses on insureds with stringent safety and loss control
standards, or accounts that are willing to implement such standards.
Georgia Casualty has a diversified book of business that includes commercial
lines other than workers' compensation, including business automobile, general
liability, property, commercial umbrella; and, beginning in 1997, a Business
Owners Policy ("BOP") was introduced.
Georgia Casualty concentrates its efforts in those states and industries
which management believes offer the greatest opportunity for profitability.
Currently, Georgia Casualty is focusing the majority of its new business efforts
in Georgia and Mississippi, states which management believes offer the greatest
opportunity for balanced, profitable growth. Outside of its core states, at the
end of 1997, Georgia Casualty had authority to produce business in Florida,
South Carolina, North Carolina and Tennessee and the company intends to begin
writing business in some of these states in 1998.
The following table summarizes, for the periods indicated, the allocation of
Georgia Casualty's net earned premiums for each of its principal product lines:
Year Ended December 31,
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(in thousands)
1997 1996 1995 1994 1993
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Workers' Compensation $12,841 $13,826 $14,954 $11,958 $ 9,890
Business Automobile 4,031 2,550 1,436 1,054 953
General Liability 1,387 1,152 1,025 1,065 1,180
Property 1,657 1,269 887 574 801
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Total Casualty $19,916 $18,797 $18,302 $14,651 $12,824
======================================================
4
Life and Health Division
The Life and Health Division of Atlantic American offers a variety of life
and supplemental health products with a focus on the senior and middle income
markets. Products offered by the Life and Health Division include: ordinary
life, Medicare supplement, cancer, and other supplemental health products.
Medicare supplement, offered on both a standard and preferred basis, accounts
for 46.5% of the Life and Health Division's net premiums. Life insurance,
including both whole and term life insurance policies, accounts for 38.8% of the
Life and Health Division's premiums. The Life and Health Division has begun to
offer several of its products, both life and supplemental health, through
payroll deduction services.
The following table summarizes, for the periods indicated, the allocation of
the Life and Health Division's net premiums earned for each of its principal
product lines followed by a brief description of the principal products.
Year Ended December 31,
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(in thousands)
1997 1996 1995 1994 1993
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Ordinary Life $ 9,437 $ 8,937 $ 7,037 $ 6,716 $ 5,130
Mass Market Life 1,016 1,303 1,260 1,395 1,541
-------------------------------------------------------
Total Life 10,453 10,240 8,297 8,111 6,671
-------------------------------------------------------
Medicare Supplement 12,534 11,560 11,882 13,347 15,052
Convalescent Care/
Short-Term Care 1,141 955 1,191 1,385 1,628
Medical/Surgical 122 160 211 289 389
Cancer 1,803 1,982 2,221 2,457 2,726
Hospital Indemnity 241 282 337 414 508
Accident Expense 523 677 790 892 992
Disability 150 122 142 155 154
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Total Accident and
Health 16,514 15,738 16,774 18,939 21,449
-------------------------------------------------------
Total Life and
Accident and
Health $26,967 $25,978 $25,071 $27,050 $28,120
=======================================================
Medicare Supplement. The Life and Health Division currently markets 7 of the
-------------------
10 standardized Medicare supplement policies created under the Omnibus Budget
Reconciliation Act of 1990 ("OBRA 1990") which are designed to provide insurance
coverage for certain expenses not covered by the Medicare program, including
copayments and deductibles.
Cancer. The Life and Health Division offers several policies providing for
------
payment of benefits in connection with the treatment of diagnosed cancer.
Other Accident & Health Coverages. The Life and Health Division also offers
---------------------------------
a number of other policies including convalescent care, accident expense,
hospital/surgical and disability.
Life Products. The Life and Health Division offers non-participating
--------------
individual life insurance policies with a number of available riders and
options.
Marketing
Casualty Division
American Southern. American Southern's business is marketed through a small
number of specialized, experienced independent agent. Most of American
Southern's agents are paid a moderate up-front commission with the potential for
additional commission by participating in a profit sharing arrangement that is
directly linked to the profitability of the business. In addition, a significant
portion (approximately 54% of total written premium) of American Southern's
premiums are assumed from third parties. In arrangements similar to those with
its agents, the premium assumed from these parties is adjusted based upon the
profitability of the assumed business.
5
Georgia Casualty. Georgia Casualty is represented by a field force of
approximately 100 independent agents in the sale and distribution of its
insurance products. Each agency is a party to a standard agency contract that
sets forth the commission structure and other terms and can be terminated by
either party upon thirty days written notice. Georgia Casualty also offers a
contingent profit-sharing arrangement that allows the most profitable agents to
earn additional commissions when specific loss experience and premium growth
goals are achieved. Marketing efforts, directed by experienced marketing
professionals in each state, are complemented by the underwriting, loss control,
and audit staffs of Georgia Casualty, who are available to assist agents in the
presentation of all insurance products and services to their insureds.
Life and Health Division
The Life and Health Division markets its policies through commissioned,
independent agents. In general, the Life and Health Division enters contractual
arrangements with general agents who, in turn, contract with independent agents.
The standard agreements set forth the commission arrangements and are terminable
by either party upon thirty days written notice. General agents receive an
override commission on sales made by agents contracted by them.
Management believes utilizing direct writing experienced agents, as well as
independent general agents who recruit and train their own agents, is cost
effective. All independent agents are compensated on a pure commission basis.
Using independent agents also enables the Life and Health Division to expand or
contract their sales forces at any time without incurring significant additional
expense.
The Life and Health Division has implemented a selective agent
qualification process, and had 3,500 licensed agents in 1997. The agents
concentrate their sales activities in either the accident and health or life
insurance product lines. During 1997, a total of 1,170 agents wrote policies on
behalf of the Life and Health Division, and approximately 20% of those agents
accounted for 80% of the Life and Health Division's annualized premium.
Products of the Life and Health Division compete directly with products
offered by other insurance companies, as agents may represent several insurance
companies. The Life and Health Division, in an effort to motivate agents to
market their products, offers the following agency services: a unique lead
system, competitive products and commission structures, efficient claims
service, prompt payment of commissions, simplified policy issue procedures,
periodic sales incentive programs and, in some cases, protected sales
territories consisting of counties and/or zip codes. Additionally, the Life and
Health Division has a staff of 19 employees whose primary function is to
facilitate the activities of the agents and to act as liaisons between the
agents and the Life and Health Division.
The company utilizes a distribution sales system which is centered around a
lead generation plan that rewards qualified agents with leads in accordance with
monthly production goals. In addition, a protected territory is established for
each qualified agent, which entitles them to all leads produced within that
territory. The territories are zip-code or county based and encompass enough
physical territory to produce a minimum senior population of 12,000. To allow
for the expense of lead generation, commissions were lowered on the Life and
Health Division's senior citizen life plans. In addition, the Life and Health
Division recruits at a general agent level rather than at a managing general
agent level in an effort to reduce commission expenses further.
The Company believes this distribution system solves an agent's most
important dilemma -- prospecting -- and allows the Life and Health Division to
build long-term relationships with individual producers who view the Life and
Health Division as their primary company. In addition, management believes that
the Life and Health Division's product line is less sensitive to competitor
pricing and commissions because of the perceived value of the protected
territory and the lead generation plan. Through this distribution channel,
production per agent contracted increased substantially when compared to the
Life and Health Division's general brokerage division.
Underwriting
Casualty Division
American Southern specializes in the handling of block accounts such as
states and municipalities that are generally sufficiently large to establish
separate class experience, relying upon the underwriting expertise of its
agents. In contrast, Georgia underwrites all of its accounts in-house and has
developed a team approach to underwriting with respect to renewal policies. The
renewal review team includes members of the staff from management and the
underwriting, loss control, claims and finance departments. By receiving active
input from each of these departments, the company has improved its underwriting
of the risks it continues to insure. All individuals with first-hand information
regarding an account are invited to share their information with the team.
6
During the course of the policy year, extensive use is made of loss control
representatives to assist underwriters in identifying and correcting potential
loss exposures. The results of each product line are reviewed on a stand-alone
basis. When the results are below expectations, management takes appropriate
corrective action which may include raising rates, reviewing underwriting
standards, altering or declining to renew accounts at expiration, and/or
terminating agencies with an unprofitable book of business.
American Southern also acts as a reinsurer with respect to all of the risks
associated with certain automobile policies issued by state administrative
agencies, naming the state and various local governmental entities as insureds.
Premiums written from such policies constituted 54% of American Southern's gross
premiums written in 1997. Premiums assumed of $23.7 million include a single
state contract of $15.9 million. Management believes that its relationship with
all of its agencies is good; however, the loss of any one agency as a customer
could potentially have a material adverse effect on the business or financial
condition of the company.
Since September 1991, Georgia Casualty has been a direct assignment carrier
in Georgia and is assigned direct workers' compensation policies rather than
participating in the National Workers' Compensation Reinsurance Pool. Georgia
Casualty had 171 direct assignment workers' compensation policies in force at
December 31, 1997 with a total net earned premium of $0.8 million in 1997. The
total net earned premium Georgia Casualty has been assigned has decreased from
$4.0 in 1995, to $2.5 in 1996, and to $0.8 in 1997.
Georgia Casualty continually evaluates the industries in which it writes
workers' compensation and today has a significant book of business in lines and
industries where the cause of loss is more readily identifiable and corrective
actions can be implemented through loss control programs, safety plans,
drug-free workplaces, re-employment drug testing and various other risk
reduction programs.
Life and Health Division
The Life and Health Division issues single premium life insurance policies
with face amounts of not less than $1,000. All life insurance policies are fully
underwritten, but the majority are issued with limited medical examinations
subject to maximum policy limits ranging from $100,000 for persons under age 31
to $25,000 for persons under age 51. Medical examinations are required in
connection with the issuance of life insurance policies in excess of these
limits and for any amount on policies issued to customers over age 50.
Paramedical examinations are ordered at age 41 for all life applications of
$50,000 and above. Approximately 95% of the net premiums earned for life
insurance sold during 1997 were derived from life insurance written below the
Life and Health Division's medical limits. For the senior market, the Life and
Health Division issue special life products on an accept-or-reject basis with a
face amount from $15,000 at age 45 to a face amount of $2,000 at age 85. The
Life and Health Division only retains a maximum amount of $50,000 with respect
to any individual life (see "Reinsurance").
Applications for insurance are reviewed as to the applicant's age and
medical history and depending upon this information, additional information may
be requested including the "Medical Information Bureau Report", medical
examinations, statements from doctors, and, where indicated, special medical
tests. If deemed necessary, the Life and Health Division uses investigative
services to supplement and substantiate information. For certain limited
coverages, the Life and Health Division has adopted simplified policy issue
procedures by which the applicant submits a short application for coverage,
typically containing only a few health related questions instead of presenting
the applicant's complete medical history. At present, approximately 20% to 30%
of the senior citizen life applications, through age 79 on the standard product
and up to age 75 on the preferred, are verified by telephone. For ages 80 and
above, 100% of the standard applicants are verified. All telephone verifications
are made by the underwriting department. Applications not meeting the
underwriting criteria are declined or additional information is requested.
7
Operating Results
The following table sets forth, on a statutory basis, the incurred losses
and loss ratios for the Company's Casualty and Life and Health Divisions during
the past five years.
Year Ended December 31
-------------------------------------------------
1997 1996 1995 1994 1993
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(dollars in thousands)
Casualty (1)
WORKERS' COMPENSATION:
Incurred losses $ 6,740 $ 6,645 $ 9,733(2) $ 7,243 $ 5,405
Loss ratio 52.5% 48.1% 65.1% 61.9% 54.7%
BUSINESS AUTOMOBILE:
Incurred losses $27,237 $23,977 $ 1,227 $ 602 $ 183
Loss ratio 69.0% 62.6% 85.5% 57.1% 19.2%
GENERAL LIABILITY:
Incurred losses $ 1,428 $ 1,242 $(1,238)(2) $ 1,080 $ 766
Loss ratio 31.3% 38.9% - 101.3% 64.9%
PROPERTY:
Incurred losses $ 1,840 $ 1,700 $ 416 $ 244 $ 223
Loss ratio 37.9% 36.0% 47.0% 42.6% 27.9%
TOTAL CASUALTY:
Incurred losses $37,245 $33,546 $ 10,138 $ 9,169 $ 6,577
Loss ratio 60.3% 55.9% 55.4% 63.7% 51.3%
Loss adjustment 13.9% 12.4% 15.2% 20.1% 19.2%
expense ratio
Expense ratio 25.3% 27.8% 31.4% 27.8% 43.7%
Combined ratio 99.5% 96.1% 102.0% 111.6% 114.2%
Life and Health
MEDICARE SUPPLEMENT:
Incurred losses $ 7,820 $ 7,136 $ 6,688 $ 7,582 $ 8,284
Loss ratio 63.0% 61.7% 57.6% 57.8% 56.5%
CONVALESCENT CARE:
Incurred losses $ 867 $ 710 $ 1,393 $ 1,486 $ 1,861
Loss ratio 74.2% 74.3% 121.0% 110.3% 121.3%
MEDICAL SURGICAL:
Incurred losses $ 103 $ 187 $ 148 $ 170 $ 279
Loss ratio 84.4% 116.6% 78.8% 61.4% 84.2%
CANCER:
Incurred losses $ 568 $ 599 $ 714 $ 885 $ 1,035
Loss ratio 31.5% 30.2% 32.9% 37.0% 39.1%
HOSPITAL INDEMNITY:
Incurred losses $ 72 $ 54 $ 171 $ 206 $ 215
Loss ratio 30.3% 41.5% 52.9% 51.4% 65.8%
ACCIDENT EXPENSE:
Incurred losses $ 47 $ 165 $ 173 $ 526 $ 622
Loss ratio 9.0% 24.4% 21.9% 58.9% 62.7%
DISABILITY INCOME:
Incurred losses $ 90 $ 37 $ 72 $ 84 $ 90
Loss ratio 60.0% 30.2% 50.7% 53.2% 58.5%
TOTAL LIFE AND HEALTH:
Incurred losses $ 9,567 $ 8,888 $ 9,359 $ 10,939 $12,386
Loss ratio 58.3% 57.2% 57.2% 58.9% 59.6%
- -----------------------
(1) Includes American Southern for 1997 and 1996 only.
(2) Includes adjustment to reallocate reserves to workers' compensation.
See "Reserves" for analysis of loss development and reserves.
8
Policyholder and Claims Services
The Company believes that prompt, efficient policyholder and claims services
are essential to its continued success in marketing its insurance products (see
"Competition"). Additionally, the Company believes that its insureds are
particularly sensitive to claim processing time and to the accessibility of
qualified staff to answer inquiries. Accordingly, the Company's policyholder and
claims services include expeditious disposition of service requests by providing
toll-free access to all customers, 24-hour claim reporting services, and direct
computer links with some of its largest accounts. The Company also utilizes a
state-of-the-art automatic call distribution system to insure timely response.
Inbound calls to customer service support groups are processed efficiently.
Operational data generated from this system allows management to further refine
ongoing client service programs and service representative training modules.
The Company supports a Customer Awareness Program as the basis for its
customer service philosophy. All personnel are required to attend customer
service classes. Hours have been expanded in all service areas to serve
customers and agents in all time zones.
Casualty Division
American Southern. American Southern controls its claims costs by utilizing
its in-house staff of claim supervisors to investigate, verify, negotiate and
settle claims. Upon notification of an occurrence purportedly giving rise to a
claim, the claims department conducts a preliminary investigation, determines
whether an insurable event has occurred and, if so, records the claim. American
Southern frequently utilizes independent adjusters and appraisers to service
claims which require on-site inspections.
Georgia Casualty. Georgia Casualty controls its claims costs by utilizing an
in-house staff of adjusters to investigate, verify, negotiate and settle claims.
Upon notification of an occurrence purportedly giving rise to a claim, the
claims department conducts a preliminary investigation to determine whether an
insurable event has occurred and, if so, records the claim. This process usually
occurs within 7 days of notification of the claim. Where appropriate, the
company utilizes independent adjusters and appraisers to service claims which
require on-site inspections.
Life and Health Division
Insureds obtain claim forms by calling the claims department customer
service group. To shorten claim processing time, a letter detailing all
supporting documents that are required to complete a claim for a particular
policy is sent to the customer along with the correct claim form. With respect
to life policies, the claim is entered into the Life and Health Division's
claims system when the proper documentation is received. Properly documented
claims are generally paid within three to nine business days of receipt. During
1997, the Life and Health Division paid approximately 118,000 claims aggregating
$14.5 million, of which approximately 113,000 claims aggregating $7.8 million
were for Medicare supplement insurance.
9
Reserves
The following table sets forth information concerning the Company's losses
and claims and loss adjustment expenses ("LAE") reserves for the periods
indicated:
1997 1996
-------------------------
Balance at January 1 $ 84,074 $ 79,514
Less: Reinsurance recoverables (26,854) (22,467)
-------------------------
Net balance at January 1 57,220 57,047
-------------------------
Incurred related to:
Current year 59,655 57,481
Prior years 21 (4,802)
-------------------------
Total incurred 59,676 52,679
-------------------------
Paid related to:
Current year 33,857 28,279
Prior years 22,246 24,227
-------------------------
Total paid 56,103 52,506
Reserves acquired due to acquisition, net 764 -
-------------------------
Net balance at December 31 61,557 57,220
Plus: Reinsurance recoverables 25,164 26,854
-------------------------
Balance at December 31 $ 86,721 $ 84,074
=========================
Casualty Division
The Casualty Division maintains loss reserves representing estimates of
amounts necessary for payment of losses and LAE. The Casualty Division also
maintains incurred but not reported reserves and bulk reserves for future
development. These loss reserves are estimates, based on known facts and
circumstances at a given point in time, of amounts the insurer expects to pay on
incurred claims. All balances are reviewed annually by qualified independent
actuaries. Reserves for LAE are intended to cover the ultimate costs of settling
claims, including investigation and defense of lawsuits resulting from such
claims. Loss reserves for reported claims are based on a case-by-case evaluation
of the type of claim involved, the circumstances surrounding the claim, and the
policy provisions relating to the type of loss. The LAE for claims reported and
claims not reported is based on historical statistical data and anticipated
future development. Inflation and other factors which may affect claim payments
are implicitly reflected in the reserving process through analysis of cost
trends and reviews of historical reserve results; however, it is difficult to
measure the effect of any one of these considerations on reserve estimates.
The Casualty Division establishes reserves for claims based upon: (a)
management's estimate of ultimate liability and claim adjusters' evaluations for
unpaid claims reported prior to the close of the accounting period, (b)
estimates of incurred but not reported claims based on past experience, and (c)
estimates of LAE. The estimated liability is continually reviewed and updated,
and changes to the estimated liability are recorded in the statement of
operations in the year in which such changes become known.
The table on the following page sets forth the development of balance sheet
reserves for unpaid losses and LAE for the Casualty Division's insurance lines
for 1987 through 1997, including periods prior to the Company's ownership of
American Southern. The top line of the table represents the estimated amount of
losses and LAE for claims arising in all prior years that were unpaid at the
balance sheet date for each of the indicated periods, including an estimate of
losses that have been incurred but not yet reported. The amounts represent
initial reserve estimates at the respective balance sheet dates for the current
and all prior years. The next portion of the table shows the cumulative amounts
paid with respect to claims in each succeeding year. The lower portion of the
table shows the reestimated amounts of previously recorded reserves based on
experience as of the end of each succeeding year.
The reserve estimates are modified as more information becomes known about
the frequency and severity of claims for individual years. The "cumulative
redundancy or deficiency" for each year represents the aggregate change in such
year's estimates through the end of 1997. In evaluating this information, it
should be noted that the amount of the redundancy or deficiency for any year
represents the cumulative amount of the changes from initial reserve estimates
for such year. Operations for any one year are only affected, favorably or
unfavorably, by the amount of the change in the estimate for such year.
Conditions and trends that have affected development of the reserves in the past
may not necessarily occur in the future. Accordingly, it is inappropriate to
predict future redundancies or deficiencies based on the data in this table.
10
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------------------------
Statutory reserve for losses
and LAE $56,712 $53,496 $53,320 $50,154 $48,031 $48,485 $50,808 $52,668 $ 47,819(1)$39,036 $35,770
Cumulative paid as of:
One year later 18,899 17,865 16,548 18,106 18,827 22,060 22,837 21,321 21,592 20,812
Two years later 25,821 25,280 25,914 27,731 32,560 35,278 33,507 32,352 32,975
Three years later 29,273 31,021 36,786 38,046 40,768 40,891 39,832 39,168
Four years later 33,674 40,295 41,872 44,267 43,745 43,713 43,249
Five years later 42,498 44,530 47,204 46,183 45,767 46,004
Six years later 46,523 49,000 48,056 47,880 47,727
Seven years later 50,658 49,835 49,704 49,671
Eight years later 51,100 51,288 51,617
Nine years later 52,424 52,363
Ten years later 53,293
Ultimate losses and LAE
reestimated as of:
End of Year 56,712 53,496 53,320 50,154 48,031 48,485 50,808 52,668 47,819(1) 39,036 35,770
One year later 51,103 49,799 46,249 47,021 46,756 53,700 53,676 53,212 47,314 40,990
Two years later 46,952 44,850 44,043 45,999 52,670 55,919 54,438 53,998 49,569
Three years later 44,138 45,568 48,446 53,040 55,865 56,064 55,313 55,752
Four years later 46,638 53,064 52,326 56,514 55,707 56,255 55,511
Five years later 54,173 56,771 56,648 56,579 56,403 56,408
Six years later 57,898 60,515 56,984 57,446 56,868
Seven years later 61,069 60,641 58,142 57,901
Eight years later 61,327 60,791 58,626
Nine years later 61,362 61,391
Ten years later 61,759
Cumulative redundancy
(deficiency) $ 2,393 $ 6,368 $ 6,016 $ 1,393 $(5,688) $(7,090) $(8,401)$(13,508) $(22,326)$(25,989)
- -------------------------
(1) Restated due to adjustment of $4.7 million for elimination of structured annuities changed to reinsurance in 1990.
11
Life and Health Division
The Life and Health Division establishes future policy benefits reserves to
meet future obligations under outstanding policies. These reserves are
calculated to satisfy policy and contract obligations as they mature. The amount
of reserves for insurance policies is calculated using assumptions for interest
rates, mortality and morbidity rates, expenses, and withdrawals. Reserves are
adjusted periodically based on published actuarial tables with some modification
to reflect actual experience (see Note 3 of Notes to Consolidated Financial
Statements for the year ended December 31, 1997).
Reinsurance
The insurance subsidiaries purchase reinsurance from unaffiliated insurers
and reinsurers to reduce their liability on individual risks and to protect
against catastrophic losses. In a reinsurance transaction, an insurance company
transfers, or "cedes," a portion or all of its exposure on insurance policies to
a reinsurer. The reinsurer assumes the exposure in return for a portion of the
premiums. The ceding of insurance does not legally discharge the insurer from
primary liability for the full amount of policies written by it, and the ceding
company incurs a loss if the reinsurer fails to meet its obligations under the
reinsurance agreement.
Casualty Division
American Southern. The limits of risks retained by American Southern vary by
type of policy and insured, and amounts in excess of such limits are reinsured.
The largest net amount insured in any one risk is $100,000. Reinsurance is
generally maintained as follows: for fire, inland marine, and commercial
automobile physical damage, recovery of losses over $40,000 up to $130,000. Net
retentions for third party losses are generally over $35,000 up to $100,000.
Catastrophe coverage for all lines except third party liability is for 95% of
$6.6 million over $400,000.
Georgia Casualty. Georgia Casualty's basic treaties cover all claims in
excess of $200,000 per person, per occurrence on casualty losses, and per risk
on property losses, up to $10.0 million per casualty claim and $3.0 million per
property claim. An excess catastrophe treaty provides coverage up to statutory
limits for any one occurrence on workers' compenThe property lines of coverage
are protected with an excess of loss treaty which affords recovery for property
losses in excess of $250,000 up to a maximum of $3.0 million. Facultative
arrangements are in place for property accounts with limits in excess of $3.0
million per risk.
Life and Health Division
The Life and Health Division entered into reinsurance contracts ceding the
excess of their retention to several primary reinsurers. Maximum retention by
the Life and Health Division on any one individual in the case of life insurance
policies is $50,000. At December 31, 1997, the Life and Health Division'
reinsured annualized premiums totaled $11.8 million of the $318.6 million of
life insurance then in force, generally under yearly renewable term agreements.
Two companies accounted for the $11.8 million of reinsurance: Munich American
Reassurance Company ($9.6 million) and Optimum Reinsurance ($2.2 million).
Certain reinsurance agreements no longer active for new business remain in-force
to cover any claims on a run-off basis.
Competition
Casualty Division
American Southern. All of the businesses in which American Southern engages
are highly competitive. The principal areas of competition are pricing and
service. Many competing property and casualty companies which have been in
business longer than American Southern have available more diversified lines of
insurance and have substantially greater financial resources. Management
believes, however, that the policies it sells are competitive with those
providing similar benefits offered by other insurers doing business in the
states where American Southern operates.
Georgia Casualty. All of Georgia Casualty's insurance business is highly
competitive. The competition can be placed in four categories: (1) companies
with higher A.M. Best ratings, (2) alternative workers' compensation markets,
(3) self-insured funds, and (4) insurance companies that actively solicit
monoline workers' compensation accounts. Georgia Casualty's efforts are directed
in the following three general categories where the company has the best
12
opportunity to control exposures and claims: (1) manufacturing, (2) artisan
contractors, and (3) service industries. Management believes that Georgia
Casualty's keys to being competitive in these areas are maintaining strong
underwriting standards, loss control programs, writing workers' compensation
coverages as part of the total insurance package, maintaining and expanding its
loyal network of agents and development of new agents in key territories. In
addition, Georgia Casualty offers quality customer service to its agents and
insureds, and provides rehabilitation, medical management, and claims management
services to its insureds. Georgia Casualty believes that it will continue to be
competitive in the marketplace based on its current strategies and services.
Life and Health Division
The life and health insurance business is highly competitive and includes a
large number of insurance companies, many of which have substantially greater
financial resources. The Life and Health Division believes that the primary
competitors are the Blue Cross/Blue Shield companies, AARP, the Prudential
Insurance Company of America, Pioneer Life Insurance Company of Illinois, AFLAC,
American Travellers, Kanawha Life, American Heritage, Bankers Life and Casualty
Company, United American Insurance Corporation, and Standard Life of Oklahoma.
The Life and Health Division competes with other insurers on the basis of
premium rates, policy benefits, and service to policyholders. The Life and
Health Division also competes with other insurers to attract and retain the
allegiance of its independent agents through commission arrangements,
accessibility and marketing assistance, lead programs, and market expertise. The
Life and Health Division believes that it competes effectively on the basis of
policy benefits, services, and market expertise.
Rating
Each year A.M. Best Company, Inc. publishes Best's Insurance Reports
("Best's") which include assessments and ratings of all insurance companies.
Best's ratings, which may be revised quarterly, fall into fifteen categories
ranging from A++ (Superior) to F (in liquidation). Best's ratings are based on
an analysis of the financial condition and operations of an insurance company
compared to the industry in general. These ratings are not designed for
investors and do not constitute recommendations to buy, sell, or hold any
security. Ratings are important in the insurance industry, and improved ratings
should have a favorable impact on the ability of the companies to compete in the
marketplace.
Casualty Division
American Southern. American Southern and its wholly-owned subsidiary,
American Safety Insurance Company, are each currently rated "A-" (Excellent) by
A.M. Best.
Georgia Casualty. In early 1997, Georgia Casualty received a Best's rating
of B+ (Very Good).
Life and Health Division
Bankers Fidelity. Bankers Fidelity maintains a Best's rating of B+ (Very
Good).
American Independent. American Independent is currently rated C by A.M.
Best, however, the rating was placed under review with "positive implications"
following its acquisition by Atlantic American and as of the date hereof a new
rating had not been assigned.
Regulation
In common with all domestic insurance companies, the Company's insurance
subsidiaries are subject to regulation and supervision in the jurisdictions in
which they do business. Statutes typically delegate regulatory, supervisory, and
administrative powers to state insurance commissions. The method of such
regulation varies, but regulation relates generally to the licensing of insurers
and their agents, the nature of and limitations on investments, approval of
policy forms, reserve requirements, the standards of solvency which must be met
and maintained, deposits of securities for the benefit of policyholders, and
periodic examinations of insurers and trade practices, among other things. The
Company's products generally are subject to rate regulation by state insurance
commissions, which require that certain minimum loss ratios be maintained.
Certain states also have insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The Company's insurance subsidiaries are subject to such
legislation and are registered as controlled insurers in those jurisdictions in
which such registration is required. Such laws vary from state to state but
typically require periodic disclosure concerning the corporation which controls
the registered insurers and all subsidiaries of such corporations, as well as
prior notice to, or approval by, the state insurance commission of
intercorporate transfers of assets (including payments of dividends in excess of
specified amounts by the insurance subsidiaries) within the holding company
system.
13
Most states require that rate schedules and other information be filed with
the state's insurance regulatory authority, either directly or through a rating
organization with which the insurer is affiliated. The regulatory authority may
disapprove a rate filing if it determines that the rates are inadequate,
excessive, or discriminatory. The Company has historically experienced no
significant regulatory resistance to its applications for rate increases.
A state may require that acceptable securities be deposited for the
protection either of policyholders located in those states or of all
policyholders. As of December 31, 1997, $15.7 million of securities were on
deposit either directly with various state authorities or with third parties
pursuant to various custodial agreements on behalf of the Life and Health and
the Casualty Divisions.
Virtually all of the states in which the Company's insurance subsidiaries
are licensed to transact business require participation in their respective
guaranty funds designed to cover claims against insolvent insurers. Insurers
authorized to transact business in these jurisdictions are generally subject to
assessments of up to 4% of annual direct premiums written in that jurisdiction
to pay such claims, if any. The occurrence and amount of such assessments has
increased in recent years. The likelihood and amount of any future assessments
cannot be estimated until an insolvency has occurred. For the last five years,
the amount incurred by the Company was not material.
NAIC Ratios
The National Association of Insurance Commissioners (the "NAIC") was
established to provide guidelines to assess the financial strength of insurance
companies for state regulatory purposes. The NAIC conducts annual reviews of the
financial data of insurance companies primarily through the application of 13
financial ratios prepared on a statutory basis. The annual statements are
submitted to state insurance departments to assist them in monitoring insurance
companies in their states and to set forth a desirable range in which companies
should fall in each such ratio.
The NAIC suggests that insurance companies which fall outside of the "usual"
range in four or more financial ratios are those most likely to require analysis
by state regulators. However, according to the NAIC, it may not be unusual for a
financially sound company to have several ratios outside the "usual" range, and
in normal years the NAIC expects 15% of the companies it tests to be outside the
"usual" range in four or more categories.
For the year ended December 31, 1997, American Southern, Georgia Casualty
and Bankers Fidelity were all within the NAIC "usual" range for all 13 financial
ratios. American Independent was outside the "usual" range on three ratios; net
change in capital and surplus, net income to total income and surplus relief.
These variances are a result of activity that took place prior to Atlantic
American's acquisition of American Independent.
Risk-Based Capital
RBC is used by rating agencies and regulators as an early warning tool to
identify weakly capitalized companies for the purpose of initiating further
regulatory action. The RBC calculation determines the amount of Adjusted Capital
needed by a company to avoid regulatory action. "Authorized Control Level
Risk-Based Capital" ("ACL") is calculated; if a company's adjusted capital is
200% or lower than ACL, it is subject to regulatory action. At December 31,
1997, all of the Company's insurance subsidiaries substantially exceeded the RBC
regulatory levels.
14
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.
December 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------
(Dollars in thousands)
Fixed maturities:
Bonds:
U.S. Government, agencies and
authorities $ 76,701 38.4% $ 73,097 39.7% $ 71,549 39.6%
States, municipalities and
political subdivisions 2,738 1.4 3,496 1.9 21,947 12.2
Public utilities 1,893 1.0 1,505 .8 4,110 2.3
Convertibles and bonds with
warrants attached - NIL 1,275 .7 1,188 .7
All other corp. bonds 10,457 5.5 11,562 6.3 12,829 7.1
Certificates of deposit 395 0.2 375 .2 1,690 .9
--------------------------------------------------------------------
Total fixed maturities(1) 92,184 46.5 91,310 49.6 113,313 62.8
Common and preferred stocks (2) 46,876 23.6 37,762 20.5 42,116 23.3
Mortgage, policy and student loans (3) 9,536 2.1 13,367 7.3 12,642 7.0
Investments in limited partnerships (4) 3,941 2.7 - - - -
Real estate 46 NIL 46 NIL 46 NIL
Short-term investments (5) 46,167 23.1 41,614 22.6 12,498 6.9
--------------------------------------------------------------------
Total investments $198,750 100.0% $184,099 100.0% $180,615 100.0%
====================================================================
(1) Fixed maturities are carried on the balance sheet at market value. Total
cost of fixed maturities was $91.1 millio as of December 31, 1997,
$91.6 million as of December 31, 1996, and $112.9 million at December
31, 1995.
(2) Equity securities are valued at market. Total cost of equity ecurities
was $18.4 million as of December 31, 1997, $19.7 million as of December
31, 1996, and $26.9 million at December 31, 1995.
(3) Mortgage loans and policy and student loans are valued at historical
cost.
(4) Investments in traded limited partnerships are valued at estimated
market value; all other partnership interests are carried at historical
cost. Total cost of investments in limited partnerships was $4.0 million
as of December 31, 1997.
(5) Short-term investments are valued at cost, which approximates market
value.
15
Results of the investment portfolio for periods shown were as follows:
Year Ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
(Dollars in thousands)
Average investments(1) $187,408 $180,816 $106,645
Net investment income 11,117 11,005 6,142
Average yield on investments 5.9% 6.1% 5.7%
Realized investment gains, net $ 1,076 $ 1,589 $ 1,731
(1) Calculated as the average of the balances at the beginning of the year
and at the end of each of the four segment quarters. The calculation for
1995 does not include American Southern's investment portfolio.
Management's investment strategy is an increased investment in short and
medium maturity bonds and common and convertible preferred stocks.
Employees
The Company and its subsidiaries at December 31, 1997 employed 176 people.
Financial Information By Industry Segment
Financial information concerning the Company and its consolidated
subsidiaries by industry segment for the three years ended December 31, 1997, is
set forth on page 21 of the 1997 Annual Report to Shareholders, and such
information by industry segment is incorporated herein by reference.
Executive Officers of the Registrant
The table below and the information following the table set forth for each
executive officer of the Company as of December 31, 1997, (based upon
information supplied by each of them) his name, age, positions with the Company,
principal occupation, and business experience for the past five years and prior
service with the Company.
Director or
Name Age Position with the Company Officer Since
- --------------------------------------------------------------------------------
J. Mack Robinson 74 Chairman of the Board 1974
Hilton H. Howell, Jr. 36 Director, President & CEO 1992
John W. Hancock 60 Senior Vice President and Treasurer 1989
Officers are elected annually and serve at the discretion of the Board of
Directors.
Mr. Robinson has served as Director and Chairman of the Board since 1974
and served as President and Chief Executive Officer of the Company from
September 1988 to May 1995. In addition, Mr. Robinson is also a Director of Bull
Run Corporation and Gray Communications Systems, Inc.
Mr. Howell has been President and Chief Executive Officer of the Company
since May 1995, and prior thereto served as Executive Vice President of the
Company from October 1192 to May 1995. He has been a Director of the Company
since October 1992. Mr. Howell is the son-in-law of Mr. Robinson. He is also a
Director of Bull Run Corporation and Gray Communications Systems, Inc.
Mr. Hancock has served as Senior Vice President and Treasurer of the Company
since November 1993 and Senior Vice President of the Life Companies since August
1997, prior thereto served as Senior Vice President and Treasurer of the Life
Companies since November 1993, prior thereto served as Vice President and
Treasurer of the Company and each of the Life Companies since April 1989, and
prior thereto served as Controller of the Life Companies since March 1988. He is
also a Director of American Independent, Bankers Fidelity Life and Georgia
Casualty. Prior to joining the Company in 1988, he was Vice President of Finance
with National Consultants, Inc.
16
Forward-Looking Statements
Certain of the statements and subject matters contained herein that are not
based upon historical or current facts deal with or may be impacted by potential
future circumstances and developments, and should be considered forward-looking
and subject to various risks and uncertainties. Such forward-looking statements
are made based upon management's belief, as well as assumptions made by and
information currently available, to management pursuant to "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements, and the discussion of such subject areas, involve, and therefore are
qualified by, the inherent risks and uncertainties surrounding future
expectations generally, and may materially differ from the Company's actual
future experience involving any one or more of such subject areas. The Company
has attempted to identify, in context, certain of the factors that it currently
believes may cause actual future experience and results to differ from current
expectations. The Company's operations and results also may be subject to the
effect of other risks and uncertainties in addition to the relevant qualifying
factors identified elsewhere herein, including, but not limited to, locality and
seasonality in the industries to which the Company offers its products, the
impact of competitive products and pricing, unanticipated increases in the rate
and number of claims outstanding, volatility in the capital markets that may
have an impact on the Company's investment portfolio, the uncertainty of general
economic conditions, and other risks and uncertainties identified from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission. Many of such factors are beyond the Company's ability to control or
predict. As a result, the Company's actual financial condition, results of
operations and stock price could differ materially from those expressed in any
forward-looking statements made by the Company. Undue reliance should not be
placed upon forward-looking statements contained herein. The Company does not
intend to publicly update any forward-looking statements that may be made from
time to time by, or on behalf of, the Company.
ITEM 2. PROPERTIES
Owned Properties. The Company owns two parcels of unimproved property
consisting of approximately seven acres located in Fulton and Washington
Counties, Georgia. At December 31, 1997, the aggregate book value of such
properties was approximately $46,000.
Leased Properties. The Company (with the exception of American Southern)
leases space for its principal offices in an office building located in Atlanta,
Georgia, from Delta Life Insurance Company, under leases which expire at various
times from May 31, 2002 to July 31, 2005. Under the current terms of the leases,
the Company occupies approximately 54,000 square feet of office space. Delta
Life Insurance Company, the owner of the building, is controlled by J. Mack
Robinson, Chairman of the Board of Directors and largest shareholder of the
Company. The terms of the leases are believed by Company management to be
comparable to terms which could be obtained by the Company from unrelated
parties for comparable rental property.
American Southern leases space for its offices in a building located in
Atlanta, Georgia. The lease term expires January 31, 2000. Under the terms of
the lease, American Southern occupies approximately 13,700 square feet.
ITEM 3. LEGAL PROCEEDINGS
Litigation
The Company and its subsidiaries are involved in various claims and lawsuits
incidental to and in the ordinary course of their businesses. In the opinion of
management, such claims will not have a material effect on the business or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the quarter ended December 31, 1997.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market and
quoted on the Nasdaq National Market (Symbol: AAME). As of March 8, 1998, there
were 6,586 shareholders of record. The following table sets forth for the
periods indicated the high and low sale prices of the Company's common stock as
reported on the Nasdaq National Market.
Year Ending December 31, High Low
- --------------------------------------------------------------------------------
1997
1st quarter $ 3 3/4 $3 1/16
2nd quarter 3 1/4 2 1/2
3rd quarter 4 1/8 2 1/2
4th quarter 5 1/2 4
1996
1st quarter $ 3 1/4 $2 1/8
2nd quarter 4 2 3/4
3rd quarter 3 5/8 3
4th quarter 3 5/8 3
The Company has not paid dividends to its common shareholders since the
fourth quarter of 1988. Payment of dividends in the future will be at the
discretion of the Company's Board of Directors and will depend upon the
financial condition, capital requirements, and earnings of the Company as well
as other factors as the Board of Directors may deem relevant. The Company's
primary sources of cash for the payment of dividends are dividends from its
subsidiaries. Under the Insurance Code of the State of Georgia, cumulative
dividend payments to the Parent Company by its insurance subsidiaries are
limited to the accumulated statutory earnings of the insurance subsidiaries
without the prior approval of the Insurance Commissioner. The Company's
principal insurance subsidiaries had the following accumulated statutory
earnings and/or (deficits) as of December 31, 1997: Georgia Casualty - $13.0
million, American Southern - $19.6 million, Bankers Fidelity Life - $18.0
million. The Company has elected to retain its earnings to grow its business and
does not anticipate paying cash dividends on its common stock in the foreseeable
future.
A total of 278,561 shares of common stock were issued in exchange for 100%
of the outstanding stock of SIA, Inc., which shares were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1993, as amended.
18
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of Atlantic American Corporation and subsidiaries
for the five year period December 31, 1997 is set forth on page 1 of the 1997
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of Atlantic American Corporation and subsidiaries are set forth on
pages 23 to 27 of the 1997 Annual Report to Shareholders and are incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and related notes are
set forth on pages 8 to 22 of the 1997 Annual Report to Shareholders and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
PART III
With the exception of information relating to the Executive Officers of the
Company, which is provided in Part I hereof, all information required by Part
III (Items 10, 11, 12, and 13) is incorporated by reference to the sections
entitled "Election of Directors", "Security Ownership of Management", "Section
16(a) Beneficial Ownership Compliance", "Executive Compensation", "Employment
Agreements With Management", and "Certain Relationships and Related
Transactions" contained in the Company's definitive proxy statement to be
delivered in connection with the Company's Annual Meeting of Shareholders to be
held May 5, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
FINANCIAL STATEMENTS
Page
Reference
---------
Consolidated Balance Sheets as of December 31, 1997
and December 31, 1996 8*
Consolidated Statements of Operations for the Three
Years ended December 31, 1997 9*
Consolidated Statements of Shareholders'Equity
for the Three Years ended December 31, 1997 10*
Consolidated Statements of Cash Flows for the Three Years
ended December 31, 1997 11*
Notes to Consolidated Financial Statements 12-22*
Report of Independent Public Accountants 28*
* The page references so designated refer to page numbers in the 1997 Annual
Report to Shareholders of Atlantic American Corporation, which pages are
incorporated herein by reference. With the exception of the information
specifically incorporated within this Form 10-K, the 1997 Annual Report to
Shareholders of Atlantic American Corporation is not deemed to be filed under
the Securities Exchange Act of 1934.
20
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants
II - Condensed financial information of registrant for the three years
ended December 31, 1997 III - Supplementary Insurance Information
for the three years ended December 31, 1997
IV - Reinsurance for the three years ended December 31, 1997
VI - Supplemental Information concerning property-casualty insurance
operations for the three years ended December 31, 1997
Schedules other than those listed above are omitted as they are
not required or are not applicable, or the required information is
shown in the financial statements or notes thereto. Columns
omitted from schedules filed have been omitted because the
information is not applicable.
EXHIBITS
3.1 - Restated and Amended Articles of Incorporation of the registrant
[incorporated by reference to Exhibit 3.1 to the registrant's Form
10-Q for the fiscal quarter ended March 31, 1996].
3.2 - Bylaws of the registrant [incorporated by reference to Exhibit 3.2
to the registrant's Form 10-K for the year ended December 31,
1993].
4.1 - Indenture between registrant and Wachovia Bank and Trust
Company, N.A., Trustee, dated as of April 1, 1987 relating to the
registrant's 8% Convertible Subordinated Notes due May 15, 1997
[incorporated by reference to Exhibit 4.1 to the registrant's Form
10-K for the year ended December 31, 1987].
10.01 - Lease Contract between registrant and Delta Life Insurance
Company dated June 1, 1992 [incorporated by reference to Exhibit
10.11 to the registrant's Form 10-K for the year ended December
31, 1992].
10.02 - First Amendment to Lease Contract between registrant and Delta
Life Insurance Company dated June 1, 1993 [incorporated by
reference to Exhibit 10.11.1 to the registrant's Form 10Q for the
quarter ended June 30, 1993].
10.03 - Second Amendment to Lease Contract between registrant and Delta
Life Insurance Company dated August 1, 1994 [incorporated by
reference to Exhibit 10.11.2 to the registrant's Form 10Q for the
quarter ended September 30, 1994].
10.04 - Lease Agreement between Georgia Casualty & Surety Company and
Delta Life Insurance Company dated September 1, 1991 [incorporated
by reference to Exhibit 10.12 to the registrant's Form 10-K for
the year ended December 31, 1992].
10.05 - First Amendment to Lease Agreement between Georgia Casualty &
Surety Company and Delta Life Insurance Company dated June 1, 1992
[incorporated by reference to Exhibit 10.12.1 to the registrant's
Form 10-K for the year ended December 31, 1992].
10.06 - Management Agreement between registrant and Georgia Casualty &
Surety Company dated April 1, 1983 [incorporated by reference to
Exhibit 10.16 to the registrant's Form 10-K for the year ended
December 31, 1986].
10.07* - Minutes of Meeting of Board of Directors of registrant held
February 25, 1992 adopting registrant's 1992 Incentive Plan
together with a copy of that plan, as adopted [incorporated by
reference to Exhibit 10.21 to the registrant's Form 10-K for the
year ended December 31, 1991].
10.08* - Employment Agreement, dated September 8, 1988, between the
registrant and John W. Hancock [incorporated by reference to
exhibit 10.30 to the registrant's Form 10-K for the year ended
December 31, 1992].
10.09 - Employment Agreement dated September 2, 1988, between the
registrant and Eugene Choate [incorporated by reference to Exhibit
10.31 to the registrant's Form 10-K for the year ended December
31, 1992].
10.10 - Loan and Security Agreement dated August 26, 1991, between
registrant's three insurance subsidiaries and Leath Furniture,
Inc. [incorporated by reference to Exhibit 10.38 to the
registrant's Form 10-K for the year ended December 31, 1992].
10.11 - First amendment to the amended and reissued mortgage note dated
January 1, 1992, [incorporated by reference to Exhibit 10.38.1 to
the registrant's Form 10-K for the year ended December 31, 1992].
21
10.12 - Intercreditor Agreement dated August 26, 1991, between Leath
Furniture, Inc., the registrant and the registrant's three
insurance subsidiaries [incorporated by reference to Exhibit 10.39
to the registrant's Form 10-K for the year ended December 31,
1992].
10.13 - Management Agreement between Registrant and Atlantic American Life
Insurance Company and Bankers Fidelity Life Insurance Company
dated July 1, 1993 [incorporated by reference to Exhibit 10.41 to
the registrant's Form 10-Q for the quarter ended September 30,
1993].
10.14 - Tax allocation agreement dated January 28, 1994, between
registrant and registrant's subsidiaries [incorporated by
reference to Exhibit 10.44 to the registrant's Form 10-K for the
year ended December 31, 1993].
10.15 - Stock Purchase Agreements by and between registrant and Fuqua
Enterprises, Inc. dated as of October 16, 1995 [incorporated by
reference to Exhibit 2.1 to the registrant's Form 8-K, filed
January 12, 1996].
10.16 - Credit Agreement, dated as of December 29, 1995, between
registrant and Wachovia Bank of Georgia, N.A. [incorporated by
reference to Exhibit 99.1 to the registrant's Form 8-K, filed
January 12, 1996].
13.1 - Those portions of the registrant's Annual Report to Shareholders
for year ended December 31, 1997, that are specifically
incorporated by reference herein.
21.1 - Subsidiaries of the registrant.
23.1 - Consent of Arthur Andersen, LLP Independent Public Accountants.
28.1 - Form of General Agent's Contract of Atlantic American Life
Insurance Company [incorporated by reference to Exhibit 28 to the
registrant's Form 10-K for the year ended December 31, 1990].
28.2 - Form of Agent's Contract of Bankers Fidelity Life Insurance
Company [incorporated by reference to Exhibit 28 to the
registrant's Form 10-K for the year ended December 31, 1990].
28.3 - Form of Agency Contract of Georgia Casualty & Surety Company
[incorporated by reference to Exhibit 28 to the registrant's Form
10-K for the year ended December 31, 1990].
(b) Reports on Form 8-K. None.
*Management contract, compensatory plan or arrangement required to be filed
pursuant to, Part IV, Item 14(C) of Form 10-K and Item 601 of Regulation S-K.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) ATLANTIC AMERICAN CORPORATION
By: /s/
John W. Hancock
Senior Vice President and Treasurer
Date: March 27, 1998
By: /s/
Edward L. Rand, Jr.
Vice President and Controller
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/
J. MACK ROBINSON Chairman of the Board March 27, 1998
/s/
HILTON H. HOWELL, JR. President, Chief Executive
Officer and Director
(Principal Executive Officer) March 27, 1998
/s/
JOHN W. HANCOCK Senior Vice President and
Treasurer (Principal Financial
Officer) March 27, 1998
/s/
EDWARD L. RAND, JR. Vice President and
Controller March 27, 1998
/s/
SAMUEL E. HUDGINS Director March 27, 1998
/s/
D. RAYMOND RIDDLE Director March 27, 1998
/s/
HARRIETT J. ROBINSON Director March 27, 1998
/s/
SCOTT G. THOMPSON Director March 27, 1998
/s/
MARK C. WEST Director March 27, 1998
/s/
WILLIAM H. WHALEY, M.D. Director March 27, 1998
/s/
DOM H. WYANT Director March 27, 1998
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Atlantic American Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Atlantic American Corporation,
incorporated by reference in this Form 10-K, and have issued our report thereon
dated March 20, 1998. Our audits of the financial statements were made for the
purpose of forming an opinion on those statements taken as a whole. The
financial statement schedules listed in Item 14 (a) are the responsibility of
the Company's management, are presented for the purpose of complying with the
Securities and Exchange Commission's rules, and are not part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 20, 1998
24
Schedule II
Page 1 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
BALANCE SHEETS
(in thousands)
ASSETS
December 31,
--------------------
1997 1996
--------- ---------
Current assets:
Cash and short-term investments $ 223 $ 382
--------- ---------
Investment in insurance subsidiaries 107,124 94,797
--------- ---------
Income taxes receivable from subsidiaries 137 55
Other assets 2,424 2,278
--------- ---------
$109,908 $ 97,512
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to affiliates $ - $ 1,058
Current portion of long-term debt 1,000 8,559
Interest payable - 56
Other payables 3,125 2,076
--------- ---------
Total current liabilities 4,125 11,749
--------- ---------
Income taxes payable to subsidiaries - 633
Long-term debt 27,600 25,994
Shareholders' equity 78,183 59,136
--------- ---------
$109,908 $ 97,512
========= =========
The notes to consolidated financial statements are an integral part of these
condensed statements.
II-1
Schedule II
Page 2 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
REVENUE
Fees, rentals and interest income
from subsidiaries $ 3,841 $ 5,662 $ 5,968
Distributed earnings from
subsidiaries 11,209 6,850 2,864
Other 20 94 12
---------- ---------- ---------
Total revenue 15,070 12,606 8,844
GENERAL AND ADMINISTRATIVE EXPENSES 5,305 6,073 5,555
INTEREST EXPENSE 2,902 3,292 2,458
---------- ---------- ---------
6,863 3,241 831
INCOME TAX PROVISION (BENEFIT) (1) (1,862) (2,054) (274)
---------- ---------- ---------
8,725 5,295 1,105
EQUITY IN UNDISTRIBUTED EARNINGS OF
CONSOLIDATED SUBSIDIARIES, NET (692) 2,316 2,013
---------- ---------- ---------
Income from continuing operations 8,033 7,611 3,118
(Loss) from discontinued
operations, net - (4,447) (10,094)
---------- ---------- ---------
Net income (loss) $ 8,033 $ 3,164 $(6,976)
========== ========== =========
(1) Under the terms of its tax-sharing agreement with its subsidiaries, income
tax provisions for the individual companies are computed on a separate
company basis. Accordingly, the Company's income tax benefit results from
the utilization of the parent company separate return loss to reduce the
consolidated taxable income of the Company and its subsidiaries.
The notes to consolidated financial statements are an integral part of these
condensed statements.
II-2
Schedule II
Page 3 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,033 $ 3,164 $(6,976)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 591 452 379
Equity in undistributed earnings
of consolidated subsidiaries 692 (2,316) (2,013)
Loss from discontinued operations - 4,447 10,094
Change in intercompany taxes (715) (245) -
Decrease in other liabilities (157) (262) (746)
Minority interest - - (554)
Other, net (245) 2,528 1,550
---------- ---------- ---------
Net cash provided by
operating activities 8,199 7,768 1,734
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries, net - - (38)
Proceeds from sale of Leath Furniture, net - 3,645 -
Acquisition of American Southern
Insurance Company - - (22,770)
Additions to property and equipment (536) (1,177) (1,058)
---------- ---------- ---------
Net cash provided (used) by
investing activities (536) 2,468 (23,866)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bank financing 5,617 11,352 22,642
Preferred stock dividends to affiliated (315) (315) (315)
shareholders
Purchase of treasury shares (558) (338) (174)
Retirements and payments of long-term
debt and notes payable to affiliates (12,628) (20,662) (675)
Proceeds from exercise of stock options 62 85 600
---------- ---------- ---------
Net cash (used) provided by
financing activities (7,822) (9,878) 220,078
---------- ---------- ---------
Net increase (decrease) in cash (159) 358 (54)
Cash at beginning of year 382 24 78
---------- ---------- ---------
Cash at end of year $ 223 $ 382 $ 24
========== ========== =========
Supplemental disclosure:
Cash paid for interest $ 2,958 $ 3,763 $ 2,894
========== ========== =========
Cash paid for income taxes $ 85 $ 116 $ 128
========== ========== =========
Long-term debt, payable to affiliates,
converted to preferred stock - - $13,400
========== ========== =========
Debt to seller for purchase of
American Southern Insurance Company - - $11,352
========== ========== =========
Issuance of stock to acquire SIA, Inc. $ 1,212 - -
========== ========== =========
The notes to consolidated financial statements are an integral part of these
condensed statements.
II-3
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
- ------------------------------------------------------------------------------------------
December 31, 1997:
A & H..... $ 1,517 $ 6,890 $ 2,631 $ -
Life...... 11,895 37,180 - 2,001
Casualty.. 3,071 81,839 21,781 1,996
-----------------------------------------------------------------
$16,483 $125,909(1) $24,412 $ 3,997
=================================================================
December 31, 1996:
A & H..... $ 2,561 $ 6,924 $ 2,135 $ -
Life...... 9,676 33,686 - 1,912
Casualty.. 2,942 79,849 22,965 1,727
-----------------------------------------------------------------
$15,179 $120,459(2) $25,100 $ 3,639
=================================================================
December 31, 1995:
A & H..... $ 3,831 $ 8,907 $ 2,222 $ -
Life...... 8,411 32,219 - 1,905
Casualty.. 2,657 74,693 21,918 1,983
-----------------------------------------------------------------
$14,899 $115,819(3) $24,140 $ 3,888
=================================================================
_________________________
(1)Includes future policy benefits of $39,188 and losses and claims of $86,721.
(2)Includes future policy benefits of $36,385 and losses and claims of $84,074.
(3)Includes future policy benefits of $36,305 and losses and claims of $79,514.
Schedule III
Page 2 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION(1)
(in thousands)
Benefits, Amortization
Investment Claims, Losses of Deferred Other Casualty
Premium Income and Settlement Acquisition Operating Premiums
Segment Revenue (Losses)*(2) Expenses Costs Expenses(2) Written
------- ------- ------------ -------------- ------------ ----------- ---------
December 31, 1997:
Life...... $10,453 $ 4,018 $ 7,022 $ 540 $ 3,480 $ -
Casualty.. 61,715 7,363 45,442 7,760 7,986 60,562
A & H..... 16,514 1,157 8,554 1,404 6,564 -
Other..... - (5) - - 4,292 -
---------------------------------------------------------------------------------
$88,682 $12,533 $61,018 $9,704 $22,322 $60,562
=================================================================================
December 31, 1996:
Life...... $10,240 $ 4,210 $ 6,446 $1,449 $ 4,543 $ -
Casualty.......... 60,047 7,377 40,245 5,349 13,039 61,068
A & H..... 15,738 1,234 7,590 1,386 7,565 -
Other..... - 225 - - 3,644 -
---------------------------------------------------------------------------------
$86,025 $13,046 $54,281 $8,184 $28,791 $61,068
=================================================================================
December 31, 1995:
Life...... $ 8,297 $ 3,941 $ 4,861 $1,799 $ 3,546 $ -
Casualty.. 18,302 2,989 12,356 - 6,582 19,074
A & H..... 16,774 1,442 7,472 1,922 7,796 -
Other..... - (75) - - 2,252 -
---------------------------------------------------------------------------------
$43,373 $ 8,297 $24,689 $3,721 $20,176 $19,074
=================================================================================
* Includes realized investment gains (losses).
(1) Supplementary insurance information contained above includes amounts related
to American Southern for 1996 and 1997 only.
(2) Investment incom is allocated based on the pro rata percentages of
insurance reserves and policyholders' funds attributable to each segment
whereas other operating expenses are allocated based on premiums collected.
Schedule IV
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
REINSURANCE
(in thousands)
Ceded To Assumed
Gross Other From Other Net
Amount Companies Companies Amount
- -----------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Life insurance in force........... $318,594 $11,767 $ - $306,827
=======================================================
Premiums --
Life insurance.................... $ 10,540 $ 91 $ - $ 10,449
Accident and health insurance..... 16,518 - - 16,518
Property and casualty insurance(1) 43,721 8,978 26,972 61,715
-------------------------------------------------------
Total premiums................. $ 70,779 $ 9,069 $26,972 $ 88,682
=======================================================
Year ended December 31, 1996:
Life insurance in force........... $277,891 $10,072 $ - $267,819
=======================================================
Premiums --
Life insurance.................... $ 10,305 $ 65 $ - $ 10,240
Accident and health insurance..... 15,738 - - 15,738
Property and casualty insurance(1) 43,317 9,009 25,739 60,047
-------------------------------------------------------
Total premiums................. $ 69,360 $ 9,074 $25,739 $ 86,025
=======================================================
Year ended December 31, 1995:
Life insurance in force........... $254,349 $10,003 $ - $244,346
=======================================================
Premiums --
Life insurance.................... $ 8,378 $ 81 $ - $ 8,297
Accident and health insurance..... 16,774 - - 16,774
Property and casualty insurance(1) 21,258 2,956 - 18,302
--------------------------------------------------------
Total premiums................. $ 46,410 $ 3,037 $ - $ 43,373
========================================================
(1) Information contained above includes amounts related to American Southern for 1996 and 1997 only.
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
Yead Ended Acquisition Reserves Premium Premium Income Year Years Costs Expenses Written
---------- ----------- -------- ------- ------- ------ ------- -------- ------- ---------- --------
December 31, 1997(1) $ 3,071 $81,839 $21,781 $61,715 $7,363 $48,562 $(3,003) $ 7,760 $41,883 $60,562
======= ======= ======= ======= ====== ======= ======== ======= =======
December 31, 1996(1) $ 2,942 $79,849 $22,965 $60,047 $7,205 $44,468 $(3,403) $ 5,349 $41,017 $61,068
======= ======= ======= ======= ====== ======= ======== ======= ======= =======
December 31, 1995 $2,657(1) $74,693(1) $21,918(1)$18,302(2)$2,989(2)$7,002(2) $ 5,985(2) $ - $12,923(2) $19,074(2)
======== ========= ======= ======= ====== ====== ======= ======= ======= =======
(1) Includes Georgia Casualty & Surety and American Southern.
(2) Includes Georgia Casualty only.