_______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-Q
___________
|X| Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
OR
|_| Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
___________
Commission File Number 0-3722
ATLANTIC AMERICAN CORPORATION
Incorporated pursuant to the laws of the State of Georgia
___________
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 May 7, 1997, was 18,644,327.
________________________________________________________________________________
ATLANTIC AMERICAN CORPORATION
INDEX
Part 1. Financial Information Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets -
December 31, 1996 and March 31, 1997 2
Consolidated Statements of Operations -
Three months ended March 31,1996 and 1997 3
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 6 - 8
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and report on Form 8-K 9
Signature 10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands, except share and per share data)
March 31, December 31,
1997 1996
--------- ---------
Cash, including short-term investments of
$40,301 and $41,614 $ 44,641 $ 45,499
-----------------------
Investments:
Bonds (Cost: $97,090 and $91,611) 95,807 91,310
Common and preferred stocks (cost:
$18,597 and$19,748) 35,723 37,762
Mortgage loans 6,752 6,812
Policy and student loans 3,030 6,555
Real estate 46 46
-----------------------
Total investments 141,358 142,485
-----------------------
Receivables:
Reinsurance 27,111 26,854
Other (net of allowance for bad debts:
$1,041 and $1,151) 30,527 16,301
Deferred acquisition costs 15,257 15,179
Other assets 4,239 4,576
Goodwill 2,063 2,100
-----------------------
Total assets $265,196 $252,994
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds:
Future policy benefits $ 36,072 $ 36,385
Unearned premiums 36,873 25,100
Losses and claims 85,757 84,074
Other policy liabilities 3,882 3,639
-----------------------
Total policy liabilities 162,584 149,198
Accounts payable and accrued expenses 9,208 9,049
Debt payable (due to affiliates: $1,058 and
$1,058) 34,611 35,611
-----------------------
Total liabilities 206,403 193,858
-----------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1 par, 4,000,000 shares authorized;
Series A preferred, 30,000 shares issued and
outstanding, $3,000 redemption value 30 30
Series B preferred, 134,000 shares issued and
outstanding, $13,400 redemption value 134 134
Common stock, $1 par, 30,000,000 shares authorized;
18,712,167 shares issued in 1997 and 1996;
18,674,732 shares outstanding in 1997 and
18,684,217 shares outstanding in 1996 18,712 18,712
Additional paid-in capital 53,682 54,062
Accumulated deficit (29,490) (31,426)
Net unrealized investment gains 15,843 17,713
Treasury stock, at cost, 37,435 shares in 1997
and 27,950 shares in 1996 (118) (89)
-----------------------
Total shareholders' equity 58,793 59,136
-----------------------
Total liabilities and shareholders' equity $265,196 $252,994
=======================
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
-------------------
In thousands, except per share data)
1997 1996
------ ------
Revenue:
Insurance premiums $21,775 $21,385
Investment income 2,875 2,680
Realized investment gains, net 39 670
Other income 2 38
------------------
Total revenue 24,691 24,773
------------------
Benefits and expenses:
Insurance benefits and losses incurred 14,532 14,089
Commissions and underwriting expenses 6,044 6,392
Interest expense 733 923
Other 1,404 1,392
------------------
Total benefits and expenses 22,713 22,796
------------------
Income before income tax expense 1,978 1,977
Income tax expense 40 -
------------------
Net income $ 1,938 $ 1,977
==================
Net income per common share $ 0.08 $ 0.08
==================
Weighted average common shares outstanding 18,873 18,808
==================
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
---------------------
1997 1996
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,938 $ 1,977
Adjustments to reconcile net income to net
cash used by operating activities:
Amortization of deferred acquisition costs 2,143 864
Acquisition costs deferred (2,221) (1,316)
Realized investment gains (39) (670)
Increase in insurance reserves 13,386 13,263
Depreciation and amortization 269 280
Increase in receivables, net (14,327) (13,906)
Decrease in other liabilities (2,343) (1,644)
Other, net 311 (762)
---------------------
Net cash used by operating activities (883) (1,914)
---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured 17,342 34,769
Investments purchased (15,943) (21,254)
Reduction in minority interest liability payable (46) -
Additions to property and equipment (192) (224)
---------------------
Net cash provided by investing activities 1,161 13,291
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (79) (79)
Proceeds from exercise of stock options 3 9
Purchase of treasury shares (60) (22)
Repayments of debt (1,000) -
---------------------
Net cash used by financing activities (1,136) (92)
---------------------
Net (decrease) increase in cash and cash equivalents (858) 11,285
Cash and cash equivalents at beginning of period 45,499 15,069
---------------------
Cash and cash equivalents at end of period $ 44,641 $ 26,354
=====================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 621 $ 642
=====================
Cash paid for income taxes $ 25 $ -
=====================
The accompanying notes are an integral part of
these consolidated financial statements.
-4-
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Note 1. Basis of presentation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with 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. All significant intercompany accounts and transactions have been
eliminated in consolidation. Operating results for the three month period ended
March 31, 1997, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. 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, 1996.
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion of financial condition and results of operations for the
periods ended March 31, 1997 and 1996 analyzes the results of operations,
consolidated financial condition, liquidity and capital resources of Atlantic
American Corporation (the "Company") and its consolidated subsidiaries: Georgia
Casualty & Surety Company ("Georgia Casualty"), American Southern Insurance
Company ("American Southern" and together with Georgia Casualty, the "Casualty
Division"), and Bankers Fidelity Life Insurance Company (the "Life and Health
Division"). Effective January 1, 1997, Atlantic American Life Insurance Company,
a wholly-owned subsidiary of the Company, was merged with and into Bankers
Fidelity Life Insurance Company.
Atlantic American Corporation's net income for the first quarter of 1997 was
$1.9 million ($.08 per share) compared to net income of $2.0 million ($.08 per
share) for the first quarter of 1996. The slight decline in net income was
attributable to a provision of $40,000 in alternative minimum taxes for the
first quarter of 1997 whereas no alternative minimum tax provision was
established for the first quarter of 1996.
Georgia Casualty earned $568,000 in the first quarter of 1997 compared to
$717,000 in 1996. This decline in earnings was mainly the result of decreases of
$347,000 in premiums and $210,000 in realized investment gains. However these
declines in income were offset by lower benefit and loss expenses, which were
reduced by $479,000 from 1996. American Southern earned $1.5 million in each of
the first quarters of 1997 and 1996. Earned premiums rose by $718,000 but were
offset by increased benefit and loss expenses; therefore these increases did not
affect operating income. The Life and Health Division earned $510,000 in the
first quarter of 1997 compared to $565,000 in 1996. First quarter 1997 earnings
were lower than those for the same period in 1996 primarily because of a
$281,000 decrease in realized investment gains, offset by a decrease in total
expenses of $149,000.
RESULTS OF OPERATIONS
Total revenue for the Company was $24.7 million for the first quarter of 1997
compared to $24.8 million in the first quarter of 1996, falling mainly from a
decline in realized investment gains of $631,000 combined with a decrease in
other income of $36,000. Increases of $390,000 in earned premiums and $196,000
in investment income offset these declines.
Insurance premiums rose primarily due to American Southern's increased premiums
of $718,000 and a marginal increase in Life and Health Division premiums of
$19,000. These increases were offset by a decline of $347,000 in Georgia
Casualty's earned premiums. The Company's increase in premiums was mainly in
American Southern's automobile line of business. The Life and Health Division's
increased premiums were primarily in the life line of business, where premiums
increased $118,000, while accident and health premiums declined $99,000. The
decline in accident and health premiums represents a decrease in all lines but
particularly in the hospital line where premiums dropped 32% from 1996. Overall,
the Life and Health Division continues to experience a decline in accident and
health premiums as a result of management's decision to market a more
diversified product mix with greater emphasis on life insurance. Georgia
Casualty's premiums fell mainly due to a 22% decline in workers' compensation
premiums, the effect of a soft market that resulted in the need for lower rates
on renewal business.
American Southern acts as a reinsurer with respect to all of the risks
associated with certain automobile policies issued by a state administrative
agency naming the state and various local governmental entities as insureds.
Premiums written from such policies constituted between 38% and 32% of American
Southern's gross premiums written in 1992 through 1996. This account is eligible
for renewal in February 1998, and management believes that its relationship with
such agency is good. However, the loss of such agency as a customer could have a
material adverse effect on the business or financial condition of the company.
The increase in investment income of $196,000 was principally due to the
increase in funds available for investment. Management has continued to focus on
increasing the Company's investments in short and medium maturity bonds and
government backed securities. The carrying value of funds available for
investment (which includes cash and short-term investments, bonds and common and
preferred stocks) at March 31, 1997, increased approximately $1.6 million mainly
due to acquisitions of government bonds totaling $5.0 million while short-term
investments and stocks declined by $1.3 million and $2.0 million, respectively.
-6-
Realized investment gains for the first quarter of 1997 were $39,000 compared to
$670,000 for the same period in 1996. The reason for the decline was primarily
due to a market downturn, which resulted in a determination to hold investments
rather than sell at the depressed market prices.
Insurance benefits and losses incurred increased slightly to $14.5 million in
the first quarter of 1997 from $14.1 million in 1996. This increase was the
result of a $477,000 increase in the Casualty Division's benefits and losses
offset by a $34,000 decrease in the Life and Health Division's benefits and
losses. The Casualty Division's increase was due to higher reserves while the
Life and Health Division's decrease was due to lower reserves.
As a percentage of premium revenue, insurance benefits and losses incurred
increased to 66.7% in 1997 from 65.9% in 1996. In 1997, Georgia Casualty's
percentage was 60.7% compared to 66.4% in 1996. American Southern's percentage
in the first quarter of 1997 was 74.9% compared to 70.5% for the same period in
1996. The Life and Health Division's percentage was 57.6% in 1997 compared to
58.3% in 1996.
Commission and underwriting expenses decreased to $6.0 million in 1997 from $6.4
million in 1996 mainly due to a decline in commissions of $490,000. American
Southern experienced a decline in commissions of $541,000, the Life and Health
Division saw only a slight decrease in commissions, and Georgia Casualty's
commission expense increased by $52,000.
Interest expense for the first quarter of 1997 was $733,000 compared to $923,000
in the first quarter of 1996 due to a decrease in the Company's debt liability
which resulted from repayments since March 31, 1996, of $4.0 million on the
American Southern acquisition loan and $5.3 million of affiliated debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries reported a combined statutory income of
$2.1 million for the first quarter of 1997 and 1996. Consistent statutory
earnings were mainly due to increased income from operations offset by a
reduction in realized gains of $631,000. The Life and Health Division's
statutory earnings increased $344,000, and the Casualty Division's statutory
earnings decreased $394,000.
In connection with the acquisition of American Southern on December 31, 1995,
the Company entered into a Credit Agreement with Wachovia Bank of Georgia, N.A.
At March 31, 1997, the Company had outstanding borrowings under this agreement
of approximately $29.0 million, of which $3.0 million will become due and
payable during the last nine months of 1997. The Company repaid $1.0 million of
outstanding principal during the first quarter of 1997 as scheduled under the
terms of the agreement. The Company intends to repay its obligations under the
Credit Agreement using dividend payments received from its subsidiaries and
receipts from its tax sharing agreement.
The Company provides certain administrative and other services to each of its
insurance subsidiaries. The amounts charged to and paid by the subsidiaries in
1997 remained approximately the same as in 1996. 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 $51.0 million at March 31,
1997.
At March 31, 1997, the Company had a net cumulative deferred tax asset of zero.
The net cumulative deferred tax asset consisted of $25.2 million of deferred tax
assets, offset by $8.9 million of deferred tax liabilities, and a $16.3 million
valuation allowance. Due to the uncertain nature of their ultimate realization
based upon past performance and expiration dates, the Company has established a
full valuation allowance against these carryforward benefits and recognizes the
benefits only as reassessment demonstrates they are realizable. The Company's
ability to generate taxable income from operations is dependent upon various
factors, many of which are beyond management's control. Accordingly, there can
be no assurance that the Company will generate future taxable income based on
historical performance. Therefore, the realization of the deferred tax assets
will be assessed periodically based on the Company's current and anticipated
results of operations.
-7-
Approximately 94.6% 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. At
March 31, 1997, Georgia Casualty had $8.6 million of accumulated statutory
earnings, American Southern had $18.5 million of accumulated statutory earnings,
and Bankers Fidelity had $17.8 million of accumulated statutory earnings.
American Southern paid the Company dividends of $900,000 in the first quarter of
1997.
The Company believes that the fees and charges it receives from its subsidiaries
and, if needed, borrowings from banks and affiliates of the Company will enable
the Company to meet its liquidity requirements for the foreseeable future. The
Company anticipates that the funds to be used to retire the $5.6 million in
outstanding principal amount of the Company's 8% Convertible Subordinated Notes
due May 15, 1997, will come from bank financing. 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.
Net cash used by operating activities was $883,000 in 1997 compared to net cash
used by operating activities of $1.9 million in the first quarter of 1996. This
improvement in operating cash flows was due mainly to lower Company expenses and
lower claims paid by Georgia Casualty. The Company's interest expense declined
by $190,000 and data processing expenses declined by $70,000. Georgia Casualty's
claims paid decreased from 1996 by $550,000. Cash and short-term investments
decreased from $45.5 million at December 31, 1996, to $44.6 million at March 31,
1997, mainly due to the sale of short-term investments, the proceeds of which
were used for non-investment purposes. Total investments (excluding short-term
investments) decreased to $141.4 million at March 31, 1997, from $142.5 million
at December 31, 1996, due primarily to declines of $3.5 million in policy and
student loans and $2.0 million in common and preferred stocks offset by a net
increase in bonds of $4.5 million.
-8-
PART II. OTHER INFORMATION
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Report on Form 8-K.
(a) The following exhibits are filed herewith:
Exhibit 11. Computation of net income per common share.
Exhibit 27. Financial data schedule.
(b) No reports on Form 8-K were filed with the Securities and Exchange
Commission during the first quarter of 1997.
-9-
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: May 14, 1997 By: /s/
------------------- --------------------------------------------
John W. Hancock
Senior Vice President-Treasurer
(Principal Financial and Accounting Officer)
-10-
EXHIBIT 11
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF NET INCOME PER COMMON SHARE
SUPPORTING SCHEDULE
Three Months Ended
March 31,
---------------------
(In thousands, except per share data) 1997 1996
-------- --------
Net income $ 1,938 $ 1,977
Less preferred dividends to affiliates (380) (380)
---------------------
Net income available to common
shareholders $ 1,558 $ 1,597
=====================
Weighted average common shares outstanding 18,873 18,808
=====================
Net income per common share $ 0.08 $ 0.08
=====================
NOTE: Fully diluted earnings per common share are not presented because the
effect of convertible subordinated notes and preferred stock is
anti-dilutive.
7
1000
3-MOS
DEC-31-1997
MAR-31-1997
0
95807
95807
35723
6752
46
141358
44641
27111
15257
265196
121829
36873
3882
0
34611
0
164
18712
39917
265196
21775
2875
39
2
14532
6044
0
1978
40
0
0
0
0
1938
0.08
0.08
0
0
0
0
0
0
0
