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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
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|X| Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
OR
|_| Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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Commission File Number 0-3722
ATLANTIC AMERICAN CORPORATION
Incorporated pursuant to the laws of the State of Georgia
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Internal Revenue Service-- Employer Identification No.
58-1027114
Address of Principal Executive Offices:
4370 Peachtree Road, N.E., Atlanta, Georgia 30319
(404) 266-5500
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
The total number of shares of the registrant's Common Stock, $1 par value,
outstanding on November 11, 1999, was 21,023,726.
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ATLANTIC AMERICAN CORPORATION
INDEX
Part 1. Financial Information Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations -
Three months and nine months ended September 3
30, 1999 and 1998
Consolidated Statements of Shareholders' Equity -
Nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and reports on Form 8-K 17
Signature 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands, except per share data)
September December
30, 31,
1999 1998
----------------------
Cash, including short-term investments of $ $
$16,545 and $24,068 23,035 32,385
---------------------
Investments:
Bonds (cost: $149,520 and $98,286) 144,748 99,341
Common and preferred stocks (cost: $31,050 53,148 61,007
and $33,116)
Other invested assets (cost: $4,982 and 4,988 4,822
$4,982)
Mortgage loans 3,790 3,851
Policy and student loans 3,145 4,268
Real estate 46 46
---------------------
Total investments 209,865 173,335
---------------------
Receivables:
Reinsurance 38,138 22,772
Other (net of allowance for bad debts: $1,343 26,415 18,912
and $1,377)
Deferred acquisition costs 19,230 16,881
Other assets 4,704 4,225
Goodwill 23,559 4,339
=====================
Total assets $344,946 $272,849
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance reserves and policy funds:
Future policy benefits $39,760 $38,912
Unearned premiums 30,132 22,971
Losses and claims 125,749 86,768
Other policy liabilities 4,541 3,726
---------------------
Total policy liabilities 200,182 152,377
Accounts payable and accrued expenses 14,468 12,255
Debt payable 51,000 26,000
---------------------
Total liabilities
265,650 190,632
---------------------
Commitments and contingencies Shareholders' equity:
Preferred stock, $1 par, 4,000,000 shares
authorized; Series B preferred,
134,000 shares issued and outstanding,
$13,400 redemption value 134 134
Common stock, $1 par, 30,000,000
shares authorized; 21,404,060
shares issued in 1999 and 19,405,753
issued in 1998 and 21,027,886 shares
outstanding in 1999 and 19,119,888 shares 21,414 19,406
outstanding in 1998
Additional paid-in capital 55,962 50,406
Accumulated deficit (13,833) (15,213)
Accumulated other comprehensive income - 17,332 28,786
unrealized investment gains, net
Treasury stock, at cost, 386,174 shares in (1,713) (1,302)
1999 and 285,865 shares in 1998
---------------------
Total shareholders' equity 79,296 82,217
=====================
Total liabilities and shareholders $344,946 $272,849
equity
=====================
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 Nine Months Ended
September September
30, 30,
--------------------------------------
(In thousands, except per share data)
------ ------ ------ -------
1999 1998 1999 1998
----- ----- ----- ----
Revenue:
Insurance premiums $29,587 $22,848 $77,300 $ 68,677
Investment income 3,371 2,825 9,105 8,466
Realized investment gains, net 181 1,093 1,660 2,005
Other income 297 29 687 198
--------------------------------------
Total revenue 33,436 26,795 88,752 79,346
--------------------------------------
Benefits and expenses:
Insurance benefits and losses incurred 21,714 15,084 56,343 46,076
Commissions and underwriting expenses 8,149 6,715 21,567 20,436
Interest expense 928 545 1,858 1,660
Other 3,283 1,597 7,474 4,790
--------------------------------------
Total benefits and expenses 34,074 23,941 87,242 72,962
--------------------------------------
(Loss) income before income tax benefit (638) 2,854 1,510 6,384
(expense)
Income tax benefit (expense) (49) 8 (93) (124)
--------------------------------------
Net (loss) income $ (687) $ 2,862 $ 1,417 $ 6,260
Net (loss) income per common share $ (.05) $ .13 $ .03 $ .27
(basic and diluted)
======================================
Weighted average common shares 20,893 18,750 19,693 18,846
outstanding, basic
======================================
Weighted average common shares 21,057 19,035 20,022 19,141
outstanding, diluted
======================================
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Net
Additional Unrealized
Preferred Common Paid-in Accumulated Investment Treasury
Nine Months Ended September Stock Stock Capital Deficit Gains Stock Total
- ------------------------------------ ----------- ------------ ------------- -------------- ---------- -----------
Balance, December 31, 1998 $ 134 $ 19,406 $ 50,406 $ (15,213) $ 28,786 $ (1,302) $ 82,217
Comprehensive income:
Net income 1,417 1,417
Decrease in unrealized (11,454) (11,454)
investment gains -----------
Total comprehensive income (10,037)
-----------
Stock issued for acquisition of
Association Casualty 2,008 6,477 8,485
Dividends accrued on preferred
stock (905) (905)
Purchase of shares for treasury (602) (602)
Issuance of shares for employee
benefit plans and stock options
(16) (37) 191 138
------------ ----------- ------------ ------------- -------------- ---------- -----------
Balance, September 30,1999 $ 134 $ 21,414 $ 55,962 $ (13,833) $ 17,332 $ (1,713) $ 79,296
============ =========== ============ ============= ============== ========== ===========
Nine Months Ended September 30, 1998
- ------------------------------------
Balance, December 31, 1997 $ 164 $ 18,921 $ 53,316 $ (23,653) $ 29,498 $ (63) $ 78,183
Comprehensive income:
Net income 6,260 6,260
Increase in unrealized investment gains 467 467
-----------
Total comprehensive income 6,727
-----------
Cash dividends paid on preferred stock (236) (236)
Dividends accrued on preferred stock (905) (905)
Purchase of shares for treasury (967) (967)
Issuance of shares for employee benefit plans
and stock options (15) (105) (120)
Issuance of shares for acquisition of
Self - Insurance Administrators, Inc. 15 51 66
-------------------------------- ----------- ------------ ------------- -------------- ---------- -----------
Balance, September 30, 1998 $ 164 $ 18,936 $ 52,211 $ (17,498) $ 29,965 $ (1,030) $ 82,748
============ =========== ============ ============= ============== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
------------------
1999 1998
------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,417 $6,260
Adjustments to reconcile net income (loss) to
net cash
provided by operating activities:
Amortization of deferred acquisition costs 8,801 8,039
Acquisition costs deferred (10,711) (8,797)
Realized investment gains (1,660) (2,005)
Increase in insurance reserves 14,420 (644)
Depreciation and amortization 1,097 1,030
Increase in receivables, net (11,857) (4,373)
Decrease in other liabilities (13) (372)
Other, net (278) (442)
----------------
Net cash provided (used) by operating 1,216 (1,304)
activities
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured 34,450 50,924
Investments purchased (50,363)(69,479)
Additions to property and equipment (547) (333)
Acquisition of American Independent 197 -
Acquisition of Association Casualty (18,836) -
Bulk reinsurance transactions, net - 552
----------------
Net cash provided (used) by investing activities (35,099)(18,336)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends - (236)
Proceeds from exercise of stock options 135 (55)
Purchase of treasury shares (602) (1,033)
Proceeds from bank financing 50,000 -
Repayments of debt (25,000)(2,600)
----------------
Net cash provided (used) by financing activities 24,533 (3,924)
----------------
Net decrease in cash and cash equivalents (9,350) (23,564)
Cash and cash equivalents at beginning of period 32,385 51,044
----------------
Cash and cash equivalents at end of period $23,035 $27,480
================
Supplemental cash flow information:
Cash paid for interest $ 1,973 $1,630
================
Cash paid for income taxes $ 131 $ 330
================
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
ATLANTIC AMERICAN 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 nine month period ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. 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, 1998.
Note 2. Acquisition
On July 1, 1999, the Company acquired Association Casualty Insurance Company
and its affiliate, Association Risk Management General Agency, Inc. together
known as "Association Casualty". The Company's third quarter and nine-month
results for the period ending September 30, 1999 include Association Casualty's
results of operations since the date of acquisition. The acquisition has been
accounted for using the purchase method of accounting. Total consideration paid
for Association Casualty was approximately $32.5 million. The excess of the
purchase price over the fair value of the net tangible and identifiable assets
acquired was recorded as goodwill. The Company funded the transaction with a
combination of borrowings under its credit facilities and the issuance of shares
of common stock of the Company.
In connection with the acquisition of Association Casualty the following assets
and liabilities were acquired:
Cash, short-term investments $6,192
Other investments 30,276
Goodwill 19,830
Other assets 12,015
--------------
--------------
Total assets 68,313
--------------
--------------
Insurance reserves and policy funds 31,885
Other liabilities 1,494
--------------
--------------
Total liabilities 33,379
--------------
--------------
Net assets $34,934
==============
Note 3. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
133"Accounting for Derivative Instruments and Hedging Activities" SFAS 133).
SFAS 133 provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activity. In June 1999, the FASB
issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement 133". SFAS
137 defers the effective date of SFAS 133 to be effective for all fiscal
quarters for all fiscal years beginning after June 15, 2000. The Company
intends to adopt SFAS 133 on January 1, 2001. Management does not believe the
adoption of SFAS 133 will have a material effect on the Company's financial
condition or results of operations.
-6-
Note 4. Segment Information
The Company has four principal insurance subsidiaries which each focus on a
specific geographic region and/or specific products. Each subsidiary is managed
autonomously and is evaluated on its individual performance. The following
summary sets forth each subsidiary's revenue and pretax income (loss) for the
quarter and year-to-date periods.
Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
-----------------------------------------------------
1999 1998 1999 1998
------------- ------------ ------------ ----------
------------- ------------ ------------ -----------
American Southern $ 11,097 $ 9,623 $ 31,725 $ 29,791
Association Casualty 4,722 - 4,722 -
Georgia Casualty 5,455 6,180 16,666 18,954
Bankers Fidelity 12,050 9,858 35,055 29,236
Corporate and other 1,314 2,321 4,235 4,306
Adjustments and eliminations (1,202) (1,187) (3,651) (2,941)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Consolidated revenues $ 33,436 $ 26,795 $ 88,752 $ 79,346
============= ============ ============ =============
============= ============ ============ =============
Income (loss) before income tax expense (benefit)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------
--------------------------------------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
American Southern $ 1,822 $ 1,967 $ 4,465 $ 4,430
Association Casualty 399 - 399 -
Georgia Casualty (2,261) 98 (2,191) 1,663
Bankers Fidelity 1,153 682 2,713 2,083
Corporate and other (1,751) 107 (3,876) (1,792)
Adjustments and eliminations - - - -
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Consolidated results $ (638) $ 2,854 $ 1,510 $ 6,384
============= ============ ============ =============
============= ============ ============ =============
-7-
Note 5. Reconciliation of Other Comprehensive Income
September 30,
1999 1998
---------------------
Gain on sale of securities included in net income $1,660 $2,005
=====================
Other comprehensive income:
Net unrealized (loss) gain arising during year (9,794) 2,472
Reclassification adjustment (1,660) (2,005)
---------------------
Net unrealized (loss) gain recognized in other $(11,454) $467
comprehensive income
=====================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is management's discussion and analysis of the financial
condition and results of operations of Atlantic American Corporation ("Atlantic
American" or the "Company") and its subsidiaries as of and for the periods
ending September 30, 1999. This discussion should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Quarterly Report Form 10-Q and with the Consolidated Financial Statements
of Atlantic American Corporation on Form 10-K for the year ended December 31,
1998.
Atlantic American is an insurance holding company whose operations are
comprised of a group of regional or specialty insurance companies: American
Southern Insurance Company and American Safety Insurance Company, together
know as "American Southern"; Association Casualty Insurance Company and
Association Risk Management General Agency, Inc. together known as
"Association Casualty"; Georgia Casualty & Surety Company ("Georgia Casualty")
; and Bankers Fidelity Life Insurance Company ("Bankers Fidelity"). Each
operating company is managed as an autonomous operation based upon the
geographic location or the type of products it underwrites.
Overall Corporate Results
On a consolidated basis, the Company lost $687,000 for the third quarter
or $0.05 per diluted share, compared to net income of $2.9 million or $0.13 per
diluted share in the third quarter of 1998. For the nine months ended September
30, 1999 the Company had net income of $1.4 million, or $0.03 per diluted share,
versus $6.3 million or $0.27 per diluted share for the comparable period in
1998. The loss for the quarter was primarily due to unsatisfactory underwriting
results in Georgia Casualty. The Company also experienced a significant decrease
in unrealized gains compared to strong realized gains last year. Excluding
Georgia Casualty, all other operating units of the Company reported profitable
results. The decline in net income for the year to date period is attributable
to the same factors.
A more detailed analysis of the individual operating entities and other
corporate activities is provided below.
-8-
Underwriting Results
American Southern
The following is a summary of American Southern's premiums:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
---------------------- ----------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Gross written premiums $ 8,472 $ 6,106 $ 36,107 $ 32,091
Ceded premiums (2,103) (1,303) (4,666) (4,505)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Net written premiums $ 6,369 $ 4,803 $ 31,441 $ 27,586
========== =========== ========== ===========
========== =========== ========== ===========
Net earned premiums $ 9,879 $ 8,472 $ 28,243 $ 26,439
========== =========== ========== ===========
Gross written premiums at American Southern increased $4.0 million during
the nine months ended September 30, 1999 to $36.1 million, up from $32.1 million
for the nine month period in 1998. For the quarter, gross premiums increased
$2.4million to $8.5 million. The increase in premiums for both the quarter and
the year to date period is primarily attributable to business provided by the
joint venture that American Southern formed with the AAA of Carolinas Motor
Club, American Auto Club Insurance Agency. American Southern holds a 50%
interest in this joint venture and underwrites the majority of the standard
automobile business written by the agency. This program, which began writing
business in 1999, markets automobile insurance to the members of the automobile
association. Gross written premiums for this program were $3.6 million for the
nine months.
The following is a break out of earned premium by line of business:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
---------------------- ----------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Commerical automobile $ 8,105 $ 6,564 $ 22,584 $ 21,232
General liabililty 980 1,121 3,278 2,913
Property 778 774 2,335 2,252
Other 16 13 46 42
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Total all lines $ 9,879 $ 8,472 $ 28,243 $ 26,439
========== =========== ========== ===========
In addition to the business written through the joint venture, American
Southern produces much of its business through contracts with various states and
municipalities, some of which represent significant amounts of revenue for the
company. These contracts are periodically subject to competitive renewal quotes
and the loss of a significant contract could have a material adverse effect on
the business or financial condition of American Southern and of the Company.
Specifically, one significant contract comes up for renewal in February 2000.
American Southern is preparing a competitive quote for this business; however,
given the competitive nature of the current insurance market place it is
possible that other carriers may submit bid at unprofitable levels in order to
obtain this business. American Southern has no intention of pricing its bids at
an unprofitable level and as a result the potential exists that the company will
not renew this program. In an effort to increase the number of programs
underwritten by American Southern and to mitigate any such loss of
business the company has hired a new marketing representative who is
responsible for the development of new programs.
-9-
The following is a break out of the loss and expense ratio of American Southern.
September 30, September 30,
---------------------- -----------------------
---------------------- -----------------------
1999 1998 1999 1998
---------------------- ----------- -----------
---------------------- ----------- -----------
Loss ratio 66.0% 62.7% 70.2% 67.4%
Expense ratio 27.3% 27.1% 25.8% 28.1%
---------------------- ----------- -----------
---------------------- ----------- -----------
Combined ratio 93.3% 89.8% 96.0% 95.5%
====================== =========== ===========
====================== =========== ===========
The loss ratio for the nine months ended September 30, 1999 increased to
70.2% from 67.4% for the comparable period in 1998. The increase in the loss
ratio is attributable to somewhat higher on existing accounts.
The increase in the loss ratio for the nine months ended September 30,
1999 was somewhat offset by a decrease in the expense ratio. The majority of
American Southern's business is structured such that the agent is rewarded or
penalized based upon the loss ratio of the business they submit to the company.
By structuring its business in this manner American Southern provides its agents
with an economic incentive to place profitable business with the company. As a
result of this arrangement, in periods where losses and the loss ratio increase,
the commission and underwriting expenses and the resulting expense ratio
decrease. For the third quarter the expense ratio increased over the prior year
as a result of higher commission expenses for business written in the third
quarter.
Association Casualty
The results of both Association Casualty Insurance Company ("ACIC") and
Association Risk Management General Agency, Inc. ("ARMGA") are included for the
first time in the third quarter of 1999, and as a result comparable numbers are
not presented. ACIC underwrites workers' compensation insurance in the state of
Texas, and ARMGA provides general property and casualty agency services in
Texas. The primary line of business for Association Casualty is workers'
compensation although the Company intends to diversify the lines of business it
writes.
The following is a summary of Association Casualty's premiums:
Three months ended
September 30,
1999
---------------
---------------
Gross written premiums $ 4,670
Ceded premiums (401)
---------------
---------------
Net written premiums $ 4,269
===============
===============
Net earned premiums $ 4,077
===============
The premium production at Association Casualty was consistent with the
Company's expectations. The insurance market in the State of Texas has become
quite competitive, with many carriers entering the market and offering their
products at prices that the company finds unacceptable. In keeping with the
philosophy of the entire Atlantic American group of companies, rather than write
business at levels that are expected to be unprofitable, Association Casualty
chooses to not write such business. While such a decision might,at times, result
in slow or even negative growth in premium volume, in the long run management
believes that such practices are in the best interest of the Company and its
policyholders and shareholders.
Gross written premiums for the quarter of $4.7 million were comprised primarily
of workers compensation business.
-10-
The following are the loss and expense ratio for Association Casualty:
Three months ended
September 30,
1999
---------------
---------------
Loss ratio 67.6%
Expense ratio 38.4%
---------------
---------------
Combined ratio 106.0%
===============
During the current year, the loss ratio at Association Casualty has been
adversely impacted by a liberal interpretation of the workers' compensation laws
in the State of Texas. This factor coupled with increasing medical costs has
raised the loss ratio to higher than historical levels. In reaction to both
events, Association Casualty has tightened the company's underwriting standards.
The expense ratio for the quarter has been impacted by Association
Casualty's efforts to become a multi-line insurance company. In addition to the
expenses associated with preparing for the expansion of its business,
Association Casualty has hired additional personnel in the underwriting and
marketing departments.
Georgia Casualty
The following is a summary of Georgia Casualty's premiums:
Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------------
--------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Gross written premiums $ 6,513 $ 6,168 $19,579 $18,737
Ceded premiums (1,534) (792) (4,404) (2,404)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net written premiums $ 4,979 $ 5,376 $15,175 $16,333
========== ========== =========== ===========
========== ========== =========== ===========
Net earned premiums $ 5,014 $ 5,653 $14,353 $16,514
========== ========== =========== ===========
While gross written premiums for Georgia Casualty are up 4.5% for the nine
months ended September 30 and 5.6% for the third quarter, the company has
increased the amount of premium that it is ceding to its reinsurers resulting in
a decline in net written premium of 7.1% for the year and 7.4% for the quarter.
The increase in ceded premium is the result of a stop loss reinsurance contract
that the company entered into in the second quarter of 1999. The stop loss
reinsurance agreement is responsible for all losses, in the aggregate, in the
1999 accident year that fall between 55% and 75% of net earned premiums. Along
with the cost of this reinsurance program, premiums for the year have been
reduced as the result of the company terminating two underwriting programs: one
for the poultry industry and one for short-haul truckers. These programs
accounted for $807,000 in earned premium in 1999 compared to approximately $1.3
million in earned premium 1998.
-11-
Following is a break out of earned premium by line of business:
Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------------
--------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Workers' compensation $ 3,494 $ 3,814 $ 9,671 $10,806
Business automobile 686 902 2,182 2,874
Property 508 537 1,576 1,578
General liability 326 400 924 1,256
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Total all lines $ 5,014 $ 5,653 $14,353 $16,514
========== ========== =========== ===========
The loss ratio at Georgia Casualty increased to 108.7% for the quarter and
89.0% for the year. As previously discussed, Georgia Casualty has been adversely
impacted by the results of two, now discontinued, underwriting programs. These
two programs account for $1.4 million in losses or 4 points of the loss ratio.
In addition to this, the wood related industry portfolio which has performed
very well for Georgia Casualty in the past has had an abnormal number
of large losses. We are aggressively instituting rate increases on this market
sector. In addition to these two programs, during the third quarter, Georgia
Casualty increased its overall reserves by $900,000 on its remaining business.
The expense ratio at Georgia Casualty has also increased over the prior
year. The primary factor in this increase is the decline in premium, primarily
due to the stop-loss treaty, for both the nine-month period and the quarter.
In addition, Georgia Casualty has over the past 6 months made significant
additions to its underwriting and management team. Beginning in 2000 it is
expected that marketing being initiated by the new management team will result
in additional business to Georgia Casualty to offset the additional costs
associated with their addition to the company. However, the focus of
management during 1999 has been on the current operations of Georgia Casualty.
The following are the loss and expense ratio's for Georgia Casualty:
Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------------
--------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Loss ratio 108.7% 75.9% 89.0% 72.2%
Expense ratio 41.7% 31.7% 41.1% 32.5%
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Combined ratio 150.4% 107.6% 130.1% 104.7%
========== ========== =========== ===========
Bankers Fidelity
- -----------------
The following is the break out of earned premium revenue for Bankers Fidelity:
- --------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------
Medicare supplement $ 6,614 $ 4,832 $ 18,784 $ 14,080
Other health 787 890 2,439 2,734
Life 3,216 3,001 9,404 8,910
=========== ======== ======== ========
Total premiums $ 10,617 $ 8,723 $ 30,627 $ 25,724
-=========== =========== ========== ===========
-12-
Earned premium revenue at Bankers Fidelity is up 21.7% for the third
quarter and 19.1% for the nine months ended September 30, 1999. The majority of
this increase has been in the Medicare supplement business, which is up 36.9%
for the quarter and 33.4% for the year to date period. This increase has come
from a focused marketing campaign over the past two years as well as the opening
up of a new region in the beginning of 1999. During 1999 Bankers Fidelity has
also increased its focus on its life insurance products and as a result the
company has generated an increase in this line of 7.2% for the quarter and 5.5%
for the nine months ended September 30, 1999.
Insurance benefits and losses at Bankers Fidelity increased 27.4% for the
quarter and 28.3% for the year to date period. This increase in insurance
benefits and losses is primarily attributable to the increase in premium volume.
In addition the loss ratio has been impacted by the timing of the approval by
various states of rate increases, principally on the company's Medicare
supplement business. As a percentage of premium income this represents an
increase from 62.8% to 65.7% for the quarter and from 63.6% to 68.5% for the
year to date period.
Commission expense for the quarter increased 16.7%, for the nine-month
period commission expense is up 12.9%. The increase in commission expense is
also attributable to the increase in premium volume; however, as a percent of
premium commission expense is down from 16.8% for the nine month period in 1998
to 15.9% for the comparable period in 1999. For the quarter this ratio is down
from 16.3% in 1998 to 15.6% in 1999. This decline is principally the result of a
reduction in commission rates on several of the company's primary health
products.
General expenses at Bankers Fidelity are up only 1.0% for the quarter but
10.2% for the year. As a percentage of premium volume this represents a decline
from 27.5% to 25.4% for the year and from 27.4% to 24.3% for the quarter. The
decline in this ratio is attributable to an effort to streamline the operations
of Bankers Fidelity. This is an ongoing effort that has to date yielded
approximately $1.0 million dollars in annualized savings.
Investment Income and Realized Gains
Investment income for the quarter increased 19.3% or $546,000, principally
from the inclusion of Association Casualty which contributed $495,000 to
investment income during the quarter. For the nine months ended September 30,
1999 investment income increased 7.5%. The Company has continued to move
investments from short-term to longer term, higher yielding investments,
particularly government agency and other highly rated bonds. Invested assets
increased from $173.3 million at the end of 1998 to $207.4 million at September
30, 1999. Of this increase $25.9 million is attributable to the inclusion of
Association Casualty; the remaining increase has come principally from the
investment of short-term funds as discussed previously.
Realized gains for the third quarter were $181,000 compared to $1.1
million in the third quarter of 1998. The management of the Company continually
evaluates the Company's investment portfolio and when opportunities arise will
divest appreciated investments. During the third quarter of 1999, given the
increase in interest rates and the general decline in the stock market, the
Company saw fewer opportunities for such divestitures.
Interest Expense
Interest expense for the third quarter increased significantly over the
third quarter of 1998. In conjunction with the acquisition of Association
Casualty, the Company entered into a $30.0 million revolving credit facility
with Wachovia Bank, N.A. To date the Company has drawn down $26 million dollar
on this facility. This, coupled with the $25 million variable rate demand bonds
entered into during the second quarter, the proceeds of which were used to pay
down the Company's prior credit facility, bring the total debt of the Company to
$51.0 million, up from $26.0 million at the end of 1998. The interest rate on
both the revolver and the bonds is variable and is tied to 30 day LIBOR.
Other Expenses and Taxes
The increase in other operating expenses during the quarter, and for the
nine month period, is attributable to the inclusion of Association Casualty in
the third quarter results. In addition, in 1999 the Company has incurred a
non-recurring expense associated with the hiring of a consulting group to assist
the Company in streamlining its operations. The contract with the consultants
runs into the fourth quarter of 1999 and will not recur in 2000.
-13-
The Company's tax provision for the quarter increased over the provision for the
third quarter of 1998 due to an unusual adjustment in 1998 relating to American
Independent Life Insurance Company.
LIQUIDITY AND CAPITAL RESOURCES
The major cash needs of the Company are for the payment of claims and expenses
as they come due and the maintenance of adequate statutory capital and surplus
to satisfy state regulatory requirements and meet debt service requirements of
the Company. The Company's primary source of cash is written premiums and
investment income. Cash payments consist of current claim payments to insureds
and operating expenses such as salaries, employee benefits, commissions, taxes,
and shareholder dividends from the subsidiaries, when earnings warrant such
dividend payments. By statute, the state regulatory authorities establish
minimum liquidity standards primarily to protect policyholders.
The Company's insurance subsidiaries reported a combined statutory income of
$3.0 million for the first nine months of 1999 compared to statutory net income
of $6.3 million for the first nine months of 1998. Total statutory net income
for the quarter was $945 thousand compared to $2.4 million in 1998. The reasons
for the decrease in statutory earnings in the first nine months of 1999 are the
same as those discussed in "Results of Operations" above. Statutory results
differ from the results of operations under generally accepted accounting
principles ("GAAP") for the Casualty Division due to the deferral of acquisition
costs. The Life and Health Division's statutory results differ from GAAP
primarily due to deferral of acquisition costs, as well as different reserving
methods.
The Company has one series of preferred stock outstanding, substantially all
of which is held by affiliates of the Company's chairman and principal
shareholders. The outstanding shares of Series B Preferred Stock ("Series B
Stock") have a stated value of $100 per share, accrue annual dividends at a rate
of $9.00 per share, in certain circumstances may be convertible into an
aggregate of approximately 3,358,000 shares of common stock, and are redeemable
at the Company's option. The Series B Stock is not currently convertible. At
June 30, 1999, the Company had accrued, but unpaid dividends on the Series B
Stock totaling $3.0 million.
On June 24, 1999, the Company issued $25.0 million in Taxable Variable Rate
Demand Bonds, Series 1999 ("the Bonds") to replace the Company's existing bank
facility. The bonds will mature on July 1, 2009 and pay a variable interest rate
that approximates 30-day LIBOR. The bonds are backed by a Letter of Credit
issued by Wachovia Bank, N.A. The cost of the Letter of Credit and its
associated fees are 180 basis points, making the effective cost of the bonds
LIBOR plus 180 basis points (currently approximately 7.0%). In connection with
issuing the Bonds, the Conmpany repaid and terminated its existing credit
facility, which provided for a term loan with an interest rate of prime less 50
basis points and would have matured December 31, 2000.
On July 1, 1999, the Company entered into a $30.0 million revolving credit
facility with Wachovia Bank, N.A. to finance a portion of its acquisition of
Association Casualty. The revolver has a five year term and requires no
principal payments until maturity. The interest rate on the revolver is 30-day
LIBOR plus 200 basis points (currently approximately 5.43%). To date the Company
has drawn down $26.0 million of the available facility.
The Company provides certain administrative and other services to each of its
insurance subsidiaries. The amounts charged to and paid by the subsidiaries in
the first six months of 1999 increased slightly over the first six months of
1998. In addition, the Company has a formal tax-sharing agreement between the
Company and its insurance subsidiaries. It is anticipated that the tax-sharing
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 $39.0 million at June 30, 1999.
At September 30, 1999, the Company had a net cumulative deferred tax asset of
zero. The net cumulative deferred tax asset consisted of approximately $19.0
million of deferred tax assets, offset by approximately $11.9 million of
deferred tax liabilities, and a $7.1 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.
-14-
Over 90.0% of the investment assets of the insurance subsidiaries are in
marketable securities that can be converted into cash, if required; however, use
of such assets by the Company is limited by state insurance regulations.
Dividend payments to the Company by its insurance subsidiaries are limited to
the accumulated statutory earnings of the individual insurance subsidiaries,
subject to annual limitations. At September 30, 1999, Georgia Casualty had $12.8
million of accumulated statutory earnings, American Southern had $20.6 million
of accumulated statutory earnings, Association Casualty had $13.7 million of
accumulated statutory earnings, and Bankers Fidelity had $25.4 million of
accumulated statutory earnings.
Net cash provided by operating activities was $1.2 million in the first nine
months of 1999 compared to net cash used by operating activities of $1.3 million
in the first nine months of 1998. Cash and short-term investments decreased from
$32.4 million at December 31, 1998, to $23.0 million at September 30, 1999,
mainly due to an increase in longer-term investments. Total investments
(excluding short-term investments) increased to $209.9 million due in part to
the shift from short-term investments as well as the acquisition of Association
Casualty.
The Company has in place a stock repurchase program, pursuant to
which the Company acquires shares of the Company's outstanding common stock
from time to time based upon prevailing market conditions. The acquired shares
are held as treasury shares and are generally used to meet the Company's
obligations to its various stock-based employee benefit programs. During the
first nine months of 1999, approximately 146,000 shares were purchased by the
Company pursuant to the stock repurchase program. The Company is currently
authorized to acquire up to 620,000 additional shares of common stock.
The Company believes that the dividends, fees, tax-sharing payments it
receives from its subsidiaries and, if needed, borrowings from banks and
affiliates of the Company will enable the Company to meet its liquidity
requirements for the foreseeable future. Management is not aware of any current
recommendations by regulatory authorities, which, if implemented, would have a
material adverse effect on the Company's liquidity, capital resources or
operations.
YEAR 2000
Many existing computer systems and equipment with embedded computer chips
currently in use were developed using two digits rather than four digits to
specify the year. As a result, many systems will recognize a date code of "00"
as the calendar year 1900 rather than 2000, which could cause systems to fail or
cause erroneous results in date sensitive systems.
The Company's operating systems, most of which depend on date sensitive data,
are integral to its business. The Company developed a program to assess the
state of readiness of the Company's internal systems, both computer systems and
those with embedded micro-processors, and those of its vendors and customers,
the remediation measures necessary for those systems to be Year 2000 compliant,
the costs to undertake such measures and to develop appropriate contingency
plans.
The Company's program to assess and remediate its internal systems (which
include both hardware and software) is virtually complete. The Company has
identified four critical operating systems that require the highest level and
priority of testing to ensure that performance is not adversely affected by the
Year 2000 issue. At the end of 1998, the Company had completed all scheduled
modifications to its systems to appropriately address the Year 2000 issue.
Initial testing of these systems has been completed and the Company is currently
running on these modified systems. Additional testing has continued through the
first nine months of 1999. To date, the Company has been able to remediate its
systems through upgrades, rather than system replacement. The failure of any of
those systems as a result of the Year 2000 issue would inhibit the Company's
ability to conduct its business and process claims, and would likely have a
material adverse effect on the Company's results of operations. The Company is
also continuing to test less critical information systems and systems with
embedded microprocessors for compliance. The Company has developed contingency
plans to enable the Company to fulfill the functions performed by those systems
in the event of failure.
While the Company believes it is taking every precaution to address the Year
2000 issue, some uncertainty remains. The Company cannot control the activities
of its third party vendors, and the Company may have failed to identify and
remediate all of its systems or may otherwise encounter unanticipated problems
related to the Year 2000 issue.
As a result, management cannot determine whether or not Year 2000 related
problems that could arise would have a material impact on the Company's
financial condition or results of operations.
-15-
As part of this process, the Company is continuing its process of surveying
its vendors and service providers and customers in order to identify areas in
which Year 2000-related problems with external systems could cause disruptions,
delays or failures that could impact the Company. As the results of these
external surveys are assessed, the Company expects to develop appropriate
contingency plans. While unlikely, it is possible that a major service provider,
such as a utility company, may be unable to provide the Company with its needed
service for a period of time. If such an event were to happen, the Company might
not be able to provide services until the utilities are returned.
During the first nine months of 1999, the Company spent less than $100,000 to
modify existing systems and applications to address the Year 2000 issue. The
Company estimates that less than $50,000 will be incurred in the remainder of
1999. The Company does not anticipate that the costs of bringing its systems
into compliance would have a material adverse effect on the results of
operations or financial condition of the Company.
FORWARD-LOOKING STATEMENTS
This report contains and references certain information that constitutes
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Those statements, to the extent they are not
historical facts, should be considered forward-looking and subject to various
risks and uncertainties. Such forward-looking statements are made based upon
management's assessments of various risks and uncertainties, as well as
assumptions made in accordance with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of such risks and uncertainties, including those
identified in the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1998 and the other filings made by the Company from time to
time with the Securities and Exchange Commission.
-16-
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) The following exhibits are filed herewith
Exhibit 11
Exhibit 27 - Financial Data Schedule
(b)(1) On July 16, 1999, the Company filed a report on Form 8-K, reporting
under Item 5 the acquisition of Association Casualty Insurance
Company and Association Risk Management General Agency.
(b)(2) On September 14, 1999, the Company filed a report Form 8-K/A,
amending Item 7 of the Form 8-K filed on July 16, 1999 to include the
financial statements and other financial information relating to the
Company's acquisition of Association Casualty Insurance Company and
Association Risk Management General Agency.
-17-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC AMERICAN CORPORATION
(Registrant)
Date: November 15, 1999 By: /S/
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
-18-
EXHIBIT 11
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF NET INCOME PER COMMON SHARE
SUPPORTING SCHEDULE
Three Months Ended Nine Months Ended
September September
30, 30,
------------------------------------------
(In thousands, except per share
data) 1999 1998 1999 1998
------------------------------------------
Basic Earnings Per Common Share:
Net income (687) 2,862 1,417 6,260
Less preferred dividends to (301) (380) (905) (1,141)
affiliates
------------------------------------------
Net income available to common (988) 2,482 512 5,119
shareholders
==========================================
Weighted average common shares 20,893 18,750 19,693 18,846
outstanding
==========================================
Net (loss) income per common (.05) .13 .03 .27
share (basic)
==========================================
Diluted Earnings Per Common Share:
Net income available to common (988) 2,482 512 5,119
shareholders
==========================================
Weighted average common shares 20,893 18,750 19,693 18,846
outstanding
Effect of dillutive stock options 164 285 329 295
------------------------------------------
Weighted average common shares
outstanding 21,057 19,035 20,022 19,141
adjusted for dilutive stock
options for dilutive stock options
==========================================
Net (loss) income per common (.05) .13 .03 .27
share (diluted)
==========================================
Common Shares Outstanding 21,028 18,719
=====================
-19-
7 1000 9-MOS DEC-31-1999 SEP-30-1999 0 144748 144748 53148 3790 46 209865 23035 38138 19230 344946 125749 30132 44301 0 51000 0 134 21414 57748 344946 77300 9105 1660 687 56343 21567 0 1510 93 1417 0 0 0 1417 0.03 0.03 0 0 0 0 0 0 0