- -------------------------------------------------------------------------------- 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, 2000 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 11, 2000, was 21,025,022.
ATLANTIC AMERICAN CORPORATION INDEX Part 1. Financial Information Page No. - -------------------------------- -------- Item 1. Financial Statements: Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 2 Consolidated Statements of Operations - Three months ended March 31, 2000 and 1999 3 Consolidated Statements of Shareholders' Equity - Three months ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows - Three months ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information - --------------------------- Item 6. Exhibits and report on Form 8-K 17 Signature 18
PART I. FINANCIAL INFORMATION Item 1. Financial Statements ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited; In thousands, except per share data) March 31, December 31, 2000 1999 --------------------- Cash and cash equivalents (including short-term investments of $9,511 and $22,471) $ 22,705 $ 34,306 -------------------- Investments: Bonds (cost: $156,526 and $143,220) 149,346 137,000 Common and preferred stocks (cost: $31,109 and 45,148 48,684 $31,183) Other invested assets (cost: $6,113 and $4,943) 6,468 5,717 Mortgage loans 3,619 3,645 Policy and student loans 3,157 3,749 Real estate 46 46 -------------------- Total investments 207,784 198,841 -------------------- Receivables: Reinsurance 38,452 39,287 Other (net of allowance for bad debts: $1,717 32,397 28,478 and $1,717) Deferred income taxes, net 5,426 4,299 Deferred acquisition costs 21,464 20,398 Other assets 4,798 5,074 Goodwill 19,861 20,461 -------------------- Total assets $352,887 $351,144 ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Insurance reserves and policy funds: Future policy benefits $ 40,489 $ 40,093 Unearned premiums 36,871 34,293 Losses and claims 128,188 126,556 Other policy liabilities 4,472 4,203 --------------------- Total policy liabilities 210,020 205,145 Accounts payable and accrued expenses 16,225 16,051 Debt payable 50,000 51,000 --------------------- Total liabilities 276,245 272,196 --------------------- Commitments and contingencies (Note 9) Shareholders' equity: Preferred stock, $1 par, 4,000,000 shares authorized; Series B preferred, 134,000 shares issued and outstanding, $13,400 redemption value 134 134 Common stock, $1 par, 30,000,000 shares authorized; 21,412,138 shares issued in 2000 in 1999 and 21,021,353 shares Outstanding in 2000 and 21,026,786 shares outstanding in 1999 21,412 21,412 Additional paid-in capital 55,375 55,677 Accumulated deficit (3,452) (4,558) Accumulated other comprehensive income - 4,689 7,836 unrealized investment gains, net Treasury stock, at cost, 390,785 shares in 2000 and 385,352 shares in 1999 (1,516) (1,553) --------------------- Total shareholders' equity 76,642 78,948 --------------------- Total liabilities and shareholders' equity $ 352,887 $ 351,144 ===================== 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, ------------------------- (Unaudited; In thousands, except per share data) 2000 1999 ----- ---- Revenue: Insurance premiums $ 31,879 $ 23,343 Investment income 4,003 2,871 Realized investment gains, net 547 865 Other income 462 258 ------------------------ Total revenue 36,891 27,337 ------------------------ Benefits and expenses: Insurance benefits and losses incurred 22,586 16,249 Commissions and underwriting expenses 8,434 6,964 Interest expense 992 465 Other 3,153 2,179 ------------------------ Total benefits and expenses 35,165 25,857 ------------------------ Income before income tax provision 1,726 1,480 Income tax provision 574 27 ------------------------ Net income 1,152 1,453 Preferred stock dividends (302) (302) ------------------------ Net income applicable to common stockholders $ 850 $ 1,151 ======================== Net income per common share (basic and diluted) $ .04 $ .06 ======================== Weighted average common shares outstanding, basic 21,012 19,111 ======================== Weighted average common shares outstanding, diluted 21,033 19,412 ======================== The accompanying notes are an integral part of these consolidated financial statements. -3-
ATLANTIC AMERICAN CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited; Amounts in thousands) Net Additional Unrealized Preferred Common Paid-in Accumulated Investment Treasury Three Months Ended March 31, 2000 Stock Stock Capital Deficit Gains Stock Total - ------------------------------------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Balance, December 31, 1999 $ 134 $ 21,412 $ 55,677 $ (4,558) $ 7,836 $ (1,553) $ 78,948 Comprehensive income (loss): Net income 1,152 1,152 Decrease in unrealized investment gains (4,842) (4,842) Deferred income tax benefit attributable to other comprehensive loss 1,695 1,695 ----------- Total comprehensive loss (1,995) ----------- Dividends accrued on preferred stock (302) (302) Purchase of shares for treasury (60) (60) Issuance of shares for employee benefit plans and stock options (46) 97 51 ---------- ---------- ----------- ----------- ---------- ---------- ----------- Balance, March 31, 2000 $ 134 $ 21,412 $ 55,375 $ (3,452) $ 4,689 $ (1,516) $ 76,642 ========== ========== =========== =========== ========== ========== =========== Balance, December 31, 1998 $ 134 $ 19,406 $ 50,406 $ (15,213) $ 28,786 $ (1,302) $ 82,217 Comprehensive income (loss) : Net income 1,453 1,453 Decrease in unrealized investment gains (3,679) (3,679) ----------- Total comprehensive loss (2,226) ----------- Dividends accrued on preferred stock (302) (302) Purchase of shares for treasury (113) (113) Issuance of shares for employee benefit plans and stock options (2) 33 31 ---------- ---------- ----------- ----------- ---------- ---------- ----------- Balance, March 31, 1999 $ 134 $ 19,406 $ 50,104 $ (13,762) $ 25,107 $ (1,382) $ 79,607 ========== ========== =========== =========== ========== ========== =========== The accompanying notes are an integral part of these consolidated financial statements. -4-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, ---------------------- 2000 1999 ---------------------- (Unaudited; In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,152 $ 1,453 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of deferred acquisition costs 2,119 2,960 Acquisition costs deferred (3,185) (3,978) Realized investment gains (547) (865) Increase in insurance reserves 4,875 13,310 Depreciation and amortization 451 346 Deferred income tax expense 567 - Increase in receivables, net (3,084) (14,729) Decrease in other liabilities 355 (574) Other, net (498) (121) --------------------- Net cash provided by (used in) operating activities 2,205 (2,198) --------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investments sold or matured 2,841 15,693 Investments purchased (15,450) (15,871) Additions to property and equipment (108) (160) Acquisition of Association Casualty (80) - -------------------- Net cash used in investing activities (12,797) (338) --------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 51 31 Purchase of treasury shares (60) (113) Repayments of debt (1,000) - --------------------- Net cash used in financing activities (1,009) (82) --------------------- Net decrease in cash and cash equivalents (11,601) (2,618) Cash and cash equivalents at beginning of period 34,306 32,385 --------------------- Cash and cash equivalents at end of period $ 22,705 $ 29,767 ===================== Supplemental cash flow information: Cash paid for interest $ 1,015 $ 465 ===================== Cash paid for income taxes $ - $ - ===================== The accompanying notes are an integral part of these consolidated financial statements. -5-
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited; In thousands) Note 1. Basis of presentation. - ------ The accompanying unaudited condensed consolidated financial statements include the accounts of Atlantic American Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The acompanying 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. Operating results for the three month period ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. Note 2. Impact of recently issued accounting standards. - ------- The Financial Accounting Standards Board has issued Statement 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 provides a comprehensive and consistent standard for recognition and measurement of derivatives and hedging activity. SFAS 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes specific accounting methods for hedges. Changes in the value of most derivatives and hedges will be included in earnings in the period of the change. SFAS 133, as amended by SFAS 137, is effective for years beginning after June 15, 2000. The Company intends to adopt SFAS 133 on January 1, 2001. Management does not believe the adoption of SFAS 133 will have a material effect on the Company's financial condition or results of operations. Note 3. Segment Information - ------- The Company has four principle insurance subsidiaries that each focus on a specific geographic region and/or specific products. Each company is managed autonomously and is evaluated on its individual performance. The following summary sets forth each company's revenue and pretax income (loss) for the three months ended March 31, 2000 and 1999. Revenues Three Months Ended March 31, ------------------ 2000 1999 ---------- --------- American Southern $ 10,950 $ 10,110 Association Casualty 5,156 - Georgia Casualty 7,223 5,539 Bankers Fidelity 13,244 11,426 Corporate and Other 2,005 1,447 Adjustments and eliminations (1,687) (1,185) ------------ ------------ Consolidated results $ 36,891 $ 27,337 =================================== -6-
Income (loss) before income tax provision Three Months Ended March 31, ------------------ 1999 2000 ---------- ---------- American Southern $ 1,559 $ 1,635 Association Casualty (175) - Georgia Casualty 444 176 Bankers Fidelity 1,060 846 Corporate and other (1,177) (1,162) ------------- ----------- Consolidated results $ 1,726 $ 1,480 =========================== Note 4. Credit Arrangements The Company is a party to a five-year revolving credit facility that provides for borrowings up to $30,000. The interest rate on the borrowings under the facility is based upon the London Interbank Offered Rate ("LIBOR") plus an applicable margin, 2.25% at March 31, 2000. The monthly credit facility provides for the payment of all of the outstanding principal balance at June 30, 2004 with no required principal payments prior to that time. The Company also has outstanding, $25,000 of Series 1999, Variable Rate Demand Bonds (the "Bonds") due July 1, 2009. The Bonds, which are redeemable at the Company's option, pay a variable interest rate that approximates 30-day LIBOR. The Bonds are backed by a thirteen-month letter of credit issued by Wachoiva Bank, N.A. The cost of the letter of credit and its associated fees are 2.25%, making the effective rate on the Bonds LIBOR plus 2.25% at March 31, 2000. The interest on the Bonds is payable monthly and the letter of credit fees are payable quarterly. The Bonds do not require the repayment of an principal prior to maturity. Subsequent to year-end, the revolving credit facility and letter of credit were both amended by Wachovia Bank, N.A. as a result of the Company's operating performance during 1999. The amendment establishes new covenants pertaining to funded debt, total capitalization, and EBITDA. As amended, beginning April 1, 2000, the margin on the revolving credit facility was increased to 3.25% and the cost of the letter of credit was increased to this same level. The margin on the revolving credit facility and the cost of the letter of credit can be reduced if the Company meets certain financial objectives during 2000. The Company expects to be in compliance with all debt covenants for the remainder of 2000. Note 5. Reconciliation of Other Comprehensive Income - ------- March 31, 2000 1999 ----------------------- Gain on sale of securities included in net income $ 547 $ 865 ======================= Other comprehensive loss: Net pre-tax unrealized loss arising during year $ (4,295) $ (2,814) Reclassification adjustment (547) (865) ----------------------- Net pre-tax unrealized loss recognized in other comprehensive loss (4,842) (3,679) Deferred income tax benefit attributable to other comprehensive training 1,695 - ----------------------- Net unrealized loss recognized in other comprehensive loss $ (3,147) (3,679) ======================= Note 6. Acquisition. - ------- On July 1, 1999, the Company acquired 100% of the outstanding stock of Association Casualty Insurance Company ("ACIC") and Association Risk Management General Agency, ("ARMGA") for a combined price of $32,958 with $8,483 of the purchase price -7-
paid in the form of common stock of the Company and the remaining $24,475 paid in cash obtained from borrowings under the Company's revolving credit facility. The acquisition of both ACIC and ARMGA were accounted for using the purchase method of accounting. Accordingly, the Company has preliminarily allocated the purchase price of the companies based on the fair value of the assets acquired and liabilities assumed and their results of operations are included in the consolidated results of operations since the date of acquisition. The following summarizes the Company's pro-forma unaudited results of operations for the quarter ended March 31, 1999 assuming the purchase of ACIC and ARMGA had been consummated as of January 1, 1999: Revenue $ 32,833 Net Income $ 935 Per common share data: Basic earnings per share $ 0.03 Diluted earnings per share $ 0.03 This pro-forma financial information has been prepared for the informational purposes only and is not necessarily indicative of the results of operations had the transaction been consummated on January 1, 1999, nor is it indicative of results of operations that may be obtained in the future. Note 8. Earnings per common share - ------ A reconciliation of the numerator and denominator of the earnings per common share calculations are as follows: (In thousands, except per share data) Three Months Ended March 31, ----------- --------- 2000 1999 ---------------------------- Basic Earnings Per Common Share Net income $ 1,152 $ 1,453 Less preferred stock dividends (302) (302) ----------------------------- Net income applicable to common shareholders $ 850 $ 1,151 ============================= Weighted average common shares outstanding 21,012 19,111 ============================= Net income per common share $ .04 $ .06 ============================= Diluted Earnings Per Common Share: Net income applicable to common shareholders $ 850 $ 1,151 ============================ Weighted average common shares outstanding 21,012 19,111 Effect of dillutive stock options 21 301 ----------------------------- Weighted average common shares outstanding Adjusted for dillutive stock options 21,033 19,412 ============================= Net income per common share $ .04 $ .06 ============================= -8-
Outstanding stock options of 811,000 and 11,000 were excluded from the earnings per common share calculation in 2000 and 1999, respectively, since their impact was antidilutive. This assumed conversion of the Series B Preferred stock was excluded from the earnings per common share calculation for 2000 and 1999 since its impact was antidilutive. Note 9. Commitments and Contigencies - ------- The Company and its subsidiaries are parties to litigation occurring in the normal course of business. In the opinion of management, such litigation will not have a material adverse effect on the Company's financial position or results of operations. -9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overall Corporate ResultS On a consolidated basis, the Company earned $1.2 million or $0.04 per diluted share during the first quarter of 2000 compared to net income of $1.5 million or $0.06 per diluted share in the first quarter of 1999. Pre-tax net income increased to $1.7 million during the first quarter of 2000 from $1.5 million for the comparable period in 1999. The Company, beginning in the first quarter of 2000, is recognizing a deferred tax provision as a result of the Company's year-end 1999 reassessment of its valuation reserve related to the Company's net operating loss carryforwards. For a further discussion of the Company's valuation allowance refer to Note 5 of the Company's consolidated financial Statements included in the Company's 1999 Annual Report on Form 10-K for the year ended December 31, 1999. A more detail analysis of the individual operating entities and other corporate activities is provided below. UNDERWRITING RESULTS - --------------------- American Southern The following is a summary of American Southern's premiums for the first quarter of 2000 and the comparable period in 1999: (Amounts in thousands) Three months ended March 31, 2000 1999 ----- ---- Gross written premiums $ 9,272 $ 21,182 Ceded premiums (1,318) (1,273) ------------ ------------- Net written premiums $ 7,954 $ 19,909 =========== ========= Net earned premiums $ 9,678 $ 8,972 ============ ============= Gross written premiums at American Southern declined $11.9 million during the first quarter of 2000 because the company is currently recognizing the premium of one of its larger contracts on a monthly basis. This contract was renewed, through a competitive bidding process, in early 2000; however, one of the other parties bidding for this work has appealed the awarding of this business to American Southern. While the Company is confident that it can defend any appeal, as a conservative measure American Southern is recognizing this premium on a monthly basis until the appeal is settled rather than recognizing the annual premium and offsetting this with unearned premium as was done in 1999. Net earned premium for the quarter increased $706,000 or 7.9% over first quarter 1999. The principal reason for this increase in earned premium is the increase in business being produced in conjunction with the AAA of Carolina's Motor Club. This program began writing business in 1999 and as a result did not have a significant impact on earned premiums in the first quarter of 1999. Earned premiums from the joint venture were $819,000 in the first quarter of 2000 compared to $198,000 in the first quarter of 1999. -10-
The following is a break out of American Southern's earned premium by line of business for the first quarter of 2000 and the comparable period in 1999: (Amounts in thousands) Three months ended March 31, 2000 1999 ----- ---- Commercial automobile 6,906 $ 6,820 Privatepassenger auto 819 198 General liability 964 1,174 Property 976 765 Other 13 15 ------------ ------------ $ 9,678 $ 8,972 ============ ============ American Southern produces much of its business through contracts with various states and municipalities, some of which represent significant amounts of revenue for the company. These contracts, which last from one to three years, are periodically subject to competitive renewal quotes and the loss of a significant contract could have a material adverse effect on the business or financial condition of American Southern and the Company. Other than the contract discussed above, none of American Southern's significant contracts are currently up for renewal. In an effort to increase the number of programs underwritten by American Southern and to insulate it from the loss of any one program, the company is continually evaluating new underwriting programs. The following is a break out of the loss and expense ratios of American Southern for the first quarter of 2000 and the comparable period in 1999: Three months ended March 31, 2000 1999 -------- --------- Loss ratio 64.3% 64.7% Expense ratio 32.4%* 29.3%* -------- --------- Combined ratio 96.7% 94.0% ======== ========= *Excludes the amortization of goodwill associated with the acquisition of American Southern. The loss ratio for the first quarter of 2000 was 64.3%,representing a slight improvement over the first quarter of 1999. American Southern was minimally impacted by the severe storms that hit the southeastern United States during the first quarter, with losses related to these storms totaling only $200,000. The expense ratio for the quarter increased from 29.3% in 1999 to 32.4% in 2000 primarily due to an increase in the company's private passenger auto line of business on which the company pays a 15% commission. This commission exceeds the company's commission on its other lines of business; however, it is competitive with the industry. Association Casualty The results of both Association Casualty Insurance Company and Association Risk Management General Agency (together referred to as "Association Casualty") are presented for the first quarter of 2000;however, since the Company did not own these companies during the first quarter of 1999 no comparative information is presented. -11-
The following is a summary of Association Casualty's premiums for the first quarter of 2000: (Amounts in thousands) Three Months ended March 31, ----------------- Gross written premiums $ 5,005 Ceded premiums (353) Net written premiums $ 4,652 ============== Net earned premiums $ 4,368 ============== Association Casualty writes predominately workers' compensation insurance in the state of Texas (96% of net earned premiums). The Texas' workers compensation market remains extremely competitive; however, Association Casualty has been successful in attracting new business and in increasing the rates it is charging for renewing business. Compared to the first quarter of 1999 (pre acquisition) gross written premiums for the first quarter of 2000 are up 14.5%. The following is the loss and expense ratio for Association Casualty for the first quarter of 2000: Three months ended March 31, 2000 ---- Loss Ratio 82.6% Expense Ratio 33.9%* ------ Combined Ratio 116.5% ------ * Excludes the amortization of goodwill and interest on an intercompany surplus note associated with the acquisition of Association Casualty. Association Casualty continues to be adversely impacted by the liberal interpretation of the workers' compensation laws in the State of Texas. The company is also seeing an increase in the number of claims that are being reopened for second surgeries. In addition Association Casualty was impacted by an unusually high number of severe claims during the quarter. The company is taking action to increase its pricing to account for these events. The expense ratio for Association Casualty is in line with the Company's expectations. Georgia Casualty The following is a summary of Georgia Casualty's premiums for the first quarter of 2000 and the comparable period in 1999: (Amounts in thousands) Three months ended March 31, 2000 1999 ------ -------- Gross written $ 11,021 $ 6,817 Ceded premiums (818) (1,387) ---------- ---------- Net written premiums $ 10,203 $ 5,430 ========== ========== Net earned premiums $ 6,425 $ 4,562 ---------- ---------- Gross written premiums at Georgia Casualty increased $4.2 million or 61.7% during the first quarter of 2000. The increase in premium is the result of several factors. First, the company, during the first quarter of 2000, began evaluating and underwriting -12-
insurance for large associations and other homogenous risks. The impact of these programs was $1.0 million in the first quarter. In addition the company has been aggressively increasing premium on its renewal business and has been pricing new business at rates higher than those used a year ago. Lastly, the company continues to see the benefits from the relationships that the new management team at Georgia Casualty has with the insurance community. The decline in ceded premium is the result of the discontinuation of the stop-loss reinsurance Agreement that the company put in place in the first quarter of 1999. Due to the improved results seen by Georgia Casualty, the protection offered by the stop loss agreement is, in the opinion of management, no longer necessary. The following is a break out of Georgia Casualty's earned premium by line of business for the first quarter of 2000 and the comparable period in 1999: (Amounts in thousands Three months ended March 31, ------------------------------ 2000 1999 -------------- -------------- Workers' Compensation $ 4,031 $ 2, 988 Commercial auto 1,008 721 General liability 576 302 Commercial multi-peril 810 551 -------------- -------------- $ 6,425 $ 4,562 ============== ============== The following is a break out of the loss and expense ratios of Georgia Casualty for the first quarter of 2000 and the comparable period in 1999: Three months ended March 31, ------------------------------ 2000 1999 -------------- -------------- Loss ratio 68.7% 77.2% Expense ratio 36.8% 40.3% -------------- -------------- -------------- -------------- Combined ratio 105.5% 117.5% ============== ============== The loss ratio declined to 68.7% in the first quarter of 2000 from 77.2% in the first quarter of 1999. The primary reason for the decline is the complete elimination, during the latter part of 1999, of two underwriting programs whose performance was substandard. In addition, the company is seeing the benefits of the increased rates that began in the fourth quarter of 1999. Also, the mix of business that Georgia Casualty underwrites has changed from one of higher hazards (e.g., logging and habitational contractors) to low and moderate hazards (e.g., retail and light manufacturing). The expense ratio for the quarter declined to 36.8% from 40.3% primarily as a result of the increase in earned premiums and only a moderate increase in fixed expenses. Bankers Fidelity The following summarizes Bankers Fidelity's premiums for the first quarter of 2000 and the comparable period in 1999: -13-
(Amounts in thousands) Three months ended March 31, ------------------------------ 2000 1999 -------------- -------------- Medicare supplement $ 7,394 $ 5,942 Other health 765 837 Life 3,249 3,030 -------------- -------------- Total $ 11,408 $ 9,809 ============== ============== Premium revenue at Bankers Fidelity increased $1.6 million or 16.3% during the first quarter of 2000. The most significant increase in premium arose in the Medicare supplement line of business which increased 24.4% for the quarter. During 1999 Bankers Fidelity expanded its Medicare supplement product into additional states which, over the course of the year, increased the sales of this product. The effects of this expansion are now being fully seen. In addition, during the fourth quarter of 1999 and first quarter of 2000 Bankers Fidelity implemented rate increases on this product, in some cases up to 30%, while the full effects of these rate increases has not yet been seen on renewal business, it is being reflected in the new business written by the company. In spite of these rate increases, the renewal rate on this product was in excess of 86% for the quarter. Bankers Fidelity is also continuing to see increased sales of its life products. The major marketing effort at Bankers Fidelity continues to be on this product line. The following summarizes Bankers Fidelity's operating expenses for the first quarter of 2000 and the comparable period in 1999: (Amounts in thousands) Three months ended March 31, ----------------------------- 2000 1999 ------------- -------------- Benefits and losses $ 8,342 $ 6,920 Commission and other expenses 3,842 3,660 ------------- ------------ Total expenses $ 12,184 $ 10,580 ============= ============== The increase in both benefits and losses and commission and other expenses is directly attributable to the increase in premiums. Benefits and losses are up 20.5%, slightly out pacing the increase in premiums. As a percentage of premiums benefits and losses were 73.1% for the quarter compared to 70.5% in the first quarter of 1999. The increase is primarily attributable to increased medical costs. The rate increases that Bankers Fidelity has put in place will ultimately mitigate the increases in medical costs; however, it will take several quarters before the full effect of the rate increases is seen. As a result of an effort to reduce commission costs as well as streamline expenses, commission and other expenses increased only 5.0% during the quarter. As a percentage of premium, these expenses were 33.7% for the first quarter of 2000 compared to 37.3% in the first quarter of 1999. INVESTMENT INCOME AND REALIZED GAINS Investment income for the quarter increased $1.1 million over the first quarter of 1999. The addition of Association Casualty accounted for $633,000 of this increase. The Company also benefited from a significant gain in a real estate partnership in which it is involved. The investment, which is accounted for under the equity method, sold several pieces of property resulting in income of approximately $400,000 for the first quarter which is not expected to be recurring. To take advantage of the steepening yield curve the company shifted securities from short-term to longer-term securities, this also contributed to the increase in investment income for the quarter. Realized gains for the first quarter decreased 37%. Management continually evaluates the Company's investment portfolio and when opportunities arise will divest appreciated investments. -14-
INTEREST EXPENSE Interest expense for the first quarter of 2000 increased significantly compared to the first quarter of 1999. In conjunction with the acquisition of Association Casualty, the Company entered into a $30.0 million revolving credit facility with Wachovia Bank, N.A. During the first quarter of 2000 the Company paid down $1.0 million on the revolver, leaving $25.0 million outstanding under the facility. This debt, coupled with the $25 million variable rated demand bonds entered into during the second quarter of 1999, the proceeds of which were used to pay down the Company's prior credit facility, bring the total debt at March 31, 2000 to $50.0 million, up from $26.0 million in the first quarter of 1999. 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 is attributable to the inclusion of Association Casualty, beginning in the third quarter of 1999. The Company, beginning in the first quarter of 2000 is recognizing a deferred tax provision as a result of the Company's year-end 1999 reassessment of its valuation reserve related to the Company's net operating loss carryforwards. For a further discussion of the Company's valuation allowance refer to Note 5 of the Company's consolidated financial statements included in the Company's 1999 Annual Report on Form 10-K for the year ended December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES The major cash needs of the Company are for the payment of claims and expenses as they come due and the maintenance of adequate statutory capital and surplus to satisfy state regulatory requirements and meet debt service requirements of the Company. The Company's primary source of cash is written premiums and investment income. Cash payments consist of current claim payments to insureds and operating expenses such as salaries, employee benefits, commissions, taxes, and shareholder dividends from the subsidiaries, when earnings warrant such dividend payments. By statute, the state regulatory authorities establish minimum liquidity standards primarily to protect policyholders. The Company's insurance subsidiaries reported a combined statutory income of $960,000 for the first three months of 2000 compared to statutory net income of $1.4 million for the first three months of 1999. The reasons for the decrease in statutory earnings in the first quarter of 2000 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 March 31, 2000, the Company had accrued, but unpaid dividends on the Series B Stock totaling $5.1 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 currently 325 basis points, making the effective cost of the bonds LIBOR plus 325 basis points. The credit facility that was replaced by the Bonds was a term loan with an interest rate of prime less 50 basis points and would have matured December 31, 2000. On July1, 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 325 basis points. The Company paid down $1.0 million on this facility during the first quarter of 2000 reducing the outstanding balance to $25.0 million. -15-
The Company is required, under both credit facilities, to meet certain debt covenants including maintaining certain ratios of earnings before interest, taxes, depreciation and amortization ("EBITDA") to interest, debt to EBITDA and debt to total capitalization. The Company was in compliance with all of its debt covenants at March 31, 2000. The Company provides certain administrative and other services to each of its insurance subsidiaries. The amounts charged to and paid by the subsidiaries in the first quarter of 2000 increased slightly over the first quarter of 1999. In addition, the Company has a formal tax-sharing agreement between the Company and its insurance subsidiaries. It is anticipated that this agreement will provide the Company with additional funds from profitable subsidiaries due to the subsidiaries' use of the Company's tax loss carryforwards, which totaled approximately $36 million at March 31, 2000. Over 90% of the investment assets of the insurance subsidiaries are in marketable securities that can be converted into cash, if required; however, use of such assets by the Company is limited by state insurance regulations. Dividend payments to the Company by its insurance subsidiaries are limited to the accumulated statutory earnings of the individual insurance subsidiaries, subject to annual limitations. At March 31, 2000, Georgia Casualty had $8.1 million of accumulated statutory earnings, American Southern had $19.7 million of accumulated statutory earnings, Association Casualty had $13.8 million of accumulated statutory earnings, and Bankers Fidelity had $15.9 million of accumulated statutory earnings. Net cash provided by operating activities was $2.2 million in the first quarter of 2000 compared to net cash used in operating activities of $2.2 million in the first quarter of 1999. Cash and short-term investments decreased from $34.3 million at December 31, 1999, to $22.7 million at March 31, 2000, mainly due to an increase in longer-term investments. Total investments (excluding short-term investments) increased to $207.8 million due to the shift from short-term investments. The Company believes that the dividends, fees, and tax-sharing payments it receives from its subsidiaries and, if needed, borrowings from banks will enable the Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current recommendations by regulatory authorities, which, if implemented, would have a material adverse effect on the Company's liquidity, capital resources or operations. FORWARD-LOOKING STATEMENTS This report contains and references certain information that constitutes forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Those statements, to the extent they are not historical facts, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon management's assessments of various risks and uncertainties, as well as assumptions made in accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of such risks and uncertainties, including those identified in the Company's Annual Report on Form 10-K for the fiscal year ending December 31, 1999 and the other filings made by the Company from time to time with the Securities and Exchange Commission. -16-
PART II. OTHER INFORMATION Item 6. Exhibits and Report on Form 8-K (a) The following exhibits are filed herewith: Exhibit 27. Financial data schedule (b) No reports on Form 8-K were filed with the Securities and Exchange Commission during the first quarter of 2000. -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: May 15, 2000 By: /s/ ---------------------------- Edward L. Rand, Jr. Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -18-
7 1000 3-MOS DEC-31-2000 MAR-31-2000 0 149346 149346 45148 3619 46 207784 22705 38452 21464 352887 168677 36871 4472 0 50000 0 134 21412 55096 352887 31879 4003 547 462 22586 8434 0 1726 574 1152 0 0 0 1152 0.04 0.04 0 0 0 0 0 0 0