ATLANTIC AMERICAN CORPORATION
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2008
OR
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o |
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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 the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o |
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Accelerated filer
o |
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Non-accelerated filer o |
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The total number of shares of the registrants Common Stock, $1 par value, outstanding on May 7,
2008, was 21,891,070.
ATLANTIC AMERICAN CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
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Unaudited |
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March 31, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Cash and cash equivalents, including short-term investments of $14 and $23,432 |
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$ |
69,401 |
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$ |
36,909 |
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Investments: |
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Fixed maturities (cost: $164,243 and $168,656) |
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162,860 |
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167,927 |
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Common and non-redeemable preferred stocks (cost: $7,956 and $5,366) |
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7,467 |
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5,335 |
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Other invested assets (cost: $1,587 and $1,563) |
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1,581 |
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1,563 |
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Policy and student loans |
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1,944 |
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1,958 |
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Real estate |
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38 |
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38 |
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Investment in unconsolidated trusts |
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1,238 |
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1,238 |
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Total investments |
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175,128 |
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178,059 |
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Receivables: |
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Reinsurance |
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12,792 |
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13,004 |
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Other (net of allowance for doubtful accounts: $718 and $728) |
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6,884 |
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6,912 |
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Deferred income taxes, net |
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5,834 |
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3,929 |
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Deferred acquisition costs |
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18,591 |
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18,830 |
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Other assets |
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1,348 |
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2,069 |
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Goodwill |
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2,128 |
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2,388 |
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Assets of discontinued operations (Note 3) |
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196,154 |
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Total assets |
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$ |
292,106 |
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$ |
458,254 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Insurance reserves and policy funds: |
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Future policy benefits |
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$ |
55,651 |
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$ |
55,548 |
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Unearned premiums |
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17,390 |
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18,948 |
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Losses and claims |
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50,413 |
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51,704 |
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Other policy liabilities |
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1,636 |
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1,878 |
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Total policy liabilities |
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125,090 |
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128,078 |
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Accounts payable and accrued expenses |
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37,878 |
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36,047 |
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Bank debt payable |
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3,750 |
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12,750 |
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Junior subordinated debenture obligations |
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41,238 |
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41,238 |
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Liabilities of discontinued operations (Note 3) |
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152,347 |
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Total liabilities |
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207,956 |
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370,460 |
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Commitments and contingencies (Note 11) |
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Shareholders equity: |
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Preferred stock, $1 par, 4,000,000 shares authorized; |
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Series B preferred, 134,000 shares issued and outstanding;
$13,400 redemption value |
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134 |
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134 |
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Series D preferred, 70,000 shares issued and outstanding;
$7,000 redemption value |
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70 |
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70 |
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Common stock, $1 par, 50,000,000 shares authorized;
shares issued and outstanding: 21,856,908 and 21,816,999 |
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21,857 |
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21,817 |
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Additional paid-in capital |
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56,452 |
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56,414 |
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Retained earnings |
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8,360 |
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10,530 |
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Accumulated other comprehensive loss |
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(2,723 |
) |
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(1,171 |
) |
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Total shareholders equity |
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84,150 |
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87,794 |
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Total liabilities and shareholders equity |
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$ |
292,106 |
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$ |
458,254 |
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The accompanying notes are an integral part of these consolidated financial statements.
-2-
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands, except per share data)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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Revenue: |
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Insurance premiums |
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$ |
23,032 |
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$ |
25,088 |
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Investment income |
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2,690 |
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2,896 |
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Realized investment gains (losses), net |
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24 |
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(3 |
) |
Other income |
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157 |
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306 |
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Total revenue |
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25,903 |
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28,287 |
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Benefits and expenses: |
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Insurance benefits and losses incurred |
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13,918 |
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15,393 |
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Commissions and underwriting expenses |
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8,309 |
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8,741 |
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Interest expense |
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927 |
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1,030 |
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Other |
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2,028 |
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2,232 |
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Total benefits and expenses |
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25,182 |
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27,396 |
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Income from continuing operations before income taxes |
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721 |
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891 |
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Income tax expense |
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297 |
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475 |
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Income from continuing operations |
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424 |
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416 |
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(Loss) income from discontinued operations, net of tax (Note 3) |
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(2,166 |
) |
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435 |
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Net (loss) income |
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(1,742 |
) |
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851 |
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Preferred stock dividends |
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(428 |
) |
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(407 |
) |
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Net (loss) income applicable to common stock |
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$ |
(2,170 |
) |
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$ |
444 |
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Basic income (loss) per common share: |
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Income from continuing operations |
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$ |
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$ |
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(Loss) income from discontinued operations |
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(.10 |
) |
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.02 |
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Net (loss) income applicable to common shareholders |
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$ |
(.10 |
) |
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$ |
.02 |
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Diluted income (loss) per common share: |
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Income from continuing operations |
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$ |
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$ |
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(Loss) income from discontinued operations |
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(.10 |
) |
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.02 |
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Net (loss) income applicable to common shareholders |
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$ |
(.10 |
) |
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$ |
.02 |
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The accompanying notes are an integral part of these consolidated financial statements.
-3-
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited; Dollars in thousands)
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Additional |
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Accumulated
Other |
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Preferred |
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Common |
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Paid-in |
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Retained |
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Comprehensive |
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Treasury |
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Stock |
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Stock |
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Capital |
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Earnings |
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Income (Loss) |
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Stock |
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Total |
|
Three Months Ended March 31, 2008 |
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Balance, December 31, 2007 |
|
$ |
204 |
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|
$ |
21,817 |
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$ |
56,414 |
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$ |
10,530 |
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$ |
(1,171 |
) |
|
$ |
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$ |
87,794 |
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Comprehensive loss: |
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Net loss |
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(1,742 |
) |
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(1,742 |
) |
Decrease in unrealized investment gains |
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(1,722 |
) |
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(1,722 |
) |
Fair value adjustment to derivative
financial instrument |
|
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|
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|
|
|
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|
(665 |
) |
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|
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|
(665 |
) |
Deferred income tax attributable to other
comprehensive loss |
|
|
|
|
|
|
|
|
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|
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|
|
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|
835 |
|
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|
|
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|
835 |
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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Total comprehensive loss |
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|
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|
|
|
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|
|
|
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|
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|
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|
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(3,294 |
) |
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Dividends accrued on preferred stock |
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|
(428 |
) |
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|
(428 |
) |
Amortization of unearned compensation |
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17 |
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|
17 |
|
Issuance of shares for employee benefit plans
and stock options |
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|
40 |
|
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|
21 |
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|
|
|
|
|
|
|
|
|
61 |
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|
|
|
|
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|
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|
Balance, March 31, 2008 |
|
$ |
204 |
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|
$ |
21,857 |
|
|
$ |
56,452 |
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|
$ |
8,360 |
|
|
$ |
(2,723 |
) |
|
$ |
|
|
|
$ |
84,150 |
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|
Three Months Ended March 31, 2007 |
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|
|
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|
Balance, December 31, 2006 |
|
$ |
204 |
|
|
$ |
21,484 |
|
|
$ |
55,832 |
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|
$ |
4,969 |
|
|
$ |
11,707 |
|
|
$ |
(8 |
) |
|
$ |
94,188 |
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|
|
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|
|
|
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|
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|
|
|
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|
|
|
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|
|
Comprehensive income: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
851 |
|
|
|
|
|
|
|
|
|
|
|
851 |
|
Increase in unrealized investment gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,375 |
|
|
|
|
|
|
|
1,375 |
|
Fair value adjustment to derivative
financial instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
|
|
|
|
|
(66 |
) |
Deferred income tax attributable to other
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(458 |
) |
|
|
|
|
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Dividends accrued on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(407 |
) |
|
|
|
|
|
|
|
|
|
|
(407 |
) |
Common stock issued in lieu of preferred
stock dividend payments |
|
|
|
|
|
|
43 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127 |
|
Deferred share compensation expense |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
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|
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|
|
1 |
|
Amortization of unearned compensation |
|
|
|
|
|
|
|
|
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|
16 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
16 |
|
Purchase of shares for treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
Issuance of shares for employee benefit plans
and stock options |
|
|
|
|
|
|
15 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007 |
|
$ |
204 |
|
|
$ |
21,542 |
|
|
$ |
55,974 |
|
|
$ |
5,413 |
|
|
$ |
12,558 |
|
|
$ |
|
|
|
$ |
95,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-4-
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,742 |
) |
|
$ |
851 |
|
Adjustments to reconcile net (loss) income to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
Amortization of deferred acquisition costs |
|
|
2,738 |
|
|
|
3,233 |
|
Acquisition costs deferred |
|
|
(2,499 |
) |
|
|
(2,202 |
) |
Realized investment (gains) losses |
|
|
(24 |
) |
|
|
3 |
|
Decrease in insurance reserves |
|
|
(2,988 |
) |
|
|
(583 |
) |
Loss (income) from discontinued operations, net |
|
|
2,166 |
|
|
|
(435 |
) |
Compensation expense related to share awards |
|
|
17 |
|
|
|
17 |
|
Depreciation and amortization (accretion) |
|
|
106 |
|
|
|
(25 |
) |
Deferred income tax (benefit) expense |
|
|
(1,280 |
) |
|
|
393 |
|
Decrease (increase) in receivables, net |
|
|
240 |
|
|
|
(249 |
) |
Decrease in other liabilities |
|
|
(3,264 |
) |
|
|
(4,318 |
) |
Goodwill impairment |
|
|
260 |
|
|
|
|
|
Other, net |
|
|
(1,472 |
) |
|
|
261 |
|
|
|
|
|
|
|
|
Net cash used in continuing operations |
|
|
(7,742 |
) |
|
|
(3,054 |
) |
Net cash used in discontinued operations |
|
|
(3,424 |
) |
|
|
(3,818 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(11,166 |
) |
|
|
(6,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from investments sold, called or matured |
|
|
36,926 |
|
|
|
9,996 |
|
Investments purchased |
|
|
(31,019 |
) |
|
|
(13,665 |
) |
Net proceeds from sale of insurance subsidiaries |
|
|
43,392 |
|
|
|
|
|
Additions to property and equipment |
|
|
(69 |
) |
|
|
(268 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operations |
|
|
49,230 |
|
|
|
(3,937 |
) |
Net cash used in discontinued operations (net of $35,501 of cash transferred) |
|
|
(11,996 |
) |
|
|
(2,490 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
37,234 |
|
|
|
(6,427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from bank financing |
|
|
|
|
|
|
9,000 |
|
Repayments of debt |
|
|
(9,000 |
) |
|
|
(9,000 |
) |
Purchase of shares for treasury |
|
|
|
|
|
|
(4 |
) |
Financing of discontinued operations |
|
|
4 |
|
|
|
360 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by continuing operations |
|
|
(8,996 |
) |
|
|
356 |
|
Net cash used in discontinued operations |
|
|
(4 |
) |
|
|
(360 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(9,000 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
17,068 |
|
|
|
(13,303 |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
Continuing operations |
|
|
36,909 |
|
|
|
17,606 |
|
Discontinued operations |
|
|
15,424 |
|
|
|
9,688 |
|
|
|
|
|
|
|
|
Total |
|
|
52,333 |
|
|
|
27,294 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
|
|
|
|
|
|
Continuing operations |
|
|
69,401 |
|
|
|
10,971 |
|
Discontinued operations |
|
|
|
|
|
|
3,020 |
|
|
|
|
|
|
|
|
Total |
|
$ |
69,401 |
|
|
$ |
13,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
999 |
|
|
$ |
1,039 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
2,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-5-
ATLANTIC AMERICAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited; Dollars in thousands, except per share amounts)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Atlantic American Corporation (the Parent) and its subsidiaries (collectively, the Company).
All significant intercompany accounts and transactions have been eliminated in consolidation. The
accompanying statements have been prepared in accordance with accounting principles generally
accepted in the United States of America 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 notes required by accounting principles generally accepted in the United States
of America. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included. The unaudited
condensed consolidated financial statements and the related notes thereto included herein should be
read in conjunction with the Companys consolidated financial statements, and the notes thereto,
that are included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
Operating results for the three month period ended March 31, 2008 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2008.
In December 2007, the Company entered into an agreement for the sale of its regional
property and casualty operations, comprised of Association Casualty Insurance Company and
Association Risk Management General Agency, Inc. (collectively known as Association Casualty) and
Georgia Casualty & Surety Company (Georgia Casualty), to Columbia Mutual Insurance Company
(Columbia). Accordingly, the assets, liabilities and results of operations of the regional
property and casualty operations have been reflected by the Company as discontinued operations.
This transaction was completed on March 31, 2008.
Note 2. Impact of Recently Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)). This statement replaces SFAS No. 141, Business Combinations (SFAS 141) and
establishes the principles and requirements for how the acquirer in a business combination: (a)
measures and recognizes the identifiable assets acquired, liabilities assumed, and any
noncontrolling interests in the acquired entity, (b) measures and recognizes positive goodwill
acquired or a gain from bargain purchase (negative goodwill), and (c) determines the disclosure
information that is decision-useful to users of financial statements in evaluating the nature and
financial effects of the business combination. The statement further requires all transaction
costs for an acquisition to be expensed as incurred rather than capitalized. In December 2007, the
FASB also issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements
(SFAS 160). This statement amends Accounting Research Bulletin No. 51, Consolidated Financial
Statements (ARB 51). Noncontrolling interest refers to the minority interest portion of the
equity of a subsidiary that is not attributable directly or indirectly to a parent. SFAS 160
establishes accounting and reporting standards that require for-profit entities that prepare
consolidated financial statements to (a) present noncontrolling interests as a component of equity,
separate from the parents equity, (b) separately present the amount of consolidated net income
attributable to noncontrolling interests in the income statement, (c) consistently account for
changes in a parents ownership interests in a subsidiary in which the parent entity has a
controlling financial interest as equity transactions, (d) require an entity to measure at fair
value its remaining interest in a subsidiary that is deconsolidated, (e) require an entity to
provide sufficient disclosures that identify and clearly distinguish between interests of the
parent and interests of noncontrolling owners. Both SFAS 141(R) and SFAS 160 are effective for
fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. The Company
does not believe that the adoption of either of the standards will have a material impact on the
Companys financial position or results of operations; although if future acquisitions are made,
the prospective accounting will differ from that of the past.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (SFAS 159). This
statement permits entities to choose, at specified election dates, to measure eligible items at
fair value (i.e. the fair value option). Items eligible for the fair value option include certain
recognized financial assets and liabilities, rights and obligations under certain insurance
contracts that are not financial instruments, host financial instruments resulting from the
separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument,
and certain commitments. Business entities are required to report unrealized gains and losses on
items for which the fair value option has been elected in net income. The fair value option:
(a) may be applied instrument by instrument, with certain exceptions; (b) is irrevocable (unless a
new election date occurs); and (c) is applied only to entire instruments and not to portions of
instruments. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins
after November 15, 2007, although early adoption is permitted under certain conditions. The
Company adopted SFAS 159 on January 1, 2008 and did not elect the fair value option for any
eligible items. Adoption of this statement did not have a material impact on the Companys
financial position or results of operations.
-6-
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value under accounting
principles generally accepted in the United States, and enhances disclosures about fair value
measurements. Fair value is defined as the exchange price at which an asset could be sold or a
liability settled in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. SFAS 157 provides
guidance on measuring fair value when required under existing accounting standards and establishes
a hierarchy that prioritizes the inputs to valuation techniques. The first level of such hierarchy
determines fair value at the quoted price (unadjusted) in active markets for identical assets
(Level 1). The second level determines fair value using valuation methodology including quoted
prices for similar assets and liabilities in active markets and other inputs that are observable
for the asset or liability, either directly or indirectly for substantially similar terms (Level
2). The third level for determining fair value utilizes inputs to valuation methodology which are
unobservable for the asset or liability (Level 3). SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company adopted SFAS 157 on January 1, 2008. The fair
values for fixed maturity and equity securities are largely determined by either independent
methods prescribed by the National Association of Insurance Commissioners (NAIC), which do not
differ materially from nationally quoted market prices, when available, or independent broker
quotations. Accordingly, at March 31, 2008, the Company believes that fixed maturity and equity
securities which have been valued using Level 1 criteria totaled $169,636; while Level 2 criteria
were used in valuing $691 of securities and Level 3 criteria were used in valuing the Companys
other invested assets which totaled $1,581. Adoption of this statement did not have a material
impact on the Companys financial position or results of operations.
Note 3. Discontinued Operations
On March 31, 2008, the Company completed the sale of its regional property and casualty
operations comprised of Association Casualty and Georgia Casualty to Columbia for approximately $42
million in cash. Accordingly, the consolidated financial statements reflect the assets,
liabilities, and operating results of Association Casualty and Georgia Casualty as discontinued
operations.
The following table provides operating results from the discontinued operations of Association
Casualty and Georgia Casualty for the three month periods ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
Insurance premiums |
|
$ |
8,789 |
|
|
$ |
10,012 |
|
Investment income |
|
|
1,400 |
|
|
|
1,574 |
|
Realized investment gains, net |
|
|
8 |
|
|
|
20 |
|
Other income |
|
|
11 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
10,208 |
|
|
|
11,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred |
|
|
8,657 |
|
|
|
7,002 |
|
Commissions and underwriting expenses |
|
|
3,800 |
|
|
|
4,179 |
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
12,457 |
|
|
|
11,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations before taxes |
|
|
(2,249 |
) |
|
|
430 |
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
(815 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, net of tax |
|
|
(1,434 |
) |
|
|
435 |
|
|
|
|
|
|
|
|
|
|
Loss from
sale of discontinued operations, net of tax of $415 |
|
|
(732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from discontinued operations |
|
$ |
(2,166 |
) |
|
$ |
435 |
|
|
|
|
|
|
|
|
-7-
The following table provides certain condensed information about the assets and liabilities of
the discontinued operations of Georgia Casualty and Association Casualty and as aggregated in the
consolidated balance sheet:
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
Assets of discontinued operations: |
|
|
|
|
Cash and cash equivalents, including short-term investments of $10,585 |
|
$ |
15,424 |
|
|
|
|
|
Investments: |
|
|
|
|
Fixed maturities (cost: $91,216) |
|
|
91,088 |
|
Common and non-redeemable preferred stocks (cost: $2,406) |
|
|
3,139 |
|
Other invested assets (cost: $47) |
|
|
47 |
|
|
|
|
|
Total investments |
|
|
94,274 |
|
|
|
|
|
Receivables: |
|
|
|
|
Reinsurance |
|
|
54,391 |
|
Other |
|
|
17,570 |
|
Deferred acquisition costs |
|
|
3,486 |
|
Other assets |
|
|
11,009 |
|
|
|
|
|
Total assets |
|
$ |
196,154 |
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations: |
|
|
|
|
Unearned premiums |
|
$ |
22,065 |
|
Losses and claims |
|
|
122,418 |
|
Accounts payable and accrued expenses |
|
|
7,864 |
|
|
|
|
|
Total liabilities |
|
$ |
152,347 |
|
|
|
|
|
Note 4. Segment Information
The Company has two principal business units, each focusing on a specific geographic region
and/or specific products. American Southern operates in the Property and Casualty insurance
market, while Bankers Fidelity operates in the Life and Health insurance market. Each business
unit is managed independently and is evaluated on its individual performance. The following
summary sets forth the revenue and pre-tax income (loss) for each principal business unit for the
three month periods ended March 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
American Southern |
|
$ |
10,556 |
|
|
$ |
12,335 |
|
Bankers Fidelity |
|
|
15,199 |
|
|
|
15,659 |
|
Corporate and Other |
|
|
2,011 |
|
|
|
2,450 |
|
Adjustments and Eliminations |
|
|
(1,863 |
) |
|
|
(2,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
25,903 |
|
|
$ |
28,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Income from continuing operations before
income taxes |
|
|
|
|
|
|
|
|
American Southern |
|
$ |
2,134 |
|
|
$ |
2,390 |
|
Bankers Fidelity |
|
|
416 |
|
|
|
295 |
|
Corporate and Other |
|
|
(1,829 |
) |
|
|
(1,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results |
|
$ |
721 |
|
|
$ |
891 |
|
|
|
|
|
|
|
|
-8-
Note 5. Credit Arrangements
Bank Debt
At March 31, 2008, the Companys $3,750 of bank debt consisted of a reducing revolving credit
facility (the Credit Agreement) with Wachovia Bank, National Association (Wachovia) pursuant to
which the Company was able to, subject to the terms and conditions thereof, initially borrow or
reborrow up to $15,000 (the Commitment Amount). In accordance with the terms of the Credit
Agreement, the Commitment Amount is incrementally reduced every six months and has been reduced to
$14,000 at March 31, 2008. The interest rate on amounts outstanding under the Credit Agreement is,
at the option of the Company, equivalent to either (a) the base rate (which equals the higher of
the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the London Interbank
Offered Rate (LIBOR) determined on an interest period of 1-month, 2-months, 3-months or 6-months,
plus an Applicable Margin (as defined). The Applicable Margin varies based upon the Companys
leverage ratio (funded debt to total capitalization, each as defined) and ranges from 1.75% to
2.50%. As of March 31, 2008, the effective interest rate was 7.10%. Interest on amounts
outstanding is payable quarterly. The Credit Agreement requires the Company to comply with certain covenants,
including, among others, ratios that relate funded debt to both total capitalization and earnings
before interest, taxes, depreciation and amortization, as well as the maintenance of minimum levels
of tangible net worth. The Company must also comply with limitations on capital expenditures,
certain payments, additional debt obligations, equity repurchases and redemptions, as well as
minimum risk-based capital levels. Upon the occurrence of an event of default, Wachovia may
terminate the Credit Agreement and declare all amounts outstanding due and payable in full. On
April 1, 2008, the Company repaid $3,750 in principal, reducing the outstanding bank debt balance
under the Credit Agreement to zero.
Junior Subordinated Debentures
The Company has two unconsolidated Connecticut statutory business trusts, which exist for the
exclusive purposes of: (i) issuing trust preferred securities (Trust Preferred Securities)
representing undivided beneficial interests in the assets of the trusts; (ii) investing the gross
proceeds of the Trust Preferred Securities in junior subordinated deferrable interest debentures
(Junior Subordinated Debentures) of Atlantic American; and (iii) engaging in only those
activities necessary or incidental thereto.
The financial structure of each of Atlantic American Statutory Trust I and II, as of March 31,
2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Atlantic American |
|
|
Atlantic American |
|
|
|
Statutory Trust I |
|
|
Statutory Trust II |
|
JUNIOR SUBORDINATED DEBENTURES (1) (2) |
|
|
|
|
|
|
|
|
Principal amount owed |
|
$ |
18,042 |
|
|
$ |
23,196 |
|
Balance March 31, 2008 |
|
|
18,042 |
|
|
|
23,196 |
|
Balance December 31, 2007 |
|
|
18,042 |
|
|
|
23,196 |
|
Coupon rate |
|
LIBOR + 4.00 |
% |
|
LIBOR + 4.10 |
% |
Interest payable |
|
Quarterly |
|
|
Quarterly |
|
Maturity date |
|
December 4, 2032 |
|
|
May 15, 2033 |
|
Redeemable by issuer on or after |
|
December 4, 2007 |
|
|
May 15, 2008 |
|
TRUST PREFERRED SECURITIES |
|
|
|
|
|
|
|
|
Issuance date |
|
December 4, 2002 |
|
|
May 15, 2003 |
|
Securities issued |
|
|
17,500 |
|
|
|
22,500 |
|
Liquidation preference per security |
|
$ |
1 |
|
|
$ |
1 |
|
Liquidation value |
|
|
17,500 |
|
|
|
22,500 |
|
Coupon rate |
|
LIBOR + 4.00 |
% |
|
LIBOR + 4.10 |
% |
Distribution payable |
|
Quarterly |
|
|
Quarterly |
|
Distribution guaranteed by (3) |
|
Atlantic American Corporation |
|
|
Atlantic American Corporation |
|
|
|
|
(1) |
|
For each of the respective debentures, the Company has the right at any time, and from
time to time, to defer payments of interest on the Junior Subordinated Debentures for a
period not exceeding 20 consecutive quarters up to the debentures respective maturity
dates. During any such period, interest will continue to accrue and the Company may not
declare or pay any cash dividends or distributions on, or purchase, the Companys common
stock nor make any principal, interest or premium payments on or repurchase any debt
securities that rank equally with or junior to the Junior Subordinated Debentures. The
Company has the right at any time to dissolve each of the trusts and cause the Junior
Subordinated Debentures to be distributed to the holders of the Trust Preferred Securities. |
-9-
|
|
|
(2) |
|
The Junior Subordinated Debentures are unsecured and rank junior and subordinate in
right of payment to all senior debt of the Parent and are effectively subordinated to all
existing and future liabilities of its subsidiaries. |
|
(3) |
|
The Parent has guaranteed, on a subordinated basis, all of the obligations under the
Trust Preferred Securities, including payment of the redemption price and any accumulated
and unpaid distributions to the extent of available funds and upon dissolution, winding up
or liquidation. |
Note 6. Derivative Financial Instruments
On February 21, 2006, the Company entered into a zero cost rate collar with Wachovia to hedge
future interest payments on a portion of the Junior Subordinated Debentures. The notional amount
of the collar was $18,042 with an effective date of March 6, 2006. The collar has a LIBOR floor
rate of 4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the 4th of each
March, June, September and December through termination on March 4, 2013. The Company will begin
making payments to Wachovia under the zero cost rate collar on June 4, 2008.
The estimated fair value and related carrying value of the Companys rate collar at March 31,
2008 was a liability of approximately $1,406.
Note 7. Reconciliation of Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net realized gains (losses) on investments
included in income from continuing operations |
|
$ |
24 |
|
|
$ |
(3 |
) |
Net realized gains on investments
included in income (loss) from discontinued
operations |
|
|
8 |
|
|
|
20 |
|
|
|
|
|
|
|
|
Total net realized gains on investments
included in net income (loss) |
|
$ |
32 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other components of comprehensive income (loss): |
|
|
|
|
|
|
|
|
Net pre-tax unrealized gains (losses) on
investments arising during period |
|
$ |
(1,690 |
) |
|
$ |
1,392 |
|
Reclassification adjustment |
|
|
(32 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
Net pre-tax unrealized gains (losses) on
investments recognized in other comprehensive
income (loss) |
|
|
(1,722 |
) |
|
|
1,375 |
|
Fair value adjustment to derivative financial
instrument |
|
|
(665 |
) |
|
|
(66 |
) |
Deferred income tax attributable to other
comprehensive income (loss) |
|
|
835 |
|
|
|
(458 |
) |
|
|
|
|
|
|
|
Change in accumulated other comprehensive income
(loss) |
|
|
(1,552 |
) |
|
|
851 |
|
Accumulated
other comprehensive income (loss) beginning of period |
|
|
(1,171 |
) |
|
|
11,707 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
end of period |
|
$ |
(2,723 |
) |
|
$ |
12,558 |
|
|
|
|
|
|
|
|
-10-
Note 8. Earnings Per Common Share
A reconciliation of the numerator and denominator used in the earnings per common share
calculations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
Shares |
|
|
Per Share |
|
|
|
Income |
|
|
(In thousands) |
|
|
Amount |
|
Basic Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
424 |
|
|
|
21,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less preferred stock dividends |
|
|
(428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
applicable to common shareholders |
|
|
(4 |
) |
|
|
21,812 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options |
|
|
|
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
applicable to common shareholders |
|
$ |
(4 |
) |
|
|
22,128 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2007 |
|
|
|
|
|
|
|
Shares |
|
|
Per Share |
|
|
|
Income |
|
|
(In thousands) |
|
|
Amount |
|
Basic Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
416 |
|
|
|
21,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less preferred stock dividends |
|
|
(407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
applicable to common shareholders |
|
|
9 |
|
|
|
21,497 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options |
|
|
|
|
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
applicable to common shareholders |
|
$ |
9 |
|
|
|
21,905 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The assumed conversion of the Companys Series B and D Preferred Stock was excluded from the
earnings per common share calculation for the three month periods ended March 31, 2008 and 2007,
respectively, since their impact was antidilutive.
-11-
Note 9. Income Taxes
A reconciliation of the differences between income taxes computed at the federal statutory
income tax rate and the income tax expense from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Federal income tax provision at statutory rate of 35% |
|
$ |
253 |
|
|
$ |
312 |
|
Tax exempt interest and dividends received deductions |
|
|
(54 |
) |
|
|
(79 |
) |
Non-deductible goodwill |
|
|
91 |
|
|
|
|
|
Loss carryforward from sale of subsidiaries |
|
|
(3,519 |
) |
|
|
|
|
Other permanent differences |
|
|
7 |
|
|
|
7 |
|
Change in asset valuation allowance due to
change in judgment relating to realizability
of deferred tax assets |
|
|
3,519 |
|
|
|
100 |
|
Intercompany fees (1) |
|
|
|
|
|
|
126 |
|
State income taxes |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
297 |
|
|
$ |
475 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Intercompany fees from discontinued operations eliminated in consolidated tax return. |
A reconciliation of the differences between income taxes computed at the federal statutory
income tax rate and the income tax benefit from discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Federal income tax provision at statutory rate of 35% |
|
$ |
(1,189 |
) |
|
$ |
150 |
|
Tax exempt interest and dividends received deductions |
|
|
(41 |
) |
|
|
(33 |
) |
Other permanent differences |
|
|
|
|
|
|
4 |
|
Intercompany fees (1) |
|
|
|
|
|
|
(126 |
) |
|
|
|
|
|
|
|
Income tax benefit |
|
$ |
(1,230 |
) |
|
$ |
(5 |
) |
|
|
|
|
|
|
|
(1) Intercompany fees from discontinued operations eliminated in consolidated tax return.
The components of the income tax expense from continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Current Federal |
|
$ |
1,577 |
|
|
$ |
73 |
|
Current State |
|
|
|
|
|
|
9 |
|
Deferred Federal |
|
|
(1,280 |
) |
|
|
393 |
|
|
|
|
|
|
|
|
Total |
|
$ |
297 |
|
|
$ |
475 |
|
|
|
|
|
|
|
|
The components of the income tax benefit from discontinued operations were:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Current Federal |
|
$ |
(1,577 |
) |
|
$ |
(62 |
) |
Deferred Federal |
|
|
347 |
|
|
|
57 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,230 |
) |
|
$ |
(5 |
) |
|
|
|
|
|
|
|
-12-
The primary differences between the effective tax rate and the federal statutory income tax
rate for the three month period ended March 31, 2008 resulted from the dividends-received deduction
(DRD) and a non-deductible goodwill impairment charge. On March 31, 2008, the Company completed
the sale of its regional property and casualty operations to Columbia, which resulted in an
estimated loss carryforward benefit of approximately $3.5 million. Since the Companys ability to
generate taxable income and utilize available tax planning strategies in the near term is dependent
upon various factors, many of which are beyond managements control, management believes that this
loss carryforward may not be realized. Accordingly, during the three month period ended March 31,
2008, the Company increased its valuation allowance by $3.5 million to reduce this deferred tax
benefit to zero. The Company will prospectively periodically assess the realization of this
deferred tax benefit.
The primary differences between the effective tax rate and the federal statutory income tax
rate for the three month period ended March 31, 2007 resulted from the DRD and the change in the
asset valuation allowance.
The current estimated DRD is adjusted as underlying factors change, including known actual
2007 distributions earned on invested assets. The actual current year DRD can vary from the
estimates based on, but not limited to, amounts of distributions from these investments as well as
appropriate levels of taxable income. The change in the asset valuation allowance results from
reassessment of the realization of certain net operating loss carryforwards.
Note 10. Employee Retirement Plans
The following table provides the components of the net periodic benefit cost for all defined
benefit pension plans of the Company:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
46 |
|
|
$ |
51 |
|
Interest cost |
|
|
84 |
|
|
|
83 |
|
Expected return on plan assets |
|
|
(54 |
) |
|
|
(54 |
) |
Net amortization |
|
|
20 |
|
|
|
28 |
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
96 |
|
|
$ |
108 |
|
|
|
|
|
|
|
|
The weighted-average assumptions used to determine the net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
2007 |
Discount rate |
|
|
5.75% |
|
|
|
5.50% |
|
Expected return on plan assets |
|
|
7.00% |
|
|
|
7.00% |
|
Projected annual salary increases |
|
|
4.50% |
|
|
|
4.50% |
|
The Company expects to contribute $299 for all defined benefit pension plans in 2008. During
the three month period ended March 31, 2008, the Company did not make any payments to the pension
plans.
Note 11. Commitments and Contingencies
From time to time, the Company is involved in various claims and lawsuits incidental to and in
the ordinary course of its businesses. In the opinion of management, any such known claims are not
expected to have a material effect on the business or financial condition of the Company.
-13-
Note 12. Related Party Transactions
The Company has, from time to time, purchased common and preferred shares in Gray Television,
Inc. (Gray Television) and Triple Crown Media, Inc. (Triple Crown) in the ordinary course of
investing. Mr. Robinson, the Companys chairman of the board of directors, is a director of Gray
Television. Mr. Howell, the Companys president and chief executive officer, is a director of Gray
Television and a director of Triple Crown. On March 11, 2008, the Parent purchased 166,354 shares
of Gray Television Class A common stock, 56,000 shares of Gray Television common stock, 11,177
shares of Triple Crown common stock, and 1,180 shares of Triple Crown Series D preferred stock in
varying amounts, which were based on estimated market values, from Association Casualty and Georgia
Casualty for an aggregate purchase price of $1,994.
-14-
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is managements discussion and analysis of the financial condition and results
of operations of Atlantic American Corporation (Atlantic American or the Parent) and its
subsidiaries (collectively, the Company) for the three month period ended March 31, 2008. This
discussion should be read in conjunction with the consolidated financial statements and notes
thereto included elsewhere herein, as well as with the consolidated financial statements and notes
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
Atlantic American is an insurance holding company whose operations are conducted primarily
through its insurance subsidiaries: American Southern Insurance Company and American Safety
Insurance Company (together known as American Southern) and Bankers Fidelity Life Insurance
Company (Bankers Fidelity). Each operating company is managed separately, offers different
products and is evaluated on its individual performance.
In December 2007, the Company entered into an agreement for the sale of its regional property
and casualty operations, Association Casualty Insurance Company and Association Risk Management
General Agency, Inc. (together known as Association Casualty) and Georgia Casualty & Surety
Company (Georgia Casualty) to Columbia Mutual Insurance Company. This transaction was completed
on March 31, 2008. In accordance with generally accepted accounting principles, the consolidated
financial statements included in this quarterly report reflect the assets, liabilities and
operating results of the regional property and casualty operations as discontinued operations.
Accordingly, unless otherwise noted, amounts and analyses contained herein reflect the continuing
operations of the Company and exclude the regional property and casualty operations. References to
income and loss from operations are identified as continuing operations or discontinued operations,
while references to net income or net loss reflect the consolidated net results of both continuing
and discontinued operations.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting
principles generally accepted in the United States of America and, in managements belief, conform
to general practices within the insurance industry. The following is an explanation of the
Companys accounting policies and the resultant estimates considered most significant by
management. These accounting policies inherently require significant judgment and assumptions and
actual operating results could differ significantly from managements initial estimates determined
using these policies. Atlantic American does not expect that changes in the estimates determined
using these policies will have a material effect on the Companys financial condition or liquidity,
although changes could have a material effect on its consolidated results of operations.
Unpaid loss and loss adjustment expenses comprised 24% of the Companys total liabilities at
March 31, 2008. This obligation includes estimates for: 1) unpaid losses on claims reported prior
to March 31, 2008, 2) development on those reported claims, 3) unpaid ultimate losses on claims
incurred prior to March 31, 2008 but not yet reported and 4) unpaid loss adjustment expenses for
reported and unreported claims incurred prior to March 31, 2008. Quantification of loss estimates
for each of these components involves a significant degree of judgment and estimates may vary,
materially, from period to period. Estimated unpaid losses on reported claims are developed based
on historical experience with similar claims by the Company. Development on reported claims,
estimates of unpaid ultimate losses on claims incurred prior to March 31, 2008 but not yet
reported, and estimates of unpaid loss adjustment expenses, are developed based on the Companys
historical experience, using actuarial methods to assist in the analysis. The Companys actuarial
staff develops ranges of estimated development on reported and unreported claims as well as loss
adjustment expenses using various methods including the paid-loss development method, the
reported-loss development method, the paid Bornhuetter-Ferguson method and the reported
Bornhuetter-Ferguson method. Any single method used to estimate ultimate losses has inherent
advantages and disadvantages due to the trends and changes affecting the business environment and
the Companys administrative policies. Further, a variety of external factors, such as legislative
changes, medical cost inflation, and others may directly or indirectly impact the relative adequacy
of liabilities for unpaid losses and loss adjustment expenses. The Companys approach is to select
an estimate of ultimate losses based on comparing results of a variety of reserving methods, as
opposed to total reliance on any single method. Unpaid loss and loss adjustment expenses are
reviewed periodically for significant lines of business, and when current results differ from the
original assumptions used to develop such estimates, the amount of the Companys recorded liability
for unpaid loss and loss adjustment expenses is adjusted. In the event the Companys actual
reported losses in any period are materially in excess of the previous estimated amounts, such
losses, to the extent reinsurance coverage does not exist, would have a material adverse effect on
the Companys results of operations.
Future policy benefits comprised 27% of the Companys total liabilities at March 31, 2008.
These liabilities relate primarily to life insurance products and are based upon assumed future
investment yields, mortality rates, and withdrawal rates after giving effect to possible risks of
adverse deviation. The assumed mortality and withdrawal rates are based upon the Companys
experience. If actual results differ from the initial assumptions, the amount of the Companys
recorded liability could require adjustment.
-15-
Deferred acquisition costs comprised 6% of the Companys total assets at March 31, 2008.
Deferred acquisition costs are commissions, premium taxes, and other costs that vary with and are
primarily related to the acquisition of new and renewal business and are generally deferred and
amortized. The deferred amounts are recorded as an asset on the balance sheet and amortized to
expense in a
systematic manner. Traditional life insurance and long-duration health insurance deferred
policy acquisition costs are amortized over the estimated premium-paying period of the related
policies using assumptions consistent with those used in computing the related liability for policy
benefit reserves. The deferred acquisition costs for property and casualty insurance and
short-duration health insurance are amortized over the effective period of the related insurance
policies. Deferred policy acquisition costs are expensed when such costs are deemed not to be
recoverable from future premiums (for traditional life and long-duration health insurance) and from
the related unearned premiums and investment income (for property and casualty and short-duration
health insurance). Assessments of recoverability for property and casualty and short-duration
health insurance are extremely sensitive to the estimates of a subsequent years projected losses
related to the unearned premiums. Projected loss estimates for a current block of business for
which unearned premiums remain to be earned may vary significantly from the indicated losses
incurred in any given previous calendar year.
Receivables are amounts due from reinsurers, insureds and agents and comprised 7% of the
Companys total assets at March 31, 2008. Insured and agent balances are evaluated periodically
for collectibility. Annually, the Company performs an analysis of the credit worthiness of the
Companys reinsurers using various data sources. Failure of reinsurers to meet their obligations
due to insolvencies or disputes could result in uncollectible amounts and losses to the Company.
Allowances for uncollectible amounts are established, as and when a loss has been determined
probable, against the related receivable. Losses are recognized when determined on a specific
account basis and a general provision for loss is made based on the Companys historical
experience.
Cash and investments comprised 84% of the Companys total assets at March 31, 2008.
Substantially all investments are in bonds and common and preferred stocks, which are subject to
significant market fluctuations. The Company carries all investments as available for sale and,
accordingly, at their estimated fair values. The Company owns certain non-redeemable preferred
stocks that do not have quoted values and are carried at estimated fair values as determined by
management. Such values inherently involve a greater degree of judgment and uncertainty and
therefore ultimately greater price volatility. On occasion, the value of an investment may decline
to a value below its amortized purchase price and remain at such value for an extended period of
time. When an investments indicated fair value has declined below its cost basis for a period of
time, primarily due to changes in credit risk, the Company evaluates such investment for other than
a temporary impairment. If other than a temporary impairment is deemed to exist, then the Company
will write down the amortized cost basis of the investment to its estimated fair value. While such
write down does not impact the reported value of the investment in the Companys balance sheet, it
is reflected as a realized investment loss in the Companys consolidated statements of operations.
Deferred income taxes comprised approximately 2% of the Companys total assets at March 31,
2008. Deferred income taxes reflect the effect of temporary differences between assets and
liabilities that are recognized for financial reporting purposes and the amounts that are
recognized for tax purposes. These deferred income taxes are measured by applying currently
enacted tax laws and rates. Valuation allowances are recognized to reduce the deferred tax assets
to the amount that is more likely than not to be realized. In assessing the likelihood of
realization, management considers estimates of future taxable income and tax planning strategies.
OVERALL CORPORATE RESULTS
On a consolidated basis, the Company had a net loss of $1.7 million, or $0.10 per diluted
share, for the three month period ended March 31, 2008, compared to net income of $0.9 million, or
$0.02 per diluted share, for the three month period ended March 31, 2007. Income from continuing
operations was $0.4 million in both the three month periods ended March 31, 2008 and 2007; while
the loss related to discontinued operations was $2.2 in the three month period ended March 31, 2008
as compared to income from discontinued operations of $0.4 million in the three month period ended
March 31, 2007. Premium revenue for the three month period ended March 31, 2008 decreased $2.1
million, or 8.2%, to $23.0 million from the comparable period in 2007. The decrease in premiums in
the three month period ended March 31, 2008 was primarily attributable to continued softening in
the property and casualty markets combined with significant product competition in the Companys
life and health operations, specifically in the Medicare supplement line of business. Income
before tax from continuing operations for the three month period ended March 31, 2008, decreased
$0.2 million, or 19.1%, to $0.7 million from the three month period ended March 31, 2007, primarily
due to a $0.3 million goodwill impairment charge taken in the first quarter of 2008.
The Companys property and casualty operations are comprised of American Southern and the
Companys life and health operations consist of the operations of Bankers Fidelity.
A more detailed analysis of the individual operating entities and other corporate activities
is provided below.
-16-
American Southern
The following is a summary of American Southerns premiums for the three month period ended
March 31, 2008 and the comparable period in 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
8,788 |
|
|
$ |
8,335 |
|
Ceded premiums |
|
|
(1,467 |
) |
|
|
(1,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums |
|
$ |
7,321 |
|
|
$ |
6,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
$ |
9,266 |
|
|
$ |
10,962 |
|
|
|
|
|
|
|
|
Gross written premiums at American Southern increased $0.5 million, or 5.4%, during the three
month period ended March 31, 2008 over the comparable period in 2007. The increase in gross
written premiums during the three month period ended March 31, 2008 was primarily due to a
significant increase in commercial automobile business generated by a newly appointed agency. Also
contributing to the increase in gross written premiums during the three month period ended March
31, 2008 were increased business writings in the surety line of business. Partially offsetting
this increase in gross written premiums were decreases in both the general liability and property
lines of business.
Ceded premiums decreased $0.3 million, or 16.9%, during the three month period ended March 31,
2008 from the comparable period in 2007. The decrease in ceded premiums was primarily due to the
significant decline in earned premiums. As American Southerns premiums are determined and ceded
as a percentage of earned premiums, a decrease in ceded premiums occurs when earned premiums
decrease.
The following presents American Southerns net earned premiums by line of business for the
three month period ended March 31, 2008 and the comparable period in 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
| |
|
|
Commercial automobile |
|
$ |
4,261 |
|
|
$ |
4,999 |
|
Private passenger auto |
|
|
|
|
|
|
42 |
|
General liability |
|
|
2,210 |
|
|
|
2,652 |
|
Property |
|
|
595 |
|
|
|
728 |
|
Surety |
|
|
2,200 |
|
|
|
2,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,266 |
|
|
$ |
10,962 |
|
|
|
|
|
|
|
|
Net earned premiums decreased $1.7 million, or 15.5%, during the three month period ended
March 31, 2008 from the comparable period in 2007, primarily due to the decline in policy writings
in 2007. During 2007, American Southern experienced a significant decrease in gross written
premiums which was primarily attributable to the loss of a program marketed through a general
agent. Prior to 2007, this program produced approximately $10 million in annualized gross written
premiums, substantially all of which were earned up through and including in 2007. Insurance
premiums are earned ratably over the policy term, and therefore premiums earned in 2008 are related
to premiums written during both 2007 and 2008.
-17-
The following sets forth American Southerns loss and expense ratios for the three month
period ended March 31, 2008 and for the comparable period in 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
|
|
|
| |
|
|
Loss ratio |
|
|
38.1 |
% |
|
|
45.8 |
% |
Expense ratio |
|
|
52.8 |
% |
|
|
44.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
90.9 |
% |
|
|
90.7 |
% |
|
|
|
|
|
|
|
|
|
The loss ratio for the three month period ended March 31, 2008 decreased to 38.1% from 45.8%
in the comparable period of 2007. The decrease in the loss ratio for the three month period ended
March 31, 2008 was primarily attributable to lower claims in the commercial automobile line of
business, favorable loss experience in the property lines of business and decreased surety losses
that resulted from the non-renewal of certain unprofitable accounts. The expense ratio for the
three month period ended March 31, 2008 increased to 52.8% from 44.9% in the comparable period of
2007. The increase in the expense ratio in the three month period ended March 31, 2008 was
primarily due to American Southerns variable commission structure, which compensates the companys
agents in relation to the loss ratios of the business they write. In periods where the loss ratio
decreases, commissions and underwriting expenses will increase and conversely in periods where the
loss ratio increases, commissions and underwriting expenses will decrease.
Bankers Fidelity
The following summarizes Bankers Fidelitys earned premiums for the three month period ended
March 31, 2008 and the comparable period in 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
| |
|
|
Medicare supplement |
|
$ |
10,371 |
|
|
$ |
10,582 |
|
Other health |
|
|
865 |
|
|
|
904 |
|
Life |
|
|
2,530 |
|
|
|
2,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,766 |
|
|
$ |
14,126 |
|
|
|
|
|
|
|
|
Premium revenue at Bankers Fidelity decreased $0.4 million, or 2.5%, during the three month
period ended March 31, 2008 from the comparable period in 2007. Premiums from the Medicare
supplement and other health lines of business decreased $0.3 million, or 2.2%, during the three
month period ended March 31, 2008, due to the non-renewal of certain policies that resulted from
increased pricing and product competition. Premiums from the life insurance line of business
decreased $0.1 million, or 4.2%, during the three month period ended March 31, 2008 from the
comparable period in 2007, due to the continued decline in sales related activities.
The following summarizes Bankers Fidelitys operating expenses for the three month period
ended March 31, 2008 and the comparable period in 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
| |
|
|
Benefits and losses |
|
$ |
10,385 |
|
|
$ |
10,374 |
|
Commission and other
expenses |
|
|
4,398 |
|
|
|
4,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
14,783 |
|
|
$ |
15,364 |
|
|
|
|
|
|
|
|
-18-
Benefits and losses increased slightly during the three month period ended March 31, 2008 over
the comparable period in 2007. As a percentage of premiums, benefits and losses were 75.4% for the
three month period ended March 31, 2008, compared to 73.4% for the three month period ended March
31, 2007. The increase in the loss ratio was primarily due to the continued aging of the existing
block of life insurance business, as well as a declining revenue base.
Commissions and other expenses decreased $0.6 million, or 11.9%, during the three month period
ended March 31, 2008 from the comparable period in 2007. The decrease in commissions and other
expenses was primarily due to reductions in compensation for officers, which was effective October
1, 2007, as well as a decrease in agency related expenses. As a percentage of premiums, these
expenses were 31.9% for the three month period ended March 31, 2008, compared to 35.3% for the
three month period ended March 31, 2007.
INVESTMENT INCOME AND REALIZED GAINS
Investment income decreased $0.2 million, or 7.1%, during the three month period ended March
31, 2008 from the comparable period in 2007. The decrease in investment income for the three month
period ended March 31, 2008 was primarily due to a large number of called securities, the proceeds
of which were reinvested at lower current market rates.
The Company had net realized investment gains of $24,000 during the three month period ended
March 31, 2008, compared to net realized investment losses of $3,000 in the three month period
ended March 31, 2007. Management continually evaluates the Companys investment portfolio and, as
needed, makes adjustments for impairments and/or will divest investments. (See Item 3 for a
discussion about market risks).
INTEREST EXPENSE
Interest expense decreased $0.1 million, or 10.0%, during the three month period ended March
31, 2008 from the comparable period in 2007. The decrease in interest expense was due to a decrease
in the London Interbank Offered Rate (LIBOR), which occurred in the latter half of 2007 and into
2008. The interest rates on the Companys trust preferred obligations and the outstanding bank
debt are based on LIBOR.
OTHER EXPENSES
Other expenses (commissions, underwriting expenses, and other expenses) decreased $0.6
million, or 5.8%, during the three month period ended March 31, 2008 from the comparable period in
2007. The decrease in other expenses for the three month period ended March 31, 2008 was primarily
attributable to reductions in compensation for officers, which was effective October 1, 2007, the
elimination of certain corporate positions and other cost reduction initiatives which were
implemented in the fourth quarter of 2007. Partially offsetting this decrease in other expenses
was a $0.3 million goodwill impairment charge taken in the three month period ended March 31, 2008.
On a consolidated basis, as a percentage of earned premiums, other expenses increased to 44.9% in
the three month period ended March 31, 2008 from 43.7% in the three month period ended March 31,
2007. The increase in the expense ratio for the three month period ended March 31, 2008 was
primarily due to the goodwill impairment charge previously discussed as well as fixed expenses
decreasing at a lesser rate than premium revenues.
INCOME TAXES
The primary differences between the effective tax rate and the federal statutory income tax
rate for the three month period ended March 31, 2008 resulted from the dividends-received deduction
(DRD) and a non-deductible goodwill impairment charge. The primary differences between the
effective tax rate and the federal statutory income tax rate for the three month period ended March
31, 2007 resulted from the DRD and an increase in the asset valuation allowance. The current
estimated DRD is adjusted as underlying factors change, including known actual 2007 distributions
earned on invested assets. The actual current year DRD can vary from the estimates based on, but
not limited to, amounts of distributions from these investments as well as appropriate levels of
taxable income.
-19-
LIQUIDITY AND CAPITAL RESOURCES
The primary cash needs of the Company are for the payment of claims and operating expenses,
maintaining adequate statutory capital and surplus levels, and meeting debt service requirements.
Current and expected patterns of claim frequency and severity may change from period to period but
generally are expected to continue within historical ranges. The Companys primary sources of cash
are written premiums, investment income and the sale and maturity of invested assets. The Company
believes that, within each business unit, total
invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from
investment earnings, future premium receipts and reinsurance collections will be adequate to fund
the payment of claims and expenses as needed. Cash flows at the Parent are derived from dividends,
management fees, and tax sharing payments from the subsidiaries. The cash needs of the Parent are
primarily for the payment of operating expenses, the acquisition of capital assets and debt service
requirements.
The Parents insurance subsidiaries reported statutory net income of $2.5 million for the
three month period ended March 31, 2008 compared to statutory net income of $3.2 million for the
three month period ended March 31, 2007. Statutory results are further impacted by the recognition
of all costs of acquiring business. In a scenario in which the Company is growing, statutory
results are generally lower than results determined under generally accepted accounting principles
(GAAP). The Parents insurance subsidiaries reported a combined GAAP net income of $2.0 million
for the three month period ended March 31, 2008, compared to $1.9 million for the three month
period ended March 31, 2007. The reasons for the increase in GAAP net income in the three month
period ended March 31, 2008 are discussed above under Results of Operations. Statutory results
for the Companys property and casualty operations differ from the Companys results of operations
under GAAP due to the deferral of acquisition costs for financial reporting purposes. The Companys
life and health operations statutory results differ from GAAP results primarily due to the
deferral of acquisition costs for financial reporting purposes, as well as the use of different
reserving methods.
At March 31, 2008, the Company had two series of preferred stock outstanding, substantially
all of which is held by affiliates of the Companys chairman and principal shareholders. The
outstanding shares of Series B Preferred Stock (Series B Preferred Stock) have a stated value of
$100 per share; accrue annual dividends at a rate of $9.00 per share and are cumulative; in certain
circumstances may be convertible into an aggregate of approximately 3,358,000 shares of common
stock; and are redeemable solely at the Companys option. The Series B Preferred Stock is not
currently convertible. At March 31, 2008, the Company had accrued, but unpaid, dividends on the
Series B Preferred Stock totaling $14.8 million. The outstanding shares of Series D Preferred
Stock (Series D Preferred Stock) have a stated value of $100 per share; accrue annual dividends
at a rate of $7.25 per share (payable in cash or shares of the Companys common stock at the option
of the board of directors of the Company) and are cumulative. In certain circumstances the shares
of Series D Preferred Stock may be convertible into an aggregate of approximately 1,754,000 shares
of the Companys common stock, subject to certain adjustments and provided that such adjustments do
not result in the Company issuing more than approximately 2,703,000 shares of common stock without
obtaining prior shareholder approval; and are redeemable solely at the Companys option. The
Series D Preferred Stock is not currently convertible. At March 31, 2008, the Company had accrued,
but unpaid, dividends on the Series D Preferred Stock totaling $0.1 million.
At March 31, 2008, the Companys $45.0 million of borrowings consisted of $3.8 million of bank
debt pursuant to the Companys credit agreement (the Credit Agreement) with Wachovia, National
Association (Wachovia) and an aggregate of $41.2 million of outstanding junior subordinated
deferrable interest debentures (Junior Subordinated Debentures). The Credit Agreement provides
for a reducing revolving credit facility pursuant to which the Company was able to, subject to the
terms and conditions thereof, initially borrow or reborrow up to $15.0 million (the Commitment
Amount). In accordance with the terms of the Credit Agreement, the Commitment Amount is
incrementally reduced every six months and has been reduced to $14.0 million at March 31, 2008.
The interest rate on amounts outstanding under the Credit Agreement is, at the option of the
Company, equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5%
above the Federal Funds Rate, each as defined) or (b) the LIBOR determined on an interest period of
1-month, 2-months, 3-months or 6-months, plus an Applicable Margin (as defined). The Applicable
Margin varies based upon the Companys leverage ratio (funded debt to total capitalization, each as
defined) and ranges from 1.75% to 2.50%. As of March 31, 2008, the combined effective interest
rate was 7.10%. Interest on amounts outstanding is payable quarterly. The Credit
Agreement requires the Company to comply with certain covenants, including, among others, ratios
that relate funded debt to both total capitalization and earnings before interest, taxes,
depreciation and amortization, as well as the maintenance of minimum levels of tangible net worth.
The Company must also comply with limitations on capital expenditures, certain payments, additional
debt obligations, equity repurchases and redemptions, as well as minimum risk-based capital levels.
Upon the occurrence of an event of default, Wachovia may terminate the Credit Agreement and
declare all amounts outstanding under the Credit Agreement due and payable in full. On April 1,
2008, the Company repaid $3.8 million in principal, reducing the outstanding bank debt balance
under the Credit Agreement to zero.
-20-
The Company has two subsidiary statutory trusts which exist for the exclusive purposes of
issuing trust preferred securities representing undivided beneficial interests in the assets of the
trusts and investing the gross proceeds of the trust preferred securities in Junior Subordinated
Debentures. The outstanding $41.2 million of Junior Subordinated Debentures have a maturity of
thirty years from their original date of issuance, are callable, in whole or in part, only at the
option of the Company five years after their respective dates of issue and quarterly thereafter,
and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from
4.00% to 4.10%. At March 31, 2008, the effective interest rate was 7.12%. The obligations of the
Company with respect to the issuances of the trust preferred securities represent a full and
unconditional guarantee by the Parent of each trusts obligations with respect to the trust
preferred securities. Subject to certain exceptions and limitations, the Company may elect from
time to time to defer Junior Subordinated Debenture interest payments, which would result in a
deferral of distribution payments on the related trust preferred securities.
On February 21, 2006, the Company entered into a zero cost rate collar with Wachovia to hedge
future interest payments on a portion of the Junior Subordinated Debentures. The notional amount
of the collar was $18.0 million with an effective date of March 6, 2006. The collar has a LIBOR
floor rate of 4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the 4th of
each March, June, September and December through termination on March 4, 2013. The Company will
begin making payments to Wachovia under the zero cost rate collar on June 4, 2008.
The Company intends to pay its obligations under the Credit Agreement and the Junior
Subordinated Debentures using dividend and tax sharing payments from its operating subsidiaries, or
from potential future financing arrangements. In addition, the Company believes that, if
necessary, at maturity, the Credit Agreement could be refinanced, although there can be no
assurance of the terms or conditions of such a refinancing, or its availability.
The Parent provides certain administrative and other services to each of its insurance
subsidiaries. The amounts charged to and paid by the subsidiaries include reimbursements for
various shared services and other expenses incurred directly on behalf of the subsidiaries by the
Parent. In addition, there is in place a formal tax-sharing agreement between the Parent and its
insurance subsidiaries. It is anticipated that this agreement will provide the Parent with
additional funds from profitable subsidiaries due to the subsidiaries use of the Parents tax loss
carryforwards, which totaled approximately $9.1 million at March 31, 2008.
Over 90% of the investment assets of the Parents insurance subsidiaries are in marketable
securities that can be converted into cash, if required; however, the use of such assets by the
Company is limited by state insurance regulations. Dividend payments to the Parent by its wholly
owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of
10% of statutory surplus or statutory earnings before recognizing realized investment gains of the
individual insurance subsidiaries. At March 31, 2008, American Southern had $38.1 million of
statutory surplus and Bankers Fidelity had $33.7 million of statutory surplus.
Net cash used in operating activities was $7.7 million in the three month period ended March
31, 2008, compared to $3.1 million in the three month period ended March 31, 2007; and cash and
short-term investments increased from $36.9 million at December 31, 2007 to $69.4 million at March
31, 2008. The increase in cash and short-term investments during the three month period ended
March 31, 2008 was primarily due to the cash received from the sale of the Companys regional
property and casualty operations, Association Casualty and Georgia Casualty, to Columbia Mutual
Insurance Company discussed previously. Partially offsetting the increase in cash and short-term
investments during the three month period ended March 31, 2008 was a federal income tax payment of
$2.0 million and a $1.5 million tax sharing payment to the Companys regional property and casualty
operations in connection with such sale.
The Company believes that the dividends, fees, and tax-sharing payments it receives from its
subsidiaries and, if needed, additional borrowings from financial institutions 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 Companys liquidity, capital resources or operations.
-21-
CONTRACTUAL OBLIGATIONS
The following table discloses the amounts of payments due under specified contractual obligations,
aggregated by category of contractual obligation, for specified time periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
Less than |
|
1 - 3 |
|
3 - 5 |
|
More than |
|
|
Total |
|
1 year |
|
years |
|
years |
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Bank debt payable |
|
$ |
3,750 |
|
|
$ |
|
|
|
$ |
3,750 |
|
|
$ |
|
|
|
$ |
|
|
Junior Subordinated Debentures |
|
|
41,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,238 |
|
Interest payable(1) |
|
|
71,028 |
|
|
|
2,847 |
|
|
|
5,694 |
|
|
|
5,694 |
|
|
|
56,793 |
|
Operating leases |
|
|
3,741 |
|
|
|
1,078 |
|
|
|
1,574 |
|
|
|
1,089 |
|
|
|
|
|
Purchase commitments(2) |
|
|
13,950 |
|
|
|
13,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and claims(3) |
|
|
50,413 |
|
|
|
29,744 |
|
|
|
16,132 |
|
|
|
3,529 |
|
|
|
1,008 |
|
Future policy benefits(4) |
|
|
55,651 |
|
|
|
8,348 |
|
|
|
15,582 |
|
|
|
15,026 |
|
|
|
16,695 |
|
Unearned premiums(5) |
|
|
12,347 |
|
|
|
5,556 |
|
|
|
2,593 |
|
|
|
1,111 |
|
|
|
3,087 |
|
Other policy liabilities |
|
|
1,636 |
|
|
|
1,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
253,754 |
|
|
$ |
63,159 |
|
|
$ |
45,325 |
|
|
$ |
26,449 |
|
|
$ |
118,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest payable is based on interest rates as of March 31, 2008 and assumes that
all debt remains outstanding until its stated contractual maturity. The interest on
outstanding bank debt and trust preferred obligations is at various rates of interest. |
|
(2) |
|
Represents balances due for goods and/or services which have been contractually
committed as of March 31, 2008. To the extent contracts provide for early termination with
notice but without penalty, only the amounts contractually due during the notice period
have been included. |
|
(3) |
|
Losses and claims include case reserves for reported claims and reserves for
claims incurred but not reported (IBNR). While payments due on claim reserves are
considered contractual obligations because they relate to insurance policies issued by the
Company, the ultimate amount to be paid to settle both case reserves and IBNR reserves is
an estimate, subject to significant uncertainty. The actual amount to be paid is not
determined until the Company reaches a settlement with any applicable claimant. Final claim
settlements may vary significantly from the present estimates, particularly since many
claims will not be settled until well into the future. In estimating the timing of future
payments by year for quarterly reporting, the Company has assumed that its historical
payment patterns will continue. However, the actual timing of future payments will likely
vary materially from these estimates due to, among other things, changes in claim reporting
and payment patterns and large unanticipated settlements. Amounts reflected do not include
reinsurance amounts which may also be recoverable based on the level of ultimate sustained
loss. |
|
(4) |
|
Future policy benefits relate to life insurance policies on which the Company is
not currently making payments and will not make future payments unless and until the
occurrence of an insurable event, such as a death or disability, or the occurrence of a
payment triggering event, such as a surrender of a policy. Occurrence of any of these
events is outside the control of the Company and the payment estimates are based on
significant uncertainties such as mortality, morbidity, expenses, persistency, investment
returns, inflation and the timing of payments. For regulatory purposes, the Company
performs cash flow modeling of such liabilities, which is the basis for the indicated
disclosure; however, due to the significance of the assumptions used, the amount presented
could materially differ from actual results. |
|
(5) |
|
Unearned premiums represent potential future revenue for the Company; however,
under certain circumstances, such premiums may be refundable with cancellation of the
underlying policy. Significantly all unearned premiums will be earned within the following
twelve month period as the related future insurance protection is provided. Significantly
all costs related to such unearned premiums have already been incurred and paid and are
included in deferred acquisition costs; however, future losses related to the unearned
premiums have not been recorded. The contractual obligations related to unearned premiums
reflected in the table represent the average loss ratio applied to the quarter end unearned
premium balances, with loss payments projected in comparable proportions to the year end
loss and claims reserves. Projecting future losses is subject to significant uncertainties
and the projected payments will most likely vary materially from these estimates as a
result of differences in future severity, frequency and other anticipated and unanticipated
factors. Amounts reflected do not take into account reinsurance amounts that may be
recoverable based on the level of ultimate sustained loss. |
-22-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Due to the nature of the Companys business it is exposed to both interest rate and market
risk. Changes in interest rates, which have historically represented the largest market risk
factor affecting the Company, may result in changes in the fair market value of the Companys
investments, cash flows and interest income and expense. The Company is also subject to risk from
changes in equity prices. There have been no material changes to the Companys market risks since
December 31, 2007, as identified in the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2007.
Item 4T. Controls and Procedures
An evaluation was performed under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our
management, including the Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and
procedures were effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting that occurred
during the period covered by this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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
managements current assessments of various risks and uncertainties, as well as assumptions made in
accordance with the safe harbor provisions of the federal securities laws. The Companys 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 Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2007 and the other filings made by the Company
from time to time with the Securities and Exchange Commission.
-23-
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 2, 1995, the Board of Directors of the Company approved an initial plan that allowed
for the repurchase of shares of the Companys common stock (the Repurchase Plan). As amended
since its original adoption, the Repurchase Plan currently allows for repurchases of up to an
aggregate of 2.0 million shares of the Companys common stock on the open market or in privately
negotiated transactions, as determined by an authorized officer of the Company. Such purchases can
be made from time to time in accordance with applicable securities laws and other requirements. As
of March 31, 2008, a maximum of 554,194 shares of common stock may yet be purchased under this
plan.
No purchases of common stock of the Company were made by or on behalf of the Company during
the three months ended March 31, 2008.
Item 6. Exhibits
|
|
|
|
|
10.1
|
|
-
|
|
First Amendment, dated effective as of March 28, 2008, to Credit Agreement and Pledge
Agreement, dated as of December 22, 2006 between Atlantic American Corporation
and Wachovia Bank, National Association. |
|
10.2
|
|
-
|
|
First Amendment, dated effective as of March 31, 2008, to Lease Agreement between Georgia
Casualty & Surety Company, Bankers Fidelity Life Insurance Company,
Atlantic American Corporation and Delta Life Insurance Company dated as of
November 1, 2007. |
|
10.3
|
|
-
|
|
Non Competition Agreement, dated effective as of March 31, 2008, between Atlantic American
Corporation and Columbia Mutual Insurance Company. |
|
31.1
|
|
-
|
|
Certification of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
31.2
|
|
-
|
|
Certification of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.1
|
|
-
|
|
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
-24-
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, 2008 |
By: |
/s/ John G. Sample, Jr.
|
|
|
|
John G. Sample, Jr. |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
-25-
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Title |
|
10.1
|
|
First Amendment, dated effective as of March 28, 2008, to Credit Agreement and Pledge
Agreement, dated as of December 22, 2006 between Atlantic American Corporation
and Wachovia Bank, National Association. |
|
|
|
10.2
|
|
First Amendment, dated effective as of March 31, 2008, to Lease Agreement between
Georgia Casualty & Surety Company, Bankers Fidelity Life Insurance
Company, Atlantic American Corporation and Delta Life Insurance Company dated as of
November 1, 2007. |
|
|
|
10.3
|
|
Non Competition Agreement, dated effective as of March 31, 2008, between Atlantic
American Corporation and Columbia Mutual Insurance Company. |
|
|
|
31.1
|
|
Certification of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
EX-10.1 FIRST AMENDMENT TO CREDIT AGREEMENT
Exhibit 10.1
FIRST AMENDMENT TO
CREDIT AGREEMENT AND PLEDGE AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT AND PLEDGE AGREEMENT (this Amendment) is made as of
the 28th day of March, 2008, between ATLANTIC AMERICAN CORPORATION, a Georgia corporation (the
Borrower) and WACHOVIA BANK, NATIONAL ASSOCIATION (the Bank).
Recitals:
The Borrower and the Bank have entered into that certain Credit Agreement dated as of
December 22, 2006 (the Credit Agreement) and that certain Pledge Agreement of even date therewith
(the Pledge Agreement). The Borrower and the Bank wish to provide for an acknowledgement and
consent to the sale of certain subsidiaries of Borrower, and amend the Credit Agreement and Pledge
Agreement in certain respects, as hereinafter provided.
NOW, THEREFORE, in consideration of the Recitals and the mutual promises contained herein and
for other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank, intending to be legally bound hereby, agree as follows:
SECTION 1. Recitals. The Recitals are incorporated herein by reference and shall be
deemed to be a part of this Amendment.
SECTION 2. Definitions. Capitalized terms used herein which are not otherwise defined
herein shall have the respective meanings assigned to them in the Credit Agreement.
SECTION 3. Acknowledgement and Consent.
(a) The Borrower has requested that the Bank consent to, and subject to the conditions
stated herein, the Bank does hereby consent to, the Borrowers consummation of the sale of
Georgia Casualty & Surety Company, Association Casualty Insurance Company and Association
Risk Management General Agency, Inc. as contemplated by that certain Stock Purchase
Agreement by and between Borrower and Columbia Mutual Insurance Company dated December 26,
2007 (the SPA).
(b) The Bank agrees (i) to deliver to the escrow agent specified in writing by the
Borrower the stock certificates listed on Exhibit A attached hereto, such
certificates to be held in escrow for the Closing defined in Section 1.3 of the SPA;
provided that Bank shall not be required to deliver such certificates prior to the date that
is five (5) days prior to such Closing, and (ii) to release from escrow the stock
certificates listed on Exhibit A attached hereto upon the consummation of the
Closing.
(c) The Banks consent herein is being given solely to facilitate the Closing defined
in Section 1.3 of SPA. If the Closing shall not occur by March 31, 2008, this Amendment
shall be null and void and of no force and effect, and Borrower shall immediately deliver
the stock certificates listed on Exhibit A to the Bank or its legal counsel.
(d) The Bank expressly reserves all of its rights and remedies with respect to any
present or future Default arising under the Credit Agreement.
SECTION 4. Amendments to Credit Agreement. The Credit Agreement is amended as set
forth in this Section 4.
(a) Amendment to Section 1.01. The definition of Pledge Agreement is hereby
amended and restated in its entirety to read as follows:
Pledge Agreement means the Pledge Agreement dated as of December,
2006 executed by the Borrower for the benefit of the Bank, as the same may
be amended, restated, supplemented or otherwise modified from time to time,
pursuant to which the Borrower (a) has pledged to the Bank the stock or
other equity interests it holds in the following Subsidiaries: American
Southern Insurance Company and Bankers Fidelity Life Insurance Company and
(b) agrees to pledge any stock or equity interests it obtains in the future
with respect to existing Subsidiaries or Persons which become Subsidiaries,
as more fully set forth therein.
(b) Amendments to Section 6.01. Substitute (h) and (o) of Section 6.01 of the
Credit Agreement hereby amended and restated in their entirety to read as follows:
(n) Bankers Fidelity Life Insurance Company, American Southern
Insurance Company or any Subsidiary of American Southern Insurance Company
shall fail to maintain an AM Best rating of B+ or better; or
(o) the Borrower shall at any time or times and for any reason cease to
own (either directly or indirectly through a Wholly Owned Subsidiary) at
least 80% of the Capital Stock and other ownership interests of each of
American Southern Insurance Company and Bankers Fidelity Life Insurance
Company; or
(c) Amendment to Schedule 4.08A. Schedule 4.08A of the Credit Agreement is
hereby amended and restated in its entirety to read as follows:
- 2 -
SCHEDULE 4.08A
EXISTING INSURANCE SUBSIDIARIES
|
|
|
|
|
Jurisdiction of |
Name of Subsidiary |
|
Incorporation |
American Southern Insurance Company
|
|
Kansas |
|
|
|
American Safety Insurance Company
|
|
Georgia |
|
|
|
Bankers Fidelity Life Insurance Company
|
|
Georgia |
SECTION 5. Amendments to Pledge Agreement. The Pledge Agreement is hereby amended as
set forth in this Section 5.
(a) Amendment to Schedule 1. Schedule 1 to the Pledge Agreement is hereby
amended and restated in its entirety to read as follows:
SCHEDULE 1
|
|
|
|
|
|
|
|
|
Number of |
|
Class |
|
|
Shares of |
|
of |
Subsidiary |
|
Stock |
|
Stock |
American Southern Insurance Company
|
|
|
300,000 |
|
|
Capital |
|
|
|
|
|
|
|
Bankers Fidelity Life Insurance Company
|
|
|
2,500,000 |
|
|
Capital |
(b) Amendment to Exhibit A. Exhibit A to the Pledge Agreement is hereby
amended and restated in its entirety to read as follows:
EXHIBIT A
Insurance Subsidiaries of Atlantic American Corporation
American Safety Insurance Company, a Georgia domestic insurance company
American Southern Insurance Company, a Kansas domestic insurance company
Bankers Fidelity Life Insurance Company, a Georgia domestic insurance corporation
SECTION 6. No Other Amendment. Except for the amendments set forth above, the text of
the Credit Agreement and the Pledge Agreement shall remain unchanged and in full force and effect.
This Amendment is not intended to effect, nor shall it be construed as, a novation. The Credit
Agreement and this Amendment shall be construed together as a single instrument and any reference
to the Agreement or any other defined term for the Credit Agreement in the Credit Agreement, the
Loan Documents or any certificate, instrument or other document delivered pursuant thereto shall
mean the Credit Agreement as amended hereby and as it may be
- 3 -
amended, supplemented or otherwise modified hereafter. The Pledge Agreement and this
Amendment shall be construed together as a single instrument and any reference to the Agreement
or any other defined term for the Pledge Agreement in the Pledge Agreement, the Loan Documents or
any certificate, instrument or other document delivered pursuant thereto shall mean the Pledge
Agreement as amended hereby and as it may be amended, supplemented or otherwise modified hereafter.
Nothing herein contained shall waive, annul, vary or affect any provision, condition, covenant or
agreement contained in the Credit Agreement or Pledge Agreement, except as herein amended, or any
of the other Loan Documents nor affect nor impair any rights, powers or remedies under the Credit
Agreement or Pledge Agreement, as hereby amended or any of the other Loan Documents. The Bank does
hereby reserve all of its rights and remedies against all parties who may be or may hereafter
become secondarily liable for the repayment of the Obligations. The Borrower promises and agrees
to perform all of the requirements, conditions, agreements and obligations under the terms of the
Credit Agreement and Pledge Agreement, as hereby amended, and the other Loan Documents. The Credit
Agreement and Pledge Agreement, as amended, and the other Loan Documents are hereby ratified and
affirmed. The Borrower hereby expressly agrees that the Credit Agreement and Pledge Agreement, as
amended, and the other Loan Documents are in full force and effect.
SECTION 7. Representations and Warranties. The Borrower hereby represents and
warrants in favor of the Bank as follows:
(a) The representations and warranties of the Borrower contained in Article IV of the
Credit Agreement are true in all material respects on and as of the date hereof (except to
the extent they are made specifically with reference to some other date, in which case they
are true and correct as of such other date);
(b) After giving effect to this Amendment, no Default or Event of Default under the
Credit Agreement, the Pledge Agreement or any other Loan Document has occurred and is
continuing on the date hereof;
(c) The Borrower has the corporate power and authority to enter into this Amendment and
to do all acts and things as are required or contemplated hereunder to be done, observed and
performed by it;
(d) This Amendment has been duly authorized, validly executed and delivered by one or
more authorized officers of the Borrower, and this Amendment, the Credit Agreement and
Pledge Agreement, as amended hereby, constitute the legal, valid and binding obligations of
the Borrower enforceable against it in accordance with their terms; and
(e) The execution and delivery of this Amendment and the Borrowers performance
hereunder and under the Credit Agreement and Pledge Agreement as amended hereby do not and
will not require the consent or approval of any regulatory authority or governmental
authority or agency having jurisdiction over the Borrower other than those which have
already been obtained or given, nor be in contravention of or in conflict with the Articles
of Incorporation or Bylaws of the Borrower, or the provision of any statute, or any
judgment, order or indenture, instrument, agreement or undertaking,
- 4 -
to which the Borrower is a party or by which its assets or properties are or may become
bound.
SECTION 8. Conditions to Effectiveness. The effectiveness of this Amendment and the
obligations of the Bank hereunder are subject to the following conditions, unless the Bank waives
such conditions:
(a) receipt by the Bank from the Borrower of a duly executed counterpart of this
Amendment; and
(b) the fact that the representations and warranties of the Borrower contained in
Section 7 of this Amendment shall be true on and as of the date hereof.
SECTION 9. Counterparts. This Amendment may be executed in multiple counterparts,
each of which shall be deemed to be an original and all of which, taken together, shall constitute
one and the same agreement.
SECTION 10. Governing Law. This Amendment shall be construed in accordance with and
governed by the laws of the State of Georgia.
SECTION 11. Attorneys Fees and Expenses. The Borrower hereby agrees that all
attorneys fees and expenses incurred by the Bank in connection with its review of the SPA and the
preparation, negotiation and execution of this Amendment shall be payable by the Borrower.
[Remainder of page intentionally left blank]
- 5 -
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed under
seal by their respective authorized officers as of the day and year first above written.
|
|
|
|
|
|
|
|
|
|
|
Attest: |
|
|
|
ATLANTIC AMERICAN CORPORATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Janie L. Ryan
|
|
|
|
By:
|
|
/s/ John G. Sample, Jr. |
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
Secretary
|
|
|
|
|
|
Name: John G. Sample, Jr. |
|
|
|
|
[CORPORATE SEAL]
|
|
|
|
|
|
Title: Senior Vice President & CFO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WACHOVIA BANK, NATIONAL ASSOCIATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Ron Edwards
Name: Ron Edwards
|
|
|
|
|
|
|
|
|
|
|
Title: SVP/Commercial Risk Management |
|
|
- 6 -
EXHIBIT A
|
|
|
|
|
|
|
|
|
Company |
|
Stock Certificate No. |
|
Number of Shares |
Georgia Casualty & Surety Company |
|
|
8234 |
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
Association Casualty Insurance
Company |
|
|
424 |
|
|
|
525,000 |
|
|
|
|
|
|
|
|
|
|
Association Casualty Insurance
Company |
|
|
425 |
|
|
|
38,835 |
|
|
|
|
|
|
|
|
|
|
Association Casualty Insurance
Company |
|
|
426 |
|
|
|
225,000 |
|
|
|
|
|
|
|
|
|
|
Association Casualty Insurance
Company |
|
|
427 |
|
|
|
111,165 |
|
EX-10.2 FIRST AMENDMENT TO LEASE AGREEMENT
Exhibit 10.2
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (the Amendment), is made this
31st day of March, 2008 (the Effective Date), by and between DELTA LIFE
INSURANCE CO., a Georgia corporation (Landlord) and ATLANTIC AMERICAN CORPORATION,
BANKERS FIDELITY LIFE INSURANCE COMPANY and GEORGIA CASUALTY & SURETY COMPANY, all Georgia
corporations (collectively, Tenant).
WITNESSETH:
WHEREAS, Landlord and Tenant entered into that certain Lease Agreement dated November 1, 2007
(the Lease), for approximately 65,489 square feet of office space (the
Premises) in the building located at 4370 Peachtree Road, N.E., Atlanta, Georgia 30319
(Building); and
WHEREAS, Landlord and Tenant desire to modify and amend the Lease in order to reduce the size
of the Premises, release Georgia Casualty & Surety Company, a Georgia corporation (GA
Casualty) from the Lease and for other purposes as hereinafter set forth;
NOW, THEREFORE, for and in consideration of the mutual covenants contained herein, and for Ten
and No/100 Dollars ($10.00) and other good and valuable consideration, paid by the parties hereto
to one another, the receipt and sufficiency of which are acknowledged by the parties hereto, the
parties hereto hereby covenant and agree as follows:
1. Defined Terms. Unless otherwise expressly provided in this Amendment, all terms
defined in the Lease shall have the same meanings when used herein as when used in the Lease, and
all such defined terms in the Lease are incorporated herein by reference.
2. Partial Surrender of Premises. As of the Effective Date, the Lease shall expire as
to that portion of the Premises consisting of 15,903 usable square feet, as more particularly
described on Exhibit A attached hereto and by this reference made a part hereof (the Surrender
Space). From and after the Effective Date, the Surrender Space shall cease to be part of the
Premises demised by the Lease. However, the Lease shall remain in full force and effect as to the
remainder of the Premises consisting of 49,586 square feet (the Retained Space).
Commencing on the day following the Effective Date (the Retained Space Commencement
Date), the square footage amount of 49,586 shall be used for all per square foot calculation
ratios and expenses, including, but not limited to, the calculations of Rent and Tenants pro-rate
share. Beginning as of the Retained Space Commencement Date, the term Premises in the Lease
shall be deemed to mean the Retained Space.
3. Release of GA Casualty. It is the intent of the parties that contemporaneously
with the execution of this Amendment Landlord will enter into a lease agreement with Columbia
Insurance Group, Inc., a Missouri corporation, for the Surrender Space. Accordingly, as of the
Effective Date, GA Casualty shall be released as a tenant under the Lease and all obligations of GA
Casualty under the Lease shall terminate and be of no further force or effect. However, the Lease
shall remain in full force and effect as to the remaining tenants, Atlantic American Corporation
and Bankers Fidelity Life Insurance Company.
4. Brokerage. Landlord and Tenant each represent, warrant and covenant to the other
that neither party has dealt in any way with any real estate broker in connection with this
Amendment. Tenant and Landlord each shall indemnify and hold the other party harmless (including
attorneys fees and costs) from any and all liabilities and costs arising from any claim resulting
from the other partys contacts with any broker making a claim against the other party in
connection with this Amendment. The foregoing indemnity shall survive the expiration or earlier
termination of the Lease.
5. No Other Modifications. Except as expressly modified by this Amendment, the Lease
remains unmodified and in full force and effect.
6. Transfer, Successors and Assigns. This Amendment shall inure to the benefit of and
shall be binding upon Landlord, Tenant and their respective transfers, successors and assigns.
7. Time of Essence. Time is of the essence of this Amendment.
8. Georgia Law. This Amendment shall be construed and interpreted under the laws of
the State of Georgia.
[signatures appear on following page]
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be executed under seal and
delivered, on the day and year first above written.
|
|
|
|
|
LANDLORD: |
|
|
|
|
|
|
|
DELTA LIFE INSURANCE CO.,
a Georgia corporation |
|
|
|
|
|
|
|
By:
Name:
|
|
/s/ James B. Falkler
James B. Falkler
|
|
|
Title:
|
|
Secretary/Treasurer |
|
|
|
|
|
|
|
|
|
(CORPORATE SEAL) |
|
|
|
|
|
|
|
TENANT: |
|
|
|
|
|
|
|
ATLANTIC AMERICAN CORPORATION, a Georgia corporation |
|
|
|
|
|
|
|
By:
Name:
|
|
/s/ John G. Sample, Jr.
John G. Sample, Jr.
|
|
|
Title:
|
|
Senior Vice President & CFO |
|
|
|
|
|
|
|
|
|
(CORPORATE SEAL) |
|
|
|
|
|
|
|
BANKERS FIDELITY LIFE INSURANCE COMPANY, a Georgia corporation |
|
|
|
|
|
|
|
By:
Name:
|
|
/s/ Eugene Choate
Eugene Choate
|
|
|
Title:
|
|
President |
|
|
|
|
|
|
|
|
|
(CORPORATE SEAL) |
|
|
[signatures continued on following page]
(Signature page to First Amendment to Lease Agreement)
[signatures continued from previous page]
|
|
|
|
|
GEORGIA CASUALTY & SURETY
COMPANY, a Georgia corporation |
|
|
|
|
|
|
|
By:
Name:
|
|
/s/ Craig Stufflet
Craig Stufflet
|
|
|
Title:
|
|
EVP |
|
|
|
|
|
|
|
|
|
(CORPORATE SEAL) |
|
|
(Signature page to First Amendment to Lease Agreement)
EXHIBIT A
SURRENDER SPACE
EX-10.3 NON COMPETITION AGREEMENT
Exhibit 10.3
NON COMPETITION AGREEMENT
THIS NON COMPETITION AGREEMENT (Agreement) is made and entered into as of the
31st day of March, 2008, by and between Atlantic American Corporation, a corporation
organized and existing under the laws of the State of Georgia (Atlantic American) and Columbia
Mutual Insurance Company, a corporation organized and existing under the laws of the State of
Missouri (Columbia).
Atlantic American and Columbia have entered into a Stock Purchase Agreement, dated as of
December 26, 2007 (the SPA). The SPA generally provides for the purchase of all of the
outstanding stock (the Interests) of Georgia Casualty & Surety Company, a Georgia corporation,
Association Casualty Insurance Company, a Texas corporation, and Association Risk Management
General Agency, Inc., a Texas corporation, each a wholly-owned subsidiary of Atlantic American
(collectively, the Subsidiaries).
In order to induce Columbia to enter into the SPA, the undersigned is entering into this
Agreement with Columbia to set forth certain terms and conditions governing certain future actions
to be taken by Atlantic American.
NOW, THEREFORE, in consideration of the transactions contemplated by the SPA and the mutual
promises and covenants contained herein, the parties agree as follows:
1. (a) Atlantic American hereby acknowledges that it is familiar with the Subsidiaries trade
secrets and with other confidential information. Atlantic American acknowledges and agrees that
Columbia would be irreparably damaged if, during the Non-Compete Period, Atlantic American or any
of its affiliates were to compete with Columbia or the Subsidiaries or otherwise engage in a
business similar to the business that is conducted by the Subsidiaries on the closing date, as
defined in Section 1.3 of the SPA (the Closing Date) and that such competition by Atlantic
American or any of its affiliates would result in a significant loss of the goodwill of the
Subsidiaries purchased by Columbia under the SPA. Therefore, in further consideration of the
Purchase Price (as such term is defined in the SPA) to be paid to Atlantic American pursuant to the
SPA for the Interests and the goodwill of the Subsidiaries being sold by Atlantic American, and for
other good and valuable consideration, Atlantic American agrees that from the Closing Date until
the second anniversary of the Closing Date (the Non-Compete Period) it shall not (and
shall cause its affiliates not to) directly or indirectly own any interest in, manage, control,
participate in (whether as a partner, agent, representative or otherwise), consult with, render
services for, or in any other manner engage in the Restricted Business anywhere in the states of
Alabama, Arizona, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, New Mexico, North
Carolina, Oklahoma, South Carolina, Tennessee and Texas; provided, that nothing herein
shall prohibit Atlantic American, or its affiliates from:
(i) marketing, selling or licensing business through its subsidiaries or affiliates (a)
American Southern Insurance Company and American Safety Insurance Company, so long as such
activities are limited to the underwriting of large account business that are specially
underwritten and specially reinsured and (b) Delta Fire and Casualty Insurance Company, so
long as such activities are limited to the home service distribution of fire contents
policies;
(ii) acquiring or combining with a business (by merger or otherwise), a component of
which engages in the Restricted Business so long as the Restricted Business component does
not exceed 25% of the annual direct written premiums of the acquired business as of the date
of acquisition; provided, that Atlantic American and its affiliates may also acquire
or combine with a business where a portion of such business engages in the Restricted
Business if both:
(1) the annual direct written premiums of such business engaging in the
Restricted Business does not exceed 35% of the annual direct written
premiums of the acquired business as of the date of acquisition; and
(2) Atlantic American or its affiliates, as applicable, uses reasonable
efforts to divest the portion of such business engaging in the Restricted
Business within one (1) year after its acquisition; provided
further, that Atlantic American shall notify Columbia and give
Columbia the opportunity to participate in the bidding or other process for
such divesture or sale during such period on a basis substantially equal to
the other interested parties and, if Columbia offers an amount equal to or
more than other interested parties, will negotiate in good faith to sell
such business to Columbia;
(iii) being a passive owner of not more than 5% of the outstanding voting stock of a
corporation which is publicly traded and is engaged in any aspect of the Restricted
Business.
For purposes hereof, the term Restricted Business means the underwriting of primary
standard commercial property and casualty business.
(b) Notwithstanding any implication to the contrary above, during the Non-Compete Period,
Atlantic American shall not, and shall cause its affiliates not to, directly, or indirectly:
(i) induce or attempt to induce any employee of the Subsidiaries to leave the employ of
the Subsidiaries, or in any way interfere with the relationship between the Subsidiaries and
any employee thereof; provided, that the term induce or attempt to induce shall
not include generalized, non-targeted searches for employees through: (A) the publication of
an advertisement or other public announcement; or (B) the use of a recruiting or employment
agency to which the name of an individual employed by the Subsidiaries on the Closing Date
has not been provided; or
(ii) call on, solicit or service any customer, licensee, licensor or other business
relation of the Subsidiaries in order to induce or attempt to induce such person to cease
doing business with the Subsidiaries, or in any way adversely interfere with the
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relationship between any such customer, supplier, licensee, licensor or other business
relation and the Subsidiaries (including making any negative statements or communications
about the Subsidiaries).
(c) If, at the time of enforcement of the covenants contained herein (the Restrictive
Covenants), a court shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the court shall be allowed
and directed to revise the restrictions contained herein to cover the maximum period, scope and
area permitted by law.
(d) The obligations of Atlantic American shall terminate:
(i) As to any transferee of Atlantic American or transferee of an affiliate who
purchases Atlantic American or a business or division of Atlantic American or such
affiliate, provided that none of Atlantic American or its affiliates holds more than
a 5% equity interest in such transferee; and/or
(ii) In the event of a Change of Control. For purposes herein, a Change of
Control shall mean (i) the consummation of a stock purchase transaction involving
Atlantic Americans outstanding capital stock, a merger or consolidation of Atlantic
American with or into another entity, or any other corporate reorganization involving
Atlantic American, if, in any such case, persons who were not stockholders of Atlantic
American immediately prior to such transaction, merger, consolidation or other
reorganization own immediately after such transaction, merger, consolidation or other
reorganization more than 50% of the voting power of the outstanding securities of each of
(A) the continuing or surviving entity and (B) any direct or indirect parent corporation of
such continuing or surviving entity or (ii) the sale, transfer or other disposition of all
or substantially all of Atlantic Americans consolidated assets.
2. The undersigned acknowledges and agrees that Columbia could not be made whole by monetary
damages in the event of any default by the undersigned of the terms and conditions set forth in
this Agreement. It is accordingly agreed and understood that Columbia, in addition to any other
remedy which it may have at law or in equity, shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and specifically to enforce the terms and provisions hereof in
any action instituted in any state or federal court having appropriate jurisdiction located in
Georgia or Texas.
3. Any term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms and provisions of
this Agreement or affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is enforceable.
4. This Agreement may be executed in one or more identical counterparts, each of which shall
be deemed to be an original, but all of which together shall constitute one and the same
instrument. Telecopy transmissions of signatures shall be deemed to constitute originals.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the undersigned as
of the day and year first above written.
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ATLANTIC AMERICAN CORPORATION |
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COLUMBIA MUTUAL INSURANCE COMPANY |
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/s/ John G. Sample, Jr.
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/s/ Gary W. Thompson |
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Name:
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John G. Sample, Jr.
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Name:
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Gary W. Thompson |
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Title:
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Senior Vice President & CFO
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Title:
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Executive Vice President |
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(Please print or type)
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(Please print or type) |
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(Signature page to Non Competition Agreement)
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EXHIBIT 31.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Hilton H. Howell, Jr., certify that:
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I have reviewed this report on Form 10-Q of Atlantic American Corporation; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
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4. |
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The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; |
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b) |
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designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
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c) |
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evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
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d) |
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disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting; and |
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The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors (or persons
performing the equivalent functions): |
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all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrants ability to record, process, summarize and
report financial information; and |
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b) |
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any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
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Date: May 15,
2008 |
/s/ Hilton H. Howell, Jr.
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Hilton H. Howell, Jr. |
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President and Chief Executive Officer |
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EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EXHIBIT 31.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John G. Sample, Jr., certify that:
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I have reviewed this report on Form 10-Q of Atlantic American Corporation; |
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Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
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4. |
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The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
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designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; |
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b) |
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designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
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c) |
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evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
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d) |
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disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting; and |
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The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors (or persons
performing the equivalent functions): |
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all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrants ability to record, process, summarize and
report financial information; and |
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b) |
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any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
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Date: May 15,
2008 |
/s/ John G. Sample, Jr.
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John G. Sample, Jr. |
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Senior Vice President and Chief Financial Officer |
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EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO
EXHIBIT 32.1
Certifications Pursuant to §906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, in
connection with the filing of the Quarterly Report on Form 10-Q of Atlantic American Corporation
(the Company) for the quarterly period ended March 31, 2008, as filed with the Securities and
Exchange Commission on the date hereof (the Report), each of the undersigned officers of the
Company certifies, that, to such officers knowledge:
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The Report fully complies with the requirements of Section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company as of the
dates and for the periods expressed in the Report. |
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Date: May 15,
2008 |
/s/ Hilton H. Howell, Jr.
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Hilton H. Howell, Jr. |
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President and Chief Executive Officer |
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Date:
May 15, 2008 |
/s/ John G. Sample, Jr.
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John G. Sample, Jr. |
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Senior Vice President and
Chief Financial Officer |
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A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906, has been provided
to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.