e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-3722
ATLANTIC AMERICAN
CORPORATION
(Exact name of registrant as
specified in its charter)
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Georgia
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58-1027114
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification no.)
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4370 Peachtree Road, N.E.,
Atlanta, Georgia
(Address of principal
executive offices)
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30319
(Zip code)
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(Registrants
telephone number, including area code)
(404) 266-5500
Securities
registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common
Stock, $1.00 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 has submitted
electronically and posted on its corporate website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
10-K or any
amendment to this
Form 10-K.
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
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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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 aggregate market value of voting and nonvoting common stock
held by non-affiliates of the registrant as of June 30,
2009, the last business day of the registrants most
recently completed second fiscal quarter, was $3,968,636. For
purposes hereof, beneficial ownership is determined under rules
adopted pursuant to Section 13 of the Securities Exchange
Act of 1934, and the foregoing excludes value ascribed to common
stock that may be deemed beneficially owned by the directors and
executive officers of the registrant, some of whom may not be
deemed to be affiliates upon judicial determination. On
March 15, 2010 there were 22,288,710 shares of the
registrants common stock, par value $1.00 per share,
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
1. Portions of the registrants Proxy Statement for
the 2010 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days of the
registrants fiscal year end, have been incorporated by
reference in Items 10, 11, 12, 13 and 14 of Part III
of this
Form 10-K.
PART I
The
Company
Atlantic American Corporation, a Georgia corporation
incorporated in 1968 (the Parent or
Company), is a holding company that operates through
its subsidiaries in well-defined specialty markets within the
life and health and property and casualty insurance industries.
Atlantic Americans principal operating subsidiaries are
American Southern Insurance Company and American Safety
Insurance Company (together known as American
Southern) within the property and casualty insurance
industry and Bankers Fidelity Life Insurance Company
(Bankers Fidelity) within the life and health
industry. Each of American Southern and Bankers Fidelity is
managed separately based upon its geographic location or the
type of products it offers, and is evaluated on its individual
performance. The Companys strategy is to focus on
well-defined geographic, demographic
and/or
product niches within the insurance marketplace. Each of
American Southern and Bankers Fidelity operates with relative
autonomy, which structure is designed to allow for quick
reaction to market opportunities.
The Parent has no significant business operations of its own and
relies on fees, dividends and other distributions from its
operating subsidiaries as the principal source of cash flow to
meet its obligations. Additional information regarding the cash
flow and liquidity needs of the Parent can be found in the
Liquidity and Capital Resources section of Managements
Discussion and Analysis of Financial Condition and Results of
Operations below.
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). This transaction was completed on
March 31, 2008. Accordingly, the assets, liabilities and
results of operations of these regional property and casualty
operations have been reflected by the Company as discontinued
operations.
Property
and Casualty Operations
American Southern comprises the Companys property and
casualty operations and its primary product lines are as follows:
Business Automobile Insurance policies provide
bodily injury
and/or
property damage liability coverage, uninsured motorist coverage
and physical damage coverage for commercial accounts.
General Liability Insurance policies cover bodily
injury and property damage liability for both premises and
completed operations exposures for general classes of business.
Property Insurance policies provide for payment of
losses on personal property caused by fire or other multiple
perils.
Surety Bonds are contracts under which one party,
the insurance company issuing the surety bond, guarantees to a
third party that the primary party will fulfill an obligation in
accordance with a contractual agreement. This obligation may
involve meeting a contractual commitment, paying a debt or
performing certain duties.
American Southern provides tailored business automobile
insurance coverage, on a multi-year contract basis, to state
governments, local municipalities and other large motor pools
and fleets (block accounts) that can be specifically
rated and underwritten. The size of the block accounts insured
by American Southern are generally such that individual class
experience generally can be determined, which allows for
customized policy terms and rates. American Southern is licensed
to do business in 32 states and the District of Columbia.
While the majority of American Southerns premiums are
derived from its automobile lines of business, American Southern
also offers personal property, inland marine and general
liability coverages. Additionally,
2
American Southern directly provides surety bond coverage for
school bus transportation and subdivision construction, as well
as performance and payment bonds.
The following table summarizes, for the periods indicated, the
allocation of American Southerns net earned premiums from
each of its principal product lines:
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Year Ended December 31,
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2009
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2008
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2007
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(In thousands)
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Automobile liability
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$
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12,299
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$
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10,904
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$
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10,936
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Automobile physical damage
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6,679
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6,628
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8,105
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General liability
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6,008
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7,996
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10,349
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Property
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2,442
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2,374
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3,005
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Surety
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6,872
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8,356
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9,180
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Total
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$
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34,300
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$
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36,258
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$
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41,575
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Life
and Health Operations
Bankers Fidelity comprises the life and health operations of the
Company and offers a variety of life and supplemental health
products with a focus on the senior markets. Products offered by
Bankers Fidelity include ordinary and term life insurance,
Medicare supplement and other accident and health insurance
products. Health business, primarily Medicare supplement
insurance, accounted for 81.4% of Bankers Fidelitys net
earned premiums in 2009 while life insurance, including both
whole and term life insurance policies, accounted for the
balance. In terms of the number of policies written in 2009,
73.3% were health insurance policies and 26.7% were life
insurance policies.
The following table summarizes, for the periods indicated, the
allocation of Bankers Fidelitys net earned premiums from
each of its principal product lines followed by a brief
description of the principal products:
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Year Ended December 31,
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2009
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2008
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2007
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(In thousands)
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Life insurance
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$
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10,616
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$
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10,357
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$
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10,615
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Medicare supplement
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42,679
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41,402
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41,786
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Other accident and health
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3,867
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3,364
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3,848
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Total health insurance
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46,546
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44,766
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45,634
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Total
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$
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57,162
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$
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55,123
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$
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56,249
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Life Insurance products include non-participating
individual term and whole life insurance policies with a variety
of riders and options. Policy premiums are dependent upon a
number of factors, including issue age, level of coverage and
selected riders or options.
Medicare Supplement Insurance includes 8 of the 12
standardized Medicare supplement policies created under the
Omnibus Budget Reconciliation Act of 1990 (OBRA
1990), which are designed to provide insurance coverage
for certain expenses not covered by the Medicare program,
including copayments and deductibles.
Other Accident and Health Insurance coverages
include several policies providing for the payment of benefits
in connection with the treatment of diagnosed cancer, as well as
a number of other policies providing nursing facility care,
accident expense, hospital/surgical and disability coverages.
3
Marketing
Property
and Casualty Operations
A portion of American Southerns business is marketed
through a small number of specialized, experienced independent
agents. American Southerns agent selection process is
actively managed by internal marketing personnel with active
oversight from management. Senior management carefully reviews
all new programs prior to implementation. Most of American
Southerns agents are paid an up-front commission with the
potential for additional commissions by participating in a
profit sharing arrangement that is directly linked to the
profitability of the underlying business. American Southern also
solicits business from governmental entities. As an experienced
writer of insurance policies for certain governmental programs,
the company actively pursues this market on a direct basis. Much
of this business is priced by means of competitive bid
situations and there can be no assurance that the company can
obtain or retain such business at the time of a specific
contract renewal.
Life
and Health Operations
Bankers Fidelity markets its policies through three distribution
channels all of which utilize commissioned, independent agents.
The three channels utilized include the traditional independent
agent, broker-agents typically interested in a specific product
of Bankers Fidelity and the special market agents which promote
workplace, association
and/or
branded products.
In the traditional independent agent arrangement, Bankers
Fidelity enters into contractual arrangements with various
regional sales directors and general agents responsible for
marketing and other sales activities, who also, in turn,
recommend appointment of other independent agents. The standard
agreements set forth the commission arrangements and are
terminable by either party upon notice. Regional sales directors
and general agents receive an override commission on sales made
by agents sponsored by them. Management believes utilizing
experienced agents, as well as independent general agents who
recruit and train their own agents, is cost effective. All
independent agents are compensated primarily on a commission
basis. Using independent agents also enables Bankers Fidelity to
effectively expand or contract its sales force without incurring
significant expense.
With the traditional independent agents, the company utilizes a
lead generation plan that rewards qualified agents with leads in
accordance with certain production criteria. In addition, a
protected territory is established for qualified agents, which
entitles them to all leads produced within that territory. The
territories are zip code or county based and encompass
sufficient geographic territory designed to produce an
economically serviceable senior population. The Company believes
that offering a lead generation system solves an agents
most important dilemma prospecting and
allows Bankers Fidelity to build long-term relationships with
agents who can view Bankers Fidelity as their primary company.
In addition, management believes that Bankers Fidelitys
product line is less sensitive to competitor pricing and
commissions because of the perceived value of the protected
territory and the lead generation plan. In protected
geographical areas, production per agent compares favorably to
unprotected areas served by the general brokerage division.
Products of Bankers Fidelity compete directly with products
offered by other insurance companies, and agents may represent
multiple insurance companies. Broker-agents generally are not
interested in developing relationships with any one particular
insurance company but are more interested in matching a specific
product with the specific needs of their clients. These agents,
while a source of business, do not participate in the lead
generation plan; but can qualify for other incentives that
Bankers Fidelity offers to its traditional independent agents.
Bankers Fidelity also has a number of agents, some of which
belong to marketing organizations, which solicit business from
various groups including employers, trade associations
and/or other
organizations. Depending on the groups needs, these agents
may target one specific product or a group of Bankers
Fidelitys products to market to the members of the group.
These agents also do not participate in the lead generation
plan; but can also qualify for other incentives that Bankers
Fidelity offers to its traditional independent agents.
Bankers Fidelity, in an effort to motivate all of its registered
agents to market its products, offers the following: competitive
products and commission structures, efficient claims service,
prompt payment of
4
commissions that immediately vest, simplified policy issue
procedures, periodic sales incentive programs and, as described
above, for the traditional independent agents, protected sales
territories determined based on specific counties
and/or zip
codes.
Bankers Fidelity has implemented an agent qualification process
and had 1,943 licensed agents as of December 31, 2009. The
agents concentrate their sales activities in both the accident
and health or life insurance product lines. During 2009,
approximately 606 agents wrote policies on behalf of Bankers
Fidelity.
Underwriting
Property
and Casualty Operations
American Southern specializes in underwriting various risks that
are sufficiently large enough to establish separate class
experience, relying upon the underwriting expertise of its
agents.
During the course of the policy life, extensive use is made of
risk management representatives to assist commercial
underwriters in identifying and correcting potential loss
exposures and to pre-inspect new underwritten accounts. The
results of each insured are reviewed on a stand-alone basis
periodically. When results are below expectations, management
takes appropriate corrective action which may include adjusting
rates, reviewing underwriting standards, adjusting commissions
paid to agents,
and/or
altering or declining to renew accounts at expiration.
Life
and Health Operations
Bankers Fidelity issues a variety of products for both life and
health insurance markets, with a focus on senior life products
typically with small face amounts of between $3,000 and $30,000,
and Medicare supplement insurance. The majority of its products
utilize Yes or No applications that are
underwritten on a non-medical basis. Bankers Fidelity offers
products to all age groups; however, its primary marketing focus
is the senior market which is generally defined as individuals
65 years of age or older. For life products offered to
other than the senior market, Bankers Fidelity may require
medical information such as medical examinations subject to age
and face amount based on published guidelines. Approximately 95%
of the net premiums earned for both life and health insurance
sold during 2009 were derived from insurance written below
Bankers Fidelitys medical limits. For the senior market,
Bankers Fidelity issues life products primarily on an
accept-or-reject
basis with face amounts up to $30,000 for preferred rates, up to
$25,000 for standard rates and up to $20,000 for modified graded
rates. Bankers Fidelity retains a maximum amount of $50,000 with
respect to any individual life policy (see
Reinsurance).
Applications for insurance are reviewed to determine the face
amount, age, and medical history. Depending upon information
obtained directly from the insured, the Medical Information
Bureau (M.I.B.) report, paramedical testing,
and/or
medical records, additional testing may be ordered. If deemed
necessary, Bankers Fidelity may use investigative services to
supplement and substantiate information. For certain limited
coverages, Bankers Fidelity has adopted simplified policy issue
procedures by which an application containing a variety of
Yes/No health related questions is submitted. For these plans, a
M.I.B. report is ordered, however, paramedical testing and
medical records are not ordered in most cases. All applications
by individuals age 60 and older are also verified by
telephone interview.
Policyholder
and Claims Services
The Company believes that prompt, efficient policyholder and
claims services are essential to its continued success in
marketing its insurance products (see Competition).
Additionally, the Company believes that its insureds are
particularly sensitive to claims processing time and to the
accessibility of qualified staff to answer inquiries.
Accordingly, the Companys policyholder and claims services
seek to offer expeditious disposition of service requests by
providing toll-free access for all customers,
24-hour
claim reporting services, and direct computer links with some of
its largest accounts. The Company also utilizes a
state-of-the-art
automatic call distribution system to ensure that inbound calls
to customer service support groups are processed efficiently.
Operational data generated from this system allows management to
further refine ongoing client service programs and service
representative training modules.
5
The Company supports a Customer Awareness Program as the basis
for its customer service philosophy. All personnel are required
to attend customer service classes. Customer service hours of
operation have been expanded in all service areas to serve
customers and agents in all domestic time zones.
Property
and Casualty Operations
American Southern controls its claims costs by utilizing an
in-house staff of claims supervisors to investigate, verify,
negotiate and settle claims. Upon notification of an occurrence
purportedly giving rise to a claim, a claim file is established.
The claims department then conducts a preliminary investigation,
determines whether an insurable event has occurred and, if so,
updates the file for the findings and any required reserve
adjustments. Frequently, independent adjusters and appraisers
are utilized to service claims which require
on-site
inspections.
Life
and Health Operations
Insureds may obtain claim forms by calling the claims department
customer service group or through Bankers Fidelitys
website. To shorten claim processing time, a letter detailing
all supporting documents that are required to complete a claim
for a particular policy is sent to the customer along with the
correct claim form. With respect to life policies, the claim is
entered into Bankers Fidelitys claims system when the
proper documentation is received. Properly documented claims are
generally paid within three to nine business days of receipt.
With regard to Medicare supplement policies, the claim is either
directly billed to Bankers Fidelity by the provider or sent
electronically through a Medicare clearing house.
Reserves
The following table sets forth information concerning the
Companys reserves for losses and claims and reserves for
loss adjustment expenses (LAE) for the periods
indicated:
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2009
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2008
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(In thousands)
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Balance at January 1
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$
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52,499
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$
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51,704
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Less: Reinsurance recoverables
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(14,870
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(13,004
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Net balance at January 1
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37,629
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38,700
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Incurred related to:
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Current year
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65,093
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62,569
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Prior years(1)
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(7,620
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(8,723
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Total incurred
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57,473
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53,846
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Paid related to:
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Current year
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42,335
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40,249
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Prior years
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14,144
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14,668
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Total paid
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56,479
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54,917
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Net balance at December 31
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38,623
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37,629
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Plus: Reinsurance recoverables
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11,489
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14,870
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Balance at December 31
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$
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50,112
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$
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52,499
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(1) |
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Favorable loss development from property and casualty operations
for the years ended December 31, 2009 and 2008 was
$6.7 million and $8.0 million, respectively. See
Note 3 of Notes to Consolidated Financial Statements. |
Reserves are set by line of business within each of the
subsidiaries. At December 31, 2009, approximately 84% of
the reserves related to property and casualty losses and
approximately 16% related to life and health losses. The
Companys property and casualty operations incur losses
which may take extended periods of time
6
to evaluate and settle. Issues with respect to legal liability,
actual loss quantification, legal discovery and ultimate
subrogation, among other factors, may influence the initial and
subsequent estimates of loss. In the property and casualty
operations, the Companys general practice is to reserve at
the upper end of the determined reasonable range of loss if no
other value within the range is determined to be more probable.
The Companys life and health subsidiary generally incurs
losses which are more readily quantified. Medical claims
received are recorded in case reserves based on contractual
terms using the submitted billings as a basis for determination.
Life claims are recorded based on contract value at the time of
notification to the Company; although policy reserves related to
such contracts have been previously established. Individual case
reserves are established by a claims processor on each
individual claim and are periodically reviewed and adjusted as
new information becomes known during the course of handling a
claim. Regular internal periodic reviews are also performed by
management to ensure that loss reserves are established and
revised timely relative to the receipt of new or additional
information. Lines of business for which loss data (e.g. paid
losses and case reserves) emerge over a long period of time are
referred to as long-tail lines of business. Lines of business
for which loss data emerge more quickly are referred to as
short-tail lines of business. The Companys long-tail line
of business generally includes general liability while the
short-tail lines of business generally include property and
automobile coverages.
The Companys actuaries regularly review reserves for both
current and prior accident years using the most current claims
data. These regular reviews incorporate a variety of actuarial
methods (discussed below in Critical Accounting Policies) and
judgments and involve a disciplined analysis. For most lines of
business, certain actuarial methods and specific assumptions are
deemed more appropriate based on the current circumstances
affecting that line of business. These selections incorporate
input from claims personnel and operating management on reported
loss cost trends and other factors that could affect the reserve
estimates.
For long-tail lines of business, the emergence of paid losses
and case reserves is less credible in the early periods, and
accordingly may not be indicative of ultimate losses. For these
lines, methods which incorporate a development pattern
assumption are given less weight in calculating incurred but not
reported (IBNR) reserves for the early periods of
loss emergence because such a low percentage of ultimate losses
are reported in that time frame. Accordingly, for any given
accident year, the rate at which losses on long-tail lines of
business emerge in the early periods is generally not as
reliable an indication of the ultimate losses as it would be for
shorter-tail lines of business. The estimation of reserves for
these lines of business in the early periods of loss emergence
is therefore largely influenced by statistical analyses and
application of prior accident years loss ratios, after
considering changes to earned pricing, loss costs, mix of
business, ceded reinsurance and other factors that are expected
to affect the estimated ultimate losses. For later periods of
loss emergence, methods which incorporate a development pattern
assumption are given more weight in estimating ultimate losses.
For short-tail lines of business, the emergence of paid loss and
case reserves is more credible in the early periods and is more
likely to be indicative of ultimate losses. The method used to
set reserves for these lines of business is based upon
utilization of a historical development pattern for reported
losses. IBNR reserves for the current year are set as the
difference between the estimated fully developed ultimate losses
for each year, less the established, related case reserves and
cumulative related payments. IBNR reserves for prior accident
years are similarly determined, again relying on an indicated,
historical development pattern for reported losses.
Based on the results of regular reserve estimate reviews, the
Company determines the appropriate reserve adjustment, if any,
to record. If necessary, recorded reserve estimates are changed
after consideration of numerous factors, including, but not
limited to, the magnitude of the difference between the
actuarial indication and the recorded reserves, improvement or
deterioration of actuarial indication in the period, the
maturity of the accident year, trends observed over the recent
past and the level of volatility within a particular line of
business. In general, changes are made more quickly to recognize
changes in estimates to ultimate losses in mature accident years
and less volatile lines of business.
Estimating case reserves and ultimate losses involves various
considerations which differ according to the line of business.
In addition, changes in state legislative and regulatory
environments may impact loss
7
estimates. General liability claims may have a long pattern of
loss emergence. Given the broad nature of potential general
liability coverages, investigative time periods may be extended
and questions of coverage may exist. Such uncertainties create
greater imprecision in estimating required levels of loss
reserves. The property and automobile lines of business
generally have less variable reserve estimates than other lines.
This is largely due to the coverages having relatively shorter
periods of loss emergence. Estimates, however, can still vary
due to a number of factors, including interpretations of
frequency and severity trends. Severity trends can be impacted
by changes in internal claim handling and reserving practices in
addition to changes in the external environment. These changes
in claim practices increase the uncertainty in the
interpretation of case reserve data, which increases the
uncertainty in recorded reserve levels.
Components of the Companys reserves for losses and claims
by product line at December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Business automobile
|
|
$
|
9,375
|
|
|
$
|
9,118
|
|
|
$
|
18,493
|
|
Personal automobile/physical damage
|
|
|
1,034
|
|
|
|
340
|
|
|
|
1,374
|
|
General & other liability
|
|
|
4,784
|
|
|
|
9,596
|
|
|
|
14,380
|
|
Other lines (including life)
|
|
|
3,173
|
|
|
|
5,508
|
|
|
|
8,681
|
|
Medicare supplement
|
|
|
209
|
|
|
|
5,351
|
|
|
|
5,560
|
|
Unallocated loss adjustment reserves
|
|
|
|
|
|
|
1,624
|
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and claims
|
|
$
|
18,575
|
|
|
$
|
31,537
|
|
|
$
|
50,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to record reserves for losses and
claims in amounts which approximate actuarial best estimates of
ultimate values. Actuarial best estimates do not necessarily
represent the midpoint value determined using the various
actuarial methods; however, such estimates will fall between the
estimated low and high end reserve values. The range of
estimates developed in connection with the December 31,
2009 review indicated that reserves could be as much as 18.3%
lower or as much as 6.8% higher. In the opinion of management,
recorded reserves represent the best estimate of outstanding
losses, although significant judgments are made in the
derivation of reserve estimates and revisions to such estimates
will be made in future periods. Any such revisions could be
material, and may materially adversely affect the Companys
financial condition and results of operations in any future
period.
Property
and Casualty Operations
American Southern maintains loss reserves representing estimates
of amounts necessary for payment of losses and LAE, and are not
discounted. IBNR reserves are also maintained for future
development. These loss reserves are estimates, based on known
facts and circumstances at a given point in time, of amounts the
insurer expects to pay on incurred claims. All balances are
reviewed periodically by the Companys independent
consulting actuary. Reserves for LAE are intended to cover the
ultimate costs of settling claims, including investigation and
defense of lawsuits resulting from such claims. Loss reserves
for reported claims are based on a
case-by-case
evaluation of the type of claim involved, the circumstances
surrounding the claim, and the policy provisions relating to the
type of loss along with anticipated future development. The LAE
for claims reported and claims not reported is based on
historical statistical data and anticipated future development.
Inflation and other factors which may affect claim payments are
implicitly reflected in the reserving process through analysis
and consideration of cost trends and reviews of historical
reserve results.
American Southern establishes reserves for claims based upon:
(a) managements estimate of ultimate liability and
claims adjusters evaluations for unpaid claims reported
prior to the close of the accounting period, (b) estimates
of IBNR claims based on past experience, and (c) estimates
of LAE. If no value is determined to be more probable in
estimating a loss after considering all factors, the
Companys general practice is to reserve at the upper end
of the determined reasonable range of loss. The estimated
liability is periodically reviewed and updated, and changes to
the estimated liability are recorded in the statement of
operations in the year in which such changes become known.
8
The following table sets forth the development of reserves for
unpaid losses and claims determined using generally accepted
accounting principles of American Southerns insurance
lines from 1999 through 2009. Specifically excluded from the
table are the life and health divisions claims reserves,
which are included in the consolidated loss and claims reserves.
The top line of the table represents the estimated cumulative
amount of losses and LAE for claims arising in all prior years
that were unpaid at the balance sheet date for each of the
indicated periods, including an estimate of IBNR losses at the
applicable date. The amounts represent initial reserve estimates
at the respective balance sheet dates for the current and all
prior years. The next portion of the table shows the cumulative
amounts paid with respect to claims in each succeeding year. The
lower portion of the table shows the re-estimated amounts of
previously recorded reserves based on experience as of the end
of each succeeding year.
The reserve estimates are modified as more information becomes
known about the frequency and severity of claims for individual
years. The cumulative redundancy or deficiency for
each year represents the aggregate change in such years
estimates through the end of 2009. Futhermore, the amount of the
redundancy or deficiency for any year represents the cumulative
amount of the changes from initial reserve estimates for such
year. Operations for any year may be affected, favorably or
unfavorably, by the amount of the change in the estimate for
such years; however, because such analysis is based on the
reserves for unpaid losses and claims, before consideration of
reinsurance, the total indicated redundancies
and/or
deficiencies may not ultimately be reflected in the
Companys net income. Further, conditions and trends that
have affected development of the reserves in the past may not
necessarily occur in the future and there could be future events
or actions that would impact future development which have not
existed in the past. Accordingly, it is impossible to accurately
predict future redundancies or deficiencies based on the data in
the following table.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
|
(In thousands)
|
|
|
Reserve for Losses and LAE
|
|
$
|
42,248
|
|
|
$
|
44,928
|
|
|
$
|
43,994
|
|
|
$
|
45,655
|
|
|
$
|
43,593
|
|
|
$
|
42,310
|
|
|
$
|
39,042
|
|
|
$
|
44,428
|
|
|
$
|
46,242
|
|
|
$
|
48,350
|
|
|
$
|
48,764
|
|
Cumulative paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
|
|
|
|
13,627
|
|
|
|
11,630
|
|
|
|
18,010
|
|
|
|
14,254
|
|
|
|
16,521
|
|
|
|
13,772
|
|
|
|
15,825
|
|
|
|
18,093
|
|
|
|
20,682
|
|
|
|
18,267
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
21,187
|
|
|
|
24,793
|
|
|
|
23,967
|
|
|
|
24,217
|
|
|
|
22,202
|
|
|
|
23,933
|
|
|
|
26,194
|
|
|
|
31,687
|
|
|
|
30,143
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,338
|
|
|
|
27,235
|
|
|
|
28,775
|
|
|
|
26,673
|
|
|
|
28,487
|
|
|
|
31,257
|
|
|
|
35,865
|
|
|
|
37,938
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,179
|
|
|
|
31,019
|
|
|
|
28,645
|
|
|
|
31,398
|
|
|
|
33,683
|
|
|
|
37,223
|
|
|
|
39,972
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,594
|
|
|
|
30,257
|
|
|
|
32,820
|
|
|
|
35,134
|
|
|
|
38,616
|
|
|
|
40,816
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,447
|
|
|
|
34,238
|
|
|
|
35,610
|
|
|
|
39,166
|
|
|
|
42,006
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,288
|
|
|
|
36,814
|
|
|
|
39,538
|
|
|
|
42,079
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,854
|
|
|
|
39,603
|
|
|
|
42,352
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,627
|
|
|
|
42,375
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,390
|
|
Ultimate losses and LAE reestimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
42,248
|
|
|
|
44,928
|
|
|
|
43,994
|
|
|
|
45,655
|
|
|
|
43,593
|
|
|
|
42,310
|
|
|
|
39,042
|
|
|
|
44,428
|
|
|
|
46,242
|
|
|
|
48,350
|
|
|
|
48,764
|
|
One year later
|
|
|
|
|
|
|
31,649
|
|
|
|
33,663
|
|
|
|
35,590
|
|
|
|
34,897
|
|
|
|
37,280
|
|
|
|
35,706
|
|
|
|
42,235
|
|
|
|
39,628
|
|
|
|
46,778
|
|
|
|
45,866
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
29,903
|
|
|
|
34,163
|
|
|
|
32,929
|
|
|
|
34,108
|
|
|
|
34,779
|
|
|
|
40,099
|
|
|
|
40,249
|
|
|
|
43,104
|
|
|
|
46,065
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,499
|
|
|
|
31,560
|
|
|
|
33,338
|
|
|
|
31,710
|
|
|
|
39,260
|
|
|
|
38,877
|
|
|
|
42,208
|
|
|
|
44,800
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,043
|
|
|
|
33,370
|
|
|
|
31,224
|
|
|
|
37,163
|
|
|
|
39,339
|
|
|
|
41,503
|
|
|
|
43,792
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,090
|
|
|
|
31,049
|
|
|
|
37,133
|
|
|
|
39,067
|
|
|
|
41,490
|
|
|
|
43,775
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,203
|
|
|
|
36,914
|
|
|
|
39,484
|
|
|
|
41,600
|
|
|
|
43,674
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,008
|
|
|
|
39,331
|
|
|
|
41,822
|
|
|
|
43,738
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,405
|
|
|
|
41,652
|
|
|
|
43,884
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,735
|
|
|
|
43,762
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,799
|
|
Cumulative redundancy
|
|
|
|
|
|
$
|
13,279
|
|
|
$
|
14,091
|
|
|
$
|
12,156
|
|
|
$
|
11,550
|
|
|
$
|
9,220
|
|
|
$
|
7,839
|
|
|
$
|
7,420
|
|
|
$
|
6,837
|
|
|
$
|
6,615
|
|
|
$
|
4,965
|
|
|
|
|
|
|
|
|
29.6
|
%
|
|
|
32.0
|
%
|
|
|
26.6
|
%
|
|
|
26.5
|
%
|
|
|
21.8
|
%
|
|
|
20.1
|
%
|
|
|
16.7
|
%
|
|
|
14.8
|
%
|
|
|
13.7
|
%
|
|
|
10.2
|
%
|
Note: Because this analysis is based on reserves for unpaid
losses and claims, before consideration of reinsurance, the
total indicated redundancies
and/or
deficiencies may not ultimately be reflected in the
Companys net income.
10
Life
and Health Operations
Bankers Fidelity establishes liabilities for future policy
benefits to meet projected future obligations under outstanding
policies. These reserves are calculated to satisfy policy and
contract obligations as they mature. The amount of reserves for
insurance policies is calculated using assumptions for interest
rates, mortality and morbidity rates, expenses, and withdrawals.
Reserves are adjusted periodically based on published actuarial
tables with modification to reflect actual experience. See
Note 3 of Notes to Consolidated Financial Statements.
Reinsurance
The Companys insurance subsidiaries may purchase
reinsurance from unaffiliated insurers and reinsurers to reduce
their potential liability on individual risks and to protect
against catastrophic losses. In a reinsurance transaction, an
insurance company transfers, or cedes, a portion or
all of its exposure on insurance policies to a reinsurer. The
reinsurer assumes the exposure in return for a portion of the
premiums. The ceding of insurance does not legally discharge the
insurer from primary liability for the full amount of policies
written by it, and the ceding company will incur a loss if the
reinsurer fails to meet its obligations under the reinsurance
agreement.
Property
and Casualty Operations
American Southerns basic reinsurance treaties generally
cover all claims in excess of specified per occurrence
limitations. Limits per occurrence within the reinsurance
treaties are as follows: Fire, inland marine, commercial
automobile physical damage $125,000 excess of
$50,000 retention; and automobile liability and general
liability excess coverage of $2.0 million less
retentions that may vary from $100,000 to $150,000 depending on
the account. American Southern maintains a property catastrophe
treaty with a $5.7 million limit excess of $300,000
retention. American Southern also issues individual surety bonds
with face amounts generally up to $1.5 million, and limited
to $5.0 million per account, that are not reinsured.
Life
and Health Operations
Bankers Fidelity has entered into reinsurance contracts ceding
the excess of its retention to several primary reinsurers.
Maximum retention by Bankers Fidelity on any one individual in
the case of life insurance policies is $50,000. At
December 31, 2009, $30.9 million of the
$287.1 million of life insurance in force at Bankers
Fidelity was reinsured, generally under yearly renewable term
agreements. Certain prior year reinsurance agreements also
remain in force although they no longer provide reinsurance for
new business.
Competition
Competition for insurance products is based on many factors
including premiums charged, terms and conditions of coverage,
service provided, financial ratings assigned by independent
rating agencies, claims services, reputation, perceived
financial strength and the experience of the organization in the
line of business being written.
Property
and Casualty Operations
The businesses in which American Southern engages are highly
competitive. The principal areas of competition are pricing and
service. Many competing property and casualty companies, which
have been in business longer than American Southern, offer more
diversified lines of insurance and have substantially greater
financial resources. Management believes, however, that the
policies it sells are competitive with those providing similar
benefits offered by other insurers doing business in the states
in which American Southern operates. American Southern attempts
to develop strong relationships with its existing agents and,
consequently, is generally privy to new programs with existing
agents.
11
Life
and Health Operations
The life and health insurance business also remains highly
competitive and includes a large number of insurance companies,
many of which have substantially greater financial resources
than Bankers Fidelity or the Company. Bankers Fidelity focuses
on four core products: Medicare supplement, small face amount
life insurance, short-term nursing home coverage and hospital
indemnity. Bankers Fidelity believes that its primary
competitors in this market are Blue Cross / Blue
Shield, Globe Life and Accident Insurance Company, Lincoln
Heritage Life Insurance Company, Mutual of Omaha, Oxford Life
Insurance Company, United Commercial Travelers of America,
United World Life Insurance Company and Woodman of the World.
Bankers Fidelity competes with these as well as other insurers
on the basis of premium rates, policy benefits and service to
policyholders. Bankers Fidelity also competes with other
insurers to attract and retain the allegiance of its independent
agents through commission and sales incentive arrangements,
accessibility and marketing assistance, lead programs,
reputation, and market expertise. In order to better compete,
Bankers Fidelity offers a proprietary lead generation program to
attract and retain traditional independent agents. Bankers
Fidelity also actively seeks opportunities in niche markets,
developing long-term relationships with a select number of
independent marketing organizations promoting worksite marketing
and selective association endorsements. Bankers Fidelity has a
track record of successfully competing in its chosen markets by
establishing relationships with independent agents and providing
proprietary marketing initiatives as well as providing
outstanding service to policyholders. Bankers Fidelity believes
that it competes effectively on the bases of policy benefits,
services and market segmentation.
Ratings
Ratings of insurance companies are not designed for investors
and do not constitute recommendations to buy, sell, or hold any
security. Ratings are important measures within the insurance
industry, and improved ratings should have a favorable impact on
the ability of a company to compete in the marketplace.
Each year A.M. Best Company, Inc.
(A.M. Best) publishes Bests Insurance
Reports, which includes assessments and ratings of all insurance
companies. A.M. Bests ratings, which may be revised
quarterly, fall into fifteen categories ranging from A++
(Superior) to F (in liquidation). A.M. Bests ratings
are based on a detailed analysis of the statutory financial
condition and operations of an insurance company compared to the
industry in general.
American Southern. American Southern and its
wholly-owned subsidiary, American Safety Insurance Company, are
each, as of the date of this report, rated A
(Excellent) by A.M. Best.
Bankers Fidelity. Bankers Fidelity is, as of
the date of this report, rated B++ (Good) by
A.M. Best.
Regulation
In common with all domestic insurance companies, the
Companys insurance subsidiaries are subject to regulation
and supervision in the jurisdictions in which they do business.
Statutes typically delegate regulatory, supervisory, and
administrative powers to state insurance commissioners. The
method of such regulation varies, but regulation relates
generally to the licensing of insurers and their agents, the
nature of and limitations on investments, approval of policy
forms, reserve requirements, the standards of solvency to be met
and maintained, deposits of securities for the benefit of
policyholders, and periodic examinations of insurers and trade
practices, among other things. The Companys products
generally are subject to rate regulation by state insurance
commissions, which require that certain minimum loss ratios be
maintained. Certain states also have insurance holding company
laws which require registration and periodic reporting by
insurance companies controlled by other corporations licensed to
transact business within their respective jurisdictions. The
Companys insurance subsidiaries are subject to such
legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Such laws
vary from state to state, but typically require periodic
disclosure concerning the corporation which controls the
registered insurers and all subsidiaries of such corporations,
as well as prior notice to, or approval by, the state insurance
commissioners of intercorporate transfers of assets (including
payments of dividends by the insurance subsidiaries in excess of
specified amounts) within the holding company system.
12
Most states require that rate schedules and other information be
filed with the states insurance regulatory authority,
either directly or through a rating organization with which the
insurer is affiliated. The regulatory authority may disapprove a
rate filing if it determines that the rates are inadequate,
excessive, or discriminatory. The Company has historically
experienced no significant regulatory resistance to its
applications for rate adjustments; however, the Company cannot
provide any assurance that it will not receive any objections to
its applications in the future.
A state may require that acceptable securities be deposited for
the protection either of policyholders located in those states
or of all policyholders. As of December 31, 2009,
securities with an amortized cost of $9.5 million were on
deposit either directly with various state authorities or with
third parties pursuant to various custodial agreements on behalf
of the Companys insurance subsidiaries.
Virtually all of the states in which the Companys
insurance subsidiaries are licensed to transact business require
participation in their respective guaranty funds designed to
cover claims against insolvent insurers. Insurers authorized to
transact business in these jurisdictions are generally subject
to assessments of up to 4% of annual direct premiums written in
that jurisdiction to pay such claims, if any. The likelihood and
amount of any future assessments cannot be estimated until an
insolvency has occurred.
NAIC
Ratios
The National Association of Insurance Commissioners (the
NAIC) was established to, among other things,
provide guidelines to assess the financial strength of insurance
companies for state regulatory purposes. The NAIC conducts
annual reviews of the financial data of insurance companies
primarily through the application of 13 financial ratios
prepared on a statutory basis. The annual statements are
submitted to state insurance departments to assist them in
monitoring insurance companies in their state and to set forth a
desirable range in which companies should fall in each such
ratio.
The NAIC suggests that insurance companies which fall outside of
the usual range in four or more financial ratios are
those most likely to require analysis by state regulators.
However, according to the NAIC, it may not be unusual for a
financially sound company to have several ratios outside the
usual range, and in normal years the NAIC expects
15% of the companies it tests to be outside the
usual range in four or more categories.
For the year ended December 31, 2009, American Southern and
Bankers Fidelity were within the NAIC usual range
for all 13 financial ratios.
Risk-Based
Capital
Risk-based capital (RBC) is used by rating agencies
and regulators as an early warning tool to identify weakly
capitalized companies for the purpose of initiating further
regulatory action. The RBC calculation determines the amount of
adjusted capital needed by a company to avoid regulatory action.
Authorized Control
Level Risk-Based
Capital (ACL) is calculated, and if a
companys adjusted capital is 200% or lower than ACL, it is
subject to regulatory action. At December 31, 2009, the
Companys insurance subsidiaries exceeded the RBC
regulatory levels.
13
Investments
Investment income represents a significant portion of the
Companys total income. Insurance company investments are
subject to state insurance laws and regulations which limit the
concentration and types of investments. The following table
provides information on the Companys investments as of the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and authorities
|
|
$
|
124,392
|
|
|
|
59.2
|
%
|
|
$
|
120,572
|
|
|
|
62.0
|
%
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
409
|
|
|
|
0.2
|
|
Public utilities
|
|
|
9,910
|
|
|
|
4.7
|
|
|
|
9,050
|
|
|
|
4.7
|
|
All other corporate bonds
|
|
|
41,776
|
|
|
|
19.9
|
|
|
|
25,605
|
|
|
|
13.2
|
|
Redeemable preferred stock
|
|
|
7,882
|
|
|
|
3.8
|
|
|
|
7,361
|
|
|
|
3.8
|
|
Certificates of deposit
|
|
|
100
|
|
|
|
0.0
|
|
|
|
100
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities(1)
|
|
|
184,060
|
|
|
|
87.6
|
|
|
|
163,097
|
|
|
|
83.9
|
|
Common and non-redeemable preferred stocks(2)
|
|
|
6,914
|
|
|
|
3.3
|
|
|
|
5,291
|
|
|
|
2.7
|
|
Mortgage, policy and student loans(3)
|
|
|
2,139
|
|
|
|
1.0
|
|
|
|
2,019
|
|
|
|
1.0
|
|
Other invested assets(4)
|
|
|
1,021
|
|
|
|
0.5
|
|
|
|
1,433
|
|
|
|
0.7
|
|
Real estate
|
|
|
38
|
|
|
|
0.0
|
|
|
|
38
|
|
|
|
0.0
|
|
Investments in unconsolidated trusts
|
|
|
1,238
|
|
|
|
0.6
|
|
|
|
1,238
|
|
|
|
0.7
|
|
Short-term investments(5)
|
|
|
14,697
|
|
|
|
7.0
|
|
|
|
21,339
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
210,107
|
|
|
|
100.0
|
%
|
|
$
|
194,455
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturity securities are carried on the balance sheet at
estimated fair value. Certain fixed maturity securities do not
have publicly quoted prices, and are carried at estimated fair
value as determined by management. Total cost of fixed maturity
securities was $189.1 million as of December 31, 2009
and $171.3 million as of December 31, 2008. |
|
(2) |
|
Equity securities are carried on the balance sheet at estimated
fair value. Total cost of equity securities was
$8.6 million as of December 31, 2009 and
$8.8 million as of December 31, 2008. |
|
(3) |
|
Mortgage, policy and student loans are valued at historical cost. |
|
(4) |
|
Investments in other invested assets are accounted for using the
equity method. Total cost of other invested assets was
$1.0 million as of December 31, 2009 and
$1.4 million as of December 31, 2008. |
|
(5) |
|
Short-term investments are valued at cost, which approximates
market value at the measurement date. |
Estimated fair values are determined as discussed in Note 1
of Notes to Consolidated Financial Statements.
Results of the Companys investment portfolio for periods
shown were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Average investments(1)
|
|
$
|
201,003
|
|
|
$
|
201,372
|
|
Net investment income
|
|
|
10,554
|
|
|
|
11,688
|
|
Average yield on investments
|
|
|
5.25
|
%
|
|
|
5.80
|
%
|
Realized investment gains (losses), net(2)
|
|
|
273
|
|
|
|
(3,995
|
)
|
|
|
|
(1) |
|
Calculated as the average of the balances at the beginning of
the year and at the end of each of the succeeding four quarters. |
14
|
|
|
(2) |
|
Includes impairment charges of $0.1 million and
$4.0 million in 2009 and 2008, respectively, primarily
related to the write-down in the value of certain bonds,
preferred and common stocks. See Note 2 of Notes to
Consolidated Financial Statements. |
Managements investment strategy is an increased investment
in short and medium maturity bonds and to a lesser extent in
common and preferred stocks.
Employees
The Company and its subsidiaries employed 125 people at
December 31, 2009. Of the 125 people employed at
December 31, 2009, 117 were full-time.
Financial
Information by Industry Segment
Each of American Southern and Bankers Fidelity operate with
relative autonomy and each company is evaluated on its
individual performance. American Southern operates in the
Property and Casualty insurance market, while Bankers Fidelity
operates in the Life and Health insurance market. Each segment
derives revenue from the collection of premiums, as well as from
investment income. Substantially all revenue other than that in
the corporate and other segment is from external sources. See
Note 14 of Notes to Consolidated Financial Statements.
Available
Information
The Company files annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
amendments to those reports and other information with the
Securities and Exchange Commission (the SEC). The
public can read and obtain copies of those materials by visiting
the SECs Public Reference Room at 100 F Street,
NE, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website that contains reports, proxy and
information statements and other information regarding issuers
like Atlantic American that file electronically with the SEC.
The address of the SECs web site is
http://www.sec.gov.
In addition, as soon as reasonably practicable after such
materials are filed with or furnished to the SEC by the Company,
the Company makes copies available to the public, free of
charge, on or through its web site at
http://www.atlam.com.
Neither the Companys website, nor the information
appearing on the website, is included, incorporated into, or a
part of, this report.
Executive
Officers of the Registrant
The table below and the information following the table set
forth, for each executive officer of the Company as of
December 31, 2009, his name, age, positions with the
Company and business experience for the past five years, as well
as any prior service with the Company (based upon information
supplied by each of them).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director or
|
Name
|
|
Age
|
|
Positions with the Company
|
|
Officer Since
|
|
J. Mack Robinson
|
|
|
86
|
|
|
Chairman Emeritus
|
|
|
1974
|
|
Hilton H. Howell, Jr.
|
|
|
47
|
|
|
Chairman of the Board, President & CEO
|
|
|
1992
|
|
John G. Sample, Jr.
|
|
|
53
|
|
|
Senior Vice President & CFO
|
|
|
2002
|
|
Officers are elected annually and serve at the discretion of the
Board of Directors.
Mr. Robinson has served as a Director since 1974,
served as Chairman of the Board from 1974 until
February 24, 2009 and served as President and Chief
Executive Officer of the Company from September 1988 to May
1995. Effective February 24, 2009, Mr. Robinson
resigned his position as Chairman of the Board and assumed the
role of Chairman Emeritus. Mr. Robinson is also a director
of Gray Television, Inc.
Mr. Howell has been President and Chief Executive
Officer of the Company since May 1995, and prior thereto served
as Executive Vice President of the Company from October 1992 to
May 1995. He has been a
15
Director of the Company since October 1992 and effective
February 24, 2009, assumed the title of Chairman of the
Board of Directors. Mr. Howell is the
son-in-law
of Mr. Robinson. He is also a director of Gray Television,
Inc. and was a director of Triple Crown Media, Inc. until
December 2009.
Mr. Sample has served as Senior Vice President and
Chief Financial Officer of the Company since July 2002. Prior to
joining the Company in July 2002, he had been a partner of
Arthur Andersen LLP since 1990. Mr. Sample is also a
director of 1st Franklin Financial Corporation.
Forward-Looking
Statements
Certain of the statements contained herein are forward-looking
statements within the meaning of the federal securities laws.
These forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform
Act of 1995, Section 27A of the Securities Exchange Act of
1933, and Section 21E of the Securities Exchange Act of
1934 and include estimates and assumptions related to, among
other things, economic, competitive and legislative
developments. The forward-looking statements are subject to
changes and uncertainties which are, in many instances, beyond
the Companys control and have been made based upon
managements current expectations and beliefs concerning
future developments and their potential effect upon the Company.
There can be no assurance that future developments will be in
accordance with managements expectations or that the
effect of future developments on the Company will be those
anticipated by management. Actual results could differ
materially from those expected by the Company, depending on the
outcome of various factors. These factors include, among others:
further deterioration in general economic conditions; continued
disruption to the financial markets; unanticipated increases in
the rate, number and amounts of claims outstanding; the possible
occurrence of terrorist attacks; the level of performance of
reinsurance companies under reinsurance contracts and the
availability, pricing and adequacy of reinsurance to protect the
Company against losses; changes in the stock markets, interest
rates or other financial markets, including the potential effect
on the Companys statutory capital levels; the uncertain
effect on the Company of regulatory and market-driven changes in
practices relating to the payment of incentive compensation to
brokers, agents and other producers; the incidence and severity
of catastrophes, both natural and man-made; stronger than
anticipated competitive activity; unfavorable judicial or
legislative developments; the potential effect of regulatory
developments, including those which could increase the
Companys business costs and required capital levels; the
Companys ability to distribute its products through
distribution channels, both current and future; the uncertain
effect of emerging claim and coverage issues; and the effect of
assessments and other surcharges for guaranty funds and other
mandatory pooling arrangements. Many of such factors are beyond
the Companys ability to control or predict. As a result,
the Companys actual financial condition, results of
operations and stock price could differ materially from those
expressed in any forward-looking statements made by the Company.
Undue reliance should not be placed upon forward-looking
statements contained herein. The Company does not intend to
publicly update any forward-looking statements that may be made
from time to time by, or on behalf of, the Company.
As a Smaller Reporting Company as defined by
Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of
Regulation S-K,
we have elected to comply with certain scaled disclosure
reporting obligations, and therefore are not required to provide
the information requested by this Item.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Leased Properties. The Company leases space
for its principal offices and for some of its insurance
operations in an office building located in Atlanta, Georgia,
from Delta Life Insurance Company under a lease which continues
until either party provides written notice of cancellation at
least twelve months in advance of the actual termination date.
The lease, which commenced on November 1, 2007, provides
for rent adjustments
16
on every fifth anniversary of the commencement date. Under the
current terms of the lease, the Company occupies approximately
49,586 square feet of office space. Delta Life Insurance
Company, the owner of the building, is controlled by J. Mack
Robinson, Chairman Emeritus and the majority shareholder of the
Company. The terms of the lease are believed by Company
management to be comparable to terms which could be obtained by
the Company from unrelated parties for comparable rental
property.
American Southern leases space for its office in a building
located in Atlanta, Georgia. American Southern entered into a
new lease with a commencement date of June 1, 2009. The
lease term expires May 31, 2019. Under the terms of the
lease, American Southern occupies approximately
17,014 square feet.
The Company believes that its current properties are in good
condition, and are sufficient for the operations of its business.
|
|
Item 3.
|
Legal
Proceedings
|
From time to time, the Company and its subsidiaries are involved
in various claims and lawsuits arising in the ordinary course of
business, both as a liability insurer defending third-party
claims brought against insureds and as an insurer defending
coverage claims brought against it. The Company accounts for
such exposures through the establishment of loss and loss
adjustment expense reserves. We do not expect that the ultimate
liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for probable
losses and costs of defense, will be material to the
Companys consolidated financial condition, although the
results of such litigation could be material to the consolidated
results of operations for any given period.
17
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
|
The Companys common stock is quoted on the Nasdaq Global
Market (Symbol: AAME). As of March 15, 2010, there were
3,999 shareholders of record. The following table sets
forth, for the periods indicated, the high and low sales prices
of the Companys common stock as reported on the Nasdaq
Global Market.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
High
|
|
|
Low
|
|
|
2009
|
|
|
|
|
|
|
|
|
1st quarter
|
|
$
|
0.97
|
|
|
$
|
0.46
|
|
2nd quarter
|
|
|
0.99
|
|
|
|
0.45
|
|
3rd quarter
|
|
|
1.20
|
|
|
|
0.64
|
|
4th quarter
|
|
|
1.72
|
|
|
|
1.00
|
|
2008
|
|
|
|
|
|
|
|
|
1st quarter
|
|
$
|
1.75
|
|
|
$
|
1.23
|
|
2nd quarter
|
|
|
3.00
|
|
|
|
1.31
|
|
3rd quarter
|
|
|
1.73
|
|
|
|
1.04
|
|
4th quarter
|
|
|
1.35
|
|
|
|
0.52
|
|
The Company has not paid dividends to its common shareholders
since the fourth quarter of 1988. The Company has elected to
retain its earnings to grow its business and does not anticipate
paying cash dividends on its common stock in the foreseeable
future. Payment of dividends in the future will be at the
discretion of the Companys Board of Directors and will
depend upon the financial condition, capital requirements,
earnings of the Company, any restrictions contained in any
agreements by which the Company is bound, as well as other
factors as the Board of Directors may deem relevant. The
Companys primary sources of cash for the payment of
dividends are dividends from its subsidiaries. Under the
insurance code of the state of jurisdiction in which each
insurance subsidiary is domiciled, dividend payments to the
Company by its insurance subsidiaries, without the prior
approval of the Insurance Commissioner of the applicable state,
are limited to the greater of 10% of statutory surplus or
statutory net income of such subsidiary before recognizing
realized investment gains. At December 31, 2009, American
Southern had $38.9 million of statutory surplus and Bankers
Fidelity had $31.4 million of statutory surplus.
Equity
Compensation Plan Information
The following table sets forth, as of December 31, 2009,
the number of securities to be issued upon exercise of
outstanding options, warrants and rights, the weighted average
exercise price of such securities and the number of securities
remaining available for future issuance under the Companys
equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
Number of
|
|
|
|
|
|
for future issuance
|
|
|
|
securities to be
|
|
|
|
|
|
under equity
|
|
|
|
issued upon
|
|
|
Weighted-Average
|
|
|
compensation plans
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
(excluding
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
securities
|
|
|
|
options, warrants
|
|
|
options, warrants
|
|
|
reflected in the
|
|
Plan Category
|
|
and rights
|
|
|
and rights
|
|
|
first column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
543,500
|
|
|
$
|
1.44
|
|
|
|
2,531,406
|
|
Equity compensation plans not approved by security holders(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
543,500
|
|
|
$
|
1.44
|
|
|
|
2,531,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All the Companys equity compensation plans have been
approved by the Companys shareholders. |
18
Issuer
Purchases of Equity Securities
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.
Other than pursuant to the Repurchase Plan, no purchases of
common stock of the Company were made by or on behalf of the
Company during the periods described below.
The table below sets forth information regarding repurchases by
the Company of shares of its common stock on a monthly basis
during the three month period ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Shares that
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
May Yet be
|
|
|
|
Total
|
|
|
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
Number of
|
|
|
Average
|
|
|
Announced
|
|
|
Under the
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Plans or
|
|
|
Plans or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
October 1 October 31, 2009
|
|
|
22,800
|
|
|
$
|
1.25
|
|
|
|
22,800
|
|
|
|
473,604
|
|
November 1 November 30, 2009
|
|
|
2,000
|
|
|
|
1.31
|
|
|
|
2,000
|
|
|
|
471,604
|
|
December 1 December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,800
|
|
|
$
|
1.25
|
|
|
|
24,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Performance Graph
As a Smaller Reporting Company as defined by
Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of
Regulation S-K,
we have elected to comply with certain scaled disclosure
reporting obligations, and therefore are not required to provide
the stock performance graph requested by this Item.
|
|
Item 6.
|
Selected
Financial Data
|
As a Smaller Reporting Company as defined by
Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of
Regulation S-K,
we have elected to comply with certain scaled disclosure
reporting obligations, and therefore are not required to provide
the information requested by this Item.
|
|
Item 7.
|
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 each of the two years in the period
ended December 31, 2009. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto included elsewhere herein.
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
19
accordance with generally accepted accounting principles, the
consolidated financial statements reflect the 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 27% of
the Companys total liabilities at December 31, 2009.
This liability includes estimates for: 1) unpaid losses on
claims reported prior to December 31, 2009, 2) future
development on those reported claims, 3) unpaid ultimate
losses on claims incurred prior to December 31, 2009 but
not yet reported and 4) unpaid loss adjustment expenses for
reported and unreported claims incurred prior to
December 31, 2009. 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 December 31,
2009 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 actuaries develop 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, could have a material adverse effect on
the Companys results of operations.
Future policy benefits comprised 32% of the
Companys total liabilities at December 31, 2009.
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.
Deferred acquisition costs comprised 7% of the
Companys total assets at December 31, 2009. 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
20
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
December 31, 2009. 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, disputes or
otherwise 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 82% of the Companys
total assets at December 31, 2009. Substantially all of the
Companys investments are in bonds and common and preferred
stocks, the values of 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 fixed maturity securities that do not have
publicly quoted values, but have an estimated fair value as
determined by management of $1.8 million at
December 31, 2009. 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, the Company evaluates
such investment for other than a temporary impairment. The
evaluation for other than temporary impairments is a
quantitative and qualitative process, which is subject to risks
and uncertainties in the determination of whether declines in
the fair value of investments are other than temporary. The
risks and uncertainties include, among other things, changes in
general economic conditions, an issuers financial
condition or near term recovery prospects and the effects of
changes in interest rates. In evaluating impairment, the Company
considers, among other factors, the intent and ability to hold
these securities until price recovery, the nature of the
investment and the prospects for the issuer and its industry,
the issuers continued satisfaction of the investment
obligations in accordance with their contractual terms, and
managements expectation that they will continue to do so,
as well as rating actions that affect the issuers credit
status. 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.
The Company determines the fair values of certain financial
instruments based on the fair market hierarchy established in
Accounting Standards Codification (ASC)
820-10-20,
Fair Value Measurements and Disclosures (ASC
820-10-20).
The fair values for fixed maturity and equity securities are
largely determined by either independent methods prescribed by
the National Association of Insurance Commissioners, which do
not differ materially from nationally quoted market prices, when
available, or independent broker quotations. See Note 2 of
Notes to Consolidated Financial Statements.
21
The following tables present assets and liabilities carried at
fair value and information about the inputs used to value those
financial instruments, by hierarchy level, in accordance with
ASC
820-10-20.
As of December 31, 2009, investments which are carried at
fair value were measured on a recurring basis as summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
|
|
|
$
|
182,281
|
|
|
$
|
1,779
|
|
|
$
|
184,060
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
6,914
|
|
|
|
|
|
|
|
6,914
|
|
|
|
|
|
Short-term investments
|
|
|
14,697
|
|
|
|
|
|
|
|
|
|
|
|
14,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,697
|
|
|
$
|
189,195
|
|
|
$
|
1,779
|
|
|
$
|
205,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Companys zero cost
interest rate collar described below, which was valued using
Level 3 criteria, was a liability of $1.5 million. The
use of different criteria of assumptions of data may have
yielded different valuations.
As of December 31, 2008, investments which are carried at
fair value were measured on a recurring basis as summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
|
|
|
$
|
161,168
|
|
|
$
|
1,929
|
|
|
$
|
163,097
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
5,291
|
|
|
|
|
|
|
|
5,291
|
|
|
|
|
|
Short-term investments
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,339
|
|
|
$
|
166,459
|
|
|
$
|
1,929
|
|
|
$
|
189,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Companys zero cost
interest rate collar valued using Level 3 criteria was a
liability of $2.1 million. The use of different criteria of
assumptions of data may have yielded different valuations.
The following is a roll-forward of the financial instruments
measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the periods ended
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
|
|
|
|
Maturity
|
|
|
Derivative
|
|
|
|
Securities
|
|
|
(Liability)
|
|
|
|
(In thousands)
|
|
|
Balance, January 1, 2008
|
|
$
|
3,000
|
|
|
$
|
(740
|
)
|
Total unrealized losses included in other comprehensive loss
|
|
|
(1,071
|
)
|
|
|
(1,345
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
1,929
|
|
|
|
(2,085
|
)
|
Total unrealized gains (losses) included in other comprehensive
loss
|
|
|
(150
|
)
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
1,779
|
|
|
$
|
(1,547
|
)
|
|
|
|
|
|
|
|
|
|
The Companys fixed maturity securities valued with
Level 3 criteria are comprised solely of issuances of
pooled debt obligations of multiple, smaller financial services
companies. They are not actively traded and valuation techniques
used to measure fair value are based on future estimated cash
flows discounted at a reasonably estimated rate of interest.
Other qualitative and quantitative information received from the
original
22
underwriter of the pooled offering is also considered, as
applicable. As the derivative is an interest rate collar,
changes in valuation are more closely correlated with changes in
interest rates and accordingly values are estimated using
projected cash flows at current interest rates discounted at a
reasonably estimated rate of interest. Fair value quotations are
also obtained from the single counterparty to the transaction.
Deferred income taxes comprised approximately 2% of the
Companys total assets at December 31, 2009. 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 deemed more likely than not to be realized. In assessing the
likelihood of realization, management considers estimates of
future taxable income and tax planning strategies.
Refer to Note 1 of Notes to Consolidated Financial
Statements for details regarding the Companys
significant accounting policies.
Overall
Corporate Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
American Southern
|
|
$
|
39,172
|
|
|
$
|
40,466
|
|
|
|
|
|
Life and Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
|
63,075
|
|
|
|
58,805
|
|
|
|
|
|
Corporate and Other
|
|
|
463
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
102,710
|
|
|
$
|
99,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
American Southern
|
|
$
|
4,782
|
|
|
$
|
5,817
|
|
|
|
|
|
Life and Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
|
2,984
|
|
|
|
1,431
|
|
|
|
|
|
Corporate and Other
|
|
|
(6,416
|
)
|
|
|
(8,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
1,350
|
|
|
$
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
$
|
|
|
|
$
|
(3,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,207
|
)
|
|
$
|
(3,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a consolidated basis, the Company had a net loss of
$1.2 million, or $0.08 per diluted share, in 2009, compared
to a net loss of $3.9 million, or $0.25 per diluted share,
in 2008. The net loss in 2009 was primarily attributable to a
$2.0 million increase in the Companys deferred tax
asset valuation allowance. The change in the deferred tax asset
valuation allowance was due to a reassessment of the future
realization of certain capital loss carryforward benefits. The
Company does not currently anticipate having sufficient future
capital gains to offset these capital losses. The net loss in
2008 was attributable to a $4.0 million realized investment
loss related to the write-down in the value of certain bonds,
preferred and common stocks due to an other than temporary
impairment and a $3.4 million loss from discontinued
operations. Income from continuing operations before taxes was
$1.4 million in 2009, compared to a loss of
$1.0 million in 2008. The increase in income from
continuing operations before taxes during 2009 was due to the
absence of a comparable $4.0 million impairment charge
recorded in 2008 discussed previously. In 2009, other than
temporary impairment charges were $0.1 million. Such
variations between years in realized investment gains and losses
23
significantly influence the reported income (loss) from
continuing operations before income taxes. The magnitude of
realized investment gains and losses in any year are a function
of the timing of trades of investments relative to the markets
themselves as well as the recognition of any impairments on
investments.
Excluding realized investment gains and losses, income from
continuing operations before taxes was $1.1 million in
2009, compared to $3.0 million in 2008. The decrease in
income from continuing operations before taxes and realized
gains and losses was primarily due to several large automobile
claims incurred in the Companys property and casualty
operations as well as higher overall loss ratios in the
Companys life and health operations. The property and
casualty losses were partially offset by a reduction in the
accrual for profit sharing commissions due to agents. Also
contributing to the decrease was a non-recurring charge of
$0.4 million, which resulted from the termination and
settlement of the Companys supplemental executive
retirement plan (SERP). Partially offsetting the
2009 decrease in income from continuing operations before taxes
and realized gains and losses were the following non-recurring
charges recorded in 2008: $0.7 million in discretionary
bonus payments to certain officers of the Company in connection
with the sale of the regional property and casualty companies
and a $0.3 million goodwill impairment charge.
Total revenue was $102.7 million in 2009 as compared to
$99.7 million in 2008. Premium revenue increased slightly
to $91.5 million in 2009 from $91.4 million in 2008.
The increase in premiums was attributable to new business
generated by the Companys life and health operations as a
result of increased marketing initiatives. Offsetting the
increase in life and health premiums in 2009 was a continued
decline in property and casualty premiums.
Total expenses were $101.4 million in 2009 as compared to
$100.7 million in 2008. Insurance benefits and losses and
commissions and underwriting expenses as a percentage of
premiums were 97.5% and 95.9% in 2009 and 2008, respectively.
The increase in expenses was primarily due to higher loss ratios
in both the property and casualty and the life and health
operations discussed above.
The Companys property and casualty operations are
comprised of American Southern and the Companys life and
health operations consist of Bankers Fidelity.
A more detailed analysis of the operating companies and other
corporate activities is provided below.
Underwriting
Results
American
Southern
The following table summarizes, for the periods indicated,
American Southerns premiums, losses, expenses and
underwriting ratios:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Gross written premiums
|
|
$
|
39,066
|
|
|
$
|
43,129
|
|
Ceded premiums
|
|
|
(6,207
|
)
|
|
|
(6,250
|
)
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$
|
32,859
|
|
|
$
|
36,879
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
34,300
|
|
|
$
|
36,258
|
|
Net losses and loss adjustment expenses
|
|
|
18,829
|
|
|
|
16,746
|
|
Underwriting expenses
|
|
|
15,561
|
|
|
|
17,903
|
|
|
|
|
|
|
|
|
|
|
Underwriting (loss) income
|
|
$
|
(90
|
)
|
|
$
|
1,609
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
54.9
|
%
|
|
|
46.2
|
%
|
Expense ratio
|
|
|
45.4
|
|
|
|
49.4
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
100.3
|
%
|
|
|
95.6
|
%
|
|
|
|
|
|
|
|
|
|
24
Gross written premiums at American Southern decreased
$4.1 million, or 9.4%, during 2009 as compared to 2008. The
decrease in gross written premiums was primarily attributable to
significant decreases in the general liability and surety lines
of business which resulted from weakness in the construction
industry. Also contributing to the decrease in gross written
premiums was the loss of one of the companys agents who
had previously produced approximately $0.7 million in
annualized general liability business. Partially offsetting the
decrease in gross written premiums was an increase in commercial
automobile business marketed through another general agent.
Ceded premiums decreased slightly during 2009 as compared to
2008. The decrease in ceded premiums was primary attributable to
the decline in written premiums. Also contributing to the
decrease were lower cession rates resulting from a new
reinsurance agreement which was enacted in the fourth quarter of
2009. Partially offsetting the 2009 decrease in ceded premiums
were higher reinsurance rates from changes in the composition of
business. Ceded premiums relative to gross written premiums
increased disproportionately due to the higher reinsurance costs
associated with the commercial automobile business versus the
reinsurance costs in the declining lines of business.
The following table summarizes, for the periods indicated,
American Southerns earned premiums by line of business:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Automobile liability
|
|
$
|
12,299
|
|
|
$
|
10,904
|
|
Automobile physical damage
|
|
|
6,679
|
|
|
|
6,628
|
|
General liability
|
|
|
6,008
|
|
|
|
7,996
|
|
Property
|
|
|
2,442
|
|
|
|
2,374
|
|
Surety
|
|
|
6,872
|
|
|
|
8,356
|
|
|
|
|
|
|
|
|
|
|
Total earned premium
|
|
$
|
34,300
|
|
|
$
|
36,258
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums decreased $2.0 million, or 5.4%, during
2009 as compared to 2008. The decrease in net earned premiums
during 2009 was primarily due to the reasons discussed
previously. In 2009, American Southerns five principal
states in terms of premium revenue, Alabama, Florida, Georgia,
Illinois, and Ohio, were relatively consistent with those in
2008 and accounted for approximately 61% of total earned
premiums for 2009.
The performance of an insurance company is often measured by its
combined ratio. The combined ratio represents the percentage of
losses, loss adjustment expenses and other expenses that are
incurred for each dollar of premium earned by the company. A
combined ratio of under 100% represents an underwriting profit
while a combined ratio of over 100% indicates an underwriting
loss. The combined ratio is divided into two components, the
loss ratio (the ratio of losses and loss adjustment expenses
incurred to premiums earned) and the expense ratio (the ratio of
expenses incurred to premiums earned).
The combined ratio for American Southern increased to 100.3% in
2009 from a combined ratio of 95.6% in 2008. The loss ratio
increased to 54.9% in 2009 from 46.2% in 2008. The overall
increase in the loss ratio was primarily attributable to several
large claims in the commercial automobile line of business. The
expense ratio decreased to 45.4% in 2009 from 49.4% in 2008. The
decrease in the expense ratio 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 increases,
commissions and underwriting expenses will decrease and
conversely in periods where the loss ratio decreases,
commissions and underwriting expenses will increase. Partially
offsetting the decrease in the 2009 expense ratio was a
non-recurring charge of $0.4 million which resulted from
the termination and settlement of the companys SERP.
In establishing reserves, American Southern initially reserves
for losses at the upper end of the reasonable range if no other
value within the range is determined to be more probable.
Selection of such an initial loss estimate is an attempt by
management to give recognition that initial claims information
received generally is
25
not conclusive with respect to legal liability, is generally not
comprehensive with respect to magnitude of loss and generally,
based on historical experience, will develop more adversely as
time and information develops. However, as a result, American
Southern generally experiences reserve redundancies when
analyzing the development of prior year losses in a current
period. At December 31, 2009, the range of estimates
developed in connection with the loss reserves for American
Southern indicated that reserves could be as much as 20.7% lower
or as much as 7.3% higher. Development from prior years
reserves has historically reduced the current year loss ratio;
however, such reduction in the current year loss ratio is
generally offset by the reserves established in the current year
for current period losses. American Southerns reserve
redundancies for the years ended December 31, 2009 and 2008
were $6.7 million and $8.0 million, respectively. To
the extent reserve redundancies vary between years, there is an
incremental impact on the results of operations from American
Southern and the Company. The indicated redundancy in 2009 was
$1.3 million less than that in 2008. After considering the
impact on contingent commissions and other related accruals, the
$1.3 million decline in the redundancy resulted in a
decline in income from operations before tax of approximately
$0.7 million in 2009 as compared to 2008. Management
believes that such differences will continue in future periods
but is unable to determine if or when incremental redundancies
will increase or decrease, until the underlying losses are
ultimately settled.
Contingent commissions, if contractually applicable, are
ultimately payable to agents based on the underlying
profitability of a particular insurance contract or a group of
insurance contracts, and are periodically evaluated and accrued
as earned. Approximately 88% of American Southerns
business provides for contractual commission arrangements which
compensate the companys agents in relation to the loss
ratios of the business they write. By structuring its business
in this manner, American Southern provides its agents with an
economic incentive to place profitable business with American
Southern. In periods when loss reserves reflect favorable
development from prior years reserves, there is generally
a highly correlated increase in commission expense also related
to the prior year business. Accordingly, favorable loss
development from prior years, while anticipated to continue in
future periods, is not an indicator of significant additional
profitability in the current year.
Bankers
Fidelity
The following summarizes, for the periods indicated, Bankers
Fidelitys premiums, losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Medicare supplement
|
|
$
|
42,679
|
|
|
$
|
41,402
|
|
Other health products
|
|
|
3,867
|
|
|
|
3,364
|
|
Life insurance
|
|
|
10,616
|
|
|
|
10,357
|
|
|
|
|
|
|
|
|
|
|
Total earned premiums
|
|
|
57,162
|
|
|
|
55,123
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses
|
|
|
41,955
|
|
|
|
40,084
|
|
Underwriting expenses
|
|
|
18,136
|
|
|
|
17,290
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
60,091
|
|
|
|
57,374
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss
|
|
$
|
(2,929
|
)
|
|
$
|
(2,251
|
)
|
|
|
|
|
|
|
|
|
|
Premium revenue at Bankers Fidelity increased $2.0 million,
or 3.7%, during 2009 as compared to 2008 primarily due to
successful marketing initiatives, recruiting of new agents, and
effective utilization of the companys proprietary lead
program. Premiums from the Medicare supplement line of business
increased $1.3 million, or 3.1%, in 2009 as compared to
2008 and accounted for 75% of total 2009 earned premiums.
Partially offsetting this increase in Medicare supplement
business was the non-renewal of certain policies that resulted
from continued pricing and product competition. Premiums from
the life insurance line of business increased $0.3 million,
or 2.5%, during 2009 over 2008 premiums due to an increase in
sales related initiatives. The other health products premiums
increased to $3.9 million in 2009 from $3.4 million in
2008, or 15.0%, primarily as a result of an increase in sales of
short-term care products and increased business
26
activities with group associations. In 2009, the companys
five principal states in terms of premium revenue, Georgia,
Indiana, Ohio, Pennsylvania, and Utah, were consistent with
those in 2008 and accounted for approximately 55% of total
premiums for 2009.
Benefits and losses increased $1.9 million, or 4.7%, during
2009 as compared to 2008. As a percentage of premiums, benefits
and losses were 73.4% in 2009 compared to 72.7% in 2008. The
increase in the loss ratio was primarily attributable to
increased medical costs within the health business. The company
continues to implement rate increases on its Medicare supplement
line of business to help to mitigate the impact of higher
medical costs.
Underwriting expenses increased $0.8 million, or 4.9%,
during 2009 as compared to 2008. The increase in underwriting
expenses during 2009 was primarily attributable to increases in
advertising and agency related expenses which resulted from the
companys marketing initiatives. As a percentage of earned
premiums, these expenses were 31.7% in 2009 compared to 31.4% in
2008. The increase in the expense ratio during 2009 was
primarily due to the reasons discussed previously.
The indicated underwriting loss of $2.9 million in 2009 and
$2.3 million in 2008 does not take into account investment
income, which is a significant component in evaluating
profitability; particularly in the life insurance business.
Increased marketing efforts have resulted in underwriting
expenses increasing at a slightly faster rate than the related
premiums, thus increasing the indicated underwriting loss.
Investment
Income and Realized Gains
Investment income decreased $1.1 million, or 9.5%, in 2009
as compared to 2008. The decrease in investment income during
2009 was primarily due to a large amount of called securities,
the proceeds from which the Company was not able to reinvest at
equivalent interest rates. Also contributing to the decrease in
investment income was a significant decrease in the interest
earned on the Companys short-term investments.
The Company had net realized investment gains of
$0.3 million in 2009 and net realized investment losses of
$4.0 million in 2008. The net realized gains in 2009 were
primarily due to the sale of the Companys investments in
the fixed maturity securities of General Motors Corporation
(GM) and General Motors Acceptance Corporation
(GMAC). On November 4, 2009, the Company sold
all of its GM and GMAC holdings resulting in realized gains of
approximately $0.3 million. During 2009, the Company also
recorded a realized loss of $0.1 million due to other than
temporary impairments in its investments in the fixed maturity
securities of CIT Group and GM, as well as certain other
invested assets. The net realized investment losses in 2008 were
due to impairment charges related to the write-down in the value
of certain bonds, preferred and common stocks. During the years
ended December 31, 2009 and 2008, the Company recorded
investment impairments due to other than temporary declines in
values, which reduced reported realized investment gains,
related to the following investments:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Corporate securities
|
|
$
|
44
|
|
|
$
|
932
|
|
Redeemable preferred stocks
|
|
|
43
|
|
|
|
2,342
|
|
Common and non-redeemable preferred stocks
|
|
|
17
|
|
|
|
666
|
|
Other invested assets
|
|
|
17
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121
|
|
|
$
|
4,014
|
|
|
|
|
|
|
|
|
|
|
While the impairments did not impact the carrying value of the
investments, they resulted in realized losses of
$0.1 million in 2009 and $4.0 million in 2008.
Management continually evaluates the Companys investment
portfolio and, as needed, makes adjustments for impairments
and/or
divests investments. See Note 2 of Notes to Consolidated
Financial Statements.
27
Interest
Expense
Interest expense decreased $0.5 million, or 16.4%, in 2009
as compared to 2008. The decrease in interest expense during
2009 was due to a decrease in the London Interbank Offered Rate
(LIBOR), as the interest rates on the Companys
trust preferred obligations and outstanding bank debt are based
on LIBOR. In addition, on April 1, 2008, the Company repaid
the outstanding balance of $3.8 million under the
Companys credit agreement (the Credit
Agreement) with Wachovia Bank, National Association
(Wachovia), which decreased interest expense by
reducing the Companys average debt level during 2009.
Partially offsetting the decrease in interest expense were net
settlement payments to Wachovia under the Companys zero
cost interest rate collar due to the LIBOR rates remaining below
the contractual floor rate of 4.77%.
Other
Expenses
Other expenses (commissions, underwriting expenses, and other
expenses) decreased $2.8 million, or 6.8%, in 2009 as
compared to 2008. The decrease in other expenses during 2009 was
primarily attributable to a reduction in profit sharing
commissions at American Southern. Profit sharing commissions at
American Southern decreased $1.6 million during 2009 due
primarily to higher loss ratios. The majority of American
Southerns business is structured in a way that agents are
rewarded based upon the loss ratios of the business they submit
to the company. In periods where the loss ratio increases,
commissions and underwriting expenses will decrease and
conversely in periods where the loss ratio decreases,
commissions and underwriting expenses will increase. Further,
during 2009 American Southerns commission expense
decreased $0.9 million from 2008 solely due to the decline
in premiums described above. Also contributing to the decrease
in other expenses in 2009 was $0.7 million in discretionary
bonus payments to certain officers of the Company in 2008 in
connection with the marketing and sale of the regional property
and casualty companies and a $0.3 million goodwill
impairment charge both of which did not recur in 2009. Partially
offsetting the decrease in other expenses in 2009 was a
non-recurring charge of $0.4 million, which resulted from
the termination and settlement of the Companys SERP. Also,
during 2009 the Companys life and health operations
experienced increases in advertising and agency related expenses
due to increases in marketing initiatives. As a percentage of
earned premiums, other expenses were 41.4% in 2009 as compared
with 44.4% in 2008. The decrease in the expense ratio was
primarily due to the reduction in profit sharing commissions and
the $0.7 million discretionary bonus discussed previously.
Income
Taxes
The primary differences between the effective tax rate and the
federal statutory income tax rate result from the
dividends-received deduction (DRD), the small life
insurance company deduction (SLD) and the change in
asset valuation allowance. The current estimated DRD is adjusted
as underlying factors change and can vary from estimates based
on, but not limited to, actual distributions from these
investments as well as appropriate levels of taxable income. The
SLD varies in amount and is determined at a rate of
60 percent of the tentative life insurance company taxable
income (LICTI). The amount of the SLD for any
taxable year is reduced (but not below zero) by 15 percent
of the tentative LICTI for such taxable year as it exceeds
$3.0 million and is ultimately phased out at
$15.0 million. The change in deferred tax asset valuation
allowance was due to the reassessment of the realization of tax
assets related to certain capital losses on investments as well
as other capital loss carryforward benefits. During 2009, the
Company increased its existing valuation allowance by
$2.0 million as it does not currently anticipate having
sufficient future capital gains to offset these capital losses
during the applicable carryforward period. The Company continues
to periodically assess the potential realization of this and all
other deferred tax benefits.
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 its invested
assets. The Company believes that, within each
28
operating company, 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 for the payment of operating expenses,
the acquisition of capital assets and debt service requirements.
At December 31, 2009, the Parent had approximately
$15.9 million of cash and short-term investments. The
Company believes that traditional funding sources of the Parent,
combined with current cash and short-term investments, should
provide sufficient liquidity for the Company
and/or the
Parent for the foreseeable future.
Dividend payments to the Parent by its 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 December 31, 2009, the
Parents insurance subsidiaries had an aggregate statutory
surplus of $70.3 million.
The Parent provides certain administrative, purchasing and other
services to each of its subsidiaries. The amounts charged to and
paid by the subsidiaries were $4.9 million and
$4.7 million in 2009 and 2008, respectively. In addition,
the Parent has a formal tax-sharing agreement with each of its
insurance subsidiaries. A net total of $2.3 million and
$7.8 million were paid to the Parent under the tax sharing
agreements in 2009 and 2008, respectively. Dividends were paid
to Atlantic American by its subsidiaries totaling
$6.5 million in 2009 and $5.5 million in 2008. As a
result of the Parents tax loss carryforwards, which
totaled approximately $6.3 million at December 31,
2009, it is anticipated that the tax sharing agreements will
continue to provide the Parent with additional funds sufficient
to meet its cash flow obligations.
In addition to these internal funding sources, the Company
maintains its revolving credit facility under the Credit
Agreement 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
was equal to $10.5 million at December 31, 2009. 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%. 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
certain 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. During 2009, there was no
balance outstanding under this Credit Agreement and the Company
was in compliance with all terms of the Credit Agreement. The
termination date of this Credit Agreement is June 30, 2010
and the Company currently does not anticipate entering into any
future credit agreements. Notwithstanding the foregoing,
however, changes in business or general economic conditions
could result in the Company determining that it is in the
Companys best interest to enter into such an agreement at
any time in the future. In such event, no assurances can be
provided that the Company would be able to enter into such an
agreement in a timely manner, on acceptable terms, or at all.
The Company has two statutory trusts which exist for the
exclusive purpose 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 deferrable interest debentures
(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
29
LIBOR plus an applicable margin. The margin ranges from 4.00% to
4.10%. At December 31, 2009, the effective interest rate
was 4.32%. 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.
The Company has not made such an election.
During 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 began making payments to
Wachovia under the zero cost rate collar on June 4, 2008.
As a result of interest rates remaining below the LIBOR floor
rate of 4.77%, these payments to Wachovia under the zero cost
rate collar continued throughout 2009. While the Company is
exposed to counterparty risk should Wachovia fail to perform,
based on the current level of interest rates, and coupled with
the current macroeconomic outlook, the Company believes that its
current exposure to nonperformance risks is minimal.
The Company intends to pay its obligations under the Credit
Agreement, if any, and the Junior Subordinated Debentures using
existing cash balances, dividend and tax sharing payments from
the operating subsidiaries, or from potential future financing
arrangements.
At December 31, 2009, the Company had 70,000 shares of
Series D Preferred Stock (Series D Preferred
Stock) outstanding. All of the shares of Series D
Preferred Stock are held by an affiliate of the Companys
Chairman Emeritus. The outstanding shares of 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 the 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. During 2009, the Company paid
$0.5 million in Series D Preferred Stock dividends.
During 2008, the Company issued common stock in lieu of
Series D Preferred Stock dividend payments of
$0.5 million. As of December 31, 2009, the Company had
accrued but unpaid dividends on the Series D Preferred
Stock of $.02 million.
Net cash used in operating activities was $0.8 million in
2009 compared to $2.7 million in 2008. Cash and short-term
investments decreased to $20.1 million at December 31,
2009 from $37.3 million at December 31, 2008. The
decrease in cash and short-term investments during 2009 was
primarily due to an increased level of investing exceeding
normal sales and maturities. In addition, during 2009 the
Company distributed accumulated benefits of $2.8 million
due to the termination of its SERP. Also contributing to the
decrease in cash and short-term investments was a final
settlement of $1.8 million with Columbia Mutual Insurance
Company relating to a valuation matter with respect to certain
loss reserves in connection with the 2008 sale of the
Companys regional property and casualty operations. Cash
and short-term investments at December 31, 2009 of
$20.1 million are believed to be sufficient to meet the
Companys near-term needs.
The Company believes that the dividends, fees, and tax-sharing
payments it receives from its subsidiaries 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.
New
Accounting Pronouncements
See Impact of Recently Issued Accounting Standards
in Note 1 of Notes to Consolidated Financial Statements.
30
Impact of
Inflation
Insurance premiums are established before the amount of losses
and loss adjustment expenses, or the extent to which inflation
may affect such losses and expenses, are known. Consequently,
the Company attempts, in establishing its premiums, to
anticipate the potential impact of inflation. If, for
competitive reasons, premiums cannot be increased to anticipate
inflation, this cost would be absorbed by the Company. Inflation
also affects the rate of investment return on the Companys
investment portfolio with a corresponding effect on investment
income.
Off-Balance
Sheet Arrangements
In the normal course of business, the Company has structured
borrowings that, in accordance with accounting principles
generally accepted in the United States of America, are recorded
on the Companys balance sheet at an amount that differs
from the ultimate contractual obligation. See Note 6 of
Notes to Consolidated Financial Statements.
Contractual
Obligations
As a Smaller Reporting Company as defined by
Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of
Regulation S-K,
we have elected to comply with certain scaled disclosure
reporting obligations, and therefore are not required to provide
the table of contractual obligations requested by this Item.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
As a Smaller Reporting Company as defined by
Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of
Regulation S-K,
we have elected to comply with certain scaled disclosure
reporting obligations, and therefore are not required to provide
the information requested by this Item.
31
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
ATLANTIC AMERICAN CORPORATION
|
|
|
|
|
|
|
|
33
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
36
|
|
|
|
|
37
|
|
|
|
|
38
|
|
32
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Atlantic American Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of
Atlantic American Corporation and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
shareholders equity, and cash flows for the years then
ended. In connection with our audits of the financial
statements, we have also audited schedules II, III, IV and
VI. These consolidated financial statements and financial
statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Atlantic American Corporation and subsidiaries at
December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related
financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set
forth therein.
BDO SEIDMAN LLP
Atlanta, Georgia
March 26, 2010
33
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
ASSETS
|
Cash and cash equivalents, including short-term investments of
$14,697 and $21,339 in 2009 and 2008, respectively
|
|
$
|
20,129
|
|
|
$
|
37,321
|
|
Investments
|
|
|
195,410
|
|
|
|
173,116
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
11,489
|
|
|
|
14,870
|
|
Other, net of allowance for doubtful accounts of $533 and $676
in 2009 and 2008, respectively
|
|
|
6,023
|
|
|
|
7,789
|
|
Deferred income taxes, net
|
|
|
6,041
|
|
|
|
10,577
|
|
Deferred acquisition costs
|
|
|
19,453
|
|
|
|
19,160
|
|
Other assets
|
|
|
1,413
|
|
|
|
1,648
|
|
Goodwill
|
|
|
2,128
|
|
|
|
2,128
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
262,086
|
|
|
$
|
266,609
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Insurance reserves and policyholder funds
|
|
$
|
129,213
|
|
|
$
|
130,774
|
|
Accounts payable and accrued expenses
|
|
|
14,165
|
|
|
|
19,183
|
|
Debt payable
|
|
|
41,238
|
|
|
|
41,238
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
184,616
|
|
|
|
191,195
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par, 4,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series D preferred, 70,000 shares issued and
outstanding; $7,000 redemption value
|
|
|
70
|
|
|
|
70
|
|
Common stock, $1 par, 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
22,373,900 shares issued; 22,291,310 shares and
22,332,087 shares outstanding in 2009 and 2008, respectively
|
|
|
22,374
|
|
|
|
22,374
|
|
Additional paid-in capital
|
|
|
57,129
|
|
|
|
57,107
|
|
Retained earnings
|
|
|
3,404
|
|
|
|
5,119
|
|
Accumulated other comprehensive loss
|
|
|
(5,405
|
)
|
|
|
(9,200
|
)
|
Treasury stock, at cost, 82,590 shares in 2009 and
41,813 shares in 2008
|
|
|
(102
|
)
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
77,470
|
|
|
|
75,414
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
262,086
|
|
|
$
|
266,609
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
34
ATLANTIC
AMERICAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
91,462
|
|
|
$
|
91,381
|
|
Investment income
|
|
|
10,688
|
|
|
|
11,814
|
|
Realized investment gains (losses), net
|
|
|
273
|
|
|
|
(3,995
|
)
|
Other income
|
|
|
287
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
102,710
|
|
|
|
99,731
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
|
60,784
|
|
|
|
56,830
|
|
Commissions and underwriting expenses
|
|
|
28,379
|
|
|
|
30,816
|
|
Interest expense
|
|
|
2,756
|
|
|
|
3,298
|
|
Other
|
|
|
9,441
|
|
|
|
9,779
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
101,360
|
|
|
|
100,723
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes
|
|
|
1,350
|
|
|
|
(992
|
)
|
Income tax expense (benefit)
|
|
|
2,557
|
|
|
|
(526
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(1,207
|
)
|
|
|
(466
|
)
|
Loss from discontinued operations, net of tax (Note 17)
|
|
|
|
|
|
|
(3,417
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,207
|
)
|
|
|
(3,883
|
)
|
Preferred stock dividends
|
|
|
(508
|
)
|
|
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stock
|
|
$
|
(1,715
|
)
|
|
$
|
(5,411
|
)
|
|
|
|
|
|
|
|
|
|
Basic loss per common share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(.08
|
)
|
|
$
|
(.09
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders
|
|
$
|
(.08
|
)
|
|
$
|
(.25
|
)
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(.08
|
)
|
|
$
|
(.09
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders
|
|
$
|
(.08
|
)
|
|
$
|
(.25
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
35
ATLANTIC
AMERICAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2007
|
|
$
|
204
|
|
|
$
|
21,817
|
|
|
$
|
56,414
|
|
|
$
|
10,530
|
|
|
$
|
(1,171
|
)
|
|
$
|
|
|
|
$
|
87,794
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,883
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,883
|
)
|
Increase in unrealized investment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,538
|
)
|
|
|
|
|
|
|
(11,538
|
)
|
Fair value adjustment to derivative financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,345
|
)
|
|
|
|
|
|
|
(1,345
|
)
|
Minimum pension liability adjustment (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
531
|
|
|
|
|
|
|
|
531
|
|
Deferred income tax attributable to other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,323
|
|
|
|
|
|
|
|
4,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,912
|
)
|
Preferred stock redeemed (Note 10)
|
|
|
(134
|
)
|
|
|
|
|
|
|
(13,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,400
|
)
|
Capital contribution (Note 10)
|
|
|
|
|
|
|
|
|
|
|
13,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,795
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,528
|
)
|
Common stock issued in lieu of preferred stock dividend payments
|
|
|
|
|
|
|
417
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
508
|
|
Restricted stock grants
|
|
|
|
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
Acquisition of 41,813 shares for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
(56
|
)
|
Issuance of 111,106 shares for employee benefit plans and
stock options
|
|
|
|
|
|
|
111
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
70
|
|
|
|
22,374
|
|
|
|
57,107
|
|
|
|
5,119
|
|
|
|
(9,200
|
)
|
|
|
(56
|
)
|
|
|
75,414
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,207
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,207
|
)
|
Decrease in unrealized investment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,925
|
|
|
|
|
|
|
|
4,925
|
|
Fair value adjustment to derivative financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538
|
|
|
|
|
|
|
|
538
|
|
Minimum pension liability adjustment (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
375
|
|
Deferred income tax attributable to other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,043
|
)
|
|
|
|
|
|
|
(2,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,588
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
|
(508
|
)
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Acquisition of 40,777 shares for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
70
|
|
|
$
|
22,374
|
|
|
$
|
57,129
|
|
|
$
|
3,404
|
|
|
$
|
(5,405
|
)
|
|
$
|
(102
|
)
|
|
$
|
77,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
36
ATLANTIC
AMERICAN CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,207
|
)
|
|
$
|
(3,883
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Amortization of deferred acquisition costs
|
|
|
9,656
|
|
|
|
9,914
|
|
Acquisition costs deferred
|
|
|
(9,949
|
)
|
|
|
(10,244
|
)
|
Realized investment (gains) losses, net
|
|
|
(273
|
)
|
|
|
3,995
|
|
(Decrease) increase in insurance reserves and policyholder funds
|
|
|
(1,561
|
)
|
|
|
2,696
|
|
Loss from discontinued operations, net
|
|
|
|
|
|
|
3,417
|
|
Compensation expense related to share awards
|
|
|
22
|
|
|
|
66
|
|
Depreciation and amortization
|
|
|
323
|
|
|
|
318
|
|
Deferred income tax expense (benefit)
|
|
|
2,493
|
|
|
|
(2,537
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
260
|
|
Decrease (increase) in receivables, net
|
|
|
4,762
|
|
|
|
(2,359
|
)
|
Decrease in other liabilities
|
|
|
(5,105
|
)
|
|
|
(1,229
|
)
|
Other, net
|
|
|
71
|
|
|
|
(3,139
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(768
|
)
|
|
|
(2,725
|
)
|
Net cash used in discontinued operations
|
|
|
|
|
|
|
(3,424
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(768
|
)
|
|
|
(6,149
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from investments sold
|
|
|
9,335
|
|
|
|
606
|
|
Proceeds from investments matured, called or redeemed
|
|
|
102,960
|
|
|
|
75,835
|
|
Investments purchased
|
|
|
(128,066
|
)
|
|
|
(88,669
|
)
|
Net proceeds from sale of insurance subsidiaries
|
|
|
|
|
|
|
43,392
|
|
Additions to property and equipment
|
|
|
(99
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by continuing operations
|
|
|
(15,870
|
)
|
|
|
31,014
|
|
Net cash used in discontinued operations (net of $35,501 of cash
transferred in 2008)
|
|
|
|
|
|
|
(11,996
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(15,870
|
)
|
|
|
19,018
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Redemption of Series B Preferred Stock
|
|
|
|
|
|
|
(13,400
|
)
|
Payment of dividends on Series B Preferred Stock
|
|
|
|
|
|
|
(1,675
|
)
|
Payment of dividends on Series D Preferred Stock
|
|
|
(508
|
)
|
|
|
|
|
Purchase of treasury shares
|
|
|
(46
|
)
|
|
|
(56
|
)
|
Repayments of debt
|
|
|
|
|
|
|
(12,750
|
)
|
Financing of discontinued operations
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(554
|
)
|
|
|
(27,877
|
)
|
Net cash used in discontinued operations
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(554
|
)
|
|
|
(27,881
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(17,192
|
)
|
|
|
(15,012
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
37,321
|
|
|
|
36,909
|
|
Discontinued operations
|
|
|
|
|
|
|
15,424
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
37,321
|
|
|
|
52,333
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
20,129
|
|
|
|
37,321
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,129
|
|
|
$
|
37,321
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,811
|
|
|
$
|
3,393
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
|
|
|
$
|
2,150
|
|
|
|
|
|
|
|
|
|
|
Cash received for income taxes
|
|
$
|
6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
37
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
|
|
Note 1.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP)
which, as to insurance companies, differ from the statutory
accounting practices prescribed or permitted by regulatory
authorities. These financial statements include the accounts of
Atlantic American Corporation (Atlantic American or
the Parent) and its subsidiaries (collectively, the
Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
At December 31, 2009, the Parent owned three insurance
subsidiaries, Bankers Fidelity Life Insurance Company
(Bankers Fidelity), American Southern Insurance
Company and its wholly-owned subsidiary, American Safety
Insurance Company (together known as American
Southern), in addition to two non-insurance subsidiaries,
Self-Insurance Administrators, Inc. (SIA, Inc.) and
xCalibre Risk Services, Inc. (XRS, Inc.). On December 26,
2007, the Company entered into a stock purchase agreement
providing for the sale of all the outstanding shares of stock of
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
(Columbia). This transaction was completed on
March 31, 2008. Accordingly, the assets, liabilities, and
results of operations of Association Casualty and Georgia
Casualty have been reflected by the Company as discontinued
operations. See Note 17.
Premium
Revenue and Cost Recognition
Life insurance premiums are recognized as revenues when due;
accident and health premiums are recognized over the premium
paying period and property and casualty insurance premiums are
recognized as revenue over the period of the contract in
proportion to the amount of insurance protection provided.
Benefits and expenses are accrued as incurred and are associated
with premiums as they are earned so as to result in recognition
of profits over the lives of the contracts. For traditional life
insurance and long-duration health insurance, this association
is accomplished by the provision of a future policy benefits
reserve and the deferral and subsequent amortization of the
costs of acquiring business, deferred policy acquisition
costs (principally commissions, premium taxes, and other
expenses of issuing policies). 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 policy benefits reserve. The Company provides for
insurance benefits and losses on accident, health, and
property-casualty claims based upon estimates of projected
ultimate losses. The deferred policy acquisition costs for
property and casualty insurance and short-duration health
insurance are amortized over the effective period of the related
insurance policies. Contingent commissions, if contractually
applicable, are ultimately payable to agents based on the
underlying profitability of a particular insurance contract or a
group of insurance contracts, and are periodically evaluated and
accrued as earned. In periods in which revisions are made to the
estimated loss reserves related to the particular insurance
contract or group of insurance contracts subject to such
commissions, corresponding adjustments are also made to the
related accruals. 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).
Goodwill
Goodwill represents the excess of cost over the fair value of
net assets acquired and is not amortized. The Company
periodically reviews its goodwill to determine if any adverse
conditions exist that could indicate impairment. Conditions that
could trigger impairment include, but are not limited to, a
significant change in business climate that could affect the
value of the related asset, an adverse action, or an assessment
by a
38
regulator. No impairment of the Companys recorded goodwill
was identified during 2009. During 2008, impairment charges of
$260 were recognized.
Investments
The Companys investments in both fixed maturity
securities, which include bonds and redeemable preferred stocks,
and equity securities, which include common and non-redeemable
preferred stocks, are classified as
available-for-sale
and, accordingly, are carried at fair value with the after-tax
difference from amortized cost, as adjusted if applicable,
reflected in shareholders equity as a component of
accumulated other comprehensive income. 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 publicly quoted market prices,
when available, or independent broker quotations. The Company
owns certain fixed maturity securities that do not have publicly
quoted market values, but have an estimated fair value as
determined by management of $1,779 at December 31, 2009.
Such values inherently involve a greater degree of judgment and
uncertainty and therefore ultimately greater price volatility.
Mortgage loans, policy and student loans, and real estate are
carried at historical cost. Other invested assets are comprised
of investments in limited partnerships, limited liability
companies, and real estate joint ventures, and are accounted for
using the equity method. If the value of a common stock,
preferred stock, other invested asset, or publicly traded bond
declines below its cost or amortized cost, if applicable, and
the decline is considered to be other than temporary, a realized
loss is recorded to reduce the carrying value of the investment
to its estimated fair value, which becomes the new cost basis.
The evaluation for other than temporary impairments is a
quantitative and qualitative process, which is subject to risks
and uncertainties in the determination of whether declines in
the fair value of investments are other than temporary. The
risks and uncertainties include changes in general economic
conditions, an issuers financial condition or near term
recovery prospects and the effects of changes in interest rates.
In evaluating impairment, the Company considers, among other
factors, the intent and ability to hold these securities until
price recovery, the nature of the investment and the prospects
for the issuer and its industry, the issuers continued
satisfaction of the investment obligations in accordance with
their contractual terms, and managements expectation that
they will continue to do so, as well as rating actions that
affect the issuers credit status. Premiums and discounts
related to investments are amortized or accreted over the life
of the related investment as an adjustment to yield using the
effective interest method. Dividends and interest income are
recognized when earned or declared. The cost of securities sold
is based on specific identification. Unrealized gains (losses)
in the value of invested assets are accounted for as a direct
increase (decrease) in accumulated other comprehensive income in
shareholders equity, net of deferred tax and, accordingly,
have no effect on net income.
Income
Taxes
Deferred income taxes represent the expected future tax
consequences when the reported amounts of assets and liabilities
are recovered or paid. They arise from differences between the
financial reporting and tax basis of assets and liabilities and
are adjusted for changes in tax laws and tax rates as those
changes are enacted. The provision for income taxes represents
the total amount of income taxes due related to the current
year, plus the change in deferred taxes during the year. A
valuation allowance is recognized if, based on managements
assessment of the relevant facts, it is more likely than not
that some portion of the deferred tax asset will not be realized.
Earnings
Per Common Share
Basic earnings per common share are based on the weighted
average number of common shares outstanding during the relevant
period. Diluted earnings per common share are based on the
weighted average number of common shares outstanding during the
relevant period, plus options and share awards outstanding using
the treasury stock method and the assumed conversion of the
Series D Preferred Stock, if dilutive. Unless otherwise
indicated, earnings per common share amounts are presented on a
diluted basis.
39
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash on hand and
investments in short-term, highly liquid securities which have
original maturities of three months or less from date of
purchase.
Impact
of Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB)
issued Accounting Standards Codification
105-10-05,
Generally Accepted Accounting Principles, which
establishes the Accounting Standards Codification
(Codification or ASC) as the single
source of authoritative GAAP recognized by the FASB to be
applied to nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are
also sources of GAAP for SEC registrants. The Codification
supersedes all existing non-SEC accounting and reporting
standards. GAAP is not intended to be changed as a result of the
Codification, but the ASC does change the way the guidance is
organized and presented. As a result, these changes have an
impact on how companies reference GAAP in their financial
statements and in their accounting policies for financial
statements issued for the interim and annual periods ending
after September 15, 2009. The Company has included the
references to the Codification, as appropriate, in these
consolidated financial statements.
In August 2009, the FASB issued ASC Update
No. 2009-5,
Fair Value Measurements and Disclosures (Topic
820) Measuring Liabilities at Fair Value
(ASU
2009-5),
to provide additional guidance on the fair value measurement of
liabilities within the scope of Topic 820. In all instances, the
reporting entity must maximize the use of the relevant
observable inputs and minimize the use of unobservable inputs.
ASU 2009-5
is effective for the first interim reporting period beginning
after August 28, 2009. Adoption of this codification did
not have a material impact on the Companys financial
condition or results of operations.
In August 2009, the FASB issued ASC Update
No. 2009-4,
Accounting for Redeemable Equity Instruments (ASU
2009-4),
which is an amendment to ASC
480-10-S99,
Distinguishing Liabilities from Equity. ASU
2009-4 was
issued to provide guidance in the application of SEC Accounting
Series Release No. 268 Presentation in
Financial Statements of Redeemable Preferred Stocks
(ASR 268) and clarifies that ASR 268 pertains to
preferred stocks and other redeemable securities including
common stock, derivative instruments, non-controlling interests,
securities held by an employee stock ownership plan and
share-based payment arrangements with employees. ASU
2009-4
became effective for the Company upon issuance and did not have
a material impact on the Companys financial condition or
results of operations.
In June 2009, the FASB issued amendments to ASC
810-10
(ASC
810-10),
which amends the consolidation guidance applicable to variable
interest entities (VIEs). An entity would
consolidate a VIE, as the primary beneficiary, when the entity
has both of the following: (a) the power to direct the
activities of a VIE that most significantly impact the
entitys economic performance and (b) the obligation
to absorb losses of the entity that could potentially be
significant to the VIE or the right to receive benefits from the
entity that could potentially be significant to the VIE. Ongoing
reassessment of whether an enterprise is the primary beneficiary
of a VIE is required. ASC
810-10
eliminates the quantitative approach previously required for
determining the primary beneficiary of a VIE. ASC
810-10 is
effective for fiscal years and interim periods beginning after
November 15, 2009. The Company will adopt the amendments to
ASC 810-10
on January 1, 2010 and does not expect the adoption to have
a material impact on the Companys financial condition or
results of operations.
In June 2009, the FASB issued an amendment to ASC 860 (ASC
860). ASC 860 amends the derecognition guidance and
eliminates the concept of a qualifying special purpose entity.
ASC 860 is effective for fiscal years and interim periods
beginning after November 15, 2009. Early adoption of ASC
860 is prohibited. The Company will adopt the amendments to ASC
860 on January 1, 2010 and does not expect the adoption to
have a material impact on the Companys financial condition
or results of operations.
In May 2009, the FASB issued ASC
855-10,
Subsequent Events (ASC
855-10).
ASC 855-10
establishes principles and disclosure requirements for events
that occur after the balance sheet date but before financial
40
statements are issued or are available to be issued. ASC
855-10 is
effective for interim and annual financial periods ending after
June 15, 2009.
In April 2009, the FASB issued ASC
820-10-65,
Transition Related to FASB Staff Position
FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (ASC
820-10-65).
ASC
820-10-65,
among other things, clarifies that the measurement objective in
determining fair value when the volume and level of activity for
an asset or liability have significantly decreased is the price
that would be received to sell the asset in an orderly
transaction between willing market participants under current
market conditions, and not the value in a hypothetical active
market. ASC
820-10-65
requires an entity to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. See
Note 2, Investments, for expanded disclosures.
In April 2009, the FASB issued ASC
320-10-65,
Transition Related to FSP
No. FAS 115-2
and
No. FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments (ASC
320-10-65).
ASC
320-10-65
replaces the existing requirement that in order for an entity to
conclude impairment of debt securities is not
other-than-temporary,
it must have the intent and ability to hold an impaired security
for a period sufficient to allow for recovery in value of the
investment. To conclude impairment is not
other-than-temporary,
ASC
320-10-65
requires management to assert that it does not have the intent
to sell the security and that it is more likely than not it will
not have to sell the security before recovery of its cost basis.
ASC
320-10-65
also changes the presentation in the financial statements of
non-credit related impairment amounts for instruments within its
scope. When the entity asserts it does not have the intent to
sell the security and it is more likely than not it will not
have to sell the security before recovery of its cost basis,
only the credit related impairment losses are to be recorded in
earnings; non-credit related losses are to be recorded in
accumulated other comprehensive income. ASC
320-10-65
also expands and increases the frequency of existing disclosures
about
other-than-temporary
impairments for debt and equity securities. See Note 2,
Investments, for expanded disclosures. ASC
320-10-65 is
effective for interim and annual reporting periods ending after
June 15, 2009. Adoption of ASC
320-10-65
did not have a material impact on the Companys financial
condition or results of operations.
In March 2008, the FASB issued ASC
815-10-65,
Transition and Effective Date Related to FASB Statement
No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement
No. 133 (ASC
815-10-65).
ASC
815-10-65
amends and expands disclosures about an entitys derivative
and hedging activities with the intent of providing users of
financial statements with an enhanced understanding of the
derivatives, their impact on the Company, and why they are used.
ASC
815-10-65 is
effective for financial statements issued for fiscal years
beginning after November 15, 2008. The Company adopted ASC
815-10-65 on
January 1, 2009 and adoption of this codification did not
have a material impact on the Companys financial condition
or results of operations.
Use of
Estimates in the Preparation of Financial
Statements
The preparation of financial statements and related disclosures
in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and
expenses during the reporting period. Significant estimates and
assumptions are used in developing and evaluating deferred
income taxes, deferred acquisition costs, insurance reserves,
investments (Note 15), pension benefits, commitments and
contingencies, among others, and actual results could differ
from managements estimates.
41
The following tables set forth the carrying value, gross
unrealized gains, gross unrealized losses and amortized cost of
the Companys investments, aggregated by type and industry,
as of December 31, 2009 and 2008.
Investments were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Cost
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government
agencies and authorities
|
|
$
|
124,392
|
|
|
$
|
628
|
|
|
$
|
3,538
|
|
|
$
|
127,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and telecom
|
|
|
24,615
|
|
|
|
695
|
|
|
|
105
|
|
|
|
24,025
|
|
Financial services
|
|
|
13,518
|
|
|
|
228
|
|
|
|
2,324
|
|
|
|
15,614
|
|
Media
|
|
|
2,412
|
|
|
|
59
|
|
|
|
|
|
|
|
2,353
|
|
Other-diversified
|
|
|
11,241
|
|
|
|
259
|
|
|
|
182
|
|
|
|
11,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities
|
|
|
51,786
|
|
|
|
1,241
|
|
|
|
2,611
|
|
|
|
53,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and telecom
|
|
|
2,668
|
|
|
|
168
|
|
|
|
|
|
|
|
2,500
|
|
Financial services
|
|
|
4,215
|
|
|
|
6
|
|
|
|
800
|
|
|
|
5,009
|
|
Media
|
|
|
806
|
|
|
|
|
|
|
|
145
|
|
|
|
951
|
|
Other-diversified
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable preferred stocks
|
|
|
7,882
|
|
|
|
174
|
|
|
|
945
|
|
|
|
8,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
184,060
|
|
|
|
2,043
|
|
|
|
7,094
|
|
|
|
189,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and non-redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
6,097
|
|
|
|
1,029
|
|
|
|
318
|
|
|
|
5,386
|
|
Media
|
|
|
718
|
|
|
|
|
|
|
|
2,480
|
|
|
|
3,198
|
|
Other-diversified
|
|
|
99
|
|
|
|
52
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common and non-redeemable preferred stocks
|
|
|
6,914
|
|
|
|
1,081
|
|
|
|
2,798
|
|
|
|
8,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested assets (fair value of $1,021)
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
1,021
|
|
Policy and student loans
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
2,139
|
|
Real estate
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Investments in unconsolidated trusts
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
195,410
|
|
|
|
3,124
|
|
|
|
9,892
|
|
|
|
202,178
|
|
Short-term investments
|
|
|
14,697
|
|
|
|
|
|
|
|
|
|
|
|
14,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
210,107
|
|
|
$
|
3,124
|
|
|
$
|
9,892
|
|
|
$
|
216,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Cost
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government
agencies and authorities
|
|
$
|
120,572
|
|
|
$
|
1,386
|
|
|
$
|
123
|
|
|
$
|
119,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
409
|
|
|
|
10
|
|
|
|
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and telecom
|
|
|
17,260
|
|
|
|
27
|
|
|
|
1,251
|
|
|
|
18,484
|
|
Financial services
|
|
|
16,301
|
|
|
|
14
|
|
|
|
4,718
|
|
|
|
21,005
|
|
Media
|
|
|
1,194
|
|
|
|
|
|
|
|
1,159
|
|
|
|
2,353
|
|
Other-diversified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities
|
|
|
34,755
|
|
|
|
41
|
|
|
|
7,128
|
|
|
|
41,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and telecom
|
|
|
2,525
|
|
|
|
27
|
|
|
|
2
|
|
|
|
2,500
|
|
Financial services
|
|
|
3,924
|
|
|
|
|
|
|
|
1,925
|
|
|
|
5,849
|
|
Automotive
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
Media
|
|
|
498
|
|
|
|
|
|
|
|
454
|
|
|
|
952
|
|
Other-diversified
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable preferred stocks
|
|
|
7,361
|
|
|
|
27
|
|
|
|
2,381
|
|
|
|
9,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
163,097
|
|
|
|
1,464
|
|
|
|
9,632
|
|
|
|
171,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and non-redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
4,927
|
|
|
|
539
|
|
|
|
1,183
|
|
|
|
5,571
|
|
Media
|
|
|
268
|
|
|
|
|
|
|
|
2,930
|
|
|
|
3,198
|
|
Other-diversified
|
|
|
96
|
|
|
|
49
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common and non-redeemable preferred stocks
|
|
|
5,291
|
|
|
|
588
|
|
|
|
4,113
|
|
|
|
8,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested assets (fair value of $1,433)
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
1,433
|
|
Policy and student loans
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
2,019
|
|
Real estate
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Investments in unconsolidated trusts
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
173,116
|
|
|
|
2,052
|
|
|
|
13,745
|
|
|
|
184,809
|
|
Short-term investments
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
194,455
|
|
|
$
|
2,052
|
|
|
$
|
13,745
|
|
|
$
|
206,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds having an amortized cost of $9,542 and $9,052 were on
deposit with insurance regulatory authorities at
December 31, 2009 and 2008, respectively, in accordance
with statutory requirements.
43
The following table sets forth the carrying value, amortized
cost, and net unrealized gains or losses of the Companys
investments aggregated by industry as of December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Gains (Losses)
|
|
|
U.S. Treasury securities and U.S. Government agencies
|
|
$
|
124,392
|
|
|
$
|
127,302
|
|
|
$
|
120,572
|
|
|
$
|
119,309
|
|
|
$
|
(2,910
|
)
|
|
$
|
1,263
|
|
Utilities and telecom
|
|
|
27,283
|
|
|
|
26,525
|
|
|
|
19,785
|
|
|
|
20,984
|
|
|
|
758
|
|
|
|
(1,199
|
)
|
Financial services
|
|
|
23,830
|
|
|
|
26,009
|
|
|
|
25,152
|
|
|
|
32,425
|
|
|
|
(2,179
|
)
|
|
|
(7,273
|
)
|
Automotive
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
Media(1)
|
|
|
3,936
|
|
|
|
6,502
|
|
|
|
1,960
|
|
|
|
6,503
|
|
|
|
(2,566
|
)
|
|
|
(4,543
|
)
|
Other diversified
|
|
|
11,533
|
|
|
|
11,404
|
|
|
|
697
|
|
|
|
638
|
|
|
|
129
|
|
|
|
59
|
|
Other investments
|
|
|
4,436
|
|
|
|
4,436
|
|
|
|
4,728
|
|
|
|
4,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
195,410
|
|
|
$
|
202,178
|
|
|
$
|
173,116
|
|
|
$
|
184,809
|
|
|
$
|
(6,768
|
)
|
|
$
|
(11,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Media includes related party investments in Gray Television,
Inc. with an amortized cost basis of $3,198 and which had an
aggregate carrying value of $718 and $267 at December 31,
2009 and 2008, respectively. See Note 13. |
The following tables present the Companys unrealized loss
aging for securities by type and length of time the security was
in a continuous unrealized loss position as of December 31,
2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury securities and obligations of U.S. Government
agencies and authorities
|
|
$
|
96,977
|
|
|
$
|
3,300
|
|
|
$
|
4,772
|
|
|
$
|
238
|
|
|
$
|
101,749
|
|
|
$
|
3,538
|
|
Corporate securities
|
|
|
12,894
|
|
|
|
609
|
|
|
|
7,525
|
|
|
|
2,002
|
|
|
|
20,419
|
|
|
|
2,611
|
|
Redeemable preferred stocks
|
|
|
|
|
|
|
|
|
|
|
4,515
|
|
|
|
945
|
|
|
|
4,515
|
|
|
|
945
|
|
Common and non-redeemable preferred stocks
|
|
|
|
|
|
|
|
|
|
|
3,683
|
|
|
|
2,798
|
|
|
|
3,683
|
|
|
|
2,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
109,871
|
|
|
$
|
3,909
|
|
|
$
|
20,495
|
|
|
$
|
5,983
|
|
|
$
|
130,366
|
|
|
$
|
9,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury securities and obligations of U.S. Government
agencies and authorities
|
|
$
|
27,184
|
|
|
$
|
123
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,184
|
|
|
$
|
123
|
|
Corporate securities
|
|
|
22,423
|
|
|
|
3,792
|
|
|
|
5,708
|
|
|
|
3,336
|
|
|
|
28,131
|
|
|
|
7,128
|
|
Redeemable preferred stocks
|
|
|
2,224
|
|
|
|
276
|
|
|
|
3,196
|
|
|
|
2,105
|
|
|
|
5,420
|
|
|
|
2,381
|
|
Common and non-redeemable preferred stocks
|
|
|
267
|
|
|
|
2,930
|
|
|
|
2,100
|
|
|
|
1,183
|
|
|
|
2,367
|
|
|
|
4,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
52,098
|
|
|
$
|
7,121
|
|
|
$
|
11,004
|
|
|
$
|
6,624
|
|
|
$
|
63,102
|
|
|
$
|
13,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
The following is a summary of investment impairments the Company
recorded due to other than temporary declines in values for the
years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Corporate securities
|
|
$
|
44
|
|
|
$
|
932
|
|
Redeemable preferred stocks
|
|
|
43
|
|
|
|
2,342
|
|
Common and non-redeemable preferred stocks
|
|
|
17
|
|
|
|
666
|
|
Other invested assets
|
|
|
17
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121
|
|
|
$
|
4,014
|
|
|
|
|
|
|
|
|
|
|
The evaluation for other than temporary impairment is a
quantitative and qualitative process, which is subject to risks
and uncertainties in the determination of whether declines in
the fair value of investments are other than temporary. The
risks and uncertainties include, among other things, changes in
general economic conditions, an issuers financial
condition or near term recovery prospects and the effects of
changes in interest rates. In evaluating impairment, the Company
considers, among other factors, the intent and ability to hold
these securities, the nature of the investment and the prospects
for the issuer and its industry, the issuers continued
satisfaction of the investment obligations in accordance with
their contractual terms, and managements expectation that
they will continue to do so, as well as rating actions that
affect the issuers credit status.
As of December 31, 2009, securities in an unrealized loss
position were primarily related to the Companys
investments in fixed maturity securities, and common and
non-redeemable preferred stocks, most significantly within the
financial services and media sectors, which have experienced
significant price deterioration and continue to be impacted by
current economic conditions. The media sector includes related
party investments in Gray Television, Inc. which had unrealized
losses of $2,480 as of December 31, 2009 and accounted for
the majority of the unrealized loss position in that sector. In
addition, the Company holds significant investments in
U.S. Government agency bonds which were also in an
unrealized loss position as of December 31, 2009. The
decrease in the value of the Companys investments in
U.S. Government agency bonds was due solely to interest
rate movements. During 2009, net pre-tax unrealized losses on
investment securities recognized in other comprehensive loss
decreased $4,925 from net pre-tax unrealized losses on
investment securities of $11,693 valued as of December 31,
2008. The decline in unrealized losses during 2009 was primarily
due to the increase in fair value of the Companys holdings
in certain financial services and media securities. The Company
does not intend to sell nor does it expect to be required to
sell the securities referenced previously. In addition, the
Company asserts its intent and ability to retain the above
equity securities until price recovery. Furthermore, based upon
the Companys expected continuation of receipt of
contractually required principal and interest payments, the
Company has deemed these securities to be temporarily impaired
as of December 31, 2009.
The following and Note 15 describe the fair value hierarchy
and disclosure requirements for the Companys financial
instruments that are carried at fair value. The fair value
hierarchy prioritizes the inputs in the valuation techniques
used to measure fair value into three broad levels.
|
|
|
|
Level 1
|
Observable inputs that reflect quoted prices for identical
assets or liabilities in active markets that the Company has the
ability to access at the measurement date. The Companys
Level 1 instruments consist of short-term investments.
|
|
|
Level 2
|
Observable inputs, other than quoted prices included in
Level 1, for the asset or liability or prices for similar
assets and liabilities. The Companys Level 2
instruments include most of its fixed maturity securities, which
consist of U.S. Treasury securities and
U.S. Government securities, municipal bonds, and certain
corporate fixed maturity securities, as well as its common and
non-redeemable preferred stocks.
|
|
|
Level 3
|
Valuations that are derived from techniques in which one or more
of the significant inputs are unobservable (including
assumptions about risk). The Companys Level 3
instruments include certain fixed maturity securities and a zero
cost interest rate collar. Fair value is based on
|
45
|
|
|
|
|
criteria that use assumptions or other data that are not readily
observable from objective sources. As of December 31, 2009,
the value of the Companys fixed maturity securities valued
using Level 3 criteria was $1,779 and the value of the zero
cost interest rate collar was a liability of $1,547 (See
Note 7 and Note 15). The use of different criteria of
assumptions of data may have yielded different valuations.
|
As of December 31, 2009, investments which are carried at
fair value were measured on a recurring basis as summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Fixed maturity securities
|
|
$
|
|
|
|
$
|
182,281
|
|
|
$
|
1,779
|
|
|
$
|
184,060
|
|
Equity securities
|
|
|
|
|
|
|
6,914
|
|
|
|
|
|
|
|
6,914
|
|
Short-term investments
|
|
|
14,697
|
|
|
|
|
|
|
|
|
|
|
|
14,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,697
|
|
|
$
|
189,195
|
|
|
$
|
1,779
|
|
|
$
|
205,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, investments which are carried at
fair value were measured on a recurring basis as summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Fixed maturity securities
|
|
$
|
|
|
|
$
|
161,168
|
|
|
$
|
1,929
|
|
|
$
|
163,097
|
|
Equity securities
|
|
|
|
|
|
|
5,291
|
|
|
|
|
|
|
|
5,291
|
|
Short-term investments
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
21,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,339
|
|
|
$
|
166,459
|
|
|
$
|
1,929
|
|
|
$
|
189,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Level 3 fixed maturity securities
consist solely of issuances of pooled debt obligations of
multiple, smaller financial services companies. They are not
actively traded and valuation techniques used to measure fair
value are based on future estimated cash flows discounted at a
reasonably estimated rate of interest. Other qualitative and
quantitative information received from the original underwriter
of the pooled offering is also considered, as applicable.
The amortized cost and carrying value of fixed maturities and
short-term investments at December 31, 2009 and 2008 by
contractual maturity were as follows. Actual maturities may
differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
16,562
|
|
|
$
|
16,537
|
|
|
$
|
23,451
|
|
|
$
|
23,404
|
|
Due after one year through five years
|
|
|
10,571
|
|
|
|
10,052
|
|
|
|
13,572
|
|
|
|
14,028
|
|
Due after five years through ten years
|
|
|
14,409
|
|
|
|
13,808
|
|
|
|
13,687
|
|
|
|
14,909
|
|
Due after ten years
|
|
|
156,260
|
|
|
|
162,418
|
|
|
|
133,726
|
|
|
|
140,263
|
|
Varying maturities
|
|
|
955
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
198,757
|
|
|
$
|
203,808
|
|
|
$
|
184,436
|
|
|
$
|
192,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Investment income was earned from the following sources:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Fixed maturities
|
|
$
|
9,878
|
|
|
$
|
10,146
|
|
Common and non-redeemable preferred stocks
|
|
|
510
|
|
|
|
356
|
|
Short-term investments
|
|
|
129
|
|
|
|
1,132
|
|
Other
|
|
|
171
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
$
|
10,688
|
|
|
$
|
11,814
|
|
Less investment expenses
|
|
|
(134
|
)
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
10,554
|
|
|
$
|
11,688
|
|
|
|
|
|
|
|
|
|
|
A summary of realized investment gains (losses) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Fixed
|
|
|
Other
|
|
|
|
|
|
|
Stocks
|
|
|
Maturities
|
|
|
Invested Assets
|
|
|
Total
|
|
|
Gains
|
|
$
|
179
|
|
|
$
|
509
|
|
|
$
|
|
|
|
$
|
688
|
|
Losses
|
|
|
(16
|
)
|
|
|
(386
|
)
|
|
|
(13
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net
|
|
$
|
163
|
|
|
$
|
123
|
|
|
$
|
(13
|
)
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Fixed
|
|
|
Other Invested
|
|
|
|
|
|
|
Stocks
|
|
|
Maturities
|
|
|
Assets
|
|
|
Total
|
|
|
Gains
|
|
$
|
|
|
|
$
|
27
|
|
|
$
|
|
|
|
$
|
27
|
|
Losses
|
|
|
(666
|
)
|
|
|
(3,282
|
)
|
|
|
(74
|
)
|
|
|
(4,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses), net
|
|
$
|
(666
|
)
|
|
$
|
(3,255
|
)
|
|
$
|
(74
|
)
|
|
$
|
(3,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Common and non-redeemable preferred stocks
|
|
$
|
415
|
|
|
$
|
|
|
Fixed maturities
|
|
|
8,562
|
|
|
|
491
|
|
Other investments
|
|
|
358
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Total proceeds
|
|
$
|
9,335
|
|
|
$
|
606
|
|
|
|
|
|
|
|
|
|
|
The Companys bond portfolio included 98% investment grade
securities at December 31, 2009 as defined by the NAIC.
47
|
|
Note 3.
|
Insurance
Reserves and Policyholder Funds
|
The following table presents the Companys reserves for
life, accident, health and property and casualty losses as well
as loss adjustment expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Insurance
|
|
|
|
|
|
|
|
|
|
In Force
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Future policy benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
|
|
$
|
46,942
|
|
|
$
|
45,276
|
|
|
$
|
250,604
|
|
|
$
|
242,412
|
|
Mass market
|
|
|
3,900
|
|
|
|
4,228
|
|
|
|
5,534
|
|
|
|
6,167
|
|
Individual annuities
|
|
|
241
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,083
|
|
|
|
49,789
|
|
|
$
|
256,138
|
|
|
$
|
248,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health insurance policies
|
|
|
7,898
|
|
|
|
7,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,981
|
|
|
|
56,827
|
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
|
18,130
|
|
|
|
19,542
|
|
|
|
|
|
|
|
|
|
Losses, claims and loss adjustment expenses
|
|
|
50,112
|
|
|
|
52,499
|
|
|
|
|
|
|
|
|
|
Other policy liabilities
|
|
|
1,990
|
|
|
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance reserves and policyholder funds
|
|
$
|
129,213
|
|
|
$
|
130,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized premiums for accident and health insurance policies
were $49,864 and $46,077 at December 31, 2009 and 2008,
respectively.
Future
Policy Benefits
Liabilities for life insurance future policy benefits are based
upon assumed future investment yields, mortality rates, and
withdrawal rates after giving effect to possible risks of
unexpected claim experience. The assumed mortality and
withdrawal rates are based upon the Companys experience.
The interest rates assumed for life, accident and health are
generally: (i) 2.5% to 5.5% for issues prior to 1977,
(ii) 7% graded to 5.5% for 1977 through 1979 issues,
(iii) 9% for 1980 through 1987 issues, and (iv) 5% to
7% for 1988 and later issues.
Loss
and Claim Reserves
Loss and claim reserves represent estimates of projected
ultimate losses and are based upon: (a) managements
estimate of ultimate liability and claims adjusters
evaluations for unpaid claims reported prior to the close of the
accounting period, (b) estimates of incurred but not
reported (IBNR) claims based on past experience, and
(c) estimates of loss adjustment expenses. The estimated
liability is periodically reviewed by management and updated
with changes to the estimated liability recorded in the
statement of operations in the year in which such changes are
known.
48
Activity in the liability for unpaid loss and claim reserves is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at January 1
|
|
$
|
52,499
|
|
|
$
|
51,704
|
|
Less: Reinsurance recoverables
|
|
|
(14,870
|
)
|
|
|
(13,004
|
)
|
|
|
|
|
|
|
|
|
|
Net balance at January 1
|
|
|
37,629
|
|
|
|
38,700
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
65,093
|
|
|
|
62,569
|
|
Prior years
|
|
|
(7,620
|
)
|
|
|
(8,723
|
)
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
57,473
|
|
|
|
53,846
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
Current year
|
|
|
42,335
|
|
|
|
40,249
|
|
Prior years
|
|
|
14,144
|
|
|
|
14,668
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
56,479
|
|
|
|
54,917
|
|
|
|
|
|
|
|
|
|
|
Net balance at December 31
|
|
|
38,623
|
|
|
|
37,629
|
|
Plus: Reinsurance recoverables
|
|
|
11,489
|
|
|
|
14,870
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
50,112
|
|
|
$
|
52,499
|
|
|
|
|
|
|
|
|
|
|
Prior years development was primarily the result of better
than expected development on prior years IBNR reserves for
certain lines of business within American Southern.
Following is a reconciliation of total incurred claims to total
insurance benefits and losses incurred:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Total incurred claims
|
|
$
|
57,473
|
|
|
$
|
53,846
|
|
Cash surrender value and matured endowments
|
|
|
1,220
|
|
|
|
1,570
|
|
Benefit reserve changes
|
|
|
2,091
|
|
|
|
1,414
|
|
|
|
|
|
|
|
|
|
|
Total insurance benefits and losses incurred
|
|
$
|
60,784
|
|
|
$
|
56,830
|
|
|
|
|
|
|
|
|
|
|
In accordance with general practice in the insurance industry,
portions of the life, property and casualty insurance written by
the Company are reinsured; however, the Company remains liable
with respect to reinsurance ceded should any reinsurer be unable
or unwilling to meet its obligations. Approximately 88% of the
Companys reinsurance receivables were due from one
reinsurer as of December 31, 2009. Reinsurance receivables
of $10,157 were due from Swiss Reinsurance Corporation, rated
A+ (Strong) by Standard & Poors and
A (Excellent) by A.M. Best. Allowances for
uncollectible amounts are established against reinsurance
receivables, if appropriate.
49
The following table reconciles premiums written to premiums
earned and summarizes the components of insurance benefits and
losses incurred.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Direct premiums written
|
|
$
|
92,901
|
|
|
$
|
95,467
|
|
Plus premiums assumed
|
|
|
3,461
|
|
|
|
2,858
|
|
Less premiums ceded
|
|
|
(6,312
|
)
|
|
|
(6,350
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
90,050
|
|
|
|
91,975
|
|
|
|
|
|
|
|
|
|
|
Change in unearned premiums
|
|
|
1,412
|
|
|
|
(594
|
)
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
91,462
|
|
|
$
|
91,381
|
|
|
|
|
|
|
|
|
|
|
Provision for benefits and losses incurred
|
|
$
|
62,129
|
|
|
$
|
60,786
|
|
Reinsurance loss recoveries
|
|
|
(1,345
|
)
|
|
|
(3,956
|
)
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses incurred
|
|
$
|
60,784
|
|
|
$
|
56,830
|
|
|
|
|
|
|
|
|
|
|
Components of reinsurance receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Receivable on unpaid losses
|
|
$
|
11,489
|
|
|
$
|
14,870
|
|
Receivable on paid losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance receivables
|
|
$
|
11,489
|
|
|
$
|
14,870
|
|
|
|
|
|
|
|
|
|
|
Total income taxes were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Tax expense (benefit) on income or loss from:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2,557
|
|
|
$
|
(526
|
)
|
Discontinued operations (Note 17)
|
|
|
|
|
|
|
(1,230
|
)
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit) on income or loss
|
|
|
2,557
|
|
|
|
(1,756
|
)
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) on components of shareholders equity:
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investment securities
|
|
|
1,724
|
|
|
|
(4,038
|
)
|
Fair value adjustment to derivative financial instrument
|
|
|
188
|
|
|
|
(471
|
)
|
Minimum pension liability adjustment
|
|
|
131
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit) on shareholders equity
|
|
|
2,043
|
|
|
|
(4,323
|
)
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit)
|
|
$
|
4,600
|
|
|
$
|
(6,079
|
)
|
|
|
|
|
|
|
|
|
|
50
A reconciliation of the differences between income taxes
computed at the federal statutory income tax rate and the income
tax expense (benefit) from continuing operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Federal income tax provision at statutory rate of 35%
|
|
$
|
473
|
|
|
$
|
(347
|
)
|
Tax exempt interest and dividends received deductions
|
|
|
(230
|
)
|
|
|
(207
|
)
|
Small life deduction
|
|
|
(119
|
)
|
|
|
(350
|
)
|
Non-deductible goodwill
|
|
|
|
|
|
|
91
|
|
Loss carryforward from sale of subsidiaries
|
|
|
|
|
|
|
(5,155
|
)
|
Intercompany fees(1)
|
|
|
|
|
|
|
1
|
|
Other permanent differences
|
|
|
42
|
|
|
|
39
|
|
Change in asset valuation allowance due to change in judgment
relating to realizability of deferred tax assets
|
|
|
2,016
|
|
|
|
5,155
|
|
Adjustment for prior years estimates to actual
|
|
|
381
|
|
|
|
247
|
|
State income taxes
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
2,557
|
|
|
$
|
(526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Intercompany fees from discontinued operations eliminated in
consolidated tax return. |
The primary differences between the effective tax rate and the
federal statutory income tax rate result from the
dividends-received deduction (DRD), the small life
insurance company deduction (SLD) and the change in
deferred tax asset valuation allowance. The current estimated
DRD is adjusted as underlying factors change and can vary from
estimates based on, but not limited to, actual distributions
from these investments as well as appropriate levels of taxable
income. The SLD varies in amount and is determined at a rate of
60 percent of the tentative life insurance company taxable
income (LICTI). The amount of the SLD for any
taxable year is reduced (but not below zero) by 15 percent
of the tentative LICTI for such taxable year as it exceeds
$3,000 and is ultimately phased out at $15,000. The change in
deferred tax asset valuation allowance was due to the
reassessment of the realization of tax assets related to certain
capital losses on investments as well as other capital loss
carryforward benefits.
Deferred tax liabilities and assets at December 31, 2009
and 2008 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
$
|
(2,999
|
)
|
|
$
|
(2,856
|
)
|
Deferred and uncollected premiums
|
|
|
(732
|
)
|
|
|
(704
|
)
|
Other
|
|
|
(10
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(3,741
|
)
|
|
|
(3,585
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
2,221
|
|
|
|
2,105
|
|
Insurance reserves
|
|
|
3,069
|
|
|
|
2,918
|
|
Capital loss carryforwards
|
|
|
7,156
|
|
|
|
5,155
|
|
Impaired assets
|
|
|
1,077
|
|
|
|
3,302
|
|
Alternative minimum tax credit
|
|
|
108
|
|
|
|
55
|
|
Net unrealized investment losses
|
|
|
2,369
|
|
|
|
4,093
|
|
Bad debts and other
|
|
|
953
|
|
|
|
1,689
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
16,953
|
|
|
|
19,317
|
|
|
|
|
|
|
|
|
|
|
Asset valuation allowance
|
|
|
(7,171
|
)
|
|
|
(5,155
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
6,041
|
|
|
$
|
10,577
|
|
|
|
|
|
|
|
|
|
|
51
The components of the income tax expense (benefit) from
continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current Federal
|
|
$
|
70
|
|
|
$
|
2,011
|
|
Current State
|
|
|
(6
|
)
|
|
|
|
|
Deferred Federal
|
|
|
2,493
|
|
|
|
(2,537
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,557
|
|
|
$
|
(526
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company had regular federal net
operating loss carryforwards (NOLs) of approximately
$6,346 expiring generally between 2010 and 2028. Currently, the
Company believes that deferred income tax benefits relating to
the NOLs will be realized. However, realization of the NOLs will
be assessed periodically based on the Companys current and
anticipated results of operations, and amounts could increase or
decrease in the near term if estimates of future taxable income
change.
As of December 2009 and 2008, a valuation allowance of $7,171
and $5,155, respectively, was established against deferred
income tax benefits relating primarily to capital loss
carryforwards that may not be realized. During 2009, the Company
increased its existing valuation allowance by $2,016 as it does
not currently anticipate having sufficient future capital gains
to offset certain of these capital losses during the applicable
carryforward period. Further, 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 $5,155. 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, as of December 31, 2008, a
valuation allowance of $5,155 was established to reduce this
deferred tax benefit to zero. The Company continues to
periodically assess the potential realization of this and all
other deferred tax benefits.
The Company has formal tax-sharing agreements, and files a
consolidated income tax return, with its subsidiaries.
|
|
Note 6.
|
Credit
Arrangements
|
Bank
Debt
At December 31, 2009, the Company had 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 was equal to $10,500
at December 31, 2009. 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%. 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
certain 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. During 2009, there was no
balance outstanding under this Credit Agreement and the Company
was in compliance with all terms of the Credit Agreement. The
termination date of this Credit Agreement is June 30, 2010.
Effective October 28, 2008, the Credit Agreement was
amended to allow the Company to redeem all the outstanding
shares of the Companys Series B Preferred Stock, par
value $1.00 per share (Series B Preferred
52
Stock) for $13,400, and to allow the Company to pay a
dividend to the holders thereof and in connection therewith of
$1,675. This redemption, and the related dividend payment, was
completed on October 28, 2008. See Note 10.
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 December 31, 2009 and 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 December 31, 2009
|
|
|
18,042
|
|
|
|
23,196
|
|
Balance December 31, 2008
|
|
|
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. |
|
(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 7.
|
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
53
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 began making payments to
Wachovia under the zero cost rate collar on June 4, 2008.
As a result of interest rates remaining below the LIBOR floor
rate of 4.77%, these payments to Wachovia under the zero cost
rate collar continued throughout 2009. While the Company is
exposed to counterparty risk should Wachovia fail to perform,
based on the current level of interest rates, and coupled with
the current macroeconomic outlook, the Company believes that its
current counterparty risk exposure is minimal.
The estimated fair value and related carrying value of the
Companys interest rate collar at December 31, 2009
was a liability of approximately $1,547 with a corresponding
increase in accumulated other comprehensive loss in
shareholders equity, net of deferred tax.
|
|
Note 8.
|
Commitments
and Contingencies
|
Litigation
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 adverse effect on the
business or financial condition of the Company.
Operating
Lease Commitments
The Companys rental expense, including common area
charges, for operating leases was $1,184 and $1,253 in 2009 and
2008, respectively. The Companys future minimum base lease
obligations under non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
2010
|
|
$
|
754
|
|
|
|
|
|
2011
|
|
|
385
|
|
|
|
|
|
2012
|
|
|
394
|
|
|
|
|
|
2013
|
|
|
404
|
|
|
|
|
|
2014
|
|
|
415
|
|
|
|
|
|
Thereafter
|
|
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9.
|
Employee
Benefit Plans
|
Stock
Options
In accordance with the Companys 1992 Incentive Plan, the
Board of Directors was authorized to grant up to 1,800,000 stock
options or share awards. The Board of Directors may grant:
(a) incentive stock options within the meaning of
Section 422 of the Internal Revenue Code;
(b) non-qualified stock options; (c) performance
units; (d) awards of restricted shares of the
Companys common stock and other stock unit awards;
(e) deferred shares of common stock; or (f) all or any
combination of the foregoing to officers and key employees.
Stock options granted under this plan expire five or ten years
from the date of grant, as specified in an award agreement.
Vesting occurs at 50% upon issuance of an option, and the
remaining portion vests in 25% increments in each of the
following two years. In accordance with the Companys
1996 Director Stock Option Plan, a maximum of 200,000 stock
options were authorized to be granted, which fully vest six
months after the grant date. In accordance with the
Companys 2002 Incentive Plan (the 2002 Plan),
the Board of Directors was authorized to grant up to 2,000,000
stock options or share awards. Subject to adjustment as provided
in the 2002 Plan, the Board of Directors is authorized to grant:
(a) incentive stock options; (b) non-qualified stock
options; (c) stock appreciation rights; (d) restricted
shares; (e) deferred shares; and (f) performance
shares
and/or
performance units. Further, the Board may authorize the granting
to non-employee directors of stock options
and/or
restricted shares. A total of 28,688 restricted shares were
issued to the Companys Board of Directors under the 2002
Plan in 2008. No restricted shares were issued in 2009. As of
December 31, 2009, an aggregate of twenty-two employees,
officers and directors held options under the three plans.
54
A summary of the status of the Companys stock options at
December 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Shares
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Options outstanding, beginning of year
|
|
|
543,500
|
|
|
$
|
1.44
|
|
|
|
624,000
|
|
|
$
|
1.42
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled or expired
|
|
|
|
|
|
|
|
|
|
|
(80,500
|
)
|
|
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of year
|
|
|
543,500
|
|
|
|
1.44
|
|
|
|
543,500
|
|
|
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
543,500
|
|
|
|
1.44
|
|
|
|
543,500
|
|
|
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for future grant
|
|
|
2,531,406
|
|
|
|
|
|
|
|
2,531,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data on options outstanding and exercisable at December 31,
2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Range of
|
|
Number of
|
|
|
Remaining Life
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
Options
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
$1.00 to $1.50
|
|
|
307,500
|
|
|
|
1.78
|
|
|
$
|
1.25
|
|
$1.51 to $2.00
|
|
|
236,000
|
|
|
|
3.16
|
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
543,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of options granted is determined on the date of
grant using the Black-Scholes option pricing model, which
requires the input of subjective assumptions, including the
expected volatility of the stock price. No options were granted
in 2009 or 2008.
401(k)
Plan
The Company initiated an employees savings plan qualified
under Section 401(k) of the Internal Revenue Code in May
1995. The plan covers substantially all of the Companys
employees. Effective January 1, 2009, the Company modified
its employees savings plan (the Plan) such
that the Plan would operate on a safe harbor basis. Under the
Plan, employees may defer up to 50% of their compensation, not
to exceed the annual deferral limit. The Companys total
matching contribution for 2009 of $294 consisted of a
contribution equal to 100% of up to the first 4% of each
participants contributions, and was made in cash. The
Companys 2008 matching contribution was in Company common
stock and was equal to 50% of up to the first 6% of each
participants contribution, with a total value of
approximately $147.
Defined
Benefit Pension Plans
The Company has a qualified funded noncontributory defined
benefit pension plan covering the employees of American Southern
and prior to May 2009 had an unfunded noncontributory defined
benefit pension plan (SERP). The plans provide
defined benefits based on years of service and average salary.
Effective May 31, 2008, the Company froze all benefits
related to its qualified pension plan, as well as the SERP. In
May 2009, the Company terminated the SERP and distributed
the accumulated benefits to those participating employees. The
Company intends to terminate the qualified pension plan, pending
governmental approval. On March 11, 2010, the Company
received a determination letter from the Internal Revenue
Service approving the termination of the Companys
qualified pension plan. It is anticipated that the Company will
distribute the accumulated benefits to participating employees
in the first half of 2010. The measurement date for these plans
was December 31 of each year.
55
Obligation
and Funded Status
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year
|
|
$
|
4,518
|
|
|
$
|
6,103
|
|
Distribution of accumulated SERP benefits
|
|
|
(2,262
|
)
|
|
|
|
|
Service cost
|
|
|
|
|
|
|
185
|
|
Interest cost
|
|
|
128
|
|
|
|
338
|
|
Plan curtailment
|
|
|
|
|
|
|
(1,005
|
)
|
Actuarial gain (loss)
|
|
|
12
|
|
|
|
(112
|
)
|
Gross benefits paid
|
|
|
(53
|
)
|
|
|
(991
|
)
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at end of year
|
|
|
2,343
|
|
|
|
4,518
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
2,139
|
|
|
|
3,164
|
|
Employer contributions
|
|
|
27
|
|
|
|
132
|
|
Actual return on plan assets
|
|
|
(19
|
)
|
|
|
(166
|
)
|
Gross benefits paid
|
|
|
(53
|
)
|
|
|
(991
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
2,094
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
Funded Status of Plan
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
|
(249
|
)
|
|
|
(2,379
|
)
|
Unrecognized net actuarial loss
|
|
|
|
|
|
|
375
|
|
Additional minimum liability
|
|
|
|
|
|
|
(375
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized in accrued liabilities at end of year
|
|
$
|
(249
|
)
|
|
$
|
(2,379
|
)
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit plans
at December 31, 2009 and 2008 was $2,343 and $4,518,
respectively.
The weighted-average assumptions used to determine the benefit
obligation at December 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Discount rate to determine the projected benefit obligation
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Projected annual salary increases
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
Included above in the 2008 pension disclosure is one plan which
was unfunded. The projected benefit obligation, accumulated
benefit obligation and fair value of plan assets for this plan
were $2,262, $2,262, and $0, respectively, as of
December 31, 2008.
Components
of Net Periodic Benefit Cost
Net periodic pension cost for the Companys qualified and
non-qualified defined benefit plans for the years ended
December 31, 2009 and 2008 included the following
components:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
185
|
|
Interest cost
|
|
|
148
|
|
|
|
338
|
|
Expected return on plan assets
|
|
|
|
|
|
|
(217
|
)
|
Net amortization
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total pension benefit expense
|
|
$
|
148
|
|
|
$
|
386
|
|
|
|
|
|
|
|
|
|
|
56
The weighted-average assumptions used to determine the net
periodic benefit cost for the year ended December 31, 2008
were as follows:
|
|
|
|
|
|
|
2008
|
|
Discount rate to determine the net periodic benefit cost
|
|
|
5.75
|
%
|
Expected long-term rate of return on plan assets used to
determine net periodic pension cost
|
|
|
7.00
|
%
|
Projected annual salary increases
|
|
|
4.50
|
%
|
The net periodic benefit cost for the year ended
December 31, 2009 was determined based on the estimated
ultimate obligation at the termination of the qualified pension
plan.
At December 31, 2009, the qualified defined benefit plan
assets (the Plan Assets) were invested in the
Evergreen Treasury Money Market Fund (the Evergreen
Fund). The Evergreen Fund invests 100% of its assets in
U.S. Treasury securities. The Companys investment
strategy with respect to pension assets is to invest the assets
in accordance with ERISA and fiduciary standards. Currently, the
Companys primary investment objective is to preserve the
Plan Assets pending government approval to terminate the
qualified defined benefit plan and distribute accumulated assets
to its employees. The Evergreen Fund does not include any equity
securities of the Company in its portfolio at any time.
Expected
Cash Flows and Payments
The Company expects to pay the $2,343 accumulated benefit
obligation in connection with the termination of the qualified
defined benefit plan in 2010.
On October 28, 2008, the Company redeemed all of the issued
and outstanding shares of Series B Preferred Stock at the
stated value of $100 per share, for an aggregate payment of
$13,400. In connection therewith, the Company also paid $1,675
in dividends to the Holders of the Series B Preferred Stock
in satisfaction of a portion of the accrued but unpaid dividends
on the Series B Preferred Stock through the date of
redemption. The Holders of the Series B Preferred Stock
agreed to discharge the Company from any obligation to pay the
remaining $13,795 of accrued but unpaid dividends on the
Series B Preferred Stock and to release the Company from
any further obligations thereunder. As a result, the reversal of
the $13,795 of accrued but unpaid dividends on the Series B
Preferred Stock was recorded as a capital contribution during
the fourth quarter of 2008.
Also on October 28, 2008, the Company entered into an
amendment to its Credit Agreement to allow it to complete the
foregoing transactions. See Note 6.
The Company had 70,000 shares of Series D Preferred
Stock (Series D Preferred Stock) outstanding at
December 31, 2009 and 2008. All of the shares of
Series D Preferred Stock are held by an affiliate of the
Companys Chairman Emeritus. The outstanding shares of
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 the
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.
During 2009, the Company paid $508 in Series D Preferred
Stock dividends. During 2008, the Company issued common stock in
lieu of Series D Preferred Stock dividend payments of $508.
As of December 31, 2009, the Company had accrued but unpaid
dividends on the Series D Preferred Stock of $23.
57
|
|
Note 11.
|
Earnings
(Loss) Per Common Share
|
A reconciliation of the numerator and denominator of the
earnings per common share calculations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic and Diluted Loss Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before preferred stock dividends
|
|
$
|
(1,207
|
)
|
|
|
22,307
|
|
|
|
|
|
Less preferred stock dividends
|
|
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations applicable to common shareholders
|
|
$
|
(1,715
|
)
|
|
|
22,307
|
|
|
$
|
(.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic and Diluted Loss Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before preferred stock dividends
|
|
$
|
(466
|
)
|
|
|
21,874
|
|
|
|
|
|
Less preferred stock dividends
|
|
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations applicable to common shareholders
|
|
$
|
(1,994
|
)
|
|
|
21,874
|
|
|
$
|
(.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumed conversion of the Series D Preferred Stock and
all outstanding stock options were excluded from the earnings
per common share calculation for 2009 and 2008 since their
impact was antidilutive.
|
|
Note 12.
|
Statutory
Reporting
|
The assets, liabilities and results of operations have been
reported on the basis of GAAP, which varies from statutory
accounting practices (SAP) prescribed or permitted
by insurance regulatory authorities. The principal differences
between SAP and GAAP are that under SAP: (i) certain assets
that are non-admitted assets are eliminated from the balance
sheet; (ii) acquisition costs for policies are expensed as
incurred, while they are deferred and amortized over the
estimated life of the policies under GAAP; (iii) the
provision that is made for deferred income taxes is different
than under GAAP; (iv) the timing of establishing certain
reserves is different than under GAAP; and (v) valuation
allowances are established against investments.
The amount of statutory net income and surplus
(shareholders equity) from continuing operations for the
Parents insurance subsidiaries for the years ended
December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Life and Health, net income
|
|
$
|
2,469
|
|
|
$
|
1,269
|
|
Property and Casualty, net income
|
|
|
5,429
|
|
|
|
4,472
|
|
|
|
|
|
|
|
|
|
|
Statutory net income
|
|
$
|
7,898
|
|
|
$
|
5,741
|
|
|
|
|
|
|
|
|
|
|
Life and Health, surplus
|
|
$
|
31,493
|
|
|
$
|
29,876
|
|
Property and Casualty, surplus
|
|
|
38,854
|
|
|
|
36,439
|
|
|
|
|
|
|
|
|
|
|
Statutory surplus
|
|
$
|
70,347
|
|
|
$
|
66,315
|
|
|
|
|
|
|
|
|
|
|