UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-3722
ATLANTIC AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Georgia
(State or other jurisdiction of incorporation or organization)
58-1027114
(I.R.S. Employer Identification No.)
4370 Peachtree Road, N.E.,
Atlanta, Georgia
(Address of principal executive offices)
30319
(Zip Code)
(Registrant’s telephone number, including area code) (404) 266-5500
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, par value
$1.00 per share
Name of exchange
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
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 No
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of voting and nonvoting common stock held by non-affiliates of the registrant as of June 28, 2013, the last business
day of the registrant’s most recently completed second fiscal quarter, was $20,425,813. 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, and 10% or greater stockholders, of the registrant, some of whom may
not be deemed to be affiliates upon judicial determination. On March 18, 2014 there were 21,066,647 shares of the registrant’s common stock, par
value $1.00 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant’s Proxy Statement for the 2014 Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days of the registrant’s fiscal year end, have been incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of
this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policyholder and Claims Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NAIC Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-Based Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Information by Industry Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
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PART III
Item 13.
Item 14.
PART IV
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Item 1.
Business
The Company
PART I
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. The Parent’s 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 and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”) within the life and
health insurance industry. Each of American Southern and Bankers Fidelity is managed separately based upon
the type of products it offers, and is evaluated on its individual performance. The Company’s 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 Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Property and Casualty Operations
American Southern comprises the Company’s 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 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 Southern’s premiums are derived from its automobile lines of business, American
Southern also offers personal property, inland marine and general liability coverages. Additionally, American
Southern directly provides surety bond coverage for school bus transportation and subdivision construction, as
well as performance and payment bonds.
1
The following table summarizes, for the periods indicated, the allocation of American Southern’s net
earned premiums from each of its principal product lines:
Automobile liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile physical damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life and Health Operations
Year Ended December 31,
2013
2012
(In thousands)
$ 24,259
8,365
3,521
2,699
7,007
$ 45,851
$ 17,319
7,556
3,442
2,033
7,121
$ 37,471
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
insurance products, primarily Medicare supplement insurance, accounted for 88.8% of Bankers Fidelity’s net
earned premiums in 2013 while life insurance, including both whole and term life insurance policies, accounted
for the balance. In terms of the number of policies written in 2013, 81.1% were health insurance policies and
18.9% were life insurance policies.
The following table summarizes, for the periods indicated, the allocation of Bankers Fidelity’s net earned
premiums from each of its principal product lines followed by a brief description of the principal products:
Life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accident and health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total health insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2013
2012
(In thousands)
$ 11,139
83,979
4,661
88,640
$ 99,779
$ 11,862
72,920
4,490
77,410
$ 89,272
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 7 of the 11 standardized Medicare supplement policies
created under the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), 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
standard 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.
Marketing
Property and Casualty Operations
A portion of American Southern’s business is marketed through a small number of specialized, experienced
independent agents. American Southern’s agent selection process is actively managed by internal marketing
personnel with oversight from management. Senior management carefully reviews all new programs prior to
2
acceptance. Most of American Southern’s 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 traditional independent agents, broker-agents typically
interested in a specific product of Bankers Fidelity and special market agents who promote workplace,
association and/or branded products.
Bankers Fidelity has implemented an agent qualification process and had 2,485 licensed agents as of
December 31, 2013. The agents generally concentrate their sales activities in both the accident and health or life
insurance product lines. During 2013, approximately 933 of the licensed agents wrote policies on behalf of
Bankers Fidelity.
Bankers Fidelity, in an effort to motivate all of its licensed agents to market its products, offers the
following: competitive products and commission structures, efficient claims service, prompt payment of
commissions that vest immediately, simplified policy issuance procedures, periodic sales incentive programs
and, as described below, for traditional independent agents, protected sales territories determined based on
specific counties and/or zip codes.
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 may
also, in turn, recommend appointment of other independent agents. The standard agreements set forth the
commission arrangements and are terminable without cause 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 system 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 agent’s most important
dilemma -- prospecting -- and allows Bankers Fidelity to build long-term relationships with agents who view
Bankers Fidelity as their primary company. In addition, management believes that Bankers Fidelity’s product line
is less sensitive to competitor pricing and commissions because of the perceived value of the protected territory
and the lead generation system. In protected geographical areas, production per agent has historically compared
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
company’s lead generation system, but can qualify for other incentives that Bankers Fidelity offers to its
traditional independent agents.
3
Bankers Fidelity also has a number of agents, some of whom belong to marketing organizations that solicit
business from various groups including employers, trade associations and/or other organizations. Depending on
the group’s needs, these agents may target one specific product or a group of Bankers Fidelity’s products to
market to a group’s members. These agents also do not participate in the company’s lead generation system, but
can also qualify for other incentives that Bankers Fidelity offers to its traditional independent agents.
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 physically inspect new
accounts. The underwriting results from each insured are reviewed on an individual basis periodically. When
results are below expectations, management takes corrective action which may include adjusting rates, revising
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 $50,000, 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 published age guidelines and coverage limits. Approximately 95% of the annualized premiums for
both life and health insurance sold during 2013 were derived from insurance written on a non-medical basis. For
the senior market, Bankers Fidelity offers life products primarily on a simplified policy issue basis with
coverage amounts up to $50,000 for preferred rates, up to $35,000 for standard rates and up to $20,000 for
graded death benefits and modified rates. Bankers Fidelity retains a maximum coverage amount of $100,000
with respect to any individual life policy (see “Reinsurance”).
Applications for insurance are reviewed to determine the face amount, age, medical history and any other
necessary information. Bankers Fidelity utilizes information obtained directly from the insured, the Medical
Information Bureau (“M.I.B.”), paramedical testing, and/or medical records. Bankers Fidelity may also utilize
investigative services to supplement and substantiate information. For certain limited coverages, Bankers Fidelity
has adopted simplified policy issuance procedures by which an application containing a variety of health related
questions is submitted. For these plans, Bankers Fidelity obtains M.I.B. and prescription drug utilization reports
and conducts a telephone interview, however, will generally not request paramedical testing or medical records.
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 Company’s 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 an 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.
4
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 Fidelity’s 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 Fidelity’s 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 Company’s reserves for losses and claims and
reserves for loss adjustment expenses (“LAE”) for the periods indicated:
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Reinsurance receivable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Reinsurance receivable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2013
2012
(In thousands)
62,873 $
(18,743)
44,130
57,975
(15,673)
42,302
97,904
(1,657)
96,247
86,780
(1,841)
84,939
66,705
24,968
91,673
48,704
14,314
63,018 $
61,786
21,325
83,111
44,130
18,743
62,873
(1) Favorable loss development from property and casualty operations for the years ended December 31,
2013 and 2012 was $2.5 million and $1.7 million, respectively. See Note 3 of Notes to Consolidated
Financial Statements.
5
Reserves are set by line of business within each of the subsidiaries. At December 31, 2013, approximately
81% of the reserves related to property and casualty losses and approximately 19% related to life and health
losses. The Company’s property and casualty operations incur losses which may take extended periods of time
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 Company’s general practice is to reserve at the higher end of the
determined reasonable range of loss if no other value within the range is determined to be more probable. The
Company’s life and health operations generally incur 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 Company’s long-tail line of
business generally consists of its general liability coverage while the short-tail lines of business generally
consist of property and automobile coverages.
The Company’s actuaries regularly review reserves for both current and prior accident years using the most
current claims data. These reviews incorporate a variety of actuarial methods (discussed 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 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 in each period. 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.
6
Estimating case reserves and ultimate losses involves various considerations which differ according to the
line of business. In addition, changes in legislative and regulatory environments may impact loss 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 Company’s reserves for losses and claims by product line at December 31, 2013 were
as follows:
Business automobile . . . . . . . . . . . . . . . . . . . . . . . . . . $
Personal automobile/physical damage . . . . . . . . . .
General & other liability . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Other lines (including life)
Medicare supplement . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated loss adjustment reserves . . . . . . . . . . .
Total reserves for losses and claims . . . . . . . . . . $
Case
19,559
1,086
2,728
2,481
151
-
26,005
IBNR
(In thousands)
13,121
$
184
7,982
4,278
9,513
1,935
37,013
$
$
$
Total
32,680
1,270
10,710
6,759
9,664
1,935
63,018
The Company’s 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, 2013
actuarial review indicated that reserves could be as much as 11.6% lower or as much as 9.3% 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 are expected to be
made in future periods. Any such revisions could be material, and may materially adversely affect the
Company’s 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 which 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 date, of amounts the
Company expects to pay on incurred claims. All balances are reviewed periodically by the Company’s
independent consulting actuary. Reserves for LAE are intended to cover the ultimate costs of settling claims,
including investigation and defense of any 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) management’s estimate of ultimate
liability and claims adjusters’ evaluations of 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 Company’s general practice is to reserve
at the higher end of the determined reasonable range of loss. The estimated liability is periodically reviewed and
7
updated, and changes to the estimated liability are recorded in the statement of operations in the period in which
such changes become known.
The following table sets forth the development of reserves for unpaid losses and claims determined using
generally accepted accounting principles of American Southern’s insurance lines from 2003 through 2013.
Specifically excluded from the table are the life and health division’s 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” for each year represents the aggregate change in
such year’s estimates through the end of 2013. Furthermore, the amount of the redundancy 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 may not ultimately be reflected in the Company’s net income.
Further, conditions and trends that have affected development of reserves in the past may not necessarily occur
in the future and there could be future events or actions that impact future development which have not existed
in the past. Accordingly, the accurate prediction of future redundancies based on the data in the following table
is not possible.
2013
2012
2011
2010
Year Ended December 31,
2008
2007
2009
(Dollars In thousands)
2006
2005
2004
2003
Reserve for
Losses and LAE . . . . $ 51,200 $ 52,764 $ 49,478 $ 46,092 $ 42,248 $
44,928 $ 43,994 $ 45,655 $ 43,593 $ 42,310 $ 39,042
Cumulative paid as of:
One year later . . . .
Two years later . . . .
Three years later . . . .
Four years later . . . .
Five years later . . . .
Six years later . . . .
Seven years later . . . .
Eight years later . . . .
Nine years later . . . .
Ten years later . . . .
25,352
18,959
34,805
15,183
25,333
34,266
10,486
17,462
23,231
29,254
13,627
19,003
22,197
24,016
28,898
11,630
21,187
23,993
25,733
27,160
31,659
18,010
24,793
29,338
30,853
31,486
32,415
35,695
14,254
23,967
27,235
29,179
30,629
30,961
31,346
33,776
16,521
24,217
28,775
31,019
31,594
32,149
32,248
32,403
34,237
13,772
22,202
26,673
28,645
30,257
30,447
30,616
30,685
30,809
32,611
End of year . . . . $ 51,200 $ 52,764 $ 49,478 $ 46,092 $ 42,248 $
47,639
44,180
46,109
39,999
38,859
39,153
32,563
30,562
30,288
31,798
Ultimate losses and LAE
reestimated as of:
One year later . . . .
Two years later . . . .
Three years later . . . .
Four years later . . . .
Five years later . . . .
Six years later . . . .
Seven years later . . . .
Eight years later . . . .
Nine years later . . . .
Ten years later . . . .
Cumulative
redundancy . . . .
$ 5,125 $ 3,369 $ 6,939 $ 10,450 $
24.7%
15.1%
6.8%
9.7%
33,663
29,903
29,077
29,162
30,156
33,091
44,928 $ 43,994 $ 45,655 $ 43,593 $ 42,310 $ 39,042
35,706
31,649
34,779
28,386
31,710
27,570
31,224
28,169
31,049
30,883
31,203
31,246
31,232
31,336
33,193
37,280
34,108
33,338
33,370
33,090
32,960
32,986
32,726
34,587
34,897
32,929
31,560
32,043
32,085
32,192
31,836
34,167
35,590
34,163
33,499
32,753
33,049
33,933
36,262
14,045 $ 10,903 $ 9,393 $ 9,426 $ 7,723 $
18.3%
20.6%
31.3%
24.8%
21.6%
5,849
15.0%
Note: This analysis is based on reserves for unpaid losses and claims, before consideration of reinsurance;
therefore the total indicated redundancies may not ultimately be reflected in the Company’s net income.
8
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 modifications to reflect actual experience. The use of significantly different assumptions, or actual
results that differ significantly from our estimates, could materially adversely affect our liquidity, results of
operations or financial condition. See Note 3 of Notes to Consolidated Financial Statements.
Reinsurance
The Company’s insurance subsidiaries from time to time 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 the
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 Southern’s 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 - $125,000
excess of $50,000 retention; Inland marine and commercial automobile physical damage - $125,000 excess of
$75,000 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 in aggregate
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
$100,000. At December 31, 2013, $18.5 million of the $259.7 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
9
operates. American Southern attempts to develop strong relationships with its agents and, consequently,
believes it is better positioned for new opportunities and programs with those agents.
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 offers life insurance products, Medicare supplement and other accident and health
insurance products with a focus on the senior market. Bankers Fidelity believes that its primary competitors 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 Healthcare, United World Life Insurance Company and Woodmen 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
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 higher 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 Best’s Insurance Reports, which includes
assessments and ratings of all insurance companies. A.M. Best’s ratings, which may be revised quarterly, fall
into fifteen categories ranging from A++ (Superior) to F (in liquidation). A.M. Best’s 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 Life Insurance Company is, as of the date of this report, rated “A-”
(Excellent) by A.M. Best.
Regulation
In common with all domestic insurance companies, the Company’s 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 Company’s 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
Company’s insurance subsidiaries are subject to such legislation and are registered as controlled insurers in
10
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.
Most states require that rate schedules and other information be filed with the state’s insurance regulatory
authority, either directly or through a ratings 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 any
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, 2013, securities with an amortized cost of $10.1
million were on deposit either directly with various state authorities or with third parties pursuant to various
custodial agreements on behalf of the Company’s insurance subsidiaries.
Virtually all of the states in which the Company’s 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, 2013, Bankers Fidelity Life Insurance Company was within the NAIC
“usual” range for all 13 financial ratios. American Southern was within the “usual” range for 12 of the 13
financial ratios, but was outside the “usual” range on the change in net premiums written ratio due to the
significant increase in premiums resulting from a new state contract awarded to American Southern in 2013.
Risk-Based Capital
Risk-based capital (“RBC”) is a metric used by ratings 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 company’s adjusted capital is
200% or lower than ACL, it is subject to regulatory action. At December 31, 2013, the Company’s insurance
subsidiaries exceeded the RBC regulatory levels.
11
Investments
Investment income represents a significant portion of the Company’s operating and 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 Company’s investments as of the dates indicated.
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government agencies and authorities . . . . . . . . . . . . . .
States, municipalities and political subdivisions. . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common and non-redeemable preferred stocks(2). . . . . . . .
Policy loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in unconsolidated trusts . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
$
17,240
7,611
7,620
166,481
2,351
201,303
21,890
2,369
2,123
38
1,238
228,961
7.6% $ 27,512
17,761
3.3
9,740
3.3
171,527
72.7
3,968
1.0
230,508
87.9
12,205
9.6
2,338
1.0
565
0.9
38
0.0
1,238
0.6
100.0% $ 246,892
11.1%
7.2
4.0
69.5
1.6
93.4
4.9
1.0
0.2
0.0
0.5
100.0%
(1) Fixed maturities are carried on the balance sheet at estimated fair value. Certain fixed maturities do not
have publicly quoted prices, and are carried at estimated fair value as determined by management.
Total adjusted cost of fixed maturities was $201.2 million as of December 31, 2013 and $202.0 million
as of December 31, 2012.
(2) Equity securities are carried on the balance sheet at estimated fair value. Total adjusted cost of equity
securities was $12.4 million as of December 31, 2013 and $10.5 million as of December 31, 2012.
(3) Policy 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 $2.1 million as of December 31, 2013 and $0.6 million as of December 31, 2012.
Estimated fair values are determined as discussed in Note 1 of Notes to Consolidated Financial Statements.
Results of the Company’s investment portfolio for periods shown were as follows:
Average investments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average yield on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2012
2013
(Dollars in thousands)
241,278
10,335
$ 233,007
11,310
4.3%
8,741
4.9%
1,434
(1) Calculated as the average of cash and investment balances (at amortized cost) at the beginning of the
year and at the end of each of the succeeding four quarters.
12
Management’s recent investment strategy has been a continued focus on quality, higher yielding corporate
bonds and preferred stocks; but at the same time shortening up on maturities to give recognition to the rise and
potential future increases in longer-term interest rates.
Employees
The Company and its subsidiaries employed 133 people at December 31, 2013. Of the 133 people
employed at December 31, 2013, 128 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 SEC’s 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 the Company that file
electronically with the SEC. The address of the SEC’s web site is 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 www.atlam.com.
Neither the Company’s 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, 2013, his name, age, positions with the Company and business experience for the
past five years, as well as any prior service to the Company.
Name
Hilton H. Howell, Jr. . . . . .
John G. Sample, Jr. . . . . . . .
Age
51
57
Positions with the Company
Chairman of the Board, President & CEO
Senior Vice President, CFO and Secretary
Officers are elected annually and serve at the discretion of the board of directors.
Director or
Officer Since
1992
2002
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
Director of the Company since October 1992 and effective February 24, 2009, began serving as Chairman of
the board of directors. He is also a director, and serves as chief executive officer, of Gray Television, Inc.
Mr. Sample has served as Senior Vice President and Chief Financial Officer of the Company since July
2002 and Secretary since May 2010. 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.
13
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 Company’s control and have been made based upon
management’s 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 management’s
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
occurrence or outcome of various factors. These factors include, among others: significant changes in general
economic conditions; 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 Company’s 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 Company’s business costs and required
capital levels; the Company’s 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
Company’s ability to control or predict. As a result, the Company’s actual financial condition and results of
operations 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.
Item 1A. Risk Factors
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 (a “smaller reporting company”), we have elected to comply with certain scaled disclosure
reporting obligations, and therefore do not have to provide the information required by this Item.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
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
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 an affiliate 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.
14
American Southern leases space for its office in a building located in Atlanta, Georgia. 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, and expect to continue to be, 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 Company’s
consolidated financial condition, although the results of such litigation could be material to the consolidated
results of operations for any given period.
Item 4.
Mine Safety Disclosures
Not applicable.
15
PART II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
The Company’s common stock is quoted on the Nasdaq Global Market (Symbol: AAME). As of March 18,
2014, there were 3,897 shareholders of record. The following table sets forth, for the periods indicated, the high
and low sales prices of the Company’s common stock as reported on the Nasdaq Global Market.
Year Ended December 31,
High
Low
2013
1st quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2nd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4th quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
1st quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2nd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4th quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.45 $
4.19
4.05
4.13
3.03 $
3.00
2.80
3.35
2.52
3.01
3.54
3.64
1.91
2.44
2.51
2.57
During 2013, the Company paid an annual cash dividend of $0.02 per share. In addition, on February 25,
2014, the Company’s board of directors declared an annual cash dividend of $0.02 per share that is payable to
shareholders of record as of the close of business on March 27, 2014. Payment of dividends in the future will be
at the discretion of the Company’s 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 Company’s primary recurring
source of cash for the payment of dividends is dividends from its subsidiaries; although as of December 31,
2013, the Parent held unrestricted cash and investment balances of approximately $32.0 million. Under the
insurance code of the state in which each insurance subsidiary is domiciled, dividend payments to the Company
by its insurance subsidiaries are subject to certain limitations without the prior approval of the applicable state’s
Insurance Commissioner.
Issuer Purchases of Equity Securities
On October 30, 2012, the board of directors of the Company approved a plan that allows for the repurchase
of up to 750,000 shares of the Company’s common stock (the “Repurchase Plan”) on the open market or in
privately negotiated transactions, as determined by an authorized officer of the Company. Any such repurchases
can be made from time to time in accordance with applicable securities laws and other requirements.
16
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, 2013.
Period
October 1 – October 31, 2013 . . . . . . . . . . . . . . . . . .
November 1 – November 30, 2013 . . . . . . . . . . . . . .
December 1 – December 31, 2013 . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
50,061
-
86,265
136,326
$
$
4.08
-
3.99
4.02
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
50,061
-
86,265
136,326
Maximum
Number of
Shares that
May Yet be
Purchased
Under the
Plans or
Programs
459,150
459,150
372,885
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 above.
Stock Performance Graph
As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting
obligations, and therefore do not have to provide the information required by this Item.
Item 6.
Selected Financial Data
As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting
obligations, and therefore do not have to provide the information required by this Item.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of the financial condition and results of operations
of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively with
the Parent, the “Company”) for the years ended December 31, 2013 and 2012. 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”) in the property and casualty insurance industry, and Bankers Fidelity
Life Insurance Company and Bankers Fidelity Assurance Company (together known as “Bankers Fidelity”) in
the life and health insurance industry. Each operating company is managed separately, offers different products
and is evaluated on its individual performance.
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 (“GAAP”) and, in management’s belief, conform to general
practices within the insurance industry. The following is an explanation of the Company’s 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
management’s 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 Company’s financial condition or
liquidity, although changes could have a material effect on its consolidated results of operations.
17
Unpaid loss and loss adjustment expenses comprised 29% of the Company’s total liabilities at December
31, 2013. This liability includes estimates for: 1) unpaid losses on claims reported prior to December 31, 2013,
2) future development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to December
31, 2013 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims
incurred prior to December 31, 2013. 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,
2013 but not yet reported, and estimates of unpaid loss adjustment expenses are developed based on the
Company’s historical experience, using actuarial methods to assist in the analysis. The Company’s 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 Company’s 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 Company’s 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 Company’s recorded liability for unpaid loss and loss adjustment expenses is
adjusted. In the event the Company’s actual reported losses in any period are materially in excess of the
previously estimated amounts, such losses, to the extent reinsurance coverage does not exist, could have a
material adverse effect on the Company’s results of operations.
Future policy benefits comprised 32% of the Company’s total liabilities at December 31, 2013. 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 Company’s experience. If actual results differ from the initial
assumptions, the amount of the Company’s recorded liability could require adjustment.
Deferred acquisition costs comprised 9% of the Company’s total assets at December 31, 2013. Deferred
acquisition costs are commissions, premium taxes, and other costs that vary with and are primarily related to the
acquisition of new and renewal business and are generally deferred and amortized. The deferred amounts are
recorded as an asset on the balance sheet and amortized to expense in a systematic manner. Traditional life
insurance and long-duration health insurance deferred policy acquisition costs are amortized over the estimated
premium-paying period of the related policies using assumptions consistent with those used in computing the
related liability for policy benefit reserves. The deferred acquisition costs for property and casualty insurance
and short-duration health insurance are amortized over the effective period of the related insurance policies.
Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future
premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and
investment income (for property and casualty and short-duration health insurance). Assessments of
recoverability for property and casualty and short-duration health insurance are extremely sensitive to the
estimates of a subsequent year’s 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 previous calendar year.
Receivables are amounts due from reinsurers, insureds and agents, and any sales of investment securities not
yet settled, and comprised 7% of the Company’s total assets at December 31, 2013. Insured and agent balances are
evaluated periodically for collectibility. Annually, the Company performs an analysis of the creditworthiness of the
reinsurers with whom the Company contracts 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
18
probable, against the related receivable. Losses are recognized by the Company when determined on a specific
account basis and a general provision for loss is made based on the Company’s historical experience.
Cash and investments comprised 82% of the Company’s total assets at December 31, 2013. Substantially all
of the Company’s 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 maturities that do not have publicly quoted values, but had
an estimated fair value as determined by management of $2.0 million at December 31, 2013. Such values
inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility
than the value of securities with publicly quoted market values. 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 investment’s indicated fair value has declined below its cost basis for a period of time, the Company
evaluates such investment for an other than temporary impairment. The evaluation for an 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. Potential risks and uncertainties
include, among other things, changes in general economic conditions, an issuer’s financial condition or near term
recovery prospects and the effects of changes in interest rates. In evaluating a potential impairment, the Company
considers, among other factors, management’s intent and ability to hold these securities until price recovery, the
nature of the investment and the expectation of prospects for the issuer and its industry, the status of an issuer’s
continued satisfaction of its obligations in accordance with their contractual terms, and management’s expectation
as to the issuer’s ability and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit
status. If an other than 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 any such write down does not impact the reported
value of the investment in the Company’s balance sheet, it is reflected as a realized investment loss in the
Company’s consolidated statements of operations in the period incurred.
The Company determines the fair values of certain financial instruments based on the fair value hierarchy
established in Accounting Standards Codification (“ASC”) 820-10-20, Fair Value Measurements and
Disclosures (“ASC 820-10-20”). The fair values of fixed maturities 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 and Note 15 of the accompanying notes to consolidated financial statements with respect to 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.
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 asset 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 Company’s
significant accounting policies.
19
Overall Corporate Results
Revenue
Property and Casualty:
American Southern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life and Health:
Bankers Fidelity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes
Property and Casualty:
American Southern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life and Health:
Bankers Fidelity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2013
2012
(In thousands)
$
53,938
$ 42,414
110,069
1,362
$ 165,369
96,566
848
$ 139,828
$
7,630
$
2,825
9,262
(5,686)
11,206
11,022
$
$
8,311
(6,054)
5,082
4,436
$
$
Management also considers and evaluates performance by analyzing the non-GAAP measure operating
income, and believes it is a useful metric for investors, potential investors, securities analysts and others
because it isolates the “core” results of the Company before considering certain items that are either beyond the
control of management (such as taxes, which are subject to timing, regulatory and rate changes depending on
the timing of the associated revenues and expenses) or are not expected to regularly impact the Company’s
operational results (such as any realized investment gains, which are not a part of the Company’s primary
operations and are, to an extent, subject to discretion in terms of timing of realization).
A reconciliation of net income to operating income is as follows:
Year Ended December 31,
2013
2012
(In thousands)
Reconcilation of Net Income to non-GAAP Measurement
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
11,022
184
(8,741)
2,465
$
$
4,436
646
(1,434)
3,648
On a consolidated basis, the Company had net income of $11.0 million, or $0.48 per diluted share, in 2013,
compared to net income of $4.4 million, or $0.18 per diluted share, in 2012. Operating income was $2.5 million
in 2013 compared to $3.6 million in 2012. The decrease in operating income during 2013 was primarily
attributable to increases in advertising expense for television commercials and social media initiatives as well as
actuarial consulting expenses related to development of worksite products to broaden overall product offering.
Investment income also decreased as the Company sold several higher yielding, longer-term investments in an
attempt to shorten the average maturity of the portfolio. Partially offsetting these factors was increased
profitability in the property and casualty operations due to more favorable loss experience in 2013 as compared
to 2012 as well as lower interest expense due to the expiration in March 2013 of an interest rate collar.
Total revenue was $165.4 million in 2013 as compared to $139.8 million in 2012. Premium revenue
increased to $145.6 million in 2013 from $126.7 million in 2012. The increase in premium revenue was
primarily attributable to increases in Medicare supplement business in the life and health operations as well as
an increase in the commercial automobile line of business in the property and casualty operations due to a
significant new state contract. Also, included in total revenue were net realized investment gains of $8.7
20
million in 2013 compared to net realized investment gains of $1.4 million in 2012. The magnitude of realized
investment gains and losses in any year is a function of the timing of trades of investments relative to the
markets themselves as well as the recognition of any other than temporary impairments on investments.
Total expenses were $154.2 million in 2013 as compared to $134.7 million in 2012. As a percentage of
premiums, insurance benefits and losses incurred and commissions and underwriting expenses were 96.8% and
96.5% in 2013 and 2012, respectively. The increase in the ratio was primarily due to increases in advertising
expenses as well as development of worksite products discussed previously, partially offset by the increase in
premium revenue and more favorable loss experience in the property and casualty operations.
A more detailed analysis of the operating companies and other corporate activities follows.
UNDERWRITING RESULTS
American Southern
The following table summarizes, for the periods indicated, American Southern’s premiums, losses,
expenses and underwriting ratios:
Year Ended December 31,
Gross written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2013
2012
(Dollars in thousands)
58,327
(7,553)
50,774
45,851
30,197
16,111
$ 43,785
(7,603)
$ 36,182
$ 37,471
27,337
12,252
(2,118)
73.0%
32.7
105.7%
(457) $
65.9%
35.1
101.0%
Gross written premiums at American Southern increased $14.5 million, or 33.2%, during 2013 as compared
to 2012. The increase in gross written premiums was primarily attributable to an increase in commercial
automobile written premiums of which $13.7 million resulted from a new state contract awarded to American
Southern in the second quarter of 2013 through a competitive bidding process.
Ceded premiums decreased slightly during 2013 as compared to 2012. American Southern’s ceded
premiums are determined as a percentage of earned premiums and generally will increase when earned
premiums increase. However, the change in ceded premiums during 2013 was disproportionate to the increase
in related earned premiums due to a separate reinsurance agreement with different terms to reinsure the
commercial automobile business from the new state contract referenced previously.
21
The following table summarizes, for the periods indicated, American Southern’s net earned premiums by
line of business:
Automobile liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile physical damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Year Ended December 31,
2013
2012
(In thousands)
24,259
8,365
3,521
2,699
7,007
45,851
$
$
17,319
7,556
3,442
2,033
7,121
37,471
Net earned premiums increased $8.4 million, or 22.4%, during 2013 as compared to 2012. The increase in
net earned premiums during 2013 was primarily attributable to the increase in commercial automobile earned
premiums from the new state contract referenced previously. Also contributing were increases in general
liability and property earned premiums resulting from new programs. In 2013, American Southern’s five
principal states in terms of premium revenue were Alabama, Florida, Georgia, South Carolina, and Texas,
which accounted for approximately 67% of total earned premiums for 2013.
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).
Net losses and loss adjustment expenses at American Southern increased $2.9 million, or 10.5%, during
2013 as compared to 2012. As a percentage of premiums, net losses and loss adjustment expenses were 65.9%
in 2013 compared to 73.0% in 2012. The decrease in the loss ratio during 2013 was due to more favorable loss
experience in significantly all lines of business. During 2012, American Southern experienced increases in the
frequency and severity of claims in the commercial automobile line of business and higher claims in the general
liability line of business which did not recur in 2013. The improvement in the loss ratio was primarily
attributable to actions taken in prior periods to better rationalize American Southern’s book of business and to
strengthen the underwriting guidelines with respect to new and renewal business.
Underwriting expenses increased $3.9 million, or 31.5%, during 2013 as compared to 2012. As a
percentage of premiums, underwriting expenses were 35.1% in 2013 compared to 32.7% in 2012. The increase
in the expense ratio was primarily due to American Southern’s variable commission structure, which
compensates the company’s agents in relation to the loss ratios of the business they write. During periods in
which the loss ratio decreases, commissions and underwriting expenses will generally increase, and conversely,
during periods in which the loss ratio increases, commissions and underwriting expenses will generally
decrease. In 2013, these commission accruals at American Southern increased $3.6 million as compared to 2012
due to the more favorable loss experience. Partially offsetting the increase in the expense ratio was the
significant increase in earned premium from the new state contract referenced previously coupled with a
relatively consistent level of fixed general and administrative expenses.
In establishing reserves, American Southern initially reserves for losses at the higher 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
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, 2013, the range of estimates developed in
connection with the loss reserves for American Southern indicated that reserves could be as much as 13.1%
22
lower or as much as 10.4% 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 Southern’s estimated net reserve
redundancies for the years ended December 31, 2013 and 2012 were $2.5 million and $1.7 million, respectively.
To the extent reserve redundancies vary between years, there is an incremental impact on the results of
operations of American Southern and the Company. The indicated redundancy in 2013 was $0.8 million more
than that in 2012. After considering the impact on contingent commissions and other related accruals, the $0.8
million increase in the redundancy resulted in an increase in income from operations before tax of
approximately $0.5 million in 2013 as compared to 2012. 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 83% of American Southern’s business provides for contractual commission
arrangements which compensate the company’s 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 in which 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 Fidelity’s premiums, losses and expenses:
Medicare supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other health products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2013
2012
(Dollars in thousands)
$ 83,979
4,661
11,139
99,779
$ 72,920
4,490
11,862
89,272
Insurance benefits and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,175
30,632
100,807
$
(1,028) $
70.3%
30.7
101.0%
62,480
25,775
88,255
1,017
70.0%
28.9
98.9%
Premium revenue at Bankers Fidelity increased $10.5 million, or 11.8%, during 2013 as compared to 2012.
Premiums from the Medicare supplement line of business increased $11.1 million, or 15.2%, in 2013 as
compared to 2012, due primarily to an increase in business generated from the company’s existing agents and
newly appointed agents as well as continued active management and implementation of rate increases on
renewal business, as appropriate. Other health product premiums increased $0.2 million, or 3.8%, during 2013
as compared to 2012, primarily as a result of new sales of the company’s short-term care products. Premiums
from the life insurance line of business decreased $0.7 million, or 6.1%, in 2013 from 2012 due to the
redemption and settlement of existing policy obligations exceeding the level of new sales activity. In 2013, the
company’s five principal states in terms of premium revenue were Georgia, Missouri, Indiana, Ohio, and
Pennsylvania, which accounted for approximately 46% of total premiums for 2013.
23
Benefits and losses increased $7.7 million, or 12.3%, during 2013 as compared to 2012. As a percentage of
premiums, benefits and losses were 70.3% in 2013 compared to 70.0% in 2012. The slight increase in the loss
ratio was primarily attributable to higher claims associated with the continued aging of the existing life
business. Partially offsetting the increase in the loss ratio was more favorable loss experience in the Medicare
supplement line of business in 2013 as compared to 2012. The company continues to implement rate increases
on its Medicare supplement line of business which have helped mitigate the impact of higher medical costs.
Underwriting expenses increased $4.9 million, or 18.8%, during 2013 as compared to 2012. As a
percentage of earned premiums, these expenses were 30.7% in 2013 compared to 28.9% in 2012. The increase
in the expense ratio was primarily attributable to increases in advertising and agency related expenses as well as
development of worksite products to broaden overall product offering. Advertising expenses in 2013 increased
$0.7 million as compared to 2012 and included charges for television commercials and social media initiatives.
Expenses related to the development of worksite products increased $0.7 million in 2013 as compared to 2012.
Investment Income and Realized Gains
Investment income decreased $0.7 million, or 6.0%, in 2013 as compared to 2012. The decrease in
investment income was primarily attributable to the sale during 2013 of a number of the Company’s
investments in longer-term fixed maturities due to a shortening up on maturities to give recognition to the rise
and potential future increases in longer-term interest rates. At December 31, 2013, the carrying value of the
Company’s fixed maturities with a maturity in excess of ten years was $76.9 million as compared to $181.6
million at December 31, 2012. The Company was not able to reinvest the proceeds from sales of fixed
maturities at equivalent interest rates, resulting in a decrease in yield on invested assets.
The Company had net realized investment gains of $8.7 million in 2013 compared to net realized
investment gains of $1.4 million in 2012. The net realized investment gains in 2013 were primarily due to the
sale of a number of the Company’s investments in longer-term fixed maturities discussed previously. The net
realized investment gains in 2012 also resulted from the disposition of several of the Company’s investments in
fixed maturities, although in lesser amounts. Management continually evaluates the Company’s investment
portfolio and, as may be determined to be appropriate, makes adjustments for impairments and/or will divest
investments. See Note 2 of Notes to Consolidated Financial Statements.
Interest Expense
Interest expense decreased $0.7 million, or 27.9%, in 2013 as compared to 2012. The decrease in interest
expense was primarily due to the termination of the Company’s zero cost interest rate collar with Wells Fargo
Bank, National Association (“Wells Fargo”) on March 4, 2013, the stated maturity date, by its terms. The
interest rate collar had a London Interbank Offered Rate (“LIBOR”) floor of 4.77%. As a result of interest rates
remaining below the LIBOR floor, the Company was required to make payments to Wells Fargo under the
interest rate collar through the maturity date.
Other Expenses
Other expenses (commissions, underwriting expenses, and other expenses) increased $9.6 million, or
22.7%, in 2013 as compared to 2012. The increase in other expenses during 2013 was primarily attributable to
increased commission and underwriting costs in the life and health operations associated with the higher
volume of business, expenses related to development of worksite products as well as increases in advertising
and agency related expenses. Also contributing to the increase in other expenses in 2013 was the $3.6 million
increase in commission accruals at American Southern due to the more favorable loss experience. The majority
of American Southern’s business is structured in a way that agents are compensated based upon the loss ratios
of the business they place with the company. During periods in which the loss ratio decreases, commissions and
underwriting expenses will generally increase, and conversely, during periods in which the loss ratio increases,
commissions and underwriting expenses will generally decrease. As a percentage of earned premiums, other
expenses were 35.6% in 2013 as compared with 33.4% in 2012. The increase in the expense ratio was primarily
24
attributable to the increase in commission accruals, advertising expenses and worksite product development
expenses discussed previously.
Income Taxes
The primary differences between the effective tax rate and the federal statutory income tax rate resulted 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 investments as well as the amount of
the Company’s 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 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 unanticipated utilization of
certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation
allowance reserve.
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 Company’s primary sources of cash are written premiums, investment
income and proceeds from the sale and maturity of its invested assets. The Company believes that, within each
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, as
described below, 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, as well as the repurchase of shares and payments
of any dividends as may be authorized and approved by the Company’s board of directors from time to time. At
December 31, 2013, the Parent had approximately $32.0 million of unrestricted cash and investments.
Dividend payments to a parent corporation by its wholly owned insurance subsidiaries are subject to annual
limitations and are restricted to 10% of statutory surplus or statutory earnings before recognizing realized
investment gains of the individual insurance subsidiaries. At December 31, 2013, the Parent’s insurance
subsidiaries had an aggregate statutory surplus of $73.6 million. Dividends were paid to Atlantic American by
its subsidiaries totaling $6.6 million and $7.4 million in 2013 and 2012, respectively.
The Parent provides certain administrative, purchasing and other services to each of its subsidiaries. The
amounts charged to and paid by the subsidiaries for these services were $6.3 million and $5.6 million in 2013
and 2012, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance
subsidiaries. A net total of $2.6 million and $2.1 million were paid to the Parent under the tax sharing
agreements in 2013 and 2012, respectively. As a result of the Parent’s tax loss carryforwards, which totaled
approximately $2.4 million at December 31, 2013, it is anticipated that the tax sharing agreements will continue
to provide the Parent with additional funds to assist in meeting its cash flow obligations.
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 $18.0 million and $23.2 million of Junior Subordinated Debentures mature on
December 4, 2032 and May 15, 2033, respectively, are callable quarterly, in whole or in part, only at the option
of the Company, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges
from 4.00% to 4.10%. At December 31, 2013, the effective interest rate was 4.30%. The obligations of the
25
Company with respect to the issuances of the trust preferred securities represent a full and unconditional
guarantee by the Parent of each trust’s 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.
The Company intends to pay its obligations under the Junior Subordinated Debentures using existing cash
balances, dividend and tax sharing payments from the operating subsidiaries, or from potential future financing
arrangements.
The Company had a zero cost interest rate collar with Wells Fargo, which terminated on March 4, 2013, the
stated maturity date, by its terms.
At December 31, 2013, the Company had 65,000 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 Company’s
controlling shareholder. 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 Company’s 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 1,629,000 shares
of the Company’s 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 Company’s option. The Series D Preferred Stock is
not currently convertible. In 2013, the Company redeemed 5,000 shares of the Series D Preferred Stock at the
stated value of $100 per share, for an aggregate payment of $0.5 million. As of December 31, 2013 and 2012,
the Company had accrued, but unpaid, dividends, on the Series D Preferred Stock of $20,945 and $22,556,
respectively. During 2013, the Company paid $0.5 million in Series D Preferred Stock dividends whereas in
2012, the Company paid $1.0 million which included a $0.5 million dividend attributable to 2011.
Cash and cash equivalents increased from $19.0 million at December 31, 2012 to $33.1 million at
December 31, 2013. The increase in cash and cash equivalents during 2013 was primarily attributable to net
cash provided by operating activities of $13.0 million. Also contributing to the increase in cash and cash
equivalents was net cash provided by investing activities of $3.8 million resulting from the sale and maturity of
securities exceeding investment purchases. Partially offsetting the increases were the acquisition of Bankers
Fidelity Assurance Company for $2.5 million, the redemption of 5,000 shares of Series D Preferred Stock for
$0.5 million, dividends paid on the Company common stock and Series D Preferred Stock of $0.4 million and
$0.5 million, respectively, and the purchase of shares for treasury for $1.4 million.
The Company believes that existing cash balances as well as the dividends, fees, and tax-sharing payments it
receives from its subsidiaries and, if needed, additional borrowings from financial institutions, will enable the
Company to meet its liquidity requirements for the foreseeable future. Management is not aware of any current
recommendations by regulatory authorities, which, if implemented, would have a material adverse effect on the
Company’s liquidity, capital resources or operations.
New Accounting Pronouncements
See “Recently Issued Accounting Standards” in Note 1 of Notes to Consolidated Financial Statements.
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 Company’s investment portfolio with a corresponding effect on investment income.
26
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 Company’s
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, we have elected to comply with certain scaled disclosure reporting
obligations, and therefore do not have to provide the table of contractual obligations required by this Item.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting
obligations, and therefore do not have to provide the information required by this Item.
27
Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
ATLANTIC AMERICAN CORPORATION
Page
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012 . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012 . .
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013 and 2012 . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012 . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
30
31
32
33
34
35
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
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, 2013 and 2012 and the related consolidated statements of
operations, comprehensive income, 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 financial
statements and schedules are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements and 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 Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit 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 presentation of the financial statements and schedules. 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, 2013 and
2012, and the results of its operations and its 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 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 USA, LLP
Atlanta, Georgia
March 26, 2014
29
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables:
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance premiums and other, net of allowance for doubtful accounts of
$339 and $379 in 2013 and 2012, respectively . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
LIABILITIES AND SHAREHOLDERS’ EQUITY
$
Insurance reserves and policyholder funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2013
2012
(Dollars in thousands,
except per share data)
$
33,102
228,961
$
18,951
246,892
14,314
18,768
9,343
363
27,509
3,245
2,544
319,381
162,373
14,843
-
41,238
218,454
$
$
6,330
-
26,133
975
2,128
320,177
154,558
11,481
7,164
41,238
214,441
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred stock, $1 par, 4,000,000 shares authorized;
Series D preferred, 65,000 and 70,000 shares issued and outstanding in
2013 and 2012, respectively; $6,500 and $7,000 redemption value in
2013 and 2012, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $1 par, 50,000,000 shares authorized;
22,400,894 shares issued; 21,117,874 and 21,216,542 shares outstanding in
2013 and 2012, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned stock grant compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 1,283,020 shares in 2013 and 1,184,352 shares in
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
70
22,401
57,103
18,738
6,204
(485)
22,401
57,180
8,621
19,571
-
(3,099)
100,927
319,381
$
$
(2,107)
105,736
320,177
The accompanying notes are an integral part of these consolidated financial statements.
30
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2013
2012
(Dollars in thousands,
except per share data)
Revenue:
Insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits and expenses:
Insurance benefits and losses incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
145,630 $
10,809
8,741
189
165,369
100,372
40,556
1,898
11,337
154,163
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
11,206
184
11,022
(482)
10,540 $
.50 $
.48 $
126,743
11,504
1,434
147
139,828
89,817
32,477
2,632
9,820
134,746
5,082
646
4,436
(508)
3,928
.19
.18
The accompanying notes are an integral part of these consolidated financial statements.
31
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross unrealized holding gain (loss) arising in the period . . . . . . . . . . . . . . . .
Related income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: reclassification adjustment for net realized gains included in net
income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Related income tax effect (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net effect on other comprehensive income (loss). . . . . . . . . . . . . . . . . . . .
Derivative financial instrument: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment to derivative financial instrument . . . . . . . . . . . . . . . . .
Related income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net effect on other comprehensive income (loss). . . . . . . . . . . . . . . . . . . .
Total other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2013
2012
(Dollars in thousands)
$
11,022 $
4,436
(11,965)
4,188
(8,741)
3,059
(13,459)
141
(49)
92
(13,367)
$
(2,345) $
11,971
(4,190)
(1,434)
502
6,849
735
(257)
478
7,327
11,763
(1) Realized gains on available-for-sale securities recognized in realized investment gains, net on the accompanying
(2)
consolidated statements of operations.
Income tax effect on reclassification adjustment for net realized gains included in income tax expense on the
accompanying consolidated statements of operations.
The accompanying notes are an integral part of these consolidated financial statements.
32
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Dollars in thousands)
Unearned Stock
Grant
Compensation
Treasury
Stock
Total
Balance, December 31, 2011 . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net
of tax . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on common stock . . . . . . . . .
Dividends on preferred stock . . . . . . . .
Purchase of 219,939 shares for
treasury . . . . . . . . . . . . . . . . . . . . . .
Issuance of 162,240 shares under stock
plans . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2012 . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net
of tax . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock redeemed (Note 10) . . .
Dividends on common stock . . . . . . . . .
Dividends on preferred stock . . . . . . . .
Restricted stock grants . . . . . . . . . . . . .
Amortization of unearned
compensation . . . . . . . . . . . . . . . . . .
Purchase of 371,220 shares for
treasury . . . . . . . . . . . . . . . . . . . . . .
70 $
-
22,401 $
-
57,136 $
-
6,179 $
4,436
-
-
-
-
-
70
-
-
(5)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,486)
(508)
-
-
22,401
-
44
57,180
-
-
8,621
11,022
-
-
-
-
-
-
-
-
(495)
-
-
393
-
-
-
-
(423)
(482)
-
-
-
12,244 $
-
7,327
-
-
-
-
19,571
-
(13,367)
-
-
-
-
-
-
- $
-
(1,753) $
-
96,277
4,436
-
-
-
-
-
-
-
-
-
-
-
(704)
219
-
-
-
7,327
(1,486)
(508)
(607)
(607)
253
(2,107)
-
-
-
-
-
311
297
105,736
11,022
(13,367)
(500)
(423)
(482)
-
-
219
-
(1,416)
(1,416)
Issuance of 72,552 shares under stock
plans . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2013 . . . . . . . . . $
-
65 $
-
22,401 $
25
57,103 $
-
18,738 $
-
6,204 $
-
(485) $
113
(3,099) $
138
100,927
The accompanying notes are an integral part of these consolidated financial statements.
33
ATLANTIC AMERICAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2012
2013
(Dollars in thousands)
11,022
$
4,436
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in insurance reserves and policyholder funds . . . . . . . . . . . . . . . . . . .
Compensation expense related to share awards. . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Proceeds from investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from investments matured, called or redeemed . . . . . . . . . . . . . . . . . . .
Investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of Bankers Fidelity Assurance, net of $1,317 acquired . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Redemption of Series D preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends on Series D preferred stock. . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from shares issued under stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of shares for treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,960
(10,336)
(8,741)
7,815
219
600
(329)
1,448
2,292
70
13,020
108,745
11,414
(112,466)
(1,338)
(2,540)
3,815
(500)
(483)
(423)
138
(1,416)
(2,684)
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
14,151
18,951
33,102
Supplemental cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,961
536
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
34
10,451
(12,325)
(1,434)
7,364
-
469
(97)
(1,140)
(1,376)
(233)
6,115
24,479
14,455
(44,403)
(169)
-
(5,638)
-
(1,015)
(1,486)
297
(607)
(2,811)
(2,334)
21,285
18,951
2,636
405
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, for insurance companies, differ
in some respects 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 with the Parent, the “Company”). All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating results achieved in any historical
period are not necessarily indicative of results to be expected in any future period.
At December 31, 2013, the Parent owned four insurance subsidiaries, Bankers Fidelity Life Insurance
Company and its wholly-owned subsidiary, Bankers Fidelity Assurance Company (“BFAC”) (together known
as “Bankers Fidelity”), and American Southern Insurance Company and its wholly-owned subsidiary, American
Safety Insurance Company (together known as “American Southern”), in addition to one non-insurance
subsidiary, xCalibre Risk Services, Inc. BFAC was acquired on December 18, 2013. The results of operations
of BFAC are included from the date of acquisition. The Parent has issued a guarantee of all liabilities of
Bankers Fidelity.
Premium Revenue and Cost Recognition
Life insurance premiums are recognized as revenue when due; accident and health insurance premiums
are recognized as revenue 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 incremental direct costs 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).
Intangibles
Intangibles consist of goodwill and other indefinite-lived intangibles. Goodwill represents the excess of
cost over the fair value of net assets acquired and is not amortized. Other indefinite-lived intangibles
represent the value of licenses acquired in the 2013 acquisition of BFAC (Note 17) and are not amortized.
As of December 31, 2013 and 2012, intangibles were $2,544 and $2,128, respectively. The Company
periodically reviews its goodwill and other indefinite-lived intangibles to determine if any adverse conditions
35
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 regulator. No impairment of the Company’s recorded intangibles was identified during
the periods presented.
Investments
The Company’s investments in both fixed maturities, 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 or loss.
The fair values for fixed maturities 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 maturities that do not have publicly quoted market values, but had an estimated fair value as determined by
management of $1,991 at December 31, 2013. Such values inherently involve a greater degree of judgment and
uncertainty and therefore ultimately greater price volatility than the value of securities with publicly quoted market
values. Policy 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 an 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. Potential risks and uncertainties include, among other things, changes in general
economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in
interest rates. In evaluating a potential impairment, the Company considers, among other factors, management’s
intent and ability to hold these securities until price recovery, the nature of the investment and the expectation of
prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its obligations in
accordance with their contractual terms, and management’s expectation as to the issuer’s ability and intent to
continue to do so, as well as ratings actions that may affect the issuer’s 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 income taxes during the year. A valuation allowance is recognized if, based on
management’s 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.
36
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.
Recently Issued Accounting Standards
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income (“ASU 2013-02”). The main objective of ASU 2013-02 is to enhance disclosures for reclassification
adjustments including changes in accumulated other comprehensive income (“AOCI”) balances by component
and significant items reclassified out of AOCI. ASU 2013-02 does not change the requirements for reporting net
income or other comprehensive income in financial statements. However, the ASU requires an entity to provide
enhanced disclosures to present separately by component reclassifications out of AOCI. In addition, an entity is
also required to provide a tabular disclosure of the effect of items reclassified out of AOCI on the respective
line items of net income, but only if the item reclassified is required under GAAP to be reclassified to net
income in its entirety. For other reclassification items that are not required under GAAP to be reclassified
directly to net income in their entirety, ASU 2013-02 only requires a cross-reference to other disclosures
required under GAAP for those items. The Company adopted ASU 2013-02 effective January 1, 2013. Since
ASU 2013-02 was a disclosure only update, its adoption did not have a material impact on the Company’s
financial condition or results of operations. See Consolidated Statements of Comprehensive Income and Note
16 for expanded disclosures.
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, and commitments and
contingencies, among others, and actual results could differ materially from management’s estimates.
37
Note 2. Investments
The following tables set forth the carrying value, gross unrealized gains, gross unrealized losses and
amortized cost of the Company’s investments, aggregated by type and industry, as of December 31, 2013 and
December 31, 2012.
Investments were comprised of the following:
Fixed maturities:
Bonds:
U.S. Treasury securities and obligations of U.S.
Government agencies and authorities . . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities:
Utilities and telecom. . . . . . . . . . . . . . . . . . . . . . .
Financial services . . . . . . . . . . . . . . . . . . . . . . . . .
Other business – diversified . . . . . . . . . . . . . . . .
Other consumer – diversified . . . . . . . . . . . . . . .
Total corporate securities . . . . . . . . . . . . . . . .
Redeemable preferred stocks:
Financial services . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer – diversified . . . . . . . . . . . . . . .
Total redeemable preferred stocks . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . .
Equity securities:
Common and non-redeemable preferred stocks:
Utilities and telecom. . . . . . . . . . . . . . . . . . . . . . .
Financial services . . . . . . . . . . . . . . . . . . . . . . . . .
Other business – diversified . . . . . . . . . . . . . . . .
Other consumer – diversified . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in unconsolidated trusts . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . .
2013
Carrying
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
$
17,240
$
576
$
210
$ 16,874
7,611
16,532
50,531
70,326
36,712
174,101
2,159
192
2,351
201,303
1,474
5,761
178
14,477
21,890
2,123
2,369
38
1,238
$ 228,961
$
402
1,353
1,736
870
391
4,350
4
-
4
5,332
510
514
131
8,863
10,018
-
-
-
-
15,350
$
17
7,226
7
320
2,906
1,745
4,978
41
-
41
5,246
-
560
-
-
560
-
-
-
-
5,806
15,186
49,115
72,362
38,066
174,729
2,196
192
2,388
201,217
964
5,807
47
5,614
12,432
2,123
2,369
38
1,238
$ 219,417
38
Fixed maturities:
Bonds:
U.S. Treasury securities and obligations of U.S.
Government agencies and authorities . . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities:
Utilities and telecom. . . . . . . . . . . . . . . . . . . . . . .
Financial services . . . . . . . . . . . . . . . . . . . . . . . . .
Other business – diversified . . . . . . . . . . . . . . . .
Other consumer – diversified . . . . . . . . . . . . . . .
Total corporate securities . . . . . . . . . . . . . . . .
Redeemable preferred stocks:
Financial services . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer – diversified . . . . . . . . . . . . . . .
Total redeemable preferred stocks . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . .
Equity securities:
Common and non-redeemable preferred stocks:
Utilities and telecom. . . . . . . . . . . . . . . . . . . . . . .
Financial services . . . . . . . . . . . . . . . . . . . . . . . . .
Other business – diversified . . . . . . . . . . . . . . . .
Other consumer – diversified . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in unconsolidated trusts . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . .
2012
Gross
Gross
Carrying
Unrealized
Unrealized
Amortized
Value
Gains
Losses
Cost
$
27,512
$
4,618
$
17,761
2,514
17,921
43,695
66,741
52,910
181,267
3,775
193
3,968
230,508
1,298
8,607
134
2,166
12,205
565
2,338
38
1,238
$ 246,892
$
3,128
3,957
7,172
7,665
21,922
18
-
18
29,072
334
857
87
489
1,767
-
-
-
-
30,839
$
-
-
-
415
12
120
547
3
-
3
550
-
39
-
-
39
-
-
-
-
589
$ 22,894
15,247
14,793
40,153
59,581
45,365
159,892
3,760
193
3,953
201,986
964
7,789
47
1,677
10,477
565
2,338
38
1,238
$ 216,642
Bonds having an amortized cost of $10,101 and $7,170 and included in the tables above were on deposit
with insurance regulatory authorities at December 31, 2013 and 2012, respectively, in accordance with statutory
requirements.
39
The following table sets forth the carrying value, amortized cost, and net unrealized gains (losses) of the
Company’s investments aggregated by industry as of December 31, 2013 and 2012.
Carrying
Value
2013
Amortized
Cost
Unrealized
Gains (Losses)
Carrying
Value
2012
Amortized
Cost
Unrealized
Gains
U.S. Treasury securities
and obligations of U.S.
Government agencies
and authorities . . . . . . . . . $ 17,240 $
16,874 $
366 $ 27,512 $ 22,894 $
4,618
Obligations of states and
political subdivisions . . .
Utilities and telecom . . . . . .
Financial services . . . . . . . .
Other business –
diversified . . . . . . . . . . . . .
Other consumer –
diversified . . . . . . . . . . . . .
Other investments . . . . . . . .
7,611
18,006
58,451
7,226
16,150
57,118
385
1,856
1,333
17,761
19,219
56,077
15,247
15,757
51,702
70,504
72,409
(1,905)
66,875
59,628
51,381
5,768
43,872
5,768
7,509
-
55,269
4,179
47,235
4,179
Investments . . . . . . . . . . . . $ 228,961 $ 219,417 $
9,544 $ 246,892 $ 216,642 $
2,514
3,462
4,375
7,247
8,034
-
30,250
The following tables present the Company’s unrealized loss aging for securities by type and length of time
the security was in a continuous unrealized loss position as of December 31, 2013 and 2012.
Less than 12 months
2013
12 months or longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Treasury securities and
obligations of U.S.
Government agencies and
authorities . . . . . . . . . . . . . . . . $
Obligations of states and
political subdivisions . . . . . .
Corporate securities . . . . . . . . .
Redeemable preferred
stocks . . . . . . . . . . . . . . . . . . . .
Common and non-redeemable
preferred stocks . . . . . . . . . . .
8,326
$
210
$
-
$
-
$
8,326 $
210
1,018
92,049
704
3,724
17
3,714
41
560
6,938
1,264
1,018
98,987
17
4,978
-
-
-
-
704
3,724
41
560
Total temporarily impaired
securities . . . . . . . . . . . . . . . . . $ 105,821
$
4,542
$
6,938
$
1,264
$ 112,759 $
5,806
Less than 12 months
2012
12 months or longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Corporate securities . . . . . . . . . $
Redeemable preferred
stocks . . . . . . . . . . . . . . . . . . . .
Common and non-redeemable
preferred stocks . . . . . . . . . . .
8,806
$
147
$
1,600
$
400
$ 10,406 $
547
1,216
3,494
3
39
-
-
-
-
1,216
3,494
3
39
Total temporarily impaired
securities . . . . . . . . . . . . . . . . . $ 13,516
$
189
$
1,600
$
400
$ 15,116 $
589
40
The evaluation for an 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. Potential risks and uncertainties include, among other things, changes in general
economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes
in interest rates. In evaluating a potential impairment, the Company considers, among other factors,
management’s intent and ability to hold these securities until price recovery, the nature of the investment and
the expectation of prospects for the issuer and its industry, the status of an issuer’s continued satisfaction of its
obligations in accordance with their contractual terms, and management’s expectation as to the issuer’s ability
and intent to continue to do so, as well as ratings actions that may affect the issuer’s credit status.
As of December 31, 2013, securities in an unrealized loss position primarily included certain of the
Company’s investments in fixed maturities within the other diversified business, other diversified consumer and
financial services sectors. The Company does not currently intend to sell nor does it expect to be required to sell
any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt
of contractually required principal and interest payments and its intent and ability to retain the securities until
price recovery, as well as the Company’s evaluation of other relevant factors, including those described above,
the Company has deemed these securities to be temporarily impaired as of December 31, 2013.
The following describes the fair value hierarchy and provides information as to the extent to which the
Company uses fair value to measure the value of its financial instruments and information about the inputs used
to value those financial instruments. The fair value hierarchy prioritizes the inputs in the valuation techniques
used to measure fair value into three broad levels.
Level 1
Level 2
Level 3
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 Company’s financial
instruments valued using Level 1 criteria include cash equivalents and exchange traded common
stocks.
Observable inputs, other than quoted prices included in Level 1, for an asset or liability or prices
for similar assets or liabilities. The Company’s financial instruments valued using Level 2 criteria
include significantly all of its fixed maturities, which consist of U.S. Treasury securities and U.S.
Government securities, obligations of states and political subdivisions, and certain corporate fixed
maturities, as well as its non-redeemable preferred stocks. In determining fair value measurements
using Level 2 criteria, the Company utilizes various external pricing sources.
Valuations that are derived from techniques in which one or more of the significant inputs are
unobservable (including assumptions about risk). Fair value is based on criteria that use
assumptions or other data that are not readily observable from objective sources. The Company’s
financial instruments valued using Level 3 criteria consist of a limited number of fixed maturities.
As of December 31, 2013 and 2012, the value of the Company’s fixed maturities valued using
Level 3 criteria was $1,991 and $2,124, respectively. The use of different criteria or assumptions
regarding data may have yielded materially different valuations.
41
As of December 31, 2013, financial instruments carried at fair value were measured on a recurring basis as
summarized below:
Assets:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
$
$
-
16,406
31,618
48,024
Significant
Other
Observable
Inputs
(Level 2)
$ 199,312
5,484
-
$ 204,796
Significant
Unobservable
Inputs
(Level 3)
$
$
1,991
-
-
1,991
Total
$ 201,303
21,890
31,618
$ 254,811
As of December 31, 2012, financial instruments carried at fair value were measured on a recurring basis as
summarized below:
Assets:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Derivative financial instrument (Note 7) . . . . . . . . . .
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
- $ 228,384
8,400
3,805
-
15,326
19,131 $ 236,784
- $
-
$
$
$
2,124
-
-
2,124
Total
$ 230,508
12,205
15,326
$ 258,039
141
$
141
The following is a roll-forward of the Company’s financial instruments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) from January 1, 2012 to December 31, 2013.
Balance, January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized gains included in comprehensive income . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized gains (losses) included in comprehensive income. . . . . . . . . . . .
Balance, December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Fixed
Maturities
2,035
89
2,124
(133)
1,991
$
Derivative
(Liability)
$
(876)
735
(141)
141
-
The Company’s fixed maturities valued using Level 3 inputs 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 (based on current cash flows)
discounted at reasonable estimated rates of interest. There are no assumed prepayments and/or default
probability assumptions as a majority of these instruments contain certain U.S. government agency strips to
support repayment of the principal. Other qualitative and quantitative information received from the original
underwriter of the pooled offerings is also considered, as applicable. The Company’s derivative financial
instrument was an interest rate collar which terminated on March 4, 2013, the stated maturity date, by its terms.
42
The amortized cost and carrying value of fixed maturities at December 31, 2013 and 2012 by contractual
maturity were as follows. Actual maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Varying maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
Carrying
Value
$
-
11,709
108,358
76,882
4,354
$ 201,303
Amortized
Cost
$
-
11,097
107,846
77,884
4,390
$ 201,217
Carrying
Value
$
1,510
5,799
40,416
181,608
1,175
$ 230,508
Amortized
Cost
$
1,500
5,213
37,013
157,266
994
$ 201,986
Investment income was earned from the following sources:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less investment expenses, included in other expenses
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2013
9,890 $
632
287
10,809
(474)
10,335 $
2012
10,626
571
307
11,504
(194)
11,310
A summary of realized investment gains (losses) follows:
Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains, net . . . . . . . . . . . . . . . . . . . . . . . .
Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains, net . . . . . . . . . . . . . . . . . . . . . . . .
Fixed
Maturities
$
8,521
(45)
8,476
$
$
$
Fixed
Maturities
$
1,434
-
1,434
2013
Equity
Securities
$
293
(28)
265
2012
Equity
Securities
$
$
-
-
-
Total
8,814
(73)
8,741
Total
1,434
-
1,434
$
$
$
$
Proceeds from the sales of investments were as follows:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
$ 107,728
972
45
$ 108,745
2012
$ 24,433
-
46
$ 24,479
The Company’s bond portfolio included 90% investment grade securities, as defined by the NAIC, at
December 31, 2013.
43
Note 3. Insurance Reserves and Policyholder Funds
The following table presents the Company’s reserves for life, accident, health and property and casualty
losses as well as loss adjustment expenses.
2013
2012
Amount of Insurance
In Force, Net
2013
2012
Future policy benefits
Life insurance policies:
Ordinary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mass market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Individual annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accident and health insurance policies . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses, claims and loss adjustment expenses. . . . . . . . . .
Other policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total insurance reserves and policyholder funds . . . .
$ 52,915
2,715
135
55,765
14,099
69,864
27,415
63,018
2,076
$ 162,373
$ 51,256
3,037
142
54,435
12,497
66,932
22,637
62,873
2,116
$ 154,558
$ 237,694
3,504
-
$ 241,198
$ 244,634
4,001
-
$ 248,635
Annualized premiums for accident and health insurance policies were $91,359 and $83,038 at December
31, 2013 and 2012, 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 Company’s experience. The interest rates assumed
for life, accident and health future policy benefits 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, (iv) 5% to 7% for 1988
through 2009 issues, and (v) 4% for 2010 through 2013 issues.
Loss and Claim Reserves
Loss and claim reserves represent estimates of projected ultimate losses and are based upon: (a)
management’s 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.
44
Activity in the liability for unpaid loss and claim reserves is summarized as follows:
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Reinsurance receivable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Reinsurance receivable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2013
62,873
(18,743)
44,130
$
2012
57,975
(15,673)
42,302
97,904
(1,657)
96,247
66,705
24,968
91,673
48,704
14,314
63,018
$
86,780
(1,841)
84,939
61,786
21,325
83,111
44,130
18,743
62,873
Prior years’ development was primarily the result of better than expected development on prior years IBNR
reserves for certain lines of business primarily within American Southern.
Following is a reconciliation of total incurred claims to total insurance benefits and losses incurred:
Total incurred claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,247
Cash surrender value and matured endowments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,215
Benefit reserve changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,910
Total insurance benefits and losses incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,372
2013
2012
$ 84,939
1,241
3,637
$ 89,817
Note 4. Reinsurance
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 99% of
the Company’s reinsurance receivables were due from two reinsurers as of December 31, 2013. Reinsurance
receivables of $1,209 were due from Swiss Reinsurance Corporation, rated “AA-” by Standard & Poor’s and
“A+” (Superior) by A.M. Best and $13,021 were due from General Reinsurance Corporation, rated “AA+” by
Standard & Poor’s and “A++” (Superior) by A.M. Best. Allowances for uncollectible amounts are established
against reinsurance receivables, if appropriate.
45
The effects of reinsurance on premiums written, premiums earned and insurance benefits and losses
incurred were as follows:
Direct premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
$ 141,313
16,702
(7,607)
$ 150,408
2012
$ 130,402
3,003
(7,671)
$ 125,734
Direct premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed premiums earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 141,720
11,517
(7,607)
$ 145,630
$ 131,299
3,115
(7,671)
$ 126,743
Provision for benefits and losses incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance loss recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance benefits and losses incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 105,828
(5,456)
$ 100,372
$
$
99,026
(9,209)
89,817
Components of reinsurance receivables were as follows:
Receivable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,314
Receivable on paid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-
Total reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,314
2013
2012
$ 18,743
25
$ 18,768
Note 5. Income Taxes
Total income taxes were allocated as follows:
Total tax expense on income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
184
$
646
2013
2012
Tax expense (benefit) on components of shareholders’ equity:
Net unrealized gains (losses) on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment to derivative financial instrument . . . . . . . . . . . . . . . . . . . . . . . .
Total tax expense (benefit) on shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(7,247)
49
(7,198)
(7,014) $
3,688
257
3,945
4,591
A reconciliation of the differences between income taxes computed at the federal statutory income tax rate
and the income tax expense is as follows:
Federal income tax provision at statutory rate of 35% . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividends received deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Small life insurance company deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in asset valuation allowance due to change in judgment relating to
realizability of deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for prior years’ estimates to actual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2013
2012
$
3,922
(149)
(586)
50
(3,059)
6
184
$
1,779
(175)
(485)
46
(440)
(79)
646
The primary differences between the effective tax rate and the federal statutory income tax rate resulted 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
46
can vary from estimates based on, but not limited to, actual distributions from investments as well as the amount of
the Company’s 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 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 unanticipated utilization of certain
capital loss carryforward benefits that had been previously reserved.
Deferred tax liabilities and assets at December 31, 2013 and 2012 were comprised of the following:
Deferred tax liabilities:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred and uncollected premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debts and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset (liability) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2013
2012
(3,766) $
(734)
(3,341)
(8)
(7,849)
(4,197)
(743)
(10,588)
(8)
(15,536)
844
5,109
2,177
1,406
309
576
10,421
(2,209)
363
1,575
4,516
5,236
1,406
306
601
13,640
(5,268)
(7,164)
$
The components of income tax expense were:
Current - Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred - Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in deferred tax asset valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
513
2,730
(3,059)
184
$
$
743
343
(440)
646
2013
2012
At December 31, 2013, the Company had regular federal net operating loss carryforwards (“NOLs”) of
approximately $2,411 expiring generally between 2028 and 2032. Currently, the Company believes that
deferred income tax benefits relating to the NOLs will be realized. However, expected realization of the NOLs
is assessed periodically based on the Company’s then current and anticipated results of operations, and amounts
could increase or decrease if estimates of future taxable income change.
As of December 31, 2013 and 2012, a valuation allowance of $2,209 and $5,268, respectively, was
established against deferred income tax benefits relating primarily to capital loss carryforwards that may not be
realized. The Company does not currently anticipate having sufficient future capital gains to offset certain of
these capital losses during the applicable carryforward period. However, the Company continues to periodically
assess the potential realization of these and all other deferred tax benefits. During 2013, the Company’s
valuation allowance decreased by $3,059. The decrease was primarily due to the unanticipated utilization of
certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation
allowance reserve.
The Company has formal tax-sharing agreements, and files a consolidated income tax return, with its
subsidiaries.
47
Note 6. 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, 2013 and
2012, was as follows:
JUNIOR SUBORDINATED DEBENTURES (1) (2)
Principal amount owed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Coupon rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable by issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRUST PREFERRED SECURITIES
Issuance date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidation preference per security . . . . . . . . . . . . . . . . . . . . . . . .
Liquidation value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Coupon rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution guaranteed by (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlantic American
Statutory Trust I
Atlantic American
Statutory Trust II
$
$
18,042
18,042
18,042
23,196
23,196
23,196
LIBOR + 4.00%
Quarterly
December 4, 2032
Yes
LIBOR + 4.10%
Quarterly
May 15, 2033
Yes
December 4, 2002
17,500
1
17,500
$
$
LIBOR + 4.00%
Quarterly
Atlantic
American
Corporation
May 15, 2003
22,500
1
22,500
LIBOR + 4.10%
Quarterly
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 Company’s 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.
48
Note 7. Derivative Financial Instrument
The Company had a zero cost interest rate collar with Wells Fargo Bank, National Association, which
terminated on March 4, 2013, the stated maturity date, by its terms.
Note 8. Commitments and Contingencies
Litigation
From time to time, the Company is, and expects to continue to be, involved in various claims and lawsuits
incidental to and in the ordinary course of its business. In the opinion of management, any such known claims
are not expected to have a material effect on the financial condition or results of operations of the Company.
Operating Lease Commitments
The Company’s rental expense, including common area charges, for operating leases was $1,215 and
$1,204 in 2013 and 2012, respectively. The Company’s future minimum base lease obligations under non-
cancelable operating leases are as follows:
Year Ending December 31,
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
886
425
435
446
457
193
2,842
Note 9. Benefit Plans
Stock Incentive Plans
On May 1, 2012, the Company’s shareholders approved the 2012 Equity Incentive Plan (the “2012 Plan”).
The 2012 Plan authorizes the grant of up to 2,000,000 stock options, stock appreciation rights, restricted shares,
restricted stock units, performance shares, performance units and other awards for the purpose of providing the
Company’s non-employee directors, consultants, officers and other employees incentives and rewards for superior
performance. A total of 200,000 restricted shares, with an estimated fair value of $704 based on the common
stock price at date of grant, were issued to officers and directors under the 2012 Plan in 2013. No awards were
made in 2012.
A summary of the status of the Company’s stock options at December 31, 2013 and 2012 is as follows:
2013
2012
Options
Options outstanding, beginning of year . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options canceled or expired . . . . . . . . . . . . . . . . . .
Options outstanding, end of year . . . . . . . . . . . . . .
Options exercisable . . . . . . . . . . . . . . . . . . . . . . . . . .
Options available for future grant . . . . . . . . . . . . .
$
Shares
77,000
(62,500)
(14,500)
-
-
1,800,000
Weighted
Average
Exercise
Price
1.59
1.59
1.59
-
-
Weighted
Average
Exercise
Price
1.68
1.73
1.59
1.59
1.59
$
Shares
231,000
(150,000)
(4,000)
77,000
77,000
2,000,000
49
401(k) Plan
The Company initiated an employees’ savings plan (the “Plan”) qualified under Section 401(k) of the
Internal Revenue Code in May 1995. The Plan covers substantially all of the Company’s employees. Effective
January 1, 2009, the Company modified 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
Company’s total matching contribution for 2013 and 2012 was $173 and $153, respectively, and consisted of a
contribution equal to 50% of up to the first 4% of each participant’s contributions. In addition to the matching
contribution, the Company also provided a 3% safe harbor non-elective contribution in 2013 and 2012 of $369
and $302, respectively. The employer match and safe harbor contribution were made in cash.
Agent Stock Purchase Plan
The Company initiated a nonqualified stock purchase plan (the “Agent Stock Purchase Plan”) in May 2012.
The purpose of the Agent Stock Purchase Plan is to promote and advance the interests of the Company and its
stockholders by providing independent agents who qualify as participants with an opportunity to purchase the
common stock of the Company. Under the Agent Stock Purchase Plan, payment for shares of common stock of
the Company is made by either deduction from an agent’s commission payment or a direct cash payment.
Stock purchases are made at the end of each calendar quarter at the then current market value.
Note 10. Preferred Stock
The Company had 65,000 and 70,000 shares of Series D preferred stock (“Series D Preferred Stock”)
outstanding at December 31, 2013 and 2012, respectively. All of the shares of Series D Preferred Stock are
held by an affiliate of the Company’s controlling shareholder. 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 Company’s 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 1,629,000 shares of the Company’s 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
Company’s option. The Series D Preferred Stock is not currently convertible. In 2013, the Company redeemed
5,000 shares of the Series D Preferred Stock at the stated value of $100 per share, for an aggregate payment of
$500. As of December 31, 2013 and 2012, the Company had accrued, but unpaid, dividends, on the Series D
Preferred Stock of $21 and $23, respectively. During 2013, the Company paid $483 in Series D Preferred Stock
dividends whereas in 2012, the Company paid $1,015 which included a $508 dividend attributable to 2011.
Note 11. Earnings 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, 2013
Shares
(In thousands)
Per Share
Amount
Income
Basic Earnings Per Common Share
Net income before preferred stock dividends. . . . . . . . . . . . . . . . . . . .
Less preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shareholders. . . . . . . . . . . . . . .
Diluted Earnings Per Common Share
Effect of dilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of Series D Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shareholders. . . . . . . . . . . . . . .
$
$
11,022
(482)
10,540
-
482
11,022
21,236
-
21,236
10
1,629
22,875
$
.50
$
.48
50
For the Year Ended December 31, 2012
Shares
(In thousands)
Per Share
Amount
Income
Basic Earnings Per Common Share
Net income before preferred stock dividends. . . . . . . . . . . . . . . . . . . .
Less preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shareholders. . . . . . . . . . . . . . .
Diluted Earnings Per Common Share
Effect of dilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shareholders. . . . . . . . . . . . . . .
$
$
4,436
(508)
3,928
-
3,928
21,222
-
21,222
67
21,289
$
$
.19
.18
The assumed conversion of the Company’s Series D Preferred Stock was excluded from the earnings per
common share calculation for 2012 since its impact would have been antidilutive.
Note 12. Statutory Reporting
The assets, liabilities and results of operations have been reported on the basis of GAAP, which varies in
some respects 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) certain valuation allowances attributable to certain
investments are different.
The amount of reported statutory net income and surplus (shareholders’ equity) for the Parent’s insurance
subsidiaries for the years ended December 31 was as follows:
Life and Health, net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and Casualty, net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statutory net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life and Health, surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and Casualty, surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statutory surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
3,013
6,224
9,237
34,530
39,092
73,622
$
$
$
$
2,271
3,104
5,375
33,059
36,947
70,006
$
$
$
$
Under the insurance code of the state in which each insurance subsidiary is domiciled, dividend payments
to the Parent by its insurance subsidiaries are subject to certain limitations without the prior approval of the
applicable state’s Insurance Commissioner. The Parent received dividends of $6,646 and $7,350 in 2013 and
2012, respectively, from its subsidiaries. In 2014, dividend payments to the Parent by the insurance subsidiaries
in excess of $7,112 would require prior approval.
Note 13. Related Party Transactions
In the normal course of business the Company has engaged in transactions with entities affiliated with the
controlling shareholder of the Company. These transactions include the leasing of office space as well as certain
investing and financing activities. At December 31, 2013, two members of the Company’s board of directors
were considered affiliates of the majority shareholder including our chairman, president and chief executive
officer.
The Company leases approximately 49,586 square feet of office and covered garage space from one such
controlled entity. During the years ended December 31, 2013 and 2012, the Company paid $864 and $853,
respectively, under this lease.
51
Certain financing for the Company has also been provided by this entity in the form of an investment in the
Series D Preferred Stock (See Note 10).
Certain members of the Company’s management and board of directors are shareholders and on the board
of directors of Gray Television, Inc. (“Gray”). As of December 31, 2013 the Company owned 880,272 shares of
Gray Class A common stock and 106,000 shares of Gray common stock. As of December 31, 2012 the
Company owned 388,060 shares of Gray Class A common stock and 106,000 shares of Gray common stock.
The aggregate carrying value of these investments in Gray at December 31, 2013 and 2012 was $12,942 and
$908, respectively.
Note 14. Segment Information
The Parent’s primary insurance subsidiaries operate with relative autonomy and each company is evaluated
based 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.
American
Southern
Bankers
Fidelity
2013
Corporate
& Other
Adjustments
& Eliminations
Consolidated
Insurance premiums . . . . . . . . . . . . . . . $ 45,851
Insurance benefits and losses
$ 99,779
$
incurred . . . . . . . . . . . . . . . . . . . . . . . .
Expenses deferred . . . . . . . . . . . . . . . . .
Amortization and depreciation
30,197
(7,106)
70,175
(3,230)
expense . . . . . . . . . . . . . . . . . . . . . . . .
7,440
Other expenses . . . . . . . . . . . . . . . . . . . .
15,777
Total expenses . . . . . . . . . . . . . . . . . .
46,308
Underwriting loss . . . . . . . . . . . . . . . . .
(457)
Investment income . . . . . . . . . . . . . . . .
4,308
Other income . . . . . . . . . . . . . . . . . . . . .
12
Operating income (loss) . . . . . . . . . . .
3,863
Net realized gains . . . . . . . . . . . . . . . . .
3,767
Income (loss) before income taxes . . $
7,630
Total revenues . . . . . . . . . . . . . . . . . . . . $ 53,938
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . $
1,350
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 126,861
$
-
-
-
-
-
-
-
15,076
15,076
-
(8,028 )
(8,028 )
$ 145,630
100,372
(10,336)
9,560
54,567
154,163
2,338
6,408
(6,330)
644
(5,686) $
$
$
9,390
$
$
$
-
$
$ 141,304
(1,757 )
(6,271 )
-
-
-
10,809
189
2,465
8,741
11,206
$
(8,028 ) $ 165,369
2,544
$
(105,268 ) $ 319,381
-
2,120
31,742
100,807
(1,028)
5,920
40
4,932
4,330
$
9,262
$ 110,069
$
1,194
$ 156,484
52
Insurance premiums . . . . . . . . . . . . . . .
Insurance benefits and losses
incurred . . . . . . . . . . . . . . . . . . . . . . . .
Expenses deferred . . . . . . . . . . . . . . . . .
Amortization and depreciation
expense . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . .
Underwriting income (loss) . . . . . . . .
Investment income . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . .
Net realized gains . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . .
Total revenues . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . .
American
Southern
Bankers
Fidelity
2012
Corporate
& Other
Adjustments
& Eliminations
Consolidated
$ 37,471
$ 89,272
$
- $
27,337
(8,515)
62,480
(3,810)
-
-
9,009
11,758
39,589
(2,118)
4,560
-
2,442
383
$
2,825
$ 42,414
$
1,350
$ 130,092
1,911
27,674
88,255
1,017
6,195
48
7,260
1,051
$
8,311
$ 96,566
$
778
$ 161,078
-
14,340
14,340
2,582
5,704
(6,054)
-
$ (6,054) $
8,286 $
$
$
- $
$ 153,912 $
-
-
-
-
(7,438)
(7,438)
$ 126,743
89,817
(12,325)
10,920
46,334
134,746
(1,833)
(5,605)
-
-
-
11,504
147
3,648
1,434
5,082
$
(7,438) $ 139,828
2,128
$
(124,905) $ 320,177
-
Note 15. Disclosures About Fair Value of Financial Instruments
The estimated fair values have been determined by the Company using available market information from
various market sources and appropriate valuation methodologies as of the respective dates. However,
considerable judgment is necessary to interpret market data and to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts which the Company
could realize in a current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
2013
2012
Level in Fair
Value
Hierarchy (1)
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Assets:
Cash and cash equivalents . . . . . . . . . . . Level 1
Fixed maturities . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . Level 3
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . Level 2
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . Level 2
Investments in unconsolidated trusts . . Level 2
(1)
(1)
$
$
33,102
201,303
21,890
2,123
2,369
38
1,238
33,102
201,303
21,890
2,123
2,369
38
1,238
$
18,951
230,508
12,205
565
2,338
38
1,238
$
18,951
230,508
12,205
565
2,338
38
1,238
Liabilities:
Junior Subordinated Debentures . . . . . . Level 2
Derivative financial instrument . . . . . . Level 3
41,238
-
41,238
-
41,238
141
41,238
141
(1) See Note 2 for a description of the fair value hierarchy as well as a disclosure of levels for classes of
these financial assets.
The fair value estimates as of December 31, 2013 and 2012 were based on pertinent information available
to management as of the respective dates. Although management is not aware of any factors that would
53
significantly affect the estimated fair value amounts, current estimates of fair value may differ significantly
from amounts that might ultimately be realized in a market exchange on any subsequent date.
The following describes the methods and assumptions used by the Company in estimating fair values:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short-term nature of the instruments.
Fixed Maturities and Common and Non-Redeemable Preferred Stocks
The carrying amount is determined in accordance with methods prescribed by the NAIC, which do not
differ materially from publicly quoted market prices. Certain fixed maturities do not have publicly quoted
values and 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 offerings is also considered, as applicable.
Non-publicly Traded Invested Assets
The fair value of investments in certain limited partnerships which are included in other invested assets on
the consolidated balance sheet were determined by officers of those limited partnerships.
Junior Subordinated Debentures
The fair value is estimated based on the quoted market prices for similar issues and the current rates offered
for debt having similar returns and remaining maturities.
Derivative Financial Instrument
As the Company’s only derivative financial instrument was an interest rate collar, changes in valuation
were correlated with changes in interest rates and contract maturity date and, accordingly, values were
estimated using projected cash flows at current interest rates discounted at a reasonably estimated rate of
interest. Fair value quotations were also obtained and considered, as applicable, from the contractual
counterparty.
Note 16. Accumulated Other Comprehensive Income
The following table sets forth the balance of each component of accumulated other comprehensive income
as of December 31, 2013 and 2012, and the changes in the balance of each component thereof during 2013.
Unrealized
Gains on
Available-
for-Sale
Securities
Balance, December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassifications . . . . . .
Amounts reclassified from accumulated other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current-period other comprehensive income (loss). . . . . . . . . . .
Balance, December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
19,663
(7,777)
(5,682)
(13,459)
6,204
$
$
Derivative
Financial
Instrument
(92) $
92
Total
19,571
(7,685)
-
92
-
(5,682)
(13,367)
6,204
$
54
Note 17. Acquisitions
On December 18, 2013, the Company acquired 100% of the outstanding stock of Direct Life Insurance
Company (“DLIC”) for $3,857 and changed the name of the company to Bankers Fidelity Assurance Company.
The acquisition will allow Bankers Fidelity to offer additional similar products to those it already writes
permitting greater diversification of product and pricing as well as opportunity for future expansion in other
states. The purchase was not significant to the financial position or results of operations of the Company in
2013 and DLIC had no significant recent operations prior to acquisition. In connection with the acquisition the
following assets and liabilities were acquired:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
$ 1,317
2,123
7
416
$ 3,863
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
6
6
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and
with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-
25(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and
procedures were effective as of that date.
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Our internal control over financial reporting system has been designed to
provide reasonable assurance regarding the reliability and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Management recognizes that there are
inherent limitations in the effectiveness of any internal control system. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect all misstatements. Furthermore, the
application of any evaluations of effectiveness on future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2013 based upon the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control – Integrated Framework (1992 version). Based on that
evaluation, management believes that internal control over financial reporting as such term is defined in
Exchange Act Rule 13a-15(f) was effective as of December 31, 2013.
There were no changes in our internal control over financial reporting that occurred during the fourth
quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
55
This Annual Report does not include an attestation report of the Company’s independent registered public
accounting firm regarding internal control over financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm pursuant to certain rules of the
Securities and Exchange Commission that exempt smaller reporting companies, including the Company, from
such requirement.
Item 9B. Other Information
None.
PART III
With the exception of certain information relating to the Executive Officers of the Company, which is
provided in Part I hereof, the information relating to securities authorized for issuance under equity
compensation plans and the information relating to the Company’s Code of Ethics, each of which is included
below, all information required by Part III (Items 10, 11, 12, 13 and 14 of Form 10-K) is incorporated by
reference to the sections entitled “Election of Directors”, “Security Ownership of Certain Beneficial Owners
and Management”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Executive Compensation”,
“Certain Relationships and Related Transactions, and Director Independence” and “Ratification of Independent
Registered Public Accounting Firm” to be contained in the Company’s definitive proxy statement in connection
with the Company’s Annual Meeting of Shareholders to be held on May 6, 2014, to be filed with the SEC
within 120 days of the Company’s fiscal year end.
Equity Compensation Plan Information
The following table sets forth, as of December 31, 2013, the number of securities issuable upon exercise of
outstanding options, warrants and rights, the weighted average exercise price thereof and the number of
securities remaining available for future issuance under the Company’s equity compensation plans:
Plan Category
Equity compensation plans approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
security holders (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Securities to Be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in the First
Column)
- $
-
- $
-
-
-
1,800,000
-
1,800,000
(1) All the Company’s equity compensation plans have been approved by the Company’s shareholders.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller, or any persons performing similar functions, as well
as its directors and other employees. A copy of this Code of Ethics has been filed as an exhibit to this annual
report on Form 10-K.
56
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a) List of documents filed as part of this report:
1. Financial Statements:
See Index to Financial Statements contained in Item 8 hereof.
2. Financial Statement Schedules:
Schedule II - Condensed financial information of the registrant
Schedule III - Supplementary insurance information of the registrant
Schedule IV - Reinsurance information for the registrant
Schedule VI - Supplemental information concerning property-casualty insurance operations of the registrant
Schedules other than those listed above are omitted as they are not required or are not applicable, or the required
information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have
been omitted because the information is not applicable.
3. Exhibits *:
3.1
- Restated Articles of Incorporation of the registrant, as amended [incorporated by reference to
Exhibit 3.1 to the registrant’s Form 10-K for the year ended December 31, 2008].
3.2
- Bylaws of the registrant, as amended [incorporated by reference to Exhibit 3.2 to the registrant’s
Form 10-K for the year ended December 31, 2008].
10.01
10.02
- Management Agreement between the registrant and Atlantic American Life Insurance Company
and Bankers Fidelity Life Insurance Company dated July 1, 1993 [incorporated by reference to
Exhibit 10.41 to the registrant’s Form 10-Q for the quarter ended September 30, 1993].
- Tax allocation agreement dated January 28, 1994, between registrant and registrant’s subsidiaries
[incorporated by reference to Exhibit 10.44 to the registrant’s Form 10-K for the year ended
December 31, 1993].
10.03** - Atlantic American Corporation 2002 Stock Incentive Plan [incorporated by reference to Exhibit 4.1
to the registrant’s Form S-8 (File No. 333-97567) filed on August 2, 2002].
10.04** - Atlantic American Corporation 2012 Nonqualified Stock Purchase Plan [incorporated by reference
to Exhibit 99.1 to the registrant’s Form S-8 (File No. 333-183207) filed on August 10, 2012].
10.05** - Atlantic American Corporation 2012 Equity Incentive Plan [incorporated by reference to Exhibit
10.1 to registrant’s Form 10-Q for the quarter ended March 31, 2013].
10.06** - Summary Terms of Consulting Arrangement between Bankers Fidelity Life Insurance Company
and William H. Whaley, M.D. [incorporated by reference to Exhibit 10.06 to the registrant’s Form
10-K for the year ended December 31, 2010].
57
10.07
- Lease Agreement between Georgia Casualty & Surety Company, Bankers Fidelity Life Insurance
Company, Atlantic American Corporation and Delta Life Insurance Company dated as of
November 1, 2007 [incorporated by reference to Exhibit 10.10 to the registrant’s Form 10-K for
the year ended December 31, 2007].
10.08
- First Amendment to Lease Agreement between Georgia Casualty & Surety Company, Bankers
Fidelity Life Insurance Company, Atlantic American Corporation and Delta Life Insurance
Company dated as of March 31, 2008 [incorporated by reference to Exhibit 10.2 to the registrant’s
Form 10-Q for the quarter ended March 31, 2008].
14.1
- Code of Ethics [incorporated by reference to Exhibit 14.1 to the registrant’s Form 10-K for the
year ended December 31, 2003].
21.1
- Subsidiaries of the registrant.
23.1
- Consent of BDO USA LLP, Independent Registered Public Accounting Firm.
31.1
- Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2
- Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1
- Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS - XBRL Instance Document.
101.SCH - XBRL Taxonomy Extension Schema.
101.CAL - XBRL Taxonomy Extension Calculation Linkbase.
101.DEF - XBRL Taxonomy Extension Definition Linkbase.
101.LAB - XBRL Taxonomy Extension Label Linkbase.
101.PRE - XBRL Taxonomy Extension Presentation Linkbase.
* The registrant agrees to furnish to the Commission upon request a copy of any instruments defining the rights
of security holders of the registrant that may be omitted from filing in accordance with the Commission’s rules
and regulations.
** Management contract, compensatory plan or arrangement required to be filed pursuant to Part IV, Item 15(c)
of Form 10-K and Item 601 of Regulation S-K.
58
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ATLANTIC AMERICAN CORPORATION
(Registrant)
By: /s/ John G. Sample, Jr.
John G. Sample, Jr.
Senior Vice President and Chief Financial Officer
Date: March 26, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Hilton H. Howell, Jr.
HILTON H. HOWELL, JR.
President, Chief Executive Officer
and Chairman of the Board (Principal Executive Officer) March 26, 2014
/s/ John G. Sample, Jr.
JOHN G. SAMPLE, JR.
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
March 26, 2014
/s/ Edward E. Elson
EDWARD E. ELSON
/s/ Robin R. Howell
ROBIN R. HOWELL
/s/ Samuel E. Hudgins
SAMUEL E. HUDGINS
Director
Director
Director
/s/ Harriett J. Robinson
HARRIETT J. ROBINSON
Director
/s/ Scott G. Thompson
SCOTT G. THOMPSON
Director
/s/ William H. Whaley, M.D.
WILLIAM H. WHALEY, M.D.
Director
/s/ Dom H. Wyant
DOM H. WYANT
Director
59
Schedule II
Page 1 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
BALANCE SHEETS
ASSETS
December 31,
2013
2012
(In thousands)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in unconsolidated trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
13,936
18,043
105,268
1,238
4,530
2,676
145,691
$
13,306
14,122
124,904
1,238
1,989
559
$ 156,118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deferred tax liability, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
297
3,229
41,238
7,824
1,320
41,238
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,764
50,382
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,927
145,691
105,736
$ 156,118
$
See accompanying report of independent registered public accounting firm.
II-1
Schedule II
Page 2 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS OF OPERATIONS
REVENUE
Fee income from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributed earnings from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
GENERAL AND ADMINISTRATIVE EXPENSES . . . . . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME TAX BENEFIT(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES, NET . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended December 31,
2012
2013
(In thousands)
6,271
6,646
1,330
14,247
11,106
1,898
1,243
(4,504)
5,747
5,275
11,022
$
$
5,605
7,350
844
13,799
9,659
2,632
1,508
(1,766)
3,274
1,162
4,436
(1) Under the terms of a tax-sharing agreement, income tax provisions for the subsidiary companies are
computed on a separate company basis. Accordingly, the Company’s income tax benefit results from
the utilization of the Parent’s separate return loss to reduce the consolidated taxable income of the
Company.
See accompanying report of independent registered public accounting firm.
II-2
Schedule II
Page 3 of 3
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to share awards. . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of consolidated subsidiaries. . . . . . . . . . .
(Increase) decrease in intercompany taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, called or matured . . . . . . . . . . . . . . . . . . . . . .
Investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital contribution to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Series D preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends on Series D preferred stock. . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from shares issued under stock plans . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of shares for treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany tax settlement from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2013
2012
(In thousands)
$
11,022
$
4,436
(644)
117
219
(5,275 )
(2,541 )
(329 )
846
161
3,576
5,568
(4,438 )
(200 )
(1,192 )
(262 )
(500 )
(483 )
(423 )
138
(1,416 )
(2,684 )
630
13,306
13,936
1,961
536
2,574
$
$
$
$
-
75
-
(1,162)
463
(97)
(746)
(251)
2,718
-
-
(200)
(166)
(366)
-
(1,015)
(1,486)
297
(607)
(2,811)
(459)
13,765
13,306
2,636
405
2,132
$
$
$
$
See accompanying report of independent registered public accounting firm.
II-3
Schedule III
Page 1 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Segment
December 31, 2013:
Bankers Fidelity . . . . . . . . . . . . . . . . . . . . . .
American Southern . . . . . . . . . . . . . . . . . . . .
December 31, 2012:
Bankers Fidelity . . . . . . . . . . . . . . . . . . . . . .
American Southern . . . . . . . . . . . . . . . . . . . .
Future Policy
Benefits,
Losses,
Claims and
Loss
Reserves
Deferred
Acquisition
Costs
Unearned
Premiums
Other Policy
Claims and
Benefits
Payable
(In thousands)
$
$
$
$
24,275
3,234
27,509
22,864
3,269
26,133
$
$
$
$
81,682
51,200
132,882(1)
77,041
52,764
129,805(2)
$
$
$
$
4,419
22,996
27,415
4,564
18,073
22,637
$
$
$
$
2,076
-
2,076
2,116
-
2,116
(1)
(2)
Includes future policy benefits of $69,864 and losses and claims of $63,018.
Includes future policy benefits of $66,932 and losses and claims of $62,873.
See accompanying report of independent registered public accounting firm.
III-1
Schedule III
Page 2 of 2
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Segment
December 31, 2013:
Bankers Fidelity . . . . . . . .
American Southern . . . . . .
Other . . . . . . . . . . . . . . . . . . .
December 31, 2012:
Bankers Fidelity . . . . . . . .
American Southern . . . . . .
Other . . . . . . . . . . . . . . . . . . .
Premium
Revenue
Net
Investment
Income
$ 99,779 $
45,851
-
5,466
4,288
581
$ 145,630 $ 10,335
$ 89,272 $
37,471
-
6,032
4,529
749
$ 126,743 $ 11,310
Benefits,
Claims,
Losses and
Settlement
Expenses
Amortization
of Deferred
Acquisition
Costs
(In thousands)
Other
Operating
Expenses
Casualty
Premiums
Written
$
$
$
$
70,175
30,197
-
100,372
62,480
27,337
-
89,817
$
$
$
$
1,820
7,140
-
8,960
$ 28,812
8,971
7,048
$ 44,831
$
-
50,774
-
$ 50,774
1,677
8,774
-
10,451
$ 24,098
3,478
6,902
$ 34,478
$
-
36,182
-
$ 36,182
See accompanying report of independent registered public accounting firm.
III-2
Schedule IV
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
REINSURANCE
Year ended December 31, 2013:
Life insurance in force . . . . . . . . . . . .
Premiums --
Bankers Fidelity . . . . . . . . . . . . . . . . .
American Southern . . . . . . . . . . . . . . .
Total premiums . . . . . . . . . . . . . . . . . .
Year ended December 31, 2012:
Life insurance in force . . . . . . . . . . . .
Premiums --
Bankers Fidelity . . . . . . . . . . . . . . . . .
American Southern . . . . . . . . . . . . . . .
Total premiums . . . . . . . . . . . . . . . . . .
Direct
Amount
Ceded To
Other
Companies
Assumed
From Other
Companies
Net
Amounts
(Dollars in thousands)
$ 259,723
$ (18,525) $
-
$ 241,198
Percentage of
Amount
Assumed
To Net
$ 99,745
41,975
$ 141,720
$
(54) $
(7,553)
$ (7,607) $
88
11,429
11,517
$ 99,779
45,851
$ 145,630
0.1%
24.9%
7.9%
$ 264,435
$ (15,800) $
-
$ 248,635
$ 89,231
42,068
$ 131,299
$
(68) $
(7,603)
$ (7,671) $
109
3,006
3,115
$ 89,272
37,471
$ 126,743
0.1%
8.0%
2.5%
See accompanying report of independent registered public accounting firm.
IV-1
Schedule VI
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Deferred
Policy
Acquisition
Costs
Year Ended
Reserves
Unearned
Premiums
Earned
Premiums
Net
Investment
Income
Claims and Claim
Adjustment
Expenses Incurred
Related To
Current
Year
Prior
Years
Amortization
of Deferred
Acquisition
Costs
Paid Claims
and Claim
Adjustment
Expenses
Premiums
Written
(In thousands)
December 31,
2013 . . . . . . $
December 31,
2012 . . . . . . $
3,234 $ 51,200 $
22,996 $
45,851 $
4,288 $ 32,672 $ (2,475) $
7,140 $
27,339 $
50,774
3,269 $ 52,764 $
18,073 $
37,471 $
4,529 $ 29,054 $ (1,717) $
8,774 $
27,134 $
36,182
See accompanying report of independent registered public accounting firm.
VI-1