| ATLANTIC AMERICAN CORP Item 1A Risk Factors There are numerous factors, many beyond our control, which could have a significant or material adverse effect on our business, financial condition, operating results or liquidity |
| Any factor discussed below or elsewhere in this report could by itself or, together with one or more factors, cause results to 18 _________________________________________________________________ [75]Table of Contents differ significantly from our expectations |
| Further, there may be significant additional risks which management has not considered which could have a significant or material adverse effect on the business, financial condition, operating results or liquidity of the Company |
| We operate in a highly competitive environment |
| The life and health and property and casualty insurance businesses are highly competitive |
| We compete with large national insurance companies, locally-based specialty carriers and alternative risk transfer entities whose activities are directed to limited markets |
| Competitors include companies that have substantially greater resources than we do, as well as mutual companies and similar companies not owned by shareholders |
| Competition 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 |
| Increased competition could adversely affect our ability to attract and retain business at current premium levels and reduce the profits that would otherwise arise from operations |
| We operate in a highly regulated environment |
| Our insurance businesses are subject to extensive regulations by state insurance authorities in each state in which they operate |
| Regulation is intended for the benefit of the policyholders rather than shareholders |
| In addition to limiting the amount of dividend and other payments that can be made to our holding company by our insurance subsidiaries, regulatory authorities have broad administrative and supervisory authority relating to: licensing requirements, trade practices, capital and surplus requirements, investment practices and rates charged to our customers |
| Regulatory authorities may also impose conditions on terms of business or rate increases that we may desire to enhance our operating results |
| In addition, we may incur significant costs in complying with regulatory requests, initiatives and/or requirements |
| Regulatory authorities generally also regulate insurance holding companies in a variety of matters such as acquisitions, changes of control and terms of affiliated transactions |
| Our revenues may fluctuate with insurance market conditions for similar products |
| We derive a significant portion of our insurance premium revenue from Medicare supplement and moderately-sized commercial property and casualty insurance policies |
| While we have in the recent past been successful in achieving premium increases which help improve our operating results, we believe that competition from alternative government sponsored products and pricing decisions from larger insurers will, at least in the short term, result in more moderate pricing increases, if not decreases in certain situations |
| Should our competitors become less disciplined in their pricing, or more permissive in their terms, we may lose customers who base their purchasing decisions primarily on price because our policy is to price coverage commensurate with the underlying risk |
| We cannot predict whether, when or how market conditions will change, or the manner in which, or the extent to which any such changes may adversely impact the results of our operations |
| Our revenues and profitability may fluctuate with interest rates and investment results |
| We generally rely on the positive performance of our investment portfolio to offset insurance losses and to contribute to our profitability |
| As our investment portfolio is primarily comprised of interest-earning assets, prevailing economic conditions, particularly changes in market interest rates, may significantly affect our operating results |
| Changes in interest rates also can affect the value of our interest-earning assets, which are principally comprised of fixed rate investment securities |
| Generally, the values of fixed-rate investment securities fluctuate inversely with changes in interest rates |
| Interest rate fluctuations could adversely affect our shareholders’ equity, income and/or cash flows |
| Further, to the extent fixed rate investment securities consist of investments in other than government or government agency securities, changing credit risk profiles may significantly affect our operating results |
| The Company generally carries investment securities at fair value; however, if the value of an investment security declines below its cost or amortized cost, and the decline is considered to be other than temporary, a realized loss is recorded to 19 _________________________________________________________________ [76]Table of Contents reduce the carrying value of the investment to its estimated fair value |
| Realized losses are reflected as a reduction in investment results and revenues and could adversely impact our results of operations |
| Our operating results may be affected if incurred losses differ from our loss reserve estimates |
| Varying periods of time often elapse between the occurrence of an insured loss, the reporting of the loss by the insured and the ultimate settlement of that loss |
| The financial statement recognition of unpaid incurred losses is made through a provision for incurred losses with corresponding loss reserves established |
| The loss reserves represent the estimate of amounts needed to pay incurred losses and related loss adjustment expense as of the balance sheet date |
| The process of estimating loss reserves is a complex undertaking and involves significant variables and judgments |
| Consideration is given to numerous factors including, but not limited to: historical data; trends in claim frequency and severity; changes in operations; emerging economic, social, regulatory and legal trends and inflation |
| Further, estimating loss reserves assumes that past experience, adjusted for the effect of current developments and anticipated trends, is an appropriate, but not always necessarily accurate, basis for predicting future settlements |
| There is no precise method for evaluating the impact of any specific factor on the adequacy of loss reserves, and ultimate settlements will differ from initial and regularly updated estimates |
| To the extent loss reserves prove to be inadequate in the future, increases in loss reserves would be necessitated with a corresponding charge to earnings in the period the reserves are increased, which could have a material adverse impact on our financial condition and results of operations |
| Rapidly changing benefit costs could have a material impact on our operations |
| A significant portion of the Company’s insurance policies provide coverage for some portion of medical benefits and/or repair/replacement of damaged property such as buildings and automobiles |
| Historical inflationary increases in those costs are considered when developing premium rates; however, on occasion, future cost increases exceed those initially estimated |
| In the medical field, scientific breakthroughs and/or new technology can result in unanticipated increasing medical costs |
| In property repair/replacement, a significant geographically concentrated demand for labor and supplies, particularly as a result of catastrophic disasters, may result in significantly increased costs |
| Rapidly changing costs of settling claims in excess of those originally anticipated, due to scientific breakthrough, new technology and/or catastrophic events could have a material adverse impact on our results of operations |
| If market conditions cause reinsurance to be more costly or unavailable, we may be required to assume increased risk or reduce the level of our underwriting commitments |
| As part of our enterprise risk management strategy, we purchase reinsurance for significant amounts of risk underwritten by our insurance company subsidiaries |
| Market conditions beyond our control determine the availability and cost of the reinsurance, which may affect the level of our business and profitability |
| We may be unable to maintain current reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at comparable rates in the future |
| If we are unable to renew our expiring coverage or to obtain new reinsurance coverage, either our net exposure to risk would increase, or if we were unwilling to assume additional risk, we would have to reduce the amount of our underwritten risk |
| We cannot guarantee that our reinsurers will pay in a timely fashion, if at all, and, as a result, we could experience losses |
| We transfer some of our risks to reinsurance companies in exchange for part of the premium we receive in connection with the risk |
| Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it does not relieve us of our liability to our policyholders |
| If reinsurers fail to pay us or fail to pay on a timely basis, our financial results would be adversely affected |
| 20 _________________________________________________________________ [77]Table of Contents The guaranty fund assessments that we are required to pay to state guaranty associations may increase and results of operations and financial condition could suffer as a result |
| A majority of the states in which we operate have separate insurance guaranty fund laws which require certain admitted insurance companies doing business within their respective jurisdictions to be a member of their guaranty associations |
| These associations are organized to pay covered claims, as defined, under insurance policies issued by insolvent insurance companies |
| Most guaranty association laws enable the associations to make assessments against member insurers to obtain funds to pay covered claims after a member insurer becomes insolvent |
| These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the covered lines of business in that state |
| Maximum assessments permitted by law in any one year are generally subject to 4prca of annual premiums written by a member in that state |
| Some states permit member insurers to recover assessments paid through surcharges on policyholders or through full or partial premium tax offsets, while other states permit recovery of assessments through the rate filing process |
| Our policy is to accrue an estimated annual assessment based on the most recent prior year’s experience |
| There is a significant degree of uncertainty in estimating the liabilities relating to an insolvent insurer due to inadequate financial data with respect to the estate of the insolvent company as supplied by the guaranty funds |
| The unpredictability of court decisions could have a material impact on our operations |
| From time to time we are party to legal proceedings that may arise from disputes over our insurance coverage |
| The financial position of our insurance subsidiaries may be affected by court decisions that expand insurance coverage beyond the intention of the insurer at the time it originally issued an insurance policy |
| In addition, a significant jury award, or series of awards, against one or more of our insureds could require us to pay large sums of money in excess of our reserve amounts |
| The passage of tort reform or other legislation, and the subsequent review of such laws by the courts, could have a material impact on our operations |
| Tort reforms generally restrict the ability of a plaintiff to recover damages by, among other limitations, eliminating certain claims that may be heard in a court, limiting the amount or types of damages, changing statutes of limitations or the period of time to make a claim, and limited venue or court selection |
| A number of states in which we do business have enacted, or are considering, tort reform legislation |
| Proposed federal tort reform legislation has failed to win Congressional approval to date |
| While the effects of tort reform would appear to be beneficial to our business generally, there can be no assurance that such reforms will be effective or ultimately upheld by the courts in the various states |
| Further, if tort reforms are effective, it could effectively increase the level of competition for us in the markets in which we compete |
| In addition, there can be no assurance that the benefits of tort reform will not be accompanied by legislation or regulatory actions that may be detrimental to our business |
| Furthermore, insurance regulators might require premium rate limitations and expanded coverage requirements as well as other requirements in anticipation of the expected benefits of tort reform which may or may not be actually realized |
| The geographic concentration of our regional property and casualty operations ties our performance to the economic, regulatory and demographic conditions of the southern United States |
| Our revenues and profitability are subject to prevailing economic, regulatory, demographic and other conditions in the states in which we write insurance |
| While our life and health subsidiary writes insurance in numerous and diverse states, our regional property and casualty subsidiaries write business in the southern United States, which include New Mexico, Oklahoma, Texas, Arkansas, Tennessee, Mississippi, Georgia, Florida, and North and South Carolina (the “Southern States |
| ”) While we have limited exposures in the states of Louisiana and Alabama, the Company does not actively solicit business in those states |
| Further, even though the regional property and casualty subsidiaries write business in these ten Southern States, there is a concentration of business in the three states of Georgia, Mississippi and Texas, 21 _________________________________________________________________ [78]Table of Contents which have potential coastal exposures |
| The Company’s coastal underwriting guidelines have been significantly revised in the past two years, thereby reducing the Company’s future exposure |
| While there can be no assurances with respect to reduced losses as a result of future storms or natural catastrophes, the concentration of business in these Southern States does limit the opportunity for risk diversification and exposes the Company to events which could result in a material adverse effect |
| Catastrophic events could have a material adverse effect on our business, consolidated operating results, financial condition and/or liquidity |
| The Company’s primary objective in managing risk is to obtain diversification in the types and locations of business written |
| In the property and casualty operations, modeling is performed to evaluate the “probable maximum loss” that may result from natural catastrophic events |
| There are however, catastrophic events which may occur, the effects of which cannot be reasonably estimated |
| In various Asian and European countries there are confirmed cases of H5N1 Avian Influenza in birds |
| Individuals, primarily in Asia, have contracted the H5N1 Avian Influenza and although there are no cases which have been reported in the United States, should such influenza reach the United States and begin spreading via human transmission, the impact on our life and health subsidiary is undeterminable |
| Further, in the past two years, our property and casualty operations have sustained losses from eight “named” hurricanes |
| Not only have the hurricanes been costly due to the direct losses incurred by the Company’s insureds, but the Company has also been subject to significant assessments from various state wind storm facilities |
| Wind storm assessments from the states of Texas, Louisiana, Mississippi, Alabama and Florida during 2005 totaled approximately dlra1dtta9 million, of which dlra1dtta8 million was absorbed by reinsurance |
| However, should catastrophic wind storms continue, the direct losses resultant therefrom, coupled with state wind storm assessments, could result in losses ultimately exceeding the Company’s reinsurance limits |
| Additionally, the Company does not insure “high-profile” individuals and/or locations and believes the risk of loss from future catastrophic terrorist activities is remote |
| Each of these or other catastrophic events, individually and/or collectively could ultimately however have a material adverse effect on our business, consolidated operating results, financial condition and/or liquidity |
| If we are unable to maintain favorable financial strength ratings, it may be more difficult for us to write new business or renew our existing business |
| Our principal operating subsidiaries hold favorable financial strength ratings from AM Best, an independent insurance rating agency |
| Financial strength ratings are used by our agents and customers as an important means of assessing the financial strength and quality of various insurers |
| If our financial position, or that of any of our individual subsidiaries, were to deteriorate, we may not maintain our existing financial strength ratings from the rating agency |
| A downgrade or withdrawal of any such rating could limit or prevent us from writing and/or renewing desirable business |
| Our business could be adversely affected by the loss of independent agents |
| We depend in part on the services of independent agents and brokers in the marketing of our insurance products |
| We face competition from other insurance companies for the services and allegiance of independent agents and brokers |
| These agents and brokers may choose to direct business to competing insurance companies or may direct less desirable risks to us |
| Our business could be adversely affected by the loss of one or more key employees |
| We are heavily dependent upon our senior management and the loss of services of any of our senior executives could adversely affect our business |
| Our success has been, and will continue to be, dependent on our ability to retain the services of existing key employees and to attract and retain additional qualified personnel in the future |
| The loss of the services of key employees or senior management, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of our business operations |
| 22 _________________________________________________________________ [79]Table of Contents We are a holding company and are dependent on dividends and other payments from our operating subsidiaries, which are subject to dividend restrictions |
| We are a holding company whose principal source of funds is cash dividends and other permitted payments from operating subsidiaries |
| If our subsidiaries are unable to make payments to us, or are able to pay only limited amounts, we may be unable to make payments on our indebtedness |
| The payment of dividends by these operating subsidiaries is subject to restrictions set forth in the insurance laws and regulations of their respective states of domicile |
| A majority of our common stock is held directly and indirectly by one family |
| The Chairman of the Board of Directors of our Company and his family, directly and indirectly, own slightly less than 2/3 of the outstanding common stock of the Company |
| Accordingly, on significantly all matters requiring a majority or greater shareholder vote, our Chairman and his family can effectively control the vote |
| Such ownership effectively precludes any other shareholder from acquiring any number of shares in an attempt to exercise any degree of control over the Company |
| Further, as a result of the significant ownership, the level of float of the Company’s stock on the NASDAQ market is minimal |