10-K 1 g12502e10vk.htm ATLANTIC AMERICAN CORPORATION ATLANTIC AMERICAN CORPORATION
Table of Contents

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year Ended December 31, 2007
or
o
  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:
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $1.00 par value
(Title of class)
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large Accelerated Filer o
  Accelerated Filer o   Non-Accelerated Filer o
(Do not check if a smaller reporting company)
  Smaller Reporting Company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ           
 
 
 
 
The aggregate market value of voting and nonvoting common stock held by non-affiliates of the registrant as of June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was $21,010,869. On March 14, 2008 there were 21,843,062 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 2008 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
 
 
                 
        Page
 
      Business     2  
          The Company     2  
          Marketing     4  
          Underwriting     5  
          Policyholder and Claims Services     5  
          Reserves     6  
          Reinsurance     10  
          Competition     10  
          Ratings     11  
          Regulation     11  
          NAIC Ratios     12  
          Risk-Based Capital     12  
          Investments     13  
          Employees     14  
          Financial Information by Industry Segment     14  
          Available Information     14  
          Executive Officers of the Registrant     14  
          Forward-Looking Statements     15  
      Risk Factors     15  
      Unresolved Staff Comments     19  
      Properties     19  
      Legal Proceedings     20  
      Submission of Matters to a Vote of Security Holders     20  
 
PART II
      Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities     20  
      Selected Financial Data     23  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
      Quantitative and Qualitative Disclosures About Market Risk     36  
      Financial Statements and Supplementary Data     37  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     71  
      Controls and Procedures     71  
      Other Information     71  
 
PART III
      Directors, Executive Officers and Corporate Governance     71  
      Executive Compensation     71  
      Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters     71  
      Certain Relationships and Related Transactions, and Director Independence     71  
      Principal Accountant Fees and Services     71  
 
PART IV
      Exhibits and Financial Statement Schedules     72  
 EX-10.09 STOCK PURCHASE AGREEMENT
 EX-10.10 LEASE AGREEMENT
 EX-21.1 SUBSIDIARIES OF THE REGISTRANT
 EX-23.1 CONSENT OF BDO SEIDMAN LLP
 EX-31.1 SECTION 302 CERTIFICATION OF THE PEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE PFO
 EX-32.1 SECTION 906 CERTIFICATIONS OF THE PEO AND PFO


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PART I
 
Item 1.   Business
 
The Company
 
Atlantic American Corporation, a Georgia corporation incorporated in 1968 (the “Parent” or “Company”), is a holding company that operates through its subsidiaries in well-defined specialty markets within the life and health and property and casualty insurance industries. Atlantic American’s principal operating subsidiaries are American Southern Insurance Company and American Safety Insurance Company (collectively known as “American Southern”) and Bankers Fidelity Life Insurance Company (“Bankers Fidelity”). Each subsidiary is managed separately based upon the geographic location or the type of products offered 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 market place. Each of the Company’s subsidiaries operates with relative autonomy, which 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 insurance companies as the principal source of cash flow to meet its obligations. Additional information regarding the cash flow and liquidity needs of the Parent may be found in the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations below.
 
In December 2007, the Company entered into an agreement for the sale of its “regional” property and casualty operations, comprised of Association Casualty Insurance Company and Association Risk Management General Agency, Inc. (collectively known as “Association Casualty”) and Georgia Casualty & Surety Company (“Georgia Casualty”), to Columbia Mutual Insurance Company. Accordingly, the assets, liabilities and results of operations of the regional property and casualty operations have been reflected by the Company as discontinued operations. The sale is expected to be completed on or about March 31, 2008.
 
Property and Casualty Operations
 
American Southern comprises the Company’s property and casualty operations and its primary products are as follows:
 
Business Automobile Insurance policies provide bodily injury and/or property damage liability coverage, uninsured motorist coverage and physical damage coverage to 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.
 
Personal Automobile Insurance policies provide bodily injury and/or property damage liability coverage, uninsured motorists coverage and physical damage coverage to individuals.
 
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 and long-haul physical damage 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 such that individual class experience generally can be determined, which allows for customized policy terms and rates. American Southern is licensed to do business in 31 states. While the majority of American Southern’s premiums are derived from auto liability and auto physical damage, American Southern also offers personal property, inland marine, and general liability coverages. Additionally,


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American Southern directly provides surety bond coverage for school bus transportation and subdivision construction, as well as performance and payment bonds. During 2007, American Southern experienced decreased premium writings in the surety line of business, specifically pay for performance bonds and subdivision construction bonds, due to the general economic slowdown, particularly in housing. As described in more detail below, the reduction in these bonds reduced premium revenue but enhanced the overall profitability of the surety business in 2007.
 
The following table summarizes, for the periods indicated, the allocation of American Southern’s net earned premiums from each of its principal product lines:
 
                                         
    Year Ended December 31,  
    2007     2006     2005     2004     2003  
    (In thousands)  
 
Automobile liability
  $ 10,936     $ 16,163     $ 16,723     $ 18,944     $ 17,947  
Automobile physical damage
    8,105       9,698       11,002       11,187       9,451  
General liability
    10,349       11,394       11,767       10,102       5,777  
Property
    3,005       3,187       3,692       3,862       3,819  
Surety
    9,180       10,218       8,263       3,967       364  
                                         
Total
  $ 41,575     $ 50,660     $ 51,447     $ 48,062     $ 37,358  
                                         
 
Life and Health Operations
 
Bankers Fidelity comprises the life and health operations of the Company and offers a variety of life and supplemental health products with a focus on the senior markets. Products offered by Bankers Fidelity include ordinary and term life insurance, Medicare supplement, cancer, and other supplemental health insurance products. Health business, primarily Medicare supplement insurance, accounted for 81.1% of Bankers Fidelity’s net earned premiums in 2007 while life insurance, including both whole and term life insurance policies, accounted for the balance. In terms of the number of policies written in 2007, 23.4% were life insurance policies and 76.6% were health 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:
 
                                         
    Year Ended December 31,  
    2007     2006     2005     2004     2003  
    (In thousands)  
 
Life insurance
  $ 10,615     $ 10,960     $ 11,600     $ 12,934     $ 13,541  
                                         
Medicare supplement
    41,786       44,919       51,414       49,575       46,190  
Other accident and health
    3,848       3,041       2,890       2,933       2,952  
                                         
Total health insurance
    45,634       47,960       54,304       52,508       49,142  
                                         
Total
  $ 56,249     $ 58,920     $ 65,904     $ 65,442     $ 62,683  
                                         
 
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 selected riders or options.
 
Medicare Supplement Insurance includes 7 of the 12 standardized Medicare supplement policies created under the Omnibus Budget Reconciliation Act of 1990 (“OBRA 1990”), which are designed to provide insurance coverage for certain expenses not covered by the Medicare program, including copayments and deductibles.
 
Other Accident and Health Insurance coverages include several policies providing for the payment of benefits in connection with the treatment of diagnosed cancer, as well as a number of other policies including facility care, accident expense, hospital/surgical and disability.


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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 active oversight from management. Senior management carefully reviews all new programs prior to implementation. 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 business generated. American Southern also solicits business from governmental entities. As an experienced writer 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 retain such business at the time of a specific contract renewal.
 
Life and Health Operations
 
Bankers Fidelity markets its policies through commissioned, independent agents. In general, Bankers Fidelity enters contractual arrangements with various general agents responsible for marketing and other activities, who also, in turn, contract with independent agents. The standard agreements set forth the commission arrangements and are terminable by either party upon notice. General agents receive an override commission on sales made by agents contracted 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 solely on a commission basis. Using independent agents also enables Bankers Fidelity to expand or contract its sales force without incurring significant additional expense.
 
Bankers Fidelity has implemented a selective agent qualification process and had 1,699 licensed agents as of December 31, 2007. The agents concentrate their sales activities in either the accident and health or life insurance product lines, although the company is currently promoting greater cross selling initiatives through property and casualty agencies, association groups and worksite marketing agencies. During 2007, approximately 484 agents wrote policies on behalf of Bankers Fidelity.
 
Bankers Fidelity utilizes multiple distribution sales channels including agency business, which is centered around a lead generation plan that rewards qualified agents with leads in accordance with monthly production goals. In addition, a protected territory is established for each qualified agent, which entitles them to all leads produced within that territory. The territories are zip code or county based and encompass sufficient geographic territory to produce a minimum senior population of 25,000. Bankers Fidelity also recruits at a general agent level as well as at a managing general agent level in an effort to use more than one distribution channel to lower expenses.
 
The Company believes these lead generation systems solve 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 plan. In protected geographical areas, production per agent compares favorably to unprotected areas served by the general brokerage division.
 
Products of Bankers Fidelity compete directly with products offered by other insurance companies, and agents may represent several insurance companies. Bankers Fidelity, in an effort to further motivate agents to market its products, offers the following agency services: a unique lead system, competitive products and commission structures, efficient claims service, prompt payment of commissions that immediately vest, simplified policy issue procedures, periodic sales incentive programs and, as described above, protected sales territories determined based on specific counties and/or zip codes.


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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 year, extensive use is made of risk management representatives to assist commercial underwriters in identifying and correcting potential loss exposures and to pre-inspect a majority of the new underwritten accounts. The results of each insured are reviewed on a stand-alone basis periodically. When the results are below expectations, management takes appropriate corrective action which may include adjusting rates, reviewing underwriting standards, reducing 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, which include senior life products typically with small face amounts of between $1,000 and $30,000, and Medicare supplement. The majority of its products are “Yes” or “No” applications that are underwritten on a non-medical basis. Bankers Fidelity offers products to all age groups; however, its primary focus is the senior market. For life products other than the senior market, Bankers Fidelity may require medical information such as medical examinations subject to age and face amount based on published guidelines. Approximately 95% of the net premiums earned for both life and health insurance sold during 2007 were derived from insurance written below Bankers Fidelity’s medical limits. For the senior market, Bankers Fidelity issues products primarily on an accept-or-reject basis with face amounts up to $30,000 for ages 45-70, $20,000 for ages 71-80 and $10,000 for ages 81-85. Bankers Fidelity retains a maximum amount of $50,000 with respect to any individual life policy (see “Reinsurance”).
 
Applications for insurance are reviewed to determine the face amount, age, and medical history. Depending upon information obtained from the insured, the Medical Information Bureau (“M.I.B.”) report, paramedical testing, and/or medical records, special testing may be ordered. If deemed necessary, Bankers Fidelity may use investigative services to supplement and substantiate information. For certain limited coverages, Bankers Fidelity has adopted simplified policy issue procedures by which an application containing a variety of Yes/No health related questions is submitted. For these plans, a M.I.B. report is ordered, however, paramedical testing and medical records are not ordered in most cases. All applications for individuals age 60 and above are verified by telephone interview.
 
Policyholder and Claims Services
 
The Company believes that prompt, efficient policyholder and claims services are essential to its continued success in marketing its insurance products (see “Competition”). Additionally, the Company believes that its insureds are particularly sensitive to claims processing time and to the accessibility of qualified staff to answer inquiries. Accordingly, the 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 a state-of-the-art automatic call distribution system to ensure that inbound calls to customer service support groups are processed efficiently. Operational data generated from this system allows management to further refine ongoing client service programs and service representative training modules.
 
The Company supports a Customer Awareness Program as the basis for its customer service philosophy. All personnel are required to attend customer service classes. Customer service hours of operation have been expanded in all service areas to serve customers and agents in all domestic time zones.
 
Property and Casualty Operations
 
American Southern controls its claims costs by utilizing an in-house staff of claims supervisors to investigate, verify, negotiate and settle claims. Upon notification of an occurrence purportedly giving rise to a


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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:
 
                         
    2007     2006     2005  
 
Balance at January 1
  $ 55,291     $ 53,817     $ 53,025  
Less: Reinsurance recoverables
    (12,266 )     (12,829 )     (12,857 )
                         
Net balance at January 1
    43,025       40,988       40,168  
                         
Incurred related to:
                       
Current year
    65,274       73,167       76,626  
Prior years(1)
    (11,517 )     (9,926 )     (8,370 )
                         
Total incurred
    53,757       63,241       68,256  
                         
Paid related to:
                       
Current year
    41,687       46,355       50,922  
Prior years
    16,395       14,849       16,514  
                         
Total paid
    58,082       61,204       67,436  
                         
Net balance at December 31
    38,700       43,025       40,988  
Plus: Reinsurance recoverables
    13,004       12,266       12,829  
                         
Balance at December 31
  $ 51,704     $ 55,291     $ 53,817  
                         
 
(1) See Note 4 of Notes to Consolidated Financial Statements.
 
Reserves are set by line of business within each of the subsidiaries and a single line of business may be written in one or more of the subsidiaries. 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. 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 includes general liability while the short-tail lines of business generally include 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 regular reviews incorporate a variety of actuarial methods (discussed below in Critical Accounting Policies) and judgments and involve a disciplined analysis. For most lines of business, certain actuarial methods and specific assumptions are deemed more appropriate based on the current


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circumstances affecting that line of business. These selections incorporate input from claims personnel and operating management on reported loss cost trends and other factors that could affect the reserve estimates.
 
For long-tail lines of business, the emergence of paid losses and case reserves is less credible in the early periods, and accordingly may not be indicative of ultimate losses. For these lines, methods which incorporate a development pattern assumption are given less weight in calculating incurred but not reported (“IBNR”) reserves for the early periods of loss emergence because such a low percentage of ultimate losses are reported in that time frame. Accordingly, for any given accident year, the rate at which losses on long-tail lines of business emerge in the early periods is generally not as reliable an indication of the ultimate loss costs 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 analysis 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 and likely indicative of ultimate losses. The method used to set reserves for these lines 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 will determine the appropriate reserve adjustment, if any, to record. If necessary, recorded reserve estimates are changed after consideration of numerous factors, including, but not limited to, the magnitude of the difference between the actuarial indication and the recorded reserves, improvement or deterioration of actuarial indication in the period, the maturity of the accident year, trends observed over the recent past and the level of volatility within a particular line of business. In general, changes are made more quickly to recognize changes in estimates to ultimate losses in mature accident years and less volatile lines of business.
 
Estimating case reserves and ultimate losses involves various considerations which differ according to the line of business. In addition, changes in state legislative and regulatory environments may impact loss 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 coverage questions 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, 2007 were as follows:
 
                         
    Case     IBNR     Total  
    (In thousands)  
 
Business automobile
  $ 9,759     $ 8,802     $ 18,561  
Personal automobile/physical damage
    1,911       659       2,570  
General & other liability
    4,483       10,984       15,467  
Other lines (including life)
    2,667       4,455       7,122  
Medicare supplement
    176       5,376       5,552  
Unallocated loss adjustment reserves
          2,432       2,432  
                         
Total reserves for losses and claims
  $ 18,996     $ 32,708     $ 51,704  
                         


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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, 2007 review indicated that reserves could be as much as 16.0% lower or as much as 6.7% higher. In the opinion of management, recorded reserves represent the best estimate of outstanding losses, although significant judgments are made in the derivation of reserve estimates and revisions to such estimates will be made in future periods. Any such revisions could be material, and may materially adversely affect the Company’s financial condition and results of operations.
 
Property and Casualty Operations
 
American Southern maintains loss reserves representing estimates of amounts necessary for payment of losses and LAE and are not discounted. IBNR reserves are also maintained for future development. These loss reserves are estimates, based on known facts and circumstances at a given point in time, of amounts the insurer expects to pay on incurred claims. All balances are reviewed periodically by both internal and external qualified actuaries. Reserves for LAE are intended to cover the ultimate costs of settling claims, including investigation and defense of lawsuits resulting from such claims. Loss reserves for reported claims are based on a case-by-case evaluation of the type of claim involved, the circumstances surrounding the claim, and the policy provisions relating to the type of loss along with anticipated future development. The LAE for claims reported and claims not reported is based on historical statistical data and anticipated future development. Inflation and other factors which may affect claim payments are implicitly reflected in the reserving process through analysis and consideration of cost trends and reviews of historical reserve results.
 
American Southern establishes reserves for claims based upon: (a) 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 IBNR claims based on past experience, and (c) estimates of LAE. The estimated liability is periodically reviewed and updated, and changes to the estimated liability are recorded in the statement of operations in the year in which such changes become known.
 
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 1997 through 2007. 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 or deficiency” for each year represents the aggregate change in such year’s estimates through the end of 2007. In evaluating this information, it should be noted that the amount of the redundancy or deficiency for any year represents the cumulative amount of the changes from initial reserve estimates for such year. Operations for any year may be affected, favorably or unfavorably, by the amount of the change in the estimate for such years; however, because such analysis is based on the reserves for unpaid losses and claims, before consideration of reinsurance, the total indicated redundancies and/or deficiencies may not ultimately be reflected in the Company’s net income. Further, conditions and trends that have affected development of the reserves in the past may not necessarily occur in the future and there could be future events or actions that would impact future development which have not existed in the past. Accordingly, it is impossible to accurately predict future redundancies or deficiencies based on the data in the following table.


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    Year Ended December 31,  
    2007     2006     2005     2004     2003     2002     2001     2000     1999     1998     1997  
    (In thousands)  
 
Reserve for losses and LAE
  $ 43,994     $ 45,655     $ 43,593     $ 42,310     $ 39,042     $ 44,428     $ 46,242     $ 48,350     $ 48,764     $ 46,972     $ 47,843  
Cumulative paid as of:
                                                                                       
One year later
            18,010       14,254       16,521       13,772       15,825       18,093       20,682       18,267       14,643       16,983  
Two years later
                    23,967       24,217       22,202       23,933       26,194       31,687       30,143       25,802       24,600  
Three years later
                            28,775       26,673       28,487       31,257       35,865       37,938       31,491       30,690  
Four years later
                                    28,645       31,398       33,683       37,223       39,972       34,987       33,767  
Five years later
                                            32,820       35,134       38,616       40,816       36,064       34,898  
Six years later
                                                    35,610       39,166       42,006       36,464       35,092  
Seven years later
                                                            39,538       42,079       37,528       35,348  
Eight years later
                                                                    42,352       37,595       36,332  
Nine years later
                                                                            37,868       36,380  
Ten years later
                                                                                    36,620  
Ultimate losses and LAE reestimated as of:
                                                                                       
End of year
    43,994       45,655       43,593       42,310       39,042       44,428       46,242       48,350       48,764       46,972       47,843  
One year later
            35,590       34,897       37,280       35,706       42,235       39,628       46,778       45,866       41,834       43,689  
Two years later
                    32,929       34,108       34,779       40,099       40,249       43,104       46,065       40,502       39,369  
Three years later
                            33,338       31,710       39,260       38,877       42,208       44,800       41,175       38,536  
Four years later
                                    31,224       37,163       39,339       41,503       43,792       40,295       38,884  
Five years later
                                            37,133       39,067       41,490       43,775       39,621       38,822  
Six years later
                                                    39,484       41,600       43,674       39,518       38,367  
Seven years later
                                                            41,822       43,738       39,453       38,426  
Eight years later
                                                                    43,884       39,524       38,303  
Nine years later
                                                                            39,710       38,348  
Ten years later
                                                                                    38,494  
Cumulative redundancy (deficiency)
          $ 10,065     $ 10,664     $ 8,972     $ 7,818     $ 7,295     $ 6,758     $ 6,528     $ 4,880     $ 7,262     $ 9,349  
              22.0 %     24.5 %     21.2 %     20.0 %     16.4 %     14.6 %     13.5 %     10.0 %     15.5 %     19.5 %
 
Note: Because this analysis is based on reserves for unpaid losses and claims, before consideration of reinsurance, the total indicated redundancies and/or deficiencies may not ultimately be reflected in the Company’s net income.


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Life and Health Operations
 
Bankers Fidelity establishes liabilities for future policy benefits to meet projected future obligations under outstanding policies. These reserves are calculated to satisfy policy and contract obligations as they mature. The amount of reserves for insurance policies is calculated using assumptions for interest rates, mortality and morbidity rates, expenses, and withdrawals. Reserves are adjusted periodically based on published actuarial tables with modification to reflect actual experience. See Note 4 of Notes to Consolidated Financial Statements.
 
Reinsurance
 
The Company’s insurance subsidiaries may purchase reinsurance from unaffiliated insurers and reinsurers to reduce their potential liability on individual risks and to protect against catastrophic losses. In a reinsurance transaction, an insurance company transfers, or “cedes,” a portion or all of its exposure on insurance policies to a reinsurer. The reinsurer assumes the exposure in return for a portion of the premiums. The ceding of insurance does not legally discharge the insurer from primary liability for the full amount of policies written by it, and the ceding company incurs 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 $150,000 per occurrence. Limits per occurrence within the reinsurance treaties are as follows: Fire, inland marine, commercial automobile physical damage — $125,000 excess of $50,000 retention; and automobile liability and general liability — excess coverage of $2.0 million less retentions that may vary from $100,000 to $150,000 depending on the account. American Southern maintains a property catastrophe treaty with a $6.6 million limit excess of $400,000 retention. American Southern also issues individual surety bonds with face amounts generally up to $1.5 million, and limited to $5.0 million per account, that are not subject to reinsurance.
 
Life and Health Operations
 
Bankers Fidelity has entered into reinsurance contracts ceding the excess of its retention to several primary reinsurers. Maximum retention by Bankers Fidelity on any one individual in the case of life insurance policies is $50,000. At December 31, 2007, $36.5 million of the $272.3 million of life insurance in force at Bankers Fidelity was reinsured, generally under yearly renewable term agreements. Certain prior year reinsurance agreements remain in force although they no longer provide reinsurance for new business.
 
Competition
 
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.
 
Property and Casualty Operations
 
The businesses in which American Southern engages are highly competitive. The principal areas of competition are pricing and service. Many competing property and casualty companies, which have been in business longer than American Southern, offer more diversified lines of insurance and have substantially greater financial resources. Management believes, however, that the policies it sells are competitive with those providing similar benefits offered by other insurers doing business in the states in which American Southern operates. American Southern attempts to develop strong relationships with its existing agents and, consequently, is generally privy to new programs with existing agents.


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Life and Health Operations
 
The life and health insurance business also remains highly competitive and includes a large number of insurance companies, many of which have substantially greater financial resources than Bankers Fidelity or the Company. Bankers Fidelity focuses on four core products in the senior market: Medicare supplement, hospital indemnity, small face amount life insurance and short-term nursing home coverage. Bankers Fidelity believes that its primary competitors in this market are Continental Life, Standard Life & Accident, Lincoln Heritage Life, United American, American Pioneer and Blue Cross / Blue Shield. 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 arrangements, accessibility and marketing assistance, lead programs, reputation, and market expertise. In order to better compete, Bankers Fidelity utilizes a proprietary lead generation program to attract and retain independent agents. Bankers Fidelity has expanded into other markets through cross-selling strategies with the company’s property and casualty affiliations, offering turn-key marketing programs to facilitate business through these relationships. Bankers Fidelity continues to expand in niche markets through long-term relationships with a select number of independent marketing organizations including worksite marketing, credit union business and association endorsements. Bankers Fidelity has a track record of competing in its chosen markets through long-standing relationships with independent agents and marketing agencies by providing proprietary marketing initiatives and outstanding service to distribution and policyholders. Bankers Fidelity believes that it competes effectively on the bases of policy benefits, services and market expertise.
 
Ratings
 
Ratings of insurance companies are not designed for investors and do not constitute recommendations to buy, sell, or hold any security. Ratings are important measures within the insurance industry, and improved ratings should have a favorable impact on the ability of a company to compete in the marketplace.
 
Each year A.M. Best Company, Inc. (“A.M. Best”) publishes 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 currently rated “A−” (Excellent) by A.M. Best.
 
Bankers Fidelity.  Bankers Fidelity is currently rated “B++” (Very Good) 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 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


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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 rating organization with which the insurer is affiliated. The regulatory authority may disapprove a rate filing if it determines that the rates are inadequate, excessive, or discriminatory. The Company has historically experienced no significant regulatory resistance to its applications for rate adjustments; however, the Company cannot provide any assurance that it will not receive any objections to its applications in the future.
 
A state may require that acceptable securities be deposited for the protection either of policyholders located in those states or of all policyholders. As of December 31, 2007, securities with an amortized cost of $10.6 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, 2007, both American Southern and Bankers Fidelity were within the NAIC “usual” range for all 13 financial ratios.
 
Risk-Based Capital
 
Risk-based capital (“RBC”) is used by rating agencies and regulators as an early warning tool to identify weakly capitalized companies for the purpose of initiating further regulatory action. The RBC calculation determines the amount of adjusted capital needed by a company to avoid regulatory action. “Authorized Control Level Risk-Based Capital” (“ACL”) is calculated, and if a company’s adjusted capital is 200% or lower than ACL, it is subject to regulatory action. At December 31, 2007, the Company’s insurance subsidiaries exceeded the RBC regulatory levels.


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Investments
 
Investment income represents a significant portion of the Company’s 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.
 
                                                 
    December 31,  
    2007     2006     2005  
    Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
 
Fixed maturities:
                                               
U.S. Government agencies and authorities
  $ 127,073       63.1 %   $ 117,127       55.9 %   $ 95,085       48.7 %
States, municipalities and political subdivisions
    412       0.2       414       0.2       422       0.2  
Public utilities
          0.0             0.0             0.0  
All other corporate bonds
    29,628       14.7       33,792       16.2       33,578       17.2  
Redeemable preferred stock
    10,714       5.3       12,949       6.2       18,154       9.3  
Certificates of deposit
    100       0.0       100       0.0       100       0.1  
                                                 
Total fixed maturities(1)
    167,927       83.3       164,382       78.5       147,339       75.5  
Common and non-redeemable preferred stocks(2)
    5,335       2.7       22,476       10.7       24,580       12.6  
Mortgage, policy and student loans(3)
    1,958       1.0       3,328       1.6       4,018       2.1  
Other invested assets(4)
    1,563       0.8       1,735       0.8       2,076       1.1  
Real estate
    38             38             38        
Investments in unconsolidated trusts
    1,238       0.6       1,238       0.6       1,238       0.6  
Short-term investments(5)
    23,432       11.6       16,191       7.8       15,744       8.1  
                                                 
Total investments
  $ 201,491       100.0 %   $ 209,388       100.0 %   $ 195,033       100.0 %
                                                 
 
(1) Fixed maturity securities are carried on the balance sheet at estimated fair value. Total cost of fixed maturity securities was $168.7 million as of December 31, 2007, $163.1 million as of December 31, 2006, and $144.6 million as of December 31, 2005.
 
(2) Equity securities are carried on the balance sheet at estimated fair value. Certain non-redeemable preferred stocks do not have publicly quoted values, and are carried at estimated fair value as determined by management. Total cost of equity securities was $5.4 million as of December 31, 2007, $7.5 million as of December 31, 2006, and $9.0 million as of December 31, 2005.
 
(3) Mortgage, policy and student loans are valued at historical cost.
 
(4) Investments in other invested assets which are traded are valued at estimated fair value and the others are accounted for using the equity method. Total cost of other invested assets was $1.6 million as of December 31, 2007, $1.8 million as of December 31, 2006, and $2.1 million as of December 31, 2005.
 
(5) Short-term investments are valued at cost, which approximates market value at the measurement date.
 
Results of the Company’s investment portfolio for periods shown were as follows:
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands)  
 
Average investments(1)
  $ 199,614     $ 199,236     $ 188,351  
Net investment income
    11,603       11,822       10,702  
Average yield on investments
    5.81 %     5.93 %     5.68 %
Realized investment gains (losses), net(2)
    12,627       3,084       (7,303 )


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(1) Calculated as the average of the balances at the beginning of the year and at the end of each of the succeeding four quarters.
 
(2) Includes a $7.2 million impairment charge in 2005 related to the write-down in the value of certain automotive sector fixed maturity investments. See Note 3 of Notes to Consolidated Financial Statements.
 
Management’s investment strategy is an increased investment in short and medium maturity bonds and common and preferred stocks.
 
Employees
 
The Company and its subsidiaries employed 146 people at December 31, 2007 which excludes 74 people in discontinued operations.
 
Financial Information By Industry Segment
 
The Company’s primary insurance subsidiaries 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 15 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 Atlantic American that file electronically with the SEC. The address of the SEC’s web site is http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC by the Company, the Company makes copies available to the public, free of charge, on or through its web site at http://www.atlam.com. Neither the 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 March 1, 2008, his name, age, positions with the Company and business experience for the past five years, as well as any prior service with the Company (based upon information supplied by each of them).
 
                     
              Director or
 
Name
  Age    
Positions with the Company
  Officer Since  
 
J. Mack Robinson
    84     Chairman of the Board     1974  
Hilton H. Howell, Jr. 
    45     Director, President & CEO     1992  
John G. Sample, Jr. 
    51     Senior Vice President & CFO     2002  
 
Officers are elected annually and serve at the discretion of the Board of Directors.
 
Mr. Robinson has served as a Director and Chairman of the Board since 1974 and served as President and Chief Executive Officer of the Company from September 1988 to May 1995. In addition, Mr. Robinson is a director of Gray Television, Inc.
 
Mr. Howell has been President and Chief Executive Officer of the Company since May 1995, and prior thereto served as Executive Vice President of the Company from October 1992 to May 1995. He has been a


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Director of the Company since October 1992. Mr. Howell is the son-in-law of Mr. Robinson. He is also a director of Triple Crown Media, Inc. and Gray Television, Inc.
 
Mr. Sample has served as Senior Vice President and Chief Financial Officer of the Company since July 2002. He also serves in the following capacities at subsidiaries of the Company: Director of Georgia Casualty, Director of Association Casualty, and Director of Bankers Fidelity. Prior to joining the Company in July 2002, he had been a partner of Arthur Andersen LLP since 1990. He is also a director of 1st Franklin Financial Corporation.
 
Forward-Looking Statements
 
Certain of the statements contained herein are forward-looking statements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 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 outcome of various factors. These factors include, among others, those discussed in the “Risk Factors” section which follows and: 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 possibility of general economic and business conditions that are less favorable than anticipated; 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 second-injury trust 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, results of operations and stock price could differ materially from those expressed in any forward-looking statements made by the Company. Undue reliance should not be placed upon forward-looking statements contained herein. The Company does not intend to publicly update any forward-looking statements that may be made from time to time by, or on behalf of, the Company.
 
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 other factors, cause results to 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 subject to the expenses and


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limitations imposed on publicly-held companies. 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 us 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 placing limits on acquisitions, changes of control and the terms of any affiliate 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 relatively large commercial property and casualty insurance policies. While we have in the recent past been partially successful in implementing 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 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


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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.
 
The guaranty fund assessments that we are required to pay to state guaranty associations may increase and our 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 4% 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.


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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.
 
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, evaluations are made with respect to 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 have been confirmed cases of Avian Influenza. Individuals, primarily in Asia, have contracted the Avian Influenza and although there are no cases which have been reported in the United States, should such influenza or similar influenzas reach the United States and begin spreading via human transmission, the impact on our life and health subsidiary is undeterminable. 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 A.M. 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 which would materially adversely impact our financial condition and results of operations.


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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.
 
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 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.
 
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 incepted on November 1, 2007, provides for rent adjustments on every fifth anniversary of the term commencement date. Under the current terms of the lease, the Company occupies approximately 65,489 square feet of office space. Delta Life Insurance Company, the owner of the building, is controlled by J. Mack Robinson, Chairman of the Board of Directors and the largest shareholder of the Company. The terms of the lease are believed by Company management to be comparable to terms which could be obtained by the Company from unrelated parties for comparable rental property.
 
American Southern leases space for its office in a building located in Atlanta, Georgia. The lease term expires January 31, 2010. Under the terms of the lease, American Southern occupies approximately 17,014 square feet.
 
Self Insurance Administrators, Inc. (“SIA”), a non-insurance subsidiary of the Company, leases space for its office in a building located in Duluth, Georgia. The lease term expired March 31, 2008 and SIA was


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moved into available space at the Company’s primary home office. Under the terms of the lease, SIA occupied 2,266 square feet.
 
Item 3.   Legal Proceedings
 
From time to time, the Company and its subsidiaries are involved in various claims and lawsuits arising in the ordinary course of business, both as a liability insurer defending third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Company accounts for such exposures through the establishment of loss and loss adjustment expense reserves. Subject to the uncertainties inherent in litigation, management expects 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 not 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.   Submission Of Matters To A Vote Of Security Holders
 
There were no matters submitted to a vote of the Company’s shareholders during the quarter ended December 31, 2007.
 
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 14, 2008, there were 4,124 shareholders of record. The following table sets forth, for the periods indicated, the high and low sale prices of the Company’s common stock as reported on the Nasdaq Global Market.
 
                 
Year Ended December 31,
  High     Low  
 
2007
               
1st quarter
  $ 4.04     $ 2.90  
2nd quarter
    5.44       3.46  
3rd quarter
    4.15       2.40  
4th quarter
    2.96       1.11  
2006
               
1st quarter
  $ 3.00     $ 2.52  
2nd quarter
    3.45       2.69  
3rd quarter
    3.15       2.25  
4th quarter
    3.86       2.24  
 
The Company has not paid dividends to its common shareholders since the fourth quarter of 1988. The Company has elected to retain its earnings to grow its business and does not anticipate paying cash dividends on its common stock in the foreseeable future. Payment of dividends in the future will be at the discretion of the 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 sources of cash for the payment of dividends are dividends from its subsidiaries. Under the insurance codes of the state of jurisdiction under which each insurance subsidiary operates, dividend payments to the Company by its insurance subsidiaries, without the prior approval of the Insurance Commissioner of the applicable state, are limited to the greater of 10% of statutory surplus or statutory net income of such subsidiary before recognizing realized investment gains. At December 31, 2007, American Southern had $38.2 million of statutory surplus and Bankers Fidelity had $33.8 million of statutory surplus.


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Equity Compensation Plan Information
 
The following table sets forth, as of December 31, 2007, the number of securities outstanding under the Company’s equity compensation plans, the weighted average exercise price of such securities and the number of securities remaining available for grant under these plans:
 
                         
                Number of
 
                securities
 
                remaining available
 
    Number of
          for future issuance
 
    securities to be
          under equity
 
    issued upon
    Weighted-average
    compensation plans
 
    exercise of
    exercise price of
    (excluding
 
    outstanding
    outstanding
    securities
 
    options, warrants
    options, warrants
    reflected in the
 
Plan Category
  and rights     and rights     first column)  
 
Equity compensation plans approved by security holders
    624,000     $ 1.42       2,479,594  
Equity compensation plans not approved by security holders(1)
                 
                         
Total
    624,000     $ 1.42       2,479,594  
                         
 
(1) All the Company’s equity compensation plans have been approved by the Company’s shareholders.
 
Issuer Purchases of Equity Securities
 
On May 2, 1995, the Board of Directors of the Company approved an initial plan that allowed for the repurchase of shares of the Company’s common stock (the “Repurchase Plan”). As amended since its original adoption, the Repurchase Plan currently allows for repurchases of up to an aggregate of 2.0 million shares of the Company’s common stock on the open market or in privately negotiated transactions, as determined by an authorized officer of the Company. Such purchases can be made from time to time in accordance with applicable securities laws and other requirements. As of December 31, 2007, a maximum of 554,194 shares of common stock may yet be purchased under this plan.
 
No purchases of common stock of the Company were made by or on behalf of the Company during the three months ended December 31, 2007.


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Performance Graph
 
The graph below compares the cumulative total return to shareholders on the Company’s common stock for the period from December 31, 2002 through December 31, 2007, with (i) the Russell 2000 Index, (ii) the Nasdaq Insurance Index, and (iii) a previously selected peer group of insurance companies (the “Insurance Peer Group”).
 
 
Assumes $100 invested at the close of trading in 12/2002 in Atlantic American common stock, the Russell 2000 Index, the NASDAQ Insurance Index and the Insurance Peer Group.
 
                                                             
      2002     2003     2004     2005     2006     2007
Atlantic American Corporation
      100.00         184.05         190.18         165.64         181.60         85.89  
Russell 2000 Index
      100.00         145.37         170.08         175.73         205.60         199.96  
NASDAQ Insurance Index
      100.00         103.61         124.11         135.59         152.01         150.81  
Insurance Peer Group
      100.00         116.82         169.35         218.09         284.04         314.51  
                                                             
 
Factual material is obtained from sources believed to be reliable, but the publisher is not responsible for any errors or omissions contained herein. Source: Value Line, Inc. and Nasdaq
 
Insurance Peer Group includes: American Safety Insurance Group Ltd., Donegal Insurance Group J, National Security Group, Inc., Meadowbrook Insurance Group, Inc., Horace Mann Educators Corp., Unico American Corp. and Covanta Holding Group.


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Item 6.   Selected Financial Data
 
                                         
    Year Ended December 31,  
    2007     2006     2005     2004     2003  
    (In thousands, except per share data)  
 
Insurance premiums
  $ 97,824     $ 109,580     $ 117,351     $ 113,504     $ 100,041  
Investment income
    11,722       11,926       10,828       10,071       9,789  
Other income
    799       768       1,105       1,049       776  
Realized investment gains (losses), net(1)
    12,627       3,084       (7,303 )     1,154       696  
                                         
Total revenue
    122,972       125,358       121,981       125,778       111,302  
                                         
Insurance benefits and losses incurred
    58,701       65,460       71,201       70,622       64,840  
Other expenses
    45,173       50,274       51,394       47,466       40,440  
                                         
Total benefits and expenses
    103,874       115,734       122,595       118,088       105,280  
                                         
Income (loss) before income taxes
    19,098       9,624       (614 )     7,690       6,022  
Income tax expense (benefit)
    7,513       2,458       (1,746 )     (149 )     (454 )
                                         
Income from continuing operations
    11,585       7,166       1,132       7,839       6,476  
(Loss) income from discontinued operations, net of tax(2)
    (4,333 )     1,770       (4,307 )     (2,822 )     368  
                                         
Net income (loss)
  $ 7,252     $ 8,936     $ (3,175 )   $ 5,017     $ 6,844  
                                         
Basic income (loss) per common share:
                                       
Income from continuing operations
  $ .46     $ .27     $     $ .31     $ .24  
(Loss) income from discontinued operations
    (.20 )     .09       (.21 )     (.13 )     .02  
                                         
Net income (loss)
  $ .26     $ .36     $ (.21 )   $ .18     $ .26  
                                         
Diluted income (loss) per common share:
                                       
Income from continuing operations
  $ .45     $ .27     $     $ .31     $ .23  
(Loss) income from discontinued operations
    (.20 )     .06       (.21 )     (.13 )     .02  
                                         
Net income (loss)
  $ .25     $ .33     $ (.21 )   $ .18     $ .25  
                                         
Tangible book value per common share(3)
  $ 2.98     $ 3.30     $ 3.00     $ 3.42     $ 3.30  
Common shares outstanding
    21,817       21,481       21,383       21,213       21,199  
Total assets
  $ 458,254     $ 459,152     $ 461,366     $ 471,274     $ 442,609  
Total long-term debt
  $ 52,988     $ 52,988     $ 49,738     $ 51,488     $ 53,238  
Total debt
  $ 53,988     $ 53,988     $ 51,488     $ 53,238     $ 56,238  
Total shareholders’ equity
  $ 87,794     $ 94,188     $ 80,453     $ 88,960     $ 86,893  
 
(1) Includes a $7,198 impairment charge in 2005 for automotive sector fixed maturity investments. See Note 3 of Notes to Consolidated Financial Statements.
 
(2) See Note 2 of Notes to Consolidated Financial Statements.
 
(3) Excludes goodwill.


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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, the “Company”) for each of the three years in the period ended December 31, 2007. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.
 
Atlantic American is an insurance holding company whose operations are conducted primarily through its insurance subsidiaries: American Southern Insurance Company and American Safety Insurance Company (together known as “American Southern”) and Bankers Fidelity Life Insurance Company (“Bankers Fidelity”). Each operating company is managed separately, offers different products and is evaluated on its individual performance.
 
In December 2007, the Company entered into an agreement for the sale of its regional property and casualty operations, Association Casualty Insurance Company and Association Risk Management General Agency, Inc. (together known as “Association Casualty”) and Georgia Casualty & Surety Company (“Georgia Casualty”) to Columbia Mutual Insurance Company. The sale is expected to be completed on or about March 31, 2008. In accordance with generally accepted accounting principles, the consolidated financial statements reflect the assets, liabilities and operating results of the regional property and casualty operations as discontinued operations. Accordingly, unless otherwise noted, amounts and analyses contained herein reflect the continuing operations of the Company and exclude the regional property and casualty operations. References to income and loss from operations are identified as continuing operations or discontinued operations, while references to net income or net loss reflect the consolidated net results of both continuing and discontinued operations.
 
Critical Accounting Policies
 
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and, in 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 initial estimates determined using these policies. Atlantic American does not expect that changes in the estimates determined using these policies will have a material effect on the Company’s financial condition or liquidity, although changes could have a material effect on its consolidated results of operations.
 
Unpaid loss and loss adjustment expenses comprised 14% of the Company’s total liabilities at December 31, 2007. This obligation includes estimates for: 1) unpaid losses on claims reported prior to December 31, 2007, 2) development on those reported claims, 3) unpaid ultimate losses on claims incurred prior to December 31, 2007 but not yet reported and 4) unpaid loss adjustment expenses for reported and unreported claims incurred prior to December 31, 2007. 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, 2007 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 actuarial staff develops ranges of estimated development on reported and unreported claims as well as loss adjustment expenses using various methods including the paid-loss development method, the reported-loss development method, the paid Bornhuetter-Ferguson method and the reported Bornhuetter-Ferguson method. Any single method used to estimate ultimate losses has inherent advantages and disadvantages due to the trends and changes affecting the business environment and the 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


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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 previous estimated amounts, such losses, to the extent reinsurance coverage does not exist, would have a material adverse effect on the Company’s results of operations.
 
Future policy benefits comprised 15% of the Company’s total liabilities at December 31, 2007. 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 4% of the Company’s total assets at December 31, 2007. 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 given previous calendar year.
 
Receivables are amounts due from reinsurers, insureds and agents and comprised 4% of the Company’s total assets at December 31, 2007. Insured and agent balances are evaluated periodically for collectibility. Annually, the Company performs an analysis of the credit worthiness of the Company’s reinsurers using various data sources. Failure of reinsurers to meet their obligations due to insolvencies or disputes could result in uncollectible amounts and losses to the Company. Allowances for uncollectible amounts are established, as and when a loss has been determined probable, against the related receivable. Losses are recognized when determined on a specific account basis and a general provision for loss is made based on the Company’s historical experience.
 
Cash and investments comprised 47% of the Company’s total assets at December 31, 2007. Substantially all investments are in bonds and common and preferred stocks, which are subject to significant market fluctuations. The Company carries all investments as available for sale and, accordingly, at their estimated fair values. The Company owns certain non-redeemable preferred stocks that do not have quoted values and are carried at estimated fair values as determined by management. Such values inherently involve a greater degree of judgment and uncertainty and therefore ultimately greater price volatility. On occasion, the value of an investment may decline to a value below its amortized purchase price and remain at such value for an extended period of time. When an investment’s indicated fair value has declined below its cost basis for a period of time, primarily due to changes in credit risk, the Company evaluates such investment for other than a temporary impairment. If other than a temporary impairment is deemed to exist, then the Company will write down the amortized cost basis of the investment to its estimated fair value. While such write down does not impact the reported value of the investment in the Company’s balance sheet, it is reflected as a realized investment loss in the Company’s consolidated statements of operations.
 
Deferred income taxes comprised approximately 1% of the Company’s total assets at December 31, 2007. 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


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deferred income taxes are measured by applying currently enacted tax laws and rates. Valuation allowances are recognized to reduce the deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income and tax planning strategies.
 
Refer to Note 1 of “Notes to Consolidated Financial Statements” for details regarding the Company’s significant accounting policies.
 
Overall Corporate Results
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (In thousands)  
 
Revenue
                       
Property and Casualty:
                       
American Southern
  $ 47,046     $ 56,593     $ 52,925  
Life and Health:
                       
Bankers Fidelity
    74,658       67,443       68,255  
Corporate and Other
    1,268       1,322       801  
                         
Total revenue
  $ 122,972     $ 125,358     $ 121,981  
                         
Income (loss) from continuing operations before income taxes
                       
Property and Casualty:
                       
American Southern
  $ 9,462     $ 10,625     $ 4,765  
Life and Health:
                       
Bankers Fidelity
    16,105       6,754       2,208  
Corporate and Other
    (6,469 )     (7,755 )     (7,587 )
                         
Income (loss) from continuing operations before income taxes
  $ 19,098     $ 9,624     $ (614 )
                         
(Loss) from discontinued operations, net of tax
  $ (4,333 )   $ 1,770     $ (4,307 )
                         
Net income (loss)
  $ 7,252     $ 8,936     $ (3,175 )
                         
 
On a consolidated basis, the Company had net income of $7.3 million, or $0.25 per diluted share, in 2007, compared to net income of $8.9 million, or $0.33 per diluted share, in 2006 and a net loss of $3.2 million, or $0.21 per diluted share, in 2005. Income from continuing operations was $11.6 million in 2007, compared with $7.2 million in 2006 and $1.1 million in 2005; while the loss from discontinued operations was $4.3 million in 2007 as compared to income from discontinued operations of $1.8 million in 2006 and a loss from discontinued operations of $4.3 million in 2005. Income from continuing operations before income taxes was $19.1 million in 2007 compared with $9.6 million in 2006 and a loss of $0.6 million in 2005. The significant increase in income from continuing operations before income taxes was due to realized investment gains which totaled $12.6 million in 2007 as compared with $3.1 million in 2006. In 2007, the Company disposed of a significant holding in Wachovia Corporation which resulted in realized investment gains totaling $12.9 million; whereas in 2005, the Company recognized a $7.2 million impairment due to its automotive sector holdings. Such variations between years in realized investment gains significantly influence the reported income (loss) from continuing operations before income taxes. Income from continuing operations before income taxes and realized investment gains was $6.5 million in both 2007 and 2006. Income from continuing operations before income taxes and realized investment losses in 2005 was $6.7 million. The magnitude of realized investment gains and losses in any year are a function of the timing of trades of investments relative to the markets themselves as well as the recognition of any impairments on investments.


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Total revenue was $123.0 million in 2007 as compared to $125.4 million in 2006 and $122.0 million in 2005. Insurance premiums decreased to $97.8 million in 2007 from $109.6 million in 2006 and $117.4 million in 2005. The continued softening in the property and casualty markets combined with the significant market competition in the Medicare supplement and Medicare advantage markets have resulted in declining premiums in both of the Company’s business segments for the past two years. Premium declines have not been as evident in the change in total revenue due to the magnitude of the changes in realized investment gains between years. Realized investment gains (losses) were a gain of $12.6 million in 2007, a gain of $3.1 million in 2006 and a loss of $7.3 million in 2005.
 
Total expenses have decreased consistent with the related premium decreases; although not directly proportionate. Insurance benefits and losses and commissions and underwriting expenses as a percentage of premiums were 93.4%, 93.0% and 93.2% in 2007, 2006 and 2005, respectively.
 
The Company’s property and casualty operations are comprised of American Southern and the Company’s life and health operations consist of the operations of Bankers Fidelity.
 
A more detailed analysis of the individual operating entities and other corporate activities is provided in the following discussion.
 
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,  
    2007     2006     2005  
    (Dollars in thousands)  
 
Gross written premiums
  $ 42,351     $ 55,539     $ 62,082  
Ceded premiums
    (6,379 )     (9,265 )     (9,099 )
                         
Net written premiums
  $ 35,972     $ 46,274     $ 52,983  
                         
Net earned premiums
  $ 41,575     $ 50,660     $ 51,447  
Net losses and loss adjustment expenses
    18,399       23,440       24,827  
Underwriting expenses
    19,185       22,528       23,333  
                         
Underwriting income
  $ 3,991     $ 4,692     $ 3,287  
                         
Loss ratio
    44.3 %     46.3 %     48.2 %
Expense ratio
    46.1       44.4       45.4  
                         
Combined ratio
    90.4 %     90.7 %     93.6 %
                         
 
Gross written premiums at American Southern decreased $13.2 million, or 23.7%, during 2007 as compared to 2006. The decrease in gross written premiums was primarily attributable to the loss of one program marketed through a general agent which prior to 2007 had annualized gross written premiums exceeding $10.0 million per annum. Loss of the program resulted from a larger competitor offering a broader coverage on a national basis to the insured.
 
Ceded premiums decreased $2.9 million, or 31.1%, during 2007 as compared to 2006. The decrease in ceded premiums was due to the decline in the related earned premiums.
 
Gross written premiums at American Southern decreased $6.5 million, or 10.5%, during 2006 as compared to 2005. The decrease in gross written premiums was primarily due to the cancellation of several commercial programs, including the low-value dwelling property business in the second half of 2005 and the joint venture with AAA Carolinas to market automobile insurance to club members, which was terminated on October 1, 2005. Also contributing to the decrease in gross written premiums was the termination of the


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relationship with one of the company’s agents who had previously produced approximately $1.6 million in annualized general liability business. Partially offsetting this decrease in gross written premiums were increased business writings in the surety line of business.
 
Ceded premiums increased $0.2 million, or 1.8%, during 2006 as compared to 2005. The increase in ceded premiums was due to changes in certain provisions in the company’s reinsurance treaty agreements relating to certain accounts.
 
The following table summarizes, for the periods indicated, American Southern’s earned premiums by line of business:
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (In thousands)  
 
Automobile liability
  $ 10,936     $ 16,163     $ 16,723  
Automobile physical damage
    8,105       9,698       11,002  
General liability
    10,349       11,394       11,767  
Property
    3,005       3,187       3,692  
Surety
    9,180       10,218       8,263  
                         
Total earned premium
  $ 41,575     $ 50,660     $ 51,447  
                         
 
Net earned premiums decreased $9.1 million, or 17.9% during 2007 from 2006 as compared to a decrease of $0.8 million, or 1.5%, during 2006 from 2005 due primarily to the changes in the written premiums for the respective years as discussed previously. In 2007, American Southern’s five largest states in terms of premium revenue were Florida, Ohio, Georgia, Alabama, and Indiana which accounted for 64% of gross written premiums.
 
The performance of an insurance company is often measured by its combined ratio. The combined ratio represents the percentage of losses, loss adjustment expenses and other expenses that are incurred for each dollar of premium earned by the company. A combined ratio of under 100% represents an underwriting profit while a combined ratio of over 100% indicates an underwriting loss. The combined ratio is divided into two components, the loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) and the expense ratio (the ratio of expenses incurred to premiums earned).
 
The combined ratio for American Southern decreased to 90.4% in 2007 from a combined ratio of 90.7% in 2006. The loss ratio decreased to 44.3% in 2007 from 46.3% in 2006. The decrease in the loss ratio was primarily attributable to the loss and cancellation of several commercial programs. The expense ratio increased to 46.1% in 2007 from 44.4% in 2006 due primarily to slightly higher profit margins on the business with variable commissions. Approximately 88% 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. The combined ratio decreased to 90.7% in 2006 from 93.6% in 2005. The single largest component of the decrease was the decreased loss ratio which decreased to 46.3% in 2006 from 48.2% in 2005. The decrease in the loss ratio was the result of cancellation of several commercial programs including the low-value dwelling property business, combined with favorable loss experience in the commercial automobile line of business.


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Bankers Fidelity
 
The following summarizes, for the periods indicated, Bankers Fidelity’s premiums, losses and expenses:
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (In thousands)  
 
Medicare supplement
  $ 41,786     $ 44,919     $ 51,414  
Other health products
    3,848       3,041       2,890  
Life insurance
    10,615       10,960       11,600  
                         
Total earned premiums
    56,249       58,920       65,904  
                         
Insurance benefits and losses
    40,302       42,020       46,374  
Underwriting expenses
    18,251       18,669       19,673  
                         
Total expenses
    58,553       60,689       66,047  
                         
Underwriting loss
  $ (2,304 )   $ (1,769 )   $ (143 )
                         
 
Premium revenue at Bankers Fidelity decreased $2.7 million, or 4.5%, during 2007 as compared to 2006. Premiums from the Medicare supplement line of business decreased $3.1 million, or 7.0%, in 2007 over 2006 and accounted for 74% of total 2007 earned premiums. In 2007, the company’s five key states in terms of premium revenue, Georgia, Pennsylvania, Ohio, Utah and West Virginia, were consistent with those in 2006 and accounted for approximately 55% of total earned premiums for 2007. The Medicare supplement line of business in these states decreased approximately $2.4 million as compared to 2006. The general decline in Medicare supplement premiums has resulted primarily from the increase in competition not only from traditional insurance company competitors but also the federal government as it provides incentives directly and indirectly to seniors to exit traditional Medicare programs and choose instead Medicare Advantage and other similar plans which result in much different economics to the insured. Premiums from the life insurance line of business decreased $0.3 million, or 3.1%, during 2007 due to a decline in sales related activities. The other health products premiums increased to $3.8 million in 2007 from $3.0 million in 2006, or 26.5%, primarily as a result of increased business activities with group “associations.” Recently, Bankers Fidelity has begun targeting group “associations” for additional sources of new business.
 
Premium revenue at Bankers Fidelity decreased $7.0 million, or 10.6%, during 2006 as compared to 2005. The most significant decrease in premiums was in the Medicare supplement line of business, where premiums decreased $6.5 million, or 12.6%, due to the continued decline in new business levels and non-renewal of certain policies that resulted from increased competition, as discussed previously. In 2006, the company’s key five states collectively accounted for approximately 56% of total earned premiums. The Medicare supplement line of business in these states increased approximately $0.1 million as compared to 2005. Premiums from the life insurance line of business decreased $0.6 million, or 5.5%, during 2006 due to a continued decline in sales related activities.
 
Benefits and losses decreased $1.7 million, or 4.1%, during 2007 as compared to 2006 and $4.4 million, or 9.4% during 2006 as compared to 2005. As a percentage of earned premiums, benefits and losses were 71.6% in 2007 compared to 71.3% in 2006 and 70.4% in 2005. The increasing loss ratio between years was primarily due to the continued aging of the life business.
 
Underwriting expenses decreased $0.4 million, or 2.2%, during 2007 as compared to 2006, and decreased $1.0 million, or 5.1%, during 2006 as compared to 2005. The decrease in underwriting expenses during 2007 and 2006 was directly related to the decline in premium revenues. As a percentage of earned premiums, these expenses were 32.4% in 2007 compared to 31.7% in 2006 and 29.8% in 2005. The increasing expense ratio during 2007 and 2006 was primarily due to increased costs on marketing initiatives related to product diversification efforts.
 
The indicated underwriting loss of $2.3 million in 2007 as compared to $1.8 million in 2006 and $0.1 million in 2005 is prior to considering investment income which is a significant component in evaluating


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profitability; particularly in the life insurance business. Further increased marketing efforts, particularly in the past two years, have resulted in underwriting expenses declining at a slower rate than the related premiums and thus increasing the indicated underwriting loss.
 
Investment Income And Realized Gains
 
Investment income of $11.7 million decreased $0.2 million, or 1.7%, during 2007 as compared to 2006 and increased $1.1 million, or 10.1%, during 2006 as compared to 2005. The decrease in investment income during 2007 was primarily due to a large number of called securities in the last six months of the year, the proceeds of which were reinvested at lower rates. The increase in investment income between 2006 and 2005 was the result of a higher level of average invested assets as well as a higher average yield on these investments.
 
The Company had net realized investment gains of $12.6 million in 2007 and $3.1 million in 2006, and net realized investment losses of $7.3 million in 2005. The significant net realized investment gains in 2007 were primarily the result of the disposition of the investment in equity securities of Wachovia Corporation which resulted in a realized investment gain of $12.9 million. The net realized investment gains in 2006 were primarily due to the sale of a portion of the Company’s automotive sector investments (bonds of General Motors, GMAC and Ford), a portion of the Company’s investment in equity securities of Wachovia Corporation, and the sale of a real estate partnership interest, all of which resulted in realized investment gains totaling $3.1 million. During the years ended December 31, 2007 and 2005, the Company recorded investment impairments due to other than temporary declines in values, which reduced reported realized investment gains, related to the following investments:
 
                         
    2007     2006     2005  
    (In thousands)  
 
Corporate bonds
  $ 123     $  —     $ 6,380  
Redeemable preferred stocks
  $     $     $ 875  
Other invested assets
  $ 123     $     $  
 
While the impairments did not impact the carrying value of the investments, they resulted in realized losses of $0.2 million in 2007 and $7.3 million in 2005. The impairment losses for 2005 were due primarily to the write down of the value of General Motors, GMAC, and Ford fixed maturity investments, all of which resulted in a charge of $7.2 million. Management continually evaluates the Company’s investment portfolio and, as needed, makes adjustments for impairments and/or will divest investments. See Note 3 of Notes to Consolidated Financial Statements.
 
Interest Expense
 
Interest expense of $4.2 million decreased $0.4 million, or 9.7%, during 2007 as compared to 2006. The decrease in interest expense during 2007 was due to active management of the revolving nature of the Company’s bank credit facility (the “Credit Agreement”) with Wachovia Bank, National Association (“Wachovia”). During each quarter, using excess funds, the Company repaid a substantial portion of its bank borrowings. At each quarter end, the Company would then reborrow funds under the Credit Agreement such that borrowed amounts were consistent at each quarter end. Such periodic bank borrowings and repayments resulted in a reduction in interest expense by reducing the average debt level outstanding during 2007 as compared to 2006.
 
Interest expense of $4.6 million increased $1.0 million, or 27.5%, during 2006 as compared to 2005. The increase in interest expense during 2006 was due primarily to an increase in interest rates. During 2006, the Company’s outstanding debt had a variable interest rate tied to three-month London Interbank Offered Rate (“LIBOR”), which increased throughout 2006. Also, on February 28, 2006, the Company entered into a $3.0 million term loan with Wachovia, which resulted in a higher average debt level and increased interest expense during 2006 as compared to the prior year. In the fourth quarter of 2006, the Company entered into the Credit Agreement. Borrowings under the Credit Agreement were used to repay the amounts outstanding under the Company’s prior term loans with Wachovia.


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Other Expenses
 
Other expenses (commissions, underwriting expenses, and other expenses) decreased $4.7 million, or 10.2%, in 2007 as compared to 2006. The decrease in premium revenue that occurred in 2007 resulted in a corresponding decrease in the related commissions and underwriting expenses. As a percentage of earned premiums, other expenses were 41.9% in 2007 as compared with 41.7% in 2006. The increase in other expenses as a percentage of earned premiums resulted from the increased marketing costs incurred in connection with continuing to diversify and grow the book of business. Offsetting some of the increased marketing costs were cost reductions which were implemented in the fourth quarter of 2007, including reductions in compensation for officers, the elimination of certain corporate positions and other cost reduction initiatives.
 
Other expenses decreased $2.1 million, or 4.4%, in 2006 as compared to 2005. The decrease in other expenses during 2006 again was primarily attributable to a reduction in commission and underwriting expenses that resulted directly from a decline in premium revenue. The decrease in premium revenue that occurred in 2006 was primarily due to the non-renewal of targeted classes of property business, lower sales activity, and an increased level of price competition. On a consolidated basis, as a percentage of earned premiums, other expenses increased to 41.7% in 2006 from 40.7% in 2005. The increase in the expense ratio during 2006 was primarily due to the lower loss ratio in 2006 as compared to 2005. The majority of American Southern’s business is structured in a way that agents are rewarded or penalized based upon the loss ratio of the business they submit to the company. In periods where the loss ratio decreases, commissions and underwriting expenses will increase and conversely in periods where the loss ratio increases, commissions and underwriting expenses should decrease.
 
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 the sale and maturity of invested assets. The Company believes that, within each subsidiary, total invested assets will be sufficient to satisfy all policy liabilities and that cash inflows from investment earnings, future premium receipts and reinsurance collections will be adequate to fund the payment of claims and expenses as needed. Cash flows at the Parent are derived from dividends, management fees, and tax sharing payments from the subsidiaries. The cash needs of the Parent are for the payment of operating expenses, the acquisition of capital assets and debt service requirements.
 
Dividend payments to the Parent by its insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries. At December 31, 2007, the Parent’s insurance subsidiaries had statutory surplus of $72.0 million.
 
The Parent provides certain administrative, purchasing and other services to each of its subsidiaries. The amounts charged to and paid by the subsidiaries were $5.0 million, $4.9 million, and $4.9 million in 2007, 2006, and 2005, respectively. In addition, the Parent has a formal tax-sharing agreement with each of its insurance subsidiaries. A net total of $3.6 million, $4.1 million and $3.9 million was paid to the Parent under the tax sharing agreements in 2007, 2006, and 2005, respectively. Dividends were paid to Atlantic American by its subsidiaries totaling $5.6 million in 2007, $7.8 million in 2006, and $11.9 million in 2005. As a result of the Parent’s tax loss carryforwards, which totaled approximately $3.6 million at December 31, 2007, it is anticipated that the tax sharing agreements will continue to provide the Parent with additional funds sufficient to meet its cash flow obligations.
 
At December 31, 2007, the Company’s $54.0 million of borrowings consisted of $12.8 million of bank debt pursuant to the Company’s Credit Agreement with Wachovia and an aggregate of $41.2 million of outstanding junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”). The Credit Agreement provides for a reducing revolving credit facility pursuant to which the Company may, subject to


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the terms and conditions thereof, initially borrow or reborrow up to $15.0 million (the “Commitment Amount”). In accordance with the terms of the Credit Agreement, the Commitment Amount is incrementally reduced every six months beginning on July 1, 2007 and had been reduced to $14.0 million at December 31, 2007. The interest rate on amounts outstanding under the Credit Agreement is, at the option of the Company, equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the LIBOR determined on an interest period of 1-month, 2-months, 3-months or 6-months, plus an Applicable Margin (as defined), and was 7.25% at December 31, 2007. The Applicable Margin varies based upon the Company’s leverage ratio (funded debt to total capitalization, each as defined) and ranges from 1.75% to 2.50%. Interest on amounts outstanding is payable quarterly. If not sooner repaid in full, the Credit Agreement requires the Company to repay $0.5 million in principal on each of June 30 and December 31, 2008, $1.0 million and $1.5 million in principal on June 30 and December 31, 2009, respectively, with one final payment of $10.5 million in principal at maturity on June 30, 2010. The Credit Agreement requires the Company to comply with certain covenants, including, among others, ratios that relate funded debt to both total capitalization and earnings before interest, taxes, depreciation and amortization, as well as the maintenance of minimum levels of tangible net worth. The Company must also comply with limitations on capital expenditures, certain payments, additional debt obligations, equity repurchases and redemptions, as well as minimum risk-based capital levels. Upon the occurrence of an event of default, Wachovia may terminate the Credit Agreement and declare all amounts outstanding under the Credit Agreement due and payable in full.
 
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 Debentures. The outstanding $41.2 million of Junior Subordinated Debentures have a maturity of thirty years from their original date of issuance, are callable, in whole or in part, only at the option of the Company five years after their respective dates of issue and quarterly thereafter, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to 4.10%. At December 31, 2007, the effective interest rate was 8.03%. The obligations of the Company with respect to the issuances of the trust preferred securities represent a full and unconditional guarantee by the Parent of each 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 intends to pay its obligations under the Credit Agreement and the Junior Subordinated Debentures using dividend and tax sharing payments from the operating subsidiaries, or from potential future financing arrangements. In addition, the Company believes that, if necessary, at maturity, the Credit Agreement could be refinanced, although there can be no assurance of the terms or conditions of such a refinancing, or its availability.
 
During 2006, the Company entered into a zero cost rate collar with Wachovia to hedge future interest payments on a portion of the Junior Subordinated Debentures. The notional amount of the collar was $18.0 million with an effective date of March 6, 2006. The collar has a LIBOR floor rate of 4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the 4th of each March, June, September and December through termination on March 4, 2013. The estimated fair value and related carrying value of the Company’s rate collar at December 31, 2007 was a liability of approximately $0.7 million.
 
At December 31, 2007, the Company had two series of preferred stock outstanding, substantially all of which is held by affiliates of the Company’s chairman and principal shareholders. The outstanding shares of Series B Preferred Stock (“Series B Preferred Stock”) have a stated value of $100 per share; accrue annual dividends at a rate of $9.00 per share and are cumulative; in certain circumstances may be convertible into an aggregate of approximately 3,358,000 shares of common stock; and are redeemable solely at the Company’s option. The Series B Preferred Stock is not currently convertible. At December 31, 2007, the Company had accrued, but unpaid, dividends on the Series B Preferred Stock totaling $14.5 million. The outstanding shares of Series D Preferred Stock (“Series D Preferred Stock”) have a stated value of $100 per share; accrue annual dividends at a rate of $7.25 per share (payable in cash or shares of the Company’s common stock at the option


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of the board of directors of the Company) and are cumulative. In certain circumstances the shares of Series D Preferred Stock may be convertible into an aggregate of approximately 1,754,000 shares of the 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. During 2007, the Company issued common stock in lieu of Series D Preferred Stock dividend payments of $0.6 million. Accordingly, as of December 31, 2007, the Company did not have any unpaid dividends on the Series D Preferred Stock.
 
Net cash provided by operating activities totaled $5.6 million in 2007, $6.8 million in 2006, and $12.4 million in 2005. The decrease in operating cash flows during each of 2007 and 2006 in comparison with the preceding year was primarily attributable to the decrease in premiums coupled with an increase in loss related payments to settle prior years’ outstanding claims. Cash and short-term investments increased to $36.9 million at December 31, 2007 from $17.6 million at December 31, 2006. The increase in cash and short-term investments during 2007 was primarily due to an increased level of investment maturities, redemptions and calls exceeding normal purchasing activity. Cash and short-term investments at December 31, 2007 of $36.9 million are believed to be sufficient to meet the Company’s near-term needs.
 
The Company believes that the cash flows it receives from its subsidiaries and, if needed, additional borrowings from banks and affiliates of the Company 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
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). This statement replaces SFAS No. 141, “Business Combinations” (“SFAS 141”) and establishes the principles and requirements for how the acquirer in a business combination: (a) measures and recognizes the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, (b) measures and recognizes positive goodwill acquired or a gain from bargain purchase (negative goodwill), and (c) determines the disclosure information that is decision-useful to users of financial statements in evaluating the nature and financial effects of the business combination. The statement further requires all transaction costs for an acquisition to be expensed as incurred rather than capitalized. In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). This statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”). Noncontrolling interest refers to the minority interest portion of the equity of a subsidiary that is not attributable directly or indirectly to a parent. SFAS 160 establishes accounting and reporting standards that require for-profit entities that prepare consolidated financial statements to (a) present noncontrolling interests as a component of equity, separate from the parent’s equity, (b) separately present the amount of consolidated net income attributable to noncontrolling interests in the income statement, (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions, (d) require an entity to measure at fair value its remaining interest in a subsidiary that is deconsolidated, (e) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interest of noncontrolling owners. Both SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. The Company does not believe that the adoption of either of the standards will have a material impact on the Company’s financial position or results of operations; although if future acquisitions are made, the prospective accounting will differ from that of the past.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115.” This statement permits entities to choose, at specified election dates, to measure eligible items at fair value (i.e. the fair value option). Items eligible for the fair value option include certain recognized financial assets and liabilities, rights and


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obligations under certain insurance contracts that are not financial instruments, host financial instruments resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument, and certain commitments. Business entities are required to report unrealized gains and losses on items for which the fair value option has been elected in net income. The fair value option: (a) may be applied instrument by instrument, with certain exceptions; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, although early adoption is permitted under certain conditions. The Company did not elect the fair value option for any specific financial instruments or other items.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. SFAS No. 157 provides guidance on measuring fair value when required under existing accounting standards and establishes a hierarchy that prioritizes the inputs to valuation techniques. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of this statement will have a material impact on the Company’s financial position or results of operations.
 
In July 2006, the FASB issued Financial Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company adopted the provisions of FIN 48 on January 1, 2007 and did not recognize any liability for unrecognized tax benefits or adjust retained earnings. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense and, as of January 1, 2007, the Company had no accrued interest and penalties.
 
In September 2005, the AICPA issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance. An internal replacement is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Modifications that result in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract must be written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company adopted SOP 05-1 on January 1, 2007. Adoption of this statement did not have a material impact on the Company’s financial position or results of operations.
 
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.


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Off-Balance Sheet Arrangements
 
In the normal course of business, the Company has structured borrowings that, in accordance with U.S. GAAP, are recorded on the Company’s balance sheet at an amount that differs from the ultimate contractual obligation. See Note 7 of Notes to Consolidated Financial Statements.
 
Contractual Obligations
 
The following table discloses the amounts of payments due under specified contractual obligations, aggregated by category of contractual obligation, for specified time periods:
 
                                         
    Payments Due By Period  
          Less than
    1-3
    3-5
    More than
 
    Total     1 Year     Years     Years     5 Years  
    (In thousands)  
 
Bank debt payable
  $ 12,750     $ 1,000     $ 11,750     $     $  
Junior Subordinated Debentures
    41,238                         41,238  
Interest payable(1)
    93,294       4,077       8,969       7,232       73,016  
Operating leases
    4,015       1,098       1,673       1,244        
Purchase commitments(2)
    9,676       9,676                    
Losses and claims(3)
    51,704       30,192       16,568       3,751       1,193  
Future policy benefits(4)
    55,548       8,275       15,841       14,910       16,522  
Unearned premiums(5)
    13,474       6,045       2,883       1,220       3,326  
Other policy liabilities
    1,878       1,878                    
                                         
Total
  $ 283,577     $ 62,241     $ 57,684     $ 28,357     $ 135,295  
                                         
 
(1) Interest payable is based on interest rates as of December 31, 2007 and assumes that all debt remains outstanding until its stated contractual maturity.
 
(2) Represents balances due for goods and/or services which have been contractually committed as of December 31, 2007. To the extent contracts provide for early termination with notice but without penalty, only the amounts contractually due during the notice period have been included.
 
(3) Losses and claims include case reserves for reported claims and reserves for claims incurred but not reported (“IBNR”). While payments due on claim reserves are considered contractual obligations because they relate to insurance policies issued by the Company, the ultimate amount to be paid to settle both case reserves and IBNR reserves is an estimate, subject to significant uncertainty. The actual amount to be paid is not determined until the Company reaches a settlement with any applicable claimant. Final claim settlements may vary significantly from the present estimates, particularly since many claims will not be settled until well into the future. In estimating the timing of future payments by year, the Company has assumed that its historical payment patterns will continue. However, the actual timing of future payments will likely vary materially from these estimates due to, among other things, changes in claim reporting and payment patterns and large unanticipated settlements. Amounts reflected do not include reinsurance amounts which may also be recoverable based on the level of ultimate sustained loss.
 
(4) Future policy benefits relate to life insurance policies on which the Company is not currently making payments and will not make future payments unless and until the occurrence of an insurable event, such as a death or disability, or the occurrence of a payment triggering event, such as a surrender of a policy. Occurrence of any of these events is outside the control of the Company and the payment estimates are based on significant uncertainties such as mortality, morbidity, expenses, persistency, investment returns, inflation and the timing of payments. For regulatory purposes, the Company does perform cash flow modeling of such liabilities, which is the basis for the indicated disclosure; however, due to the significance of the assumptions used, the amount presented could materially differ from actual results.
 
(5) Unearned premiums represent potential future revenue for the Company; however, under certain circumstances, such premiums may be refundable with cancellation of the underlying policy. Significantly all unearned premiums will be earned within the following twelve month period as the related future


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insurance protection is provided. Significantly all costs related to such unearned premiums have already been incurred and paid and are included in deferred acquisition costs; however, future losses related to the unearned premiums have not been recorded. The contractual obligations related to unearned premiums reflected in the table represent the average loss ratio applied to the year end unearned premium balances, with loss payments projected in comparable proportions to the year end loss and claims reserves. Projecting future losses is subject to significant uncertainties and the projected payments will most likely vary materially from these estimates as a result of differences in future severity, frequency and other anticipated and unanticipated factors. Amounts reflected do not take into account reinsurance amounts which may be recoverable based on the level of ultimate sustained loss.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate And Market Risk
 
Due to the nature of the Company’s business, it is exposed to both interest rate and market risk. Changes in interest rates, which represent a significant risk factor affecting the Company, may result in changes in the fair value of the Company’s investments, cash flows and interest income and expense. To manage this risk, the Company generally invests in U.S. Government agency fixed maturity securities and monitors its level of investment in securities that are directly linked to loans or mortgages.
 
The table below summarizes the estimated fair values that might result from changes in interest rates applicable to the Company’s fixed maturity portfolio:
 
                                         
    +200bp     +100bp     Fair value     −100bp     −200bp  
    (In thousands)  
 
December 31, 2007
  $ 148,943     $ 157,692     $ 167,927     $ 178,626     $ 191,200  
December 31, 2006
  $ 144,531     $ 153,875     $ 164,382     $ 176,216     $ 189,604  
 
The Company is also subject to risk from changes in equity prices. The table below summarizes the effect that a change in equity prices would have on the value of the Company’s equity portfolio. At December 31, 2006, the Company’s investment in Wachovia Corporation was the Company’s single largest equity investment. The Company did not have any similarly large holding at December 31, 2007.
 
                                         
    +20%     +10%     Fair Value     −10%     −20%  
    (In thousands)  
 
December 31, 2007 — Total equity holdings
  $ 6,402     $ 5,869     $ 5,335     $ 4,802     $ 4,268  
                                         
December 31, 2006
                                       
Investment in Wachovia Corporation
  $ 20,474     $ 18,768     $ 17,062     $ 15,356     $ 13,650  
Other equity holdings
    6,497       5,956       5,414       4,872       4,331  
                                         
Total equity holdings
  $ 26,971     $ 24,724     $ 22,476     $ 20,228     $ 17,981  
                                         
 
The interest rate on the Company’s debt is variable and based on LIBOR. The table below summarizes the effect that changes in interest rates would have on the Company’s interest expense.
 
                                         
    Interest Expense           Interest Expense  
    +200bp     +100bp     Debt     −100bp     −200bp  
    (In thousands)  
 
December 31, 2007
  $ 1,055     $ 528     $ 53,988     $ (528 )   $ (1,055 )
December 31, 2006
  $ 1,055     $ 528     $ 53,988     $ (528 )   $ (1,055 )
 
On February 21, 2006, the Company entered into a zero cost rate collar with Wachovia to hedge future interest payments on a portion of the Junior Subordinated Debentures. The notional amount of the collar was $18,042 with an effective date of March 6, 2006. The collar has a LIBOR floor rate of 4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the 4th of each March, June, September and December through termination on March 4, 2013.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of
Atlantic American Corporation
Atlanta, Georgia
 
We have audited the accompanying consolidated balance sheets of Atlantic American Corporation and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. We have also audited schedules II, III, IV and VI as of and for each of the three years in the period ended December 31, 2007. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Atlantic American Corporation and subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
 
BDO SEIDMAN LLP
 
Atlanta, Georgia
March 27, 2008


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ATLANTIC AMERICAN CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,  
    2007     2006  
    (Dollars in thousands,
 
    except per share data)  
 
ASSETS
Cash and cash equivalents, including short-term investments of $23,432 and $16,191 in 2007 and 2006, respectively
  $ 36,909     $ 17,606  
Investments
    178,059       193,197  
Receivables:
               
Reinsurance
    13,004       12,266  
Other, net of allowance for doubtful accounts of $728 and $752 in 2007 and 2006, respectively
    6,912       14,267  
Deferred income taxes, net
    3,929       1,627  
Deferred acquisition costs
    18,830       20,218  
Other assets
    2,069       2,715  
Goodwill
    2,388       3,008  
Assets of discontinued operations (Note 2)
    196,154       194,248  
                 
Total assets
  $ 458,254     $ 459,152  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Insurance reserves and policyholder funds
  $ 128,078     $ 134,316  
Accounts payable and accrued expenses
    36,047       33,200  
Debt payable
    53,988       53,988  
Liabilities of discontinued operations (Note 2)
    152,347       143,460  
                 
Total liabilities
    370,460       364,964  
                 
Commitments and contingencies (Note 9)
               
Shareholders’ equity:
               
Preferred stock, $1 par, 4,000,000 shares authorized;
               
Series B preferred, 134,000 shares issued and outstanding; $13,400 redemption value
    134       134  
Series D preferred, 70,000 shares issued and outstanding; $7,000 redemption value
    70       70  
Common stock, $1 par, 50,000,000 shares authorized;
               
21,816,999 shares issued in 2007 and 21,484,440 shares issued in 2006 and 21,816,999 shares outstanding in 2007 and 21,481,413 shares outstanding in 2006
    21,817       21,484  
Additional paid-in capital
    56,414       55,832  
Retained earnings
    10,530       4,969  
Accumulated other comprehensive (loss) income
    (1,171 )     11,707  
Treasury stock, at cost, 3,027 shares in 2006
          (8 )
                 
Total shareholders’ equity
    87,794       94,188  
                 
Total liabilities and shareholders’ equity
  $ 458,254     $ 459,152  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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ATLANTIC AMERICAN CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands, except
 
    per share data)  
 
Revenue:
                       
Insurance premiums
  $ 97,824     $ 109,580     $ 117,351  
Investment income
    11,722       11,926       10,828  
Realized investment gains (losses), net
    12,627       3,084       (7,303 )
Other income
    799       768       1,105  
                         
Total revenue
    122,972       125,358       121,981  
                         
Benefits and expenses:
                       
Insurance benefits and losses incurred
    58,701       65,460       71,201  
Commissions and underwriting expenses
    32,663       36,404       38,221  
Interest expense
    4,160       4,605       3,611  
Other
    8,350       9,265       9,562  
                         
Total benefits and expenses
    103,874       115,734       122,595  
                         
Income (loss) from continuing operations before taxes
    19,098       9,624       (614 )
Income tax expense (benefit)
    7,513       2,458       (1,746 )
                         
Income from continuing operations
    11,585       7,166       1,132  
(Loss) income from discontinued operations, net of tax (Note 2)
    (4,333 )     1,770       (4,307 )
                         
Net income (loss)
    7,252       8,936       (3,175 )
Preferred stock dividends
    (1,691 )     (1,333 )     (1,206 )
                         
Net income (loss) applicable to common stock
  $ 5,561     $ 7,603     $ (4,381 )
                         
Basic income (loss) per common share:
                       
Income from continuing operations
  $ .46     $ .27     $  
(Loss) income from discontinued operations
    (.20 )     .09       (.21 )
                         
Net income (loss) applicable to common shareholders
  $ .26     $ .36     $ (.21 )
                         
Diluted income (loss) per common share:
                       
Income from continuing operations
  $ .45     $ .27     $  
(Loss) income from discontinued operations
    (.20 )     .06       (.21 )
                         
Net income (loss) applicable to common shareholders
  $ .25     $ .33     $ (.21 )
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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ATLANTIC AMERICAN CORPORATION
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
                                                         
                            Accumulated
             
                      Retained
    Other
             
                Additional
    Earnings
    Comprehensive
             
    Preferred
    Common
    Paid-In
    (Accumulated
    Income
    Treasury
       
    Stock     Stock     Capital     Deficit)     (Loss)     Stock     Total  
    (Dollars in thousands)  
 
Balance, December 31, 2004
  $ 134     $ 21,412     $ 50,347     $ 462     $ 17,207     $ (602 )   $ 88,960  
Comprehensive loss:
                                                       
Net loss
                      (3,175 )                 (3,175 )
Decrease in unrealized investment gains
                            (6,549 )           (6,549 )
Minimum pension liability adjustment
                            (160 )           (160 )
Deferred income tax attributable to other comprehensive loss
                            2,348             2,348  
                                                         
Total comprehensive loss
                                        (7,536 )
Dividends accrued on preferred stock
                (1,206 )                       (1,206 )
Deferred share compensation expense
                (201 )     (40 )           240       (1 )
Restricted stock grants
                (66 )                 66        
Amortization of unearned compensation
                66                         66  
Acquisition of 45,619 shares for treasury
                                  (132 )     (132 )
Issuance of 194,026 shares for employee benefit plans and stock options
                (15 )     (27 )           344       302  
                                                         
Balance, December 31, 2005
    134       21,412       48,925       (2,780 )     12,846       (84 )     80,453  
Comprehensive income:
                                                       
Net income
                      8,936                   8,936  
Decrease in unrealized investment gains
                            (660 )           (660 )
Fair value adjustment to derivative financial instrument
                            (165 )           (165 )
Minimum pension liability adjustment
                            216             216  
Deferred income tax attributable to other comprehensive income
                            213             213  
                                                         
Total comprehensive income
                                        8,540  
Minimum pension liability adjustment due to adoption of SFAS 158, net of tax
                            (743 )           (743 )
Issuance of 70,000 shares of preferred stock
    70             6,930                         7,000  
Dividends accrued on preferred stock
                (155 )     (1,178 )                 (1,333 )
Deferred share compensation expense
                4                           4  
Restricted stock grants
          22       (22 )                        
Amortization of unearned compensation
                66                         66  
Acquisition of 25,774 shares for treasury
                                  (70 )     (70 )
Issuance of 102,009 shares for employee benefit plans and stock options
          50       84       (9 )           146       271  
                                                         
Balance, December 31, 2006
  $ 204     $ 21,484     $ 55,832     $ 4,969     $ 11,707     $ (8 )   $ 94,188  
Comprehensive loss:
                                                       
Net income
                      7,252                   7,252  
Decrease in unrealized investment gains
                            (19,549 )           (19,549 )
Fair value adjustment to derivative financial instrument
                            (575 )           (575 )
Minimum pension liability adjustment
                            312             312  
Deferred income tax attributable to other comprehensive loss
                            6,934             6,934  
                                                         
Total comprehensive loss
                                        (5,626 )
Dividends on preferred stock
                      (1,691 )                 (1,691 )
Common stock issued in lieu of preferred stock dividend payments
            227       386                         613  
Deferred share compensation expense
          10       (8 )                         2  
Restricted stock grants
          12       (12 )                        
Amortization of unearned compensation
                66                         66  
Acquisition of 5,655 shares for treasury
                                  (23 )     (23 )
Issuance of 102,239 shares for employee benefit plans and stock options
          84       150                   31       265  
                                                         
Balance, December 31, 2007
  $ 204     $ 21,817     $ 56,414     $ 10,530     $ (1,171 )   $     $ 87,794  
                                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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ATLANTIC AMERICAN CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands)  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 7,252     $ 8,936     $ (3,175 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
                       
Amortization of deferred acquisition costs
    11,119       13,697       14,167  
Acquisition costs deferred
    (9,731 )     (11,764 )     (13,291 )
Realized investment (gains) losses, net
    (12,627 )     (3,084 )     7,303  
(Decrease) increase in insurance reserves and policyholder funds
    (6,238 )     (3,497 )     3,460  
Loss (income) from discontinued operations, net
    4,333       (1,770 )     4,307  
Compensation expense related to share awards
    68       70       65  
Depreciation and amortization
    108       871       949  
Deferred income tax expense (benefit)
    3,711       981       (2,959 )
Decrease in receivables, net
    5,067       778       801  
Increase in other liabilities
    1,507       1,429       784  
Goodwill impairment
    620              
Other, net
    425       147       11  
                         
Net cash provided by continuing activities
    5,614       6,794       12,422  
Net cash used in discontinued activities
    (5,629 )     (6,298 )     (1,155 )
                         
Net cash (used in) provided by operating activities
    (15 )     496       11,267  
                         
Cash flows from investing activities:
                       
Proceeds from investments sold
    22,538       18,384       28,715  
Proceeds from investments matured, called or redeemed
    69,653       24,827       33,414  
Investments purchased
    (78,988 )     (59,683 )     (66,038 )
Additions to property and equipment
    (446 )     (286 )     (644 )
                         
Net cash provided by (used in) continuing operations
    12,757       (16,758 )     (4,553 )
Net cash provided by (used in) discontinued operations
    12,301       (7,666 )     (4,048 )
                         
Net cash provided by (used in) investing activities
    25,058       (24,424 )     (8,601 )
                         
Cash flows from financing activities:
                       
Proceeds from issuance of Series D Preferred Stock
          7,000        
Proceeds from exercise of stock options
    19       16       34  
Purchase of treasury shares
    (23 )     (70 )     (132 )
Proceeds from bank financing
    36,000       15,750        
Repayments of debt
    (36,000 )     (13,250 )     (1,750 )
Financing of discontinued operations
    936       (6,560 )     (4,200 )
                         
Net cash provided by (used in) continuing operations
    932       2,886       (6,048 )
Net cash (used in) provided by discontinued operations
    (936 )     6,560       4,200  
                         
Net cash (used in) provided by financing activities
    (4 )     9,446       (1,848 )
                         
Net increase (decrease) in cash
    25,039       (14,482 )     818  
Cash and cash equivalents at beginning of year
                       
Continuing operations
    17,606       24,684       22,863  
Discontinued operations
    9,688       17,092       18,095  
                         
Total
    27,294       41,776       40,958  
                         
Cash and cash equivalents at end of year
                       
Continuing operations
    36,909       17,606       24,684  
Discontinued operations
    15,424       9,688       17,092  
                         
Total
  $ 52,333     $ 27,294     $ 41,776  
                         
Supplemental cash flow information:
                       
Cash paid for interest
  $ 4,195     $ 4,711     $ 3,470  
                         
Cash paid for income taxes
  $ 460     $ 609     $ 317  
                         
Cash received for income taxes
  $     $ 676     $  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(Dollars in thousands, except per share amounts)
 
Note 1.   Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) which, as to insurance companies, differ from the statutory accounting practices prescribed or permitted by regulatory authorities. These financial statements include the accounts of Atlantic American Corporation (“Atlantic American” or the “Parent”) and its subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.
 
At December 31, 2007, the Parent owned five insurance subsidiaries, Bankers Fidelity Life Insurance Company (“Bankers Fidelity”), American Southern Insurance Company and its wholly-owned subsidiary, American Safety Insurance Company (together known as “American Southern”), Association Casualty Insurance Company and Georgia Casualty & Surety Company (“Georgia Casualty”), in addition to two non-insurance subsidiaries, Association Risk Management General Agency, Inc., and Self-Insurance Administrators, Inc. (“SIA, Inc.”). Association Casualty Insurance Company and Association Risk Management General Agency, Inc. are together termed “Association Casualty.” On December 26, 2007, the Company entered into a Stock Purchase Agreement (“SPA”) providing for the sale of all the outstanding shares of stock of Association Casualty and Georgia Casualty to Columbia Mutual Insurance Company (“Columbia”). Accordingly, the assets, liabilities, and results of operations of Association Casualty and Georgia Casualty have been reflected by the Company as discontinued operations (Note 2).
 
Premium Revenue and Cost Recognition
 
Life insurance premiums are recognized as revenues when due; accident and health premiums are recognized over the premium paying period and property and casualty insurance premiums are recognized as revenue over the period of the contract in proportion to the amount of insurance protection provided. Benefits and expenses are accrued as incurred and are associated with premiums as they are earned so as to result in recognition of profits over the lives of the contracts. For traditional life insurance and long-duration health insurance, this association is accomplished by the provision of a future policy benefits reserve and the deferral and subsequent amortization of the costs of acquiring business, “deferred policy acquisition costs” (principally commissions, premium taxes, and other expenses of issuing policies). Deferred policy acquisition costs are amortized over the estimated premium-paying period of the related policies using assumptions consistent with those used in computing the policy benefits reserve. The Company provides for insurance benefits and losses on accident, health, and property-casualty claims based upon estimates of projected ultimate losses. The deferred policy acquisition costs for property and casualty insurance and short-duration health insurance are amortized over the effective period of the related insurance policies. Deferred policy acquisition costs are expensed when such costs are deemed not to be recoverable from future premiums (for traditional life and long-duration health insurance) and from the related unearned premiums and investment income (for property and casualty and short-duration health insurance).
 
Goodwill
 
Goodwill represents the excess of cost over the fair value of net assets acquired and is not amortized. The Company periodically reviews its goodwill to determine if any adverse conditions exist that could indicate impairment. Conditions that could trigger impairment include, but are not limited to, a significant change in business climate that could affect the value of the related asset, an adverse action, or an assessment by a regulator. During 2007, an impairment of $620 was recognized. No impairment of the Company’s recorded goodwill was identified during 2006 or 2005.


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Investments
 
The Company’s investments in both fixed maturity securities, which include bonds and redeemable preferred stocks, and equity securities, which include common and non-redeemable preferred stocks, are classified as “available-for-sale” and, accordingly, are carried at fair value with the after-tax difference from amortized cost, as adjusted if applicable, reflected in shareholders’ equity as a component of accumulated other comprehensive income. The fair values for fixed maturity and equity securities are largely determined by either independent methods prescribed by the National Association of Insurance Commissioners (“NAIC”), which do not differ materially from nationally quoted market prices, when available, or independent broker quotations. Certain non-redeemable preferred stocks that do not have quoted values are carried at estimated fair value as determined by management. With the exception of short-term securities for which amortized cost is predominately used to approximate fair value, security prices are first sought from NAIC pricing services with the remaining unpriced securities submitted to brokers for prices. Mortgage loans, policy and student loans, and real estate are carried at historical cost. Other invested assets are comprised of investments in limited partnerships, limited liability companies, and real estate joint ventures. Those which are publicly traded are carried at estimated fair value and the others 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. In evaluating impairment, the Company considers, among other factors, the expected holding period, the nature of the investment and the prospects for the company and its industry. Premiums and discounts related to investments are amortized or accreted over the life of the related investment as an adjustment to yield using the effective interest method. Dividends and interest income are recognized when earned or declared. The cost of securities sold is based on specific identification. Unrealized gains (losses) in the value of invested assets are accounted for as a direct increase (decrease) in accumulated other comprehensive income in shareholders’ equity, net of deferred tax and, accordingly, have no effect on net income.
 
Income Taxes
 
Deferred income taxes represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. They arise from differences between the financial reporting and tax basis of assets and liabilities and are adjusted for changes in tax laws and tax rates as those changes are enacted. The provision for income taxes represents the total amount of income taxes due related to the current year, plus the change in deferred taxes during the year. A valuation allowance is recognized if, based on 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 each period. Diluted earnings per common share are based on the weighted average number of common shares outstanding during each period, plus common shares calculated including stock options and share awards outstanding using the treasury stock method and assumed conversion of the Series B and Series D Preferred Stock, if dilutive. Unless otherwise indicated, earnings per common share amounts are presented on a diluted basis.
 
Stock Options
 
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) using the modified prospective transition method. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” The adoption of SFAS 123R did not have a material impact on the Company’s consolidated statements of operations or net income (loss) per share. Prior to January 1, 2006, stock options were reported under the recognition and measurement principles of APB Opinion No. 25 instead of the fair


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value approach recommended in SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Accordingly, no stock-based employee compensation expense attributable to stock options was reflected in net income, as all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Pro forma net income (loss) and net income (loss) per common share were determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of these options was determined at the date of grant using an options pricing model, which requires the input of subjective assumptions, including the volatility of the stock price. If the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation in 2005, the Company’s net income (loss) and net income (loss) per share would not have been materially different from that as reported.
 
Cash and Cash Equivalents
 
Cash and cash equivalents consist of cash on hand and investments in short-term, highly liquid securities which have original maturities of three months or less from date of purchase.
 
Impact of Recently Issued Accounting Standards
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). This statement replaces SFAS No. 141, “Business Combinations” (“SFAS 141”) and establishes the principles and requirements for how the acquirer in a business combination: (a) measures and recognizes the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, (b) measures and recognizes positive goodwill acquired or a gain from bargain purchase (negative goodwill), and (c) determines the disclosure information that is decision-useful to users of financial statements in evaluating the nature and financial effects of the business combination. The statement further requires all transaction costs for an acquisition to be expensed as incurred rather than capitalized. In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). This statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”). Noncontrolling interest refers to the minority interest portion of the equity of a subsidiary that is not attributable directly or indirectly to a parent. SFAS 160 establishes accounting and reporting standards that require for-profit entities that prepare consolidated financial statements to (a) present noncontrolling interests as a component of equity, separate from the parent’s equity, (b) separately present the amount of consolidated net income attributable to noncontrolling interests in the income statement, (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions, (d) require an entity to measure at fair value its remaining interest in a subsidiary that is deconsolidated, (e) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interest of noncontrolling owners. Both SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. The Company does not believe that the adoption of either of the standards will have a material impact on the Company’s financial position or results of operations; although if future acquisitions are made, the prospective accounting will differ from that of the past.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115.” This statement permits entities to choose, at specified election dates, to measure eligible items at fair value (i.e. the fair value option). Items eligible for the fair value option include certain recognized financial assets and liabilities, rights and obligations under certain insurance contracts that are not financial instruments, host financial instruments resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument, and certain commitments. Business entities are required to report unrealized gains and losses on items for which the fair value option has been elected in net income. The fair value option: (a) may be applied instrument by instrument, with certain exceptions; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, although early adoption is


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permitted under certain conditions. The Company did not elect the fair value option for any specific financial instruments or other items.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. SFAS No. 157 provides guidance on measuring fair value when required under existing accounting standards and establishes a hierarchy that prioritizes the inputs to valuation techniques. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of this statement will have a material impact on the Company’s financial position or results of operations.
 
In July 2006, the FASB issued Financial Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company adopted the provisions of FIN 48 on January 1, 2007 and did not recognize any liability for unrecognized tax benefits or adjust retained earnings. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense and, as of January 1, 2007, the Company had no accrued interest and penalties.
 
In September 2005, the AICPA issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance. An internal replacement is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Modifications that result in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract must be written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company adopted SOP 05-1 on January 1, 2007. Adoption of this statement did not have a material impact on the Company’s financial position or results of operations.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant estimates and assumptions are used in developing and evaluating deferred income taxes, deferred acquisition costs, insurance reserves, investments, pension benefits, commitments and contingencies, among others, and actual results could differ from management’s estimates.


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Note 2.   Discontinued Operations
 
On December 26, 2007, the Company entered into a SPA providing for the sale of all the outstanding shares of stock of Association Casualty and Georgia Casualty to Columbia. Accordingly, the consolidated financial statements reflect the assets, liabilities, and operating results of Georgia Casualty and Association Casualty as discontinued operations.
 
The following table provides operating results from the discontinued operations of Georgia Casualty and Association Casualty for the years indicated:
 
                         
    Year Ended December 31,  
    2007     2006     2005  
 
Revenue:
                       
Insurance premiums
  $ 37,031     $ 44,125     $ 60,242  
Investment income
    6,343       6,397       5,857  
Realized investment gains (losses), net
    3,225       3,607       (3,153 )
Other income
    26       45       158  
                         
Total revenue
    46,625       54,174       63,104  
                         
Benefits and expenses:
                       
Insurance benefits and losses incurred
    34,107       26,472       44,474  
Commissions and underwriting expenses
    16,951       25,584       22,716  
Other
    3,109       453       2,765  
                         
Total benefits and expenses
    54,167       52,509       69,955  
                         
(Loss) income from discontinued operations before taxes
    (7,542 )     1,665       (6,851 )
Income tax benefit
    (3,209 )     (105 )     (2,544 )
                         
Net (loss) income from discontinued operations
  $ (4,333 )   $ 1,770     $ (4,307 )
                         


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The following table provides condensed information about the assets and liabilities of the discontinued operations of Georgia Casualty and Association Casualty and as aggregated in the consolidated balance sheet:
 
                 
    December 31,  
    2007     2006  
 
Assets of Discontinued Operations:
               
Cash and cash equivalents, including short-term investments of $10,585
and $3,997 in 2007 and 2006, respectively
  $ 15,424     $ 9,688  
                 
Investments:
               
Fixed maturities (cost: $91,216 and $97,278)
    91,088       97,933  
Common and non-redeemable preferred stocks (cost: $2,406 and $3,733)
    3,139       6,350  
Other invested assets (cost: $47 and 1,330)
    47       1,295  
                 
Total investments
    94,274       105,578  
                 
Receivables:
               
Reinsurance
    54,391       42,227  
Other
    17,570       20,709  
Deferred acquisition costs
    3,486       4,200  
Other assets
    11,009       11,846  
                 
Total assets
  $ 196,154     $ 194,248  
                 
Liabilities of Discontinued Operations:
               
Unearned premiums
  $ 22,065     $ 25,532  
Losses and claims
    122,418       107,658  
Accounts payable and accrued expenses
    7,864       10,270  
                 
Total liabilities
  $ 152,347     $ 143,460  
                 


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Note 3.   Investments
 
Investments were comprised of the following:
 
                                 
    2007  
          Gross
    Gross
       
    Carrying
    Unrealized
    Unrealized
    Amortized
 
    Value     Gains     Losses     Cost  
 
Fixed Maturities:
                               
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  $ 127,070     $ 994     $ 67     $ 126,143  
Obligations of states and political subdivisions
    412       14             398  
Corporate securities
    29,728       314       832       30,246  
Mortgage-backed securities (government guaranteed)
    3                   3  
Redeemable preferred stocks
    10,714       264       1,416       11,866  
                                 
Total fixed maturities
    167,927       1,586       2,315       168,656  
Common and non-redeemable preferred stocks
    5,335       590       621       5,366  
Other invested assets (fair value of $1,563)
    1,563                   1,563  
Policy and student loans
    1,958                       1,958  
Real estate
    38                   38  
Investments in unconsolidated trusts
    1,238                   1,238  
                                 
Investments
    178,059       2,176       2,936       178,819  
Short-term investments
    23,432                   23,432  
                                 
Total investments
  $ 201,491     $ 2,176     $ 2,936     $ 202,251  
                                 
 
                                 
    2006  
          Gross
    Gross
       
    Carrying
    Unrealized
    Unrealized
    Amortized
 
    Value     Gains     Losses     Cost  
 
Fixed Maturities:
                               
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  $ 117,120     $ 99     $ 1,660     $ 118,681  
Obligations of states and political subdivisions
    414       18             396  
Corporate securities
    33,892       2,597       297       31,592  
Mortgage-backed securities (government guaranteed)
    7                   7  
Redeemable preferred stocks
    12,949       656       153       12,446  
                                 
Total fixed maturities
    164,382       3,370       2,110       163,122  
Common and non-redeemable preferred stocks
    22,476       14,960       30       7,546  
Other invested assets (fair value of $1,735)
    1,735             34       1,769  
Mortgage loans (fair value of $1,564)
    1,379                   1,379  
Policy and student loans
    1,949                   1,949  
Real estate
    38                   38  
Investments in unconsolidated trusts
    1,238                   1,238  
                                 
Investments
    193,197       18,330       2,174       177,041  
Short-term investments
    16,191                   16,191  
                                 
Total investments
  $ 209,388     $ 18,330     $ 2,174     $ 193,232  
                                 


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Bonds and short-term investments having an amortized cost of $10,553 and $10,709 were on deposit with insurance regulatory authorities at December 31, 2007 and 2006, respectively, in accordance with statutory requirements.
 
Securities with unrealized losses at December 31, 2007 and 2006 were as follows:
 
                                                 
    2007  
    Less than 12 months     12 months or longer     Total  
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Losses     Value     Losses     Value     Losses  
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  $ 8,189     $ 40     $ 4,241     $ 27     $ 12,430     $ 67  
Corporate securities
    9,801       425       5,918       407       15,719       832  
Redeemable preferred stocks
    4,465       657       2,751       759       7,216       1,416  
Common and non-redeemable preferred stocks
    1,980       303       928       318       2,908       621  
                                                 
Total temporary impaired securities
  $ 24,435     $ 1,425     $ 13,838     $ 1,511     $ 38,273     $ 2,936  
                                                 
 
                                                 
    2006  
    Less than 12 months     12 months or longer     Total  
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Losses     Value     Losses     Value     Losses  
 
U.S. Treasury securities and obligations of U.S. Government agencies and authorities
  $ 23,091     $ 175     $ 71,819     $ 1,485     $ 94,910     $ 1,660  
Corporate securities
    3,885       52       5,054       245       8,939       297  
Redeemable preferred stocks
                5,637       153       5,637       153  
Common and non-redeemable preferred stocks
    594       24       994       6       1,588       30  
Other invested assets
    1,735       34                   1,735       34  
                                                 
Total temporary impaired securities
  $ 29,305     $ 285     $ 83,504     $ 1,889     $ 112,809     $ 2,174  
                                                 
 
Market changes in interest rates and credit spreads result in changes in the fair values of investments and are accumulated and reported as unrealized gains and losses. Excluding U.S. Treasury securities and obligations of U.S. Government agencies and authorities, the change in value of which is deemed solely to relate to interest rate movements, the Company held investments in less than 30 issuers which had unrealized investment losses at December 31, 2007 and 2006, respectively. The majority of the unrealized losses at December 31, 2007 resulted from holdings in financial entities which have been impacted by the markets and related liquidity in the markets for mortgage related and other derivative products. Holdings with the largest amount of unrealized losses include redeemable preferred stocks of Citigroup and JPMorgan Chase and corporate bonds of General Motors Acceptance Corporation. Unrealized losses related to these three holdings aggregated approximately 1/3 of the Company’s total unrealized losses related to corporate bonds, common and preferred stocks at December 31, 2007.
 
During the years ended December 31, 2007, 2006, and 2005, the Company recorded impairments related to the following investments.
 
                         
    2007     2006     2005  
 
Corporate securities(1)
  $ 123     $     $ 6,380  
Redeemable preferred stocks(1)
  $     $     $ 875  
Other invested assets
  $ 123     $     $  
 
 
(1) Includes automotive sector impairments of $7,198 in 2005, primarily from holdings in General Motors and related entities.


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As part of the Company’s ongoing investment review, the Company has reviewed its investment portfolio and concluded that there were no additional investments with other than temporary impairments as of December 31, 2007 or 2006. The evaluation for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. The risks and uncertainties include changes in general economic conditions, an issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. As a result of issuers’ continued satisfaction of the investment obligations in accordance with their contractual terms, if applicable, and management’s expectation that they will continue to do so, also if applicable, management’s intent and ability to hold these securities, as well as the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence, the Company believes that the unrealized losses on investments at December 31, 2007 and 2006 were temporary.
 
The amortized cost and carrying value of fixed maturities and short-term investments at December 31, 2007 and 2006 by contractual maturity were as follows. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
                                 
    2007     2006  
    Carrying
    Amortized
    Carrying
    Amortized
 
   
Value
    Cost     Value     Cost  
    (In thousands)  
 
Maturities
                               
Due in one year or less
  $ 43,069     $ 43,031     $ 39,592     $ 39,587  
Due after one year through five years
    14,389       14,084       12,936       12,644  
Due after five years through ten years
    13,832       13,832       22,751       22,081  
Due after ten years
    120,066       121,138       105,287       104,994  
Varying maturities
    3       3       7       7  
                                 
Totals
  $ 191,359     $ 192,088     $ 180,573     $ 179,313  
                                 
 
Investment income was earned from the following sources:
 
                         
    2007     2006     2005  
 
Fixed maturities
  $ 9,384     $ 9,922     $ 8,205  
Common and non-redeemable preferred stocks
    767       948       1,386  
Mortgage loans
    79       184       250  
Short-term investments
    1,297       671       598  
Other
    195       201       389  
                         
Total investment income
  $ 11,722     $ 11,926     $ 10,828  
Less investment expenses
    (119 )     (104 )     (126 )
                         
Net investment income
  $ 11,603     $ 11,822     $ 10,702  
                         
 
A summary of realized investment gains (losses) follows:
 
                                 
    2007  
          Fixed
    Other Invested
       
    Stocks     Maturities     Assets     Total  
 
Gains
  $ 12,905     $ 21     $     $ 12,926  
Losses
          (176 )     (123 )     (299 )
                                 
Realized investment gains (losses), net
  $ 12,905     $ (155 )   $ (123 )   $ 12,627  
                                 
 


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    2006  
          Fixed
    Other Invested
       
    Stocks     Maturities     Assets     Total  
 
Gains
  $ 1,738     $ 1,201     $ 654     $ 3,593  
Losses
          (509 )           (509 )
                                 
Realized investment gains (losses), net
  $ 1,738     $ 692     $ 654     $ 3,084  
                                 
 
                                 
    2005  
          Fixed
    Other
       
    Stocks     Maturities     Invested Assets     Total  
 
Gains
  $ 715     $ 81     $     $ 796  
Losses
    (384 )     (7,715 )           (8,099 )
                                 
Realized investment gains (losses), net
  $ 331     $ (7,634 )   $     $ (7,303 )
                                 
 
Proceeds from the sale of investments were as follows:
 
                         
    2007     2006     2005  
 
Common and non-redeemable preferred stocks
  $ 16,635     $ 1,666     $ 11,884  
Fixed maturities
    5,753       15,510       16,021  
Student loans
          128       245  
Other investments
    150       1,080       565  
                         
Total proceeds
  $ 22,538     $ 18,384     $ 28,715  
                         
 
The Company’s investments in fixed maturity securities of General Motors and General Motors Acceptance Corporation exceeded 10% of shareholders’ equity at December 31, 2007. The carrying value of these fixed maturity investments at December 31, 2007 was $9,907 with an adjusted cost basis of $10,164.
 
The Company’s bond portfolio included 90% investment grade securities at December 31, 2007 as defined by the NAIC.

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Note 4.   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.
 
                                 
                Amount of Insurance
 
                In Force  
    2007     2006     2007     2006  
 
Future policy benefits
                               
Life insurance policies:
                               
Ordinary
  $ 44,187     $ 43,046     $ 228,780     $ 224,401  
Mass market
    4,586       4,908       6,985       7,667  
Individual annuities
    297       332              
                                 
      49,070       48,286     $ 235,765     $ 232,068  
                                 
Accident and health insurance policies
    6,478       3,733                  
                                 
      55,548       52,019                  
Unearned premiums
    18,948       25,190                  
Losses and claims
    51,704       55,291                  
Other policy liabilities
    1,878       1,816                  
                                 
Total insurance reserves and policyholder funds
  $ 128,078     $ 134,316                  
                                 
 
Annualized premiums for accident and health insurance policies were $45,913 and $47,326 at December 31, 2007 and 2006, 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 are generally: (i) 2.5% to 5.5% for issues prior to 1977, (ii) 7% graded to 5.5% for 1977 through 1979 issues, (iii) 9% for 1980 through 1987 issues, and (iv) 5% to 7% for 1988 and later issues.
 
Loss and Claim Reserves
 
Loss and claim reserves represent estimates of projected ultimate losses and are based upon: (a) management’s estimate of ultimate liability and claim 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.


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Activity in the liability for unpaid loss and claim reserves is summarized as follows:
 
                         
    2007     2006     2005  
 
Balance at January 1
  $ 55,291     $ 53,817     $ 53,025  
Less: Reinsurance recoverables
    (12,266 )     (12,829 )     (12,857 )
                         
Net balance at January 1
    43,025       40,988       40,168  
                         
Incurred related to:
                       
Current year
    65,274       73,167       76,626  
Prior years
    (11,517 )     (9,926 )     (8,370 )
                         
Total incurred
    53,757       63,241       68,256  
                         
Paid related to:
                       
Current year
    41,687       46,355       50,922  
Prior years
    16,395       14,849       16,514  
                         
Total paid
    58,082       61,204       67,436  
                         
Net balance at December 31
    38,700       43,025       40,988  
Plus: Reinsurance recoverables
    13,004       12,266       12,829  
                         
Balance at December 31
  $ 51,704     $ 55,291     $ 53,817  
                         
 
Prior years’ development was primarily the result of better than expected development on prior years IBNR reserves for Medicare supplement as well as certain lines of business within American Southern.
 
Following is a reconciliation of total incurred claims to total insurance benefits and losses incurred:
 
                         
    2007     2006     2005  
 
Total incurred claims
  $ 53,757     $ 63,241     $ 68,256  
Cash surrender value and matured endowments
    1,413       1,666       1,663  
Benefit reserve changes
    3,531       553       1,282  
                         
Total insurance benefits and losses incurred
  $ 58,701     $ 65,460     $ 71,201  
                         
 
Note 5.   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 to meet its obligations. Approximately 82% of the Company’s reinsurance receivables were due from one reinsurer as of December 31, 2007. Reinsurance receivables of $10,686 were with Swiss Reinsurance Corporation, rated “AA-” (Very Strong) by Standard & Poor’s and “A+” (Superior) by A.M. Best. Allowances for uncollectible amounts are established against reinsurance receivables, if appropriate.


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The following table reconciles premiums written to premiums earned and summarizes the components of insurance benefits and losses incurred.
 
                         
    2007     2006     2005  
 
Direct premiums written
  $ 89,766     $ 104,253     $ 118,184  
Plus — premiums assumed
    9,022       9,763       9,655  
Less — premiums ceded
    (6,729 )     (9,338 )     (9,290 )
                         
Net premiums written
    92,059       104,678       118,549  
                         
Change in unearned premiums
    6,242       5,006       (1,269 )
Change in unearned premiums ceded
    (477 )     (104 )     71  
                         
Net change in unearned premiums
    5,765       4,902       (1,198 )
                         
Net premiums earned
  $ 97,824     $ 109,580     $ 117,351  
                         
Provision for benefits and losses incurred
  $ 66,641     $ 70,217     $ 79,462  
Reinsurance loss recoveries
    (7,940 )     (4,757 )     (8,261 )
                         
Insurance benefits and losses incurred
  $ 58,701     $ 65,460     $ 71,201  
                         
 
Components of reinsurance receivables were as follows:
 
                 
    2007     2006  
 
Receivable on unpaid losses
  $ 12,929     $ 12,266  
Receivable on paid losses
    75        
                 
    $ 13,004     $ 12,266  
                 
 
Note 6.   Income Taxes
 
Total income taxes were allocated as follows:
 
                         
    2007     2006     2005  
 
Tax expense (benefit) on income or loss from:
                       
Continuing operations
  $ 7,513     $ 2,458     $ (1,746 )
Discontinued operations
    (3,209 )     (105 )     (2,544 )
                         
Total tax expense (benefit) on income or loss
    4,304       2,353       (4,290 )
                         
Tax (benefit) expense on components of shareholders’ equity:
                       
Net unrealized gains (losses) on investment securities
    (6,842 )     (231 )     (2,292 )
Fair value adjustment to derivative financial instrument
    (201 )     (58 )      
Minimum pension liability adjustment
    109       (325 )     (56 )
                         
Total tax benefit on shareholders’ equity
    (6,934 )     (614 )     (2,348 )
                         
Total tax (benefit) expense
  $ (2,630 )   $ 1,739     $ (6,638 )
                         


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A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and the income tax expense (benefit) from continuing operations was as follows:
 
                         
    2007     2006     2005  
 
Federal income tax provision at statutory rate of 35%
  $ 6,684     $ 3,368     $ (215 )
Tax exempt interest and dividends received deductions
    (282 )     (401 )     (444 )
Small life deduction
    (55 )     (579 )     (534 )
Non-deductible goodwill
    217              
Intercompany fees(1)
    363       504        
Other permanent differences
    38       46       39  
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets
    333       (569 )     (125 )
Adjustment for prior years’ estimates to actual
    205       80       (474 )
State income taxes
    10       9       7  
                         
Income tax expense (benefit)
  $ 7,513     $ 2,458     $ (1,746 )
                         
 
 
(1) Intercompany fees from discontinued operations eliminated in consolidated tax return.
 
A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and the income tax expense (benefit) from discontinued operations was as follows:
 
                         
    2007     2006     2005  
 
Federal income tax provision at statutory rate of 35%
  $ (2,640 )   $ 583     $ (2,398 )
Tax exempt interest and dividends received deductions
    (147 )     (170 )     (257 )
Intercompany fees(1)
    (363 )     (504 )      
Other permanent differences
    9       4       10  
Adjustment for prior years’ estimates to actual
    (68 )     (26 )     101  
State income taxes
          8        
                         
Income tax benefit
  $ (3,209 )   $ (105 )   $ (2,544 )
                         
 
 
(1) Intercompany fees from discontinued operations eliminated in consolidated tax return.
 
The primary differences between the effective tax rate and the federal statutory income tax rate results from the dividends-received deduction (“DRD”), the small life insurance company deduction (“SLD”) and the change in asset valuation allowance. The current estimated DRD is adjusted as underlying factors change, including known actual 2007 distributions earned on invested assets. The actual 2007 DRD can vary from the estimates based on, but not limited to, amounts of distributions from these investments as well as appropriate levels of taxable income. The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”). The amount of the SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3,000 and is ultimately phased out at $15,000. The change in the asset valuation allowance results from reassessment of the realization of certain net operating loss carry forwards.


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Deferred tax liabilities and assets at December 31, 2007 and 2006 were comprised of the following:
 
                 
    2007     2006  
 
Deferred tax liabilities:
               
Deferred acquisition costs
  $ (2,564 )   $ (2,874 )
Net unrealized investment gains
          (5,655 )
Deferred and uncollected premiums
    (672 )     (657 )
                 
Total deferred tax liabilities
    (3,236 )     (9,186 )
                 
Deferred tax assets:
               
Net operating loss carryforwards
    1,957       4,161  
Insurance reserves
    2,819       3,148  
Impaired assets
    1,333       1,247  
Alternative minimum tax credit
          1,125  
Net unrealized investment losses
    266        
Bad debts and other
    1,484       1,493  
                 
Total deferred tax assets
    7,859       11,174  
                 
Asset valuation allowance
    (694 )     (361 )
                 
Net deferred tax assets
  $ 3,929     $ 1,627  
                 
 
The components of the income tax expense (benefit) from continuing operations were:
 
                         
    2007     2006     2005  
 
Current — Federal
  $ 3,792     $ 1,468     $ 1,206  
Current — State
    10       9       7  
Deferred — Federal
    3,711       981       (2,959 )
                         
Total
  $ 7,513     $ 2,458     $ (1,746 )
                         
 
The components of the income tax (benefit) expense from discontinued operations were:
 
                         
    2007     2006     2005  
 
Current — Federal
  $ (1,662 )   $ (1,089 )   $ (1,228 )
Current — State
          8        
Deferred — Federal
    (1,547 )     976       (1,316 )
                         
Total
  $ (3,209 )   $ (105 )   $ (2,544 )
                         
 
At December 31, 2007, the Company had regular federal net operating loss carryforwards of approximately $3,609 expiring generally between 2009 and 2025. As of December 31, 2007 and 2006, a valuation allowance of $694 and $361, respectively, was established against deferred income tax benefits relating primarily to net operating loss carryforwards that may not be realized. In each year, the changes in the valuation allowance resulted from a reassessment of the realization of certain net operating loss carryforwards. During 2005, the Company amended certain prior years’ tax returns to recognize permanent items that generated an income tax refund of $676 which was received in 2006. Since the Company’s ability to generate taxable income from operations and utilize available tax-planning strategies in the near term is dependent upon various factors, many of which are beyond management’s control, management believes that the remaining deferred income tax benefits relating to certain years’ carryforwards may not be realized. However, realization of the remaining deferred income tax benefits will be assessed periodically based on the Company’s current and anticipated results of operations, and amounts could increase or decrease in the near term if estimates of future taxable income change. The Company has formal tax-sharing agreements, and files a consolidated income tax return, with its subsidiaries.


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Note 7.  Credit Arrangements
 
Bank Debt
 
At December 31, 2007, the Company’s $12,750 of bank debt consisted of a reducing revolving credit facility (the “Credit Agreement”) with Wachovia Bank, National Association (“Wachovia”) pursuant to which the Company was able to, subject to the terms and conditions thereof, initially borrow or reborrow up to $15,000 (the “Commitment Amount”). In accordance with the terms of the Credit Agreement, the Commitment Amount is incrementally reduced every six months beginning on July 1, 2007 and had been reduced to $14,000 by December 31, 2007. The interest rate on amounts outstanding under the Credit Agreement is, at the option of the Company, equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the London Interbank Offered Rate (“LIBOR”) determined on an interest period of 1-month, 2-months, 3-months or 6-months, plus an Applicable Margin (as defined). The Applicable Margin varies based upon the Company’s leverage ratio (funded debt to total capitalization, each as defined) and ranges from 1.75% to 2.50%. As of December 31, 2007, the effective interest rate was 7.25%. Interest on amounts outstanding is payable quarterly. If not sooner repaid in full, the Credit Agreement requires the Company to repay $500 in principal on each of June 30 and December 31, 2008, $1,000 and $1,500 in principal on June 30 and December 31, 2009, respectively, with one final payment of $10,500 in principal at maturity on June 30, 2010. The Credit Agreement requires the Company to comply with certain covenants, including, among others, ratios that relate funded debt to both total capitalization and earnings before interest, taxes, depreciation and amortization, as well as the maintenance of minimum levels of tangible net worth. The Company must also comply with limitations on capital expenditures, certain payments, additional debt obligations, equity repurchases and redemptions, as well as minimum risk-based capital levels. Upon the occurrence of an event of default, Wachovia may terminate the Credit Agreement and declare all amounts outstanding due and payable in full. The Company was in compliance with all covenants at December 31, 2007.
 
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.


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The financial structure of each of Atlantic American Statutory Trust I and II, as of December 31, 2007 and 2006, was as follows:
 
                 
    Atlantic American
    Atlantic American
 
    Statutory Trust I     Statutory Trust II  
 
JUNIOR SUBORDINATED DEBENTURES(1)(2)
               
Principal amount owed
  $ 18,042     $ 23,196  
Balance December 31, 2007
    18,042       23,196  
Balance December 31, 2006
    18,042       23,196  
Coupon rate
    LIBOR + 4.00 %     LIBOR + 4.10 %
Interest payable
    Quarterly       Quarterly  
Maturity date
    December 4, 2032       May 15, 2033  
Redeemable by issuer on or after
    December 4, 2007       May 15, 2008  
TRUST PREFERRED SECURITIES
               
Issuance date
    December 4, 2002       May 15, 2003  
Securities issued
    17,500       22,500  
Liquidation preference per security
  $ 1     $ 1  
Liquidation value
    17,500       22,500  
Coupon rate
    LIBOR + 4.00 %     LIBOR + 4.10 %
Distribution payable
    Quarterly       Quarterly  
Distribution guaranteed by(3)
    Atlantic American
Corporation
      Atlantic American
Corporation
 
 
 
(1) For each of the respective debentures, the Company has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures’ respective maturity dates. During any such period, interest will continue to accrue and the Company may not declare or pay any cash dividends or distributions on, or purchase, the 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.
 
Note 8.   Derivative Financial Instruments
 
On February 21, 2006, the Company entered into a zero cost rate collar with Wachovia to hedge future interest payments on a portion of the Junior Subordinated Debentures. The notional amount of the collar was $18,042 with an effective date of March 6, 2006. The collar has a LIBOR floor rate of 4.77% and a LIBOR cap rate of 5.85% and adjusts quarterly on the 4th of each March, June, September and December through termination on March 4, 2013.
 
The estimated fair value and related carrying value of the Company’s rate collar at December 31, 2007 was a liability of approximately $740.


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Note 9.   Commitments and Contingencies
 
Litigation
 
From time to time, the Company is involved in various claims and lawsuits incidental to and in the ordinary course of its businesses. In the opinion of management, any such known claims are not expected to have a material effect on the business or financial condition of the Company.
 
Operating Lease Commitments
 
The Company’s rental expense, including common area charges, for operating leases was $1,268, $1,276, and $1,269 in 2007, 2006, and 2005, respectively. The Company’s future minimum lease obligations under non-cancelable operating leases are as follows:
 
         
Year Ending December 31,  
 
2008
  $ 1,098  
2009
    1,018  
2010
    655  
2011
    622  
2012
    622  
Thereafter
     
         
Total
  $ 4,015  
         
 
Note 10.   Employee Benefit Plans
 
Stock Options
 
In accordance with the Company’s 1992 Incentive Plan, the Board of Directors was authorized to grant up to 1,800,000 stock options or share awards. The Board of Directors may grant: (a) incentive stock options within the meaning of Section 422 of the Internal Revenue Code; (b) non-qualified stock options; (c) performance units; (d) awards of restricted shares of the Company’s common stock and other stock unit awards; (e) deferred shares of common stock; or (f) all or any combination of the foregoing to officers and key employees. Stock options granted under this plan expire five or ten years from the date of grant, as specified in an award agreement. Vesting occurs at 50% upon issuance of an option, and the remaining portion vests in 25% increments in each of the following two years. In accordance with the Company’s 1996 Director Stock Option Plan, a maximum of 200,000 stock options were authorized to be granted, which fully vest six months after the grant date. In accordance with the Company’s 2002 Incentive Plan (the “2002 Plan”), the Board of Directors was authorized to grant up to 2,000,000 stock options or share awards. Subject to adjustment as provided in the 2002 Plan, the Board of Directors is authorized to grant: (a) incentive stock options; (b) non-qualified stock options; (c) stock appreciation rights; (d) restricted shares; (e) deferred shares; and (f) performance shares and/or performance units. Further, the Board may authorize the granting to non-employee directors of stock options and/or restricted shares. A total of 12,397, 21,923 and 21,923 restricted shares were issued to the Company’s Board of Directors under the 2002 Plan in 2007, 2006 and 2005, respectively. As of December 31, 2007, an aggregate of twenty-eight employees, officers and directors held options under the three plans.


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A summary of the status of the Company’s stock options at December 31, 2007, 2006 and 2005, is as follows:
 
                                                 
    2007     2006     2005  
          Weighted
          Weighted
          Weighted
 
          Average
          Average
          Average
 
Shares
  Shares     Exercise Price     Shares     Exercise Price     Shares     Exercise Price  
 
Options outstanding, beginning of year
    636,500     $ 1.43       649,500     $ 1.44       677,500     $ 1.47  
Options exercised
    (7,000 )     2.68       (9,500 )     1.70       (21,000 )     1.73  
Options canceled or expired
    (5,500 )     1.63       (3,500 )     1.44       (7,000 )     3.54  
                                                 
Options outstanding, end of year
    624,000       1.42       636,500       1.43       649,500       1.44  
                                                 
Options exercisable
    624,000       1.42       636,500       1.43       649,500       1.44  
                                                 
Options available for future grant
    2,479,594               2,486,491               2,504,914          
                                                 
 
Data on options outstanding and exercisable at December 31, 2007 is as follows:
 
                         
          Outstanding and Exercisable  
          Weighted Average
       
    Number of
    Remaining Life
    Weighted Average
 
Range of Exercise Price
  Options     (Years)     Exercise Price  
 
$1.00 to $1.50
    380,000       3.79     $ 1.25  
$1.51 to $2.00
    244,000       5.17     $ 1.67  
                         
      624,000                  
                         
 
The fair value of options granted is determined on the date of grant using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected volatility of the stock price. No options were granted in 2007, 2006 or 2005.
 
401(k) Plan
 
The Company initiated an employees’ savings plan qualified under Section 401(k) of the Internal Revenue Code in May 1995. The plan covers substantially all of the Company’s employees, except employees of American Southern. Under the plan, employees generally may elect to contribute up to 16% of their compensation to the plan. The Company generally makes a matching contribution on behalf of each employee in an amount equal to 50% of the first 6% of such contributions. The Company’s matching contribution is in Company common stock and had a value of approximately $136, $135, and $129 in 2007, 2006, and 2005, respectively. During 2007, an additional matching contribution was made by the Company to the plan in an amount equal to 50% of the first 6% of an employee’s contribution to the plan. The additional contribution was in cash and was $141.
 
Defined Benefit Pension Plans
 
The Company has both a funded and unfunded noncontributory defined benefit pension plan covering the employees of American Southern. The plans provide defined benefits based on years of service and average salary. The Company’s general funding policy is to contribute annually the maximum amount that can be deducted for income tax purposes. The measurement date for these plans was December 31 of each year.


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Obligation and Funded Status
 
                 
    2007     2006  
 
Change in Benefit Obligation
               
Net benefit obligation at beginning of year
  $ 6,190     $ 5,713  
Service cost
    204       237  
Interest cost
    330       314  
Actuarial loss
    (316 )     53  
Gross benefits paid
    (305 )     (127 )
                 
Net benefit obligation at end of year
    6,103       6,190  
                 
Change in Plan Assets
               
Fair value of plan assets at beginning of year
    3,154       2,799  
Employer contributions
    215       184  
Actual return on plan assets
    100       298  
Gross benefits paid
    (305 )     (127 )
                 
Fair value of plan assets at end of year
    3,164       3,154  
                 
Funded Status of Plan
               
Funded status at end of year
    (2,939 )     (3,036 )
Unrecognized net actuarial loss
    1,322       1,634  
Unrecognized prior service cost
    (7 )     (7 )
Unrecognized net transition obligation
           
Additional minimum liability
    (329 )     (483 )
Additional liability due to SFAS 158
    (986 )     (1,144 )
                 
Net amount recognized in accrued liabilities at end of year
  $ (2,939 )   $ (3,036 )
                 
 
The accumulated benefit obligation for all defined benefit plans at December 31, 2007 and 2006 was $5,117 and $5,046, respectively.
 
The weighted-average assumptions used to determine the benefit obligation at December 31, 2007 and 2006 were as follows:
 
                 
    2007   2006
 
Discount rate to determine the projected benefit obligation
    5.75 %     5.50 %
Projected annual salary increases
    4.50 %     4.50 %
 
Included in the above is one plan which is unfunded. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for this plan were $2,017, $1,681, and $0, respectively, as of December 31, 2007 and $1,986, $1,586, and $0, respectively, as of December 31, 2006.
 
Components of Net Periodic Benefit Cost
 
Net periodic pension cost for the Company’s qualified and non-qualified defined benefit plans for the years ended December 31, 2007, 2006 and 2005 included the following components:
 
                         
    2007     2006     2005  
 
Service cost
  $ 204     $ 237     $ 177  
Interest cost
    330       314       298  
Expected return on plan assets
    (216 )     (193 )     (185 )
Net amortization
    112       155       142  
                         
    $ 430     $ 513     $ 432  
                         


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The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2007, 2006 and 2005 were as follows:
 
                         
    2007     2006     2005  
 
Discount rate to determine the net periodic benefit cost
    5.75 %     5.50 %     5.75 %
Expected long-term rate of return on plan assets used to determine net periodic pension cost
    7.00 %     7.00 %     7.00 %
Projected annual salary increases
    4.50 %     4.50 %     4.50 %
 
The qualified defined benefit plan assets were invested in the AIM Basic Balanced Fund (the “Fund”), the prospectus for which indicates an average annual return of approximately 7% since its inception; accordingly, a 7.00% rate of return was used to calculate the periodic benefit cost for 2007. The Fund normally invests at least 65% of its assets in equity securities and at least 30% of its assets in fixed income securities that are investment grade at the time of purchase. The remaining assets of the Fund are allocated to other investments at the Fund manager’s discretion, based upon current business, economic and market conditions.
 
The Company’s investment strategy with respect to pension assets is to invest the assets in accordance with ERISA and fiduciary standards. The long-term primary investment objectives are to: 1) provide for a reasonable amount of long-term growth of capital, without undue exposure to risk, and protect the assets from erosion of purchasing power, and 2) provide investment results that meet or exceed the actuarially assumed long-term rate of return. The Fund does not include any equity securities of the Company in its portfolio at any time.
 
Expected Cash Flows
 
The Company expects to contribute $299 for all defined benefit plans in 2008.
 
Estimated Future Benefit Payments
 
Estimated future benefit payments as of December 31, 2007 were as follows:
 
         
Pension Benefits
     
 
2008
  $ 224  
2009
  $ 224  
2010
  $ 258  
2011
  $ 289  
2012
  $ 317  
2013 — 2017
  $ 2,371  
 
Note 11.   Preferred Stock
 
The Company had 134,000 shares of Series B Preferred Stock (“Series B Preferred Stock”) outstanding at December 31, 2007 and 2006, having a stated value of $100 per share. All of the shares of Series B Preferred Stock are held by affiliates of the Company’s Chairman. Annual dividends on the Series B Preferred Stock are $9.00 per share and are cumulative. Dividends accrue whether or not declared by the Board of Directors. The Series B Preferred Stock is not currently convertible, but may become convertible into shares of the Company’s common stock under certain circumstances. In such event, the Series B Preferred Stock would be convertible into an aggregate of approximately 3,358,000 shares of the Company’s common stock at a conversion rate of $3.99 per share. The Series B Preferred Stock is redeemable solely at the option of the Company. As of December 31, 2007 and 2006, the Company had accrued but unpaid dividends on the Series B Preferred Stock of $14,472 and $13,266, respectively.
 
The Company had 7,000 shares of Series D Preferred Stock (“Series D Preferred Stock”) outstanding at December 31, 2007 and 2006. All of the shares of Series D Preferred Stock are held by affiliates of the Company’s Chairman. The outstanding shares of Series D Preferred Stock have a stated value of $100 per


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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 1,754,000 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. During 2007, the Company issued common stock in lieu of Series D Preferred Stock dividend payments of $0.6 million. Accordingly, as of December 31, 2007, the Company did not have any unpaid dividends on the Series D Preferred Stock. As of December 31, 2006, the Company had accrued but unpaid dividends on the Series D Preferred Stock of $127.
 
Note 12.   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, 2007  
                Per Share
 
    Income     Shares     Amount  
 
Basic Earnings Per Common Share
                       
Income from continuing operations before preferred stock dividends
  $ 11,585       21,606          
Less preferred stock dividends
    (1,691 )              
                         
Income from continuing operations applicable to common shareholders
    9,894       21,606     $ 0.46  
                         
Diluted Earnings Per Common Share
                       
Effect of dilutive stock options
          346          
                         
Income from continuing operations applicable to common shareholders
  $ 9,894       21,952     $ 0.45  
                         
 
                         
    For the Year Ended
 
    December 31,2006  
                Per Share
 
    Income     Shares     Amount  
 
Basic Earnings Per Common Share
                       
Income from continuing operations before preferred stock dividends
  $ 7,166       21,419          
Less preferred stock dividends
    (1,333 )              
                         
Income from continuing operations applicable to common shareholders
    5,833       21,419     $ 0.27  
                         
Diluted Earnings Per Common Share
                       
Effect of dilutive stock options
          330          
Effect of Series B and D Preferred Stock
    1,333       5,112          
                         
Income from continuing operations applicable to common shareholders
  $ 7,166       26,861     $ 0.27  
                         
 


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    For the Year Ended
 
    December 31, 2005  
                Per Share
 
    Income     Shares     Amount  
 
Basic and Diluted Loss Per Common Share
                       
Income from continuing operations before preferred stock dividends
  $ 1,132       21,305          
Less preferred stock dividends
    (1,206 )              
                         
Loss from continuing operations applicable to common shareholders
  $ (74 )     21,305     $  
                         
 
The assumed conversion of the Series B Preferred Stock was excluded from the earnings per common share calculation for 2007 and 2005 since its impact was antidilutive. The assumed conversion of the Series D Preferred Stock was excluded from the earnings per common share calculation for 2007 since its impact was antidilutive. In 2005, all outstanding stock options were excluded from the earnings per common share calculation since their impact was antidilutive.
 
Note 13.   Statutory Reporting
 
The assets, liabilities and results of operations have been reported on the basis of GAAP, which varies from statutory accounting practices (“SAP”) prescribed or permitted by insurance regulatory authorities. The principal differences between SAP and GAAP are that under SAP: (i) certain assets that are non-admitted assets are eliminated from the balance sheet; (ii) acquisition costs for policies are expensed as incurred, while they are deferred and amortized over the estimated life of the policies under GAAP; (iii) the provision that is made for deferred income taxes is different than under GAAP; (iv) the timing of establishing certain reserves is different than under GAAP; and (v) valuation allowances are established against investments.
 
The amount of statutory net income and surplus (shareholders’ equity) from continuing operations for the Parent’s insurance subsidiaries for the years ended December 31 were as follows:
 
                         
    2007     2006     2005  
 
Life and Health, net income
  $ 11,961     $ 3,173     $ 5,135  
Property and Casualty, net income
    8,466       5,955       6,410  
                         
Statutory net income(1)
  $ 20,427     $ 9,128     $ 11,545  
                         
Life and Health, surplus
  $ 33,810     $ 34,467     $ 33,881  
Property and Casualty, surplus
    38,213       34,938       31,041  
                         
Statutory surplus
  $ 72,023     $ 69,405     $ 64,922  
                         
 
 
(1) Automotive sector impairments of $7,198 were recorded in the first quarter of 2006 for statutory purposes.
 
Under the insurance code of the state of jurisdiction under which each insurance subsidiary operates, 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 $5,576, $7,786 and $11,942 in 2007, 2006, and 2005, respectively, from its subsidiaries. In 2008, dividend payments by insurance subsidiaries in excess of $13,263 would require prior approval.
 
Note 14.   Related Party and Other Transactions
 
In the normal course of business the Company has engaged in transactions with its Chairman and his affiliates from time to time. These transactions include the leasing of office space as well as certain investing and financing activities.

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The Company leases approximately 65,489 square feet of office and covered garage space from an entity which is an affiliate of the Company and its Chairman. During the years ended December 31, 2007, 2006, and 2005, the Company paid $1,066, $1,069 and $1,065, respectively, under these leases.
 
Certain financing for the Company has been provided by affiliates of the Company’s Chairman, in the form of investments in the Series B and the Series D Preferred Stock (See Note 11).
 
The Company has in the past made mortgage loans to finance properties owned by Leath Furniture, LLC (“Leath”), which, prior to July 11, 2006, was owned by an affiliate of the Chairman. At December 31, 2007 and 2006, the balance of mortgage loans owed by Leath to the Company’s insurance subsidiary was $0 and $1,378, respectively. For 2007, 2006, and 2005, interest paid by Leath on the mortgage loans totaled $79, $184, and $250, respectively.
 
In accordance with terms of the SPA with Columbia, certain investments held by the discontinued operations were required to be disposed of at any time prior to the completion of the sale. Effective November 30, 2007, an investment in a real estate joint venture was sold by Georgia Casualty to an affiliate of the Company’s Chairman. In connection with the sale, management obtained an independent appraisal of the underlying real estate assets. Further, subsequent to December 31, 2007, substantially all of the shares of Triple Crown Media, Inc. (“Triple Crown”) and Gray Television, Inc. (“Gray”) held by the discontinued operations were acquired by the Parent at their quoted or estimated market values.
 
Certain members of management are shareholders and on the Board of Directors of Triple Crown and Gray. On August 3, 2005, Gray announced a plan to spin-off its newspaper publishing and wireless businesses to its shareholders. The new company formed as a result of the spin-off, Triple Crown, then acquired Bull Run Corporation (“Bull Run”). In connection with the spin-off, the Company received one share of Triple Crown common stock for every ten shares of Gray common stock and for every ten shares of Gray Class A common stock owned. In connection with the Bull Run acquisition, the Company received 0.0289 shares of Triple Crown common stock for each share of Bull Run common stock owned by it and one share of Triple Crown Series A preferred stock for each share of Bull Run Series D preferred stock owned by it. The exchange of Bull Run Series D preferred stock for Triple Crown Series A preferred stock resulted in a realized loss of $591. At December 31, 2007 and 2006, the Company (including its discontinued operations) owned 54,732 shares of Triple Crown common stock, 388,060 shares of Gray Class A common stock and 106,000 shares of Gray common stock. At December 31, 2007, the Company (including its discontinued operations) owned 2,360 shares of Triple Crown Series A preferred stock. At December 31, 2006, the Company (including its discontinued operations) owned 175 shares of Gray Series C preferred stock and 2,360 shares of Triple Crown Series A preferred stock. On May 22, 2007, Gray Television redeemed the Company’s investment in Gray Television Series C preferred stock at a price of $10,000 per share plus accrued but unpaid dividends thereon. There was no gain or loss on the transaction. The aggregate carrying value of these investments in Triple Crown and Gray at December 31, 2007 was $1,642 and $4,149, respectively. The aggregate carrying value of these investments in Triple Crown and Gray at December 31, 2006 was $2,086 and $5,701, respectively.
 
In 1998, American Southern formed the American Auto Insurance Agency (the “Agency”) in a joint venture with Carolina Motor Club, Inc. to market personal automobile insurance to the members of the automobile club. American Southern at all times held a 50% interest in the joint venture, accounted for using the equity method and reflected as an operating activity, and underwrote a majority of the standard automobile business written by the Agency. This program, which began writing business in 1999, had gross written premiums of approximately $0, $2,550 and $8,615 in 2007, 2006, and 2005, respectively. The Company has, in the past funded its pro rata share of operations. Effective October 1, 2005, this joint venture was terminated due to unfavorable underwriting results and, consequently, a significant decrease in gross written premiums occurred during 2006.
 
Note 15.   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


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insurance market, while Bankers Fidelity operates in the Life and Health insurance market. All segments derive 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
    Bankers
    Corporate
    Discontinued
    Adjustments
       
    Southern     Fidelity     & Other     Operations     & Eliminations     Consolidated  
 
December 31, 2007
                                               
Insurance premiums
  $ 41,575     $ 56,249     $             $     $ 97,824  
                                                 
Insurance benefits and losses incurred
    18,399       40,302                           58,701  
Expenses deferred
    (8,398 )     (1,333 )                         (9,731 )
Amortization and depreciation expense
    9,460       1,767                           11,227  
Other expenses
    18,123       17,817       16,515               (8,778 )     43,677  
                                                 
Total expenses
    37,584       58,553       16,515               (8,778 )     103,874  
                                                 
Underwriting income (loss)
    3,991       (2,304 )                                
Investment income, including net realized gains
    5,450       18,351       4,372               (3,824 )     24,349  
Other income
    21       58       5,674               (4,954 )     799  
                                                 
Income (loss) from continuing operations before income taxes
  $ 9,462     $ 16,105     $ (6,469 )           $     $ 19,098  
                                                 
Total revenues
  $ 47,046     $ 74,658     $ 10,046             $ (8,778 )   $ 122,972  
                                                 
Goodwill
  $ 1,350     $ 778     $ 260             $     $ 2,388  
                                                 
Total assets
  $ 116,473     $ 129,968     $ 110,465     $ 196,154     $ (94,806 )   $ 458,254  
                                                 
 
                                                 
    American
    Bankers
    Corporate
    Discontinued
    Adjustments
       
    Southern     Fidelity     & Other     Operations     & Eliminations     Consolidated  
 
December 31, 2006
                                               
Insurance premiums
  $ 50,660     $ 58,920     $             $     $ 109,580  
                                                 
Insurance benefits and losses incurred
    23,440       42,020                           65,460  
Expenses deferred
    (11,087 )     (677 )                         (11,764 )
Amortization and depreciation expense
    12,523       2,045                           14,568  
Other expenses
    21,092       17,301       17,710               (8,633 )     47,470  
                                                 
Total expenses
    45,968       60,689       17,710               (8,633 )     115,734  
                                                 
Underwriting income (loss)
    4,692       (1,769 )                                
Investment income, including net realized gains
    5,914       8,450       4,341               (3,695 )     15,010  
Other income
    19       73       5,614               (4,938 )     768  
                                                 
Income (loss) from continuing operations before income taxes
  $ 10,625     $ 6,754     $ (7,755 )           $     $ 9,624  
                                                 
Total revenues
  $ 56,593     $ 67,443     $ 9,955             $ (8,633 )   $ 125,358  
                                                 
Goodwill
  $ 1,350     $ 778     $ 880             $     $ 3,008  
                                                 
Total assets
  $ 122,292     $ 128,246     $ 113,837     $ 194,248     $ (99,471 )   $ 459,152  
                                                 
 


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    American
    Bankers
    Corporate
    Discontinued
    Adjustments
       
    Southern     Fidelity     & Other     Operations     & Eliminations     Consolidated  
 
December 31, 2005
                                               
Insurance premiums
  $ 51,447     $ 65,904     $             $     $ 117,351  
                                                 
Insurance benefits and losses incurred
    24,827       46,374                           71,201  
Expenses deferred
    (12,582 )     (709 )                         (13,291 )
Amortization and depreciation expense
    12,715       2,401                           15,116  
Other expenses
    23,200       17,981       16,326               (7,938 )     49,569  
                                                 
Total expenses
    48,160       66,047       16,326               (7,938 )     122,595  
                                                 
Underwriting income (loss)
    3,287       (143 )                                
Investment income, including net realized gains
    4,818       5,816       3,072               (2,983 )     10,723  
Automotive sector investments impairment charge
    (3,733 )     (3,465 )                         (7,198 )
Other income
    393             5,667               (4,955 )     1,105  
                                                 
Income (loss) from continuing operations before income taxes
  $ 4,765     $ 2,208     $ (7,587 )           $     $ (614 )
                                                 
Total revenues
  $ 52,925     $ 68,255     $ 8,739             $ (7,938 )   $ 121,981  
                                                 
Goodwill
  $ 1,350     $ 778     $ 880             $     $ 3,008  
                                                 
Total assets
  $ 123,919     $ 128,225     $ 99,663     $ 201,745     $ (92,186 )   $ 461,366  
                                                 
 
Note 16.   Disclosures About Fair Value of Financial Instruments
 
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. 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.
 
                                 
    2007     2006  
    Carrying
    Estimated
    Carrying
    Estimated
 
    Amount     Fair Value     Amount     Fair Value  
 
Assets:
                               
Cash and cash equivalents, including short-term investments
  $ 36,909     $ 36,909     $ 17,606     $ 17,606  
Fixed maturities
    167,927       167,927       164,382       164,382  
Common and non-redeemable preferred stocks
    5,335       5,335       22,476       22,476  
Mortgage loans
                1,379       1,564  
Policy and student loans
    1,958       1,958       1,949       1,949  
Other invested assets
    1,563       1,563       1,735       1,735  
Real estate
    38       38       38       38  
Investments in unconsolidated trusts
    1,238       1,238       1,238       1,238  
Liabilities:
                               
Debt payable to bank
    12,750       12,750       12,750       12,750  
Junior Subordinated Debentures
    41,238       41,238       41,238       41,238  
 
The fair value estimates as of December 31, 2007 and 2006 were based on pertinent information available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, current estimates of fair value may differ significantly from amounts that might ultimately be realized.

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The following describes the methods and assumptions used by the Company in estimating fair values:
 
Cash and Cash Equivalents, including Short-term Investments
 
The carrying amount approximates fair value due to the short-term nature of the instruments.
 
Fixed Maturities, Common and Non-Redeemable Preferred Stocks and Publicly Traded Other Invested Assets
 
The carrying amount is determined in accordance with methods prescribed by the NAIC, which do not differ materially from nationally quoted market prices. Certain non-redeemable preferred stocks that do not have quoted values are carried at estimated fair value as determined by management.
 
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.
 
Mortgage Loans
 
The fair values are estimated based on quoted market prices for those or similar investments.
 
Debt Payable and Junior Subordinated Debentures
 
The fair value is estimated based on the quoted market prices for the same or similar issues or on the current rates offered for debt having the same or similar returns and remaining maturities.
 
Note 17.   Reconciliation of Other Comprehensive Income (Loss)
 
The Company’s comprehensive income (loss) consists of net income (loss), unrealized gains and losses on securities available for sale, fair value adjustments from the ownership of a derivative financial instrument and minimum additional pension liability, net of applicable income taxes. Other than net income (loss), the other components of comprehensive income (loss) for the years ended December 31, 2007, 2006 and 2005 were as follows:
 
                         
    December 31,  
    2007     2006     2005  
 
Net realized gains (losses) on investment securities included in income (loss) from continuing operations
  $ 12,627     $ 3,084     $ (7,303 )
Net realized gains (losses) on investment securities included in income (loss) from discontinued operations
    3,225       3,607       (3,153 )
                         
Total net realized gains (losses) on investment securities included in net income (loss)
  $ 15,852     $ 6,691     $ (10,456 )
                         
Other components of comprehensive income (loss):
                       
Net pre-tax unrealized gains (losses) on investment securities arising during year
  $ (3,697 )   $ 6,031     $ (17,005 )
Reclassification adjustment for net realized (gains) losses on investment securities
    (15,852 )     (6,691 )     10,456  
                         
Net pre-tax unrealized gains (losses) on investment securities recognized in other comprehensive income (loss)
    (19,549 )     (660 )     (6,549 )
Fair value adjustment to derivative financial instrument
    (575 )     (165 )      
Minimum pension liability adjustment
    312       (928 )     (160 )
Deferred income tax attributable to other comprehensive income (loss)
    6,934       614       2,348  
                         
    $ (12,878 )   $ (1,139 )   $ (4,361 )
                         


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Note 18.   Quarterly Financial Information (Unaudited)
 
The following table sets forth a summary of the quarterly unaudited results of operations for the two years in the period ended December 31, 2007:
 
                                                                 
    2007     2006  
    First
    Second
    Third
    Fourth
    First
    Second
    Third
    Fourth
 
    Quarter     Quarter     Quarter     Quarter     Quarter     Quarter     Quarter     Quarter  
 
Revenue
  $ 28,287     $ 27,753     $ 28,516     $ 38,416(1 )   $ 32,936     $ 30,789     $ 30,449     $ 31,184  
                                                                 
Income from continuing operations before income taxes
  $ 891     $ 1,305     $ 2,432     $ 14,470     $ 2,652     $ 1,703     $ 2,333     $ 2,936  
Income tax expense
    475       686       656       5,696       956       787       471       244  
                                                                 
Income from continuing operations
    416       619       1,776       8,774       1,696       916       1,862       2,692  
Income (loss) from discontinued operations, net of tax
    435       (185 )     30       (4,613 )     1,798       (1,175 )     875       272  
                                                                 
Net income (loss)
  $ 851     $ 434     $ 1,806     $ 4,161     $ 3,494     $ (259 )   $ 2,737     $ 2,964  
                                                                 
Per common share data:
                                                               
Income from continuing operations
  $     $ 0.01     $ 0.06     $ 0.38     $ 0.07     $ 0.03     $ 0.07     $ 0.11  
Discontinued operations
    0.02       (0.01 )           (0.21 )     0.08       (0.06 )     0.04       0.01  
                                                                 
Basic income (loss) per share
  $ 0.02     $     $ 0.06     $ 0.17     $ 0.15     $ (0.03 )   $ 0.11     $ 0.12  
                                                                 
Income from continuing operations
  $     $ 0.01     $ 0.06     $ 0.32     $ 0.07     $ 0.03     $ 0.07     $ 0.10  
Discontinued operations
    0.02       (0.01 )           (0.17 )     0.07       (0.06 )     0.03       0.01  
                                                                 
Diluted income (loss) per share
  $ 0.02     $     $ 0.06     $ 0.15     $ 0.14     $ (0.03 )   $ 0.10     $ 0.11  
                                                                 
 
(1) Includes a $12.9 million realized gain from the disposition of the Company’s investment in equity securities of Wachovia Corporation in the fourth quarter of 2007.


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Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
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-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of that date.
 
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. An internal control system over financial reporting 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 misstatements. Also, projections of any evaluation of effectiveness to 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, 2007 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this 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, 2007.
 
There have been no changes in our internal control over financial reporting that occurred during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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 temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report on this Annual Report.
 
Item 9b.   Other Information
 
None.
 
PART III
 
With the exception of 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, which is included in Part II, Item 5 hereof, and the information relating to the Company’s Code of Ethics, which is included below, all information required by Part III (Items 10, 11, 12, 13 and 14) 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 to be filed with the SEC within 120 days of the Company’s fiscal year end and delivered in connection with the Company’s Annual Meeting of Shareholders to be held on May 6, 2008.


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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 the Company’s annual report on Form 10-K for the year ended December 31, 2003 and is incorporated herein by this reference.
 
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 Registrant
 
Schedule III — Supplementary insurance information for the three years ended December 31, 2007
 
Schedule IV — Reinsurance for the three years ended December 31, 2007
 
  Schedule VI — Supplemental information concerning property-casualty insurance operations for the three years ended December 31, 2007
 
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, 2002].    
  3 .1.1     Amendment to Restated Articles of Incorporation of the registrant, as amended [incorporated by reference to Exhibit 3.1 to the registrant’s Form 8-K dated October 4, 2006].    
  3 .2     Bylaws of the registrant [incorporated by reference to Exhibit 3.2 to the registrant’s Form 10-K for the year ended December 31, 1993].    
  3 .2.1     Amendment of Bylaws of the registrant, effective as of February 22, 2007 [incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K dated February 28, 2007].    
  10 .01     Management Agreement between registrant and Georgia Casualty & Surety Company dated April 1, 1983 [incorporated by reference to Exhibit 10.16 to the registrant’s Form 10-K for the year ended December 31, 1986].    
  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].    
  10 .03     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 .04**     Atlantic American Corporation 1992 Incentive Plan [incorporated by reference to Exhibit 4 to the registrant’s Form S-8 filed on November 1, 1999].    
  10 .05**     Atlantic American Corporation 1996 Director Stock Option Plan [incorporated by reference to Exhibit 4 to the registrant’s Form S-8 filed on November 1, 1999].    
  10 .06**     Atlantic American Corporation 2002 Stock Incentive Plan [incorporated by reference to Exhibit 4.1 to the registrant’s Form S-8 filed on August 2, 2002].    


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  10 .07**     Summary Terms of Consulting Arrangement between Atlantic American Corporation and Samuel E. Hudgins, entered into in June 2002 [incorporated by reference to Exhibit 10.23 to the registrant’s Form 10-K for the year ended December 31, 2002].    
  10 .08     Credit Agreement, dated as of December 22, 2006 between Atlantic American Corporation and Wachovia Bank, National Association [incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K dated December 22, 2006].    
  10 .09     Stock Purchase Agreement, dated as of December 26, 2007 between Atlantic American Corporation and Columbia Mutual Insurance Company.    
  10 .10     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.    
  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 Seidman 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.    
 
* The registrant agrees to furnish to the Commission upon request a copy of any instruments defining the rights of securityholders 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.

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SIGNATURES
 
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.
 
(Registrant) ATLANTIC AMERICAN CORPORATION
 
  By: 
/s/  John G. Sample, Jr.
John G. Sample, Jr.
Senior Vice President and Chief Financial Officer
 
Date: March 31, 2008
 
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/  J. Mack Robinson

J. Mack Robinson
  Chairman of the Board   March 31, 2008
         
/s/  Hilton H. Howell, Jr.

Hilton H. Howell, Jr.
  President, Chief Executive Officer and Director (Principal Executive Officer)   March 31, 2008
         
/s/  John G. Sample, Jr.

John G. Sample, Jr.
  Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)   March 31, 2008
         
/s/  Edward E. Elson

Edward E. Elson
  Director   March 31, 2008
         
/s/  Samuel E. Hudgins

Samuel E. Hudgins
  Director   March 31, 2008
         
/s/  D. Raymond Riddle

D. Raymond Riddle
  Director   March 31, 2008
         
/s/  Harriett J. Robinson

Harriett J. Robinson
  Director   March 31, 2008
         
/s/  Scott G. Thompson

Scott G. Thompson
  Director   March 31, 2008
         
/s/  Mark C. West

Mark C. West
  Director   March 31, 2008


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Signature
 
Title
 
Date
 
         
/s/  William H. Whaley, M.D.

William H. Whaley, M.D.
  Director   March 31, 2008
         
/s/  Dom H. Wyant

Dom H. Wyant
  Director   March 31, 2008
         
/s/  Harold K. Fischer

Harold K. Fischer
  Director   March 31, 2008


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SCHEDULE II
Page 1 of 3
 
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
 
BALANCE SHEETS
 
                 
    December 31,  
    2007     2006  
    (In thousands)  
 
ASSETS
Cash and short-term investments
  $ 9,220     $ 9,388  
Investment in subsidiaries
    94,654       99,294  
Investments in unconsolidated trusts
    1,238       1,238  
Deferred tax asset, net
    3,268       967  
Income taxes receivable from subsidiaries
    4,888       1,386  
Other assets
    1,380       1,742  
Net investment in discontinued operations
    43,807       50,788  
                 
Total assets
  $ 158,455     $ 164,803  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other payables
  $ 16,673     $ 16,627  
Debt payable to bank
    12,750       12,750  
Junior subordinated debentures
    41,238       41,238  
                 
Total liabilities
    70,661       70,615  
Shareholders’ equity
    87,794       94,188  
                 
Total liabilities and shareholders’ equity
  $ 158,455     $ 164,803  
                 


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SCHEDULE II
Page 2 of 3
 
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
 
STATEMENTS OF OPERATIONS
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (In thousands)  
 
REVENUE
                       
Fees, rentals and interest income from subsidiaries
  $ 4,954     $ 4,939     $ 4,948  
Distributed earnings from subsidiaries
    5,576       7,786       11,942  
Other
    656       745       188  
                         
Total revenue
    11,186       13,470       17,078  
GENERAL AND ADMINISTRATIVE EXPENSES
    7,429       8,989       9,281  
INTEREST EXPENSE
    4,160       4,605       3,611  
                         
      (403 )     (124 )     4,186  
INCOME TAX BENEFIT(1)
    526       997       6,085  
                         
      123       873       10,271  
EQUITY IN UNDISTRIBUTED EARNINGS (LOSSES) OF CONTINUING OPERATIONS, NET
    11,462       6,293       (9,139 )
EQUITY IN EARNINGS (LOSSES) OF DISCONTINUED OPERATIONS, NET
    (4,333 )     1,770       (4,307 )
                         
NET INCOME (LOSS)
  $ 7,252     $ 8,936     $ (3,175 )
                         
 
(1) Under the terms of its tax-sharing agreement with its subsidiaries, income tax provisions for the individual companies are computed on a separate company basis. Accordingly, the Company’s income tax benefit results from the utilization of the parent company separate return loss to reduce the consolidated taxable income of the Company and its subsidiaries.


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SCHEDULE II
Page 3 of 3
 
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
ATLANTIC AMERICAN CORPORATION
(Parent Company Only)
 
STATEMENTS OF CASH FLOWS
 
                         
    Year Ended December 31,  
    2007     2006     2005  
    (In thousands)  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 7,252     $ 8,936     $ (3,175 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Realized investment gains
    (533 )     (439 )     (72 )
Depreciation and amortization
    702       692       776  
Compensation expense related to share awards
    68       70       65  
Equity in undistributed (earnings) losses of continuing operations
    (11,462 )     (6,293 )     9,139  
Equity in (earnings) losses of discontinued operations
    4,333       (1,770 )     4,307  
(Increase) decrease in intercompany taxes
    (3,502 )     1,696       (663 )
Deferred income tax expense (benefit)
    3,711       981       (2,959 )
(Decrease) increase in other liabilities
    (1,607 )     291       406  
Other, net
    249       163       217  
                         
Net cash (used in ) provided by operating activities
    (789 )     4,327       8,041  
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Capital contribution to subsidiaries
                (50 )
Additions to property and equipment
    (411 )     (173 )     (153 )
                         
Net cash used in investing activities
    (411 )     (173 )     (203 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Proceeds from issuance of Series D Preferred Stock
          7,000        
Purchase of treasury shares
    (23 )     (70 )     (132 )
Proceeds from bank financing
    36,000       15,750        
Repayments of debt
    (36,000 )     (13,250 )     (1,750 )
Proceeds from exercise of stock options
    19       16       34  
Financing of discontinued operations
    1,036       (6,560 )     (4,200 )
                         
Net cash provided by (used in) financing activities
    1,032       2,886       (6,048 )
                         
Net (decrease) increase in cash
    (168 )     7,040       1,790  
Cash at beginning of year
    9,388       2,348       558  
                         
Cash at end of year
  $ 9,220     $ 9,388     $ 2,348  
                         
Supplemental disclosure:
                       
Cash paid for interest
  $ 4,195     $ 4,711     $ 3,470  
                         
Cash (received) paid for income taxes
  $ 450     $ (76 )   $ 300  
                         


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Table of Contents

SCHEDULE III
Page 1 of 2
 
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
 
SUPPLEMENTARY INSURANCE INFORMATION
 
                                 
          Future Policy
             
          Benefits, Losses,
          Other Policy
 
    Deferred
    Claims and Loss
    Unearned
    Claims and
 
Segment
  Acquisition Costs     Reserves     Premiums     Benefits Payable  
    (In thousands)  
 
December 31, 2007:
                               
Bankers Fidelity
  $ 15,644     $ 63,258     $ 3,332     $ 1,878  
American Southern
    3,186       43,994       15,616        
                                 
    $ 18,830     $ 107,252 (1)   $ 18,948     $ 1,878  
                                 
December 31, 2006:
                               
Bankers Fidelity
  $ 16,024     $ 61,655     $ 3,494     $ 1,816  
American Southern
    4,194       45,655       21,696        
                                 
    $ 20,218     $ 107,310 (2)   $ 25,190     $ 1,816  
                                 
December 31, 2005:
                               
Bankers Fidelity
  $ 16,957     $ 61,580     $ 4,011     $ 2,445  
American Southern
    5,194       43,593       26,185        
                                 
    $ 22,151     $ 105,173 (3)   $ 30,196     $ 2,445  
                                 
 
(1) Includes future policy benefits of $55,548 and losses and claims of $51,704.
 
(2) Includes future policy benefits of $52,019 and losses and claims of $55,291.
 
(3) Includes future policy benefits of $51,356 and losses and claims of $53,817.


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Table of Contents

SCHEDULE III
Page 2 of 2
 
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
 
SUPPLEMENTARY INSURANCE INFORMATION
 
                                                 
                Benefits,
    Amortization
             
          Net
    Claims, Losses
    of Deferred
    Other
    Casualty
 
    Premium
    Investment
    and Settlement
    Acquisition
    Operating
    Premiums
 
Segment
  Revenue     Income     Expenses     Costs     Expenses     Written  
    (In thousands)  
 
December 31, 2007:
                                               
Bankers Fidelity
  $ 56,249     $ 6,091     $ 40,302     $ 1,713     $ 16,538     $  
American Southern
    41,575       5,497       18,399       9,406       9,779       35,972  
Other
          15                   7,737        
                                                 
    $ 97,824     $ 11,603     $ 58,701     $ 11,119     $ 34,054     $ 35,972  
                                                 
December 31, 2006:
                                               
Bankers Fidelity
  $ 58,920     $ 6,097     $ 42,020     $ 1,610     $ 17,059     $  
American Southern
    50,660       5,516       23,440       12,087       10,441       46,274  
Other
          209                   9,077        
                                                 
    $ 109,580     $ 11,822     $ 65,460     $ 13,697     $ 36,577     $ 46,274  
                                                 
December 31, 2005:
                                               
Bankers Fidelity
  $ 65,904     $ 5,866     $ 46,374     $ 1,927     $ 17,746     $  
American Southern
    51,447       4,821       24,827       12,240       11,093       52,983  
Other
          15                   8,388        
                                                 
    $ 117,351     $ 10,702     $ 71,201     $ 14,167     $ 37,227     $ 52,983  
                                                 


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Table of Contents

SCHEDULE IV
 
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
 
REINSURANCE
 
                                         
          Ceded To
    Assumed
          Percentage of
 
    Direct
    Other
    From Other
    Net
    Amount Assumed
 
    Amount     Companies     Companies     Amounts     To Net  
    (In thousands)  
 
Year ended December 31, 2007:
                                       
Life insurance in force
  $ 272,308     $ (36,543 )   $     $ 235,765          
                                         
Premiums —
                                       
Bankers Fidelity
  $ 56,340     $ (350 )   $ 259     $ 56,249       0.5 %
American Southern
    38,381       (6,856 )     10,050       41,575       24.2 %
                                         
Total premiums
  $ 94,721     $ (7,206 )   $ 10,309     $ 97,824       10.5 %
                                         
Year ended December 31, 2006:
                                       
Life insurance in force
  $ 269,306     $ (37,238 )   $     $ 232,068          
                                         
Premiums —
                                       
Bankers Fidelity
  $ 58,692     $ (73 )   $ 301     $ 58,920       0.5 %
American Southern
    50,599       (9,369 )     9,430       50,660       18.6 %
                                         
Total premiums
  $ 109,291     $ (9,442 )   $ 9,731     $ 109,580       8.9 %
                                         
Year ended December 31, 2005:
                                       
Life insurance in force
  $ 276,996     $ (33,025 )   $     $ 243,971          
                                         
Premiums —
                                       
Bankers Fidelity
  $ 65,734     $ (191 )   $ 361     $ 65,904       0.5 %
American Southern
    51,935       (9,028 )     8,540       51,447       16.6 %
                                         
Total premiums
  $ 117,669     $ (9,219 )   $ 8,901     $ 117,351       7.6 %
                                         


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Table of Contents

SCHEDULE VI
 
ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
 
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
 
                                                                                 
                                  Claims and Claim
          Paid
       
                                  Adjustment Expenses
    Amortization
    Claims
       
    Deferred
                      Net
    Incurred Related To     of Deferred
    and Claim
       
    Policy
          Unearned
    Earned
    Investment
    Current
    Prior
    Acquisition
    Adjustment
    Premiums
 
Year Ended
  Acquisition     Reserves     Premium     Premium     Income     Year     Years     Costs     Expenses     Written  
    (In thousands)  
 
December 31, 2007
  $ 3,186     $ 43,994     $ 15,616     $ 41,575     $ 5,497     $ 27,009     $ (8,610 )   $ 9,406     $ 20,723     $ 35,972  
                                                                                 
December 31, 2006
  $ 4,194     $ 45,655     $ 21,696     $ 50,660     $ 5,516     $ 30,174     $ (6,734 )   $ 12,087     $ 20,815     $ 46,274  
                                                                                 
December 31, 2005
  $ 5,194     $ 43,593     $ 26,185     $ 51,447     $ 4,821     $ 30,037     $ (5,210 )   $ 12,240     $ 23,513     $ 52,983  
                                                                                 


VI-1