UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

 

Form 10-K

 

 

Commission File Number: 0-6334

 

ASSURANCEAMERICA CORPORATION

 

 

Registrant’s telephone number, including area code:

(770) 952-0200

 

Securities registered under Section 12(b) of the Exchange Act:
None

 

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share

 

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 Form 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):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes o     No þ

 

The aggregate market value of the voting and non-voting common equity held by persons other than affiliates of the registrant as of June 30, 2008 was $7,858,577 based on a sale price of $.45 per share.

 

There were 65,176,103 shares of the registrant’s common stock outstanding as of March 15, 2009.

 

Documents Incorporated By Reference

 

Parts of the Registrant’s definitive proxy statement for the 2009 Annual Meeting of Shareholders to be held on April 30, 2009 are incorporated by reference into Part III of this report.

 

 

TABLE OF CONTENTS

 

 

Statements in this report that are not historical fact are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed in this report. The risks and uncertainties include, without limitation, uncertainties related to estimates and assumptions generally; inflation and other changes in economic conditions (including changes in interest rates and financial markets); pricing competition and other initiatives by competitors; ability to obtain regulatory approval for requested rate changes and the timing thereof; legislative and regulatory developments; risks related to the nature of the Company’s business, such as the adequacy of its reserve for loss and loss adjustment expense; claims experience; losses; reliance on key personnel; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail); changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs; and other matters described from time to time by the Company in this report. In addition, you should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods.

 

 

History

 

AssuranceAmerica Corporation, a Nevada corporation (the “Company”) (formerly Brainworks Ventures, Inc.), is an insurance holding company that was originally incorporated in 1969 under the laws of the state of Utah. AssuranceAmerica Corporation, a Georgia corporation (“AssuranceAmerica Georgia”), began the Company’s current insurance business in 1998 through its subsidiary, TrustWay Insurance Agencies, LLC (“TrustWay”), a Delaware limited liability company (formerly AssetAmerica Insurance Agencies, LLC). In 1999, the Company formed another subsidiary, AssuranceAmerica Managing General Agency LLC (“MGA”), a Delaware limited liability company, that until 2003 provided all of the underwriting, claims and policyholder service functions for the Georgia nonstandard personal automobile program for Gateway Insurance Company of St. Louis, Missouri. In late 2002, the Company formed its subsidiary AssuranceAmerica Insurance Company (“AAIC”), a property and casualty insurance company and South Carolina corporation that focuses on writing nonstandard automobile business and other specialty products.

 

On April, 1, 2003, the Company, then known as Brainworks Ventures, Inc., consummated a merger with AssuranceAmerica Georgia. To effect the merger, AA Holdings, LLC, a Delaware limited liability company, merged with and into AssuranceAmerica Georgia for the purpose of converting the limited liability company into a corporation. Thereafter, pursuant to an Agreement and Plan of Merger and Reorganization by and among the Company, AAHoldings Acquisition Sub, Inc., AAHoldings, LLC and AssuranceAmerica Georgia, dated April 1, 2003 (the “Merger Agreement”), the shareholders of AssuranceAmerica Georgia exchanged an aggregate of 19,508,902 shares of AssuranceAmerica Georgia common stock, no par value, on a 1-for-1 basis, for shares of common stock, $0.01 par value per share, of the Company (“Company Common Stock”). Due to an insufficient number of authorized shares of Company Common Stock, the shareholders of AssuranceAmerica Georgia continued to hold an aggregate of 23,241,098 shares of series A convertible preferred stock, no par value, of AssuranceAmerica Georgia (“AssuranceAmerica Georgia Preferred Stock”), which stock, pursuant to the terms of the Merger Agreement, was converted into shares of Company Common Stock when the authorized number of shares of Company Common Stock was increased to a number sufficient to exchange each share of AssuranceAmerica Georgia Preferred Stock for one share of Company Common Stock. Upon conversion, the former shareholders of AssuranceAmerica Georgia held a total of 42,790,000 shares of Company Common Stock. Such conversion occurred simultaneously with the increase in the number of authorized shares of Company Common Stock. A special meeting of the shareholders of the Company was held on June 26, 2003, to vote upon a proposal to increase the number of authorized shares of Company Common Stock to permit such conversion of the AssuranceAmerica Preferred Stock. The proposal was approved by the Company’s shareholders. The Merger Agreement also effected a change in the executive officers of the Company and a majority change in the Board of Directors of the Company. As a result of the merger, the Company ceased its historical business in order to focus upon the insurance business of AssuranceAmerica Georgia.

 

Who We Are

 

We are a holding company which, through our wholly-owned insurance company, managing general agency, and retail agency network, underwrites and distributes primarily non-standard personal automobile insurance products to individuals. The Company offers Non-standard personal automobile insurance and is provided to insureds who are unable to obtain standard insurance coverage because of their payment history, driving record, age, vehicle type, or other factors. These policies generally require higher premiums than standard policies for comparable coverage. We offer products in nine states, including Georgia, South Carolina, Florida, Louisiana, Texas, Alabama, Arizona, Indiana and Mississippi.

 

We began our current insurance business in 1998 through the acquisition of a series of retail insurance agencies located in Florida now known as TrustWay. In 1999, we organized MGA, which initially provided all of the underwriting, claims and policyholder service functions for the Georgia non-standard personal automobile program for an unaffiliated insurance company. In late 2002, we organized AAIC, which began underwriting non-standard personal automobile policies in April 2003 and currently writes business in Georgia, South Carolina, Florida, Louisiana, Texas, Alabama, Arizona, Indiana and Mississippi.

Our Business

 

We currently have three revenue producing operating subsidiaries, the combination of which we believe is vital to generating consistent profitability throughout the insurance cycle: AAIC, MGA and TrustWay. AAIC and MGA constitute what we refer to as our wholesale operations, while TrustWay constitutes what we refer to as our retail operations. We believe that this structure allows us to manage our growth strategies and respond to changing market conditions more effectively than if we were only a risk-bearing enterprise or only a distribution platform.

 

The following chart depicts our organizational structure and principal affiliates.

 

 

AAIC is a property and casualty insurance company domiciled in South Carolina that focuses on writing non-standard automobile business. It is also licensed to underwrite business in West Virginia, Pennsylvania, Illinois, Tennessee, Missouri, Virginia and Arkansas. Currently, AAIC is not writing in these states, but we expect to begin writing business in the new states, provided that the underwriting environment remains positive and the capital and surplus of AAIC supports such growth. AAIC cedes approximately 70% of its gross written premiums to five reinsurers, four of which are rated A- or better by A.M. Best and one of which is not formally followed by A.M. Best.

 

MGA markets AAIC’s policies through more than 2000 independent insurance agencies. MGA provides all of the underwriting, accounting, product management, legal, policyholder administration and claims functions for AAIC and for two unaffiliated insurers of the non-standard automobile insurance policies, which are produced by MGA in Florida and Texas. MGA receives commissions and other administrative fees from AAIC and the unaffiliated insurance companies based on the amount of gross premiums produced for each respective company. Additionally, MGA receives various fees related to insurance transactions that vary according to state insurance laws and regulations.

 

TrustWay is comprised of 46 retail insurance agencies with 38 locations in Florida, five locations in Alabama, and three locations in Georgia. TrustWay has been appointed by a number of unaffiliated insurance carriers and AAIC, and primarily sells non-standard personal automobile insurance and related products and services. TrustWay receives commissions and various fees associated with the sale of the products and services from its appointing insurance carriers.

 

Our Industry

 

Personal auto insurance is the largest line of property and casualty insurance in the United States. In 2008, this market was estimated to be $164.1 billion by the National Association of Insurance Commissioners (“NAIC”) Market Share Reports. Personal auto insurance provides coverage to drivers for liability to others for both bodily injury and property damage and for physical damage to an insured’s vehicle from collision and other perils. Personal auto insurance is comprised of preferred, standard and non-standard risks. Non-standard insurance is intended for drivers who, due to their driving record, age, vehicle type, payment history or other factors represent a higher than

normal risk. As a result, customers that purchase non-standard auto insurance generally pay higher premiums for similar coverage than drivers who qualify for standard or preferred policies.

 

While there is no established industry-recognized demarcation between non-standard policies and all other personal auto policies, we believe that non-standard auto risks or specialty auto risks generally constitute approximately 15-20% of the overall personal automobile insurance market, with the exact percentage fluctuating according to competitive conditions in the market.

 

The personal auto insurance industry is cyclical, characterized by periods of price competition and excess capacity followed by periods of high premium rates and shortages of underwriting capacity. When underwriting standards for preferred and standard companies become more restrictive, more insureds seek non-standard coverage and the size of the non-standard market increases.

 

Our Products

 

Our non-standard insurance products provide customers with coverage for the minimum required statutory limits for bodily injury and property damage liability arising out of the operation of a motor vehicle. We also offer insurance coverage that affords protection for collision and physical damage to the insureds’ motor vehicles, bodily injury and property damage caused by uninsured motorists, medical payments, towing and labor, and accidental death and dismemberment.

 

Target Market

 

The typical purchaser of non-standard personal automobile insurance is highly sensitive to price and payment terms, but generally insensitive to insurer ratings. AAIC is not rated by A.M. Best. Our insureds typically purchase insurance from AAIC or one of its competitors because of a lack of other coverage options and will switch to a standard provider when able. Generally, the resulting customer non-renewals have historically been more than offset by new customers entering our markets.

 

Our market has a significant Hispanic component. This market demographic is prominent in the southeast and, as of December 31, 2008, represents approximately 20% of our policies in force.

 

Wholesale Operations

 

Our wholesale operations are divided into four primary functional areas: Claims, Underwriting and Customer Service, Information Technology, and Product Development and Management.

 

Claims

 

AAIC seeks to pay the claims it owes in a fast, fair manner and strives to have the lowest cycle time for non-contested claims (the period of time from the initial claim report to settlement) in the industry. The non-standard personal automobile insurance market experiences a higher level of fraudulent or inflated claims than the standard or preferred market. Our Claims Division takes a hard stance on the claims AAIC does not owe and works to develop a reputation as a carrier that will aggressively fight such inflated or fraudulent claims. In order to accomplish these objectives, the Claims Division seeks the highest caliber associate, paying above prevailing market rates in order to attract and retain experienced professionals in every area of the Claims Division.

 

All claims are assigned to experienced claims personnel, and the files are directed immediately to handling adjusters to reduce cycle time. The Claims Division is organized into various units to provide efficient file handling capability.

 

We make an effort to keep the file pending levels for our adjusters at below industry standards to reduce errors. All adjuster authority levels are determined based on the experience of the particular adjuster. We have formalized reserving and audit processes, conduct periodic file audits, conduct a monthly reserve reconciliation process and a complete periodic review of every pending file.

The Claims Division has a state of the art web-based claims system which is instrumental in increasing productivity by streamlining the claims processes, and it provides a competitive advantage by utilizing immediate, real-time data for evaluation purposes and allowing the exchange of information with fraud fighting agencies.

 

Underwriting and Customer Service

 

The Underwriting and Customer Service Division services the needs of our agents and insureds. A number of the Customer associates are bilingual and work predominately on a Spanish call line providing service to our Spanish-speaking agents and insureds.

 

We emphasize the use of automation wherever possible to minimize costs. We have a phone messaging system that telephones policyholders to remind them of payments due and of pending cancellations. We send agents copies of policyholder notices electronically instead of mailing them and agents can apply payments and process their own policy changes online, reducing the time spent by Customer Service performing these activities.

 

Product Development and Management

 

The Product Development and Management Division designs and prices each insurance product we offer, assists in the introduction of each new product to the agency force, monitors each product, and recommends rate changes, policy payment plans, new insurance coverages and variables. This division uses our data warehouse to analyze and follow each product from the point of sale through termination and claims settlement, if any. We perform a market analysis for each new state prior to expanding operations into a new state. As part of the analysis, we produce and review actuarial studies, analyze required forms and coverages, and analyze rates, legal and competitive environment studies. After reviewing this data, we prioritize potential expansion states.

 

Information Technology

 

The Information Technology Division is responsible for the management of the information technology functions of MGA and AAIC and also advises TrustWay on its information technology functions. This division is organized in three groups: Application Development, Business Intelligence and Infrastructure Support.

 

With respect to the Application Development group our primary application is our policy management system (PTS), which was designed for the non-standard automobile insurance industry. This software application is an end-to-end, enterprise wide, real-time, web-based policy administration system. PTS manages and increases efficiencies among the most critical functions and throughout our entire organization.

 

By utilizing internet technologies, PTS provides a method to sell, quote, issue, and manage policies from any location. PTS centralizes information and is designed to reduce workload, errors and costs associated with tracking and managing an insurance policy. It allows for control of user access to the database and opens communication channels through all levels of the organization. This system allows for the quoting, binding, initial premium collection, and printing of declarations pages, policies, endorsements and insurance ID cards at the point of sale at the agent’s office.

 

PTS is designed to be scalable and is expected to be capable of handling millions of policies. This allows PTS to grow as our business grows. Additional lines of insurance may be added as needed. The agreement with the vendor of this software package grants us a perpetual license to the source code and the ability to develop derivatives and advance the product to meet business demands and react to changing market conditions.

 

The Business Intelligence group supports our central data warehouse. Our data warehouse integrates and cleanses data from multiple sources and is the main repository of our Company’s historical data. It allows for complex reporting queries to be run without slowing down operational systems. This area also provides the Company with real time business intelligence through a set of processes, architectures, and technologies that transform raw data into actionable reports, gauge driven scorecards, and dashboards.

 

The Infrastructure Support group supports our voice and data networks, hosts our websites, policy administration system, the accounting system and the data warehouse. They are also responsible for the VOIP phone system and desktop support.

We have contracted with Sunguard Availability Services for our business recovery services, which include critical applications, voice systems and data recovery.

 

Retail Operations

 

Our entry into the insurance industry in January 1998 was through the acquisition of 33 retail agencies in Florida. We reduced the number of locations over time to 26 and have since acquired several additional insurance agencies. All of the retail operations currently operate under the TrustWay brand or as a division of TrustWay and consist of a total of 46 independent non-standard automobile insurance agencies located in Florida (38), Alabama (5), and Georgia (3).

 

TrustWay mainly writes new business with four to ten carriers depending upon the state or office.

 

We expect that growth in revenues will come from increasing the average premium volume per location through the opening of additional offices, selected acquisitions, improved marketing, retention efforts and placing this business with higher commission rate carriers.

 

Reinsurance

 

In the normal course of business, AAIC seeks to reduce its overall risk levels by obtaining reinsurance from reinsurers. Reinsurance contracts do not relieve AAIC from its obligations to policyholders in the event that a reinsurer is unable to make its payments to AAIC. The Company periodically reviews the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. AAIC cedes approximately 70% of its gross written premium to five reinsurers, four of which are rated A- or better by A.M. Best and one of which is not formally followed by A.M. Best.

 

Reserves

 

AAIC establishes reserves for its estimated liability for unpaid losses and loss adjustment expenses on an individual case basis for all reported incidents. The reserve includes amounts for uncollected expenses, anticipated future claim development and losses incurred but not reported (based upon actuarial analysis of historical data). The Claims Department has a statistical standardized process for setting up the initial reserves (and adjustments) and conducts file audits, monthly reserve reconciliation and a quarterly review of every pending file. Additionally, the reserves for loss and loss adjustment expenses are reviewed semi-annually by a consulting actuarial firm.

 

State Insurance Licenses

 

AAIC, MGA and TrustWay operate under licenses issued by various insurance authorities. Certain employees must be licensed as insurance agents or adjusters in any state where they perform a function requiring licensure. These licenses may be of perpetual duration or renewable periodically, provided the holder continues to meet applicable regulatory requirements. The licenses govern the kinds of insurance that may be written in the issuing state and the other services that may be provided. Such licenses are normally issued only after the filing of an appropriate application and the satisfaction of prescribed criteria. All licenses that are material to our businesses are in good standing.

 

Supervision and Regulation

 

Insurance companies are generally subject to regulation and supervision by insurance departments of the jurisdiction in which they are domiciled or licensed to transact business. The nature and extent of such regulation and supervision varies from jurisdiction to jurisdiction. Generally, an insurance company is subject to a higher degree of regulation and supervision in its state of domicile. State insurance departments have broad administrative power relating to licensing insurers and agents, regulating premium charges and policy forms, establishing reserve requirements, prescribing statutory accounting methods, the form and content of statutory financial reports, and regulating the type and amount of investments permitted. Rate regulation varies from “file and use” to prior approval to mandated rates.

State insurance departments are charged with the responsibility of ensuring that insurance companies maintain adequate capital and surplus and comply with a variety of operational standards. Insurance companies are generally required to file detailed annual and other reports with the insurance department of each jurisdiction in which they conduct business. State insurance departments are authorized to make periodic and other examinations of regulated insurers’ financial condition and operations to monitor financial stability of the insurers and to ensure adherence to statutory accounting principles and compliance with state insurance laws and regulations.

 

Insurance holding company laws enacted in many jurisdictions grant to insurance authorities the power to regulate acquisitions of insurers and certain other transactions and to require periodic disclosure of certain information. These laws impose prior approval requirements for transactions between regulated insurers and their affiliates and generally regulate dividend and other distributions, including management fees, loans, and cash advances, between regulated insurers and their affiliates.

 

Under state insolvency and guaranty laws, regulated insurers can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from the insolvency of other insurers. Insurers are also required by many states, as a condition of doing business in the state, to provide coverage to certain risks which are not insurable in the voluntary market. These “assigned risk” plans generally specify the types of insurance and the level of coverage which must be offered to such involuntary risks, as well as the allowable premium. Many states also have involuntary market plans which hire a limited number of servicing carriers to provide insurance to involuntary risks. These plans, through assessments, pass underwriting and administrative expenses on to insurers that write voluntary coverages in those states.

 

Insurance companies are generally required by insurance regulators to maintain sufficient surplus to support their writings. Although the ratio of writings to surplus that the regulators will allow is a function of a number of factors, including the type of business being written, the adequacy of the insurer’s reserves, the quality of the insurer’s assets and the identity of the regulator, the annual net premiums that an insurer may write are generally limited in relation to the insurer’s total policyholders’ surplus. Thus, the amount of an insurer’s surplus may, in certain cases, limit its ability to grow its business. The NAIC also has developed a risk-based capital (RBC) program to enable regulators to carry out appropriate and timely regulatory actions relating to insurers that show signs of weak or deteriorating financial condition. The RBC program consists of a series of dynamic surplus related formulas which contain a variety of factors that are applied to financial balances based on a degree of certain risks, such as asset, credit and underwriting risks.

 

Many states have laws and regulations that limit an insurer’s ability to exit a market. For example, certain states limit an automobile insurer’s ability to cancel or non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit cancellation or non-renewal of policies and that subject program withdrawals to prior approval requirements may restrict an insurer’s ability to exit unprofitable markets.

 

Regulation of insurance constantly changes as real or perceived issues and developments arise. Some changes may be due to economic developments, such as changes in investment laws made to recognize new investment vehicles. Other changes result from such general pressures as consumer resistance to price increases and concerns relating to insurer rating, underwriting practices and solvency. In recent years, legislation and voter initiatives have been introduced, and in some areas adopted, which deal with use of non-public consumer information, use of financial responsibility and credit information in underwriting, insurance rate development, rate determination and the ability of insurers to cancel or non-renew insurance policies, reflecting concerns about consumer privacy, coverage, availability, prices and alleged discriminatory pricing. In addition, from time to time, the U.S. Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary.

 

In some states, the automobile insurance industry has been under pressure in past years from regulators, legislators or special interest groups to reduce, freeze, or set rates to a level that is not necessarily related to underlying costs, including initiatives to roll back automobile and other personal lines rates. This kind of activity has affected adversely, and in the future may affect adversely, the profitability and growth of the automobile insurance business in those jurisdictions and may limit the ability to increase rates to compensate for increases in

costs. Adverse legislative and regulatory activity limiting the ability to price automobile insurance adequately or affecting the insurance operations adversely in other ways may occur in the future. The impact of these regulatory changes on us cannot be predicted.

 

Statutory Accounting Principles

 

The Company’s results are reported in accordance with accounting principles generally accepted in the United States of America (GAAP), which differ in certain respects from amounts reported under statutory accounting principles (SAP) prescribed by insurance regulatory authorities. Primarily, under GAAP:

 

1. Commissions, premium taxes and other variable costs incurred in connection with writing new and renewal business are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP.

 

2. Certain assets are included in the consolidated balance sheet, but are non-admitted and charged directly against statutory surplus under SAP. These assets consist primarily of premium receivables that are outstanding over 90 days, federal deferred tax assets in excess of statutory limitations, furniture, equipment, application computer software, leasehold improvements and prepaid expenses.

 

3. Amounts related to ceded reinsurance, such as prepaid reinsurance premiums and reinsurance recoverables, are shown gross, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP.

 

4. Fixed-maturity securities, which are classified as available-for-sale, are reported at current market values, rather than at amortized cost, or the lower of amortized cost or market, depending on the credit quality of the specific security, as required by SAP. Equity securities are reported at quoted market values, which may differ from the NAIC market values as required by SAP.

 

5. Both current and deferred taxes are recognized in the income statement for GAAP, while deferred taxes are posted directly to surplus for SAP.

 

Investments

 

The Company employs a conservative approach to investment and capital management intended to ensure that there is sufficient capital to support all of the insurance premium that can be profitably written. The Company’s portfolio is invested primarily in investment-grade fixed-income and equity securities.

 

Competition

 

Non-standard personal automobile insurance consumers typically purchase the statutory minimum limits of liability insurance required to register their vehicles. Accordingly, we believe that we primarily compete on the basis of price, the amount of down payment required to bind coverage, and payment terms. However, we also generally compete on the basis of consumer recognition, agency relationships, types of coverage offered, claims handling, financial stability, customer service and geographic availability. Because of the purchasing habits of our customers, the rate of policy retention is poor when compared to the retention rate of standard and preferred policies. Our success, therefore, depends in part on our ability to replace insureds that do not renew their policies.

 

We currently compete with many national, regional and local writers. The insurance underwriting and agency businesses are highly competitive. Many competitors are national in scope, larger, and better capitalized than we are. Some competitors have broad distribution networks of employed agents. Smaller regional insurance companies and local agents also compete vigorously at the local level. We believe our focus on the non-standard automobile market gives us a competitive advantage together with competitive prices, payment terms and emphasis on customer service.

 

Employees

 

As of December 31, 2008, we had 257 employees, whom we refer to as “associates”.

 

 

The corporate headquarters of the Company is located at RiverEdge One, Suite 600, 5500 Interstate North Parkway, Atlanta, Georgia 30328. The Company currently leases its office space at the RiverEdge One facility under a 12-year lease that commenced on May 1, 2003.

 

The Company’s agencies are all located in leased locations throughout Alabama, Florida and Georgia under short to medium term commercial leases. The Company believes these facilities to be sufficient for its current and future needs.

 

 

The Company is not a party to any pending legal proceedings other than routine litigation that is incidental to its business.

 

 

There were no matters submitted for a vote of security holders during the fourth quarter of 2008.

 

 

The Company Common Stock is quoted on the Over-the-Counter Bulletin Board (“OTC-BB”) under the symbol “ASAM.OB”. There is currently a very limited trading market for the Company Common Stock. The following sets forth, for the respective periods indicated, the high and low bid prices of the Company Common Stock in the over-the-counter market, as reported and summarized by the OTC-BB. Such prices are based on inter-dealer bid and asked prices, without retail mark-up, mark-down, commissions or adjustments, and may not represent actual transactions.

 

 

The Company has never declared or paid cash dividends on the Company’s Common Stock and currently intends to retain any future earnings for the operation and expansion of its business. Any determination to pay cash dividends on the Company’s Common Stock will be at the discretion of the Board of Directors of the Company and will be dependent on the Company’s financial condition, results of operations, contractual restrictions, capital requirements, business prospects and such other factors as the Company’s Board of Directors deems relevant. Additionally, the payment of dividends or distributions from AAIC to the Company is restricted by the insurance laws and regulations of South Carolina.

 

In an event of default under the Junior Subordinated Indenture issued by the Company to AssuranceAmerica Capital Trust I, the Company may not pay any dividends on its common stock until the default has been cured or waived.

 

At March 15, 2009, there were approximately 767 holders of record of the Company Common Stock.

 

The information under the heading “Equity Compensation Plan Information” in Item 12 is hereby incorporated by reference.

 

 

Selected Quarterly Financial Information

 

 

 

Results of Operations

 

The Company reported a net loss of $3.2 million for the year ended December 31, 2008 compared to net income of $.3 million for the year ended December 31, 2007. The Company reported a basic loss per common share of $0.050 for the year ended December 31, 2008 compared to basic earnings of $0.004 for the year ended December 31, 2007. Fully diluted losses per common share for the year ended December 31, 2008 were $0.050 compared to earnings of $0.004 for the year ended December 31, 2007. The 2008 results include a $2.4 million after tax charge from a goodwill write down from the Company’s review of goodwill after which it concluded that the carrying value of goodwill related to its retail operations exceeded its fair value by that amount. Pre-tax losses excluding the goodwill impairment was $1.2 million for the period ended December 31, 2008 as compared to pre-tax income of $.8 million for the comparable 2007 period.

 

In addition to the goodwill impairment, contributing factors towards the Company’s 2008 include a decline in net income from the Company’s retail operations. This decline was partially offset by increases in earned premium in AAIC and related increases in commission and fee income in MGA. Increased loss and loss adjustment expenses as a percentage of earned premiums (“Loss Ratio”) in AAIC (from 74.3% in 2007 to 82.5%) in 2008 offset these increases in revenues. Fee income improvements in MGA reflect fees associated with increased premium production in AAIC in the states of Louisiana and Arizona. Commission and fee income decreases in TrustWay are related to the decline in the construction industry and high unemployment rates in Florida as well as the recession.

 

Revenues

 

Premiums

 

Gross premiums written for the year ended December 31, 2008 were $93.3 million. In the comparable period for 2007, AAIC recorded $88.4 million in gross premiums written. 2008 gross premiums written includes insurance premiums written directly by AAIC, “direct premiums written,” of $92.2 million, plus $1.0 million of premiums associated with the insurance risk transferred to AAIC by two unaffiliated insurance companies pursuant to a reinsurance contract, referred to as “assumed premiums written.” AAIC recorded assumed premiums written of $1.6 million in the year ended December 31, 2007. The decrease in assumed premiums written in 2008 as compared to 2007 is due to a shift of business away from the unaffiliated carriers to AAIC in order to increase profit margins.

The majority of our growth in 2008 occurred in Louisiana and Arizona as AAIC began writing policies in Louisiana in 2007 and Arizona in 2008. Louisiana accounted for $7.0 million of the increase during 2008 over the comparable 2007 period. During 2008 Arizona accounted for $2.3 million year-over-year increase in direct premiums written in AAIC. Georgia, the state from which we receive the majority of our premiums, which represented 35% of our direct business in 2008, declined $3.0 million due to a continued soft market and pricing pressures. Direct premiums written in Florida decreased 8% in 2008 from the prior year due to depressed economic conditions in the state. Policies in force increased 10% from December 31, 2007 to December 31, 2008. The Company cedes approximately 70% of its direct premiums written to its reinsurers and the total amount ceded for the year ended December 31, 2008, was $64.4 million.

 

Premiums written refers to the total amount of premiums billed to the policyholder less the amount of premiums returned, generally as a result of cancellations, during a given period. Premiums written become premiums earned as the policy ages. Barring premium rate changes, if an insurance company writes the same mix of business each year, premiums written and premiums earned will be equal and the unearned premium reserve will remain constant. During periods of growth, the unearned premium reserve will increase, causing premiums earned to be less than premiums written. Conversely, during periods of decline, the unearned premium reserve will decrease, causing premiums earned to be greater than premiums written. The Company’s net premiums earned, after deducting reinsurance, was $28.9 million for the year ended December 31, 2008 and compared to $25.4 million for the year ended December 31, 2007.

 

Commission and Fee Income

 

MGA and TrustWay produce and service non-standard personal automobile insurance business for our own carrier and other insurers. We receive service fees for agency, underwriting, policy administration, and claims adjusting services performed on behalf of these insurers. We also receive commission and service fee income in TrustWay on other insurance products produced for unaffiliated insurance companies on which we do not bear underwriting risk, including travel protection, vehicle protection and hospital indemnity insurance policies. Commission rates vary between carriers and are applied to premiums written to determine commission income.

 

Commission income for the year ended December 3, 2008, as a result of business produced in both TrustWay and the MGA increased $0.5 million compared to the same period ended December 31, 2007. The increase primarily relates to an increase in MGA commissions on premium production for the 2008 period over the comparable 2007 period. Also AAIC pays MGA commission on 30% of premium which AAIC retains and this amount is subsequently eliminated upon consolidation.

 

Managing general agent fees for the period ended December 31, 2008 were $12.3 million, an increase of $1.5 million when compared to the same period of 2007. Increases in the number of policies sold are the largest contributing factor.

 

Net Investment Income

 

Our investment portfolio is generally highly liquid and consists substantially of readily marketable, investment-grade debt and equity securities. Net investment income is primarily comprised of interest and dividends earned on these securities, net of realized gains, losses and related investment expenses. Net investment income decreased to $0.3 million for the period ended December 31, 2008 from $0.8 million in the comparable 2007 period. The decrease is primarily a result of realized losses on investments of $0.4 million during 2008.

 

Expenses

 

Insurance Loss and Loss Adjustment Expenses

 

Insurance losses and loss adjustment expenses include payments made to settle claims, estimates for future claim payments and changes in those estimates for current and prior periods, as well as loss adjustment expenses incurred in connection with settling claims. Insurance losses and loss adjustment expenses are influenced by many factors, such as claims frequency and severity trends, the impact of changes in estimates for prior accident years, and increases in the cost of medical treatment and automobile repairs. The anticipated impact of inflation is

considered when we establish our premium rates and set loss reserves. We perform a rolling quarterly actuarial analysis each month and establish or adjust (for prior accident quarters) reserves, based upon our estimate of the ultimate incurred losses and loss adjustment expenses to reflect loss development information and trends that have been updated for the most recent quarter’s activity. Each month our estimate of ultimate loss and loss adjustment expenses is evaluated by accident quarter, by state and by major coverage grouping (e.g., bodily injury, physical damage) and changes in estimates are reflected in the period the additional information becomes known.

 

We have historically used reinsurance to manage our exposure to loss by ceding a portion of our gross losses and loss adjustment expenses to reinsurers. We remain obligated for amounts covered by reinsurance in the event that the reinsurers do not meet their obligations under the agreements (due to, for example, disputes with the reinsurer or the reinsurer’s insolvency). The Company cedes approximately 70% of its direct loss and loss adjustment expenses incurred to its reinsurers and the amount ceded for the year ended December 31, 2008, was $54.5 million compared to $41.6 million as of December 31, 2007.

 

After making deductions for the effect of reinsurance, losses and loss adjustment expenses were $23.7 million for the period ended December 31, 2008. As a percentage of earned premiums, this amount increased for the period ended December 31, 2008, from 74.3% to 82.5%, when compared with the same period in 2007. The amount represents actual payments made and changes in estimated future payments to be made to or on behalf of AAIC’s policyholders, including the expenses associated with settling claims. The increase in the year-over-year loss ratio is mainly attributable to the Company’s increase in writings and adverse development in certain states.

 

Other Expenses

 

Other operating expenses, including selling, general and administrative expenses increased $2.0 million for the year ended December 31, 2008 when compared to the same period of 2007. These increases are associated, in part, with the growth of AAIC and related operations. AAIC and MGA experience proportionate increases in selling costs as the premiums written increase. As a percentage of revenue, selling, general and administrative expenses for the twelve-month period ended December 31, 2008 decreased from 62.0% to 61.1% when compared to the 2007 period. This decrease is primarily attributable to the increase in revenue production in proportion to the increase in expenses related to the MGA. Depreciation and amortization expense increased $0.1 million for the year ended December 31, 2008 when compared to the same period of 2007. This increase is associated with the increase in fixed and intangible assets, including the added depreciable and amortizable assets from acquisitions.

 

Income Tax Expense (Benefit)

 

The provision for income taxes for the year ended December 31, 2008 amounted to a benefit of $1.4 million, and consists of federal and state income taxes at an effective rate of 30%. The Company had a tax expense of $0.5 million for the period ended December 31, 2007, representing an effective tax rate of 65%. The company experienced a more normal tax rate in 2008 as the 2007 effective tax rate was skewed due to the impact certain permanent differences had on the relatively small 2007 pre-tax income.

 

Financial Condition

 

Investments and cash as of December 31, 2008 decreased $4.7 million to $19.1 million from $23.8 million as of December 31, 2007. The decrease was due in part to the repayment of notes payable in the amount of $3.0 million, a $1.2 million decline in the market value of bonds and stocks and $1.2 million of net purchases of property and equipment. This decrease was offset by $0.9 million in cash from operations. The Company’s long-term investments of $8.2 million are equally spread in direct obligations of the U.S. Treasury as well as those securities unconditionally guaranteed as to the payment of principal and interest by the United States government or any agency thereof and in high-quality corporate and municipal bonds. The Company’s investment activities are made in accordance with the company’s investment policy. The objectives of the investment policy are to obtain favorable after-tax returns on investments through a diversified portfolio of fixed income, equity and real estate holdings. The Company’s investment criteria and practices reflect the short-term duration of its contractual obligations with policyholders and regulators. Tax considerations include federal and state income tax as well as

premium tax abatement and credit opportunities offered to insurance companies in the states where AAIC writes policies.

 

Premiums receivable as of December 31, 2008, increased $2.4 million to $31.2 million compared to $28.8 million as of December 31, 2007. The balance represents amounts due from AAIC’s insureds and the increase is directly attributable to the increase in AAIC’s premium writings during 2008. The Company’s policy is to write off receivable balances immediately upon cancellation or expiration, and the Company does not consider an allowance for doubtful accounts to be necessary.

 

Reinsurance recoverables as of December 31, 2008, increased $9.7 million, to $39.0 million compared to $29.3 million as of December 31, 2007. The increase is directly related to AAIC’s continued growth. AAIC maintains a quota-share reinsurance treaty with its reinsurers in which it cedes approximately 70% of both premiums and losses. The $39.0 million represents the reinsurers’ portion of losses and loss adjustment expense, both paid and unpaid.

 

Prepaid reinsurance premiums as of December 31, 2008, increased $1.8 million to $22.9 million compared to December 31, 2007. The increase results from AAIC’s continued growth and represents premiums ceded to its reinsurers which have not been fully earned.

 

Property and equipment, net of depreciation, increased $0.2 million to $2.5 million as of December 31, 2008 compared to December 31, 2007. The increase is attributable to new purchases of computer software and hardware at the Company’s corporate headquarters and furniture and leasehold improvements in both its agencies and corporate headquarters.

 

Other receivables as of December 31, 2008 decreased $1.3 million to $1.7 million compared to $3.0 million as of December 31, 2007. The balances represent TrustWay receivables from insurance carriers for direct bill commissions and balances due to MGA from insurance carriers for amounts owed in accordance with the terms of its managing general agency agreements. The decrease in the receivable is directly attributable to cash received for business placed by MGA in the states of Florida and Texas on behalf of two non-affiliated insurers.

 

Intangible assets as of December 31, 2008, decreased $3.6 million to $7.8 million from the balance of $11.4 million as of December 31, 2007. This decrease is directly related to the $3.4 million goodwill impairment charge attributable to its retail operations.

 

Prepaid income tax increased to $0.1 million as of December 31, 2008 compared $1.8 million as of December 31, 2007. This increase represents income tax on the loss from operations excluding the goodwill impairment charge.

 

Deferred tax assets increased $1.9 million as of December 31, 2008 compared to the balance as of December 31, 2007. This increase primarily relates to the deferred tax asset arising from the net operating loss carry-forward generated in 2008.

 

Accounts payable and accrued expenses as of December 31, 2008, increased $0.4 million from December 31, 2007 to $7.6 million. The increase is related to $0.5 million in unclaimed property and $0.2 million in accrued expenses for payroll and general expense. The increase was offset by $0.3 million of collections of the balances due to carriers related to an increase in direct bill agency business.

 

Unearned premium as of December 31, 2009 increased $1.9 million to $32.9 million as of December 31, 2008 from $30.9 million as of December 31, 2007, and represents premiums written but not earned. This is directly attributable to the increase in AAIC’s premium writings during 2008.

 

Unpaid losses and loss adjustment expenses increased $8.9 million to $42.6 million as of December 31, 2008 from $33.7 million at December 31, 2007. This amount represents management’s estimates of future amounts needed to pay claims and related expenses and the increase correlates with the increase in AAIC’s writings and anticipated future losses.

 

Reinsurance payable as of December 31, 2008 increased $1.2 million to $26.4 million, compared to $25.1 million as of December 31, 2007. The amount represents premiums owed to the Company’s reinsurers. AAIC maintains five quota-share reinsurance treaties with its reinsurers in which it cedes 70% of the both premiums

and losses for the majority of its states and 100% of a portion of its Florida business. The increase is directly attributable to the increase in AAIC’s premium writings during 2008.

 

Provisional commission reserves represent the difference between our minimum ceding commission and the provisional amount paid by the reinsurers. These balances as of December 31, 2008 increased $0.4 million to $3.4 million, compared to the balance at December 31, 2007. The increase is related to increases in AAIC writings.

 

Notes payable as of December 31, 2008, decreased approximately $2.8 million compared to December 31, 2007. The change resulted primarily from a $1.7 million payment to former owners of The Insurance Center, Inc. acquired in 2006 and $1.0 million in payments applied to the principal balances payable on promissory notes to the Company’s Chairman and the former CEO.

 

Liquidity and Capital Resources

 

Net cash provided by operating activities for the year ended December 31, 2008, was $0.9 million compared to net cash provided by operating activities of $5.1 million for the same period of 2007.

 

Investing activities for the year ended December 31, 2008 consisted of $5.8 million in net sales of investments, offset by the purchase of computer software and hardware and leasehold improvements in the amount of $1.2 million in our headquarters and in TrustWay.

 

Financing activities for the year ended December 31, 2008 included debt repayments for the year ended December 31, 2007 in the amount of $2.9 million offset by a newly issued promissory note in the amount of $0.3 million in connection with the purchase from the software vendor of the source code for our policy management system (“PMS”).

 

The Company’s liquidity and capital needs have been met in the past through premium, commission and fee income, loans from its Chairman, its Chief Executive Officer, and a Division President of the Company and the issuance of its Series A Convertible Preferred Stock, Common Stock and Debt Securities. The Company’s related party debt consists of unsecured promissory notes payable to its Chairman. The promissory notes carry an interest rate of 8% per annum and provide for the repayment of principal on an annual basis. During the first nine months of 2005, the Company issued 840,000 shares of its Series A Convertible Preferred Stock for an aggregate consideration of $4.2 million. The Series A Convertible Stock paid a semi-annual dividend of $0.20 per share. During the fourth quarter of 2005, the Company issued 669,821 shares of its Common Stock for an aggregate consideration of $435,000. During the first quarter of 2006, the Company issued 600,000 shares of its Common Stock for an aggregate consideration of $390,000. On December 22, 2005, the Company consummated the private placement of 5,000 of the Trust’s floating rate capital securities, with a liquidation amount of $1,000 per capital security (the “Capital Securities”). In connection with the Trust’s issuance and sale of the Capital Securities, the Company purchased from the Trust 155 of the Trust’s floating rate common securities, with a liquidation amount of $1,000 per common security (the “Common Securities”). The Trust used the proceeds from the issuance and sale of the Capital Securities and the Common Securities to purchase $5,155,000 in aggregate principal amount of the floating rate junior subordinated debentures of the Company (the “Debentures”). The Capital Securities mature on December 31, 2035, but may be redeemed at par beginning December 31, 2010 if and to the extent the Company exercises its right to redeem the Debentures. The Capital Securities require quarterly distributions by the Trust to the holders of the Capital Securities, at a floating rate of three-month LIBOR plus 5.75% per annum, reset quarterly. Distributions are cumulative and will accrue from the date of original issuance but may be deferred for a period of up to 20 consecutive quarterly interest payment periods if the Company exercises its right under the Indenture to defer the payment of interest on the Debentures. See subsequent event Note 17 to the consolidated financial statements.

 

The growth of the Company has and will continue to strain its liquidity and capital resources. AAIC is required by the state of South Carolina to maintain minimum Statutory Capital and Surplus of $3.0 million. As of December 31, 2008, AAIC’s statutory Capital and Surplus was $10.7 million.

 

Off-Balance Sheet Arrangements

 

The Company did not have any off-balance sheet arrangements during the year ended December 31, 2008.

 

All information required to be disclosed in Item 8 is incorporated by reference from the section entitled “Index to Financial Statements” in Item 15 of this Annual Report.

 

 

The Company did not have any changes in or disagreements with accountants on accounting and financial disclosure.

 

 

As of the end of the period covered by this Annual Report on Form 10-K, the Company’s Chief Executive Officer and its Acting Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Company’s Chief Executive Officer and Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 policies and procedures may deteriorate. Based on this evaluation, management determined that, as of December 31, 2008, we maintained effective internal control over financial reporting.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

 

There is no other information required to be disclosed in a report on Form 8-K during the fourth quarter of 2008 that was not so disclosed.

 

 

Except for information regarding executive officers, all information required to be disclosed in Item 10 is incorporated by reference from the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 30, 2009 (“Proxy Statement”).

 

Executive Officers

 

The following table sets forth the name, age and position of each of our executive officers.

 

 

Biographies of Executive Officers

 

David H. Anthony joined the Company as Vice President of Information Technology in March 2004 of AssuranceAmerica Managing General Agency, LLC. Mr. Anthony has 23 years of experience in the Information Technology industry with the last 12 focused in the area of consulting. Prior to joining the Company, he served as Vice President of CGI Information Systems and Management Consultants for four years.

 

Charlie Brock has served as the Vice President — Sales of AssuranceAmerica Managing General Agency, LLC since he joined the Company in December, 2007. He was Chief Marketing Officer and Vice president of Sales for Access Insurance Company from April 2007 to December 2007. He was the President and COO of Executrac, Inc., in Atlanta, GA, from 2003 to April 2007. Prior to 2003, Mr. Brock served in several capacities with The Coca-Cola Company, Frito-Lay and Proctor and Gamble.

 

Mark H. Hain has served as Senior Vice President, General Counsel and Secretary since August 2005 and Executive Vice President since February 2009. He served as Senior Vice President since August 2005 prior to becoming Executive Vice President. Prior to joining the Company, Mr. Hain was in the private practice of law for two years and was General Counsel for Computer Jobs.com, Inc. for two years. He served as Senior Vice President and General Counsel for Norrell Corporation from 1988 to 1999 and as General Counsel for American First Corporation, C.L. Frates & Co, Inc. and the Oklahoma Insurance Department prior to 1988.

 

Guy W. Millner has served as the Chairman of the Board since June 2003. Mr. Millner served as Chairman of AA Holdings, LLC, the predecessor of AssuranceAmerica Corporation, a Georgia corporation, from 1999 to 2003. From 1961 to 1999, Mr. Millner served as Chairman of Norrell Corporation, a leading provider of staffing and outsourcing solutions.

 

Scott M. Nelson is the Vice President of Product Development of AssuranceAmerica Managing General Agency, LLC. Prior to joining the Company in 2004, Mr. Nelson served as Assistant Vice President, Product

Management, for five years for Answer Financial in Encino, CA. Prior to Answer Financial, he managed several states for Windsor Insurance Company, a leading writer of non-standard auto insurance.

 

Tony Pepsoski is the Regional Vice President of Product Development AssuranceAmerica Managing General Agency, LLC. Prior to joining the company in April 2006, Tony was a Senior Product Manager at The Hartford, managing personal auto and homeowner products. Prior to The Hartford, he managed products for several states for Windsor Insurance Company.

 

Joseph J. (Joe) Skruck, CPCU, has served as the President and Chief Operating Officer since October of 2008. Prior to that Mr. Skruck served as President and Chief Operating Officer of AssuranceAmerica Managing General Agency, LLC, an insurance subsidiary of the Company since January 2002. He served as Senior Vice-President of Sun States Insurance Group from 1998 through 2001.

 

Gregory D. Woods, joined the Company in 2005 and serves as Controller and Acting Chief Financial Officer of the Company. Prior to joining the Company, he spent three years from 2002 to 2005 with Assurant Group in various financial management roles within the company. Mr. Woods also served as the Controller with Aon Specialty Corporation for three years from 1999 to 2002. Prior to 1999, Mr. Woods served in several financial capacities with Orion Capital Companies and Aon Re. He has an insurance accounting career that spans over 20 years.

 

Al Yeager is the Vice President of Claims and underwriting of AssuranceAmerica Managing General Agency, LLC. Mr. Yeager has 21 years of claims, product, sales and general management experience with leading companies in the insurance industry. Prior to joining the company in October 2008, Al served as Regional Vice President of Product Management and as a Vice President of Claims for AIG personal lines. Prior to AIG, he spent 17 years with Progressive Insurance in a variety of capacities across the country. Mr. Yeager holds a B.S. degree in Biochemistry.

 

 

All information required to be disclosed in Item 11 is incorporated by reference from the section entitled “Executive Compensation” in the Company’s Proxy Statement.

 

 

Except for information regarding the Company’s equity compensation plans set forth below, all information required to be disclosed in Item 12 is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Company’s Proxy Statement.

 

Equity Compensation Plan Information

 

The following table provides information as of December 31, 2008, with respect to the Company’s compensation plans under which equity securities are authorized for issuance:

 

 

 

 

 

All information required to be disclosed in Item 13 is incorporated by reference from the section entitled “Certain Relationships and Related Transactions” in the Company’s Proxy Statement.

 

 

All information required to be disclosed in Item 14 is incorporated by reference from the Company’s Proxy Statement.

 

 

(a) Documents filed as part of this report:

 

(1) Financial Statements

 

The following financial statements of the Company, together with the Report of the Company’s Independent Registered Public Accounting Firm dated March 27, 2009, are filed herewith:

 

 

(2) Financial Statement Schedules

 

All financial statement schedules are omitted, as the required information is inapplicable or the information is presented in the respective financial statements or related notes.

 

(3) Exhibits

 

 

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:

 

ASSURANCEAMERICA CORPORATION

 

Guy W. Millner,
Chairman and Chief Executive Officer

 

Date: March 27, 2009

 

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.

 

Index to Financial Statements

 

 

To the Board of Directors and shareholders

AssuranceAmerica Corporation

 

We have audited the consolidated balance sheets of AssuranceAmerica Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 AssuranceAmerica Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

We were not engaged to examine management’s assertion about the effectiveness of AssuranceAmerica Corporation’s internal control over financial reporting as of December 31, 2008 included in the accompanying Form 10-K and, accordingly, we do not express an opinion thereon.

 

Porter Keadle Moore, LLP

 

Atlanta, Georgia

March 25, 2009

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to consolidated financial statements.

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See accompanying notes to consolidated financial statements.

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the years ended December 31, 2008 and 2007

 

 

 

See accompanying notes to consolidated financial statements.

ASSURANCEAMERICA COPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

See accompanying notes to consolidated financial statements.

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

See note 15 for supplemental cash flow information.

 

 

See accompanying notes to consolidated financial statements.

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

 

AssuranceAmerica Corporation, a Nevada corporation (the “Company”), is an insurance holding company whose business is comprised of AssuranceAmerica Insurance Company (“AAIC”), AssuranceAmerica Managing General Agency, LLC (“MGA”) and TrustWay Insurance Agencies, LLC (“TrustWay”), each wholly-owned. The Company solicits and underwrites nonstandard private passenger automobile insurance. The Company is headquartered in Atlanta, Georgia.

 

 

Basis of Consolidation and Presentation

 

The accompanying consolidated financial statements include the accounts and operations of the Company. All material intercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).

 

Estimates

 

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported financial statement balances as well as the disclosure of contingent assets and liabilities. Actual results could differ materially from those estimates used.

 

The Company’s liability for unpaid losses and loss adjustment expenses (an estimate of the ultimate cost to settle claims both reported and unreported), although supported by actuarial projections and other data, is ultimately based on management’s reasoned expectations of future events. Although considerable variability is inherent in these estimates, management believes that this liability is adequate. Estimates are reviewed regularly and adjusted as necessary. Such adjustments are reflected in current operations.

 

Goodwill represents the amount by which the cost of acquired net assets exceeds their related fair value. Other intangible assets include the costs of specifically identifiable intangible assets, primarily customer renewal lists. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, the carrying value of goodwill and other intangible assets is reviewed annually or whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. The Company uses an independent valuation firm to assist in its assessment of possible impairment of intangible assets. If the fair value of the operations to which goodwill relates is less than the carrying amount of those operations, including unamortized goodwill, the carrying amount of goodwill is reduced accordingly with a charge to expense. The Company recognized a goodwill impairment loss of $3.4 million in 2008. There was no impairment loss recognized during 2007.

 

New Accounting Standards Adopted

 

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about the information used to measure fair value. SFAS No. 157 applies whenever other accounting pronouncements require, or permit, assets or liabilities to be measured at fair value; it does not require any new fair value measurements. The adoption SFAS No. 157 did not have a material impact on the results of operations or financial position of the Company (See Note 4 for required disclosures).

 

Effective January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115”, which permits entities to voluntarily choose to measure many financial instruments at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value is elected for an instrument, the statement specifies

 

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements — (Continued)

 

that entities report in earnings unrealized gains and losses at each subsequent reporting date. The Company did not elect the fair value option for any of its financial assets or liabilities.

 

Recognition of Revenues

 

Insurance premiums are recognized pro rata over the terms of the policies. The unearned portion of premiums is included in the Consolidated Balance Sheet as a liability for unearned premium. Commission income is recognized in the period the insurance policy is written and is reduced by an estimate of future cancellations. Installment and other fees are recognized in the periods the services are rendered.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate fair value because of their short maturities. The carrying amounts of equity securities and long-term bonds purchased are adjusted to reflect the current market value. The carrying value of the junior subordinated debentures approximates the fair value because the interest rate adjusts quarterly.

 

Deferred Acquisition Costs

 

Deferred acquisition costs (“DAC”) include premium taxes and commissions incurred in connection with the production of new and renewal business, less ceding commissions allowed by reinsurers. These costs are deferred and amortized over the period in which the related premiums are earned. The Company does not consider anticipated investment income in determining the recoverability of these costs. Based on current indications, management believes that these costs will be fully recoverable and, accordingly, no reduction in DAC has been recognized.

 

Contingencies

 

In the normal course of business, the Company is named as a defendant in lawsuits related to claims and other insurance policy issues. Some of the actions seek extra-contractual and/or punitive damages. These actions are vigorously defended unless a reasonable settlement appears appropriate. In the opinion of management, the ultimate outcome of known litigation is not expected to be material to the Company’s financial condition, results of operations, or cash flows.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash demand deposits, money market accounts and bank certificates of deposit with a maturity of less than three months.

 

Property and Equipment

 

Property and equipment is recorded at cost and depreciated on a straight-line basis. The estimated useful lives used for depreciation purposes are as follows: Furniture and fixtures — 5 to 7 years; equipment — 3 to 5 years; software currently in service — 3 to 5 years; autos — 3 to 5 years; leasehold improvements — over the remaining life of the lease, including options. Improvements, additions and major renewals which extend the life of an asset are capitalized. Repairs are expensed in the year incurred. Depreciation expense was $862,436 and $769,373 for the twelve months ended December 31, 2008 and 2007, respectively.

 

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements — (Continued)

 

A summary of property and equipment is as follows:

 

 

Amortization of Intangible Assets

 

Intangible assets consist of non-competition agreements, renewal lists, restrictive covenants and goodwill. Intangible assets are stated at cost. Goodwill and certain intangibles with indefinite lives are not amortized, but instead are tested for impairment at least annually. The non-competition agreements and restrictive covenants are amortized on a straight-line basis varying from 21/2 years to 5 years and the renewal lists are being amortized on a straight-line basis over periods ranging from 7 to 10 years. Amortization expense was $425,494 and $415,899 for the twelve months ended December 31, 2008 and 2007, respectively.

 

Intangible assets include the following:

 

 

The estimated aggregate amortization expense for each of the succeeding five fiscal years is:

 

 

The Company conducted its review of the carrying value of goodwill and other intangible assets and concluded that the fair value of its retail operations was less than the carrying amount of those operations and the unamortized goodwill was reduced accordingly with a charge to expense in the amount of $3.4 million in its statement of operations. The Company does not anticipate any goodwill write downs in the future based on recent costs reductions and operational changes in the retail operations. The Company uses an independent valuation firm to assist in its assessment of possible impairment of intangible assets.

 

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements — (Continued)

 

Advertising

 

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2008 and 2007 was $1,490,592 and $1,180,562 respectively.

 

Stock Options

 

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-based Payment” (“SFAS 123R”). The provisions of SFAS 123R require companies to expense in their financial statements the estimated fair value of awarded stock options after the effective date. The Company adopted this statement using the modified prospective application. For options granted and vested prior to the effective date, the Company continues to follow the intrinsic value method set forth in Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB No. 25”) and discloses the pro forma effects on net income as if the fair value of these options had been expensed. The disclosure provisions required by SFAS 123R are provided in Note 9.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are established for temporary differences between the financial reporting bases and the tax bases of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The principal assets and liabilities that generate these temporary differences are unearned premiums, loss and loss adjustment expense reserves, deferred policy acquisition costs, operating loss and tax-credit carry forwards and non-deductible provisions for unearned revenue and goodwill. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period that includes the enactment date.

 

The Company has entered into a tax sharing agreement with AAIC. The operating results for AAIC are included in the consolidated income tax return filed by the Company. The income tax provision is computed separately for AAIC and the Company. TrustWay and MGA are not tax paying entities for federal income tax purposes and their results are consolidated with the Company’s tax return. AAIC only pays federal income tax.

 

 

All of the Company’s marketable equity and long-term investment securities have been classified as available-for-sale because all of the Company’s long-term securities are available to be sold in response to the Company’s liquidity needs, changes in market interest rates, asset-liability management strategies, and other economic factors. Investments available-for-sale are stated at fair value on the balance sheet. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income within shareholders’ equity, net of related deferred income taxes

 

A decline in the fair value of an available-for-sale security below cost that is deemed other than temporary results in a charge to income, resulting in the establishment of a new cost basis for the security. Net unrealized losses for the twelve months ended December 31, 2008 and gains for 2007 were $1,102,659 and $112,808, respectively.

 

Premiums and discounts are amortized or accreted, respectively, over the life of the related fixed maturity security as an adjustment to yield using a method that approximates the effective interest method. Dividends and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific-identification method for determining the cost of securities sold.

 

At December 31, 2008, long-term investments carried at market value of $3,918,281 and short-term investments of approximately $150,371 were pledged by one of the Company’s subsidiaries under requirements of regulatory authorities.

 

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements — (Continued)

 

A summary of investments follows as of:

 

 

The amortized cost, fair value and gross unrealized gains or losses of debt securities available-for-sale at December 31, 2008, by contractual maturity, is shown below:

 

 

The amortized cost, fair value and gross unrealized gains or losses of securities available-for-sale at December 31, 2008 and 2007, by security type, is shown below:

 

 

 

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements — (Continued)

 

 

As of December 31, 2008, the Company has determined that all of the unrealized losses in the table above were temporary. There were no fundamental issues with any of these securities and the Company has the ability and intent to hold the securities until there is a recovery in fair value. There are some securities with unrealized losses of greater than 10% of book value.

 

The carrying amounts of individual assets are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. The Company considers internal and external information, such as credit ratings in concluding that the impairments are not other than temporary.

 

The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2008 and 2007.

 

 

The total proceeds received on investments amounted to $10,861,877 and $2,842,020 for the year 2008 and 2007, respectively. The company had realized gains and losses of $71,544 and $459,770 during 2008 and $102,776 and $68,307 for the same period last year.

 

 

The fair value of our investments in fixed income and equity securities is based on observable market quotations, other market observable data, or is derived from such quotations and market observable data. We utilize third party pricing servicers, brokers and internal valuation models to determine fair value. We gain assurance of the overall reasonableness and consistent application of the assumptions and methodologies and compliance with accounting standards for fair value determination through our ongoing monitoring of the fair values received or derived internally.

 

Level 1 inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. Treasury securities and active exchange-traded equity securities). Level 2 securities are comprised of securities whose fair value was determined by a nationally recognized pricing service using observable market inputs. Level 3 securities are comprised of (i) securities for which the pricing service is unable to provide a fair value, (ii) securities whose fair value is determined by the pricing service based on unobservable inputs and

 

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements — (Continued)

 

(iii) securities, other than securities backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization.

 

The following table illustrates the fair value measurements as of December 31, 2008:

 

 

 

The estimated liabilities for losses and loss adjustment expenses (“LAE”) include the accumulation of estimates for losses for claims reported prior to the balance sheet dates (“case reserves”), estimates (based upon actuarial analysis of historical data) of losses for claims incurred but not reported (“IBNR”) and for the development of case reserves to ultimate values, and estimates of expenses for investigating, adjusting and settling all incurred claims. Amounts reported are estimates of the ultimate costs of settlement, net of estimated salvage and subrogation. These estimated liabilities are subject to the outcome of future events, such as changes in medical and repair costs as well as economic and social conditions that impact the settlement of claims. Management believes that, given the inherent variability in any such estimates, the aggregate reserves are within a reasonable and acceptable range of adequacy. The methods of making such estimates and for establishing the resulting reserves are reviewed and updated quarterly and any resulting adjustments are reflected in current operations.

 

A summary of unpaid losses and loss adjustment expenses, net of reinsurance ceded, is as follows:

 

 

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements — (Continued)

 

 

Activity in the liability for unpaid claims and claim adjustment expenses is summarized as follows:

 

 

The majority of the Company’s net claim payments related to accidents occurring in the current year. As a result of changes in estimates of insured events in prior years, the net claims and claim adjustment expenses incurred decreased by $753,000 in 2008 reflecting higher than anticipated losses and decreased by $223,000 for 2007 due to favorable loss development.

 

 

In the normal course of business, the Company seeks to reduce its overall risk levels by obtaining reinsurance from other insurance enterprises or reinsurers. Reinsurance premiums and reserves on reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.

 

Reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company periodically reviews the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies.

 

Reinsurance assets include balances due from other insurance companies under the terms of reinsurance agreements. Amounts applicable to ceded unearned premiums, ceded loss payments and ceded claims liabilities are reported as assets in the accompanying balance sheets. Under the reinsurance agreements the Company has two reinsurers that are required to collateralize the reinsurance recoverables. As of December 31, 2008 both reinsurers have provided a letter of credit and a secured trust account to provide security sufficient to satisfy AAIC’s obligations under the reinsurance agreement. The Company believes the fair value of its reinsurance recoverables approximates their carrying amounts.

 

ASSURANCEAMERICA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements — (Continued)

 

The impact of reinsurance on the statements of operations for the period ended December 31 is as follows: