BENEFITS AND CLAIMS. Benefits and claims expense increased $23.7 million, or 33.6%, from $70.5 million to $94.2 million. Benefits and claims from Company-issued policies increased $24.4 million, or 62.7%, and were offset, in part, by a decrease in benefits and claims from acquired policies of $700,000, or 2.2%. In connection with the increase in premiums, benefits and claims increased $8 million, or 61.5%, from Medicare Supplement Products marketed by Senior Benefits, an increase of $5.9 million, or 53.2%, from Medical Expense Products marketed by LifeStyles Marketing, an increase of $7.9 million, or 232.4%, from Medicare Supplement and Medical Expense Products marketed by non-affiliated general agencies, and an increase of $2.6 million from Critical Care and Specified Disease Products marketed by non-affiliated general agencies. As a result of continued lapses from a closed block of business, benefits and claims decreased $3.4 million, or 38.6%, from policies purchased from AII. The block of business acquired from NFIC and AICT reflected an increase in benefits and claims expense of $2.2 million, or 11.8%, and was primarily related to disability income products. Additionally, benefits and claims expense increased $600,000 due to the recent acquisition of FLICA.
million. The increase resulted from the growth in sales which began in the second quarter of 1995. Amortization of DPAC increased $3.2 million for Medical Expense Products produced by LifeStyles Marketing, $3.5 million for Medicare Supplement Products produced by Senior Benefits, and $2.8 million for Critical Care and Specified Disease Products produced by non-affiliated general agencies, a portion of which was attributable to a large group policy which lapsed in 1996. Amortization of DPAC also increased $4.1 million due to sales of new policies underwritten by NFIC and AICT. This increase for NFIC and AICT was offset, in part, by a $2.1 million decrease in amortization of the cost of insurance purchased which was capitalized in connection with the Company's acquisition of NFIC and AICT. Further offsetting this increase in amortization of DPAC was a decrease of $2.9 million from discontinued Medicare Supplement Products and Medical Expense Products. Amortization of DPAC pertaining to FLICA increased $2.3 million related to the Critical Care and Specified Disease Products produced by non-affiliated general agencies.
INCOME TAXES. The Company records income taxes based on the asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the carrying amounts and the tax basis of assets and liabilities.
In accordance with the Statement, the cumulative effect of recording the difference between estimated market value and amortized cost at January 1, 1994 of securities classified as available-for-sale to a separate component of stockholders' equity has been treated as a change in accounting principle and no restatement of prior year financial statements has been made. Additionally, in accordance with the statement, all investments categorized as held-to-maturity were transferred to the available-for-sale category at December 31, 1995.
The amortized cost and estimated market values of investments in fixed maturities at December 31, 1996 and 1995, are summarized by category as follows:
1996. The Company had, prior to 1996 recognized 100% of the cumulative losses of LifeStyles Marketing. During 1996, those cumulative losses were fully recovered through earnings.
In February 1996, the Company formed HCO Marketing. The Company owns 80% of HCO Marketing which commenced operations in March 1996. HCO Marketing's operations were not significant in 1996. The Company will advance money to HCO Marketing to fund operations. These advances will be repaid in the future through positive cash flows generated from renewal commissions, from advanced commissions from non-affiliated insurance carriers, and if and when profits are recognized from continuing operations.
at par plus accrued interest. Following the death of any holder of the Notes and the request for repayment, the Company will repay such holder's Notes at par plus accrued interest. The Company is not obligated to redeem more than $50,000 in principal amount per holder per calendar year or in aggregate for all holders more than $250,000 in principal amount per calendar year. The Notes contain certain covenants which limit the Company's ability to, (i) incur certain types of indebtedness, (ii) pay dividends or make distributions to holders of the Company's equity securities, or (iii) consolidate, merge, or transfer all or substantially all of the Company's assets. The Notes also contain covenants which require the Company to maintain, (i) a minimum amount of liquid assets, (ii) a minimum consolidated net worth, and (iii) a minimum fixed charge ratio.
A valuation allowance has been provided for 1996 and 1995, respectively, for the tax effect of a portion of the non-life loss carryovers since it is more likely than not that such benefits will not be realized.
The statutory financial statements of the Insurance Subsidiaries are prepared using accounting methods which are prescribed or permitted by the insurance department of the respective companies' state of domicile. Prescribed statutory accounting practices include a variety of publications of the NAIC as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company employed no permitted statutory accounting practices that individually or in the aggregate materially affected statutory surplus or risk-based capital at December 31, 1996 or 1995.
The Company adopted, as of July 1, 1982, an employee incentive stock option plan (the "ISO Plan"). The ISO Plan authorizes the Company's Board of Directors to issue to key full-time employees of the Company, or any of its subsidiaries, non-transferrable options to purchase up to 580,000 (as adjusted to
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds Withheld Reinsurance Agreement (the "Agreement") effective July 1, 1996 on the inforce Critical Care and Specified Disease business. The Agreement provided an initial ceding commission of $10.5 million, of which $8.4 million was received in cash. This ceding commission allowance will be repaid, inclusive of interest at 12.5%, as statutory profits emerge from the reinsured block of business. For the year ended December 31, 1996, the
In March 1990, NFL entered into a coinsurance treaty with Paramount Life Insurance Company ("Paramount"). Under the terms of the treaty, which was in effect from April 1, 1990 through May 31, 1995, NFL assumed 90% of the Critical Care and Specified Disease policies written by Paramount. The treaty effectively ended upon the purchase of this block of business by NFL from Paramount. For the year ended December 31, 1996, 1995 and 1994, $0, $582,000 and $1,601,000, respectively, of assumed premiums under this coinsurance treaty were recorded as revenue.
The Company collects $20,000 per month until this note and the related accrued interest is satisified. Payment of the principal and interest under the Elkins Note has been guaranteed by Elkins. In addition, under the terms of a Security Agreement delivered to Westbridge by NFC, following a default, Westbridge has the right to apply monies, balances, credit or collections which it may hold for NFC on deposit, or which might otherwise be payable to NFC by NFL (including, among other things, agents' commissions payable by NFL to NFC), to offset the unpaid balance of the Elkins Note.