The fourth quarter 1998 plan provided for the termination of 43 employees including substantially all of the executive and administrative employees in the Company's Bethesda and New York offices, based on the decision to shut down the Bethesda and New York offices by May 31, 1999. Substantially all of the severance has been paid with the exception of one former executive officer whose severance is to be paid monthly through April 2001. The Company had incurred costs of $1.4 million and $4.0 million which were charged against the accrual during 1999 and 1998, respectively, for terminated employees.
The fourth quarter 1998 plan recognized abandoned leasehold improvement costs in connection with the Company's plan to sublease or vacate the New York offices. The Company expensed $3.0 million principally as a result of abandoning the New York leased property.
Cash Flow from Financing Activities. Cash used by financing activities, excluding the parent company, were $492.3 million, $391.4 million and $325.9 million for the years ended December 31, 1999, 1998 and 1997, respectively. The majority of the cash outflow is attributable to policyholder surrenders exceeding deposits by $191.7 million in 1999, $354.1 million in 1998 and $275.7 million in 1997. Cash outflows during 1999 also included dividends and surplus debenture principal aggregating $326.3 million made to the parent company compared to $44.3 million in 1998 and $14.7 million in 1997. Substantially all of the increases in dividends and surplus debenture payments during 1999 were the direct result of proceeds received by PLAIC from the disposition of Businesses Held for Sale.
Death benefits............................. $ 22,137 $ 23,435 $ 23,282 Fixed benefit claims incurred.............. 8,477 7,929 10,114 Other insurance policy benefits and change in future policy benefits................. 32,003 33,344 31,226 --------- --------- --------- Total policyholder benefits................ $ 62,617 $ 64,708 $ 64,622 ========= ========= =========
Net Investment Income. Net investment income decreased $89.5 million (62.1%) in 1999 compared to 1998 and decreased $10.0 million (6.5%) in 1998 compared to 1997. The decline in 1999 is primarily attributable to the sale of Professional, the United Life Assets and the Career Sales Division on March 31, 1999, April 1999 and July 30, 1999, respectively. The decrease in 1998 is primarily attributable to United Life, where net investment income decreased $11.4 million in 1998 compared to 1997. United Life has experienced high surrenders of fixed annuities in 1998 and 1997 reflecting low reinvestment rates available as annuities reached the end of their surrender fee period. Surrenders at United Life totaled $253.2 million in 1998 and $255.6 million in 1997. Such surrenders resulted in a liquidation of approximately $168.9 million and $104.0 million of invested assets during 1998 and 1997, respectively, which caused the declines in investment income. Partially offsetting the decline at United Life are small increases for other companies, the largest of which related to investment income earned by Marquette during 1998 from an assumed reinsurance contract. This contract was terminated as of September 30, 1998.
Net Investment Gains (Losses). The Company maintains an investment portfolio that focuses on maximizing investment income, without exposure to unwarranted interest rate and credit risk. The Company actively manages asset duration and liquidity risks. As a result of this strategy, the Company routinely sells positions in securities no longer meeting its criteria. Sales of securities resulted in the Company realizing gains (losses), of ($502,000), $14.1 million and $19.3 million (including $1.8 million for SW Financial), during 1999, 1998 and 1997, respectively. During 1999, 1998 and 1997, the Company liquidated securities available for sale in order to meet cash flow demands associated with policyholder surrenders that in the aggregate exceeded policyholder deposits by $191.7 million, $354.1 million and $275.7 million, respectively. In addition, during 1997, the Company liquidated most of its equity holdings and private placement bond holdings.
Policy and contract claims represent estimates of both reported claims and claims incurred but not reported based on experience. Prior to disposition, the Company had been closely monitoring the development of claims reserve experience for Penn Life. The methodology previously utilized has experienced, what appeared to be, a deterioration of the adequacy of claims reserves associated with disability income products sold prior to the Company's ownership. During 1998, the Company changed its methodology in recording these reserves. The effect of the change in methodology is inseparable from the effect of the change in accounting estimate and is accordingly reflected in operations as a change in accounting estimate for 1998.
Beginning Gross Accretion Net Balance Amortization of Interest Amortization ------- ------------ ----------- ------------
Interest sensitive products: Universal life .............................. 1,353,224 1,420,306 Annuities ................................... 528,184 609,915 ---------- ---------- 1,881,408 2,030,221
During a pre-trial conference on November 9, 1998, all parties agreed to the consolidation of all of the actions and the Court appointed lead plaintiffs on behalf of shareholders and noteholders. The Court also approved the selection of three law firms as co-lead counsel for shareholders and noteholders. A consolidated and amended complaint was filed on January 22, 1999. A First Consolidated Amended Class Action Complaint naming, as defendants, the Company, David J. Stone, formerly a director and Chairman and Chief Executive Officer, and Steven W. Fickes, formerly a director and President and Chief Financial Officer was filed on March 15, 1999 (the "Complaint").
The Memo states that $9,000 of cash plus interest accruing through the date of consummation of the settlement, will be paid in full and final settlement of all claims set forth in the Complaint (the "Settlement"). Of that sum, $1,500 plus interest will be paid by the Company and $7,500 plus interest will be paid by the Company's outside directors and officers liability insurance carrier. The Settlement is conditioned upon, among other things, confirmatory discovery, execution of a definitive settlement agreement and related documents, notice to the Company's shareholders of the Settlement and final approval by the United States District Court (with all time to appeal such approval having run or any appeals having been resolved in favor of approval of the Settlement). During the three months ended December 31, 1999, the Company paid the $1,500 liability related to the settlement to an escrow account.
As a result of the sale of the United Life Assets along with other non-core operations, the Company announced a restructuring plan in June 1999 to significantly reduce its Dallas-based staff and vacate certain office space. The Company incurred restructuring costs aggregating $5,307 for the nine months ended September 30, 1999 associated with such restructuring.
The following reflects the impact of activity for the years ended December 31, 1997 and 1998 on the restructuring accrual balances under the 1997 plan:
On February 28, 2000 the Bankruptcy Court issued an order scheduling a hearing to consider approval of the sale agreement with Reassure America, subject to higher or better offers, and establishing the procedures for the submission of competing offers ("Sales Procedure Order").
Deferred debt issuance costs, which are included in other assets, represent costs incurred in connection with obtaining long-term debt financing which have been capitalized and are being amortized on an interest yield method over the terms of the respective debt. Deferred costs totaled $2,530 which is net of accumulated amortization of $1,580.
During 1997, the Company purchased $7,650 of subordinated indebtedness of ACO Acquisition Corp., which was subsequently re-named Acordia, Inc. (Acordia). The Acordia subordinated notes pay interest on a current basis at 12.5% per annum, payable in semi-annual installment. Acordia is an insurance broker specializing in the marketing of commercial property and casualty programs. Acordia is 28.6% owned by Knightsbridge.
Policy and contract claims ........................... 57,517 Other policyholder funds ............................. 14,203 ----------
under the Convertible Notes totaled $2,800 for the year ended December 31, 1997. The Company agreed to maintain sufficient cash and cash equivalents to fund the interest payments on the Convertible Notes for the first three years. At December 31, 1997 restricted cash and short-term investments totaled $3,339.
In addition, certain of PennCorp's insurance subsidiaries purchased $10,000 liquidation value of 5.5% Mandatorily Redeemable Preferred Stock, par value $0.01 per share (the 5.5% Preferred Stock) of Southwestern Life Acquisition Corporation, a wholly-owned subsidiary of SWF. During 1996 SLAC was dissolved and the 5.5% Preferred Stock was exchanged for 5.5% Preferred Stock of Southwestern Life Companies, Inc. (SLC), also a wholly-owned subsidiary of SWF. The 5.5% Preferred Stock accrues dividends payable in cash or, subject to certain conditions, through the issuance of additional shares of 5.5% Preferred Stock. The 5.5% Preferred Stock is not subject to optional redemption and matures on December 31, 2005. If SLC fails to satisfy its mandatory redemption obligation or if dividends payable on the 5.5% Preferred Stock are in arrears for four or more quarterly dividend periods, the holders of the 5.5% Preferred Stock will be entitled to elect 49.0% of the members of the Board of Directors of SLC and, upon receipt of regulatory approval, a majority of the Board of Directors of SLC. The 5.5% Preferred Stock is the only preferred stock of SLC authorized for issuance. The holders of the 5.5% Preferred Stock are entitled to class voting rights under certain circumstances, including in connection with a merger of SLC or a sale of all or substantially all its assets or the authorization or issuance of senior pari passu preferred stock, and as otherwise provided by law. For the year ended December 31, 1997, 59 additional shares were issued with a redemption value of $594 in lieu of cash to satisfy dividend requirements.
Deferred tax assets: Deferred policy acquisition costs ........................ $ 9,548 Future policy benefits ................................... 73,660 Invested assets, subject to capital gains treatment ...... 24,907 --------- 108,115
As part of the purchase accounting for the Company's acquisitions, a present value of insurance in force asset is established which represents the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. Such value is the actuarially determined present value of the projected cash flows from the acquired policies, discounted at an appropriate risk rate of return.
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Therefore, the Company is contingently liable for recoverable unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely event that assuming reinsurers are unable to meet their obligations. The Company evaluates the financial condition of its reinsurers to
The Company provides certain health care and life insurance benefits for retired employees. Employees meeting certain age and length of service requirements become eligible for these benefits. The Company's obligation for accrued postretirement health and welfare benefits is unfunded. Following is an analysis of the change in the liability for accrued postretirement benefits for the year ended December 31, 1997: