Set forth below are the selected consolidated financial data of the Company as of the dates and for the periods indicated. Statutory data are based upon statutory accounting practices and were derived from statutory financial statements filed with state insurance departments. The selected consolidated and combined financial data below should be read in conjunction with the consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.
Premiums on traditional policies increased 12.1% from $50.5 million in 1994 to $56.6 million in 1995. This increase is entirely a result of the acquisition of Lamar Life, which added $8.8 million in such revenues in 1995. Sales growth in this product line has not been a strategic goal of the Company. Rather, the Company's new business strategy emphasizes the sale of universal life products.
Universal life charges ceded to client companies consist of monthly mortality charges and administrative fees which are ceded to entities in the Company's network of agent owned reinsurance companies and affiliated companies. The amount of such charges ceded increased 40.3% from $15.9 million in 1993 to $22.3 million in 1994. This increase is the result of added production in existing client companies and an increase in the number of active client companies from 13 to 15 during 1994.
Premiums on traditional policies decreased 7.7% from $54.7 million in 1993 to $50.5 million in 1994. Sales growth in this product line has not been a strategic goal of the Company. Rather, the Company's new business strategy emphasizes the sale of universal life products that generally have greater profit margins (after reflecting cost of capital).
At December 31, 1995, corporate debt securities, then defaulted as to principal and/or interest, were marked to market as realized losses from permanent impairment in value, and constituted less than 1% of the Company's total fixed maturity securities.
The Company increased its indebtedness under the senior credit facility by $36 million in connection with the acquisition of Lamar Life in April of 1995, and further increased its indebtedness by $14 million in December of 1995. Such increases were offset by scheduled quarterly principal payments totaling $15 million during 1995.
During 1995, 1994 and 1993, the Company owned certain derivative investments in the form of interest rate swap agreements. During the term of an interest rate swap, the net swap settlement amount is accrued over the unexpired term as an adjustment of interest income. Gains or losses on termination are deferred and amortized as an interest adjustment over the remaining original life of the underlying financial instrument, or reflected in operations as appropriate.
The determination of expected future gross profits and losses is based on historical gross profits and management's estimates and assumptions regarding future investment spreads, maintenance expenses, mortality and persistency of the block of business. The accuracy of the estimates and
Certain front-end fees assessed against policyholder account balances on universal life contracts are deferred and amortized with interest in relation to the present value of expected gross profits on the product. Such amortization is in direct proportion to amortization of deferred policy acquisition costs for a given policy form and is netted with amortization of deferred policy acquisition costs in the Consolidated Statements of Operations.
2. ACQUISITION On April 28, 1995, Life Partners Group, Inc. finalized an agreement to acquire Lamar Financial Group, Inc. ("Lamar"), together with all its subsidiaries, including Lamar Life Insurance Company of Jackson, Mississippi, for a purchase price of $77 million.
Following is an analysis of net realized gains (losses) on investments (in thousands):
On November 30, 1994 the Company granted options to purchase 250,000 shares of Common Stock to the Company's chief executive officer. The options are exercisable at $20.25 per share, vest equally over a five year period, and expire in 2003.
9. COMMON STOCK (CONTINUED) stock options is determined using an option-pricing model. This statement encourages, but does not require, companies to adopt the fair value based method of accounting to recognize compensation expense for employee stock compensation plans. However, it does require a company to comply with the disclosure requirements set forth in the statement. The Company expects to continue to utilize the accounting in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and in 1996, and thereafter, expects to make pro forma disclosures of net income as if the fair value based method of accounting defined in SFAS 123 had been applied.
In connection with the Company's acquisition of certain of its insurance subsidiaries, the seller, I.C.H. Corporation ("I.C.H.") agreed to indemnify the Company relative to various matters pertaining to the Internal Revenue Service ("IRS") examination for periods prior to the acquisition of said insurance subsidiaries. To the extent the IRS examination of preacquisition tax years results in an increase in the Company's tax in years subsequent to the examination, I.C.H. has contractually agreed to reimburse the Company for certain disallowed deductions relating to Philadelphia Life. In addition, the Company believes that I.C.H. is liable for damages in postacquisition tax years with respect to Massachusetts General and other insurance subsidiaries resulting from I.C.H.'s failure to satisfy certain contractual covenants in connection with such tax examinations. Philadelphia Life is also a party to an indemnification agreement between Tenneco Inc. ("Tenneco"), I.C.H. and others included in the acquisition agreement pursuant to which I.C.H. acquired Philadelphia Life and other insurance companies from Tenneco pursuant to which Tenneco agreed to indemnify Phliadelphia Life for certain lost deductions.