December 31, -------------------- 1997 1996 -------- -------- Investments: Fixed maturities: Available-for-sale, at market value (amortized cost $122,840 and $90,020) $128,749 $ 91,597 Equity securities, at market 4,770 1,596 Mortgage loans on real estate 389 658 Investment real estate 566 - Policy loans 284 282 Short-term investments and certificates of deposit 12,654 8,072 -------- --------
The following table reflects the calculation of basic and diluted earnings per share:
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131"). This pronouncement, also effective for calendar year 1998 financial statements, requires reporting segment information consistent with the way executive management of an entity disaggregates its operations internally to assess performance and make decisions regarding resource allocations. Among the information to be disclosed, SFAS 131 requires an entity to report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. SFAS 131 also requires reconciliations of total segment revenues, total segment profit or loss and total segment assets to the corresponding amounts shown in the entity's consolidated financial statements. The Company does not expect that its adoption of SFAS 131 in 1998 will significantly change the number or designation of the reportable segments currently disclosed in its Consolidated Financial Statements.
In addition, policy persistency has declined in connection with the implementation of certain rate increases together with intensified competitor solicitation of the Company's policyholders. These events affected the future profit margins available to absorb amortization of Deferred Policy Acquisition Costs ("DPAC"). As a result of these adverse changes, the Company undertook a revaluation of the recoverability of DPAC in the fourth quarter. Based on the results of this review and the impact of future projected premium revenues and the discontinuance of certain lines of business, the Company determined that a premium deficiency for certain lines of business existed as of December 31, 1997. A premium deficiency occurs when the projected present value of future premiums associated with these policies will not be adequate to cover the projected present value of future payments for benefits and related amortization of DPAC. Generally accepted accounting principles require the immediate recognition of a premium deficiency by charging the unamortized DPAC to expense. In this connection, for the quarter and year ended December 31, 1997, the Company recorded a non-cash charge to expense of approximately $65.0 million and incurred a significant loss for the year ended December 31, 1997. This adjustment has no impact on the Company's cash position at December 31, 1997 and does not impact the statutory capital and surplus of the Insurance Subsidiaries.
As a result of these losses, in November 1997, the Company engaged Houlihan, Lokey, Howard & Zukin to act as its financial advisor to explore the Company's strategic alternatives which may include, without limitation, a refinancing, recapitalization or other corporate reorganization involving a significant reduction in, or exchange of equity for, outstanding indebtedness. Since November 1997, the Company has held discussions with the regulatory authorities in its domiciliary states of Delaware, Texas and Mississippi and with an ad hoc creditors' committee representing both the holders of the 11% Senior Subordinated Notes ("Senior Subordinated Notes") due 2002 and the holders of its 7-1/2% Convertible Subordinated Notes ("Convertible Notes") due 2004.
Mortality Based on modifications of the 1955-1960 Select and Ultimate Basic Tables and, for certain issues from 1975 through 1981, modifications of the 1958 CSO. Issues for 1981 through 1994 use modifications of the 1965-1970 Select and Ultimate Basic Tables. Issues subsequent to 1994 use modifications of the 1975-1980 Ultimate Basic Tables.
Since November 1997, the Company has suspended the scheduled dividend payments on its Series A Preferred Stock. The failure to declare and pay the scheduled dividend on the Series A Preferred Stock constituted an event of non-compliance under the terms of the Series A Preferred Stock Agreement and resulted in an immediate increase to 9.25% from 8.25% in the rate at which dividends accrue on the Series A Preferred Stock. This increase will remain in effect until such time as no event of non-compliance exists. At December 31, 1997, $0.8 million of cumulative, unpaid dividends have been accrued.
A valuation allowance of approximately $23.8 million has been provided for the year ended December, 31, 1997 for the tax effect of the Company's net operating loss carryovers and other deductible temporary differences since it appears more likely than not that such benefits will not be realized. For 1996, a valuation allowance was provided for a portion of the Company's net operating loss carryovers. The change in the valuation allowance for 1997 relates primarily to the increase in net operating losses and decrease in DPAC.
At December 31, 1997, NFL has approximately $7.9 million in its shareholders surplus account from which it could make distributions to the Company without incurring any federal tax liability. The amount of dividends which may be paid by NFL to the Company is limited by statutory regulations.
At December 31, 1997, the Company and its wholly-owned subsidiaries have aggregate net operating loss carryforwards of approximately $70.4 million and $61.9 million for regular tax and alternative minimum tax purposes, respectively, which expire in 2003 through 2013.
In late 1993, NFL entered into a coinsurance treaty with FLICA. FLICA is a wholly-owned subsidiary of FHC. Under the terms of the treaty, NFL assumed a 90% pro-rata share of certain Critical Care and Specified Disease business. For the years ended December 31, 1997, 1996 and 1995, $0, $2.3 million, and $5.1 million, respectively, of assumed premiums under this coinsurance treaty are included as premium revenue in the consolidated financial statements. This coinsurance treaty was cancelled subsequent to the acquisition of the remaining interest of FLICA's parent FHC, on May 31, 1996.
In May 1987, NFL entered into a coinsurance treaty with FLICA. Under the terms of the treaty, NFL assumed a 50% pro-rata share of all insurance business written by FLICA from January 1, 1987 through December 31, 1988. In November 1988, the coinsurance treaty was amended to extend through 1997. For the years ended December 31, 1997, 1996 and 1995, $0, $1.7 million, and $4.3 million, respectively, of assumed premiums under the coinsurance treaty are included as revenue in the consolidated financial statements. This coinsurance treaty was cancelled subsequent to the acquisition of the remaining interest of FLICA's parent FHC, on May 31, 1996.