The following table sets forth the credit quality, by NAIC designation and Standard & Poors (S & P) rating equivalents, of fixed maturity securities:
On April 29, 1996, the Company designated 5.0 million shares of its preferred stock as Series A Preferred Stock and on July 18, 1996, such shares were exchanged for 5.0 million shares of Class A Common Stock. The preferred stock, which pays cumulative annual cash dividends of $1.00 per share, payable quarterly, is recorded at its liquidation value of $20.00 per share.
At December 31, 1996, stockholders' equity was $638.5 million, or $28.55 per common share, compared to $564.3 million, or $23.65 per common share (after giving effect to stock split) at December 31, 1995. Approximately $1.70 of the increase in stockholders' equity per common share is attributable to the exchange of Class A Common Stock for preferred stock. Included in stockholders' equity per common share is $1.05 and $1.40 at December 31, 1996 and 1995, respectively, attributable to unrealized investment gains resulting from marking the Company's fixed maturity securities classified as available for sale to market value. The change in unrealized appreciation of fixed maturity and equity securities classified as available for sale reduced stockholders' equity $9.9 million in 1996, after related adjustments to deferred policy acquisition costs, value of insurance in force acquired, unearned revenue reserve and deferred income taxes. During 1996, a credit of $4.9 million was posted directly to stockholders' equity as a result of an initial public offering completed by an equity investee of the Company.
Congress has from time to time considered possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. The United States Supreme Court recently held in NATIONSBANK OF NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY that annuities are not insurance for purposes of the National Bank Act. This factor or others may cause Congress to consider legislation that would eliminate such tax deferral, at least for certain annuities. Other possible legislation, including a simplified "flat tax" income tax structure with an exemption from taxation for investment income, could also adversely affect the sale of life insurance compared with other financial products if such legislation were to be enacted. There can be no assurance as to whether such legislation will be enacted or, if enacted, whether such legislation would contain provisions with possible adverse effects on the Company's annuity and life insurance products.
As described in Note 4 to the consolidated financial statements, in 1994 the Company changed its method of accounting for certain investments in debt securities.
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 also excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements and allows companies to forego the disclosures when those estimates can only be made at excessive cost. Accordingly, the aggregate fair value amounts presented herein are limited by each of these factors and do not purport to represent the underlying value of the Company.
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 --------- --------- --------- (DOLLARS IN THOUSANDS) Fixed maturities: Held for investment $ 56,062 $ 50,050 $ 35,065 Available for sale 113,919 108,748 101,683 Equity securities 1,367 1,163 1,971 Held in inventory 3,324 25,868 (130) Mortgage loans on real estate 24,791 23,850 24,870 Investment real estate 5,024 4,970 6,385 Policy loans 7,314 7,189 6,894 Other long-term investments 536 381 2,668 Short-term investments 3,825 3,344 3,919 Other 3,680 5,667 4,000 --------- --------- --------- 219,842 231,230 187,325 Less investment expenses (9,113) (8,122) (8,491) --------- --------- --------- Net investment income $ 210,729 $ 223,108 $ 178,834 ========= ========= =========
In February 1996, an equity investee of the Company completed an initial public offering which resulted in an increase of $4.9 million, net of $2.6 million in taxes, in the Company's share of the investee's stockholders' equity. This increase was credited directly to common stock, allocated proportionately among Class A Common Stock and Class B Common Stock based on shares outstanding. As a result of the public offering, the Company's voting stock interest in the investee declined to an amount less than 20%. Accordingly, the Company discontinued the use of the equity method of accounting for this investment and has classified the investment as equity securities (carrying value $18.0 million at December 31, 1996) in the consolidated balance sheet. At December 31, 1995, the investment had a carrying value of $4.9 million and was classified as securities and indebtedness of related parties in the consolidated balance sheet. During 1996, the Company sold approximately 77% of its holdings in this investment and realized a gain of $50.4 million.