felanders/preprocessed huggingface dataset:
During the fourth quarter of 2014, the Company reached an agreement with the NY DFS on reserving methodologies for New York financial reporting purposes in respect of certain variable annuity products. For a discussion of the impact of the agreement, see “Business-Regulation-State Insurance Regulation-Insurance Reserves and Regulatory Capital”.
The following table provides a demonstration of the sensitivity of each of these balances relative to our future rate of return assumptions by quantifying the adjustments to each balance that would be required assuming both an increase and decrease in our future rate of return by 100 basis points. The sensitivity includes both an increase and decrease of 100 basis points to the future rate of return assumptions in all years. The information below is for illustrative purposes only and considers only the direct effect of changes in our future rate of return on the DAC and DSI balances and not changes in any other assumptions such as persistency, mortality, or expenses included in our evaluation of DAC and DSI. Further, this information does not reflect changes in reserves, such as the reserves for the guaranteed minimum death and optional living benefit features of our variable annuity products, or the impact that changes in such reserves may have on the DAC and DSI balances.
For certain living benefit features of the variable annuities that are accounted for as embedded derivatives, the changes in reserves are significantly impacted by changes in both the capital markets assumptions and actuarial assumptions. Capital market inputs and actual contractholders’ account values are updated each quarter based on capital market conditions as of the end of the quarter, while actuarial assumptions are reviewed at least annually, and updated based upon emerging experience, future expectations and other data. For additional information about the impacts of capital markets assumptions, including interest rates, NPR credit spreads and equity returns, refer to “Quantitative and Qualitative Disclosures About Market Risk” below. In 2014, updates to lapse rate assumptions drove the most significant changes to these reserves. Other factors may also drive variability in the change in reserves, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time. For a discussion of the drivers of the changes in our optional living benefit features for the years ended December 31, 2014 and 2013, see “-Results of Operations.”
ACQUISITIONS On September 19, 2000, the Company completed the acquisition of all of the issued and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar") from The Prudential Insurance Company of America ("The Prudential") for $51.8 million, which approximated book value. As a result of the acquisition, Gibraltar became a wholly owned subsidiary of the Company and, immediately following the acquisition, its name was changed to Mt. McKinley Insurance Company ("Mt. McKinley"). In connection with the acquisition of Mt. McKinley, which has significant exposure to asbestos and environmental claims, Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary of The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley's reserves as of September 19, 2000 and The Prudential guaranteed Prupac's obligation to Mt. McKinley.
Mt. McKinley, a run-off property and casualty insurer in the United States, has had a long relationship with the Company and its principal operating company, Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by Everest Re and wrote insurance until 1985, when it was placed in run-off. In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is also a reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re's business. In particular, Mt. McKinley provided stop-loss reinsurance protection, in connection with the Company's October 5, 1995 IPO, for any adverse loss development on Everest Re's June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $89.4 million remains available (the "Stop Loss Agreement"). The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the acquisition. However, these contracts have become transactions with affiliates with the financial impact eliminated in consolidation.
AIN owns a 13,000 square foot building in a suburb of Jackson, Mississippi. In March, 1998, this building was under a contract for sale at $537,000.
In March 1997 CICA acquired the remaining 5.5% of FAIC not owned by ALLIC. CICA issued approximately 134,000 shares of Citizens Class A Common Stock to the minority holders of FAIC. Upon consummation of the acquisition of the minority interest, Citizens incurred a non-recurring charge to earnings of approximately $400,000. This charge is based upon the fair market value of the shares to be issued, less the minority interest acquired, and approximately $670,000 of goodwill. Subsequently, FAIC was liquidated.
Cash balances of the Company in its primary depository, Chase Bank of Texas, Austin, Texas, were significantly in excess of Federal Deposit Insurance Corporation (FDIC) coverage at December 31, 1997 and 1996. Management monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. Management does not believe the Company is at risk for such a loss. During 1998, the Company intends to utilize highly-rated commercial paper as a cash management tool to minimize excess cash balances and enhance return.
(1) On February 28, 1994, the Company sold its investment in 100% of the common stock of PFS Holding Company ("PFSH") and its wholly-owned subsidiary, Premium Financing Specialists, Inc., to FHC.
In order to reduce the probability of unexpected increases in policy or contract surrenders, which would create a need for increased liquidity, the Company has structured its interest-sensitive life insurance and annuity products to include substantial surrender charges. At December 31, 1998, approximately 81% and 83% of the reserves for interest-sensitive life insurance and annuity products, respectively, were for policies with surrender charges or otherwise not subject to discretionary withdrawal by the policyholder. Also at December 31, 1998, the aggregate cash surrender values of the Company's interest-sensitive life insurance and annuity products were approximately 87% and 93%, respectively, of the aggregate policyholder fund value.
Summary--The Company's net income increased approximately $6.6 million, or 210.1%, in 1998, compared to 1997, and increased approximately $436,000, or 16.1%, in 1997 compared to 1996. These increases are attributable primarily to increases in income resulting from increases in sales volume, as discussed below.
The Company generally utilizes cash from operations to fund its needs for cash. The Company generated cash from operating activities of approximately $12.1 million, $4.6 million and $4.5 million for the years ended December 31, 1998, 1997, and 1996, respectively. The Company used approximately $10.9 million, $1.3 million and $3.5 million of net cash for investment activities for the years ended December 31, 1998, 1997, and 1996, respectively, and approximately $475,000, $348,000, and $387,000 for redemption and retirement of common stock for the years ended December 31, 1998, 1997, and 1996, respectively. In 1998, 1997, and 1996, redemption requests received by the Company were not material in amount, either individually nor in the aggregate, and the Company believes that its liquid assets are sufficient to meet anticipated requests for redemption. At December 31, 1998, 1997, and 1996, the redemption value of redeemable common stock was approximately $9.6 million, $5.9 million, and $5.0 million, respectively. The Company's future cash flows available to fund operations will depend primarily on the level of sales of annuity and life insurance products and upon the Company's ability to control operating expenses in relation to demand placed upon the organization from increased sales.
Premiums and discounts are amortized or accreted over the life of the related investment as an adjustment to yield using the effective interest method. Interest income is recognized when earned. Realized gains and losses on sales of investments are included in earnings and are derived using the specific identification method for determining the cost of investments sold.
"Other" items above include Regan Holding Corp. (stand-alone) and its remaining subsidiaries, LifeSurance Corporation, Legacy Advisory Services, Inc., and Legacy Reinsurance Company. Such entities' operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure. "Reconciling Items" consist solely of eliminations of intercompany amounts such as investment in, and income from, subsidiaries.
We specialize in the sale of individual annuities (primarily deferred annuities) and, to a lesser extent, we also sell life insurance policies. Under accounting principles generally accepted in the United States, or GAAP, premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender charges deducted from the account balances of policyholders in connection with withdrawals, realized gains and losses on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest credited to account balances, changes in fair value of embedded derivatives, amortization of deferred policy acquisition costs, other operating costs and expenses and income taxes.
At December 31, 2003 and 2002, the amortized cost and estimated fair value of fixed maturity securities and equity securities that were in an unrealized loss position were as follows:
•Under SFAS No. 133, the future annual index credits on our index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We are required to estimate the fair value of these embedded derivatives. Our estimates of the fair
The following table summarizes certain information contained in or derived from the consolidated financial statements and the notes thereto.
In June 2002, the Company completed the sale of the insurance subsidiary. In July 2002, the Board of Directors approved a tender offer to the Company's preferred shareholders at a price of $4.40 per share, and on July 19, 2002, tender offer materials were mailed to the holders of the preferred stock. On August 23, 2002, the Company purchased 377,288 shares of preferred stock, or 83.4% of the total preferred shares outstanding, from those shareholders who elected to tender their shares.
On October 17, 2002, the Board of Directors appointed Shalom S. Maidenbaum, Esq. as a Director of the Company to fill an existing vacancy on the Board. In addition, the Directors elected Mr. Hommel as the Company's Treasurer and Mr. Maidenbaum as the Company's Vice President and Secretary. On March 13, 2003, the Board of Directors appointed William T. Konczynin as an additional Director to fill an existing vacancy.
The Company currently has no commitments for any capital expenditures. However, if the Company develops certain planned strategic alliances or identifies a target company to be merged or otherwise combined with the Company, the Company's plans regarding capital expenditures and related commitments are likely to change.
The adequacy of the Company's liquidity position and its ability to continue as a going concern are dependent on the Company's success in developing new cash revenue sources or, alternatively, in obtaining short-term financing while its new businesses are being developed.
Discount rate (pre-retirement period) 6.35% Discount rate (post-retirement period) 6.35% Annual rate of return on plan assets 6.35% Annual rate of increase in compensation N/A
The following management's narrative analysis of the results of operations is presented pursuant to General Instructions I(2)(a) of Form 10-K in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations.
IDS Life Insurance Company also owns IDS REO 1, LLC, IDS REO 2, LLC and American Enterprise REO 1, LLC which hold real estate investments. IDS Life Insurance Company and its seven subsidiaries are referred to collectively in this Form 10-K as "IDS Life".
Death and other benefits for traditional life insurance increased $4.7 million or 13% primarily due to increased in force levels.
For annuity and universal life insurance products, the assumptions made in projecting future results and calculating the DAC balance and DAC amortization expense are management's best estimates. Management is required to update these assumptions whenever it appears that, based on actual experience or other evidence, earlier estimates should be revised. When assumptions are changed, the percentage of estimated gross profits used to amortize DAC might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in a decrease in the DAC balance and an increase in DAC amortization expense, while a decrease in amortization percentage will result in an increase in the DAC balance and a decrease in DAC amortization expense. The impact on results of operations of changing assumptions can be either positive or negative in any particular period and is reflected in the period in which such changes are made.
The second exposure is the equity risk related to certain annuity products that pay interest based upon the relative change in the S&P 500 index. IDS Life enters into options and futures contracts to economically hedge this risk. These products generally have rates that are paid to clients based on equity market performance, with minimum guarantees. The minimum guarantees are provided by a portfolio of fixed income securities, while the equity based return is provided by a portfolio of equity options and futures constructed to replicate the return to the contractholder.
The excess and surplus lines segment’s loss ratio improved to 62.0% for 2003 compared to 63.4% for 2002, and 60.6% for the four months ended December 31, 2001. The improvement is attributable to a reduction in the current year loss ratio, reflecting the effects of rate increases realized over the past two years. Despite this improvement, development of prior year losses contributed approximately six percentage points to the current year loss ratio, or approximately $17.9 million. This resulted primarily from strengthening of case and incurred but not reported losses of this segment’s other liability business for accident years 1999 to 2001. Improvements in claims handling procedures implemented beginning in 2002 have contributed to this strengthening and should result in an improvement in the ultimate settlement value of individual losses. Additionally, reported and open claim counts indicate that claim counts are not increasing at the same rate as premiums. The growth in reported claim counts, which increased 19.7% in 2003, compares favorably to the growth in earned premiums of 88.2% in 2003. Open claim
Earned premiums increased 12% to $122.4 million for the year ended December 31, 2003 from $109.2 million for the same period in 2002. The increase is related to: (a) approximately $3.9 million of earned premiums associated with the assumed business underwritten by HCC discussed above, (b) an increase in involuntary pool premium of approximately $5.2 million and (c) earned premiums of approximately $7.3 million associated with the Kemper renewal rights acquisition noted above.
The expense ratio for the year ended December 31, 2003 was 28.7%, compared to 28.8% and 29.2% for 2002 and 2001, respectively. The expense ratio reflects the impact of variable expenses (i.e., commission and premium taxes) associated with the additional earned premium and was favorably affected by cost containment in the segment’s overhead expenses.
A trust has also been established to secure payments owed to the Company from the reinsurer. The Company is the sole beneficiary of this trust. Securities of approximately $44.1 million are included in the trust as of December 31, 2003. In addition, the Company has a $50.0 million letter of credit to secure the payments as of December 31, 2003.
Credit risk is a major factor of overall enterprise risk within the Company. Certain policies and procedures have been established to protect the Company against such losses, particularly as respects its investment holdings, and its receivable balances from insureds and reinsurers.
The Company is also exposed to credit risk on losses recoverable from reinsurers and premiums receivable from insureds. The Company mitigates this risk by avoiding concentrations of exposure to individual issuers. However, downturns in one sector or market can adversely impact other sectors and may result in higher credit exposure. The Company does not utilize credit default swaps to mitigate its credit exposure from either investments or counterparties.
(1) The Company had no significant business activity until November 26, 1993, when it acquired the Integrity Companies from National Mutual. Results of operations prior to the acquisition for the period from January 1, 1993 through November 26, 1993 are presented for comparative purposes.
Net income during 1997 was $27.6 million compared to $23.4 million for 1996. Operating earnings (net income applicable to common shareholders, excluding, net of tax, realized investment gains and losses, non-recurring charges and income from defined benefit pension plan asset management operations which were sold) were $34.1 million and $22.2 million for 1997 and 1996, respectively. The increase in operating earnings is primarily attributable to an increase in net investment spread due to both deposit growth from sales of retail and institutional spread products and ongoing asset/liability management and, to a lesser extent, an increase in fee income as a result of a larger base of variable annuity deposits.
Operating earnings for retail spread products were 1.36% and 1.30% of average assets under management of $2.76 billion and $2.66 billion for that segment during 1997 and 1996, respectively. This increase in retail spread margins is primarily attributable to ongoing asset/liability management, which generated higher net investment spreads. Operating earnings for institutional spread products were 0.62% and 0.57% of average assets under management of $1.48 billion and $567.7 million for that segment during 1997 and 1996, respectively. The increase in institutional spread margins is also primarily attributable to ongoing asset/liability management. Operating earnings for retail variable products were 0.52% and 0.66% of average assets under management of $970.3 million and $728.2 million for that segment during 1997 and 1996, respectively. The decline in retail variable margins is primarily attributable to lower amortization expense of deferred policy acquisition costs during 1996. The Company's corporate and other segment primarily includes earnings on insurance subsidiaries surplus and holding company cash and investments, marketing partnership and broker-dealer fee income, and unallocated corporate overhead. Income tax expense and preferred stock dividends are not allocated to any segment.
in the average fair value of off-balance sheet assets managed due to sales. As a result of the sale of ARM Capital Advisors' operations and the State Bond Mutual Funds management contracts, asset management fee income will decrease in the future.
Operating expenses increased to $32.5 million in 1997 from $31.1 million in 1996. The increase is primarily attributable to increased marketing efforts (including an increase in marketing staff and additional investments in technology) to expand and enhance the support of distribution channels in the retail and institutional markets, partially offset by a reduction in guaranty fund assessment accruals. The Company continues to actively pursue and retain producers within its distribution channels to market its products.
(2) The earnings (loss) per share amounts for 1996 have been restated to comply with SFAS No. 128, ``Earnings Per Share.''
Gross Premiums Written. Gross premiums written for 2000, 1999 and 1998 were $517.1 million, $364.1 million and $378.1 million, respectively. The increase in gross premiums written of $153.0 million or 42.0% in 2000 is primarily due to increases in premium volume from the Company's regional offices as well as new programs introduced in 2000, principally the golf course program ($15.3 million) and a livery program ($27.5 million). In addition, the Company increased prices on its commercial lines in 2000, reflecting the hardening commercial insurance market. The gross premiums written decrease of $14.0 million or 3.7% in 1999 compared to 1998 is due primarily to three factors. First, in 1999 the Company focused on underwriting standards and adequate pricing during a period of competitive pricing in both commercial and personal lines. Second, service disruptions in early 1998 associated with the implementation of a new policy issuance system at the end of 1997 negatively impacted new and renewal policy processing and agents' willingness in 1999 to place business with the Company. Finally, the reduction in the A.M. Best rating of Highlands to B++ from A-, announced by A.M. Best in June 1998, caused a decline in premium production as certain agents were unwilling to use a B++ market.
$11.6 million of deferred taxes related to the write-off of LMI because it was determined that deferred tax assets associated with LMI would not be recoverable by the Company.
(d) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by statutory capital at the end of the year.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
The independent registered public accounting firm auditors’ report accompanying our December 31, 2020 financial statements contained an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared “assuming that we will continue as a going concern,” which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business.
The Company accounts for income taxes under FASB ASC 740, ”Accounting for Income Taxes”. Under FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FASB ASC 740-10-05, ”Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
Net investment income increased by 9.8% to $314.4 million in 2018 compared to $286.3 million in 2017. The increase in 2018 was primarily due to higher income from our limited partnerships and from our growing fixed maturity portfolio, partially offset by a lower dividend income from our equity portfolio.
Gross written premiums increased by 16.1% to $1,555.2 million in 2018 compared to $1,339.5 million in 2017, primarily due to increases in Latin American business and business written through our Canada and Singapore branches, partially offset by the negative impact of $20.6 million from the movement of foreign exchange rates. Net written premiums increased by 131.8% to $1,426.6 million in 2018 compared to $615.4 million in 2017. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of changes in affiliated reinsurance contracts including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017. Premiums earned increased 180.0% to $1,406.5 million in 2018 compared to $502.3 million in 2017. The change in premiums earned relative to net written premiums is partially due to the impact of the non-renewal of the quota share contract between Everest Re and Bermuda Re and is also the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred losses and LAE increased by 63.9% to $1,020.9 million in 2018 compared to $622.8 million in 2017, primarily due to an increase of $496.5 million in current year attritional losses related to the increase in premiums earned resulting primarily from changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017, as well as $104.1 million of unfavorable development on prior years catastrophe losses, mainly related to Hurricane Harvey, Irma and Maria and the 2017 Mexico earthquake. The increase was partially offset by a decrease of $191.9 million in current year catastrophe losses. The current year catastrophe losses of $165.3 million in 2018 are outlined above. The current year catastrophe losses of $357.2 million in 2017 related to Hurricane Maria ($238.6 million), Hurricane Irma ($79.2 million), the Mexico City earthquake ($10.2 million), the South Africa Knysna fires ($9.9 million), Cyclone Debbie in Australia ($8.4 million), the Peru storms ($7.4 million) and Hurricane Harvey ($3.4 million).
Gross premiums written during 1998 were $87,929,152, compared with $99,507,846 in 1997 and $90,939,387 in 1996.
The following selected consolidated financial data for each of the five years in the period ended December 31, 2005 have been derived from Gallagher’s Consolidated Financial Statements. Such data should be read in conjunction with Gallagher’s Consolidated Financial Statements and related notes thereto, which have been incorporated by reference in Item 8 of this annual report.
For 2005, our net loss and loss adjustment expense ratio was 5.1% higher than our direct loss ratio because we paid minimum premiums to reinsurers that were in excess of the actual premiums expected when the reinsurance was originally priced. Further, our loss experience in the excess layers reinsured (typically losses above $1 million) was better than the loss experience in the lower layers retained by us. Our direct and net loss and loss adjustment expense ratio also was negatively affected by the level of the unallocated loss adjustment expense ratio, which was 7.5% on a direct basis and 9.0% on a net basis. This high level of unallocated loss adjustment expense was due to lower than expected premium volume, while having to incur the costs necessary to build a claim infrastructure and management process.
In 2004, Potomac’s sources of cash consisted primarily of net investment income and proceeds from sales and maturities of investments. Potomac’s uses of cash were primarily investing expenses and the purchase of investments.
Instead of any single method, we use a combination of various actuarial and analytical methods to estimate the amount of reserves for each line of business on the basis of historical, statistical and industry information. Primary methods that we utilize to determine our ultimate losses and loss adjustment expenses include:
The Company leased approximately 400 square feet of office space, on a month-to-month basis, at 1525 Cedar Cliff Drive, Camp Hill, Pennsylvania until October 31, 2003. The monthly rent for this space was $400. The Company leases an additional 800 square feet of office space in Cedarhurst, New York under a
(a) The per share data presented above has not been adjusted to reflect the effect of a one-for-ten reverse common stock split approved by the Company's common shareholders on March 15, 2003 but has yet to be effected by the Company. See Note 11 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K.
As a result of the approval of the Plan of Liquidation, the Company adopted a liquidation basis of accounting in its financial statements for the period from March 25, 1998 to August 28, 2002. Under this basis of accounting, assets were stated at their estimated net realizable values and liabilities were stated at their anticipated settlement amounts. As a result of the transaction with CFC Partners and the related termination of the Plan of Liquidation, effective August 29. 2002, the Company re-adopted accounting principles applicable to going concern entities. Furthermore, as discussed elsewhere in this Form 10-K, the Company has restated its liquidation-basis financial statements for prior periods to conform such statements to the current presentation.
The consolidated financial statements presented herein do not include any adjustments that might result from the outcome of this uncertainty.
Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002
Trademarks and Copyrights: WECOSIGNTM is now a U.S. Service Mark. We have not applied for a patent application for our propriety underwriting techniques and do not intend to do so at this time. Our management considers our service mark, and future similar intellectual property critical to our business, so we intend to take steps to protect our intellectual property rights. However, effective trademark and other intellectual property may not be available in every country where we intend to sell our products and services online.
For the initial nine-month operating period ending December 31, 1998, the Company had consolidated net income of approximately $19,461,000, which is $0.81 per common share, or $0.76 per common share on a fully diluted basis. Consolidated net income before realized capital gains was approximately $16,788,000. A loss of approximately $449,000 was incurred during the three month period ended March 31, 1998 relating to expenses and costs incurred in the formation and organization of the Company. Earnings per share for the twelve months ended December 31, 1998 has been calculated using earnings and number of shares outstanding since the beginning of the second fiscal quarter.
At December 31, 1998, approximately $45.0 million at fair value, 17% of Annuity & Life Re's invested assets, consisted of below investment grade securities. Annuity & Life Re limits its investments in fixed maturities that are rated below investment grade to 25% of capital, as these investments are subject to a higher degree of credit risk than investment grade securities. Annuity & Life Re monitors its below investment grade securities as well as the creditworthiness of the portfolio as a whole. When fair market values decline for reasons other than changes in interest rates or other perceived temporary conditions, the security is written down to its net realizable value. Annuity & Life Re had no fixed maturities in default at December 31, 1998, and no securities were written down during the year.
The minimum exercise price of the ISO's will be equal to the fair market value, as defined in the Plan, of the Company's optioned Common Shares at the date of grant. The term of the ISO's is not more than ten years from the date of grant. Unless otherwise provided in the option agreement, the ISO's shall be exercisable in three equal annual installments, commencing on the first anniversary of the grant date.
The weighted average fair value of options granted during 1998 is $6.47. The fair value of the options is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions; dividend yield of 1.07% per annum; expected volatility of 26%; expected life of 10 years; and a risk free interest rate of 5.6%.
PREMIUM REVENUE. During 1998, premium revenue increased five percent from the prior year, primarily due to six additional weeks of results in 1998 from the FHP acquisition. Discontinued indemnity and workers' compensation products that were not meeting profitability expectations partially offset this increase.
Government premiums increased seven percent or $380 million over the prior year as a result of:
- - Increases of $208 million from premium rate increases that averaged approximately four percent; offset by
- - Decreases of $129 million from net membership losses caused by our exit of certain rural geographic areas and Medicaid lines of business primarily in California, Utah and Texas.
Because the claims-based FHP core systems function more effectively than our core computing systems for claims administration on behalf of non-delegated delivery systems, we decided to maintain the FHP systems. As a result, the scope of our Year 2000 compliance activities was expanded to include the FHP computer system. We have a detailed project plan for modifying the FHP systems to be Year 2000 compliant in phases during 1999. Based upon an outside consultant's recommendations and internal analysis, we estimate that the total cost to make the FHP systems Year 2000 compliant ranges from $5 to $9 million.
We are also contacting our third party vendors, provider and hospital networks, business partners, contractors, and service providers, including HCFA, to assess their Year 2000 level of readiness. In some cases, we are seeking reasonable assurances with respect to Year 2000 compliance. Our priority is to assess the readiness of our providers with delegated responsibility and other third parties with which we electronically exchange data or interact. Because we do not control the products, services, or systems of our providers, vendors or customers, we cannot ensure their Year 2000 compliance. We anticipate developing business process contingency plans by June 1999 for external sources that appear to be at risk.
RISK-BASED CAPITAL REQUIREMENTS. The National Association of Insurance Commissioners has proposed that states adopt risk-based capital standards that, if implemented, would require new minimum capitalization limits for health care coverage provided by HMOs and other risk-bearing health care entities. To date, Washington is the only state where we have HMO operations that has adopted these standards. We do not expect this legislation to have a material impact on our consolidated financial position in the near future if other states where we operate HMOs adopt these standards. Further, we believe that cash flows from operations or, if necessary, borrowings under our credit facility, will be sufficient to fund any additional risk-based capital requirements.
Recent market conditions have led to illiquidity in certain markets for financial instruments, causing the Company to consider such markets inactive. Examples of the criterion used by the Company to determine that a market is inactive include, but are not limited to, a significant widening of bid-ask spreads in brokered markets, significant decreases in trade volumes relative to historical levels, few observable transactions, non-binding broker quotes, and noncurrent pricing for recent transactions with significant variance over time or among market makers in the observable prices for such transactions, thus reducing the potential relevance of those observations.
The Company’s liability for funding agreements to an unrelated third party trust related to NLIC’s MTN program equals the balance that accrues to the benefit of the contractholder, including interest credited. The funding agreements constitute insurance obligations and are considered annuity contracts under Ohio insurance laws.
In connection with its reorganization, the Company realized a non-taxable gain from the extinguishment of certain indebtedness for tax purposes, since the gain results from a reorganization under the Bankruptcy Code. However, the Company is required to reduce certain tax attributes of the holding company, including (i) NOLs, (ii) certain tax credits, and (iii) tax bases in assets in an amount equal to such a gain on extinguishment.
The Company, through NFL and FLICA, entered into a 90% Coinsurance Funds Withheld Reinsurance Agreement (the "Agreement") with a reinsurer effective July 1, 1996 on the in force 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 was to be repaid, inclusive of interest at 12.5%, as statutory profits emerged from the reinsured block of business. For the year ended December 31, 1996, the repayment was $1.9 million. The ceding allowance payable for the year ended December 31, 1996 was $8.6 million. The Company exercised its option to terminate and recapture this Agreement on April 1, 1997 consisting of approximately $9.0 million in total recapture costs calculated at an interest rate of 15% less approximately $2.0 million in unearned premium reserves due to NFL and FLICA. See NOTE 14 - "Extraordinary Item."
Cash Flows From Operating Activities: Net income $ 2,106 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed net income of subsidiaries 212 Accrued investment income 168 Increase in other assets (671) Increase in other liabilities 2,685 Dividends received from subsidiaries 300 Other, net (2,263) --------------------- Net Cash Provided By Operating Activities 2,537 ---------------------
Our insurance subsidiaries’ expense ratio, which is the ratio of policy acquisition and other underwriting expenses to premiums earned, was 31.2% in 2012, compared to 31.4% in 2011.
Our income tax benefit was $7.2 million in 2011, compared to $1.6 million in 2010. We recorded an income tax benefit based upon our loss before income tax and tax-exempt interest income earned for 2011. We carried back a portion of our 2011 net operating loss to the taxable income of prior years and our income tax benefit for 2011 reflected a current tax benefit for the carryback. We expected to apply the remainder of the 2011 net operating loss to taxable income we generate in future periods, and our income tax benefit for 2011 reflected a deferred tax benefit for the carryforward.
At December 31, 2012 and 2011, our investment portfolio of primarily investment-grade bonds, common stock, short-term investments and cash totaled $826.2 million and $798.6 million, respectively, representing 61.8% and 61.9%, respectively, of our total assets (see “Business - Investments” for more information).
Depreciation expense for 2012, 2011 and 2010 amounted to $944,632, $1.0 million and $1.2 million, respectively.
We measure all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and record such expense in our results of operations. In determining the expense we record for stock options granted to directors and employees of our subsidiaries and affiliates other than Donegal Mutual, we estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected term used as the assumption in the model. We base the expected term of an option award on our historical experience for similar awards. We determine the dividend yield by dividing the per share dividend by the grant date stock price. We base the expected volatility on the volatility of our stock price over a historical period comparable to the expected term.
Shares available for future option grants at December 31, 2012 totaled 40,936 shares under all plans.
22 - Interim Financial Data 22 - Interim Financial Data (unaudited)
Weighted Principal Average Cash Flows Interest Rate 1999 $ 848.9 7.87% 2000 942.7 8.01 2001 954.2 8.08 2002 1,086.3 7.76 2003 1,415.3 7.33 Thereafter 4,784.1 7.59
Fixed annuity receipts totaled approximately $480 million in 1998, $490 million in 1997 and $570 million in 1996. Annuity receipts in 1997 reflect the decrease of business written by a single agency from $99 million in 1996 to $23 million in 1997. AAG is no longer writing business through this agency. AAG believes that the success of the stock market and the recent interest rate environment have also resulted in decreased sales and persistency of traditional fixed annuities. Sales of annuity products linked to the performance of the stock market (equity-indexed and variable annuities) helped offset this decrease.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Financial Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Fair Value of Financial Instruments Methods and assumptions used in estimating fair values are described in Note P to the financial statements. These fair values represent point-in-time estimates of value that might not be particularly relevant in predicting AFC's future earnings or cash flows.
Held to Maturity $ 202.2 $ 331.0 $ 9.3 $ 2.4 ($ 1.2) Available for Sale 1,925.8 284.8 871.8 29.6 (47.3) Total $2,128.0 $ 615.8 $ 881.1 $32.0 ($48.5)
Trust Issued Preferred Securities Wholly-owned subsidiary trusts of AAG have issued $225 million of preferred securities and, in turn, purchased $225 million of newly-authorized AAG subordinated debt issues which provide interest and principal payments to fund the respective trusts' obligations. The preferred securities are mandatorily redeemable upon maturity or redemption of the subordinated debt.
(*)Included primarily in "Other operating and general expenses" in the Statement of Earnings.
Reinsurance In the normal course of business, AFC's insurance subsidiaries assume and cede reinsurance with other insurance companies. The following table shows (in millions) (i) amounts deducted from property and casualty premiums in connection with reinsurance ceded, (ii) amounts included in income for reinsurance assumed and (iii) reinsurance recoveries deducted from losses and loss adjustment expenses.
(*) Incorporated herein by reference. (**) Copy included in Report filed electronically with the Securities and Exchange Commission.
(2) Further details of the calculation of basic earnings per share are set forth in notes 2 and 22 of the consolidated financial statements for the years ended December 31, 2002, 2001 and 2000. Consolidated financial statements are attached hereto as Exhibit I.
Approximately 89.7% of the total premiums increase is attributed to increases in premium rates, while the remaining 10.3% is attributed to increases in membership.
- Due to prior years' experience and to cope with increases in health services cost, TSI was required to increase premium rates to better reflect expected claims costs. This effort was made gradually as contracts were renewed, and commenced in the last semester of 1999. TSI was able to implement these increases and retain the majority of its accounts because of its products and services, and its position in the health insurance market. The segment continues monitoring premium rates increases, particularly in the rated Corporate Accounts sector. This monitoring will make sure that premium rates reflect the actual claims experience of the groups.
Net cash flows from operations are expected to sustain operations for the next year and thereafter, as long as the operations continue showing positive results. In addition, the Corporation monitors its premium rates and its claims incurred to ascertain proper cash flows and has the ability to increase premium rates throughout the year in the monthly renewal process.
As of December 31, 2002, the repurchase obligations credit facilities remained unused. Such facilities are due on various dates in 2003. Management understands that the Corporation has the ability to extend or renew them at its convenience.
The Corporation's consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles applied on consistent basis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The policies discussed below are considered by management to be critical to an understanding of the Corporation's financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. For all these policies, management cautions that future events may not necessarily develop as forecast, and the best estimates routinely require adjustment. Management believes that the amounts provided for these critical accounting estimates are adequate.