The selected financial data have been derived from the consolidated financial statements of Security-Connecticut Corporation (1996, 1995 and 1994), and Security-Connecticut Life Insurance Company and subsidiary (referred to as "Predecessor Company") for each of the years in the two-year period ended December 31, 1993.
Realized Gains on Investments - Net realized gains on investments were $7.3 million in 1996 compared with $6.2 million in 1995. The 1996 gains were the result of net realized gains from the sale of investments of $8.8 million, partially offset by increases in the allowance for losses and permanent impairment writedowns of $1.0 million and deferred policy acquisition costs ("DAC") associated with realized gains of $0.5 million. The 1995 gains were the result of net realized gains of $15.1 million from the sale of investments partially offset by increases in the allowance for losses and permanent impairment writedowns of $4.3 million and DAC associated with realized gains of $4.6 million. One investment represented $3.0 million of the $4.3 million increase in allowance for losses in 1995.
To provide for additional liquidity to meet normal variations in contractual obligations, the Company maintains cash and short-term investments, and a significant portion (65.0% at December 31, 1996) of its invested assets in readily marketable public debt securities. The Company believes that its liquidity needs are adequately met with the aforementioned investment policies, combined with the contractual terms of its life insurance and annuity products.
The excess of the purchase price over the fair value of identifiable net assets acquired is being amortized on a straight-line basis over a period of 40 years. Accumulated amortization was $16.3 million and $15.4 million at December 31, 1996 and 1995, respectively. The carrying value of goodwill is reviewed periodically for indicators of impairment in value.
The liabilities for future policy benefits for universal life insurance policies and deferred annuities consist of policy account balances that accrue to the benefit of the policyholders, without reduction (or offset) for/by surrender charges. Interest-crediting rates for these products during 1996, 1995 and 1994 ranged from 4.05% to 8.00%. The liabilities for future policy benefits for traditional life policies and immediate annuities are computed using a net level premium method (i.e., the benefit and expense net premiums determined as a level percentage of the corresponding gross premiums) and assumptions of investment yields, mortality and withdrawals based principally on Company experience projected at the time of policy issue, with provisions for possible adverse deviations.
Fair values for fixed maturity securities and equity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, by discounting expected future cash flows using a current market rate applicable to the coupon rate, credit quality and maturity of the investments.
The following table summarizes the carrying amounts and estimated fair values of mortgage loans, policy loans, and deposit contract liabilities as of December 31, 1996 and 1995. The table excludes, other invested assets and cash and invested cash, all of which had fair values approximating carrying values. It also excludes fixed maturity and equity securities whose fair values are disclosed elsewhere in this footnote.
(3) Deposit contracts are included in the consolidated balance sheets under the caption "Contractholder Funds." The remainder of the balance sheet caption "Contractholder Funds" that does not fit the definition of "investment-type insurance contracts" (i.e. deposit contracts) is considered insurance contracts. Fair value disclosures are not required for these insurance contracts and have not been determined. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. It is important to note that readers of these financial statements could draw inappropriate conclusions about the Company's shareholders' equity, determined on a fair value basis, since only the fair value of assets and liabilities defined as financial instruments are disclosed. The Company and other companies in the insurance industry are monitoring the related actions of the various rule-making bodies and attempting to determine an appropriate methodology for estimating and disclosing the "fair value" of their insurance contract liabilities.
The indenture agreement covering the Debt contains several debt covenants that, among other things: (i) places limitations on liens, (ii) requires prompt payments, (iii) requires continued corporate existence and (iv) limits the issue or disposition of capital stock of any subsidiary. The Company has complied with all debt covenants during 1996.
Life insurance in-force and life and immediate annuity premiums assumed from other companies increased in 1996 due to the inclusion of premiums assumed by AHL. AHL commenced operations January 1, 1996.
The Company adopted the 1993 Stock Incentive Plan ("SIP") for the benefit of employees of the Company and its subsidiary which provides for the issuance of stock options, stock appreciation rights ("SARs") and restricted stock. Under the SIP, a maximum of 510,000 shares of common stock may be issued upon the exercise of options, or in the form of SARs or restricted stock. Stock options granted under the SIP are at the fair market value at the time of grant and, subject to termination of employment, expire 10 years from the date of grant. Such options are not transferable other than on death and are exercisable in equal increments on the option issuance anniversary in the three years following issuance. In September 1996, the SIP was amended to provide for accelerated vesting of issued options by written agreement between the participant and the Board of Directors.
At December 31, 1996 and 1995, there were 219,452 shares with a weighted-average exercise price of $22.54 and 85,050 shares with a weighted-average price of $21.96, respectively, exercisable under the SIP.
December 31, ---------------- 1996 1995 ------- ------- (000s omitted) Accumulated postretirement benefit obligation: Retirees $ (72) $ (45) Fully eligible active plan participants (77) (79) Other active plan participants (199) (239) ------- ------- Accumulated postretirement benefit obligation (348) (363) Unrecognized prior service costs (2,166) (2,282) Unrecognized transition obligation (126) (66) ------- ------- Accrued plan cost included in other liabilities $(2,640) $(2,711) ======= =======