The Company and its subsidiaries rent office space at various locations. The Company also owns two office buildings in Tarrant County, Texas with approximately 150,000 square feet.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Revenues. Revenues increased to $955.8 million in 1997 from $730.6 million in 1996, an increase of $225.2 million, or 31%. The increase was a result of increases in premiums, net investment income, and fees and other income.
Net investment income. Net investment income increased to $84.2 million in 1997 from $71.3 million in 1996, an increase of $12.9 million, or 18%. The increase was due to an increase in invested assets and yield on invested assets. Invested assets increased to $1,133.8 million at December 31, 1997 from $1,082.9 million at December 31, 1996.
Gains on sale of investments. The Company recognized gains on sale of investments of $4.0 million in 1997 compared to $652,000 in 1996. The amount of realized gains or losses on the sale of investments is a function of interest rates, market trends and the timing of sales. In addition, due primarily to decreasing long-term interest rates in 1997, the net unrealized investment gains on securities classified as "available for sale", reported as a separate component of stockholders' equity and net of applicable income taxes and minority interests, was $14.3 million at December 31, 1997 compared to $2.2 million at December 31, 1996.
Life Insurance and Annuity. Operating income for the Life Insurance and Annuity segment increased to $17.5 million in 1997 from $15.1 million in 1996, an increase of $2.4 million, or 16.0%. The increase related primarily to a decrease in agency expenses, the continued growth from the sale of new life policies, and the recognition of the Company's share of the profits on a closed block of business.
Credit Services. Operating income for the Credit Services business increased to $20.5 million in 1997 from $15.2 million in 1996, an increase of $5.3 million or 35%. The increase is primarily due to the continued growth in new sales which increases revenue and operating income and better performance by the credit card portfolio.
Corporate and Other. Operating income for Corporate and Other was $23.9 million in 1997 compared to $7.2 million in 1996. Losses incurred on the Technology and Outsourcing Division decreased to $2.7 million in 1997 from $4.8 million in 1996. Operating income for the Real Estate Division increased to $4.1 million in 1997 compared to $1.0 million in 1996. The increase relates primarily to reporting a full year's operations for this division compared to 1996 when this division was formed in the fourth quarter with the acquisition of ARC. Operating income from other corporate activities increased to $22.5 million in 1997 from $11.0 million in 1996, an increase of $11.5 million. The increase was primarily due to the addition of the Student
Revenues. Revenues increased to $730.6 million in 1996 from $641.1 million in 1995, an increase of $89.5 million, or 14%. The increase was a result of increases in premiums, net investment income, and fees and other income.
Net investment income. Net investment income increased to $71.3 million in 1996 from $65.1 million in 1995, an increase of $6.2 million, or 10%. The increase was due to an increase in invested assets which was partially offset by a lower yield on invested assets. Invested assets increased to $1,082.9 million at December 31, 1996 from $931.3 million at December 31, 1995.
Fees and other income. Fees and other income increased to $110.8 million in 1996 from $54.7 million in 1995, an increase of $56.1 million, or 103%. The increase related primarily to the increase in revenue from the Credit Services segment, revenue from the companies acquired by the Technology and Outsourcing Division in 1995 and administrative fees from the administrative operation acquired from AEGON on April 1, 1996.
Underwriting, acquisition and other expenses. Underwriting, acquisition and other expenses increased to $280.8 million in 1996 from $230.0 million in 1995, an increase of $50.8 million, or 22%. The increase was primarily due to the growth in premium volume, costs associated with the businesses acquired by the Technology and Outsourcing Division in 1995 and expenses relating to the administrative operation acquired from AEGON. As a percentage of revenues, these expenses increased to 38.4% in 1996 from 35.9% in 1995.
Interest expense. Interest expense decreased to $2.5 million in 1996 from $3.9 million in 1995, a decrease of $1.4 million. The decrease was due to a lower cost of borrowing and a lower average amount of debt outstanding in 1996 compared to 1995, due to the use of part of the proceeds from a public offering to pay off $10.3 million of debt.
Income before federal income taxes and minority interests ("operating income"). Operating income increased to $111.4 million in 1996 from $86.7 million in 1995, an increase of $24.7 million, or 29%. Operating income (loss) for each of the Company's segments and divisions was as follows:
Credit Services. Operating income for the Credit segment business increased to $15.2 million in 1996 from $1.4 million in 1995, an increase of $13.8 million. This is primarily due to an increase in the profit per card and a 38% increase in the number of cards outstanding at December 31, 1996 compared to December 31, 1995.
Corporate and Other. Operating income for Corporate and Other was $7.2 million in 1996 compared to $6.0 million in 1995. Technology and Outsourcing Division incurred comparable operating losses in 1996 and 1995. The losses primarily resulted from the losses of certain companies in the development stage which was partially offset by operating income of other businesses. In November 1996, the Company acquired ARC. The operations of ARC are reported as the Real Estate Division. The Company reported operating income from the Real Estate Division of $1.0 million in 1996. Operating income from other corporate activities increased to $11.0 million in 1996 from $10.2 million in 1995. The increase was primarily due to the increase in investment income not allocated to the other segments and the decrease in interest expense. The primary reason for the increase in investment income not allocated to the other segments was due to the investment income earned on the net proceeds from the public offering completed by the Company on May 1, 1996. The increase was partially offset by fewer gains realized on sale of investments in 1996 compared to 1995.
The Company's effective tax rate was 31.9% for 1997 compared to 32.5% for 1996 and 33.5% in 1995. The 1997, 1996, and 1995 effective rate varied from the federal tax rate of 35% primarily due to income allocated to partners for tax purposes, the small life insurance company deduction allowed for certain insurance subsidiaries of the Company and the change in the valuation allowance related to deferred tax assets.
The Company's invested assets increased to $1,133.8 million at December 31, 1997 from $1,082.9 million at December 31, 1996, an increase of $50.9 million. The primary sources for the asset growth were the cash provided by current year operations and the increase in market values of the fixed maturity securities held as "available for sale." The sources were partially offset by the acquisition of several new companies and remaining interest of two companies, and the withdrawals, net of deposits, from investment products. The increase in market values was the direct result of decreases in long-term interest rates.
On June 22, 1994, the Company issued its 8.75% Senior Notes Payable due June 2004 ("8.75% Senior Notes") in the aggregate amount of $27.7 million. Interest on the 8.75% Senior Notes is paid semi-annually. The notes require principal repayments starting June 1, 1998 and on each June 1 thereafter in the amount of $4.0 million each until repaid.
The Company had no outstanding balance on its revolving credit note with AEGON at December 31, 1997. The note has a maximum line of credit of $12.0 million through August 1, 2002 and bears interest at prime plus 0.875%.
Effective January 1, 1997, the Company acquired the agency force and certain assets of UGA, Inc. for a price equal to the net book value of the tangible assets acquired and assumed certain agent commitments of $3.9 million. The tangible assets acquired consist primarily of agent debit balances, a building, and related furniture and fixtures having a net book value of $13.1 million, which approximates fair market value of the tangible assets.
During 1997, the Company purchased $6.3 million of credit card receivables from a bank owned by the Company's Chairman.
the other two in 1997, for a gain of $2.0 million and $4.7 million, respectively. The operations of the dental benefit companies were not material to the operations of the Company.
The Company may be required by certain minority stockholders to purchase their shares of subsidiaries of the Company at a predetermined formula price which approximates GAAP book value. The formula price based on information available at December 31, 1997 was $6.8 million.
General. The Company has an Investment Committee which monitors the investment portfolio of the Company and its subsidiaries. The Investment Committee receives investment management services from external professionals.
Fixed maturity securities. Fixed maturity securities accounted for 73.3% of the Company's total investments at December 31, 1997. Fixed maturity securities consisted of the following:
December 31, 1997 ----------------- % of Total Carrying Carrying Value Value -------- -------- (Dollars in thousands) U.S. Treasury and U.S. Government agency obligations ..... $ 52,000 6.3% Corporate bonds .......................................... 471,736 56.7 Mortgage-backed securities issued by U.S. ................ Government agencies and authorities .................... 47,869 5.8 Other mortgage and asset backed securities ............... 259,855 31.2 -------- ----- $831,460 100.0% ======== =====
As of December 31, 1997, $796.0 million or 95.7% of the fixed maturity securities portfolio was rated BBB or better (investment grade) and only $35.4 million or 4.3% of the fixed maturity securities portfolio were invested in below investment grade securities (less than BBB). A quality distribution for fixed maturity securities is as follows:
Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send premium notices, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at approximately $3.8 million.
To date, the Company has incurred and expensed approximately $1.0 million primarily for assessment of the Year 2000 issue and the development of a modification plan.
The project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company is required to adopt FAS No. 130 effective January 1, 1998.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information." The statement is effective for fiscal years beginning after December 15, 1997 with earlier application permitted. This statement significantly changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. The Company is required to adopt FAS No. 131 effective January 1, 1998.