The book value per common share for years prior to 1997 has been restated to reflect the 2 for 1 stock split effective September 12, 1997.
Property and casualty insurers experienced higher earnings in 1997 due to the relative absence of major catastrophes. Standard & Poor has reported that increased capacity and increased competition are forcing property and casualty insurers to cut prices, particularly in the commercial sector.
The reinsurance market continued to experience significant consolidation in 1997. Despite the reduction in the number of large reinsurance companies, the cost of reinsurance coverage has been decreasing. This may be attributable in part to the relatively improved underwriting experience over the last two years, the expanded Bermuda market and the resurgence of Lloyd's of London.
Litigation continues to be a major industry concern. In Alabama, and increasingly in other states, the insurance and finance industries have been targeted in litigation. The legal environment in Alabama has received national news coverage and the Alabama legislature is considering tort reform. Future changes in the current environment, if any, cannot be predicted.
Recent Supreme Court and other regulatory rulings are expected to lead to increased marketing of insurance products by banks and other financial services firms. This may lead to increased competition; however, the Company does not expect to be significantly impacted since its major products do not include traditional life and property and casualty insurance products which banks may begin to market. Accordingly, this may result in additional products and services being sold through the Company's bank distribution channel. Congress has indicated that it may examine the issue of banking reform including state regulation of the insurance industry.
The federal government, commercial companies and the insurance industry continue to work together toward Superfund reform and dealing with the cleanup of pollution sites. Among issues pending are the determination of retroactive liability and a proposed insurer-specific tax. The most recent bill introduced in Congress reflects a scaled down Superfund reform plan that largely retains the retroactive liability system.
income before realized gains generated by the property and casualty segment was adversely impacted in 1996 by losses from Hurricanes Bertha, Fran and Hortense of approximately $6.0 million, net of tax. The Company's United Kingdom insurance subsidiary incurred additional operating losses in 1996 principally due to canceled product lines. The 1995 results included, on an after-tax basis, $.5 million in net investment gains and a $3.8 million charge on the settlement of the final portion of the credit bond litigation.
Life ---- 1997 $ 63,410 1996 $ 58,838 1995 $ 43,469
Property and Casualty --------------------- 1997 $ 101,772 1996 $ 86,028 1995 $ 83,971
The growth in gross collected premiums was primarily related to the following products:
The Company expects long-term premium growth to continue. Actual growth in any one year may vary depending on the acquisition or loss of significant clients, business acquisitions and international expansion or other factors as described in the Safe Harbor Cautionary Statement.
The cost of reinsurance to cover catastrophe losses decreased by $1.8 million to $7.5 million in 1997, from $9.3 million in 1996. The cost in 1995 was $9.5 million. The Company continually reviews its exposure to catastrophe losses.
Operating expenses (excluding interest expense) were $298.8 million in 1997, $280.8 million in 1996 and $251.5 million in 1995. The ratio of operating expenses to gross premiums earned in 1997 was 11.4%, showing continued improvement from 1996 of 11.8% and 1995 of 12.5%. The Company is in the process of replacing many of its legacy systems and is upgrading its systems to accommodate business for the year 2000. Costs relate to the new processing system being implemented for the property and casualty segment totaled $4.2 million in 1997, $6.3 million in 1996 and $4.9 million in 1995. Similar expense levels are expected to continue through 1998.
The effective tax rate decreased to 28% in 1997 from 30.5% in 1996. This decrease is due in part to the increase in low income housing investments and a reduction of losses in the United Kingdom subsidiary. The Company continues its strategy to increase its investments of tax-exempt and tax-credit investments to minimize its income tax expense.
Total assets increased 9% to $3.8 billion at December 31, 1997, from $3.5 billion at December 31, 1996. The increase is attributable to strong cash flows. Total assets increased 16% at December 31, 1996, from $3.0 billion at December 31, 1995. This increase resulted from strong cash flows and the investment of proceeds from the issuance of Series B Convertible Preferred Stock. Invested assets at December 31, 1997, 1996 and 1995, were $2.2 billion, $2.0 billion and $1.7 billion respectively. At December 31, 1997, investments in fixed maturities represented 84% of the total investment portfolio while short-term and other investments (principally invested cash and short-term bonds) represented another 9%. The Company does not hold significant investments in equity securities, mortgage loans or real estate.
In February 1996, the Board of Directors revoked the 1990 authority to repurchase Company stock and authorized a repurchase of up to one million shares of the Company's stock in the open market from time to time subject to certain conditions. At December 31, 1997, the Company held approximately 271,000 shares as treasury stock.
Page ---- Report of Independent Certified Public Accountants 45 Consolidated Balance Sheets at December 31, 1997 and 1996 46 Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995 47 Consolidated Statements of Common Stock and Other Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 48 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 49 Notes to Consolidated Financial Statements for the year ended December 31, 1997 50
Per share data has been restated due to stock split. See accompanying notes to consolidated financial statements.
* American Bankers Insurance Company of Florida (ABIC) * American Bankers Life Assurance Company of Florida (ABLAC) * American Reliable Insurance Company (ARIC) * Bankers American Life Assurance Company (BALAC) * Bankers Insurance Group (BIG) * Caribbean American Life Assurance Company (CALAC) * Caribbean American Property Insurance Company (CAPIC) * Federal Warranty Service Corporation (FWSC) * Voyager Insurance Companies
For life business, the costs of acquiring new business (principally commissions and certain variable underwriting, agency and policy issue expenses) are deferred and amortized over the term of the contracts as follows:
* Acquisition costs relating to credit life and accident and health insurance are amortized over the term of the contracts in relation to premiums earned.
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $10,091,000 $9,278,000 and $8,607,000, respectively and is a component of operating expenses. Estimated useful lives range from 10 to 40 years for buildings and 3 to 10 years for furniture and equipment.
Operating results and other financial data for each segment are presented in Note 12. Industry segments are primarily composed of the Company's business in the life and property and casualty insurance industries. The geographic segments include the companies or branches located in the United States and its possessions as domestic and all other as foreign. Included in the domestic segments is one foreign insurance subsidiary which writes no direct business, reinsures only affiliated U.S. risks transacted in U.S. dollars and has elected to be taxed as a U.S. corporation.
Previously, the Company would periodically purchase securities for trading purposes generally not to exceed $20,000,000. The Company no longer engages in this activity, and there were no securities in the trading portfolio at December 31, 1997. At December 31, 1996, the Company held trading securities with a fair value of $9,038,000 (amortized cost $8,867,000) resulting in an unrealized gain of $171,000 which was included in operating results.
Investments by the Company in investment grade corporate debt securities may be affected by a rating decline subsequent to acquisition. However, the percentage of the portfolio affected by such developments is generally not significant due to the diversification of the aggregate portfolio.
An analysis of net realized gains and losses applicable to investments is as follows:
FAIR VALUES The fair value of the Company's financial instruments other than investments and those where fair values approximate carrying value (See Note 2(l)) are as follows:
The composition of the liability at December 31, 1997 and 1996, and related significant assumptions used are as follows:
The Company's insurance subsidiaries follow the policy of reinsuring risk in excess of $250,000 under a domestic ordinary life policy, $400,000 under an international ordinary life policy and $300,000 under a property policy. In addition, aggregate excess of loss coverage is obtained for the Company's property and casualty business as protection against catastrophic losses. Ceded claim and policy liabilities are recorded as assets on the balance sheet under the caption "Reinsurance Receivable." The Company's insurance subsidiaries are liable for these amounts in the event reinsurers are unable to pay their portion of the claims. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities or economic attributes of the reinsurers to lessen its exposure to significant losses from reinsurer insolvencies. Reinsurance ceded incurred losses for 1997 and 1996 were $416,333,000 and $315,096,000 respectively. Liabilities for ceded claim reserves and recoverables on paid losses at December 31, 1997 and 1996 are shown below.
The provision for foreign taxes includes amounts attributable to income from U.S. possessions which are considered foreign under U.S. tax laws.
Deferred income taxes of $13,066,000, $9,015,000, and $10,230,000 in 1997, 1996 and 1995 respectively have been provided on net unrealized investment gains.
The Company intends to indefinitely reinvest the undistributed earnings of its wholly owned foreign subsidiaries. The cumulative amount of undistributed earnings for which the Company has not provided deferred income taxes is approximately $77,300,000 as of December 31, 1997. Upon distribution of such earnings in a taxable transaction, the Company would incur additional U.S. income taxes in the amount of approximately $19,500,000 net of anticipated foreign tax credits.
The Company made federal income tax payments (net of refunds) of $24,075,000, $21,875,000, and $13,448,000 for the years 1997, 1996 and 1995 respectively.
Interest paid was $16,485,000 in 1997, $17,924,000 in 1996, and $14,328,000 in 1995.
The 10.2% promissory notes program was paid and terminated by the Company during 1997. The convertible debenture bonds were converted to shares of the Company's common stock during January 1998.
The Company has authorized 10,000,000 shares of no par preferred stock. On February 24, 1988, the Board of Directors adopted a "Rights Plan" (amended November 14, 1990, December 19, 1997, February 5, 1998, and February 19, 1998) creating certain rights which attach to and trade with each share of common stock outstanding on or after March 11, 1988. Upon the acquisition of, or the announcement of a tender offer for, specified amounts of the Company's common stock, the rights will separate from the common stock, at which time holders of the rights will be entitled to purchase units of the Company's Series A Participating Preferred Stock. Thereafter, under certain circumstances (including acquisitions of specified amounts of the Company's common stock, mergers involving the Company, and certain self-dealing transactions by an acquisitor), holders of the rights will be entitled to purchase common stock (or other property) of the Company (or of the acquiring entity) at prescribed levels. At December 31, 1997, there were 350,000 shares of Series A Preferred Stock reserved for issuance. The rights are redeemable at the Company's option and expire on March 10, 1998. The Board of Directors adopted a new "Rights Plan" on February 19, 1998 and designated and reserved for issuance 1,000,000 shares of Series C Participating Preferred Stock, which terms are substantially similar to the Series A Preferred Stock. Neither Rights Plans were or will be triggered by the proposed acquisition by Cendant Corporation.
At December 31, 1997, the Company had 2,300,000 shares of $3.125 Series B Cumulative Convertible Preferred Stock issued and outstanding. Holders of the Convertible Preferred Stock are entitled to a cumulative dividend, payable quarterly, at the annual rate of $3.125 per share. If six quarterly dividends are in arrears, the holders of the convertible preferred stock will be entitled to vote as a separate class to elect two directors of the Company. The Convertible Preferred Stock will not be redeemable prior to August 7, 2000. On and after such date, the Convertible Preferred Stock will be redeemable, in whole or in part, at the option of the Company, at $51.88 per share of Convertible Preferred Stock during the period from August 7, 2000 to August 6, 2001 and declining ratably annually to $50 per share of Convertible Preferred Stock on or after August 7, 2006, plus in each case accrued and unpaid dividends to the redemption date.
Stock insurance companies are subject to various states' insurance laws and regulations whereby amounts available for dividends are restricted. Net consolidated assets restricted as to distribution to the Company are $672,500,000. The maximum statutory allowed dividends in 1998 are $141,300,000.
A summary of statutory financial information for the domestic insurance companies is presented below:
At their Annual Meeting in 1997, the stockholders approved the Equity Incentive Plan (EIP). Under the EIP, selected officers and employees may be granted Options, Stock Appreciation Rights, Restricted Stock, Merit Awards, Performance Share Awards and Cash Awards. An aggregate of 4,000,000 (post-split) shares of common stock are reserved for issuance under the EIP. Awards were granted as follows:
Under the Stock Incentive Compensation Plan (SICP), key management employees were granted a total of 672,100 (post-split) options on shares of common stock during the years 1991 through 1996. Option prices were equivalent to fifty percent of the fair market value of common stock on the grant date with prices ranging from $3.66 to $11.88. As the result of the adoption of the EIP, no new grants will be made under the SICP.
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options as allowed pursuant to FASB Statement No. 123, "Accounting for Stock Based Compensation" (FASB Statement 123). FASB Statement 123 requires use of option valuation models that require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.
Under the 1994 Key Executive Debenture Plan (KEDP), the Board may select certain Company officers to be eligible to purchase convertible debentures. As of December 31, 1997, two debentures in the aggregate amount of $3.7 million had been issued which are convertible into all the 300,000 shares as currently reserved under the plan. All debentures were converted by the holders in January 1998.
Although the debt is not a direct obligation of the Company, it is nevertheless reported as part of the Company's debt with an offsetting balance reflected as a reduction of stockholders' equity. As contributions to the LESOP are made by the Company, the debt is repaid to the bank by the LESOP and the balances on the Company's balance sheet are reduced accordingly. The Company has guaranteed the Trust's loan obligation. It intends to make contributions to the LESOP in amounts sufficient to enable the Trust to repay the loan on a quarterly basis over ten years, including interest equal to 6%. The shares held by the bank as collateral are released proportionately as loan repayments are made. Upon such release, the shares are available for allocation to employees based upon years of service. Employees are entitled to direct the vote of the shares allocated to them on voting instruction forms furnished to the trustee. Unallocated shares are voted by the LESOP's Trustee. At December 31, 1997 and 1996, the loan balance was $2.1 million and $4.3 million respectively. The interest portion of the LESOP pension expense was $.3 million in 1997 and $.4 million in 1996.
As a result of the promulgation of Statement of Position (SOP) 93-6 - "Employers' Accounting for Employee Stock Ownership Plans" - by the American Institute of Certified Public Accountants in late 1993, new reporting rules became effective in 1994. These changes are mandated for shares acquired in 1993 and later, and are optional for previously acquired shares. The Company has no shares subject to the mandated provisions and, as permitted by the SOP, is not electing to change its accounting for previously acquired shares. The following disclosures are made to supplement previously disclosed plan information:
* All shares held by the LESOP are treated as issued and outstanding and, accordingly, are included in the Company's earnings per share calculations.
Prior allocated 3,503,986 Allocated in 1997 343,432 Suspense shares 343,440 Distribution (684) --------- Total 4,190,174 =========
The 1994 Amended and Restated Directors' Deferred Compensation Plan (Deferred Plan) allows the directors to defer their fees in cash or in common stock equivalents. The fees that are deferred in common stock equivalents will accumulate and earn interest from the time the fees are deferred until the last day of each quarter when they are converted to common stock equivalents. Upon termination from the board, the director will receive, as elected, either cash or actual shares of the Company's common stock. The Deferred Plan provides for the issuance of up to 400,000 shares of the Company's common stock. At December 31, 1997 there were 123,273 shares allocated under this plan.
The Company has a non-contributory pension plan covering substantially all of its domestic employees. Benefits under the Plan are based on years of service and compensation levels near retirement. The Company's funding policy is to contribute amounts that meet minimum funding requirements but which do not exceed the maximum funding limits as currently determined under applicable tax regulations. The Plan previously reached the full funding limitation and, accordingly, no contributions were made in 1997, 1996 and 1995.
A summary of the approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 1997, is as follows:
Certain of ABIG's subsidiaries, including the Company, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate, sales practices, marketing, disclosure and policy coverage issues. While a number of similar suits have been filed in other jurisdictions, the insurance and finance industries have been targeted in Alabama by plaintiffs' lawyers who enjoy a favorable judicial climate. The Company typically has been named as a co-defendant with one or several retailer or finance companies who have sold the Company's product to a consumer. Other insurers are also joined as co-defendants in some of the suits.
Although the Alabama lawsuits and similar suits pending in Mississippi and other jurisdictions generally involve relatively small amounts of actual or compensatory damages, they typically assert claims requesting substantial punitive awards or purport to represent a large class of policyholders. The Company denies any wrongdoing in any of these suits and believes that it has not engaged in any conduct that would warrant an award of punitive damages or that the class allegations have merit. The Company has been advised by legal counsel that it has meritorious defenses to all claims being asserted against it.
While no one case is necessarily significant in terms of financial risk to the Company, the judicial climate in Alabama is such that the outcome of these cases is extremely unpredictable. Moreover, class action lawsuits to which the Company is a party do not lend themselves to potential damage calculation. Without admitting any wrongdoing, the Company has settled a number of these suits, but there are still a significant number of cases pending, and it is expected that more suits alleging essentially the same causes of action are likely to continue to be filed during 1998. The Company intends to continue to defend itself vigorously against all such suits and believes, based on information currently available, that
The consummation of the Merger is conditioned upon several requirements, including shareholder and regulatory approval. If the Company fails to consummate the Merger, under certain circumstances, the Company will be obligated to pay a termination fee to Cendant of $94.9 million plus expenses.
Cendant's proposal to acquire the Company followed an announcement by the Company that it had entered into an agreement with American International Group, Inc. ("AIG") for the acquisition by AIG of 100 percent of the outstanding stock of the Company pursuant to the merger (the "AIG Merger") of the Company with and into AIGF, Inc., a Florida corporation and a newly formed wholly-owned subsidiary of AIG, in accordance with the terms of the Agreement and Plan of Merger, dated as of December 21, 1997 among the Company, AIG and AIGF as amended and restated as of January 7, 1998, amended by Amendment No. 1 thereto dated as of January 28, 1998, and as further amended and restated as of February 28, 1998 (the "AIG Merger Agreement"). In connection with the AIG Merger Agreement, the Company had granted AIG an option to purchase a number of newly issued shares of Common Stock equal to approximately 19.9% of the outstanding number of shares of Common Stock pursuant to the Stock Option Agreement dated as of December 21, 1997, as amended and restated as of February 28, 1998 (the "Stock Option Agreement"). In addition, Messrs. Landon and Gaston who hold approximately 8.3% of the outstanding Common Stock had entered into a voting agreement (the "Voting Agreement") with AIG pursuant to which these stockholders agreed to vote their shares of Common Stock in favor of
The AIG Merger Agreement, Stock Option Agreement and Voting Agreement have been terminated. On March 18, the Company, AIG and Cendant entered into a settlement agreement (the "Settlement Agreement") pursuant to which AIG agreed to temporarily waive certain provisions of the AIG Merger Agreement, which waiver permitted the Company to terminate the AIG Merger Agreement and enter into the Cendant Merger Agreement. On March 23, 1998, in accordance with the terms of the Settlement Agreement, the Company paid to AIG a termination fee of $100 million principally from funds provided by its short-term credit facility and Cendant paid $5 million, and agreed to pay an additional $5 million to AIG in respect of AIG's expenses, and the Company and AIG entered into a termination agreement which resulted in the termination of the AIG Merger Agreement, the Stock Option Agreement and the Voting Agreement.
The Merger is subject to approval by regulatory authorities and the Company's shareholders which are expected to be obtained by the end of the second quarter of 1998. In connection with the Merger, the Company will recognize certain expenses associated with the accelerated vesting of benefits under several compensation plans, including employee stock options and restricted stock. The Company estimates that the after-tax charge related to the acceleration of such benefits will be approximately $6 million.
AMERICAN BANKERS INSURANCE GROUP, INC. SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1997 (IN THOUSANDS)
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS AT DECEMBER 31, (IN THOUSANDS)
*Eliminated in consolidated financial statements. See accompanying notes to condensed financial statements.
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1997
Certain items in the 1996 financial statements have been reclassified to conform with the 1997 presentation.
*Includes premiums from both the life and property and casualty segments.
*1995 amount has been restated to reflect the reclassification of credit bond losses in Schedule III, approximately $8,000.