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. Changes in the current environment, if any, cannot be predicted.
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. The 1994 results included, on an after-tax basis, $1.7 million in net investment gains and a $2.9 million charge on the final settlement of credit bond litigation initiated by bondholders.
PROPERTY AND CASUALTY --------------------- 1996 $ 86,067 1995 $ 83,971 1994 $ 66,023
catastrophe losses experienced by the industry in past years had caused the reinsurance market capacity to be limited and more costly.
The Company's experience in the property and casualty segment has been better than industry experience, as demonstrated by the following statutory combined ratios:
In 1996, the Company incurred approximately $9.2 million in pre-tax losses related to Hurricanes Bertha, Fran and Hortense.
The Company's 1996 reserve development, both foreign and domestic, was not significantly different from previously established reserves. The Company's reserve development includes the effects from losses experienced from excess casualty reinsurance pools in which the Company discontinued participation effective in or prior to 1981. The Company reported pre-tax losses from these pools of $8.3 million in 1996, $7.3 million in 1995 and $4.2 million in 1994. Reserve additions in 1996 increased significantly to $6.7 million from $3.0 million in 1995.
It is difficult to make a reasonable estimate of the Company's ultimate liability due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is complex and uncertain. Our historical experience suggests, however, that although reinsurance pool losses will continue, they should not have a materially adverse effect on the Company's financial condition or cash flows.
A few of the Company's products such as Mobilehome Physical Damage and Homeowners are affected by seasonal changes during the year, causing the profitability in those lines and for the Company to fluctuate throughout the year.
investments in fixed maturities represented 85% of the total investment portfolio while short-term and other investments (principally invested cash) represented another 9%. The Company does not hold significant investments in equity securities, mortgage loans or real estate. At December 31, 1996, there were $8.7 million in investments pertaining to Florida properties, which represents 85% of the total mortgage loans and real estate portfolio.
Stockholder's equity increased by $310.9 million to $710.2 million at December 31, 1996, from $399.3 million at January 1, 1994. In July 1996, the Company issued 2.3 million shares of preferred stock with a stated value of $50 per share that contributed net proceeds of $111.8 million to equity. The other primary sources of growth in stockholder's equity from January 1, 1994, to December 31, 1996, are accumulated earnings of $223.3 million reduced by $46.9 million in dividends paid on the Company's common and preferred shares. Under FASB Statement 115 - Accounting for Certain Investments in Debt and Equity Securities - certain investments in debt and equity securities are carried in the balance sheet at fair value. The difference between amortized cost and fair value of securities available-for-sale (unrealized gain or loss, net of tax) is included as a component of equity. Unrealized gains, net of taxes on the Company's fixed maturity portfolio were $7.7 million at December 31, 1996.
The increase in interest rates resulted in a reduction in the market value of the Company's fixed maturity portfolio. Unrealized gains on fixed maturity investments decreased to $25.1 million at December 31, 1996, from $35.2 million at December 31, 1995. At December 31, 1996, $2.0 billion or 57.6% of the Company's total assets were comprised of securities, short-term investments and cash. Securities are principally readily marketable and none are part of highly leveraged transactions. In the bond portfolio, 80% of bonds have maturities of under five years and 83% have a rating of "A" or better (79% and 87% respectively at December 31, 1995).
Cash flows from operations of $202.7 million in 1996, $266.0 million in 1995, and $235.2 million in 1994 contributed to meet operating requirements, as well as anticipated debt service. Cash provided by operating activities in excess of these needs is used in investing activities. During 1996, the Company raised $115 million in a public offering of preferred stock. The net proceeds of $111.8 million were used primarily to support future growth and reduce debt. Excluding any significant business acquisitions, the Company expects to provide all its capital needs internally in 1997.
In 1995, the Company executed a $250 million financing program with a group of banks, which features a bid loan and revolving line of credit facility to replace the $130 million financing program. In 1994, the Company registered $200 million of medium-term notes with maturities ranging from nine months to thirty years, with the Securities and Exchange Commission. In 1994 and 1995, the Company issued a $75 million fixed rate note and a $50 million floating rate note respectively. The interest rate on the floating rate note is determined quarterly, and interest under the short-term facility is determined at the time amounts are borrowed. Accordingly, interest rate changes may impact the Company's interest expense. Under these arrangements, approximately $245 million is available for short-term liquidity needs as of year end.
The Company does not commit a significant portion of its investment portfolio to equity securities, which were 5.7% of total invested assets at December 31, 1996; consequently, liquidity is not significantly affected by changes in the equity securities markets. The Company's preferred stock portfolio is exposed to market value fluctuations which result primarily, but not exclusively, from the sensitivity of the preferred stocks to interest rate changes. To mitigate the interest rate sensitivity of this portfolio, the Company has established a limited cross-hedging program utilizing U.S. Treasury futures and option contracts. Open positions at December 31, 1996 were not significant.
The Company expects to continue its policy of paying regular cash dividends; however, future dividends are dependent on the Company's future earnings, capital requirements and financial condition. Additionally, based on the current dividend paying abilities of the insurance subsidiaries, the Company does not foresee any difficulty in servicing its outstanding indebtedness or its dividend-paying abilities.
The investments of the insurance subsidiaries are limited as to type and amount by the insurance laws of the state of domicile. During 1996, the NAIC adopted the Investments of Insurers Model Act which provides a well-capitalized insurer more discretion and flexibility in its investing practices. Additionally, investment policies are reviewed by the Board of Directors.
The NAIC has promulgated Risk-Based Capital (RBC) requirements. Under the RBC requirements, areas such as asset risk, insurance risk, interest risk and business risk are evaluated and compared to the Company's capital and surplus to determine relative solvency margins. The Company's insurance subsidiaries all exceed their respective RBC requirements.
The Catastrophe Reserve Subgroup of the NAIC is currently working on the development and implementation of a mandatory, tax-deductible, pre-event catastrophe reserve based on geographic exposure zones and premiums by line of business. Agreement is yet to be reached on certain factors included in the design of the reserve, such as a trigger point and a cap on the reserve.
The competitors of the Company consist of both stock and mutual insurance companies. Because the profits, if any, of mutual companies accrue to the policyholders, such companies may have certain competitive advantages. Some competing companies, both stock and mutual, have been in business a longer time, are more widely known by reason of such factors as age and size, and have greater financial resources than ABIG. However, due to the specialized nature of the markets served and products offered, most businesses of the Company compete directly with a relatively small number of other insurance companies, which share the Company's specialty nationwide and in regional and state markets.
Life insurance companies are required to establish and maintain policy liabilities to meet their obligations on life policies. These liabilities are amounts which, with additions from premiums to be received on outstanding policies and with interest on such funds compounded annually at certain assumed rates, are calculated to be sufficient to meet policy obligations at death or maturity in accordance with the mortality tables employed when the policies were issued. Liabilities for losses and loss adjustment expenses for
property and casualty insurance represent estimates of unpaid claims related to known losses and of claims which have been incurred but not reported. These liabilities are based upon past experience of ultimate claim settlements and of unreported losses and loss adjustment expenses. The length of time for which such costs must be estimated varies depending upon the coverage involved. Since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liability and damage awards, the process used in computing reserves cannot be exact, particularly for liability coverages.
Except for historical information provided in this Annual Report, statements made throughout this document, including Management's Discussion and Analysis, are forward-looking and, as such, actual results could differ materially from those expected by the Company. The actual results of the Company may be affected by (i) adverse catastrophe experience in certain of the Company's property and casualty products, (ii) significant changes in interest rates, (iii) increased competition causing reduction in product margin or loss of a significant client, (iv) adverse loss development on property and casualty prior years' claims or the excess casualty reinsurance pools, (v) premium growth expectation not met because of the loss of a significant client, (vi) outcome of litigation and other state and federal regulatory issues, and (vii) general economic conditions. In addition, the actual results of forward-looking statements are also subject to the specific factors which may be included with a particular forward-looking statement.
* Note: All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of American Bankers Insurance Group, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER COMMON SHARE DATA):
For the Years ended December 31 (in thousands except per common share data):
v American Bankers Insurance Company of Florida (ABIC) v American Bankers Life Assurance Company of Florida (ABLAC) v American Reliable Insurance Company (ARIC) v Bankers American Life Assurance Company (BALAC) v Bankers Insurance Company, Ltd. (BICL) v Caribbean American Life Assurance Company (CALAC) v Caribbean American Property Insurance Company (CAPIC) v Federal Warranty Service Corporation (FWSC) v Voyager Insurance Companies
Under FASB Statement 115, investments in debt and equity securities are classified as either held-to-maturity, available-for-sale or trading. Investments in debt securities are classified as held-to-maturity and measured at amortized cost if the Company has the positive intent and ability to hold these securities to maturity. Investments in debt securities not classified as held-to-maturity and equity securities with readily determinable fair values are classified as either available-for-sale or trading securities and measured at fair value. Securities that are purchased and held principally for the purpose of selling them in the near term shall be classified as trading securities and reported at fair value with subsequent changes in value reflected as unrealized investment gains and losses in the Consolidated Statements of Income. Investments not classified as either trading securities or held-to-maturity securities are classified as available-for-sale securities and reported at fair value with subsequent changes in value reflected as unrealized investment gains and losses in the Consolidated Statements of Common Stock and Other Stockholders' Equity.
Life insurance and annuity premiums, including single premiums for accidental death and dismemberment policies, are reported as earned when due. Credit life insurance premiums and accident and health premiums are earned over the terms of the contracts in relation to anticipated benefits to the policyholders. Property insurance premiums are recognized as income principally on a pro rata basis over the life of the policies.
v Acquisition costs relating to credit life and accident and health insurance are amortized over the term of the contracts in relation to premiums earned.
Claim liabilities net of salvage and subrogation are based primarily upon past experience and may be more or less than the amounts ultimately paid or recovered when the claims are settled. Changes in the estimated liability are charged or credited to operations as the estimates are revised.
Depreciation of property and equipment is provided primarily on the accelerated method. Buildings are depreciated on the straight-line method.
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was $9,278,000, $8,607,000 and $8,550,000 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.
Primary earnings per common share are based on net income (adjusted for dividends on preferred stock) using the weighted average number of such shares outstanding during the year after giving effect to common stock equivalents and treasury shares.
Fully diluted earnings per share also assume conversion, if dilutive, of the Company's convertible debt, preferred stock and options into common shares after appropriate adjustments for interest.
v Investment securities: Fair values for fixed maturity securities are based on quoted market prices when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices.
v Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
At December 31, 1996 and 1995, fixed maturities with an amortized cost of $67,356,000 and $58,356,000 respectively were on deposit with insurance regulatory authorities to meet statutory requirements. In addition, fixed maturities with an amortized cost of $37,467,000 and $46,325,000 were being held in trust under reinsurance agreements at December 31, 1996 and 1995, respectively. The approximate market value and amortized cost of fixed maturity investments at December 31, 1996, are shown below by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. During 1995, the Company transferred securities from the held-to-maturity category to the available-for-sale category, as allowed under the FASB 115 Guide to Implementation. The amortized cost of the transferred securities was $61,193,000 and the related unrealized gain was $2,678,000.
The Company has no significant investment concentration of credit risk by issuer, industry or geographic region.
(4) POLICY LIABILITIES, UNEARNED PREMIUMS AND LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The composition of the liability at December 31, 1996 and 1995, and related significant assumptions used are as follows:
Overall claims experience is principally dependent on the frequency and severity of claims as well as trends in litigation and loss cost inflation. With the exception of discontinued lines, the Company writes primarily property coverages which are characterized by relatively short settlement periods and quick development of ultimate losses. Discontinued business includes the Company's participation in excess casualty reinsurance assumed pools. The business is long-tail in nature and losses continue to exceed both Company and industry expectations. Most of these losses result from asbestos-related and environmental pollution claims. Management is unable to make a reasonable estimate of the Company's ultimate liability from these pools due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is complex and uncertain. The Company establishes loss reserves on known claims as recommended by the various pool managers and additional reserves to compensate for those claims that have not yet been reported. Losses from its discontinued reinsurance pools included in the accompanying table are $8.3 million, $7.3 million and $4.2 million in 1996, 1995 and 1994 respectively. Reinsurance pool reserves represent approximately 10.7% of the gross liability for property and casualty losses and LAE at December 31, 1996. The Company's estimating and reserving practices are reviewed continually. Subsequent adjustments to the original estimates are made when determinable and are reflected in current year operations.
Accident and health net claim liabilities reported in the Company's life subsidiaries were $80,026,000, $57,049,000 and $55,875,000 at December 31, 1996, 1995 and 1994, respectively. There was no significant adverse development during the past three years.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax liabilities and assets are as follows:
Deferred income taxes (benefits) of $9,015,000, $10,230,000 and $(13,398,000) in 1996, 1995 and 1994 respectively have been provided on net unrealized investment gains (losses).
Interest paid was $17,924,000 in 1996, $14,328,000 in 1995 and $10,719,000 in 1994.
The Company has authorized 3,500,000 shares of no par preferred stock. On February 24, 1988, the Board of Directors adopted a "Rights Plan" (amended November 14, 1990) 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, 1996, 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.
administrative rules as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state and may change in the future. The NAIC has a project to codify statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. The codification, when completed, will likely change the definitions of what comprises prescribed as opposed to permitted statutory accounting practices and may result in changes to the accounting policies that insurance companies use to prepare their statutory financial statements.
Under the terms of the Incentive Plan, certain other management employees may be granted options at prices equivalent to fifty percent of the fair market value of the Company's common stock on the grant date. Shares obtained by exercise are subject to restrictions. Non-vested shares are subject to forfeiture if employment is terminated except by death, disability or retirement. Vesting occurs ratably over a five-year period from the date of exercised. As of December 31, 1996 there were 289,586 shares authorized. Grants may be made under the Incentive Plan until November 14, 2000.
Shares issued under the plans are recorded at fair market value at the effective date of the grant. The unamortized difference ($4,382,000 as of December 31, 1996, and $3,620,000 as of December 31, 1995) between the fair market value and option price on shares which are restricted is reported as part of stockholders' equity. Amortization of the restricted stock is recorded as compensation expense ratably over the vesting period ($1,544,000 in 1996, $1,407,000 in 1995 and $965,000 in 1994). Furthermore, any difference between the fair market value and the option price on the unrestricted shares in the Award Plan and Senior Plan is recorded as compensation expense. Forfeitures are included as credits in the income statement during the period in which the forfeiting event occurs.
Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under those plans, consistent with FASB Statement No. 123, the reduction in the Company's 1996 and 1995 net income and net income per share would have been insignificant. The effect of applying the fair value method of accounting for stock options on reported net income and net income per share for 1996 and 1995 may not be representative of the effects for future years because outstanding options vest over a period of several years and additional awards are generally made each year.
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 vote the shares allocated to them. Unallocated shares are voted by the LESOP's Trustee. At December 31, 1996 and 1995, the loan balance was $4.3 million and $6.4 million respectively. The interest portion of the LESOP pension expense was $.4 million in 1996 and $.6 million in 1995 and in 1994.
o Compensation expense for the years ended December 31, 1996, 1995 and 1994 was $1,186,000, $1,430,000 and $1,480,000 respectively. The compensation expense represents the Company's contributions to the LESOP necessary to meet its periodic debt service, after applying dividend payments received on the shares held by the LESOP. All dividends paid on such shares retain their character as distributions made from the Company's retained earnings.
The Board of Directors previously approved a non-qualified supplemental benefit plan. This unfunded deferred compensation plan is intended to provide pension benefits which would otherwise be provided under the benefit accrual formula applicable to all employees in the Company's qualified Plan, but which are in excess of an annual amount permitted under current tax regulations. Expense ($.1 million in 1996, $.1 million in 1995 and $.3 million in 1994) is being recognized over the remaining service period for the officers presently covered.
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. 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 1997. The Company intends to continue to defend itself vigorously against all such suits and believes, based on information currently available, that any liabilities that could result are not expected to have a material adverse effect on the Company's financial position.
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1996
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto of American Bankers Insurance Group, Inc. and Subsidiaries.
The Company is scheduled to repay the LESOP note at a yearly amount of $2,125,000 plus interest. For a description of short-term and long-term debt payable to others and related information see Note 7 to the Consolidated Financial Statements on page 57 in Part II Item 8 of this report. For a description of the Company's commitments and contingencies, see Note 11 to the Consolidated Financial Statements on page 64 in Part II Item 8 of this report.
AMERICAN BANKERS INSURANCE GROUP, INC. REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
* 1995 and 1994 amounts have been restated to reflect the reclassification of credit bond losses in Schedule III, approximately $8,000 in 1995 and $3,500 in 1994.