INSURANCE OPERATIONS Insurance revenues pursuant to generally accepted accounting principles (GAAP) include only the mortality, expense and surrender charges for interest-sensitive products. Insurance revenues do not include group and credit premium equivalents and cash deposits from interest-sensitive products.
As a result of more of the ordinary life business being interest-sensitive, the group business being on a self-funded or split-funded basis and the credit business being written on an administrative services only basis, in which only the fees charged are included in insurance revenues for GAAP purposes, it is necessary to evaluate insurance revenues including premium equivalents. As demonstrated in the table on page 1, for 1997, 1996 and 1995, insurance revenues were $279.8 million, $258.5 million and $247.3 million, respectively, while total insurance revenues including premium equivalents were $638.5 million, $567.6 million and $511.8 million, respectively. Because so much of the Company's business is interest-sensitive and administrative services only, insurance revenues including premium equivalents are a better measure of sales and growth.
Ordinary benefits and claims in 1997, 1996 and 1995 were $144.3 million, $111.0 million and $103.2 million, respectively. 1997 included $25.4 million of benefits and claims from CUL operations. The increase each year was also the result of growth in first year and renewal business, increased interest credited to policyholder account balances and some increase in mortality and morbidity experience.
Credit benefits and claims amounted to $12.6 million, $13.9 million and $19.8 million in 1997, 1996 and 1995, respectively. These decreases were due, in part, to a reduction in the change in unearned premiums which is included in credit benefits and claims. These reductions were also the result of terminating unprofitable accounts and certain previously fully insured accounts converting to reinsured accounts.
Ordinary taxes, commissions and general expenses were $45.4 million, $33.1 million, $29.4 million for 1997, 1996 and 1995, respectively. The increase in 1997 is primarily due to CUL expenses of $7.9 million. The increase each year was also the result of growth in ordinary business. Group taxes, commissions and general expenses were $13.6 million, $12.3 million, $12.2 million, respectively. These expenses have remained relatively flat due to a decrease in taxes and commissions offset by an increase in general expenses. The increases in Group general expenses in 1997, 1996 and 1995 were due to growth in business, administration of larger group cases and the implementation of a new local area network group system. Credit taxes, commissions and general expenses were $68.4 million, $72.3 million and $65.1 million in 1997, 1996 and 1995, respectively. The decrease in 1997 was attributable to a decrease in earned commissions due to decreased insurance revenues. The increase in 1996 was primarily due to an increase in commissions earned as a result of increased insurance revenues and a higher effective commission rate due to increased contingent commissions as a result of improved claims.
INCOME TAXES Income tax expense was up in 1997 compared to 1996 due to an increase in pre-tax net earnings and a higher effective rate for our newly acquired companies and down in 1996 compared to 1995 due to a decrease in pre-tax net earnings including realized gains. The effective tax rates in 1997, 1996 and 1995 were 32.9%, 32.2%, and 32.2%, respectively.
The Company's legal department includes a compliance area headed by an officer who is a lawyer
REALIZED INVESTMENT GAINS Realized investment gains, net were $.5 million for the year ended December 31, 1997 compared to $.4 million for the year ended December 31, 1996 and $6.0 million for the year ended December 31, 1995. The realized investment gains for the respective periods were primarily the result of adjustments made in the investment portfolio to increase the yield on invested assets less recognizing any decline in value other than temporary in the value of certain investments. The 1995 realized investment gains also included realized gains on real estate.
As an insurer, the Company is required to maintain substantial liabilities for future policy benefits and policyholders' account balances. Since premiums and deposits received in anticipation of such benefits are investable funds, it is expected that the Company will continue to increase its investment portfolio using cash flow from operations.
OPERATING ACTIVITIES The net cash provided by operating activities for the years ended December 31, 1997, 1996 and 1995 aggregated $96.7 million, $66.5 million and $75.8 million, respectively. The increase from 1996 to 1997 was due to an increase in policyholder account balances as a result of reduction in surrenders in 1997. The decrease in 1996 from 1995 was due primarily to (1) the funding of surrenders and maturities of certain ordinary life policies in 1996 and (2) an increase in reinsurance receivables primarily from the increased sale of credit reinsured accounts.
The Company's policy loans are a higher percentage of invested and total assets than industry norm as a result of a significant block of Management Security Plan (MSP) business. The MSP product is an interest-sensitive, deferred compensation/ executive benefit-type product with the policy loan feature being an integral part of the product. A market rate of interest is charged on the policy loans and a predetermined built-in spread is achieved between the interest rate charged on the policy loans and the interest rate credited on the loaned funds. Accordingly, all MSP policy loans are completely collateralized by the underlying policyholders' account balances. All policy loans are funded out of cash provided by operating activities and do not represent a significant restriction on the Company's liquidity.
Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires that securities classified as available-for-sale be reported at fair value and the related unrealized gain or loss net of deferred income taxes be reported as a separate component of stockholders' equity. Additionally, pursuant to GAAP, deferred acquisition costs for interest-sensitive products, decreased $9.4 million at December 31, 1997 and decreased $3.4 million at December 31, 1996 for the effect that would have been recognized had the unrealized gain at December 31, 1997 and 1996 on debt securities actually been realized.
The Company completed a FELINES PRIDES convertible security offering in June 1997, resulting in net proceeds of $99.4 million which was used to retire bank debt of the Company.
The year 2000 Issue is the result of computer programs written using two digits rather than four to define the applicable year. Any of the Company's computer programs or equipment that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including a temporary inability to process transactions or engage in normal business activities.
Risk-based capital is a tool for insurance regulators to evaluate the capital of insurers. Based on calculations using the appropriate NAIC formula, AHL, CUL, Concord, and FCIC exceeded the Risk-Based Capital requirements at December 31, 1997 and 1996.
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. The Company desires to take advantage of the "safe harbor" provisions of the Act.
This Annual Report on Form 10-K contains forward-looking statements, together with related data and projections, about the Company's projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management's then-current expectations. The business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate.
We have audited the 1997 consolidated financial statements of American Heritage Life Investment Corporation and subsidiaries as listed in the accompanying index under Item 8. In connection with our audit of the consolidated financial statements, we have also audited the 1997 financial statement schedules as listed in the accompanying index under Item 8. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statements schedules based on our audit.
In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Heritage Life Investment Corporation and subsidiaries at December 31, 1997, and the results of their operations and their cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related 1997 financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
February 5, 1998 * * * * * * * * * * *
We have audited the 1996 and 1995 consolidated financial statements of American Heritage Life Investment Corporation and subsidiaries as listed in the accompanying index under Item 8. In connection with our audits of the consolidated financial statements, we have also audited the 1996 and 1995 financial statement schedules as listed in the accompanying index under Item 8. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statements schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Heritage Life Investment Corporation and subsidiaries at December 31, 1996, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
(4) Cost of Business Acquired: The value assigned to the insurance in force of acquired insurance companies at the date of acquisition is amortized using methods similar to those used for deferred acquisition costs.
Debt securities are investments which mature at a specified future date more than one year after they were issued. Equity securities include common stocks and redeemable preferred stocks. Investments are categorized as (1) held to maturity, (2) available-for-sale, or (3) trading. All debt and equity securities have been classified by the Company as available-for-sale and are stated at fair value. Unrealized gains or losses on debt and equity securities available-for-sale resulting from fluctuations in fair values were recorded, net of deferred income taxes and adjustments to the deferred acquisition costs for interest-sensitive insurance products, directly to a separate component of stockholders' equity. Realized investment gains or losses are calculated on the basis of specific identification and include writedowns on those investments where the decline in value below its cost or amortized cost is considered to be other than temporary.
Certain amounts for 1996 and 1995 have been reclassified to conform with the presentation adopted in 1997.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 1997 and December 31, 1996 (in thousands) were as follows:
No valuation allowance was recorded at December 31, 1997 or 1996.
Prior to 1985, certain life insurance company income was not subject to federal income tax until distributed. For tax purposes such income was accumulated in a memorandum "policyholders' surplus account" and taxed upon distribution. At December 31, 1997, the policyholders' surplus account was $10.9 million.
Proceeds from sales and maturities of investments in debt securities during 1997, 1996 and 1995 were $115.8 million, $59.1 million and $69.3 million, respectively.
The amortized cost and fair value of debt securities available-for-sale (in thousands) at December 31, 1997, by contractual maturity, were as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without penalties.
The amortized cost of high yield bonds included in debt securities available-for-sale was $42.1 million with a market value of $43.5 million, which represented 3.0% of invested assets.
The fair value of policy loans approximates the book value, as interest rates charged for a majority of the policy loans are updated to current market rates on an annual basis.
At December 31, 1997, all of the notes payable to banks were short-term, unsecured and related to advances under $120.0 million lines of credit ($80.8 million available to be drawn at December 31, 1997) bearing interest at a rate of 6.375%. The arrangements under the terms of the lines of credit are reviewed annually for renewal. The Company also has a $75.0 million line of credit (the entire $75.0 million available to be drawn at December 31, 1997) which is specifically to be used for acquisitions. The loan has a term of five years and contains certain financial covenants and commitment fees. The Company was in compliance with the covenants at December 31, 1997.
On June 27, 1997, the Company completed the offering of 2.07 million shares of FELINE PRIDES. Proceeds from the offering of $98.4 million (after underwriting and other associated costs) were used for the repayment of debt of the Company. Each unit of FELINE PRIDES pays quarterly interest and yield enhancement payments of $1.0625 per share, or 8.50%. The Company has recorded the yield enhancement payments of 1.75% totaling $5.4 million, as a liability and a reduction to stockholders' equity on the Company's Consolidated Balance Sheets. The liability is reduced when the yield enhancement payments are paid.
The reinsurance contracts do not relieve the Company from its obligation to its policyholders, and it remains liable should any reinsurer be unable to meet its obligations. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. In the accompanying financial statements, insurance revenues, benefits and claims and deferred acquisition costs are reported net of reinsurance ceded with policy liabilities being reported gross of reinsurance ceded.
$12.6 million, respectively. The amount of insurance premiums ceded under reinsurance agreements for the years ended December 31, 1997, 1996 and 1995 were $126.6 million, $111.7 million and $97.8 million, respectively. The amounts of recoveries for benefits paid under reinsurance agreements for the years ended December 31, 1997, 1996 and 1995 were $108.8 million, $104.0 million and $96.7 million, respectively.
At December 31, 1997, the Company had six stock-based compensation plans, which are described below. The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock issued to Employees" and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed option plans. The compensation that has been charged against income for the long-term incentive plan stock, employee stock purchase and agents stock purchase plans (in thousands) was as follows:
A summary of the status of the Company's fixed stock option plans as of December 31, 1997 and 1996, and changes during the years ended on those dates is presented below:
Under the Company's Long-Term Incentive Plan, the performance units feature provides for the grant to a participating employee of shares of common stock based on targeted award levels established for each participating employee at the beginning of each fiscal year in accordance with a formula relating to individual levels of performance.
The Company maintains a stock purchase plan under which its employees and directors and those of its subsidiaries can purchase shares of its common stock in the open market through an unaffiliated plan administrator. Pursuant to the plan, 702,404 shares had been purchased as of December 31, 1997. During the years ended December 31, 1997 and 1996, 45,336 shares and 58,662 shares, respectively, were purchased pursuant to the plan. This plan provides for monthly payroll and directors' fees purchases up to $1,500, with the employer making a monthly percentage contribution for the
The Company maintains a stock purchase plan under which its agents can purchase shares of its common stock in the open market through an unaffiliated plan administrator. Pursuant to the plan, 86,046 shares had been purchased as of December 31, 1997. During the years ended December 31, 1997 and 1996, 18,930 shares and 25,904 shares, respectively, were purchased pursuant to the plan. The plan provides for monthly deductions from commissions payable by participating subsidiaries of the Company to their participating agents with a minimum monthly deduction of $500 and maximum of $2,000. The participating subsidiary contributes, at the time of each purchase, an amount equal to five percent (5%) of its agent's deduction for purchases from commissions payable.
*Total income, insurance revenues and operating profits are net of reinsurance.
AHL, like other insurance companies, is currently a defendant in lawsuits that involve claims for punitive, exemplary or other extracontractual damages, which are for amounts substantially in excess of the actual damages sought. Management considers such litigation regrettably to be of the type to which insurance companies are usually and customarily subjected in the ordinary course of business; and to date the settlements of such claims of this nature have not been material to the financial position of the Company. In the opinion of management, based on the currently ascertained facts of the pending litigation, which the Company intends to vigorously defend, the ultimate resolution of such litigation should not be material to the financial position of the Company.
The Company acquired Columbia Universal Life Insurance Company for $44 million in cash effective January 1, 1997. Effective December 31, 1996, the Company acquired a block of business from Kentucky Home Mutual Life Insurance Company with approximately $1.8 million of premiums and premium equivalents and $3.3 million of assets. On June 30, 1997, the Company closed on the acquisition of Concord General Life Insurance Company for a total consideration of $7.5 million. Effective July 31, 1997, AHLIC acquired ERJ Insurance Group, Inc., a credit insurance marketing organization. Effective September 30, 1997, the Company acquired a block of business from Security Life of Denver, a member of the ING Group, with approximately $14.0 million of premiums. These acquisitions were reflected in the Company's financial statements at December 31, 1997. Each of these acquisitions has been accounted for as a purchase and the operating results from the respective acquisition dates are included in the consolidated statement of earnings.
If these acquisitions had been in effect since January 1, 1996, 1996 results would have been as follows:
(1) Per share amounts have been restated to reflect the two-for-one stock split in the form of a stock dividend paid March 4, 1998 to shareholders of record February 18, 1998.
See Footnote 1(c) on page 29 which sets forth the accounting polices related to investment.
The following condensed balance sheets of American Heritage Life Investment Corporation ("Registrant") as of December 31, 1997 and 1996 and its condensed statements of earnings and cash flows for the years ended December 31, 1997, 1996 and 1995 should be read in conjunction with the notes to consolidated financial statements included elsewhere in this report. Since the Registrant's condensed statements of changes in stockholders' equity for the years ended December 31, 1997, 1996 and 1995 are identical to the consolidated statements of changes in stockholders' equity included elsewhere in this report, such statements are not repeated in this schedule.
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION (REGISTRANT) CONDENSED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ($ IN THOUSANDS)
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ($ IN THOUSANDS)