The principal executive offices of the Company are located at 1055 Broadway, Kansas City, Missouri 64105 and the Company's telephone number is (816) 391-2700.
The selected consolidated financial data set forth below represent historical results of Americo as if Americo was in existence and had owned the insurance subsidiaries throughout the periods covered herein. The historical financial information for the five years ended December 31, 1996 and at December 31, 1996, 1995, 1994, 1993 and 1992 has been derived from the audited Consolidated Financial Statements of the Company. The selected consolidated financial data set forth below is qualified in its entirety by reference to and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K.
- ------------------------- (1) On February 28, 1994, the Company sold its investment in 100% of the common stock of PFS Holding Company ("PFSH") and its wholly-owned subsidiary, Premium Financing Specialists, Inc. to FHC.
The following discussion analyzes significant items affecting the results of operations and the financial condition of the Company. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
The Company's generation of new business increased in each of the three years ended December 31, 1996. Annualized annuity premiums increased significantly as a result of an increase in tax-qualified business written in connection with a joint venture arrangement entered into by the Company in 1993. The following table summarizes the Company's sales in terms of annualized premiums:
The Company intends to continue its focus on the sale of interest-sensitive life insurance and annuity products through its marketing and distribution systems. In addition, the Company may also pursue selected acquisitions of blocks of life insurance business and life insurance companies.
In October 1995, in connection with administrative agreements entered into with Ohio Casualty and Ohio Life, an unaffiliated company reinsured 100% of the insurance business of Ohio Life on a coinsurance basis. This unaffiliated company reinsured certain risks on these same liabilities to Great Southern on a modified coinsurance basis. In July 1996, the Company entered into similar agreements with Fremont Life. The invested assets related to the reinsured business are owned by the unaffiliated company. The Company has offset the receivable from the unaffiliated company against its liabilities under the modified coinsurance agreement in the Company's consolidated balance sheet. At December 31, 1996 and 1995, the reinsured business, consisting primarily of annuities and universal life policies, had aggregate insurance liabilities of $774 million and $347 million, respectively. The earnings from these transactions are included in the Company's results of operations from the dates of the agreements.
The effects of the above transactions, collectively referred to as the Acquisitions, on the individual income statement components, excluding the costs of financing, are as follows (in millions):
The operating expenses in the above table include only the direct expenses related to providing administration for the policies and assets of the Acquisitions. The operating expenses shown do not include any allocation of indirect or overhead expenses.
Premiums and policy revenues. Premiums and policy revenues totalled $165.6 million in 1996 compared to $140.1 million in 1995. Adjusting for the Acquisitions, premiums and policy revenues decreased $3.8 million from 1995 to 1996.
The Company's share of earnings from its equity subsidiaries decreased from $9.4 million in 1995 to $5.5 million in 1996 as a result of a reduction in gains on the sale of real estate by GSSW in 1996 compared to 1995 and increased expenses at the Company's other equity subsidiaries. Gains from the sale of real estate by GSSW added $1.2 million to investment income in 1996 compared to $3.3 million in 1995. Income from the Company's investment in Argus decreased in 1996 due to increased systems development costs incurred by Argus.
Policyholder benefits. Policyholder benefits were $49.5 million higher in 1996 than in 1995. Excluding the effects of the Acquisitions, policyholder benefits increased $0.2 million from 1995 to 1996. This increase in policyholders benefits resulted from increased death benefits, partially offset by a lower increase in benefit reserves in 1996 compared to 1995. The Company experienced an unusually high level of death benefits during the first half of 1996, including a small number of policies with very large face amounts which had offsetting benefit reserve releases. Lower benefit reserve increases in 1996 also resulted from the decrease in traditional premiums.
Premiums and policy revenues. Premiums and policy revenues totalled $140.1 million in 1995 compared to $134.2 million in 1994.
In 1995, expected prepayments of the portfolio were accelerated as interest rates had declined. In 1994, interest rates increased, reducing the expected prepayment rate. As a result of the changes in expected prepayments, amortization of premiums and accretion of discounts were accelerated in 1995, causing an increase in net investment income of $1.4 million in 1995 compared to 1994.
The Company's share of earnings from its equity subsidiaries increased to $9.4 million in 1995 from $7.1 million in 1994. The increase in earnings from equity subsidiaries resulted primarily from an increase in operating income on real estate owned by GSSW and $3.3 million of gains from the sale of real estate for the year ended December 31, 1995 compared to $1.2 million of gains on mortgage loan paydowns in 1994. Additionally, earnings from the Company's other equity subsidiaries improved in 1995.
Net investment income earned on short-term investments increased $2.1 million in 1995 primarily due to an increase in the interest rate earned on short-term investments of approximately 200 basis points over 1994.
Amortization expense. Amortization expense increased $3.2 million from $23.5 million in 1994 to $26.7 million in 1995. Excluding the effects of the Acquisitions, amortization expense increased $1.8 million from 1994 to 1995. This increase is a result of the revisions by the Company of its estimates of future gross profits on interest-sensitive life products in 1994 and 1995. Under GAAP, deferred policy acquisitions costs and the cost of business acquired on interest-sensitive life products are amortized based on the estimated future gross profits of the related policies. As a result of these revisions, the amortization of deferred policy acquisition costs and cost of business acquired increased $4.0 million in 1995 compared to an increase of $0.9 million in 1994.
Provision for income taxes. The provision for income taxes decreased from a rate of 40.7% of pre-tax income in 1994 to 36.1% of pre-tax income in 1995. In 1994, the Company recorded additional income tax expense of $1.3 million due to increasing the valuation allowance of deferred tax benefits which may not be recoverable in the future. Additionally, in 1994 the Company recorded income tax expense of $0.5 million with respect to a final settlement with the IRS regarding examinations of certain subsidiaries.
In order to meet its obligations under the surplus debentures, United Fidelity uses funds generated by its direct and assumed insurance operations and dividends from its insurance subsidiaries. The ability of the insurance subsidiaries to pay dividends is subject to regulatory restrictions. The insurance holding company statutes in Texas and Kansas regulate payment of dividends by an insurance company to its parent. Without the consent of the states' insurance commissioner, an insurance company may not pay dividends to its parent in excess of the greater of (i) the insurer's prior year statutory net gain from operations, or (ii) 10% of its prior year ending statutory capital and surplus, subject in either case to sufficient earned statutory surplus from which such dividends may be paid. Additionally, an insurance company is required to notify the respective insurance department ten days prior to the payment of ordinary dividends.
The Company believes that its investment portfolio will allow it to satisfy all existing contractual obligations to policyholders. At December 31, 1996, the Company's investment portfolio included cash and short-term investments totalling $96.1 million, marketable equity securities totalling $48.3 million as well as $380.2 million in U.S. Treasury and government securities, mortgage-backed securities and asset-backed securities and $290.1 million of corporate bonds classified as available for sale that management believes could be readily converted to cash.
Financial condition. Stockholder's equity increased to $207.0 million at December 31, 1996 from $190.8 million at December 31, 1995. The increase was the result of net income of $27.3 million, a decrease in net unrealized investment gains of $9.0 million, and a $2.0 million dividend to FHC. Net unrealized investment losses in 1996 were recorded due to the decline in the market value of the Company's available for sale fixed maturity securities, partially offset by unrealized gains on marketable equity securities. See Note 4 to the Company's Consolidated Financial Statements included elsewhere in this Form 10-K for further discussion of the components of the change in net unrealized investment gains.
Statutory capital and surplus of the Company's insurance subsidiaries at December 31, 1996 includes $42.9 million relating to financial reinsurance agreements which is not included in stockholder's equity on a GAAP basis.
Financial reinsurance treaties between National Farmers Union and an unrelated reinsurer contain statutory minimum surplus requirements and require National Farmers Union to place securities in an escrow account ($273.4 million at December 31, 1996) to secure National Farmers Union's obligations to the
The NAIC assigns securities quality ratings called "NAIC designations" that are used by insurers when preparing their annual statements. The NAIC assigns designations to publicly-traded as well as privately-placed securities. The designations assigned by the NAIC range from class 1 to class 6, with a rating in class 1 being of the highest quality. The following table sets forth the composition of the Company's fixed maturity securities according to NAIC designations and S&P and Moody's ratings at December 31, 1996:
(3) Carrying amount is market value. The amortized cost of "Available for Sale" securities at December 31, 1996 was $671.8 million.
The Company continually reviews its non-investment grade debt securities (NAIC designations 3 through 6) for evidence of declines in value which are other than temporary. The Company does not anticipate any material increase in its investments in non-investment grade debt securities. At December 31, 1996, the Company's investment portfolio contained no securities which were in default as to principal or interest.
At December 31, 1996, approximately $184.3 million in carrying value of the Company's investment portfolio consisted of mortgage loans, which were collateralized primarily by multi-family apartments, office buildings and retail properties located in 33 states. Approximately 39% of the portfolio was multi-family apartments, 23% was office buildings, 25% was retail space and 13% was other types of properties. At December 31, 1996, approximately 21% of the mortgage loan portfolio was secured by properties in Texas, and 21% in Missouri and 11% in Kansas. No more than 10% of the remaining portfolio was secured by properties in any one state.
At December 31, 1996, only 1.9% of the mortgage loan portfolio consisted of loans with balloon payments that mature before January 1, 1998. At December 31, 1996, mortgage loans delinquent by more than 90 days, as determined on a contract delinquency basis, totalled approximately $0.2 million, which constituted 0.1% of mortgage loans and was 0.01% of cash and invested assets. Loans foreclosed upon and transferred to real estate owned in the Company's consolidated balance sheet totalled $1.6 million, or less than 1% of total mortgage loans at December 31, 1996. The favorable default experience is principally attributed to the Company having been selective in the purchase of mortgages in connection with acquisitions of its life insurance subsidiaries. In light of the current market interest rate environment, the Company may experience prepayments on its mortgage loan portfolio, thus reducing its yield on such portfolio. The Company plans to continue applying its historical underwriting standards to future investments in mortgage loans.
The acquisition of Ohio State and IGL will be accounted for using the purchase method of accounting. The direct policy liabilities will be included on the Company's balance sheet. The assets retained by the Reinsurer will be included on the Company's balance sheet as a receivable from the Reinsurer.
In June 1996, the Financial Accounting Standards Board issued Statement of Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 establishes new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing, and new accounting requirements for pledged collateral. SFAS 125 is effective for transactions occurring after December 31, 1996. The implementation of portions of this statement with respect to accounting for pledged collateral, repurchase agreements and similar transactions was deferred for one year by SFAS No. 127 "Deferral of the Effective Date of Certain Provision of the FASB Statement No. 125" issued in December 1996. Implementation of these new accounting standards is not expected to have a material impact on the consolidated financial statements of the Company.