The Company currently leases approximately 15,000 square feet of office space in Brewster, New York, under a lease expiring in October 2001; 18,000 square feet in Orlando, Florida, under a lease expiring in January, 2002; and 8,000 square feet in Miami, Florida, under a month to month lease arrangement, as the principal offices of American Progressive, American Pioneer and WorldNet, respectively, at an aggregate annual rental of approximately $464,000. It also leases smaller offices in Elmhurst, New York; Andalusia, Alabama; and Waterloo, Ontario, for an aggregate annual rental of approximately $69,000.
The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of the Company, the related notes thereto and the auditors' report thereon and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The selected consolidated financial data presented below for, and at the end of, each of the years from December 31, 1991 through 1995 are derived from the consolidated financial statements of the Company, which have been audited and reported upon by KPMG Peat Marwick LLP, independent certified public accountants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations".
The Insurance Subsidiaries had revenues of approximately $25.6 million, $43.9 million and $40.5 million for the years ended December 31, 1993, 1994 and 1995, respectively, representing 91%, 91% and 93%, of the Company's total revenues for each period, respectively. Although American Progressive, domiciled in New York, primarily sells its products in New York and the northeastern United States and American Pioneer, domiciled in Florida, primarily sells its products in Florida and the southeastern United States, one or both of the Insurance Subsidiaries is licensed in 45 states and in the District of Columbia. American Pioneer and American Progressive have been rated "B+" and "B" by A.M. Best, respectively. A.M. Best's ratings are based upon factors relevant to policyholders, agents, insurance brokers and intermediaries and are not directed to the protection of shareholders in the rated company. See "Business--Ratings".
Revenues. Total revenues decreased approximately $4,311,000 from total revenues of approximately $48,033,000 for the year ended December 31, 1994 to approximately $43,722,000 for the year ended December 31, 1995. Total premiums and policyholder fees earned decreased approximately $3,514,000. Supplemental health insurance premiums at American Progressive increased approximately $1,842,000 (primarily in NYS DBL, Medicare supplement and hospital indemnity) and its life premiums grew approximately $340,000, while American Pioneer's life premiums grew approximately $656,000 and its group dental premiums grew approximately $892,000. The increase in these life and supplemental health premiums of $3,730,000 was offset by the decrease of approximately $4,757,000 in American Pioneer's major hospital and major medical premiums and the decrease in American Progressive's premiums from its participation in NAIU accident pool (approximately $1,531,000) and other accident & health products that are no longer being actively marketed by the Company (approximately $956,000). Realized gains on investments increased approximately $632,000 to approximately $674,000, compared to a gain of approximately $42,000 for the prior year, and are primarily attributed to increasing interest rates throughout 1995. As a result of realizing these investment gains, net investment income decreased approximately $466,000.
Revenues. Total revenues increased approximately $19,953,000 to approximately $48,033,000 for the year ended December 31, 1994 compared to total revenues of approximately $28,089,000 for the year ended December 31, 1993. Premiums and policyholder fees earned increased approximately $18,798,000. The most significant component of this increase is the inclusion of the premiums of American Pioneer for the entire year in 1994 compared to only seven months in 1993, which amounted to approximately $8,725,000. The remaining increase of $10,073,000 is a result of new supplemental health premiums at American Progressive, which amounted to approximately $9,291,000, acquired blocks of accident insurance amounting to approximately $1,447,000, an increase of life premiums of approximately $215,000 and offset by a decrease in its in force health premiums of approximately $880,000. Net investment income increased approximately $710,000. This increase is attributable to the inclusion of the net investment income of American Pioneer in 1994 offset by the decrease in interest income of American Progressive due to its purchase of American Pioneer. Realized gains on investments decreased approximately $634,000 to a gain of approximately $42,000, compared to a gain of approximately $676,000 for the same period last year and is primarily attributed to the lack of sales in 1994 due to the increase of prevailing interest rates in 1994 compared to declining rates in 1993.
Fee income for the year ended December 31, 1994 increased approximately $1,660,000 which reflects an increase in fees earned by WorldNet for managed care, travel assistance, claims administration and communication services. For the year ended December 31, 1994, the Company amortized approximately $219,000 of the deferred revenue which was generated in 1993 through the reinsurance of certain ordinary life insurance policies compared to $801,000 amortized in the same period in 1993. See "Results of Operations--Years Ended December 31, 1993 and 1992--Revenues" for further discussion of the 1993 amount.
When the Company acquired American Pioneer in May 1993, it established an asset account for the present value of future profits related to its insurance in force. Approximately $237,000 was amortized from this account as a charge against income in 1994, while in the corresponding period of 1993, $793,000 was amortized, $680,000 of which was as a result of the reinsurance of certain life policies by American Pioneer. See "Results of Operations--Years Ended December 31, 1993 and 1992--Benefits, Claims and Other Deductions" for further discussion of the 1993 amount.
The Company requires cash to pay the operating expenses necessary to support its status as an insurance holding company (which under applicable Insurance Department regulations must bear its own expenses) and to meet the cost involved in being a publicly-owned company.
As of December 30, 1994, the Company sold 400 shares of the Series B Preferred Stock to Wand/Universal Investments L.P. ("Wand") for $4 million pursuant to a stock subscription agreement entered into on August 12, 1994. See "Certain Relationships and Related Transactions--Wand/Midland Transaction" for additional information. The proceeds of the sale were used to redeem all of the Series A Preferred Stock. The liquidation preference (including accumulated dividends) of the Series A Preferred Stock as of December 30, 1994 was approximately $7.1 million, which was eliminated as a consequence of the redemption, resulting in an increase in earnings per share applicable to common shareholders and stockholders' equity of approximately $1.5 million. The redemption price of $5,618,062 (the "Redemption Price") was paid by a cash payment of $4,000,000 and the issuance of a convertible debenture with a fair value of $1,618,062 (based on the then market price of the common stock then issuable upon conversion of the debenture) and a face amount of $1,000,000 (the "Debenture"). This redemption was effected pursuant to a repurchase agreement between the Company and Midland entered into on March 7, 1994. The Series A Preferred Stock had been issued to Midland in 1991 in connection with the Company's purchase of all the outstanding common stock of American Progressive from Midland. The Debenture was called for redemption on February 12, 1995, at which time $106,496 of its principal was paid in cash and the balance of the principal was converted into 671,807 shares of Common Stock.
American Progressive and American Pioneer are required to maintain minimum amounts of capital and surplus as determined by statutory accounting. The minimum statutory capital and surplus requirements of American Progressive and American Pioneer as of December 31, 1995 for the maintenance of authority to do business were $2,500,000 and $1,561,917, respectively, but substantially more than this is needed to permit continued writing of new business. At December 31, 1995 the adjusted statutory capital and surplus, including asset valuation reserve, of American Progressive and American Pioneer were $9,255,846 and $13,815,357 respectively.
The NAIC has adopted risk based capital ("RBC") rules which became effective December 31, 1993 and have been adopted by both New York and Florida. See "Regulation--Risk-Based Capital Requirements". The new RBC rules provide for various regulatory actions when the ratio of a company's total adjusted surplus to its RBC falls below 100%. At December 31, 1995, American Progressive and American Pioneer had RBC ratios of approximately 334% and 756% of the Authorized Control Level, respectively.
Changes in interest rates may affect the incidence of policy surrenders and withdrawals. In addition to the potential impact on liquidity, unanticipated surrenders and withdrawals in a changed interest rate environment could adversely affect earnings if the Company were required to sell investments at reduced values in order to meet liquidity demands. The Company manages the asset and liability portfolios in order to minimize the adverse earnings impact of changing market rates. The Company seeks to invest in assets which have duration and interest spread characteristics similar to the liabilities which they support.
The net yield on cash and invested assets declined from 7.83% in 1993, to 7.48% in 1994 and to 6.97% in 1995. These decreases came as a result of declining market interest rates in 1993 and 1994, which caused higher yielding securities to be called or prepaid from the portfolio with the reinvestment of the proceeds at lower interest rates. In addition, the Company invested in shorter maturity investments to better match its policyholder liabilities and decrease its exposure to interest rate volatility. A significant portion of these securities are held to support the liabilities for policyholder account balances, which liabilities are subject to periodic adjustments to their credited interest rates. The credited interest rates of the interest-sensitive policyholder account balances are determined by management based upon factors such as portfolio rates of return and prevailing market rates and typically follow the pattern of yields on the assets supporting these liabilities.
On April 1, 1994, WorldNet purchased certain assets of HAT and an affiliated corporation for Can. $625,000 (approximately U.S. $470,000), payable over five years. WorldNet also executed an agreement with HAT and OBC under which WorldNet subcontracted HAT's obligations under certain service contracts between HAT and OBC, and between HAT and other insurers. The note payable to HAT required annual payments of Can. $125,000 (approximately U.S. $94,000) plus accrued interest, beginning on April 1, 1994, and bore interest at 6%. In 1995, substantially all of the assets of OBC (including the shares of OBC's subsidiary HAT) were acquired by Liberty Mutual Insurance Company ("Liberty Health"). In February, 1996, WorldNet and Liberty Health agreed to terminate the service agreement between OBC and WorldNet. In connection with the termination of the service agreement, Liberty Health agreed to cancel the promissory notes executed on April 1, 1994, which notes amounted to $370,000 at December 31, 1995. At the same time, the Company wrote off the corresponding assets, including the value of the service agreement, which assets amounted to approximately $170,000. The resulting net income from this transaction was approximately $200,000 and will be reflected in the Company's financial statements for the first quarter of 1996.
o Debt and equity securities that are held for current resale would be classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings.
In October, 1995, the FASB issued Statement 123, "Accounting for Stock-Based Compensation" which requires disclosure of new employee stock options in the form of a note to the financial statements based on the fair value at the date of the grant and is effective for financial statements for fiscal years beginning after December 15, 1995, with earlier adoption permitted. Companies also may base the recognition of compensation cost for new and modified options on these fair values. The disclosures required in Statement 123 must include the pro forma effects on the Company's net income resulting from the grant of these options and other stock awards. The Company will adopt Statement 123 in its 1996 financial statements and intends to disclose the impact in the footnotes to the financial statements rather than record these charges in its statement of operations.