The amounts for 1993 and forward are reported in accordance with FASB Statement 113.
In response to this environment, some activity at the state level has occurred. During 1995, the California legislature authorized the establishment of the California Earthquake Authority, which will
provide an alternative facility to California consumers for obtaining insurance to cover the earthquake peril. A similar situation exists in Florida where a state-sponsored insurance facility has accepted a significant number of insureds as insurance companies have continued to limit the amount of their Florida business.
Litigation concerns continue to lead the industry's list of concerns. In Alabama, the insurance industry has been targeted in litigation. The legal environment in Alabama has received national news coverage and the Alabama legislature is considering tort reform. Changes, if any, in the current environment cannot be predicted. In the meantime, Alabama litigation represents a significant issue to the industry.
- American Bankers Life Assurance Company of Florida (ABLAC) and subsidiaries, including Caribbean American Life Assurance Company (CALAC)
In 1994, the Company adopted FASB Statement 115 - Accounting for Certain Investments in Debt and Equity Securities (FASB Statement 115). Under the Statement, 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.
Prior to 1994, fixed maturities, including preferred stocks with sinking fund provisions, were carried at amortized cost.
Policy liabilities on life and annuity business are computed principally by the net level premium method based upon assumptions as to future investment yield, mortality, morbidity, and withdrawals consistent with those used to develop the gross premiums on the policies in force. Universal life and annuity policyholders' liabilities are based on full
account values. Unearned premiums for credit insurance and property business represent the unexpired portion of the premiums.
Primary earnings per common share are based on net income using the weighted average number of such shares outstanding during the year after giving effect to common stock equivalents and treasury shares.
For those foreign affiliates where the foreign currency is the functional currency, unrealized foreign exchange losses net of taxes have been reflected in Common Stock and Other Stockholders' Equity under the caption Net unrealized investment and foreign exchange gains (losses).
- 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
- Mortgage loans and policy loans: The fair values for mortgage loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms. The carrying amounts for policy loans approximate their fair values at the reporting date.
Operating results and other financial data for each segment are presented in Note 12. Industry segments are primarily composed of the companies 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.
At December 31, 1995 and 1994, the fair value, amortized cost, and gross unrealized gains and losses of investments in held-to-maturity and available-for-sale securities consisted of the following:
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. The Company has no significant investment concentration of credit risk by issuer, industry or geographic region.
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:
(4) Policy Liabilities, Unearned Premiums and Liabilities for Losses and Loss Adjustment Expenses
The composition of the liability at December 31, 1995 and 1994, and related significant assumptions used are as follows.
Reconciliation of Liability for Losses and Loss Adjustment Expenses for Domestic Property and Casualty Subsidiaries
Prior to 1984, ABLAC was taxed at regular corporate rates in accordance with the Life Insurance Company Income Tax Act of 1959, whereby a portion of its statutory income was not subject to current income taxation, but was accumulated in an account designated "policyholders' surplus." The aggregate balance in this account ($17,000,000, at December 31, 1995) would be taxed at applicable current rates only if distributed to stockholders or if the account exceeded a prescribed maximum. The Deficit Reduction Act of 1984 eliminated additions to the account for 1984 and thereafter. ABLAC does not anticipate any transactions that would cause any part of this amount to become taxable. Deferred taxes in the amount of $5,950,000 have not been provided since the Company does not anticipate any transactions that would cause any part of the account balance to become taxable. As of December 31, 1995, ABLAC has a shareholders' surplus account balance (on a tax basis) of approximately $105,800,000 from which it could pay dividends to stockholders without incurring any federal income tax liability, subject to regulatory requirements and the availability of funds. The other life insurance subsidiaries do not have policyholders' surplus account balances.
Effective January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method as required by FASB Statement 109 - Accounting for Income Taxes. The cumulative effect of adopting FASB Statement 109 as of January 1, 1993, was to decrease net income for the year by $1,005,000.
Deferred income taxes (benefits) of $10,230,000, ($13,398,000) and $3,695,000 in 1995, 1994 and 1993, respectively, have been provided on net unrealized investment gains (losses).
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 $45,048,000 as of December 31, 1995. Upon distribution of such earnings in a taxable transaction, the Company would incur additional U.S. income taxes in the amount of approximately $8,881,000 net of anticipated foreign tax credits.
On April 11, 1994, the Company filed with the Securities and Exchange Commission a shelf registration statement for $200,000,000 medium-term notes which provides for maturities ranging from nine months to thirty years. Under this shelf registration, the Company issued a $75,000,000 fixed rate note in May 1994 at 7.6% that is due May 1999 and interest is payable semi-annually. In addition, the Company issued a five year $50,000,000 floating rate note in April 1995. Interest is payable and the rate is established on a quarterly basis. At December 31, 1995, the interest rate was 6.5875%.
Interest paid was $14,328,000 in 1995, $10,719,000 in 1994 and $8,748,000 in 1993.
An interest rate swap agreement which expired in June 1994 increased interest expense by $608,000 in 1994 and $1,405,000 in 1993.
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 $444,800,000. The maximum statutory allowed dividends in 1996 are $68,200,000.
Statutory capital and surplus at December 31, 1995, included $34,730,000 for life insurance subsidiaries of undistributed earnings from downstream insurance subsidiaries, which are also included in the surplus of the parent insurance companies.
permitted statutory accounting practices, and may result in changes to the accounting policies that insurance companies use to prepare their statutory financial statements.
On May 25, 1994, stockholders approved the adoption of the 1994 Senior Management Stock Option Plan (Senior Plan). Under the terms of the Senior Plan, certain key employees may be granted options at prices equivalent to the fair market value of ABIG's common stock on the grant date. Each option further entitles the employee to be awarded two additional shares of restricted common stock. Options are not exercisable before the six-month anniversary nor after the third anniversary from the date of grant. During a three-year vesting period, the restricted shares are subject to forfeiture in the event the related primary shares are disposed, or if employment with the Company is terminated except by death, disability or retirement. Dividends and voting rights on the restricted shares remain with the employee during the vesting period. Full vesting occurs on the third anniversary after the date the options are exercised. Grants may be made under this plan until February 18, 2004.
On May 25, 1994, stockholders approved the adoption of the 1994 Non-Employee Directors' Stock Option Plan (Director's Plan). Under the terms of the plan, each non-employee director will receive 1,000 options annually at prices equivalent to the fair market value of ABIG's common stock on the grant date. Options granted are not exercisable before the six-month anniversary nor after the fifth anniversary from the date of the grant. As of December 31, 1995 there were 50,000 shares authorized, 26,000 issued and 2,000 were exercised. Grants may be made under this plan until March 24, 2004.
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. Grants may be made under the Incentive Plan until November 14, 2000.
The Executive Stock Option/Dividend Accrual Plan (ESODAP) authorizes stock options for key management employees of the Company. As of December 31, 1995, options representing 710,414 shares had been issued under the plan, of which 211,052 had been exercised and 65,938 had been terminated. A key feature of the plan is the Dividend Accrual Account which allows for the crediting of dividends in order to assist the executive in the exercise of the options. The Company discontinued making grants under this plan effective with the approval and adoption of the 1991 Incentive and Award plans.
The Leveraged Employee Stock Ownership Plan (LESOP) through its trust was funded by a loan from a bank which was collateralized with newly issued shares of the Company's stock purchased by the LESOP at market price.
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.
- Compensation expense for the years ended December 31, 1995, 1994 and 1993 was $1,430,000, $1,480,000 and $1,660,000, 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.
- All shares held by the LESOP are treated as issued and outstanding and, accordingly, are included in the Company's earnings per share calculations.
- Shares held by the LESOP as of December 31, 1995 include the following:
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 100,000 shares of the Company's common stock. At December 31, 1995 there were 68,133 shares allocated under this plan.
The following sets forth the funded status of the Plan and the amount of prepaid pension cost included in the Company's balance sheet at December 31:
The Company has issued insurance contracts which constitute financial instruments with off-balance-sheet risk. These financial guarantee contracts extend credit insurance coverage to installment contracts originated by mobilehome dealers and lenders pursuant to retail sales of mobilehomes (credit bond insurance). The coverage extends for the duration of the loan, generally 12-15 years. The Company discontinued accepting any additional credit bond business in 1986. These financial instruments entail elements of credit risk in excess of the amount recognized in the financial statements.
The Company's exposure to credit loss in the event of non-performance by the debtor under the financial guarantee is represented by the unamortized contract balance at the time of default. The Company currently has coverage outstanding on approximately 2,100 individual loans. Based on historical information, between 10% and 15% of the loans are expected to default during their existence. Losses could range from $2,000,000 to $3,000,000 but are expected to be matched by related insurance premiums collected during the same period.
There are no cash requirements related to these instruments unless the mobilehome owner defaults on the loan, at which time the Company will be liable for the unamortized loan balance.
The Company and certain of its insurance subsidiaries are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate and policy coverage issues. As has been widely reported in the news media, 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 retail or finance companies who have sold the Company's product to a consumer. A number of other credit insurers are named as co-defendants in many of the suits.
Although these lawsuits generally involve relatively small amounts of actual or compensatory damages, they typically assert claims requesting substantial punitive awards. 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. The Company has been advised by legal counsel that it has meritorious defenses to all claims being asserted against it.
The Company is involved with a number of cases in the ordinary course of business relating to insurance matters or, more infrequently, certain corporate matters. Generally, the Company's liability is limited to specific amounts relating to insurance or policy coverage for which provision has been made in the financial statements. Other cases involve general corporate matters which generally do not represent significant contingencies for the Company.
The Company distributes its products through eight markets or distribution channels involving over one thousand clients. Its business is generally not concentrated, and no single customer accounted for 10% or more of the Company's consolidated revenue in 1995.
The sum of the quarterly earnings per share amounts may not equal the comparable amounts for the full year because the computations are done independently.
AMERICAN BANKERS INSURANCE GROUP, INC. SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1995 (IN THOUSANDS)
Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1995
The Company is scheduled to repay the LESOP note at a yearly amount of $2,125,000 plus interest. For a description of a short- term and long-term debt payable to others and related information see Note 7 to the Consolidated Financial Statements on page 54 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 60 in Part II Item 8 of this report.
AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
Schedule VI AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)