The Company maintains its principal offices at 777 Main Street, Fort Worth, Texas. Such offices were leased by NFL in July 1983 under a lease agreement which was subsequently amended and which expires in June 2001.
WPS, the Company's wholly-owned printing subsidiary which prints all policies, forms and brochures of the Insurance Subsidiaries, maintains its manufacturing facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas, under a lease agreement which expires in October, 2005.
Fee and service income is generated primarily from (i) telemarketing services provided to unaffiliated insurance agencies, (ii) commissions received by marketing organizations from unaffiliated insurance companies, (iii) administrative and computer services provided to FLICA, and (iv) fees received by WPS for services provided to unaffiliated companies.
Over the past four years, the Company has acquired seasoned blocks of business to supplement its revenue. These acquisitions included (i) a block of Medicare Supplement Products purchased from AII in September 1992, (ii) a block of Medicare Supplement Products purchased from LHI in March 1993, (iii) a block of Cancer and Specified Disease Products purchased from DNL in February 1994 and (iv) a block of policies in all of the Company's product lines purchased in the Acquisition.
The following table shows the premiums received by the Company through internal sales and through acquisitions during the periods indicated.
Benefits and claims expense as a percentage of total premiums rose 4.3% in 1995 compared to 1994. This increase is primarily attributable to two factors. First, a shift in product mix from defined benefit policies such Cancer and Specified Disease Products, to Medical Expense Products and Medicare Supplement Products which have inherently higher benefit ratios. Second, increased medical provider claims industry-wide contributed to the increase.
Amortization of DPAC. Amortization of DPAC increased $1.8 million, or 18.6%, from $9.7 million to $11.5 million. The increase in amortization of DPAC resulted from amortization increases of $2.9 million related to LifeStyles Marketing Products, $1.4 million from discontinued Medicare Supplement Products and $927,000 from pre-1987 Medical Expense Products. These increases are offset, in part, by decreases in amortization of DPAC related to Company-issued Cancer and Specified Disease Product of $2.0 million and Cancer and Specified Disease Product reinsured from FLICA of $1.1 million.
General and Administrative Expenses. General and administrative expenses increased $5.1 million, or 30.1%, from $16.8 million to $21.9 million. This increase stems from expenses associated with developing marketing operations to maintain growth momentum and the effect of the first full fiscal year administering the NFIC and AICT acquisition.
Interest Expense. Interest expense decreased $635,000, or 21.2%, from $3.0 million to $2.4 million. This decrease is the result of the Company retiring $25.0 million of 11.7% Senior Subordinated Debentures effective March 30, 1995 along with the issuance of $20.0 million of 11.0% senior notes on February 28, 1995.
Year Ended December 31, 1994 Compared with Year Ended December 31, 1993
The increase in total acquired policy premiums resulted from premiums of $29.7 million from the policies obtained in the Acquisition and $3.9 million from the Cancer and Specified Disease Products acquired from DNL, which, in each case, were not present in the year ended December 31, 1993. In addition, premiums on the block of policies acquired from LHI in March 1993 increased $242,000, or 10.7%, from the corresponding prior year period. These increases were offset, in part, by a decrease in premiums on the block of policies acquired from AII in September 1992 of $7.9 million, or 37.4%, due to policy lapses or cancellations.
The increase in first-year premiums resulted primarily from $3.9 million in first-year premiums generated by Senior Benefits, which began writing the Company's Medicare Supplement Products in November 1993, and increases of $1.7 million, or 30.9%, in first-year premiums for Medical Expense Products sold by LifeStyles Marketing and $1.3 million, or 118.2%, in first-year premiums on policies reinsured from FLICA. These increases were offset, in part, by a decrease of $548,000, or 27.1% in first-year premiums on Cancer and Specified Disease Products written directly by the Company.
Fee and Service Income. Fee and service income increased $300,000, or 21.4%, from $1.4 million to $1.7 million due primarily to increased commissions received through LifeStyles Marketing from non-affiliated insurers.
Benefits and Claims. Benefits and claims increased $20.4 million, or 61.4%, from $33.2 million to $53.6 million. This increase was due primarily to benefits and claims of $19.4 million on the policies acquired in the Acquisition, $2.7 million on the Cancer and Specified Disease Products acquired from DNL in February 1994, and $1.5 million on the Medicare Supplement Products marketed by Senior Benefits following its formation in November 1993, each of which were not present or were insignificant in the corresponding period in 1993. Also contributing were increases in benefits and claims of $1.1 million, or 15.9%, for LifeStyles Products, $1.4 million, or 32.6%, for Cancer and Specified Disease Products issued directly by the Company, and $352,000 or 23.0%, for Cancer and Specified Disease Products reinsured from FLICA. These increases were offset, in part, by decreases in benefits and claims of $4.3 million, or 29.9%, for the previously acquired Medicare Supplement Products, and $1.3 million, or 46.4%, for pre-1987 Medical Expense Products.
The decrease in commissions paid by NFL resulted primarily from decreases of $1.3 million, or 37.1%, in commissions paid on the previously acquired Medicare Supplement Products and $157,000, or 4.1%, in commissions paid on Cancer and Specified Disease Products issued directly by the Company. These decreases were offset, in part, by $767,000 in commissions paid on the Cancer and Specified Disease Products acquired from DNL, and $205,000 of commission expense relating to Medicare Supplement Products marketed by Senior Benefits, each of which were not present in 1993, and increases of $234,000, or 12.6%, in commissions paid on LifeStyles Products and $269,000, or 22.4%, in commissions paid on Cancer and Specified Disease Products reinsured from FLICA. The increase in commissions paid by LifeStyles Marketing resulted from increased production of new business.
Interest Expense. Interest expense increased $600,000, or 24.0%, from $2.5 million to $3.1 million due primarily to the 25% increase in the Company's consolidated debt following NFL's sale in February 1994 of $5.0 million principal amount of Senior Subordinated Debentures previously held in its investment portfolio.
Premiums. Premiums increased $12.0 million, or 21.2%, from $56.7 million to $68.7 million. This increase was due primarily to an increase in total acquired policy premiums of $16.5 million or 239.0%, offset, in part, by a decrease in renewal premiums (excluding renewal premiums on policies acquired in acquisitions) of $3.7 million, or 9.1% and a decrease in first-year premiums for Company-issued policies of $808,000, or 8.5%.
The increase in total acquired policy premiums resulted from an increase in premiums of $14.2 million for the Medicare Supplement Products acquired from AII in September 1992 and premiums of $2.3 million for the Medicare Supplement Products acquired from LHI in March 1993.
Net Realized Gain on Investments. Net realized gain on investments increased $578,000, or 137.0%, from $422,000 to $1.0 million. This increase was due primarily to premium amounts received upon the redemption of bonds prior to their scheduled maturities. These redemptions resulted generally from the low interest rate environment during 1993.
Benefits and Claims. Benefits and claims increased $6.7 million, or 25.3%, from $26.5 million to $33.2 million. This increase was due primarily to an increase of $9.8 million, or 309.4%, in benefits and claims on the Medicare Supplement Products acquired from AII in September 1992, and benefits and claims of $1.3 million on the Medicare Supplement Products acquired from LHI in March 1993. This increase was offset, in part, by a decrease of $2.5 million, or 26.4%, for LifeStyles Products, a decrease of $886,000, or 11.5%, for Cancer and Specified Disease Products and a decrease of $1.0 million, or 18.2%, for pre-1987 Medical Expense Products.
The increase in commissions paid on acquired policies resulted from an increase of $2.3 million, or 211.6%, in commissions paid on the Medicare Supplement Products acquired from AII in September 1992 and $139,000 in commissions paid on the Medicare Supplement Products acquired from LHI in March 1993.
General and Administrative Expenses. General and administrative expenses increased $1.6 million, or 12.6%, from $12.7 million to $14.3 million due primarily to an increase of $1.0 million, or 9.9%, for the general and administrative expenses of NFL, and an increase for LifeStyles Marketing of $451,000, or 17.1%. The increase for NFL resulted from the Medicare Supplement Products acquired from AII in September 1992. The increase for LifeStyles Marketing is attributable to expenses relating to expanded marketing efforts.
Interest Expense. Interest expense increased $100,000, or less than 4.0%, from $2.5 million to $2.6 million.
Westbridge is a holding company which conducts its principal operations through its Insurance Subsidiaries. Westbridge's primary assets consist of the outstanding capital stock of NFL and NFIC, of which it is the sole stockholder. NFL owns 100% of WNL and also owns a 40.0% interest in Freedom Holding. AICT is a wholly-owned subsidiary of NFIC. Westbridge's primary sources of funds are dividends from its Insurance Subsidiaries, advances due or dividends from non-insurance subsidiaries, principal and interest payments on a surplus certificate issued by NFL to Westbridge, lease payments on fixed assets, tax contributions under a tax sharing agreement among Westbridge and its subsidiaries, and receipt of principal and interest payments due on the Elkins' note (as defined below). During the year ended December 31, 1995, Westbridge received approximately $3.3 million, or 93.3%, of its funds (excluding proceeds from the issuance of securities) from its subsidiaries. Of the funds received from its subsidiaries, approximately $1.0 million, or 30.8%, was received from the insurance subsidiaries in the form of lease payments on fixed assets, payments of principal and interest on the surplus certificate issued by NFL and payments under a tax sharing agreement, and the remaining $2.3 million, or 69.2%, was received from LifeStyles Marketing and Senior Benefits in the form of repayments of advances from Westbridge. Westbridge's expenses and other obligations consist primarily of $2.2 million in annual interest payments on the Senior Subordinated Notes, $1.7 million in annual dividends on the Series A Preferred Stock, working capital requirements for its marketing subsidiaries and taxes. For the year ended December 31, 1995, Westbridge's cash requirements (exclusive of amounts paid in connection with the sale of the Common Stock and Senior Subordinated Notes) aggregated approximately $6.1 million. Westbridge used a substantial portion of the proceeds from the sale of the Common Stock and Senior Subordinated Notes to redeem the Senior Subordinated Debentures in March 1995. The Senior Subordinated Notes mature in March 2002 and the Series A Preferred Stock is subject to mandatory redemption in April 2004.
In the ordinary course of business, the Company advances first-year commissions on policies written by its general agency networks and their agents. The Company is reimbursed for these advances from commissions earned over the respective policy's life. In the event that policies lapse prior to the time the Company has been fully reimbursed, the agency network or the individual agents, as the case may be, are responsible for reimbursing the Company for the outstanding balance of the commission advance. There can be no assurance as to the occurrence or degree of any future losses. As of December 30, 1995, outstanding advances totaled $16.7 million.
The Company's consolidated net cash used for operations totaled $21.3 million, $10.6 million, and $7.2 million in 1995, 1994 and 1993, respectively. The increase in 1995 resulted from increases to deferred policy acquisition costs and receivables from agents resulting from substantial increases in production of new business during 1995. The primary reasons for the increase in cash used for operations during 1994 and 1993 are increases to deferred policy acquisition costs and an increase in paid claims associated with the Medicare Supplement Products acquired in September 1992 and March 1993, the policies acquired from DNL in February 1994 and the policies obtained in the Acquisition. These increases have been offset, in part, by increases in collected premiums and a decrease in commissions paid.
Net cash used for operations has been impacted by the Company's significant acquisitions of closed blocks of policies since September 1992. These acquisitions involve the transfer to the Company of cash or other investment assets and the assumption by the Company of policy liabilities. While the benefits and claims paid on the policies assumed are reflected directly in the statement of cash flows, the initial receipt of cash and/or investment assets is reflected supplementally on the statement of cash flows through a schedule of non-cash investing activities. As a result, as the investment assets mature or are liquidated, and cash is paid out in the form of benefits and claims, the effect on the Company's statement of cash flows is an increase in net cash used. Such negative operating cash flows are planned, and are an inherent part of acquisitions of closed blocks of business. A review of operating cash flows should be considered in conjunction with the supplemental schedule of non-cash investing activities.
Net cash provided by financing activities was $20.0 million, $24.9 million, and $34,000 for the years ended December 1995, 1994, and 1993, respectively. In February 1995, $29.3 million of cash was provided by the public sale of Common Stock and Senior Subordinated Notes. In December, 1995, $14.9 million of cash was provided by borrowing under a credit agreement with a bank, and approximately $1.0 million of cash was provided by the issuance of a senior note. See further discussion of these financing activities in NOTE 7 of "Notes to the Consolidated Financial Statements" therein. Also, in March 1995, $25.0 million in cash was used to redeem the Senior Subordinated Debentures. In the first six months of 1994, $20.0 million in cash was provided in the sale of the Series A Preferred Stock and the sale by NFL, to a non-affiliated party, of $5,000,000 principal amount of Senior Subordinated Debentures, which had previously been held by NFL in its investment portfolio. There were no significant financing activities during the year ended December 31, 1993.
The Company believes that its near-term cash requirements will be met through a combination of operating and investing cash flows. The Company anticipates that its longer-term cash requirements for the operation of the business will also be met through a combination of operating and investing cash flows. Additional capital may be necessary for future growth, whether internal or through acquisitions. There can be no assurance that such additional capital will be obtained, that opportunities for future acquisitions will arise or that additional capital to consummate such acquisitions will be available.
Inflation may affect, to a limited extent, claim costs on the Company's Medicare Supplement Products and Medical Expense Products. Costs associated with a hospital stay, and the amounts reimbursed by the Medicare program, are each determined, in part, based on the rate of inflation. If hospital and other medical costs which are reimbursed by the Medicare program increase, claim costs on the Medicare Supplement Products will increase. Similarly, as the hospital and other medical costs increase, claim costs on the Medical Expense Products will increase. However, with the approval of the relevant state regulatory authority, the Company has the ability, within the constraints of the loss ratios mandated by the regulatory authorities, to raise premium rates on its guaranteed renewable products in the event of adverse claims experience. In addition, the Company has limited its exposure to inflation by incorporating certain maximum benefits under its policies. See "BUSINESS--PRODUCTS."
The NAIC has proposed certain risk-based capital ("RBC") statutory requirements for insurance companies. Under the proposed requirements, insurers whose capital and surplus fall below the specified level would be subject to remedial action. The proposed guidelines do not take effect until adopted on a state by state basis. Delaware has and Texas has not yet adopted such proposals. As of December 31, 1995, the RBC for each of the Insurance Subsidiaries exceeded the proposed threshold for required regulatory intervention. See "BUSINESS--REGULATION."
In our opinion, the consolidated financial statements listed in the index appearing on page 42 of this Form 10-K present fairly, in all material respects, the financial position of Westbridge Capital Corp. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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.
The Company purchased the outstanding capital stock of a health insurer and its subsidiary in the second quarter of 1994 for a cash purchase price of $20.1 million. This purchase resulted in the Company receiving assets and assuming liabilities as follows:
The Company purchased a Medicare Supplement block of business in the first quarter of 1993. This purchase resulted in the Company receiving investments and assuming liabilities as follows:
WESTBRIDGE CAPITAL CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share data)
Nature of Operations. The Company, through its subsidiaries and affiliates, principally underwrites and sells specialized health insurance products and health plans. The company's major product lines are Cancer and Specified Disease Products, Medical Expense Products and Medicare Supplement Products.
Investments. In 1994, the Company's fixed maturity portfolio was segregated into two components: fixed maturities held-to-maturity and fixed maturities available-for-sale. During 1995, the Company's held-to-maturity portfolio was reclassified as available-for-sale; therefore, fixed maturities available-for-sale are carried at market value. Changes in aggregate unrealized appreciation or depreciation on fixed maturities available for sale are reported directly in stockholders' equity, net of applicable deferred income taxes. Equity securities (common and nonredeemable preferred stocks) are carried at market value. The Company's 40% equity investment in Freedom Holding Company is accounted for on the equity basis (i.e., cost adjusted for equity in post-acquisition earnings and amortization of excess cost). Mortgage loans on real estate and policy loans are carried at the unpaid principal balance. Accrual of interest income ceases when loans are ninety days or more past due. Foreclosed assets are carried at the lower of fair value or unpaid principal balance, less necessary costs to effect foreclosure. Realized gains and losses on sales of investments are recognized in current operations on the specific identification basis. Changes in market values of equity securities, after deferred income tax effects, are reflected as unrealized appreciation or depreciation directly in stockholders' equity and, accordingly, have no effect on current operations. Deferred Policy Acquisition Costs. Policy acquisition costs consisting of commissions and other costs, which vary with and are primarily related to the production of new business, are deferred and amortized over periods not to exceed the estimated premium-paying periods of the related policies. Also included in deferred policy acquisition costs is the cost of insurance purchased on acquired business. Amortization is dynamically adjusted based on current and projected future levels of premium revenue. Such projected future levels of premium revenue are estimated using assumptions as to interest, mortality, morbidity and withdrawals consistent with those used in calculating liabilities for future policy benefits.
Fee and service income and investment income are recognized when earned.
Earnings Per Share. Primary net income per share of Common Stock is determined by dividing net income, less dividends on the Series A Preferred Stock, by primary weighted-average shares outstanding. Fully diluted net income per share is computed through dividing net income by fully diluted weighted average shares outstanding, which assumes conversion of the Series A Preferred Stock. At the December 31, 1994, the Series A Preferred Stock was convertible at $8.75 per share, resulting in 2,285,720 additional shares. The additional average shares outstanding were measured from the April 12, 1994 issue date, through December 31, 1994. At December 31, 1995, as a result of the February 28, 1995 common stock issuance, the conversion price was adjusted to $8.41 per share resulting in 2,378,120 additional shares.
FAS No. 121 is effective for fiscal years beginning after 1995. The Company plans to adopt FAS No. 121 effective January 1, 1996. Management does not anticipate that adoption of this standard will have a material impact on the Company's financial statements.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standard No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (the "Statement"). This Statement requires all debt securities and certain equity securities to be classified in three categories and accounted for as follows:
* Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.
The Company does not engage in "trading" of securities, and accordingly, all of the applicable investments have been categorized as held-to-maturity securities or as available-for-sale securities at December 31, 1994 and as available-for-sale securities at December 31, 1995.
Market values represent the closing sales prices of marketable securities. Estimated fair values are based on the credit quality and duration of marketable securities deemed comparable by the company, which may be of another issuer.
The amortized cost and estimated market value of investments in available-for-sale fixed maturities as of December 31, 1995, are shown below, in thousands, summarized by year to maturity. Mortgage-backed securities are listed separately. 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.
Estimated Amortized Market Cost Value ------- -------- Due in one year or less $ 3,441 $ 3,441 Due after one year through five years 23,078 23,380 Due after five years through ten years 18,730 19,987 Due after ten years 27,155 28,897 Mortgage-backed securities 10,756 11,075 ------- ------- $83,160 $86,780 ======= =======
A summary of unrealized appreciation (depreciation) on investments in fixed maturities held-to-maturity, is as follows (in thousands):
Proceeds from sales of investments in fixed maturity securities were $9,682,000 in 1995 and $13,176,000 in 1994. Gross gains of $255,000 and gross losses of $73,000 were realized on 1995 sales. Gross gains of $372,000 and gross losses of $52,000 were realized on 1994 sales.
Securities on deposit with insurance regulators in accordance with statutory requirements at December 31, 1995 and 1994 aggregated $19,920,000 and $19,820,000, respectively.
On April 12, 1994, Westbridge consummated the acquisition (the "Acquisition") of all of the outstanding capital stock of NFIC and its wholly-owned subsidiary AICT. NFIC and AICT are health insurers which ceased marketing operations in the past, and currently administer closed blocks of health insurance policies. During the latter part of 1994, NFIC and AICT renewed marketing operations. The purchase price for the Acquisition approximated $20,100,000, which was paid in cash. The Acquisition has been accounted for under the purchase method and, accordingly, the operating results of NFIC and AICT have been included in the consolidated operating results since the date of acquisition.
During 1995, the Company revised the assumptions used in calculating the future policy benefit and claims liabilities for NFIC and AICT. These changes resulted in a net purchase accounting adjustment of approximately $13.4 million.
The pro-forma financial information is presented for informational purposes only, and is not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire periods presented. In addition, the pro forma financial information is not intended to be a projection of future results.
Acquisition of a Block of Cancer and Specified Disease Insurance Business
On February 8, 1994, NFL completed its purchase of a block of Cancer and Specified Disease Insurance from Dixie National Life Insurance Company. The purchase price for the block was $2,125,000. This acquisition has been accounted for using the purchase method of accounting.
In November 1988, the Company purchased a 40% equity interest in Freedom Holding Company of Louisville, Kentucky ("Freedom"). Freedom owns 100% of Freedom Life Insurance Company of America ("FLICA"), a Mississippi insurer licensed in 34 states and specializing in the sale of Cancer and Specified Disease Insurance products. Freedom's 60% principal owner is John P. Locke. Concurrent with the equity purchase in Freedom, Locke and his insurance marketing agencies also entered into a 10-year marketing agreement with FLICA and NFL for the sale of their products on an exclusive basis. Additionally, FLICA and NFL consummated a 10-year coinsurance agreement under which NFL or its affiliates will receive 50% of all insurance business written by FLICA.
The purchase price for the equity ownership in Freedom aggregated $4,200,000. The Company also made loans to Locke and Freedom in the amount of $2,400,000 and $1,086,000 respectively. The loans were each in the form of 10-year, 11.70% notes. Concurrent with the purchase, Locke made a $2,400,000 capital contribution to Freedom. This capital contribution together with the Company's loan to Freedom and $1,600,000 of the purchase price proceeds were utilized by Freedom to retire all of its then existing debt obligations. During 1994, both notes were repaid in full.
The Company utilizes the equity method of accounting for its 40% equity interest in Freedom. The Company's portion of Freedom's earnings was $348,000 in 1995, $345,000 in 1994 and $333,000 in 1993. The Company received a $120,000 dividend in 1995 from Freedom.
In November 1993, the Company acquired a 50% interest in Senior Benefits, which markets Medicare Supplement policies for NFL. The Company is providing financing to Senior Benefits during the start-up phase of the operations. Senior Benefits' revenue and expenses were $1,005,000 and $1,105,000 during 1995, and $278,000 and $547,000 during 1994, respectively. Of the revenues received, $982,000 were derived from NFL in the form of commission income on insurance products sold during 1995, and $271,000 in 1994. Through December 31, 1995, the Company loaned Senior Benefits approximately $980,000 in the form of advances. There is not a scheduled repayment plan in place for amounts the Company has loan Senior Benefits. No dividends are to be distributed to any shareholders until all advances due to the Company have been repaid. Through December 31, 1995, the Company has recognized 100% of the cumulative losses of Senior Benefits of which the minority interest share of such losses is approximately $175,000.
Withdrawals Standard industry tables are used for issues through 1975; Company experience is used for issues subsequent to 1975.
Interest Level 4% for issues through 1965; level 4.5% for 1966 through 1969 issues, and 6% graded to 4.5% in 25 years for 1970 through 1981 issues. Issues for 1982 through 1987 are 10% graded to 7% at year 10. ART issues in 1988 and later are 8.5% for 5 years graded to 7.5% in year 20. Participating policies are 4.5% for issues through 1965; 5% for 1966 through 1969 issues, and graded from 6% to 5% in 25 years for issues subsequent to 1969.
Mortality Based on modifications of the 1955-1960 Select and Ultimate Basic Tables and, for certain issues from 1975 through 1981, modifications of the 1958 CSO. Issues subsequent to 1981 use modifications of the 1965-1970 Select and Ultimate Basic Tables.
Withdrawals Issues through 1980 are based on industry experience; 1981 through 1993 issues are based on industry experience and Company experience, where available. Policies acquired in acquisitions are based on recent experience of the blocks acquired.
Interest Issues through 1980 are 6% graded to 4.5% in 25 years; most 1981 through 1992 issues are 10% graded to 7% in 10 years except for certain NationalCare and Supplemental Hospital Income issues which are 8% graded to 6% in 8 years and LifeStyles Products which are 9% graded to 7% in 10 years. 1993 issues are 7% level. Policies acquired from AII in 1992 are 6.4% level. Policies acquired from LHI in 1993 and DNL in 1994 are 6% level. Policies acquired in the Acquisition of NFIC and AICT are 7% level.
Mortality Issues through 1980 use the 1955-1960 Ultimate Table; issues subsequent to 1980 through 1992 use the 1965-1970 Ultimate Table. 1993 issues use the 1975-1980 Ultimate Table. Policies acquired in acquisitions use the 1965-1970 Ultimate Table.
On February 28, 1995, the Company issued 1,500,000 shares of its Common Stock in an underwritten public offering. The Shares of Common Stock were issued at a price of $7.00 per share, less an underwriting discount of $.42 per share. As a result of the issuance of the Common Stock, the conversion rate of the Series A Preferred Stock has been adjusted. The Series A Preferred Stock is now convervitble into 2,378,120 shares of Common Stock at a conversion price of $8.41 per share.
On February 28, 1995, the Company issued $20,000,000 aggregate principal amount of its 11% Senior Subordinated Notes due 2002 (the "Notes"), in an underwritten public offering. The Notes were issued at par, less an underwriting discount of 4%.
In March 1986, the Company completed a public offering of 25,000 Units consisting of $25,000,000 principal amount of 11.70% Senior Subordinated Debentures due 1996 (the "Debentures") and warrants to purchase 800,000 shares of the Company's Common Stock (the "Warrants") at $12.25 per share. The Warrants expired unexercised on March 15, 1991.
On December 22, 1995, the Company issued a $1,000,000 principal amount 10% Senior Note due 2002 (the "Senior Note") to the Chairman of the Board of Directors, a related party. The Senior Note was issued at par. In connection with the Senior Note issuance, the Company also issued a common stock purchase Warrant for 135,501 shares of common stock at an exercise price of $7.38 per share.
The Company has a $20,000,000 Credit Agreement (the "Agreement") which is secured by receivable balances from insurance agents which expires on December 28, 1997. There is a commitment fee of 1/2 of 1% on the unused portion. At the Company's option, interest under the Agreement may be based on prime rate or LIBOR plus an applicable margin. The rate in effect at December 31, 1995, was approximately 8.7%. The Company borrowed approximately $14,880,000 under the Agreement at December 31, 1995. The Agreement required the Company, among other things, to maintain minimum levels of statutory surplus, tangible net worth and certain minimum financial ratios. Subsequent to December 31, 1995 the Company made an additional borrowing under the Agreement of approximately $2,200,000.
On April 12, 1994, the Company issued 20,000 shares of Series A Cumulative Convertible Redeemable Exchangeable Preferred Stock (the "Series A Preferred Stock"), at a price of $1,000 per share. The Series A Preferred Stock was issued in a private placement, and was subsequently registered with the Securities and Exchange Commission under a registration statement which was declared effective in October 1994. The following summarizes the significant terms of the Series A Preferred Stock:
* On or after April 12, 1995, the Series A Preferred Stock may, at the option of the Company, be exchanged for an amount of Convertible Subordinated Notes due April 12, 2004, equal to the aggregate liquidation preference of the Series A Preferred Stock being exchanged. The Convertible Subordinated Notes would bear interest at 8.25% and be convertible into common stock at a price of $8.41 per share, in each case, subject to certain adjustments.
A summary of deferred policy acquisition costs by major product line of insurance follows:
The cost of insurance purchased in 1994 is related to the purchase of NFIC and is being amortized in relation to premium revenues over the remaining life of the business. Interest accrues on the unamortized balance at 7% per year. Amortization of this cost of insurance purchased was approximately $2.3 million and $3.0 million in 1995 and 1994, respectively, net of interest accretion of $1.3 million and $1.5 million.
During 1995, the Company recorded Purchase Accounting adjustments to the purchase price of NFIC as these adjustments fell within the one-year "look-back" period following the acquisition, in accordance with Statement of Financial Accounting Standard No. 38 "Accounting for Preacquisition Contingencies of Purchased Enterprises."
For each of the next five years, the estimated amortization of the cost of insurance purchased is 15% to 20% of each years' beginning balance.
Year Ended December 31, ---------------------- 1995 1994 1993 ----- ------ ------ (In thousands)
Current $1,032 $1,581 $ 321 Deferred 1,781 1,183 1,241 ----- ----- ----- Total provision for income taxes $2,813 $2,764 $1,562 ===== ===== =====
Provision has not been made for state and foreign income tax expense since such expense is minimal.
Year Ended December 31, ----------------------------- 1995 1994 1993 ------- ----- ------ Statutory tax rate 34% 34% 34% Small life insurance company deduction calculated as a percentage of life insurance company income -- (5%) (3%) Unutilized loss carryforwards of non-life companies -- 2% 4% Equity earnings of unconsolidated subsidiary (1%) (1%) (2%) Other items, net -- -- (2%) ---- ---- ---- Effective tax rate 33% 30% 31% ==== ==== ====
Deferred taxes are recorded for temporary differences between the financial reporting basis and the federal income tax basis of the Company's assets and liabilities. The sources of these differences and the estimated tax effect of each are as follows:
December 31, ------------------------------ 1995 1994 -------- --------- (In thousands) Deferred Tax Liabilities: Deferred policy acquisition costs $ 8,683 $11,817 Invested assets 604 63 Unrealized gain on investments 851 - Other deferred tax liabilities 2,399 1,890 ------ ------ Total deferred tax liability 12,537 13,770 ------ ------ Deferred Tax Assets: Policy reserves 3,296 8,668 Net operating loss carryforwards 6,960 6,292 Tax credit carryforwards 11 11 Unrealized depreciation of investments - 75 Other deferred tax assets 1,307 444 Valuation allowance (4,878) (4,951) ------ ------ Total deferred tax asset 6,696 10,539 ------ ------ Net deferred tax liability $ 5,841 $ 3,231 ------ ------
A valuation allowance has been provided for 1995 and 1994, respectively, for the tax effect of a portion of the non-life loss carryovers since it is more likely than not that such benefits will not be realized. The change in the valuation allowance of $73,000 is due primarily to decreases in non-life net operating losses which are not expected to be utilized against life company income.
At December 31, 1995, the Company and its wholly-owned subsidiaries have aggregate non-life net operating loss carryforwards of approximately $19,241,000 and $8,021,000 for regular tax and alternative minimum tax purposes, respectively, which expire in 2001 through 2010.
Under applicable Delaware law, NFL must maintain minimum aggregate statutory capital and surplus of $550,000. Under applicable Texas law, each of NFIC and AICT must maintain minimum aggregate statutory capital and surplus of $1.4 million. The state of Georgia requires licensed out-of-state insurers to maintain minimum capital of $1.5 million and Kentucky requires minimum surplus of $2.0 million, which levels are higher than those of any other states in which the Insurance Subsidiaries are currently licensed. Accordingly, the minimum aggregate statutory capital and surplus which each of NFL, NFIC and AICT must maintain is $3.5 million. At December 31, 1995, aggregate statutory capital and surplus for NFL, NFIC and AICT was $14.1 million, $9.9 million and $8.3 million, respectively. Statutory net income (loss) for NFL, NFIC and AICT for the year ended December 31, 1995, was $(5.5) million, $(0.8) million and $1.7 million, respectively. AICT is wholly-owned by NFIC. Accordingly, statutory capital and surplus of NFIC includes capital and surplus of AICT.
Dividend payments from Westbridge's principal Insurance Subsidiaries are regulated by the insurance laws of their domiciliary states. NFL is domiciled in Delaware. Under the Delaware Insurance Code, an insurer domiciled in Delaware may not declare or pay a dividend or other distribution from any source other than "earned surplus" without the state insurance commissioner's prior approval. "Earned surplus" is defined as an amount equal to the unassigned funds of an insurer as set forth on its most recent statutory annual statement, including all or part of the surplus arising from unrealized capital gains or revaluation of assets. NFIC and AICT are domiciled in Texas. An insurer domiciled in Texas may pay dividends only out of "surplus profits arising from its business". Moreover, insurers domiciled in either Delaware or Texas may not pay "extraordinary dividends" without first providing the state insurance commissioner with 30-days prior notice, during which time such commissioner may disapprove the payment. An "extraordinary dividend" is defined as a dividend whose fair market value together with that of other dividends made within the preceding 12 months exceeds the greater of (a) ten percent of the insurer's surplus as regards policyholders as of the preceding December 31 or (b) the net gain from operations of such insurer, not including realized capital gains, for the 12-month period ending on the preceding December 31. In September 1994, NFL paid to Westbridge an "extraordinary dividend" in the amount of $2.0 million. With respect to ordinary dividends payable by an insurer domiciled in Delaware, notice of any dividend must be provided to the state insurance commissioner within five (5) business days following the declaration thereof and at least ten (10) days prior to the payment thereof. As of December 31, 1994, NFL had negative statutory "earned surplus" as a result of historical statutory losses. For the foreseeable future, NFL has agreed to seek the approval of the Delaware insurance commissioner prior to making any dividend payments. As of December 31, 1995, AICT has the ability to pay to NFIC, without prior regulatory approval, $835,000 in dividends during 1996. As of December 31, 1995, NFIC has the ability to pay to Westbridge, without prior regulatory approval, $1.0 million during 1996. In both Delaware and Texas, the state insurance commissioner reviews the dividends paid by each insurer domiciled in such commissioner's state at least once each year to determine whether they are reasonable in relation to the insurer's surplus as regards policyholders and quality of earnings. The state insurance commissioner may issue an order to limit or disallow the payment of ordinary dividends if such commissioner finds the insurer to be presently or potentially financially distressed or troubled.
In December 1990, the Company and NFL entered into an agreement under which NFL issued a Surplus Certificate to the Company in the principal amount of $2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid aggregate principal under the Surplus Certificate bears interest at an agreed upon rate not to exceed 10% and is repayable, in whole or in part, upon (i) NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any reinsurance treaties, and (ii) NFL receiving prior approval for repayment from the Delaware State Insurance Commissioner. During 1993 and 1994, NFL received such approval and repaid $2,086,000 to the Company. No principle payments were made in 1995.
The statutory financial statements of the Company's insurance subsidiaries are prepared using accounting methods which are prescribed or permitted by the insurance department of the respective companies' state of domicile. Prescribed statutory accounting practices include a variety of publications of the NAIC as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company employed no permitted statutory accounting practices that individually or in the aggregate materially affected statutory surplus or risk-based capital at December 31, 1995 or 1994.
The Company adopted, as of July 1, 1982, an employee incentive stock option plan (the "ISO Plan"). The ISO Plan, as amended, authorizes the Company's Board of Directors to issue to key full-time employees of the Company, or any of its subsidiaries, non-transferrable options to purchase up to 580,000 (as adjusted to give effect for stock dividends paid in 1983) shares, in the aggregate, of the Company's Common Stock. Options granted under the ISO Plan are intended to qualify as either "incentive stock options" under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), or as non-qualified stock options as defined under the Code. The ISO Plan provides that the option price per share will be no less than the fair market value for a share of the Company's Common Stock on the date of grant. To date, all option prices have been equal to the fair market value of the stock on the date of grant. The ISO plan also provides that shares available upon the exercise of options granted under the ISO Plan may be paid for with cash or by tendering shares of Common Stock owned by optionee(s), or a combination of the foregoing. All options outstanding are exercisable within ten years from the date the option was granted, except that no option is exercisable until at least one year after its grant. In addition, the ISO Plan provides that no one owning 10% of the total combined voting power of all classes of the Company's stock, or of the stock of any subsidiary, is eligible to be awarded options under the ISO Plan.
The Company also adopted, as of September 5, 1985, a second employee stock option plan (the "1985 Plan"). The 1985 Plan provides for the granting, to eligible employees of the Company or its subsidiaries, of stock options to purchase up to a total of 200,000 shares of the Company's Common Stock. Options granted under the 1985 Plan are treated as "non-qualified stock options" for purposes of the Code and the option price per share shall not be less than 90% of the fair market value of the Company's Common Stock on the date of grant. All options outstanding are exercisable within seven years from the date the option was granted, except that no option is exercisable until at least one year after its grant.
A third employee stock option plan (the "1992 Plan"), was adopted as of March 26, 1992. The 1992 Plan provided for the granting, to eligible employees of the Company or its subsidiaries, of stock options to purchase up to a total of 300,000 shares of the Company's Common Stock. Options granted under the 1992 Plan are treated as "non-qualified stock options" for purposes of the Code and the option price per share shall not be less than 90% of the fair market value of the Company's Common Stock on the date of grant. All options outstanding are exercisable within seven years from the date the option was granted, except that no option is exercisable until at least one year after its grant.
At December 31, 1995, options for 141,294 shares were exercisable under the stock options plans at a price ranging from $1.88 to $2.50; and options for 148,700 shares were exercisable at a price ranging from $5.18 to $7.71. Also, at December 31, 1995, 1994 and 1993, options for 6,000, 128,000 and 168,000 shares, respectively, remained available for future grant under the plans.
In late 1993, NFL entered into a coinsurance treaty with FLICA. FLICA is a wholly-owned subsidiary of Freedom. Under the terms of the treaty, NFL assumed a 90% pro-rata share of first occurrence cancer business. For the years ended December 31, 1995, 1994 and 1993, $5,058,000, $1,640,000, and zero, respectively, of assumed premiums under this coinsurance treaty are included as premium revenue in the Consolidated Financial Statements.
In May 1987, NFL entered into a coinsurance treaty with FLICA. Under the terms of the treaty, NFL assumed a 50% pro-rata share of all insurance business written by FLICA from January 1, 1987 through December 31, 1988. In November 1988 (see NOTE 4), the coinsurance treaty was amended to extend through 1997. For the years ended December 31, 1995, 1994 and 1993, $4,272,000, $4,607,000, and $4,856,000, respectively, of assumed premiums under the coinsurance treaty are included as premium revenues in the consolidated financial statements.
The Company's future minimum lease payments for non-cancelable operating leases, relating primarily to office facilities and data processing equipment having a remaining term in excess of one year, at December 31, 1995, aggregated $13,580,000. The amounts due by year are as follows: 1996-$2,750,000; 1997-$2,550,000; 1998- $2,260,000; 1999-$1,990,000; 2000-$1,760,000; and thereafter-$2,270,000. Aggregate rental expense included in the consolidated financial statements for all operating leases approximated $3,413,000, $2,953,000, and $1,908,000 in 1995, 1994 and 1993, respectively.
A reconciliation of capital and surplus reported by the Insurance Subsidiaries under regulatory practices to stockholders' equity as reported herein by Westbridge on a consolidated GAAP basis follows:
Summarized quarterly financial data for each of the Company's last two years of operations is as follows:
CONDENSED FINANCIAL INFORMATION OF REGISTRANT WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) BALANCE SHEETS (In thousands)