AHL and its subsidiaries own 29.77 acres in a suburban area of Jacksonville, Florida, upon which it completed construction in August, 1994 of an eight story home office building containing approximately 140,000 square feet and a two story annex building of approximately 20,000 square feet.
ORDINARY PRE-TAX OPERATING EARNINGS WERE $49.8 MILLION, $40.3 MILLION AND $35.1 MILLION IN 1998, 1997 AND 1996, RESPECTIVELY. The increase each year was primarily due to growth in insurance revenues and investment income, less normal growth in benefits and claims, and expenses and for 1998 and 1997 CUL's pre-tax operating earnings of $3.9 million and $2.4 million, respectively, with no comparable amount in 1996.
Ordinary insurance revenues amounted to $197.4 million, $168.2 million and $137.4 million in 1998, 1997 and 1996, respectively. Premiums including equivalents were $285.2 million, $241.1 million and $181.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increases in insurance revenues and premiums and premium equivalents in 1998 over 1997 and 1997 over 1996 were due primarily to increased sales of interest-sensitive products resulting in increased policy charges and increased sales of individual accident and health and cancer plans. Also, 1998 and 1997 included $14.6 million and $14.1 million of insurance revenues and $48.6 million and $31.5 million of premium equivalents for CUL, respectively, without a corresponding amount in 1996.
Group benefits and claims in 1998, 1997 and 1996 totaled $26.5 million, $18.3 million and $24.0 million, respectively. Group benefits increased in 1998 as a result of growth in the insured business. Group benefits were reduced in 1997, compared to 1996, as a result of the managed care program, the AHL Select Provider Network and new cases written on a self-funded or split-funded basis where claims are not included in the Company's benefits and claims expenses for financial statement purposes.
Group taxes, commissions and general expenses in 1998, 1997 and 1996 were $14.3 million, $13.6 million and $12.3 million, respectively. These expenses have remained relatively flat due to a decrease in taxes and commissions offset by an increase in general expenses. The increases in group general expenses in 1998 and 1997 were due to growth in business, administration of larger group cases and the implementation of a new local area network group claims processing system.
Credit insurance revenues for 1998, 1997 and 1996 were $71.5 million, $80.6 million and $85.6 million, respectively. Credit premiums and premium equivalents amounted to $144.6 million, $173.8 million and $171.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. The decrease in insurance revenues and credit premiums and premium equivalents in 1998 was a result of a reduction in reinsured and administrative services only business and the termination of certain unprofitable accounts. The increase in credit premiums and premium equivalents in 1997 was a result of geographic expansion, increased sales of reinsured business and additional premium equivalents generated from administering the run-off of a block of credit life and health insurance for another insurance company, effective in June 1996. The decrease in credit insurance revenues from 1996 to 1997 was due to a reduction in sales of retained insured business.
Credit benefits and claims amounted to $9.7 million, $12.6 million and $13.9 million in 1998, 1997 and 1996, respectively. These decreases were due, in part, to a reduction in the change in unearned premiums which is included in credit benefits and claims. These reductions were also the result of terminating unprofitable accounts and certain previously fully insured accounts converting to reinsured accounts. As a result of these actions, the Company reduced the combined commission and loss ratio by 6% in 1998 versus 1997.
Other operating expenses in 1998, 1997 and 1996 were $12.8 million, $9.5 million and $4.2 million, respectively. These expenses primarily relate to non-life insurance operations, including interest expense. Interest expense is a function of the average debt outstanding and interest rate charged. Interest expense included in non-segmented operating expenses was $10.0 million, $7.7 million and $3.7 million for 1998, 1997 and 1996, respectively. These increases were due primarily to bank debt outstanding and the inclusion of interest on the FELINE PRIDES in 1998 and 1997.
Prescribed or permitted Statutory Accounting Principles (SAP) may vary between states and between companies. The National Association of Insurance Commissioners (NAIC) is in the process of codifying SAP to promote standardization of methods, which may result in changes in statutory accounting practices for the Company's insurance subsidiaries. Such changes are not expected to significantly impact the Company's statutory financial statements. Management is not aware of any other additional pending regulation from the various state insurance departments that would have a significant impact on the Company's operations.
The net cash provided by operating activities for the years ended December 31, 1998, 1997 and 1996 aggregated $88.7 million, $96.7 million and $66.5 million, respectively. The decrease in 1998 from 1997 was due primarily to the funding of surrenders of certain ordinary life policies. The increase in 1997 from 1996 was due primarily to an increase in policyholder account balances as a result of a reduction in surrenders in 1997.
The Company's policy loans are a higher percentage of invested and total assets than industry norm as a result of a significant block of Management Security Plan (MSP) business. The MSP product is an interest-sensitive, deferred compensation/executive benefit-type product with the policy loan feature being an integral part of the product. A market rate of interest is charged on the policy loans and a predetermined built-in spread is achieved between the interest rate charged on the policy loans and the interest rate credited on the loaned funds. Accordingly, all MSP policy loans are completely collateralized by the underlying policyholders' account balances. Policy loans are generally funded out of cash provided by operating activities and do not represent a significant restriction on the Company's liquidity.
Policy loans totaled $482.0 million at December 31, 1998. The significant amount of policy loans was attributable to the policy loans associated with the MSP executive deferred compensation plan offered by the Company which aggregated $431.2 million at December 31,1998. As discussed earlier, the policy loan feature is an integral part of the product. MSP policy loans increased by $73.6 million in 1998 over 1997.
The Company's investment strategy is to earn a favorable return on its investments in excess of rates for which the Company is contractually obligated to its policyholders. To achieve this strategy, the Company maintains an asset/liability matching program, monitoring the investment spread achieved on each product. Targeted investment spreads have been maintained for all products despite fluctuations in interest rates and an overall compression of market rates.
The plan also called for a complete and ongoing assessment of the status and progress of customers, vendors and corporate service partners in achieving Year 2000 compliance. For the most part, failure of any one or a group of customers or vendors to be Year 2000 compliant will have little or no effect on the ability of the Company to process business and serve its customers. In the unlikely event the Company fails to complete those portions of its Year 2000 compliance plan not already substantially done, its ability to electronically adjudicate claims would be negatively impacted. However, the Company has in place a proven manual claims adjudication system that would be utilized in such an unlikely event, and the incremental cost incurred would not be material.
The direct and indirect cost of achieving Year 2000 compliance, including all remediation, replacement and upgrading of non-compliant systems over the three years preceeding the turn of the century is expected to be approximately $8.3 million. Most of such cost will be capitalized and amortized over the reasonable useful lives of the new software systems put in place, as they relate primarily to upgrading or replacing systems for business reasons other than year 2000 remediation. Costs expensed in 1997, 1998 and to be expensed in 1999 are immaterial to the overall financial statements of the Company.
American Heritage Life Investment Corporation is a holding company; and its liquidity is largely dependent on the ability of its subsidiaries, primarily AHL, to pay dividends and on external financing. In addition, AHLIC charges its subsidiaries a management fee to cover its basic operating expenses.
The amount of dividends that AHL can pay to AHLIC is limited by regulatory restriction to an annual amount equal to the greater of 10% of AHL's statutory surplus, or its prior year's statutory gain from operations plus net realized capital gains on a noncumulative basis, provided AHL will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend is paid. The amount of dividends that CUL can pay to AHL is limited to the greater of the statutory net gain from operations for the preceding year or 10% of net surplus at the end of the preceding year and is further restricted by the balance of unassigned surplus from which dividends are paid. A dividend of $13.0 million, related to AHL's earnings in 1997, was paid to AHLIC in 1998. AHL chose not to pay any dividends to AHLIC during 1997 and 1996. None of the other subsidiaries paid any ordinary dividends to AHLIC or AHL during 1998, 1997 or 1996. Approximately $26.0 million, related to AHL's 1998 earnings, is available to dividend to the Company during 1999 without regulatory approval. The
outstanding bank debt of the Company is serviced through either dividends from AHL in excess of the amount required to pay stockholder dividends or by replacement borrowing.
Risk-Based Capital is a tool for insurance regulators to evaluate the capital of insurers. Based on calculations using the appropriate NAIC formula, AHL, CUL, Concord Heritage, Keystone State and First Colonial exceeded the Risk-Based Capital requirements at December 31, 1998 and 1997.
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying factors that could cause actual results to differ materially from those projected in such statements. The Company desires to take advantage of the "safe Harbor" provisions of the Act.
Factors that may cause the Company's actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include among others, the following possibilities: (i) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors;(ii) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates, limitation on the ability to manage care and utilization, and tax treatment of insurance products;(iii) fluctuations in the interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investments;(iv) failure to obtain new customers, retain existing customers or reduction in policies in force by existing customers; (v) higher service, administrative, or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (vi) loss or retirement of key executives; (vii) termination of provider contracts or renegotiation at less cost-effective rates or terms of payment; (ix) changes in the Company's liquidity due to changes in asset and liability matching; (x) restrictions on insurance underwriting based on genetic testing and other criteria; (xi) adverse changes in the ratings obtained from independent rating agencies; (xii) failure to maintain adequate reinsurance; (xiii) possible claims relating to sales practices for insurance products and claim denials and (xiv) adverse trends in mortality and morbidity.
possible future adverse experience deviations. Policyholders' account balances for interest-sensitive products represent premiums received plus interest credited during the contract accumulation period, less contract charges for mortality and expenses. For the years ended December 31, 1998 and 1997, the weighted average interest rates credited to the policyholders' account balances were 5.08% and 5.46%, respectively; and the related interest credited to the policyholders' account balances was $54.0 million and $52.3 million. The surrender charge provisions for interest-sensitive policies vary depending upon the type of policy. For universal life-type policies, the surrender charges generally range over a period of 5-20 years at varying rates depending upon the plan of insurance. For annuities, the surrender charges generally range over a period of 7-10 years with charges varying from 1% to 10% of the accumulated fund value over the surrender charge period.
Debt securities are investments which mature at a specified future date more than one year after they were issued. Equity securities include common stocks and non-redeemable preferred stocks. Investments are categorized as (1) held to maturity, (2) available-for-sale, or (3) trading. All debt and equity securities have been classified by the Company as available-for-sale and are stated at fair value. Unrealized gains or losses on debt and equity securities available-for-sale resulting from fluctuations in fair values were recorded, net of deferred income taxes and adjustments to the deferred acquisition costs for interest-sensitive insurance products, directly to a separate component of stockholders' equity. Realized investment gains or losses are calculated on the basis of specific identification and include writedowns on those investments where the decline in value below its cost or amortized cost is considered to be other than temporary.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
The effective Federal income tax rates on earnings before income taxes (amounts in thousands) were lower than the maximum statutory rates as follows:
The tax effects of temporary differences that gave rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 1998 and December 31, 1997 (in thousands) were as follows:
Prior to 1985, certain life insurance company income was not subject to Federal income tax until distributed. For tax purposes such income was accumulated in a memorandum "policyholders' surplus account" and is not taxable unless it is distributed, unless certain limitations under the Internal Revenue Code are exceeded or, unless the income tax deferral status of the account is modified by future tax legislation. At December 31, 1998, the policyholders' surplus account was $10.9 million.
For the years ended December 31, 1998, 1997 and 1996, net investment income (in thousands) was as follows:
The amortized cost and fair values of debt securities available-for-sale by category of securities (in thousands) were as follows:
Equity securities The fair value and carrying value of equity securities, other than private placements, were based on bid prices published in financial newspapers. For private placements, cost has been determined to approximate fair value.
Policy loans The fair value of policy loans approximates the book value, as interest rates charged for a majority of the policy loans are updated to current market rates on an annual basis.
Cash and short-term investments The carrying amount approximates fair value because of the short maturity of these instruments.
Notes payable to banks The carrying amount approximates fair value because the interest rates charged represent current market rates.
At December 31, 1998, all of the notes payable to banks were short-term, unsecured and related to advances under $137.0 million lines of credit ($73.4 million available to be drawn at December 31, 1998) bearing interest at rates ranging from 5.48% to 5.66%. The arrangements under the terms of the lines of credit are reviewed annually for renewal. The Company also has a $75.0 million line of credit (the entire $75.0 million available to be drawn at December 31, 1998) which is specifically to be used for acquisitions. The loan has a term of five years and contains certain financial covenants and commitment fees. The Company was in compliance with the covenants at December 31, 1998.
Each FELINE PRIDES consists of a unit with a stated amount of $50 comprised of (a) a stock purchase contract under which (i) the holder will purchase from the Company on August 16, 2000, a number of shares of common stock of the Company equal to a specified rate and (ii) the Company will pay 1.75% yield enhancement payments to the holder and (b) beneficial ownership of a 6.75% trust preferred security representing a preferred undivided interest in the assets of a Trust. The sole assets of the Trust are a 6.75% subordinated debenture of the Company due August 16, 2002 with a principal amount of $106.7 million.
The amount of insurance premiums assumed under reinsurance agreements for the years ended December 31, 1998, 1997 and 1996 were $8.6 million, $4.5 million and $5.8 million, respectively. The amount of insurance premiums ceded under reinsurance agreements for the years ended December 31, 1998, 1997 and 1996 were $90.3 million, $126.6 million and $111.7 million, respectively. The amounts of recoveries for benefits paid under reinsurance agreements for the years ended December 31, 1998, 1997 and 1996 were $97.6 million, $108.8 million and $104.0 million, respectively.
The following table sets forth the computation of basic and diluted net earnings per share (amounts in thousands):
Compensation cost determined pursuant to Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" would not have had a material effect on the Company's net earnings and earnings per share for 1998, 1997 and 1996.
A summary of the status of the Company's fixed stock option plans as of December 31, 1998, 1997 and 1996, and changes during the years ended on those dates is presented below:
The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Under the Company's Long-Term Incentive Plan, the restricted stock feature provides for the grant of common stock to a participating employee. The number of shares of restricted stock available to be issued in the name of
each participating employee is determined at the beginning of each fiscal year and is based on the prior year's operating results. Such shares are restricted for three years and held by the Company in the name of the participating employee, who has the right to vote and to receive dividends paid on all such shares. Such shares are subject to forfeiture to the Company if the participating employee does not remain in the Company's employ for three years after the date of grant.
During the years ended December 31, 1998, 1997 and 1996, the Company granted 28,028, 34,432 and 21,940 shares of restricted stock, respectively.
The Company has a trusteed profit sharing plan for the exclusive benefit of eligible employees. The Company's annual contribution to the plan is equal to the lesser of 10% of consolidated earnings as defined or 10% of qualifying compensation paid to participants. The annual contributions amounted to $1.5 million in 1998, $1.3 million in 1997 and $1.2 million in 1996.
Activity in the liability for policy and contract claims (in thousands) at December 31, 1998, 1997 and 1996 is summarized as follows:
The Company evaluates performance and allocates resources based on the earnings from operations before income taxes (excluding realized investment gains and losses). Performance is also evaluated based on premium equivalents. Premium equivalents for ordinary insurance include cash deposits from interest-sensitive products. Group premium equivalents include business sold on a self-funded or split-funded basis, and credit premium equivalents include business written on an administrative services only basis. The accounting policies of the reportable segments are the same as those described in Footnote (1), Summary of Significant Accounting Policies.
The payment of dividends to AHLIC by AHL is subject to the regulation of the State of Florida Department of Insurance. A dividend may be made without prior Florida Insurance Commissioner's approval if the dividend is equal to or less than the greater of: (a) 10% of AHL's surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains; or (b) AHL's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, if AHL will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend is paid. As a result of such restrictions, the maximum dividend which could be paid to AHLIC by its insurance subsidiaries during 1999 without prior approval is $26.0 million.
AHLIC's insurance subsidiaries had statutory net operating earnings of $27.7 million, $24.5 million and $20.6 million and statutory net earnings of $31.3 million, $27.8 million and $22.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. Total statutory stockholder's equity of the separate subsidiaries was $204.4 million at December 31, 1998 and $196.8 million at December 31, 1997. At December 31, 1998, pursuant to the insurance laws of the State of Florida, the minimum capital and surplus required to be maintained by AHL was approximately $51.8 million.
Other comprehensive income, as reflected in the Consolidated Statements of Stockholders' Equity, consisted of net unrealized investment gains of $.9 million for the year ended December 31, 1998. Total comprehensive income, which was $37.6 million for the year ended December 31, 1998, included net earnings of $36.7 million and other comprehensive income.
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION (REGISTRANT) CONDENSED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ($ IN THOUSANDS)
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION (REGISTRANT) CONDENSED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 ($ IN THOUSANDS)
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 ($ IN THOUSANDS)
(a) Allocated to the industry segment based on required liabilities for future policy benefits. (b) Allocated on functional cost basis unless specifically identifiable with industry segment. (c) Includes only cost of insurance, expense and surrender charges for interest-sensitive products. Insurance revenues do not include group and credit premium equivalents and cash deposits from interest-sensitive products.