Insurance revenues pursuant to generally accepted accounting principles ("GAAP") include only the mortality, 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.
As a result of more of the ordinary life business being interest-sensitive, the group business being on a self-funded or split funded basis and the credit business being written on an administrative services only basis, in which only the fees charged are included in insurance revenues for GAAP purposes, it is necessary to evaluate insurance revenues including premium equivalents. For 1996, 1995 and 1994, insurance revenues were $258.5 million, $247.3 million and $230.6 million, respectively, while total insurance revenues including premium equivalents were $567.6 million, $511.8 million and $445.5 million, respectively. Because so much of the Company's business is interest-sensitive and administrative services only, insurance revenues including premium equivalents are a better measure of sales and growth.
Credit insurance revenues for 1996, 1995 and 1994 were $85.6 million, $83.6 million and $73.4 million, respectively. Credit premiums and premium equivalents amounted to $171.2 million, $138.1 million and $116.3 million for the years ended December 31, 1996, 1995 and 1994, respectively. Credit insurance revenues and premiums and premium equivalents increased during these periods as a result of geographic expansion and increased sales of reinsured business, which generally provides less risk to the Company at an acceptable profit margin. The increase in 1996 over 1995 was also attributed to additional fee income generated from administering the run-off of credit life and health insurance for another insurance company, effective June 1996.
Credit benefits and claims amounted to $13.9 million, $19.8 million and $21.4 million in 1996, 1995 and 1994, 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 retained business accounts converting to reinsured accounts.
Ordinary taxes, commissions and general expenses were $33.1 million, $29.4 million and $29.0 million for 1996, 1995 and 1994, respectively. The increase each year was primarily the result of growth in ordinary business. Group taxes, commissions and general expenses were $12.3 million, $12.2 million and $12.5 million, respectively. These expenses have remained relatively flat due to a decrease in taxes and commissions offset by an increase in general expenses. The decrease in commissions and taxes was the result of reduced premiums. The increases in general insurance expenses in 1996 and 1995 were due to growth in business, administration of larger group cases and the implementation of a new local area network group system. Credit taxes, commissions and general expenses were $72.3 million, $65.1 million and $54.1 million in 1996, 1995 and 1994, respectively. The increase each year was primarily due to an increase in commissions earned as a result of increased insurance revenues and a higher effective commission rate, due to increased contingent commissions as a result of improved claims.
Amortization of deferred acquisition costs was $25.6 million in 1996, $23.7 million in 1995 and $20.8 million in 1994. These increases were primarily due to growth in business in force and an increase in lapses of individual health business resulting from the implementation of rate increases, which increase the write-off of the policies' deferred acquisition costs.
Net investment income was $77.0 million, $70.6 million and $66.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. These increases were due primarily to an increase in invested assets and changes made in the investment portfolio to improve the yield. The effective yield on invested assets for the year ended December 31, 1996 was 7.72% compared to 7.64% for the year ended December 31, 1995 and 7.87% for the year ended December 31, 1994. The increase in yield from 1995 to 1996 was due to changes made in the investment portfolio including a reduction in lower yielding equity securities and an increase in higher yielding corporate bonds and mortgage loans. The reduction in yield from 1994 to 1995 was primarily the result of declining interest rates during 1995.
Ordinary pre-tax operating earnings were $35.1 million, $28.9 million and $26.0 million in 1996, 1995 and 1994, 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.
Credit pre-tax operating earnings were $3.8 million, $2.7 million and $1.8 million in 1996, 1995 and 1994, respectively. The increase in credit pre-tax operating earnings in 1996 over 1995 and 1995 over 1994 was the result of terminating certain unprofitable accounts and reducing the commissions paid on accounts with unsatisfactory margins which negatively impacted operations in 1994. Additionally, the Company is administering the run-off of the credit life and health insurance business for another insurance company, effective June 1996, which will increase fee income over a four-year period. The Company is only responsible for administration of the run-off and has no insurance risk.
The Company's legal department includes a compliance area headed by an officer who is a lawyer with regulatory experience. The compliance area reviews and approves marketing material, policy filings and other areas which are the subject of market conduct compliance requirements of the various state insurance departments.
Realized investment gains, net were $419,511 for the year ended December 31, 1996 compared to $6.0 million for the year ended December 31, 1995 and $2.0 million for the year ended December 31, 1994. The realized investment gains for the respective periods were primarily the result of adjustments made in the investment portfolio to increase the yield on invested assets less recognizing any decline in value other than temporary in the value of certain investments. The 1995 realized investment gains also included realized gains on real estate.
The Company is engaged primarily in the life and health insurance business. The Company's insurance subsidiaries generate major sources of cash flow from premiums collected for traditional insurance products, deposits and policy charges for interest-sensitive products, and investment income attributable to its life insurance operations and associated investment portfolio. This results in a significant portion of the Company's assets being liquid.
due primarily to (i) the funding of surrenders and maturities of certain ordinary life policies in 1996 and (ii) an increase in reinsurance receivables primarily from the increased sales from credit reinsured accounts. The increase in 1995 from 1994 was due primarily to (i) the funding in 1994 of the termination of certain premium deposit accounts amounting to $16.4 million with no comparable reductions in 1995 and (ii) an increase in accrued investment income and a related decrease in unearned investment income due to changing policy loan interest on certain plans from in advance to in arrears during 1994 discussed in the following paragraph.
The Company's balance sheet contains a high ratio of liquid assets. Such assets are made up of cash, short-term investments and readily marketable securities.
At December 31, 1996, U. S. Treasury obligations and GNMA's at market value aggregated $156.6 million, or 32.2% of the total bond portfolio of $486.9 million.
Policy loans totaled $399.6 million at December 31, 1996, or 39.5% of total invested assets. 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 $370.7 million at December 31, 1996. As discussed earlier, the policy loan feature is an integral part of the product. MSP policy loans increased by approximately $22.1 million in 1996 over 1995.
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 policy, 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.
Notes payable to banks at December 31, 1996 were $85.5 million compared to a balance of $95.0 million at December 31, 1995. The decrease in bank debt at December 31, 1996 compared to the amount at December 31, 1995 reflected the 1996 payoff of a $20.0 million loan related to investment purchases. Partially offsetting this reduction was an increase in bank debt for cash needs of the Company including stockholder dividends, interest expense on outstanding debt and federal income taxes during 1996.
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, limitations on the ability to manage care and utilization, and tax treatment of insurance products; (iii) fluctuations in 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 reductions 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) increases in medical costs, including increases in utilization and costs of medical services; (viii) 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 by 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.
All other schedules are omitted as the required information is inapplicable or presented in the consolidated financial statements or related notes.
Such principles differ in some respects from those followed in preparing statutory reports filed with various insurance departments. Under GAAP:
(3) Deferred Acquisition Costs: The costs (principally commissions) of acquiring traditional life, interest-sensitive products and accident and health contracts, certain expenses of the policy issue and underwriting department, and certain agency expenses, all of which vary with and are primarily related to the production of new business, have been deferred. Deferred acquisition costs of traditional life and accident and health contracts are being amortized over the premium payment period of the related policies using the same assumptions as were used for computing liabilities for future policy benefits, together with appropriate expense assumptions. For interest-sensitive life products, deferred acquisition costs are being amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and investment, mortality and expense margins. Assumptions used for estimating the related gross profits are evaluated regularly (at least annually) and amortization is appropriately modified.
Other operating expenses include primarily interest expense related to bank borrowings and other general corporate expenses of AHLIC.
Earnings per share of common stock are based on the weighted average number of shares outstanding during each year, excluding treasury shares. Options outstanding to purchase common stock had no significant dilutive effect on earnings per share.
The components of income tax expense (in thousands) for each of the three years ended December 31 were 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, 1996 and December 31, 1995 (in thousands) were as follows:
No valuation allowance was recorded at December 31, 1996 or 1995.
Proceeds from sales and maturities of investments in debt securities during 1996, 1995 and 1994 were $59.1 million, $69.3 million and $97.2 million, respectively. Gross gains and losses on those sales, and net gains and losses on sales of other investments (in thousands), were as follows:
The amortized cost and fair value of debt securities available-for-sale (in thousands) at December 31, 1996, by contractual maturity, were as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without penalties.
There were no individual investments at December 31, 1996, other than U.S. government securities, which exceeded 10% of the Company's stockholders' equity.
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.
For residential mortgage loans, fair value was estimated using quoted market prices for securities backed by similar loans. The fair value of commercial loans was estimated by discounting expected future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
At December 31, 1996, all of the notes payable to banks were short-term, unsecured and related to advances under $120.0 million lines of credit ($54.5 million available to be drawn at December 31, 1996) bearing interest at rates ranging from 6.09% to 7.75%. The arrangements under the terms of the lines of credit are reviewed annually for renewal. Debt of $20.0 million matures in 1997 and relates to the acquisition of $20.0 million of GNMA's, which were financed at an interest rate of 6.10% and which provides a positive interest spread between the rate earned on the GNMA's and the respective borrowing rate.
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding insurance to other insurance companies or reinsurers under excess coverage and co-insurance contracts. The maximum risk generally retained on AHL's ordinary life insurance on any one insured is $100,000 for policies issued prior to July 1, 1994 and $200,000 on policies issued subsequent to July 1, 1994. The amount retained on group and credit life insurance is generally $50,000. Generally, income from reinsurance arrangements is recognized in a manner similar to the income recognition on the underlying policy contracts.
The amount of insurance premiums assumed and ceded under reinsurance agreements for the year ended December 31, 1996 was $5.8 million and $111.7 million, respectively. For the year ended December 31, 1995 the amount assumed and ceded was $12.6 million and $97.8 million, respectively. The amounts of recoveries for benefits paid under reinsurance agreements for the years ended December 31, 1996 and 1995 were $104.0 million and $96.7 million, respectively.
Employees" and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed option plans. The compensation that has been charged against income for the long-term incentive plan stock, employee stock purchase and agents stock purchase plans (in thousands) was as follows:
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 1996 and 1995.
A summary of the status of the Company's fixed stock option plans as of December 31, 1996 and 1995, and changes during the years ended on those dates is presented below:
During the years ended December 31, 1996 and 1995, the Company granted 4,214 and 5,383 shares of common stock related to the performance units feature. No shares were granted in 1994.
The Company maintains a stock purchase plan under which its agents can purchase shares of its common stock in the open market through an unaffiliated plan administrator. Pursuant to the plan, 33,558 shares had been purchased as of December 31, 1996. During the years ended December 31, 1996 and 1995, 12,952 shares and 10,448 shares, respectively, were purchased pursuant to the plan. The plan provides for monthly
deductions from commissions payable by participating subsidiaries of the Company to their participating agents with a minimum monthly deduction of $500 and maximum of $2,000. The participating subsidiary contributes, at the time of each purchase, an amount equal to five percent (5%) of its agent's deduction for purchases from commissions payable.
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 $1.2 million in 1996 and 1995, and $1.1 million in 1994. The total return to participants in 1996 was 7.74%. The average annual return to participants for the last ten years was 8.55%.
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 1997 without prior approval is $24.8 million.
AHLIC's insurance subsidiaries had statutory net operating earnings of $20.6 million, $19.0 million and $13.5 million and statutory net earnings of $22.1 million, $33.9 million and $14.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. Statutory stockholders' equity of such subsidiaries was $145.0 million at December 31, 1996 and $134.5 million at December 31, 1995. At December 31, 1996, pursuant to the insurance laws of the State of Florida, the minimum capital and surplus required to be maintained by AHL was approximately $45.6 million.
No pronouncements which have been issued by the Financial Accounting Standards Board have or will have a significant impact on the consolidated financial statements of the Company.
In the years 1996 and 1994, no dividend was paid to the Registrant by AHL. On December 27, 1995, a dividend of $13,245,264 related to American Heritage Life Insurance Company's (AHL's) earnings in 1994, was paid from AHL to the Registrant.
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994