American Heritage Life Investment Corporation and its subsidiaries are engaged primarily in the life and health insurance business. The Company's consolidated earnings are primarily attributable to its principal subsidiary, American Heritage Life Insurance Company ("AHL"). Following is a discussion of the significant components of the consolidated results of operations for the years ended December 31, 1996, 1995 and 1994.
Ordinary insurance revenues amounted to $137.4 million, $123.7 million and $114.0 million, in 1996, 1995 and 1994, respectively. Premiums including equivalents were $181.5 million, $167.3 million and $161.6 million for the years ended December 31, 1996, 1995 and 1994, respectively. The increases in revenues and premiums and premium equivalents in 1996 over 1995 and 1995 over 1994 were due primarily to increased policy charges on interest-sensitive products due to increased sales, increased sales of individual accident and health plans, and rate increases on certain cancer/dread disease plans. The increase in individual accident and health sales in 1996 compared to 1995 included for the first time a full year of long-term care product sales that increased revenues approximately $5.7 million.
Group insurance revenues in 1996, 1995 and 1994 totaled $35.5 million, $39.9 million and $43.2 million, respectively. Premiums and premium equivalents were $214.9 million, $206.4 million and $167.5 million for 1996, 1995 and 1994, respectively. These increases in premiums and premium equivalents included the sales to larger group cases that were sold on a self-funded basis.
Ordinary benefits and claims in 1996, 1995 and 1994 were $111.0 million, $103.2 million and $95.6 million, respectively. The increase each year was the result of growth in first year and renewal business, increased interest credited to policyholder account balances and some increase in mortality and morbidity experience.
Group benefits and claims in 1996, 1995 and 1994 totaled $24.0 million, $25.6 million and $29.1 million, respectively. Group benefits have been reduced as a result of a 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 expense for financial statement purposes.
The Company's major operating costs consist of commissions, payroll, premium taxes and administrative-related expenditures. General insurance expenses as a percentage of total income, excluding realized investment gains (losses) and including premium equivalents, remained constant at 4.9% for the years ended December 31, 1996 and 1995 and down from 5.5% for the year ended December 31, 1994. This demonstrates that the Company has been able to control the level of general insurance expenses, which in turn has been a significant factor in the Company's steady growth in operating earnings.
Non-segmented operating expenses in 1996, 1995 and 1994 were $3.9 million, $3.4 million and $2.2 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 $3.7 million, $3.3 million and $2.0 million for 1996, 1995 and 1994, respectively. These increases were due primarily to additional bank debt outstanding in 1996 and 1995 and an increase in interest rates in 1995 from 1994.
Income tax expense was down in 1996 compared to 1995 due to a decrease in pre-tax earnings and up in 1995 compared to 1994 due to increased pre-tax earnings. The effective tax rates on net earnings were 32.2% in 1996 and 1995 and 31.8% in 1994.
Group pre-tax operating earnings were $4.5 million, $7.5 million and $7.3 million in 1996, 1995 and 1994, respectively. The decrease in group pre-tax operating earnings from 1995 to 1996 was a result of reduced margins on certain cases due to the competitive pricing in the group marketplace on both administrative services only and insured business and increased health claims on insured cases. The increase in group pre-tax operating earnings from 1994 to 1995 was the result of necessary rate actions on certain cases, the terminations of certain unprofitable cases.
Management is not aware of any pending regulation from the various state insurance departments that would have a significant impact on the Company's operations.
As insurers, the Company's subsidiaries are required to maintain substantial liabilities for future policy benefits and policyholders' account balances. Since premiums and deposits received in anticipation of such benefits are investable funds, it is expected that the Company's insurance subsidiaries will continue to increase their investment portfolios using cash flow from operations.
The net cash provided by operating activities for the years ended December 31, 1996, 1995 and 1994 aggregated $66.5 million, $75.8 million and $48.5 million, respectively. The decrease in 1996 from 1995 was
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. All policy loans are funded out of cash provided by operating activities and do not represent a significant restriction on the Company's liquidity. During 1994, the Company changed the payment method of interest on these loans from in advance to in arrears, which decreased unearned investment income and increased accrued investment income.
The amortized cost of high yield bonds at December 31, 1996 aggregated $14.8 million with a market value of $15.0 million. At December 31, 1996 these investments represented only 1.1% of total assets or 1.5% of invested assets.
Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires that securities classified as available-for-sale be reported at fair value and the related unrealized gain or loss net of deferred income taxes be reported as a separate component of stockholders' equity. Additionally, pursuant to GAAP, deferred acquisition costs for interest-sensitive products, decreased $3.4 million at December 31, 1996 and decreased $7.3 million at December 31, 1995 for the effect that would have been recognized had the unrealized gain/loss at December 31, 1996 and 1995 on debt securities actually been realized.
During 1996 and 1995, consistent with the Company's investment strategy, certain changes were made in the investment portfolio to improve the overall investment results. Changes to the investment portfolio in 1996 included sales of GNMA's and purchases of corporate bonds and mortgage loans. During 1995, the Company sold certain parcels of real estate, reduced common stock and GNMA holdings, and increased investments in bonds and mortgage loans. The current investment strategy includes increasing investments in corporate bonds and mortgage loans while decreasing investments in GNMA's as they pay down.
Notes payable to banks at December 31, 1996 included $20.0 million related to a $20.0 million investment purchase where the Company is earning a positive spread on the invested assets acquired less the interest paid on the bank debt. This loan matures in June, 1997. The Company may choose to pay off or renew the debt obligation at the Company's option, depending upon economic conditions at the maturity date. The weighted average interest rate on the remaining $65.5 million of bank debt at December 31, 1996 was 6.12%. Also, the Company has a bank commitment for an acquisition line of credit of up to $100 million to be used to fund acquisitions of blocks of business or other life and health insurance companies. The Company will borrow on this acquisition line to fund the acquisition of Columbia Universal Life Insurance Company.
On December 10, 1996, the Company announced it had entered into an agreement in principle to acquire Columbia Universal Life Insurance Company for $44 million in cash. This acquisition closed on March 3, 1997. Columbia Universal Life Insurance Company had premiums and premium equivalents of $36.4 million for the year ended December 31, 1996 and assets of $368.5 million at December 31, 1996. This acquisition will be reflected in the Company's financial statements in 1997. Also effective December 31, 1996, the Company acquired a block of business from Kentucky Home Mutual Life Insurance Company with approximately $1.8 million of premiums and premium equivalents and $3.3 million of assets.
The Company 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, the Company charges its subsidiaries a management fee to cover its basic operating expenses.
The amount of dividends that AHL can pay to the Company 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 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. AHL chose not to pay any dividends to the Company during 1996 and 1994. A dividend of approximately $13.2 million, related to AHL's earnings in 1994, was paid to the Company in 1995. Approximately $20.8 million, related to 1996 earnings, is available to dividend to the Company during 1997 without regulatory approval. The outstanding bank debt of the Company is serviced through either dividends from AHL in excess of the amount used to pay stockholder dividends or by replacement borrowing.
In the fourth quarter of 1995, the Company's Board of Directors authorized management to repurchase from time to time up to 300,000 shares of the Company's common stock. At December 31, 1996, 101,700 shares had been acquired and funded by borrowings of $2.2 million.
The Risk-Based Capital for Life and/or Health Insurers Model Act was adopted by the National Association of Insurance Commissioners (NAIC) in 1992. A similar act was adopted for property and casualty insurance companies in 1994. The main purpose of these model acts was to provide a tool for insurance regulators to evaluate the capital of insurers. Based on calculations using the appropriate NAIC formula, AHL and FCIC exceeded the Risk-Based Capital requirements at December 31, 1996 and 1995.
We have audited the consolidated financial statements of American Heritage Life Investment Corporation and subsidiaries as listed in the accompanying index under Item 8. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index under Item 8. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Heritage Life Investment Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
AHLIC is a holding company whose principal subsidiary is American Heritage Life Insurance Company (AHL). AHL is licensed to do business as a life insurance company in 49 states, Puerto Rico, the District of Columbia and the U.S. Virgin Islands. It markets life and accident and health insurance on an individual, group and credit basis through licensed agents and brokers. First Colonial Insurance Company, a subsidiary of AHL, markets credit property insurance and is currently licensed in twelve states.
(1) Insurance Revenue and Expense Recognition: For traditional insurance products, premiums, benefits and expenses are reported in a manner which results in the recognition of profits over the life of the policies. For interest-sensitive products, premiums received are recognized as deposits; revenues consist of surrender, mortality and expense charges; and profits are recognized as earned.
account balances was $36.9 million and $35.2 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 10-20 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. During the year ended December 31, 1994, the Company adopted the provisions of Financial Accounting Standard Board's Statement of the Financial Accounting Standard No. 115, "Accounting for Investments in Certain Debt and Equity Securities." Under these provisions, investments are required to be 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.
Depreciation of property and equipment is computed on the straight-line method over the estimated useful lives of the respective assets.
Certain amounts for 1995 and 1994 have been reclassified to conform with the presentation adopted in 1996.
The effective federal income tax rates on earnings before income taxes were lower than the maximum statutory rates as follows:
Deferred income taxes reflect the impact of temporary differences between the financial statement and tax basis carrying values of assets and liabilities. The temporary differences that gave rise to significant portions of the deferred tax liability and the effect on deferred income tax expense of changes in those temporary differences (in thousands) for the years ended December 31, 1996, 1995 and 1994 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 taxed upon distribution. At December 31, 1996, the policyholders' surplus account was $8.8 million.
The estimated fair values (in thousands) of the Company's financial instruments are summarized as follows:
The fair value and carrying value of debt securities were estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers.
The fair value of real estate was calculated using estimated market values.
The carrying amount estimates fair value because the interest rates charged approximate current market rates.
Interest expense for the years ended December 31, 1996, 1995 and 1994 totaled $6.1 million, $5.6 million and $4.0 million, respectively, of which $3.7 million, $3.3 million and $2.0 million, respectively, were included in other operating expenses and $2.4 million, $2.2 million and $2.0 million, respectively, related to the purchase of the GNMA's discussed above which reduced net investment income.
A contingent liability exists for that portion of the policies reinsured in the event that the reinsuring companies are unable to pay their share of any resulting claims as reinsurance contracts do not relieve the Company from its obligations to its policyholders. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
At December 31, 1996, the Company had six stock-based compensation plans, which are described below. The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock issued to
The Company has three fixed stock option plans primarily for its employees. Under the 1980 Stock Option Plan, the Company may grant options to its employees for up to 300,000 shares of common stock. Under the 1988 Stock Option Plan, the Company may grant options to its employees for up to 266,666 shares of common stock. Under the 1996 Stock Option Plan, the Company may grant options to its employees for up to 350,000 shares of common stock. Under all plans, the exercise price of each option equals the market price of the Company's stock on the date of grant. The Company had a 1982 Stock Option Plan which expired in 1992 but options which were granted under that plan prior to its expiration continue in effect. Under the 1980 and 1996 Plans, the option's maximum term is ten years. Under the 1988 Plan, the option's maximum term is six years. Under the 1980 Plan, options are granted in the first part of the year and vest in increments of 33% per year beginning one year from date of grant and continuing for two more years. Under the 1988 Plan, options are granted during the year and vest in increments of 20% per year over a five year period beginning no less than six months after the grant.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 3.1% and 3.6%; expected volatility of 20% for both years for the 1980 Plan options. No options were granted under the 1982 or 1988 plans during the period.
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 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.
During the years ended December 31, 1996, 1995 and 1994, the Company granted 10,970, 19,985 and 12,651 shares of restricted stock, respectively.
Activity in the liability for policy and contract claims (in thousands) at December 31, 1996, 1995 and 1994 is summarized as follows:
* Total income, insurance revenues and operating profits are net of reinsurance.
Total income includes net investment income which is allocated to the industry segments based on required liabilities for future policy benefits and policyholders' account balances.
On March 3, 1997, AHL acquired all the outstanding common stock of Columbia Universal Corporation (Columbia Universal) whose primary operating subsidiary is Columbia Universal Life Insurance Company, for $44.0 million in cash. Columbia Universal Life Insurance Company is a life insurance company which sells annuity, supplemental health and individual life insurance products. The acquisition will be accounted for using the purchase method. At December 31, 1996 Columbia Universal had consolidated assets of $368.5 million and life insurance volume in force of $1.6 billion and for the year ended December 31, 1996 premiums and premium equivalents of $36.4 million.
On a pro forma basis at December 31, 1996, including the acquisition of Columbia Universal, total assets for the Company would have been $1.7 billion and life insurance volume in force would have been $22.1 billion.
(1) Net earnings and per share amounts include realized investment gains (losses), net of federal income taxes, as follows:
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
See Footnote 1(c) to the Consolidated Financial Statements on page 31 which sets forth the accounting policies related to investments.
The following condensed balance sheets of American Heritage Life Investment Corporation ("Registrant") as of December 31, 1996 and 1995 and its condensed statements of earnings and cash flows for the years ended December 31, 1996, 1995 and 1994 should be read in conjunction with the notes to consolidated financial statements included elsewhere in this report. Since the Registrant's condensed statements of changes in stockholders' equity for the years ended December 31, 1996, 1995 and 1994 are identical to the consolidated statements of changes in stockholders' equity included elsewhere in this report, such statements are not repeated in this schedule.
CONDENSED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(a) Includes both life and accident and health premiums and commission and expense allowances on reinsurance ceded.