AHL also owns a 92 space parking lot in downtown Jacksonville, Florida and one parcel of vacant land located in suburban Jacksonville, consisting of approximately 32 acres.
American Heritage Life Investment Corporation (AHLIC) and subsidiaries (the "Company") are engaged primarily in the life insurance business. The Company's consolidated earnings are primarily attributable to its principal subsidiaries, American Heritage Life Insurance Company (AHL) and Columbia Universal Life Insurance Company (CUL). Following is a discussion of the significant components of the consolidated results of operations for the years ended December 31, 1998, 1997 and 1996.
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.
Because increasing amounts of the ordinary life business are interest-sensitive, the group business being sold predominately on a self-funded or split-funded basis and the credit business being written on a reinsured or an administrative services only basis, in which only the fees charged are included in insurance revenues for GAAP purposes, it is important to evaluate insurance revenues including premium equivalents. As demonstrated in the table on page 1, for 1998, 1997 and 1996, insurance revenues were $308.9 million, $279.8 million and $258.5 million, respectively, while total insurance revenues including premium equivalents were $651.6 million, $638.5 million and $567.6 million, respectively. Since so much of the Company's business is interest-sensitive and administrative services only, insurance revenues including premium equivalents are a better measure of growth in revenues.
Ordinary taxes, commissions and general expenses were $49.5 million, $45.4 million and $33.1 million for 1998, 1997 and 1996, respectively. The increase in 1997 was primarily due to CUL expenses of $7.9 million with no comparable amount in 1996. The increase each year was also the result of growth in ordinary business and expansion of regional offices.
Amortization of deferred acquisition costs and cost of business acquired was $38.9 million in 1998, $32.4 million in 1997 and $25.6 million in 1996. These increases were primarily due to CUL amortization of $4.5 million and $4.1 million in 1998 and 1997, respectively, with no comparable amount in 1996, growth in blocks of business acquired and in business in force, and an increase in lapses of individual health business resulting from the implementation of rate increases, which increased the write-off of the policies' deferred acquisition costs.
GROUP PRE-TAX EARNINGS WERE $4.9 MILLION, $4.6 MILLION AND $4.5 MILLION IN 1998, 1997 AND 1996, RESPECTIVELY. Group pre-tax operating earnings have remained stable in a competitive and volatile marketplace.
Group insurance revenues in 1998, 1997 and 1996 totaled $40.0 million, $31.0 million and $35.5 million, respectively. Premiums and premium equivalents were $221.8 million, $223.6 million and $214.9 million for 1998, 1997 and 1996, respectively. The increase in insurance revenues from 1997 to 1998 was due primarily to additional sales of insured business. The decrease in premiums and premium equivalents from 1997 to 1998 was due to reduced claim costs as a result of managed care activities. The decrease in insurance revenues from 1996 to 1997 was due to reduced sales of insured business in 1997. The increase in premiums and premium equivalents from 1996 to 1997 was due to increased sales on a self-funded or split-funded basis.
CREDIT PRE-TAX OPERATING EARNINGS WERE $6.7 MILLION, $5.6 MILLION AND $3.8 MILLION IN 1998, 1997 AND 1996, RESPECTIVELY. The increase in credit pre-tax operating earnings in 1998 over 1997 and 1997 over 1996 was primarily the result of terminating certain unprofitable accounts and reducing the commissions paid on accounts with unsatisfactory margins.
Credit taxes, commissions and general expenses were $60.9 million, $67.5 million and $72.3 million in 1998, 1997 and 1996, respectively. The decreases were primarily attributable to a decrease in earned commissions due to decreased insurance revenues.
Net investment income was $110.9 million, $105.4 million and $77.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. These increases were due primarily to CUL net investment income of $27.6 million and $25.6 million in 1998 and 1997, respectively, without a comparable amount in 1996 and an increase in invested assets and changes made in the investment portfolio to enhance the yield. The effective yield on invested assets for the years ended December 31, 1998, 1997 and 1996 were 7.22%, 7.55% and 7.72%, respectively. The decrease in yield from 1997 to 1998 and 1996 to 1997 was due primarily to market conditions offset partially by changes made to the investment portfolio to improve the yield.
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, was 6.0% for the year ended December 31, 1998, 5.4% for the year ended December 31, 1997 and 4.9% for the year ended December 31, 1996. The increase each year was due to recent acquisitions where the acquired company had higher expense levels than the Company and additional expenses associated with new production, regional expansion, and technology.
The amortized cost of high yield bonds at December 31, 1998 aggregated $42.4 million with a market value of $41.0 million. At December 31, 1998 these investments represented only 2.0% of total assets or 2.6% 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 $10.5 million at December 31, 1998 and decreased $9.4 million at December 31, 1997 for the effect that would have been recognized had the unrealized gain at December 31, 1998 and 1997 on debt securities actually been realized.
The mortgage loan portfolio at December 31, 1998, which aggregated $88.9 million, consisted of residential mortgages of $1.5 million and commercial mortgages of $87.4 million , all of which were first mortgages on properties (with no concentration in any particular industry). There were no non-performing mortgage loans in the portfolio at December 31, 1998.
The Company employs various methodologies to manage its exposure to interest rate risks. Investments are maintained in accordance with the Company's investment policy which is designed to match policyholder obligations to relative maturities of the related investment assets. The Company is exposed to interest rate risk on these investments. The following data shows the estimated effect of changes in interest rates in basis points ("bp") on the fair values of the Company's debt security investments (in millions of dollars): -100bp = +$50.9 million; -50bp = +$26.1 million; +50bp = -$25.0 million and +100bp = - -$52.2 million. Since the Company has the ability to modify crediting rates, the effect on net earnings of these changes in market rates should not be material.
Notes payable to banks at December 31, 1998 were $63.6 million compared to a balance of $39.2 million at December 31, 1997. The increase in bank debt at December 31, 1998 compared to the amount at December 31, 1997 reflected the funding of interest payments, dividends and Federal income taxes. The 1998 balance also included $16 million of AHL debt, used to fund policy loans, which was subsequently paid off out of cash flow in the first quarter of 1999. The weighted average interest rate on the bank debt at December 31, 1998 was 5.54%.
The Company completed a FELINES PRIDES convertible security offering in June 1997, resulting in net proceeds of $98.4 million which was used to retire bank debt of the Company.
The Company has in place a Year 2000 compliance plan that includes updates and revisions to existing software, as well as the installation of new or replacement software. The Company's Year 2000 compliance plan began with a detailed assessment of systems starting in the fall of 1996. It followed with a disciplined plan of remediation, replacement and upgrading that will result in Year 2000 compliant software being in place in all areas of the business enterprise by the end of the second quarter of 1999, and full Year 2000 compliance well before the end of the year. Included in the plan are several system projects not specifically undertaken to remediate Year 2000 issues, but which, as a result, will ensure Year 2000 compliance in those areas. As of the first quarter of 1999, the Company has installed or upgraded Year 2000 compliant systems supporting approximately 90% of the Company's business.
The Annual Report on Form 10-K contains forward-looking statements, together with related data and projections, about the Company's projected financial results and it s future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management's then-current expectations, The Business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate.
We have audited the 1998 and 1997 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 1998 and 1997 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 statements schedules based on our audits.
In our opinion, the 1998 and 1997 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, 1998 and 1997, and the results of their operations and their cash flow for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related 1998 and 1997 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.
We have audited the accompanying consolidated statements of earnings, stockholders' equity, and cash flows of American Heritage Life Investment Corporation and subsidiaries for the year ended December 31, 1996. In connection with our audit of the consolidated financial statements, we have also audited the amounts included in financial statement schedules II, III and IV for the year ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of American Heritage Life Investment Corporation and subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the financial statement schedules referred to above, when considered in conjunction with the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements include the accounts of American Heritage Life Investment Corporation (AHLIC) and its subsidiaries. All significant intercompany accounts have been eliminated in consolidation. The term "Company" as used herein includes AHLIC and its subsidiaries.
AHLIC is a holding company whose principal subsidiaries are American Heritage Life Insurance Company (AHL) and Columbia Universal Life Insurance Company (Columbia). 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. Columbia, a subsidiary of AHL, markets annuity and individual life insurance products and is currently licensed in 41 states, the District of Columbia and Puerto Rico. First Colonial Insurance Company, a subsidiary of AHL, markets credit property insurance and is currently licensed in 18 states. Concord Heritage Life Insurance Company, a subsidiary of AHL, markets supplemental life and health products through worksite marketing and is licensed in 15 states. Keystone State Life Insurance Company, a subsidiary of AHL, markets individual life products and is currently licensed in 12 states, the District of Columbia and the U.S. Virgin Islands. ERJ Insurance Group, Inc., a subsidiary of AHLIC, is an insurance agency that markets a broad portfolio of credit insurance products.
The accompanying consolidated financial statements are presented on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
(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 in proportion to gross premiums. For interest-sensitive products, premiums received are recognized as deposits; revenues consist of surrender, mortality and expense charges; and profits are recognized in relation to the incidence of expected gross profits.
(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 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 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 modified as necessary.
Accruals are provided to cover the cost of reported claims not paid and for claims incurred but not reported to the Company. The accruals are computed based on historical claims experience modified for variations in expected future benefits.
Certain amounts for 1997 and 1996 have been reclassified to conform with the presentation adopted in 1998.
No valuation allowance was recorded at December 31, 1998 or 1997.
Proceeds from sales and maturities of investments in debt securities during 1998, 1997 and 1996 were $139.7 million, $115.8 million and $59.1 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, 1998, by contractual maturity, were as follows:
The amortized cost of high yield bonds included in debt securities available-for-sale was $42.4 million with a market value of $41.0 million, which represented 2.6% of invested assets.
There were no individual investments at December 31, 1998, other than U.S. government securities, which exceeded 10% of the Company's stockholders' equity.
Debt securities 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.
Mortgage loans on real estate 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.
Investment in real estate The fair value of real estate was calculated using estimated market values.
Under current assumptions, amortization of cost of business acquired, including accrued interest implicit in the calculation of the amortization, for the next five years is expected to be as follows (amounts in thousands):
Interest expense to banks for the years ended December 31, 1998, 1997 and 1996 totaled $3.2 million, $4.4 million and $6.1 million, respectively.
On June 27, 1997, the Company completed the offering of 2.07 million shares of FELINE PRIDES. Proceeds from the offering of $98.4 million (after underwriting and other associated costs) were used for the repayment of debt of the Company. Each unit of FELINE PRIDES pays quarterly interest and yield enhancement payments of $1.0625 per share, or 8.50% annually. Interest expense on these securities for the years ended December 31, 1998 and 1997 totaled $7.0 million and $3.6 million, respectively. The Company recorded the yield enhancement payments initially of 1.75% totaling $5.4 million, as a liability and a reduction to stockholders' equity on the Company's Consolidated Balance Sheets. The liability is reduced when the yield enhancement payments are paid.
The reinsurance contracts do not relieve the Company from its obligations to its policyholders, and it remains liable should any reinsurer be unable to meet its obligations. 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. In the accompanying financial statements, insurance revenues, benefits and claims and deferred acquisition costs are reported net of reinsurance ceded.
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 600,000 shares of common stock. Under the 1996 Stock Option Plan, the Company may grant options to its employees for up to 700,000 shares of common stock. The 1988 Stock Option Plan expired July 27, 1998 and therefore no new options may be granted under this plan. Under all plans, the exercise price of each option equals the market price of the Company's stock on the date of grant. Under the 1980 and 1996 Plans, the option's maximum term is ten years. Under the 1980 and 1996 Plans, options are granted during the year and vest in increments of 20% or 33% per year over a five or three 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 1998, 1997 and 1996, respectively: dividend yield of 1.7%, 2.2% and 3.1%; expected volatility of 22% for 1998 and 20% for 1997 and 1996. The weighted-average fair value of options granted for the three years ended December 31, 1998, 1997 and 1996, respectively, was $7.51, $5.23 and $3.26.
Under the Company's Long-Term Incentive Plan, the performance units feature provides for the grant to a participating employee of shares of common stock based on targeted performance levels established for each participating employee at the beginning of each fiscal year in accordance with a formula relating to individual levels of performance.
During the years ended December 31, 1998, 1997 and 1996, the Company granted 7,892, 11,734 and 8,428 shares of common stock related to the performance units feature, respectively.
The Company maintains a stock purchase plan under which its employees and directors and those of its subsidiaries can purchase shares of its common stock in the open market through an unaffiliated plan administrator. Pursuant to the plan, 743,351 shares had been purchased as of December 31, 1998. During the years ended December 31, 1998 and 1997, 40,947 shares and 45,336 shares, respectively, were purchased pursuant to the plan. This plan provides for monthly payroll and directors' fees purchases up to $1,500, with the employer making a monthly percentage contribution for the account of each participant, based upon their purchases, as follows: (a) 25% of amounts from $5 through $25, (b) 20% of amounts in excess of $25 through $50, and (c) 15% of amounts in excess of $50 through $1,500.
The Company has three reportable segments: ordinary, group and credit insurance. The Company's Ordinary Insurance Department provides interest-sensitive products (universal life, single and flexible premium deferred annuities, single premium immediate annuities), level and decreasing term products and supplemental accident and health insurance products to individuals. The Group Insurance Department distributes insurance products and related services to large employers for their employee benefit plans. The group products provide life, disability, medical and dental insurance. The Credit Insurance Department offers life, accident and health and property insurance coverages to consumer debtors, primarily through banks, automobile dealers, finance companies, credit unions and retailers. This coverage is issued on either the single-premium or outstanding loan balance basis.
The following table details the industry segment information for the three years ended December 31, 1998:
Reconciliations of total income and pre-tax operating earnings for the three years ended December 31, 1998 were as follows:
The following table presents assets specifically related to each industry segment. Assets not able to be separately identified with an industry segment have not been allocated. Total assets of subsidiaries are included in industry segments without regard to that portion related to equity.
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1998 (amounts in thousands)
The following condensed balance sheets of American Heritage Life Investment Corporation ("Registrant") as of December 31, 1998 and 1997 and its condensed statements of earnings and cash flows for the years ended December 31, 1998, 1997 and 1996 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, 1998, 1997 and 1996 are identical to the consolidated statements of changes in stockholders' equity included elsewhere in this report, such statements are not repeated in this schedule.
On December 30, 1998, a dividend of $13,000,000 related to American Heritage Life Insurance Company's (AHL's) earnings in 1997, was paid from AHL to the Registrant. In the years 1997 and 1996, no dividend was paid to the Registrant by AHL.