The Company's headquarters building complex is located at 11222 Quail Roost Drive, Miami, Florida 33157, and is approximately 480,000 square feet in size. The building is used exclusively for general office use, except for a portion which functions as the Company's warehouse.
Supreme Court and regulatory rulings are expected to lead to increased marketing of insurance products by financial institutions. Moreover, legislation has been introduced in Congress for reform of the regulation of financial institutions including state regulation of insurance products marketed and underwritten by financial institutions. Financial institutions have begun to market and underwrite insurance products which are generally limited to traditional life insurance and annuity products. The Company does not expect this activity by financial institutions to be of significance to its business. It is possible that the financial institutions may seek to market the products and services being sold through ABIG's bank distribution channel.
Some financial and lending institutions have begun to offer debt cancellation agreements. Under these agreements, the creditor agrees to forgive all or part of a debt upon death, disability or unemployment of the debtor. Thus, these agreements are similar to the Company's credit life and disability products. The state insurance and financial institution regulators are examining these agreements to determine whether they should be regulated as insurance. The determination by the regulators may impact the marketability of these agreements. The Company is unable to predict the extent to which these agreements will impact its business.
Company also executed a Stock Option Agreement granting Fortis the right to purchase up to 8,406,559 shares of common stock upon the occurrence of certain events at $55 per share. If the merger is not consummated, the total amount that Fortis may receive under the Stock Option Agreement and the Fortis Merger Agreement is limited to $100 million plus expenses. In addition, certain stockholders have entered into a voting agreement with Fortis pursuant to which they have generally agreed to vote their shares in favor of the Fortis Merger Agreement and the merger.
As discussed in the Terminated Acquisition Proposals section, the Company received a merger termination fee of $400 million from Cendant Corporation which was reflected in the Company's Consolidated Statements of Income net of a $100 million merger termination fee paid to AIG. The net fee is included in the other lines segment. Merger related expenses approximated $15.3 million pre-tax and are also included in the other lines segment.
During the fourth quarter of 1998, the Company strengthened reserves by $9.8 million pre-tax and wrote off deferred acquisition costs of $3.1 million pre-tax primarily relating to lines of business no longer being written. Reserve strengthening of $4 million pre-tax is included in the Personal Lines segment with the rest of the items included in the other lines segment. In addition, the Company incurred charges totaling $6.4 million pre-tax from miscellaneous items including costs related to the relocation of a subsidiary.
In 1997, operating results benefited from growth in net investment income and realized gains, while 1996 was adversely impacted by catastrophic losses of approximately $9.2 million, pre-tax, principally in the Financial Markets.
Gross collected premiums increased by $58.7 million or 2%, to $2.8 billion in 1998 from $2.7 billion in 1997. Premium production in 1998 did not meet our overall expectation and, in large part, this slowdown in sales momentum was attributed to the disruption which was caused by the proposed failed acquisitions. Gross collected premiums increased 10% in 1997 and 9% in 1996.
The Company's property and casualty segment experience continues to perform better than the industry.
STATUTORY COMBINED RATIOS 1998 1997 1996 ------------------------- ---- ---- ----- ABIG 96.0 95.7 96.8 Industry 105* 101.6 105.8
Currently, it is not possible to determine the future development of asbestos or environmental claims. The uncertainty is due to a general absence of reliable predictive data and of generally accepted actuarial methodology for these exposures. There are also significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, determination of the ultimate damages and the final allocation to financially responsible parties is complex and uncertain. ABIG's historical experience however suggests that although reinsurance pool losses will continue, they should not have a materially adverse effect on the Company's financial condition or cash flows. Losses, net of reinsurance, from ABIG's discontinued reinsurance pools were $1.8, $6.6 and $8.3 million in 1998, 1997 and 1996, respectively. The survival rate for 1998 is 19.6 years which is an increase from 16.4 years in 1997. At December 31, 1998 and 1997, the Company had $37.2 million and $38.5 million, respectively, of gross reserves related to the reinsurance pools.
Company has retroceded the majority of its personal accident liability to other insurance companies. On a gross basis, the personal accident loss ratios are substantially higher than that expected at the time the programs were written. However, due to the nature of the Company's retrocessional coverage, net losses on these programs have not been material to the Company's operating results. At December 31, 1998, the Company had gross payables of $14.1 million, ceded recoverables of $18.2 million, gross reserves of $45.8 million and ceded receivables of $37.8 million relating to the personal accident business. The Company is currently actively investigating the cause for the significant increase in the personal accident gross loss ratio. The outcome of that investigation is currently uncertain but may result in the Company taking legal or other action against its brokers, reinsurers or others. The Company is currently involved in arbitration overpayment of certain claims with one of the cedants, and several of the Company's retrocessioners have delayed payment pending further review. The December 31, 1998 loss reserves and reinsurance recoverables are based on various estimates that are subject to considerable uncertainty. However, it is management's opinion that due to the direct relationship of the business written to the Company's reinsurance coverage that future development on these programs will not have a material adverse effect on the Company's financial condition or results of operations.
Total assets increased in 1998 by 15.5% to $4.4 billion from $3.8 billion at December 31, 1997. The increase is primarily attributable to merger termination fees and the acquisition of MSD with assets of $196.9 million and the change in prepaid reinsurance premiums of $96.5 million as a result of an increase in ceded business. The increase of 9% in total assets to $3.8 billion in 1997 from $3.5 billion in 1996 was primarily attributable to increases in invested assets of $194.7 million.
INVESTED ASSETS FIXED MATURITIES % SHORT-TERM & OTHER % --------------- ------------------ -------------------- 1998 $2.5 billion 80% 14% 1997 $2.2 billion 84% 9% 1996 $2.0 billion 85% 8%
Stockholders' equity increased by $548 million to $1.1 billion at December 31, 1998, from $513 million at January 1, 1996. In August 1997, ABIG declared a two-for-one split, effected in the form of a stock dividend, on the Company's common stock. The stock split resulted in all common shareholders receiving one additional share for each share they held. In July 1996, ABIG issued 2.3 million shares of preferred stock with a stated value of $50 per share. The preferred stock issuance contributed net proceeds of $111.8 million to equity. The other primary source of growth in stockholders' equity from January 1, 1996 to December 31, 1998, was accumulated earnings of $476.3 million net of $68.2 million in dividends paid to ABIG's common and preferred shareholders.
At December 31, 1998, $2.5 billion or 58% of ABIG's total assets were comprised of securities, short-term investments and cash. The securities are principally readily marketable and none are part of highly leveraged transactions. In the bond portfolio, 66% have maturities of under five years and 79% have a rating of "A" or better (80% at December 31, 1997 and 1996). Unrealized gains in fixed maturity investments decreased to $36.6 million at December 31, 1998, from $42.6 million at December 31, 1997.
ABIG's investment portfolio has been structured to match cash requirements. Liabilities representing current cash requirements including claim liabilities, accrued commissions and other liabilities
The 1.5 million share stock buyback program is not expected to significantly impact ABIG's liquidity or cash flow in any one financial reporting period. During 1998, ABIG acquired 88,900 of its shares at a cost of $3.8 million and an additional 476,100 at a cost of $22.7 million during the first quarter of 1999.
While the impact, if any, from the resolution of pending litigation or any potential market conduct investigation cannot presently be identified, ABIG does not believe any unfavorable outcome will have a material effect on liquidity or financial condition.
The interest rate on the floating rate note is determined quarterly. The interest rate under the short-term facility is determined at the time amounts are borrowed. Accordingly, interest rate changes may impact the Company's interest expense.
The entire project reports to an Executive Steering Committee and is being monitored by the Internal Audit Group. The Internal Audit Group reports the progress of the Company's Year 2000 project to the Board of Directors.
Non-information technology systems such as those pertaining to the operations of the building have been evaluated using the same four phases described above. Currently, the Company is in the Validation testing phase. The Company expects that all non-information systems should be compliant by the early part of 1999.
While the Company is not presently aware of any significant exposure, there can be no guarantee that the systems of ABIG's corporate clients and other third parties will be converted in a timely manner, or that a failure to properly convert by another company would not have a material adverse effect on the Company. In the event the Company, clients or other third parties fail to be converted in a timely manner, the Company intends to implement the necessary portions of its disaster recovery plan. The Company as part of its overall business operation, has developed a disaster recovery plan which includes electronic as well as non-electronic processes. Additional internal resources will be focused to address each failure on a case-by-case basis. The recovery steps necessary will vary considerably depending on the nature of the Year 2000 issue being addressed.
On November 12, 1998, the Company and three of its clients entered into a settlement of all claims in class action litigation consolidated by the Panel on Multi-District Litigation in the United States District Court for the Middle District of Alabama, contingent upon approval of the fairness of the settlement by the District Court and other conditions. This series of class actions involved the largest collective class exposure to the Company. Under the terms of the settlement, without admitting any liability, the Company will contribute approximately $15 million in distributions to the classes and subclasses, and has agreed to be bound by an injunction limiting the percentage of authorized non-filing insurance premium to be charged consumer finance and retailer accounts during 6 year and 18 month periods, respectively. The Company has accrued additional expenses associated with implementing the settlement.
ABIG's insurance subsidiaries, like other insurance companies, are subject to regulation and supervision in the jurisdictions in which they are authorized to engage in business. Such regulations vary from state to state, but generally relate to standards of solvency, pricing, licensing, investment restrictions, insurance policy forms approval, computation of reserves, assessments and financial reporting.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The NAIC has recommended an effective date of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current accounting in some areas. It is not known whether the domiciliary states of ABIG's insurance subsidiaries will adopt the Codification and whether the Departments will make any changes to the guidance. ABIG has not estimated the potential effect of the Codification guidance if adopted by the Departments as the effect could differ as changes are made to the Codification guidance, prior to its recommended effective date of January 1, 2001.
Life insurance companies are required to establish and maintain policy liabilities and claim liabilities to meet their future obligations on life policies. Policy liabilities are amounts which will be sufficient to meet policy obligations at death, disability or maturity taking into account future premiums less expenses, interest, expected lapses and expected mortality. Claim liabilities are amounts of future unpaid benefits on all incurred claims, whether reported to the Company or not.
In the ordinary course of business, ABIG reinsures risks with other insurance companies. ABIG remains contingently liable for the risks reinsured should the reinsuring companies fail to meet the obligations assumed in the reinsurance agreements. (See Note 7 to the Consolidated Financial Statements.)
Except for historical information provided in this Annual Report, statements made throughout this document, including Management's Discussion and Analysis, are forward-looking and, as such, actual results could differ materially from those expected by the Company. The actual results of the Company may be affected by (1) adverse catastrophe experience in certain of the Company's property and casualty products, (2) significant changes in interest rates, (3) increased competition causing reduction in product margin or loss of a significant client, (4) adverse loss development on property and casualty prior years' claims or the excess casualty reinsurance pools, (5) premium growth expectation not met because of the loss of any significant client, (6) outcome of litigation and other state and federal regulatory issues, (7) unresolved issues by the Company, its clients and third party vendors related to the Year 2000 compliance, and (8) general economic conditions. In addition, the actual results of forward-looking statements are also subject to the specific factors which may be included with a particular forward-looking statement.
Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996 54
Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997, and 1996 55
Consolidated Statements of Common Stock and Other Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996 56
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 57
Notes to Consolidated Financial Statements for the year ended December 31, 1998 58
To the Board of Directors and Stockholders of American Bankers Insurance Group, Inc.
The merger is subject to approval by regulatory authorities and the Company's shareholders which are expected to be obtained by the end of the third quarter of 1999. Upon merger closing, the Company will recognize certain expenses associated with the accelerated vesting of benefits under several compensation plans, including employee stock options and restricted stock. The Company estimates that the pre-tax charge related to the acceleration of such benefits will be approximately $7.4 million.
Certain officers of the Company have severance agreements which entitle them to receive specified payments under certain circumstances following a change in control. Upon merger closing, the maximum amount that the Company could incur pursuant to such severance agreements is approximately $23.6 million, pre-tax.
The accompanying consolidated financial statements include the accounts of American Bankers Insurance Group, Inc. (ABIG) and its subsidiaries (the Company):
In February 1997, the Financial Accounting Standards Board issued FASB Statement 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share (EPS). It replaced the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is based on income available to common shareholders and the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company adopted FASB Statement 128 in 1997 and has restated all previously reported per share amounts to conform to the new presentation.
Pension costs are comprised of service costs applicable to benefits earned during the year, net interest cost or credit applicable to interest on plan liabilities and plan assets, and amortization of certain charges and credits including prior service costs.
* Investment securities: Fair values for fixed maturity securities are based on quoted market prices when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices.
* Mortgage loans and policy loans: The fair values for mortgage loans are estimated using discounted cash-flow analysis, using interest rates currently being offered for loans with similar terms. The carrying amounts for policy loans approximate their fair values at the reporting date.
* Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
The Company recognizes the income (ceding fees) on reinsurance contracts principally on a pro rata basis over the life of the policies covered under the reinsurance agreements.
In 1998, the Company adopted FASB Statement 131, "Disclosures about Segments of an Enterprise and Related Information." FASB 131 supersedes FASB 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FASB 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of FASB 131 did not affect results of operations or financial position of the Company but did affect the disclosure of segment information. The Company has restated all previously reported segment information to conform to the new presentation.
Certain items in the 1997 and prior financial statements have been reclassified to conform with the 1998 presentation.
Foreign exchange gains and losses due to the translation of foreign currency are combined with net unrealized investment gains and losses in the Stockholders' Equity section of the Balance Sheet. Following is a reconciliation of the "Net unrealized investment and foreign exchange gains (losses)" account:
FAIR VALUES The fair value of the Company's financial instruments other than investments and those where fair values approximate carrying value (see Note 3(l)) are as follows:
(A) Life insurance in force and future policy benefits are stated individually net of reinsurance ceded to other companies. Reinsurance ceded to other companies has been added back to policy liabilities and unearned premiums for balance sheet presentation. (B) All withdrawal assumptions are based on the Company's experience.
The consolidated financial statements include estimated provisions for unpaid losses and loss adjustment expenses (LAE) applicable to the Company's property and casualty insurance subsidiaries. These subsidiaries write principally credit property, unemployment, homeowners, mobilehome physical damage and livestock lines of business throughout the United States, Canada, the Caribbean and the United Kingdom. Such liabilities are established using a combination of case basis estimates and actuarial projections and include provisions for claims incurred but not yet reported as of the balance sheet date.
The Company's U.K. subsidiary participated in certain personal accident reinsurance programs from other insurance companies during 1994 to 1997. The Company ceased writing this reinsurance in 1997; however, certain risk may continue beyond 1997 due to the nature of the reinsurance contracts written. The Company has retroceded the majority of its personal accident liability to other insurance companies. On a gross basis, the personal accident loss ratios are substantially higher than that expected at the time the programs were written. However, due to the nature of the Company's retrocessional coverage, net losses on these programs have not been material to the Company's operating results. At December 31, 1998, the Company had gross payables of $14.1 million, ceded recoverables of $18.2 million, gross reserves of $45.8 million and ceded receivables of $37.8 million relating to the personal accident business. The Company is currently actively investigating the cause for the significant increase in the personal accident gross loss ratio. The outcome of that investigation is currently uncertain but may result in the Company taking legal or other action against its brokers, reinsurers or others. The Company is currently involved in arbitration overpayment of certain claims with one of the cedants, and several of the Company's retrocessioners have delayed payment pending further review. The December 31, 1998 loss reserves and reinsurance recoverables are based on various estimates that are subject to considerable uncertainty. However, it is management's opinion that due to the direct relationship of the business written to the Company's reinsurance coverage that future development on these programs will not have a material adverse effect on the Company's financial condition or results of operations.
The accompanying tables present an analysis of losses and LAE for the Company's domestic property and casualty subsidiaries. The following table provides a reconciliation of beginning and ending liability balances for 1998, 1997 and 1996.
Accident and health net claim liabilities reported in the Company's life subsidiaries were $84,778,000, $80,564,000 and $80,026,000 at December 31, 1998, 1997 and 1996, respectively. There was no significant adverse development during the past three years.
The Company adopted FASB Statement 130, "Reporting Comprehensive Income," effective January 1, 1998. Components of comprehensive income for the Company include items such as foreign currency translation and unrealized gains (losses) on available-for-sale securities.
Related tax effects are allocated to each component of other comprehensive income as follows:
Reinsurance ceded incurred losses for 1998, 1997 and 1996 were $434,430,000, $416,333,000 and $315,096,000, respectively. Liabilities for ceded claim reserves and recoverables on paid losses at December 31, 1998 and 1997 are shown below.
Significant components of the provision for income taxes are as follows:
Interest paid was $18,399,000 in 1998, $16,485,000 in 1997 and $17,924,000 in 1996.
The Company has authorized 10,000,000 shares of preferred stock. At December 31, 1998, the Company had 2,300,000 authorized shares of $3.125 Series B Cumulative Convertible Preferred Stock issued and, at December 31, 1998, 1,983,205 outstanding. Holders of the Convertible Preferred Stock are entitled to a cumulative dividend, payable quarterly, at the annual rate of $3.125 per share. If six quarterly dividends are in arrears, the holders of the convertible preferred stock will be entitled to vote as a separate class to elect two directors of the Company. The Convertible Preferred Stock will not be redeemable prior to August 7, 2000. On and after such date, the Convertible Preferred Stock will be redeemable, in whole or in part, at the option of the Company, at $51.88 per share of Convertible Preferred Stock during the period from August 7, 2000 to August 6, 2001 and declining ratably annually to $50 per share of Convertible Preferred Stock on or after August 7, 2006, plus in each case accrued and unpaid dividends to the redemption date.
On February 19, 1998, the Board of Directors adopted a "Rights Plan" creating certain rights which attach to and trade with each share of common stock outstanding on or after March 10,1998. Upon the acquisition of, or the announcement of a tender offer for, specified amounts of the Company's common stock, the rights will separate from the common stock, at which time holders of the rights will be entitled to purchase units of the Company's Series C Participating Preferred Stock. Thereafter, under certain circumstances (including acquisitions of specified amounts of the Company's common stock, mergers involving the Company, and certain self-dealing transactions by an acquisitor), holders of the rights will be entitled to purchase common stock (or other property) of the Company (or of the acquiring entity) at prescribed levels. At December 31, 1998, there were 1,000,000 shares of Series C Preferred Stock reserved for issuance. The rights are redeemable at the Company's option and expire on March 10, 2008. The Rights Plan was amended so that the rights issuable pursuant to the Rights Plan will not separate solely as a result of the execution or delivery of the Fortis Merger Agreement and other related agreements or the consummation of the transactions contemplated thereby. The Company has also reserved for issuance 350,000 shares of Series A participating Preferred Stock in connection with the "Old Rights Plan" that had terminated in March 1998.
At their Annual Meeting in 1997, the stockholders approved the Equity Incentive Plan (EIP). Under the EIP, selected officers and employees may be granted Options, Stock Appreciation Rights, Restricted Stock, Merit Awards, Performance Share Awards and Cash Awards. An aggregate of 4,000,000 (post-split) shares of common stock are reserved for issuance under the EIP.
Under the Restricted Stock Award, certain key employees may purchase common stock at fifty percent of the fair market value of the common stock on the grant date. Shares obtained by exercise are subject to restrictions. Non-vested shares are subject to forfeiture if employment is terminated except by death, disability or retirement. Vesting occurs ratably over a five-year period from the date exercised. No new grants were made during 1998. The weighted-average fair value of options granted during 1997 was $14.31.
Under the Non-Qualified Stock Option, certain key employees were granted options to acquire common stock at prices equivalent to the fair market value of the common stock on the grant date. Each option further entitles the employee to be awarded, for no additional consideration, one or two additional shares of restricted common stock. The options which entitle the grantee one additional restricted share vests after five years from date of exercise. These options are not exercisable before the first year anniversary nor after the fifth annual anniversary from the date of the grant. The weighted-average fair value of these options granted during 1998 and 1997 was $14.59 and $7.79. The options which entitle the grantee two additional restricted shares vest after three years from date of exercise. These options are not exercisable before the first year anniversary nor after the third annual anniversary from date of grant. The weighted average fair value of these options granted during 1998 and 1997 was $10.56 and $5.36.
Under the Non-Employee Directors' Stock Option, each non-employee director received options at prices equivalent to the fair market value of the common stock on the grant date. Options granted are not exercisable before the first year anniversary nor after the fifth anniversary from the date of the grant. No new grants were made during 1998. The weighted-average fair value of options granted during 1997 was $8.08.
Under the Senior Management Stock Option Plan (SMSOP), key management employees were granted options on shares of the common stock during the years 1994 through 1996. Option prices were equivalent to the fair market value of common stock on the grant date. The grantee received for no additional consideration two shares of common stock subject to certain transfer restrictions for every one primary share purchased upon the exercise of the option. As the result of the adoption in 1997 of the EIP, no new grants were made under the SMSOP.
Under the Stock Incentive Compensation Plan (SICP), key management employees were granted a total of 672,100 (post-split) options on shares of common stock. Option prices were equivalent to fifty percent of the fair market value of common stock on the grant date. As the result of the adoption in 1997 of the EIP, no new grants were made under the SICP. At December 31, 1998, there were no options outstanding, only restricted stock.
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options as allowed pursuant to FASB Statement No. 123. FASB Statement 123 requires use of option valuation models that require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under those plans, consistent with FASB Statement No. 123, the reduction in the Company's 1998, 1997, and 1996 net income and net income per share would have been insignificant. The effect of applying the fair value method of accounting for stock options on reported net income and net income per share for 1998, 1997 and 1996 may not be representative of the effects for future years because outstanding options vest over a period of several years and additional awards are generally made each year.
The fair value of options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996:
Although the debt was not a direct obligation of the Company, it was nevertheless reported as part of the Company's debt with an offsetting balance reflected as a reduction of stockholders' equity. As contributions to the LESOP were made by the Company, the debt was repaid to the bank by the LESOP and the balances on the Company's balance sheet were reduced accordingly. The Company guaranteed the Trust's loan obligation. It made contributions to the LESOP in amounts sufficient to enable the Trust to repay the loan on a quarterly basis over ten years, including interest equal to 7.565%. The shares held by the bank as collateral were released proportionately as loan repayments were made. Upon such release, the shares were available for allocation to employees based upon years of service. Employees are entitled to direct the vote of the shares allocated to them on voting instruction forms furnished to the trustee. Unallocated shares were voted by the LESOP's Trustee. During 1998 the loan was paid off. The interest portion of the LESOP pension expense was $.04 million in 1998 and $.3 million in 1997.
All shares allocated to domestic participants were transferred to the amended and restated American Bankers Insurance Group, Inc. 401(K) and Employee Stock Ownership Plan. The shares allocated to foreign participants remain in the LESOP.
The following disclosures are made to supplement previously disclosed plan information:
* Dividends paid on all shares held by the LESOP through March 1998 were used to service the debt of the LESOP.
* Compensation expense for the years ended December 31, 1998, 1997 and 1996 was $1,727,000, $976,000 and $1,186,000 respectively. The compensation expense represents the Company's contributions to the LESOP necessary to meet its periodic debt service, after applying dividend payments received on the shares held by the LESOP. All dividends paid on such shares retain their character as distributions made from the Company's retained earnings.
In 1998, the Company adopted FASB Statement 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits." The prior years' information has been restated to conform with the disclosure requirements under FASB 132.
The Company has a non-contributory pension plan covering substantially all of its domestic employees. Benefits under the Plan are based on years of service and compensation levels near retirement. The Company's funding policy is to contribute amounts that meet minimum funding requirements but which do not exceed the maximum funding limits as currently determined under applicable tax regulations. The Plan previously reached the full funding limitation and, accordingly, no contributions were made in 1998, 1997 and 1996.
Certain of ABIG's subsidiaries, including the Company, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate, marketing, sales practices, disclosure and policy coverage issues. While a number of similar suits have been filed in other jurisdictions, the insurance and finance industries have been targeted in Alabama by plaintiffs' lawyers who enjoy a favorable judicial climate. The Company typically has been named as a co-defendant with one or several retailer or finance companies who have sold the Company's product to a consumer. Other insurers are also joined as co-defendants in some of the suits. Although the Alabama lawsuits and similar suits pending in Mississippi and other jurisdictions generally involve relatively small amounts of actual or compensatory damages, they typically assert claims requesting substantial punitive awards or purport to represent a large class of policyholders.
The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Segment data includes allocated overhead costs to each of the operating segments. Asset information by reportable segment is not reported. The Company does not produce such information internally as it reviews its assets and liabilities at the individual affiliated company level.
The Company is organized primarily on the basis of its distribution channels. There are ten separate markets, six of the markets are aggregated into the "Financial Markets." Two are combined to form the "Personal Lines." The Financial Markets' products, consisting primarily of credit-related insurance, are sold through retailers, financial institutions, manufactured housing, travel trailer and equipment manufacturers, dealers and lenders, and utility companies. The Personal Lines' business, consisting of non credit-related products and services, is sold primarily through independent agents. All other business has been included in "Other." The Company's business is generally not concentrated, and no single customer accounted for 10% or more of the Company's consolidated gross collected premiums in 1998.
The table below presents information about reported segments for the years ended December 31:
Summarized data for the Company's foreign operations (principally in Canada and the United Kingdom) and domestic operations are as follows:
(A) Includes the following in 1998: 1. $300 million in net termination fees income. See Note 17. 2. $17 million related to the settlement of litigation associated with the Company's non-file insurance product in the third quarter. See Note 13. 3. $15 million expense related to the Company's Consent Order with various states in the fourth quarter. See Note 13. 4. $15.3 million in merger-related expenses.
1. $100 million termination fee paid to AIG was reported in "Total benefits and expenses" in the the first, second, and third quarters' Forms 10-Q. Such merger termination fee has been netted against the $400 million termination fee received from Cendant during the fourth quarter of 1998 (see Note 17) and was reclassified to "Merger termination fees, net" in the accompanying Consolidated Statements of Income. 2. $9.3 million in merger-related expenses. 3. $3.5 million in merger-related expenses. 4. $17 million related to the settlement of litigation associated with the Company's non-file insurance product (see Note 13) and $1.6 million in merger-related expenses.. 5. $400 million termination fee received from Cendant (see Note 17), $15 million in expenses related to the Company's Consent Order with various states (see Note 13) and $.9 million in merger-related expenses.
During 1998, the Company was a party to two agreements regarding the acquisition of the Company. Both agreements were terminated prior to consummation.
Cendant's acquisition proposal followed an announcement by the Company that it had entered into an Agreement and Plan of Merger (the "AIG Merger Agreement") with American International Group, Inc. ("AIG"). In March 1998, the Company, AIG and Cendant entered into a settlement agreement (the "Settlement Agreement") pursuant to which AIG agreed to temporarily waive certain provisions of the AIG Merger Agreement, allowing the Company to terminate the AIG Merger Agreement and enter into the Cendant Merger Agreement. In connection with the termination of the AIG Merger Agreement and other related agreements, AIG received from the Company a termination fee of $100 million which the Company financed through its short-term credit facility.
The Company acquired three companies during 1998 for $62 million. The acquisitions were accounted for as purchases and the results of these companies' operations are included in 1998 income from the date of acquisition to December 31, 1998.
Information on Summary of Investments - Other Than Investments in Related Parties is included on page 13 in Part I Item 1 c. of this report, and in Note 4 on page 63 in Part II Item 8 of this report, with the exception of the Information on Equity Securities which is included below.
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1998
AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
- ------------- * Excluding net realized investment gains of $19,828, $10,394, and $7,812 for 1998, 1997 and 1996, respectively. ** Excluding Life and Annuity premiums.
In 1998, the Company adopted FASB 131, "Disclosures about Segments of an Enterprise and Related Information." The Supplementary Insurance Information Schedule III has been changed to conform with FASB 131. For more information, see Note 14 "Segment Information."