The property and casualty industry is expected to reflect higher earnings in 1995, as a result of fewer major catastrophes, reductions in loss costs and an increase in investment income. Standard & Poor's is projecting a 5.3% return on operating revenue compared with 4.3% in 1994.
Unprecedented catastrophe losses in recent years have prompted insurers to more aggressively limit their exposures to catastrophes. Such actions have in turn created insurance availability problems in certain areas.
Net income for 1995 increased to $72.3 million from $56.5 million in 1994, representing an increase of 28%. The Company's largest financial distribution channels continue to produce strong overall premium growth contributing to the increase in net income. The 1995 results include, on an after-tax basis, an increase of $16.2 million in net investment income, net investment gains of $.5 million and a $3.8 million charge on the settlement of the final portion of the credit bond litigation. The 1994 results included, on an after-tax basis, $1.7 million in net investment gains and a $2.9 million charge on the final settlement of the credit bond litigation initiated by bondholders. The 1993 results included, on an after-tax basis, $4.6 million in net losses attributable to adverse development of claims from Hurricane Andrew and losses incurred from a March winter storm which affected the Northeastern United States.
Pre-tax operating income before realized gains (losses) by industry segment was as follows:
These segment results exclude interest and other corporate activity. The 1993 winter storm and credit bond losses are included in the property and casualty segment. (See Note 12 to the Consolidated Financial Statements on page 61 in Part II
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of American Bankers Insurance Group, Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
At December 31 (in thousands except par value of common stock):
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles which vary in certain respects from reporting practices prescribed or permitted by state insurance departments and include the following significant accounting policies:
Acquisition costs relating to ordinary life contracts are amortized over the estimated term of the contracts in proportion to the ratio of the annual premium revenue to total premium revenue expected. Acquisition costs for universal life and annuities 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. The assumptions used for the estimates are consistent with those used in computing the policy liabilities.
Acquisition costs relating to credit life and accident and health insurance are amortized over the term of the contracts in relation to premiums earned.
The method of computing the deferred policy acquisition costs for property business (commissions and other acquisition expenses) limits the amount deferred to the lower of (1) unearned premiums which remain after deducting the expected amount of losses, loss adjustment expenses, and servicing costs estimated to be incurred as the premiums are earned; or (2) the costs applicable to the unearned premiums.
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was $8,607,000, $8,550,000 and $5,956,000, respectively, and is a component of operating expenses.
Estimated useful lives range from 10 to 40 years for buildings and 3 to 10 years for furniture and equipment.
Fully diluted earnings per share also assume conversion, if dilutive, of the Company's convertible debt and options into common shares after appropriate adjustments for interest.
independent pricing services. The fair values for equity securities are based on quoted market prices.
- Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
- Trade receivables and payables: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
- Notes payable: The carrying amount of the Company's short-term financing program approximates its fair value. The carrying amount of the Company's convertible subordinated debentures approximates their fair values. Fair values for the Company's promissory notes and the note payable guaranteed by the Company for the LESOP are based on a discounted cash flow calculation using the Company's current borrowing rate for similar debts. Fair values for the Company's medium-term notes are based on a discounted cash flow calculation using the current market rate for notes with a similar term.
The cumulative effect as of January 1, 1994 of adopting FASB Statement 115 on the opening balance of Stockholders' Equity was an increase of $1,471,000 (net of $792,000 in deferred income taxes) to reflect the net unrealized holding gains on securities classified as available-for-sale previously carried at amortized cost. The Company periodically purchases securities for trading purposes generally not to exceed $30,000,000. At December 31, 1995 and 1994, there were no securities in the trading portfolio.
At December 31, 1995 and 1994, fixed maturities with an amortized cost of $58,356,000 and $57,141,000, respectively, were on deposit with insurance regulatory authorities to meet statutory requirements. In addition, fixed maturities with an amortized cost of $46,325,000 and $48,655,000 were being held in trust under reinsurance agreements at December 31, 1995 and 1994, respectively. The approximate market value and amortized cost of fixed maturity investments at December 31, 1995, are shown below by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. During 1995, the Company transferred securities from the held-to maturity category to the available-for-sale category, as allowed under the FASB 115 Guide to Implementation. The amortized cost of the transferred securities was $61,193,000 and the related unrealized gain was $2,678,000.
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:
The Company engages in a limited hedging program. A cross hedge has been established using U.S.Treasury Securities futures contracts to minimize the effects of interest rate fluctuations on a certain portion of the Company's preferred stock portfolio. Realized losses totaling $3.5 million in 1995 resulted from terminated and expired option contracts. These contracts were hedged against preferred stock which generated $1.3 million in realized gains. There were no open futures positions existing at December 31,1995.
The Company disposed of certain held-to-maturity securities due to deteriorating credit or mandatory redemption. The components of investment income for the years ended December 31 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.
Overall claims experience is principally dependent on the frequency and severity of claims as well as trends in litigation and loss cost inflation. With the exception of discontinued lines, the Company writes primarily property coverages which are characterized by relatively short settlement periods and quick development of ultimate losses. Discontinued business includes the Company's participation in excess casualty reinsurance assumed pools. The business is long-tail in nature and losses continue to exceed both Company and industry expectations. Most of these losses result from asbestos-related and environmental pollution claims. Management is unable to make a reasonable estimate of the Company's ultimate liability from these pools due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is complex and uncertain. The Company establishes loss reserves on known claims as recommended by the various pool managers and additional reserves to compensate for those claims that have not yet been reported. Losses from its discontinued reinsurance pools included in the accompanying table are $7.3 million, $4.2 million and $3.0 million in 1995, 1994 and 1993, respectively. Reinsurance pool reserves represent approximately 11.4% o the gross liability for property and casualty losses and LAE at December 31, 1995. The Company's estimating and reserving practices are reviewed continuously. Subsequent adjustments to the original estimates are made when determinable and are reflected in current year operations.
The accompanying tables present an analysis of losses and LAE for the Company's property and casualty domestic subsidiaries. The following table provides a reconciliation of beginning and ending liability balances for 1995, 1994 and 1993.
Accident and health net claim liabilities reported in the Company's life subsidiaries were $57,049,000, $55,875,000 and $57,789,000 at December 31, 1995, 1994 and 1993, respectively. There was no significant development during the past three years.
The Company's insurance subsidiaries follow the policy of reinsuring risk in excess of $250,000 under an ordinary life policy, $150,000 on a group life policy, and $500,000 under a property policy. In addition, aggregate excess of loss coverage is obtained for the Company's property and casualty business as protection against catastrophic losses. Ceded claim and policy liabilities are recorded as assets on the balance sheet under the caption Reinsurance Receivable. The Company's insurance subsidiaries are liable for these amounts in the event reinsurers are unable to pay their portion of the claims. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities or economic attributes of the reinsurers to lessen its exposure to significant losses from reinsurer insolvencies. Reinsurance ceded incurred losses for 1995 and 1994 were $268,820,000 and $203,667,000, respectively. Liabilities for ceded claim reserves and recoverables on paid losses at December 31, 1995 and 1994 are shown below.
The effect of reinsurance on premiums written and earned for the years ended December 31 is as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The net deferred tax asset at December 31, 1994 is included under the caption "Other Assets." Significant components of the Company's net deferred tax liabilities and assets are as follows:
Total income tax expense (benefit) varies from amounts computed by applying current federal income tax rates to income before income taxes. The reasons for these differences and the approximate tax effects thereon for each year ended December 31 are as follows:
The Company made federal income tax payments (net of refunds) of $13,448,000, $16,550,000 and $20,450,000 for the years 1995, 1994 and 1993, respectively. The Company has a consolidated net capital loss carryforward of $2,471,000 for tax purposes expiring in 1998.
On December 1, 1995, the Company replaced its short-term credit facility with a $250,000,000 five year competitive advance and revolving credit agreement with a group of banks. The agreement features a revolving line of credit, commercial paper and/or bid loan facilities. Interest rates vary according to the credit instrument exercised and the market rates then prevailing. Quarterly fees payable under this credit facility are: (a) fees payable to each lender, based upon the Company's Moody's and Standard & Poor's ratings at every quarter end; (b) utilization fees; and (c) administrative fee. The fees incurred in 1995 were $1,482,000 for these facilities. Fees were $906,000 and $1,355,000 for 1994 and 1993 respectively. The credit agreement contains various covenants pertaining to minimum stockholders equity, maximum funded debt ratio and insurance statutory surplus and other ratios.
The Company has authorized 3,500,000 shares of no par preferred stock. At December 31, 1995, no shares had been issued.
On February 24, 1988, the Board of Directors adopted a "Rights Plan" (amended November 14, 1990) creating certain rights which attach to and trade with each share of common stock outstanding on or after March 11, 1988. 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 A 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. The rights are redeemable at the Company s option and expire on March 10, 1998.
The Company's insurance subsidiaries prepare their statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the insurance department of their state of domicile. Prescribed statutory accounting practices include state laws, regulations and general administrative rules as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state and may change in the future. The NAIC has a project to codify statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. The codification, when completed, will likely change the definitions of what comprises prescribed as opposed to
On May 22, 1991, stockholders approved two stock option plans: (1) 1991 Stock Option/Restricted Stock Award Plan (Award Plan) and (2) 1991 Stock Incentive Compensation Plan (Incentive Plan). Under the terms of the Award Plan, certain key employees may be granted options at prices equivalent to the fair market value of ABIG's common stock on the grant date. Each option further entitles the employee to be awarded three additional shares of restricted common stock. Options are not exercisable before the six-month anniversary nor after the third annual anniversary from the date of grant. During the vesting period, the restricted shares are subject to forfeiture in the event the related primary shares are disposed, or if employment with the Company's terminated except by death, disability or retirement. Dividends and voting rights on the restricted shares remain with the employee during the vesting period. Full vesting occurs on the fifth annual anniversary after the date the options are exercised. The Company amended the Plan's vesting period provision, originally five years, to allow certain restricted shareholders to elect an additional one, two or three year vesting period for their shares. In 1994, the stockholders approved the Senior Management Stock Option Plan, and as a result, no new grants will be made under the Award Plan.
Shares issued under the plans are recorded at fair market value at the effective date of the grant. The unamortized difference ($3,620,000 as of December 31, 1995, and $3,204,000 as of December 31, 1994) between the fair market value and option price on shares which are restricted is reported as part of stockholders' equity. Amortization of the restricted stock is recorded as compensation expense ratably over the vesting period ($1,407,000 in 1995, $965,000 in 1994 and $1,110,000 in 1993). Furthermore, any difference between the fair market value and the option price on the unrestricted shares in the Award Plan and Senior Plan is recorded as compensation expense. Forfeitures are included as credits in the income statement during the period in which the forfeiting event occurs.
Under the 1994 Key Executive Debenture Plan (KEDP), the Board may select certain Company officers to be eligible to purchase convertible debentures. As of December 31, 1995, two debentures in the aggregate amount of $3.7 million had been issued which are convertible into all the 150,000 shares as currently reserved under the plan.
At December 31, 1995 and 1994, the loan balance was $6.4 million and $8.5 million respectively. The interest portion of the LESOP pension expense was $.6 million in 1995 and in 1994, and $.7 million in 1993.
As a result of the promulgation of Statement of Position (SOP) 93-6 - Employers' Accounting for Employee Stock Ownership Plans - by the American Institute of Certified Public Accountants in late 1993, new reporting rules became effective in 1994. These changes are mandated for shares acquired in 1993 and later, and are optional for previously acquired shares. The Company has no shares subject to the mandated provisions and, as permitted by the SOP, is not electing to change its accounting for previously acquired shares. The following disclosures are made to supplement previously disclosed plan information:
- Dividends paid on all shares held by the LESOP are used to service the existing debt of the LESOP.
A summary of the approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 1995, is as follows:
Total rental expense for the years ended December 31, 1995, 1994 and 1993 was $7,661,000, $5,716,000 and $6,233,000 respectively.
While no one case is necessarily significant in terms of financial risk to the Company, the judicial climate in Alabama is such that the outcome of these cases is extremely unpredictable. Without admitting any wrongdoing, the Company has settled a number of these suits, but there are still a significant number of cases pending, and it is expected that more suits alleging essentially the same causes of action are likely to continue to be filed during 1996. The Company intends to continue to defend itself vigorously against all such suits and believes, based on information currently available, that any liabilities that could result are not expected to have a material effect on the Company's financial position.
Quarterly financial information for the years ended December 31, 1995 and 1994, is presented below:
Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS - CONTINUED FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto of American Bankers Insurance Group, Inc. (Parent).
*Excluding net realized investment gains of $721, $2,679 and $5,454 for 1995, 1994 and 1993, respectively.
**Excluding Credit Bond losses and expenses of $11,467, $6,599 and $2,974 for 1995, 1994 and 1993, respectively.
Schedule IV AMERICAN BANKERS INSURANCE GROUP, INC. REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)