(1) The extraordinary credit reported in the two years ended December 31, 1992 represents the realization of the tax benefit for operating loss carryforwards accounted for prior to Financial Accounting Standards Board Statement 109, "Accounting for Income Taxes," which Statement was adopted by the Company as of January 1, 1993.
(2) After provision for Series A Preferred Stock dividends of $284,000, $487,000, $529,000 and $576,000 for the years ended December 31, 1991, 1992, 1993 and 1994, respectively.
(3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Effects of Accounting Pronouncements" for a discussion of the impact of changes in accounting principles.
The Company is an insurance holding company representing the strategic combination of two life insurance companies, American Progressive and American Pioneer, and WorldNet, an international managed care company. These companies were assembled in 1991-1993, with the Insurance Subsidiaries each being acquired at prices approximately equal to or below their adjusted statutory book value. Management is now focused on growth, both internal, through aggressive marketing and product development programs directed at specialty life and accident & health insurance products, and by seeking further acquisitions of insurance companies or blocks of business. It also has embarked on a program to rationalize operations through consolidation of administrative and processing facilities.
Net Income. For the year ended December 31, 1995, the Company earned net income of approximately $2,642,000 resulting in an earnings per share applicable to common shareholders of $0.25. For the year ended December 31, 1994, the Company earned net income of approximately $2,228,000 before its dividend requirement on the Series A Preferred Stock, which dividend amounted to approximately $576,000, resulting in an earnings per share of $0.20. On December 30, 1994, the Company redeemed the Series A Preferred Stock at a discount of approximately $1,522,000 ($0.17 per share), which discount increased the 1994 net income applicable to common shareholders to approximately $3,173,000, or $0.37 per share.
Fee income for the year ended December 31, 1995 decreased approximately $988,000 which reflects the fees earned by WorldNet for managed care, travel assistance, claims administration and communication services. This reduction is a result of the Company's termination of certain nonprofitable contracts. For the year ended December 31, 1995, the Company amortized approximately $244,000 of the deferred revenue compared to the $219,000 amortized in the same period in 1994, which increase is attributable to the $80,000 of additional amortization generated by the 75% quota share reinsurance agreement effected on July 1, 1995. See "Business-Reinsurance Ceded".
Benefits, Claims and Other Deductions. Total benefits, claims and other deductions decreased approximately $4,724,000 to $41,071,000 for the year ended December 31, 1995. The change in future policy benefits amounted to a decrease of approximately $4,267,000. The decrease in reserves for the year ended December 31, 1995 was $1,337,000 and primarily relates to the reduction in the 1995 NAIU premium, (approximately $491,000) the non-marketed accident & health business of American Progressive ($827,000) and the major hospital and major medical of American Pioneer ($430,000) offset by an increase in the supplemental health insurance reserves currently being sold (approximately $559,000). This decrease compares to an increase in 1994 of approximately $2,930,000, which increase in 1994 primarily relates to the increase in reserves of American Progressive when it entered the NAIU accident pool and assumed the North American Company businesses of approximately $2,556,000 (See "Business - Reinsurance"). Claims and other benefits increased approximately $1,247,000. This increase is a result of increased mortality of approximately $344,000 at American Progressive and increased supplemental health benefits of approximately $2,456,000 and increased morbidity of approximately $651,000 on the non-marketed health business at both insurance companies. This increase was offset by a reduction of approximately $2,204,000 in major hospital and major medical benefits at American Pioneer, which reduction is a result of the lower premium revenue discussed above. The increase in deferred acquisition costs increased approximately $386,000 and was due to the increase in new business production noted above.
Other operating costs and expenses decreased approximately $1,286,000. Expenses incurred by the insurance subsidiaries during 1995 exceeded the 1994 amount by approximately $151,000. Commissions, new business expenses and premium taxes increased approximately $509,000, while the general overhead expenses decreased approximately $358,000. The remaining decrease of $1,437,000 results from a decrease of continuing operation expenses incurred by WorldNet (approximately $1,708,000) resulting from the termination of certain unprofitable contracts, (approximately $1,208,000) and the relocation of WorldNet to Florida from Texas in 1994 (approximately $500,000) offset by an increase by the Parent Company (approximately $271,000). Amortization of the present value of future profits was approximately $205,000 for 1995 compared to $237,000 in 1994, which decrease is due to the lower amount of insurance in force.
The results of operations for the year ended December 31, 1994 include the operations of American Progressive, American Pioneer and WorldNet. The results of operations for the year ended December 31, 1993 include all the operations of American Progressive and WorldNet and the results of the operations of American Pioneer from May 26, 1993 (the date of acquisition) to December 31, 1993.
Net Income. For the year ended December 31, 1994, the Company earned net income of approximately $2,228,000 before its dividend requirement on the Series A Preferred Stock, which dividend amounted to approximately $576,000, resulting in an earnings per share of $0.20. On December 30, 1994, the Company redeemed the Series A Preferred Stock at a discount of approximately $1,522,000 ($0.17 per share), which discount increased the net income applicable to common shareholders to approximately $3,173,000, or $0.37 per share. For the year ended December 31, 1993, the Company reported net income of approximately $1,553,000 before its dividend requirement on the Series A Preferred Stock, which amounted to $529,000, resulting in an earnings per share of $0.14.
The Company's need for capital has historically been to maintain or increase the surplus of its Insurance Subsidiaries, to fund the losses incurred by WorldNet, and to support the Company as an insurance holding company, including the maintenance of its status as a public company. In addition, the Company requires capital to fund its anticipated growth through acquisitions of other companies and blocks of insurance business.
In December 1994, the Company sold 688,610 shares of Common Stock to various persons and a corporation for an aggregate consideration of $1,549,372 ($2.25 per share). Some of the purchasers were granted registration rights by the Company. The purchasers included certain officers and directors of the Company, members of their families and a holder of more than 5% of the Company's common stock, whose purchases totaled 267,666 shares. See "Certain Relationships and Related Transactions--Other Transactions".
On September 30, 1994, the Company entered into a new agreement with its commercial bank, under which it borrowed $800,000 on a one year term loan, extended by the Company for a second year. The borrowing under the new agreement was utilized to pay off the $400,000 borrowed under a prior $500,000 line of credit with the same bank and as working capital for the Company and operating expenses for WorldNet. The new loan is secured by the pledge of 100% of the outstanding common stock of Quincy Coverage Corp. ("Quincy"), an immaterial subsidiary engaged in the insurance brokerage business, the receivables of Quincy and WorldNet and 9.9% of the outstanding common stock of American Progressive. As of December 31, 1994 and December 31, 1995, $800,000 was outstanding on this loan agreement, which bears interest at 2.0% over prime. The Company expects to refinance this loan when it matures.
Liquidity is also affected by unscheduled benefit payments including death benefits, benefits under accident and health policies and interest-sensitive policy surrenders and withdrawals. The amount of surrenders and withdrawals is affected by a variety of factors such as credited interest rates for similar products, general economic conditions and events in the industry which affect policyholders' confidence. Although the contractual terms of substantially all of the Company's in force life insurance policies and annuities give the holders the right to surrender the policies and annuities, the Company imposes penalties for early surrenders. At December 31, 1995 the Company held reserves that exceeded the underlying cash surrender values of its in force life insurance and annuities by more than $9.9 million. The insurance companies have not experienced any material changes in surrender and withdrawal activity over the past years.
At December 31, 1995, the investment portfolios of the life insurance subsidiaries included cash and short-term investments totaling $12,290,000, as well as fixed maturity securities that could readily be converted to cash with carrying values of (and fair values) of $116,429,000. The fair values of these liquid investments totalled more than
$128,719,000 and constituted approximately 95% of the Company's investments at December 31, 1995. At December 31, 1995, all of the Company investments were income producing and current in interest and principal payments except for one security with a carrying value of $243,750. In addition, the Company has no investment in any derivative instruments or other hybrid securities that contain any off balance sheet risk or investments in other securities whose fair values and principal repayments would be highly volatile to changes in interest rates, except for GNMA's, FNMA's and investment grade corporate collateralized mortgage obligations.
In December 1991, WorldNet was formed to provide travel assistance, claims administration and communication services and acquire certain assets of an unaffiliated company which had previously been engaged in that business.
Through December 31, 1995, the Company has provided approximately $3.4 million to WorldNet. These funds were used to support WorldNet's start-up costs, a portion of the costs of acquiring the HAT assets and the cost of acquiring WorldNet's Dallas, Texas facility and later closing it and relocating certain of its operations to the facility purchased from HAT in Miami Beach, Florida. WorldNet's revenues were $2,338,000, $4,068,000 and $3,071,000 for 1993, 1994 and 1995, respectively. WorldNet incurred a net loss of approximately $481,000, $1,375,000 and $665,000 for the years ended December 31, 1993, 1994 and 1995, respectively. The 1994 loss included a charge of approximately $500,000 related to employee severance and relocation costs incurred in connection with the consolidation of WorldNet's facilities. During 1993 and 1994, WorldNet incurred approximately $144,000 and $190,000 respectively of organizational expenses which are being amortized over a five-year period. In 1995 no organizational expenses were incurred.
o Debt and equity securities not classified as held to maturity or as trading securities would be classified as "available for sale" and reported at fair value. Unrealized gains and losses would not be reflected in earnings but would be reported as a separate component of stockholders' equity.
The Company adopted Statement 115 on January 1, 1994, the effect of which increased its unrealized gains by $494,541. In November, 1995, the FASB issued a Special Report titled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", which report allows enterprises to reassess the appropriateness of the classifications of all securities held and account for any resulting reclassifications between the investment accounts. This one-time reassessment had to be made prior to December 31, 1995 and be appropriately disclosed in the financial statements. In December, 1995, the Company did reassess the appropriateness of the classifications of its securities and reclassified all of the securities contained in the held to maturity account to the available for sale account as they may be considered for sale prior to maturity as part of the asset/liability management strategy. The carrying value of the securities reclassed to available for sale amounted to $35,942,303 and the fair value amounted to $36,098,026. This transfer resulted in the Company increasing its unrealized gains by $155,723. As changes in interest rates occur, the carrying value of the securities classified as available for sale, as well as any securities which may in the future be classified as held for maturity, will be impacted. Typically, as interest rates rise, the carrying value of these securities may decline. Conversely, if interest rates decline, the carrying value of these securities may increase. Management cannot predict the impact that changes in future interest rates will have on the Company's financial statements.