1996 1995 1994 1993 1992 Revenue: Insurance revenues...$ 30,302 $ 26,713 $ 24,431 $ 21,849 $ 21,330 Investment income.... 32,654 31,217 27,685 27,551 27,770 Other-net............ 988 1,026 (717) 895 2,152 -------- -------- ------- -------- -------- Total........... $ 63,944 $ 58,956 $ 51,399 $ 50,295 $ 51,252 ======== ======== ======== ======== ======== Net income.......... $ 5,308 $ 4,500 $ 2,217 $ 3,287 $ 4,8774 ======== ======== ======== ======== ======== Total assets........ $568,980 $536,720 $496,098 $473,582 $434,894 ======== ======== ======== ======== ======== Contingent payment notes net of allowance........ $ 7,874 $ 7,874 $ 7,874 $ 7,874 $ 7,874 ======== ======== ======== ======== ======== Notes payable to affiliates....... $ 12,500 $ 12,500 $ 12,500 $ 12,500 $ 12,500 ======== ======== ======== ======== ========
Summarized below are the consolidated results of operations for the years ended December 31, 1996, 1995 and 1994 (in thousands): As of December 31, ------------------------- 1996 1995 1994 ---- ---- ---- Traditional life insurance premiums $14,436 $12,690 $10,836 Universal life and investment policies 15,866 14,023 13,595 Investment income 32,654 31,217 27,685 Realized gains (losses) 679 601 (1,404) Other income 309 425 687 ------- ------- ------- Total revenues 63,944 58,956 51,399 ------- ------- ------- Policyholder benefits and claims 13,611 11,668 11,364 Change in liability for future policyholder benefits, net of transfers to reinsurers 24,984 23,124 21,081 Operating expenses, commissions, taxes and fees 10,148 9,624 8,983 Interest accrual on contingent payment notes 1,184 998 983 Amortization of policy acquisition costs 3,592 3,955 3,222 Amortization of cost of insurance acquired 2,392 2,456 2,366 ------- ------- ------- Total benefits and expenses 55,911 51,825 47,999 ------- ------- -------
METLIFE TEXAS HOLDINGS, INC. AND SUBSIDIARY ANNUAL REPORT ON FORM 10-K (Continued) - ------------------------------------------------------------
Item 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) As of December 31, ------------------------- 1996 1995 1994 ---- ---- ---- Income before Federal income taxes $ 8,033 $ 7,131 $ 3,400 Federal income taxes 2,725 2,631 1,183 ------- ------- ------- Net income $ 5,308 $ 4,500 $ 2,217 ======= ======= =======
Individual life insurance sales of TLIC in annualized premium (excluding premiums in excess of target), which represents first year premium and is used to measure sales production, were $9,247,000 for the year ended December 31, 1996, an increase of $659,000, or 7.7%, from December 31, 1995 results. Sales of universal life, which comprised 50.9% of 1996 total life sales, increased $247,000, or 5.5%, for 1996 versus 1995 primarily due to the success of the Convenient Life product of TLIC. Sales of traditional life products increased $535,000, or 17.8% and term life sales decreased $123,000, or 11.0%, over the same period.
Total revenues increased $5.0 million in 1996 from the comparable period in 1995, and $7.6 million in 1995 from the comparable period in 1994. The increase in 1996 is primarily attributable to (i) a $1.7 million, or 13.8%, increase in traditional life premiums and a $1.8 million, or 13.1%, increase in universal life and investment product policy charges, both attributable to an increase in business in force related to increased sales in recent years, and (ii) a $1.4 million, or 4.6%, increase in net investment income resulting from increased yields earned on invested assets and an increase in invested assets (from $441.3 million at December 31, 1995 to $459.6 million at December 31, 1996).
Federal income taxes remained virtually flat in 1996 as compared to 1995 resulting from a $352,000 decrease in current taxes and a more than offsetting $446,000 increase in deferred tax expense. Current tax expense decreased $230,000 resulting from the difference between the book and tax basis of policyholder reserves and $220,000 resulting from the difference between the tax and book basis of realized capital losses. These decreases were partially
offset by a $57,000 increase related to an increase in capital gains for Holdings. Deferred tax expense increased $453,000 due to the difference between the tax and book basis of deferred policy acquisition costs and $459,000 due to the difference between the tax and book basis of policyholder reserves. These increases were partially offset by a $495,000 decrease caused by the difference between the tax and book basis of invested assets.
As a result of the above-mentioned items, net income increased $0.8 million, or 18.0%, in 1996 versus 1995 and $2.3 million, or 103.0%, in 1995 versus 1994.
Fourth quarter 1996 revenues of $17.1 million increased $1.4 million, or 8.9%, over fourth quarter 1995 revenues primarily because of a $1.0 million, or 29.5%, increase in universal life and investment product policy charges and a $0.5 million, or 14.1%, increase in traditional insurance premiums, both due to increased sales of these products in recent years.
The sole activities of Holdings consist of the investment of its assets in certain high grade, liquid investments permitted by the indenture pursuant to which its Contingent Payment Notes were issued (see Note 9 to the Consolidated Financial Statements), administration of its Contingent Payment Notes and ownership of the outstanding common stock of its wholly-owned subsidiary, TLIC. Since payment of principal on the Contingent Payment Notes is not required until December 1997, Holdings does not have substantial short-term liquidity needs. Nevertheless, on December 31, 1996, Holdings had $17.8 million of high grade, liquid investments which will be available to make the required principal payments, if any, on the Contingent Payment Notes in 1997. Income earned on these investments should be sufficient to cover the semi-annual interest payments, if any, on the Contingent Payment Notes. Under the terms of the Indenture, Holdings paid no interest in both 1996 and 1995 on the Contingent Payment Notes because of accumulated
TLIC has mortgage loans with a carrying value of $31,910,000 ($35,216,000 less a $3,306,000 reserve for losses) at December 31, 1996. The carrying value of these mortgage loans comprised 6.9% of total invested assets. The $3,306,000 reserve for losses for mortgage loans increased $4,000 in 1996 due to loan payoffs. Management believes that the reserve for losses recognizes any potential losses which may occur in the future on impaired mortgage loans. It represents 9.4% of the total mortgage loan book value and covers 111.9% of the $2,955,000 in mortgage loan principal
The gross yield on all mortgage loans was 8.1% in 1996, 8.3% in 1995, 9.24% in 1994 and 9.36% in 1993. In 1996, mortgage loan income was reduced $149,000 due to loan restructurings, which compares to $253,000 in 1995. In 1996, foreclosed property income was $13,000 lower than if the properties were yielding their respective mortgage rates of interest. In 1995, such income was $303,000 lower.
The mortgage loan portfolio of TLIC includes $17,034,000 of commercial loans, $59,000 of loans on apartments, $306,000 of residential loans and $17,817,000 of agricultural loans. 50.6% of these loans are in Texas and 49.4% are in other states. Since its acquisition by Holdings, TLIC has made 11 commercial mortgage loans with a book value aggregating $5,038,000, fifteen purchase money mortgages on foreclosed
At December 31, 1996, TLIC had $982,000 of foreclosed real estate which consists of one acreage property with residential development. Real estate also includes property occupied by TLIC with a net book value of $2,459,000 at December 31, 1996.
Due to the relatively small amount of below investment grade and nonperforming investments, these investments have not had, nor are they expected to have, a material impact on the financial condition of TLIC or its results of operations.
investments. Four-fifths of its securities at December 31, 1996 were readily marketable securities, primarily publicly traded bonds and stocks. TLIC must maintain adequate liquidity to provide funds needed to make current payments to policyholders. TLIC has utilized an asset/liability matching process to help determine the investment rate it can credit to its policyholders. The universal life insurance products of TLIC are credited an interest rate based upon earnings from allocated assets less an interest rate margin. In the recent history of TLIC, the philosophy of its management has been to maintain this interest rate margin based on the returns on its investments rather than to credit current market rates to its previously issued policies. The interest rate credited by its competitors to their new policyholders is, however, influenced by the current market rates of available investments. Significant increases in the credited rates of these competitors could cause TLIC either to reduce its margins or to credit a rate that may be noncompetitive and result in surrenders of policies by some holders of previously issued TLIC policies. However, TLIC has high surrender charges on most of its universal life products during the first ten policy years (and during the ten years following any increases in the policy face amount) that would discourage surrenders or result in lower surrender values.
A reduction in market interest rates could reduce the reinvestment rate of its fixed investments and result in a lower than expected yield. However, in this environment, TLIC could reduce the rates credited to the products underlying these investments and maintain its interest rate margin without risking significant amounts of policy surrenders.
Thus, changes (other than sudden significant changes) in the interest rate environment and the resulting changes in the interest rates credited to policyholders would not significantly affect withdrawal experience because of the significance of surrender charges to universal life policyholders. However, a sudden significant increase in current market rates could have a material adverse impact on the liquidity of TLIC because policyholders might convert to products of competitors to which higher rates are credited. Conversely, sudden declines in interest rates could materially increase the liquidity of TLIC if the issuers of its fixed rate long-term investments exercise their bond call options or refinance at lower rates the mortgages that are owned by TLIC.
The response to this Item is submitted in a separate section of this report. See Item 14(a)(1) and (2), page.38