The headquarters building is located at 11222 Quail Roost Drive, Miami, Florida 33157,and is approximately 415,000 square feet in size. The building is used exclusively for general office use, except for a portion which functions as the Company's warehouse. Certain other properties are infrequently acquired through foreclosures of mortgage loans in which ABLAC has invested. ABLAC holds and operates such properties until sale can be effected.
The reinsurance market experienced significant consolidation in 1996. Despite the reduction in the number of large reinsurance companies, the cost of reinsurance coverage has been decreasing. This may be attributable in part to the relatively improved underwriting experience over the last two years, the expanded Bermuda market and the resurgence of Lloyd's of London.
Recent Supreme Court and other regulatory rulings are expected to lead to increased marketing of insurance products by banks. This may lead to increased competition; however, the Company does not expect to be significantly impacted since its major products do not include traditional life and property and casualty insurance products which banks may begin to market. Accordingly, this may result in additional products and services being sold through the Company's bank distribution channel. Congress has indicated that during 1997, it may examine the issue of banking reform including state regulation of the insurance industry.
In 1996, net income increased 31% to $94.5 million from $72.3 million in 1995. Operating results benefited from continued strong growth in net investment income and in the Company's credit-related products. After-tax operating income before realized gains generated by the property and casualty segment was adversely impacted in 1996 by losses from Hurricanes Bertha, Fran and Hortense of approximately $6.0 million. The Company's United Kingdom insurance subsidiary incurred additional operating losses in 1996 principally due to cancelled product lines. The 1995 results included, on an
Pre-tax operating income before realized gains by industry segment was as follows:
(in thousands) LIFE ---- 1996 $ 57,569 1995 $ 43,469 1994 $ 30,434
Total revenues increased 12% in 1996 over the prior year, primarily due to increases in net earned premiums of $137.8 million and investment income of $21.8 million. Gross collected premiums increased more than $200 million or approximately 9%, from $2.3 billion in 1995 to $2.5 billion in 1996. Excluding a $66 million block of business acquired in 1995, gross collected premiums increased 12%. In 1996, property and casualty segment revenues increased by $146.5 million compared to the life segment increase of $20 million. A significant portion of the property and casualty segment growth resulted from the increase in net earned premiums in credit unemployment and extended service contract products.
The growth in gross collected premiums was primarily related to three products:
Growth in these and other products were offset by the decline in the credit property product, primarily related to the cancellation of certain accounts due to insufficient profit margins. Premium growth was also adversely impacted by planned declines in the Mobilehome Physical Damage and Homeowners product lines which are more susceptible to seasonal changes and catastrophes.
The cost of reinsurance to cover catastrophe losses has remained relatively unchanged at $9.3 million and $9.5 million in 1996 and 1995 respectively. The cost in 1994 was $6.4 million. The Company continually reviews its exposure to catastrophe losses and, in 1995, increased its coverage which accounted for the majority of the increase in cost over 1994. The unusually large number of major
Investment income increased by 22% to $121.2 million in 1996 from $99.4 million in 1995. The increase is mainly due to the overall increase in invested assets of $280 million. The increase in 1995 from 1994 was 34%; however, this included growth due to the acquisition of a $66 million block of business. The Company's average fixed income investment yield was 6.8% in 1996, 7.0% in 1995 and 6.7% in 1994.
Gross collected premiums increased 30% in 1995 (26% excluding the $66 million acquisition) and 23% in 1994. Net earned premiums increased 13% in 1995 and 24% in 1994.
Through our extensive use of adjustable commission arrangements based on claims experience, we have been able to generate business with stable underwriting results. The overall loss ratio for the Company was 37.9% in 1996 compared with 37.3% and 40.0% in 1995 and 1994 respectively. The commission expense ratios for the same periods were 41.5% in 1996, 42.4% in 1995 and 40.0% in 1994.
This 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. The Company's exposure is primarily through participation in excess casualty pools. These pools typically involve high-layer coverages that are applicable only after primary insurance coverage and, in many cases, reinsurance coverages have been exhausted. The Company's experience can differ significantly from that of other insurers which wrote the primary coverages directly. The Company establishes loss reserves on known claims as recommended by the various pool managers, plus additional reserves to compensate for those claims that have not yet been reported. Reserve additions in 1996 have increased the survival ratio to 14 years from 8.5 in 1995.
Operating expenses (excluding interest expense) were $280.8 million in 1996, $251.5 million in 1995 and $220.2 million in 1994. The ratio of operating expenses to gross premiums earned in 1996 was 11.8%, showing continued improvement from 1995 of 12.5% and 1994 of 13.1%. The Company is in the process of replacing many of its legacy systems and is upgrading its systems to accommodate business for the year 2000. The most significant of these costs relate to the new processing system being implemented for the property and casualty segment, which totaled $6.3 million in 1996, $4.9 million in 1995 and $3.6 million in 1994. Similar expense levels are expected to continue through 1997.
Interest expense was $17.5 million, $15.6 million and $11.2 million in 1996, 1995 and 1994 respectively. The increase in interest expense in 1996 is primarily due to elevated debt levels during the year. The increase in interest expense from 1994 to 1995 was due in part to an increase in interest rates and increases in debt of $38.2 million.
Total assets increased 16% to $3.5 billion at December 31, 1996, from $3.0 billion at December 31,1995. The increase is attributable to strong cash flows, and the investment of proceeds from the issuance of the Series B Convertible Preferred Stock. Total assets increased 23% at December 31, 1995, from $2.4 billion at December 31, 1994. This increase resulted from strong cash flows, the assumption of a block of business and additional debt financing. Invested assets at December 31, 1996, 1995 and 1994, were $2.0 billion, $1.7 billion and $1.3 billion respectively. At December 31, 1996,
Liabilities were $2.8, $2.5 and $2.0 billion at December 31, 1996, 1995 and 1994 respectively. Liabilities associated with policies represent a major portion of total liabilities including $2.1 billion or 75.0% in 1996, $1.9 or 75.1% in 1995, and $1.5 or 74.1% in 1994. Notes payable were $222.5 million at December 31, 1996, $236.0 million at December 31, 1995, and $197.8 million at December 31, 1994. The Company's debt to capitalization ratio of 23.9% at December 31, 1996, is at its lowest level in years down from 31.5% and 32.8% at December 31, 1995 and 1994 respectively.
The Company registered $200 million in medium-term notes with the Securities and Exchange Commission in 1994. During 1995 and 1994, the Company issued $50.0 million and $75.0 million of these medium term notes respectively. The debt issuance proceeds were used to refinance outstanding debt and to support the Company's continued growth and expansion into new markets. In 1995, the Company replaced its short-term financing facility and borrowed $87 million, mainly used to pay off its former facility.
In February 1996, the Board of Directors revoked the 1990 authority to repurchase Company stock and authorized a repurchase of up to one million shares of the Company's stock in the open market from time to time subject to certain conditions. At December 31, 1996, the Company held approximately 93,000 shares as treasury stock.
While the impact, if any, from the resolution of pending litigation cannot presently be identified, the Company does not expect any unfavorable outcome to have a material effect on liquidity or financial condition.
The Company does not concentrate in policy coverages under which policyholders may control, on a discretionary basis, access to cash benefits through policy surrender and withdrawals.
ABIG's insurance subsidiaries, like other insurance companies, are subject to regulation and supervision in the states 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.
A substantial portion of the business written by the insurance subsidiaries is credit insurance. Most states have enacted laws which regulate credit insurance to a greater extent than they regulate other forms of insurance, including maximum premiums which may be charged and commissions which can be paid. A component rating approach which allows state regulators to take into account factors other than losses in determining the reasonableness of credit insurance rates was made part of the National Association of Insurance Commissioners (NAIC) Creditor-Placed Insurance Model Act that was adopted in 1996. Individual states which adopt the regulation are generally expected to adapt the model regulation to their perceived needs and to apply the regulation to business written in that state. Adoption of this Regulation is not expected to significantly affect the Company's operations.
Profits of insurance companies are affected not only by volume of insurance sold and renewed, but by such factors as mortality and loss experience, investment income and underwriting expenses.
The majority of the Company's property and casualty insurance business is represented by property coverage in which the ultimate loss experience develops relatively quicker than that for insurers concentrated more heavily in liability coverages.
In the ordinary course of business, the Company reinsures risks with other insurance companies; nonetheless, the Company is contingently liable with respect to risks reinsured, should the reinsuring companies fail to meet the obligations assumed in the reinsurance agreements. (See Note 5 to the Consolidated Financial Statements.)
To the Board of Director and Stockholders of American Bankers Insurance Group, Inc.
v 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.
v 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.
v Trade receivables and payables: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
v 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.
Certain items in the 1995 and prior financial statements have been reclassified to conform with the 1996 presentation.
Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts. Certain significant estimates, including those used in determining property and casualty loss reserves, life insurance policy liabilities, valuation allowances for investment assets, and unrecoverable reinsurance, are discussed throughout the notes to consolidated financial statements.
The Company disposed of certain held-to-maturity securities due to deteriorating credit or mandatory redemption.
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 1996, 1995 and 1994.
The Company's insurance subsidiaries follow the policy of reinsuring risk in excess of $250,000 under an ordinary life policy and $300,000 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 1996 and 1995 were $315,096,000 and $268,820,000 respectively. Liabilities for ceded claim reserves and recoverables on paid losses at December 31, 1996 and 1995 are shown below.
Prior to 1984, ABLAC was taxed at regular corporate rates in accordance with the Life Insurance Company Income Tax Act of 1959, whereby a portion of its statutory income was not subject to current income taxation, but was accumulated in an account designated "policyholders' surplus." The aggregate balance in this account ($17,000,000 at December 31, 1996) would be taxed at applicable current rates only if distributed to stockholders or if the account exceeded a prescribed maximum. The Deficit Reduction Act of 1984 eliminated additions to the account for 1984 and thereafter. ABLAC does not anticipate any transactions that would cause any part of this amount to become taxable. Deferred taxes in the amount of $5,950,000 have not been provided since the Company does not anticipate any transactions that would cause any part of the account balance to become taxable. As of December 31, 1996, ABLAC has a shareholders' surplus account balance (on a tax basis) of approximately $128,000,000 from which it could pay dividends to stockholders without incurring any federal income tax liability, subject to regulatory requirements and the availability of funds. The other life insurance subsidiaries do not have policyholders' surplus account balances.
ABIG and all other subsidiaries are taxed at regular corporate rates applied to taxable income as determined in accordance with the Internal Revenue Code.
Significant components of the provision for income taxes attributable to continuing operations 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
The Company intends to indefinitely reinvest the undistributed earnings of its wholly owned foreign subsidiaries. The cumulative amount of undistributed earnings for which the Company has not provided deferred income taxes is approximately $60,000,000 as of December 31, 1996. Upon distribution of such earnings in a taxable transaction, the Company would incur additional U.S. income taxes in the amount of approximately $12,700,000 net of anticipated foreign tax credits.
Current tax benefits of approximately $1,300,000 related to the vesting of restricted stock were credited directly to additional paid-in capital in 1996.
At December 31, 1996, the Company's U.K. subsidiary had approximately $13,624,000 in net operating loss (NOL) carryforwards. A valuation allowance for the full amount of the related tax benefit has been established due to uncertainties associated with utilization of the NOL carryforwards.
The Company made federal income tax payments (net of refunds) of $21,875,000, $13,448,000 and $16,550,000 for the years 1996, 1995 and 1994 respectively.
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 1996 were $316,000 for these facilities. Fees were $1,482,000 and $906,000 for 1995 and 1994 respectively. The credit agreement contains various covenants pertaining to minimum stockholders' equity, maximum funded debt ratio and insurance statutory surplus and other ratios. No dividend payments are permitted if there is a default under the credit agreement.
In 1994, the Company filed with the Securities and Exchange Commission a shelf registration statement for $200,000,000 medium-term notes which provides for maturities ranging from nine months to thirty years. Under this shelf registration, the Company issued a $75,000,000 fixed rate note in May 1994 at 7.6% that is due May 1999 and interest is payable semi-annually. In addition, the Company issued a five-year $50,000,000 floating rate note in April 1995. Interest is payable and the rate is established on a quarterly basis. At December 31, 1996, the interest rate was 6.2%.
At December 31, 1996, the Company had 2,300,000 shares of $3.125 Series B Cumulative Convertible Preferred Stock issued and 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.
Each share of Preferred Stock has a liquidating preference of $50, plus accrued and unpaid dividends, and is convertible at any time at the option of the holders thereof into .9987 shares of Common Stock of the Company (equivalent to a conversion price of $50.065 per Common Share), subject to adjustment under certain conditions.
Stock insurance companies are subject to various states' insurance laws and regulations whereby amounts available for dividends are restricted. Net consolidated assets restricted as to distribution to the Company are $570,400,000. The maximum statutory allowed dividends in 1997 are $139,800,000.
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
On May 25, 1994, stockholders approved the adoption of the 1994 Senior Management Stock Option Plan (Senior Plan). Under the terms of the Senior 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 two additional shares of restricted common stock. Options are not exercisable before the six-month anniversary nor after the third anniversary from the date of grant. During a three-year vesting period, the restricted shares are subject to forfeiture in the event the related primary shares are disposed, or if employment with the Company is 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 third anniversary after the date the options are exercised. As of December 31, 1996 there were 608,878 shares authorized. Grants may be made under this plan until February 18, 2004.
On May 25, 1994, stockholders approved the adoption of the 1994 Non-Employee Directors' Stock Option Plan (Director's Plan). Under the terms of the plan, each non-employee director will receive 1,000 options annually at prices equivalent to the fair market value of ABIG's common stock on the grant date. Options granted are not exercisable before the six-month anniversary nor after the fifth anniversary from the date of the grant. As of December 31, 1996, there were 50,000 shares authorized. Grants may be made under this plan until March 24, 2004.
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 is 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. In 1995, 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
A summary of the status and activity for options and shares granted and exercised under the Plans at December 31, 1996, is as follows:
The Executive Stock Option/Dividend Accrual Plan (ESODAP) authorizes stock options for key management employees of the Company. As of December 31, 1996, options representing 710,414 shares had been issued under the plan, of which 275,912 had been exercised and 65,938 had been terminated. A key feature of the plan is the Dividend Accrual Account which allows for the crediting of dividends in order to assist the executive in the exercise of the options. The Company discontinued making grants under this plan effective with the approval and adoption of the 1991 Incentive and Award plans.
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, 1996, 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.
o Dividends paid on all shares held by the LESOP are used to service the existing debt of the LESOP.
o All shares held by the LESOP are treated as issued and outstanding and, accordingly, are included in the Company's earnings per share calculations.
o Shares held by the LESOP as of December 31, 1996 include the following:
The 1994 Amended and Restated Directors' Deferred Compensation Plan (Deferred Plan) allows the directors to defer their fees in cash or in common stock equivalents. The fees that are deferred in common stock equivalents will accumulate and earn interest from the time the fees are deferred until the last day of each quarter when they are converted to common stock equivalents. Upon termination from the board, the director will receive, as elected, either cash or actual shares of the Company's common stock. The Deferred Plan provides for the issuance of up to 100,000 shares of the Company's common stock. At December 31, 1996 there were 75,563 shares allocated under this plan.
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.
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, 1996, is as follows:
Certain of ABIG's subsidiaries, including ABIC, ABLAC and Voyager, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate 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. A number of other insurers are also named as co-defendants in many of the suits.
Although the Alabama lawsuits and similar suits pending in 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 Company denies any wrongdoing in any of these suits and believes that it has not engaged in any conduct that would warrant an award of punitive damages or that the class allegations have merit. The Company has been advised by legal counsel that it has meritorious defenses to all claims being asserted against it.
The Company distributes its products through eight markets or distribution channels involving over one thousand clients. Its business is generally not concentrated, and no single customer accounted for 10% or more of the Company's consolidated gross collected premiums in 1996.
Quarterly financial information for the years ended December 31, 1996 and 1995, is presented below:
AMERICAN BANKERS INSURANCE GROUP, INC. SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1996 (IN THOUSANDS)
Information on Summary of Investments - Other Than Investments in Related Parties is included on page 11 in Part I Item 1 c. of this report, and in Note 3 on page 49 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. SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)