* Share and per share amounts have been restated for a two-for-one stock split paid March 4, 1998 to shareholders of record February 18, 1998.
American Heritage Life Investment Corporation (AHLIC) and subsidiaries (the "Company") are engaged primarily in the life insurance business. The Company's consolidated earnings are primarily attributable to its principal subsidiaries, American Heritage Life Insurance Company (AHL) and Columbia Universal Life Insurance Company (CUL). Following is a discussion of the significant components of the consolidated results of operations for the years ended December 31, 1997, 1996 and 1995.
Ordinary insurance revenues amounted to $168.2 million, $137.4 million and $123.7 million in 1997, 1996 and 1995, respectively. Premiums including equivalents were $241.1 million, $181.5 million and $167.3 million for the years ended December 31, 1997, 1996 and 1995, respectively. The increases in insurance revenues and premiums and premium equivalents in 1997 over 1996 and 1996 over 1995 were due primarily to increased policy charges on interest-sensitive products due to increased sales, increased sales of individual accident and health plans, and rate increases on certain cancer/dread disease plans. 1997 included $14.1 million of insurance revenues and $31.5 million of premium equivalents for CUL, without a corresponding amount in 1996. The increase in individual accident and health sales in 1996 compared to 1995 included for the first time a full year of new long-term care product sales that increased revenues approximately $5.7 million.
Group insurance revenues in 1997, 1996 and 1995 totaled $31.0 million, $35.5 million and $39.9 million, respectively. Premiums and premium equivalents were $223.6 million, $214.9 million and $206.4 million for 1997, 1996 and 1995, respectively. The decreases in insurance revenues were due to increased sales of self-funded or split-funded business. The increases in premiums and premium equivalents included the sales to larger group cases that were sold on a self-funded basis.
Group benefits and claims in 1997, 1996 and 1995 totaled $18.3 million, $24.0 million and $25.6 million, respectively. Group benefits have been reduced as a result of the managed care program, the AHL Select Provider Network and new cases written on a self-funded or split-funded basis where claims are not included in the Company's benefits and claims expenses for financial statement purposes.
The Company's major operating costs consist of commissions, payroll, premium taxes and administrative-related expenditures. General insurance expenses as a percentage of total income, excluding realized investment gains (losses) and including premium equivalents, was 5.4% for the year ended December 31, 1997 and remained constant at 4.9% for the years ended December 31, 1996 and 1995. The
Amortization of deferred acquisition costs and cost of business acquired was $32.4 million in 1997, $25.6 million in 1996, and $23.7 million in 1995. These increases were primarily due to CUL amortization of $4.1 million in 1997 with no comparable amount in 1996, growth in business in force, and an increase in lapses of individual health business resulting from the implementation of rate increases, which increase the write-off of the policies' deferred acquisition costs.
Non-segmented operating expenses in 1997, 1996 and 1995 were $5.1 million, $3.9 million and $3.4 million, respectively. These expenses primarily relate to non-life insurance operations, including interest expense. Interest expense is a function of the average debt outstanding and interest rate charged. Interest expense included in non-segmented operating expenses was $7.7 million, $3.7 million and $3.3 million for 1997, 1996 and 1995, respectively. These increases were due primarily to additional bank debt outstanding and in 1997 included interest on the FELINE PRIDES.
NET INVESTMENT INCOME Net investment income was $105.4 million, $77.0 million, and $70.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. These increases were due primarily to CUL net investment income of $25.6 million in 1997 without a comparable amount in 1996, an increase in invested assets and changes made in the investment portfolio to improve the yield. The effective yields on invested assets for the years ended December 31, 1997, 1996 and 1995 were 7.55%, 7.72%, and 7.64%, respectively. The decrease in yield from 1996 to 1997 was due to market conditions as well as the acquisition of lower yielding portfolios through the acquisitions. The increase in yield from 1995 to 1996 was due to changes made in the investment portfolio including a reduction in lower yielding equity securities, an increase in higher yielding corporate bonds and mortgage loans, and increased MSP policy loan balances with a higher average interest rate.
PRE-TAX OPERATING EARNINGS Ordinary pre-tax operating earnings were $40.3 million, $35.1 million, and $28.9 million in 1997, 1996 and 1995, respectively. The increase each year was primarily due to growth in insurance revenues and investment income, less normal growth in benefits and claims, and expenses and for 1997 CUL's pre-tax operating earnings of $2.4 million with no comparable amount in 1996.
Group pre-tax earnings were $4.6 million, $4.5 million and $7.5 million in 1997, 1996 and 1995, respectively. The decreases in group pre-tax operating earnings in 1997 and 1996 compared to 1995 were the results of reduced margins on certain cases due to the competitive pricing in the group marketplace on both administrative services only and insured business and increased health claims on insured cases.
Credit pre-tax operating earnings were $5.6 million, $3.8 million and $2.7 million in 1997, 1996 and 1995, respectively. The increase in credit pre-tax operating earnings in 1997 over 1996 and 1996 over 1995 was the result of terminating certain unprofitable accounts and reducing the commissions paid on accounts with unsatisfactory margins. Additionally, the Company is administering the run-off of the credit life and health insurance business for another insurance company, effective June 1996, which will increase fee income over a four-year period. The Company is only responsible for administration of the run-off and has no insurance risk.
OTHER ITEMS Management is not aware of any pending regulation from the various state insurance departments that would have a significant impact on the Company's operations.
with regulatory experience. The compliance area reviews and approves marketing material, policy filings and other areas which are the subject of market conduct compliance requirements of the various state insurance departments.
INVESTMENTS The Company's balance sheet contains a high ratio of liquid assets. Such assets are made up of cash, short-term investments and readily marketable securities.
The amortized cost of high yield bonds at December 31, 1997 aggregated $42.1 million with a market value of $43.5 million. At December 31, 1997 these investments represented only 2.3% of total assets, or 3.0% of invested assets.
Policy loans totaled $407.5 million at December 31, 1997, or 27.7% of total invested assets. The significant amount of policy loans was attributable to the policy loans associated with the MSP executive deferred compensation plan offered by the Company which aggregated $357.6 million at December 31,1997. As discussed earlier, the policy loan feature is an integral part of the product. MSP policy loans decreased by $13.1 million in 1997 over 1996.
Notes payable to banks at December 31, 1997 were $39.2 million compared to a balance of $85.5 million at December 31, 1996. The decrease in bank debt at December 31, 1997 compared to the amount at December 1996 reflected the pay down of bank debt with the proceeds of the securities offering. The weighted average interest rate on the bank debt at December 31, 1997 was 6.4%.
Effective December 31, 1996, the company acquired a block of business from Kentucky Home Mutual Life Insurance Company with approximately $1.8 million of premiums and premium equivalents and $3.3 million of assets. The Company acquired CUL for $44 million in cash effective January 1, 1997. On June 30, 1997, the Company closed on the acquisition of Concord General Life Insurance Company (Concord General) for a total consideration of $7.5 million. Effective July 31, 1997, AHLIC acquired ERJ Insurance Group, Inc., a credit insurance marketing organization. Effective September 30, 1997, the Company acquired a block of business from Security Life of Denver, a member of the ING Group (ING), with approximately $14.0 million of premiums. These acquisitions were reflected in the Company's financial statements at December 31, 1997.
The Company has completed an assessment and has in place a Year 2000 compliance plan which includes updates and revisions to existing software, and the installation of replacement software. The Company's Year 2000 plan is to ensure that there are no data-related failures associated with computer hardware, computer software, business equipment, control systems or its relationships with business partners. The Company has implemented a corporate project team and is using internal and external resources for testing and acceptance of software and hardware. The Company has been aggressively addressing Year 2000 compliance since 1996 and is on schedule to have the conversion completed according to plan.
The amount of dividends that AHL can pay to the Company is limited by regulatory restriction to an annual amount equal to the greater of 10% of AHL's statutory surplus, or its prior year's statutory gain from operations plus net realized capital gains on a noncumulative basis if AHL will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend is paid. AHL chose not to pay any dividends to the Company during 1997 and 1996. A dividend of approximately $13.2 million, related to AHL's earnings in 1994, was paid to the Company in 1995. Approximately $25.1 million, related to 1997 earnings of the insurance subsidiaries, is available to dividend to the Company during 1998 without regulatory approval. The outstanding bank debt of the Company is serviced through either dividends from its subsidiaries in excess of the amount required to pay stockholder dividends or by replacement borrowing.
The Stockholders and Board of Directors American Heritage Life Investment Corporation
(A) CONSOLIDATION POLICY The accompanying consolidated financial statements include the accounts of American Heritage Life Investment Corporation (AHLIC) and its subsidiaries. All significant intercompany accounts have been eliminated in consolidation. The term "Company" as used herein includes AHLIC and its subsidiaries.
AHLIC is a holding company whose principal subsidiaries are American Heritage Life Insurance Company (AHL) and Columbia Universal Life Insurance Company (Columbia). AHL is licensed to do business as a life insurance company in 49 states, Puerto Rico, the District of Columbia and the U.S. Virgin Islands. It markets life and accident and health insurance on an individual, group and credit basis through licensed agents and brokers. Columbia, a subsidiary of AHL, markets annuity and individual life insurance products and is currently licensed in 36 states and Puerto Rico. First Colonial Insurance Company, a subsidiary of AHL, markets credit property insurance and is currently licensed in twelve states. Concord General Life Insurance Company, a subsidiary of AHL, markets supplemental life and health products through worksite marketing and is licensed in 15 states. ERJ Insurance Group, Inc., a subsidiary of AHLIC, is an insurance agency that markets a broad portfolio of credit products.
(5) Insurance Liabilities: The liabilities for future policy benefits for traditional life and accident and health contracts (which represent the excess of the present value of future benefits to be paid on behalf of or to policyholders over the present value of future net premiums) are computed by a net level premium method using assumptions deemed appropriate at the date of issue (or as of the date of acquisition for acquired blocks of business). Estimated future investment yield assumptions range from 3.75% to 8.00%; withdrawals are based on Company experience; mortality and morbidity from recognized morbidity and mortality tables are modified for anticipated company experience, with reasonable provisions for possible future adverse experience deviations. Policyholders' account balances for interest-sensitive products represent premiums received plus interest credited during the contract accumulation period, less contract charges for mortality and expenses. For the years ended December 31, 1997 and 1996, the
Other operating expenses include primarily interest expense related to bank borrowings, other general corporate expenses of AHLIC and insurance agency expenses.
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods presented are restated to conform to the Statement 128 requirements.
Per share data, weighted average shares outstanding and shares related to stock compensation plans have been restated to reflect the two-for-one stock split in the form of a stock dividend paid March 4, 1998 to shareholders of record February 18, 1998.
For the years ended December 31, 1997, 1996 and 1995, net investment income (in thousands) was as follows:
There were no individual investments at December 31, 1997, other than U.S. government securities, which exceeded 10% of the Company's stockholders' equity.
The carrying amount approximates fair value because of the short maturity of these instruments.
The carrying amount approximates fair value because the interest rates charged represent current market rates.
Interest expense for the years ended December 31, 1997, 1996 and 1995 totaled $4.4 million, $6.1 million and $5.6 million.
The amount of insurance premiums assumed under reinsurance agreements for the years ended December 31, 1997, 1996 and 1995 were $4.5 million, $5.8 million and
The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands):
Amounts have been restated to reflect a two-for-one stock split in the form of a stock dividend paid March 4, 1998 to shareholders of record February 18, 1998.
For additional disclosures regarding employee stock options and restricted stock, see Note 10.
The Company has three fixed stock option plans primarily for its employees. Under the 1980 Stock Option Plan, the Company may grant options to its employees for up to 600,000 shares of common stock. Under the 1988 Stock Option Plan, the Company may grant options to its employees for up to 533,333 shares of common stock. Under the 1996 Stock Option Plan, the Company may grant options to its employees for up to 700,000 shares of common stock. Under all plans, the exercise price of each option equals the market price of the Company's stock on the date of grant. Under the 1980 and 1996 Plans, the option's maximum term is ten years. Under the 1988 Plan, the option's maximum term is six years. Under the 1980 Plan, options are granted in the first part of the year and vest in increments of 33% per year beginning one year from date of grant and continuing for two more years. Under the 1988 Plan and 1996 Plan, options are granted during the year and vest in increments of 20% per year over a five year period beginning no less than six months after the grant.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997 and 1996, respectively: dividend yield of 2.2% and 3.1%; expected volatility of 20% for both years for the 1980 and 1996 Plan options. No options were granted under the 1982 or 1988 plans during the periods.
Under the Company's Long-Term Incentive Plan, the restricted stock feature provides for the grant of common stock to a participating employee. The number of shares of restricted stock available to be issued in the name of each participating employee is determined at the beginning of each fiscal year and is based on the prior year's operating results. Such shares are restricted for three years and held by the Company in the name of the participating employee, who has the right to vote and to receive dividends paid on all such shares.
During the years ended December 31, 1997, 1996 and 1995, the Company granted 34,432, 21,940 and 39,970 shares of restricted stock, respectively.
During the years ended December 31, 1997, 1996 and 1995, the Company granted 11,734, 8,428 and 10,766 shares of common stock related to the performance units feature, respectively.
account of each participant, based upon their purchases, as follows: (a) 25% of amounts from $5 through $25, (b) 20% of amounts in excess of $25 through $50, and (c) 15% of amounts in excess of $50 through $1,500.
The Company has a trusteed profit sharing plan for the exclusive benefit of eligible employees. The Company's annual contribution to the plan is equal to the lesser of 10% of consolidated earnings as defined or 10% of qualifying compensation paid to participants. The annual contributions amounted to $1.3 million in 1997 and $1.2 million in 1996 and 1995.
Activity in the liability for policy and contract claims (in thousands) at December 31, 1997, 1996 and 1995 is summarized as follows:
A majority of the Company's assets consists of investments and cash which are not identified with a specific operation. Accordingly, it is not possible to separate assets, capital expenditures, and depreciation by industry segment.
AHLIC's insurance subsidiaries had statutory net operating earnings of $24.5 million, $20.6 million and $19.0 million and statutory net earnings of $27.8 million, $22.1 million and $33.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. Total statutory stockholder's equity of the separate subsidiaries was $196.8 million at December 31, 1997 and $145.0 million at December 31, 1996. At December 31, 1997, pursuant to the insurance laws of the State of Florida, the minimum capital and surplus required to be maintained by AHL was approximately $48.5 million.
No pronouncements, otherwise not disclosed, which have been issued by the Financial Accounting Standards Board will have a significant impact on the consolidated financial statements of the Company.
If the 1997 acquisitions had been in effect at January 1, 1997, the 1997 pro forma results would not have been significantly different from actual results.
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS)
In the years 1997 and 1996, no dividend was paid to the Registrant by AHL. On December 27, 1995, a dividend of $13,245,264 related to American Heritage Life Insurance Company's (AHL's) earnings in 1994, was paid from AHL to the Registrant.
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION (REGISTRANT) CONDENSED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ($ IN THOUSANDS)
AMERICAN HERITAGE LIFE INVESTMENT CORPORATION SUPPLEMENTARY INSURANCE INFORMATION ($ IN THOUSANDS)
(a) Allocated to the industry segment based on required liabilities for future policy benefits. (b) Allocated on functional cost basis unless specifically identifiable with industry segment. (c) Includes only cost of insurance, expense and surrender charges for interest- sensitive products. Insurance revenues do not include group and credit premium equivalents and cash deposits from interest-sensitive products.