1996 Periods Combined (Three Months Ended December 31, 1996 and Nine Months Ended September 30, 1996) Compared to Year Ended December 31, 1995
Operating data for 1996 are presented in two periods: the three months ended December 31, 1996, and the nine months ended September 30, 1996 (the period preceding the ALH Stock Purchase). As explained above under Item 6 - Selected Consolidated Financial Data, the purchase accounting adjustments resulting from the ALH Stock Purchase materially affect the comparability of operating data for the periods before and after the ALH Stock Purchase.
Net investment income decreased 1.6 percent to $409.0 million in the 1996 periods from $415.5 million in 1995. The average invested assets (amortized cost basis) increased to $5.1 billion in the 1996 periods compared to $4.7 billion in 1995 while the yield earned on average invested assets decreased to 8.1 percent in the 1996 periods from 8.8 percent in 1995. Cash flows received during 1995 and 1996 (including cash flows from the sales of investments) were invested in lower-yielding securities due to a general decline in interest rates.
Amortization of goodwill increased to $9.3 million in the 1996 periods from $9.1 million in 1995 due to the adoption of the new basis of accounting.
Extraordinary charge incurred in 1996 relates to debt issuance costs that were written off when the $125.0 million principal balance outstanding under the senior credit facility was repaid using the proceeds from the capital contribution from ALH. The extraordinary charge incurred in 1995 relates to debt issuance costs that were written off when the former senior term loan was paid off with the proceeds of the new senior credit facility.
Net investment income increased 22 percent to $415.5 million in 1995 from $341.1 million in the 1994 periods on a 7 percent increase in average invested assets (amortized cost basis) to $4.7 billion in 1995 compared to $4.4 billion in the 1994 periods. The percentage increase in net investment income was greater than the percentage increase in average invested assets because the yield earned on average invested assets increased to 8.8 percent in 1995 from 7.9 percent in the 1994 periods. The increase in yield primarily resulted from the application of purchase accounting as a result of the Acquisition.
Interest expense on notes payable increased to $32.6 million in 1995 from $14.1 million in the 1994 periods as a result of additional interest on debt incurred to finance the Acquisition, partially offset by a reduction in interest expense resulting from the repayment of subsidiary bank debt that had been outstanding prior to the Acquisition.
Amortization related to operations increased 9.6 percent to $42.3 million in 1995 from $38.6 million in the 1994 periods. Amortization related to operations during the first nine months of 1994 is comprised solely of amortization of cost of policies produced. Amortization related to operations during 1995 and the last three months of 1994 is comprised of amortization of: (i) the cost of policies purchased for business in force at the Acquisition date; and (ii) the cost of policies produced for business written subsequent to the Acquisition date.
Cost of policies purchased represents the portion of the cost to acquire the Company that is attributable to the right to receive cash flows from insurance contracts written at the Acquisition date. Some costs incurred subsequent to the Acquisition date on policies issued prior to such date, which otherwise would have been deferred had it not been for the Acquisition (because they vary with and are primarily related to the production of the acquired policies), are expensed. Examples include commissions paid in excess of ultimate commissions and bonus interest. However, such amounts were considered in determining the cost of policies purchased and its amortization. The amount of amortization related to operations in the 1995 period is less than the 1994 period primarily due to costs related to purchased policies that would have been deferred as the cost of policies produced but instead are expensed as either: (i) other operating costs; or (ii) interest on annuities and financial products.
Amortization related to investment gains increased to $83.3 million in 1995 from $2.8 million in the 1994 periods as a result of the increase in investment gains.
Extraordinary charge incurred in 1995 relates to debt issuance costs that were written off when the former senior term loan was paid off with the proceeds of the new bank financing.
The Company's insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments that they are permitted to make and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations and the Company's business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and corporate securities rated investment grade by established nationally-recognized rating organizations or, if not rated, in securities of comparable investment quality.
The amortized cost and estimated fair value of fixed maturities (all of which were actively managed) at December 31, 1996 were as follows:
The following table sets forth fixed maturity investments at December 31, 1996, classified by rating categories (designated categories include securities with "+" or "-" ratings modifiers). The category assigned is the highest rating by Standard & Poor's or Moody's Investors Service or, as to $41.1 million fair value of fixed maturities not rated by such firms, the rating assigned by the NAIC. For the purposes of this table, NAIC Class 1 is included in the "A" rating; Class 2, "BBB"; and Class 3, "BB"; and Classes 4-6, "B+ and below".
In general, prepayments on the underlying mortgage loans, and the securities backed by these loans, increase when the level of prevailing interest rates declines significantly below the interest rates on such loans. Mortgage-backed securities purchased at a discount to par will experience an increase in yield when the underlying mortgages prepay faster than expected. Those securities purchased at a premium that prepay faster than expected will incur a reduction in yield. When declines in interest rates occur, the proceeds from the prepayment of mortgage-backed securities are likely to be reinvested at lower rates than the Company was earning on the prepaid securities. As the level of prevailing interest rates increases, prepayments on mortgage-backed securities decrease as fewer underlying mortgages are refinanced. When this occurs, the average maturity and duration of the mortgage-backed securities increase, which decreases the yield on mortgage-backed securities purchased at a discount because the discount is realized as income at a slower rate and increases the yield on those purchased at a premium as a result of a decrease in annual amortization of the premium.
Pass-throughs and sequential and targeted amortization classes have similar prepayment variability. Pass-throughs have historically provided the best liquidity in the mortgage-backed securities market and provide the best price/performance ratio in a highly volatile interest rate environment. This type of security is also frequently used as collateral in the dollar roll market. Sequential
At December 31, 1996, the mortgage loan portfolio of the Company was diversified across 58 properties with an average loan size of approximately $1.0 million. Approximately 99 percent of the mortgage loan balance relates to commercial properties including retail, multifamily residential, office, industrial, nursing home, restaurant and other properties. Less than 1 percent of the mortgage loan balance was noncurrent at December 31, 1996. The Company had $.2 million in realized losses on mortgage loans during 1996. At December 31, 1996, the Company had a loan loss reserve of $.3 million.
Other invested assets include certain non-traditional investments, including investments in venture capital funds, limited partnerships and promissory notes.
As part of its investment strategy, the Company enters into reverse repurchase agreements and dollar roll transactions to increase its return on investments and improve its liquidity. Reverse repurchase agreements involve a sale of securities and an agreement to repurchase the same securities at a later date at an agreed upon price. Dollar rolls are similar to reverse repurchase agreements except that the repurchase involves securities that are only substantially the same as the securities sold. The Company enhances its investment yield by investing the proceeds from the sales in short-term securities pending the contractual repurchase of the securities at discounted prices in the forward market. The Company is able to engage in such transactions due to the market demand for mortgage-backed securities to form CMOs. Such investment borrowings averaged $81.4 million during 1996 and were collateralized by investment securities with fair values approximately equal to the loan value. The weighted average interest rate on short-term collateralized borrowings was 5.6 percent in 1996. The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. The Company's exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments (which was not material at December 31, 1996). The Company believes that the counterparties to its reverse repurchase and dollar roll agreements are financially responsible and that the counterparty risk is minimal.
Withdrawals and surrenders have increased in recent years due to: (i) the aging of the Company's annuity business in force resulting in an increased amount of deferred annuity liabilities that could be surrendered without penalty or with a nominal penalty; (ii) growth in the Company's annuity business resulting from the substantial volume of premium collections in 1993 through 1995; (iii) increased policyholder utilization of the systematic withdrawal features which first became available on annuity policies in 1992; and (iv) increased competition from alternative investments such as certificates of deposit, mutual funds and variable annuity products as a result of a flattened yield curve and declining interest rates.
The following table summarizes the Company's deferred annuity liabilities at December 31, 1996 and 1995, and sales for the years then ended, respectively, by surrender charge category.
Deferred annuity liabilities that could be surrendered without penalty increased from $508.8 million, or 14 percent of deferred annuity liabilities, at December 31, 1993 to $891.2 million, or 18 percent of deferred annuity liabilities, at December 31, 1996. The following table summarizes the Company's deferred annuity liabilities in which the surrender charge expires within the first subsequent year and the second subsequent year at December 31, 1994, 1995 and 1996.
Most of the Company's assets are invested in bonds and other securities, substantially all of which are readily marketable. Although there is no present need or intent to dispose of such investments, the Company could liquidate portions of its investments or use them to facilitate borrowings under reverse repurchase agreements if such a need arose. At December 31, 1996, the Company's portfolio of bonds, notes and redeemable preferred stocks had an aggregate net unrealized gain of $115.9 million.
The Company needs liquidity primarily to service its debt, pay dividends on its capital stock and pay operating expenses. The primary sources of funds for these payments are dividends on capital stock from subsidiaries, interest payments on surplus notes and net tax sharing payments received from American Life and Casualty.
Effective September 30, 1996, Conseco purchased 5,434,783 newly issued shares of ALH's common stock for $125.0 million. The proceeds from the issuance of the shares were used by ALH to make a $125.0 million capital contribution to the Company. The Company used the proceeds from the capital contribution to repay all amounts borrowed under its senior credit facility.
Statutory accounting practices prescribed or permitted for the Company's insurance subsidiaries differ in many respects from those governing the preparation of financial statements under GAAP. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts reported in the GAAP basis financial statements for comparable items. The Company's insurance subsidiaries follow certain permitted statutory accounting practices which are not specifically prescribed in state laws, regulations, general administrative rules or various NAIC publications. Such permitted practices do not enhance statutory surplus. Further, the Company's insurance subsidiaries do not have any reinsurance agreements generally known as "surplus relief reinsurance" which have the effect of increasing statutory surplus at inception and reducing statutory surplus in subsequent years as amounts are recaptured by reinsurers. Information as to statutory capital and surplus and statutory net income for the Company's insurance subsidiaries as of and for the years ended December 31, 1996 and 1995, is included in note 13 in the accompanying consolidated financial statements.
Management of American Life Holding Company is responsible for the reliability of the financial information in this annual report. The financial statements are prepared in accordance with generally accepted accounting principles and the other financial information in this annual report is consistent with that of the financial statements (except for such information described as being in accordance with regulatory or statutory accounting requirements).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Life Holding Company and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the three months ended December 31, 1996, the nine months ended September 30, 1996, the year ended December 31, 1995, and the three months ended December 31, 1994 and the consolidated results of operations and cash flows for the nine months ended September 30, 1994 of American Life Holding Company in conformity with generally accepted accounting principles.
The Company is an insurance holding company engaged primarily in the development, marketing, issuance and administration of annuity and life insurance products through its insurance subsidiaries, American Life and Casualty Insurance Company ("American Life and Casualty") and Vulcan Life Insurance Company ("Vulcan Life"). The Company markets its annuity and life insurance products primarily to middle-income individuals, ages 45 and over, through a general agency and insurance brokerage distribution system. The Company owns 100 percent of American Life and Casualty, which owns 98 percent of Vulcan Life.
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"), which, as to the subsidiary insurance companies, differ in some respects from statutory accounting practices followed in the preparation of financial statements submitted to state insurance departments. The financial statements prepared in conformity with GAAP include amounts based on informed estimates and judgment of management, with consideration given to materiality. Significant estimates and assumptions are utilized in the calculation of cost of policies produced, cost of policies purchased, goodwill, insurance liabilities, liabilities related to litigation, guaranty fund assessment accruals and deferred income taxes. Actual experience may differ from those estimates.
ALH contributed the proceeds from the issuance of the shares to the Company. The Company used the proceeds from the capital contribution to repay all amounts borrowed under its senior credit facility. As a result of the ALH Stock Purchase, the Company is an indirect wholly owned subsidiary of Conseco. Effective September 30, 1996, the Company adopted a new basis of accounting under the "push down" method effective September 30, 1996. Under this method, the assets and liabilities of the Company were revalued to reflect Conseco's cost basis, which is based on the fair values of such assets and liabilities on the dates Conseco's ownership interests were acquired. As a result, the assets and liabilities included in the December 31, 1996, consolidated balance sheet represent the following combination of values: (i) the portion of the Company's net assets acquired by Partnership II in the Acquisition is valued as of September 29, 1994; and (ii) the portion of the Company's net assets acquired in the ALH Stock Purchase is valued as of September 30, 1996.
The effect of the adoption of the new basis of accounting on the Company's balance sheet accounts was as follows (dollars in millions):
Trading account - fixed maturity securities are bought and held principally for the purpose of selling them in the near term. Trading account securities are carried at estimated fair value. Unrealized gains or losses are included in net investment gains (losses). The Company did not hold any trading account securities at December 31, 1996 or 1995.
Held to maturity - (all other fixed maturity securities) are those securities which the Company has the ability and positive intent to hold to maturity, and are carried at amortized cost. The Company may dispose of these securities if the credit quality of the issuer deteriorates, if regulatory requirements change or under other unforeseen circumstances. The Company has not held any securities in this classification since the Acquisition.
Anticipated returns, including investment gains and losses, from the investment of policyholder balances are considered in determining the amortization of the cost of policies purchased and the cost of policies produced. When actively managed fixed maturity securities are stated at fair value, an adjustment to the cost of policies purchased and the cost of policies produced may be necessary if a change in amortization would have been recorded if such securities had been sold at their fair value and the proceeds reinvested at current yields. Furthermore, if future yields expected to be earned on such securities decline, it may be necessary to increase certain insurance liabilities. Adjustments to such liabilities are required when their balances, in addition to future net cash flows (including investment income), are insufficient to cover future benefits and expenses.
Unrealized gains and losses and the related adjustments described above have no effect on earnings. The Company records them, net of tax, as a component of shareholder's equity. The following table summarizes the effect of these adjustments on the related balance sheet accounts as of December 31, 1996:
For transfers to the trading category - the unrealized gain or loss is recognized in earnings;
For transfers to actively managed from held to maturity - the unrealized gain or loss is recognized in shareholder's equity; and
Short-term investments include commercial paper, invested cash and other investments purchased with maturities less than three months and are carried at amortized cost, which approximates estimated fair value. The Company considers all short-term investments to be cash equivalents.
Other invested assets principally consist of debt instruments, which are generally recorded at amortized cost, and limited partnership investments, which are reported under the equity method.
Fees received and costs incurred in connection with origination of investments, principally mortgage loans, are deferred. Fees, costs, discounts and premiums are amortized as yield adjustments over the contractual life of the investments. Anticipated prepayments on mortgage-backed securities are taken into consideration in determining estimated future yields on such securities.
The specific identification method is used to account for the disposition of investments. The differences between sale proceeds and carrying values are reported as gains and losses on investments, or as adjustments to investment income if the proceeds are prepayments by issuers prior to maturity.
The cost of policies purchased represents the portion of the cost to acquire the Company that is attributable to the right to receive future cash flows from insurance contracts existing at the date of the Acquisition. The value of cost of policies purchased is the actuarially determined present value of the projected future cash flows from the insurance contracts existing at the Acquisition date.
o Identify the expected future cash flows from the blocks of business.
o Determine the value of the policies purchased by discounting the expected future cash flows by the discount rate the Company requires.
To the extent that past or future experience on purchased business varies from projections due to differences in renewal premiums collected, investment spread, investment gains or losses, mortality and morbidity costs and other factors, it may be necessary to adjust the amortization of the cost of policies purchased. For example, sales of fixed maturity investments that result in a gain (or loss), but also reduce (or increase) the future investment spread because the sale proceeds are reinvested at a lower (or higher) earnings rate, may cause amortization to increase (or decrease) reflecting the change in the incidence of cash flows. For universal life- type contracts and investment-type contracts, the accumulated amortization is adjusted (whether an increase or a decrease) whenever there is a material change in the estimated gross profits expected over the life of a block of business in order to maintain a constant relationship between cumulative amortization and the present value (discounted at the rate of interest that accrues to the policies) of expected gross profits. For most other contracts, the unamortized asset balance is reduced by a charge to income only when the present value of future cash flows, net of the policy liabilities, is not sufficient to cover such asset balance.
Costs of producing new business (primarily commissions, bonus interest and certain costs of policy issuance and underwriting, net of fees charged to the policy in excess of ultimate fees charged), which vary with and are primarily related to the production of new business, are deferred to the extent recoverable from future profits. Such costs are amortized with interest as follows:
o For universal life-type contracts and investment-type contracts, in relation to the present value of expected gross profits from these contracts, discounted using the interest rate credited to the policy.
o For immediate annuities with mortality risks, in relation to the present value of benefits to be paid.
o For traditional life insurance products, in relation to future anticipated premium revenue using the same assumptions that are used in calculating the insurance liabilities.
Recoverability of the unamortized balance of the cost of policies produced is evaluated regularly. Cumulative and future amortization of the cost of policies produced is adjusted, when there is a material change in estimated gross profits expected over the life of a block of business, consistent with the methods described above for the cost of policies purchased.
The excess of the cost of acquiring the Company's net assets over their estimated fair values is recorded as goodwill and is being amortized on the straight-line basis over a 40 year period. The Company periodically assesses the recoverability of goodwill through projections of future earnings of the related subsidiaries. Such assessment is made based on whether goodwill is fully recoverable from projected undiscounted net cash flows from earnings of the subsidiaries over the remaining amortization period. If future evaluations of goodwill indicate a material change in the factors supporting recoverability over the remaining amortization period, all or a portion of goodwill may need to be written off or the amortization period shortened (no such changes have occurred).
Accident and health insurance reserves are comprised of unearned premium reserves computed on a pro rata basis, return of premium reserves and the present value of amounts not yet due on long-term disability policies computed on the same basis as life insurance.
Income tax expense includes deferred income taxes arising from temporary differences between the financial statement and income tax reporting basis of assets and liabilities. Deferred income tax expense or benefit is based on the changes in the deferred income tax asset or liability from period to period. Additionally, the effect of a tax rate change on accumulated deferred income taxes is reflected in income in the period in which the change is enacted.
A charge is made against consolidated income representing the share of earnings of Vulcan Life attributable to its minority interest. Shareholder's equity attributable to the minority interest is shown separately on the consolidated balance sheet.
Securities segregated for the future redemption of redeemable preferred stock are reported at amortized cost. The Company has the positive intent and ability to hold these securities until maturity. See note 7 for a description of these securities and the redeemable preferred stock.
Investment securities: The estimated fair values for fixed maturity securities (including redeemable preferred stocks) and equity securities are based on quotes from independent pricing services, where available. For investment securities for which such quotes are not available, the estimated fair values are determined using values obtained from broker-dealer market makers or, by discounting expected future cash flows using current market interest rates applicable to the yield, credit quality and, for fixed maturity securities, the maturity of the investments.
Securities segregated for the future redemption of redeemable preferred stock: Estimated fair values of the U.S. Treasury securities held in escrow for the future redemption of redeemable preferred stock are based on quoted market prices.
Notes payable: The estimated fair value of variable rate notes payable approximates their par value. The estimated fair value of fixed rate notes payable is based on quoted market prices.
The following table sets forth the amortized cost and estimated fair value of fixed maturities at December 31, 1996, based upon the pricing source used to determine the estimated fair value:
The following table sets forth fixed maturity investments at December 31, 1996, classified by rating categories. The category assigned is the highest rating by a nationally recognized statistical rating organization or, as to $41.1 million fair value of fixed maturities not rated by such firms, the rating assigned by the National Association of Insurance Commissioners ("NAIC"). For the purposes of this table, NAIC Class 1 is included in the "A" rating; Class 2, "BBB-"; and Class 3, "BB-"; and Classes 4-6, "B+ and below."
The following table sets forth the amortized cost and estimated fair value of fixed maturity securities at December 31, 1996, by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because most mortgage-backed securities provide for periodic payments throughout their lives.
At December 31, 1996, net unrealized appreciation of equity securities (before income taxes) was $.7 million, consisting of $.7 million of gross appreciation and no depreciation.
The Company's mortgage loans are primarily commercial loans, including retail, multifamily residential, office, industrial, nursing home, restaurant and other properties. Approximately 19 percent, 12 percent, 12 percent, 10 percent and 9 percent of the mortgage loan balance was on properties located in Minnesota, Florida, Iowa, California and Arizona, respectively. No other state comprised greater than 8 percent of the mortgage loan balance. Less than 1 percent of the mortgage loan balance was noncurrent at December 31, 1996. The Company had a loan loss reserve of $.3 million at December 31, 1996.
Reinsurance contracts do not relieve the Company from its obligations to its policyholders. The Company remains contingently liable to its policyholders for the portion reinsured to the extent that the reinsuring companies do not meet their obligations assumed under the reinsurance agreements. At December 31, 1996, the total reinsurance receivable of $13.7 million, included $7.7 million from an insurance company that is not rated by A.M. Best Company, because (according to A.M. Best) it did not have sufficient operating history to evaluate its performance. No other balance from a single reinsurer exceeded $1.2 million. Ceded reinsurance premiums deducted from premiums and policy fund charges were $1.5 million, $7.5 million, $6.0 million, $1.2 million and $3.9 million for the three months ended December 31,1996, the nine months ended September 30, 1996, the year ended December 31, 1995, the three months ended December 31, 1994 and the nine months ended September 30, 1994, respectively.
The indenture governing the senior subordinated notes contains a waiver of any rights, claims or interests in the securities held in escrow for the benefit of the holders of the Company's redeemable preferred stock and contain certain covenants, which among other things: (i) require the maintenance of specified statutory capital and surplus, ratings, and financial and other ratios by the Company and its subsidiaries; (ii) limit the incurrence of additional indebtedness, the payment of dividends by the Company and its subsidiaries and investments in certain types of investments including non-investment grade securities and certain classes of collateralized mortgage obligations; and (iii) restrict transfers of funds from American Life and Casualty to the Company. In addition, the occurrence of a change of control (as defined) would accelerate the repayment of the Senior Credit Facility and senior subordinated notes at the holders' option.
Effective September 30, 1996, the Company repaid the $125.0 million principal balance outstanding under the Senior Credit Facility using the proceeds from a $125.0 million capital contribution received from ALH. As a result of the repayment, the Company recognized an extraordinary charge of $.8 million, net of an income tax benefit of $.5 million. In 1995, the Company recognized an extraordinary charge of $4.0 million (net of a $2.2 million income tax benefit) when the proceeds from the Senior Credit Facility were used to repay the existing term loan.
In August 1992, the Company issued 2.8 million shares of $2.16 Redeemable Cumulative Preferred Stock (the "$2.16 preferred shares") at a public offering price of $25 per share. A portion of the net proceeds were used to purchase $69.0 million face amount of zero coupon United States Treasury securities maturing in August 2007. These securities have been placed in an escrow account to be used for the future redemption of the $2.16 preferred shares on or before their mandatory redemption date in 2007.
The $2.16 preferred shares are entitled to annual cumulative cash dividends of $2.16 per share, payable quarterly. The Company may, at its option, redeem the $2.16 preferred shares in whole or in part, at any time after five years from date of issue initially at $26.25 per share and declining to $25.00 per share on or after September 30, 2000, plus cumulative unpaid dividends. The $2.16 preferred shares are mandatorily redeemable by the Company on September 30, 2007 at a redemption price of $25 per share, plus cumulative unpaid dividends. In liquidation, the $2.16 preferred stockholders are entitled to $25 per share (aggregate $69.0 million) plus cumulative unpaid dividends before any distributions shall be made to common shareholders.
The $2.16 preferred shares are non-voting except as required by the Delaware General Corporation Law and except that whenever cumulative dividends on the $2.16 preferred shares aggregating an amount equal to eight or more full quarterly dividends are in arrears, the authorized number of directors will be increased by two and the holders of the $2.16 preferred shares and the $2.32 preferred shares (if eligible to vote as discussed hereafter), voting as a single class, will have the right to elect two directors. The $2.16 preferred shares are not convertible.
The $2.32 preferred shares rank on parity with the other Series Preferred Stock shares with respect to dividends and distributions except that in the event of liquidation, they rank junior to the $2.16 preferred shares with respect to the distribution of assets held in the escrow account for the future redemption of the $2.16 preferred shares and on parity with the $2.16 preferred shares and senior to all other preferred stock of the Company now or hereafter existing with respect to the distribution of assets held in the separate escrow account for the future redemption of the $2.32 preferred shares.
The $2.32 preferred shares are non-voting except as required by the Delaware General Corporation Law and except, that, whenever cumulative dividends on the $2.32 preferred shares aggregating an amount equal to eight or more full quarterly dividends are in arrears, the authorized number of directors will be increased by two and the holders of the $2.32 preferred shares and the $2.16 preferred shares (if eligible to vote as discussed above), voting as a single class, will have the right to elect two directors. The $2.32 preferred shares are not convertible.
The Savings Bank Litigation seeks monetary damages from the government including recovery of: (i) the Company's investment in the Savings Bank of 143,640 shares of ALH's 1988 Series Preferred Stock and $8.4 million of cash; and (ii) compensation for costs incurred and the value of benefits conferred on the defendant through the plaintiffs' purchase, operation and management of the Savings Bank. Total restitution sought by the plaintiffs exceeds $30 million.
The Board of Directors has authorized the Company to issue 1,600,000 shares of common stock, par value $.01. There were 1,500,100 shares issued and outstanding for all periods presented in the consolidated financial statements. All of the outstanding common stock is owned by ALH. The Company paid a cash dividend of $153.0 million on its common stock to ALH in connection with the Acquisition.
See note 8 for a description of the Savings Bank Litigation.
ALH, Vulcan Life and certain of its independent agents have been named as defendants in litigation in the state of Alabama concerning life insurance products sold to school teachers in the late 1980's. The cases are: (i) Sentell, et al. v. Vulcan Life Insurance Company et al., filed in the Circuit Court for Pickens County, Alabama, on August 22, 1994; (ii) Rembert, et al. v. Vulcan Life Insurance Company et al., filed on June 29, 1995, and pending in the Circuit Court of Marengo County, Alabama; (iii) Baldwin et al. v. Vulcan Life Insurance Company et al., filed on July 6, 1995, and pending in the Circuit Court of Marengo County, Alabama; (iv) Thomas, et al., v. Charley, et al., filed in the Circuit Court of Wilcox County, Alabama on or about December 20, 1994; (v) Wheeler v. Vulcan Life Insurance Company, et al., filed in the Circuit Court in Lamar County, Alabama on May 18, 1995; and (vi) Pitts, et al. v. Vulcan Life Insurance Company et al., filed in June 1996 in the Circuit Court in Lamar County, Alabama (all cases are referred to herein as the "Vulcan Life Litigation"). The plaintiffs in the Vulcan Life Litigation allege, among other things, that the agent defendants misrepresented that the life products were part of an employee benefit plan and that such plan would pay the premiums for their policies although, under the Code, life insurance products may not be purchased through such a plan. The plaintiffs allege that they purchased the life insurance products because of such alleged misrepresentations. The plaintiffs have requested an award of compensatory and punitive damages of unspecified amounts. The defendants have denied any liability and have raised numerous defenses including the statute of limitations.
The six states with the largest shares of the subsidiaries' premiums collected in 1996 were California (11 percent), Florida (9.7 percent), Michigan (7.4 percent), New Jersey (7.0 percent), Illinois (6.2 percent) and Texas (5.5 percent). No other state accounted for more than 4 percent of total collected premiums.
Anticipated returns from the investment of policyholder balances are considered in determining the amortization of the cost of policies purchased and cost of policies produced. Sales of fixed maturity investments change the incidence of profits on such policies because investment gains (losses) are recognized currently and the expected future yields on the investment of policyholder balances are reduced (increased). Accordingly, amortization of the cost of policies produced and the cost of policies purchased was increased by $12.0 million, $4.8 million, $83.3 million and $2.8 million for the three months ended December 31, 1996, the nine months ended September 30, 1996, the year ended December 31, 1995, and the nine months ended September 30, 1994, respectively.
The net assets of the insurance subsidiaries available for transfer to stockholders are limited to the amounts by which the insurance subsidiaries' net assets, as determined in accordance with statutory accounting practices prescribed or permitted by state regulatory authorities, exceed minimum regulatory statutory capital and surplus requirements; however, payment of dividends or other distributions to stockholders may also be subject to prior approval by regulatory authorities. The Iowa laws require that the statutory surplus of American Life and Casualty following any dividend or distribution be reasonable in relation to its outstanding liabilities and adequate for its financial needs (as determined under standards contained therein). The Iowa Insurance Commissioner may bring an action to enjoin or rescind the payment of a dividend or distribution by an insurer domiciled in its state that would cause such insurer's statutory surplus to be unreasonable or inadequate under this standard. At December 31, 1996, $28.3 million was available
to be transferred to the Company from American Life and Casualty (based on amounts reported in accordance with statutory accounting practices) in the form of dividends, surplus note payments, loans or advances.