The Company's headquarters are located in Miami, Florida, where it owns approximately 55 acres of an office park with the following improvements: (i) a seven-story office building containing approximately 231,000 rentable square feet of office space, (ii) three six-story office buildings containing approximately 130,000 rentable square feet per building and (iii) five single-story buildings and two mid-rise buildings containing, in the aggregate, approximately 384,000 rentable square feet of office and warehouse space. The Company occupies the entire seven-story building, a portion of the space in one of the six-story buildings, and space in two of the single-story buildings.
On March 27, 1996, the Board of Directors of the Company authorized the sale of its Annuity Operations and the Western Diversified Group. As a result of this action, beginning in 1996, the Company has reported the results of operations of the Annuity Operations and Western Diversified Group as discontinued operations. The Consolidated Statements of Income for the years ended December 31, 1995 and 1994 have been restated to reflect the results of these operations as discontinued operations. Accordingly, the Statement of Income Data for the years ended December 31, 1995 and 1994 has also been restated.
On September 30, 1997, the Company sold all of the common stock of substantially all of the subsidiaries which comprise the Western Diversified Group (the principal subsidiaries of the Company that market credit life and disability and retail service warranty coverage) to Protective Life Insurance Company.
See Note 3 to the consolidated financial statements for a complete discussion of the impact of the adoption of new accounting pronouncements. During 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share", effective January 1, 1997. The Company has restated prior years' earnings per share data in accordance with this statement.
Operating loss from continuing operations decreased to $5.0 million, or $0.20 per common share, for the year ended December 31, 1996 from $18.7 million, or $0.74 per common share, for the year ended December 31, 1995. Included in the operating loss for the year ended December 31, 1995 is a pre-tax charge of $10.0 million for claims incurred in relation to the group product in 1994, as discussed below. In addition, the 1995 operating loss includes $26.2 million of pre-tax charges related to intangible asset write-offs, severance and other charges related to the Company's strategic evaluation of operations including additional losses related to a discontinued product in the stop-loss reinsurance product line. Excluding these charges and the 1996 charges discussed above, continuing operations decreased to an operating loss of $0.6 million, or $0.03 per common share, for the year ended December 31, 1996 from operating income of $4.8 million, or $0.19 per common share, for the year ended December 31, 1995. This decrease was primarily attributable to an increase in the group gross medical loss ratio to 76.3% in 1996 from 74.3% in 1995, excluding the $10.0 million charge relating to claims incurred in 1994, as discussed above, and a decrease in group gross earned premiums to $1,523.4 million in 1996 from $1,680.6 million in 1995. See further discussion below regarding these variances. These items were partially offset by a decrease in the group gross expense ratio to 24.5% for the year ended December 31, 1996 from 25.5% for the year ended December 31, 1995, excluding the charges discussed above.
The Company's continuing operations primarily consist of its group health business, its joint venture HMO and its stop-loss reinsurance business. The Company reports the results of operations of the Annuity Operations and the Western Diversified Group as discontinued operations.
In the first quarter of 1997, the Company decided to stop selling small group insurance plans in California, Maryland, and New Jersey and to terminate existing small group insurance plans in these states. In addition, the Company began the introduction of a new product in April 1997 and as of December 1997 is offering this product in 31 states which represents most of the states in which the Company expects to focus its marketing efforts. These various actions contributed to a 39.6% decrease in group covered lives to 544,000 at December 31, 1997 from 901,000 at December 31, 1996, which resulted in the decrease in group earned premium noted above. Partially offsetting this decrease was an 87.9% increase in gross premiums from the Company's HMO joint venture to $201.8 million in 1997 from $107.4 million in 1996.
Other income consists primarily of profit sharing provisions in accordance with a Group Reinsurance Agreement with London Life Insurance Company and Transamerica Occidental Life Insurance Company (the "Group Reinsurance Agreement"). See further discussion in "Liquidity and Capital Resources -- Reinsurance".
Commissions, as a percent of net premiums, were 7.1%, 7.5% and 7.9% for the years ended December 31, 1997, 1996 and 1995, respectively. These decreases were primarily due to the relative decrease in new group product sales, which incur a higher commission rate than renewals. In addition, the decrease has been affected by the increase in sales of the HMO product, which incur a lower commission rate than group products.
General expenses increased 2.2% to $251.6 million for the year ended December 31, 1997 from $246.1 million for the year ended December 31, 1996 and decreased 17.6% to $246.1 million for 1996 from $298.6 million for the year ended December 31, 1995. As a percentage of net premiums, general expenses were 28.2%, 24.0% and 28.4% for the years ended December 31, 1997, 1996 and 1995, respectively. During the year ended December 31, 1997, the Company restructured its operations in conjunction with the closing of the sales of the Annuity Operations and Western Diversified Group and anticipated reduced premium volume in its group operations. Accordingly, the Company reduced its workforce by approximately 1,000 employees or 36% during 1997. In addition, during the three months ended December 31, 1997, the Company recognized an impairment of intangible assets relating to operations to be disposed of and severance and other charges relating to further reductions in workforce resulting from the continued decrease in premium volume in the group operations. Accordingly, the Company incurred a total pre-tax charge to continuing operations of $35.0 million during 1997. During the years ended December 31, 1996 and 1995, the Company incurred pre-tax charges of $6.7 million and $20.4 million, respectively, related to its strategic evaluation of operations. Excluding these charges for all periods, general expenses decreased 9.5% to $216.6 million for the year ended December 31, 1997 from $239.4 million for the year ended December 31, 1996, which was a 13.9% decrease from $278.2 million for the year ended December 31, 1995. These decreases are primarily due to the reduction in workforce and other expense reductions which have been implemented during 1997 and 1996.
The Company's income tax provisions differ from the amounts determined by multiplying total income before income taxes by the statutory federal income tax rate of 35% primarily due to permanent differences including goodwill amortization, non-taxable investment income, non-deductible expenses, changes in tax valuation allowances and other items. During 1995, the Company increased its valuation allowance for the tax losses from NHP by $1.5 million, bringing the total for such valuation allowance to $3.7 million at December 31, 1995. During 1996, the Company determined that the valuation allowance was no longer necessary.
In January 1997, the Company announced that it would be focusing its marketing efforts and resources in those markets and states in which it believes it can best increase profitability and market share. In connection with this strategy, in the first quarter of 1997, the Company decided to stop selling small group insurance plans in California, Maryland and New Jersey and to terminate existing small group insurance plans in these states. The Company began the introduction of a new product in April 1997 and as of December 1997 is offering this product in 31 states which represents most of the states in which the Company expects to focus its marketing efforts. As the Company exits the states noted above and possibly other states, and until the new product is sold in sufficient quantities to exceed lapses of the existing inforce product, the Company may experience further reductions in group covered lives, and as a result, in gross premiums. If gross premiums decline at a faster rate than the Company is able to reduce general expenses, the group gross expense ratio could increase. It is also possible that the Company could experience an increase in the group medical loss ratio for existing business in additional exit states, if any.
have not already enacted all of the HIPAA group and small group standards may enact state reforms consistent with HIPAA. The final outcome of state amendments or new legislation, as well as federal regulations addressing these provisions, cannot be predicted.
The Company uses a variety of data processing hardware and software systems to process its business. Many of these systems utilize a two-digit field to identify a year, as has been standard in most data processing systems. A two-digit year field will not process correctly once a change in century occurs in the year 2000. The Company, in common with most organizations that use automated systems, must transition its systems to a four-digit year field by the year 2000 or arrange for other processing alternatives. In order to process certain calculations correctly, in some instances this transition must be completed by January 1, 1999. To date, the Company has identified certain existing systems that will be modified to be year 2000 compliant and modifications are currently being made to such systems. Certain other systems have been identified to be replaced and the Company is currently proceeding with replacing these systems. The Company is currently evaluating which other systems will be modified to be year 2000 compliant, and which systems will be the subject of other processing alternatives. However, if such modifications and conversions are not completed on a timely basis, the year 2000 problem may have a material impact on the operations of the Company. Further, even if the Company timely completes such modifications and conversions, there can be no assurance that the failure by vendors or other third parties to solve the year 2000 problem will not have a material impact on the operations of the Company. During 1997, the Company expended approximately $2.7 million related to the year 2000 project. The Company currently expects to incur between approximately $15.0 million and $20.0 million during 1998 and 1999 relating to the year 2000 project.
Principal sources of funds at the insurance company level are insurance premiums, contract charges earned, annuity considerations collected, net investment income received and proceeds from investments that have been sold, called or matured, or from loans that have been repaid. The principal uses of these funds are the payment of operating expenses, the payment of claims and benefits on insurance policies, the purchase of investments and the payment of indebtedness. Net cash provided by operating activities (reflecting principally (i) premiums and contract charges collected less claims and benefits on insurance products plus (ii) interest collected on invested assets less (iii) commissions and other general expenses paid, together with (iv) the inflows or outflows from the purchases or sales of trading account securities) was $5.0 million, $301.7 million and $383.0 million in 1997, 1996 and 1995, respectively. The net decrease in cash flows from operating activities from 1996 to 1997 was generally due to the sale of the Annuity Operations and the reduction in the volume of the group business, partially offset by decreased operating expenses.
activities was $161.8 million, $270.4 million and $155.4 million in 1997, 1996 and 1995, respectively. The Company purchased shares of common stock for aggregate purchase prices of $22.7 million and $3.2 million during 1997 and 1995, respectively. Deposits received from universal life and investment-type contracts were $81.7 million, $453.2 million and $886.3 million in 1997, 1996 and 1995, respectively. Payments to contract holders of these products consist of surrenders, partial withdrawals, death claims and annuitized benefits. Such payments for these same periods aggregated $184.7 million, $705.6 million and $666.7 million, respectively. During 1995, the Company paid $342.0 million pursuant to a reinsurance agreement to cede 90% of certain annuity contracts. The amount of cash and cash equivalents at December 31, 1997, 1996 and 1995 was $31.7 million, $167.5 million and $99.6 million, respectively.
During the year ended December 31, 1997, the Company sold sufficient available-for-sale securities, along with existing cash and cash equivalents, to aggregate $188.0 million, which was dividended by the insurance subsidiaries to the holding company. A portion of these funds were used to acquire shares of common stock, as discussed above. In the event that the sale of the Company does not occur, the remainder of this cash may be used to repurchase additional common stock, pay dividends, reduce debt, acquire blocks of business or for general corporate purposes, or for a combination of two or more of such uses.
The Annuity Operations historically represented a significant source of cash flows to the Company. Historically, the Annuity Operations were profitable, generating a positive cash flow from operations. As the annuity business grew, the considerations received historically exceeded the payments on these contracts, producing positive cash flows from financing activities. In 1996 and during 1997 prior to the sale of the Annuity Operations on March 31, 1997, surrenders or other payments exceeded receipts from these contracts, producing negative cash flows from financing activities. The operating cash flows and the financing cash flows from the Annuity Operations provided the funds for the majority of the investing activities of the Company. Now that the sale of the Annuity Operations is complete, the Company no longer has the positive cash flows from operations or negative cash flows from financing activities in connection with this business. The Company realized net positive cash flows from operations for the three months ended March 31, 1997 of $100.1 million, but experienced net negative cash flows from operations of $95.1 million for the nine months ended December 31, 1997. This decrease was primarily attributable to the sale of the Annuity Operations, a reduction in operating income and the timing of settlements of accruals previously established for severance and related charges. In addition, the majority of the net negative cash flows from financing activities of $161.8 million for the year ended December 31, 1997, which includes payments on investment contracts, will no longer be experienced. Future cash flows from investing activities will be reduced from historical levels as the Company's investment portfolio has been reduced from approximately $6.0 billion at December 31, 1996 to approximately $1.0 billion at December 31, 1997 following the sale of the Annuity Operations.
During 1997, the Company expended approximately $2.7 million for the Year 2000 project. The Company currently expects to incur between approximately $15.0 million and $20.0 million during 1998 and 1999 relating to the year 2000 project.
insurance business for a rolling 12-month period exceeds contractual amounts, the Company receives a reduced profit sharing payment.