This information should be read in conjunction with the historical consolidated financial statements of the Company and SCL and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The following selected financial data presented under the caption "Operating Data" and "Balance Sheet Data" for, and as at the end of, each of the years ended December 31, 1992 and 1993, were derived from the consolidated financial statements of SCL. Statutory data has been derived from the Annual Statements of SCL and LSL as filed with the insurance regulatory authorities.
On October 13, 1993, LNL formed the Company to serve as a holding company for SCL and its subsidiary LSL. On January 19, 1994, LNL effected a reorganization in which it contributed $10 million in capital and all of the outstanding shares of SCL to the Company in exchange for 8,500,000 shares of the Company's Common Stock and a Term Note in the principal amount of $65 million. On February 2, 1994, LNL sold 100% of the outstanding common stock of the Company in an IPO for $187 million. All of the proceeds of the IPO, net of related issuance expenses, were received by LNL. Also at this date, certain officers were granted 47,727 shares of stock subject to restrictions which lapsed upon repayment of the Term Note. On March 1, 1996, the Company repaid the Term Note utilizing proceeds from the public sale of $75 million of medium term notes with an effective interest rate of 7.39% due in 2003. On April 26, 1995, AHL, a wholly owned subsidiary of the Company, was incorporated as an insurance company in Bermuda. AHL commenced operations in 1996, reinsuring life insurance policies for an unaffiliated reinsurance company.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Insurance Fees - Insurance fees increased $11.4 million, or 9.1%, from $125.5 million in 1995 to $136.9 million in 1996, reflecting primarily an increase in the mortality and expense assessments for universal life products of $5.2 million and $4.9 million, respectively. The mortality and expense assessment increases resulted from (i) growth of in-force universal life business from $13.4 billion at December 31, 1995 to $14.1 billion at December 31, 1996 and (ii) aging of the in-force business resulting in higher average mortality charges.
Security-Connecticut Corporation ("Security-Connecticut" or the "Company") is an insurance holding company which owns 100% of the outstanding stock of Security-Connecticut Life Insurance Company ("SCL") and its wholly owned subsidiary Lincoln Security Life Insurance Company ("LSL"). The Company also owns 100% of Arrowhead Ltd. ("AHL"), an insurance company incorporated in Bermuda in 1995. The Company, through SCL and LSL, offers a diverse portfolio of individual life insurance and annuity products to customers throughout the 50 states, the District of Columbia and Guam. Included in the portfolio of products are universal life, interest sensitive whole life, term life, single premium deferred and immediate annuities, as well as a small amount of group life and accident and health insurance. Most of the Company's sales for 1996 were related to term, universal life and single premium deferred annuity products. The Company provides its products through a non-exclusive, independent general agency system. Within the independent agency system, the Company accesses three principal distribution channels: wholesale, retail and special markets that are geographically diverse. In January 1996, AHL began operating as a small reinsurance company reinsuring life insurance policies of an unaffiliated reinsurance company. AHL had assumed premiums of approximately $9.5 million, in 1996.
Revenue for universal life insurance policies consists of policy charges for the cost of insurance, administration, and surrenders that have been assessed against policy account balances during the period. Universal life revenue also includes policy initiation fees that are deferred and amortized in relation to the estimated future gross profits of the policies. Expenses for universal life insurance policies include interest credited to policy account balances and benefit claims incurred during the period in excess of policy account balances. Expenses for deferred annuities include interest credited to account balances. Premiums for traditional individual life policies and immediate annuities are recognized as revenue over the premium-paying period. All insurance related revenue and expenses are reported net of reinsurance ceded.
In the accompanying financial statements, amounts reported as premiums include premiums earned from traditional life, group life, health insurance and immediate annuities, net of related reinsurance amounts.
The Company invests in mortgage loans principally involving commercial real estate. At December 31, 1996, 43.2% of such mortgages ($55.5 million) involved properties located in California, Illinois, Massachusetts, Missouri, Pennsylvania and Texas. Such investments consist of first liens on completed income-producing properties. The maximum percentage of any one loan to its property value at the time of the loan is 75 percent. The Company is a participant in approximately $95 million of mortgage loans with LNL under which LNL has the right at any time on 10 days notice to purchase the Company's interest for the then-existing principal plus accrued interest.
With respect to policies issued by LSL, the maximum retention limit is as follows: (i) individuals up to age 70, $100,000; (ii) individuals age 70 and over, $50,000; (iii) Second-to-die, $100,000. Amounts exceeding the maximum retention limits are then ceded to SCL, which retains an additional $400,000 up to age 70, $200,000 age 70 and over, and $900,000 on second-to-die up to joint end age 70, $400,000 for joint end age 70 and over, before retroceding the remainder with automatic reinsurance pools.
The Company also adopted the Security-Connecticut Corporation Long-Term Incentive Plan ("LTIP") for management positions whose level of responsibility is such as to impact significantly on Company results. The participants are measured on the attainment of established target adjusted return on equity goals during a three year performance cycle. The participants' award percentage is determined by their level of responsibility. The awards are paid out 80% in SCC stock and 20% in cash. Each participant may elect to receive a greater portion of their award in stock. The total amount awarded for the 1994-1996 performance cycle was $0.7 million.
The Company sponsors unfunded, defined benefit plans that provide postretirement medical and life insurance benefits to full-time employees who work for the Company 10 years and have attained age 65. Medical benefits are also available to spouses and other dependents of employees. Limited contributions, which can be adjusted annually based on such items as years of service and retirement age are required from individuals. The life insurance benefits are noncontributory, although participants can elect supplemental contributory benefits.
The status of the postretirement medical and life insurance benefit plans and the amount recognized on the balance sheets was as follows:
SCL consolidated statutory-basis net income $ 21,391 $ 14,257 $ 9,951 ========= ========= =========
The complaint, seeking actual and punitive damages, alleges that SCL has a practice of misleading and/or misinforming policyholders on the basis of a policy rate class designation. Specifically, the plaintiff alleges that the "special non-smoker" designation leads policyholders to believe that they are being charged premiums based on a "superior" rate when the actual premiums are based on an "inferior, substandard or rated class."
Plaintiffs originally filed a class action complaint in November 1995, alleging breach of contract, fraud and violation of Connecticut's Unfair Trade Practices Act. Plaintiffs claimed that SCL improperly charged additional premiums to pay for the tax on DAC incurred by defendants LNL and the Company.
In November 1996, the plaintiffs filed a Request for Leave to Amend Complaint, alleging in the proposed Complaint that SCL misled purchasers about the cost of insurance and insurance rates and improperly increased premiums for factors other than changes in mortality. Plaintiffs now seek to assert a class action claim against SCL and SCC on behalf of "all persons . . . who purchased a life insurance policy from defendant Security-Connecticut Life Insurance Company and thereafter had their premiums increased," as well as on behalf of a sub-class of Connecticut policyholders under an Unfair Trade Practices count.