-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IG7ForWw0N/gfEPFWPWDqZ1HMg1QgYuQh4KcvvmPucuUiGHBzXDWfbvmHBqQRBC0 J08l7ZMaQhveEoSvzvTgZg== 0000950144-96-001424.txt : 19960402 0000950144-96-001424.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950144-96-001424 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HERITAGE LIFE INVESTMENT CORP CENTRAL INDEX KEY: 0000005172 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 591219710 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07255 FILM NUMBER: 96542362 BUSINESS ADDRESS: STREET 1: 1776 AMERICAN HERITAGE LIFE DRIVE STREET 2: AMERICAN HERITAGE LIFE BLDG CITY: JACKSONVILLE STATE: FL ZIP: 32224 BUSINESS PHONE: 9049921776 MAIL ADDRESS: STREET 1: 1776 AMERICAN HERITAGE LIFE DRIVE CITY: JACKSONVILLE STATE: FL ZIP: 32224 10-K 1 AMERICAN HERITAGE LIFE INVESTMENT CORPORATION 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [X] ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1995 Commission File No. 1-7255 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No fee required) For the transition period from ________ to ________ AMERICAN HERITAGE LIFE INVESTMENT CORPORATION (Exact name of registrant as specified in its charter)
Florida 59-1219710 - ------------------------------------------------------ ------------------------------------------------------- (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) American Heritage Life Building 1776 American Heritage Life Drive Jacksonville, Florida 32224 - ------------------------------------------------------- ------------------------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number - Area Code 904-992-1776 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Exchange - ------------------------------------------------------- ---------------------------------------------- Common Stock, Par Value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Title of Class ------------------ None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on February 29, 1996 was approximately $154,451,163. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at February 29, 1996 ----- -------------------------------- Common Stock, Par value $1.00 per share 13,833,786 Shares
DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated herein by reference:
Document Where Incorporated - ------------------------------------------------------- ---------------------------------------------- Annual report to shareholders for the year ended December 31, 1995 Part II Proxy statement dated March 22, 1996 Part III
2 TABLE OF CONTENTS
ITEM DESCRIPTION PAGE NO. NO. 1. BUSINESS 1 2. PROPERTIES 12 3. LEGAL PROCEEDINGS 12 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED 16 STOCKHOLDER MATTERS 6. SELECTED FINANCIAL DATA 16 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 16 CONDITION AND RESULTS OF OPERATIONS 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 16 ACCOUNTING AND FINANCIAL DISCLOSURE 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27 11. EXECUTIVE COMPENSATION 27 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 27 AND MANAGEMENT 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 28 SIGNATURES 29
3 PART I ITEM 1. BUSINESS American Heritage Life Investment Corporation, (the "Company"), a Florida corporation founded on September 27, 1968, is a holding company whose principal subsidiary is American Heritage Life Insurance Company ("AHL"), a Florida life insurance company. AHL was organized on September 11, 1956 and is presently authorized to do business as a life insurance company in all states, other than New York, and in the District of Columbia, U.S. Virgin Islands and Puerto Rico. The total number of employees of the Company at December 31, 1995 was 538. AHL is engaged in the business of underwriting life and accident and health insurance on an individual, credit and group basis. First Colonial Insurance Company, ("FCIC"), a Florida credit property insurance company and a wholly-owned subsidiary of AHL, was organized in 1987. Hereinafter, AHL and FCIC are sometimes referred to as the "Insurance Companies." The Company has reported increased operating earnings for 20 consecutive years and has increased dividends to shareholders for 26 consecutive years. In addition, the Company had more than $18.3 billion of gross life insurance volume in force, and $1.318 billion of assets at December 31, 1995. Management believes that these results were achieved by a combination of constantly monitoring the operations and focusing on expense control. Expense control and productivity are key ingredients in achieving the increased operating earnings. The Company's ratio of expenses to total revenues, including premium equivalents, (defined for this purpose as including premiums, premium equivalents and investment income and excluding realized investment gains and losses) has been recognized as being low based on industry averages. For the years ended December 31, 1991 through 1995, general insurance expenses as a percentage of total revenues, including premium equivalents, ranged from 6.2% to 4.9%. For the years ended December 31, 1991 through 1995, operating earnings per employee for each such year increased from $30,342 to $44,932. There can be no assurance that the Company will continue to experience this level of growth in the future. 1 4 MARKETING AREAS The Company has three primary marketing areas: ordinary, group and credit. The following table sets forth the insurance revenues, insurance revenues and premium equivalents and pre-tax operating earnings of the three marketing areas for each of the years in the five year period ended December 31, 1995.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (in thousands) Insurance revenues (1): Ordinary Life $ 40,173 38,405 37,000 35,753 33,308 Accident and health 83,545 75,588 71,975 65,464 53,609 --------- ------- ------- ------- ------- Total ordinary 123,718 113,993 108,975 101,217 86,917 -------- ------- ------- ------- ------- Group Life 8,604 7,719 10,350 10,832 13,865 Accident and health 31,321 35,503 42,473 48,325 59,120 -------- ------- ------- ------- ------- Total group 39,925 43,222 52,823 59,157 72,985 -------- ------- ------- ------- ------- Credit Life 35,380 29,516 29,183 25,053 19,554 Accident and health 48,228 43,858 36,395 26,635 16,415 --------- ------- ------- ------- ------- Total credit 83,608 73,374 65,578 51,688 35,969 --------- ------- ------- ------- ------- Total $ 247,251 230,589 227,376 212,062 195,871 ========= ======= ======= ======= ======= Insurance revenues and premium equivalents (1): Ordinary $ 167,328 161,612 149,106 138,241 148,414 Group 206,354 167,520 158,188 163,701 177,187 Credit 138,134 116,318 103,113 93,027 73,811 --------- ------- ------- ------- ------- Total $ 511,816 445,450 410,407 394,939 399,412 ========= ======= ======= ======= ======= Pre-tax operating earnings: Ordinary $ 28,935 26,049 21,798 17,322 15,826 Group 7,470 7,323 6,042 5,269 4,528 Credit 2,739 1,754 1,720 2,969 2,848 --------- ------- ------- ------- ------- Total $ 39,144 35,126 29,560 25,560 23,202 ========= ======= ======= ======= =======
- ------------------------ (1) Insurance revenues include only the fees charged for interest-sensitive and administrative services only business and do not include group and credit premium equivalents and cash deposits from interest-sensitive products. Thus it is necessary to evaluate insurance revenues including premium equivalents. Ordinary insurance revenues for reporting purposes pursuant to generally accepted accounting principles include only the cost of insurance, expense and surrender charges for interest-sensitive products. Revenues do not include cash deposits from interest-sensitive products. Group and credit insurance revenues do not include premium equivalents for the periods presented. Group premium equivalents represent the claim costs paid for minimum premium and self funded type plans which are paid with policyholder funds as opposed to being paid by the Company. Under indemnity type plans offered by the Company, claims are considered in determining the premiums to be paid by the policyholder. For self funded or split funded type plans, the Company pays the claim costs with policyholder funds and such amounts are not included in the premiums paid to the Company. Credit premium equivalents represent the claim costs paid on administrative services only business. 2 5 ORDINARY DEPARTMENT GENERAL. Ordinary operations provide interest-sensitive products (universal life, single and flexible premium deferred annuities and excess-interest whole life), single premium immediate annuities, level and decreasing term products and supplemental accident and health insurance products to individuals. The largest portion (77.7% for the year ended December 31, 1995) of new annualized sales was produced on a payroll allotment basis with the remainder produced by a variety of direct billing methods through individual agents. AHL's strategy in its ordinary operations is to offer a broader product mix than its competitors in the payroll allotment area and to solicit all of the employee base by targeting direct sales of insurance products to higher income employees in addition to payroll allotment sales. Although the Company knows of no independent study of the types of insurance products offered in the industry, AHL believes it is one of the few life insurance companies in the United States to offer a broad range of both life and accident and health insurance products on a payroll allotment basis. Distribution by payroll allotment requires a sophisticated data processing capability which the Company has developed over the years. The Company believes it has sufficient data processing capacity to accommodate future growth for the foreseeable future without any significant additional capital expenditures. BACKGROUND. The Ordinary Department has been a key component of the strategy and profit-making ability of AHL since its founding. For the year ended December 31, 1995, the Ordinary Department accounted for approximately 74% of the Company's pre-tax operating earnings, which excludes non-operating items not allocated to the marketing areas. Initially, ordinary operations consisted only of life insurance products. In the mid-1970's, ordinary health insurance products were introduced into the product portfolio in response to the Company's increasing sales opportunities and successes in the payroll allotment market niche. More recently, AHL has begun to target a complementary market to its payroll allotment marketing efforts. This market was developed in response to the personal life insurance needs of the owners, executives, officers, and managers of its payroll allotment client companies. AHL has broadened its strategic marketing mission to include this adjunct market niche in addition to the more traditional "rank and file worker" market addressed by the other payroll allotment marketing life insurance companies. As part of its focus, AHL also redirected its upscale sales efforts from the more traditional "kitchen table approach" to a strategy of making those upscale sales at the workplace. To describe its differentiation in the marketplace, AHL has coined a descriptive phrase: "AHL--The Workplace Marketer(R) -- The Company that serves the life and health insurance needs of the American Worker--from the lunchroom to the board room." MARKETS. Many ordinary life insurance companies focus on the upscale market consisting of those individuals earning $80,000 or more. However, this target market constitutes a small percentage of the buyer population. By targeting the entire workplace, including the lower income worker earning under $40,000 per year and the middle income worker earning $40,000-$80,000 per year, AHL has increased its market to a majority of the buyer population. Furthermore, AHL offers a multiple product line of life and supplemental health products, rather than the more narrow product mix offered by some other companies, thereby increasing its marketing opportunities. AHL believes that by targeting a much larger market and offering the workplace market a full range of life and supplemental health products results in a stronger marketing strategy. 3 6 PRODUCTS. AHL's strategy is to price its products at levels competitive with those of comparable products in the market, so long as they will provide an acceptable profit margin. Set forth below are the primary products offered: PAYROLL ALLOTMENT PRODUCTS: UPSCALE PRODUCTS: Universal Life Universal Life Interest-Sensitive Whole Life Excess Interest Whole Life Term Life Term Life Annuities Annuities Cancer/Dread Disease Accident Disability Income Hospital Indemnity including a Supplemental Health Options Plan
It is the general policy of AHL to declare the interest rate to be credited on funds received from interest-sensitive products monthly with such rates being guaranteed for one year for both first year and renewal funds during a particular month. All interest-sensitive products are subject to surrender charge provisions which vary depending upon the particular type of policy. For universal life-type policies, the surrender charges generally range over a period of 10-20 years at varying rates, depending upon the plan of insurance. For annuities, the surrender charges generally range over a period of 7-10 years with charges varying from 1% to 10% of the accumulated fund value over the surrender charge period. All ordinary accident and health products are guaranteed renewable, with periodic rate increases permitted due to adverse claims experience with the approval of the respective state insurance department. Major health products include specified disease (e.g., cancer, heart/stroke), accident, disability income, long-term care and hospital income. Premiums on ordinary policies are payable on a monthly, quarterly, semi-annual, annual, single or flexible premium basis. AHL's current practice dictates that unless the need for a medical examination is indicated by the age and amount applied for or by an investigation, the majority of ordinary life insurance is written without requiring a medical examination in amounts up to $250,000 on applicants aged 0-35; up to $150,000 on applicants aged 36-40; up to $99,999 on applicants aged 41-50; up to $49,999 on applicants up to age 60. Somewhat higher limits are permitted for certain agents with home office approval. A blood chemistry profile is generally required for insurance amounts of $100,000 and greater. DISTRIBUTION SYSTEM. AHL's products are marketed through the personal producing general agent ("PPGA") system in 49 states. AHL has found the PPGA system to be an efficient distribution system. These agents are not exclusively AHL producers but may write business for several insurance companies. Each PPGA's compensation is based only upon production. Although the Company knows of no independent study of cost of sales in the ordinary insurance industry, AHL believes that it has an efficient employee-based field support network and that its cost of sales is relatively low by industry standards. AHL has 10 regional directors, 11 regional office coordinators and 17 regional sales managers located throughout the continental United States, recruiting, training, licensing, serving, and motivating AHL's over 6,800 agents. The home office agency department is comprised of a staff of 23 people, including a senior vice president and four marketing vice presidents. 4 7 GROUP DEPARTMENT MARKETS. Although AHL's Group Department currently operates in 15 states, it has clients of national scope. AHL's primary market for group life and health insurance is corporate employers who have more than 100 employees located in the southeast. Employer groups range in size from 100 to over 40,000 employees. The Company targets employers with 500 to 5,000 employees. AHL has focused on an integrated approach to manage benefits. With health care being a locally delivered product, it is important to establish close relations with providers and client companies. AHL furnishes all components necessary to effectively manage program costs including a provider network, managed care program and benefits adjudication. PRODUCTS. AHL's group products include group term life insurance, accidental death and dismemberment, short-term disability, long-term disability, dental, and major medical coverage. A wide range of funding vehicles, including fully insured, split funding and self-funded products, are sold within these product lines. For the years ended December 31, 1995 and 1994, approximately 81% and 74%, respectively, of group business (based on premiums and premiums equivalents) was written on a self-funded or split funded basis. DISTRIBUTION SYSTEM. AHL's group life and health products are distributed through its regional group managers working with agents, consultants, brokers and directly with policyholders. As health care has consumed a greater portion of employers' operating costs, responsibility for managing the programs has shifted from the personnel function to the financial function. Often this is accomplished without the assistance of an agent on an ongoing basis. Accordingly, AHL works with large corporations on a direct basis and with those brokers who have clients in the marketplace. AHL's strategy of focusing its marketing efforts on the brokerage and consulting community resulted in a significant portion of sales coming from this important business segment. AHL has been successful in demonstrating the value of its products and services to leading brokerage firms. ADMINISTRATIVE SERVICES ONLY VERSUS RETAINED BUSINESS. AHL's group business has responded to the market by offering more products which allow employers to share more of the risk for the financing of their health benefit programs. There has been a shift in AHL's block of business from traditionally funded products to split funded products and administrative services only products which may be purchased with or without specific and aggregate stop-loss coverage. The impact of this in the financial statement presentation has been a reduction in traditional premium levels offset by an increase in premium equivalents. MARKET NICHE. AHL's target market will continue to be corporate employers with 100 or more lives. Particular emphasis will be placed on direct marketing to those employers having a home office or regional presence within the southeastern United States employing between 500 and 5,000 employees. The products offered by AHL's Group Department complement the individual life and health products sold on a payroll deduction basis and provide AHL agents and brokers and AHL's client companies with a complete portfolio of products and services. MARKETING PLANS AHL will continue to develop products and services to meet employer/employee needs. As managed care has gained growing acceptance within AHL's market, AHL has decided to complement its product line with the introduction of HMO products. Development is underway. 5 8 CREDIT DEPARTMENT MARKETS AND PRODUCTS. AHL is a full service credit insurance operation (credit life and credit accident and health insurance) providing direct and reinsured programs to a broad spectrum of the marketplace. In addition, credit related property insurance coverage through its wholly-owned subsidiary, FCIC, is offered. AHL has expanded its credit insurance marketing activities to include 34 of the 50 states. Credit operations consist of life and accident and health insurance coverages offered to consumer debtors, chiefly through banks, automobiles dealers, finance companies and retailers. Typically, this insurance will pay outstanding loan obligations in the event of an insured loss. This coverage is issued on either the single-premium or outstanding loan balance basis. Credit life is sold on a reducing or level-term basis and is available on a single-life or, if permitted by state law, on a joint-life basis where the related loan is co-signed. Credit accident and health insurance will normally only be written in conjunction with credit life insurance. The maximum term is generally 10 years for credit life insurance and five to six years for credit accident and health insurance. The maximum issue age for credit life and credit accident and health insurance is 71 and 66, respectively. All of the foregoing terms and limits are subject to statutory requirements which may vary in individual states from those specified above. FCIC's products are designed to address the additional needs of the clients of the Credit Department. Collateral protection coverage is marketed to financial institutions and installment floater and vendor's single interest coverage are marketed to consumer finance companies and retail dealers. In addition, unemployment insurance is offered where permitted. FCIC is currently licensed in 12 states. The credit insurance industry is well established and is closely controlled by state regulation. Competition is still very strong even though there has been some retrenchment in the industry. Several companies have restricted their marketing and several major providers have withdrawn completely from the marketplace, which management believes has provided significant opportunities for both new account sales and the administration of runoff business for companies that have ceased writing credit insurance. DISTRIBUTION SYSTEM. The distribution channels used by AHL and FCIC include direct marketing by regional sales managers and the general agency system. Additionally, FCIC has an assistant vice president for its credit property insurance who works with and through the regional sales managers. AHL and FCIC do not employ direct mail or other mass solicitation- type marketing. 6 9 INVESTMENTS The Company's investment objective is to earn a favorable return on invested assets in excess of contractual obligations through a diversified portfolio of high-quality, income-producing assets including primarily bonds, preferred stocks, common stocks and to some extent mortgages (residential and commercial). Our current investment strategy includes increasing our investments in corporate bonds and mortgage loans while decreasing our investments in GNMA's on a gradual basis. AHL carefully matches the investment portfolio's assets with its policy liabilities. A positive investment spread has been attained for all products. The maturity of the investment portfolio is monitored so that the Company will be able to fund its future expected cash obligations. At December 31, 1995 and December 31, 1994, the Company had consolidated invested assets of $979,602,947 and $845,729,426, respectively. The following tabulation sets forth the categories, amounts and percentages of these investments.
% OF % OF DECEMBER 31, 1995 TOTAL DECEMBER 31, 1994 TOTAL ----------------- ------- ----------------- ------ Debt securities available-for-sale $515,428,786 52.6% $412,746,726 48.8% Equity securities available-for-sale 34,734,980 3.6 52,476,038 6.2 Mortgage loans on real estate 29,506,184 3.0 20,625,877 2.5 Investment real estate 375,204 - 1,022,985 .1 Policy loans 376,672,196 38.5 351,160,060 41.5 Short-term investments 22,885,597 2.3 7,697,740 .9 ------------ ----- ------------ ----- Total $979,602,947 100.0% $845,729,426 100.0% ============ ===== ============ =====
At December 31, 1995, the Company had consolidated debt securities available-for-sale at an amortized cost of $493,813,866 and a fair value of $515,428,786. The following tabulation sets forth these investments by Standard and Poor's rating categories.
DECEMBER 31, 1995 DECEMBER 31, 1995 AMORTIZED FAIR RATING COST VALUE ------------------------------- ---------------------- ---------------------- AAA $214,395,411 $215,707,562 AA 17,530,900 17,991,300 A,A- 76,580,054 82,353,400 BBB+, BBB, BBB- 117,680,946 126,089,188 BB+ and lower 29,139,831 32,817,380 Non-rated 1,884,944 1,832,600 Private placements 7,841,820 9,969,357 ------------- ------------ Total bonds 465,053,906 486,760,787 Redeemable preferred stocks 28,759,960 28,667,999 ------------- ------------ Total debt securities available-for-sale $ 493,813,866 $515,428,786 ============= ============
7 10 The amortized cost and estimated fair value of debt securities at December 31, 1995, by contractual maturity, were as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without penalties.
DECEMBER 31, 1995 ---------------------------------------- ESTIMATED AMORTIZED FAIR COST VALUE -------------- -------------- Due in one year or less $ 5,616,792 $ 5,729,284 Due after one year through five years 7,610,743 8,433,999 Due after five years through ten years 135,888,071 146,812,594 Due after ten years 119,447,770 129,429,412 GNMA's 196,490,530 196,355,498 Redeemable preferred stocks 28,759,960 28,667,999 ------------ ------------ Total $493,813,866 $515,428,786 ============ ============
The following tabulation provides information with respect to the investment results of the Company for the years ended December 31, 1995, 1994 and 1993:
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1995 1994 1993 ---------- ---------- ---------- ($ in thousands) Average invested assets, weighted (1) $923,946 $848,012 $800,974 Net investment income 70,601 66,706 63,875 Realized investment gains 6,003 2,011 1,184 Change in unrealized investment gains (losses) on equity and debt securities (2) 27,664 (24,919) (11,263) Ratio of net investment income to weighted average invested assets (3) 7.64% 7.87% 7.97%
- -------------------- (1) Average invested assets for 1995 and 1994 are calculated using fair values for all securities as required by Financial Accounting Standard No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In 1993 equity securities were carried at fair value and debt securities were carried at cost. (2) The change in unrealized investment gains (losses) includes gains and losses on equity securities only in 1993. In 1995 and 1994, unrealized gains and losses are calculated on both equity and debt securities as prescribed by FAS 115. (3) Since equity securities are carried at fair values for all years presented, and debt securities are reported at fair value for 1995 and 1994, all increases (decreases) in fair value result in a reduction (increase) of the ratio calculated above. At December 31, 1995, U.S. Treasury obligations and GNMA's, both of which are secured by the full faith and credit of the United States Government, aggregated at fair value $203,177,693 or 40.0% of the total bond portfolio of $508,285,787 (including short-term bonds of $21,525,000). The amortized cost 8 11 of non-investment grade bonds (rated below BBB- by Standard & Poor's Corporation and excluding private placements and non-rated securities) at December 31, 1995 was $30,152,831 with a fair value of $32,817,380. At fair value, these investments represented 2.5% of total consolidated assets, or 3.4% of invested assets. The Company's holdings of non- investment grade paper has been limited and will continue to be minimal in the future. The Company's mortgage loan portfolio aggregated $29,506,184 at December 31, 1995. There were no non-performing mortgage loans at December 31, 1995. The Company holds no collateralized mortgage obligations or derivative securities. ADDITIONAL INFORMATION REGARDING INSURANCE OPERATIONS The following table sets forth the cash premiums and deposits received (in thousands) by geographic region in the United States for the Insurance Companies for the three years ended December 31, 1995:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1995 1994 1993 -------- -------- -------- Southeast $258,408 $252,531 $225,220 Southwest 43,804 41,863 45,478 Midwest 14,185 13,007 17,704 Northeast 8,220 6,934 9,897 Northwest 12,523 8,586 5,300 -------- -------- -------- Total $337,140 $322,921 $303,599 ======== ======== ========
The following tabulation sets forth the amount of gross life insurance volume in force by industry segment at December 31, 1995, 1994, and 1993:
AT DECEMBER 31, ------------------------------------------------------ TYPE OF INSURANCE 1995 1994 1993 ------------------------------ ---------- ---------- ---------- ($ in millions) Gross life insurance volume in force: Ordinary $ 9,167 $ 8,282 $ 7,727 Credit 4,138 3,578 2,972 Group 5,079 4,956 4,902 ------- ------- ------- Total $18,384 $16,816 $15,601 ======= ======= =======
REINSURANCE It is the general practice of the life insurance industry to reinsure portions of life and accident and health insurance risks with other companies. The maximum amount of ordinary insurance which AHL generally retains on any one life currently insured under ordinary policies is $100,000 for policies issued prior to July 1, 1994 and $200,000 for policies issued subsequent to July 1, 1994, with reductions for certain substandard, military and older age risks. The major portion of reinsurance ceded on a GAAP basis is under agreements with American United Life Insurance Company, Barnett Banks Insurance, Inc., General Financial Life Insurance Company, Life Reassurance Corporation, Lincoln National Life Insurance Company, Reassurance Company of Hanover, Reinsurance Group of America, Inc., Southwestern Dealers Insurance Company and Transamerica Occidental Life Insurance Company. At December 31, 1995, the 9 12 aggregate amount of life insurance volume in force ceded under reinsurance agreements totaled $3,836,741,000 (20.9% of the total in force at that date). For the year ended December 31, 1995, $41,507,117, or 20.3% of the total accident and health insurance premiums written, were reinsured. Pursuant to GAAP and the terms and conditions of the reinsurance agreements with the reinsurers which provide for an effective transfer of risk to the reinsurer, the Company has taken credit in its consolidated financial statements for the portion ceded to the respective reinsurer. Management reviews the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. All receivables due from the reinsurers have been settled in a timely manner. GOVERNMENT REGULATION The Company and its insurance subsidiaries are subject to regulation and supervision by the states in which the insurance subsidiaries transact business. The laws of the various states establish regulatory agencies with broad administrative powers to grant and revoke licenses to transact business, regulate rates on certain business prior to use, establish reserve requirements, determine the form and content of required statutory financial statements, determine the reasonableness and adequacy of statutory capital and surplus and prescribe the types of permitted investments and the maximum concentrations of certain classes of investments. As part of their routine regulatory oversight process, approximately once every three years state insurance departments conduct periodic detailed examinations of the books, records and accounts of insurance companies domiciled in their states. Further, insurance companies are subject to market conduct examinations by state insurance regulators. Such examinations are not conducted according to any fixed schedule. Insurance companies are required to file detailed annual and quarterly statements with the state insurance regulators in each of the states in which they do business, and their business and accounts are subject to examination by such agencies at any time. State insurance receivership laws, rather than federal bankruptcy laws, govern the liquidation or rehabilitation of insurance companies. This insurance regulation and supervision is designed primarily to ensure the financial stability of insurance companies and to protect policyholders rather than shareholders or general creditors. FINANCIAL REGULATION The Risk-Based Capital for Life and/or Health Insurers Model Act (the "Model Act") was adopted by the National Association of Insurance Commissioners ("NAIC") in 1992. A similar model act was adopted for property and casualty insurance companies in 1994. The main purpose of these model acts is to provide a tool for insurance regulators to evaluate the capital of insurers with respect to the risks assumed by them and determine whether there is a need for possible corrective action. These model acts provide for four different levels of regulatory action, each of which may be triggered if an insurer's Total Adjusted Capital is less than a corresponding "level" of Risk Based Capital ("RBC"). A modified phase-in test is triggered if an insurer's Total Adjusted Capital is less than 200% of its "Authorized Control Level RBC" (as defined in the Model Act), or less than 250% of its Authorized Control Level RBC and the insurer has a negative trend ("the Company Action Level"). At the Company Action Level, the insurer must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. The "Regulatory Action Level" is triggered if an insurer's Total Adjusted Capital is less than 150% of its Authorized Control Level RBC. At the 10 13 Regulatory Action Level, the regulatory authority will perform a special examination of the insurer and issue an order specifying corrective actions that must be followed. The "Authorized Control Level" is triggered if an insurer's Total Adjusted Capital is less than 100% of its Authorized Control Level RBC, and at that level the regulatory authority is authorized (although not mandated) to take regulatory control of the insurer. The "Mandatory Control Level" is triggered if an insurer's Total Adjusted Capital is less than 70% of its Authorized Control Level RBC, and at that level the regulatory authority must take regulatory control of the insurer. Regulatory control may lead to rehabilitation or liquidation of an insurer. Based on calculations using the NAIC formula as of December 31, 1995, AHL and FCIC exceeded the required level for RBC at such time. DIVIDEND REGULATION The Company is a legal entity separate and distinct from its subsidiaries. As a holding company with no other significant business operations, its primary sources of cash to meet its obligations are borrowings, dividends and other payments from its insurance subsidiaries. The Company's insurance subsidiaries are subject to various regulatory restrictions on the maximum amount of payments, including dividends and other distributions, that they may make to the Company without obtaining prior regulatory approval. As a Florida domiciled insurance company, AHL is subject to Florida law, effective June 8, 1993, to the effect that life and health insurance company dividends may be made without prior Florida Insurance Commissioner's approval if the dividend is equal to or less than the greater of: (a) 10% of AHL's surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains; or (b) AHL's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, 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. If insurance regulators determine that payment of a dividend or any other payment to an affiliate (such as a payment under a tax allocation agreement or for employee or other services or pursuant to a surplus debenture) would, because of the financial condition of the paying insurance company or otherwise, be hazardous to such insurance company's policyholders or creditors or to certain other parties, the regulators may block payment of such dividends or such other payment to the affiliates that would otherwise be permitted without prior approval. CHANGE OF CONTROL REGULATION The states in which the Company's insurance subsidiaries are domiciled have enacted legislation or adopted administrative regulations affecting the acquisition of control of insurance companies as well as transactions between insurance companies and persons controlling them. Most states require administrative approval of the acquisition of control of an insurance company incorporated in the state or the acquisition of control of an insurance holding company whose insurance subsidiary is incorporated in the state. In Florida, the acquisition of 5% of such shares is generally deemed to be the acquisition of "control" for the purpose of the holding company statutes and requires not only filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. 11 14 COMPETITION The life insurance industry is highly competitive. The competitors of the Company consist of both stock and mutual companies, and in many instances they have been in business for longer periods of time and may have greater financial resources than the Company. However, management of the Company believes that its policies are generally competitive with similar types of policies being offered by other insurers doing business in the jurisdictions in which they operate. In addition to the more than 1,800 life insurance companies which are competitors of the Company, there are banks and other financial institutions that could be permitted to sell life insurance products directly, thereby increasing competition even more. However, there are a number of unresolved regulatory issues related to the authority of banks located in the Company's major marketing areas to compete directly with the Company in the sale of life insurance products, including interest-sensitive products. OTHER BUSINESS The non-life insurance operations, excluding AHLIC, consisted primarily of intercompany operations which are eliminated in consolidation and accordingly did not contribute materially to consolidated operating earnings. ITEM 2. PROPERTIES AHL and its subsidiaries own 29.77 acres in a suburban area of Jacksonville, Florida, upon which it completed construction in August, 1994 of an eight story home office building containing approximately 140,000 square feet and a two story annex building of approximately 20,000 square feet. AHL and its affiliates relocated to this new home office building effective August 29, 1994. AHL also owns a 92 space parking lot in downtown Jacksonville, Florida and one parcel of vacant land located in suburban Jacksonville, consisting of approximately 32 acres. ITEM 3. LEGAL PROCEEDINGS AHL, like other insurance companies, is currently a defendant in lawsuits that involve claims for punitive, exemplary or other extra contractual damages, which are for amounts substantially in excess of the actual damages sought. Management considers such litigation regrettably to be of the type to which insurance companies are usually and customarily subjected in the ordinary course of business and to date the settlements of such claims of this nature have not been material to the financial position of the Company. In the opinion of management, based on the currently ascertained facts of the pending litigation, which the Company intends to vigorously defend, the ultimate resolution of such litigation should not be material to the financial position of the Company. 12 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1995. EXECUTIVE OFFICERS OF REGISTRANT The following tabulation is a list of the names and ages as well as the position held for the past five years by each executive officer of the Company and certain executive officers of AHL, none of whom is related to each other either by blood or marriage.
NAME AGE POSITION ---- --- -------- T. O'Neal Douglas 60 Chairman of the Board, President and Chief Executive Officer (a) Chairman and Chief Executive Officer (b) Chris A. Verlander 48 Executive Vice President (a) President (b) C. Richard Morehead 49 Executive Vice-President, Treasurer and Chief Financial Officer (a) (b) Chief Accounting Officer (a) Charles C. Baggs 45 Senior Vice-President, Administration (b) James H. Baum 44 Senior Vice-President Group Department (b) David A. Bird 39 Senior Vice-President Agency Department (b) W. Michael Heekin 43 Senior Vice-President, General Counsel and Corporate Secretary (a) (b) Elizabeth A. Mahin 35 Senior Vice-President and Chief Accounting Officer (b) William J Thomas 51 Senior Vice-President Credit Department (b) Curtiss S. Sheldon 54 Senior Vice-President and Chief Actuary (b) (a) AHLIC (b) AHL
Mr. Douglas' principal positions are those of: Chairman of the Board of Directors of the Company, a position he has held since April, 1994; President and Chief Executive Officer of the Company, a position he has held since February, 1990; Director of the Company, a position he has held since July, 1987; Director of AHL, a position he has held since January, 1984; Chief Executive Officer of AHL, a position he has held since February, 1990; and Chairman of AHL, a position he has held since April, 1994. From July, 1986 to April, 1994 he was President of AHL. From July, 1986 to February, 1990, he was Executive Vice President of the Company. From April, 1985 to July, 1986 he was Executive Vice President of AHL. From December, 1983 to April, 1985, he was Senior Vice President of AHL. 13 16 Mr. Chris A. Verlander's principal positions are those of: Executive Vice President of the Company, which he has held since April, 1990; Director of the Company, a position he has held since July, 1987; Director of AHL which he has held since April, 1985 and President of AHL, which he has held since April, 1994. Prior to April, 1994 and since April, 1990 he was Executive Vice President of AHL. Prior to April, 1994 and since September, 1985, he was Corporate Secretary of the Company and AHL. Prior to April, 1990 and since 1984, he was Senior Vice President of the Company and AHL. Prior to 1984 and since 1979, he was Vice President of AHL. Mr. Morehead's principal positions are those of Executive Vice President of the Company and AHL, which he has held since April, 1994, Treasurer and Chief Financial Officer and Chief Accounting Officer of the Company and Chief Financial Officer of AHL, which he has held since July, 1986 and Director of AHL, which he has held since July, 1990. Prior to April, 1994 and since July, 1986, he was Senior Vice President of the Company and AHL. Prior to July, 1986 and since 1983, he was a partner in the accounting firm of Peat, Marwick, Mitchell & Co. (now KPMG Peat Marwick LLP) and had been affiliated with that firm since 1976. Mr. Bagg's principal position is that of Senior Vice President of AHL, a position he has held since December, 1990. Prior to December, 1990 and since November, 1988 he was Vice President of AHL. Prior to November, 1988 and since May, 1987 he was Assistant Vice President of AHL. From February, 1985 until May, 1987 he was employed by AHL in a non-officer capacity. Mr. Baum's principal position is that of Senior Vice President, Group Department, of AHL, which position he has held since September, 1987. Prior to September, 1987 and since December, 1986, he was Vice President and Group Actuary of AHL. Mr. Bird's principal position is that of Senior Vice President, Agency Department of AHL, which he has held since May, 1994. Prior to May, 1994 and since January, 1994 he was Vice-President of AHL. Prior to 1994 and since 1987, he was a Regional Director of AHL. Mr. Heekin's principal positions are those of Senior Vice President, Corporate Secretary and General Counsel of the Company, which he has held since April, 1994; Senior Vice President and General Counsel of AHL, which he has held since March, 1993; and Corporate Secretary of AHL, which he has held since April, 1994. Prior to March, 1993 and since August, 1991, he was engaged by the Florida State Insurance Department as the Deputy Receiver of Guarantee Security Life Insurance Company in Receivership in Jacksonville, Florida. Prior to August, 1991 and since July, 1991, he was engaged by the Florida State Insurance Department as the Deputy Supervisor of Guarantee Security Life Insurance Company. Prior to July, 1991 and since October, 1988, Mr. Heekin was Associate Dean of Florida State University College of Law in Tallahassee, Florida. Ms. Mahin's principal position is that of Senior Vice President and Chief Accounting Officer of AHL, which she has held since April, 1994. Prior to April, 1994 and since August, 1990 she was Vice President and Controller of AHL. Prior to August, 1990 and since April, 1989 she was Assistant Vice President and Assistant Controller of AHL. From July, 1988 until April, 1989 she was employed by AHL in a non-officer capacity. Mr. Thomas' principal position is that of Senior Vice President of AHL, a position he has held since July, 1995. Prior to July, 1995 and since April, 1990, he was Vice President of AHL. Prior to April, 1990 and since May, 1987, he was Assistant Vice President of AHL. From December, 1986 until May, 1987, he was employed by AHL in a non-officer capacity. Mr. Sheldon's principal position is that of Senior Vice President and Chief Actuary of AHL, which he has held since August, 1993. Prior to August, 1993 and since June, 1978 he was with Southern Farm Bureau Life Insurance Company, serving as vice president and chief actuary since February, 1987. 14 17 COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers to file with the Securities and Exchange Commission ("SEC") and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of the Shares. Executive officers and directors are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 1995, all Section 16(a) filing requirements applicable to its executive officers and directors were complied with, except for two Form 4 reports reflecting an indirect interest in 4,030 shares acquired in April, 1995, by two trusts of which Mr. A. Dano Davis is a trustee. Such transaction was reported on the trust's Form 4s for June, 1995. 15 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS See the Section entitled "Quarterly Stock Prices and Dividends" on page 29 of the Registrant's 1995 Annual Report to Shareholders, which is enclosed, which section is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA See "Selected Financial Data" on page 17 of this document. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See "Management's Discussion and Analysis" commencing on page 13 of the Registrant's 1995 Annual Report to Shareholders which is enclosed, which discussion and analysis is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Consolidated Statements of Earnings," "Consolidated Balance Sheets," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," "Independent Auditors' Report" and "Quarterly Financial Data," on pages 17 through 29 of the Registrant's 1995 Annual Report to Shareholders which is enclosed, which statements and data are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. 16 19 SELECTED FINANCIAL DATA CONSOLIDATED SUMMARY OF EARNINGS (In thousands except per share amounts and number of shares)
YEARS ENDED DECEMBER 31 1995 1994 1993 1992 1991 - ----------------------- ------------- ------------- ------------ ------------ ------------- Income: Insurance revenues $ 247,251 230,589 227,376 212,062 195,871 Net investment income 70,601 66,706 63,875 59,721 54,535 Realized investment gains, net 6,003 2,011 1,184 237 89 ------------- ------------ ------------ ------------ ----------- Total income 323,855 299,306 292,435 272,020 250,495 ------------- ------------ ------------ ------------ ----------- Benefits, claims and expenses: Benefits and claims 148,581 146,146 159,335 155,722 147,706 Underwriting, acquisitions and insurance expenses: Taxes, commissions and general expenses 106,399 95,326 82,298 71,012 64,953 Amortization of deferred acquisition costs 23,744 20,758 20,091 19,450 14,601 Other operating expenses 3,694 2,413 1,806 1,685 1,211 ------------- ------------ ------------ ------------ ----------- Total benefits claims and expenses 282,418 264,643 263,530 247,869 228,471 ------------- ------------ ------------ ------------ ----------- Earnings before income taxes 41,437 34,663 28,905 24,151 22,024 Income taxes 13,362 11,022 9,190 7,255 6,946 ------------- ------------ ------------ ------------ ----------- Net earnings $ 28,075 23,641 19,715 16,896 15,978 ------------- ------------ ------------ ------------ ----------- Net earnings per share of common stock $ 2.02 $ 1.71(2) 1.59(2) 1.42 1.27 ------------- ------------ ------------ ------------ ----------- Weighted average number of shares outstanding 13,882,041 13,855,297 12,399,070 11,902,790 11,860,313 ------------- ------------ ------------ ------------ ----------- Cash Dividends Declared Per Share(1) $ .65 $ .70 .59 .56 .53 ------------- ------------ ------------ ------------ ----------- At December 31: Total Assets $ 1,317,896 $ 1,179,257 1,138,578 1,016,984 892,595 ------------- ------------ ------------ ------------ ----------- Notes Payable to Banks, Long-Term $ 20,000 20,000 - 50,000 - ------------- ------------ ------------ ------------ -----------
(1) 1994 includes $.055 dividend declared December 30, 1994, paid February 24, 1995 to shareholders of record February 13, 1995. (2) As a result of the 1,872,045 additional shares outstanding from the public stock offering completed in October, 1993, net earnings per share of common stock were diluted for the years ended December 31, 1993 and subsequent. 17 20 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES AMERICAN HERITAGE LIFE INVESTMENT CORPORATION AND SUBSIDIARIES
Page (1) Financial Statements Number ------ Independent Auditors' Report - Years ended December 31, 1995, 1994 and 1993 * Consolidated Statements of Earnings, Years ended December 31, 1995, 1994 and 1993 * Consolidated Balance Sheets, December 31, 1995 and 1994 * Consolidated Statements of Stockholders' Equity, Years ended December 31, 1995, 1994 and 1993 * Consolidated Statements of Cash Flows, Years ended December 31, 1995, 1994 and 1993 * Notes to Consolidated Financial Statements, Years ended December 31, 1995, 1994 and 1993 * (2) Financial Statement Schedules: Independent Auditors' Report 19 I. - Summary of Investments - Other than Investments in Related Parties, December 31, 1995 20 III. - Condensed Financial Information of Registrant 21 V. - Supplementary Insurance Information, Years ended December 31, 1995, 1994 and 1993 25 VI. - Reinsurance, Years ended December 31, 1995, 1994 and 1993 26
All other schedules are omitted as the required information is inapplicable or presented in the consolidated financial statements or related notes. *Incorporated by reference. 18 21 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors American Heritage Life Investment Corporation: Under date of January 29, 1996, we reported on the consolidated balance sheets of American Heritage Life Investment Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in note 1 to the aforementioned consolidated financial statements, during the year ended December 31, 1994, the Company adopted the provisions of the Financial Standard Board's Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities." KPMG PEAT MARWICK LLP Jacksonville, Florida January 29, 1996 19 22 SCHEDULE I AMERICAN HERITAGE LIFE INVESTMENT CORPORATION SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1995
AMOUNT AT WHICH SHOWN FAIR IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET - -------------------------------------- ------------- ------------ ------------- Debt securities available-for sale: Bonds: United States Government and government agencies and authorities $ 210,422,603 $211,617,564 $211,617,564 States, municipalities and political subdivisions 345,000 372,600 372,600 Public utilities 33,173,518 34,033,555 34,033,555 Convertibles and bonds with warrants attached 2,736,309 2,763,000 2,763,000 All other corporate 218,376,476 237,974,068 237,974,068 Redeemable preferred stock 28,759,960 28,667,999 28,667,999 ------------- ------------ ------------ Total debt securities 493,813,866 $515,428,786 515,428,786 ------------- ============ ------------ Equity securities available-for-sale: Common stocks: Public utilities 489,945 720,000 720,000 Banks, trust and insurance companies 3,192,880 5,413,193 5,413,193 Industrial, miscellaneous and all other 19,526,233 28,601,787 28,601,787 ------------- ------------ ------------ Total equity securities 23,209,058 $ 34,734,980 34,734,980 ------------- ============ ------------ Mortgage loans on real estate 29,506,184 29,506,184 Real estate 375,204 375,204 Policy loans 376,672,196 376,672,196 Short-term investments 22,885,597 22,885,597 ------------- ------------ Total investments $ 946,462,105 $979,602,947 ============= ============
See Footnote 1(c) to the Consolidated Financial Statements on page 22 of the Annual Report to Shareholders which sets forth the accounting policies related to investments. 20 23 SCHEDULE III AMERICAN HERITAGE LIFE INVESTMENT CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT The following condensed balance sheets of American Heritage Life Investment Corporation ("Registrant") as of December 31, 1995 and 1994 and its condensed statements of earnings and cash flows for the years ended December 31, 1995, 1994 and 1993 should be read in conjunction with the notes to consolidated financial statements included elsewhere in this report. Since the Registrant's condensed statements of changes in stockholders' equity for the years ended December 31, 1995, 1994 and 1993 are identical to the consolidated statements of changes in stockholders' equity included elsewhere in this report, such statements are not repeated in this schedule. 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. In the years 1994 and 1993, no dividends were paid to the Registrant by AHL. 21 24 SCHEDULE III, CONTINUED AMERICAN HERITAGE LIFE INVESTMENT CORPORATION (REGISTRANT) CONDENSED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994 - ------ ------------ ------------ Cash $ 46,174 $ 34,220 Certificate of deposit 100,000 100,000 Investment in life insurance subsidiaries, at equity 249,370,749 204,265,884 Investment in non-life insurance subsidiaries, at equity 4,454,226 4,433,485 Accounts receivable 11,449,111 460,999 Intercompany accounts 756,600 0 Other assets 9,485,563 10,732,903 ------------ ------------ $275,662,423 $220,027,491 ============ ============ Liabilities and Stockholders's Equity - ------------------------------------- Liabilities: Notes payable to banks $ 54,994,000 $ 44,200,000 Other liabilities 1,339,193 2,254,845 Intercompany accounts 0 213,031 ------------ ------------ Total liabilities 56,333,193 46,667,876 ------------ ------------ Stockholders' equity: Common stock of $1.00 par value. Authorized 20,000,000 shares in 1995 and 1994; issued 13,933,206 in 1995 and 13,905,794 in 1994 13,933,206 13,905,794 Preferred stock: Convertible of $10.00 par value. Authorized 500,000 shares; none issued 0 0 Non-convertible of $10.00 par value. Authorized 500,000 shares; none issued 0 0 Additional paid-in capital 42,214,787 41,866,379 Retained earnings 148,454,353 129,406,469 Unrealized investment gains (losses) 16,772,078 (10,892,295) ------------ ------------ 221,374,424 174,286,347 Less cost of 97,277 in 1995 and 45,954 in 1994 common shares in treasury 2,045,194 926,732 ------------ ------------ Total stockholders' equity 219,329,230 173,359,615 ------------ ------------ $275,662,423 $220,027,491 ============ ============
22 25 SCHEDULE III, CONTINUED AMERICAN HERITAGE LIFE INVESTMENT CORPORATION (REGISTRANT) CONDENSED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 -------------- -------------- -------------- Income: Investment income $ 62,678 14,120 28,788 Other income 304,200 307,111 304,200 Realized loss - - (78,003) ------------ ----------- ----------- Total income 366,878 321,231 254,985 Operating expenses 3,719,580 2,429,137 1,857,680 ------------ ----------- ----------- Loss before income tax benefits (3,352,702) (2,107,906) (1,602,695) Income tax benefits (1,203,700) (780,500) (596,400) ------------ ----------- ----------- Loss before equity in earnings (loss) of subsidiaries (2,149,002) (1,327,406) (1,006,295) Equity in net earnings of life insurance subsidiaries 30,565,760 25,320,502 21,003,611 Equity in net losses of non-life insurance subsidiaries (341,372) (352,194) (282,687) ------------ ----------- ----------- Net earnings $ 28,075,386 23,640,902 19,714,629 ============ =========== ===========
23 26 SCHEDULE III, CONTINUED AMERICAN HERITAGE LIFE INVESTMENT CORPORATION (REGISTRANT) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 --------------- -------------- -------------- Operating activities: Net earnings $ 28,075,386 23,640,902 19,714,629 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in accounts receivable (10,988,112) (138,117) (310,434) Change in other assets 1,247,340 (1,270,691) (1,166,096) Change in other liabilities (915,652) 1,082,606 (1,351,669) Equity in net earnings of life insurance subsidiaries (30,565,760) (25,320,502) (21,003,611) Equity in net loss of non-life insurance subsidiaries 341,372 352,194 282,687 Other 0 0 239,856 --------------- -------------- -------------- Net cash used from operating activities (12,805,426) (1,653,608) (3,594,638) --------------- -------------- -------------- Financing activities: Dividends from subsidiaries 13,245,264 0 0 Capital contribution to subsidiary (120,000) (240,000) 0 Increase (decrease) in notes payable to banks 10,794,000 11,720,000 10,379,000 Change in intercompany accounts (969,631) (170,635) (443,417) Dividends to stockholders (9,389,613) (10,061,465) (7,770,638) Purchase of treasury stock (1,118,462) (2,229) (317,596) Excess over par value on shares issued 402,718 405,830 1,689,488 Other, net (26,896) 3,321 61,361 --------------- -------------- -------------- Net cash provided by financing activities 12,817,380 1,654,822 3,598,198 --------------- -------------- -------------- Increase (decrease) in cash 11,954 1,214 3,560 Cash at beginning of year 34,220 33,006 29,446 --------------- -------------- -------------- Cash at end of year $ 46,174 34,220 33,006 =============== ============== ==============
24 27 SCHEDULE V AMERICAN HERITAGE LIFE INVESTMENT CORPORATION SUPPLEMENTARY INSURANCE INFORMATION
INDUSTRY SEGMENT DEFERRED FUTURE POLICYHOLDERS' POLICY AND - ---------------------------- ACQUISITION POLICY ACCOUNT UNEARNED CONTRACT Year ended December 31, 1995 COSTS BENEFITS BALANCES PREMIUMS CLAIMS - ---------------------------- --------- ------------ ----------- ---------- ------------ Ordinary $158,250,346 195,859,984 629,589,633 3,360,538 9,537,431 Group 0 9,227,751 6,080,433 0 31,380,088 Credit 0 0 0 49,956,614 9,457,926 Other 0 0 0 0 (309,722) ------------ ----------- ------------ ---------- ---------- $158,250,346 205,087,735 635,670,066 53,317,152 50,375,445 ============ =========== =========== ========== ========== Year ended December 31, 1994 - ---------------------------- Ordinary $162,867,773 183,043,220 570,024,695 1,677,180 8,198,767 Group 0 9,468,534 6,511,065 0 36,376,975 Credit 0 0 0 49,927,086 8,733,157 Other 0 0 0 0 (215,082) ------------ ----------- ------------ ---------- ---------- $162,867,773 192,511,754 576,535,760 51,604,266 53,308,899 ============ =========== =========== ========== ========== Year ended December 31, 1993 - ---------------------------- Ordinary $146,332,710 175,251,348 525,186,003 1,698,586 8,800,490 Group 0 9,092,255 6,105,984 0 39,978,241 Credit 0 0 0 45,179,106 7,635,993 Other 0 0 0 0 (175,626) ------------ ----------- ------------ ---------- ---------- $146,332,710 184,343,603 531,291,987 46,877,692 56,414,724 ============ =========== =========== ========== ==========
AMORTIZATION TAXES, INDUSTRY SEGMENT NET BENEFITS OF DEFERRED COMMISSIONS - ---------------------------- INSURANCE INVESTMENT AND ACQUISITION AND GENERAL Year ended December 31, 1995 REVENUES INCOME(A) CLAIMS COSTS EXPENSES (B) - ---------------------------- --------- ------------ ----------- -------------- ------------- Ordinary 123,718,289 61,559,101 103,183,528 23,744,359 29,414,331 Group 39,924,809 5,356,427 25,595,022 0 12,216,464 Credit 83,608,031 4,011,351 19,801,846 0 65,077,894 Other 0 (325,514) 0 0 (309,722) ----------- ---------- ----------- ---------- ----------- 247,251,129 70,601,365 148,580,396 23,744,359 106,398,967 =========== ========== =========== ========== =========== Year ended December 31, 1994 - ---------------------------- Ordinary 113,993,333 57,477,827 95,637,818 20,757,868 29,026,850 Group 43,221,583 5,657,542 29,093,520 0 12,462,165 Credit 73,373,760 3,846,885 21,414,613 0 54,052,460 Other 0 (275,761) 0 0 (215,082) ----------- ---------- ----------- ---------- ----------- 230,588,676 66,706,493 146,145,951 20,757,868 95,326,393 =========== ========== =========== ========== =========== Year ended December 31, 1993 - ---------------------------- Ordinary 108,974,989 55,724,809 94,240,229 20,090,573 28,571,495 Group 52,822,594 4,979,433 39,503,583 0 12,256,743 Credit 65,578,092 3,379,675 25,591,565 0 41,645,832 Other 0 (209,141) 0 0 (175,626) ----------- ---------- ----------- ---------- ----------- 227,375,675 63,874,776 159,335,377 20,090,573 82,298,444 =========== ========== =========== ========== ===========
(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. 25 28 SCHEDULE VI AMERICAN HERITAGE LIFE INVESTMENT CORPORATION REINSURANCE (IN THOUSANDS OF DOLLARS)
CEDED TO ASSUMED PERCENTAGE GROSS OTHER FROM OTHER NET OF AMOUNT AMOUNT COMPANIES COMPANIES AMOUNTS ASSUMED TO NET ------------ --------- --------- ----------- -------------- Year Ended December 31, 1995 - ---------------------------- Life insurance volume in force $ 15,016,456 3,836,741 3,367,550 14,547,265 23.1% ============ ========== ========== =========== ===== Insurance revenues(a): Ordinary $ 119,182 5,756 10,292 123,718 8.3% Group 44,602 6,989 2,312 39,925 5.8% Credit 168,677 85,081 12 83,608 .1% ------------ ---------- ---------- ----------- ----- Total $ 332,461 97,826 12,616 247,251 5.1% ============ ========== ========== =========== ===== Year Ended December 31, 1994 - ---------------------------- Life insurance volume in force $13,818,345 3,284,122 2,997,321 13,531,544 22.2% =========== ========== ========== =========== ===== Insurance revenues(a): Ordinary $ 120,009 6,016 0 113,993 - Group 51,534 8,502 190 43,222 .4% Credit 129,880 59,475 2,969 73,374 4.0% ------------ ---------- ---------- ----------- ----- Total $ 301,423 73,993 3,159 230,589 1.4% ============ ========== ========== =========== ===== Year Ended December 31, 1993 - ---------------------------- Life insurance volume in force $12,543,890 2,898,107 3,057,223 12,703,006 24.1% =========== ========== ========== =========== ===== Insurance revenues(a): Ordinary $ 114,646 5,671 0 108,975 - Group 57,766 8,033 3,090 52,823 5.8% Credit 113,301 47,723 0 65,578 - ------------ ---------- ---------- ----------- ----- Total $ 285,713 61,427 3,090 227,376 1.4% ============ ========== ========== =========== =====
(a) Includes both life and accident and health premiums and commission and expense allowances on reinsurance ceded. 26 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the section entitled "Election of Directors" on page 1 of the Registrant's Proxy Statement dated March 22, 1996 which section is incorporated herein by reference. See the section entitled "Executive Officers of Registrant" on page 13, Part I of this report. ITEM 11. EXECUTIVE COMPENSATION See the section entitled "Executive Compensation and Other Transactions with Management" beginning on page 6 of the Registrant's Proxy Statement dated March 22, 1996, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the sections entitled "Election of Directors" and "Principal Shareholders" which commence on pages 1 and 22, respectively, of the Registrant's Proxy Statement dated March 22, 1996, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the section entitled "Executive Compensation and Other Transactions with Management" beginning on page 6 of the Registrant's Proxy Statement dated March 22, 1996, which section is incorporated herein by reference. 27 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of documents filed with this report (1) Financial Statements See "Index to Financial Statements and Schedules" on page 16, Part II of this report. (2) Schedules See "Index to Financial Statements and Schedules" on page 16, Part II of this report. (3) Exhibits Number Description ------ ----------- 3(a) Amended and Restated Articles of Incorporation of American Heritage Life Investment Corporation dated February 9, 1995. Incorporated by reference to Exhibit 3(a) of the Form 10-K filed by Registrant for the period ended December 31, 1994 (File No. 1-7255). (b) By-Laws of American Heritage Life Investment Corporation as amended and restated, dated April 28, 1994. Incorporated by reference to Exhibit 3 of a Form 8-K, dated April 29, 1994 (File No. 1-7255). 4 Common Stock Certificate of American Heritage Life Investment Corporation. Incorporated by reference to Exhibit 4 of the Form 10-K filed by the Registrant for the period ended December 31, 1994 (File No. 1-7255). 10(a)(1) American Heritage Life Investment Corporation, 1988 Stock Option Plan, as Amended and Restated. Incorporated by reference to Exhibit 3(a) of the Form 10-K filed by Registrant for the period ended December 31, 1994 (File No. 1-7255). (a)(2) American Heritage Life Investment Corporation 1980 Stock Option Plan, as Amended and Restated. Incorporated by reference to Exhibit 3(a) of the Form 10-K filed by Registrant for the period ended December 31, 1994 (File No. 1-7255). (a)(3) American Heritage Life Investment Corporation 1996 Stock Option Plan. Incorporated by reference to Exhibit II of Registrant's Proxy Statement dated March 22, 1996. (File No. 1-7255). 10(b)(1) American Heritage Life Investment Corporation Amended and Restated Annual Incentive Plan. (2) American Heritage Life Insurance Company Long-Term Incentive Plan. Incorporated by reference to Exhibit I of Registrant's Proxy Statement dated March 22, 1996 (File No. 1-7255). 10(c)(1) Senior Corporate Officers Management Security Plan of American Heritage Life Investment Corporation and Subsidiaries. Incorporated by reference to Exhibit 10(c)(1) of Form 10-K filed by Registrant for the period ended December 31, 1993 (File No. 1-7255). (2) Officers Management Security Plan of American Heritage Life Investment Corporation and Subsidiaries. Incorporated by reference to Exhibit 10(c)(2) of Form 10-K filed by Registrant for the period ended December 31, 1993 (File No. 1-7255). 13 Annual Report to Shareholders for the year ended December 31, 1995. 21 Significant Subsidiary of the Registrant - American Heritage Life Insurance Company (organized in the State of Florida) 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter ended December 31, 1995. 28 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN HERITAGE LIFE INVESTMENT CORPORATION Date: March 29, 1996 By: /s/ T. O'Neal Douglas ------------------------------------------ T. O'Neal Douglas Its Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ T. O'Neal Douglas Chairman, President and Director - -------------------------------------- (Principal Executive Officer) T. O'Neal Douglas /s/ C. Richard Morehead Executive Vice President and - -------------------------------------- Treasurer (Principal C. Richard Morehead Financial and Accounting Officer) /s/ Chris A. Verlander Executive Vice President - -------------------------------------- Director Chris A. Verlander /s/ Edward L. Baker Director - -------------------------------------- Edward L. Baker /s/ A. Dano Davis Director March 29, 1996 - -------------------------------------- A. Dano Davis /s/ Robert D. Davis Director - -------------------------------------- Robert D. Davis /s/ H. Corbin Day Director - -------------------------------------- H. Corbin Day /s/ Radford D. Lovett Director - -------------------------------------- Radford D. Lovett /s/ W. A. Verlander Director - -------------------------------------- W. A. Verlander
29 EX-10.(B)(1) 2 AMENDED & RESTATED ANNUAL INCENTIVE PLAN 1 EXHIBIT 10(b)(1) AMERICAN HERITAGE LIFE INVESTMENT CORPORATION AMENDED AND RESTATED ANNUAL INCENTIVE PLAN I. PURPOSE OF THE PLAN The purpose of the Annual Incentive Plan (the "Plan") of American Heritage Life Investment Corporation (the "Company") is to provide officers of the Company and its subsidiaries with financial incentives to exert their maximum efforts on behalf of the Company and its subsidiaries. By rewarding officers with additional cash compensation when significant financial goals have been achieved, the Company believes that the Plan will promote increased personal interest in the welfare of the Company by those primarily responsible for its continued growth and profitability. II. EFFECTIVE DATE The Plan became effective on the first day of the 1992 fiscal year and is amended and restated as of February 6, 1996. The Plan will continue in effect until and unless terminated by the Board of Directors or its Executive Committee (the "Board") or the Company's Compensation Committee. III. DEFINITIONS 1. "Base Compensation" is the fixed portion of officers' compensation. It specifically excludes any amounts paid pursuant to the Annual or the Long-Term Incentive Plans. 2. "Committee" means the Compensation Committee of the Board of Directors of the Company as such Committee may be constituted from time to time. The Committee shall consist of at least two (2) members of the Board selected by the Board, all of whom shall be outside directors within the meaning of Section 162(m)(4)(c)(i) of the Internal Revenue Code of 1986 (the "Code"), and the selection of persons for participation in the Plan, decisions concerning the timing, pricing and amount of any grant pursuant to the Plan to such a person, and (to the extent required in order to qualify for the performance-based remuneration exception under Section 162(m) of the Code) all other decisions under the Plan shall be made by a vote of at least a majority of such members. 3. "Plan Year" means the fiscal year of the Company. 2 4. "Participant" means any employee designated by the Compensation Committee to participate in the Plan. 5. "Retirement" shall be defined as the first day of the month following the month in which the Participant attains his or her 65th birthday. 6. "Disability" shall be defined as when a Participant becomes totally disabled before attaining his or her 65th birthday and if such total disability continues for more than three months. It does not include disability that is either intentionally self-inflicted or caused by illegal or criminal acts of the Participant. 7. "Threshold Performance" means the minimum performance level at which awards are funded. IV. ELIGIBILITY AND PARTICIPATION In general, corporate officers will participate in one or more Plan elements. The Committee, at its discretion may exclude one or more officers from participation in the Plan. An employee shall become eligible to participate on the first day of the fiscal year immediately subsequent to the employee's appointment as an officer or is selected by the Committee as the case may be. V. ADMINISTRATION; POWERS AND DUTIES OF THE COMMITTEE 1. ADMINISTRATION. The Committee shall be responsible for the administration of the Plan. The Committee is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, to provide for conditions and assurances deemed necessary or advisable to protect the interests of the Company, and to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. Determinations, interpretations, or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final and binding and conclusive for all purposes and upon all persons whomsoever. The Committee may delegate ministerial tasks to such persons (including Employees) as it deems appropriate. A majority of the members of the Committee shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination 2 3 reduced to writing and signed by all of the members of the Company Committee shall be fully effective as if it has been made by a majority voice at a meeting duly called and held. The transactions contemplated by the Plan are intended to qualify for the performance-based remuneration exception under Section 162(m) of the Code. The Committee may from time to time make amendments to the Plan as it, in its sole discretion, determines are necessary in order to preserve such exception under such section or other similar section which might be in effect. 2. AMENDMENT, MODIFICATION, AND TERMINATION OF THE PLAN. The Committee may at any time terminate, and from time to time may amend or modify the Plan, except that no amendment shall increase the amount of an award payable to a Participant or class of Participants and except that no such termination shall be effective with respect to the Plan Year in which it occurs. VI. DETERMINATION OF PERFORMANCE MEASURES AND GOALS Before the beginning of each Plan Year, the President & CEO shall propose the criteria and performance goals upon which Company and individual performance will be based. In the initial Plan Year, the corporate criterion as set forth in table in Section VII below is growth in operating income. The criteria for Business Units as set forth in table in Section VII below are percent growth in premium and equivalent revenues and Business Unit Operating Income. The Committee must approve the Company and individual criteria and performance goals. Under normal business conditions, the criteria and performance levels established prior to the Plan Year will not be altered or revised once they have been approved. However, unusual conditions may warrant a reexamination of such criteria and performance levels. Unusual conditions include, but are not limited to, extraordinary gains and losses, acquisitions or dispositions of significant operating units and other nonrecurring events. Revision of Company performance goals are subject to approval of the Committee. Revision of business unit criteria or performance goals are subject to approval by the Committee. VII. AWARD OPPORTUNITIES Target opportunities represent levels paid if the predetermined performance levels are exactly achieved. Actual awards can range from 0% to 150% of the target 3 4 awards, and will be based on how performance during the Plan Year compares to the predetermined performance levels. Except for the President/CEO, performance will be measured on at least two organization levels: - Company - Business Unit (Ordinary, Credit or Group) - Individual Performance
DISTRIBUTION OF TOTAL OPPORTUNITY CORPORATE CORPORATE BUSINESS UNIT INDIVIDUAL - ------------------------------ ----------- --------------- ------------ Chairman of the Board - President 100% - - - ----------------------------------------------------------------------------------------------------------------------- Executive Vice President and Corporate SVPs 70% - 30% - ----------------------------------------------------------------------------------------------------------------------- Most Business Unit SVPs 20% 60% 20% - ----------------------------------------------------------------------------------------------------------------------- Corporate VPs 60% - 40% - ----------------------------------------------------------------------------------------------------------------------- Business Unit VPs 15% 60% 25% - ----------------------------------------------------------------------------------------------------------------------- Corporate AVPs 50% - 50% - ----------------------------------------------------------------------------------------------------------------------- Business Unit AVPs 10% 60% 30% - -----------------------------------------------------------------------------------------------------------------------
The performance of each level will be evaluated independently. Note that award opportunities will be available in any given year only to the extent that: - there are sufficient statutory earnings to pay dividends, and - GAAP operating earnings exceed threshold levels. 4 5 VIII. PAYMENT OF AWARDS Except as provided in the following paragraph, all awards made under the Plan shall be paid to Participants within 30 days after the date on which consolidated financial statements of the Company for the Plan Year have been prepared and the independent certified public accountants for the Company have completed their exam. IX. CHANGES IN EMPLOYEE STATUS When a Participant's employment is terminated; voluntarily or involuntarily, prior to the last day of the Plan Year, for reasons other than death, retirement or disability, the Participant forfeits all rights to awards under the Plan. Participants terminating after the end of the Plan Year but prior to payment of awards are entitled to all awards earned. Termination during the Plan Year for reasons of death, retirement or disability will result in a prorata payment based on the number of full months of employment during the Plan Year divided by twelve. X. RIGHTS OF EMPLOYERS Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time nor confer upon any Participant any right to continue in the employ of the Company. 5 EX-13 3 ANNUAL REPORT 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS 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 subsidiary, American Heritage Life Insurance Company (AHL). Following is a discussion of the significant components of the consolidated results of operations for the years ended December 31, 1995, 1994 and 1993. INSURANCE OPERATIONS Insurance revenues pursuant to generally accepted accounting principles (GAAP) include only the mortality, 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. As a result of more of the ordinary life business being interest-sensitive, the group business being on a self-funded or split funded basis and the credit business being written on an administrative services only basis, in which only the fees charged are included in insurance revenues for GAAP purposes, it is necessary to evaluate insurance revenues including premium equivalents. As demonstrated in the table on page 12, for 1995, 1994, and 1993, insurance revenues were $247.3 million, $230.6 million, and $227.4 million, respectively, while total insurance revenues including premium equivalents were $511.8 million, $445.5 million, and $410.4 million, respectively. Because so much of the Company's business is interest sensitive and administrative services only, insurance revenues including premium equivalents is a better measure of sales and growth. Ordinary insurance revenues amounted to $123.7 million, $114.0 million and $109.0 million, in 1995, 1994 and 1993, respectively. Premiums including premium equivalents, were $167.3 million, $161.6 million and $149.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. The increases in revenues and premiums and premium equivalents in 1995 over 1994 and 1994 over 1993 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. The increase in individual accident and health sales in 1995 compared to 1994 included a new long-term care product and a supplemental hospital indemnity product that in the aggregate increased revenues approximately $4.6 million. Group insurance revenues in 1995, 1994 and 1993 totaled $39.9 million, $43.2 million and $52.8 million, respectively. In 1995 and 1994, a majority of the new group cases were written on a self-funded or split-funded basis where only the fees charged are included in insurance revenues for financial statement purposes. Including premium equivalents related to this business, premiums and premium equivalents were $206.4 million, $167.5 million and $158.2 million for 1995, 1994 and 1993, respectively. These increases in premiums and premium equivalents included the sales to larger group cases that were sold on a self-funded basis. Credit insurance revenues for 1995, 1994 and 1993 were $83.6 million, $73.4 million and $65.6 million, respectively. Credit premiums and premium equivalents amounted to $138.1 million, $116.3 million and $103.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. Credit insurance revenues and premiums and premium equivalents increased during these periods as a result of geographic expansion and increased sales of reinsurance, which generally provides less risk to the Company at an acceptable profit margin. Ordinary benefits and claims in 1995, 1994 and 1993 were $103.2 million, $95.6 million and $94.2 million, respectively. The increase each year was the result of growth in first year and renewal business, increased interest credited to policyholder account balances and some increase in mortality and morbidity experience. Group benefits and claims in 1995, 1994 and 1993 totaled $25.6 million, $29.1 million and $39.5 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 expense for financial statement purposes. Credit benefits and claims amounted to $19.8 million, $21.4 million and $25.6 million in 1995, 1994 and 1993, respectively. These decreases were due to a reduction in the change in unearned premiums which is included in credit benefits and claims. These reductions are the result of terminating unprofitable accounts in 1994 and 1995. The Company's major operating costs consist of commissions, payroll, premium taxes and administrative-related expenditures. During 1995, 1994 and 1993, management took certain actions and reduced the annualized level of general insurance expenses. Such actions consisted primarily of cost reductions in home office administrative areas, including certain personnel, travel, telephone, supplies and data processing expenses. Additionally, during 1995 and 1994, general expenses have been reduced as the result of the Company's move to a new home office building in the third quarter of 1994 which reduced expenses by approximately one million dollars on an annual basis. 13 2 MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED Expenses as a percentage of total income excluding realized investment gains (losses) and including premium equivalents decreased from 5.8% for the year ended December 31, 1993 to 4.9% for the year ended December 31, 1995. This reduction demonstrates that the Company has been able to control the level of general insurance expenses which in turn has been a significant factor in our steady growth in operating earnings. Ordinary taxes, commissions and general expenses were $29.4 million, $29.0 million and $28.6 million for 1995, 1994 and 1993, respectively. The increase each year was primarily the result of growth in ordinary business. Group taxes, commissions and general expenses were $12.2 million, $12.5 million and $12.3 million, respectively. The decrease in 1995 versus 1994 included a decrease in taxes and commissions offset by an increase in general expenses. The decrease in commissions and taxes was the result of reduced premiums. The increase in 1994 compared to 1993 was primarily the result of increased general expenses. The increases in general expenses in 1995 and 1994 were due to growth in business, administration of larger group cases and the implementation of a new local area network group system. Credit taxes, commissions and general expenses were $65.1 million, $54.1 million and $41.6 million in 1995, 1994 and 1993, respectively. The increase each year was primarily due to an increase in commissions earned as a result of increased insurance revenues and, for 1995 and 1994, a higher effective commission rate. Amortization of deferred acquisition costs was $23.7 million in 1995, $20.8 million in 1994 and $20.1 million in 1993. The increase in amortization expenses was primarily due to growth in business in force, and an increase in lapses of individual health business resulting from the implementation of rate increases, which increased the write-off of the policies' deferred acquisition costs. Non-segmented operating expenses in 1995, 1994 and 1993 were $3.4 million, $2.2 million and $1.6 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 the interest rate charged. Interest expense included in non-segmented operating expenses was $3.3 million, $2.0 million and $1.4 million for 1995, 1994 and 1993, respectively. These increases were due primarily to additional bank debt outstanding in 1995 and 1994 and an increase in interest rates in 1995. INCOME TAXES Income tax expense was up in 1995 compared to 1994 and in 1994 compared to 1993 due to increased earnings and an increase in the effective tax rate on net earnings to 32.2% in 1995 and 31.8% in 1994 and 1993. NET INVESTMENT INCOME Net investment income was $70.6 million, $66.7 million and $63.9 million for the years ended December 31, 1995, 1994 and 1993, respectively. These increases were due primarily to an increase in invested assets, changes made in the investment portfolio to improve the yield and additional investment income from the proceeds of the public stock offering completed in October, 1993. The effective yield on invested assets for the year ended December 31, 1995 was 7.64% compared to 7.87% for the year ended December 31, 1994 and 7.97% for the year ended December 31, 1993. These reductions in yield were primarily the result of declining interest rates during 1995 and 1994. PRE-TAX OPERATING EARNINGS Ordinary pre-tax operating earnings were $28.9 million, $26.0 million and $21.8 million in 1995, 1994 and 1993, 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. Group pre-tax operating earnings were $7.5 million, $7.3 million and $6.0 million in 1995, 1994 and 1993, respectively. The increase in group pre-tax operating earnings over this time period reflects the overall increased profitability in the business, including necessary rate actions on certain cases, the terminations of certain unprofitable cases and the movement of cases from insured to self-funded plans, which provides less volatility in financial results to the Company. Credit pre-tax operating earnings were $2.7 million, $1.8 million and $1.7 million in 1995, 1994 and 1993, respectively. In 1993 and 1994, the Company experienced deterioration in the profit margins on certain new and existing accounts. During 1995, the Company experienced an improvement in the operating results of the credit operations. Actions taken to improve the operating results of the Credit Department included terminating unprofitable accounts and reducing the commissions paid on accounts with unsatisfactory margins which impacted operations in 1995. OTHER ITEMS Management is not aware of any pending regulations from the various state insurance departments that would have a significant impact on the Company's operations. The Company's legal department includes a compliance area headed by an officer who is a lawyer 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. 14 3 REALIZED INVESTMENT GAINS Realized investment gains, net were $6.0 million for the year ended December 31, 1995 compared to $2.0 million for the year ended December 31, 1994 and $1.2 million for the year ended December 31, 1993. The realized investment gains for the respective periods were primarily the result of adjustments made in the investment portfolio to increase the yield on invested assets less recognizing any decline in value other than temporary in the value of certain investments. The 1995 realized investment gains also included realized gains on real estate reduced by realized losses on the settlement of litigation, aggregating approximately $3,200,000. LIQUIDITY AND CAPITAL RESOURCES The Company is engaged primarily in the life insurance business. The principal subsidiary, AHL, generates major sources of cash flow from premiums collected for traditional insurance products, deposits and policy charges for interest-sensitive products, and investment income attributable to its life insurance operations and associated investment portfolio. This results in a significant portion of the Company's assets being liquid. As an insurer, AHL is required to maintain substantial liabilities for future policy benefits and policyholders' account balances. Since premiums and deposits received in anticipation of such benefits are investable funds, it is expected that AHL will continue to increase its investment portfolio using cash flow from operations. OPERATING ACTIVITIES The net cash provided by operating activities for the years ended December 31, 1995, 1994 and 1993 aggregated $75.8 million, $48.5 million and $73.9 million, respectively. The increase in 1995 from 1994 and the decrease from 1993 to 1994 were due primarily to (1) the funding in 1994 of the termination of certain premium deposit accounts amounting to $16.4 million with no comparable reductions in 1995 or 1993 and (2) an increase in accrued investment income and a related decrease in unearned investment income due to changing policy loan interest on certain plans from in advance to in arrears during 1994 discussed in the following paragraph. The Company's policy loans are a higher percentage of invested and total assets than industry norm as a result of a significant block of Management Security Plan (MSP) business. The MSP product is an interest-sensitive, deferred compensation/executive benefit-type product with the policy loan feature being an integral part of the product. A market rate of interest is charged on the policy loans and a predetermined built-in spread is achieved between the interest rate charged on the policy loans and the interest rate credited on the loaned funds. Accordingly, all MSP policy loans are completely collateralized by the underlying policyholders' accounts balances. All policy loans are funded out of cash provided by operating activities and do not represent a significant restriction on the Company's liquidity. During 1994, the Company changed the payment method of interest on these loans from in advance to in arrears, which decreased unearned investment income and increased accrued investment income. 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. At December 31, 1995, U. S. Treasury obligations and GNMA's at market value aggregated $203.2 million, or 40.0% of the total bond portfolio of $508.3 million. The amortized cost of high yield bonds at December 31, 1995 aggregated $30.2 million with a market value of $32.8 million. At December 31, 1995 these investments represented only 2.5% of total assets or 3.4% of invested assets. Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities", requires that securities classified as available-for-sale be reported at fair value and the related unrealized gain or loss, net of deferred income taxes, be reported as a separate component of stockholders' equity. Additionally, pursuant to GAAP, deferred acquisition costs for interest-sensitive products, decreased $7.3 million at December 31, 1995 and increased $10.1 million at December 31, 1994 for the effect that would have been recognized had the unrealized gain/loss at December 31, 1995 and 1994 on debt securities actually been realized. During 1995 and 1994, consistent with the Company's investment strategy, certain changes were made in the investment portfolio to improve the overall investment results. During 1995, the Company sold certain parcels of real estate, reduced common stock and GNMA holdings, and increased investments in bonds and mortgage loans. These changes will result in increased future investment earnings. The current investment strategy includes increasing investments in corporate bonds and mortgage loans while decreasing investments in GNMA's on a gradual basis. The mortgage loan portfolio at December 31, 1995, which aggregated $29.5 million, consisted of residential mortgages of $1.5 million and commercial mortgages of $28.0 million (with no concentration in any particular industry), all of which were first mortgages on properties located in the Southeast. There were no non-performing mortgage loans in the portfolio at December 31, 1995. The Company holds no collateralized mortgage obligations or derivative securities. 15 4 MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED Policy loans totaled $376.7 million at December 31, 1995, or 38.5% 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 $348.6 million at December 31, 1995. As discussed earlier, the policy loan feature is an integral part of the product. MSP policy loans increased by approximately $24.9 million in 1995 over 1994. The Company's investment strategy is to earn a favorable return on its investments in excess of rates for which the Company is contractually obligated to its policyholders. To achieve this policy, the Company maintains an asset/liability matching program, monitoring the investment spread achieved on each product. Targeted investment spreads have been maintained for all products despite fluctuations in interest rates and an overall compression of market rates. NOTES PAYABLE TO BANKS Notes payable to banks at December 31, 1995 were $95.0 million compared to a balance of $84.2 million at December 31, 1994. The increase in bank debt at December 31, 1995 compared to the amount at December 31, 1994 reflected the cash needs of the Company, including stockholder dividends, interest expense on outstanding debt and federal income taxes. The notes payable to banks at December 31, 1995 and 1994 included $40.0 million related to two separate $20.0 million investment purchases where the Company is earning a positive spread on the invested assets acquired less the interest paid on the bank debt. These two loans mature in January, 1996 and June, 1997. The loan that matured in January, 1996 was repriced on a short-term basis at an interest rate of 5.8%. Under the terms of the note agreements, the Company may choose to pay off or renew the debt obligations at the Company's option, depending upon economic conditions at the respective maturity dates. The weighted average interest rate on the remaining $55.0 million of bank debt at December 31, 1995 was 6.26%. OTHER The Company is a holding company; and its liquidity is largely dependent on the ability of its subsidiaries, primarily AHL, to pay dividends and on external financing. In addition, the Company charges its subsidiaries a management fee to cover its basic operating expenses. On October 4, 1993, the Company closed on its public stock offering with 1,872,045 common shares sold which resulted in net proceeds of $33.5 million. This amount was contributed as additional capital to AHL on October 13, 1993. 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. A dividend of approximately $13.2 million, related to AHL's earnings in 1994, was paid to the Company in 1995. AHL chose not to pay any dividends to the Company during 1994 and 1993. Approximately $33.1 million, related to 1995 earnings, is available to dividend to the Company during 1996 without regulatory approval. The outstanding bank debt of the Company is serviced through either dividends from AHL in excess of the amount required to pay stockholder dividends or by replacement borrowing. In the fourth quarter of 1995, the Board of Directors of American Heritage Life Investment Corporation authorized management to repurchase from time to time up to 300,000 shares of the Company's common stock. At December 31, 1995, 51,300 shares had been acquired and funded by borrowings of $1,118,030. The Risk-Based Capital for Life and/or Health Insurers Model Act was adopted by the National Association of Insurance Commissioners (NAIC) in 1992. A similar act was adopted for property and casualty insurance companies in 1994. The main purpose of these model acts is to provide a tool for insurance regulators to evaluate the capital of insurers. Based on calculations using the appropriate NAIC formula, AHL and FCIC exceeded the Risk-Based Capital requirements at December 31, 1995 and 1994. 16 5 CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31 1995 1994 1993 ============================================================================================ Income: Insurance revenues $247,251,129 230,588,676 227,375,675 Net investment income 70,601,365 66,706,493 63,874,776 Realized investment gains, net 6,002,693 2,011,089 1,183,827 - ------------------------------------------------------------------------------------------- Total income 323,855,187 299,306,258 292,434,278 - ------------------------------------------------------------------------------------------- Benefits, claims and expenses: Benefits and claims 148,580,396 146,145,951 159,335,377 Underwriting, acquisition and insurance expenses: Taxes, commissions and general expenses 106,398,967 95,326,393 82,298,444 Amortization of deferred acquisition costs 23,744,359 20,757,868 20,090,573 Other operating expenses 3,693,979 2,413,444 1,805,555 - ------------------------------------------------------------------------------------------- Total benefits, claims and expenses 282,417,701 264,643,656 263,529,949 - ------------------------------------------------------------------------------------------- Earnings before income taxes 41,437,486 34,662,602 28,904,329 Income taxes 13,362,100 11,021,700 9,189,700 - ------------------------------------------------------------------------------------------- Net earnings $ 28,075,386 23,640,902 19,714,629 - ------------------------------------------------------------------------------------------- Net earnings per share of common stock $ 2.02 1.71 1.59 ===========================================================================================
See accompanying notes to consolidated financial statements. 17 6 CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31 1995 1994 ============================================================================================== Investments: Debt securities, available-for-sale, at fair value (amortized cost of $493,813,866 in 1995 and $450,670,196 in 1994) $ 515,428,786 412,746,726 Equity securities, available-for-sale, at fair value (cost of $23,209,058 in 1995 and $35,583,745 in 1994) 34,734,980 52,476,038 Mortgage loans on real estate 29,506,184 20,625,877 Investment real estate, at cost 375,204 1,022,985 Policy loans 376,672,196 351,160,060 Short-term investments 22,885,597 7,697,740 - ---------------------------------------------------------------------------------------------- Total investments 979,602,947 845,729,426 - ---------------------------------------------------------------------------------------------- Cash 20,681,707 19,490,055 Agents' balances and prepaid commissions 39,077,008 39,146,576 Premiums receivable 41,816,329 43,434,693 Accrued investment income 24,274,265 16,197,251 Deferred acquisition costs 158,250,346 162,867,773 Property and equipment, at cost, less accumulated depreciation of $10,337,104 in 1995 and $9,717,228 in 1994 27,829,804 27,294,320 Reinsurance receivables 9,230,940 11,730,734 Other assets 17,132,578 13,366,322 - ---------------------------------------------------------------------------------------------- $1,317,895,924 1,179,257,150 ==============================================================================================
See accompanying notes to consolidated financial statements. 18 7
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 ====================================================================================== Policy liabilities: Future policy benefits $205,087,735 192,511,754 Policyholders' account balances 635,670,066 576,535,760 Unearned premiums 53,317,152 51,604,266 Policy and contract claims 50,375,445 53,308,899 - -------------------------------------------------------------------------------------- Total policy liabilities 944,450,398 873,960,679 - -------------------------------------------------------------------------------------- Notes payable to banks, short-term 74,994,000 64,201,000 Notes payable to banks, long-term 20,000,000 20,000,000 Deferred income taxes 28,882,185 16,559,755 Other liabilities 30,240,111 31,176,101 - -------------------------------------------------------------------------------------- Total liabilities 1,098,566,694 1,005,897,535 - -------------------------------------------------------------------------------------- Stockholders' equity: Common stock of $1.00 par value: Authorized 20,000,000 shares; issued 13,933,206 in 1995 and 13,905,794 in 1994 13,933,206 13,905,794 Preferred stock: Convertible of $10.00 par value: Authorized 500,000 shares; none issued - - Non-convertible of $10.00 par value: Authorized 500,000 shares; none issued - - Additional paid-in capital 42,214,787 41,866,379 Retained earnings 148,454,353 129,406,469 Net unrealized investment gains (losses) 16,772,078 (10,892,295) - -------------------------------------------------------------------------------------- 221,374,424 174,286,347 Less cost of 97,277 in 1995 and 45,954 in 1994 common shares in treasury 2,045,194 926,732 - -------------------------------------------------------------------------------------- Total stockholders' equity 219,329,230 173,359,615 $1,317,895,924 1,179,257,150 ======================================================================================
19 8 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31 1995 1994 1993 ========================================================================================================= Common stock: Balance at beginning of year $13,905,794 13,880,278 7,948,186 Add par value of shares issued pursuant to stock splits in the form of stock dividends - - 3,997,564 Shares issued in connection with stock offering - - 1,872,045 Add shares issued on exercise of stock options 5,147 2,002 - Other shares issued (surrendered), net 22,265 23,514 62,483 - --------------------------------------------------------------------------------------------------------- Balance at end of year 13,933,206 13,905,794 13,880,278 - --------------------------------------------------------------------------------------------------------- Additional paid-in capital: Balance at beginning of year 41,866,379 41,482,746 8,134,187 Excess over par value of shares issued in connection with stock offering - - 31,659,071 Deduction related to exercise of stock options (54,310) (22,197) - Excess over par value on other shares issued 402,718 405,830 1,689,488 - --------------------------------------------------------------------------------------------------------- Balance at end of year 42,214,787 41,866,379 41,482,746 - --------------------------------------------------------------------------------------------------------- Retained earnings: Balance at beginning of year 129,406,469 115,464,920 107,199,755 Add net earnings 28,075,386 23,640,902 19,714,629 Deduct cash dividends declared on common stock ($.65 per share in 1995, $.70 per share in 1994 and $.59 per share in 1993) (9,027,502) (9,699,353) (7,419,662) Deduct par value of shares issued pursuant to stock splits in the form of stock dividends - - (3,997,564) Deduct cash dividend in lieu of issuance of fractional shares related to stock splits - - (32,238) - --------------------------------------------------------------------------------------------------------- Balance at end of year 148,454,353 129,406,469 115,464,920 - --------------------------------------------------------------------------------------------------------- Net unrealized investment gains (losses): Balance at beginning of year (10,892,295) 14,026,745 25,290,094 Unrealized gain upon adoption of FAS 115 at beginning of year - 3,855,293 - Change during the year 27,664,373 (28,774,333) (11,263,349) - --------------------------------------------------------------------------------------------------------- Balance at end of year 16,772,078 (10,892,295) 14,026,745 - --------------------------------------------------------------------------------------------------------- Treasury stock: Balance at beginning of year 926,732 924,503 606,907 Add treasury shares purchased (51,323 shares in 1995, 127 shares in 1994 and 14,428 shares in 1993) 1,118,462 2,229 317,596 - --------------------------------------------------------------------------------------------------------- Balance at end of year 2,045,194 926,732 924,503 - --------------------------------------------------------------------------------------------------------- Total stockholders' equity $219,329,230 173,359,615 183,930,186 =========================================================================================================
See accompanying notes to consolidated financial statements. 20 9 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1995 1994 1993 ============================================================================================================= Operating activities: Net earnings $28,075,386 23,640,902 19,714,629 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in agents' balances and prepaid commissions 69,568 (1,685,089) (7,956,578) Change in premiums receivable 1,618,364 (1,118,525) (4,809,336) Change in accrued investment income (8,072,512) (10,106,418) (589,258) Change in reinsurance receivables 2,499,794 (4,373,374) 64,557 Amortization of deferred acquisition costs 23,744,359 20,757,868 20,090,573 Acquisition costs deferred (33,066,762) (27,154,051) (29,078,713) Change in future policy benefits 12,575,981 8,168,151 7,598,510 Change in policyholders' account balances 49,146,959 45,243,773 51,772,423 Change in unearned premiums 1,712,886 4,726,574 13,402,925 Change in policy and contract claims liability (3,433,454) (3,105,825) 507,683 Change in income taxes 3,170,493 5,764,326 (2,894,285) Change in unearned investment income (803,546) (16,237,325) 2,909,032 Provision for depreciation and amortization 1,706,197 1,907,688 2,417,991 Other, net (3,109,884) 2,079,649 797,801 - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 75,833,829 48,508,324 73,947,954 - ------------------------------------------------------------------------------------------------------------- Investing activities: Sales of debt securities 46,209,384 32,102,680 187,784,357 Maturities of debt securities 32,025,829 65,018,991 118,636,008 Sales of equity securities 13,951,296 2,576,814 31,259,998 Maturities of mortgage loans on real estate 2,032,781 2,019,204 2,881,949 Policy loans paid 18,124,136 18,564,952 14,629,461 Sales of property and equipment and investment real estate 1,296,141 13,057 3,095,381 Acquisition of block of business 6,046,744 - - Purchases of debt securities (121,355,196) (104,742,062) (384,145,735) Purchases of equity securities (2,436,944) (5,817,667) (14,996,857) Origination of mortgage loans on real estate (10,913,088) (4,727,270) (6,804,150) Sales (purchases) of short-term investments, net (15,187,857) (5,038,954) 713,011 Policy loans made (42,736,849) (35,055,135) (56,819,388) Purchases of property and equipment and investment real estate (2,029,702) (13,062,743) (10,321,292) Other, net - (3,115,871) 2,994,427 - ------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (74,973,325) (51,264,004) (111,092,830) - ------------------------------------------------------------------------------------------------------------- Financing activities: Proceeds received from stock offering - - 33,531,116 Net proceeds from short-term borrowings 10,793,000 11,720,000 10,379,000 Dividends to stockholders (9,027,502) (9,699,353) (7,419,662) Purchase of treasury stock (1,118,462) (2,229) (317,596) Other, net (315,888) 1,242,166 1,855,202 - ------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 331,148 3,260,584 38,028,060 - ------------------------------------------------------------------------------------------------------------- Increase in cash 1,191,652 504,904 883,184 Cash at beginning of year 19,490,055 18,985,151 18,101,967 - ------------------------------------------------------------------------------------------------------------- Cash at end of year $20,681,707 19,490,055 18,985,151 - ------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 5,721,054 4,039,768 3,569,560 Federal income taxes 9,650,000 4,800,000 10,100,000 =============================================================================================================
See accompanying notes to consolidated financial statements. 21 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 subsidiary is American Heritage Life Insurance Company (AHL). 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. First Colonial Insurance Company, a subsidiary of AHL, markets credit property insurance and is currently licensed in twelve states. (B) BASIS OF PRESENTATION The accompanying consolidated financial statements are presented on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Such principles differ in some respects from those followed in preparing statutory reports filed with various insurance departments for AHL. Under GAAP: (1) Insurance Revenue and Expense Recognition: For traditional insurance products, premiums, benefits and expenses are reported in a manner which results in the recognition of profits over the life of the policies. For interest-sensitive products, premiums received are recognized as deposits; revenues consist of surrender, mortality and expense charges; and profits are recognized as earned. (2) Investments: Bonds and redeemable preferred stocks, which are classified as debt securities available-for-sale, are stated at fair value. (3) Deferred Acquisition Costs: The costs (principally commissions) of acquiring traditional life, interest-sensitive products and accident and health contracts, certain expenses of the policy issue and underwriting department, and certain agency expenses, all of which vary with and are primarily related to the production of new business, have been deferred. Deferred acquisition costs of traditional life and accident and health contracts are being amortized over the premium payment period of the related policies using the same assumptions as were used for computing liabilities for future policy benefits, together with appropriate expense assumptions. For interest-sensitive life products, deferred acquisition costs are being amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and investment, mortality and expense margins. Assumptions used for estimating the related gross profits are evaluated regularly (at least annually) and amortization is appropriately modified. (4) Insurance Liabilities: The liabilities for future policy benefits (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, except for interest-sensitive products) are computed by a net level premium method using estimated future investment yields from 3.75% to 8.00%; withdrawals based on Company experience; mortality, and morbidity from recognized morbidity and mortality tables modified for anticipated company experience, with reasonable provisions for possible future adverse experience deviations. Policyholders' account balances represent premiums received plus interest credited during the contract accumulation period, less contract charges for mortality and expenses. For the years ended December 31, 1995 and 1994, the weighted average interest rates credited to the policyholders' account balances were 6.28% and 5.64%, respectively; and the related interest credited to the policyholders' account balances was $35,208,675 and $30,575,168. The surrender charge provisions for interest-sensitive policies vary depending upon the type of policy. For universal life-type policies, the surrender charges generally range over a period of 10-20 years at varying rates depending upon the plan of insurance. For annuities, the surrender charges generally range over a period of 7-10 years with charges varying from 1% to 10% of the accumulated fund value over the surrender charge period. (C) VALUATION OF CERTAIN INVESTMENTS Debt securities are investments which mature at a specified future date more than one year after they were issued. Equity securities include common stocks. During the year ended December 31, 1994, the Company adopted the provisions of Financial Accounting Standard Board's Statement of the Financial Accounting Standard No. 115, "Accounting for Investments in Certain Debt and Equity Securities." Under these provisions, investments are required to be categorized as (1) held to maturity, (2) available-for-sale, or (3) trading. All debt and equity securities have been classified by the Company as available-for-sale and are stated at fair value. Unrealized gains or losses, on debt securities and equity securities available-for-sale in 1995 and 1994 and equity securities in 1993, resulting from fluctuations in fair values were recorded, net of deferred income taxes and adjustments to the deferred acquisition costs for interest-sensitive insurance products, directly to a 22 11 separate component of stockholders' equity. Realized investment gains or losses are calculated on the basis of specific identification and include writedowns on those investments where the decline in value below its cost or amortized cost is considered to be other than temporary. Policy loans are carried at the actual amount loaned to the policyholder. No policy loans are made for amounts in excess of the cash surrender value of the related policy. Accordingly, in all instances, the policy loans are fully collateralized by the related liability for future policy benefits for traditional insurance policies and by the policyholders' account balance for interest-sensitive policies. (D) PROPERTY AND EQUIPMENT Depreciation of property and equipment is computed on the straight-line method over the estimated useful lives of the respective assets. (E) POLICY AND CONTRACT CLAIMS Accruals are provided to cover the cost of reported claims not paid and for claims incurred but not reported to the Company. The accruals are computed based on historical claims experience modified for variations in expected future benefits. (F) OTHER OPERATING EXPENSES Other operating expenses include primarily interest expense related to bank borrowings and other general corporate expenses of AHLIC. (G) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. (H) EARNINGS PER SHARE Earnings per share of common stock are based on the weighted average number of shares outstanding during each year, excluding treasury shares. Options outstanding to purchase common stock had no significant dilutive effect on earnings per share. (I) RECLASSIFICATIONS Certain amounts for 1994 and 1993 have been reclassified to conform with the presentation adopted in 1995. (2) INCOME TAXES The effective federal income tax rates on earnings before income taxes were lower than the maximum statutory rates as follows:
- ---------------------------------------------------------------------------------------------------- 1995 1994 1993 Amt.(*) % Amt.(*) % Amt.(*) % - ---------------------------------------------------------------------------------------------------- Computed "expected" tax expense $14,503 35 $12,132 35 $10,117 35 Dividends received deduction (448) (1) (570) (2) (337) (1) Tax exempt interest (8) - (13) - (13) - Credits from oil and gas investments (677) (2) (523) (1) (574) (2) Other, net (8) - (4) - (3) - - ---------------------------------------------------------------------------------------------------- Effective income tax expense $13,362 32 $11,022 32 $9,190 32 - ----------------------------------------------------------------------------------------------------
*Presented in thousands. Deferred income taxes reflect the impact of temporary differences between the financial statement and tax basis carrying values of assets and liabilities. The temporary differences that gave rise to significant portions of the deferred tax liability and the effect on deferred income tax expense of changes in those temporary differences for the years ended December 31, 1995, 1994 and 1993 (in thousands) were as follows:
- --------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- Excess of GAAP earnings over statutory earnings of life insurance operations $ 3,571 6,248 2,915 Difference in tax and statutory policy liabilities (450) (1,494) (13) Unearned investment income 149 4,683 (247) Deferred acquisition costs tax (2,573) (2,157) (2,481) Deferred gain on real estate 2,286 - - Miscellaneous items, net 252 (338) 596 - --------------------------------------------------------------------------------------------------------------------------------- Deferred income tax expense $ 3,235 6,942 770 - ---------------------------------------------------------------------------------------------------------------------------------
The components of income tax expense for each of the three years ended December 31, 1995 (in thousands) follow:
- -------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Current $10,127 4,080 8,420 Deferred 3,235 6,942 770 - -------------------------------------------------------------------------------------------------------------------------------- Total $13,362 11,022 9,190 - --------------------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 1995 and December 31, 1994 (in thousands) were as follows:
- ---------------------------------------------------------------- 1995 1994 - ---------------------------------------------------------------- Deferred tax assets: Insurance reserves $23,081 26,806 Unrealized investment losses on securities available-for-sale - 3,812 Unearned investment income 400 524 Other 304 - Less: Valuation allowance - (3,812) - ---------------------------------------------------------------- Total deferred tax assets 23,785 27,330 - ---------------------------------------------------------------- Deferred tax liabilities: Deferred acquisition costs 41,350 43,160 Unrealized investment gains on securities available-for-sale 9,031 - Deferred gain on real estate 2,286 - Other - 730 - ---------------------------------------------------------------- Total deferred tax liabilities 52,667 43,890 - ---------------------------------------------------------------- Net deferred tax liability 28,882 16,560 Current tax liability (asset) 100 (505) - ---------------------------------------------------------------- Accrued and deferred income taxes $28,982 16,055 - ----------------------------------------------------------------
23 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED No valuation allowance was recorded at December 31, 1995. At December 31, 1994, a deferred tax valuation allowance of $3,812,265 was established on deferred tax assets associated with the unrealized investment losses on securities available-for-sale. Prior to 1985, certain life insurance company income was not subject to federal income tax until distributed. For tax purposes such income was accumulated in a memorandum "policyholders' surplus account" and taxed upon distribution. At December 31, 1995, the policyholders' surplus account was $8,772,071. (3) INVESTMENTS For the years ended December 31, 1995, 1994 and 1993, net investment income was as follows:
- ---------------------------------------------------------------------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- Investment income: Debt securities $38,675,897 37,386,736 35,930,897 Equity securities 1,679,445 1,745,996 1,853,458 Mortgage loans on real estate 2,289,602 1,920,979 1,477,090 Investment real estate 42,885 52,204 541,976 Policy loans 30,230,887 27,553,970 26,408,929 Short-term investments 2,776,262 2,854,880 2,678,327 Other 4,200 8,607 96,087 - ---------------------------------------------------------------------------------------------------------- Gross investment income 75,699,178 71,523,372 68,986,764 Investment expenses 5,097,813 4,816,879 5,111,988 - ---------------------------------------------------------------------------------------------------------- Net investment income $70,601,365 66,706,493 63,874,776 - ----------------------------------------------------------------------------------------------------------
Proceeds from sales and maturities of investments in debt securities during 1995, 1994 and 1993 were $69,288,549, $97,220,363 and $310,534,483, respectively. Gross gains and losses on those sales, and net gains and losses on sales of other investments, were as follows:
- ------------------------------------------------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------------------- Debt securities - gains $ 897,439 2,578,320 4,442,290 Debt securities - losses (14,708,841) (2,305,110) (5,484,171) - ------------------------------------------------------------------------------- Debt securities, net (13,811,402) 273,210 (1,041,881) Equity securities, net 13,186,845 1,749,675 2,224,838 Real estate 7,127,250 (11,796) ( 7,914) Other, net (500,000) - 8,784 - ------------------------------------------------------------------------------- Realized investment gains, net* $ 6,002,693 2,011,089 1,183,827 - -------------------------------------------------------------------------------
* Included for 1995 in realized investment gains, net were realized losses related to the settlement of certain litigation, aggregating approximately $3,200,000. Stockholders' equity included the following unrealized investment gains (losses) at December 31:
- ----------------------------------------------------------------------------------------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- Equity securities available-for-sale: Gross unrealized investment gains $12,068,045 18,717,048 22,162,722 Gross unrealized investment losses (542,123) (1,824,755) (583,127) - ----------------------------------------------------------------------------------------------------------- 11,525,922 16,892,293 21,579,595 - ----------------------------------------------------------------------------------------------------------- Debt securities available-for-sale: Gross unrealized investment gains 23,965,535 2,033,609 - Gross unrealized investment losses (2,350,615) (39,957,079) - - ----------------------------------------------------------------------------------------------------------- 21,614,920 (37,923,470) - - ----------------------------------------------------------------------------------------------------------- Gross unrealized investment gains (losses) 33,140,842 (21,031,177) 21,579,595 Increase (decrease)in deferred acquisition costs for interest- sensitive insurance products (7,337,628) 10,138,882 - Deferred federal income tax (benefit) (9,031,136) - (7,552,850) - ----------------------------------------------------------------------------------------------------------- Net unrealized investment gains (losses) $16,772,078 (10,892,295) 14,026,745 - -----------------------------------------------------------------------------------------------------------
The change in unrealized depreciation on debt securities for the year ended December 31, 1993 was $10,016,287. The amortized cost and fair values of debt securities available-for-sale by category of securities were as follows:
- ---------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE - ---------------------------------------------------------------------------------- December 31, 1995: Obligations of U.S. government corpora- tions and agencies $ 13,932,073 1,329,993 - 15,262,066 Obligations of state and local governments 345,000 27,600 - 372,600 Corporate securities 283,046,263 21,105,333 712,974 303,438,622 GNMA's 196,490,530 1,502,609 1,637,641 196,355,498 - ---------------------------------------------------------------------------------- Total $493,813,866 23,965,535 2,350,615 515,428,786 - ---------------------------------------------------------------------------------- December 31, 1994: Obligations of U.S. government corpora- tions and agencies $ 5,645,467 428,433 147,607 5,926,293 Obligations of state and local governments 345,000 37,950 - 382,950 Corporate securities 226,154,428 1,495,267 20,378,534 207,271,161 GNMA's 218,525,301 71,959 19,430,938 199,166,322 - ---------------------------------------------------------------------------------- Total $450,670,196 2,033,609 39,957,079 412,746,726 - ----------------------------------------------------------------------------------
The amortized cost and fair value of debt securities available-for-sale at December 31, 1995, by contractual maturity, were as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without penalties. 24 13
- ------------------------------------------------------------------------- DECEMBER 31, 1995 -------------------------- AMORTIZED FAIR COST VALUE - ------------------------------------------------------------------------- Due in one year or less $ 5,616,792 5,729,284 Due after one year through five years 7,610,743 8,433,999 Due after five years through ten years 135,888,071 146,812,594 Due after ten years 119,447,770 129,429,412 GNMA's 196,490,530 196,355,498 Redeemable preferred stocks 28,759,960 28,667,999 - ------------------------------------------------------------------------- Total $493,813,866 515,428,786 - -------------------------------------------------------------------------
The amortized cost of high yield bonds included in debt securities available-for-sale was $30,152,831 with a market value of $32,817,380, which represented 3.4% of invested assets. There were no individual investments at December 31, 1995, other than U.S. government securities, which exceeded 10% of the Company's stockholders' equity. (4) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are summarized as follows:
- ------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1995 - ------------------------------------------------------------------------------------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE - ------------------------------------------------------------------------------------------------- Debt securities $ 515,428,786 515,428,786 Equity securities 34,734,980 34,734,980 Mortgage loans on real estate 29,506,184 35,569,633 Investment real estate 375,204 2,400,000 Policy loans 376,672,196 376,672,196 Cash and short-term investments 43,567,304 43,567,304 - ------------------------------------------------------------------------------------------------- Total cash and investments $1,000,284,654 1,008,372,899 Notes payable to banks $ 94,994,000 94,994,000 ================================================================================================= AT DECEMBER 31, 1994 - ------------------------------------------------------------------------------------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE - ------------------------------------------------------------------------------------------------- Debt securities $412,746,726 412,746,726 Equity securities 52,476,038 52,476,038 Mortgage loans on real estate 20,625,877 22,813,189 Investment real estate 1,022,985 5,600,000 Policy loans 351,160,060 351,160,060 Cash and short-term investments 27,187,795 27,187,795 - ------------------------------------------------------------------------------------------------- Total cash and investments $865,219,481 871,983,808 - ------------------------------------------------------------------------------------------------- Notes payable to banks $ 84,201,000 84,201,000 - -------------------------------------------------------------------------------------------------
These fair values were determined as follows: Debt securities The fair value and carrying value of debt securities were estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. Equity securities The fair value and carrying value of equity securities, other than private placements, were based on bid prices published in financial newspapers. For private placements, cost has been determined to approximate fair value. Mortgage loans on real estate For residential mortgage loans, fair value was estimated using quoted market prices for securities backed by similar loans. The fair value of commercial loans was estimated by discounting expected future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Investment in real estate The fair value of real estate was calculated using estimated market values. Policy loans The fair value of policy loans approximates the book value, as interest rates charged for a majority of the policy loans are updated to current market rates on an annual basis. Cash and short-term investments The carrying amount approximates fair value because of the short maturity of these instruments. Notes Payable to Banks The carrying amount estimates fair value because the interest rates charged approximate current market rates. (5) NOTES PAYABLE TO BANKS Short-term notes payable to banks at December 31, 1995, of which all were unsecured, related to advances under $100,000,000 lines of credit ($25,006,000 available to be drawn at December 31, 1995) bearing interest at rates ranging from 4.85% to 8.00%. The arrangements under the terms of the lines of credit are reviewed annually for renewal. Debt of $40,000,000, of which $20,000,000 is long-term and secured, matures in 1996 and 1997 and relates to the acquisition of $40,000,000 of GNMA's, which were financed at interest rates of 4.85% and 6.10% and provide a positive interest spread between the rate earned on the GNMA's and the respective borrowing rate. Interest expense for the years ended December 31, 1995, 1994 and 1993 totaled $5,555,271, $4,016,637 and $3,569,676, respectively, of which $3,311,939, $2,020,545 and $1,413,993, respectively, were included in other operating expenses and $2,243,332, $1,996,092 and $2,155,683, respectively, related to the purchase of the GNMA's discussed above which reduced net investment income. (6) REINSURANCE In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding insurance to other insurance companies or reinsurers under excess coverage and co-insurance contracts. The maximum risk generally retained on ordinary life insurance on any one insured is $100,000 for policies issued prior to July 1, 1994 and $200,000 on policies issued subsequent to July 1, 1994. The amount retained on group and credit life insurance is generally $50,000. Generally, income from reinsurance arrangements is recognized in a manner similar to the income recognition on the underlying policy contracts. 25 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED A contingent liability exists for that portion of the policies reinsured in the event that the reinsuring companies are unable to pay their share of any resulting claims as reinsurance contracts do not relieve the Company from its obligations to its policyholders. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The amount of insurance premiums assumed and ceded under reinsurance agreements for the year ended December 31, 1995 was $12,616,191 and $97,826,310, respectively. For the year ended December 31, 1994 the amount assumed and ceded was $3,159,171 and $73,993,254, respectively. The amounts of recoveries for benefits paid under reinsurance agreements for the years ended December 31, 1995 and 1994 were $96,660,625 and $70,936,685, respectively. (7) EMPLOYEES AND AGENTS BENEFIT PLANS (a) STOCK OPTIONS The Company has three stock option plans primarily for its employees. Under the plans, options are granted to purchase shares of AHLIC's common stock at per share prices of not less than 100% of fair market value at date of grant. At December 31, 1995, options to purchase 271,947 shares (94,443 shares exercisable) were outstanding at option prices ranging from $11.13 to $21.50 per share (aggregate $4,919,154). In addition, options to purchase 322,055 shares were available for future grant. At December 31, 1994, options to purchase 291,561 shares (72,919 shares exercisable) were outstanding at option prices ranging from $11.13 to $21.50 per share (aggregate $5,174,927). In addition, options to purchase 319,775 shares were available for future grant. In 1995, 41,984 shares were granted at an option price of $18.50 per share. In 1994, 24,612 shares were granted at an option price of $18.75 per share. In 1993, 19,779 shares were granted at an option price of $21.50 per share and 120,000 shares were granted at an option price of $17.50 per share. In 1995, 17,334 shares were exercised at $11.13 per share. In 1994, 1,334 shares were exercised at $11.13 per share and 5,334 shares at $9.38 per share. In 1993, no shares were exercised. (b) PROFIT SHARING 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 $1,171,350 in 1995, $1,110,520 in 1994 and $1,076,758 in 1993. The total return to participants in 1995 was 10.87%. The average annual return to participants for the last ten years was 9.45%. (c) STOCK PURCHASE PLAN The Company maintains a stock purchase plan under which its employees and directors and those of its subsidiaries can purchase shares of its common stock in the open market through an unaffiliated plan administrator. Pursuant to the plan, 299,203 shares had been purchased as of December 31, 1995. During the years ended December 31, 1995 and 1994, 29,512 shares and 31,802 shares, respectively, were purchased pursuant to the plan. This plan provides for monthly payroll and directors' fees purchases up to $1,500, with the employer making a monthly percentage contribution for the 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 also maintains a stock purchase plan under which its agents can purchase shares of its common stock in the open market through an unaffiliated plan administrator. Pursuant to the plan, 20,606 shares had been purchased as of December 31, 1995. During the years ended December 31, 1995 and 1994, 10,448 shares and 10,158 shares, respectively, were purchased pursuant to the plan.The plan provides for monthly deductions from commissions payable by participating subsidiaries of the Company to their participating agents with a minimum monthly deduction of $1,000 and maximum of $2,000. The participating subsidiary contributes, at the time of each purchase, an amount equal to five percent (5%) of its agent's deduction for purchases from commissions payable. (8) POLICY AND CONTRACT CLAIMS Activity in the liability for policy and contract claims at December 31, 1995, 1994 and 1993 (in thousands) is summarized as follows:
- ----------------------------------------------------------- 1995 1994 1993 - ----------------------------------------------------------- Balance at beginning of year $53,309 56,415 55,907 Less reinsurance recoverables 3,142 2,096 2,925 - ----------------------------------------------------------- Net balance at beginning of year 50,167 54,319 52,982 - ----------------------------------------------------------- Incurred related to: Current year 126,874 118,065 127,163 Prior years (383) (1,130) (813) - ----------------------------------------------------------- Total incurred 126,491 116,935 126,350 - ----------------------------------------------------------- Paid related to: Current year 114,149 101,868 106,711 Prior years 15,726 19,219 18,302 - ----------------------------------------------------------- Total paid 129,875 121,087 125,013 - ----------------------------------------------------------- Net balance at end of year 46,783 50,167 54,319 Plus reinsurance recoverables 3,592 3,142 2,096 - ----------------------------------------------------------- Balance at end of year $50,375 53,309 56,415 - -----------------------------------------------------------
26 15 (9) INDUSTRY SEGMENT INFORMATION Insurance revenues, total income, and pre-tax operating earnings, reconciled to net earnings, for the three years ended December 31, 1995 for each industry segment, Ordinary, Group and Credit, were as follows:
--------------------------------------------------------------- (in thousands) 1995 1994 1993 *Insurance revenues: Ordinary $123,718 113,993 108,975 Group 39,925 43,222 52,823 Credit 83,608 73,374 65,578 --------------------------------------------------------------- Total insurance revenues $247,251 230,589 227,376 --------------------------------------------------------------- *Total income: Ordinary $185,277 171,471 164,700 Group 45,281 48,879 57,802 Credit 87,619 77,221 68,958 Other non-segmented income less eliminations (325) (276) (209) Realized investment gains (losses) 6,003 2,011 1,184 --------------------------------------------------------------- Total income $323,855 299,306 292,435 --------------------------------------------------------------- Operating earnings: *Ordinary - Total income $185,277 171,471 164,700 Less deductions: Benefits and claims 103,184 95,637 94,240 Taxes, commissions and general expenses 29,414 29,027 28,571 Amortization of deferred acquisition costs 23,744 20,758 20,091 --------------------------------------------------------------- Pre-tax operating earnings 28,935 26,049 21,798 --------------------------------------------------------------- *Group - Total income 45,281 48,879 57,802 Less deductions: Benefits and claims 25,595 29,094 39,503 Taxes, commissions and general expenses 12,216 12,462 12,257 --------------------------------------------------------------- Pre-tax operating earnings 7,470 7,323 6,042 --------------------------------------------------------------- *Credit - Total income 87,619 77,221 68,958 Less deductions: Benefits and claims 19,802 21,415 25,592 Taxes, commissions and general expenses 65,078 54,052 41,646 --------------------------------------------------------------- Pre-tax operating earnings 2,739 1,754 1,720 --------------------------------------------------------------- Other - Total income 5,677 1,735 975 Less: Total expenses 3,384 2,198 1,630 --------------------------------------------------------------- Total other 2,293 (463) (655) --------------------------------------------------------------- Earnings before income taxes 41,437 34,663 28,905 Income taxes 13,362 11,022 9,190 --------------------------------------------------------------- Net earnings $28,075 23,641 19,715 ---------------------------------------------------------------
* Total income, insurance revenues and operating profits are net of reinsurance. Total income includes net investment income which is allocated to the industry segments based on required liabilities for future policy benefits and policyholders' account balances. 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. (10) STOCKHOLDER'S EQUITY AND NET EARNINGS The payment of dividends to AHLIC by AHL is subject to the regulation of the State of Florida Department of Insurance. A dividend may be made without prior Florida Insurance Commissioner's approval if the dividend is equal to or less than the greater of: (a) 10% of AHL's surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains; or (b) AHL's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, 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. As a result of such restrictions, the maximum dividend which could be paid to AHLIC by AHL during 1996 without prior approval is $33.1 million. AHLIC's insurance subsidiaries had statutory net operating earnings of $18,998,530, $13,466,184 and $11,702,137 and statutory net earnings of $33,940,756, $14,135,172 and $13,744,398 for the years ended December 31, 1995, 1994 and 1993, respectively. Statutory stockholder's equity of such subsidiaries was $134,527,656 at December 31, 1995 and $139,250,736 at December 31, 1994. At December 31, 1995, pursuant to the insurance laws of the State of Florida, the minimum capital and surplus required to be maintained by AHL was approximately $43.4 million. (11) NEW PRONOUNCEMENTS BY THE FINANCIAL ACCOUNTING STANDARDS BOARD No pronouncements which have been issued by the Financial Accounting Standards Board have or will have a significant impact on the consolidated financial statements of the Company. (12) CONTINGENT LIABILITIES AHL, like other insurance companies, is currently a defendant in lawsuits that involve claims for punitive, exemplary or other extracontractual damages, which are for amounts substantially in excess of the actual damages sought. Management considers such litigation regrettably to be of the type to which insurance companies are usually and customarily subjected to in the ordinary course of business and to date the settements of such claims of this nature have not been material to the financial position of the Company. In the opinion of management, based on the currently ascertained facts of the pending litigation, which the Company intends to vigorously defend, the ultimate resolution of such litigation should not be material to the financial position of the Company. 27 EX-21 4 SIGNIFICANT SUBSIDIARY OF THE REGISTRANT 1 EXHIBIT 21 SIGNIFICANT SUBSIDIARY OF THE REGISTRANT American Heritage Life Insurance Company (organized in the State of Florida) EX-27 5 FINANCIAL DATA SCHEDULE
7 1 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 515,428,786 515,428,786 515,428,786 34,734,980 29,506,184 375,204 979,602,947 20,681,707 9,230,940 158,250,346 1,317,895,924 205,087,735 53,317,152 50,375,445 635,670,066 94,994,000 0 0 13,933,206 205,396,024 1,317,895,924 247,251,129 70,601,365 6,002,693 0 148,580,396 23,744,359 106,398,967 41,437,486 13,362,100 28,075,386 0 0 0 28,075,386 2.02 2.02 50,167,000 126,874,000 (383,000) 114,149,000 15,726,000 46,783,000 0
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