-----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, HwgDYAO7Ifon2XXvR9IEbMlM2vxfulC1FPZ+rnsTIgOvKXiD3dFZhn3G9zU8ziAK zZ2lOEFm9GI/fHBJOdLs5g== 0000950144-97-003207.txt : 19970329 0000950144-97-003207.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950144-97-003207 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN BANKERS INSURANCE GROUP INC CENTRAL INDEX KEY: 0000350571 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 591985922 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09633 FILM NUMBER: 97567690 BUSINESS ADDRESS: STREET 1: 11222 QUAIL ROOST DR CITY: MIAMI STATE: FL ZIP: 33157 BUSINESS PHONE: 3052532244 MAIL ADDRESS: STREET 1: 11222 QUAIL ROOST DR CITY: MIAMI STATE: FL ZIP: 33157 10-K405 1 AMERICAN BANKERS INSURANCE GROUP 10-K405 12/31/96 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 [ ] 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 _____________ Commission File Number 0-9633 AMERICAN BANKERS INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) FLORIDA 59-1985922 (State or other jurisdiction of (I.R.S. employer incorporation or organization) Identification No.) 11222 QUAIL ROOST DRIVE, MIAMI, FL 33157 (Address of principal executive offices) Registrant's telephone number, including area code: (305) 253-2244 Securities registered pursuant to Section 12(g) of the Act: Title of Class -------------- Common Stock, $1 Par Value $3.125 Series B Cumulative Convertible Preferred Stock, $50 Liquidation Preference Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 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. [X] The aggregate market value on March 21, 1997, of the voting stock held by non-affiliates of the Registrant was approximately $1,015,099,000. Shares of Common Stock held by executive officers and directors who individually own 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates; however, this determination of affiliate status is not necessarily determinative for other purposes. There were 20,500,000 shares outstanding of the Registrant's Common Stock, $1 par value, as of March 21, 1997. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the definitive Proxy Statement for the annual shareholders meeting to be held May 23, 1997 to be filed within 120 days of the Registrant's fiscal year-end are incorporated by reference in Part III of this Form 10-K. Portions of the Form S-3 Registration Statement Number 2-94359; the Registrant's Annual Report on Form 10-K for the years ended 1988, 1990, 1991, 1993, 1994, and 1995; the Registration Statement on Form 8-A filed March 11, 1988; the Registrant's current report on Form 10-Q dated March 31, 1994, June 30,1995, March 31, 1996, and June 30, 1996; the 1987 Annual Meeting Proxy Statement; the Registrant's current report on Form 8-K dated November 14, 1990 are also incorporated by reference in Part IV of this Form 10-K. ================================================================================ 2 AMERICAN BANKERS INSURANCE GROUP, INC. AND SUBSIDIARIES Table of Contents
PAGE PART I NUMBER ------ Item 1 Business .................................................................................. 2 Item 2 Properties................................................................................. 21 Item 3 Legal Proceedings ......................................................................... 21 Item 4 Submission of Matters to a Vote of Security Holders ....................................... 22 PART II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters .................. 26 Item 6 Selected Financial Data ................................................................... 27 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................... 31 Item 8 Financial Statements and Supplementary Data ............................................... 39 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures .................................................... 75 PART III Item 10 Directors and Executive Officers of the Registrant ........................................ 76 Item 11 Executive Compensation .................................................................... 76 Item 12 Security Ownership of Certain Beneficial Owners and Management ............................ 76 Item 13 Certain Relationships and Related Transactions ............................................ 76 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................... 77
1 3 PART I ITEM 1 BUSINESS a. DEVELOPMENT OF BUSINESS American Bankers Insurance Group, Inc. ("ABIG", "American Bankers" or the "Company") was incorporated in Florida on July 24, 1978. ABIG became the holding company of American Bankers Insurance Company of Florida ("ABIC") and American Bankers Life Assurance Company of Florida ("ABLAC") as a result of their merger with wholly-owned subsidiaries of ABIG after approval by their respective stockholders on October 31, 1980. In addition to ABIC and ABLAC, the Company's subsidiaries include American Bankers Compania de Seguros, S.A. ("ABCS"), American Bankers Suguros de Vida, S.A. ("ABSV"), Seguros la Hemisferica, S.A., Federal Warranty Service Corp. ("FWSC"), Sureway, Inc., Caribbean American Life Assurance Company ("CALAC"), Caribbean American Property Insurance Company ("CAPIC"), American Reliable Insurance Company ("ARIC"), Bankers American Life Assurance Company ("BALAC"), Bankers Insurance Company Limited ("BICL"), Bankers Atlantic Reinsurance Company ("BARC"), and five insurance companies referred to collectively as the Voyager Insurance Companies. ABIC was incorporated in the state of Florida on October 29, 1947 and ABLAC, a legal reserve life insurance company, was incorporated in the state of Florida on February 6, 1952. ABCS, a wholly owned subsidiary in Mexico, began operations in 1995. ABSV, a wholly owned subsidiary in Argentina, began operations in 1996. Seguros la Hemisferica, S.A., a wholly owned subsidiary in the Dominican Republic, began operations in 1996. FWSC, a wholly owned subsidiary in California, was acquired in 1988. Sureway, Inc., a wholly owned subsidiary in Floria, began operations in 1973. CALAC and CAPIC, wholly owned subsidiaries in Puerto Rico, began operations in 1988 and 1992 respectively. ARIC, a wholly owned subsidiary in Arizona, was acquired by the Company in 1984. BALAC, a wholly owned subsidiary in New York, began operations in 1991. BICL, a wholly owned subsidiary in the United Kingdom, began operations in 1990. BARC, a wholly owned subsidiary in the Turks & Caicos islands, began operations in 1995. The Voyager Insurance Companies were acquired by the Company in 1993 and consist of five companies incorporated in Florida, Georgia and South Carolina. The Company's credit-related insurance products consist primarily of credit unemployment, accidental death and dismemberment ("AD&D"), disability, property, and life insurance issued in connection with the financing of consumer purchases. American Bankers also writes non credit-related insurance in markets where it believes it has less competition from other insurers. For example, the Company also sells extended service contracts in connection with consumer purchases. For information on the growth of the Company's business for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, see the Gross Collected Premium table set forth below in "Narrative Description of Business." b. BUSINESS SEGMENT DATA See Note 12 to the Consolidated Financial Statements on page 65 in Part II Item 8 of this report. 2 4 c. NARRATIVE DESCRIPTION OF BUSINESS General The Company is a specialty insurer providing primarily credit-related insurance products in the U.S. and Canada as well as in Latin America, the Caribbean and the United Kingdom. The majority of the Company's gross collected premiums are derived from credit-related insurance products sold through financial institutions and other entities which provide consumer financing as a regular part of their businesses. The Company's credit-related insurance products consist primarily of credit unemployment, accidental death and dismemberment ("AD&D"), disability, property, and life insurance issued in connection with the financing of consumer purchases. Credit-related insurance products generally offer a consumer a convenient option to insure a credit card or loan balance so that the amount of coverage purchased equals the amount of outstanding debt. Coverage is generally available to all consumers with few of the underwriting conditions that apply to ordinary term insurance, such as medical examinations and medical history reports. The Company's life and AD&D insurance products generally provide payment in full of the outstanding debt balance in the event of the insured's death. The unemployment and disability products satisfy the minimum monthly loan payment for a specified duration in the event of unemployment or disability. The Company's property insurance products pay the loan balance or the cost of repairing or replacing the insured's merchandise in the event of a loss due to a covered event. The Company avoids lines of insurance characterized by long loss payout periods, such as workers' compensation and most general liability coverages. The Company markets its products on a wholesale basis through a network of clients that consist primarily of major financial institutions, retailers and other entities which provide consumer financing as a regular part of their businesses. American Bankers enters into contracts, typically with terms of three to five years, with its corporate clients pursuant to which such clients market the Company's insurance products to their customers. In return, these clients receive expense reimbursements or commissions and are thus able to recover costs associated with the marketing of the insurance and generate incremental revenues. The Company's clients typically share in the profitability of business written through them. American Bankers also writes non credit-related insurance in markets where it believes it has less competition from other insurers. For example, the Company's extended service contracts products pay the cost of repairing or replacing the insured's merchandise in the event of damages due to a covered event. In addition, the Company acts as an administrator for the National Flood Insurance Program, for which it earns a fee for collecting premiums and processing claims. The Company does not assume any underwriting risk with respect to this program. The Company's business strategy is to continue developing distribution channels which provide access to large numbers of potential insureds in markets not traditionally served by other insurance companies. In addition, the Company emphasizes long-term relationships and the development of insurance programs designed to meet individual client needs. An essential part of the Company's strategy is to invest in technology which enables American Bankers to accommodate a large group of clients and their customers while simultaneously offering customized insurance programs. 3 5 American Bankers has been able to develop a diverse client base. In 1996, no single client accounted for more than 10% of the Company's gross collected premiums. The Company distributes its products through various markets or distribution channels involving over one thousand clients. Its business is generally not concentrated and the ten largest unrelated clients represent 28% of the Company's gross collected premiums. ABIC and ABLAC jointly market products and programs within each distribution channel, and the Company believes that such cross-marketing achieves economies of scale thus lowering administrative costs. By combining its service and marketing activities, the Company centralizes the processing of its products and avoids duplication of administrative functions. The Company also provides management services and marketing support to its clients. Management services include administration of captive insurance companies and other participating programs for clients. American Bankers provides comprehensive administrative support in claims, accounting, tax, data processing and actuarial matters. The Company also packages credit-related insurance programs to meet a client's particular needs and provides the marketing assistance to implement these programs. Marketing support includes a full range of marketing materials, direct mail and telemarketing services and personnel training programs. The majority of the Company's business utilizes contracts which afford the Company's clients the opportunity to participate in the underwriting results of policies they market to their customers. The "Retro Plan" contract links a client's overall commission to the claims experience on policies marketed to its customers, so that low loss ratios result in higher commissions for the client and high loss ratios result in lower commissions. Another form of participation is a profit sharing contract under which the client participates in up to 50% of the profits generated from its insurance business. The Company also cedes premiums generated by certain clients to the clients' own captive insurance companies or to reinsurance subsidiaries in which clients have an equity interest. For the Company's remaining business, the client's commission is not linked to its claims experience. Business Segments Life Insurance (in thousands)
TOTAL ASSETS NET PREMIUMS TOTAL REVENUES OPERATING INCOME* EARNED 1996 $1,439,300 $384,000 $437,500 $63,900 1995 1,333,100 377,100 417,500 44,700 1994 1,023,600 360,100 394,500 32,000
*Operating income consists of earnings before interest expense and taxes. HIGHLIGHTS o Gross collected premiums increased 9% to $763.2 million in 1996 from $702.5 million in 1995. o Five products (Credit Life, Credit A&H, Group Life, Mortgage A&H, and Group A&H) contributed 92% of the segment's 1996 gross collected premiums. These products are sold through various distribution channels. o Operating income increased by 43% to $63.9 million in 1996 from $44.7 million in 1995. 4 6 SUBSIDIARIES o American Bankers Life Assurance Company of Florida (ABLAC) o American Bankers Seguros de Vida, S.A. (ABSV) o Bankers American Life Assurance Company (BALAC) o Caribbean American Life Assurance Company (CALAC) o Voyager Life and Health Insurance Company (VLHIC) o Voyager Life Insurance Company (VLIC) MAJOR PRODUCTS o Credit Life o Credit Accident & Health o Group Life o Mortgage Accident & Health o Group Accident & Health DISTRIBUTION CHANNELS o Retailers o Financial Institutions Commercial Banks Consumer Finance Companies Mortgage Bankers Savings Institutions o Manufactured Housing, Travel Trailer and Equipment Manufacturers, Dealers and Lenders o Independent Agents PROPERTY AND CASUALTY INSURANCE (in thousands)
TOTAL ASSETS NET PREMIUMS EARNED TOTAL REVENUES OPERATING INCOME* 1996 $1,969,700 $994,500 $1,080,700 $91,900 1995 1,602,200 863,600 934,200 87,400 1994 1,347,300 734,200 775,300 66,700
*Operating income consists of earnings before interest expense and taxes. HIGHLIGHTS o Gross collected premiums increased 9% to $1.7 billion in 1996 from $1.6 billion in 1995. Credit Unemployment and Extended Service Contracts were the products representing the largest premium increases in 1996. o Operating income increased 5% to $91.9 million in 1996 from $87.4 million in 1995. 5 7 SUBSIDIARIES o American Bankers Insurance Company of Florida (ABIC) o American Bankers Compania de Seguros, S.A. (ABCS) o American Reliable Insurance Company (ARIC) o Bankers Insurance Company, Ltd. (BICL) o Caribbean American Property Insurance Company (CAPIC) o Seguros La Hemisferica, S.A. o Voyager Indemnity Insurance Company (VIIC) o Voyager Property and Casualty Insurance Company (VPCIC) WARRANTY COMPANIES o Federal Warranty Service Corporation (FWSC) o Sureway, Inc. o Voyager Service Warranties, Inc. (VSW) o Voyager Service Programs, Inc. (VSP) MAJOR PRODUCTS o Credit Unemployment o Credit Property o Extended Service Contracts o Mobilehome Physical Damage o Credit Accident & Health DISTRIBUTION CHANNELS o Retailers o Financial Institutions Commercial Banks Consumer Finance Companies Mortgage Bankers Savings Institutions o Manufactured Housing, Travel Trailer and Equipment Manufacturers, Dealers and Lenders o Independent Agents For additional Business Segment Information see page 29 in Part II Item 6 of this report. 6 8 PRODUCTS The following table sets forth the gross collected premiums of the Company's major insurance products:
GROSS COLLECTED PREMIUMS MAJOR INSURANCE PRODUCTS YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in millions) Credit Unemployment $ 489.4 $ 410.8 $ 269.8 $ 172.9 $ 127.9 Credit A&H 377.6 349.0 244.5 182.8 174.0 Credit Property 336.9 367.7 354.2 268.6 187.2 Credit Life 309.5 287.2 211.7 165.5 152.1 Extended Service Contracts 203.9 129.5 19.3 12.0 10.7 Mobilehome Physical Damage 132.2 137.3 121.4 100.1 41.6 Homeowners 93.7 101.1 87.0 85.6 91.5 Mortgage A&H 66.6 53.3 49.1 44.3 37.4 Group A&H 50.7 39.6 26.4 27.7 22.4 Livestock Mortality 46.6 40.8 48.6 51.9 29.6 All Other (1) 385.7 370.3 329.1 315.8 246.0 -------------- ------------------ --------------- ------------------ ------------------ Total $ 2,492.8 $ 2,286.6 $ 1,761.1 $ 1,427.2 $ 1,120.4 ============== ================== =============== ================== ==================
- --------------- (1) "All Other" represents a large number of products, approximately 50 to 60 each year. The most significant in 1996 and 1995 are the flood and surety products. The Company's business can be divided into two principal types of products: (1) Financial Market Products, consisting primarily of credit-related insurance, and (2) Personal Insurance lines, consisting of non credit-related products and services. Financial Market Products Property Insurance. The Company's property insurance is written primarily by ABIC, ARIC, CAPIC and certain of the Voyager Companies. Through these subsidiaries, the Company writes a variety of property insurance which includes homeowners' and coverages for comprehensive physical damage of mobilehomes, autos, furniture, fixtures and other consumer goods. In the event of a loss due to a covered event, the Company will either pay off the loan balance or replace or repair the merchandise. The terms of the Company's property policies range from 30 days to multiple years. Multiple year policies generally coincide with the term of the financing for the insured property. For example, a consumer purchasing an automobile and financing the purchase over a three-year period can purchase a three-year physical damage policy at the inception of the loan for a single premium. An increasing proportion of gross collected premiums are monthly premiums received in connection with credit card purchases. Such premiums are based on the average outstanding credit card balance. 7 9 Life and Disability Insurance. Through ABLAC, BALAC, CALAC and certain of the Voyager Companies, the Company writes life, AD&D and disability insurance primarily on consumer loans, mortgages and credit card balances. This life insurance is a form of decreasing term life insurance written generally without medical examination of the borrower. Premiums are received either in a single payment at the time the policy is written or monthly along with the borrower's regular payment. It is normally written for the term of the installment debt and retires all or a portion of the indebtedness in the event of the insured's death. Disability insurance covers a borrower for payments coming due on an installment loan, mortgage loan or revolving charge account while the borrower is disabled. Credit Unemployment Insurance. Through ABIC and CAPIC, the Company writes unemployment insurance on credit card balances in conjunction with life, disability and property coverages. This unemployment insurance provides for the payment of the minimum monthly loan payment for a specified duration while the insured is involuntarily out of work. Premiums for this coverage are based on the average outstanding credit card balance. Extended Service Contracts. The Company's extended service contract (ESC) business involves various arrangements including the administration for and the insuring of obligations for ESC's sold in conjunction with the sale of consumer products by retailers. The ESC's typically provide service guarantees through the retailers which go beyond any manufacturers' warranties underlying the products. Of the Company's "Major Insurance Products", eight are associated with the Financial Market Products. Personal Insurance Lines The Company also derives revenues from non credit-related insurance products and services. These products and services principally consist of: (i) group life and group disability, (ii) individual life and disability products sold through employer-sponsored payroll deduction programs, (iii) administration fees earned in connection with the National Flood Insurance Program, iv) livestock mortality insurance, (v) individual life insurance and annuity products sold principally in Latin America and the Caribbean, and (vi) surety coverages. Underwriting The Company has over 40 years of experience in providing credit life and credit property insurance and therefore maintains an extensive actuarial database for its major lines of business. This database enables the Company to better identify and quantify the expected loss experience and is employed in the design of coverage and the establishment of premium rates. American Bankers uses this information in monitoring the loss experience of individual clients. A distinct characteristic of the Company's credit-related insurance products is that the majority of these products represent relatively low policy values since policy size is equal to the size of the installment purchase or credit card balance. Thus, loss severity for most of the Company's business is low relative to other insurance companies writing more traditional lines of business. For those product lines where exposure to catastrophe loss is higher (Homeowners and Mobilehome Physical Damage) the Company closely monitors and manages its aggregate risk by geographic area and has entered into reinsurance treaties to control its exposure to catastrophe losses. 8 10 With respect to the Company's non credit-related insurance products, the Company utilizes traditional underwriting techniques. The Company seeks to ensure the quality of its business by maintaining strict underwriting standards. In underwriting individual life policies, the Company employs medical questionnaires, medical examinations, and current reports from the Medical Information Bureau. Group underwriting takes into account demographic factors such as age, gender and occupation of members of the groups. The Company also seeks to reduce its risk exposure by avoiding lines of insurance characterized by long loss payout periods, such as workers' compensation and most general liability coverages. Marketing American Bankers markets its credit-related insurance programs as a wholesale distributor through several defined distribution channels: Consumer Finance Companies, Mortgage Bankers, Electric, Gas, and Telephone Utilities, Savings Institutions, Commercial Banks, Manufactured Housing, Travel Trailer and Equipment Manufacturers, Dealers, Lenders, and Retailers. These distribution channels constitute the Company's Financial Market distribution channel. The distribution channel for the Company's Personal Insurance Lines is primarily Independent Agents. At December 31, 1996, the Company had 86 salaried sales representatives and 15 sales managers located in 14 regional sales offices throughout the U.S., Canada, Puerto Rico, the United Kingdom and Latin America. Employees in the regional sales offices solicit potential new clients and service existing clients. These sales personnel typically have work experience in the client's industry and have received extensive sales and product training from the Company. The Company's sales personnel provide ongoing service and advice to clients to assist them in marketing the Company's insurance products and attempt to gain new clients by illustrating how the client can provide a value-added service to its customers and at the same time enhance their profitability by marketing the Company's products. Specifically, the Company's sales personnel approach each potential client with a structured four-call process: (i) initial contact, (ii) gathering information and analyzing the prospect's needs, (iii) presenting a program tailored to those needs, and (iv) agreeing to and implementing a program that is satisfactory to both the client and the Company. Products are individual programs underwritten by ABIC, ABLAC, or any of the insurance subsidiaries or "packages" which are a combination of products from various subsidiaries. These products can also be sold through more than one distribution channel. Product cross-over is commonplace within the Company's system, which facilitates streamlined administration and processing, as well as product development. For example, the Company's "Chargegard" product is a combination of life, accident and disability, unemployment and property insurance coverage and is marketed through the Consumer Finance Companies, Mortgage Bankers and Savings Institutions, Commercial Banks and Retailers distribution channels. 9 11 Distribution Channels --------------------- The following is a discussion of the distribution channels for the Financial Market Products: Consumer Finance Companies The client base consists of consumer and commercial finance companies, leasing and second mortgage institutions, and mortgage brokers. Because many major consumer finance companies have their own captive insurance companies, approximately half of the premiums written historically have been ceded to these captive insurance companies. Therefore, a substantial portion of the income in this area is derived from the management fees paid by clients' captive companies for processing and servicing this insurance. Mortgage Bankers and Savings Institutions The client base consists of mortgage bankers, savings institutions and home builders. Through these clients, the Company markets life, AD&D, disability and property insurance products to residential and consumer borrowers as well as to depositors. Commercial Banks The Company markets its installment loan and credit card related insurance products through commercial banks, bank holding companies and their non-bank subsidiaries and other issuers of general purpose credit cards. Increases in gross collected premiums have resulted primarily from the marketing of insurance programs in connection with credit cards. American Bankers tries to expand the business written by its clients in this area by assisting them in implementing direct mail and telemarketing programs. Manufactured Housing and Travel Trailer Manufacturers and Lenders The Company provides property insurance and credit related products to purchasers of mobilehomes and travel trailers. Products are distributed primarily through manufactured housing, motor home and travel trailer manufacturers, dealers and lenders. Retailers The Company is a major provider of credit-related insurance and is a provider of extended service contracts products to the retail industry. This client base includes department and specialty stores, home furnishings and home improvement stores, appliance and electronic stores, general merchandise and automotive chains, jewelry stores, catalogs and rental companies. To further enhance its market position in this area, the Company develops customized direct mail and telemarketing programs for these clients. Premiums are generated from mailings included in monthly credit card statements or are generated at the point of sale. Equipment Manufacturers and Dealers Dealers and Manufacturers revenues are derived from credit life, disability, physical damage and warranty insurance products sold through agricultural and other equipment manufacturers. 10 12 The following is a discussion of the distribution channels for the Personal Insurance Lines: Independent Agents The Company markets individual life insurance and annuity policies to the public through a network of independent agents. In the agency market, the Company competes with many large nationwide companies. As a result, the Company has made the decision to control the growth of this segment by de-emphasizing the U.S. market and focusing on the Caribbean and Latin American markets where loss experience has been favorable and the competition is less vigorous. Other products sold through agents include livestock insurance which primarily covers animal mortality, and surety coverages. Agents also produce the flood premium that the Company administers on behalf of the National Flood Insurance Program. The Company acts as administrator and does not assume any underwriting risk with respect to this program. Investments The functions of the investment department are an integral part of any insurance company's operations. The Company's investment department is guided by strategic objectives established by the Finance Committee of the Board of Directors. The major investment objectives are: o To ensure adequate safety of investments and to protect and enhance capital. o To maximize risk-adjusted, after-tax return on investments. o To make prudent investment decisions based on the current market environment. o To provide sufficient liquidity to meet cash requirements with minimum sacrifice of investment returns. In seeking to achieve these objectives, the Company invests predominantly in fixed income securities of the U.S. Government or its agencies, collateralized mortgage obligations ("CMOs") and investment grade corporate bonds. Protection against default risk is a primary consideration. The CMOs are tested for volatility prior to purchase. Interest rate risk is controlled by matching the average duration of invested assets with the average duration of the policy liabilities. Investment department personnel work closely with the Company's actuaries to ensure that this balance is maintained. Private investments are made selectively to support the insurance business. These investments comprise about 2% of the fixed maturities portfolio. While these Company underwritten investments are non-rated, a careful evaluation of creditworthiness is performed before an investment is made. This analysis helps to ensure that prudent investment standards are maintained, even in the non-rated portfolio holdings. The Company's equity portfolio is managed by outside investment advisors who are monitored on a regular basis against established performance benchmarks. 11 13
Quality of Fixed Maturities Maturity of Fixed Maturities ========================================= ===================================== AAA 57% 0-1 Years 10% AA 6% 1-5 Years 70% A 20% 5-10 Years 16% BBB 14% 10-20 Years 3% BB/NR 1% Over 20 Years 1% Private Placement 2% ---------- ---------- 100% 100%
At December 31 (in thousands):
AT CARRYING VALUE: 1996 1995 1994 1993 1992 - ---------------------------------------- -------------- -------------- --------------- -------------- ------------- FIXED MATURITIES Corporate - Fixed Rate $679,800 $346,000 $229,900 $169,200 $195,400 Corporate - Adjustable Rate 19,900 15,000 14,400 4,900 10,800 Corporate - Convertible 5,400 6,000 1,400 5,500 State and Municipal 137,500 123,500 109,800 79,800 60,600 U.S. Government 741,600 817,900 631,400 567,800 455,100 Foreign Govt & Jurisdiction 67,100 61,900 36,200 30,100 26,700 Installment Loans 14,000 17,300 22,200 22,200 24,900 - ---------------------------------------- -------------- -------------- --------------- -------------- ------------- $1,665,300 $1,387,600 $1,043,900 $875,400 $779,000 - ---------------------------------------- -------------- -------------- --------------- -------------- ------------- EQUITY SECURITIES Preferred - Fixed Rate $27,800 $38,400 $16,600 $15,000 $11,000 Preferred - Convertible 5,800 700 600 5,900 5,800 Common 79,300 73,900 48,200 52,600 42,800 - ---------------------------------------- -------------- -------------- --------------- -------------- ------------- $112,900 $113,000 $65,400 $73,500 $59,600 - ---------------------------------------- -------------- -------------- --------------- -------------- ------------- Mortgage Loans $10,200 $11,800 $13,800 $15,500 $17,600 Policy Loans 8,300 7,800 6,800 6,700 5,900 Real Estate 5,600 3,100 3,800 4,200 5,800 Short-Term & Other Investments (principally invested cash) 166,100 165,100 131,200 135,600 114,200 - ---------------------------------------- -------------- -------------- --------------- -------------- ------------- $190,200 $187,800 $155,600 $162,000 $143,500 - ---------------------------------------- -------------- -------------- --------------- -------------- ------------- TOTAL INVESTMENTS $1,968,400 $1,688,400 $1,264,900 $1,110,900 $982,100 ======================================== ============== ============== =============== ============== =============
The amounts for 1994 and forward are reported in accordance with FASB Statement 115. 12 14 NET INVESTMENT INCOME (in millions of dollars) 1996 $ 121 1995 99 1994 74 1993 70 1992 68 Other information with respect to investments is included in Note 3 to the Consolidated Financial Statements on page 49 in Part II Item 8 of this report. REINSURANCE The Company's insurance subsidiaries reinsure that portion of risk in excess of $250,000 under an ordinary life policy, and $300,000 under a property policy. In addition, coverage is obtained for the Company's property business as protection against catastrophic losses. This coverage is mainly related to the Company's homeowner, mobilehome physical damage and credit property products. The Company has excess of loss catastrophe reinsurance providing coverage per catastrophe on property losses of $30 million excess of a $15 million retention exclusive of any recoveries from the proportional reinsurance described above. Additional coverage is provided through aggregate stop loss coverage if the net loss ratio (after deducting all other reinsurance) exceeds 37.3%. The Company believes that its catastrophe reinsurance coverage continues to be adequate. The reinsurance market showed signs of stabilization in 1996. The Company's reinsurance receivable and prepaid reinsurance premiums at December 31, 1996 totaled $709.7 million. The Company's reinsurance was placed with numerous reinsurers including the following significant reinsurers: (i) Triton Insurance Company, (ii) Lincoln National Life Insurance Company, and (iii) Caterpillar Insurance Company, Limited. The Company historically has not experienced any material losses in collection of reinsurance receivables. CERTAIN FACTORS COMMON TO THE OPERATIONS OF INSURANCE COMPANIES Government Regulation The Company and its insurance subsidiaries are subject to regulation and supervision by the states in which the Companys insurance subsidiaries transact business. This regulation is designed primarily to ensure the financial stability of insurance companies and to protect policyholders, rather than stockholders or creditors. State insurance regulatory agencies have broad administrative powers to grant and revoke licenses to transact business, regulate trade practices, establish guaranty associations, license agents, require approval of policy forms and premium rates on certain business prior to use, establish reserve requirements, determine the form and content of required financial statements, determine reasonableness and adequacy of capital and surplus and prescribe the types of permitted investments and the maximum concentrations of certain classes of investments. These agencies also conduct periodic detailed examinations of the books, records and accounts of insurance companies domiciled in their states, generally once every three to five years. Applicable state insurance laws, rather than federal bankruptcy laws apply to the liquidation or the reorganization of insurance companies. 13 15 A substantial portion of the business written by the Company's insurance subsidiaries is credit-related insurance. Most states have enacted laws which regulate credit-related insurance to a greater extent than they regulate other forms of insurance including maximum premiums which may be charged and commissions which may be paid. In addition, certain states have enacted or are considering regulations which similarly attempt to limit profitability based upon underwriting experience. The National Association of Insurance Commissioners (NAIC) develops and modifies model laws and regulations which may be modified and adopted by the various states to meet their perceived needs and concerns regarding business written in the state. While these model laws and regulations have no effect on the Company until adopted by the states, the activities of the NAIC provide useful insight into laws or regulations that might be adopted by the various states. In the area of credit insurance, the Creditor-Placed Insurance Model Act adopted in 1996 by the NAIC allows state regulators to take into account factors other than losses in determining the reasonableness of credit insurance rates. The NAIC also took action in 1995 on credit life insurance by adopting an alternative approach to strict loss ratio based rate making which allows state regulators to take into account factors other than losses in determining the reasonableness of credit insurance rates. Neither of these actions is expected to significantly affect the Companys operations. With respect to investment practices, in 1996 the NAIC adopted the Investments of Insurers Model Act which provides a well-capitalized insurer more discretion and flexibility in its investing practices. The Board of Directors also reviews the investment policies of the Companys insurance subsidiaries. Recent federal initiatives that may affect the industry have focused on Superfund reform and dealing with the cleanup of pollution sites. Among issues pending are the determination of retroactive liability and a proposed insurer specific tax. No prediction can be made as to whether any such initiatives will ultimately result in legislation or the form that any such legislation might take. Financial Regulation Insurance companies are required to file detailed annual and quarterly statements with state insurance regulators in each of the states in which they do business. In addition, the Companys insurance subsidiaries are required to comply with a minimum risk-based capital (RBC Standards) developed by the NAIC. Under the RBC standards - risk specific for each company - areas such as asset risk, insurance risk, interest risk, and business risk are evaluated and compared to the Companys capital and surplus to determine relative solvency margins. Standards for the RBC formula were approved by regulators and effective for 1993 statutory financial statements for life companies and in 1994 for property and casualty companies. All of the Companys insurance subsidiaries meet the minimum risk-based capital requirements and requires no action based on the criteria described above. Dividend Regulation The Company is a legal entity separate and distinct from its subsidiaries. As a holding company with no other business operations, its primary sources of cash needed to meet its obligations are dividends and other payments from its insurance subsidiaries. 14 16 The Companys insurance subsidiaries are subject to various regulatory restrictions on the maximum amount of payments, including dividends, loans or cash advances that they may make to the Company without obtaining prior regulatory approval. As Florida domiciled insurance companies, ABIC and ABLAC are subject to Florida requirements that insurance company dividends must receive prior regulatory approval unless, either (i) such dividends do not exceed the larger of: (a) the lesser of 10% of surplus or net gain from operations (ABLAC) or net income (ABIC), not including realized capital gains, plus a 2-year carryforward for ABIC, (b) 10% of surplus, with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains; or (c) the lesser of 10% of surplus or net investment income (net gain before capital gains for ABLAC) plus a 3-year carryforward (2-year carryforward for ABLAC) with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains; or (ii) the dividend is equal to or less than the greater of: (a) 10% of the insurers surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains; or the insurers entire net operating profits and realized net capital gains derived during the immediately preceding calendar year; and (b) the insurer will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend is made. As an Arizona domiciled insurance company, ARIC must receive prior regulatory approval unless such dividends do not exceed the lesser of either 10% of surplus as regards policyholders or the net investment income. As Puerto Rico domiciled companies, CALAC and CAPIC shall not pay any cash dividend to stockholders except out of that part of its unassigned surplus funds which is derived from any realized net profits on its business. As a New York domiciled company, BALAC must file notice of its intention to declare a dividend and the amount thereof with the superintendent of insurance who may disapprove such distribution if he finds that it is not warranted by the companys financial condition. The Voyager Insurance Companies are domiciled in Georgia and South Carolina. Georgia and South Carolina require prior regulatory approval for dividends in excess of the greater of (i) 10% of a companys surplus as regards policyholders or (ii) net gain from operations for life companies, or net income, not including realized capital gains for non-life companies, as of the preceding year end. 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 companys policyholders or creditors, the regulators may block payment of such dividends or such other payment to the affiliates that would otherwise be permitted without prior approval. See other information with respect to dividend regulation in Note 8 to the Consolidated Financial Statements on page 55 in Part II Item 8 of this report. 15 17 Change of Control Regulation The states in which the Companys 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 the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. In the other states in which the Companys insurance subsidiaries are domiciled, however, an acquisition of 10% of such shares is generally deemed to be the acquisition of control. In many states, the insurance authority may find that control in fact does or does not exist in circumstances in which a person owns or controls either a lesser or a greater amount of securities. Competition The historical competitors of the Company consist of both stock and mutual insurance companies. Some competing companies, both stock and mutual, have been in business for a longer time, are more widely known by reason of such factors as age and size, and have greater financial resources than the Company. However, due to the specialized nature of the markets served and products offered, the Company's competitors differ among the different geographic locations and market segments in which the Company conducts business. Banks have begun to market and underwrite insurance products which may lead to increased competition. However, because the Company's products do not include traditional life insurance products, the Company does not expect to be significantly impacted. In addition, lending institutions have begun to issue debt cancellation agreements, which are similar to the Companys credit life and disability products. The Company is unable to predict the market effect that this development may have. The Company's strategy is to establish profitable insurance underwriting and to service business in distribution channels that are relatively free of competition. In keeping with this strategy, the Company markets non-traditional insurance products through non-traditional distribution channels. RESERVES Life insurance companies are required to establish and maintain policy liabilities to meet their obligations on life policies. These liabilities are amounts which, with additions from premiums to be received on outstanding policies and with interest on such benefits compounded annually at certain assumed rates, are calculated to be sufficient to meet policy obligations at death or maturity in accordance with the mortality tables employed when the policies were issued. Liabilities for losses and loss adjustment expenses for property and casualty insurance represent estimates of unpaid claims related to known losses and of claims which have been incurred but not reported. These liabilities are based upon past experience of ultimate claim settlements and of unreported losses and loss adjustment expenses. The length of time for which such costs must be estimated varies depending upon the coverage involved. Since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liability and damage awards, the process used in computing reserves cannot be exact, particularly for liability coverages. The majority of the Company's property and casualty insurance business is represented by property coverage in which the ultimate loss experience develops relatively quicker than that for insurers concentrated more heavily in liability coverages. In the ordinary course of business, the Company reinsures risks with other insurance companies; nonetheless, the Company is contingently liable with respect to risks reinsured, should the reinsuring companies fail to meet the obligations assumed in the reinsurance agreements. Information on the Company's Reserves appears in Note 4 to the Consolidated Financial Statements on page 52 in Part II Item 8 of this report. 16 18 Property and Casualty Losses and Loss Adjustment Expenses The consolidated financial statements include estimated provisions for unpaid losses and loss adjustment expenses (LAE) applicable to the Company's property and casualty insurance subsidiaries. Currently, these subsidiaries write principally credit unemployment, credit property, extended service contracts, mobilehome physical damage, homeowners, and livestock lines of business throughout the United States, Canada, the Caribbean, and the United Kingdom. Such liabilities are established using a combination of case basis estimates and statistical projections and include provisions for claims incurred but not yet reported as of the balance sheet date. Overall claims experience is principally dependent on the frequency and severity of claims. With the exception of discontinued lines, the Company writes primarily property coverages which are characterized by relatively short settlement periods and quick development of ultimate losses. The discontinued reinsurance assumed pools involve liability coverages where development of the ultimate loss is more difficult to predict because of the settlement duration and the relative absence of homogeneity of claims as compared to the Company's property coverages. The Company's estimating and reserving practices are reviewed continuously. Subsequent adjustments to the original estimates are made when determinable and are reflected in current year operations. The following table shows the development of the estimated liability for the ten years prior to 1996. 17 19 AMERICAN BANKERS INSURANCE GROUP, INC. DOMESTIC PROPERTY AND CASUALTY SUBSIDIARIES ANALYSIS OF REPORTED BALANCE SHEET LOSS AND LAE DEVELOPMENT GAAP BASIS (IN THOUSANDS)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Liability for Unpaid Losses & LAE $63,804 $79,915 $83,873 $83,328 $87,262 $89,626 $94,531 $117,080 $137,936 $163,918 $187,212 LIABILITY RE-ESTIMATED AS OF: 1 year later $75,086 $89,495 79,857* 88,054* 79,291* 83,107* 106,007* 119,810* 144,123* 168,188* 2 years later $80,793 87,088* 84,156* 84,112* 83,882* 85,203* 110,226* 136,905* 150,478* 3 years later 81,023* 92,783* 83,415* 88,843* 86,954* 89,697* 122,481* 148,475* 4 years later 86,138* 93,414* 87,017* 90,476* 91,670* 104,249* 136,894* 5 years later 88,035* 96,420* 89,180* 96,419* 106,458* 119,228* 6 years later 90,248* 99,029* 94,541* 111,122* 118,389* 7 years later 93,079* 104,150* 109,473* 119,976* 8 years later 98,186* 119,273* 117,301* 9 years later 113,338* 127,056* 10 years later 121,109* Cumulative (Deficiency) Redundancy $(57,305) ($47,141) ($33,428) ($36,648) ($31,127) ($29,602) ($42,363) ($31,395) ($12,542) ($4,270) CUMULATIVE AMOUNT OF LIABILITY PAID THROUGH: 1 years later $44,862 $53,374 $45,460* $52,144* $49,983* $48,399* $63,922* $65,901* $71,654* $93,449* 2 years later $57,549 63,779* 59,865* 64,778* 61,736* 60,540* 85,500* 92,249* 96,417* 3 years later 61,867* 72,704* 67,232* 71,287* 68,174* 68,190* 101,603* 107,401* 4 years later 68,841* 78,370* 71,444* 74,210* 73,273* 80,932* 112,557* 5 years later 73,678* 81,840* 73,394* 78,292* 84,642* 90,090* 6 years later 76,208* 83,604* 76,938* 89,410* 90.447* 7 years later 77,862* 86,856* 87,886* 91,789* 8 years later 80,973* 97,766* 89,234* 9 years later 91,870* 99,050* 10 years later 93,141*
$158,359 $187,999 $239,357 $267,944 Gross Liability - end of year** 41,279 50,063 75,439 80,732 -------- -------- -------- -------- Net Liability - end of year ** $117,080 $137,936 $163,918 $187,212 Gross Re-estimated Liability ** $194,592 $199,861 $244,374 Re-estimated Reinsurance Recoverable 46,117 (49,383) 76,186 -------- -------- -------- Net Re-estimated Liability ** $148,475 $150,478 $168,188 Gross Cumulative (Deficiency) (36,233) (11,862) (5,017)
* Indicates amounts are net of collected salvage and subrogation to conform with the presentation of Schedule P in the 1996 Statutory Reports filed with the state regulatory authorities. **Amounts do not include issued but unpresented claim drafts as of December 31; $1,546 (1992), $2,411 (1993), $1,322 (1994), $1,576 (1995), and $1,374 (1996). 18 20 The table in the preceding page presents the development of balance sheet liabilities for 1986 through 1996. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the re-estimated amount of the previously recorded liability based on the experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. Note that each amount includes the effects of all changes in amounts for prior periods. Conditions and trends that have affected development of the liabilities in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. In the most recent years, actual loss development of the estimated liabilities for unpaid claims and LAE amounts demonstrated that the original estimates have generally been adequate except for those relating to the line "financial guarantees" (1985-1986), reinsurance pools, and for 1992 due to Hurricane Andrew. The "cumulative (deficiency) redundancy" represents the aggregate change in the estimates over all prior years. Such amounts have been reflected in income over the years indicated. The effect on income of the past three years of changes in estimates of the liabilities for losses and LAE is shown in Note 4 to the Consolidated Financial Statements on page 53 in Part II Item 8 of this report. For the Company, the financial guarantee line is represented by its credit bond insurance where litigation and certain related legal issues have historically served to complicate the reserving process. Effective with 1995 settlements, credit bond insurance is not expected to produce any future impact. The Company's reserve development includes the effects from losses experienced from reinsurance pools in which the Company discontinued participation effective on or prior to 1981. The Company reported pre-tax losses in its discontinued reinsurance pools of $8.3 million in 1996, $7.3 million in 1995 and $4.2 million in 1994. The business is long tail in nature, and losses have exceeded both Company and industry expectations, primarily as a result of evolving legal theory and application which exceeded the intended scope of coverage when the policies were written. The Company's insurance liability, which is secondary and excess in nature, does not surface until the underlying primary coverages and other reinsurance coverages if any, are exhausted. Loss experience has developed in excess of historical experience because of the legal development of cases, including asbestos, environmental and pollution cases. The Company's experience can differ significantly from that of other insurers which wrote the primary coverages directly. The reserves are reviewed, at a minimum annually, by both the reinsurance intermediaries, where the claim liabilities are initially established, and by the Company's actuaries. Lack of historical development indicative of ultimate claim cost and a changing legal definition of what the ultimate liability will be, has created significant uncertainty and has consequently led to underreserving. The Company continues to evaluate and review reserve adequacy in this area using, among other analyses, studies supplied by the Reinsurance Association of America and any adjustments made are reflected in current year results. Federal government Superfund proposals which would change or define the liability for pollution claims add to the uncertainty. Given the inconsistencies of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, it is not presently possible to quantify the ultimate exposure. As a result, the Company expects that future earnings may be adversely affected by environmental and asbestos claims, although the amounts cannot be reasonably estimated. However, based on its actuarial studies and analysis, the Company believes it is not likely these claims will have a material adverse effect on the Company's financial condition. At December 31, 1996, the Company holds $31.9 (gross) million of reserves related to the reinsurance pools. 19 21 No specific formula adjustment is made to the reserves in connection with anticipated inflation; however, most coverages relate to property settlements which occur relatively quickly. The Company establishes full reserves on all lines (net of anticipated salvage and subrogation) and does not employ discounting in its reserving process. The differences between the December 31, 1996 liability for losses and LAE reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and that reported in the annual statement filed with state insurance departments in accordance with statutory accounting practices (SAP) are as follows: Liability reported on a SAP basis, net of intercompany elimination for reinsured claim liabilities with affiliated life and health companies $190,484,000 Deduct estimated salvage and subrogation recoveries recorded on a cash basis for SAP purposes and on an accrual basis for GAAP purposes (3,272,000) ---------- Liability reported on a GAAP basis for the domestic Property and Casualty subsidiaries before unpresented claim drafts and translation of foreign branch operations 187,212,000 Deduct unpresented claim drafts reported as other liabilities for SAP purposes, but reported as claim liabilities for GAAP purposes, and translation of foreign branch operations (1,374,000) ---------- Liability reported on a GAAP basis - domestic Property and Casualty subsidiaries only 185,838,000 Add reserves of foreign subsidiaries not included in consolidated statutory liability 11,050,000 ---------- Liability reported on a GAAP basis (net) 196,888,000 Add Reinsurance Recoverable for ceded unpaid losses (domestic of $80,732,000 and foreign of $20,276,000) 101,008,000 ----------- Liability reported on a GAAP basis (gross) $297,896,000 ------------
EMPLOYEES As of December 31, 1996, the Company employed 2,874 people. d. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS For financial information about foreign and domestic operations see Note 12 to the Consolidated Financial Statements on page 65 in Part II Item 8 of this report. 20 22 ITEM 2 PROPERTIES The headquarters building is located at 11222 Quail Roost Drive, Miami, Florida 33157,and is approximately 415,000 square feet in size. The building is used exclusively for general office use, except for a portion which functions as the Company's warehouse. Certain other properties are infrequently acquired through foreclosures of mortgage loans in which ABLAC has invested. ABLAC holds and operates such properties until sale can be effected. ITEM 3 LEGAL PROCEEDINGS Except as discussed in the following paragraph, there are no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. LITIGATION Following is a description of material legal proceedings: ALABAMA AND OTHER LITIGATION: Certain of ABIG's subsidiaries, including ABIC, ABLAC, and Voyager, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate and policy coverage issues. While a number of similar suits have been filed in other jurisdictions, the insurance and finance industries have been targeted in Alabama by plaintiffs' lawyers who enjoy a favorable judicial climate. The Company typically has been named as a co-defendant with one or several retailer or finance companies who have sold the Company's product to a consumer. A number of other credit insurers are named as co-defendants in many of the suits. Although these lawsuits generally involve relatively small amounts of actual or compensatory damages, they typically assert claims requesting substantial punitive awards. The Company denies any wrongdoing in any of these suits and believes that it has not engaged in any conduct that would warrant an award of punitive damages. The Company has been advised by legal counsel that it has meritorious defenses to all claims being asserted against it. While no one case is necessarily significant in terms of financial risk to the Company, the judicial climate in Alabama is such that the outcome of these cases is extremely unpredictable. Without admitting any wrongdoing, the Company has settled a number of these suits, but there are still a significant number of cases pending, and it is expected that more suits alleging essentially the same causes of action are likely to continue to be filed during 1997. The Company intends to continue to defend itself vigorously against all such suits and believes, based on information currently available, that any liabilities that could result are not expected to have a material effect on the Company's financial position. The Company is involved with a number of cases in the ordinary course of business relating to insurance matters or, more infrequently, certain corporate matters. Generally, the Company's liability is limited to specific amounts relating to insurance or policy coverage for which provision has been made in the financial statements. Other cases involve general corporate matters which generally do not represent significant contingencies for the Company. 21 23 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1996. 22 24 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information concerning each of the Executive Officers of the Company and the Executive Officers of the Company's subsidiaries:
POSITION AND OFFICES WITH THE COMPANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS NAME AGE AND OTHER DIRECTORSHIPS, IF ANY - ---- --- ---------------------------------------- R. Kirk Landon 67 Chairman of the Board (1990-Present); Chief International Officer (1996-Present); Chief Executive Officer of the Company (1980-1995); Chief International Officer (1996-Present) of ABIC and ABLAC; Chief Executive Officer (1989-1995) of ABIC and ABLAC; Director of BALAC (1990-1995); Director of BICL (1993-Present); Director of CALAC and CAPIC (1992-1996); Director of VGI, VLIC, and VLHIC (1993-1995); Director of Mayor's Jewelers (jewelry retailers (1987-Present). Gerald N. Gaston 64 Chief Executive Officer and President (1996-Present); President and Chief Operating Officer (1982-1995); Vice Chairman of the Board (1980- Present) of the Company. Chief Executive Officer (1996) of ABIC & ABLAC; Chairman of the Board (1991-Present), Vice Chairman of the Board (1990- 1991) and Chief Operating Officer (1990-1995) of ABIC and ABLAC; Chairman of the Board, ARIC (1993-present); Director of BALAC (1981-Present); Chairman of the Board and President of BARC (1995-1996); Chairman of the Board of VGI, VLHIC, and VLIC (1993-present); Director of Inter Continental Bank (1993-1995) Eugene E. Becker 47 Chief Executive Officer (1996-Present) of ABIC and ABLAC; Executive Vice President (1991-Present) of the Company; Chief Executive Officer of VGI, VLHIC, and VLIC (1996); and Chief Marketing Officer of the Company (1991-1995); President of ABIC (1989-1996); Executive Vice President of ABLAC (1983-1989); Director, Financial Markets of ABIC and ABLAC (1983- Present); Director (1989-1996) of ARIC; CEO (1996) of ARIC; President, ARIC (1993-1996); Chairman of the Board (1991-Present) of BALAC; Director of BARC (1995-Present); President (1993-1996) and Chief Operating Officer (1993-1995) of VGI, VLHIC, and VLIC.
23 25
POSITION AND OFFICES WITH THE COMPANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS NAME AGE AND OTHER DIRECTORSHIPS, IF ANY - ---- --- ---------------------------------------- Floyd G. Denison 53 Executive Vice President - Finance of the Company, ABIC and ABLAC (1996-Present). Executive Vice President and Director, Corporate Asset Management of the Company (1991-1996); Treasurer of the Company (1986-1991); Executive Vice President, Investments of ABIC and ABLAC (1996-Present), Senior Vice President, Investments, of ABIC and ABLAC (1983-1996); Vice President of BALAC (1991-Present); Chairman of the Board of BARC (1996-Present); Director of BICL (1995-1996); Director of VIIC, VLIC, VLHIC (1996-Present); Director of VPCIC (1993-Present). Jay R. Fuchs 41 President of ABLAC (1991-Present); President of ABIC (1996-Present); Executive Vice President of ABIC (1996); Director, ABIC and ABLAC (1991-Present); Executive Vice President, Financial Markets of ABIC and ABLAC (1988-1991); Director (1991-Present) and President (1996-Present) of BALAC; Director of VLIC and VLHIC (1993-Present). Director of VGI (1993-1995), VIIC, VPCIC (1993-Present). Leonardo F.Garcia 45 Vice President and Treasurer of the Company (1996-Present); Secretary of the Company (1994-1996); Senior Vice President and Secretary, Corporate Planning and Acquisitions of ABIC and ABLAC (1994-1996); Vice President of Investments (1993-1995); Secretary of VGI (1994-1996). Assistant Secretary of ARIC (1995-1996); Director (1995-Present) and Secretary (1994-1996) of BALAC; Secretary of CALAC and CAPIC (1994-1996); Director and Secretary of BARC (1995-1996); Secretary of VGI, VPCIC, (1994-1996); Assistant Secretary of VIIC, VLIC and VLHIC (1994-1996). Arthur W. Heggen 51 Secretary of the Company (1996-Present); Vice President and Treasurer of the Company (1991-1996); Vice President and Principal Accounting Officer of the Company (1990-1991); Senior Vice President (1990-Present), Secretary (1996-Present) of ABIC and ABLAC; Vice President of BALAC (1995-1996); Secretary and Director of BALAC (1996-Present); Secretary of VGI VPCIC, CALAC, and CAPIC (1996-Present); Assistant Secretary VIIC, VLIC, and VLHIC (1996-Present).
24 26
POSITION AND OFFICES WITH THE COMPANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS NAME AGE AND OTHER DIRECTORSHIPS, IF ANY - ---- --- ---------------------------------------- Jason Israel 44 Executive Vice President, Administration (1996-Present); Executive Vice President, Operations, of ABIC and ABLAC (1993-1995); Senior Vice President, Financial Operations, of ABIC and ABLAC (1992); Senior Vice President, Profits, of ABIC and ABLAC (1990-1992); Vice President of BALAC (1995-Present); Executive Vice President of CALAC and CAPIC (1995-Present) Michael T. Ray 43 Executive Vice President, Information Services, of ABIC and ABLAC (1996-Present); First Senior Vice President, Personal and Financial Sales, of ABIC and ABLAC (1994-1995); First Senior Vice President, Marketing Director, of ABIC and ABLAC (1992-1994); Senior Vice President, Financial Insurance Processing, of ABIC and ABLAC (1990-1992). Stephen T. Williams 45 Executive Vice President, Subsidiaries (1996-Present) of the Company; Chief Executive of VGI, VIIC, VLIC, VLHIC, and VPCIC (1996-Present); Chief Executive Officer (1996-Present) ARIC. Executive Vice President, Marketing Director, of ABIC and ABLAC (1996-Present); First Senior Vice President, Marketing Director of ABIC and ABLAC (1994-1995); Senior Vice President, Regional Sales, of ABIC and ABLAC (1988-1993). Director of BALAC (1990-Present); President (1991-1995) and Executive Vice President of BALAC (1996-Present).
None of the Executive Officers named above are involved in legal proceedings as defined in Regulation S-K, Item 401(f). Information with respect to promoters and control persons is not applicable. 25 27 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS a. MARKET FOR COMMON STOCK Common Share Prices and Dividend Data
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1996 - ---- High $39.88 $44.25 $50.38 $52.38 Low 33.25 32.50 39.50 45.75 Dividend 0.19 0.20 0.20 0.20 1995 - ---- High $31.13 $32.88 $37.38 $39.38 Low 23.38 26.63 30.75 34.63 Dividend 0.18 0.19 0.19 0.19
The last sale price per share of the Company's stock on the last trading day of 1996, as reported by NASDAQ, was $51.13. COMMON SHARES American Bankers Insurance Group, Inc. is traded over-the-counter under the NASDAQ symbol ABIG. The stock appears in the NASDAQ National Market stock table. This table presents the high, low and closing sales prices for the stock under the abbreviation AMBKRSINS. The ending market price as of March 21, 1996 was $53.50. b. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS At December 31, 1996, there were 1,532 registered shareholders. c. DIVIDENDS PER SHARE OF COMMON STOCK For information of the dividends paid per common share see the Table of data in Item 5 a. above. The Company expects to continue its policy of paying regular cash dividends; however, future dividends are dependent on future earnings, capital requirements and financial condition. For more information regarding liquidity and capital resources see page Part II Item 7 page 35. 26 28 ITEM 6 SELECTED FINANCIAL DATA At December 31 (in thousands except book value per common share):
Major Balance Sheet Items 1996 1995 1994 1993 1992 ASSETS Investments $1,968,400 $1,688,400 $1,264,900 $1,110,900 $982,100 Cash 30,400 23,300 89,500 39,800 10,400 Reinsurance receivable 202,600 168,100 130,900 174,200 Deferred policy acquisition costs 388,000 310,900 229,600 198,800 174,900 Prepaid reinsurance premiums 507,100 502,300 396,800 310,600 Other assets 373,000 294,700 320,800 326,200 236,900 - --------------------- -------------- -------------- --------------- -------------- -------------- Total assets 3,469,500 2,987,700 2,432,500 2,160,500 1,404,300 - --------------------- -------------- -------------- --------------- -------------- -------------- LIABILITIES Policy and claim liabilities 2,070,500 1,858,900 1,502,600 1,395,900 802,800 Notes payable 222,500 236,000 197,800 158,900 139,600 Deferred income taxes 40,800 29,500 5,000 10,800 Accrued expenses 156,900 136,200 98,800 87,000 77,200 Other liabilities 268,600 214,100 227,400 114,400 105,500 - --------------------- -------------- -------------- --------------- -------------- -------------- Total liabilities 2,759,300 2,474,700 2,026,600 1,761,200 1,135,900 - --------------------- -------------- -------------- --------------- -------------- -------------- STOCKHOLDERS' EQUITY Preferred stock 115,000 Common stock 20,500 20,400 20,200 20,100 16,400 Additional paid-in capital 217,900 215,100 212,100 210,900 128,400 Net unrealized investment and foreign exchange gains (losses) 7,400 7,300 (38,500) 400 (2,600) Retained earnings 359,400 282,700 225,400 183,000 143,100 Treasury stock at cost (1,400) (2,500) (1,600) (400) (400) Unamortized restricted stock (4,400) (3,600) (3,200) (4,100) (3,800) Collateralization of loan to Leveraged Employee Stock Ownership Plan (4,200) (6,400) (8,500) (10,600) (12,700) - --------------------- -------------- -------------- --------------- -------------- -------------- Total stockholders' equity 710,200 513,000 405,900 399,300 268,400 - --------------------- -------------- -------------- --------------- -------------- -------------- Total liabilities and stockholders' equity $3,469,500 $2,987,700 $2,432,500 $2,160,500 $1,404,300 - --------------------- -------------- -------------- --------------- -------------- -------------- Book value per common share $29.12 $25.34 $20.15 $19.87 $16.38 ===================== ============== ============== =============== ============== ==============
The amounts for 1993 and forward are reported in accordance with FASB Statement 113. 27 29 For the Years ended December 31 (in thousands except per common share data):
Consolidated Statements of Income 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues Net premiums earned $1,378,500 $1,240,700 $1,094,300 $882,000 $733,000 Net investment income 121,200 99,400 74,400 70,400 67,500 Realized investment gains 7,800 700 2,700 5,400 2,800 Gain on insurance settlement 5,400 Other income 21,500 20,100 15,400 10,100 8,800 - --------------------- -------------- --------------- -------------- ------------ ------------- Total revenues 1,529,000 1,360,900 1,186,800 973,300 812,100 - --------------------- -------------- --------------- -------------- ------------ ------------- Benefits and expenses Benefits, claims, losses, and settlement expenses 523,000 463,100 437,900 349,800 299,800 Commissions 571,800 526,500 437,700 358,000 289,400 Operating expenses 280,800 251,500 220,200 181,700 153,800 Interest expense 17,500 15,600 11,200 8,100 9,600 - --------------------- -------------- --------------- -------------- ------------ ------------- Total benefits and expenses 1,393,100 1,256,700 1,107,000 897,600 752,600 - --------------------- -------------- --------------- -------------- ------------ ------------- Pre-tax income from operations 135,900 104,200 79,800 75,700 59,500 - --------------------- -------------- --------------- -------------- ------------ ------------- Income tax (expense) benefit Current (28,900) (25,200) (14,800) (24,400) (19,000) Deferred (12,500) (6,700) (8,500) 2,000 1,800 - --------------------- -------------- --------------- -------------- ------------ ------------- (41,400) (31,900) (23,300) (22,400) (17,200) - --------------------- -------------- --------------- -------------- ------------ ------------- Net income before cumulative effect of change in accounting 94,500 72,300 56,500 53,300 42,300 Cumulative effect of change in accounting for income taxes (1,000) - --------------------- -------------- --------------- -------------- ------------ ------------- Net income $94,500 $72,300 $56,500 $52,300 $42,300 - --------------------- -------------- --------------- -------------- ------------ ------------- PER COMMON SHARE DATA Primary Net income before cumulative effect of change in accounting $4.39 $3.48 $2.74 $2.85 $2.57 Cumulative effect of change in accounting for income taxes (0.05) - --------------------- -------------- --------------- -------------- ------------ ------------- Net income $4.39 $3.48 $2.74 $2.80 $2.57 - --------------------- -------------- --------------- -------------- ------------ ------------- Weighted average number of shares outstanding 20,814 20,746 20,596 18,670 16,432 - --------------------- -------------- --------------- -------------- ------------ ------------- Fully diluted Net income before cumulative effect of change in accounting $4.31 $3.48 $2.74 $2.78 $2.39 Cumulative effect of change in accounting for income taxes (0.05) - --------------------- -------------- --------------- -------------- ------------ ------------- Net income $4.31 $3.48 $2.74 $2.73 $2.39 - --------------------- -------------- --------------- -------------- ------------ ------------- Weighted average number of shares outstanding 21,965 20,823 20,613 19,317 18,433 - --------------------- -------------- --------------- -------------- ------------ ------------- Dividends per common share $0.79 $0.75 $0.71 $0.68 $0.60 ===================== ============== =============== ============== ============ =============
28 30 For the Years ended December 31 (in thousands):
GROSS GROSS PREMIUMS CEDED PREMIUMS NET PREMIUMS COLLECTED PREMIUMS EARNED EARNED EARNED 1996 1995 1996 1995 1996 1995 1996 1995 - -------------------- ----------- ------------ ------------ ----------- ------------ ------------ ----------- ------------ Unemployment $489,400 $410,800 $460,100 $367,500 $195,000 $125,300 $265,100 $242,200 Credit A&H 377,600 349,000 381,900 320,200 194,400 136,600 187,500 183,600 Credit Property 336,900 367,700 335,900 320,800 152,400 157,000 183,500 163,800 Credit Life 309,500 287,200 291,300 242,700 158,200 105,800 133,100 136,900 Extended Service Contracts 203,900 129,500 110,800 31,000 8,400 1,000 102,400 30,000 Mobilehome Physical Damage 132,200 137,300 136,700 109,600 40,700 27,800 96,000 81,800 Homeowners 93,700 101,100 100,900 100,300 39,000 40,900 61,900 59,400 Mortgage A&H 66,600 53,300 63,700 52,900 6,600 5,000 57,100 47,900 Group A&H 50,700 39,600 51,100 38,800 13,000 9,500 38,100 29,300 Livestock Mortality 46,600 40,800 45,500 41,300 14,400 12,500 31,100 28,800 - -------------------- ----------- ------------ ------------ ----------- ------------ ------------ ----------- ------------ Subtotal 2,107,100 1,916,300 1,977,900 1,625,100 822,100 621,400 1,155,800 1,003,700 - -------------------- ----------- ------------ ------------ ----------- ------------ ------------ ----------- ------------ All Other 385,700 370,300 398,800 383,000 176,100 146,000 222,700 237,000 - -------------------- ----------- ------------ ------------ ----------- ------------ ------------ ----------- ------------ Total $2,492,800 $2,286,600 $2,376,700 $2,008,100 $998,200 $767,400 $1,378,500 $1,240,700 ==================== =========== ============ ============ =========== ============ ============ =========== ============
FIVE-YEAR SELECTED FINANCIAL DATA At December 31:
LIFE INSURANCE SUBSIDIARIES 1996 1995 1994 1993 1992 - -------------------------------------------- -------------- ------------- ------------- ------------- ---------------- Statutory capital and surplus (in thousands)* $234,700 $188,900 $174,100 $175,900 $116,400 - -------------------------------------------- -------------- ------------- ------------- ------------- ---------------- Ratio of statutory capital and surplus to liabilities 33.2% 28.6% 32.2% 35.5% 24.8% - -------------------------------------------- -------------- ------------- ------------- ------------- ---------------- PROPERTY AND CASUALTY SUBSIDIARIES - -------------------------------------------- -------------- ------------- ------------- ------------- ---------------- Statutory capital and surplus (in thousands)* $374,500 $271,500 $224,900 $215,900 $156,200 - -------------------------------------------- -------------- ------------- ------------- ------------- ---------------- Ratio of net premiums written to statutory capital and surplus 2.4% 3.1% 2.6% 2.3% 2.6% - -------------------------------------------- -------------- ------------- ------------- ------------- ---------------- Ratio of loss and loss expense reserves to statutory capital and surplus 50.8% 65.5% 58.2% 55.6% 65.7% - -------------------------------------------- -------------- ------------- ------------- ------------- ---------------- Combined loss and expense ratio (statutory basis) 96.8% 93.8% 96.0% 94.1% 95.7% - -------------------------------------------- -------------- ------------- ------------- ------------- ----------------
*See Note 8 to Consolidated Financial Statements. 29 31 For the Years ended December 31:
Operating Ratios 1996 1995 1994 1993 1992 - ------------------------------------------ -------------- ------------ ------------ ---------- --------- As a percent of net premiums earned: Benefits, claims, losses, and settlement expenses 37.9% 37.3% 40.0% 39.7% 40.9% Commissions 41.5 42.4 40.0 40.6 39.5 Operating expenses as a percent of gross premiums earned 11.8 12.5 13.1 13.6 14.6 - --------------------------------------------------- ------------------ ------------------ ------------------ ------------------ Net operating income as a percent of gross premiums earned 3.8 3.6 3.3 3.7 3.8 Net operating income as a percent of total revenues (excluding realized investment gains and losses) 5.9 5.3 4.6 5.0 5.0 Net income as a percent of average assets (return on assets) 2.9 2.7 2.5 3.4 3.1 Net income as a percent of average common stockholders' equity (return on equity) 16.5 15.7 14.1 15.7 17.4 - --------------------------------------------------- ------------------ ------------------ ------------------ ------------------ At December 31: Debt as a percent of total capitalization 23.9 31.5 32.8 28.5 34.2 Price/Earnings Ratio (FULLY DILUTED) 11.9 11.2 8.8 9.4 9.3 Price/Book Value Ratio 1.8 1.5 1.2 1.3 1.5 - --------------------------------------------------- ------------------ ------------------ ------------------ ------------------
Gross Life Insurance in Force Gross Collected Premiums (in millions of dollars) (in millions of dollars) 1996 $ 48,704 $ 2,493 1995 42,708 2,287 1994 32,129 1,761 1993 30,848 1,427 1992 27,878 1,120
30 32 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW INDUSTRY Property and casualty insurers are expected to experience higher earnings in 1996 due to large capital gains, the relative absence of major catastrophes, and stabilizing provisions for environmental and asbestos losses. Consequently, return on equity has been projected at 15% or higher for 1996, despite stagnant (3.6%) premium growth. A.M. Best, however, has reported a weakening of business fundamentals and increased competition, which is forcing property and casualty insurers to cut prices, particularly in the commercial sector. The reinsurance market experienced significant consolidation in 1996. Despite the reduction in the number of large reinsurance companies, the cost of reinsurance coverage has been decreasing. This may be attributable in part to the relatively improved underwriting experience over the last two years, the expanded Bermuda market and the resurgence of Lloyd's of London. Litigation continues to be a major industry concern. In Alabama, and increasingly in other states, the insurance and finance industries have been targeted in litigation. The legal environment in Alabama has received national news coverage and the Alabama legislature is considering tort reform. Changes in the current environment, if any, cannot be predicted. Recent Supreme Court and other regulatory rulings are expected to lead to increased marketing of insurance products by banks. This may lead to increased competition; however, the Company does not expect to be significantly impacted since its major products do not include traditional life and property and casualty insurance products which banks may begin to market. Accordingly, this may result in additional products and services being sold through the Company's bank distribution channel. Congress has indicated that during 1997, it may examine the issue of banking reform including state regulation of the insurance industry. The Company has become aware that some financial institutions have, in connection with a loan, begun to issue debt cancellation agreements, which are similar to the Company's credit life and credit disability products. Various state insurance and financial institution regulators are examining these agreements to determine whether they should be regulated as insurance. It is premature to project the ultimate legal resolution and resulting market effects this development might have. The federal government, commercial companies and the insurance industry continue to work together toward Superfund reform and dealing with the cleanup of pollution sites. Among issues pending are the determination of retroactive liability and a proposed insurer-specific tax. The most recent bill introduced in Congress reflects a scaled down Superfund reform plan that largely retains the retroactive liability system. AMERICAN BANKERS In 1996, net income increased 31% to $94.5 million from $72.3 million in 1995. Operating results benefited from continued strong growth in net investment income and in the Company's credit-related products. After-tax operating income before realized gains generated by the property and casualty segment was adversely impacted in 1996 by losses from Hurricanes Bertha, Fran and Hortense of approximately $6.0 million. The Company's United Kingdom insurance subsidiary incurred additional operating losses in 1996 principally due to cancelled product lines. The 1995 results included, on an 31 33 after-tax basis, $.5 million in net investment gains and a $3.8 million charge on the settlement of the final portion of the credit bond litigation. The 1994 results included, on an after-tax basis, $1.7 million in net investment gains and a $2.9 million charge on the final settlement of credit bond litigation initiated by bondholders. Pre-tax operating income before realized gains by industry segment was as follows: (in thousands) LIFE ---- 1996 $ 57,569 1995 $ 43,469 1994 $ 30,434 PROPERTY AND CASUALTY --------------------- 1996 $ 86,067 1995 $ 83,971 1994 $ 66,023 These segment results exclude interest and other corporate activity. REVENUES Total revenues increased 12% in 1996 over the prior year, primarily due to increases in net earned premiums of $137.8 million and investment income of $21.8 million. Gross collected premiums increased more than $200 million or approximately 9%, from $2.3 billion in 1995 to $2.5 billion in 1996. Excluding a $66 million block of business acquired in 1995, gross collected premiums increased 12%. In 1996, property and casualty segment revenues increased by $146.5 million compared to the life segment increase of $20 million. A significant portion of the property and casualty segment growth resulted from the increase in net earned premiums in credit unemployment and extended service contract products. The growth in gross collected premiums was primarily related to three products: (in thousands)
Product 1996 1995 Increase ------- ---- ----- -------- Credit Unemployment $ 489,400 $ 410,800 $ 78,600 Credit A&H 377,600 349,000 28,600 Extended Service Contracts 203,900 129,500 74,400 ------------- ------------- ----------- Total $ 1,070,900 $ 889,300 $ 181,600
Growth in these and other products were offset by the decline in the credit property product, primarily related to the cancellation of certain accounts due to insufficient profit margins. Premium growth was also adversely impacted by planned declines in the Mobilehome Physical Damage and Homeowners product lines which are more susceptible to seasonal changes and catastrophes. The Company expects long-term premium growth to continue. Actual growth in any one year may vary depending on the acquisition or loss of significant clients, business acquisitions and international expansion or other factors as described in the Safe Harbor Cautionary Statement. The cost of reinsurance to cover catastrophe losses has remained relatively unchanged at $9.3 million and $9.5 million in 1996 and 1995 respectively. The cost in 1994 was $6.4 million. The Company continually reviews its exposure to catastrophe losses and, in 1995, increased its coverage which accounted for the majority of the increase in cost over 1994. The unusually large number of major 32 34 catastrophe losses experienced by the industry in past years had caused the reinsurance market capacity to be limited and more costly. Investment income increased by 22% to $121.2 million in 1996 from $99.4 million in 1995. The increase is mainly due to the overall increase in invested assets of $280 million. The increase in 1995 from 1994 was 34%; however, this included growth due to the acquisition of a $66 million block of business. The Company's average fixed income investment yield was 6.8% in 1996, 7.0% in 1995 and 6.7% in 1994. Gross collected premiums increased 30% in 1995 (26% excluding the $66 million acquisition) and 23% in 1994. Net earned premiums increased 13% in 1995 and 24% in 1994. Total net premiums earned by industry segment were as follows: (in millions)
1996 1995 1994 --------------------------------------- Life $ 384.0 $ 377.1 $ 360.1 Property and Casualty 994.5 863.6 734.2 ----------- ----------- ----------- Total $ 1,378.5 $ 1,240.7 $ 1,094.3
CLAIMS AND COMMISSIONS Through our extensive use of adjustable commission arrangements based on claims experience, we have been able to generate business with stable underwriting results. The overall loss ratio for the Company was 37.9% in 1996 compared with 37.3% and 40.0% in 1995 and 1994 respectively. The commission expense ratios for the same periods were 41.5% in 1996, 42.4% in 1995 and 40.0% in 1994. The Company's experience in the property and casualty segment has been better than industry experience, as demonstrated by the following statutory combined ratios:
1996 1995 1994 ------------------------------ Property & Casualty Segment 97 94 96 Industry 107* 106.5 108
*A.M. Best estimates In 1996, the Company incurred approximately $9.2 million in pre-tax losses related to Hurricanes Bertha, Fran and Hortense. Credit bond pre-tax losses and expenses amounted to $11.5 million in 1995 and $6.6 million in 1994, including reserves and partial litigation settlements of $5.8 million and $4.5 million in 1995 and 1994 respectively. In 1996, the Company did not incur any significant expenses or losses associated with the remaining credit bond policies in force. The Company's 1996 reserve development, both foreign and domestic, was not significantly different from previously established reserves. The Company's reserve development includes the effects from losses experienced from excess casualty reinsurance pools in which the Company discontinued participation effective in or prior to 1981. The Company reported pre-tax losses from these pools of $8.3 million in 1996, $7.3 million in 1995 and $4.2 million in 1994. Reserve additions in 1996 increased significantly to $6.7 million from $3.0 million in 1995. 33 35 This business is long-tail in nature and losses continue to exceed both Company and industry expectations. Most of these losses result from asbestos-related and environmental pollution claims. The Company's exposure is primarily through participation in excess casualty pools. These pools typically involve high-layer coverages that are applicable only after primary insurance coverage and, in many cases, reinsurance coverages have been exhausted. The Company's experience can differ significantly from that of other insurers which wrote the primary coverages directly. The Company establishes loss reserves on known claims as recommended by the various pool managers, plus additional reserves to compensate for those claims that have not yet been reported. Reserve additions in 1996 have increased the survival ratio to 14 years from 8.5 in 1995. It is difficult to make a reasonable estimate of the Company's ultimate liability due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is complex and uncertain. Our historical experience suggests, however, that although reinsurance pool losses will continue, they should not have a materially adverse effect on the Company's financial condition or cash flows. A few of the Company's products such as Mobilehome Physical Damage and Homeowners are affected by seasonal changes during the year, causing the profitability in those lines and for the Company to fluctuate throughout the year. OPERATING AND INTEREST EXPENSES Operating expenses (excluding interest expense) were $280.8 million in 1996, $251.5 million in 1995 and $220.2 million in 1994. The ratio of operating expenses to gross premiums earned in 1996 was 11.8%, showing continued improvement from 1995 of 12.5% and 1994 of 13.1%. The Company is in the process of replacing many of its legacy systems and is upgrading its systems to accommodate business for the year 2000. The most significant of these costs relate to the new processing system being implemented for the property and casualty segment, which totaled $6.3 million in 1996, $4.9 million in 1995 and $3.6 million in 1994. Similar expense levels are expected to continue through 1997. Interest expense was $17.5 million, $15.6 million and $11.2 million in 1996, 1995 and 1994 respectively. The increase in interest expense in 1996 is primarily due to elevated debt levels during the year. The increase in interest expense from 1994 to 1995 was due in part to an increase in interest rates and increases in debt of $38.2 million. TAXES The effective tax rate remained constant at 31% in 1996 and 1995 despite an increase in operating losses from our United Kingdom insurance subsidiary. These losses did not provide any tax benefit to the Company and were also the primary cause for the increase in 1995 from an effective tax rate of 29% in 1994. The Company continues to increase its concentration of tax-exempt and tax-credit investments to minimize its income tax expense. FINANCIAL CONDITION Total assets increased 16% to $3.5 billion at December 31, 1996, from $3.0 billion at December 31,1995. The increase is attributable to strong cash flows, and the investment of proceeds from the issuance of the Series B Convertible Preferred Stock. Total assets increased 23% at December 31, 1995, from $2.4 billion at December 31, 1994. This increase resulted from strong cash flows, the assumption of a block of business and additional debt financing. Invested assets at December 31, 1996, 1995 and 1994, were $2.0 billion, $1.7 billion and $1.3 billion respectively. At December 31, 1996, 34 36 investments in fixed maturities represented 85% of the total investment portfolio while short-term and other investments (principally invested cash) represented another 9%. The Company does not hold significant investments in equity securities, mortgage loans or real estate. At December 31, 1996, there were $8.7 million in investments pertaining to Florida properties, which represents 85% of the total mortgage loans and real estate portfolio. Liabilities were $2.8, $2.5 and $2.0 billion at December 31, 1996, 1995 and 1994 respectively. Liabilities associated with policies represent a major portion of total liabilities including $2.1 billion or 75.0% in 1996, $1.9 or 75.1% in 1995, and $1.5 or 74.1% in 1994. Notes payable were $222.5 million at December 31, 1996, $236.0 million at December 31, 1995, and $197.8 million at December 31, 1994. The Company's debt to capitalization ratio of 23.9% at December 31, 1996, is at its lowest level in years down from 31.5% and 32.8% at December 31, 1995 and 1994 respectively. The Company registered $200 million in medium-term notes with the Securities and Exchange Commission in 1994. During 1995 and 1994, the Company issued $50.0 million and $75.0 million of these medium term notes respectively. The debt issuance proceeds were used to refinance outstanding debt and to support the Company's continued growth and expansion into new markets. In 1995, the Company replaced its short-term financing facility and borrowed $87 million, mainly used to pay off its former facility. Stockholder's equity increased by $310.9 million to $710.2 million at December 31, 1996, from $399.3 million at January 1, 1994. In July 1996, the Company issued 2.3 million shares of preferred stock with a stated value of $50 per share that contributed net proceeds of $111.8 million to equity. The other primary sources of growth in stockholder's equity from January 1, 1994, to December 31, 1996, are accumulated earnings of $223.3 million reduced by $46.9 million in dividends paid on the Company's common and preferred shares. Under FASB Statement 115 - Accounting for Certain Investments in Debt and Equity Securities - certain investments in debt and equity securities are carried in the balance sheet at fair value. The difference between amortized cost and fair value of securities available-for-sale (unrealized gain or loss, net of tax) is included as a component of equity. Unrealized gains, net of taxes on the Company's fixed maturity portfolio were $7.7 million at December 31, 1996. In February 1996, the Board of Directors revoked the 1990 authority to repurchase Company stock and authorized a repurchase of up to one million shares of the Company's stock in the open market from time to time subject to certain conditions. At December 31, 1996, the Company held approximately 93,000 shares as treasury stock. LIQUIDITY AND CAPITAL RESOURCES The increase in interest rates resulted in a reduction in the market value of the Company's fixed maturity portfolio. Unrealized gains on fixed maturity investments decreased to $25.1 million at December 31, 1996, from $35.2 million at December 31, 1995. At December 31, 1996, $2.0 billion or 57.6% of the Company's total assets were comprised of securities, short-term investments and cash. Securities are principally readily marketable and none are part of highly leveraged transactions. In the bond portfolio, 80% of bonds have maturities of under five years and 83% have a rating of "A" or better (79% and 87% respectively at December 31, 1995). The Company's investment portfolio has been structured to match cash requirements. Liabilities representing current cash requirements including claim liabilities, accrued commissions and other liabilities totaled $906.3, $748.0 and $646.1 million, at December 31, 1996, 1995 and 1994 respectively. Other significant cash commitments in 1997 include shareholder dividends of approximately $24.5 million under the current capital structure. 35 37 Cash flows from operations of $202.7 million in 1996, $266.0 million in 1995, and $235.2 million in 1994 contributed to meet operating requirements, as well as anticipated debt service. Cash provided by operating activities in excess of these needs is used in investing activities. During 1996, the Company raised $115 million in a public offering of preferred stock. The net proceeds of $111.8 million were used primarily to support future growth and reduce debt. Excluding any significant business acquisitions, the Company expects to provide all its capital needs internally in 1997. Capital expenditures planned for 1997 are not expected to be significant compared to the Company's overall liquidity and cash flow. The Company began expanding its headquarters and incurred costs of approximately $2.9 million in 1996. The cost to complete the expansion in 1997 is expected to be an additional $2.6 million. The one million share stock buyback program is not expected to significantly impact the Company's liquidity or cash flow in any one financial reporting period. While the impact, if any, from the resolution of pending litigation cannot presently be identified, the Company does not expect any unfavorable outcome to have a material effect on liquidity or financial condition. In 1995, the Company executed a $250 million financing program with a group of banks, which features a bid loan and revolving line of credit facility to replace the $130 million financing program. In 1994, the Company registered $200 million of medium-term notes with maturities ranging from nine months to thirty years, with the Securities and Exchange Commission. In 1994 and 1995, the Company issued a $75 million fixed rate note and a $50 million floating rate note respectively. The interest rate on the floating rate note is determined quarterly, and interest under the short-term facility is determined at the time amounts are borrowed. Accordingly, interest rate changes may impact the Company's interest expense. Under these arrangements, approximately $245 million is available for short-term liquidity needs as of year end. The Company does not commit a significant portion of its investment portfolio to equity securities, which were 5.7% of total invested assets at December 31, 1996; consequently, liquidity is not significantly affected by changes in the equity securities markets. The Company's preferred stock portfolio is exposed to market value fluctuations which result primarily, but not exclusively, from the sensitivity of the preferred stocks to interest rate changes. To mitigate the interest rate sensitivity of this portfolio, the Company has established a limited cross-hedging program utilizing U.S. Treasury futures and option contracts. Open positions at December 31, 1996 were not significant. The Company does not concentrate in policy coverages under which policyholders may control, on a discretionary basis, access to cash benefits through policy surrender and withdrawals. The Company expects to continue its policy of paying regular cash dividends; however, future dividends are dependent on the Company's future earnings, capital requirements and financial condition. Additionally, based on the current dividend paying abilities of the insurance subsidiaries, the Company does not foresee any difficulty in servicing its outstanding indebtedness or its dividend-paying abilities. Payment of dividends to ABIG by its insurance subsidiaries is dependent on regulations dictated by statutory authorities in each state in which they are domiciled. The National Association of Insurance Commissioners has introduced standards which would treat dividends in excess of the lesser of 10% of surplus or net income as extraordinary dividends requiring insurance department approval. While some states have adopted the standards, others have not. The payment of dividends by the subsidiaries is subject to restrictions discussed further in Notes 7 and 8 to the Consolidated Financial Statements. 36 38 REGULATIONS ABIG's insurance subsidiaries, like other insurance companies, are subject to regulation and supervision in the states in which they are authorized to engage in business. Such regulations vary from state to state, but generally relate to standards of solvency, pricing, licensing, investment restrictions, insurance policy forms approval, computation of reserves, assessments and financial reporting. A substantial portion of the business written by the insurance subsidiaries is credit insurance. Most states have enacted laws which regulate credit insurance to a greater extent than they regulate other forms of insurance, including maximum premiums which may be charged and commissions which can be paid. A component rating approach which allows state regulators to take into account factors other than losses in determining the reasonableness of credit insurance rates was made part of the National Association of Insurance Commissioners (NAIC) Creditor-Placed Insurance Model Act that was adopted in 1996. Individual states which adopt the regulation are generally expected to adapt the model regulation to their perceived needs and to apply the regulation to business written in that state. Adoption of this Regulation is not expected to significantly affect the Company's operations. The investments of the insurance subsidiaries are limited as to type and amount by the insurance laws of the state of domicile. During 1996, the NAIC adopted the Investments of Insurers Model Act which provides a well-capitalized insurer more discretion and flexibility in its investing practices. Additionally, investment policies are reviewed by the Board of Directors. The NAIC has promulgated Risk-Based Capital (RBC) requirements. Under the RBC requirements, areas such as asset risk, insurance risk, interest risk and business risk are evaluated and compared to the Company's capital and surplus to determine relative solvency margins. The Company's insurance subsidiaries all exceed their respective RBC requirements. The Catastrophe Reserve Subgroup of the NAIC is currently working on the development and implementation of a mandatory, tax-deductible, pre-event catastrophe reserve based on geographic exposure zones and premiums by line of business. Agreement is yet to be reached on certain factors included in the design of the reserve, such as a trigger point and a cap on the reserve. COMPETITION The competitors of the Company consist of both stock and mutual insurance companies. Because the profits, if any, of mutual companies accrue to the policyholders, such companies may have certain competitive advantages. Some competing companies, both stock and mutual, have been in business a longer time, are more widely known by reason of such factors as age and size, and have greater financial resources than ABIG. However, due to the specialized nature of the markets served and products offered, most businesses of the Company compete directly with a relatively small number of other insurance companies, which share the Company's specialty nationwide and in regional and state markets. Profits of insurance companies are affected not only by volume of insurance sold and renewed, but by such factors as mortality and loss experience, investment income and underwriting expenses. RESERVES Life insurance companies are required to establish and maintain policy liabilities to meet their obligations on life policies. These liabilities are amounts which, with additions from premiums to be received on outstanding policies and with interest on such funds compounded annually at certain assumed rates, are calculated to be sufficient to meet policy obligations at death or maturity in accordance with the mortality tables employed when the policies were issued. Liabilities for losses and loss adjustment expenses for 37 39 property and casualty insurance represent estimates of unpaid claims related to known losses and of claims which have been incurred but not reported. These liabilities are based upon past experience of ultimate claim settlements and of unreported losses and loss adjustment expenses. The length of time for which such costs must be estimated varies depending upon the coverage involved. Since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liability and damage awards, the process used in computing reserves cannot be exact, particularly for liability coverages. The majority of the Company's property and casualty insurance business is represented by property coverage in which the ultimate loss experience develops relatively quicker than that for insurers concentrated more heavily in liability coverages. In the ordinary course of business, the Company reinsures risks with other insurance companies; nonetheless, the Company is contingently liable with respect to risks reinsured, should the reinsuring companies fail to meet the obligations assumed in the reinsurance agreements. (See Note 5 to the Consolidated Financial Statements.) SAFE HARBOR CAUTIONARY STATEMENT Except for historical information provided in this Annual Report, statements made throughout this document, including Management's Discussion and Analysis, are forward-looking and, as such, actual results could differ materially from those expected by the Company. The actual results of the Company may be affected by (i) adverse catastrophe experience in certain of the Company's property and casualty products, (ii) significant changes in interest rates, (iii) increased competition causing reduction in product margin or loss of a significant client, (iv) adverse loss development on property and casualty prior years' claims or the excess casualty reinsurance pools, (v) premium growth expectation not met because of the loss of a significant client, (vi) outcome of litigation and other state and federal regulatory issues, and (vii) general economic conditions. In addition, the actual results of forward-looking statements are also subject to the specific factors which may be included with a particular forward-looking statement. 38 40 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AMERICAN BANKERS INSURANCE GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Report of Independent Certified Public Accountants 40 Consolidated Balance Sheets at December 31, 1996 and 1995 41 Consolidated Statements of Income for the years ended December 31, 1996, 1995, and 1994 42 Consolidated Statements of Common Stock and Other Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994 43 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994 44 Notes to Consolidated Financial Statements for the year ended December 31, 1996 45 SCHEDULES: * I - Summary of Investments - Other Than Investments in Related Parties 67 II - Condensed Financial Information of Registrant 68-71 III - Supplementary Insurance Information 72 IV - Reinsurance 73 V - Supplemental Information Concerning Property - Casualty Insurance Operations 74
* Note: All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 39 41 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Director and Stockholders of American Bankers Insurance Group, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of American Bankers Insurance Group, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Miami, Florida March 12, 1997 40 42 CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 (IN THOUSANDS EXCEPT PAR VALUE OF STOCK):
- ---------------------------------------------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------------------------------- ASSETS Investments Held-to-maturity securities, at amortized cost (fair value: $864,307 in 1996 and $613,749 in 1995) $ 851,146 $ 594,277 Available-for-sale securities, at fair value (amortized cost: $793,217 in 1996 and $777,540 in 1995) 805,124 793,277 Trading securities at fair value (amortized cost: $8,867 in 1996) 9,038 Equity securities, at approximate market value (cost: $98,662 in 1996 and $98,612 in 1995) 112,895 113,028 Mortgage loans on real estate 10,236 11,793 Policy loans 8,290 7,819 Short-term and other investments 171,674 168,216 - ---------------------------------------------------------------------------------------------------------------- Total investments 1,968,403 1,688,410 - ---------------------------------------------------------------------------------------------------------------- Cash 30,434 23,257 Accounts receivable, net of allowance for doubtful accounts of $4,526 in 1996 and $5,024 in 1995 128,963 130,970 Reinsurance receivable 202,626 168,128 Accrued investment income 24,296 20,943 Deferred policy acquisition costs 387,993 310,879 Prepaid reinsurance premiums 507,077 502,312 Other assets 219,711 142,835 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 3,469,503 $ 2,987,734 - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities $ 291,756 $ 275,250 Unearned premiums 1,291,142 1,178,867 Claim liabilities 487,596 404,745 - ---------------------------------------------------------------------------------------------------------------- 2,070,494 1,858,862 - ---------------------------------------------------------------------------------------------------------------- Other policyholders' funds 6,795 7,113 Notes payable 222,490 235,981 Deferred income taxes 40,795 29,549 Accrued commissions and other expenses 156,896 136,174 Other liabilities 261,826 207,058 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 2,759,296 2,474,737 - ---------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 11) - ---------------------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock: authorized 3,500 shares $3.125 Series B Cumulative Convertible Preferred Stock (stated at liquidation preference of $50 per share), issued and outstanding 2,300 shares 115,000 Common stock of $1 par value. Authorized 35,000 shares; issued and outstanding 20,530 shares in 1996 and 20,384 shares in 1995 20,530 20,384 Additional paid-in capital 217,939 215,121 Net unrealized investment and foreign exchange gains 7,437 7,255 Retained earnings 359,359 282,748 Treasury stock at cost - 93 shares in 1996 and 136 shares in 1995 (1,426) (2,516) Unamortized restricted stock (4,382) (3,620) Collateralization of loan to Leveraged Employee Stock Ownership Plan (4,250) (6,375) - ---------------------------------------------------------------------------------------------------------------- Total stockholders' equity 710,207 512,997 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 3,469,503 $ 2,987,734 ================================================================================================================
See accompanying notes to consolidated financial statements. 41 43 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS EXCEPT PER COMMON SHARE DATA):
- ------------------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ GROSS COLLECTED PREMIUMS $ 2,492,828 $ 2,286,573 $ 1,761,080 ====================================================================================================== PREMIUMS AND OTHER REVENUES Net premiums earned $ 1,378,485 $ 1,240,713 $ 1,094,317 Net investment income 121,200 99,400 74,442 Realized investment gains 7,812 721 2,679 Other income 21,538 20,014 15,397 - ------------------------------------------------------------------------------------------------------ Total revenues 1,529,035 1,360,848 1,186,835 - ------------------------------------------------------------------------------------------------------ BENEFITS AND EXPENSES Benefits, claims, losses, and settlement expenses 523,024 463,130 437,959 Commissions 571,768 526,425 437,674 Operating expenses 280,768 251,519 220,218 Interest expense 17,530 15,579 11,168 - ------------------------------------------------------------------------------------------------------ Total benefits and expenses 1,393,090 1,256,653 1,107,019 - ------------------------------------------------------------------------------------------------------ Income before income taxes 135,945 104,195 79,816 - ------------------------------------------------------------------------------------------------------ Income tax expense Current (28,921) (25,205) (14,830) Deferred (12,521) (6,730) (8,442) - ------------------------------------------------------------------------------------------------------ Total income tax expense (41,442) (31,935) (23,272) - ------------------------------------------------------------------------------------------------------ NET INCOME $ 94,503 $ 72,260 $ 56,544 ====================================================================================================== PER COMMON SHARE DATA Primary: NET INCOME $ 4.39 $ 3.48 $ 2.74 ====================================================================================================== Weighted average number of shares outstanding 20,814 20,746 20,596 ====================================================================================================== Fully diluted: NET INCOME $ 4.31 $ 3.48 $ 2.74 ====================================================================================================== Weighted average number of shares outstanding 21,965 20,823 20,613 ======================================================================================================
See accompanying notes to consolidated financial statements. 42 44 CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY For the Years ended December 31 (in thousands except per common share data):
- ------------------------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ PREFERRED STOCK: Proceeds from sale of stock $ 115,000 Balance at end of year $ 115,000 - ------------------------------------------------------------------------------------------------------------ COMMON STOCK: Balance at beginning of year $ 20,384 $ 20,244 $ 20,140 Exercise/forfeitures of options 146 140 104 Balance at end of year $ 20,530 $ 20,384 $ 20,244 - ------------------------------------------------------------------------------------------------------------ ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year $ 215,121 $ 212,139 $ 210,878 Exercise/forfeitures of options and related tax expense 5,479 2,982 1,261 Issuance of treasury stock 658 Expenses related to issuance of stock (3,319) Balance at end of year $ 217,939 $ 215,121 $ 212,139 - ------------------------------------------------------------------------------------------------------------ NET UNREALIZED INVESTMENT AND FOREIGN EXCHANGE GAINS (LOSSES): Balance at beginning of year $ 7,255 $ (38,554) $ 356 Change in net unrealized investment (losses) gains (4,013) 71,310 (52,588) Taxes on net unrealized investments gains (losses) 1,215 (23,628) 17,094 Equity adjustment from foreign currency translation 2,980 (1,873) (3,416) Balance at end of year $ 7,437 $ 7,255 $ (38,554) - ------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS: Balance at beginning of year $ 282,748 $ 225,374 $ 182,975 Net income 94,503 72,260 56,544 Cash dividends ($.79, $.75 and $.71 per share), net of tax benefit on unallocated LESOP shares (17,892) (14,886) (14,145) Balance at end of year $ 359,359 $ 282,748 $ 225,374 - ------------------------------------------------------------------------------------------------------------ TREASURY STOCK: Balance at beginning of year $ (2,516) $ (1,623) $ (416) Purchase of treasury stock (175) (893) (1,207) Issuance of treasury stock 1,265 Balance at end of year $ (1,426) $ (2,516) $ (1,623) - ------------------------------------------------------------------------------------------------------------ UNAMORTIZED RESTRICTED STOCK: Balance at beginning of year $ (3,620) $ (3,205) $ (4,053) Exercise/forfeitures of options (2,306) (1,822) (116) Amortization expense 1,544 1,407 964 Balance at end of year $ (4,382) $ (3,620) $ (3,205) - ------------------------------------------------------------------------------------------------------------ COLLATERALIZATION OF LOAN TO LESOP: Balance at beginning of year $ (6,375) $ (8,500) $ (10,625) Reduction of LESOP loan 2,125 2,125 2,125 Balance at end of year $ (4,250) $ (6,375) $ (8,500) - ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 43 45 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years ended December 31 (in thousands):
- ---------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 94,503 $ 72,260 $ 56,544 Adjustments to reconcile net income to net cash provided operating activities: Increase in policy liabilities, unearned premiums and claim liabilities (net of reinsurance) 172,195 213,544 66,219 Change in other assets and other liabilities (15,174) 43,818 76,031 Decrease (increase) in accounts receivable 2,007 (25,414) 26,895 (Increase) in accrued investment income (3,353) (4,881) (2,264) Increase in accrued commission and expenses 20,722 37,355 11,862 (Decrease) increase in other policyholders' funds (318) (6,108) 6,855 Increase in policy loans (471) (978) (119) Amortization of deferred policy acquisition costs 497,855 449,749 345,505 Amortization of cost of insurance acquired 1,899 2,447 6,109 Policy acquisition costs deferred (574,969) (531,048) (376,327) Provision for amortization and depreciation 9,150 11,873 13,089 Deferred income taxes 12,521 6,730 8,442 Net gain on sale of investments (7,812) (721) (2,679) Compensation and tax effect on stock option shares 2,837 1,407 965 Net cash flow from purchases and sales of trading securities (8,852) (4,019) (1,887) - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 202,740 266,014 235,240 - ---------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of investments Held-to-maturity securities (351,992) (159,185) (164,825) Available-for-sale securities (844,994) (346,237) (430,475) Mortgage loan (263) (1,517) Real estate (563) Proceeds from sale of investments Held-to-maturity securities 158 Available-for-sale securities 223,292 94,267 218,914 Mortgage loans 1,200 2,654 3,286 Real estate 1,473 87 Proceeds from maturities of investments Held-to-maturity securities 95,100 71,395 104,226 Available-for-sale securities 608,029 27,244 57,535 (Increase) decrease in short-term investments (1,447) (38,345) 5,919 Transactions related to capital assets Capital expenditures (10,946) (9,770) (5,784) Sales of capital assets 509 302 282 - ---------------------------------------------------------------------------------------------------------- Net cash used in investing activities (279,776) (358,414) (212,281) - ---------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from issuance of notes payable 138,147 131,000 96,723 Repayment of notes payable (149,513) (90,683) (55,683) Dividends paid to shareholders (17,951) (14,824) (14,304) Proceeds from sale of stock 113,679 1,248 1,238 Purchase of treasury stock (175) (893) (1,208) - ---------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 84,187 25,848 26,766 - ---------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 26 273 (15) - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 7,177 (66,279) 49,710 Cash at beginning of year 23,257 89,536 39,826 - ---------------------------------------------------------------------------------------------------------- Cash at end of year $ 30,434 $ 23,257 $ 89,536 - ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 44 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS American Bankers Insurance Group, Inc. provides credit-related insurance programs in the United States, Canada and the Caribbean. The Company also conducts business in Latin America and the United Kingdom. ABIG, as an international wholesaler and marketer of insurance products, services and programs, concentrates on marketing through financial institutions, retailers and other entities which provide consumer financing as a regular part of their business. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in conformity with generally accepted accounting principles which vary in certain respects from reporting practices prescribed or permitted by state insurance departments and include the following significant accounting policies: (a) Consolidation Policy The accompanying consolidated financial statements include the accounts of American Bankers Insurance Group, Inc. (ABIG) and its subsidiaries (the Company): v American Bankers Insurance Company of Florida (ABIC) v American Bankers Life Assurance Company of Florida (ABLAC) v American Reliable Insurance Company (ARIC) v Bankers American Life Assurance Company (BALAC) v Bankers Insurance Company, Ltd. (BICL) v Caribbean American Life Assurance Company (CALAC) v Caribbean American Property Insurance Company (CAPIC) v Federal Warranty Service Corporation (FWSC) v Voyager Insurance Companies All significant intercompany transactions and accounts have been eliminated in consolidation. (b) Investments Under FASB Statement 115, investments in debt and equity securities are classified as either held-to-maturity, available-for-sale or trading. Investments in debt securities are classified as held-to-maturity and measured at amortized cost if the Company has the positive intent and ability to hold these securities to maturity. Investments in debt securities not classified as held-to-maturity and equity securities with readily determinable fair values are classified as either available-for-sale or trading securities and measured at fair value. Securities that are purchased and held principally for the purpose of selling them in the near term shall be classified as trading securities and reported at fair value with subsequent changes in value reflected as unrealized investment gains and losses in the Consolidated Statements of Income. Investments not classified as either trading securities or held-to-maturity securities are classified as available-for-sale securities and reported at fair value with subsequent changes in value reflected as unrealized investment gains and losses in the Consolidated Statements of Common Stock and Other Stockholders' Equity. 45 47 Equity securities are carried at market value. Mortgage loans and policy loans are stated at the unpaid principal balance of such loans net of unamortized discount. Investments with impairment in value, which is other than temporary, are written down to estimated realizable value. The writedowns are included in realized investment gains in the Consolidated Statements of Income. Premiums and discounts on mortgage-backed securities are amortized using the simple interest method over the expected life of each security - generally 2 to 7 years. In addition, a pro rata portion of premiums and discounts is recognized when principal payments are received and is included in net investment income in the Consolidated Statements of Income. Unrealized gains and losses on equity securities are reflected in Stockholders' Equity. The cost of securities sold is based on the specific identification method. (c) Premium Revenues Life insurance and annuity premiums, including single premiums for accidental death and dismemberment policies, are reported as earned when due. Credit life insurance premiums and accident and health premiums are earned over the terms of the contracts in relation to anticipated benefits to the policyholders. Property insurance premiums are recognized as income principally on a pro rata basis over the life of the policies. (d) Policy Acquisition Costs For life business, the costs of acquiring new business (principally commissions and certain variable underwriting, agency and policy issue expenses) are deferred and amortized over the term of the contracts as follows: v Acquisition costs relating to ordinary life contracts are amortized over the estimated term of the contracts in proportion to the ratio of the annual premium revenue to total premium revenue expected. Acquisition costs for universal life and annuities are 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. The assumptions used for the estimates are consistent with those used in computing the policy liabilities. v Acquisition costs relating to credit life and accident and health insurance are amortized over the term of the contracts in relation to premiums earned. v The method of computing the deferred policy acquisition costs for property business (commissions and other acquisition expenses) limits the amount deferred to the lower of (1) unearned premiums which remain after deducting the expected amount of losses, loss adjustment expenses, and servicing costs estimated to be incurred as the premiums are earned; or (2) the costs applicable to the unearned premiums. Deferred acquisition costs are reviewed quarterly to assure their recoverability. The recoverability of the deferral is calculated without considering investment income. (e) Policy Liabilities and Unearned Premiums Policy liabilities on life and annuity business are computed principally by the net level premium method based upon assumptions as to future investment yield, mortality, morbidity, and withdrawals consistent with those used to develop the gross premiums on the policies in force. Universal life and annuity policyholders' liabilities are based on full account values. Unearned premiums for credit insurance and property business represent the unexpired portion of the premiums. 46 48 (f) Claim Liabilities Claim liabilities net of salvage and subrogation are based primarily upon past experience and may be more or less than the amounts ultimately paid or recovered when the claims are settled. Changes in the estimated liability are charged or credited to operations as the estimates are revised. (g) Income Taxes Deferred taxes are provided for temporary differences in the bases of assets and liabilities for financial reporting and tax purposes. (h) Property and Equipment Depreciation of property and equipment is provided primarily on the accelerated method. Buildings are depreciated on the straight-line method. Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was $9,278,000, $8,607,000 and $8,550,000 respectively and is a component of operating expenses. Estimated useful lives range from 10 to 40 years for buildings and 3 to 10 years for furniture and equipment. (i) Earnings Per Common Share Primary earnings per common share are based on net income (adjusted for dividends on preferred stock) using the weighted average number of such shares outstanding during the year after giving effect to common stock equivalents and treasury shares. Fully diluted earnings per share also assume conversion, if dilutive, of the Company's convertible debt, preferred stock and options into common shares after appropriate adjustments for interest. (j) Pension Plan Pension costs are comprised of service costs applicable to benefits earned during the year, net interest cost or credit applicable to interest on plan liabilities and plan assets, and amortization of certain charges and credits including prior service costs. (k) Translation of Foreign Currencies For those foreign affiliates where the foreign currency is the functional currency, unrealized foreign exchange gains (losses) net of taxes have been reflected in Common Stock and Other Stockholders' Equity under the caption "Net unrealized investment and foreign exchange gains (losses)." (l) Fair Values of Financial Instruments The Company has used the following methods and assumptions in estimating its fair value disclosures: v Investment securities: Fair values for fixed maturity securities are based on quoted market prices when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services. The fair values for equity securities are based on quoted market prices. 47 49 v Mortgage loans and policy loans: The fair values for mortgage loans are estimated using discounted cash-flow analysis, using interest rates currently being offered for loans with similar terms. The carrying amounts for policy loans approximate their fair values at the reporting date. v Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. v Trade receivables and payables: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. v Notes payable: The carrying amount of the Company's short-term financing program approximates its fair value. The carrying amount of the Company's convertible subordinated debentures approximates their fair values. Fair values for the Company's promissory notes and the note payable guaranteed by the Company for the LESOP are based on a discounted cash-flow calculation using the Company's current borrowing rate for similar debts. Fair values for the Company's medium-term notes are based on a discounted cash-flow calculation using the current market rate for notes with a similar term. (m) Reinsurance The Company recognizes the income (ceding fees) on reinsurance contracts principally on a pro rata basis over the life of the policies covered under the reinsurance agreements. (n) Segment Information Operating results and other financial data for each segment are presented in Note 12. Industry segments are primarily composed of the Company's business in the life and property and casualty insurance industries. The geographic segments include the companies or branches located in the United States and its possessions as domestic and all other as foreign. Included in the domestic segments is one foreign insurance subsidiary which writes no direct business, reinsures only affiliated U.S. risks transacted in U.S. dollars and has elected to be taxed as a U.S. corporation. (o) Reclassifications Certain items in the 1995 and prior financial statements have been reclassified to conform with the 1996 presentation. (p) Estimates Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts. Certain significant estimates, including those used in determining property and casualty loss reserves, life insurance policy liabilities, valuation allowances for investment assets, and unrecoverable reinsurance, are discussed throughout the notes to consolidated financial statements. 48 50 (3) INVESTMENTS AND FAIR VALUES INVESTMENTS The Company periodically purchases securities for trading purposes generally not to exceed $20,000,000. At December 31, 1996, the Company held trading securities with a fair value of $9,038,000 (amortized cost $8,867,000) resulting in an unrealized gain of $171,000 which was included in operating results. There were no securities in the trading portfolio at December 31, 1995. At December 31, 1996 and 1995, the fair value, amortized cost, and gross unrealized gains and losses of investments in held-to-maturity and available-for-sale securities consisted of the following:
- -------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 (in thousands) FAIR AMORTIZED GROSS UNREALIZED HELD-TO-MATURITY VALUE COST GAINS LOSSES - -------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 180,212 $178,900 $ 2,157 $ (845) Obligations of states and political subdivisions 119,427 117,953 1,736 (262) Debt securities issued by foreign governments 31,416 29,502 1,969 (55) Corporate securities 506,196 497,735 9,946 (1,485) Other debt securities 27,056 27,056 - -------------------------------------------------------------------------------------------------- TOTAL $864,307 $851,146 $ 15,808 $ (2,647) - -------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 43,456 $ 44,256 $ (800) Obligations of states and political subdivisions 19,597 19,326 $ 497 (226) Debt securities issued by foreign governments 37,638 34,537 3,182 (81) Corporate securities 136,629 133,807 3,743 (921) Other debt securities 5,855 5,976 64 (185) - -------------------------------------------------------------------------------------------------- Subtotal 243,175 237,902 7,486 (2,213) Collateralized mortgage obligations 561,949 555,315 8,476 (1,842) TOTAL $805,124 $793,217 $ 15,962 $ (4,055) - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 (in thousands) FAIR AMORTIZED GROSS UNREALIZED HELD-TO-MATURITY VALUE COST GAINS LOSSES - -------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 189,138 $184,463 $ 4,799 $ (124) Obligations of states and political subdivisions 111,219 108,793 2,573 (147) Debt securities issued by foreign governments 17,748 17,373 825 (450) Corporate securities 267,514 255,518 12,087 (91) Other debt securities 28,130 28,130 - -------------------------------------------------------------------------------------------------- TOTAL $613,749 $594,277 $ 20,284 $ (812) - -------------------------------------------------------------------------------------------------- Available-for-Sale - -------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 51,917 $ 52,199 $ 8 $ (290) Obligations of states and political subdivisions 14,676 14,364 613 (301) Debt securities issued by foreign governments 44,514 41,260 3,305 (51) Corporate securities 64,555 62,593 3,587 (1,625) Other debt securities 12,637 12,607 329 (299) - -------------------------------------------------------------------------------------------------- Subtotal 188,299 183,023 7,842 (2,566) Collateralized mortgage obligations 604,978 594,517 12,343 (1,882) - -------------------------------------------------------------------------------------------------- Total $793,277 $777,540 $ 20,185 $ (4,448) - --------------------------------------------------------------------------------------------------
49 51 At December 31, 1996 and 1995, fixed maturities with an amortized cost of $67,356,000 and $58,356,000 respectively were on deposit with insurance regulatory authorities to meet statutory requirements. In addition, fixed maturities with an amortized cost of $37,467,000 and $46,325,000 were being held in trust under reinsurance agreements at December 31, 1996 and 1995, respectively. The approximate market value and amortized cost of fixed maturity investments at December 31, 1996, are shown below by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. During 1995, the Company transferred securities from the held-to-maturity category to the available-for-sale category, as allowed under the FASB 115 Guide to Implementation. The amortized cost of the transferred securities was $61,193,000 and the related unrealized gain was $2,678,000.
- --------------------------------------------------------------------------------------------- HELD-TO-MATURITY AVAILABLE-FOR-SALE ---------------- ------------------ FAIR AMORTIZED FAIR AMORTIZED (in thousands): VALUE COST VALUE COST - --------------------------------------------------------------------------------------------- Due in one year or less $106,786 $106,753 $ 15,501 $ 15,478 Due after one year through five years 558,286 549,402 112,285 110,249 Due after five years through ten years 165,057 162,629 98,617 96,352 Due after ten years 34,178 32,362 16,772 15,823 - --------------------------------------------------------------------------------------------- Subtotal 864,307 851,146 243,175 237,902 Collateralized mortgage obligations 561,949 555,315 - --------------------------------------------------------------------------------------------- Balance at December 31, 1996 $864,307 $851,146 $805,124 $793,217 - --------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Foreign exchange gains and losses due to the translation of foreign currency are combined with net unrealized investment gains and losses in the Stockholders' Equity section of the Balance Sheet. Following is a reconciliation of the "Net unrealized investment and foreign exchange gains (losses)" account: - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ CHANGE CHANGE DECEMBER 31 (in thousands): 1996 FOR 1996 1995 FOR 1995 1994 - ------------------------------------------------------------------------------------------------ Fixed Maturities Available-for-Sale: Gross unrealized gains $ 15,962 $ (4,223) $ 20,185 $ 19,425 $ 760 Gross unrealized losses (4,055) 393 (4,448) 38,873 (43,321) Equity Securities: Gross unrealized gains 18,184 420 17,764 11,782 5,982 Gross unrealized losses (3,951) (603) (3,348) 1,230 (4,578) - ------------------------------------------------------------------------------------------------ Subtotal 26,140 (4,013) 30,153 71,310 (41,157) Taxes (9,015) 1,215 (10,230) (23,628) 13,398 Foreign Exchange Translation (9,688) 2,980 (12,668) (1,873) (10,795) - ------------------------------------------------------------------------------------------------ TOTAL $ 7,437 $ 182 $ 7,255 $ 45,809 $(38,554) - ------------------------------------------------------------------------------------------------
Investments by the Company in investment grade corporate debt securities may be affected by a rating decline subsequent to acquisition. However, the percentage of the portfolio affected by such developments is generally not significant due to the diversification of the aggregate portfolio. The Company has no significant investment concentration of credit risk by issuer, industry or geographic region. 50 52 An analysis of net realized gains and losses applicable to investments is as follows:
- --------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (in thousands): 1996 1995 1994 - --------------------------------------------------------------------------------------- Fixed Maturities Held-to-Maturity: Gross realized gains $ 2 Gross realized losses $ (118) (168) $ (234) Fixed Maturities Available-for-Sale: Gross realized gains 2,240 712 828 Gross realized losses (1,652) (266) (512) Fixed Maturities Trading: Gross realized gains 218 272 Gross realized losses (282) (2,159) Equity Securities: Gross realized gains 14,353 6,734 6,086 Gross realized losses (6,028) (1,653) (1,783) Other Invested Assets: Gross realized gains 1,160 1,285 2,393 Gross realized losses (2,143) (5,861) (2,212) - --------------------------------------------------------------------------------------- TOTAL $ 7,812 $ 721 $ 2,679 - ---------------------------------------------------------------------------------------
The Company disposed of certain held-to-maturity securities due to deteriorating credit or mandatory redemption. The components of investment income are as follows:
- --------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (in thousands): 1996 1995 1994 - --------------------------------------------------------------------------------------- Interest on fixed maturities $ 103,539 $ 83,724 $ 63,347 Dividends on preferred stocks 3,100 3,169 2,365 Dividends on common stocks 5,720 1,509 1,326 Interest on mortgage loans 1,072 1,228 1,293 Interest on policy loans 499 475 305 Short-term and other investment income 12,180 14,777 11,085 - --------------------------------------------------------------------------------------- Total 126,110 104,882 79,721 Less: Investment expenses (4,910) (5,482) (5,279) - --------------------------------------------------------------------------------------- Net investment income $ 121,200 $ 99,400 $ 74,442 - ---------------------------------------------------------------------------------------
FAIR VALUES The fair value of the Company's financial instruments other than investments and those where fair values approximate carrying value (See Note 2(l)) are as follows: - --------------------------------------------------------------------------------------- 1996 1995 AT DECEMBER 31 FAIR CARRYING FAIR CARRYING (in thousands): VALUE AMOUNT VALUE AMOUNT - --------------------------------------------------------------------------------------- Mortgage Loans $ 10,600 $ 10,200 $ 12,200 $ 11,800 Notes Payable $ 221,300 $ 222,500 $ 238,800 $ 236,000 - ---------------------------------------------------------------------------------------
51 53 (4) POLICY LIABILITIES, UNEARNED PREMIUMS AND LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The composition of the liability at December 31, 1996 and 1995, and related significant assumptions used are as follows:
- -------------------------------------------------------------------------------------------------------------------------- LIFE AMOUNT OF INSURANCE FUTURE POLICY BASES OF ASSUMPTIONS (B) IN FORCE (A) BENEFITS (A) LINE OF BUSINESS (in millions) (in thousands) INTEREST RATES 1996 1995 1996 1995 AND METHODS MORTALITY - -------------------------------------------------------------------------------------------------------------------------- LIFE: Ordinary $ 288 $ 279 $ 30,309 $ 30,425 Rates range from 110% 55-60 8% graded to 4% Select and for most recent Ultimate issues and 4% graded to 3% for earliest issues. Annuity Fixed Premium 10,967 12,241 Same as above. Same as above. Flexible Premium 34,766 35,243 Full Account Value Single and Other Paid Up 18,475 19,248 Full Account Value Credit 15,819 13,874 113,638 109,432 Unearned premiums based principally on the "Rule of 78's" method. Group 10,335 14,424 1,304 1,603 7 1/2% Net Level 130% 60 CSG Universal Life 3,094 2,635 105,210 85,846 Full Account Value All Other 898 973 6,696 7,048 2.5%-6% Various Net Level ACCIDENT AND HEALTH: Group 10,397 7,939 Unearned premiums based on the pro rata method. Credit 104,604 98,021 Unearned premiums based on the average of the pro rata and "Rule of 78's" methods. Individual 49,252 50,046 3% 105% 1959 ADB Table Property: 552,141 457,969 Unearned premiums based on the pro rata method. - -------------------------------------------------------------------------------------------------------------------------- Totals - Net 30,434 32,185 1,037,759 915,061 Reinsurance Ceded 18,270 10,523 545,139 539,056 Totals - Gross $48,704 $42,708 $1,582,898 $1,454,117 - --------------------------------------------------------------------------------------------------------------------------
(A) Life insurance in force and future policy benefits are stated individually net of reinsurance ceded to other companies. Reinsurance ceded to other companies has been added back to policy liabilities and unearned premiums for balance sheet presentation. (B) All withdrawal assumptions are based on the Company's experience. 52 54 PROPERTY AND CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES The consolidated financial statements include estimated provisions for unpaid losses and loss adjustment expenses (LAE) applicable to the Company's property and casualty insurance subsidiaries. These subsidiaries write principally credit property, unemployment, homeowners, mobilehome physical damage and livestock lines of business throughout the United States, Canada, the Caribbean and the United Kingdom. Such liabilities are established using a combination of case basis estimates and actuarial projections and include provisions for claims incurred but not yet reported as of the balance sheet date. Overall claims experience is principally dependent on the frequency and severity of claims as well as trends in litigation and loss cost inflation. With the exception of discontinued lines, the Company writes primarily property coverages which are characterized by relatively short settlement periods and quick development of ultimate losses. Discontinued business includes the Company's participation in excess casualty reinsurance assumed pools. The business is long-tail in nature and losses continue to exceed both Company and industry expectations. Most of these losses result from asbestos-related and environmental pollution claims. Management is unable to make a reasonable estimate of the Company's ultimate liability from these pools due to a general absence of reliable predictive data and of a generally accepted actuarial methodology for these exposures, significant unresolved legal issues including coverage issues, policy definitions and evolving theories and arguments. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is complex and uncertain. The Company establishes loss reserves on known claims as recommended by the various pool managers and additional reserves to compensate for those claims that have not yet been reported. Losses from its discontinued reinsurance pools included in the accompanying table are $8.3 million, $7.3 million and $4.2 million in 1996, 1995 and 1994 respectively. Reinsurance pool reserves represent approximately 10.7% of the gross liability for property and casualty losses and LAE at December 31, 1996. The Company's estimating and reserving practices are reviewed continually. Subsequent adjustments to the original estimates are made when determinable and are reflected in current year operations. The accompanying tables present an analysis of losses and LAE for the Company's domestic property and casualty subsidiaries. The following table provides a reconciliation of beginning and ending liability balances for 1996, 1995 and 1994.
- ----------------------------------------------------------------------------------------------- Reconciliation of Liability for Losses and Loss Adjustment Expenses for Domestic Property and Casualty Subsidiaries - ----------------------------------------------------------------------------------------------- (in thousands): 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Liability for losses and LAE at beginning of year (net) $ 162,342 $ 137,978 $ 119,491 - ----------------------------------------------------------------------------------------------- Losses and LAE incurred related to: Current year 321,487 269,623 235,857 Prior years (3,748) 332 2,612 - ----------------------------------------------------------------------------------------------- Total incurred 317,739 269,955 238,469 - ----------------------------------------------------------------------------------------------- Losses and LAE paid related to: Current year (223,754) (173,937) (154,498) Prior years (70,489) (71,654) (65,484) - ----------------------------------------------------------------------------------------------- Total paid (294,243) (245,591) (219,982) - ----------------------------------------------------------------------------------------------- Liability for losses and LAE at end of year (net) 185,838 162,342 137,978 Reinsurance receivable for unpaid losses 80,732 75,439 50,063 Liability for losses and LAE at end of year (gross) $ 266,570 $ 237,781 $ 188,041 - -----------------------------------------------------------------------------------------------
Accident and health net claim liabilities reported in the Company's life subsidiaries were $80,026,000, $57,049,000 and $55,875,000 at December 31, 1996, 1995 and 1994, respectively. There was no significant adverse development during the past three years. 53 55 (5) REINSURANCE The Company's insurance subsidiaries follow the policy of reinsuring risk in excess of $250,000 under an ordinary life policy and $300,000 under a property policy. In addition, aggregate excess of loss coverage is obtained for the Company's property and casualty business as protection against catastrophic losses. Ceded claim and policy liabilities are recorded as assets on the balance sheet under the caption "Reinsurance Receivable." The Company's insurance subsidiaries are liable for these amounts in the event reinsurers are unable to pay their portion of the claims. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities or economic attributes of the reinsurers to lessen its exposure to significant losses from reinsurer insolvencies. Reinsurance ceded incurred losses for 1996 and 1995 were $315,096,000 and $268,820,000 respectively. Liabilities for ceded claim reserves and recoverables on paid losses at December 31, 1996 and 1995 are shown below.
- ------------------------------------------------------------------------------ AT DECEMBER 31 (in thousands): 1996 1995 - ------------------------------------------------------------------------------ Ceded Claim Liabilities: Life and health business $ 63,554 $ 51,169 Property and casualty business $101,010 $ 80,215 - ------------------------------------------------------------------------------ Reinsurance Recoverable on Paid Losses: Life and health business $ 19,492 $ 12,784 Property and casualty business $ 20,682 $ 16,435 - ------------------------------------------------------------------------------
The effect of reinsurance on premiums written and earned for the years ended December 31 is as follows:
- ------------------------------------------------------------------------------------------------------- 1996 1995 1994 (in thousands): WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED - ------------------------------------------------------------------------------------------------------- Life and Health: Direct premiums $ 714,651 $ 677,758 $ 653,256 $ 562,360 $ 499,140 $ 495,066 Assumed premiums $ 48,563 $ 62,878 $ 49,209 $ 57,058 $ 42,998 $ 41,146 Ceded premiums $ 362,458 $ 356,671 $ 277,893 $ 242,311 $ 188,568 $ 176,112 - ------------------------------------------------------------------------------------------------------- Property and Casualty: Direct premiums $1,690,883 $1,561,533 $1,474,399 $1,309,557 $1,136,660 $1,060,463 Assumed premiums $ 38,731 $ 74,524 $ 109,709 $ 79,158 $ 82,276 $ 79,450 Ceded premiums $ 637,448 $ 641,537 $ 601,123 $ 525,109 $ 482,525 $ 405,696 - -------------------------------------------------------------------------------------------------------
54 56 (6) INCOME TAXES Prior to 1984, ABLAC was taxed at regular corporate rates in accordance with the Life Insurance Company Income Tax Act of 1959, whereby a portion of its statutory income was not subject to current income taxation, but was accumulated in an account designated "policyholders' surplus." The aggregate balance in this account ($17,000,000 at December 31, 1996) would be taxed at applicable current rates only if distributed to stockholders or if the account exceeded a prescribed maximum. The Deficit Reduction Act of 1984 eliminated additions to the account for 1984 and thereafter. ABLAC does not anticipate any transactions that would cause any part of this amount to become taxable. Deferred taxes in the amount of $5,950,000 have not been provided since the Company does not anticipate any transactions that would cause any part of the account balance to become taxable. As of December 31, 1996, ABLAC has a shareholders' surplus account balance (on a tax basis) of approximately $128,000,000 from which it could pay dividends to stockholders without incurring any federal income tax liability, subject to regulatory requirements and the availability of funds. The other life insurance subsidiaries do not have policyholders' surplus account balances. Under current Internal Revenue Code provisions, the life insurance subsidiaries are taxed under a single-phase structure incorporating tax rules comparable to other corporate taxpayers. The life insurance subsidiaries are included in the Company's consolidated tax return. ABIG and all other subsidiaries are taxed at regular corporate rates applied to taxable income as determined in accordance with the Internal Revenue Code. Pre-tax income is derived from the following sources:
- ---------------------------------------------------------------------------- (in thousands): 1996 1995 1994 - ---------------------------------------------------------------------------- Domestic (including U.S. possessions) $ 144,381 $ 107,772 $ 78,459 Foreign (8,436) (3,577) 1,357 - ---------------------------------------------------------------------------- Total $ 135,945 $ 104,195 $ 79,816 - ----------------------------------------------------------------------------
Pre-tax income from foreign sources excludes the results of Canadian branches of domestic companies. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax liabilities and assets are as follows:
- --------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, (IN THOUSANDS): 1996 1995 - --------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Deferred policy acquisition costs $ 104,687 $ 87,519 Net unrealized investment gains 9,015 10,230 Depreciation and amortization 5,218 5,442 Others - net 10,918 6,211 - --------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities 129,838 109,402 - --------------------------------------------------------------------------------------------------------------- Deferred tax assets: Insurance policy liabilities (61,385) (53,138) Difference between book and tax bases of investments (9,403) (5,195) Accrued expenses and other amounts not currently deductible for tax purposes (16,179) (15,583) Tax loss carryforward of U.K. subsidiary (4,496) (1,434) Others - net (2,076) (5,937) - --------------------------------------------------------------------------------------------------------------- Total gross deferred tax assets (93,539) (81,287) Less valuation allowance 4,496 1,434 - --------------------------------------------------------------------------------------------------------------- Net deferred tax assets (89,043) (79,853) - --------------------------------------------------------------------------------------------------------------- Net deferred tax liability (asset) $ 40,795 $ 29,549 - ---------------------------------------------------------------------------------------------------------------
55 57 Significant components of the provision for income taxes attributable to continuing operations are as follows:
- --------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (in thousands): 1996 1995 1994 - --------------------------------------------------------------------------- Current: Federal $ 24,169 $ 19,608 $ 12,480 Foreign 4,752 5,597 2,350 - --------------------------------------------------------------------------- Total current 28,921 25,205 14,830 - --------------------------------------------------------------------------- Deferred: Federal 11,032 6,773 7,901 Foreign 1,489 (43) 541 - --------------------------------------------------------------------------- Total deferred 12,521 6,730 8,442 - --------------------------------------------------------------------------- Total provision for income taxes $ 41,442 $ 31,935 $ 23,272 - ---------------------------------------------------------------------------
The provision for foreign taxes includes amounts attributable to income from U.S. possessions which are considered foreign under U.S. tax laws. Total income tax expense (benefit) varies from amounts computed by applying current federal income tax rates to income before income taxes. The reasons for these differences and the approximate tax effects thereon for each year ended December 31 are as follows:
- ---------------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Foreign operating loss carryforward 2.5 1.6 Rate differential - U.S. possessions (2.5) (3.4) (1.1) Tax exempt investment income and dividends (1.7) (2.4) (2.6) Tax settlement, refunds and other taxes 1.0 (.4) (.8) Tax credits, others - net (3.8) .3 (1.3) - ---------------------------------------------------------------------- Effective tax rate 30.5% 30.7% 29.2% - ----------------------------------------------------------------------
Deferred income taxes (benefits) of $9,015,000, $10,230,000 and $(13,398,000) in 1996, 1995 and 1994 respectively have been provided on net unrealized investment gains (losses). The Company intends to indefinitely reinvest the undistributed earnings of its wholly owned foreign subsidiaries. The cumulative amount of undistributed earnings for which the Company has not provided deferred income taxes is approximately $60,000,000 as of December 31, 1996. Upon distribution of such earnings in a taxable transaction, the Company would incur additional U.S. income taxes in the amount of approximately $12,700,000 net of anticipated foreign tax credits. Current tax benefits of approximately $1,300,000 related to the vesting of restricted stock were credited directly to additional paid-in capital in 1996. At December 31, 1996, the Company's U.K. subsidiary had approximately $13,624,000 in net operating loss (NOL) carryforwards. A valuation allowance for the full amount of the related tax benefit has been established due to uncertainties associated with utilization of the NOL carryforwards. The Company made federal income tax payments (net of refunds) of $21,875,000, $13,448,000 and $16,550,000 for the years 1996, 1995 and 1994 respectively. 56 58 (7) Notes Payable Following is a summary of outstanding debt at December 31:
- --------------------------------------------------------------------------------------------------------------------- (in thousands): 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Short-term credit facility $ 80,317 $ 87,000 $200,000,000 medium-term note program 125,000 125,000 10.2% promissory notes due September 12, 1998, annual prepayments of $4.6 million commenced September 12, 1995. Interest is payable quarterly 9,200 13,800 Note payable guaranteed by the Company for LESOP. (See Note 9.) 4,250 6,375 Convertible debenture bonds due to officers on May 24, 1999 (convertible into 150,000 shares of the Company's Common Stock). Interest is payable quarterly at 1% above prime 3,723 3,723 Other notes payable 83 - --------------------------------------------------------------------------------------------------------------------- Total $222,490 $235,981 - ---------------------------------------------------------------------------------------------------------------------
On December 1, 1995, the Company replaced its short-term credit facility with a $250,000,000 five-year competitive advance and revolving credit agreement with a group of banks. The agreement features a revolving line of credit, commercial paper and/or bid loan facilities. Interest rates vary according to the credit instrument exercised and the market rates then prevailing. Quarterly fees payable under this credit facility are: (a) fees payable to each lender, based upon the Company's Moody's and Standard & Poor's ratings at every quarter end; (b) utilization fees; and (c) administrative fee. The fees incurred in 1996 were $316,000 for these facilities. Fees were $1,482,000 and $906,000 for 1995 and 1994 respectively. The credit agreement contains various covenants pertaining to minimum stockholders' equity, maximum funded debt ratio and insurance statutory surplus and other ratios. No dividend payments are permitted if there is a default under the credit agreement. In 1994, the Company filed with the Securities and Exchange Commission a shelf registration statement for $200,000,000 medium-term notes which provides for maturities ranging from nine months to thirty years. Under this shelf registration, the Company issued a $75,000,000 fixed rate note in May 1994 at 7.6% that is due May 1999 and interest is payable semi-annually. In addition, the Company issued a five-year $50,000,000 floating rate note in April 1995. Interest is payable and the rate is established on a quarterly basis. At December 31, 1996, the interest rate was 6.2%. Interest paid was $17,924,000 in 1996, $14,328,000 in 1995 and $10,719,000 in 1994. The following information is furnished with respect to the Company's short-term borrowings (commercial paper and revolving line of credit):
- ------------------------------------------------------------------------- AT DECEMBER 31 (in thousands): 1996 1995 - ------------------------------------------------------------------------- Amount outstanding $ 80,317 $87,000 Weighted average interest rate on outstanding debt 5.62% 6.15% For the year ended December 31 (in thousands): 1996 1995 - ------------------------------------------------------------------------- Average amount outstanding $114,058 $83,417 Maximum amount outstanding $188,147 $97,000 Average interest rate 5.63% 6.23% - -------------------------------------------------------------------------
57 59 (8) Stockholders' Equity The Company has authorized 3,500,000 shares of no par preferred stock. On February 24, 1988, the Board of Directors adopted a "Rights Plan" (amended November 14, 1990) creating certain rights which attach to and trade with each share of common stock outstanding on or after March 11, 1988. Upon the acquisition of, or the announcement of a tender offer for, specified amounts of the Company's common stock, the rights will separate from the common stock, at which time holders of the rights will be entitled to purchase units of the Company's Series A Participating Preferred Stock. Thereafter, under certain circumstances (including acquisitions of specified amounts of the Company's common stock, mergers involving the Company, and certain self-dealing transactions by an acquisitor), holders of the rights will be entitled to purchase common stock (or other property) of the Company (or of the acquiring entity) at prescribed levels. At December 31, 1996, there were 350,000 shares of Series A Preferred Stock reserved for issuance. The rights are redeemable at the Company's option and expire on March 10, 1998. At December 31, 1996, the Company had 2,300,000 shares of $3.125 Series B Cumulative Convertible Preferred Stock issued and outstanding. Holders of the Convertible Preferred Stock are entitled to a cumulative dividend, payable quarterly, at the annual rate of $3.125 per share. If six quarterly dividends are in arrears, the holders of the convertible preferred stock will be entitled to vote as a separate class to elect two directors of the Company. The Convertible Preferred Stock will not be redeemable prior to August 7, 2000. On and after such date, the Convertible Preferred Stock will be redeemable, in whole or in part, at the option of the Company, at $51.88 per share of Convertible Preferred Stock during the period from August 7, 2000 to August 6, 2001 and declining ratably annually to $50 per share of Convertible Preferred Stock on or after August 7, 2006, plus in each case accrued and unpaid dividends to the redemption date. Each share of Preferred Stock has a liquidating preference of $50, plus accrued and unpaid dividends, and is convertible at any time at the option of the holders thereof into .9987 shares of Common Stock of the Company (equivalent to a conversion price of $50.065 per Common Share), subject to adjustment under certain conditions. Stock insurance companies are subject to various states' insurance laws and regulations whereby amounts available for dividends are restricted. Net consolidated assets restricted as to distribution to the Company are $570,400,000. The maximum statutory allowed dividends in 1997 are $139,800,000. A summary of statutory financial information for the domestic insurance companies is presented below:
- ------------------------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Statutory Net Income (including net realized capital gains/losses) Life insurance subsidiaries $54,100 $21,000 $15,700 Property and casualty insurance subsidiaries $52,200 $29,400 $40,400 - ------------------------------------------------------------------------------------------------- AT DECEMBER 31 (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------------------- Statutory Capital and Surplus Life insurance subsidiaries $234,700 $188,900 Property and casualty insurance subsidiaries $374,500 $271,500
Statutory Permitted Practices The Company's insurance subsidiaries prepare their statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the insurance department of their state of domicile. Prescribed statutory accounting practices include state laws, regulations and general 58 60 administrative rules as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state and may change in the future. The NAIC has a project to codify statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. The codification, when completed, will likely change the definitions of what comprises prescribed as opposed to permitted statutory accounting practices and may result in changes to the accounting policies that insurance companies use to prepare their statutory financial statements. (9) Compensation and Other Plans Stock Option Plans Senior Management Plan On May 25, 1994, stockholders approved the adoption of the 1994 Senior Management Stock Option Plan (Senior Plan). Under the terms of the Senior Plan, certain key employees may be granted options at prices equivalent to the fair market value of ABIG's common stock on the grant date. Each option further entitles the employee to be awarded two additional shares of restricted common stock. Options are not exercisable before the six-month anniversary nor after the third anniversary from the date of grant. During a three-year vesting period, the restricted shares are subject to forfeiture in the event the related primary shares are disposed, or if employment with the Company is terminated except by death, disability or retirement. Dividends and voting rights on the restricted shares remain with the employee during the vesting period. Full vesting occurs on the third anniversary after the date the options are exercised. As of December 31, 1996 there were 608,878 shares authorized. Grants may be made under this plan until February 18, 2004. Non-Employee Directors' Stock Option Plan On May 25, 1994, stockholders approved the adoption of the 1994 Non-Employee Directors' Stock Option Plan (Director's Plan). Under the terms of the plan, each non-employee director will receive 1,000 options annually at prices equivalent to the fair market value of ABIG's common stock on the grant date. Options granted are not exercisable before the six-month anniversary nor after the fifth anniversary from the date of the grant. As of December 31, 1996, there were 50,000 shares authorized. Grants may be made under this plan until March 24, 2004. Award and Incentive Plans On May 22, 1991, stockholders approved two stock option plans: (1) 1991 Stock Option/Restricted Stock Award Plan (Award Plan) and (2) 1991 Stock Incentive Compensation Plan (Incentive Plan). Under the terms of the Award Plan, certain key employees may be granted options at prices equivalent to the fair market value of ABIG's common stock on the grant date. Each option further entitles the employee to be awarded three additional shares of restricted common stock. Options are not exercisable before the six-month anniversary nor after the third annual anniversary from the date of grant. During the vesting period, the restricted shares are subject to forfeiture in the event the related primary shares are disposed, or if employment with the Company is terminated except by death, disability or retirement. Dividends and voting rights on the restricted shares remain with the employee during the vesting period. Full vesting occurs on the fifth annual anniversary after the date the options are exercised. In 1995, the Company amended the Plan's vesting period provision, originally five years, to allow certain restricted shareholders to elect an additional one-, two- or three-year vesting period for their shares. In 1994, the stockholders approved the Senior Management Stock Option Plan, and as a result, no new grants will be made under the 59 61 Award Plan Under the terms of the Incentive Plan, certain other management employees may be granted options at prices equivalent to fifty percent of the fair market value of the Company's common stock on the grant date. Shares obtained by exercise are subject to restrictions. Non-vested shares are subject to forfeiture if employment is terminated except by death, disability or retirement. Vesting occurs ratably over a five-year period from the date of exercised. As of December 31, 1996 there were 289,586 shares authorized. Grants may be made under the Incentive Plan until November 14, 2000. A summary of the status and activity for options and shares granted and exercised under the Plans at December 31, 1996, is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- Award/Senior Plan Incentive Plan Non-Employee Directors Plan - ----------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Granted Exercised Price Granted Exercised Price Granted Exercised Price - ----------------------------------------------------------------------------------------------------------------------------------- As of December 31, 1993 38,400 470,478 60,465 1994 Grants 89,500 75,100 13,000 Exercises (Award Plan $14.63 - $23.13, Senior Plan $22.13, and principally $11.06 Incentive Plan) (49,400) 49,400 (51,100) 51,100 Forfeitures/Reacquisitions (56,400) (4,360) Lapses (3,900) (24,000) - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at End of Year (all exercisable) 74,600 463,478 107,205 13,000 1995 Grants 74,400 65,500 13,000 Exercises (Award Plan $18.13 - $26.50, Senior Plan $23.13 - $30.25, and $15.13 - 17.00 Incentive Plan and $22.56 Non-Employee) (66,500) 66,500 (41,200) 41,200 (2,000) 2,000 Forfeitures/Reacquisitions (7,500) (5,390) Lapses (19,500) (24,300) - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at End of Year (all exercisable) 63,000 522,478 $27.20 N/A 143,015 N/A 24,000 2,000 $26.52 1996 Grants 94,200 $41.10 73,300 $20.53 13,000 $40.38 Exercises (Award Plan $26.50, Senior Plan $22.13 - $47.50, and $20.50 - 23.75 Incentive Plan and $22.56 - $29.88 Non-Employee) (60,600) 60,600 $33.46 (45,000) 45,000 $20.51 (5,000) 5,000 $26.95 Forfeitures/Reacquisitions (14,538) $27.90 (6,570) Lapses (9,300) $27.90 (28,300) $20.55 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at End of Year (all exercisable) 87,300 $37.78 N/A N/A 32,000 $32.08 Exercised - Net 568,540 181,445 7,000 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $8.18 $20.57 $11.42 - -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1996:
- ----------------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- $22.13 - $30.25 39,700 2.0 $ 8.88 39,700 $ 8.88 $40.38 - $47.50 79,600 2.8 $27.37 79,600 $27.37 - ----------------------------------------------------------------------------------------------------------------------------------- $22.13 - $47.50 119,300 2.6 $36.25 119,300 $36.25
60 62 Shares issued under the plans are recorded at fair market value at the effective date of the grant. The unamortized difference ($4,382,000 as of December 31, 1996, and $3,620,000 as of December 31, 1995) between the fair market value and option price on shares which are restricted is reported as part of stockholders' equity. Amortization of the restricted stock is recorded as compensation expense ratably over the vesting period ($1,544,000 in 1996, $1,407,000 in 1995 and $965,000 in 1994). Furthermore, any difference between the fair market value and the option price on the unrestricted shares in the Award Plan and Senior Plan is recorded as compensation expense. Forfeitures are included as credits in the income statement during the period in which the forfeiting event occurs. Fair Values of Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options as allowed pursuant to FASB Statement No. 123, "Accounting for Stock Based Compensation" (FASB Statement 123). FASB Statement 123 requires use of option valuation models that require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under those plans, consistent with FASB Statement No. 123, the reduction in the Company's 1996 and 1995 net income and net income per share would have been insignificant. The effect of applying the fair value method of accounting for stock options on reported net income and net income per share for 1996 and 1995 may not be representative of the effects for future years because outstanding options vest over a period of several years and additional awards are generally made each year. The fair value of options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995: Risk-free interest rate 5.63% 5.97% Expected life 1.33 1.34 Expected volatility 26% 32% Expected dividend yield 1.99% 2.56%
ESODAP The Executive Stock Option/Dividend Accrual Plan (ESODAP) authorizes stock options for key management employees of the Company. As of December 31, 1996, options representing 710,414 shares had been issued under the plan, of which 275,912 had been exercised and 65,938 had been terminated. A key feature of the plan is the Dividend Accrual Account which allows for the crediting of dividends in order to assist the executive in the exercise of the options. The Company discontinued making grants under this plan effective with the approval and adoption of the 1991 Incentive and Award plans. Other Plans KEDP Under the 1994 Key Executive Debenture Plan (KEDP), the Board may select certain Company officers to be eligible to purchase convertible debentures. As of December 31, 1996, two debentures in the aggregate amount of $3.7 million had been issued which are convertible into all the 150,000 shares as currently reserved under the plan. 61 63 LESOP The Leveraged Employee Stock Ownership Plan (LESOP) through its trust was funded by a loan from a bank which was collateralized with newly issued shares of the Company's stock purchased by the LESOP at market price. Although the debt is not a direct obligation of the Company, it is nevertheless reported as part of the Company's debt with an offsetting balance reflected as a reduction of stockholders' equity. As contributions to the LESOP are made by the Company, the debt is repaid to the bank by the LESOP and the balances on the Company's balance sheet are reduced accordingly. The Company has guaranteed the Trust's loan obligation. It intends to make contributions to the LESOP in amounts sufficient to enable the Trust to repay the loan on a quarterly basis over ten years, including interest equal to 6%. The shares held by the bank as collateral are released proportionately as loan repayments are made. Upon such release, the shares are available for allocation to employees based upon years of service. Employees are entitled to vote the shares allocated to them. Unallocated shares are voted by the LESOP's Trustee. At December 31, 1996 and 1995, the loan balance was $4.3 million and $6.4 million respectively. The interest portion of the LESOP pension expense was $.4 million in 1996 and $.6 million in 1995 and in 1994. As a result of the promulgation of Statement of Position (SOP) 93-6 - "Employers' Accounting for Employee Stock Ownership Plans" - by the American Institute of Certified Public Accountants in late 1993, new reporting rules became effective in 1994. These changes are mandated for shares acquired in 1993 and later, and are optional for previously acquired shares. The Company has no shares subject to the mandated provisions and, as permitted by the SOP, is not electing to change its accounting for previously acquired shares. The following disclosures are made to supplement previously disclosed plan information: o Dividends paid on all shares held by the LESOP are used to service the existing debt of the LESOP. o Compensation expense for the years ended December 31, 1996, 1995 and 1994 was $1,186,000, $1,430,000 and $1,480,000 respectively. The compensation expense represents the Company's contributions to the LESOP necessary to meet its periodic debt service, after applying dividend payments received on the shares held by the LESOP. All dividends paid on such shares retain their character as distributions made from the Company's retained earnings. o All shares held by the LESOP are treated as issued and outstanding and, accordingly, are included in the Company's earnings per share calculations. o Shares held by the LESOP as of December 31, 1996 include the following: Prior allocated 1,237,159 Allocated in 1996 171,717 Suspense shares 343,439 Distribution (322) -------- Total 1,751,993 ---------
Directors' Deferred Compensation Plan The 1994 Amended and Restated Directors' Deferred Compensation Plan (Deferred Plan) allows the directors to defer their fees in cash or in common stock equivalents. The fees that are deferred in common stock equivalents will accumulate and earn interest from the time the fees are deferred until the last day of each quarter when they are converted to common stock equivalents. Upon termination from the board, the director will receive, as elected, either cash or actual shares of the Company's common stock. The Deferred Plan provides for the issuance of up to 100,000 shares of the Company's common stock. At December 31, 1996 there were 75,563 shares allocated under this plan. 62 64 (10) Pension Plan The Company has a non-contributory pension plan covering substantially all of its domestic employees. Benefits under the Plan are based on years of service and compensation levels near retirement. The Company's funding policy is to contribute amounts that meet minimum funding requirements but which do not exceed the maximum funding limits as currently determined under applicable tax regulations. The Plan previously reached the full funding limitation and, accordingly, no contributions were made. The pension plan expense included the following components for the years ended December 31:
- ------------------------------------------------------------- (in thousands) 1996 1995 1994 - ------------------------------------------------------------- Service cost $ 2,146 $ 1,903 $ 2,534 Interest cost 2,230 1,988 1,924 Actual return on plan assets (7,656) (9,228) 1,354 Net amortization and deferral 4,499 6,862 (3,426) - ------------------------------------------------------------- Pension plan expense $ 1,219 $ 1,525 $ 2,386 - -------------------------------------------------------------
The following sets forth the funded status of the Plan and the amount of prepaid pension cost included in the Company's balance sheet at December 31:
- ------------------------------------------------------------------------------------------------ (in thousands) 1996 1995 Actuarial present value of benefit obligations: - ------------------------------------------------------------------------------------------------ A. Vested benefit obligation $(21,892) $(24,119) - ----------------------------------------------------------------------------------------------- B. Accumulated benefit obligation $(25,228) $(27,648) - ----------------------------------------------------------------------------------------------- C. Projected benefit obligation $(33,868) $(38,777) Plan assets at fair value, primarily listed stocks and bonds 44,897 37,747 - ----------------------------------------------------------------------------------------------- Excess (deficit) of Plan assets over projected benefit obligation 11,029 (1,030) Unrecognized net (gain) loss from past experience different from that assumed (8,435) 4,884 Prior service cost not yet recognized in net periodic pension costs (208) (249) - ----------------------------------------------------------------------------------------------- Prepaid pension cost included in other assets $ 2,386 $ 3,605 - ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Assumptions used were as follows: 1996 1995 - ------------------------------------------------------------------------- Plan discount rate for benefit obligation 7.5% 6.5% Rate of increase in compensation 5% 6% Expected long-term rate of return on assets 9% 9% - -------------------------------------------------------------------------
The Board of Directors previously approved a non-qualified supplemental benefit plan. This unfunded deferred compensation plan is intended to provide pension benefits which would otherwise be provided under the benefit accrual formula applicable to all employees in the Company's qualified Plan, but which are in excess of an annual amount permitted under current tax regulations. Expense ($.1 million in 1996, $.1 million in 1995 and $.3 million in 1994) is being recognized over the remaining service period for the officers presently covered. 63 65 (11) Commitments and Contingencies A summary of the approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 1996, is as follows:
- --------------------------------------------------------------------------------- For the Years ending December 31 (in thousands): Real Property Equipment Total - --------------------------------------------------------------------------------- 1997 2,374 3,052 5,426 1998 2,162 2,751 4,913 1999 1,848 1,401 3,249 2000 1,325 641 1,966 2001 498 518 1,016 - --------------------------------------------------------------------------------- $ 8,207 $ 8,363 $16,570 - ---------------------------------------------------------------------------------
Total rental expense for the years ended December 31, 1996, 1995 and 1994 was $9,258,000, $7,661,000 and $5,716,000 respectively. Contingencies During 1995, the Company completed a settlement with the Federal Deposit Insurance Corporation (FDIC) of the only remaining lawsuit against the Company relating to its relationship with a former credit bond client. This settlement included the entry of orders by the Court dismissing all claims between the Company and the FDIC with prejudice. The settlement, net of previously established reserves, resulted in a charge of $5.8 million. Effective with this settlement, the Company concluded all litigation ever initiated against it in connection with its discontinued credit bond insurance business. Certain of ABIG's subsidiaries, including ABIC, ABLAC and Voyager, are presently parties to a number of individual consumer and class action lawsuits pending in Alabama involving premium, rate and policy coverage issues. While a number of similar suits have been filed in other jurisdictions, the insurance and finance industries have been targeted in Alabama by plaintiffs' lawyers who enjoy a favorable judicial climate. The Company typically has been named as a co-defendant with one or several retailer or finance companies who have sold the Company's product to a consumer. A number of other insurers are also named as co-defendants in many of the suits. Although the Alabama lawsuits and similar suits pending in other jurisdictions generally involve relatively small amounts of actual or compensatory damages, they typically assert claims requesting substantial punitive awards or purport to represent a large class of policyholders. The Company denies any wrongdoing in any of these suits and believes that it has not engaged in any conduct that would warrant an award of punitive damages or that the class allegations have merit. The Company has been advised by legal counsel that it has meritorious defenses to all claims being asserted against it. While no one case is necessarily significant in terms of financial risk to the Company, the judicial climate in Alabama is such that the outcome of these cases is extremely unpredictable. Without admitting any wrongdoing, the Company has settled a number of these suits, but there are still a significant number of cases pending, and it is expected that more suits alleging essentially the same causes of action are likely to continue to be filed during 1997. The Company intends to continue to defend itself vigorously against all such suits and believes, based on information currently available, that any liabilities that could result are not expected to have a material adverse effect on the Company's financial position. The Company is involved with a number of cases in the ordinary course of business relating to insurance matters or, more infrequently, certain corporate matters. Generally, the Company's liability is limited to specific amounts relating to insurance or policy coverage for which provision has been made in the financial statements. Other cases involve general corporate matters which generally do not represent significant contingencies for the Company. 64 66 (12) Segment Information
- ------------------------------------------------------------------------------------ Industry Segments (in thousands): 1996 1995 1994 - ------------------------------------------------------------------------------------ Net premiums earned: Life $ 383,965 $ 377,108 $ 360,100 Property and Casualty 994,520 863,605 734,217 - ------------------------------------------------------------------------------------ Total $ 1,378,485 $ 1,240,713 $ 1,094,317 - ------------------------------------------------------------------------------------ Income before interest and income taxes: Life $ 63,901 $ 44,731 $ 32,020 Property and Casualty 91,876 87,357 66,693 Other (2,302) (12,314) (7,729) - ------------------------------------------------------------------------------------ Subtotal 153,475 119,774 90,984 Interest expense (17,530) (15,579) (11,168) - ------------------------------------------------------------------------------------ Total $ 135,945 $ 104,195 $ 79,816 - ------------------------------------------------------------------------------------ Identifiable assets: Life $ 1,439,254 $ 1,333,076 $ 1,023,634 Property and Casualty 1,969,705 1,602,160 1,347,262 Other 60,544 52,498 61,603 - ------------------------------------------------------------------------------------ Total $ 3,469,503 $ 2,987,734 $ 2,432,499 - ------------------------------------------------------------------------------------
Summarized data for the Company's foreign operations (principally in Canada and the United Kingdom) and domestic operations are as follows:
- ------------------------------------------------------------------------------------- GEOGRAPHIC SEGMENTS FOR THE YEARS ENDED DECEMBER 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------- Net premiums earned: Domestic (including U.S. possessions) $1,315,822 $1,190,084 $1,048,603 Foreign 62,663 50,629 45,714 - ------------------------------------------------------------------------------------- Total $1,378,485 $1,240,713 $1,094,317 - ------------------------------------------------------------------------------------- Income before income taxes: Domestic (including U.S. possessions) $ 129,652 $ 100,616 $ 76,305 Foreign 6,293 3,579 3,511 - ------------------------------------------------------------------------------------- Total $ 135,945 $ 104,195 $ 79,816 - ------------------------------------------------------------------------------------- Identifiable assets: Domestic (including U.S. possessions) $3,294,847 $2,871,773 $2,326,076 Foreign 174,656 115,961 106,423 - ------------------------------------------------------------------------------------- Total $3,469,503 $2,987,734 $2,432,499 - -------------------------------------------------------------------------------------
The Company distributes its products through eight markets or distribution channels involving over one thousand clients. Its business is generally not concentrated, and no single customer accounted for 10% or more of the Company's consolidated gross collected premiums in 1996. 65 67 (13) Quarterly Financial Information (Unaudited) Quarterly financial information for the years ended December 31, 1996 and 1995, is presented below:
- -------------------------------------------------------------------------------------- (in thousands except per common share data): First Second Third Fourth 1996 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- Total revenues $375,697 $385,988 $399,619 $367,731 Total benefits and expenses $344,810 $350,733 $367,922 $329,625 Net income $ 20,636 $ 25,060 $ 22,637 $ 26,170 Net income per common share - primary $ .99 $ 1.19 $ 1.02 $ 1.16 - --------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- First Second Third Fourth 1995 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- Total revenues $309,775 $326,207 $357,245 $367,621 Total benefits and expenses $288,143 $303,791 $332,158 $332,561 Net income $ 14,871 $ 16,048 $ 18,684 $ 22,657 Net income per common share - primary $ .72 $ .77 $ .90 $ 1.09 - --------------------------------------------------------------------------------------
The sum of the quarterly earnings per share amounts may not equal the comparable amounts for the full year because the computations are done independently. 66 68 Schedule I AMERICAN BANKERS INSURANCE GROUP, INC. SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1996 (IN THOUSANDS) Information on Summary of Investments - Other Than Investments in Related Parties is included on page 11 in Part I Item 1 c. of this report, and in Note 3 on page 49 in Part II Item 8 of this report, with the exception of the Information on Equity Securities which is included below.
AMOUNT AT WHICH SHOWN IN COST MARKET VALUE THE BALANCE SHEET ---- ------------ ----------------- Equity Securities: Common Stocks: Public Utilities $837 $704 $704 Banks, Trust and Insurance Companies 4,207 6,807 6,807 Industrial, Miscellaneous and All Other 60,378 71,752 71,752 Non-Redeemable Preferred Stock 33,240 33,632 33,632 ------ ------- ------ Total Equity Securities $ 98,662 $ 112,895 $ 112,895 ======== ========= =========
67 69 Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS AT DECEMBER 31, (IN THOUSANDS)
1996 1995 ---- ---- ASSETS Investments in subsidiaries* $934,610 $730,501 Amounts due from subsidiaries* 0 19,988 Other investments 1,109 2,613 Cash 366 459 Other 12,439 9,310 -------- -------- Total Assets $948,524 $762,871 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt 80,317 87,000 Long-term debt 142,173 148,981 Amounts due to subsidiaries* 2,853 0 Accrued expenses and other liabilities 12,974 13,893 -------- -------- Total liabilities $238,317 $249,874 -------- -------- STOCKHOLDERS' EQUITY Preferred stock 115,000 Common stock 20,530 20,384 Additional paid-in capital 217,939 215,121 Net unrealized investment and foreign exchange gains 7,437 7,255 Retained earnings 359,359 282,748 Treasury stock, at cost (1,426) (2,516) Unamortized restricted stock (4,382) (3,620) Collaterization of loan to Leveraged Employee Stock Ownership Plan (4,250) (6,375) -------- -------- Total stockholders' equity 710,207 512,997 -------- -------- Total liabilities and stockholders' equity $948,524 $762,871 ======== ========
*Eliminated in consolidated financial statements. See accompanying note to condensed financial statements. 68 70 Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
1996 1995 1994 ---- ---- ---- REVENUES: Net investment income $ 5,934 $ 2,744 $ 2,547 Net realized investment (losses) gains (4,379) (194) 891 Dividends from subsidiaries* 21,270 8,775 22,539 ----------------- ---------------- ------------- Total revenues 22,825 11,325 25,977 ----------------- ---------------- ------------- EXPENSES: Operating expenses 3,943 13,214 10,178 Interest 17,530 15,565 11,158 ----------------- ---------------- ------------- Total expenses 21,473 28,779 21,336 ----------------- ---------------- ------------- Income (loss) before income taxes and equity in undistributed income of subsidiaries 1,352 (17,454) 4,641 INCOME TAX (BENEFIT) EXPENSE: Current (5,356) (8,853) (7,235) Deferred (1,313) 27 1,178 ----------------- ---------------- ------------- (6,669) (8,826) (6,057) ----------------- ---------------- ------------- Income (loss) before equity in undistributed income of subsidiaries 8,021 (8,628) 10,698 Equity in undistributed income of subsidiaries* 86,482 80,888 45,846 ----------------- ---------------- ------------- Net income $94,503 $72,260 $56,544 ================= ================ =============
*Eliminated in consolidated financial statements. See accompanying note to condensed financial statements. 69 71 Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
1996 1995 1994 ---- ---- ---- Operating Activities: Net income $ 94,503 $ 72,260 $ 56,544 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (73,427) (79,523) (47,926) (Increase) in amounts due from subsidiaries 41,891 (8,654) (13,544) Decrease in other assets (6,423) 2,289 12,912 (Decrease) increase in accrued liabilities (13,552) 7,932 (1,000) Other 2,836 1,397 1,066 Deferred income taxes (2,213) 27 1,178 --------- --------- --------- Net cash provided by (used in) operating activities 43,615 (4,272) 9,230 --------- --------- --------- Investing activities: Increase in investment in subsidiaries (82,789) (4,587) (565) Decrease (Increase) in other investments 1,636 (193) (3,046) Payment for purchase of subsidiaries, net of cash acquired (46,742) (17,034) (32,284) --------- --------- --------- Net cash used in investing activities (127,895) (21,814) (35,895) --------- --------- --------- Financing activities: Purchase of treasury stock (175) (893) (1,208) Proceeds from issuance of common stock 1,898 1,248 1,238 Proceeds from issuance of preferred stock 111,781 0 0 Proceeds from issuance of short-term debt - other 138,147 50,000 18,000 Proceeds from issuance of long-term debt - other 0 81,000 78,723 Repayment of long-term debt - other (4,683) (4,683) (4,683) Repayment of short-term debt - other (144,830) (86,000) (51,000) Cash dividends paid to stockholders (17,951) (14,824) (14,304) --------- --------- --------- Net cash provided by financing activities 84,187 25,848 26,766 --------- --------- --------- Net (decrease) increase in cash (93) (238) 101 Cash at beginning of year 459 697 596 --------- --------- --------- Cash at end of year $ 366 $ 459 $ 697 ========= ========= =========
See accompanying note to condensed financial statements 70 72 Schedule II AMERICAN BANKERS INSURANCE GROUP, INC. (PARENT) CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1996 NOTES TO CONDENSED FINANCIAL STATEMENTS The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto of American Bankers Insurance Group, Inc. and Subsidiaries. The Company is scheduled to repay the LESOP note at a yearly amount of $2,125,000 plus interest. For a description of short-term and long-term debt payable to others and related information see Note 7 to the Consolidated Financial Statements on page 57 in Part II Item 8 of this report. For a description of the Company's commitments and contingencies, see Note 11 to the Consolidated Financial Statements on page 64 in Part II Item 8 of this report. 71 73 Schedule III AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
Deferred Policy Future Other Policy Acquisition Policy Unearned Claim Premium Costs Benefits Premiums Benefits Revenue ---------------- -------- -------- ------------ ------- 1996 Life & Health $167,686 $291,756 $419,573 $189,700 $383,965 Property & Casualty 220,307 871,569 297,896 994,520 Other -------- -------- ---------- -------- ---------- Total $387,993 $291,756 $1,291,142 $487,596 $1,378,485 -------- -------- ---------- -------- ---------- 1995 Life & Health $146,548 $275,250 $399,500 $161,926 $377,108 Property & Casualty 164,331 779,367 242,819 863,605 Other -------- -------- ---------- -------- ---------- Total $310,879 $275,250 $1,178,867 $404,745 $1,240,713 -------- -------- ---------- -------- ---------- 1994 Life & Health $128,606 $266,221 $330,986 $141,587 $360,100 Property & Casualty 100,975 572,293 191,526 734,217 Other -------- -------- ---------- -------- ---------- Total $229,581 $266,221 $903,279 $333,113 $1,094,317 -------- -------- ---------- -------- ----------
Benefits Net Claims and Other Net Investment Loss Amortization of Operating Premiums Income* Expenses** DAC Expenses Written** ---------- ---------- --------------- --------- ---------- 1996 Life & Health $47,604 $176,935 $93,843 $91,700 $ 152,681 Property & Casualty 69,960 346,089 404,012 250,532 1,092,166 Other 3,636 12,449 -------- -------- -------- -------- ---------- Total $121,200 $523,024 $497,855 $354,681 $1,244,847 -------- -------- -------- -------- ---------- 1995 Life & Health $40,249 $168,899 $91,953 $96,105 $196,596 Property & Casualty 58,415 294,231 357,796 206,190 982,985 Other 736 25,900 -------- -------- -------- -------- ---------- Total $99,400 $463,130 $449,749 $328,195 $1,179,581 -------- -------- -------- -------- ---------- 1994 Life & Health $34,022 $180,513 $73,140 $106,225 $191,997 Property & Casualty 39,225 257,446 272,365 181,425 736,411 Other 1,195 24,737 -------- -------- -------- -------- ---------- Total $74,442 $437,759 $345,505 $312,387 $928,408 -------- -------- -------- -------- ----------
*Excluding net realized investment gains of $7,812, $721 and $2,679 for 1996, 1995 and 1994, respectively. **Excluding Life and Annuity premiums. 72 74 Schedule IV AMERICAN BANKERS INSURANCE GROUP, INC. REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
Percentage of Gross Ceded to other Assumed from amount assumed amount companies other companies Net amount to net ------ -------------- --------------- ---------- -------------- 1996 Life insurance in force $37,851,887 $18,270,339 $10,852,864 $30,434,412 35.7% ----------- ----------- ----------- ----------- Premiums: Life insurance $357,795 $190,201 $47,825 $215,419 22.2% Accident & Health insurance* 469,532 213,834 26,688 282,386 9.5% Property & Liability insurance 1,411,964 594,173 62,889 880,680 7.1% ----------- ----------- ----------- ----------- Total premiums $2,239,291 $998,208 $137,402 $1,378,485 10.0% ----------- ----------- ----------- ----------- 1995 Life insurance in force $41,916,797 $10,522,839 $791,405 $32,185,363 2.4% ----------- ----------- ----------- ----------- Premiums: Life insurance $285,100 $123,004 $40,329 $202,425 19.9% Accident & Health insurance* 376,010 151,155 35,870 260,725 13.8% Property & Liability insurance 1,169,333 493,268 101,498 777,563 13.1% ----------- ----------- ----------- ----------- Total premiums $1,830,443 $767,427 $177,697 $1,240,713 14.3% ----------- ----------- ----------- ----------- 1994 Life insurance in force $30,685,770 $8,686,424 $1,443,472 $23,442,818 5.9% ----------- ----------- ----------- ----------- Premiums: Life insurance $262,340 $83,411 $25,808 $204,737 12.6% Accident & Health insurance* 313,839 111,634 15,415 217,620 7.1% Property & Liability insurance 979,350 386,763 79,373 671,960 11.8% ----------- ----------- ----------- ----------- Total premiums $1,555,529 $581,808 $120,596 $1,094,317 11.0% ----------- ----------- ----------- -----------
*Includes premiums from both the life and property and casualty segments. 73 75 Schedule VI AMERICAN BANKERS INSURANCE GROUP, INC. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
Claims and Claim Adjustment Expenses Incurred Related To Paid Claims and Claim Current Year Prior Years* Adjustment Expenses ------------ ----------- ------------------- 1996 Consolidated Property and Casualty Entities $345,857 $ 232 $313,299 1995 Consolidated Property and Casualty Entities $285,119 $ 9,112 $261,463 1994 Consolidated Property and Casualty Entities $252,403 $ 5,043 $234,292
Information otherwise required in the Schedule is provided in Schedule III. * 1995 and 1994 amounts have been restated to reflect the reclassification of credit bond losses in Schedule III, approximately $8,000 in 1995 and $3,500 in 1994. 74 76 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 75 77 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Directors of the Company is included in the Definitive Proxy Statement for the annual shareholders meeting, to be filed within 120 days of the registrant's fiscal year-end. Information regarding the Executive Officers of the Company is included in Part I of this report. There are no failures by directors, officers, beneficial owners of more than ten percent of the Company's stock or other persons subject to reporting under Section 16(a) of the Exchange Act of 1934 to timely file reports thereunder is included in the aforementioned Definitive Proxy Statements. ITEM 11 EXECUTIVE COMPENSATION Information regarding Executive Compensation is included in the Definitive Proxy Statement for the annual shareholders meeting, to be filed within 120 days of the registrant's fiscal year-end. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding Security Ownership of Certain Beneficial Owners and Management is included in the Definitive Proxy Statement for the annual shareholders meeting, to be filed within 120 days of the registrant's fiscal year-end. The registrant has no knowledge of any contractual arrangement that may result in a change of control at a subsequent date. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding Certain Relationships and Related Transactions is included in the Definitive Proxy Statement for the annual shareholders meeting, to be filed within 120 days of the registrant's fiscal year-end. 76 78 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a.) (1) and (2) - The response to this portion of Item 14 is listed on page 36 of this report. (3) Exhibits 3(a)(14) - Third Amended and Restated Articles of Incorporation. 3(b)(13) - Corporate By-Laws, Amended and Restated. As amended on April 18, 1996. 4(a)(2) - Rights to Purchase Series A Participating Preferred Stock. 4(b)(5) - Amendment to the Rights to Purchase Series A Participating Preferred Stock 10(a)(1) - Form of Executive Compensation Agreement. 10(b)(3) - 1987 Executive Stock Option/Dividend Accrual Plan. 10(c)(6) - Form of Executive Severance Benefits Agreement. 10(d)(12) - 5 Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 1, 1995 among the Company, certain banks and Barclays Bank PLC. 10(e)(12) - Issuance and Paying Agent Agreement (For Commercial Paper) dated as of 21st day of November 1995 by and between the Company and Chemical Bank. 10(f)(7) - $23,000,000, 10.2% Promissory Notes. 10(g)(7) - Nonqualified Supplemental Benefit Plan. 10(h)(8) - Master License Agreement between Policy Management Systems Corporation ("PMSC"), a South Carolina Corporation and American Bankers Insurance Group, Inc. ("customer"). 10(i)(9) - Trust Indenture and Selling Agency Agreement for shelf filing of $200,000,000 medium-term notes. 10(j)(10) - 1991 Stock Incentive Compensation Plan, as amended February 18, 1994. 10(k)(10) - 1991 Stock Option/Restricted Stock Award Plan, as amended February 18, 1994. 10(l)(10) - Director's Deferred Compensation Plan, amended and restated May 25, 1994. 10(m)(10) - Retirement Plan, as amended December 30, 1994. 10(n)(10) - Management Incentive Plan, as amended May 25, 1994. 10(o)(10) - 1994 Key Executive Convertible Subordinated Debenture Plan. 10(p)(10) - 1994 Non-Employee Directors' Stock Option Plan.
77 79 10(q)(10) - 1994 Senior Management Stock Option Plan. 10(r)(10) - $75,000,000, 7.60% Medium-term Note dated May 2,1994. 10(s)(10) - Irrevocable Stand-by Letter of Credit in favor of Tandy Corporation dated January 31, 1995; 10(t)(10) - Reimbursement Agreement with certain banks dated January 31, 1995. 10(u)(11) - $50,000,000, Floating Rate, Medium-term Note dated April 12, 1995. 10(v)(12) - Form of Executive Compensation Agreement. 10(w)(12) - Amendment to the 1991 Stock Option/Restricted Stock Award Plan. 11 - Statement regarding computation of earnings per share. 21 - Subsidiaries of the registrant. 23 - Consent of Independent Accountants. 27 - Financial Data Schedule 28 - Information from Reports furnished to Insurance Regulatory Authorities. 99 - Additional Exhibits Documents relating to American Bankers Insurance Group, Inc. Leverage Employee Stock Ownership Plan (LESOP). 99(a)(4) - Note 99(b)(4) - Guaranty Agreement from American Bankers Insurance Group, Inc., American Bankers Insurance Company of Florida and American Bankers Life Assurance Company of Florida in favor of Sun Bank/Miami, N.A. 99(c)(6) - Modified ESOP Note. 99(d)(7) - Second Amendment to Trust Agreement among American Bankers Insurance Group and Barnett Banks Trust Company, N.A. (Successor to Southeast Bank, N.A., original trustee). 99(e)(10) - American Bankers Insurance Group, Inc. Leveraged Employee Stock Ownership Plan, as amended December 30, 1994.
Footnotes 78 80 (1) Exhibit incorporated herein by reference from Form S-3 Registration Statement Number 2-94359. (2) Exhibit incorporated herein by reference from Registrant's Statement on Form 8-A filed on March 11, 1988. (3) Exhibit incorporated herein by reference from 1987 Annual Meeting Proxy Statement (Exhibit "A," pages 14 through 19). (4) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1988. (5) Exhibit incorporated herein by reference from Registrant's Current Report on Form 8-K dated November 14, 1990. (6) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1990. (7) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1991. (8) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1993. (9) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for March 31, 1994. (10) Exhibit incorporated herein by reference from Registrant's Annual Report on Form 10-K for 1994. (11) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for June 30, 1995. (12) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-K for 1995. (13) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for March 31, 1996. (14) Exhibit incorporated herein by reference from Registrant's Current Report on Form 10-Q for June 30, 1996. (b.) REPORTS ON FORM 8-K No report on Form 8-K was filed during the fourth quarter 1996. (c.) EXHIBITS The response to this portion of Item 14 is submitted as a separate section of this report. (d.) FINANCIAL STATEMENT SCHEDULES The response to this portion of Item 14 is submitted as part of Part II Item 8 of this report. 79 81 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 Bankers Insurance Group, Inc. /s/ Gerald N. Gaston By: --------------------------------------- Chief Executive Officer, President, March 28, 1997 Gerald N. Gaston and Vice Chairman of the Board /s/ Robert Hill By: --------------------------------------- Senior Vice President and March 28, 1997 Robert Hill Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report signed below by the following persons on behalf of the Registrant and in the capacities and on March 28, 1996. American Bankers Insurance Group, Inc. /s/ R. Kirk Landon - ------------------------------ Chairman of the Board March 28, 1997 R. Kirk Landon and Director /s/ Gerald N. Gaston - ------------------------------ Chief Executive Officer, March 28, 1997 Gerald N. Gaston President, Vice Chairman of the Board and Director /s/ William H. Allen, Jr. - ------------------------------ Director March 28, 1997 William H. Allen Jr. - ------------------------------ Director March 28, 1997 Nicholas A. Buoniconti /s/ Armando M. Codina - ------------------------------ Director March 28, 1997 Armando M. Codina /s/ Peter J. Dolara - ------------------------------ Director March 28, 1997 Peter J. Dolara /s/ Jack F. Kemp - ------------------------------ Director March 28, 1997 Jack F. Kemp 80 82 /s/ James F. Jorden - ------------------------------ Director March 28, 1997 James F. Jorden - ------------------------------ Director March 28, 1997 Daryl L. Jones /s/ Malcolm G. MacNeill - ------------------------------ Director March 28, 1997 Malcolm G. MacNeill /s/ Eugene M. Matalene Jr. - ------------------------------ Director March 28, 1997 Eugene M. Matalene Jr. /s/ Albert H. Nahmad - ------------------------------ Director March 28, 1997 Albert H. Nahmad /s/ Nicholas J. St. George - ------------------------------ Director March 28, 1997 Nicholas J. St. George /s/ Robert C. Strauss - ------------------------------ Director March 28, 1997 Robert C. Strauss /s/ George E. Williamson II - ------------------------------ Director March 28, 1997 George E. Williamson II 81 83 ITEM 14 (C) EXHIBIT INDEX
Pages ----- Exhibit 11 - Statement regarding computation of earnings per share E-1 Exhibit 21 - Subsidiaries of the registrant E-2 Exhibit 23 - Consent of Independent Certified Public Accountants E-3 Exhibit 27 - Financial Data Schedule E-4
Other exhibits have been incorporated by reference. See Item 14, Part IV of this Annual Report on Form 10-K. 82 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS EXCEPT PER SHARE DATA)
1996 1995 1994 ---- ---- ---- Primary: Weighted average shares outstanding 20,814 20,746 20,596 ======== ======== ======== Net income $ 94,503 $ 72,260 $ 56,544 Less convertible preferred stock dividend 3,115 -- -- -------- -------- -------- Adjusted net income $ 91,388 $ 72,260 $ 56,544 ======== ======== ======== Per share amount: Net income $ 4.39 $ 3.48 $ 2.74 ======== ======== ======== Fully diluted: Weighted average shares outstanding 20,814 20,746 20,596 Assumed conversion of convertible preferred stock, subordinated debentures and stock options 1,151 77 17 -------- -------- -------- Total 21,965 20,823 20,613 ======== ======== ======== Net income $ 94,503 $ 72,260 $ 56,544 Add convertible debenture interest, net of federal income tax effect 228 260 -- -------- -------- -------- Adjusted net income $ 94,731 $ 72,520 $ 56,544 ======== ======== ======== Per share amount: -------- -------- -------- Net income $ 4.31 $ 3.48 $ 2.74 ======== ======== ========
E-1 EX-21 3 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
STATE OF PERCENT OF VOTING SIGNIFICANT SUBSIDIARIES INCORPORATION SECURITIES OWNED - -------------------------------------------------------------------------------------------------------- American Bankers Insurance Company of Florida Florida 100% American Bankers Life Assurance Company of Florida 100% Florida American Reliable Insurance Company Arizona 100% Bankers American Life Assurance Company New York 100% Bankers American Reinsurance Company Turks & Caicos 100% Bankers Insurance Company Limited United Kingdom 100% Caribbean American Life Assurance Company Puerto Rico 100% Caribbean American Property Insurance Company Puerto Rico 100% Voyager Group, Inc. Florida 100% Voyager Life and Health Insurance Company Georgia 100% Voyager Life Insurance Company Georgia 100%
E-2 EX-23 4 CONSENT OF INDEP. CERTIFIED PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No.33-77564) and in the Registration Statements on Form S-8 (No. 33-28936, No. 33-40802 and No. 33-82342) of American Bankers Insurance Group, Inc. of our report dated March 12, 1997 appearing on page 40 of this Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Miami, Florida March 28, 1997 E-3 EX-27 5 FINANCIAL DATA SCHEDULE
7 1000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 805,124 851,146 864,307 112,895 10,236 0 1,968,403 30,434 0 387,993 3,469,503 291,756 1,291,142 487,596 6,795 222,490 0 115,000 20,530 574,677 3,469,503 1,378,485 121,200 7,812 21,538 523,024 0 0 135,945 41,442 94,503 0 0 0 94,503 4.39 4.31 162,342 321,487 (3,748) 223,754 70,489 185,838 (4270)
-----END PRIVACY-ENHANCED MESSAGE-----